-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DMGDe3SjKhHv1l/omTiOZXUlwPu+LJukjNouV+5cNlc34DP4N/WjEBAn7QdGuoI0 8f0Bg/prS1dk1MzxL7Pb8w== 0000950134-99-010171.txt : 19991117 0000950134-99-010171.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950134-99-010171 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR LODGING L P CENTRAL INDEX KEY: 0001048789 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752564994 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-39595-01 FILM NUMBER: 99754960 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FORMER COMPANY: FORMER CONFORMED NAME: FELCOR SUITES LP DATE OF NAME CHANGE: 19971030 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 333-3959-01 FELCOR LODGING LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) DELAWARE 72-2544994 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062 (Address of principal executive offices) (Zip Code) (972) 444-4900 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- - -------------------------------------------------------------------------------- 2 FELCOR LODGING LIMITED PARTNERSHIP INDEX
PAGE ---- PART I. -- FINANCIAL INFORMATION Item 1. Financial Statements.............................................................................. 3 FELCOR LODGING LIMITED PARTNERSHIP Consolidated Balance Sheets - September 30, 1999 (Unaudited) and December 31, 1998..................................................................... 3 Consolidated Statements of Operations -- For the Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited)............................................. 4 Consolidated Statements of Cash Flows -- For the Nine Months Ended September 30, 1999 and 1998 (Unaudited)............................................. 5 Notes to Consolidated Financial Statements..................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14 General/Third Quarter Activities............................................................... 14 Results of Operations.......................................................................... 14 Liquidity and Capital Resources................................................................ 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 24 PART II. -- OTHER INFORMATION Item 5. Other Information................................................................................. 25 Item 6. Exhibits and Reports on Form 8-K.................................................................. 25 SIGNATURE....................................................................................................... 26
3 PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) ASSETS Investment in hotels, net of accumulated depreciation of $290,495 at September 30, 1999 and $178,072 at December 31, 1998 ..................... $ 4,045,358 $ 3,955,582 Investment in unconsolidated entities .......................................... 137,017 148,065 Cash and cash equivalents ...................................................... 48,027 34,692 Due from Lessees ............................................................... 19,650 18,968 Deferred expenses, net of accumulated amortization of $3,758 at September 30, 1999 and $2,096 at December 31, 1998 ....................... 13,104 10,041 Other assets ................................................................... 7,930 8,035 ------------ ------------ Total assets ........................................................ $ 4,271,086 $ 4,175,383 ============ ============ LIABILITIES AND PARTNERS' EQUITY Debt, net of discount of $1,458 at September 30, 1999 and $1,628 at December 31, 1998 ............................................. $ 1,707,981 $ 1,594,734 Distributions payable .......................................................... 42,549 67,262 Accrued expenses and other liabilities ......................................... 87,848 57,312 Minority interest in other partnerships ........................................ 51,389 51,105 ------------ ------------ Total liabilities ................................................... 1,889,767 1,770,413 ------------ ------------ Commitments and contingencies (Notes 3 and 5) Partners' equity: Redeemable units at redemption value ........................................... 52,276 67,595 Preferred units: Series A Cumulative Preferred Units, 6,050 units issued and outstanding ... 151,250 151,250 Series B Redeemable Preferred Units, 58 units issued and outstanding ...... 143,750 143,750 Partners' Capital .............................................................. 2,034,043 2,042,375 ------------ ------------ Total liabilities and partners' equity .............................. $ 4,271,086 $ 4,175,383 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 4 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER UNIT DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenues: Percentage lease revenue ....................... $ 120,598 $ 104,919 $ 377,480 $ 223,775 Equity in income from unconsolidated entities .. 2,353 2,446 6,190 6,429 Other revenue .................................. 1,131 1,234 2,516 3,326 ------------ ------------ ------------ ------------ Total revenues ........................ 124,082 108,599 386,186 233,530 ------------ ------------ ------------ ------------ Expenses: General and administrative ..................... 2,943 1,452 7,696 4,026 Depreciation ................................... 38,627 27,720 112,789 61,036 Taxes, insurance, and other .................... 19,529 14,651 60,386 29,490 Interest expense ............................... 31,520 22,960 90,692 46,486 Minority interest in other partnerships ........ 348 323 1,987 805 ------------ ------------ ------------ ------------ Total expenses ........................ 92,967 67,106 273,550 141,843 ------------ ------------ ------------ ------------ Income before extraordinary charge ............... 31,115 41,493 112,636 91,687 Extraordinary charge from write off of deferred financing fees ................................ 2,519 1,113 3,075 ------------ ------------ ------------ ------------ Net income ....................................... 31,115 38,974 111,523 88,612 Preferred distributions .......................... 6,184 6,184 18,551 13,987 ------------ ------------ ------------ ------------ Income applicable to unitholders ................. $ 24,931 $ 32,790 $ 92,972 $ 74,625 ============ ============ ============ ============ Per unit data: Basic: Income applicable to unitholders before extraordinary charge ...................... $ 0.35 $ 0.57 $ 1.33 $ 1.65 Extraordinary charge ........................... (0.04) (0.02) (0.06) ------------ ------------ ------------ ------------ Net income applicable to unitholders ........... $ 0.35 $ 0.53 $ 1.31 $ 1.59 ============ ============ ============ ============ Weighted average units outstanding ............. 71,001 61,541 70,988 46,958 Diluted: Income applicable to unitholders before extraordinary charge ...................... $ 0.35 $ 0.57 $ 1.32 $ 1.64 Extraordinary charge ........................... (0.04) (0.02) (0.06) ------------ ------------ ------------ ------------ Net income applicable to unitholders ........... $ 0.35 $ 0.53 $ 1.30 $ 1.58 ============ ============ ============ ============ Weighted average units outstanding ............. 71,208 61,913 71,238 47,327
The accompanying notes are an integral part of these consolidated financial statements. 4 5 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities: Net income ..................................................................... $ 111,523 $ 88,612 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ......................................................... 112,789 61,036 Amortization of deferred financing fees .............................. 2,035 1,927 Accretion of debt .................................................... (725) Amortization of unearned officers' and directors' compensation ....... 526 605 Equity in income from unconsolidated entities ........................ (6,190) (6,429) Extraordinary charge for write off of deferred financing fees ........ 1,113 3,075 Minority interest in other partnerships .............................. 1,987 805 Changes in assets and liabilities: Due from Lessees ..................................................... (682) (19,031) Deferred financing fees .............................................. (6,211) (4,300) Other assets ......................................................... (1,755) (4,102) Accrued expenses and other liabilities ............................... 24,006 28,933 ------------ ------------ Net cash flow provided by operating activities ............. 