10-Q 1 felcorlp-9302018x10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018

OR
o
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 333-220497 (Rangers Sub I, LLC)
Commission File Number 333-39595-01 (FelCor Lodging Limited Partnership)
  
 

RANGERS SUB I, LLC
FELCOR LODGING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)

  
 

Maryland (Rangers Sub I, LLC)
 
30-1001580
Delaware (FelCor Lodging Limited Partnership)
 
75-2544994
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
c/o RLJ Lodging Trust
 
 
3 Bethesda Metro Center, Suite 1000
 
 
Bethesda, Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)
 
(301) 280-7777
(Registrant’s Telephone Number, Including Area Code)
  
 
Indicate by check mark whether the registrant: (1) has filed all 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.
Rangers Sub I, LLC (refer to the Note below)                             o Yes  ý No 
FelCor Lodging Limited Partnership (refer to the Note below)                     o Yes  ý No 
Note: As voluntary filers not subject to the filing requirements of the Securities Exchange Act of 1934, the registrants have filed all reports pursuant to Section 13 or 15(d) for the preceding 12 months as if they were subject to such filing requirements.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  
Rangers Sub I, LLC                                         ý Yes  o No 
FelCor Lodging Limited Partnership                                 ý Yes  o No 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Rangers Sub I, LLC:
Large accelerated filer
 
o
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
ý 
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
FelCor Lodging Limited Partnership:
Large accelerated filer
 
o
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
ý 
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Rangers Sub I, LLC                                         o Yes  ý No 
FelCor Lodging Limited Partnership                                 o Yes  ý No 
As of November 7, 2018, RLJ Lodging Trust, L.P. owns 100% of the percentage interests of Rangers Sub I, LLC. As of November 7, 2018, FelCor Holdings Trust, a wholly-owned subsidiary of RLJ Lodging Trust, L.P., owns 99% of the percentage interests of FelCor Lodging Limited Partnership, and Rangers General Partner, LLC, a wholly-owned subsidiary of RLJ Lodging Trust, L.P., owns 1% of the percentage interests of FelCor Lodging Limited Partnership.
 



EXPLANATORY NOTE
 
On August 31, 2017 (the "Acquisition Date"), RLJ Lodging Trust ("RLJ"), RLJ Lodging Trust, L.P. ("RLJ LP"), Rangers Sub I, LLC, a wholly owned subsidiary of RLJ LP ("Rangers"), and Rangers Sub II, LP, a wholly owned subsidiary of RLJ LP ("Partnership Merger Sub") consummated the transactions contemplated by the Agreement and Plan of Merger (the "Merger Agreement") dated as of April 23, 2017 with FelCor Lodging Trust Incorporated ("FelCor") and FelCor Lodging Limited Partnership ("FelCor LP"), pursuant to which Partnership Merger Sub merged with and into FelCor LP, with FelCor LP surviving as a wholly owned subsidiary of RLJ LP (the "Partnership Merger"), and, immediately thereafter, FelCor merged with and into Rangers, with Rangers surviving as a wholly owned subsidiary of RLJ LP (the "REIT Merger" and, together with the Partnership Merger, the "Mergers").

Where it is important to distinguish between the entities, we either refer specifically to Rangers; FelCor (as predecessor to Rangers); or FelCor LP. Otherwise, we use the terms "we" or "our" to refer to (i) Rangers and FelCor LP, collectively (including their consolidated subsidiaries) following the Mergers and (ii) FelCor and FelCor LP, collectively (including their consolidated subsidiaries) prior to consummation of the Mergers, unless the content indicates otherwise.

This quarterly report on Form 10-Q for the quarter ended September 30, 2018 combines the filings for Rangers and FelCor LP. Rangers indirectly owns a 99% partnership interest in FelCor LP. Through FelCor LP, Rangers owns hotel properties and conducts other business.

We believe combining the periodic reports for Rangers and FelCor LP into a single combined report results in the following benefits:

•
presents the business as a whole (the same way management views and operates the business);

•
eliminates duplicative disclosure and provides a more streamlined presentation (a substantial portion of our disclosure applies to both Rangers and FelCor LP); and

•
saves time and cost by preparing combined reports instead of separate reports.

Rangers consolidates FelCor LP for financial reporting purposes. Rangers has no assets other than its indirect investment in FelCor LP and no liabilities separate from FelCor LP. Therefore, the reported assets and liabilities for Rangers and FelCor LP are substantially identical.

RLJ LP owns 100% of Rangers. Rangers indirectly owns 99% of FelCor LP. A wholly-owned subsidiary of RLJ LP owns the remaining 1% of FelCor LP, which is a noncontrolling interest that is reflected within the equity section of the consolidated balance sheets and in the consolidated statements of equity. Apart from the different equity treatment, the consolidated financial statements for Rangers and FelCor LP are nearly identical, except that net income (loss) attributable to the 1% noncontrolling interest in FelCor LP is deducted from Rangers' net income (loss) in order to arrive at net income (loss) attributable to Rangers.

We present the sections in this report combined unless separate disclosure is required for clarity.

RLJ accounted for the Mergers noted above under the acquisition method of accounting in ASC 805, Business Combinations. In accordance with the guidance, RLJ elected to apply pushdown accounting to our consolidated financial statements in order to reflect the new basis of accounting established by RLJ for the individual assets acquired and the liabilities assumed in the Mergers. Accordingly, our consolidated financial statements for the periods before and after the Acquisition Date reflect different bases of accounting, and the financial positions and the results of operations for those periods are not comparable. As a result, the consolidated financial statements and the notes to those financial statements are separated into two distinct periods; the periods prior to the Acquisition Date are identified as "Predecessor," and the periods after the Acquisition Date are identified as "Successor." The new basis of accounting for the assets and liabilities that existed on the Acquisition Date will be used in the preparation of our future financial statements and footnotes.








i



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
Rangers Sub I, LLC
 
 
Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
FelCor Lodging Limited Partnership
 
 
Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ii


PART I. FINANCIAL INFORMATION
 
Item 1.         Financial Statements
Rangers Sub I, LLC
Consolidated Balance Sheets
(Amounts in thousands)
(unaudited)

 
September 30, 2018
 
December 31, 2017
Assets
 

 
 

Investment in hotel properties, net
$
2,122,454

 
$
2,497,880

Investment in unconsolidated joint ventures
15,807

 
16,912

Cash and cash equivalents
15,735

 
14,728

Restricted cash reserves
5,225

 
3,303

Related party rent receivable
45,612

 
80,090

Intangible assets, net
46,907

 
118,170

Prepaid expense and other assets
5,101

 
12,691

Assets of hotel properties held for sale, net
25,177

 
—

Total assets
$
2,282,018

 
$
2,743,774

 
 
 
 
Liabilities and Equity
 

 
 

Debt, net
$
713,632

 
$
1,299,105

Accounts payable and other liabilities
47,042

 
54,191

Related party lease termination fee payable
17,548

 
7,707

Accrued interest
9,588

 
12,286

Distributions payable
122

 
126

Total liabilities
787,932

 
1,373,415

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Equity
 
 
 

Member's equity:
 
 
 

Member's equity
1,364,041

 
1,302,739

Retained earnings
65,260

 
4,090

Total member's equity
1,429,301

 
1,306,829

Noncontrolling interest:
 

 
 

Noncontrolling interest in consolidated joint ventures
5,918

 
5,900

Noncontrolling interest in FelCor LP
14,437

 
13,200

Total noncontrolling interest
20,355

 
19,100

Preferred equity in a consolidated joint venture, liquidation value of $45,515 and $45,430 at September 30, 2018 and December 31, 2017, respectively
44,430

 
44,430

Total equity
1,494,086

 
1,370,359

Total liabilities and equity
$
2,282,018

 
$
2,743,774


 
The accompanying notes are an integral part of these consolidated financial statements.

1

Rangers Sub I, LLC
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Amounts in thousands, except share and per share data)
(unaudited)
 
Successor
 
 
 
Predecessor
 
Successor
 
 
 
Predecessor
 
For the three months ended September 30,
 
September 1 through September 30,
 
 
July 1
through
August 31,
 
For the nine months ended September 30,
 
September 1 through
September 30,
 
 
January 1 through
August 31,
 
2018
 
2017
 
 
2017
 
2018
 
2017
 
 
2017
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Room revenue
$
—

 
$
—

 
 
$
111,977

 
$
—

 
$
—

 
 
$
425,682

Food and beverage revenue
—

 
—

 
 
20,577

 
—

 
—

 
 
90,572

Related party lease revenue
57,811

 
20,854

 
 
—

 
172,011

 
20,854

 
 
—

Other revenue
—

 
—

 
 
10,417

 
—

 
—

 
 
35,261

Total revenues
$
57,811

 
$
20,854

 
 
$
142,971

 
$
172,011

 
$
20,854

 
 
$
551,515

Expenses
 

 
 
 
 
 

 
 
 
 
 
 
 
Operating expenses
 

 
 
 
 
 

 
 
 
 
 
 
 
Room expense
$
—

 
$
—

 
 
$
28,652

 
$
—

 
$
—

 
 
$
112,813

Food and beverage expense
—

 
—

 
 
17,325

 
—

 
—

 
 
71,828

Management and franchise fee expense
—

 
—

 
 
4,625

 
—

 
—

 
 
19,901

Other operating expense
—

 
—

 
 
37,272

 
—

 
—

 
 
147,827

Total property operating expenses
—

 
—

 
 
87,874

 
—

 
—

 
 
352,369

Depreciation and amortization
19,292

 
5,974

 
 
17,699

 
60,496

 
5,974

 
 
73,065

Impairment loss
—


—

 
 
—

 
—

 
—

 
 
35,109

Property tax, insurance and other
13,947

 
4,449

 
 
12,647

 
42,834

 
4,449

 
 
44,278

General and administrative
(564
)
 
192

 
 
2,785

 
595

 
192

 
 
16,006

Transaction costs
194

 
1,039

 
 
61,932

 
2,369

 
1,039

 
 
68,248

Total operating expenses
32,869

 
11,654

 
 
182,937

 
106,294

 
11,654

 
 
589,075

Operating income (loss)
24,942

 
9,200

 
 
(39,966
)
 
65,717

 
9,200

 
 
(37,560
)
Other income
1

 
—

 
 
—

 
111

 
—

 
 
100

Interest income
70

 
3

 
 
46

 
153

 
3

 
 
126

Interest expense
(8,467
)
 
(4,779
)
 
 
(12,908
)
 
(30,221
)
 
(4,779
)
 
 
(51,690
)
Gain (loss) on sale of hotel properties, net
24,254

 
—

 
 
(891
)
 
14,930

 
—

 
 
(1,764
)
(Loss) gain on extinguishment of indebtedness, net
(1,656
)
 
—

 
 
(3,278
)
 
11,280

 
—

 
 
(3,278
)
Income (loss) before equity in income from unconsolidated joint ventures
39,144

 
4,424

 
 
(56,997
)
 
61,970

 
4,424

 
 
(94,066
)
Equity in income from unconsolidated joint ventures
218

 
115

 
 
556

 
945

 
115

 
 
1,074

Income (loss) before income tax benefit (expense)
39,362

 
4,539

 
 
(56,441
)
 
62,915

 
4,539

 
 
(92,992
)
Income tax benefit (expense)
—

 
—

 
 
551

 
—

 
—

 
 
(499
)
Income (loss) from continuing operations
39,362

 
4,539

 
 
(55,890
)
 
62,915

 
4,539

 
 
(93,491
)
Loss from discontinued operations
—

 
—

 
 
(3,415
)
 
—

 
—

 
 
(3,415
)

2

Net income (loss) and comprehensive income (loss)
39,362

 
4,539

 
 
(59,305
)
 
62,915

 
4,539

 
 
(96,906
)
Net (income) loss attributable to noncontrolling interests:
 

 
 
 
 
 
 

 
 
 
 
 
 
 
Noncontrolling interest in consolidated joint ventures
(52
)
 
(51
)
 
 
108

 
(18
)
 
(51
)
 
 
545

Noncontrolling interest in FelCor LP
(389
)
 
(45
)
 
 
274

 
(618
)
 
(45
)
 
 
495

Preferred distributions - consolidated joint venture
(374
)
 
(122
)
 
 
(252
)
 
(1,109
)
 
(122
)
 
 
(979
)
Net income (loss) and comprehensive income (loss) attributable to Rangers
38,547

 
4,321

 
 
(59,175
)
 
61,170

 
4,321

 
 
(96,845
)
Preferred dividends
—

 
—

 
 
(4,186
)
 
—

 
—

 
 
(16,744
)
Net income (loss) and comprehensive income (loss) attributable to ownership interests/common shareholders
$
38,547

 
$
4,321

 
 
$
(63,361
)
 
$
61,170

 
$
4,321

 
 
$
(113,589
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted per common share data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations per share attributable to common shareholders
 
 


 
 
$
(0.43
)
 
 
 
 
 
 
$
(0.80
)
Net loss per share attributable to common shareholders


 
 
 
 
$
(0.46
)
 


 
 
 
 
$
(0.83
)
Weighted-average number of common shares


 
 
 
 
137,904,668

 


 
 
 
 
137,331,743

 

The accompanying notes are an integral part of these consolidated financial statements.

3


Rangers Sub I, LLC
Consolidated Statements of Changes in Equity
(Amounts in thousands)
(unaudited)

 
Member's Equity
 
Noncontrolling Interest
 
 
 
 
 
Equity
 
Retained Earnings
 
FelCor LP
 
Consolidated
Joint 
Ventures
 
Preferred Equity in a Consolidated Joint Venture
 
Total 
Equity
Successor - Balance at December 31, 2017
$
1,302,739

 
$
4,090

 
$
13,200

 
$
5,900

 
$
44,430

 
$
1,370,359

Net income and comprehensive income
—

 
61,170

 
618

 
18

 
1,109

 
62,915

Contributions
667,115

 
—

 
6,738

 
—

 
—

 
673,853

Distributions
(605,813
)
 
—

 
(6,119
)
 
—

 
—

 
(611,932
)
Preferred distributions - consolidated joint venture
—

 
—

 
—

 
—

 
(1,109
)
 
(1,109
)
Successor - Balance at September 30, 2018
$
1,364,041

 
$
65,260

 
$
14,437

 
$
5,918

 
$
44,430

 
$
1,494,086



The accompanying notes are an integral part of these consolidated financial statements.























4


Rangers Sub I, LLC
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)

 
Shareholders’ Equity
 
Noncontrolling Interest
 
 
 
 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Par 
Value
 
Additional 
Paid-in Capital
 
Accumulated Deficit
 
Consolidated
Joint 
Ventures
 
Preferred Equity in a Consolidated Joint Venture
 
Total 
Equity
Predecessor - Balance at December 31, 2016
12,879,475

 
$
309,337

 
137,990,097

 
$
1,380

 
$
2,576,988

 
$
(2,706,408
)
 
$
7,503

 
$
43,783

 
$
232,583

Net income (loss) and comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
(96,845
)
 
(545
)
 
979

 
(96,411
)
Issuance of stock awards
—

 
—

 
1,998,497

 
20

 
839

 
—

 
—

 
—

 
859

Amortization of share-based compensation
—

 
—

 
—

 
—

 
11,946

 
—

 
—

 
—

 
11,946

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
—

 
—

 
(893,309
)
 
(9
)
 
—

 
(6,425
)
 
—

 
—

 
(6,434
)
Allocation to the redeemable noncontrolling interests in FelCor LP
—

 
—

 
—

 
—

 
(196
)
 
—

 
—

 
—

 
(196
)
Contribution from the noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
333

 
—

 
333

Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(150
)
 
—

 
(150
)
Distributions on Series A preferred shares
—

 
—

 
—

 
—

 
—

 
(16,744
)
 
—

 
—

 
(16,744
)
Distributions on common shares and units
—

 
—

 
—

 
—

 
—

 
(22,468
)
 
—

 
—

 
(22,468
)
Preferred distributions - consolidated joint venture
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(979
)
 
(979
)
Issuance of preferred equity in a consolidated joint venture
—

 
—

 
—

 
—

 
—

 
—

 
—

 
647

 
647

Predecessor - Balance at August 31, 2017
12,879,475

 
$
309,337

 
139,095,285

 
$
1,391

 
$
2,589,577

 
$
(2,848,890
)
 
$
7,141

 
$
44,430

 
$
102,986

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


The accompanying notes are an integral part of these consolidated financial statements.











5


Rangers Sub I, LLC
Consolidated Statements of Changes in Equity
(Amounts in thousands)
(unaudited)

 
Member's Equity
 
Noncontrolling Interest
 
 
 
 
 
Equity
 
Retained Earnings
 
FelCor LP
 
Consolidated
Joint 
Ventures
 
Preferred Equity in a Consolidated Joint Venture
 
Total 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor - Balance at September 1, 2017
$
1,462,053

 
$
—

 
$
14,769

 
$
5,157

 
$
44,430

 
$
1,526,409

Distribution of FelCor TRS
(78,882
)
 
—

 
(797
)
 
78

 
—

 
(79,601
)
Net income and comprehensive income
—

 
4,321

 
45

 
51

 
122

 
4,539

Contributions
35,190

 
—

 
355

 
—

 
—

 
35,545

Distributions
(18,932
)
 
—

 
(191
)
 
—

 
—

 
(19,123
)
Preferred distributions - consolidated joint venture
—

 
—

 
—

 
—

 
(122
)
 
(122
)
Successor - Balance at September 30, 2017
$
1,399,429

 
$
4,321

 
$
14,181

 
$
5,286

 
$
44,430

 
$
1,467,647



The accompanying notes are an integral part of these consolidated financial statements.


