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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005


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 1-14236

FelCor Lodging Trust Incorporated

(Exact name of registrant as specified in its charter)


Maryland (State or other jurisdiction of incorporation or organization)		75-2541756 (I.R.S. Employer Identification No.)


545 E. John Carpenter Freeway, Suite 1300, Irving, Texas (Address of principal executive offices)		75062 (Zip Code)

(972) 444-4900
(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. R Yes £ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). R Yes £ No

The number of shares of Common Stock, par value $.01 per share, of FelCor Lodging Trust Incorporated outstanding on August 1, 2005, was 60,135,804.

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)


	June 30,			December 31,
	2005			2004
ASSETS
Investment in hotels, net of accumulated depreciation of $994,414 at June 30, 2005 and $948,631 at December 31, 2004	$	2,892,951		$	2,955,766
Investment in unconsolidated entities		106,380			110,843
Hotels held for sale		31,860			255
Cash and cash equivalents		124,945			119,310
Restricted cash		29,634			34,736
Accounts receivable, net of allowance for doubtful accounts of $639 at June 30, 2005 and $905 at December 31, 2004		59,132			51,845
Deferred expenses, net of accumulated amortization of $16,324 at June 30, 2005 and $14,935 at December 31, 2004		16,364			18,804
Condominium development project		6,480			1,613
Other assets		27,090			24,486

Total assets	$	3,294,836		$	3,317,658


LIABILITIES AND STOCKHOLDERS’ EQUITY
Debt, net of discount of $3,949 at June 30, 2005 and $4,529 at December 31, 2004	$	1,743,420		$	1,767,122
Distributions payable		9,362			8,867
Accrued expenses and other liabilities		145,843			124,922
Minority interest in FelCor LP, 2,788 units issued and outstanding at June 30, 2005 and December 31, 2004		38,497			39,659
Minority interest in other partnerships		48,442			46,765

Total liabilities and minority interest		1,985,564			1,987,335


Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Convertible Preferred Stock, 12,880 shares issued and outstanding at June 30, 2005 and December 31, 2004		309,362			309,362
Series B Cumulative Redeemable Preferred Stock, 14 and 68 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively		34,395			169,395
Series C Cumulative Redeemable Preferred Stock, 54 shares issued and outstanding at June 30, 2005		135,000			—
Common stock, $.01 par value, 200,000 shares authorized and 69,441 and 69,436 shares issued, including shares in treasury, at June 30, 2005 and December 31, 2004, respectively		694			694
Additional paid-in capital		2,086,742			2,085,189
Accumulated other comprehensive income		15,534			15,780
Accumulated deficit		(1,088,904	)		(1,066,143	)
Less: Common stock in treasury, at cost, of 9,277 and 9,619 shares at June 30, 2005 and December 31, 2004, respectively		(183,551	)		(183,954	)


Total stockholders’ equity		1,309,272			1,330,323


Total liabilities and stockholders’ equity	$	3,294,836		$	3,317,658

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

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2005 and 2004
(unaudited, in thousands, except for per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenues:
Hotel operating revenue	$	325,553		$	302,445		$	620,481		$	582,440
Retail space rental and other revenue		120			180			276			425

Total revenues		325,673			302,625			620,757			582,865


Expenses:
Hotel departmental expenses		111,103			106,805			212,836			206,259
Other property operating costs		89,903			84,240			177,841			167,230
Management and franchise fees		16,887			15,863			31,687			30,179
Taxes, insurance and lease expense		32,524			29,628			63,341			59,543
Corporate expenses		4,728			4,380			9,269			7,742
Depreciation		30,485			28,027			60,093			56,503
Asset disposition costs		—			—			650			—

Total operating expenses		285,630			268,943			555,717			527,456


Operating income		40,043			33,682			65,040			55,409
Interest expense, net		(33,471	)		(39,203	)		(66,170	)		(79,797	)
Charge-off of deferred financing costs		—			(3,944	)		—			(4,174	)
Loss on early extinguishment of debt		—			(28,246	)		—			(28,246	)
Impairment		(732	)		—			(732	)		—
Gain on swap termination		—			1,005			—			1,005

Income (loss) before equity in income of unconsolidated entities, minority interests and gain on sales of assets		5,840			(36,706	)		(1,862	)		(55,803	)
Equity in income from unconsolidated entities		3,837			2,691			4,968			3,673
Gain on sale of assets		389			—			389			—
Minority interests		111			1,617			975			2,764

Income (loss) from continuing operations		10,177			(32,398	)		4,470			(49,366	)
Discontinued operations		174			725			(2,133	)		(3,006	)

Net income (loss)		10,351			(31,673	)		2,337			(52,372	)
Preferred dividends		(9,809	)		(8,970	)		(19,900	)		(15,696	)
Issuance costs of redeemed preferred stock		(5,198	)		—			(5,198	)		—

Net loss applicable to common stockholders	$	(4,656	)	$	(40,643	)	$	(22,761	)	$	(68,068	)


Basic and diluted loss per common share data:
Net loss from continuing operations	$	(0.08	)	$	(0.70	)	$	(0.35	)	$	(1.10	)

Net loss	$	(0.08	)	$	(0.69	)	$	(0.38	)	$	(1.15	)

Weighted average common shares outstanding		59,404			58,950			59,363			58,952

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

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
(unaudited, in thousands)


	Six Months Ended June 30,
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	2,337		$	(52,372	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		61,282			61,065
Loss (gain) on sale of assets		(175	)		941
Amortization of deferred financing fees		1,670			2,370
Accretion of debt, net of discount		579			310
Amortization of unearned compensation		1,363			1,101
Equity in income from unconsolidated entities		(4,968	)		(3,673	)
Distributions of income from unconsolidated entities		240			403
Impairment loss		1,291			—
Bad debt reserve		266			273
Charge-off of deferred financing costs		—			4,174
Loss on early extinguishment of debt		—			28,246
Minority interests		(1,075	)		(3,728	)
Changes in assets and liabilities:
Accounts receivable		(7,887	)		(13,512	)
Restricted cash — operations		(997	)		(9,611	)
Other assets		(4,122	)		3,629
Accrued expenses and other liabilities		22,771			172

Net cash flow provided by operating activities		72,575			19,788


Cash flows (used in) provided by investing activities:
Acquisition of hotel		—			(27,759	)
Acquisition of interest in venture		(1,197	)		—
Cash from consolidation of venture		3,204			—
Improvements and additions to hotels		(49,949	)		(34,005	)
Additions to condominium project		(3,588	)		—
Proceeds from sale of assets		8,926			40,863
Increase in restricted cash — investing		5,524			3,055
Capital contributions to unconsolidated entities		(700	)		—
Distributions of capital from unconsolidated entities		4,431			2,726

Net cash flow used in investing activities		(33,349	)		(15,120	)


Cash flows (used in) provided by financing activities:
Proceeds from borrowings		—			344,490
Repayment of borrowings		(10,649	)		(537,606	)
Payment of deferred financing fees		—			(2,221	)
Contributions from minority interest holders		1,028			—
Net proceeds from sale of preferred stock		130,468			104,461
Redemption of preferred stock		(135,000	)		—
Distributions paid to minority interest holders		—			(4,000	)
Distributions paid to preferred stockholders		(19,405	)		(13,351	)

Net cash flow used in financing activities		(33,558	)		(108,227	)

Effect of exchange rate changes on cash		(33	)		(1,007	)
Net change in cash and cash equivalents		5,635			(104,566	)
Cash and cash equivalents at beginning of periods		119,310			231,885

Cash and cash equivalents at end of periods	$	124,945		$	127,319


Supplemental cash flow information — Interest paid	$	64,756		$	89,538

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

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

In 1994, FelCor Lodging Trust Incorporated, or FelCor, went public as a real estate investment trust, or REIT, with six hotels and a market capitalization of $120 million. We are now one of the nation’s largest public lodging REITs, based on total assets and number of hotels owned, holding ownership interests in 140 hotels at June 30, 2005. We are the owner of the largest number of Embassy Suites Hotels^®, and Doubletree Guest Suites^® hotels in North America. Our portfolio includes 69 full service, all suite hotels.

FelCor is the sole general partner of, and the owner of an approximately 95% limited partnership interest in, FelCor Lodging Limited Partnership, or FelCor LP. All of our operations are conducted solely through FelCor LP, or its subsidiaries.

At June 30, 2005, we had ownership interests in 140 hotels. We owned a 100% real estate interest in 108 hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels, a 75% interest in an entity owning one hotel, a 51% interest in an entity owning three hotels and 50% interests in unconsolidated entities that own 19 hotels. As a result of our ownership interests in the operating lessees of 135 of these hotels, we reflect their operating revenues and expenses in our consolidated statements of operations. The operations of 133 of the 135 consolidated hotels were included in continuing operations at June 30, 2005. The remaining two hotels were subject to firm sale contracts at June 30, 2005 (one of which was sold in July 2005), and their operations were included in discontinued operations. The operating revenues and expenses of the remaining five hotels are unconsolidated.

At June 30, 2005, we had an aggregate of 60,163,904 shares of FelCor common stock and 2,788,135 units of FelCor LP limited partnership interest outstanding.

The following table reflects the distribution, by brand, of the 133 hotels included in our consolidated continuing operations at June 30, 2005:


Brand	Hotels		Rooms
Embassy Suites Hotels		55		13,925
Doubletree^® and Doubletree Guest Suites		10		2,206
Holiday Inn^® — branded		36		12,221
Crowne Plaza^® and Crowne Plaza Suites^®		12		4,025
Sheraton^® and Sheraton Suites^®		10		3,269
Other brands		10		2,482

Total hotels		133

The hotels shown in the above table are located in the United States (31 states) and Canada (two hotels), with concentrations in Texas (26 hotels), California (19 hotels), Florida (16 hotels) and Georgia (14 hotels). Approximately 56% of our hotel room revenues were generated from hotels in these four states during the six months ended June 30, 2005.

At June 30, 2005, of the 133 consolidated hotels included in continuing operations, (i) subsidiaries of Hilton Hotels Corporation, or Hilton, managed 65, (ii) subsidiaries of InterContinental Hotels Group, or IHG, managed 51 (iii) subsidiaries of Starwood Hotels & Resorts Worldwide, Inc., or Starwood, managed 11, and (iv) other independent management companies managed six.