238,416 151,131 ------------ ------------ Cash flows used in investing activities: Improvements and additions to hotels ........................................... (192,847) (44,310) Acquisition of hotel assets .................................................... (10,802) (354,435) Acquisition of unconsolidated entities ......................................... (984) Proceeds from sale of hotels ................................................... 15,091 Net cash received from acquisition of Bristol Hotels ........................... 16,790 Bristol Interim Credit Facility ................................................ (120,000) Cash distributions from unconsolidated entities ................................ 17,187 18,406 ------------ ------------ Net cash flow used in investing activities ................. (171,371) (484,533) ------------ ------------ Cash flows from financing activities: Proceeds from borrowings ....................................................... 782,000 942,003 Repayment of borrowings ........................................................ (674,200) (640,300) Contributions .................................................................. 8 140,721 Distributions paid to preferred unitholders .................................... (19,804) (13,987) Distributions paid to unitholders .............................................. (141,714) (63,210) ------------ ------------ Net cash flow provided by (used in) financing activities ... (53,710) 365,227 ------------ ------------ Net change in cash and cash equivalents .................................................. 13,335 31,825 Cash and cash equivalents at beginning of periods ........................................ 34,692 17,543 ------------ ------------ Cash and cash equivalents at end of periods .............................................. $ 48,027 $ 49,368 ============ ============ Supplemental cash flow information -- Interest paid .................................................................. $ 85,606 $ 33,322 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 6 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization FelCor Lodging Limited Partnership and its subsidiaries (the "Company") at September 30, 1999, owned interests in 187 hotels with nearly 50,000 rooms and suites (collectively the "Hotels"). The sole general partner of the Company is FelCor Lodging Trust Incorporated ("FelCor"), one of the nation's largest hotel real estate investment trusts ("REIT"). At September 30, 1999, FelCor owned a greater than 95% equity interest in the Company. At September 30, 1999, the Company owned 100% interests in 163 hotels, a 90% or greater interest in entities that owned seven hotels, a 60% interest in an entity that owned two hotels and 50% interests in separate entities that owned 15 hotels. The Company is the owner of the largest number of Embassy Suites(R), Crowne Plaza(R), Holiday Inn(R), and independently owned Doubletree(R) branded hotels in the world. The following table presents the Hotels, by brand, leased to each of the Company's Lessees at September 30, 1999:
NOT OPERATED BRAND DJONT BRISTOL UNDER A LEASE TOTAL ---------- ---------- ------------- ---------- Embassy Suites 58 58 Holiday Inn 44 1 45 Doubletree and Doubletree Guest Suites(R) 16 16 Crowne Plaza and Crowne Plaza Suites(R) 17 17 Holiday Inn Select(R) 10 10 Sheraton(R)and Sheraton Suites(R) 9 9 Hampton Inn(R) 9 9 Holiday Inn Express(R) 5 5 Fairfield Inn(R) 5 5 Harvey Hotel(R) 4 4 Independent 2 1 3 Courtyard by Marriott(R) 2 2 Four Points by Sheraton(R) 1 1 Hilton Suites(R) 1 1 Homewood Suites(R) 1 1 Westin(R) 1 1 ---------- ---------- ---------- ---------- Total Hotels 85 100 2 187 ========== ========== ========== ==========
The Hotels are located in the United States (34 states) and Canada, with 79 hotels in California, Florida and Texas. The following table provides information regarding the net acquisition and disposition of hotels through September 30, 1999:
NET HOTELS ACQUIRED/(DISPOSED OF) ---------------------- 1994 7 1995 13 1996 23 1997 30 1998 120 FIRST QUARTER 1999 (4) SECOND QUARTER 1999 (2) THIRD QUARTER 1999 -- ----- 187
6 7 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION (CONTINUED) At September 30, 1999, the Company leased 85 of the Hotels to DJONT Operations, L.L.C., a Delaware limited liability company, or a consolidated subsidiary thereof (collectively "DJONT"), and leased 100 of the Hotels to Bristol Hotels & Resorts, or a consolidated subsidiary thereof ("Bristol" and, together with DJONT, the "Lessees"). Two Hotels were not leased. Thomas J. Corcoran, Jr., the President, Chief Executive Officer, and a Director of FelCor, and Hervey A. Feldman, Chairman Emeritus of FelCor, beneficially own a 50% voting common equity interest in DJONT. The remaining 50% nonvoting common equity interest is beneficially owned by the children of Charles N. Mathewson, a director of FelCor and major initial investor in the Company. DJONT has entered into management agreements pursuant to which 72 of the Hotels leased by it are managed by subsidiaries of Promus Hotel Corporation ("Promus"), ten are managed by subsidiaries of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), and three are managed by two independent management companies. Bristol, an independent publicly owned company, leases and manages 100 Hotels and manages one hotel which operates without a lease. Bristol is one of the largest independent hotel operating companies in North America and operates the largest number of Bass Hotels & Resorts-branded hotels in the world. Certain reclassifications have been made to prior period financial information to conform to the current period's presentation with no effect to previously reported net income or shareholders' equity. These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the financial statements and notes thereto of the Company and DJONT included in FelCor's Annual Report on Form 10-K for the year ended December 31, 1998 (the "10-K"). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K and present interim disclosures required by the SEC. The financial statements for the three and nine months ended September 30, 1999 and 1998 are unaudited; however, in the opinion of management, all adjustments (which include only normal recurring accruals) have been made which are considered necessary to present fairly the operating results and financial position of the Company for the unaudited periods. 7 8 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENT IN UNCONSOLIDATED ENTITIES At September 30, 1999, the Company owned 50% interests in separate entities owning 15 hotels, a parcel of undeveloped land, and a condominium management company. The Company also owned a 97% nonvoting interest in an entity that is developing condominiums for sale and that owns an annex to a hotel owned by the Company. The Company accounts for its investments in these unconsolidated entities under the equity method. Summarized combined financial information for 100% of these unconsolidated entities is as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Balance sheet information: Investment in hotels, net of accumulated depreciation........................ $ 286,379 $269,881 Non-recourse mortgage debt................................................... $ 203,444 $176,755 Equity....................................................................... $ 95,083 $105,347
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Statements of Operations Information: Percentage lease revenue $ 13,998 $ 13,575 $ 40,968 $ 40,144 Other income 2,828 2,087 7,155 3,201 ------------ ------------ ------------ ------------ Total revenue 16,826 15,662 48,123 43,345 ------------ ------------ ------------ ------------ Expenses: Depreciation 4,511 4,261 14,019 12,804 Taxes, insurance, and other 2,805 2,303 7,830 5,462 Interest expense 3,627 3,373 10,314 9,727 ------------ ------------ ------------ ------------ Total expenses 10,943 9,937 32,163 27,993 ------------ ------------ ------------ ------------ Net income $ 5,883 $ 5,725 $ 15,960 $ 15,352 ============ ============ ============ ============ Net income attributable to the Company $ 2,888 $ 2,862 $ 7,796 $ 7,676 Amortization of cost in excess of book value (535) (416) (1,606) (1,247) ------------ ------------ ------------ ------------ Equity in income from unconsolidated entities $ 2,353 $ 2,446 $ 6,190 $ 6,429 ============ ============ ============ ============
8 9 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DEBT Debt at September 30, 1999 and December 31, 1998 consisted of the following (in thousands):