6

Rangers Sub I, LLC
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
 
Successor
 
 
 
Predecessor
 
For the nine months ended September 30,
 
September 1
through
September 30,
 
 
January 1 through
August 31,
 
2018
 
2017
 
 
2017
Cash flows from operating activities
 
 
 

 
 
 

Net income (loss)
$
62,915

 
$
4,539

 
 
$
(96,906
)
Adjustments to reconcile net income (loss) to cash flow provided by operating activities:
 

 
 

 
 
 

(Gain) loss on sale of hotel properties and other assets, net
(14,930
)
 
—

 
 
5,079

Depreciation and amortization
60,496

 
5,974

 
 
73,065

Amortization of deferred financing costs
217

 
—

 
 
2,803

Other amortization
(2,877
)
 
(526
)
 
 
—

Equity in income from unconsolidated joint ventures
(945
)
 
(115
)
 
 
(1,074
)
Distributions of income from unconsolidated joint ventures
2,050

 
750

 
 
333

Amortization of fixed stock and directors' compensation
—

 
—

 
 
3,833

Equity-based severance
—

 
—

 
 
8,372

(Gain) loss on extinguishment of indebtedness, net
(11,280
)
 
—

 
 
3,278

Impairment loss
—

 
—

 
 
35,109

Changes in assets and liabilities:
 
 
 
 
 
 

Related party rent receivable
34,477

 
—

 
 
—

Hotel and other receivables, net
—

 
(12,582
)
 
 
(6,155
)
Prepaid expense and other assets
5,723

 
12

 
 
2,954

Accounts payable and other liabilities
68

 
1,349

 
 
54,361

Advance deposits and deferred revenue
—

 
—

 
 
4,426

Accrued interest
(2,698
)
 
(10,563
)
 
 
9,862

Net cash flow provided by (used in) operating activities
133,216

 
(11,162
)
 
 
99,340

Cash flows from investing activities
 
 
 

 
 
 

Proceeds from the sale of hotel properties, net
434,361

 
—

 
 
73,416

Improvements and additions to hotel properties
(58,209
)
 
(55
)
 
 
(63,802
)
Additions to property and equipment
(4
)
 
—

 
 
—

Distributions from unconsolidated joint ventures in excess of earnings
—

 
—

 
 
840

Net cash flow provided by (used in) investing activities
376,148

 
(55
)
 
 
10,454

Cash flows from financing activities
 
 
 

 
 
 

Proceeds from borrowings
—

 
—

 
 
66,000

Repayments of borrowings
(569,033
)
 
(471
)
 
 
(121,691
)
Repurchase of common shares to satisfy employee withholding requirements
—

 
—

 
 
(6,434
)
Contributions from members
673,853

 
35,545

 
 
—

Distributions to members
(610,132
)
 
(19,123
)
 
 
—

Distribution of FelCor TRS
—

 
(51,867
)
 
 
—

Distributions on preferred shares
—

 
—

 
 
(18,836
)
Distributions on common shares
—

 
—

 
 
(30,926
)
Distributions on Operating Partnership units
—

 
—

 
 
(134
)
Payments of deferred financing costs
(10
)
 
—

 
 
—

Distributions to noncontrolling interests
—

 
—

 
 
(150
)
Contributions from noncontrolling interests
—

 
—

 
 
333

Preferred distributions - consolidated joint venture
(1,113
)
 
(126
)
 
 
(977
)
Net proceeds from the issuance of preferred equity in a consolidated joint venture
—

 
—

 
 
647

Net cash flow used in financing activities
(506,435
)
 
(36,042
)
 
 
(112,168
)
Net change in cash, cash equivalents, and restricted cash reserves
2,929

 
(47,259
)
 
 
(2,374
)
Cash, cash equivalents, and restricted cash reserves, beginning of period
18,031

 
64,434

 
 
66,808

Cash, cash equivalents, and restricted cash reserves, end of period
$
20,960

 
$
17,175

 
 
$
64,434


The accompanying notes are an integral part of these consolidated financial statements.

7

FelCor Lodging Limited Partnership
Consolidated Balance Sheets
(Amounts in thousands)
(unaudited)

 
September 30, 2018
 
December 31, 2017
Assets
 

 
 

Investment in hotel properties, net
$
2,122,454

 
$
2,497,880

Investment in unconsolidated joint ventures
15,807

 
16,912

Cash and cash equivalents
15,735

 
14,728

Restricted cash reserves
5,225

 
3,303

Related party rent receivable
45,612

 
80,090

Intangible assets, net
46,907

 
118,170

Prepaid expense and other assets
5,101

 
12,691

Assets of hotel properties held for sale, net
25,177

 
—

Total assets
$
2,282,018

 
$
2,743,774

 
 
 
 
Liabilities and Partners' Capital
 

 
 

Debt, net
$
713,632

 
$
1,299,105

Accounts payable and other liabilities
47,042

 
54,191

Related party lease termination fee payable
17,548

 
7,707

Accrued interest
9,588

 
12,286

Distributions payable
122

 
126

Total liabilities
787,932

 
1,373,415

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Partners' Capital
 
 
 

Partners’ capital:
 
 
 

Partners' capital
1,377,819

 
1,315,898

Retained earnings
65,919

 
4,131

Total partners’ capital, excluding noncontrolling interest
1,443,738

 
1,320,029

Noncontrolling interest in consolidated joint ventures
5,918

 
5,900

Preferred capital in a consolidated joint venture, liquidation value of $45,515 and $45,430 at September 30, 2018 and December 31, 2017, respectively
44,430

 
44,430

Total partners' capital
1,494,086

 
1,370,359

Total liabilities and partners' capital
$
2,282,018

 
$
2,743,774

 

The accompanying notes are an integral part of these consolidated financial statements.


8

FelCor Lodging Limited Partnership
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Amounts in thousands, except unit and per unit data)
(unaudited)
 
Successor
 
 
 
Predecessor
 
Successor
 
 
 
Predecessor
 
For the three months ended September 30,
 
September 1
through
September 30,
 
 
July 1
through
August 31,
 
For the nine months ended September 30,
 
September 1
through
September 30,
 
 
January 1 through
August 31,
 
2018
 
2017
 
 
2017
 
2018
 
2017
 
 
2017
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Room revenue
$
—

 
$
—

 
 
$
111,977

 
$
—

 
$
—

 
 
$
425,682

Food and beverage revenue
—

 
—

 
 
20,577

 
—

 
—

 
 
90,572

Related party lease revenue
57,811

 
20,854

 
 
—

 
172,011

 
20,854

 
 
—

Other revenue
—

 
—

 
 
10,417

 
—

 
—

 
 
35,261

Total revenues
$
57,811

 
$
20,854

 
 
$
142,971

 
$
172,011

 
$
20,854

 
 
$
551,515

Expenses
 

 
 
 
 
 

 
 
 
 
 
 
 
Operating expenses
 

 
 
 
 
 

 
 
 
 
 
 
 
Room expense
$
—

 
$
—

 
 
$
28,652

 
$
—

 
$
—

 
 
$
112,813

Food and beverage expense
—

 
—

 
 
17,325

 
—

 
—

 
 
71,828

Management and franchise fee expense
—

 
—

 
 
4,625

 
—

 
—

 
 
19,901

Other operating expense
—

 
—

 
 
37,272

 
—

 
—

 
 
147,827

Total property operating expenses
—

 
—

 
 
87,874

 
—

 
—

 
 
352,369

Depreciation and amortization
19,292

 
5,974

 
 
17,699

 
60,496

 
5,974

 
 
73,065

Impairment loss
—

 
—

 
 
—

 
—

 
—

 
 
35,109

Property tax, insurance and other
13,947

 
4,449

 
 
12,647

 
42,834

 
4,449

 
 
44,278

General and administrative
(564
)
 
192

 
 
2,785

 
595

 
192

 
 
16,006

Transaction costs
194

 
1,039

 
 
61,932

 
2,369

 
1,039

 
 
68,248

Total operating expenses
32,869

 
11,654

 
 
182,937

 
106,294

 
11,654

 
 
589,075

Operating income (loss)
24,942

 
9,200

 
 
(39,966
)
 
65,717

 
9,200

 
 
(37,560
)
Other income
1

 
—

 
 
—

 
111

 
—

 
 
100

Interest income
70

 
3

 
 
46

 
153

 
3

 
 
126

Interest expense
(8,467
)
 
(4,779
)
 
 
(12,908
)
 
(30,221
)
 
(4,779
)
 
 
(51,690
)
Gain (loss) on sale of hotel properties, net
24,254

 
—

 
 
(891
)
 
14,930

 
—

 
 
(1,764
)
(Loss) gain on extinguishment of indebtedness, net
(1,656
)
 
—

 
 
(3,278
)
 
11,280

 
—

 
 
(3,278
)
Income (loss) before equity in income from unconsolidated joint ventures
39,144

 
4,424

 
 
(56,997
)
 
61,970

 
4,424

 
 
(94,066
)
Equity in income from unconsolidated joint ventures
218

 
115

 
 
556

 
945

 
115

 
 
1,074

Income (loss) before income tax benefit (expense)
39,362

 
4,539

 
 
(56,441
)
 
62,915

 
4,539

 
 
(92,992
)
Income tax benefit (expense)
—

 
—

 
 
551

 
—

 
—

 
 
(499
)
Income (loss) from continuing operations
39,362

 
4,539

 
 
(55,890
)
 
62,915

 
4,539

 
 
(93,491
)

9

Loss from discontinued operations
—

 
—

 
 
(3,415
)
 
—

 
—

 
 
(3,415
)
Net income (loss) and comprehensive income (loss)
39,362

 
4,539

 
 
(59,305
)
 
62,915

 
4,539

 
 
(96,906
)
Net (income) loss attributable to noncontrolling interests:
 

 
 
 
 
 

 
 
 
 
 
 
 
Noncontrolling interest in consolidated joint ventures
(52
)
 
(51
)
 
 
108

 
(18
)
 
(51
)
 
 
545

Preferred distributions - consolidated joint venture
(374
)
 
(122
)
 
 
(252
)
 
(1,109
)
 
(122
)
 
 
(979
)
Net income (loss) and comprehensive income (loss) attributable to FelCor LP
38,936

 
4,366

 
 
(59,449
)
 
61,788

 
4,366

 
 
(97,340
)
Preferred distributions
—

 
—

 
 
(4,186
)
 
—

 
—

 
 
(16,744
)
Net income (loss) and comprehensive income (loss) attributable to FelCor LP partners and common unitholders
$
38,936

 
$
4,366

 
 
$
(63,635
)
 
$
61,788

 
$
4,366

 
 
$
(114,084
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted per common unit data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations per unit attributable to common unitholders


 


 
 
$
(0.43
)
 


 


 
 
$
(0.80
)
Net loss per unit attributable to common unitholders


 
 
 
 
$
(0.46
)
 


 
 
 
 
$
(0.83
)
Weighted-average number of common units
 
 
 
 
 
138,514,851

 


 
 
 
 
137,941,926

 

The accompanying notes are an integral part of these consolidated financial statements.


10


FelCor Lodging Limited Partnership
Consolidated Statements of Partners' Capital
(Amounts in thousands)
(unaudited)

 
Partners' Capital
 
Noncontrolling Interest
 
 
 
 
 
Capital
 
Retained Earnings
 
Consolidated
Joint 
Ventures
 
Preferred Capital in a Consolidated Joint Venture
 
Total 
Partners' Capital
Successor - Balance at December 31, 2017
$
1,315,898

 
$
4,131

 
$
5,900

 
$
44,430

 
$
1,370,359

Net income and comprehensive income
—

 
61,788

 
18

 
1,109

 
62,915

Contributions
673,853

 
—

 
—

 
—

 
673,853

Distributions
(611,932
)
 
—

 
—

 
—

 
(611,932
)
Preferred distributions - consolidated joint venture
—

 
—

 
—

 
(1,109
)
 
(1,109
)
Successor - Balance at September 30, 2018
$
1,377,819

 
$
65,919

 
$
5,918

 
$
44,430

 
$
1,494,086



The accompanying notes are an integral part of these consolidated financial statements.























11


FelCor Lodging Limited Partnership
Consolidated Statements of Partners' Capital
(Amounts in thousands)
(unaudited)

 
Partners’ Capital
 
Noncontrolling Interest
 
 
 
 
 
Preferred Units
 
Common Units
 
Consolidated
Joint 
Ventures
 
Preferred Capital in a Consolidated Joint Venture
 
Total 
Partners' Capital
Predecessor - Balance at December 31, 2016
$
309,337

 
$
(128,040
)
 
$
7,503

 
$
43,783

 
$
232,583

Net income (loss) and comprehensive income (loss)
—

 
(97,340
)
 
(545
)
 
979

 
(96,906
)
Issuance of FelCor restricted stock
—

 
859

 
—

 
—

 
859

Amortization of FelCor share-based compensation
—

 
11,946

 
—

 
—

 
11,946

Shares acquired to satisfy minimum required federal and state tax withholding on vesting FelCor restricted stock
—

 
(6,434
)
 
—

 
—

 
(6,434
)
Allocation to the redeemable units in the Operating Partnership
—

 
433

 
—

 
—

 
433

Contribution from the noncontrolling interests
—

 
—

 
333

 
—

 
333

Distribution to noncontrolling interests
—

 
—

 
(150
)
 
—

 
(150
)
Distributions on preferred units
—

 
(16,744
)
 
—

 
—

 
(16,744
)
Distributions on common units
—

 
(22,602
)
 
—

 
—

 
(22,602
)
Preferred distributions - consolidated joint venture
—

 
—

 
—

 
(979
)
 
(979
)
Issuance of preferred capital in a consolidated joint venture
—

 
—

 
—

 
647

 
647

Predecessor - Balance at August 31, 2017
$
309,337

 
$
(257,922
)
 
$
7,141

 
$
44,430

 
$
102,986

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


The accompanying notes are an integral part of these consolidated financial statements.













12


FelCor Lodging Limited Partnership
Consolidated Statements of Partners' Capital
(Amounts in thousands)
(unaudited)

 
Partners' Capital
 
Noncontrolling Interest
 
 
 
 
 
Capital
 
Retained Earnings
 
Consolidated
Joint 
Ventures
 
Preferred Capital in a Consolidated Joint Venture
 
Total 
Partners' Capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor - Balance at September 1, 2017
$
1,476,822

 
$
—

 
$
5,157

 
$
44,430

 
$
1,526,409

Distribution of FelCor TRS
(79,679
)
 
—

 
78

 
—

 
(79,601
)
Net income and comprehensive income
—

 
4,366

 
51

 
122

 
4,539

Contributions
35,545

 
—

 
—

 
—

 
35,545

Distributions
(19,123
)
 
—

 
—

 
—

 
(19,123
)
Preferred distributions - consolidated joint venture
—

 
—

 
—

 
(122
)
 
(122
)
Successor - Balance at September 30, 2017
$
1,413,565

 
$
4,366

 
$
5,286

 
$
44,430

 
$
1,467,647



The accompanying notes are an integral part of these consolidated financial statements.


13

FelCor Lodging Limited Partnership
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
 
Successor
 
 
 
Predecessor
 
For the nine months ended September 30,
 
September 1
through
September 30,
 
 
January 1 through
August 31,
 
2018
 
2017
 
 
2017
Cash flows from operating activities
 
 
 

 
 
 

Net income (loss)
$
62,915

 
$
4,539

 
 
$
(96,906
)
Adjustments to reconcile net income (loss) to cash flow provided by operating activities:
 

 
 

 
 
 

(Gain) loss on sale of hotel properties and other assets, net
(14,930
)
 
—

 
 
5,079

Depreciation and amortization
60,496

 
5,974

 
 
73,065

Amortization of deferred financing costs
217

 
—

 
 
2,803

Other amortization
(2,877
)
 
(526
)
 
 
—

Equity in income from unconsolidated joint ventures
(945
)
 
(115
)
 
 
(1,074
)
Distributions of income from unconsolidated joint ventures
2,050

 
750

 
 
333

Amortization of fixed stock and directors' compensation
—

 
—

 
 
3,833

Equity-based severance
—

 
—

 
 
8,372

(Gain) loss on extinguishment of indebtedness, net
(11,280
)
 
—

 
 
3,278

Impairment loss
—

 
—

 
 
35,109

Changes in assets and liabilities:
 
 
 
 
 
 

Related party rent receivable
34,477

 
—

 
 
—

Hotel and other receivables, net
—

 
(12,582
)
 
 
(6,155
)
Prepaid expense and other assets
5,723

 
12

 
 
2,954

Accounts payable and other liabilities
68

 
1,349

 
 
54,361

Advance deposits and deferred revenue
—

 
—

 
 
4,426

Accrued interest
(2,698
)
 
(10,563
)
 
 
9,862

Net cash flow provided by (used in) operating activities
133,216

 
(11,162
)
 
 
99,340

Cash flows from investing activities
 
 
 

 
 
 

Proceeds from the sale of hotel properties, net
434,361

 
—

 
 
73,416

Improvements and additions to hotel properties
(58,209
)
 
(55
)
 
 
(63,802
)
Additions to property and equipment
(4
)
 
—

 
 
—

Distributions from unconsolidated joint ventures in excess of earnings
—

 
—

 
 
840

Net cash flow provided by (used in) investing activities
376,148

 
(55
)
 
 
10,454

Cash flows from financing activities
 
 
 

 
 
 

Proceeds from borrowings
—

 
—

 
 
66,000

Repayments of borrowings
(569,033
)
 
(471
)
 
 
(121,691
)
Repurchase of FelCor common shares to satisfy employee withholding requirements
—

 
—

 
 
(6,434
)
Contributions from partners
673,853

 
35,545

 
 
—

Distributions to partners
(610,132
)
 
(19,123
)
 
 
—

Distribution of FelCor TRS
—

 
(51,867
)
 
 
—

Distributions to preferred unitholders
—

 
—

 
 
(18,836
)
Distributions to common unitholders
—

 
—

 
 
(30,926
)
Distributions to FelCor LP limited partners
—

 
—

 
 
(134
)
Payments of deferred financing costs
(10
)
 
—

 
 
—

Distributions to noncontrolling interests
—

 
—

 
 
(150
)
Contributions from noncontrolling interests
—

 
—

 
 
333

Preferred distributions - consolidated joint venture
(1,113
)
 
(126
)
 
 
(977
)
Net proceeds from the issuance of preferred capital in a consolidated joint venture
—

 
—

 
 
647

Net cash flow used in financing activities
(506,435
)
 
(36,042
)
 
 
(112,168
)
Net change in cash, cash equivalents, and restricted cash reserves
2,929

 
(47,259
)
 
 
(2,374
)
Cash, cash equivalents, and restricted cash reserves, beginning of period
18,031

 
64,434

 
 
66,808

Cash, cash equivalents, and restricted cash reserves, end of period
$
20,960

 
$
17,175

 
 
$
64,434


The accompanying notes are an integral part of these consolidated financial statements.

14

Rangers Sub I, LLC and FelCor Lodging Limited Partnership
Notes to the Consolidated Financial Statements
(unaudited)

1.              Organization
 
Rangers Sub I, LLC ("Rangers") is a Maryland limited liability company and a wholly-owned subsidiary of RLJ Lodging Trust, L.P. ("RLJ LP"). FelCor Lodging Trust Incorporated ("FelCor") merged into and with Rangers on August 31, 2017, as further described in Note 3. In the Rangers consolidated financial statements, FelCor is presented as the Predecessor and Rangers is presented as the Successor. Rangers owns an indirect 99% partnership interest in FelCor Lodging Limited Partnership ("FelCor LP"). Rangers General Partner, LLC, also a wholly-owned subsidiary of RLJ LP, owns the remaining 1% partnership interest and is the sole general partner of FelCor LP. Rangers and FelCor LP are collectively referred to as the "Company." Substantially all of the Company’s assets and liabilities are held by, and all of its operations are conducted through FelCor LP. The Company owns primarily premium-branded, upper-upscale hotels located in major markets and resort locations.

As of September 30, 2018, the Company owned 31 hotel properties with approximately 9,365 rooms, located in 13 states.  The Company, through wholly-owned subsidiaries, owned a 100% interest in 28 hotel properties, a 95% controlling interest in The Knickerbocker, and 50% interests in entities owning two hotel properties. The Company consolidates its real estate interests in the 29 hotel properties in which it holds a controlling financial interest, and the Company records the real estate interests in the two hotels in which it holds an indirect 50% interest using the equity method of accounting. The Company leases 30 of its 31 hotel properties to subsidiaries of RLJ LP.