Certain reclassifications have been made to prior period financial information to conform to the current period’s presentation with no effect on previously reported net loss or stockholders’ equity.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization ¾ (continued)

The financial information for the three and six months ended June 30, 2005 and 2004, is unaudited. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying financial statements for the three and six months ended June 30, 2005 and 2004, include adjustments based on management’s estimates (consisting of normal and recurring accruals), which we consider necessary for a fair presentation of the results for the periods. The financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004, included in our Annual Report on Form 10-K for the year ended December 31, 2004 (“Form 10-K”). Operating results for the three and six months ended June 30, 2005, are not necessarily indicative of the results that may be expected for the entire year.

2. Foreign Currency Translation

Results of operations for our Canadian hotels are maintained in Canadian dollars and translated using the average exchange rates during the period. Assets and liabilities are translated to U.S. dollars using the exchange rates in effect at the balance sheet date. Resulting translation adjustments are reflected in accumulated other comprehensive income included in stockholders’ equity.

3. Investment in Unconsolidated Entities

We owned 50% interests in joint venture entities that owned 19 hotels at June 30, 2005, and 20 hotels at December 31, 2004. We also owned a 50% interest in entities that own real estate in Myrtle Beach, South Carolina, provide condominium management services, and lease four hotels. We account for our investments in these unconsolidated entities under the equity method. We do not have any majority-owned subsidiaries that are not consolidated in our financial statements. We make adjustments to our equity in income from unconsolidated entities related to the difference between our basis in investment in unconsolidated entities compared to the historical basis of the assets recorded by the joint ventures.

Summarized unaudited combined financial information for 100% of these unconsolidated entities is as follows (in thousands):


	June 30,		December 31,
	2005		2004
Balance sheet information:
Investment in hotels, net of accumulated depreciation	$	260,282	$	282,028
Total assets	$	286,835	$	313,104
Debt	$	207,678	$	218,292
Total liabilities	$	211,147	$	237,597
Equity	$	75,688	$	75,507

Debt of our unconsolidated entities at June 30, 2005, consisted of $207.7 million of non-recourse mortgage debt.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Investment in Unconsolidated Entities – (continued)

Summarized combined statement of operations information for 100% of our unconsolidated entities is as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Total revenues	$	21,039	$	18,093	$	37,268	$	32,411
Net income	$	7,531	$	6,076	$	10,419	$	8,782

In May 2005, but effective as of February 28, 2005, we acquired for $1.2 million an additional 25% interest in a joint venture in which we had previously owned a 50% interest. This joint venture owns a single hotel and has been included in our consolidated financial statements for the second quarter.

4. Debt

Debt at June 30, 2005 and December 31, 2004, consisted of the following (in thousands):


						Balance Outstanding
	Encumbered	Interest Rate at			Maturity	June 30,		December 31,
	Hotels	June 30, 2005			Date	2005		2004
Promissory note	none		5.14	^(a)	June 2016	$	650	$	650
Senior unsecured term notes	none		7.63		October 2007		122,892		122,426
Senior unsecured term notes	none		9.00		June 2011		298,535		298,409
Senior unsecured term notes	none		7.79	^(b)	June 2011		290,000		290,000

Total unsecured debt			8.27				712,077		711,485


Mortgage debt	9 hotels		6.52		July 2009 - 2014		105,189		105,951
Mortgage debt	6 hotels		4.74	^(c)	August 2007		85,511		86,412
Mortgage debt	10 hotels		5.13	^(c)	May 2006		142,905		144,669
Mortgage debt	15 hotels		7.24		Nov. 2007		125,779		127,316
Mortgage debt	7 hotels		7.32		April 2009		128,966		130,458
Mortgage debt	6 hotels		7.55		June 2009		67,306		67,959
Mortgage debt	8 hotels		8.70		May 2010		174,066		175,504
Mortgage debt	7 hotels		8.73		May 2010		134,660		135,690
Mortgage debt	1 hotel		5.81	^(a)	August 2008		15,500		15,500
Mortgage debt	1 hotel		7.23		October 2005		10,189		10,521
Mortgage debt	3 hotels^(d)		7.48		April 2011		25,022		49,476
Mortgage debt	1 hotel		7.91		December 2007		10,585		—
Other	1 hotel		9.17		August 2011		5,665		6,181

Total secured debt^(e)	75 hotels		7.25				1,031,343		1,055,637

Total^(e)			7.66	%		$	1,743,420	$	1,767,122


(a)		Variable interest rate based on LIBOR. The six month LIBOR was 3.53% at June 30, 2005.

(b)		Variable interest rate based on LIBOR, however $100 million of these notes were matched with interest rate swap agreements that effectively converted the variable interest rate to a fixed rate of 7.8%.

(c)		Variable interest rate based on LIBOR. This debt may be extended at our option for up to two, one-year periods, subject to meeting certain conditions.

(d)		$24 million of this debt was extinguished in July 2005 upon the surrender of two hotels to their non-recourse mortgage holder. The remainder of this debt is expected to be extinguished in the third quarter, upon the surrender of the remaining hotel to its non-recourse mortgage holder.

(e)		Interest rates are calculated based on the weighted average outstanding debt at June 30, 2005.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Debt ¾ (continued)

We reported interest expense net of interest income of $0.8 million and $0.6 million and capitalized interest of $0.4 million and $0.2 million for the three months ended June 30, 2005 and 2004, respectively. For the six months ended June 30, 2005 and 2004, respectively, we reported interest expense net of interest income of $1.4 million and $1.3 million and capitalized interest of $1.0 million and $0.2 million.

At June 30, 2005, we had aggregate mortgage indebtedness of approximately $1.0 billion that was secured by 75 of our consolidated hotels with an aggregate book value of approximately $1.8 billion. Substantially all of this debt is recourse solely to the specific assets securing the debt, except in the case of fraud, misapplication of funds and other customary recourse carve-out provisions. Loans secured by 36 hotels provide for lock-box arrangements. With respect to loans secured by 18 of these hotels, if the debt service coverage ratios fall below certain levels and certain other conditions are met, the lender is entitled to apply the revenues from the hotels securing the loan to satisfy current requirements for debt service, taxes, insurance and other reserves, and to hold the balance of the revenues, if any, until debt service coverage ratios again reach specified levels. Three of these 18 hotels, which at June 30, 2005, we were in the process of surrendering to their non-recourse mortgage holders, are currently below the prescribed debt service coverage ratios and are subject to these lock-box requirements. In July 2005, two of these hotels were surrendered and we currently expect the final hotel to be surrendered by the end of the third quarter. These three hotels which were owned by a consolidated joint venture, have an aggregate fair market value below the outstanding debt balance of $25 million at June 30, 2005, are generally located in depressed markets and are expected to generate negative cash flow for the foreseeable future.

With respect to loans secured by the remaining 18 hotels, the owner is permitted to retain 115% of budgeted hotel operating expenses before the remaining revenues would become subject to a lock-box arrangement if a specified debt service coverage ratio was not met. The lender is entitled to apply the remaining revenues to satisfy current requirements for debt service, taxes, insurance and other reserves with any excess cash returned to the owner. The mortgage loans secured by 16 of these 18 hotels also provide that, so long as the debt service coverage ratios remain below a second, even lower minimum level, the lender may retain any excess cash (after deduction for the 115% of budgeted operating expenses, debt service, tax, insurance and other reserve requirements) and, if the debt service coverage ratio remains below this lower minimum level for 12 consecutive months, apply any accumulated excess cash to the prepayment of the principal amount of the debt. If the debt service coverage ratio exceeds the lower minimum level for three consecutive months, any then accumulated excess cash will be returned to the owner. Ten of these 18 hotels, which accounted for 6% of our total revenues in 2004, fell below the applicable debt service coverage ratio in 2004 and are currently subject to the lock-box provisions. None of the hotels are currently below the second, even lower minimum debt service coverage ratio that would permit the lender to retain excess cash after deduction for the 115% of budgeted operating expenses, debt service, tax, insurance and other reserve requirements.

In July 2005, we made the initial draw of $3.8 million on our $69.8 million recourse construction loan, for the development of a 184-unit condominium project in Myrtle Beach, South Carolina. The interest on this facility is currently based on LIBOR plus 225 basis points and will be capitalized as part of the cost of the project. The interest rate may be reduced to LIBOR plus 200 basis points when the project is 55% complete and upon satisfaction of certain other requirements. The facility matures in the fourth quarter of 2007 .

5. Derivatives

In the normal course of business, we are exposed to the effect of interest rate changes. We limit these risks by following established risk management policies and procedures, including the use of derivatives. It is our objective to use interest rate hedges to manage our fixed and floating interest rate position and not to engage in speculation on interest rates. We manage interest rate risk based on the varying circumstances of anticipated

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Derivatives – (continued)

borrowings and existing floating and fixed rate debt. We will generally seek to pursue interest rate risk mitigation strategies that will result in the least amount of reported earnings volatility under GAAP while still meeting strategic economic objectives and maintaining adequate liquidity and flexibility. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

To determine the fair values of our derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

At June 30, 2005, we had three interest rate swaps with an aggregate notional amount of $100 million, maturing in December 2007. These interest rate swaps are designated as cash flow hedges and are marked to market through other comprehensive income. The estimated unrealized net gain on these interest rate swap agreements was approximately $0.9 million at June 30, 2005, and represents the amount we would receive if the agreements were terminated, based on current market rates. The interest rate received on these interest rate swaps is 4.25% plus LIBOR and the interest rate paid is 7.80%. These swaps were 100% effective through June 30, 2005.

The amounts paid or received by us under the terms of the interest rate swap agreements are accrued as interest rates change, and we recognize them as an adjustment to interest expense, which will have a corresponding effect on our future cash flows. The interest rate swaps increased interest expense by $0.2 million and by $0.4 million during the three and six months ended June 30, 2005, respectively.

Our interest rate swaps have monthly to semi-annual settlement dates. Agreements such as these contain a credit risk in that the counterparties may be unable to fulfill the terms of the agreement. We minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties. The Standard & Poor’s credit ratings for each of the financial institutions that are counterparties to our interest rate swap agreements are AA- or better.

We had fair value hedges with a notional amount of $400 million that we terminated in 2004. These fair value hedges decreased interest by $1.4 million and $4.2 million during the three and six months ended June 30, 2004. In June 2004, we unwound six interest rate swap agreements with an aggregate notional amount of $175 million that were matched with the $175 million notes due 2004 that were redeemed. A $1 million gain was recorded, offsetting the loss on the redemption of the debt. Also in June 2004, five additional swaps with an aggregate notional amount of $125 million, that were matched to the $125 million senior unsecured notes due 2007, were unwound at a cost of $2.3 million. The $2.3 million cost decreased the value of these notes and is being amortized to interest expense over the life of the debt. In July 2004, the remaining four interest rate swap agreements having a notional value of $100 million were unwound at a cost of $1.3 million. The $1.3 million cost decreased the mortgage debt due November 2007 and is being amortized to interest expense over the life of this debt.