OUTSTANDING BALANCE ------------------- INTEREST RATE MATURITY DATE SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------- ------------- ------------------ ----------------- FLOATING RATE DEBT: Line of Credit LIBOR + 150bps June 2001 $ 345,000 $ 411,000 Term Loan LIBOR + 150bps December 1999 250,000 Senior Term Loan LIBOR + 250bps March 2004 250,000 Mortgage debt LIBOR + 200bps February 2003 62,702 Other Up to LIBOR + 200bps Various 23,150 34,750 ------------ ------------ Total floating rate debt 680,852 695,750 ------------ ------------ FIXED RATE DEBT: Line of credit - swapped 7.24% June 2001 200,000 325,000 Publicly-traded term notes 7.38% October 2004 174,345 174,249 Publicly-traded term notes 7.63% October 2007 124,197 124,122 Mortgage debt 7.24% November 2007 143,128 145,062 Senior Term Loan - swapped 8.30% March 2004 125,000 Mortgage debt 6.97% December 2002 43,836 Mortgage debt 7.54% April 2009 99,427 Mortgage debt 7.55% June 2009 74,744 Other 6.96% - 7.23% 2000 - 2005 86,288 86,715 ------------ ------------- Total fixed rate debt 1,027,129 898,984 ------------ ------------- Total Consolidated Debt $ 1,707,981 $ 1,594,734 ============ =============
One month LIBOR at September 30, 1999, was 5.4%. A portion of the Company's Line of Credit and Senior Term Loan is matched with interest rate swap agreements which effectively convert the variable rate on the Line of Credit and Senior Term Loan to a fixed rate. During the third quarter 1999, the Company entered into Forward Rate Agreements which fix three month LIBOR on $188 million of floating rate debt at an average rate of 5.93%, effective December 8, 1999. The Line of Credit and the Senior Term Loan contain various affirmative and negative covenants including limitations on total indebtedness, total secured indebtedness, and restricted payments (such as stock repurchases and cash distributions), as well as the obligation to maintain certain minimum tangible net worth and certain minimum interest and debt service coverage ratios. At September 30, 1999, the Company was in compliance with all such covenants The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the Line of Credit and Senior Term Loan. Most of the mortgage debt is nonrecourse to the Company (with certain exceptions) and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of the mortgage debt is prepayable; subject, however, to various prepayment penalties, yield maintenance, or defeasance obligations. 9 10 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. TAXES, INSURANCE, AND OTHER Taxes, insurance, and other is comprised of the following for the three and nine months ended September 30, 1999 and 1998 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Real estate and personal property taxes .......... $ 12,851 $ 10,246 $ 41,845 $ 23,269 Property insurance ............................... 868 801 2,596 1,346 Land lease expense ............................... 5,010 2,729 13,124 3,535 State franchise taxes and Canadian income tax .... 800 561 2,821 1,026 Other ............................................ 314 314 ---------- ---------- ---------- ---------- Total taxes, insurance, and other ....... $ 19,529 $ 14,651 $ 60,386 $ 29,490 ========== ========== ========== ==========
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS The Company is to receive rental income from the Lessees under the Percentage Leases, which expire in 2002 (five hotels), 2003 (three hotels), 2004 (12 hotels), 2005 (19 hotels), 2006 (26 hotels), 2007 (37 hotels), 2008 (54 hotels), and thereafter (15 hotels). The rental income under the Percentage Leases between 14 of the unconsolidated entities, of which the Company owns 50%, is payable by the Lessee to the respective entities and is not included in the schedule of future lease commitments to the Company. Minimum future rental income (i.e., base rents) payable to the Company under these noncancellable operating leases at September 30, 1999 is as follows (in thousands):
DJONT BRISTOL TOTAL ------------ ------------ ------------ Remainder of 1999 .................. $ 34,669 $ 38,894 $ 73,563 2000 ............................... 140,235 180,055 320,290 2001 ............................... 143,609 180,076 323,685 2002 ............................... 143,967 180,049 324,016 2003 ............................... 130,445 177,302 307,747 2004 and thereafter ................ 519,383 820,168 1,339,551 ------------ ------------ ------------ $ 1,112,308 $ 1,576,544 $ 2,688,852 ============ ============ ============
Certain entities owning interests in DJONT and managers for certain hotels have agreed to make loans to DJONT of up to an aggregate of approximately $17.3 million to the extent necessary to enable DJONT to pay rent and other obligations due under the respective Percentage Leases relating to a total of 34 of the Hotels. No loans were outstanding under such agreements at September 30, 1999. DJONT engages independent third-party managers to operate the Hotels leased by it and generally pays such managers a base management fee based on a percentage of room and suite revenue and an incentive management fee based on DJONT's income before overhead expenses for each hotel. In certain instances, the hotel managers have subordinated fees and are committed to make subordinated loans to DJONT, if needed, to meet its rental and other obligations under the Percentage Leases. Bristol serves as both the lessee and manager of 100 Hotels leased to it by the Company at September 30, 1999 and, as such, is compensated for both roles through the profitability of the Hotels, after meeting their operating expenses and rental obligations under the Percentage Leases. 10 11 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED) Bristol has entered into an absolute and unconditional guarantee of the obligations of the Bristol Lessees under the Percentage Leases, and is required to maintain a minimum liquid net worth. A portion of this liquid net worth is being satisfied through a letter of credit for the benefit of the Company. This letter of credit is subject to periodic reductions upon satisfaction of certain conditions and, at September 30, 1999, was in the amount of $9.1 million. According to Bristol's financial statements filed with the SEC, for the three and nine months ended September 30, 1999, Bristol had net income of $1.9 and $7.5 million, respectively, and at September 30, 1999, had stockholders' equity of $43.0 million. Bristol is a public company whose common stock is listed on the New York Stock Exchange under the symbol BH and that files its financial statements with the SEC in accordance with the Securities and Exchange Act of 1934. The Company presently expects to spend approximately $225 million during 1999 for capital improvements at the Hotels, consisting of both the 1999 renovation and redevelopment program and routine capital replacements and improvements, which may be funded from cash on hand or borrowings under its Line of Credit. Through the nine months ending September 30, 1999, the Company had spent approximately $193 million on such capital improvements. 6. SUPPLEMENTAL CASH FLOW INFORMATION During the first nine months of 1999, the Company purchased the land related to three hotels which were previously leased under long term land leases for an aggregate purchase price of $19.8 million as follows (in thousands): Assets acquired................................................. $ 19,776 Debt assumed.................................................... (7,800) Operating Partnership units issued.............................. (1,174) -------- Net cash paid by the Company............................... $ 10,802 ========
The debt assumed was paid off immediately after the purchase. 11 12 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Segment Information The Company has determined that its reportable segments are those that are consistent with the Company's method of internal reporting, which segments its business by Lessee. The Company's Lessees at September 30, 1999 were DJONT and Bristol. Prior to July 28, 1998 (the date of the Bristol Merger) the Company had only one Lessee, DJONT. The following tables present information for the reportable segments for the nine months ended September 30, 1999 and 1998 (in thousands) for both DJONT and Bristol:
CORPORATE SEGMENT NOT ALLOCABLE CONSOLIDATED NINE MONTHS ENDED SEPTEMBER 30, 1999 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL - --------------------------------------------- ------------ ------------ ------------ ------------ ------------ Statements of Operations Information: Revenues: Percentage lease revenue ................. $ 201,712 $ 175,768 $ 377,480 $ 377,480 Equity in income from unconsolidated entities ................................. 5,595 595 6,190 6,190 Other revenue ............................ 234 1,296 1,530 $ 986 2,516 ------------ ------------ ------------ ------------ ------------ Total revenues ................. 207,541 177,659 385,200 986 386,186 ------------ ------------ ------------ ------------ ------------ Expenses: General and administrative ............... 7,696 7,696 Depreciation ............................. 60,411 52,378 112,789 112,789 Taxes, insurance, and other .............. 25,257 35,129 60,386 60,386 Interest expense ......................... 90,692 90,692 Minority interest in other partnerships .. 1,987 1,987 1,987 ------------ ------------ ------------ ------------ ------------ Total expenses ................. 87,655 87,507 175,162 98,388 273,550 ------------ ------------ ------------ ------------ ------------ Income before extraordinary charge .......... $ 119,886 $ 90,152 $ 210,038 $ (97,402) $ 112,636 ============ ============ ============ ============ ============ Funds From Operations: Income before extraordinary charge .......... $ 119,886 $ 90,152 $ 210,038 $ (97,402) $ 112,636 Series B preferred distributions ............ (9,703) (9,703) Depreciation ................................ 60,411 52,378 112,789 112,789 Depreciation for unconsolidated entities .... 6,827 563 7,390 7,390 ------------ ------------ ------------ ------------ ------------ Funds from operations ....................... $ 187,124 $ 143,093 $ 330,217 $ (107,105) $ 223,112 ============ ============ ============ ============ ============ Weighted average units outstanding(1) ....... 75,928
12 13 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. SEGMENT INFORMATION (CONTINUED)
CORPORATE SEGMENT NOT ALLOCABLE CONSOLIDATED NINE MONTHS ENDED SEPTEMBER 30, 1998 DJONT BRISTOL(2) TOTAL TO SEGMENTS TOTAL - --------------------------------------------- ------------ ------------ ------------ ------------ ------------ Statements of Operations Information: Revenues: Percentage lease revenue ................. $ 182,341 $ 41,434 $ 223,775 $ 223,775 Equity in income from unconsolidated entities ............................... 6,305 124 6,429 6,429 Other revenue ............................ 215 215 $ 3,111 3,326 ------------ ------------ ------------ ------------ ------------ Total revenues ................. 188,646 41,773 230,419 3,111 233,530 ------------ ------------ ------------ ------------ ------------ Expenses: General and administrative ............... 4,026 4,026 Depreciation ............................. 51,731 9,305 61,036 61,036 Taxes, insurance, and other .............. 22,164 7,326 29,490 29,490 Interest expense ......................... 46,486 46,486 Minority interest in other partnerships .. 805 805 805 ------------ ------------ ------------ ------------ ------------ Total expenses ................. 74,700 16,631 91,331 50,512 141,843 ------------ ------------ ------------ ------------ ------------ Income before extraordinary charge .......... $ 113,946 $ 25,142 $ 139,088 $ (47,401) $ 91,687 ============ ============ ============ ============ ============ Funds From Operations: Income before extraordinary charge .......... $ 113,946 $ 25,142 $ 139,088 $ (47,401) $ 91,687 Series B preferred distributions ............ (5,139) (5,139) Depreciation ................................ 51,731 9,305 61,036 61,036 Depreciation for unconsolidated entities .... 7,604 7,604 7,604 ------------ ------------ ------------ ------------ ------------ Funds from operations ....................... $ 173,281 $ 34,447 $ 207,728 $ (52,540) $ 155,188 ============ ============ ============ ============ ============ Weighted average units outstanding(1) ....... 52,017
- --------- (1) Weighted average units outstanding are computed including dilutive options, unvested stock grants, and assuming conversion of Series A Preferred Units to Units. (2) Bristol information is presented from July 28, 1998, the date of the Bristol Merger. 8. SUBSEQUENT EVENTS On October 15, 1999, the Company and Starwood, in a 50/50 joint venture, acquired the 437-room Sheraton Premier Hotel in Tysons Corner, Virginia, a suburb of Washington, DC, for a purchase price of $52.9 million. The purchase price consisted of approximately $52.8 million in cash and 3,571 Operating Partnership Units valued at $28 per unit. A subsidiary of Starwood will manage the hotel under a 20-year management agreement. Beginning in October of 1999 through November 10, 1999 the Company purchased approximately 2.1 million shares of outstanding common stock of FelCor on the open market pursuant to its previously announced $100 million stock buyback program. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For background information relating to the Company and the definitions of certain capitalized terms used herein, reference is made to Note 1 of Notes to Consolidated Financial Statements of FelCor Lodging Limited Partnership appearing elsewhere herein. THIRD QUARTER ACTIVITIES: FINANCIAL PERFORMANCE (AS COMPARED TO THIRD QUARTER 1998): o Revenues increased 14.3% to $124 million o Net income applicable to unitholders decreased 24% to $24.9 million o EBITDA increased 9.4% to $106 million o Funds From Operations ("FFO") increased 1% to $69 million o Comparable hotels (150 hotels) RevPAR increased 1.8% o Non-comparable hotels (33 hotels) RevPAR increased 21.4% o Total hotel portfolio (183 hotels) RevPAR increased 4.4% HOTEL RENOVATION, REDEVELOPMENT AND REBRANDING: o Completed $11.7 million in renovations at three hotels including our 18th Crowne Plaza hotel, at Old Mill, Omaha, Nebraska o Fifteen additional hotels were undergoing renovation o Capital expenditures to the hotel portfolio totaled $13 million o Approximately 1% of room nights were out-of-service RESULTS OF OPERATIONS The Company Nine Months Ended September 30, 1999 and 1998 For the nine months ended September 30, 1999 and 1998, the Company had revenues of $386.2 million and $233.5 million, respectively, consisting primarily of Percentage Lease revenues of $377.5 million and $223.8 million, respectively. The increase in total revenue is primarily attributable to the Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of interests in more than 100 additional hotels since June 30, 1998, including 101 hotels (net of hotels subsequently sold) that were acquired through the Bristol Merger on July 28, 1998. Those hotels owned for all of the nine months ended September 30, 1999 and 1998 recorded an increase in Percentage Lease revenues of $6 million or 3.5%. The Company generally seeks to improve those of its hotels that management believes can achieve increases in room and suite revenue and RevPAR as a result of renovation, redevelopment and rebranding. However, during the course of such improvements hotel revenue performance is often adversely affected by such temporary factors as rooms and suites out of service and disruptions of hotel operations. (A more detailed discussion of hotel room and suite revenue is contained in "The Hotels" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.) 14 15 Total expenses increased $131.8 million in the nine months ended September 30, 1999, from $141.8 million to $273.6 million, compared to the same period in 1998. This increase resulted primarily from the additional hotels acquired in 1998 through the Bristol Merger. Total expenses as a percentage of total revenue increased to 70.8% for the nine months ended September 30, 1999, from 60.7% in the same period of 1998. The major components of the increase in expenses, as a percentage of total revenue, are depreciation; taxes, insurance, and other; and interest expense. Depreciation increased as a percentage of total revenue to 29.2% in the nine months ended September 30, 1999, from 26.1% in the nine months ended September 30, 1998. The relative increase in depreciation expense is primarily attributed to depreciation on $230 million in capital expenditures made over the past twelve months. A large percentage of these improvements are short-lived assets. Taxes, insurance, and other, as a percentage of total revenue, increased from 12.6% to 15.6%. The majority of the increase, as a percentage of total revenue, is attributed to land lease expenses, which represent 3.5% of total revenue in 1999 but only 1.5% in 1998. Land lease expenses, as a percentage of total revenue, increased principally because of the larger number of hotels subject to land leases acquired through the Bristol Merger. The remaining increase in taxes, insurance, and