2.              Summary of Significant Accounting Policies
 
The combined Annual Report on Form 10-K for the year ended December 31, 2017 of Rangers and FelCor LP contains a discussion of the Company's significant accounting policies. Other than noted below, there have been no other significant changes to the Company's significant accounting policies since December 31, 2017.

Basis of Presentation and Principles of Consolidation
 
The unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. The unaudited financial statements include all adjustments that are necessary, in the opinion of management, to fairly state the consolidated balance sheets, statements of operations and comprehensive income (loss), statements of changes in equity (partners' capital) and statements of cash flows.

The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, included in the combined Annual Report on Form 10-K of Rangers and FelCor LP filed with the SEC on March 2, 2018.

The consolidated financial statements include the accounts of Rangers, FelCor LP and its wholly-owned subsidiaries, and joint ventures in which the Company has a majority voting interest and control. For the controlled subsidiaries that are not wholly-owned, the third-party ownership interest represents a noncontrolling interest, which is presented separately in the consolidated financial statements. The Company also records the real estate interests in two joint ventures in which it holds an indirect 50% interest using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates
 
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


15

Revenue

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which supersedes or replaces nearly all GAAP revenue recognition guidance. The guidance establishes a new control-based revenue recognition model that changes the basis for deciding when revenue is recognized over time or at a point in time and expands the disclosures about revenue. The guidance also applies to sales of real estate and the new principles-based approach is largely based on the transfer of control of the real estate to the buyer. The Company adopted this standard on January 1, 2018 using the modified retrospective transition method. Based on the Company's assessment, the adoption of this standard did not have an impact to the Company's consolidated financial statements.

Lease Revenue
 
The Company's hotel properties are leased through intercompany lease agreements. The Company's hotel property-owning subsidiaries (the "Lessors") lease the hotel properties to lessees owned by FelCor TRS Holdings, LLC ("FelCor TRS"), a subsidiary of RLJ LP (the "Lessees"). Base lease revenue is reported as income by the Lessor on a straight-line basis over the lease term. Percentage lease revenue is reported as income by the Lessor over the lease term when it is earned and becomes receivable from the Lessees, according to the provisions of the respective lease agreements. The Lessees are in compliance with their rental obligations under their respective lease agreements.

For the Predecessor period, the Company’s revenue consisted of room revenue, food and beverage revenue, and revenue from other hotel operating departments (such as parking fees, golf, pool and other resort fees, gift shop sales and other guest service fees). These revenues were recorded net of any sales and occupancy taxes collected from the hotel guests. All rebates or discounts were recorded as a reduction to revenue, and there are no material contingent obligations with respect to rebates and discounts offered by the hotels. All revenues were recorded on an accrual basis as they were earned. An allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the existing accounts receivable portfolio and it was recorded as a bad debt expense. The allowance for doubtful accounts was calculated as a percentage of the aged accounts receivable.  Any cash received prior to a guest's arrival was recorded as an advance deposit from the guest and recognized as revenue at the time of the guest's occupancy at the hotel property.

Investment in Hotel Properties

The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment ("FF&E"), and inventory. The Company may also acquire intangible assets or liabilities related to in-place leases, management agreements, franchise agreements and advanced bookings.  The Company allocates the purchase price among the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. The Company determines the fair value by using market data and independent appraisals available to us and making numerous estimates and assumptions. Transaction costs are expensed for acquisitions that are considered business combinations and capitalized for asset acquisitions.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The guidance clarifies the definition of a business by adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar identifiable asset(s), then the transaction is considered to be an asset acquisition (or disposition). As a result of this standard, the Company anticipates the majority of its hotel purchases will be considered asset acquisitions as opposed to business combinations, although the determination will be made on a transaction-by-transaction basis. Transaction costs associated with asset acquisitions will be capitalized rather than expensed as incurred. The Company adopted this guidance on January 1, 2018 on a prospective basis. The Company does not believe the accounting for each future acquisition (or disposal) of assets or a business will be materially different, therefore, the adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for FF&E. Maintenance and repairs are expensed and major renewals or improvements to the hotel properties are capitalized. Indirect project costs, including interest, salaries and benefits, travel and other related costs that are directly attributable to the development, are also capitalized. Upon the sale or disposition of a hotel property, the asset and related accumulated depreciation accounts are removed and the related gain or loss is included in the gain or loss on sale of hotel properties in the consolidated statements of operations and comprehensive income. A sale or disposition of a hotel

16

property that represents a strategic shift that has or will have a major effect on the Company's operations and financial results is presented as discontinued operations in the consolidated statements of operations and comprehensive income.

In accordance with the guidance on impairment or disposal of long-lived assets, the Company does not consider the "held for sale" classification on the consolidated balance sheet until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met. The Company does not depreciate assets so long as they are classified as held for sale. Upon designation as held for sale and quarterly thereafter, the Company reviews the realizability of the carrying value, less costs to sell, in accordance with the guidance. Any such adjustment to the carrying value is recorded as an impairment loss.

The Company assesses the carrying value of its hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and the Company’s intent with respect to holding or disposing of the hotel properties. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.

Sale of Real Estate

ASU 2014-09 also applies to the sale of real estate and the new principles-based approach is largely based on the transfer of control of the real estate to the buyer. In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This guidance clarifies that ASC 610-20 applies to the derecognition of nonfinancial assets, including real estate, and in substance nonfinancial assets, which are defined as assets or a group of assets for which substantially all of the fair value consists of nonfinancial assets and the group or subsidiary is not a business. As a result of this guidance, sales and partial sales of real estate assets will be accounted for similar to all other sales of nonfinancial and in substance nonfinancial assets. The Company adopted this guidance on January 1, 2018 using the modified retrospective transition method. Based on the Company's assessment, the adoption of this guidance did not have an impact on the Company's consolidated financial statements.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance will require lessees to recognize a right-of-use asset and a lease liability for most of their leases on the balance sheet, and an entity will need to classify its leases as either an operating or finance lease in order to determine the income statement presentation. Leases with a term of 12 months or less will be accounted for similar to the existing guidance today for operating leases. Lessors will classify their leases using an approach that is substantially equivalent to the existing guidance today for operating, direct financing, or sales-type leases. Lessors may only capitalize the incremental direct costs of leasing, so any indirect costs of leasing will be expensed as incurred. The guidance requires an entity to separate the lease components from the non-lease components in a contract, with the lease components being accounted for in accordance with ASC 842 and the non-lease components being accounted for in accordance with other applicable accounting guidance. The guidance is effective for annual reporting periods beginning after December 15, 2018, and the interim periods within those annual periods, with early adoption permitted. The Company will adopt this new standard on January 1, 2019. The Company has not yet completed its analysis on this standard, but it believes the application of the new standard will result in the recording of a right-of-use asset and a lease liability on the consolidated balance sheet for each of its ground leases, parking leases, and equipment leases, which represent the majority of the Company's current operating lease payments. The Company does not expect the adoption of this standard will materially affect its consolidated statements of operations and comprehensive income.

In August 2018, the SEC issued SEC Final Rule 33-10532, Disclosure Update and Simplification. The amendments simplify or eliminate duplicative, overlapping, or outdated disclosure requirements. The amendments also add certain disclosure requirements, such as requiring entities to disclose the current and comparative quarter and year-to-date changes in shareholders' equity for interim periods. The amended rules are effective for reports filed on or after November 5, 2018. However, the SEC issued Compliance & Disclosure Interpretation 105.09 that allows entities to defer the adoption of the new disclosure requirement relating to changes in shareholders' equity for interim periods until the Form 10-Q for the quarterly period that begins after November 5, 2018. The Company will adopt the new disclosure requirement relating to changes in shareholders' equity for interim periods on January 1, 2019. Based on the Company's assessment, the adoption of the new disclosures will not have a material impact on the Company's consolidated financial statements.


17

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The guidance modifies the disclosure requirements for fair value measurements by removing or modifying some of the disclosures, while also adding new disclosures. The guidance is effective for annual reporting periods beginning after December 15, 2019, and the interim periods within those annual periods, with early adoption permitted. The Company will adopt this new standard on January 1, 2020. Based on the Company's assessment, the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

3.              Merger with RLJ
 
On August 31, 2017 (the "Acquisition Date"), RLJ Lodging Trust ("RLJ"), RLJ LP, Rangers, and Rangers Sub II, LP, a wholly-owned subsidiary of RLJ LP ("Partnership Merger Sub"), consummated the transactions contemplated by the definitive Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 23, 2017, with FelCor and FelCor LP pursuant to which Partnership Merger Sub merged with and into FelCor LP, with FelCor LP surviving as a wholly-owned subsidiary of RLJ LP (the "Partnership Merger"), and, immediately thereafter, FelCor merged with and into Rangers, with Rangers surviving as a wholly-owned subsidiary of RLJ LP (the "REIT Merger" and, together with the Partnership Merger, the "Mergers").

RLJ accounted for the Mergers under the acquisition method of accounting in ASC 805, Business Combinations. In accordance with the guidance, RLJ elected to apply pushdown accounting to the Company's consolidated financial statements in order to reflect the new basis of accounting established by RLJ for the individual assets acquired and the liabilities assumed in the Mergers. Accordingly, the consolidated financial statements of the Company for the periods before and after the Acquisition Date reflect different bases of accounting, and the financial positions and the results of operations for those periods are not comparable. As a result, the consolidated financial statements and the notes to those financial statements are separated into two distinct periods; the periods prior to the Acquisition Date are identified as "Predecessor," and the periods after the Acquisition Date are identified as "Successor". The new basis of accounting for the assets and liabilities that existed on the Acquisition Date will be used in the preparation of the Company's future financial statements and footnotes.

At the closing of the Mergers, FelCor LP had controlling financial interests in the Lessors, and FelCor TRS and its property-operating subsidiaries, the Lessees. The hotel properties were leased through intercompany lease agreements between the Lessors and the Lessees, resulting in the Lessees' lease payments being eliminated in consolidation. Immediately after the consummation of the Mergers and the push down of the allocation of the purchase price consideration, FelCor LP distributed its equity interests in FelCor TRS to RLJ LP. The Company accounted for the distribution as a transaction amongst entities under common control. As a result of the distribution of the equity interests in FelCor TRS, the Lessees' lease payments pursuant to the leases are no longer eliminated in consolidation.

The following table reflects the new basis of accounting for the assets and liabilities that existed on the Acquisition Date and the impact of the distribution of the equity interests in FelCor TRS to RLJ LP:
 
August 31, 2017
 
New Basis Before
FelCor TRS Distribution
 
FelCor TRS
Distribution
 
New Basis After
FelCor TRS Distribution
Investment in hotel properties
$
2,661,114

 
$
(2,000
)
 
$
2,659,114

Investment in unconsolidated joint ventures
25,651

 
(7,900
)
 
17,751

Cash and cash equivalents
47,396

 
(40,878
)
 
6,518

Restricted cash reserves
17,038

 
(10,989
)
 
6,049

Hotel and other receivables
28,308

 
(28,308
)
 
—

Deferred income tax assets
58,170

 
(58,170
)
 
—

Intangible assets
139,673

 
(20,262
)
 
119,411

Prepaid expenses and other assets
23,811

 
(11,417
)
 
12,394

Debt
(1,305,337
)
 
—

 
(1,305,337
)
Accounts payable and other liabilities
(118,360
)
 
52,995

 
(65,365
)
Advance deposits and deferred revenue
(23,795
)
 
23,795

 
—

Accrued interest
(22,612
)
 
—

 
(22,612
)
Distributions payable
(4,312
)
 
—

 
(4,312
)
Total equity
$
1,526,745

 
$
(103,134
)
 
$
1,423,611



18

RLJ used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the equity interests acquired:
 
•
Investment in hotel properties — RLJ estimated the fair values of the land and improvements, buildings and improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the market, cost, and income approaches. These valuation methodologies are based on significant Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates, discount rates, capital expenditures, and cash flow projections at the respective hotel properties.
 
•
Investment in unconsolidated joint ventures — RLJ estimated the fair value of its real estate interests in the unconsolidated joint ventures by using the same valuation methodologies for the investment in hotel properties noted above. In addition, RLJ estimated the fair value of an unconsolidated joint venture's mortgage loan by using the same valuation methodology for the debt noted below. RLJ recognized the net assets acquired based on its respective ownership interest in the joint venture according to the joint venture agreement.

•
Deferred income tax assets — RLJ estimated the future realizable value of the deferred income tax assets by estimating the amount of the net operating loss that will be utilized in future periods by the acquired taxable REIT subsidiaries. RLJ then applied its applicable effective tax rate against the net operating losses to determine the appropriate deferred income tax assets to recognize. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.

•
Intangible assets — RLJ estimated the fair value of its below market ground lease intangible assets by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancelable term of the lease. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The below market ground lease intangible assets are amortized over the remaining terms of the respective leases as adjustments to rental expense in property tax, insurance and other in the consolidated statements of operations and comprehensive income (loss). The Company estimated the fair value of the advanced bookings intangible assets by using the income approach to determine the projected cash flows that a hotel property will receive as a result of future hotel room and guest events that have already been reserved and pre-booked at the hotel property as of the Acquisition Date. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The advanced bookings intangible asset is amortized over the duration of the hotel room and guest event reservations period at the hotel property to depreciation and amortization in the consolidated statements of operations and comprehensive income (loss). The Company recognized the following intangible assets in the Mergers (dollars in thousands):
 
 
 
 
Weighted Average Amortization Period
(in Years)
Below market ground leases
 
$
118,050

 
54
Advanced bookings
 
13,862

 
1
Other intangible assets
 
7,761

 
6
Total intangible assets
 
$
139,673

 
46

•
Above market ground lease liabilities — RLJ estimated the fair value of its above market ground lease liabilities by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancelable term of the lease. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The Company recognized approximately $15.5 million of above market ground lease liabilities in the Mergers, which are included in accounts payable and other liabilities in the accompanying consolidated balance sheet. The above market ground lease liabilities are amortized over the remaining terms of the respective leases as adjustments to rental expense in property tax, insurance and other in the consolidated statements of operations and comprehensive income (loss).

•
Debt — RLJ estimated the fair value of the Senior Notes (as defined in Note 7) by using publicly available trading prices, market interest rates, and spreads for the Senior Notes, which are Level 3 inputs in the fair value hierarchy. RLJ estimated the fair value of the mortgage loans using a discounted cash flow model and incorporated various inputs and assumptions for the effective borrowing rates for debt with similar terms and the loan to estimated fair value of the collateral, which are Level 3 inputs in the fair value hierarchy. The Company recognized approximately

19

$71.7 million in above market debt fair value adjustments on the Senior Notes and the mortgage loans assumed in the Mergers, which is included in debt, net in the accompanying consolidated balance sheet. The above market debt fair value adjustments are amortized over the remaining terms of the respective debt instruments as adjustments to interest expense in the consolidated statements of operations and comprehensive income (loss).

•
Noncontrolling interest in consolidated joint ventures — RLJ estimated the fair value of the consolidated joint ventures by using the same valuation methodologies for the investment in hotel properties noted above. RLJ then recognized the fair value of the noncontrolling interest in the consolidated joint ventures based on the joint venture partner's ownership interest in the consolidated joint venture. This valuation methodology is based on Level 3 inputs and assumptions in the fair value hierarchy.

•
Preferred equity in a consolidated joint venture — RLJ estimated the fair value of the preferred equity in a consolidated joint venture by comparing the contractual terms of the preferred equity agreement to market-based terms of a similar preferred equity agreement, which is based on Level 3 inputs in the fair value hierarchy.

•
Restricted cash reserves, hotel and other receivables, prepaid expenses and other assets, accounts payable and other liabilities, advance deposits and deferred revenue, accrued interest, and distributions payable — The carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities.

For the three and nine months ended September 30, 2018, the Company recognized approximately $0.2 million and $1.9 million of integration costs, respectively. The Company recognized approximately $1.0 million of integration costs during the Successor period of September 1, 2017 through September 30, 2017. The Company recognized approximately $61.9 million and $68.2 million of transaction costs during the Predecessor period of July 1, 2017 through August 31, 2017 and the Predecessor period of January 1, 2017 through August 31, 2017, respectively. The transaction costs primarily related to financial advisory, legal, accounting, severance, other professional service fees, and other transaction-related costs in connection with the Mergers. The integration costs primarily related to professional fees and employee-related costs, including compensation for transition employees. The merger-related transaction and integration costs noted above were expensed to transaction costs in the consolidated statements of operations and comprehensive income (loss).

4.              Investment in Hotel Properties
 
Investment in hotel properties consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Land and improvements
$
531,850

 
$
597,451

Buildings and improvements
1,545,752

 
1,801,302

Furniture, fixtures and equipment
116,378

 
126,590

 
2,193,980

 
2,525,343

Accumulated depreciation
(71,526
)
 
(27,463
)
Investment in hotel properties, net
$
2,122,454

 
$
2,497,880

 
For the three and nine months ended September 30, 2018, the Company recognized depreciation expense related to its investment in hotel properties of approximately $19.2 million and $60.0 million, respectively. For the Successor period of September 1, 2017 through September 30, 2017, the Company recognized depreciation expense related to its investment in hotel properties of approximately $5.9 million. For the Predecessor period of July 1, 2017 through August 31, 2017, the Company recognized depreciation expense related to its investment in hotel properties of approximately $17.6 million. For the Predecessor period of January 1, 2017 through August 31, 2017, the Company recognized depreciation expense related to its investment in hotel properties of approximately $72.7 million.
 
Impairment
 
The Company determined that there was no impairment of any assets for the nine months ended September 30, 2018 or for the Successor period of September 1, 2017 through September 30, 2017.

During the Predecessor period of January 1, 2017 through August 31, 2017, the Company recorded a total impairment loss of $35.1 million related to two hotel properties. In March 2017, the Company recorded a $24.8 million impairment loss on one hotel property, which was based on both third-party offers to purchase the hotel property and observable market data on a price

20

per room basis from transactions involving hotel properties in similar locations (a Level 2 input in the fair value hierarchy). In June 2017, two hotel properties, including the hotel property that was previously impaired in March 2017, were classified as held for sale on the consolidated balance sheet. The basis for these hotel properties had previously been written down to the respective fair values of the hotel properties based on both third-party offers to purchase the hotel properties and observable market data on a price per room basis from transactions involving hotel properties in similar locations (a Level 2 input in the fair value hierarchy). The Company recorded an additional impairment loss of $10.3 million on these two hotel properties in order to reflect the contractual sale prices, less the estimated costs to sell.

Held for Sale

In July 2018, the Company entered into a purchase and sale agreement to sell the Holiday Inn San Francisco - Fisherman's Wharf. At September 30, 2018, this hotel property has been included in assets of hotel properties held for sale, net in the accompanying consolidated balance sheet. The transaction closed on October 15, 2018.