To fulfill requirements under the $150 million secured loan facility executed in April 2003, we purchased 6% interest rate caps with a notional amount of $142.9 million. We concurrently sold interest rate caps with identical terms. In July 2004, we purchased 6.5% interest rate caps on LIBOR with a notional amount of $86 million to fulfill requirements under an $86 million cross-collateralized floating rate CMBS loan and concurrently sold interest rate caps with identical terms. These interest rate cap agreements have not been designated as hedges. The fair value of both the purchased and sold interest rate caps were insignificant at June 30, 2005, and resulted in no net earnings impact.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Preferred Stock

On April 8, 2005, we completed the issuance of 5.4 million depositary shares, each representing 1/100 of a share of our 8% Series C Cumulative Redeemable Preferred Stock, with gross proceeds of $135 million. The gross proceeds were used to redeem a like number of shares of our 9% Series B preferred stock. The redemption of the Series B preferred shares resulted in a reduction in income available to common shareholders of $5.2 million representing the original issuance cost of the Series B preferred shares redeemed.

7. Hotel Operating Revenue, Departmental Expenses and Other Property Operating Costs

Hotel operating revenue from continuing operations was comprised of the following (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Room revenue	$	262,294	$	241,785	$	500,837	$	466,622
Food and beverage revenue		47,154		45,021		88,810		85,194
Other operating departments		16,105		15,639		30,834		30,624

Total hotel operating revenue	$	325,553	$	302,445	$	620,481	$	582,440

For the first six months of both 2005 and 2004, over 99% of our revenue was comprised of hotel operating revenues, which included room revenue, food and beverage revenue, and revenue from other hotel operating departments (such as telephone, parking and business centers). These revenues are recorded net of any sales or occupancy taxes collected from our guests. All rebates or discounts are recorded, when allowed, as a reduction in revenue, and there are no material contingent obligations with respect to rebates or discounts offered by us. All revenues are recorded on an accrual basis, as earned. Appropriate allowances are made for doubtful accounts and are recorded as a bad debt expense. The remaining 1% of our revenue was from retail space rental revenue and other sources.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Hotel Operating Revenue, Departmental Expenses and Other Property Operating Costs – (continued)

Hotel departmental expenses from continuing operations were comprised of the following:


	Three Months Ended June 30,
	2005				2004
			% of Total				% of Total
			Hotel				Hotel
	Dollars in		Operating		Dollars in		Operating
	Thousands		Revenue		Thousands		Revenue
Room	$	67,105		20.6	$	63,661		21.0
Food and beverage		35,856		11.0		35,275		11.7
Other operating departments		8,142		2.5		7,869		2.6

Total hotel departmental expenses	$	111,103		34.1	$	106,805		35.3


	Six Months Ended June 30,
	2005				2004
			% of Total				% of Total
			Hotel				Hotel
	Dollars in		Operating		Dollars in		Operating
	Thousands		Revenue		Thousands		Revenue
Room	$	128,721		20.7	$	123,352		21.2
Food and beverage		68,748		11.1		67,676		11.6
Other operating departments		15,367		2.5		15,231		2.6

Total hotel departmental expenses	$	212,836		34.3	$	206,259		35.4

Other property operating costs from continuing operations were comprised of the following:


	Three Months Ended June 30,
	2005				2004
			% of Total				% of Total
			Hotel				Hotel
	Dollars in		Operating		Dollars in		Operating
	Thousands		Revenue		Thousands		Revenue
Hotel general and administrative expense	$	29,406		9.0	$	27,874		9.2
Marketing		27,553		8.5		25,946		8.6
Repair and maintenance		17,518		5.4		16,314		5.4
Energy		15,426		4.7		14,106		4.7

Total other property operating costs	$	89,903		27.6	$	84,240		27.9


	Six Months Ended June 30,
	2005				2004
			% of Total				% of Total
			Hotel				Hotel
	Dollars in		Operating		Dollars in		Operating
	Thousands		Revenue		Thousands		Revenue
Hotel general and administrative expense	$	57,893		9.3	$	54,982		9.5
Marketing		53,859		8.7		50,874		8.7
Repair and maintenance		34,495		5.6		32,666		5.6
Energy		31,594		5.1		28,708		4.9

Total other property operating costs	$	177,841		28.7	$	167,230		28.7

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Hotel Operating Revenue, Departmental Expenses and Other Property Operating Costs – (continued)

Included in hotel departmental expenses and other property operating costs are hotel employee compensation and benefit expenses of $100.6 million and $97.1 million for the three months ended June 30, 2005 and 2004, respectively and $196.6 million and $190.0 million for the six months ended June 30, 2005 and 2004, respectively.

8. Taxes, Insurance and Lease Expense

Taxes, insurance and lease expense from continuing operations is comprised of the following (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Operating lease expense ^(a)	$	17,952	$	16,555	$	32,946	$	30,871
Real estate and other taxes		10,844		10,043		23,348		22,045
Property insurance, general liability insurance and other		3,728		3,030		7,047		6,627

Total taxes, insurance and lease expense	$	32,524	$	29,628	$	63,341	$	59,543


(a)		Includes hotel lease expense of $15.6 million and $14.2 million associated with 14 hotels and 15 hotels owned by unconsolidated entities for the three months ended June 30, 2005 and 2004, respectively, and $28.1 million and $26.1 million for the six months ended June 30, 2005 and 2004, respectively. Included in lease expense are $9.3 million and $7.3 million in percentage rent for the three months ended June 30, 2005 and 2004, respectively, and $14.7 million and $12.2 million in percentage rent for the six months ended June 30, 2005 and 2004, respectively.

9. Impairment

Our hotels are comprised of operations and cash flows that can clearly be distinguished, both operationally and for financial reporting purposes. Accordingly, we consider our hotels to be components as defined by Statement of Financial Accounting Standards 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS 144, for purposes of determining impairment charges and reporting discontinued operations. We recorded impairment charges under the provisions of the SFAS 144 of $0.6 million during the first quarter with respect to assets held for sale and included in discontinued operations at June 30, 2005. The impairment charges included in discontinued operations provide for estimated selling costs, including termination fees related to our management and franchise agreements. We recorded $0.7 million of impairment charges in June 2005, with respect to one of our non-strategic hotels included in continuing operations. In July 2005, we accepted a non-binding contract for sale of this hotel and reduced its carrying value to the purchase contract amount.

We continue to review and evaluate our hotel portfolio on an ongoing basis and may identify additional non-strategic hotels for sale based upon various factors. If we decide to sell additional hotels, or if our estimates of market value for hotels currently designated as non-strategic decline, we could incur future impairment charges.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Discontinued Operations

Included in discontinued operations are the results of operations of nine hotels sold or otherwise disposed of in 2005, two hotels designated as held for sale at June 30, 2005, and 18 hotels disposed of in 2004. Condensed financial information for the hotels included in discontinued operations is as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Operating revenue	$	6,166		$	32,811		$	14,240		$	68,186
Operating expenses		5,710			31,114			15,118			70,154

Operating income (loss)		456			1,697			(878	)		(1,968	)
Direct interest costs		(40	)		(534	)		(581	)		(1,060	)
Impairment loss		—			—			(559	)		—
Loss on sale of assets		(234	)		(1,214	)		(214	)		(941	)
Minority interest		(8	)		776			99			963

Income (loss) from discontinued operations	$	174		$	725		$	(2,133	)	$	(3,006	)

In January 2005, we sold the Holiday Inn Salt Lake City, Utah, and, in April 2005, the Whispering Woods Conference Center in Olive Branch, Mississippi. The Moline, Illinois, Holiday Inn and Holiday Inn Select were sold in May 2005 for aggregate gross proceeds of $13 million. In the second quarter of 2005, we surrendered five limited service hotels, owned by a consolidated joint venture, to their non-recourse mortgage holder. The book value of these hotels approximated the book value of the debt extinguished, therefore no gain or loss was recorded.

During 2004, we sold 17 hotels for gross proceeds of $157 million. Also in 2004, we terminated a hotel lease and incurred $4.9 million in lease termination charges upon the return of the asset to the lessor.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Numerator:
Income (loss) from continuing operations	$	10,177		$	(32,398	)	$	4,470		$	(49,366	)
Less: Preferred dividends		(9,809	)		(8,970	)		(19,900	)		(15,696	)
Issuance costs of redeemed preferred stock		(5,198	)		—			(5,198	)		—

Loss from continuing operations applicable to common stockholders		(4,830	)		(41,368	)		(20,628	)		(65,062	)
Discontinued operations		174			725			(2,133	)		(3,006	)

Net loss applicable to common stockholders	$	(4,656	)	$	(40,643	)	$	(22,761	)	$	(68,068	)

Denominator:
Denominator for basic earnings per share		59,404			58,950			59,363			58,952

Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversions		59,404			58,950			59,363			58,952


Earnings (loss) per share data:
Basic:
Loss from continuing operations	$	(0.08	)	$	(0.70	)	$	(0.35	)	$	(1.10	)
Discontinued operations		0.00			0.01			(0.03	)		(0.05	)

Net loss		(0.08	)	$	(0.69	)	$	(0.38	)	$	(1.15	)

Diluted:
Loss from continuing operations	$	(0.08	)	$	(0.70	)	$	(0.35	)	$	(1.10	)
Discontinued operations		0.00			0.01			(0.03	)		(0.05	)

Net loss	$	(0.08	)	$	(0.69	)	$	(0.38	)	$	(1.15	)

Securities that could potentially dilute basic earnings per share in the future and that were not included in the computation of diluted earnings per share, because they would have been antidilutive for the periods presented, are as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Restricted shares granted but not vested		673		382		593		255
Series A convertible preferred shares		9,985		8,202		9,985		8,202

Series A preferred dividends that would be excluded from net loss applicable to common stockholders, if these Series A preferred shares were dilutive, were $6.3 million and $5.2 million for the three months ended June 30, 2005 and 2004, respectively, and $12.6 million and $8.1 million for the six months ended June 30, 2005 and 2004, respectively.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Stock Based Compensation Plans

We apply Accounting Principles Board Opinion 25, or APB 25, and related interpretations in accounting for our stock based compensation plans for stock based compensation issued prior to January 1, 2003. In 1995, Statement of Financial Accounting Standards 123, “Accounting for Stock-Based Compensation,” or SFAS 123 was issued, which, if fully adopted by us, would have changed the methods we apply in recognizing the cost of the plans. As permitted under the transition provisions of Statement of Financial Accounting Standards 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” we began recognizing compensation expense in accordance with SFAS 123 for all new awards issued after December 31, 2002. Had the compensation cost for our stock-based compensation plans been determined in accordance with SFAS 123 prior to January 1, 2003, our net income or loss and net income or loss per common share for the periods presented would approximate the pro forma amounts below (in thousands, except per share data):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Income (loss) from continuing operations, as reported	$	10,177		$	(32,398	)	$	4,470		$	(49,366	)
Add stock based compensation included in the net income or loss, as reported		746			519			1,352			1,022
Less stock based compensation expense that would have been included in the determination of net income or loss if the fair value method had been applied to all awards		(749	)		(597	)		(1,357	)		(1,107	)

Income (loss) from continuing operations, pro forma	$	10,174		$	(32,476	)	$	4,465		$	(49,451	)


Basic and diluted net loss per common share:
As reported	$	(0.08	)	$	(0.70	)	$	(0.35	)	$	(1.10	)
Pro forma	$	(0.08	)	$	(0.70	)	$	(0.35	)	$	(1.11	)

The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts.

