e10vq

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 September 30, 2006


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. þYes oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

The number of shares of Common Stock, par value $.01 per share, of FelCor Lodging Trust Incorporated outstanding on November 3, 2006, was 62,015,136.

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)


	September 30,			December 31,
	2006			2005
ASSETS
Investment in hotels, net of accumulated depreciation of $707,027 at September 30, 2006 and $754,502 at December 31, 2005	$	2,271,256		$	2,587,379
Investment in unconsolidated entities		111,431			109,262
Hotels held for sale		12,398			—
Cash and cash equivalents		133,054			94,564
Restricted cash		25,237			18,298
Accounts receivable, net of allowance for doubtful accounts of $660 at September 30, 2006 and $2,203 at December 31, 2005		46,310			54,815
Deferred expenses, net of accumulated amortization of $14,074 at September 30, 2006 and $12,150 at December 31, 2005		10,167			12,423
Condominium development project		56,295			13,051
Other assets		25,381			29,301

Total assets	$	2,691,529		$	2,919,093


LIABILITIES AND STOCKHOLDERS’ EQUITY
Debt, net of discount of $2,095 at September 30, 2006 and $2,982 at December 31, 2005	$	1,448,075		$	1,675,280
Distributions payable		20,967			8,596
Accrued expenses and other liabilities		153,811			138,017


Total liabilities		1,622,853			1,821,893


Commitments and contingencies

Minority interest in FelCor LP, 1,355 and 2,763 units issued and outstanding at September 30, 2006 and December 31, 2005, respectively		12,033			25,393

Minority interest in other partnerships		27,618			40,014


Stockholders’ equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Convertible Preferred Stock, 12,880 shares, liquidation value of $322,011, issued and outstanding at September 30, 2006 and December 31, 2005		309,362			309,362
Series C Cumulative Redeemable Preferred Stock, 68 shares, liquidation value of $169,950, issued and outstanding at September 30, 2006 and December 31, 2005		169,412			169,412
Common stock, $.01 par value, 200,000 shares authorized and 69,438 shares issued, including shares in treasury, at September 30, 2006 and December 31, 2005, respectively		694			694
Additional paid-in capital		2,065,995			2,081,869
Accumulated other comprehensive income		20,674			19,602
Accumulated deficit		(1,395,593	)		(1,372,720	)
Less: Common stock in treasury, at cost, of 7,403 and 9,231 shares at September 30, 2006 and December 31, 2005, respectively		(141,519	)		(176,426	)


Total stockholders’ equity		1,029,025			1,031,793


Total liabilities and stockholders’ equity	$	2,691,529		$	2,919,093

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

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2006 and 2005
(unaudited, in thousands, except for per share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Revenues:
Hotel operating revenue	$	284,531		$	267,861		$	866,092		$	789,829
Retail space rental and other revenue		211			1,632			501			1,908

Total revenues		284,742			269,493			866,593			791,737


Expenses:
Hotel departmental expenses		92,945			90,246			281,608			264,302
Other property operating costs		79,862			76,691			237,408			223,875
Management and franchise fees		14,302			13,702			45,642			40,088
Taxes, insurance and lease expense		31,228			29,388			91,592			86,867
Corporate expenses		7,164			4,839			18,530			14,108
Depreciation		27,154			25,487			79,729			75,108
Impairment loss		5,874			—			15,142			—

Total operating expenses		258,529			240,353			769,651			704,348


Operating income		26,213			29,140			96,942			87,389
Interest expense, net		(28,273	)		(32,053	)		(87,585	)		(95,528	)
Hurricane loss		—			(2,309	)		—			(2,309	)
Charge-off of deferred financing costs		—			—			(962	)		—
Early extinguishment of debt		—			—			(438	)		—

Income (loss) before equity in income of unconsolidated entities, minority interests and gain on sales of assets		(2,060	)		(5,222	)		7,957			(10,448	)
Equity in income from unconsolidated entities		3,948			3,260			9,708			8,229
Minority interests		110			1,015			1,926			2,263
Gain (loss) on sale of assets		(92	)		80			(92	)		469