The following table is a summary of the major classes of assets held for sale (in thousands):
 
September 30, 2018
Land and improvements
$
12,203

Buildings and improvements
10,900

Furniture, fixtures and equipment
2,074

Total assets of hotel properties held for sale, net
$
25,177


5.              Investment in Unconsolidated Joint Ventures
 
As of September 30, 2018 and December 31, 2017, the Company owned 50% interests in joint ventures that owned two hotel properties. The Company accounts for the investments in these unconsolidated joint ventures under the equity method of accounting. The Company makes adjustments to the equity in income (loss) from unconsolidated joint ventures related to the difference between the Company's basis in the investment in the unconsolidated joint ventures as compared to the historical basis of the assets and liabilities of the joint ventures. As of September 30, 2018 and December 31, 2017, the unconsolidated entities' debt consisted entirely of non-recourse mortgage debt.

The following table summarizes the components of the Company's investments in unconsolidated joint ventures (in thousands):
 
September 30, 2018
 
December 31, 2017
Equity basis of the joint venture investments
$
(4,998
)
 
$
(4,733
)
Cost of the joint venture investments in excess of the joint venture book value
20,805

 
21,645

Investment in unconsolidated joint ventures
$
15,807

 
$
16,912


The following table summarizes the components of the Company's equity in income from unconsolidated joint ventures (in thousands):
 
Successor
 
 
 
Predecessor
 
Successor
 
 
 
Predecessor
 
For the three months ended September 30,
 
September 1
through
September 30,
 
 
July 1
through
August 31,
 
For the nine months ended September 30,
 
September 1 through
September 30,
 
 
January 1 through
August 31,
 
2018
 
2017
 
 
2017
 
2018
 
2017
 
 
2017
Unconsolidated joint ventures net income attributable to the Company
$
498

 
$
208

 
 
$
621

 
$
1,784

 
$
208

 
 
$
1,332

Depreciation of cost in excess of book value
(280
)
 
(93
)
 
 
(65
)
 
(839
)
 
(93
)
 
 
(258
)
Equity in income from unconsolidated joint ventures
$
218

 
$
115

 
 
$
556

 
$
945

 
$
115

 
 
$
1,074

 

21

6.            Sale of Hotel Properties
 
During the nine months ended September 30, 2018, the Company sold five hotel properties for a total sale price of approximately $441.2 million. In connection with these transactions, the Company recorded an aggregate $14.8 million net gain on sales, which is included in gain (loss) on sale of hotel properties, net in the accompanying consolidated statement of operations and comprehensive income (loss). The gain on sale is net of approximately $9.8 million in lease termination fees as a result of early terminating the TRS Leases with the lessees at these hotel properties.

The following table discloses the hotel properties that were sold during the nine months ended September 30, 2018:
Hotel Property Name
 
Location
 
Sale Date
 
Rooms
Embassy Suites Boston Marlborough
 
Marlborough, MA
 
February 21, 2018
 
229

Sheraton Philadelphia Society Hill Hotel
 
Philadelphia, PA
 
March 27, 2018
 
364

Embassy Suites Napa Valley
 
Napa, CA
 
July 13, 2018
 
205

The Vinoy Renaissance St. Petersburg Resort & Golf Club
 
St. Petersburg, FL
 
August 28, 2018
 
362

DoubleTree by Hilton Burlington Vermont
 
Burlington, VT
 
September 27, 2018
 
309

 
 
 
 
Total
 
1,469


On October 15, 2018, the Company sold the Holiday Inn San Francisco - Fisherman's Wharf for $75.3 million. In connection with the sale, the Company transferred its purchase option on the land underlying the ground lease to the buyer. The proceeds to the Company as a result of the sale was approximately $30.4 million.

During the Predecessor period of January 1, 2017 through August 31, 2017, the Company sold two hotel properties in two separate transactions for a total sale price of approximately $92.0 million. In connection with these transactions, the Company recorded a $1.6 million loss on sale, which is included in loss on sale of hotel properties, net in the accompanying consolidated statement of operations and comprehensive income (loss).

The following table discloses the hotel properties that were sold during the nine months ended September 30, 2017:
Hotel Property Name
 
Location
 
Sale Date
 
Rooms
Morgans New York
 
New York, NY
 
July 17, 2017
 
117

Royalton New York
 
New York, NY
 
August 1, 2017
 
168

 
 
 
 
Total
 
285


7.              Debt
 
The Company's debt consisted of the following (in thousands):
 
 
 
 
 
 
 
 
 
 
Outstanding Borrowings at
 
 
Number of Assets Encumbered
 
Interest Rate
 
Maturity Date
 
 
 
September 30, 2018
 
December 31, 2017
Senior secured notes (1)(2)(3)
 
9
 
5.63%
 
—
 
 
 
$
—

 
$
552,669

Senior unsecured notes (1)(2)(4)
 
—
 
6.00%
 
June 2025
 
 
 
506,503

 
510,047

PNC Bank/Wells Fargo (5)
 
3
 
4.95%
 
October 2022
 
 
 
92,322

 
120,893

Prudential (6)
 
1
 
4.94%
 
October 2022
 
 
 
29,758

 
30,323

Scotiabank (1) (7)
 
1
 
LIBOR + 3.00%
 
November 2018
 
(8)
 
85,073

 
85,404

 
 
14
 
 
 
 
 
 
 
713,656

 
1,299,336

Deferred financing costs, net
 
 
 
 
 
 
 
 
 
(24
)
 
(231
)
Debt, net
 
 
 
 
 
 
 
 
 
$
713,632

 
$
1,299,105

 
(1)
Requires payments of interest only through maturity.
(2)
The senior secured notes include $28.7 million at December 31, 2017, and the senior unsecured notes include $31.5 million and $35.1 million at September 30, 2018 and December 31, 2017, respectively, related to fair value adjustments that RLJ pushed down to the Company's consolidated financial statements as a result of the Mergers.

22

(3)
On March 9, 2018, the Company completed the early redemption of the senior secured notes in full for an aggregate amount of approximately $539.0 million, which included the redemption price of 102.813% for the outstanding principal amount. The Company recognized a gain of approximately $12.9 million on the early redemption, which is included in gain (loss) on extinguishment of indebtedness, net in the accompanying consolidated statements of operations and comprehensive income (loss).
(4)
The Company has the option to redeem the senior unsecured notes beginning June 1, 2020 at a premium of 103.0%.
(5)
Includes $2.0 million and $3.0 million at September 30, 2018 and December 31, 2017, respectively, related to fair value adjustments on the mortgage loans that RLJ pushed down to the Company's consolidated financial statements as a result of the Mergers.
(6)
Includes $0.6 million and $0.7 million at September 30, 2018 and December 31, 2017, respectively, related to a fair value adjustment on the mortgage loan that RLJ pushed down to the Company's consolidated financial statements as a result of the Mergers.
(7)
Includes $0.1 million and $0.4 million at September 30, 2018 and December 31, 2017, respectively, related to a fair value adjustment on the mortgage loan that RLJ pushed down to the Company's consolidated financial statements as a result of the Mergers.
(8)
On November 5, 2018, RLJ LP paid off the Scotiabank mortgage loan in full. In connection with the mortgage loan payoff, the Company's consolidated joint venture entered into an $85.0 million related party loan with RLJ LP at an interest rate of LIBOR + 3.00% that has a maturity date of November 9, 2023.

The senior unsecured notes and the senior secured notes (collectively, the "Senior Notes"), and certain mortgage agreements are subject to customary financial covenants. As of September 30, 2018 and December 31, 2017, the Company was in compliance with all financial covenants.

Interest Expense

During the three and nine months ended September 30, 2018, the Company recognized $8.5 million and $30.2 million of interest expense, respectively.

During the Successor period of September 1, 2017 through September 30, 2017, the Company recognized $4.8 million of interest expense. During the Predecessor period of July 1, 2017 through August 31, 2017, the Company recognized $12.9 million of interest expense, which is net of capitalized interest of $0.3 million.

During the Predecessor period of January 1, 2017 through August 31, 2017, the Company recognized $51.7 million of interest expense, which is net of capitalized interest of $1.1 million.
  
8.              Fair Value
 
Fair Value Measurement
 
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market.  The fair value hierarchy has three levels of inputs, both observable and unobservable:
 
•
Level 1 — Inputs include quoted market prices in an active market for identical assets or liabilities.
 
•
Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.

•
Level 3 — Inputs are unobservable and corroborated by little or no market data.
 
Fair Value of Financial Instruments
 
The Company used the following market assumptions and/or estimation methods:
 
•
Cash and cash equivalents, restricted cash reserves, hotel and other receivables, accounts payable and other liabilities — The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value because of their short term maturities.
 

23

•
Debt — The Senior Notes had an estimated fair value of approximately $1.0 billion at December 31, 2017. On March 9, 2018, the Company completed the early redemption of the senior secured notes in full for an aggregate amount of approximately $539.0 million. The senior unsecured notes had an estimated fair value of approximately $504.0 million at September 30, 2018. The Company estimated the fair value of the Senior Notes by using publicly available trading prices, market interest rates, and spreads for the Senior Notes, which are Level 2 and Level 3 inputs in the fair value hierarchy. The mortgage loans had an estimated fair value of approximately $205.7 million and $236.2 million at September 30, 2018 and December 31, 2017, respectively. The Company estimated the fair value of the mortgage loans by using a discounted cash flow model and incorporating various inputs and assumptions for the effective borrowing rates for debt with similar terms and the loan to estimated fair value of the collateral, which are Level 3 inputs in the fair value hierarchy. The total estimated fair value of the Company's debt was $709.7 million and $1.3 billion at September 30, 2018 and December 31, 2017, respectively. The total carrying value of the Company's debt was $713.6 million and $1.3 billion at September 30, 2018 and December 31, 2017, respectively.
 
9.       Commitments and Contingencies
 
Restricted Cash Reserves
 
The Company is obligated to maintain cash reserve funds for future capital expenditures at the hotels (including the periodic replacement or refurbishment of FF&E) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve cash ranging typically from 4.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. As of September 30, 2018 and December 31, 2017, approximately $5.2 million and $3.3 million, respectively, was available in the restricted cash reserves for future capital expenditures, real estate taxes and insurance.

Minimum Lease Payments
 
In the future, the Company will receive rental income from the Lessees under its lease agreements. The lease agreements contain a specific base rent amount or a percentage rent amount, which is calculated based on a percentage of room revenues, food and beverage revenues, and other revenues at the hotel properties. The lease agreements will expire in 2018 (one hotel), 2019 (22 hotels), 2022 (five hotels), and thereafter (one hotel).

As of September 30, 2018, the future minimum lease payments to the Company under the noncancelable operating leases were as follows (in thousands):
2018
$
15,712

2019
58,880

2020 (1)
—

2021 (1)
—

2022 (1)
—

Thereafter (1)
—

Total
$
74,592


(1)
In 2020, the lease terms for the in-place lease agreements will be reset to market-based rental terms. At that time, the future minimum lease payments to the Company under the noncancelable operating leases will be determined.

Litigation
 
Other than the legal proceeding mentioned below, neither the Company nor any of its subsidiaries is currently involved in any regulatory or legal proceedings that management believes will have a material and adverse effect on the Company's financial position, results of operations or cash flows.

Prior to the Mergers, on March 24, 2016, an affiliate of InterContinental Hotels Group PLC ("IHG"), which was previously the hotel management company for three of the Company’s hotels (two of which were sold in 2006, and one of which was converted by the Company into a Wyndham brand and operation in 2013), notified the Company that the National Retirement Fund in which the employees at those hotels had participated had assessed a withdrawal liability of $8.3 million, with required

24

quarterly payments including interest, in connection with the termination of IHG’s operation of those hotels. The Company’s hotel management agreements with IHG stated that it may be obligated to indemnify and hold IHG harmless for some or all of any amount ultimately contributed to the pension trust fund with respect to those hotels.

Based on the current assessment of the claim, the resolution of this matter may not occur until 2022. As of September 30, 2018, the Company maintained an accrual of approximately $4.6 million for the future quarterly payments to the pension trust fund, which is included in accounts payable and other liabilities in the accompanying consolidated balance sheet.

The Company plans to vigorously defend the underlying claims and, if appropriate, IHG’s demand for indemnification.

Management Agreements

As discussed in Note 3, Merger with RLJ, the Company distributed its equity interests in FelCor TRS to RLJ LP immediately after consummation of the Mergers. As a result of the distribution of its equity interests in FelCor TRS, the Company's consolidated financial statements do not include the financial information related to the Lessees' management agreements.

During the Predecessor comparative period, the Company's hotel properties were operated pursuant to long-term management agreements with initial terms ranging from 5 to 20 years. Certain hotel properties also received the benefits of a franchise agreement pursuant to management agreements with Hilton, Wyndham, Marriott and other hotel brands. The management agreements, including those that include the benefits of a franchise agreement, have a base management fee generally between 2.0% and 5.0% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel. Management fees are included in management and franchise fee expense in the accompanying consolidated statements of operations and comprehensive income (loss). For the Predecessor period of July 1, 2017 through August 31, 2017, the Company recognized management fee expense of approximately $4.4 million. For the Predecessor period of January 1, 2017 through August 31, 2017, the Company recognized management fee expense of approximately $19.1 million.

The Wyndham management agreements guarantee minimum levels of annual net operating income at each of the Wyndham-managed hotels for each year of the initial 10-year term to 2023, subject to an aggregate $100 million limit over the term and an annual $21.5 million limit. For the Predecessor period of July 1, 2017 through August 31, 2017, the Company recorded $1.4 million for the pro-rata portion of the projected aggregate full-year guaranties. For the Predecessor period of January 1, 2017 through August 31, 2017, the Company recorded $3.8 million for the pro-rata portion of the projected aggregate full-year guaranties. The Company recognized these amounts as a reduction of Wyndham's contractual management and other fees.

Franchise Agreements
 
As discussed in Note 3, Merger with RLJ, the Company distributed its equity interests in FelCor TRS to RLJ LP immediately after consummation of the Mergers. As a result of the distribution of its equity interests in FelCor TRS, the Company's consolidated financial statements do not include the financial information related to the Lessees' franchise agreements.

During the Predecessor comparative periods, certain of the Company’s hotel properties were operated under franchise agreements with initial terms of 15 years. These franchise agreements exclude certain hotel properties that received the benefits of a franchise agreement pursuant to management agreements with Hilton, Wyndham, Marriott and other hotel brands. In addition, The Knickerbocker is not operated with a hotel brand so the hotel did not have a franchise agreement. Franchise agreements allow the hotel properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally 5.5% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs of 4.0% of room revenue. Franchise fees are included in management and franchise fee expense in the accompanying consolidated statements of operations and comprehensive income. For the Predecessor period of July 1, 2017 through August 31, 2017, the Company recognized franchise fee expense of approximately $0.2 million. For the Predecessor period of January 1, 2017 through August 31, 2017, the Company recognized franchise fee expense of approximately $0.8 million.


25

10.       Equity
 
Successor Period

Rangers Ownership Interests/FelCor LP Partnership Interests

As of September 30, 2018, RLJ LP owned 100% of the ownership interests and was the sole managing member of Rangers. In addition, Rangers owned, through indirect interests, 99.0% of the partnership interests in FelCor LP. Rangers consolidates FelCor LP for financial reporting purposes as a result of its controlling financial interest. Rangers General Partner, LLC's 1.0% partnership interest in FelCor LP is recognized as a noncontrolling interest in FelCor LP on the consolidated balance sheets of Rangers.

Consolidated Joint Venture Preferred Equity

The Company's joint venture that redeveloped The Knickerbocker raised $45.0 million ($44.4 million net of issuance costs) through the sale of redeemable preferred equity under the EB-5 Immigrant Investor Program. The purchasers receive a 3.25% current annual return (which increases to 8% if the Company does not redeem the equity interest before the fifth anniversary of the respective equity issuance), plus a 0.25% non-compounding annual return payable at redemption. The fifth anniversary for the majority of the equity issuance is in February 2019. The preferred equity raised by the joint venture is included in preferred equity in a consolidated joint venture on the consolidated balance sheets.

Predecessor Period

Common Stock

In 2015, FelCor's Board of Directors authorized a share repurchase program to acquire up to $100.0 million of FelCor's shares of common stock, par value $0.01 per share (the "Common Stock"), through October 31, 2017. During the Predecessor period of January 1, 2017 through August 31, 2017, FelCor did not repurchase and retire any of its shares of Common Stock.

Upon completion of the REIT Merger, on August 31, 2017, each issued and outstanding share of Common Stock was converted into the right to receive 0.362 common shares of RLJ. Accordingly, for the Successor period, FelCor no longer has any issued, outstanding, or authorized shares of Common Stock.

During the Predecessor period of January 1, 2017 through August 31, 2017, the Company declared a cash dividend (distribution) of $0.06 per share of Common Stock (unit) in each of the first and second quarters of 2017 and a cash dividend (distribution) of $0.04 per share of Common Stock (unit) for the Predecessor period of July 1, 2017 through August 31, 2017.

Preferred Stock/Units

FelCor's Board of Directors authorized the issuance of up to 20 million shares of preferred stock in one or more series. FelCor's $1.95 Series A cumulative convertible preferred stock, par value $0.01 per share (the "Series A Preferred Stock") (units), had an annual cumulative dividend (distribution) that was payable in arrears equal to the greater of $1.95 per share (unit) or the cash distributions declared or paid for the corresponding period on the number of shares of Common Stock (units) into which the Series A Preferred Stock (units) is then convertible. Each share of Series A Preferred Stock (unit) was convertible at the holder's option to 0.7752 shares of Common Stock (units), subject to certain adjustments.

Upon completion of the REIT Merger, each issued and outstanding share of Series A Preferred Stock was converted into the right to receive one $1.95 Series A Cumulative Convertible Preferred Share, par value $0.01 per share, of RLJ. Accordingly, for the Successor period, FelCor no longer has any issued, outstanding, or authorized shares of Series A Preferred Stock.

During the Predecessor period of January 1, 2017 through August 31, 2017, the Company declared a cash dividend (distribution) of $0.4875 on each share of Series A Preferred Stock (unit) in each of the first and second quarters of 2017 and a cash dividend (distribution) of $0.325 on each share of Series A Preferred Stock (unit) for the Predecessor period of July 1, 2017 through August 31, 2017.

11.       Redeemable Noncontrolling Interests/Units in FelCor LP    
 

26

In the Predecessor period, FelCor recorded the redeemable noncontrolling interests in FelCor LP, and FelCor LP recorded the redeemable units, in the mezzanine section (between liabilities and equity/partners' capital) of the consolidated balance sheets because of the redemption feature of the units. The redeemable noncontrolling interests/redeemable units held by the limited partners were redeemable for shares of Common Stock, or at the option of FelCor, for cash. Additionally, FelCor's consolidated statements of operations and comprehensive income (loss) separately present earnings attributable to the redeemable noncontrolling interests. FelCor adjusted the redeemable noncontrolling interests in FelCor LP (or redeemable units) each reporting period to reflect the greater of the carrying value based on the accumulation of historical costs or the redemption value. FelCor based the historical cost on the proportionate relationship between the carrying value of the equity associated with FelCor's common stockholders relative to that of FelCor LP's unitholders. FelCor based the redemption value on the closing price of the Common Stock at the end of the reporting period. FelCor allocated the net income (loss) to FelCor LP's noncontrolling limited partners based on their weighted average ownership percentage during the period.