13. Subsequent Events

At June 30, 2005, we were in the process of surrendering three limited service hotels, owned by a consolidated joint venture, to their non-recourse mortgage holders. Two of these hotels were surrendered to their non-recourse mortgage holder in July 2005, and the final hotel is expected to be transferred in the third quarter 2005. Upon the transfer of the remaining hotel the full $25 million of consolidated debt associated with these hotels will be extinguished.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

In the second quarter of 2005, revenue per available room, or RevPAR, increased 9.6% for our consolidated hotels in continuing operations and our average daily room rate, or ADR, comprised 59% of the increase in RevPAR. The significant role that ADR played in the increase in revenue contributed to a 130 basis point improvement in hotel operating margin, compared to the same period in 2004. We currently expect that ADR will continue to be a major portion of our RevPAR increases for the intermediate-term, which should continue to improve our hotel operating margins. The second quarter of 2005 represents the fifth consecutive quarter that we have experienced year over year ADR growth.

We continue to invest in our core hotels to maintain their competitive position and to take advantage of the current phase of the lodging cycle. During the first six months of 2005, we spent $56 million on capital improvements and replacements (including our pro rata share of capital for unconsolidated ventures), and anticipate capital expenditures of approximately $100 million for the full year.

During 2005, through July, we have sold or otherwise disposed of 10 hotels for gross proceeds of $16.4 million and have one hotel under a firm sale contract for $38 million, which is expected to close in the third quarter of 2005. During the third quarter, we expect to complete the process of surrendering the last one of eight limited service hotels, owned by a consolidated joint venture, to its non-recourse mortgage holder. These eight hotels had an aggregate fair market value below their outstanding debt balance, are generally located in depressed markets and are expected to generate negative cash flow for the foreseeable future.

After disposing of the previously mentioned hotels, we will have 13 hotels remaining that we are currently marketing for sale. We estimate that the gross proceeds from the disposition of these hotels will be approximately $107 million and we intend to complete the sale of these hotels by mid-2006.

We continue to review and evaluate our hotel portfolio on an ongoing basis and may identify additional non-strategic hotels for sale based upon various factors. If we decide to sell additional hotels or if our estimates of market value for hotels, currently designated as non-strategic, decline, we could incur future impairment charges.

Financial Comparison (in thousands of dollars, except RevPAR and hotel operating margin)


	Three Months Ended								Six Months Ended
	June 30,								June 30,
							% Change								% Change
	2005			2004			2004-2005		2005			2004			2004-2005
RevPAR		76.83			70.12			9.6		73.23			67.69			8.2
Hotel operating profit⁽¹⁾		75,136			65,909			14.0		134,776			119,229			13.0
Hotel operating margin⁽¹⁾		23.1	%		21.8	%		6.0		21.7	%		20.5	%		5.9
Income (loss) from continuing operations⁽²⁾		10,177			(32,398	)		131.4		4,470			(49,366	)		109.1
Funds From Operations (“FFO”)^{(1) (3)}		28,062			(9,489	)		395.7		41,856			(5,927	)		806.2
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)⁽¹⁾⁽⁴⁾		79,938			40,527			97.2		140,101			94,755			47.9


(1)		Included in the Financial Comparison are non-GAAP financial measures, including FFO, EBITDA, hotel operating profit and hotel operating margin. Further discussions of the use, limitations and importance of, and detailed reconciliations to the most comparable GAAP measure, of these non-GAAP financial measures are found elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(2)

Included in the income (loss) from continuing operations are the following amounts (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2005		2004			2005		2004
Charge off of deferred debt costs	$	—	$	3,944		$	—	$	4,174
Early extinguishment of debt		—		28,246			—		28,246
Asset disposition costs		—		—			650		—
Gain on swap termination		—		(1,005	)		—		(1,005	)
Impairment		732		—			732		—

(3)

In accordance with the guidance provided by the Securities and Exchange Commission, or SEC, on non-GAAP financial measures, FFO has not been adjusted to add back the following items included in net income (loss) (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2005		2004			2005		2004
Charge-off of deferred debt costs	$	—	$	3,944		$	—	$	4,174
Early extinguishment of debt		—		28,246			—		28,246
Issuance costs of redeemed preferred stock		5,198		—			5,198		—
Gain on swap termination		—		(1,005	)		—		(1,005	)
Impairment loss		732		—			1,291		—
Asset disposition costs		—		—			1,300		4,900

(4)

Consistent with SEC guidance on non-GAAP financial measures, EBITDA has not been adjusted for the following amounts included in net income (loss) (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Charge-off of deferred debt costs	$	—		$	3,944		$	—		$	4,174
Early extinguishment of debt		—			28,246			—			28,246
Issuance costs of redeemed preferred stock		5,198			—			5,198			—
Gain on swap termination		—			(1,005	)		—			(1,005	)
Impairment loss		732			—			1,291			—
Loss (gain) on sale of assets		(155	)		1,214			(175	)		941
Asset disposition costs		—			—			1,300			4,900

Results of Operations

Comparison of the Three Months Ended June 30, 2005 and 2004

For the three months ended June 30, 2005, we recorded a loss applicable to common shareholders of $5 million, or $0.08 per share, compared to a loss of $41 million, or $0.69 per share, for the three months ended June 30, 2004.

Total revenue increased 7.6% to $326 million, compared to the prior year quarter. Hotel operating revenues from continuing operations made up more than 99% of the total revenues for both the second quarters of 2005 and 2004. Hotel operating revenues from continuing operations were $326 million for the second quarter 2005, an increase of $23 million, or 7.6%, compared to the same period in 2004. The increase in revenues was primarily related to a 9.6% increase in our hotel portfolio’s RevPAR, compared to the same period in 2004. The increase in RevPAR was driven by increases in ADR of 5.7% and occupancy of 3.7%. The increase in ADR amounted to 59% of the improvement in RevPAR, as the trend of improving rates, that began in 2004 continued into the second quarter 2005 and contributed to a 130 basis point improvement in hotel operating margins (hotel operating profit as a percentage of hotel revenue).

Operating expenses for the quarter increased by $17 million or 6%, compared to the prior year quarter. Operating income for the second quarter of 2005 increased by $6 million or 19% over the prior year period. The improvement in operating income was driven largely by increased revenue and improvements in operating margins, which resulted principally from increased ADR. The increase in operating expenses came principally from increases in hotel departmental expenses of $4 million; other property operating expenses of $6 million;

management and franchise fees of $1 million; taxes, insurance and lease expense of $3 million; and depreciation expense of $2 million. With the exception of hotel departmental expenses, which decreased as a percentage of total revenue, all of these expenses remained constant to the prior year as a percent of total revenue. The increase in hotel departmental expenses resulted largely from increases in occupancy, with the majority of the increase in labor related costs. The increase in other property operating expenses resulted from increased hotel occupancy, with increases in labor costs, utilities, maintenance, and marketing expenses. Management and franchise fees increased as a function of the increase in revenue. Taxes, insurance and lease expenses increased principally due to increased lease expense, which is a function of revenue, and increased property taxes, largely from reductions recorded in the prior year related to two hotels. Depreciation expense increased as a result of the increased depreciation related to 2004 capital expenditures of $96 million.

Net interest expense included in continuing operations decreased $6 million or 15% compared to the second quarter in 2004. This reduction is principally related to a $240 million reduction in our average outstanding debt, largely resulting from the early retirement of a portion of our senior notes in 2004.

At June 30, 2005, we had 133 hotels included in our consolidated continuing operations, of which 13 were non-strategic hotels identified for sale and three were in the process of being surrendered to their non-recourse mortgage holders. The 13 non-strategic hotels included in continuing operations represented 10% of the rooms in our hotel portfolio, but only 4% of our calendar year 2004 consolidated hotel operating profit.

We recorded an impairment charge of $0.7 million in the second quarter of 2005, related to one of our non-strategic hotels included in continuing operations. In July 2005, we accepted a non-binding contract for sale of this hotel and reduced its carrying value to the purchase contract amount. It is our policy to classify a hotel as “held for sale” once we have a contract with a non-refundable deposit. In the second quarter of 2004, we recorded $31 million in charges related to the early retirement of a portion of our senior notes.

Equity in income from unconsolidated entities increased by 43% to $4 million in the second quarter of 2005, compared to the same period last year. The increase is attributed to the increased RevPAR for these hotels and an improvement in their operating margins.

Minority interest declined by $2 million, principally because of smaller losses being allocated to FelCor Lodging Limited Partnership as a result of the improved operations in the quarter, compared to the same period in 2004.

Income from continuing operations was $10 million for the second quarter 2005, compared to a loss of $32 million in the same period in 2004.

Discontinued operations for the quarter represent the operating income, direct interest costs and gains or losses on sale of nine hotels disposed of during the first six months of 2005, two hotels that were designated as held for sale at June 30, 2005, and 18 hotels disposed of in 2004.

Net income for the second quarter 2005 was $10 million, compared to a net loss in the same period of 2004 of $32 million.

Preferred dividends increased by $1 million. This results from a full quarter of preferred dividends on the Series A preferred stock issued in April 2004, partially offset by savings from the issuance of 5.4 million depositary shares representing Series C preferred stock and the redemption of a corresponding number of shares of Series B preferred stock during the second quarter 2005.

In accordance with the Emerging Issues Task Force Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” we have subtracted $5 million of the issuance costs of our redeemed Series B preferred stock from net income to determine net loss applicable to common stockholders for the calculation of net loss per share.