other, as a percentage of total revenue, is related primarily to increased property taxes resulting from property tax reassessments. Interest expense increased, as a percentage of total revenue, to 23.5% in the nine months ended September 30, 1999, from 19.9% in the nine months ended September 30, 1998. This increase in interest expense is attributed to the increased debt used to finance renovations, refinancing of debt at higher rates which served to extend maturities and convert such debt from variable to fixed rates, and the assumption of debt related to the more highly leveraged Bristol assets. Three Months Ended September 30, 1999 and 1998 For the three months ended September 30, 1999 and 1998, the Company had revenues of $124.1 million and $108.6 million, respectively, consisting primarily of Percentage Lease revenues of $120.6 million and $104.9 million, respectively. The increase in total revenue is primarily attributed to the Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of interests in more than 100 additional hotels since June 30, 1998, including 101 hotels (net of hotels subsequently sold) that were acquired through the Bristol Merger on July 28, 1998. Those hotels owned for all of both quarters ended September 30, 1999 and 1998, recorded a small decrease in Percentage Lease revenues of $1.8 million for the three months ended September 30, 1999 versus 1998. Total expenses increased $25.9 million in the three months ended September 30, 1999, from $67.1 million to $93.0 million, compared to the same period in 1998. This increase resulted primarily from the additional hotels acquired on July 28, 1998 through the Bristol Merger. Total expenses as a percentage of total revenue increased to 74.9% for the three months ended September 30, 1999, from 61.8% in the same period of 1998. The major components of the increase in expenses, as a percentage of total revenue are general and administrative expenses; depreciation; taxes, insurance, and other; and interest expense. General and administrative expenses increased as a percentage of total revenue from 1.3% in the quarter ended September 30, 1998 to 2.4% for the quarter ended September 30, 1999. Included in the 1999 quarter was approximately $600,000 (0.5% of total revenues) of one time costs primarily associated with the write-off of costs of a public debt offering which was abandoned when interest rates became unattractive. 15 16 Depreciation increased as a percentage of total revenue to 31.1% in the three months ended September 30, 1999, from 25.5% in the three months ended September 30, 1998. The relative increase in depreciation expense is primarily related to depreciation on $230 million in capital expenditures made over the past twelve months. A large percentage of these improvements are short-lived assets. Taxes, insurance and other, as a percentage of total revenue increased from 13.5% to 15.7% for the three months ended September 30, 1999, as compared to the same quarterly period in 1998. This increase is principally related to increased assessments for property taxes. The property tax increases resulted primarily from increases in property valuations on reappraisals, which typically follow a change in ownership, as with the hotels acquired in the Bristol Merger, and the redevelopment and rebranding of hotels. Interest expense increased as a percentage of total revenue, to 25.4% in the three months ended September 30, 1999, from 21.1% in the three months ended September 30, 1998. The increase is related to approximately $200 million additional debt outstanding at September 30, 1999, as compared to September 30, 1998, used principally for funding capital improvements and to the refinancing of approximately $635 million of debt at higher interest rates in 1999 to extend maturities and convert such debt from variable to fixed rates. Funds From Operations The Company considers Funds From Operations to be a key measure of a REIT's performance and should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company's and FelCor's operating performance and liquidity. The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines Funds From Operations as net income or loss (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of properties, plus real estate related depreciation and amortization, after comparable adjustments for the Company's portion of these items related to unconsolidated entities and joint ventures. The Company believes that Funds From Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures, to pay dividends and to fund other cash needs. The Company computes Funds From Operations in accordance with standards established by NAREIT which may not be comparable to Funds From Operations reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. Funds From Operations does not represent cash generated from operating activities as determined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company 's liquidity, nor does it necessarily reflect the funds available to fund the Company's cash needs, including its ability to make cash distributions. Funds From Operations may include funds that may not be available for management's discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. 16 17 The following table details the computation of Funds From Operations (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ FUNDS FROM OPERATIONS (FFO): Net income ......................................... $ 31,115 $ 38,974 $ 111,523 $ 88,612 Series B preferred distributions ................ (3,234) (3,234) (9,703) (5,139) Extraordinary charge from write off of deferred financing fees .................... 2,519 1,113 3,075 Depreciation .................................... 38,627 27,720 112,789 61,036 Depreciation for unconsolidated entities ........ 2,372 2,501 7,390 7,604 ------------ ------------ ------------ ------------ FFO ................................................ $ 68,880 $ 68,480 $ 223,112 $ 155,188 ============ ============ ============ ============ Weighted average units outstanding ................. 75,898 66,603 75,928 52,017
Included in the FFO computed above is the Company's share of FFO from its interests in separate entities owning 15 hotels, a condominium management company and an entity that is developing condominiums for sale and owns a hotel annex. The FFO contribution from these unconsolidated entities is derived as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ STATEMENTS OF OPERATIONS INFORMATION: Percentage lease revenue ......................... $ 13,998 $ 13,575 $ 40,968 $ 40,144 Other income ..................................... 2,828 2,087 7,155 3,201 ------------ ------------ ------------ ------------ Total revenue ............................ 16,826 15,662 48,123 43,345 ------------ ------------ ------------ ------------ Expenses: Depreciation ................................ 4,511 4,261 14,019 12,804 Taxes, insurance, and other ................. 2,805 2,303 7,830 5,462 Interest expense ............................ 3,627 3,373 10,314 9,727 ------------ ------------ ------------ ------------ Total expenses ........................... 10,943 9,937 32,163 27,993 ------------ ------------ ------------ ------------ Net income ....................................... $ 5,883 $ 5,725 $ 15,960 $ 15,352 ============ ============ ============ ============ Percentage of net income attributable to the Company ..................................... $ 2,888 $ 2,862 $ 7,796 $ 7,676 Amortization of cost in excess of book value ..... (535) (416) (1,606) (1,247) ------------ ------------ ------------ ------------ Equity in income from unconsolidated entities .... 2,353 2,446 6,190 6,429 Depreciation ..................................... 2,312 2,085 7,202 6,357 Amortization of cost in excess of book value ..... 535 416 1,606 1,247 ------------ ------------ ------------ ------------ FFO from unconsolidated entities ................. $ 5,200 $ 4,947 $ 14,998 $ 14,033 ============ ============ ============ ============
17 18 The Hotels Upscale and full service hotels, like Embassy Suites, Crowne Plaza, Holiday Inn and Holiday Inn Select, Doubletree and Doubletree Guest Suites, Sheraton and Sheraton Suites, and Westin, are expected to account for approximately 97% of Percentage Lease revenue in 1999. The following tables set forth historical occupancy, average daily rate ("ADR") and RevPAR at September 30, 1999 and 1998, and the percentage changes therein between the years presented for the Hotels in which the Company had an ownership interest at September 30, 1999. This information is presented regardless of the date of acquisition. COMPARABLE HOTELS (A)