The following table summarizes the changes in the redeemable noncontrolling interests (or redeemable units) (in thousands):
 
Predecessor
 
January 1
through
August 31
 
2017
Balance at beginning of the period
$
4,888

Redemption value allocation
196

Distributions paid to unitholders
(134
)
Net loss
(495
)
Balance at end of the period
$
4,455


Upon completion of the Partnership Merger, each outstanding FelCor LP Common Unit was converted into 0.362 common units of limited partnership interest in RLJ LP, unless the respective limited partner of FelCor LP elected to redeem his or her FelCor LP Common Units and receive 0.362 common shares of RLJ. Accordingly, for the Successor period, the Company no longer recognizes a redeemable noncontrolling interest (or redeemable units) in FelCor LP on the consolidated balance sheets.

12.       Loss per Common Share/Unit
 
Successor Period

For the Successor period, RLJ LP, through direct and indirect wholly-owned subsidiaries, owns 100% of the ownership interests and is the sole member and partner of Rangers and FelCor LP, respectively.

Predecessor Period

Basic earnings (loss) per common share/unit is calculated by dividing net income (loss) attributable to common shareholders (unitholders) by the weighted-average number of common shares (units) outstanding during the period excluding the weighted-average number of unvested restricted shares (units) outstanding during the period. Diluted earnings per common share/unit is calculated by dividing net income attributable to common shareholders (unitholders) by the weighted-average number of common shares (units) outstanding during the period, plus any shares (units) that could potentially be outstanding during the period. The potential shares (units) consist of the unvested restricted share (unit) grants and unvested performance units, calculated using the treasury stock method. Any anti-dilutive shares (units) have been excluded from the diluted earnings (loss) per share (unit) calculation.
 
Unvested share-based payment awards that contain non-forfeitable rights to dividends (distributions) or dividend (distribution) equivalents (whether paid or unpaid) are participating shares (units) and are considered in the computation of earnings (loss) per share (unit) pursuant to the two-class method. If there were any undistributed earnings allocable to the participating shares (units), they would be deducted from net income (loss) attributable to common shareholders (unitholders) used in the basic and diluted earnings (loss) per share (unit) calculations.
 
The limited partners’ outstanding limited partnership units in FelCor LP (which may be redeemed for common shares of beneficial interest under certain circumstances) have been excluded from the diluted earnings (loss) per share (unit) calculation

27

as there was no effect on the per share (unit) amounts, since the limited partners’ share of income would also be added back to net income (loss) attributable to common shareholders.



The computation of basic and diluted earnings (loss) per common share (unit) is as follows (in thousands, except share/unit and per share/unit data):

Rangers Loss Per Common Share
 
Predecessor
 
July 1
through
August 31,
 
January 1
through
August 31,
 
2017
 
2017
Numerator:
 
 
 
Net loss attributable to Rangers
$
(59,175
)
 
$
(96,845
)
Discontinued operations attributable to Rangers
3,400

 
3,400

Loss from continuing operations attributable to Rangers
(55,775
)
 
(93,445
)
Less: Preferred dividends
(4,186
)
 
(16,744
)
Less: Dividends paid on unvested restricted stock
—

 
(73
)
Numerator for the loss from continuing operations attributable to Rangers common stockholders
(59,961
)
 
(110,262
)
Numerator for the discontinued operations attributable to Rangers common stockholders
(3,400
)
 
(3,400
)
Numerator for the loss attributable to Rangers common stockholders excluding amounts attributable to unvested restricted stock
$
(63,361
)
 
$
(113,662
)
 
 
 
 
Denominator:
 
 
 
Weighted-average number of common shares - basic
137,904,668

 
137,331,743

Weighted-average number of common shares - diluted
137,904,668

 
137,331,743

 
 
 
 
Basic and diluted loss per share:
 
 
 
Loss from continuing operations
$
(0.43
)
 
$
(0.80
)
Discontinued operations
$
(0.02
)
 
$
(0.02
)
Net loss
$
(0.46
)
 
$
(0.83
)


28


FelCor LP Loss Per Common Unit
 
Predecessor
 
July 1
through
August 31,
 
January 1
through
August 31,
 
2017
 
2017
Numerator:
 
 
 
Net loss attributable to FelCor LP
$
(59,449
)
 
$
(97,340
)
Discontinued operations attributable to FelCor LP
3,415

 
3,415

Loss from continuing operations attributable to FelCor LP
(56,034
)
 
(93,925
)
Less: Preferred distributions
(4,186
)
 
(16,744
)
Less: Distributions paid on FelCor unvested restricted stock
—

 
(73
)
Numerator for the loss from continuing operations attributable to FelCor LP common unitholders
(60,220
)
 
(110,742
)
Numerator for the discontinued operations attributable to FelCor LP common unitholders
(3,415
)
 
(3,415
)
Numerator for the net loss attributable to FelCor LP common unitholders excluding amounts attributable to FelCor unvested restricted stock
$
(63,635
)
 
$
(114,157
)
 
 
 
 
Denominator:
 
 
 
Weighted-average number of common units - basic
138,514,851

 
137,941,926

Weighted-average number of common units - diluted
138,514,851

 
137,941,926

 
 
 
 
Basic and diluted loss per unit:
 
 
 
Loss from continuing operations
$
(0.43
)
 
$
(0.80
)
Discontinued operations
$
(0.02
)
 
$
(0.02
)
Net loss
$
(0.46
)
 
$
(0.83
)




29

13.       Supplemental Information to the Statements of Cash Flows

The following supplemental information to the Statements of Cash Flows is for both Rangers and FelCor LP (in thousands): 
 
Successor
 
 
 
Predecessor
 
For the nine months ended September 30,
 
September 1
through
September 30,
 
 
January 1 through
August 31,
 
2018
 
2017
 
 
2017
Reconciliation of cash, cash equivalents, and restricted cash reserves
 
 
 
 
 
 
Cash and cash equivalents
$
15,735

 
$
10,503

 
 
$
47,396

Restricted cash reserves
5,225

 
6,672

 
 
17,038

Cash, cash equivalents, and restricted cash reserves
$
20,960

 
$
17,175

 
 
$
64,434

 
 
 
 
 
 
 
Interest paid, net of capitalized interest
$
38,069

 
$
16,301

 
 
$
38,677

 
 
 
 
 
 
 
Income taxes (refund) paid
$
(1,742
)
 
$
19

 
 
$
1,346

 
 
 
 
 
 
 
Supplemental investing and financing transactions
 
 
 
 
 
 
In conjunction with the sale of hotel properties, the Company recorded the following:
 
 
 
 
 
 
Sale of hotel properties
$
441,200

 
$
—

 
 
$
92,000

Transaction costs
(7,034
)
 
—

 
 
(18,584
)
Operating prorations
195

 
—

 
 
—

Proceeds from the sale of hotel properties, net
$
434,361

 
$
—

 
 
$
73,416

 
 
 
 
 
 
 
Supplemental non-cash transactions
 
 
 
 
 
 
Accrued capital expenditures
$
2,566

 
$
6,956

 
 
$
3,640

 
 
 
 
 
 
 
FelCor TRS Distribution (1)
$
—

 
$
51,267

 
 
$
—


(1) Refer to Note 3, Merger with RLJ, for the non-cash assets and liabilities comprising the FelCor TRS distribution.

14.       FelCor LP's Consolidating Financial Information
 
Certain of FelCor LP's 100% owned subsidiaries (FCH/PSH, L.P.; FelCor/CMB Buckhead Hotel, L.L.C.; FelCor/CMB Marlborough Hotel, L.L.C.; FelCor/CMB Orsouth Holdings, L.P.; FelCor/CMB SSF Holdings, L.P.; FelCor/CSS Holdings, L.P.; FelCor Dallas Love Field Owner, L.L.C.; FelCor Milpitas Owner, L.L.C.; FelCor TRS Borrower 4, L.L.C.; FelCor Hotel Asset Company, L.L.C.; FelCor St. Pete (SPE), L.L.C.; FelCor Esmeralda (SPE), L.L.C.; FelCor S-4 Hotels (SPE), L.L.C.; Madison 237 Hotel, L.L.C.; Myrtle Beach Owner, L.L.C.; and Royalton 44 Hotel, L.L.C., collectively the “Subsidiary Guarantors”), together with Rangers, guaranty, fully and unconditionally, except where subject to customary release provisions as described below, and jointly and severally, our senior notes debt.
The guaranties by the Subsidiary Guarantors may be automatically and unconditionally released upon (i) the sale or other disposition of all of the capital stock of the Subsidiary Guarantor or the sale or disposition of all or substantially all of the assets of the Subsidiary Guarantor, if, in each case, as a result of such sale or disposition, such Subsidiary Guarantor ceases to be a subsidiary of FelCor LP, (ii) the consolidation or merger of any such Subsidiary Guarantor with any person other than FelCor LP, or a subsidiary of FelCor LP, if, as a result of such consolidation or merger, such Subsidiary Guarantor ceases to be a subsidiary of the Operating Partnership, (iii) a legal defeasance or covenant defeasance of the indenture, (iv) the unconditional and complete release of such Subsidiary Guarantor in accordance with the modification and waiver provisions of the indenture, or (v) the designation of a restricted subsidiary that is a Subsidiary Guarantor as an unrestricted subsidiary under and in compliance with the indenture.


30

For the Predecessor period, FelCor TRS was a subsidiary guarantor in the condensed consolidating balance sheet, the condensed consolidating statements of operations and comprehensive income, and the condensed consolidating statements of cash flows. Pursuant to the terms of each of the indentures governing the Senior Notes, upon completion of the distribution of the equity interests in FelCor TRS, FelCor TRS' guarantee of the Senior Notes was automatically released and FelCor TRS Holdings, L.L.C. ceased being a subsidiary guarantor of the Senior Notes. Accordingly, FelCor TRS is not a subsidiary guarantor in the FelCor LP consolidating financial information for the Company.

The following tables present the consolidating financial information for the Subsidiary Guarantors:

FelCor Lodging Limited Partnership
Condensed Consolidating Balance Sheet
September 30, 2018 (Successor)
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Equity investment in consolidated entities
$
1,941,135

 
$
—

 
$
—

 
$
(1,941,135
)
 
$
—

Investment in hotel properties, net
—

 
657,176

 
1,465,278

 
—

 
2,122,454

Investment in unconsolidated joint ventures
15,807

 
—

 
—

 
—

 
15,807

Cash and cash equivalents
10,346

 
—

 
5,389

 
—

 
15,735

Restricted cash reserves
439

 
—

 
4,786

 
—

 
5,225

Related party rent receivable
—

 
19,816

 
25,796

 
—

 
45,612

Intangible assets, net
—

 
46,907

 
—

 
—

 
46,907

Prepaid expense and other assets
2,004

 
657

 
2,440

 
—

 
5,101

Assets of hotel properties held for sale, net
—

 
25,177

 
—

 
—

 
25,177

Total assets
$
1,969,731

 
$
749,733

 
$
1,503,689

 
$
(1,941,135
)
 
$
2,282,018

 
 
 
 
 
 
 
 
 
 
Debt, net
$
506,503

 
$
—

 
$
239,838

 
$
(32,709
)
 
$
713,632

Accounts payable and other liabilities
9,902

 
16,091

 
21,049

 
—

 
47,042

Related party lease termination fee payable
—

 
1,985

 
15,563

 
—

 
17,548

Accrued interest
9,588

 
—

 
—

 
—

 
9,588

Distributions payable
—

 
—

 
122

 
—

 
122

Total liabilities
525,993

 
18,076

 
276,572

 
(32,709
)
 
787,932

 
 
 
 
 
 
 
 
 
 
Partnership interests
1,443,738

 
731,657

 
1,176,769

 
(1,908,426
)
 
1,443,738

Total partners' capital, excluding noncontrolling interest
1,443,738

 
731,657

 
1,176,769

 
(1,908,426
)
 
1,443,738

Noncontrolling interest in consolidated joint ventures
—

 
—

 
5,918

 
—

 
5,918

Preferred capital in a consolidated joint venture
—

 
—

 
44,430

 
—

 
44,430

Total partners’ capital
1,443,738

 
731,657

 
1,227,117

 
(1,908,426
)
 
1,494,086

Total liabilities and partners’ capital
$
1,969,731

 
$
749,733

 
$
1,503,689

 
$
(1,941,135
)
 
$
2,282,018












31


FelCor Lodging Limited Partnership
Condensed Consolidating Balance Sheet
December 31, 2017 (Successor)
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Equity investment in consolidated entities
$
2,384,094

 
$
—

 
$
—

 
$
(2,384,094
)
 
$
—

Investment in hotel properties, net
—

 
856,541

 
1,641,339

 
—

 
2,497,880

Investment in unconsolidated joint ventures
16,912

 
—

 
—

 
—

 
16,912

Cash and cash equivalents
9,202

 
—

 
5,526

 
—

 
14,728

Restricted cash reserves
436

 
—

 
2,867

 
—

 
3,303

Related party rent receivable
—

 
32,200

 
47,890

 
—

 
80,090

Intangible assets, net
—

 
48,846

 
69,324

 
—

 
118,170

Prepaid expense and other assets
4,405

 
3,292

 
4,994

 
—

 
12,691

Total assets
$
2,415,049

 
$
940,879

 
$
1,771,940

 
$
(2,384,094
)
 
$
2,743,774

 
 
 
 
 
 
 
 
 
 
Debt, net
$
1,062,716

 
$
—

 
$
269,098

 
$
(32,709
)
 
$
1,299,105

Accounts payable and other liabilities
20,018

 
13,605

 
20,568

 
—

 
54,191

Related party lease termination fee payable
—

 
—

 
7,707

 
—

 
7,707

Accrued interest
12,286

 
—

 
—

 
—

 
12,286

Distributions payable
—

 
—

 
126

 
—

 
126

Total liabilities
1,095,020

 
13,605

 
297,499

 
(32,709
)
 
1,373,415

 
 
 
 
 
 
 
 
 
 
Partnership interests
1,320,029

 
927,274

 
1,424,111

 
(2,351,385
)
 
1,320,029

Total partners' capital, excluding noncontrolling interest
1,320,029

 
927,274

 
1,424,111

 
(2,351,385
)
 
1,320,029

Noncontrolling interest in consolidated joint ventures
—

 
—

 
5,900

 
—

 
5,900

Preferred capital in a consolidated joint venture
—

 
—

 
44,430

 
—

 
44,430

Total partners’ capital
1,320,029

 
927,274

 
1,474,441

 
(2,351,385
)
 
1,370,359

Total liabilities and partners’ capital
$
2,415,049

 
$
940,879

 
$
1,771,940

 
$
(2,384,094
)
 
$
2,743,774






















32


FelCor Lodging Limited Partnership
Condensed Consolidating Statement of Operations and Comprehensive Income
For the Three Months Ended September 30, 2018 (Successor)
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Related party lease revenue
$
—

 
$
27,360

 
$
30,451

 
$
—

 
$
57,811

Total revenues
—

 
27,360

 
30,451

 
—

 
57,811

 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
Depreciation and amortization
115

 
8,017

 
11,160

 
—

 
19,292

Property tax, insurance and other
(4
)
 
7,598

 
6,353

 
—

 
13,947

General and administrative
(491
)
 
29

 
(102
)
 
—

 
(564
)
Transaction costs
(4
)
 
261

 
(63
)
 
—

 
194

Total operating expenses
(384
)
 
15,905

 
17,348

 
—

 
32,869

Operating income
384

 
11,455

 
13,103

 
—

 
24,942

Other income
1

 
—

 
—

 
—

 
1

Interest income
285

 
—

 
15

 
(230
)
 
70

Interest expense
(5,955
)
 
—

 
(2,742
)
 
230

 
(8,467
)
Gain on sale of hotel properties, net
—

 
(9,971
)
 
34,225

 
—

 
24,254

Loss on extinguishment of indebtedness
(4
)
 
—

 
(1,652
)
 
—

 
(1,656
)
Income before equity in income from unconsolidated joint ventures
(5,289
)
 
1,484

 
42,949

 
—

 
39,144

Equity in income from consolidated entities
44,007

 
—

 
—

 
(44,007
)
 
—

Equity in income from unconsolidated joint ventures
218

 
—

 
—

 
—

 
218

Net income and comprehensive income
38,936

 
1,484

 
42,949

 
(44,007
)
 
39,362

Noncontrolling interest in consolidated joint ventures
—

 
—

 
(52
)
 
—

 
(52
)
Preferred distributions - consolidated joint venture
—

 
—

 
(374
)
 
—

 
(374
)
Net income and comprehensive income attributable to FelCor LP
$
38,936

 
$
1,484

 
$
42,523

 
$
(44,007
)
 
$
38,936



















33

FelCor Lodging Limited Partnership
Condensed Consolidating Statement of Operations and Comprehensive Income
For the Period of September 1, 2017 through September 30, 2017 (Successor)
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Related party lease revenue
$
—

 
$
9,511

 
$
11,343

 
$
—

 
$
20,854

Total revenues
—

 
9,511

 
11,343

 
—

 
20,854

 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
Depreciation and amortization
38

 
2,021

 
3,915

 
—

 
5,974

Property tax, insurance and other
8

 
2,821

 
1,620

 
—

 
4,449

General and administrative
191

 
—

 
1

 
—

 
192

Transaction costs
1,034

 
4

 
1

 
—

 
1,039

Total operating expenses
1,271

 
4,846

 
5,537

 
—

 
11,654

Operating income
(1,271
)
 
4,665

 
5,806

 
—

 
9,200

Interest income
27

 
—

 
—

 
(24
)
 
3

Interest expense
(3,980
)
 
—

 
(825
)
 
26

 
(4,779
)
Income before equity in income from unconsolidated joint ventures
(5,224
)
 
4,665

 
4,981

 
2

 
4,424

Equity in income from consolidated entities
9,641

 
—

 
—

 
(9,641
)
 
—

Equity in income from unconsolidated joint ventures
—

 
—

 
115

 
—

 
115

Net income and comprehensive income
4,417

 
4,665

 
5,096

 
(9,639
)
 
4,539

Noncontrolling interest in consolidated joint ventures
(51
)
 
—

 
—

 
—

 
(51
)
Preferred distributions - consolidated joint venture
—

 
—

 
(122
)
 
—

 
(122
)
Net income and comprehensive income attributable to FelCor LP
$
4,366

 
$
4,665

 
$
4,974

 
$
(9,639
)
 