Comparison of the Six Months Ended June 30, 2005 and 2004

For the six months ended June 30, 2005, we recorded a loss applicable to common shareholders of $23 million, or $0.38 per share, compared to a loss of $68 million, or $1.15 per share, for the six months ended June 30, 2004.

Total revenue increased 6.5% to $621 million, compared to the prior year quarter. Hotel operating revenues from continuing operations made up more than 99% of the total revenues for both the six months ended 2005 and 2004 and were $620 million for the six month period ending June 30, 2005, reflecting an increase of $38 million, or 6.5%, compared to the same period in 2004. The increase in revenues was primarily related to an 8.2% increase in our hotel portfolio’s RevPAR, compared to the same period in 2004. The increase in RevPAR was driven by increases in ADR of 5.7% and occupancy of 2.3%. The increase in ADR amounted to 70% of the improvement in RevPAR, as the trend of improving rates, that began in 2004 continued through the second quarter 2005 and contributed to a 120 basis point improvement in hotel operating margins (hotel operating profit as a percentage of hotel revenue).

Operating expenses for the six months increased by $28 million or 5%, compared to the prior year period. Operating income for the six month period in 2005 increased by $10 million, or 17%, over the prior year period. The improvement in operating income was driven largely by increased revenue and improvements in operating margins, which resulted principally from increased ADR. The increase in operating expenses came principally from increases in hotel departmental expenses of $7 million; other property operating expenses of $11 million; taxes, insurance and lease expense of $4 million; and depreciation expense of $4 million. With the exception of hotel departmental expenses, which decreased as a percentage of total revenue, all of these expenses remained constant to the prior year as a percent of total revenue. The increase in hotel departmental expenses resulted largely from increases in occupancy, with the majority of the increase in labor related costs. The increase in other property operating expenses resulted from increased hotel occupancy, with increases in labor costs, utilities, maintenance, and marketing expenses. Taxes, insurance and lease expenses increased principally due to increased lease expense, which is a function of revenue, and increased property taxes, largely from reductions recorded in the prior year related to two hotels. Depreciation expense increased as a result of the increased depreciation related to 2004 capital expenditures of $96 million.

Net interest expense included in continuing operations decreased $14 million, or 17%, compared to the same period in 2004. This reduction is principally related to a $260 million reduction in our average outstanding debt, largely resulting from the early retirement of a portion of our senior notes in 2004 and a 34 basis point reduction in our average interest rate.

We recorded an impairment charge of $0.7 million in the second quarter of 2005, related to one of our non-strategic hotels included in continuing operations. In July 2005, we accepted a non-binding contract for sale of this hotel and reduced its carrying value to the purchase contract amount. It is our policy to classify a hotel as “held for sale” once we have a contract with a non-refundable deposit. In the same six month period of 2004, we recorded $31 million in charges related to the early retirement of a portion of our senior notes and cancellation of our line of credit.

Equity in income from unconsolidated entities increased by 35% to $5 million in the six month period ended June 30, 2005, compared to the same period last year. The increase is attributed to the increased RevPAR for these hotels and an improvement in their operating margins.

Income from continuing operations was $5 million for the six month period of 2005, compared to a loss of $49 million in the same period in 2004.

Discontinued operations for the period represent the operating income, direct interest costs and gains or losses on sale of nine hotels disposed of during the first six months of 2005, two hotels that were designated as held for sale at June 30, 2005, and 18 hotels disposed of in 2004.

Net income for the six months ended June 30, 2005 was $2 million, compared to a net loss in the same period of 2004 of $52 million.

Preferred dividends increased by $4 million. This results from a full six months of preferred dividends on the Series A preferred stock issued in April 2004, partially offset by savings from the issuance of 5.4 million depositary shares representing Series C preferred stock and the redemption of a corresponding number of shares of Series B preferred stock during the second quarter 2005.

Non-GAAP Financial Measures

We refer in this quarterly report on Form 10-Q to certain “non-GAAP financial measures.” These measures, including FFO, EBITDA, hotel operating profit and hotel operating margin, are measures of our financial performance that are not calculated and presented in accordance with generally accepted accounting principles (“GAAP”). The following tables reconcile each of these non-GAAP measures to the most comparable GAAP financial measure. Immediately following the reconciliations, we include a discussion of why we believe these measures are useful supplemental measures of our performance and of the limitations upon such measures.

The following tables detail our computation of FFO and EBITDA (in thousands):

Reconciliation of Net Income (Loss) to FFO
(in thousands, except per share data)


	Three Months Ended June 30,
	2005								2004
						Per Share								Per Share
	Dollars			Shares		Amount			Dollars			Shares		Amount
Net income (loss)	$	10,351							$	(31,673	)
Preferred dividends		(9,809	)							(8,970	)
Issuance costs of redeemed preferred stock		(5,198	)							—

Net loss applicable to common stockholders		(4,656	)		59,404	$	(0.08	)		(40,643	)		58,950	$	(0.69	)
Depreciation from continuing operations		30,485					0.51			28,027					0.47
Depreciation from unconsolidated entities and discontinued operations		2,604					0.04			3,991					0.07
Loss (gain) on sale of assets		(155	)				(0.00	)		1,214					0.02
Minority interest in FelCor LP		(216	)		2,788		(0.02	)		(2,078	)		3,033		(0.02	)
Conversion of options and unvested restricted stock		—			339		—			—

FFO	$	28,062			62,531	$	0.45		$	(9,489	)		61,983	$	(0.15	)

Reconciliation of Net Income (Loss) to FFO
(in thousands, except per share data)


	Six Months Ended June 30,
	2005								2004
						Per Share								Per Share
	Dollars			Shares		Amount			Dollars			Shares		Amount
Net income (loss)	$	2,337							$	(52,372	)
Preferred dividends		(19,900	)							(15,696	)
Issuance costs of redeemed preferred stock		(5,198	)							—

Net loss applicable to common stockholders		(22,761	)		59,363	$	(0.38	)		(68,068	)		58,952	$	(1.15	)
Depreciation from continuing operations		60,093					1.01			56,503					0.96
Depreciation from unconsolidated entities and discontinued operations		5,758					0.10			8,182					0.14
Loss (gain) on sale of assets		(175	)				0.00			941					0.02
Minority interest in FelCor LP		(1,059	)		2,788		(0.06	)		(3,485	)		3,033		(0.07	)
Conversion of options and unvested restricted stock		—			319					—					—

FFO	$	41,856			62,470	$	0.67		$	(5,927	)		61,985	$	(0.10	)

Consistent with SEC guidance on non-GAAP financial measures, FFO has not been adjusted for the following amounts included in net income or loss (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2005		2004			2005		2004
Charge-off of deferred debt costs	$	—	$	3,944		$	—	$	4,174
Asset disposition costs		—		—			1,300		4,900
Issuance costs of redeemed preferred stock		5,198		—			5,198		—
Loss on early extinguishment of debt		—		28,246			—		28,246
Impairment loss		732		—			1,291		—
Gain on swap termination		—		(1,005	)		—		(1,005	)

Reconciliation of Net Income (Loss) to EBITDA
(in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income (loss)	$	10,351		$	(31,673	)	$	2,337		$	(52,372	)
Depreciation from continuing operations		30,485			28,027			60,093			56,503
Depreciation from unconsolidated entities and discontinued operations		2,604			3,991			5,758			8,182
Minority interest in FelCor LP		(216	)		(2,078	)		(1,059	)		(3,485	)
Interest expense		34,273			39,798			67,614			81,114
Interest expense from unconsolidated entities and discontinued operations		1,687			1,943			4,007			3,791
Amortization expense		755			519			1,352			1,022

EBITDA	$	79,939		$	40,527		$	140,102		$	94,755

Consistent with SEC guidance on non-GAAP financial measures, EBITDA has not been adjusted for the following amounts included in net income or loss (in thousands):


	Three Months Ended						Six Months
	June 30,						Ended June 30,
	2005			2004			2005			2004
Charge-off of deferred debt costs	$	—		$	3,944		$	—		$	4,174
Asset disposition costs		—			—			1,300			4,900
(Gain) loss on sale of assets		(155	)		1,214			(175	)		941
Early extinguishment of debt		—			28,246			—			28,246
Impairment		732			—			1,291			—
Gain on swap termination		—			(1,005	)		—			(1,005	)

The following tables detail our computation of hotel operating profit, hotel operating margin, hotel operating expenses and the reconciliation of hotel operating expenses to total operating expenses with respect to our hotels included in continuing operations at June 30, 2005.

Hotel Operating Profit
(dollars in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Total revenue	$	325,673		$	302,625		$	620,757		$	582,865
Retail space rental and other revenue		(120	)		(180	)		(276	)		(425	)

Hotel revenue		325,553			302,445			620,481			582,440
Hotel operating expenses		(250,417	)		(236,536	)		(485,705	)		(463,211	)

Hotel operating profit	$	75,136		$	65,909		$	134,776		$	119,229

Hotel operating margin		23.1	%		21.8	%		21.7	%		20.5	%

Hotel Operating Expense Composition
(dollars in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Hotel departmental expenses:
Room	$	67,105		$	63,661		$	128,721		$	123,352
Food and beverage		35,856			35,275			68,748			67,676
Other operating departments		8,142			7,869			15,367			15,231

Other property related costs:
Administrative and general		29,406			27,874			57,893			54,982
Marketing and advertising		27,553			25,946			53,859			50,874
Repairs and maintenance		17,518			16,314			34,495			32,666
Energy		15,426			14,106			31,594			28,708
Taxes, insurance and lease expense		32,524			29,628			63,341			59,543

Total other property related costs		122,427			113,868			241,182			226,773
Management and franchise fees		16,887			15,863			31,687			30,179

Hotel operating expenses	$	250,417		$	236,536		$	485,705		$	463,211


Reconciliation of total operating expenses to hotel operating expenses:
Total operating expenses	$	285,630		$	268,943		$	555,717		$	527,456
Corporate expenses		(4,728	)		(4,380	)		(9,269	)		(7,742	)
Depreciation		(30,485	)		(28,027	)		(60,093	)		(56,503	)
Asset disposition costs		—			—			(650	)		—

Hotel operating expenses	$	250,417		$	236,536		$	485,705		$	463,211

The following tables reconcile net income or loss to hotel operating profit and the ratio of operating income to total revenue to hotel operating margin.