THIRD QUARTER 1999 YEAR TO DATE 1999 ------------------------------------- ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR ---------- ---------- ---------- ---------- ---------- ---------- Original 75.1% $ 110.91 $ 83.26 73.7% $ 115.15 $ 84.90 CSS Hotels 75.6 121.01 91.43 75.5 126.65 95.68 1996 Acquisitions 75.6 127.93 96.73 74.4 129.73 96.48 1997 Acquisitions 72.2 113.32 81.84 72.9 116.24 84.77 1998 Acquisitions 70.4 97.41 68.58 Total DJONT Comparable Hotels 73.9 115.93 85.63 74.2 122.05 90.54 Total Bristol Comparable Hotels 71.6 84.83 60.75 70.4 79.90 56.25 Total Comparable Hotels 72.7% $ 99.72 $ 72.47 72.5% $ 103.53 $ 75.03
THIRD QUARTER 1998 YEAR TO DATE 1998 ------------------------------------- ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR ---------- ---------- ---------- ---------- ---------- ---------- Original 74.6% $ 109.05 $ 81.30 74.9% $ 113.56 $ 85.02 CSS Hotels 73.5 121.98 89.65 74.6 126.19 94.16 1996 Acquisitions 77.2 126.26 97.51 75.6 127.34 96.23 1997 Acquisitions 73.1 110.66 80.93 73.5 113.70 83.53 1998 Acquisitions 73.8 97.36 71.81 Total DJONT Comparable Hotels 74.1 114.63 84.97 74.5 120.39 89.68 Total Bristol Comparable Hotels 71.8 82.21 59.01 70.4 79.75 56.11 Total Comparable Hotels 72.9% $ 97.70 $ 71.20 72.6% $ 102.52 $ 74.44
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD 3RD QTR. 1999 VS. 3RD QTR. 1998 1999 VS. 1998 YEAR TO DATE ------------------------------------- ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR ---------- ---------- ---------- ---------- ---------- ---------- Original Hotels 0.5 pts 1.7% 2.4% (1.2) pts 1.4% (0.1)% CSS Hotels 2.1 (0.8) 2.0 0.9 0.4 1.6 1996 Acquisitions (1.6) 1.3 (0.8) (1.2) 1.9 0.3 1997 Acquisitions (0.9) 2.4 1.1 (0.6) 2.2 1.5 1998 Acquisitions (3.4) 0.1 (4.5) Total DJONT Comparable Hotels (0.2) 1.1 0.8 (0.3) 1.4 1.0 Total Bristol Comparable Hotels (0.2) 3.2 2.9 0.0 0.2 0.2 Total Comparable Hotels (0.2) pts 2.1% 1.8% (0.1) pts 1.0% 0.8%
(A) DJONT Comparable Hotels includes 74 and 60 hotels, and Bristol Comparable Hotels includes 76 and 49 hotels, in the third quarter and year to date, respectively, which were not undergoing redevelopment in either the 1999 or 1998 periods reported. 18 19 NON-COMPARABLE HOTELS (B)
THIRD QUARTER 1999 YEAR TO DATE 1999 ------------------------------------ ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ---------- ---------- ---------- ---------- ---------- DJONT Non-comparable Hotels 64.4% $ 92.37 $ 59.51 68.5% $ 107.16 $ 73.41 Bristol Non-comparable Hotels 67.1% $ 92.38 $ 62.02 67.8% $ 89.26 $ 60.55 Total Non-comparable Hotels 66.2% $ 92.38 $ 61.16 68.1% $ 95.08 $ 64.71
THIRD QUARTER 1998 YEAR TO DATE 1998 ------------------------------------ ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ---------- ---------- ---------- ---------- ---------- DJONT Non-comparable Hotels 61.6% $ 89.74 $ 55.32 70.9% $ 104.91 $ 74.44 Bristol Non-comparable Hotels 59.1% $ 80.78 $ 47.72 67.4% $ 83.75 $ 56.42 Total Non-comparable Hotels 60.0% $ 84.01 $ 50.38 68.5% $ 90.91 $ 62.31
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD 3RD QTR. 1999 VS. 3RD QTR. 1998 1999 VS. 1998 YEAR TO DATE ------------------------------------- ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR ---------- ---------- ---------- ---------- ---------- ---------- DJONT Non-comparable Hotels 2.8pts 2.9% 7.6% (2.4) pts 2.1% (1.4)% Bristol Non-comparable Hotels 8.0pts 14.4% 30.0% 0.4 pts 6.6% 7.3% Total Non-comparable Hotels 6.2pts 10.0% 21.4% (0.4) pts 4.6% 3.8%
(B) DJONT Non-comparable Hotels includes 12 and 26 hotels and Bristol Non-comparable Hotels includes 21 and 48 hotels, in the third quarter and year to date, respectively, undergoing redevelopment in either the 1999 or 1998 periods reported. The Bristol Non-comparable Hotels excludes four hotels targeted for sale. ALL HOTELS (C)
THIRD QUARTER 1999 YEAR TO DATE 1999 ------------------------------------ ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ---------- ---------- ---------- ---------- ---------- Comparable Hotels 72.7% $ 99.72 $ 72.47 72.5% $ 103.53 $ 75.03 Non-comparable Hotels 66.2% $ 92.38 $ 61.16 68.1% $ 95.08 $ 64.71 Total Hotels 71.5% $ 98.47 $ 70.40 70.5% $ 99.89 $ 70.42
THIRD QUARTER 1998 YEAR TO DATE 1998 ------------------------------------ ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ---------- ---------- ---------- ---------- ---------- Comparable Hotels 72.9% $ 97.70 $ 71.20 72.6% $ 102.52 $ 74.44 Non-comparable Hotels 60.0% $ 84.01 $ 50.38 68.5% $ 90.91 $ 62.31 Total Hotels 70.5% $ 95.60 $ 67.44 70.8% $ 97.53 $ 69.06
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD 3RD QTR. 1999 VS. 3RD QTR. 1998 1999 vs. 1998 Year to Date ------------------------------------- ------------------------------------- OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR ---------- ---------- ---------- ---------- ---------- ---------- Comparable Hotels (0.2)pts 2.1% 1.8% (0.1) pts 1.0% 0.8% Non-comparable Hotels 6.2 pts 10.0% 21.4% (0.5) pts 4.6% 3.8% Total Hotels 1.0 pts 3.0% 4.4% (0.3) pts 2.4% 2.0%
19 20 (C) Excludes four hotels targeted for sale. Comparison of The Hotels' Operating Statistics for the Three and Nine Months Ended September 30, 1999 and 1998 The Company measures hotel operating statistics by looking at hotels that were not undergoing major renovation during either the current year period or the prior year period ("Comparable Hotels"). Major renovations generally adversely affect the earnings of the hotel by taking rooms out of service and disrupting hotel operations. For the three and nine months ended September 30, 1999 the Company's Comparable Hotels had increases in RevPAR, compared to the same period in 1998, of 1.8% and 0.8%, respectively. In both the quarter and nine months ended September 30, 1999 the Comparable Hotels had higher ADR, than in the prior year, increasing 2.1% and 1.0%, respectively, but occupied rooms ("Occupancy") fell 0.2 percentage points and 0.1 percentage points, respectively. In general, the Company is encouraged by the relative firming of rates compared to the prior year. This appears to be indicative of the absorption of the new rooms introduced in certain markets during the past year. The strongest improvements in the quarter ended September 30, 1999, compared to the same period of 1998, came in the Comparable DJONT Original Hotels, DJONT CSS Hotels and the Comparable Bristol Hotels. Much of the strength from the Comparable DJONT Original Hotels and CSS Hotels came from those parts of Florida that were not directly threatened by hurricanes in the quarter. Additionally, California and New Orleans continue to generate strong demand and room rates. These hotels recorded increased Occupancy over the same quarter last year and ADR was either up or essentially flat to the prior year. For the nine months ended September 30, 1999, these hotels had improvements in ADR compared to the same period in 1998 and the CSS Hotels also had an increase in Occupancy of 0.9 percentage points for the nine months ended September 30, 1999 over 1998. The Original Hotels, however, had a 1.2 percentage point decline in Occupancy for the nine months ended September 30, 1999, compared to 1998. The DJONT Comparable Hotels that did not trend upward in the third quarter of 1999 were from the 1996 Acquisitions and 1998 Acquisitions. RevPAR performance at these hotels was adversely affected by over building in certain markets, such as Atlanta, Dallas and Phoenix. The Company anticipates that as the excess supply from recent building is absorbed in these markets, RevPAR performance will strengthen. However, the 1996 Acquisitions continued to show an increase in ADR for the nine months ended September 30, 1999 compared to the same period in 1998. The Bristol Comparable Hotels continue to have strong showings from the Holiday Inn-branded hotels which make up approximately 70% of the quarterly Bristol Comparable room revenues. These Comparable Hotels had a 4.7% RevPAR growth over the same quarterly period in 1998, which brought up the increase in RevPAR for the nine months ended September 30, 1999 to 1.5%. The Company attributes the strong performance at the Holiday Inn-branded hotels to recently completed renovation programs and the strong RevPAR increases being recognized at Bass Hotels & Resorts-branded hotels from an overall repositioning of the brands. The Company anticipates that these favorable trends for the Bristol Comparable Hotels will continue at least through the end of the year. The Non-comparable Hotel performance for the quarter was most profoundly affected by the Allerton Crowne Plaza, which was closed in the third quarter 1998 for renovation. This hotel reopened in the second quarter of 1999 and generated a nearly 380% increase in its RevPAR for the third quarter 1999, as compared to the same period in 1998. The remainder of the Bristol Non-comparable Hotels also showed strong improvements in RevPAR during the quarter which are attributed to the completion of the renovation at many of these hotels. The DJONT Non-comparable Hotels are also generally showed strong RevPAR increases for the third quarter, compared to the same period last year, in spite of being partially offset by decreases in ADR at six hotels that were undergoing renovations during the third quarter of 1999. 