$
4,366























34

FelCor Lodging Limited Partnership
Condensed Consolidating Statement of Operations and Comprehensive Loss
For the Period of July 1, 2017 through August 31, 2017 (Predecessor)
(in thousands
 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Room revenue
$
—

 
$
111,977

 
$
—

 
$
—

 
$
111,977

Food and beverage revenue
—

 
20,577

 
—

 
—

 
20,577

Related party lease revenue
—

 
—

 
(20
)
 
20

 
—

Other revenue
2

 
10,281

 
134

 
—

 
10,417

Total revenues
2

 
142,835

 
114

 
20

 
142,971

 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
Room expense
—

 
28,652

 
—

 
—

 
28,652

Food and beverage expense
—

 
17,325

 
—

 
—

 
17,325

Management and franchise fee expense
—

 
4,625

 
—

 
—

 
4,625

Other operating expense
—

 
37,272

 
—

 
—

 
37,272

Total property operating expenses
—

 
87,874

 
—

 
—

 
87,874

Depreciation and amortization
78

 
6,494

 
11,127

 
—

 
17,699

Property tax, insurance and other
815

 
7,286

 
4,526

 
20

 
12,647

General and administrative
—

 
1,889

 
896

 
—

 
2,785

Transaction costs
61,932

 
—

 
—

 
—

 
61,932

Total operating expenses
62,825

 
103,543

 
16,549

 
20

 
182,937

Operating loss
(62,823
)
 
39,292

 
(16,435
)
 
—

 
(39,966
)
Intercompany interest income (expense)
56

 
—

 
(56
)
 
—

 
—

Interest income
23

 
23

 
—

 
—

 
46

Interest expense
(9,637
)
 
—

 
(3,271
)
 
—

 
(12,908
)
Loss on sale of hotel properties, net
2

 
(913
)
 
20

 
—

 
(891
)
Loss on extinguishment of indebtedness
—

 
—

 
(3,278
)
 
—

 
(3,278
)
Loss before equity in income from unconsolidated joint ventures
(72,379
)
 
38,402

 
(23,020
)
 
—

 
(56,997
)
Equity in income from consolidated entities
16,160

 
—

 
—

 
(16,160
)
 
—

Equity in income from unconsolidated joint ventures
165

 
399

 
(8
)
 
—

 
556

Loss before income tax benefit
(56,054
)
 
38,801

 
(23,028
)
 
(16,160
)
 
(56,441
)
Income tax benefit
20

 
531

 
—

 
—

 
551

Loss from continuing operations
(56,034
)
 
39,332

 
(23,028
)
 
(16,160
)
 
(55,890
)
Loss from discontinued operations
(3,415
)
 
—

 
—

 
—

 
(3,415
)
Net loss and comprehensive loss
(59,449
)
 
39,332

 
(23,028
)
 
(16,160
)
 
(59,305
)
Noncontrolling interest in consolidated joint ventures
—

 
76

 
32

 
—

 
108

Preferred distributions - consolidated joint venture
—

 
—

 
(252
)
 
—

 
(252
)
Net loss and comprehensive loss attributable to FelCor LP
(59,449
)
 
39,408

 
(23,248
)
 
(16,160
)
 
(59,449
)
Preferred distributions
(4,186
)
 
—

 
—

 
—

 
(4,186
)
Net loss and comprehensive loss attributable to FelCor LP common unitholders
$
(63,635
)
 
$
39,408

 
$
(23,248
)
 
$
(16,160
)
 
$
(63,635
)




35

FelCor Lodging Limited Partnership
Condensed Consolidating Statement of Operations and Comprehensive Income
For the Nine Months Ended September 30, 2018 (Successor)
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Related party lease revenue
$
—

 
$
70,046

 
$
101,965

 
$
—

 
$
172,011

Total revenues
—

 
70,046

 
101,965

 
—

 
172,011

 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
Depreciation and amortization
343

 
25,129

 
35,024

 
—

 
60,496

Property tax, insurance and other
99

 
22,310

 
20,425

 
—

 
42,834

General and administrative
482

 
84

 
29

 
—

 
595

Transaction costs
1,979

 
361

 
29

 
—

 
2,369

Total operating expenses
2,903

 
47,884

 
55,507

 
—

 
106,294

Operating income
(2,903
)
 
22,162

 
46,458

 
—

 
65,717

Other income
10

 
—

 
101

 
—

 
111

Interest income
524

 
—

 
15

 
(386
)
 
153

Interest expense
(22,485
)
 
—

 
(8,122
)
 
386

 
(30,221
)
Gain on sale of hotel properties, net
—

 
(19,386
)
 
34,316

 
—

 
14,930

Gain on extinguishment of indebtedness, net
12,932

 
—

 
(1,652
)
 
—

 
11,280

Income before equity in income from unconsolidated joint ventures
(11,922
)
 
2,776

 
71,116

 
—

 
61,970

Equity in income from consolidated entities
72,765

 
—

 
—

 
(72,765
)
 
—

Equity in income from unconsolidated joint ventures
945

 
—

 
—

 
—

 
945

Net income and comprehensive income
61,788

 
2,776

 
71,116

 
(72,765
)
 
62,915

Noncontrolling interest in consolidated joint ventures
—

 
—

 
(18
)
 
—

 
(18
)
Preferred distributions - consolidated joint venture
—

 
—

 
(1,109
)
 
—

 
(1,109
)
Net income and comprehensive income attributable to FelCor LP
$
61,788

 
$
2,776

 
$
69,989

 
$
(72,765
)
 
$
61,788




















36

FelCor Lodging Limited Partnership
Condensed Consolidating Statement of Operations and Comprehensive Loss
For the Period of January 1, 2017 through August 31, 2017 (Predecessor)
(in thousands)
 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Room revenue
$
—

 
$
425,682

 
$
—

 
$
—

 
$
425,682

Food and beverage revenue
—

 
90,572

 
—

 
—

 
90,572

Related party lease revenue
—

 
—

 
84,509

 
(84,509
)
 
—

Other revenue
41

 
34,883

 
337

 
—

 
35,261

Total revenues
41

 
551,137

 
84,846

 
(84,509
)
 
551,515

 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
Room expense
—

 
112,813

 
—

 
—

 
112,813

Food and beverage expense
—

 
71,828

 
—

 
—

 
71,828

Management and franchise fee expense
—

 
19,901

 
—

 
—

 
19,901

Other operating expense
—

 
147,827

 
—

 
—

 
147,827

Total property operating expenses
—

 
352,369

 
—

 
—

 
352,369

Depreciation and amortization
309

 
28,064

 
44,692

 
—

 
73,065

Impairment loss
—

 
35,109

 
—

 
—

 
35,109

Property tax, insurance and other
921

 
111,020

 
16,846

 
(84,509
)
 
44,278

General and administrative
—

 
8,914

 
7,092

 
—

 
16,006

Transaction costs
68,248

 
—

 
—

 
—

 
68,248

Total operating expenses
69,478

 
535,476

 
68,630

 
(84,509
)
 
589,075

Operating loss
(69,437
)
 
15,661

 
16,216

 
—

 
(37,560
)
Other income
—

 
—

 
100

 
—

 
100

Intercompany interest income (expense)
241

 
—

 
(241
)
 
—

 
—

Interest income
66

 
59

 
1

 
—

 
126

Interest expense
(38,722
)
 
—

 
(12,968
)
 
—

 
(51,690
)
Loss on sale of hotel properties, net
2

 
(1,565
)
 
(201
)
 
—

 
(1,764
)
Loss on extinguishment of indebtedness
—

 
—

 
(3,278
)
 
—

 
(3,278
)
Loss before equity in income from unconsolidated joint ventures
(107,850
)
 
14,155

 
(371
)
 
—

 
(94,066
)
Equity in income from consolidated entities
12,779

 
—

 
—

 
(12,779
)
 
—

Equity in income from unconsolidated joint ventures
1,181

 
(77
)
 
(30
)
 
—

 
1,074

Loss before income tax expense
(93,890
)
 
14,078

 
(401
)
 
(12,779
)
 
(92,992
)
Income tax expense
(35
)
 
(464
)
 
—

 
—

 
(499
)
Loss from continuing operations
(93,925
)
 
13,614

 
(401
)
 
(12,779
)
 
(93,491
)
Loss from discontinued operations
(3,415
)
 
—

 
—

 
—

 
(3,415
)
Net loss and comprehensive loss
(97,340
)
 
13,614

 
(401
)
 
(12,779
)
 
(96,906
)
Noncontrolling interest in consolidated joint ventures
—

 
336

 
209

 
—

 
545

Preferred distributions - consolidated joint venture
—

 
—

 
(979
)
 
—

 
(979
)
Net loss and comprehensive loss attributable to FelCor LP
(97,340
)
 
13,950

 
(1,171
)
 
(12,779
)
 
(97,340
)
Preferred distributions
(16,744
)
 
—

 
—

 
—

 
(16,744
)
Net loss and comprehensive loss attributable to FelCor LP common unitholders
$
(114,084
)
 
$
13,950

 
$
(1,171
)
 
$
(12,779
)
 
$
(114,084
)


37

FelCor Lodging Limited Partnership
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2018 (Successor)
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Operating activities:
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
$
(38,965
)
 
$
66,876

 
$
105,305

 
$
—

 
$
133,216

Investing activities:
 
 
 
 
 
 
 
 
 
Proceeds from the sale of hotel properties, net
—

 
151,466

 
282,895

 
—

 
434,361

Improvements and additions to hotel properties
—

 
(21,751
)
 
(36,458
)
 
—

 
(58,209
)
Additions to property and equipment
(4
)
 
—

 
—

 
—

 
(4
)
Intercompany financing
515,209

 
—

 
—

 
(515,209
)
 
—

Cash flows from investing activities
515,205

 
129,715

 
246,437

 
(515,209
)
 
376,148

Financing activities:
 
 
 
 
 
 
 
 
 
Repayments of borrowings
(538,813
)
 
—

 
(30,220
)
 
—

 
(569,033
)
Contributions from partners
673,853

 
—

 
—

 
—

 
673,853

Distributions to partners
(610,132
)
 
—

 
—

 
—

 
(610,132
)
Payments of deferred financing costs
—

 
—

 
(10
)
 
—

 
(10
)
Preferred distributions - consolidated joint venture
—

 
—

 
(1,113
)
 
—

 
(1,113
)
Intercompany financing
—

 
(196,591
)
 
(318,618
)
 
515,209

 
—

Cash flows from financing activities
(475,092
)
 
(196,591
)
 
(349,961
)
 
515,209

 
(506,435
)
Net change in cash, cash equivalents, and restricted cash reserves
1,148

 
—

 
1,781

 
—

 
2,929

Cash, cash equivalents, and restricted cash reserves, beginning of year
9,637

 
—

 
8,394

 
—

 
18,031

Cash, cash equivalents, and restricted cash reserves, end of period
$
10,785

 
$
—

 
$
10,175

 
$
—

 
$
20,960






























38

FelCor Lodging Limited Partnership
Condensed Consolidating Statement of Cash Flows
For the Period of September 1, 2017 through September 30, 2017 (Successor)
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Operating activities:
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
$
(8,078
)
 
$
(1,666
)
 
$
(1,418
)
 
$
—

 
$
(11,162
)
Investing activities:
 
 
 
 
 
 
 
 
 
Improvements and additions to hotel properties
—

 
(16
)
 
(39
)
 
—

 
(55
)
Intercompany financing
(6,879
)
 
—

 
—

 
6,879

 
—

Cash flows from investing activities
(6,879
)
 
(16
)
 
(39
)
 
6,879

 
(55
)
Financing activities:
 
 
 
 
 
 
 
 
 
Repayment of borrowings
—

 
—

 
(471
)
 
—

 
(471
)
Contributions from partners
35,545

 
—

 
—

 
—

 
35,545

Distributions to partners
(19,123
)
 
—

 
—

 
—

 
(19,123
)
Distribution of FelCor TRS
—

 
(51,867
)
 
—

 
—

 
(51,867
)
Preferred distributions - consolidated joint venture
—

 
—

 
(126
)
 
—

 
(126
)
Intercompany financing
—

 
5,056

 
1,823

 
(6,879
)
 
—

Cash flows from financing activities
16,422

 
(46,811
)
 
1,226

 
(6,879
)
 
(36,042
)
Net change in cash, cash equivalents, and restricted cash reserves
1,465

 
(48,493
)
 
(231
)
 
—

 
(47,259
)
Cash, cash equivalents, and restricted cash reserves, beginning of period
7,965

 
48,507

 
7,962

 
—

 
64,434

Cash, cash equivalents, and restricted cash reserves, end of period
$
9,430

 
$
14

 
$
7,731

 
$
—

 
$
17,175





























39

FelCor Lodging Limited Partnership
Condensed Consolidating Statement of Cash Flows
For the Period of January 1, 2017 through August 31, 2017 (Predecessor)
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Operating activities:
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
$
(40,773
)
 
$
85,899

 
$
54,214

 
$
—

 
$
99,340

Investing activities:
 
 
 
 
 
 
 
 
 
Proceeds from the sale of hotel properties, net
(696
)
 
74,281

 
(169
)
 
—

 
73,416

Improvements and additions to hotel properties
1

 
(16,727
)
 
(47,076
)
 
—

 
(63,802
)
Distributions from unconsolidated joint ventures in excess of earnings
840

 
—

 
—

 
—

 
840

Intercompany financing
91,391

 
—

 
—

 
(91,391
)
 
—

Cash flows from investing activities
91,536

 
57,554

 
(47,245
)
 
(91,391
)
 
10,454

Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
—

 
—

 
66,000

 
—

 
66,000

Repayments of borrowings
—

 
—

 
(121,691
)
 
—

 
(121,691
)
Distributions to preferred unitholders
(18,836
)
 
—

 
—

 
—

 
(18,836
)
Distributions to common unitholders
(30,926
)
 
—

 
—

 
—

 
(30,926
)
Distributions to noncontrolling interests
—

 
—

 
(150
)
 
—

 
(150
)
Contributions from noncontrolling interests
—

 
333

 
—

 
—

 
333

Net proceeds from the issuance of preferred capital in a consolidated joint venture
—

 
—

 
647

 
—

 
647

Intercompany financing
—

 
(140,853
)
 
49,462

 
91,391

 
—

Other
(6,568
)
 
—

 
(977
)
 
—

 
(7,545
)
Cash flows from financing activities
(56,330
)
 
(140,520
)
 
(6,709
)
 
91,391

 
(112,168
)
Net change in cash, cash equivalents, and restricted cash reserves
(5,567
)
 
2,933

 
260

 
—

 
(2,374
)
Cash, cash equivalents, and restricted cash reserves, beginning of year
13,532

 
45,574

 
7,702

 
—

 
66,808

Cash, cash equivalents, and restricted cash reserves, end of period
$
7,965

 
$
48,507

 
$
7,962

 
$
—

 
$
64,434



40

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the information contained in the combined Annual Report on Form 10-K for the year ended December 31, 2017 of Rangers Sub I, LLC ("Rangers") and FelCor Lodging Limited Partnership ("FelCor LP"), filed with the SEC on March 2, 2018 (the "Annual Report"), which is accessible on the SEC’s website at www.sec.gov.

Statement Regarding Forward-Looking Information
 
The following information contains certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the use of the words "believe," "project," "expect," "anticipate," "estimate," "plan," "may," "will," "will continue," "intend," "should," or similar expressions.  Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements.  Some factors that might cause such a difference include the following: the current global economic uncertainty, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in the lodging industry, seasonality of the lodging industry, risks related to natural disasters, such as earthquakes and hurricanes, hostilities, including future terrorist attacks or fear of hostilities that affect travel, our ability to obtain lines of credit or permanent financing on satisfactory terms, changes in interest rates, access to capital through offerings of our common and preferred shares of beneficial interest, or debt, our ability to identify suitable acquisitions, our ability to close on identified acquisitions and integrate those businesses and inaccuracies of our accounting estimates.  Given these uncertainties, undue reliance should not be placed on such statements.
 
Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled "Forward-Looking Statements," "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report, as well as the risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.

Overview
 
Rangers is a Maryland limited liability company that, through FelCor LP, owns hotel properties and conducts other business. Substantially all of Rangers' assets and liabilities are held by, and all of its operations are conducted through, FelCor LP. 100% of the ownership interests of Rangers are held by RLJ LP, which is the operating partnership of RLJ, one of the largest U.S. publicly traded lodging REITs in terms of both number of hotels and number of rooms. Rangers indirectly owns a 99% partnership interest in FelCor LP. Rangers GP, a wholly-owned subsidiary of RLJ LP, owns the remaining 1% partnership interest and is the sole general partner of FelCor LP.

Our hotel properties are concentrated in markets that we believe exhibit multiple demand generators and attractive long-term growth prospects. We believe premium-branded, compact full-service hotels with these characteristics generate high levels of Revenue per Available Room ("RevPAR"), strong operating margins and attractive returns.

As we look at factors that could impact our business, we find that the consumer is generally in good financial health, job creation remains positive, and an increase in wages is adding to consumers' disposable income. While geopolitical and global economic uncertainty still exists and interest rates are rising, we remain cautiously optimistic that positive employment trends, high consumer confidence, and elevated corporate sentiment will continue to drive economic expansion in the U.S. and generate positive lodging demand and RevPAR growth for the industry. However, in light of accelerating supply, RevPAR growth is likely to be moderate.

RLJ continues to follow a prudent and disciplined capital allocation strategy. RLJ will continue to look for and weigh all possible investment decisions against the highest and best returns for its shareholders over the long term. RLJ believes that its cash on hand and expected access to capital along with its senior management team's experience, extensive industry relationships and asset management expertise, will enable us to pursue investment opportunities that generate additional internal and external growth.

41


As of September 30, 2018, we owned 31 hotel properties with approximately 9,365 rooms, located in 13 states.  We owned, through wholly-owned subsidiaries, a 100% interest in 28 hotel properties, a 95% interest in The Knickerbocker, and 50% interests in entities owning two hotel properties. We consolidate the real estate interests in the 29 hotel properties in which we hold a controlling financial interest, and we record the real estate interests in the two hotels in which we hold an indirect 50% interest using the equity method of accounting. The Company leases 30 of its 31 hotel properties to subsidiaries of RLJ LP.
 
Recent Significant Activities
 
Our significant activities reflect RLJ's commitment to creating long-term shareholder value through enhancing its hotel portfolio's quality, recycling capital and maintaining a prudent capital structure. During the nine months ended September 30, 2018, the following significant activities took place:

•
In February 2018, we sold the Embassy Suites Boston Marlborough in Marlborough, Massachusetts for $23.7 million.

•
In March 2018, we completed the early redemption of the senior secured notes in full for an aggregate principal amount of $524.0 million.

•
In March 2018, we sold the Sheraton Philadelphia Society Hill Hotel in Philadelphia, Pennsylvania for $95.5 million.

•
In July 2018, we sold the Embassy Suites Napa Valley in Napa, California for $102.0 million.