Reconciliation of Net Income (Loss) to Hotel Operating Profit
(in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income (loss)	$	10,351		$	(31,673	)	$	2,337		$	(52,372	)
Discontinued operations		(174	)		(725	)		2,133			3,006
Equity in income from unconsolidated entities		(3,837	)		(2,691	)		(4,968	)		(3,673	)
Minority interests		(111	)		(1,617	)		(975	)		(2,764	)
Interest expense, net		33,471			39,203			66,170			79,797
Charge-off of deferred financing costs		—			3,944			—			4,174
Impairment		732			—			732			—
Asset disposition costs		—			—			650			—
Loss on early extinguishment of debt		—			28,246			—			28,246
Gain on swap termination		—			(1,005	)		—			(1,005	)
Corporate expenses		4,728			4,380			9,269			7,742
Depreciation		30,485			28,027			60,093			56,503
Retail space rental and other revenue		(120	)		(180	)		(276	)		(425	)
Gain on sale of assets		(389	)		—			(389	)		—

Hotel operating profit	$	75,136		$	65,909		$	134,776		$	119,229

Reconciliation of Ratio of Operating Income to Total Revenue to Hotel Operating Margin


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Ratio of operating income to total revenue		12.3			11.1			10.5			9.5
Less:
Retail space and rental and other revenue		—			—			—			—
Plus:
Corporate expenses		1.4			1.4			1.4			1.3
Depreciation		9.4			9.3			9.7			9.7
Asset disposition costs		—			—			0.1			—

Hotel operating margin		23.1	%		21.8	%		21.7	%		20.5	%

Substantially all of our non-current assets consist of real estate. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminish predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider supplemental measures of performance, which are not measures of operating performance under GAAP, to be helpful in evaluating a real estate company’s operations. These supplemental measures, including FFO, EBITDA, hotel operating profit and hotel operating margin, are not measures of operating performance under GAAP. However, we consider these non-GAAP measures to be supplemental measures of a hotel REIT’s performance and should be considered along with, but not as an alternative to, net income as a measure of our operating performance.

FFO and EBITDA

The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT,”) defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships

and joint ventures are calculated to reflect FFO on the same basis. We compute FFO in accordance with standards established by NAREIT. This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.

EBITDA is a commonly used measure of performance in many industries. We define EBITDA as net income or loss (computed in accordance with GAAP) plus interest expenses, income taxes, depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect EBITDA on the same basis.

Hotel Operating Profit and Operating Margin

Hotel operating profit and operating margin are commonly used measures of performance in the hotel industry and give investors a more complete understanding of the operating results over which our individual hotels and operating managers have direct control. We believe that hotel operating profit and operating margin is useful to investors by providing greater transparency with respect to two significant measures used by us in our financial and operational decision-making. Additionally, these measures facilitate comparisons with other hotel REITs and hotel owners. We present hotel operating profit and hotel operating margin by eliminating corporate-level expenses, depreciation and expenses related to our capital structure. We eliminate corporate-level costs and expenses because we believe property-level results provide investors with supplemental information with respect to the ongoing operating performance of our hotels and the effectiveness of management in running our business on a property-level basis. We eliminate depreciation and amortization, even though they are property-level expenses, because we do not believe that these non-cash expenses, which are based on historical cost accounting for real estate assets and implicitly assume that the value of real estate assets diminish predictably over time, accurately reflect and adjustment in the value of our assets.

Use and Limitations of Non-GAAP Measures

Our management and Board of Directors use FFO and EBITDA to evaluate the performance of our hotels and to facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital intensive companies. We use hotel operating profit and hotel operating margin in evaluating hotel-level performance and the operating efficiency of our hotel managers.

The use of these non-GAAP financial measures has certain limitations. FFO, EBITDA, hotel operating profit and hotel operating margin, as presented by us, may not be comparable to FFO, EBITDA, hotel operating profit and hotel operating margin as calculated by other real estate companies. These measures do not reflect certain expenses that we incurred and will incur, such as depreciation, interest and capital expenditures. Management compensates for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliations to the most comparable GAAP financial measures, and our consolidated statements of operations and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures.

These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. Neither should FFO, FFO per share or EBITDA be considered as measures of our liquidity or indicative of funds available for our cash needs, including our ability to make cash distributions or service our debt. FFO per share does not measure, and should not be used as a measure of, amounts that accrue directly to the benefit of shareholders. FFO, EBITDA, hotel operating profit and hotel operating margin reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. Management strongly encourages investors to review our financial information in its entirety and not to rely on any single financial measure.

Hotel Portfolio Composition

The following tables set forth, as of June 30, 2005, for 130 of our 133 hotels included in our consolidated portfolio of continuing operations, distribution by brand, by our top metropolitan markets, by selected states, by type of location, and by market segment. Three limited service hotels, which we were in the process of surrendering to their mortgage holders, have been excluded.


					% of			% of 2004 Hotel
Brand	Hotels		Rooms		Total Rooms			Operating Profit
Embassy Suites Hotel		55		13,925		37	%		52	%
Holiday Inn-branded		36		12,221		32			22
Sheraton-branded		10		3,269		9			10
Doubletree-branded		10		2,206		6			6
Crowne Plaza		12		4,025		11			5
Other		7		1,811		5			5


					% of			% of 2004 Hotel
Top Markets	Hotels		Rooms		Total Rooms			Operating Profit
Atlanta		10		3,061		8	%		9	%
Dallas		12		3,586		10			5
Los Angeles Area		6		1,435		4			5
Orlando		6		2,219		6			5
Boca Raton/Ft. Lauderdale		4		1,118		3			4
New Orleans		2		746		2			4
Minneapolis		4		955		3			4
Philadelphia		3		1,174		3			3
San Diego		1		600		2			3
Phoenix		3		798		2			3
San Antonio		4		1,189		3			3
Northern New Jersery		3		759		2			3
Chicago		4		1,239		3			3
San Francisco Bay Area		8		2,690		7			3
Houston		4		1,403		4			3
Washington DC		1		437		1			3


					% of			% of 2004 Hotel
Top Four States	Hotels		Rooms		Total Rooms			Operating Profit
California		19		5,536		15	%		16	%
Texas		26		7,515		20			14
Florida		16		5,343		14			12
Georgia		12		3,415		9			9


					% of			% of 2004 Hotel
Location	Hotels		Rooms		Total Rooms			Operating Profit
Suburban		58		14,743		39	%		39	%
Urban		31		10,069		27			27
Airport		26		8,183		22			22
Resort		13		4,044		11			12
Interstate		2		418		1			0


					% of			% of 2004 Hotel
Segment	Hotels		Rooms		Total Rooms			Operating Profit
Upscale all-suite		68		16,791		45	%		59	%
Full service		37		12,385		33			23
Upscale		23		7,843		21			17
Limited service		2		438		1			1

Hotel Operating Statistics

The following tables set forth historical occupancy, ADR and RevPAR at June 30, 2005 and 2004, and the percentage changes therein between the periods presented, for 130 of our 133 hotels included in our consolidated portfolio of continuing operations. Three limited service hotels, which we were in the process of surrendering to their mortgage holders, have been excluded.

Operating Statistics by Brand


	Occupancy (%)
	Three Months Ended June 30,							Six Months Ended June 30,
	2005		2004		%Variance			2005		2004		% Variance
Embassy Suites Hotels		76.5		72.6		5.3			73.7		71.2		3.6
Holiday Inn-branded hotels		70.6		69.1		2.2			66.8		65.7		1.7
Sheraton-branded hotels		67.3		66.0		2.0			64.5		65.0		(0.8	)
Doubletree-branded hotels		72.2		70.1		3.1			68.7		69.4		(1.0	)
Crowne Plaza hotels		70.1		65.2		7.6			66.8		63.4		5.3
Other hotels		61.6		64.5		(4.5	)		59.2		59.4		(0.3	)

Total hotels		72.1		69.5		3.7			68.9		67.4		2.3


	ADR ($)
	Three Months Ended June 30,						Six Months Ended June 30,
	2005		2004		% Variance		2005		2004		% Variance
Embassy Suites Hotels		121.15		117.39		3.2		123.54		118.31		4.4
Holiday Inn-branded hotels		88.75		83.31		6.5		86.75		82.28		5.4
Sheraton-branded hotels		111.02		96.82		14.7		109.48		97.19		12.6
Doubletree-branded hotels		110.96		105.10		5.6		112.28		104.45		7.5
Crowne Plaza hotels		101.57		96.44		5.3		97.22		92.79		4.8
Other hotels		102.73		95.57		7.5		97.32		91.44		6.4

Total hotels		106.57		100.83		5.7		106.27		100.50		5.7


	RevPAR ($)
	Three Months Ended June 30,						Six Months Ended June 30,
	2005		2004		% Variance		2005		2004		% Variance
Embassy Suites Hotels		92.63		85.23		8.7		91.08		84.22		8.1
Holiday Inn-branded hotels		62.65		57.56		8.8		57.95		54.07		7.2
Sheraton-branded hotels		74.70		63.89		16.9		70.62		63.22		11.7
Doubletree-branded hotels		80.13		73.65		8.8		77.09		72.44		6.4
Crowne Plaza hotels		71.24		62.85		13.3		64.92		58.84		10.3
Other hotels		63.29		61.64		2.7		57.63		54.32		6.1

Total hotels		76.83		70.12		9.6		73.23		67.69		8.2

Operating Statistics for Our Top Markets


	Occupancy (%)
	Three Months Ended June 30,							Six Months Ended June 30,
	2005		2004		% Variance			2005		2004		% Variance
Atlanta		71.0		67.5		5.2			70.9		67.5		4.9
Dallas		51.4		53.5		(3.9	)		52.3		52.9		(1.1	)
Los Angeles Area		75.4		71.9		5.0			73.4		72.4		1.3
Orlando		75.3		79.3		(5.0	)		77.6		77.6		0.0
Boca Raton/Ft. Lauderdale		80.3		77.0		4.3			85.2		82.0		4.0
New Orleans		73.5		75.5		(2.7	)		73.7		70.8		4.0
Minneapolis		75.5		69.4		8.8			70.5		66.0		6.8
Philadelphia		81.4		72.8		11.7			71.1		64.5		10.2
San Diego		84.0		83.3		0.9			82.8		84.8		(2.4	)
Phoenix		74.9		71.8		4.3			78.1		76.5		2.1
San Antonio		81.7		72.7		12.4			75.6		71.0		6.5
Northern New Jersey		77.1		71.1		8.4			71.1		68.0		4.6
Chicago		80.9		76.4		5.8			71.2		69.3		2.8
San Francisco Bay Area		72.9		67.5		8.0			67.6		64.6		4.6
Houston		73.1		72.0		1.5			71.2		72.8		(2.3	)
Washington DC		83.0		78.5		5.8			75.1		74.4		1.0