Income (loss) from continuing operations		1,906			(867	)		19,499			513
Discontinued operations		18,156			12,125			20,560			13,082

Net income		20,062			11,258			40,059			13,595
Preferred dividends		(9,665	)		(9,829	)		(29,022	)		(29,729	)
Issuance costs of redeemed preferred stock		—			(1,324	)		—			(6,522	)

Net income (loss) applicable to common stockholders	$	10,397		$	105		$	11,037		$	(22,656	)


Basic and diluted earnings (loss) per common share data:
Net income (loss) from continuing operations	$	(0.13	)	$	(0.20	)	$	(0.16	)	$	(0.60	)

Net income (loss)	$	0.17		$	—		$	0.18		$	(0.38	)

Basic and diluted weighted average common shares outstanding		61,148			59,442			60,441			59,398

Cash dividends declared on common stock	$	0.20		$	—		$	0.55		$	—

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

FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2006 and 2005
(unaudited, in thousands)


	Nine Months Ended
	September 30,
	2006			2005
Cash flows from operating activities:
Net income	$	40,059		$	13,595
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		83,198			91,795
Loss (gain) on sale of assets		(16,963	)		(10,022	)
Amortization of deferred financing fees		2,479			2,522
Accretion of debt, net of discount		887			871
Amortization of unearned compensation		4,339			2,171
Equity in income from unconsolidated entities		(9,708	)		(8,229	)
Distributions of income from unconsolidated entities		2,996			670
Impairment loss		15,142			1,860
Bad debt reserve		—			1,389
Charge-off of deferred financing costs		1,044			—
Loss (gain) on early extinguishment of debt		596			(2,538	)
Minority interests		(799	)		(1,470	)
Changes in assets and liabilities:
Accounts receivable		2,147			(9,518	)
Restricted cash — operations		(4,230	)		(7,784	)
Other assets		1,127			569
Accrued expenses and other liabilities		18,296			41,295

Net cash flow provided by operating activities		140,610			117,176

Cash flows (used in) provided by investing activities:
Acquisition of interest in venture		—			(1,197	)
Cash from consolidation of venture		—			3,204
Improvements and additions to hotels		(108,623	)		(76,632	)
Additions to condominium project		(43,060	)		(7,778	)
Proceeds from sale of assets		177,105			52,354
Proceeds received from property damage insurance		7,351			—
Decrease in restricted cash — investing		462			8,454
Distributions of capital from unconsolidated entities		4,793			6,021
Capital contributions to unconsolidated entities		(250	)		(700	)

Net cash flow (used in) provided by investing activities		37,778			(16,274	)

Cash flows (used in) provided by financing activities:
Proceeds from borrowings		124,897			6,002
Repayment of borrowings		(205,593	)		(25,951	)
Payment of deferred financing fees		(1,201	)		—
Decrease in restricted cash — financing		2,825			4,429
Net proceeds from sale of preferred stock		—			164,221
Redemption of preferred stock		—			(169,395	)
Exercise of stock options		1,407			—
Contributions from minority interest holders		1,948			1,591
Distributions paid to other partnerships’ minority interests		(13,167	)		—
Distributions paid to preferred stockholders		(29,035	)		(30,231	)
Distributions paid to FelCor LP limited partners		(615	)		—
Distributions paid to common stockholders		(21,558	)		—

Net cash flow used in financing activities		(140,092	)		(49,334	)

Effect of exchange rate changes on cash		194			45
Net change in cash and cash equivalents		38,490			51,613
Cash and cash equivalents at beginning of periods		94,564			119,310

Cash and cash equivalents at end of periods	$	133,054		$	170,923

Supplemental cash flow information — Interest paid	$	77,259		$	85,626

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, a real estate investment trust, or REIT, went public 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 hotel rooms owned. We are the owner of the largest number of Embassy Suites Hotels^{^®}and Doubletree Guest Suites^® hotels in North America. Our portfolio includes 65 upper upscale, all-suite hotels.