•
In July 2018, we entered into a purchase and sale agreement to sell the Holiday Inn San Francisco - Fisherman's Wharf. At September 30, 2018, this hotel property has been included in assets of hotel properties held for sale, net on the consolidated balance sheet. The transaction closed on October 15, 2018.

•
In August 2018, we sold The Vinoy Renaissance St. Petersburg Resort & Golf Club in St. Petersburg, Florida for $185.0 million.

•
In September 2018, we sold the DoubleTree by Hilton Burlington Vermont in Burlington, Vermont for $35.0 million.

Our Customers
 
Our hotel property-owning subsidiaries (the "Lessors") receive rental income from the property-operating subsidiaries (the "Lessees") under lease agreements. The lease agreements contain a specific base rent amount or a percentage rent amount, which is calculated based on a percentage of room revenues, food and beverage revenues, and other revenues at the hotel properties.

Substantially all of our hotel properties consist of premium-branded, compact full-service hotels. As a result of this property profile, the majority of our hotel properties' customers are transient in nature. Transient business typically represents individual business or leisure travelers. As a result, macroeconomic factors that impact both business travel and leisure travel have an effect on our business. Group business is typically defined as a minimum of 10 guestrooms booked together as part of the same piece of business. Group business may or may not use the meeting space at any given hotel. A number of our hotels are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer.

Our Revenues and Expenses
 
Our revenues are derived from rental income received under lease agreements, which contain a specific base rent amount or a percentage rent amount, which is calculated based on a percentage of room revenue, food and beverage revenue, and other revenue at the hotel properties.

Our expenses consist of the depreciation and amortization on our investment in hotel properties and intangible assets, and property taxes, insurance, and other property-related costs of our hotel properties.

For the Predecessor period, our revenues were primarily derived from the operation of hotels, including the sale of rooms, food and beverage revenue and other revenue, which consists of parking fees, golf, pool, and other resort fees, gift shop sales, and other guest service fees.

42

 
For the Predecessor period, our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management and franchise fees and other operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other operating expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance and utility costs. Our hotel properties that are subject to franchise agreements are charged a royalty fee, plus additional fees for marketing, central reservation systems and other franchisor costs, in order for the hotel properties to operate under the respective brands. The franchise fees are based on a percentage of room revenue. Our hotel properties are managed by independent, third-party management companies under long-term agreements pursuant to which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel property. We generally receive a cash distribution from the management companies on a monthly basis, which reflects the hotel-level sales less hotel-level operating expenses.

Key Indicators of Financial Performance
 
We use financial information to evaluate the amount of rental income we receive from the Lessees under our lease agreements. We earn a base rent amount or a percentage rent amount, which is calculated based on a percentage of room revenues, food and beverage revenues, and other revenues at the hotel properties. Industry standard statistical information and comparative data, such as Average Daily Rate ("ADR"), occupancy, and RevPAR, are used to measure the operating performance of our hotel properties, including its impact on the amount of rental income recognized from base rent or percentage rent. We also use financial information to evaluate the significance of the property taxes, insurance, and other property-related costs at our hotel properties.

We use a variety of operating, financial and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In addition, we use other information that may not be financial in nature, including industry standard statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotel properties in our portfolio to determine each hotel's contribution to cash flow and its potential to provide attractive long-term total returns. The key indicators included:

•
ADR
•
Occupancy
•
RevPAR
ADR, Occupancy and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring the operating performance at the individual hotel property level and across our entire business. We evaluate the individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only room revenue.

Critical Accounting Policies
 
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. It is possible that the actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. Our Annual Report on Form 10-K for the year ended December 31, 2017 contains a discussion of our critical accounting policies. There have been no significant changes to our critical accounting policies since December 31, 2017.


43

Results of Operations
 
At September 30, 2018 and 2017, we owned 31 and 37 hotel properties, respectively.  Based on when a hotel property is acquired, sold, or closed for renovation, the operating results for certain hotel properties are not comparable for the three and nine months ended September 30, 2018 and 2017.  The non-comparable hotel properties include eight dispositions that were completed between January 1, 2017 and September 30, 2018.

As discussed in Note 3 to our accompanying consolidated financial statements, Merger with RLJ, RLJ elected to apply pushdown accounting to the Company's consolidated financial statements. Accordingly, the Company's consolidated financial statements for the periods before and after August 31, 2017 (the "Acquisition Date") reflect different bases of accounting, and the results of operations for those periods are not comparable. As a result, the results of operations are separated into two distinct periods; the periods prior to the Acquisition Date are identified as "Predecessor", and the periods after the Acquisition Date are identified as "Successor". Additionally, immediately after the consummation of the Mergers, the Company distributed the equity interests in FelCor TRS to RLJ LP. As a result of the distribution of FelCor TRS, the Lessees' lease payments are no longer eliminated in consolidation.


44

Comparison of the three months ended September 30, 2018 to the Successor period of September 1, 2017 through September 30, 2017 and the Predecessor period of July 1, 2017 through August 31, 2017
 
Successor
 
 
 
Predecessor
 
 
 
 
 
For the three months ended September 30,
 
September 1
through
September 30,
 
 
July 1 through August 31,
 
 
 
 
 
2018
 
2017
 
 
2017
 
$ Change
 
% Change
Revenues
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
Room revenue
$
—

 
$
—

 
 
$
111,977

 
$
(111,977
)
 
(100.0
)%
Food and beverage revenue
—

 
—

 
 
20,577

 
(20,577
)
 
(100.0
)%
Related party lease revenue
57,811

 
20,854

 
 
—

 
36,957

 
—
 %
Other revenue
—

 
—

 
 
10,417

 
(10,417
)
 
(100.0
)%
Total revenues
$
57,811

 
$
20,854

 
 
$
142,971

 
$
(106,014
)
 
(64.7
)%
Expenses
 

 
 
 
 
 

 


 


Operating expenses
 

 
 
 
 
 

 


 


Room expense
$
—

 
$
—

 
 
$
28,652

 
$
(28,652
)
 
(100.0
)%
Food and beverage expense
—

 
—

 
 
17,325

 
(17,325
)
 
(100.0
)%
Management and franchise fee expense
—

 
—

 
 
4,625

 
(4,625
)
 
(100.0
)%
Other operating expense
—

 
—

 
 
37,272

 
(37,272
)
 
(100.0
)%
Total property operating expenses
—

 
—

 
 
87,874

 
(87,874
)
 
(100.0
)%
Depreciation and amortization
19,292

 
5,974

 
 
17,699

 
(4,381
)
 
(18.5
)%
Property tax, insurance and other
13,947

 
4,449

 
 
12,647

 
(3,149
)
 
(18.4
)%
General and administrative
(564
)
 
192

 
 
2,785

 
(3,541
)
 
—
 %
Transaction costs
194

 
1,039

 
 
61,932

 
(62,777
)
 
(99.7
)%
Total operating expenses
32,869

 
11,654

 
 
182,937

 
(161,722
)
 
(83.1
)%
Operating income (loss)
24,942

 
9,200

 
 
(39,966
)
 
55,708

 
—
 %
Other income
1

 
—

 
 
—

 
1

 
100.0
 %
Interest income
70

 
3

 
 
46

 
21

 
42.9
 %
Interest expense
(8,467
)
 
(4,779
)
 
 
(12,908
)
 
9,220

 
(52.1
)%
Gain (loss) on sale of hotel properties, net
24,254

 
—

 
 
(891
)
 
25,145

 
—
 %
Loss on extinguishment of indebtedness
(1,656
)
 
—

 
 
(3,278
)
 
1,622

 
(49.5
)%
Income (loss) before equity in income from unconsolidated joint ventures
39,144

 
4,424

 
 
(56,997
)
 
91,717

 
—
 %
Equity in income from unconsolidated joint ventures
218

 
115

 
 
556

 
(453
)
 
(67.5
)%
Income (loss) before income tax benefit
39,362

 
4,539

 
 
(56,441
)
 
91,264

 
—
 %
Income tax benefit
—

 
—

 
 
551

 
(551
)
 
(100.0
)%
Income (loss) from continuing operations
39,362

 
4,539

 
 
(55,890
)
 
90,713

 
—
 %
Loss from discontinued operations
—

 
—

 
 
(3,415
)
 
3,415

 
(100.0
)%
Net income (loss) and comprehensive income (loss)
39,362

 
4,539

 
 
(59,305
)
 
94,128

 
—
 %
Net (income) loss attributable to noncontrolling interests:
 

 
 
 
 
 

 


 
 
Noncontrolling interest in consolidated joint ventures
(52
)
 
(51
)
 
 
108

 
(109
)
 
—
 %
Noncontrolling interest in FelCor LP
(389
)
 
(45
)
 
 
274

 
(618
)
 
—
 %
Preferred distributions - consolidated joint venture
(374
)
 
(122
)
 
 
(252
)
 
—

 
—
 %
Net income (loss) and comprehensive income (loss) attributable to Rangers
38,547

 
4,321

 
 
(59,175
)
 
93,401

 
—
 %
Preferred dividends
—

 
—

 
 
(4,186
)
 
4,186

 
(100.0
)%
Net income (loss) and comprehensive income (loss) attributable to ownership interests/common shareholders
$
38,547

 
$
4,321

 
 
$
(63,361
)
 
$
97,587

 
—
 %

45


Revenues

Total revenues for the three months ended September 30, 2018 decreased $106.0 million, or 64.7%, to $57.8 million from $163.9 million for the three months ended September 30, 2017 ($20.9 million for the Successor period of September 1, 2017 through September 30, 2017 and $143.0 million for the Predecessor period of July 1, 2017 through August 31, 2017). The decrease was the result of a $112.0 million decrease in room revenue, a $20.6 million decrease in food and beverage revenue, and a $10.4 million decrease in other revenue, partially offset by a $37.0 million increase in related party lease revenue.

Room Revenue

Room revenue for the three months ended September 30, 2018 decreased $112.0 million, or 100.0%, from the three months ended September 30, 2017.  The decrease was the result of the Mergers on August 31, 2017 and the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.
 
Food and Beverage Revenue
 
Food and beverage revenue for the three months ended September 30, 2018 decreased $20.6 million, or 100.0%, from the three months ended September 30, 2017. The decrease was the result of the Mergers on August 31, 2017 and the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.
 
Related Party Lease Revenue

Related party lease revenue for the three months ended September 30, 2018 increased $37.0 million to $57.8 million from $20.9 million for the three months ended September 30, 2017 ($20.9 million for the Successor period of September 1, 2017 through September 30, 2017 and $0.0 million for the Predecessor period of July 1, 2017 through August 31, 2017). The recognition of related party lease revenue in the Successor period as compared to the Predecessor period is the result of the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.

Other Revenue
 
Other revenue, which includes revenue derived from ancillary sources such as parking fees, golf, pool, and other resort fees, gift shop sales and other guest service fees, for the three months ended September 30, 2018 decreased $10.4 million, or 100.0%, from the three months ended September 30, 2017.  The decrease was the result of the Mergers on August 31, 2017 and the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.

Property Operating Expenses
 
Property operating expenses for the three months ended September 30, 2018 decreased $87.9 million, or 100.0%, from the three months ended September 30, 2017. The decrease was the result of the Mergers on August 31, 2017 and the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.
 
Depreciation and Amortization
 
Depreciation and amortization expense for the three months ended September 30, 2018 decreased $4.4 million, or 18.5%, to $19.3 million from $23.7 million for the three months ended September 30, 2017 ($6.0 million for the Successor period of September 1, 2017 through September 30, 2017 and $17.7 million for the Predecessor period of July 1, 2017 through August 31, 2017). The decrease was primarily the result of a $4.0 million decrease in depreciation and amortization expense associated with the hotel properties that were sold during the comparative period and a $0.4 million decrease in depreciation and amortization expense as a result of the pushdown accounting for the new basis of accounting established by RLJ for the assets acquired in the Mergers.
 

46

Property Tax, Insurance and Other
 
Property tax, insurance and other expense for the three months ended September 30, 2018 decreased $3.1 million, or 18.4%, to $13.9 million from $17.1 million for three months ended September 30, 2017 ($4.4 million for the Successor period of September 1, 2017 through September 30, 2017 and $12.6 million for the Predecessor period of July 1, 2017 through August 31, 2017).  The decrease was primarily the result of a decrease in property tax, insurance and other expense associated with hotel properties that were sold during the comparative period, partially offset by an increase in property tax expense as a result of property tax reassessments in certain jurisdictions as a result of the Merger with RLJ.

General and Administrative
 
General and administrative expense decreased $3.5 million during the three months ended September 30, 2018 from $3.0 million for the three months ended September 30, 2017 ($0.2 million for the Successor period of September 1, 2017 through September 30, 2017 and $2.8 million for the Predecessor period of July 1, 2017 through August 31, 2017). The decrease in general and administrative expense was primarily attributable to the Mergers on August 31, 2017, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ. The Merger with RLJ resulted in a decrease in compensation expense and a decrease in other general and administrative expenses. The decrease in general and administrative expense was also attributable to a decrease of $0.9 million related to the receipts of prior year employee tax credits during the three months ended September 30, 2018.

Transaction Costs
 
Transaction costs for the three months ended September 30, 2018 decreased $62.8 million, or 99.7%, to $0.2 million from $62.9 million for the three months ended September 30, 2017 ($1.0 million for the Successor period of September 1, 2017 through September 30, 2017 and $61.9 million for the Predecessor period of July 1, 2017 through August 31, 2017). The decrease in transaction costs was attributable to a decrease of approximately $62.8 million in transaction and integration costs related to the Mergers.

Interest Expense

Interest expense for the three months ended September 30, 2018 decreased $9.2 million, or 52.1%, to $8.5 million from $17.7 million for the three months ended September 30, 2017 ($4.8 million for the Successor period of September 1, 2017 through September 30, 2017 and $12.9 million for the Predecessor period of July 1, 2017 through August 31, 2017).  The decrease in interest expense was due to a lower average debt balance during the three months ended September 30, 2018. The lower average debt balance was a result of the redemption of the senior secured notes in March 2018, the early payoff of a mortgage loan that was encumbered by a hotel property that was sold during the three months ended September 30, 2018, and mortgage loan principal payments. In addition, the decrease in interest expense was the result of the amortization of fair value adjustments on the Senior Notes and the mortgage loans that were recognized at fair value in the Mergers on August 31, 2017, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.

Loss on Extinguishment of Indebtedness
 
During the three months ended September 30, 2018, the Company recognized a loss on extinguishment of indebtedness of approximately $1.7 million, which was due to the early payoff of a mortgage loan that was encumbered by a hotel property that was sold during the three months ended September 30, 2018. During the Predecessor period of January 1, 2017 through August 31, 2017, the Company recognized a $3.3 million loss on extinguishment of indebtedness as a result of writing off the unamortized deferred financing costs in connection with the termination of the Company's line of credit agreement.


47

Comparison of the nine months ended September 30, 2018 to the Successor period of September 1, 2017 through September 30, 2017 and the Predecessor period of January 1, 2017 through August 31, 2017
 
Successor
 
 
 
Predecessor
 
 
 
 
 
For the nine months ended September 30,
 
September 1
through
September 30,
 
 
January 1
through
August 31,
 
 
 
 
 
2018
 
2017
 
 
2017
 
$ Change
 
% Change
Revenues
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
Room revenue
$
—

 
$
—

 
 
$
425,682

 
$
(425,682
)
 
(100.0
)%
Food and beverage revenue
—

 
—

 
 
90,572

 
(90,572
)
 
(100.0
)%
Related party lease revenue
172,011

 
20,854

 
 
—

 
151,157

 
—
 %
Other revenue
—

 
—

 
 
35,261

 
(35,261
)
 
(100.0
)%
Total revenues
$
172,011

 
$
20,854

 
 
$
551,515

 
$
(400,358
)
 
(69.9
)%
Expenses
 

 
 
 
 
 

 
 
 
 
Operating expenses
 

 
 
 
 
 

 
 
 
 
Room expense
$
—

 
$
—

 
 
$
112,813

 
$
(112,813
)
 
(100.0
)%
Food and beverage expense
—

 
—

 
 
71,828

 
(71,828
)
 
(100.0
)%
Management and franchise fee expense
—

 
—

 
 
19,901

 
(19,901
)
 
(100.0
)%
Other operating expense
—

 
—

 
 
147,827

 
(147,827
)
 
(100.0
)%
Total property operating expenses
—

 
—

 
 
352,369

 
(352,369
)
 
(100.0
)%
Depreciation and amortization
60,496

 
5,974

 
 
73,065

 
(18,543
)
 
(23.5
)%
Impairment loss
—

 
—

 
 
35,109

 
(35,109
)
 
(100.0
)%
Property tax, insurance and other
42,834

 
4,449

 
 
44,278

 
(5,893
)
 
(12.1
)%
General and administrative
595

 
192

 
 
16,006

 
(15,603
)
 
(96.3
)%
Transaction costs
2,369

 
1,039

 
 
68,248

 
(66,918
)
 
(96.6
)%
Total operating expenses
106,294

 
11,654

 
 
589,075

 
(494,435
)
 
(82.3
)%
Operating income (loss)
65,717

 
9,200

 
 
(37,560
)
 
94,077

 
—
 %
Other income
111

 
—

 
 
100

 
11

 
11.0
 %
Interest income
153

 
3

 
 
126

 
24

 
18.6
 %
Interest expense
(30,221
)
 
(4,779
)
 
 
(51,690
)
 
26,248

 
(46.5
)%
Gain (loss) on sale of hotel properties, net
14,930

 
—

 
 
(1,764
)
 
16,694

 
—
 %
Gain (loss) on extinguishment of indebtedness, net
11,280

 
—

 
 
(3,278
)
 
14,558

 
—
 %
Income (loss) before equity in income from unconsolidated joint ventures
61,970

 
4,424

 
 
(94,066
)
 
151,612

 
—
 %
Equity in income from unconsolidated joint ventures
945

 
115

 
 
1,074

 
(244
)
 
(20.5
)%
Income (loss) before income tax expense
62,915

 
4,539

 
 
(92,992
)
 
151,368

 
—
 %
Income tax expense
—

 
—

 
 
(499
)
 
499

 
(100.0
)%
Income (loss) from continuing operations
62,915

 
4,539

 
 
(93,491
)
 
151,867

 
—
 %
Loss from discontinued operations
—

 
—

 
 
(3,415
)
 
3,415

 
(100.0
)%
Net income (loss) and comprehensive income (loss)
62,915

 
4,539

 
 
(96,906
)
 
155,282

 
—
 %
Net (income) loss attributable to noncontrolling interests:
 

 
 
 
 
 

 
 
 
 
Noncontrolling interest in consolidated joint ventures
(18
)
 
(51
)
 
 
545

 
(512
)
 
—
 %
Noncontrolling interest in FelCor LP
(618
)
 
(45
)
 
 
495

 
(1,068
)
 
—
 %
Preferred distributions - consolidated joint venture
(1,109
)
 
(122
)
 
 
(979
)
 
(8
)
 
0.7
 %
Net income (loss) and comprehensive income (loss) attributable to Rangers
61,170

 
4,321

 
 
(96,845
)
 
153,694

 
—
 %

48

Preferred dividends
—

 
—

 
 
(16,744
)
 
16,744

 
(100.0
)%
Net income (loss) and comprehensive income (loss) attributable to ownership interests/common shareholders
$
61,170

 
$
4,321

 
 
$
(113,589
)
 
$
170,438

 
—
 %

Revenues
 
Total revenues for the nine months ended September 30, 2018 decreased $400.4 million, or 69.9%, to $172.0 million from $572.4 million for the nine months ended September 30, 2017 ($20.9 million for the Successor period of September 1, 2017 through September 30, 2017 and $551.5 million for the Predecessor period of January 1, 2017 through August 31, 2017). The decrease was the result of a $425.7 million decrease in room revenue, a $90.6 million decrease in food and beverage revenue, and a $35.3 million decrease in other revenue, partially offset by a $151.2 million increase in related party lease revenue.