20 21 RENOVATION, REDEVELOPMENT, REBRANDING, AND OTHER CAPITAL EXPENDITURES Through September 30, 1999, the Company had spent $193 million (of a planned $225 million) on its 1999 program for the renovation, redevelopment, or rebranding of over 60 hotels, and capital expenditures to maintain the remaining hotels in a competitive condition. In the third quarter of 1999, approximately $13.1 million was spent on the 1999 renovation program and $11 million was spent on other routine capital improvements. The renovation and redevelopment program for 1999 was approximately 90% complete as of the end of the third quarter. Renovations were completed at the Allerton Crowne Plaza hotel in Chicago, Illinois, which was closed during most of the first half of 1999. The Company presently expects to spend approximately an additional $30 million to complete the 15 projects in process at the end of the third quarter, to complete 2 additional smaller renovation projects and for other capital improvements in 1999. In 2000, the Company currently expects to spend approximately $40 million on the renovation, redevelopment and rebranding of its existing hotels. Eighteen hotels (8 of which are Bristol-operated hotels) were undergoing renovation, redevelopment, or rebranding during the quarter, which resulted in approximately 40,000 room nights out-of-service, or approximately 1.0% of available room nights. Approximately 2.3% of available rooms were out-of-service during the first nine months of 1999. Many of these projects also include renovations to the hotel's exterior, public areas, meeting spaces and restaurants, which typically have a negative impact on hotel revenues. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to meet its cash requirements, including distributions and repayments of indebtedness, is its share of the cash flow from the Percentage Leases. For the nine months ended September 30, 1999, net cash flow provided by operating activities, consisting primarily of Percentage Lease revenue, was $238 million and Funds From Operations was $223 million. The Lessees' obligations under the Percentage Leases are largely unsecured. The Lessees have limited capital resources, and, accordingly, their ability to make lease payments under the Percentage Leases is substantially dependent on the ability of the Lessees to generate sufficient cash flow from the operation of the Hotels. At September 30, 1999, DJONT had a cumulative shareholders' deficit of $15 million. The shareholders' deficit results primarily from losses incurred as a consequence of the one-time costs of the renovation, redevelopment and rebranding programs at the Hotels and the substantial number of room and suite nights lost due to renovation. Currently, management expects DJONT to be profitable in the fourth quarter and to recognize only a small loss for the year. It is anticipated that a substantial portion of any future profits of DJONT will be retained until a positive shareholders' equity is restored. It is anticipated that DJONT's future earnings will be sufficient to enable it to continue to make its lease payments under the Percentage Leases. Certain entities owning interests in DJONT and the managers of certain hotels have agreed to make loans to DJONT of up to an aggregate of approximately $17.3 million to the extent necessary to enable DJONT to pay rent and other obligations when due under the respective Percentage Leases relating to a total of 34 of the Hotels. No loans were outstanding under such agreements at September 30, 1999. Bristol has entered into an absolute and unconditional guarantee of the obligations of the Bristol Lessees under the Percentage Leases, and is required to maintain a minimum liquid net worth. A portion of this liquid net worth is being satisfied through a letter of credit for the benefit of the Company. This letter of credit is subject to periodic reductions upon satisfaction of certain conditions and, at September 30, 1999, was in the amount of $9.1 million. According to Bristol's financial statements filed with the SEC, for the three and nine months ended September 30, 1999, Bristol had net income of $1.9 and $7.5 million, respectively, and at September 30, 1999, had stockholders' equity of $43.0 million. 21 22 The Company may incur indebtedness to make property acquisitions, to purchase shares of FelCor's capital stock, or to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to the extent that working capital and cash flow from the Company's investments are insufficient for such purposes. FelCor's board of directors has authorized FelCor to repurchase up to $100 million of its outstanding common shares and the stock repurchases may, at the discretion of the Company's management, be made from time to time at prevailing prices in the open market or through privately negotiated transactions. The Company expects to fund the repurchase program through the use of cash, existing credit facilities, proceeds from the sale of assets and debt refinancings. Beginning in October of 1999 through November 10, 1999 the Company purchased approximately 2.1 million shares of outstanding common stock of FelCor on the open market pursuant to its previously announced $100 million stock buyback program. The Line of Credit and the Senior Term Loan contain various affirmative and negative covenants, including limitations on total indebtedness, total secured indebtedness, restricted payments (such as stock repurchases and cash distributions), as well as the obligation to maintain certain minimum tangible net worth and certain minimum interest and debt service coverage ratios. At September 30, 1999, the Company was in compliance with all such covenants. The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the Line of Credit and Senior Term Loan. Most of the mortgage debt is nonrecourse to the Company (with certain exceptions) and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of the mortgage debt is prepayable; subject, however, to various prepayment penalties, yield maintenance, or defeasance obligations. At September 30, 1999, the Company had $48.0 million of cash and cash equivalents and had utilized $545 million of the $850 million available under the Line of Credit. Certain significant credit and debt statistics at September 30, 1999 are as follows: o Interest coverage ratio of 3.4x o Total debt to annualized EBITDA of 4.1x o Borrowing capacity of $305 million under the Line of Credit o Consolidated debt equal to 39.4% of investment in hotels, at cost o Fixed interest rate debt equal to 60% of total debt o Weighted average maturity of fixed interest rate debt of approximately six years o Mortgage debt to total assets of 11% o Debt of less than $5 million and $32 million maturing in the remainder of 1999 and 2000, respectively. To manage the relative mix of its debt between fixed and variable rate instruments, the Company has entered into interest rate swap agreements with six financial institutions. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding debt under its Line of Credit and Senior Term Loan without an exchange of the underlying principal amount, and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid, the effective fixed rate, and the variable rate to be received by the Company at September 30, 1999, are summarized in the following table:
SWAP RATE RECEIVED SWAP RATE EFFECTIVE (VARIABLE) AT SWAP NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 9/30/99 MATURITY --------------- ------------ ---------- --------- ------------- $ 50 million 6.111% 7.736% 5.309% October 1999 $ 25 million 5.955% 7.580% 5.373% November 1999 $ 25 million 5.558% 7.183% 5.371% July 2001 $ 25 million 5.548% 7.173% 5.371% July 2001 $ 75 million 5.555% 7.180% 5.371% July 2003 $100 million 5.796% 8.296% 5.371% July 2003 $ 25 million 5.826% 8.326% 5.371% July 2003 ------------ $325 million ============