FelCor is the sole general partner of, and the owner of a more than 97% interest in, FelCor Lodging Limited Partnership, or FelCor LP. All of our operations are conducted solely through FelCor LP and its subsidiaries.

At September 30, 2006, we had ownership interests in 110 hotels. We held 100% of ownership interests (whether by fee, leasehold or otherwise) in 83 hotels, a 90% or greater interest in entities owning five hotels, a 75% interest in an entity owning one hotel, a 60% interest in an entity owning two hotels and 50% interests in unconsolidated entities that own 19 hotels. We held majority ownership interests in the operating lessees of 105 of these hotels, consequently, we include their operating revenues and expenses in our consolidated statements of operations. The operations of 104 of these consolidated hotels were included in continuing operations at September 30, 2006, and one hotel was designated as held for sale and included in discontinued operations. The operating revenues and expenses of the remaining four hotels are unconsolidated.

At September 30, 2006, we had an aggregate of 62,035,662 shares of FelCor common stock and 1,355,016 units of FelCor LP limited partnership interests outstanding.

The following table reflects the distribution, by brand, of our 104 consolidated hotels included in continuing operations at September 30, 2006:


Brand	Hotels		Rooms
Embassy Suites Hotels		54		13,652
Doubletree^® and Doubletree Guest Suites		7		1,471
Holiday Inn^® — branded		26		8,858
Sheraton^® and Sheraton Suites^®		10		3,274
Other brands		7		2,473

Total hotels		104		29,728

The hotels shown in the above table are located in the United States (102 hotels in 27 states) and Canada (two hotels), with concentrations in Texas (15 hotels), California (16 hotels), Florida (13 hotels) and Georgia (10 hotels). Approximately 54% of our hotel room revenues in continuing operations were generated from hotels in these four states during the nine months ended September 30, 2006.

At September 30, 2006, of our 104 consolidated hotels included in continuing operations, (i) subsidiaries of Hilton Hotels Corporation, or Hilton, managed 62, (ii) subsidiaries of InterContinental Hotels Group, or IHG, managed 29 (iii) subsidiaries of Starwood Hotels & Resorts Worldwide, Inc., or Starwood, managed 11, and (iv) other independent management companies managed two.

The information in our consolidated financial statements for the three and nine months ended September 30, 2006 and 2005 is unaudited. Preparing 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 nine months ended September 30, 2006 and 2005, 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, 2005, included in our Current Report on Form 8-K dated October 17, 2006. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of actual operating results for the entire year.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Foreign Currency Translation

Operating results 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 September 30, 2006, and at December 31, 2005. We also owned a 50% interest in joint venture entities that own real estate and provide condominium management services in Myrtle Beach, South Carolina, 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 depreciation of our excess basis in investment in unconsolidated entities when compared to the historical basis of the assets recorded by the joint ventures.

The following table sets forth summarized combined financial information for these unconsolidated entities (including the equity we do not own) (in thousands):


	September 30,		December 31,
	2006		2005
Balance sheet information:
Investment in hotels, net of accumulated depreciation	$	261,563	$	259,645
Total assets	$	303,456	$	295,065
Debt	$	203,402	$	203,880
Total liabilities	$	211,863	$	211,174
Equity	$	91,593	$	83,891

Debt of our unconsolidated entities at September 30, 2006 and December 31, 2005, consisted entirely of non-recourse mortgage debt.