Room Revenue
 
Room revenue for the nine months ended September 30, 2018 decreased $425.7 million, or 100.0%, from the nine months ended September 30, 2017.  The decrease was the result of the Mergers on August 31, 2017 and the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.

Food and Beverage Revenue
 
Food and beverage revenue for the nine months ended September 30, 2018 decreased $90.6 million, or 100.0%, from the nine months ended September 30, 2017. The decrease was the result of the Mergers on August 31, 2017 and the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.
 
Related Party Lease Revenue

Related party lease revenue for the nine months ended September 30, 2018 increased $151.2 million to $172.0 million from $20.9 million for the nine months ended September 30, 2017 ($20.9 million for the Successor period of September 1, 2017 through September 30, 2017 and $0.0 million for the Predecessor period of January 1, 2017 through August 31, 2017). The recognition of related party lease revenue in the Successor period as compared to the Predecessor period is the result of the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.

Other Revenue
 
Other revenue, which includes revenue derived from ancillary sources such as parking fees, golf, pool, and other resort fees, gift shop sales and other guest service fees, for the nine months ended September 30, 2018 decreased $35.3 million, or 100.0%, from the nine months ended September 30, 2017.  The decrease was the result of the Mergers on August 31, 2017 and the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.

Property Operating Expenses
 
Property operating expenses for the nine months ended September 30, 2018 decreased $352.4 million, or 100.0%, from the nine months ended September 30, 2017. The decrease was the result of the Mergers on August 31, 2017 and the Company distributing its equity interests in FelCor TRS to RLJ LP immediately after the consummation of the Mergers, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.
 

49

Depreciation and Amortization
 
Depreciation and amortization expense for the nine months ended September 30, 2018 decreased $18.5 million, or 23.5%, to $60.5 million from $79.0 million for the nine months ended September 30, 2017 ($6.0 million for the Successor period of September 1, 2017 through September 30, 2017 and $73.1 million for the Predecessor period of January 1, 2017 through August 31, 2017). The decrease was primarily the result of a $13.4 million decrease in depreciation and amortization expense associated with the hotel properties that were sold during the comparative period and a $5.1 million decrease in depreciation and amortization expense as a result of the pushdown accounting for the new basis of accounting established by RLJ for the assets acquired in the Mergers.

Impairment Loss

During the Predecessor period of January 1, 2017 through August 31, 2017, the Company recorded a total impairment loss of $35.1 million related to two hotel properties. In March 2017, the Company recorded a $24.8 million impairment loss on one hotel property based on third-party offers to purchase the hotel property and observable market data on transactions involving hotel properties in similar locations. At June 30, 2017, two hotel properties, including the hotel property that was previously impaired in March 2017, were classified as held for sale on the consolidated balance sheet. The Company recorded an additional impairment loss of $10.3 million on these two hotel properties in order to reflect the contractual sale prices, less the estimated costs to sell.

Property Tax, Insurance and Other
 
Property tax, insurance and other expense for the nine months ended September 30, 2018 decreased $5.9 million, or 12.1%, to $42.8 million from $48.7 million for the nine months ended September 30, 2017 ($4.4 million for the Successor period of September 1, 2017 through September 30, 2017 and $44.3 million for the Predecessor period of January 1, 2017 through August 31, 2017).  The decrease was primarily the result of a decrease in property tax, insurance and other expense associated with hotel properties that were sold during the comparative period, partially offset by an increase in property tax expense as a result of property tax reassessments in certain jurisdictions as a result of the Merger with RLJ.

General and Administrative
 
General and administrative expense for the nine months ended September 30, 2018 decreased $15.6 million, or 96.3%, to $0.6 million from $16.2 million for the nine months ended September 30, 2017 ($0.2 million for the Successor period of September 1, 2017 through September 30, 2017 and $16.0 million for the Predecessor period of January 1, 2017 through August 31, 2017). The decrease in general and administrative expense was primarily attributable to the Mergers on August 31, 2017, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ. The Merger with RLJ resulted in a decrease in compensation expense and a decrease in other general and administrative expenses. The decrease in general and administrative expense was also attributable to a decrease of $0.9 million related to the receipts of prior year employee tax credits during the nine months ended September 30, 2018.

Transaction Costs
 
Transaction costs for the nine months ended September 30, 2018 decreased $66.9 million, or 96.6%, to $2.4 million from $69.2 million for the nine months ended September 30, 2017 ($1.0 million for the Successor period of September 1, 2017 through September 30, 2017 and $68.2 million for the Predecessor period of January 1, 2017 through August 31, 2017). The decrease in transaction costs was primarily attributable to a decrease of approximately $67.4 million in transaction and integration costs related to the Mergers.
 
Interest Expense
 
Interest expense for the nine months ended September 30, 2018 decreased $26.2 million, or 46.5%, to $30.2 million from $56.5 million for the nine months ended September 30, 2017 ($4.8 million for the Successor period of September 1, 2017 through September 30, 2017 and $51.7 million for the Predecessor period of January 1, 2017 through August 31, 2017).  The decrease in interest expense was due to a lower average debt balance during the nine months ended September 30, 2018. The lower average debt balance was a result of the redemption of the senior secured notes in March 2018, the early payoff of a mortgage loan that was encumbered by a hotel property that was sold during the nine months ended September 30, 2018, and mortgage loan principal payments. In addition, the decrease in interest expense was the result of the amortization of fair value adjustments on the Senior Notes and the mortgage loans that were recognized at fair value in the Mergers on August 31, 2017, as noted in Note 3 to our accompanying consolidated financial statements, Merger with RLJ.

50


Gain (Loss) on Extinguishment of Indebtedness, net
 
During the nine months ended September 30, 2018, the Company recognized a net gain on extinguishment of indebtedness of approximately $11.3 million. In March 2018, the Company recognized a $12.9 million gain on extinguishment of indebtedness, which was due to the early redemption of the senior secured notes. In July 2018, the Company recognized a $1.7 million loss on extinguishment of indebtedness, which was due to the early payoff of a mortgage loan that was encumbered by a hotel property that was sold during the nine months ended September 30, 2018. During the Predecessor period of January 1, 2017 through August 31, 2017, the Company recognized a $3.3 million loss on extinguishment of indebtedness as a result of writing off the unamortized deferred financing costs in connection with the termination of the Company's line of credit agreement.

Liquidity and Capital Resources
 
Our short-term liquidity requirements consist primarily of the funds necessary to pay for operating expenses and other expenditures directly associated with our hotel properties, including:
 
•
recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with brand standards; and
 
•
interest expense and scheduled principal payments on outstanding indebtedness.
 
We expect to meet our short-term liquidity requirements generally through the net cash provided by operations, existing cash balances, and proceeds from the sale of hotel properties.
 
Our long-term liquidity requirements consist primarily of the funds necessary to pay for the costs of redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our hotel properties, and scheduled debt payments, at maturity or otherwise. We expect to meet our long-term liquidity requirements through various sources of capital, including existing working capital, the net cash provided by operations, long-term mortgage loans and other secured and unsecured borrowings, the proceeds from the sale of hotel properties, and if necessary, borrowings under RLJ's revolving credit facility.
 
Sources and Uses of Cash
 
As of September 30, 2018, we had $21.0 million of cash, cash equivalents, and restricted cash reserves as compared to $18.0 million at December 31, 2017.
 
Cash flows from Operating Activities
 
The net cash flow provided by operating activities totaled $133.2 million for the nine months ended September 30, 2018. The net cash flow used in operating activities totaled $11.2 million for the Successor period of September 1, 2017 through September 30, 2017. The net cash flow provided by operating activities totaled $99.3 million for the Predecessor period of January 1, 2017 through August 31, 2017.

Our cash flows provided by operating activities generally consist of the cash received from the hotel property lease agreements between the Lessors and the Lessees, partially offset by the cash paid for corporate expenses and other working capital changes. For the Predecessor period, our cash flows provided by operating activities generally consisted of the net cash generated by our hotel operations, partially offset by the cash paid for corporate expenses and other working capital changes.

Refer to the "Results of Operations" section for further discussion of our operating results for the nine months ended September 30, 2018, the Successor period of September 1, 2017 through September 30, 2017, and the Predecessor period of January 1, 2017 through August 31, 2017.
 
Cash flows from Investing Activities
 
The net cash flow provided by investing activities totaled $376.1 million for the nine months ended September 30, 2018 primarily due to $434.4 million of net cash proceeds from the sale of hotel properties, partially offset by $58.2 million in routine capital improvements and additions to our hotel properties.


51

The net cash flow used in investing activities totaled $0.1 million for the Successor period of September 1, 2017 through September 30, 2017 due to routine capital improvements and additions to our hotel properties.

The net cash flow provided by investing activities totaled $10.5 million for the Predecessor period of January 1, 2017 through August 31, 2017 primarily due to $73.4 million of net cash proceeds from the sale of two hotel properties. The net cash flow provided by investing activities was partially offset by $63.8 million in capital improvements and additions to our hotel properties.
 
Cash flows from Financing Activities
 
The net cash flow used in financing activities totaled $506.4 million for the nine months ended September 30, 2018 primarily due to a payment of approximately $539.0 million to redeem the senior secured notes, $610.1 million in distributions to members, $28.1 million to payoff a mortgage loan that was encumbered by a hotel property that was sold, and $2.1 million in mortgage loans principal payments. The net cash flow used in financing activities was partially offset by $673.9 million in contributions from members.

The net cash flow used in financing activities totaled $36.0 million for the Successor period of September 1, 2017 through September 30, 2017 primarily due to the $51.9 million distribution of the equity interests in FelCor TRS to RLJ LP and $19.1 million in distributions to members, partially offset by $35.5 million in contributions from members.

The net cash flow used in financing activities totaled $112.2 million for the Predecessor period of January 1, 2017 through August 31, 2017 primarily due to $121.7 million in repayments on debt borrowings, $49.8 million in distributions to common and preferred stockholders, and $6.4 million paid to repurchase common shares to satisfy employee withholding requirements. The net cash flow used in financing activities was partially offset by $66.0 million in additional debt borrowings under the line of credit.

Capital Expenditures and Reserve Funds
 
We maintain each of our hotel properties in good repair and condition and in conformity with applicable laws and regulations, franchise agreements and management agreements. Generally, the cost of routine improvements and alterations are paid out of furniture, fixtures and equipment ("FF&E") reserves, which are funded by a portion of each hotel property’s gross revenues. Routine capital expenditures are administered by us with the assistance of the property management companies. However, we have approval rights over the capital expenditures as part of the annual budget process for each of our hotel properties.
 
From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. In addition, upon acquisition of a hotel we often are required to complete a property improvement plan in order to bring the hotel up to the respective franchisor’s standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the FF&E reserves. To the extent that the FF&E reserves are not available or sufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with cash and cash equivalents on hand and/or other sources of available liquidity.
 
With respect to some of our hotel properties that are operated under franchise agreements with major national hotel brands and for some of our hotel properties subject to first mortgage liens, we are obligated to maintain FF&E reserve accounts for future capital expenditures at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels, and typically ranges between 4.0% and 5.0% of the respective hotel’s total gross revenue. As of September 30, 2018, approximately $0.9 million was held in FF&E reserve accounts for future capital expenditures.
 
Off-Balance Sheet Arrangements
 
As of September 30, 2018, we owned 50% interests in joint ventures that owned two hotel properties. RLJ LP owns more than 50% of the operating lessee for one of these hotels and the other hotel is operated without a lease. None of our officers or employees holds an ownership interest in any of these joint ventures or entities.


52

One of the 50% unconsolidated joint ventures that owns a hotel property has $21.1 million of non-recourse mortgage debt, of which our pro rata portion was $10.6 million, none of which is reflected as a liability on our consolidated balance sheet. Our liabilities with regard to the non-recourse debt and the liabilities of our subsidiaries that are members or partners in joint ventures are generally limited to guaranties of the borrowing entity’s obligations to pay for the lender’s losses caused by misconduct, fraud or misappropriation of funds by the venture and other typical exceptions from the non-recourse provisions in the mortgages, such as for environmental liabilities. In addition, this joint venture is subject to two ground leases with terms expiring in 2044.

The other 50% unconsolidated joint venture that owns a hotel property is subject to a ground lease with an initial term expiring in 2021. After the initial term, the joint venture may extend the ground lease for an additional term of 10 years to 2031.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Market risk includes the risks that arise from changes in interest rates, equity prices and other market changes that affect market sensitive instruments. Our primary market risk exposure is to changes in interest rates on our variable rate debt. As of September 30, 2018, we had approximately $85.0 million of total variable rate debt outstanding (or 12.5% of total indebtedness) with a weighted-average interest rate of 5.26% per annum. As of September 30, 2018, if market interest rates on our variable rate debt were to increase by 1.00%, or 100 basis points, interest expense would decrease future earnings and cash flows by approximately $0.9 million annually.
 
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. From time to time, we may enter into derivative financial instruments such as interest rate swaps to mitigate our interest rate risk or to effectively lock the interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes.
 
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations outstanding as of September 30, 2018, the following table presents the principal repayments and related weighted-average interest rates by contractual maturity dates (in thousands):
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Fixed rate debt (1)
$
411

 
$
2,556

 
$
2,670

 
$
2,824

 
$
110,997

 
$
475,000

 
$
594,458

Weighted-average interest rate
4.95
%
 
4.95
%
 
4.95
%
 
4.95
%
 
4.95
%
 
6.00
%
 
5.79
%
Variable rate debt (1) (2)
$
85,000

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
85,000

Weighted-average interest rate (3)
5.26
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
5.26
%
Total
$
85,411

 
$
2,556

 
$
2,670

 
$
2,824

 
$
110,997

 
$
475,000

 
$
679,458


(1)
Excludes $34.2 million related to fair value adjustments on the debt that RLJ pushed down to our consolidated financial statements as a result of the Mergers.
(2)
Excludes $24,000 of net deferred financing costs on a mortgage loan.
(3)
The weighted-average interest rate considers the implied forward rates in the yield curve at September 30, 2018.
 
Our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, prevailing interest rates, and our hedging strategies at that time.
 
Changes in market interest rates on our fixed rate debt impact the fair value of our debt, but such changes have no impact to our consolidated financial statements. As of September 30, 2018, the estimated fair value of our fixed rate debt was $624.7 million, which is based on having the same debt service requirements that could have been borrowed at the date presented, at prevailing current market interest rates. If interest rates were to rise by 1.00%, or 100 basis points, and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease by approximately $31.6 million.


53

Item 4.            Controls and Procedures.
 
Rangers

Evaluation of Disclosure Controls and Procedures
 
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Rangers' management, under the supervision and participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, Rangers' Chief Executive Officer and Chief Financial Officer concluded that Rangers' disclosure controls and procedures were effective as of September 30, 2018.
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in Rangers' internal control over financial reporting (as defined in Rule 13a-15 and 15d-15 of the Exchange Act) during the period ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

FelCor LP

Evaluation of Disclosure Controls and Procedures
 
In accordance with Rule 13a-15(b) of the Exchange Act, the management of Rangers GP, the sole general partner of FelCor LP, under the supervision and participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, Rangers GP's Chief Executive Officer and Chief Financial Officer concluded that FelCor LP's disclosure controls and procedures were effective as of September 30, 2018.
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in FelCor LP's internal control over financial reporting (as defined in Rule 13a-15 and 15d-15 of the Exchange Act) during the period ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.                     Legal Proceedings
 
The nature of the operations of our hotel properties exposes our hotel properties and the Company to the risk of claims and litigation in the normal course of their business. Other than routine litigation arising out of the ordinary course of business and the pension trust litigation matter noted in Note 9, Commitments and Contingencies, the Company is not presently subject to any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company.

Item 1A.            Risk Factors
 
For a discussion of our potential risks and uncertainties, please refer to the "Risk Factors" section in the Annual Report which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Annual Report.

Item 2.                     Unregistered Sales of Equity Securities and Use of Proceeds
 
None.

Item 3.                     Defaults Upon Senior Securities
 
None.
 

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Item 4.                     Mine Safety Disclosures
 
Not applicable.

Item 5.                     Other Information
 
None.

55


Item 6.                     Exhibits
 
The exhibits required to be filed by Item 601 of Regulation S-K are noted below:
 
Exhibit Index
Exhibit
Number
 
Description of Exhibit
 
 
 
3.1
 
3.2
 
3.3
 
3.4
 
31.1*
 
31.2*
 
31.3*
 
31.4*
 
32.1*
 
32.2*
 
101.INS
 
XBRL Instance Document
 
Submitted electronically with this report
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Submitted electronically with this report
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
Submitted electronically with this report
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Submitted electronically with this report
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
Submitted electronically with this report
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
Submitted electronically with this report
 *Filed herewith

56

SIGNATURES
 
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.
 
RANGERS SUB I, LLC
 
 
Dated: November 7, 2018
/s/ LESLIE D. HALE
 
Leslie D. Hale
 
President and Chief Executive Officer
 
 
 
 
Dated: November 7, 2018
/s/ SEAN M. MAHONEY
 
Sean M. Mahoney
 
Executive Vice President, Chief Financial Officer and Treasurer
 
(Principal Financial Officer)
 
 
 
 
Dated: November 7, 2018
/s/ CHRISTOPHER A. GORMSEN
 
Christopher A. Gormsen
 
Chief Accounting Officer
 
(Principal Accounting Officer)



 
FELCOR LODGING LIMITED PARTNERSHIP
 
By: Rangers General Partner, LLC, its General Partner
 
 
Dated: November 7, 2018
/s/ LESLIE D. HALE
 
Leslie D. Hale
 
President and Chief Executive Officer
 
 
 
 
Dated: November 7, 2018
/s/ SEAN M. MAHONEY
 
Sean M. Mahoney
 
Executive Vice President, Chief Financial Officer and Treasurer
 
(Principal Financial Officer)
 
 
 
 
Dated: November 7, 2018
/s/ CHRISTOPHER A. GORMSEN
 
Christopher A. Gormsen
 
Chief Accounting Officer
 
(Principal Accounting Officer)


57