22 23 The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company pursuant to the terms of its interest rate agreement and will have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which are limited to major banks and financial institutions, and it does not anticipate nonperformance by the counterparties. During the third quarter 1999, the Company entered into Forward Rate Agreements which fix three month LIBOR on $188 million of floating rate debt at an average rate of 5.93%, effective December 8, 1999. To provide for additional financing flexibility, FelCor has approximately $946 million of common stock, preferred stock, debt securities, and/or common stock warrants available for offerings under shelf registration statements previously declared effective. INFLATION Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the Lessees' ability to raise room rates. SEASONALITY The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy rates primarily during the first three quarters of each year. This seasonality can be expected to cause fluctuations in the Company's quarterly lease revenue, particularly during the fourth quarter, to the extent that it receives Percentage Rent. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in lease revenue, the Company expects to utilize cash on hand or borrowings under the Line of Credit to make distributions to its equity holders. YEAR 2000 The Year 2000 issue relates to computer programs that were written using two digits, rather than four, to define the applicable year. In those programs the year 2000 may be incorrectly identified as the year 1900, which could result in a system failure or miscalculation causing a disruption of operations, including a temporary inability to process transactions, prepare financial statements, or engage in other normal business activities. The Company believes that its efforts to identify and resolve the Year 2000 issues will avoid a major disruption of its business. The Company has assessed its internal computer systems and believe that they will properly utilize dates beyond December 31, 1999. The Company and its managers have completed the assessment of both computer and noninformation technology systems to determine if the Hotels are Year 2000 compliant. This assessment included embedded systems that operate elevators, phone systems, energy maintenance systems, security systems, and other systems. Most of the upgrades to make a hotel Year 2000 compliant had been anticipated as part of the renovation, redevelopment, and rebranding program that the Company generally undertakes upon acquisition of a hotel. The Company has spent approximately $8 million through the third quarter of 1999 to remediate Year 2000 issues and anticipates spending an additional $1 million to remediate all Year 2000 issues, which amount is included in the Company's 1999 capital plans. The majority of the unspent funds relate to the acquisition and systematic implementation of Year 2000 compliant computer hardware and software for the Hotels. The Company and the managers of the Hotels are confident this phase of the project will be completed by December 15, 1999. 23 24 Concurrent with the assessment of the Year 2000 issue, the Company and its hotel managers and Lessees are developing contingency plans intended to mitigate and respond to disruptions in business operations that may result from Year 2000 issues, and are developing cost estimates for such plans. This phase of the Year 2000 project will extend into 2000. The Company and the operators of the Hotels rely upon operational and financial systems provided by independent, external providers of products and services. These businesses include suppliers of electricity, natural gas, telephone service and other public utilities, financial institutions, and airlines. Since the Company does not control these external businesses, it cannot ensure they will be ready for Year 2000, which in turn could disrupt the operations of the Hotels or cause potential hotel guests to postpone or cancel their travel plans. The Company has received assurances from the managers of the Hotels, the franchisors of the Hotels and the Lessees, that they have implemented appropriate steps to assure that the Year 2000 readiness of these external businesses. However, if these external businesses were to experience a Year 2000 problem, the resulting business disruption could have a material adverse effect on our results of operations and financial condition. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Portions of this Quarterly Report on Form 10-Q include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's current expectations are disclosed herein and in the Company's other filings under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, (collectively, "Cautionary Disclosures"). The forward looking statements included herein, and all subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf, are expressly qualified in their entirety by the Cautionary Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information and disclosures regarding market risks applicable to the Company is incorporated herein by reference to the discussion under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" contained elsewhere in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 1999. 24 25 PART II. -- OTHER INFORMATION ITEM 5. OTHER INFORMATION. For information relating to asset acquisitions and certain other transactions by the Company through September 30, 1999, see Note 1 of Notes to Consolidated Financial Statements of FelCor Lodging Limited Partnership contained in Item 1 of Part I of this Quarterly Report on Form 10-Q. Such information is incorporated herein by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: Exhibit Number Description ------- ----------- 10.8 Non-Qualified Deferred Compensation Plan, as amended and restated July 1999 (filed as Exhibit 10.9 to FelCor's Form 10-Q for the quarter ended September 30, 1999 (the "September 1999 10-Q") and incorporated herein by reference). 10.18.1 Second Amendment to Credit Agreement dated as of August 20, 1999, among FelCor Lodging Trust Incorporated and FelCor Lodging Limited Partnership, as Borrower, the financial institutions party thereto, and The Chase Manhattan Bank, as administrative agent (filed as Exhibit 10.19.1 to the September 1999 10-Q and incorporated herein by reference). 10.21.4 Second Amendment to Loan Agreement dated as of August 20, 1999, among FelCor Lodging Trust Incorporated and FelCor Lodging Limited Partnership, as Borrower, the financial institutions party thereto, and The Chase Manhattan Bank, as administrative agent (filed as Exhibit 10.22.4 to the September 1999 10-Q and incorporated herein by reference). 27 Financial Data Schedule. (b) Reports on Form 8-K: Registrant did not file any reports on Form 8-K during the third quarter of 1999. 25 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 15, 1999 FELCOR LODGING LIMITED PARTNERSHIP By: FelCor Lodging Trust Incorporated Its General Partner By: /s/ Lester C. Johnson ----------------------------------------- Lester C. Johnson Vice President and Controller (Chief Accounting Officer) 26 27 INDEX TO EXHIBITS
Exhibit Number Description -------- ----------- 10.8 Non-Qualified Deferred Compensation Plan, as amended and restated July 1999 (filed as Exhibit 10.9 to FelCor's Form 10-Q for the quarter ended September 30, 1999 (the "September 1999 10-Q") and incorporated herein by reference). 10.18.1 Second Amendment to Credit Agreement dated as of August 20, 1999, among FelCor Lodging Trust Incorporated and FelCor Lodging Limited Partnership, as Borrower, the financial institutions party thereto, and The Chase Manhattan Bank, as administrative agent (filed as Exhibit 10.19.1 to the September 1999 10-Q and incorporated herein by reference). 10.21.4 Second Amendment to Loan Agreement dated as of August 20, 1999, among FelCor Lodging Trust Incorporated and FelCor Lodging Limited Partnership, as Borrower, the financial institutions party thereto, and The Chase Manhattan Bank, as administrative agent (filed as Exhibit 10.22.4 to the September 1999 10-Q and incorporated herein by reference). 27 Financial Data Schedule.
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER 30, 1999 10Q FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SEPTEMBER 30, 1999 10Q OF FELCOR LODGING LIMITED PARTNERSHIP. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 48,027 0 19,650 0 0 67,677 4,335,853 290,495 4,271,086 130,397 1,707,981 0 295,000 0 2,086,319 4,271,086 0 386,186 0 0 0 0 90,692 112,636 0 112,636 0 1,113 0 111,523 1.31 1.30
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