The following table sets forth summarized combined statement of operations information for our unconsolidated entities (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Total revenues	$	23,062		$	20,384		$	64,572		$	57,652
Net income		8,734			7,098			21,928			18,238

Net income attributable to FelCor	$	4,367		$	3,549		$	10,964		$	9,119
Preferred return		—			130			—			386
Depreciation of cost in excess of book value		(419	)		(419	)		(1,256	)		(1,276	)

Equity in income from unconsolidated entities	$	3,948		$	3,260		$	9,708		$	8,229

The following table summarizes the components of our investment in unconsolidated entities (in thousands):


	September 30,			December 31,
	2006			2005
Hotel investments	$	47,693		$	43,117
Cost in excess of book value of hotel investments		61,842			63,098
Land and condominium investments		3,557			4,270
Hotel lessee investments		(1,661	)		(1,223	)

	$	111,431		$	109,262

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Investment in Unconsolidated Entities — (continued)

The following table summarizes the components of our equity in income from unconsolidated entities (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Hotel investments	$	4,149		$	3,372		$	10,232		$	8,419
Land and condominium investments		(32	)		107			(86	)		179
Hotel lessee operations		(169	)		(219	)		(438	)		(369	)

	$	3,948		$	3,260		$	9,708		$	8,229

4. Debt

Debt (in thousands) at September 30, 2006 and December 31, 2005 consisted of:


				Balance Outstanding
	Encumbered	Interest Rate at	Maturity	September 30,			December 31,
	Hotels	September 30, 2006^(a)	Date	2006			2005
Promissory note	none	LIBOR (L) + 2.00^(f)	June 2016	$	650		$	650
Line of credit^(b)	none	L + 1.75^(f)	January 2009		—			—
Senior unsecured term notes	none	7.63	October 2007		124,056	*		123,358
Senior unsecured term notes	none	8.50	June 2011		298,849			298,660
Term loan	—	—	—		—			225,000
Senior unsecured term notes	none	L + 4.25^(f)	June 2011		190,000	*		190,000
Senior unsecured term notes^(c)	none	7.80	June 2011		100,000	*		100,000

Total unsecured debt					713,555			937,668

Mortgage debt	8 hotels	6.56	July 2009 — 2014		98,027			104,282
Mortgage debt^(d)	8 hotels	L + 1.25^(f)	May 2007		88,265	*		117,913
Mortgage debt	7 hotels	7.32	March 2009		125,083			127,455
Mortgage debt	4 hotels	7.55	June 2009		40,673	*		41,912
Mortgage debt	8 hotels	8.70	May 2010		170,266			172,604
Mortgage debt	7 hotels	8.73	May 2010		131,337			133,374
Mortgage debt	1 hotel	L + 2.85^(f)	August 2008		15,500			15,500
Mortgage debt	1 hotel	5.81	July 2016		12,917			10,457
Other	1 hotel	9.17	August 2011		4,644			5,204
Construction loan^(e)	—	L + 2.00^(f)	August 2007		47,808			8,911

Total secured debt	45 hotels				734,520			737,612

				$	1,448,075		$	1,675,280

* Debt to be redeemed or paid off in fourth quarter 2006				$	542,994

Debt to be issued in fourth quarter 2006				$	465,000


(a)		Our weighted average interest rate as of September 30, 2006 was 8.13%.

(b)		We have a borrowing capacity of $125 million on our line of credit. The interest on this line can range from L + 175 to L + 225 basis points, based on our leverage ratio (as defined in our line of credit agreement).

(c)		We have swapped $100 million of floating rate debt, at L + 4.25 percent, for a fixed rate of 7.80 percent. These interest rate swaps expire in December 2007.

(d)		This debt has a one-year extension option, subject to certain contingencies.

(e)		We have a $69.8 million recourse construction loan facility for the development of a 184-unit condominium project in Myrtle Beach, South Carolina. The interest on this facility is being capitalized as part of the cost of the project.