	ADR ($)
	Three Months Ended June 30,							Six Months Ended June 30,
	2005		2004		% Variance			2005		2004		% Variance
Atlanta		91.09		86.04		5.9			91.12		87.53		4.1
Dallas		94.11		90.60		3.9			94.84		90.74		4.5
Los Angeles Area		117.32		111.17		5.5			115.94		109.28		6.1
Orlando		83.64		75.20		11.2			89.44		79.41		12.6
Boca Raton/Ft. Lauderdale		120.37		107.17		12.3			141.19		124.07		13.8
New Orleans		135.87		144.35		(5.9	)		141.58		145.94		(3.0	)
Minneapolis		123.75		123.37		0.3			123.30		121.97		1.1
Philadelphia		124.08		110.20		12.6			114.94		104.08		10.4
San Diego		138.43		124.69		11.0			130.74		119.72		9.2
Phoenix		111.95		101.45		10.3			129.83		120.55		7.7
San Antonio		91.24		87.15		4.7			88.85		86.08		3.2
Northern New Jersey		139.54		136.78		2.0			136.97		135.52		1.1
Chicago		120.46		108.45		11.1			110.18		102.09		7.9
San Francisco Bay Area		114.74		114.24		0.4			112.88		111.28		1.4
Houston		72.65		67.98		6.9			71.37		71.11		0.4
Washington DC		147.80		127.60		15.8			147.86		126.82		16.6


	RevPAR ($)
	Three Months Ended June 30,							Six Months Ended June 30,
	2005		2004		% Variance			2005		2004		% Variance
Atlanta		64.67		58.04		11.4			64.57		59.11		9.2
Dallas		48.38		48.46		(0.2	)		49.63		48.03		3.3
Los Angeles Area		88.51		79.88		10.8			85.08		79.12		7.5
Orlando		63.02		59.65		5.7			69.45		61.64		12.7
Boca Raton/Ft. Lauderdale		96.71		82.54		17.2			120.33		101.72		18.3
New Orleans		99.82		109.04		(8.5	)		104.36		103.39		0.9
Minneapolis		93.43		85.62		9.1			86.93		80.52		8.0
Philadelphia		100.97		80.25		25.8			81.71		67.13		21.7
San Diego		116.35		103.87		12.0			108.23		101.58		6.6
Phoenix		83.87		72.86		15.1			101.46		92.24		10.0
San Antonio		74.58		63.39		17.6			67.20		61.13		9.9
Northern New Jersey		107.52		97.21		10.6			97.42		92.19		5.7
Chicago		97.45		82.91		17.5			78.48		70.77		10.9
San Francisco Bay Area		83.64		77.10		8.5			76.31		71.91		6.1
Houston		53.07		48.93		8.5			50.80		51.78		(1.9	)
Washington DC		122.75		100.11		22.6			111.10		94.36		17.7

Liquidity and Capital Resources

Our principal source of cash to meet our cash requirements, including distributions to stockholders and repayments of indebtedness, is from the results of operations of our hotels. For the six months ended June 30, 2005, net cash flow provided by operating activities, consisting primarily of hotel operations, was $73 million. At June 30, 2005, we had cash and cash equivalents of approximately $125 million. Included in cash and cash equivalents is approximately $35 million utilized to meet our hotel minimum working capital requirements.

We currently expect that our cash flow provided by operating activities for 2005 will be approximately $126 million to $129 million. Our cash flow forecasts assume a full year RevPAR increase of 7.5% to 8% and hotel operating margin improvement over our prior year same-store margin is expected to be at least as strong for the second half of the year as it was for the first half. For 2005, our current operating plan contemplates preferred dividend payments of $39 million, capital expenditures of approximately $100 million ($50 million has been spent through June 30, 2005), $21 million in normal recurring principal payments and proceeds of approximately $83 million from the sale of non-strategic hotels ($16 million was received through July 31, 2005).

We are required to reinvest the proceeds from the further sale of IHG managed hotels in other hotels to be managed by IHG or pay substantial termination fees. As of August 1, 2005, we had an unsatisfied reinvestment obligation of $32 million from the sale of IHG managed hotels. If we do not fulfill this reinvestment obligation within 12 months of the date of sale, we will be required to pay liquidated damages to IHG aggregating $8 million. Additionally, until the earlier of either our satisfaction of the reinvestment requirement, or the payment of liquidated damages, we are required to pay monthly termination fees of $108,000 (based on the hotels we have sold through August 1, 2005), which payments will be offset against any liquidated damages payable with respect to these properties. In addition, nine of the 13 remaining hotels previously identified for sale are managed by IHG and subject to the reinvestment obligation in the event they are sold. We will incur additional reinvestment obligations of approximately $62 million if these hotels are sold at currently estimated prices or, if the proceeds of sale are not so reinvested, we will incur approximately $17 million in additional liquidated damages and termination fees for which we would be liable to IHG.

At June 30, 2005, approximately 25% of our outstanding debt had variable interest rates based on LIBOR. Variable interest rates have recently been increasing and, based on our debt outstanding at June 30, 2005, a one percent change in LIBOR would impact our annual interest expense by $4.3 million.

On April 8, 2005, we completed the issuance of 5.4 million depositary shares representing our 8% Series C preferred stock, realizing gross proceeds of $135 million. The gross proceeds were used to redeem a like number of depositary shares representing our 9% Series B preferred stock. Following the redemption, we had approximately $34 million of our Series B preferred stock remaining outstanding.

At June 30, 2005, we had aggregate mortgage indebtedness of approximately $1.0 billion that was secured by 75 of our consolidated hotels with an aggregate book value of approximately $1.8 billion. Substantially all of this debt is recourse solely to the specific assets securing the debt, except in the case of fraud, misapplication of funds and other customary recourse carve-out provisions. Loans secured by 36 hotels provide for lock-box arrangements. With respect to loans secured by 18 of these hotels, if the debt service coverage ratios fall below certain levels and certain other conditions are met, the lender is entitled to apply the revenues from the hotels securing the loan to satisfy current requirements for debt service, taxes, insurance and other reserves, and to hold the balance of the revenues, if any, until debt service coverage ratios again reach specified levels. Three of these 18 hotels, which at June 30, 2005, we were in the process of surrendering to their non-recourse mortgage holders, are currently below the prescribed debt service coverage ratios and are subject to these lock-box requirements. In July 2005, two of these hotels were surrendered and we currently expect the final hotel to be surrendered by the end of the quarter. These three hotels were owned by a consolidated joint venture, have an aggregate fair market value below the outstanding debt balance of $25 million at June 30, 2005, are generally located in depressed markets and are expected to generate negative cash flow for the foreseeable future.

With respect to loans secured by the remaining 18 hotels, the owner is permitted to retain 115% of budgeted hotel operating expenses before the remaining revenues would become subject to a lock-box arrangement if a specified debt service coverage ratio was not met. The lender is entitled to apply the remaining revenues to satisfy current requirements for debt service, taxes, insurance and other reserves, with any excess cash returned to the owner. The mortgage loans secured by 16 of these 18 hotels also provide that, so long as the debt service coverage ratios remain below a second, even lower minimum level, the lender may retain any excess cash (after deduction for the 115% of budgeted operating expenses, debt service, tax, insurance and other reserve requirements) and, if the debt service coverage ratio remains below this lower minimum level for 12 consecutive months, apply any accumulated excess cash to the prepayment of the principal amount of the debt. If the debt service coverage ratio exceeds the lower minimum level for three consecutive months, any then accumulated excess cash will be returned to the owner. Ten of these 18 hotels, which accounted for 6% of our total revenues in 2004, fell below the applicable debt service coverage ratio in 2004 and are currently subject to the lock-box provisions. None of the hotels are currently below the second, even lower minimum debt service coverage ratio that would permit the lender to retain excess cash after deduction for the 115% of budgeted operating expenses, debt service, tax, insurance and other reserve requirements.

In July 2005, we made the initial draw of $3.8 million on our $69.8 million recourse construction loan, for the development of a 184-unit condominium project in Myrtle Beach, South Carolina. The interest on this facility is based on LIBOR plus 225 basis points and will be capitalized as part of the cost of the project. The interest rate may be reduced to LIBOR plus 200 basis points when the project is 55% complete and upon the satisfaction of certain other requirements. The facility matures in the fourth quarter of 2007 .

If actual operating results fail to meet our current expectations, as reflected in our current public guidance, or if interest rates increase more than currently expected, we may be unable to continue to satisfy the incurrence test under the indentures governing our senior unsecured notes. In such an event, we may be prohibited from, among other things, incurring any additional indebtedness or paying dividends on our preferred or common stock, except to the extent necessary to satisfy the REIT qualification requirement that we distribute currently at least 90% of our taxable income. In the event of our failure of this incurrence test, based upon our current estimates of taxable income for 2005, we would be unable to distribute the full amount of dividends accruing under our outstanding preferred stock in 2005 and, accordingly, could pay no dividends on our common stock. However, based on our operating results to date and our current estimates for the remainder of 2005, we do not anticipate a violation of this incurrence test.

We currently anticipate that we will continue to meet our financial covenant and incurrence tests under the RevPAR guidance provided by us at our second quarter earnings conference call on August 3, 2005. For the third quarter of 2005, we currently anticipate that our portfolio RevPAR will be 7% to 8% above the comparable period of the prior year. The RevPAR increase for July 2005 was approximately 8%, compared to the same period in 2004. We currently anticipate that full year 2005 hotel portfolio RevPAR will increase approximately 7.5% to 8%. For 2005 we expect to make capital expenditures of approximately $100 million ($50 million has been spent through June 30, 2005), and at August 1, 2005, we were under a firm contract to sell one hotel for $38 million. We estimate that our net loss applicable to common stockholders for 2005 will be in the range of $63 to $60 million, or $1.06 to $1.01 per share.

We currently maintain receivables from Delta Airlines of approximately $1.5 million, substantially all of which are less than 60 days old and are being paid in the ordinary course of business. If Delta’s recently reported operating losses and challenges were to result in its bankruptcy, a loss of its outstanding receivables could have a material adverse effect upon FelCor’s current estimates of third quarter and full year net income.

FFO and EBITDA are non-GAAP financial measures, as previously discussed under the caption “Non-GAAP Financial Measures” elsewhere in this Quarterly Report on Form 10-Q, and reference is made to that discussion. Following is our reconciliation of estimated FFO, FFO per share and EBITDA to the corresponding GAAP financial measure.

Reconciliation of Estimated Net Loss to Estimated FFO and EBITDA
(in million, except per share data)


	Third Quarter 2005 Guidance												Full Year 2005 Guidance^(b)
	Low Guidance						High Guidance						Low Guidance						High Guidance
				Per Share						Per Share						Per Share						Per Share
	Dollars			Amount^(a)			Dollars			Amount^(a)			Dollars			Amount ^(a)			Dollars			Amount ^(a)
Net income (loss)	$	1					$	2					$	(13	)				$	(11	)
Preferred dividends		(10	)					(10	)					(39	)					(39	)
Issuance costs of redeemed preferred stock		—						—						(5	)					(5	)

Net income (loss) applicable to common stockholders		(9	)	$	(0.15	)		(8	)	$	(0.19	)		(57	)	$	(0.96	)		(55	)	$	(0.93	)
Depreciation		33						33						133						133
Minority interest in FelCor LP		—						—						(2	)					(2	)
Issuance costs of redeemed preferred stock		—						—						5						5

FFO	$	24		$	0.38		$	25		$	0.40		$	79		$	1.26		$	81		$	1.29


Net income (loss)		1						2						(13	)				$	(11	)
Depreciation		33						33						133						133
Minority interest in FelCor LP		—						—						(2	)					(2	)
Interest expense		34						34						137						137
Interest expense from unconsolidated entities		2						2						8						8
Amortization expense		1						1						3						3

EBITDA	$	71					$	72					$	266					$	268


(a)		Weighted average shares are 59.4 million. Adding minority interest and unvested restricted stock of 3.3 million shares to weighted average shares, provides the weighted average shares of 62.7 million used to compute FFO per share.

(b)		Included in full year net loss, FFO and EBITDA guidance are the following estimated amounts (in millions, except per share amounts):


				Per Share
	Dollar			Amount
Asset disposition costs	$	(1	)	$	(0.02	)
Impairment		(1	)		(0.02	)

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, require us to reduce room rates in the near term and may limit our ability to raise room rates in the future. We are also subject to the risk that inflation will cause increases in hotel operating expenses disproportionately to revenues.

Seasonality

The lodging business is seasonal in nature. Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors and other considerations affecting travel. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may utilize cash on hand or borrowings to satisfy our obligations or make distributions to our equity holders.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated by reference in this Quarterly Report on Form 10-Q include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks”, or other variations of these terms (including their use in the negative), or by discussions of strategies, plans or intentions. A number of factors could cause actual results to differ materially from those anticipated by these forward-looking statements. Among these factors are:

	•		general economic and lodging industry conditions, including the anticipated continuation of the current recovery in the economy, the realization of anticipated job growth, the impact of the United States’ military involvement in the Middle East and elsewhere, future acts of terrorism, and the impact on the travel industry of high fuel costs and increased security precautions, the impact that the bankruptcy of one or more major air carriers may have on our revenues and receivables;

	•		our overall debt levels and our ability to obtain new financing and service debt;

	•		our inability to retain earnings;

	•		our liquidity and capital expenditures;

	•		our growth strategy and acquisition activities;

	•		our inability to sell the hotels held for sale at anticipated prices; and

	•		competitive conditions in the lodging industry.

In addition, these forward-looking statements are necessarily dependent upon assumptions and estimates that may prove to be incorrect. Accordingly, while we believe that the plans, intentions and expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. The forward-looking statements included in this report, and all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are expressly qualified in their entirety by the risk factors and cautionary statements discussed in our filings under the Securities Act of 1933 and the Securities Exchange Act of 1934. We undertake no obligation to update any forward-looking statements to reflect future events or circumstances.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk

At June 30, 2005, approximately 75% of our consolidated debt had fixed interest rates, after considering interest rate swaps. Currently, market rates of interest are below the rates we are obligated to pay on our fixed-rate debt.

The following table provides information about our financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents scheduled maturities and weighted average interest rates, by maturity dates. For interest rate swaps, the table presents the notional amount and weighted average interest rate, by contractual maturity date. The fair value of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at the date presented, at then current market interest rates. The fair value of our interest rate swaps indicates the estimated amount that would have been received or paid by us had the swaps been terminated at the date presented.

Expected Maturity Date
at June 30, 2005
(dollars in thousands)


																						Fair
	2005			2006			2007			2008			2009			Thereafter			Total			Value
Liabilities
Fixed rate:
Debt	$	18,484		$	17,779		$	271,368		$	16,328		$	201,629		$	687,216		$	1,212,804		$	1,204,728
Average interest rate		7.48	%		7.79	%		7.48	%		7.94	%		7.40	%		8.53	%		8.07	%
Floating rate:
Debt		2,728			143,018			2,015			17,618			78,537			290,650			534,566			534,566
Average interest rate		5.00	%		5.12	%		4.74	%		5.68	%		4.74	%		7.79	%		6.53	%
Total debt	$	21,212		$	160,797		$	273,383		$	33,946		$	280,166		$	977,866		$	1,747,370
Net discount																				(3,950	)

Total debt																			$	1,743,420


Interest rate derivatives
Interest rate swaps
Variable to fixed		—			—		$	100,000			—			—			—		$	100,000		$	894
Average pay rate		—			—			7.80	%		—			—			—			7.80	%
Average receive rate		—			—			7.79	%		—			—			—			7.79	%

Swap contracts, such as described above, contain a credit risk, in that the counterparties may be unable to fulfill the terms of the agreement. We minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties. The Standard & Poor’s credit ratings for each of the financial institutions that are counterparties to our interest rate swap agreements are AA- or better.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and principal financial officer concluded, as of the Evaluation Date, that our disclosure controls and procedures were effective, such that the information relating to us required to be disclosed in our reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

(b) Changes in internal control over financial reporting.

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. — OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

FelCor held its 2005 Annual Meeting of Stockholders on May 17, 2005 (the “Annual Meeting”). At the Annual Meeting, the stockholders of FelCor elected Thomas J. Corcoran, Jr., Donald J. McNamara, Michael D. Rose and David C. Kloeppel to serve as Class II Directors until the Annual Meeting of Stockholders to be held in 2008.

The total number of shares entitled to vote at the 2005 Annual Meeting was 59,816,504 shares of Common Stock. A total of 47,204,750 shares of Common Stock were represented in person or by proxy at the Annual Meeting. The following table sets forth, with respect to each of the directors elected, the number of votes cast for, and the number of votes withheld, with respect to his election:


Nominee	Votes For		Votes Withheld
Thomas J. Corcoran, Jr.		46,118,346		1,086,404
Donald J. McNamara		31,944,307		15,260,443
Michael D. Rose		46,258,309		946,441
David C. Kloeppel		46,443,072		761,678

At the 2005 Annual Meeting, the stockholders of FelCor also approved our 2005 Restricted Stock and Stock Option Plan (the “Plan”) covering an aggregate of 1 million shares of Common Stock. A total of 35,316,275 shares were voted in favor of the adoption of the Plan, while an aggregate of 3,276,373 shares were voted against, or abstained from voting on, the Plan. Broker non-votes with respect to 8,612,102 shares were not counted as votes either for or against the Plan and were disregarded in determining the number of shares entitled to vote on the Plan.

In addition, at the 2005 Annual Meeting, the stockholders of FelCor ratified the selection of PricewaterhouseCoopers LLP as our independent auditor. There were 45,697,666 votes cast for ratification, 1,479,989 votes against and 27,095 shares abstained from voting.

Item 6. Exhibits.

The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K:


Exhibit Number		Description of Exhibit
10.34.1		Construction Loan Agreement, dated April 27, 2005, among Grande Palms, L.L.C. and Bank of America, N.A., as Administrative Agent, and the other financial institutions party thereto, and Bank of America Securities, as Lead Arranger, for a maximum principal loan amount of $69.8 million.

10.34.2		Guaranty Agreement, dated April 27, 2005, by FelCor Lodging Limited Partnership in favor of Bank of America, N.A. on behalf of the lenders.

10.34.3		Form of Promissory Note, each dated April 27, 2005, made by Grande Palms, L.L.C., each separately payable to the order of Bank of America, N.A. ($25 million), Bank of Montreal ($20 million) and The Bank of Nova Scotia ($24.8 million).

10.34.4		Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated April 27, 2005, made by Grande Palms, L.L.C. for the benefit of Bank of America, N.A., as Administrative Agent under the Construction Loan Agreement referenced in Exhibit 10.34.1.

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2		Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

INDEX TO EXHIBITS


Exhibit Number		Description of Exhibit
10.34.1		Construction Loan Agreement, dated April 27, 2005, among Grande Palms, L.L.C. and Bank of America, N.A., as Administrative Agent, and the other financial institutions party thereto, and Bank of America Securities, as Lead Arranger, for a maximum principal loan amount of $69.8 million.

10.34.2		Guaranty Agreement, dated April 27, 2005, by FelCor Lodging Limited Partnership in favor of Bank of America, N.A. on behalf of the lenders.

10.34.3		Form of Promissory Note, each dated April 27, 2005, made by Grande Palms, L.L.C., each separately payable to the order of Bank of America, N.A. ($25 million), Bank of Montreal ($20 million) and The Bank of Nova Scotia ($24.8 million).

10.34.4		Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated April 27, 2005, made by Grande Palms, L.L.C. for the benefit of Bank of America, N.A., as Administrative Agent under the Construction Loan Agreement referenced in Exhibit 10.34.1.

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2		Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

FELCOR LODGING TRUST INCORPORATED

/s/ Lester C. Johnson

Lester C. Johnson
Senior Vice President and
Principal Accounting Officer


		Page
	PART I. — FINANCIAL INFORMATION

Item 1.	Financial Statements		3
	Consolidated Balance Sheets June 30, 2005 and December 31, 2004 (unaudited)		3
	Consolidated Statements of Operations – For the Three and Six Months Ended June 30, 2005 and 2004 (unaudited)		4
	Consolidated Statements of Comprehensive Income (Loss) – For the Three and Six Months Ended June 30, 2005 and 2004 (unaudited)		5
	Consolidated Statements of Cash Flows – For the Three and Six Months Ended June 30, 2005 and 2004 (unaudited)		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	General		18
	Financial Comparison		18
	Results of Operations		19
	Non-GAAP Financial Measures		22
	Hotel Portfolio Composition		28
	Hotel Operating Statistics		29
	Liquidity and Capital Resources		31
	Inflation		34
	Seasonality		34
	Disclosure Regarding Forward-Looking Statements		34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		36

	PART II. – OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders		37
Item 6.	Exhibits		38

SIGNATURE			39
Construction Lease Agreement
Guaranty Agreement
Form of Promissory Note
Mortgage, Assignment of Rents & Leases, Security Agreement
Certification of CEO Pursuant to Section 302
Certification of Principal Financial Officer Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of Principal Financial Officer Pursuant to Section 906