(f)		Variable interest rate based on LIBOR. The six month LIBOR was 5.37% at September 30, 2006 and 4.58% at December 31, 2005.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Debt — (continued)

We reported interest expense of $28.3 million and $32.1 million for the three months ended September 30, 2006 and 2005, respectively, which is net of: (i) interest income of $0.9 million and $1.2 million and (ii) capitalized interest of $0.9 million and $0.4 million, respectively. We reported interest expense of $87.6 million and $95.5 million, for the nine months ended September 30, 2006 and 2005, respectively, net of: (i) interest income of $2.5 million and $2.6 million and (ii) capitalized interest of $2.1 million and $1.4 million, respectively.

At September 30, 2006, we had aggregate mortgage indebtedness of approximately $735 million that was secured by 45 of our consolidated hotels with an aggregate book value of approximately $1.1 billion and by our Royale Palms condominium development. Our hotel mortgage 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 10 hotels provide for lock-box arrangements under certain circumstances. With respect to these loans secured by 10 hotels, we are permitted to retain 115% of budgeted hotel operating expenses, but the remaining revenues would become subject to a lock-box arrangement if a specified debt service coverage ratio is not met. The mortgage loans secured by eight of these 10 hotels also provide that, if the debt service coverage ratios remain below a second, even lower minimum level, the lender may retain any excess cash (after deduction for 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 us. Eight of these 10 hotels, which accounted for 6% of our total revenues in 2005, are currently subject to the lock-box provisions because they failed to meet the debt service coverage ratio in 2004. These hotels currently exceed the minimum debt service coverage ratio; however, under the terms of the loan agreement, the lock-box provisions remain in place until the loan is repaid. None of these hotels have ever fallen below the lower minimum debt service coverage ratio.

In April 2006, Moody’s Investors Service upgraded the ratings of our senior unsecured debt to Ba3, from B1, with a stable outlook. The upgrade applies to all of our outstanding senior unsecured notes. The upgrade resulted in a reduction in the interest rate, from 9.0% to 8.5%, on approximately $300 million in principal of senior unsecured notes maturing in 2011 effective April 3, 2006.

In the second quarter of 2006 we refinanced the mortgage debt with regard to one hotel. In connection with this refinancing, we retired a $10.4 million mortgage loan paying 7.91% interest. Associated with the retirement of this debt, we recorded a charge of $0.5 million relating to deferred financing costs and early extinguishment of debt. The refinanced mortgage is for $13.0 million paying 5.81% interest. The loan agreement required that $6.4 million be placed in restricted cash to pay for property renovations over the next six to 12 months. The $13.0 million of proceeds from the new debt was used to directly fund the following: retirement of $10.4 million of debt, restricted cash of $2.2 million and loan costs of $0.4 million.

In the third quarter of 2006, we retired $4.8 million of secured debt related to one hotel. In connection with this early retirement we recorded $0.2 million of expense in discontinued operations during the third quarter of 2006.

5. Derivatives

In the normal course of business, we are exposed to the effect of interest rate fluctuations. We limit these risks by following established risk management policies and procedures, including the use of derivatives. We use interest rate hedges to manage our fixed and floating interest rate position and do not speculate on interest rates. We manage interest rate risk based on the varying circumstances of anticipated borrowings and existing floating and fixed rate debt. We 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.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Derivatives — (continued)

At September 30, 2006, 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 with any adjustments reflected in other comprehensive income. The estimated unrealized net gain on these interest rate swap agreements was approximately $1.8 million at September 30, 2006 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 L + 4.25% and the interest rate paid is 7.80%. These swaps were 100% effective through September 30, 2006.

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 decreased interest expense by $0.5 million and $1.0 million during the three and nine months ended September 30, 2006, respectively, and increased interest expense by $0.4 million during the nine months ended September 30, 2005. The impact on interest expense for the three months ended September 30, 2005 was not significant.

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.

To fulfill requirements under certain loans, we purchased interest rate caps with aggregate notional amounts of $88.0 million and $225.7 million as of September 30, 2006 and December 31, 2005, respectively. We also sold interest rate caps on a portion of these notional amounts with identical terms that had aggregate notional amounts of $225.7 million as of December 31, 2005. The purchased interest rate cap agreements as of September 30, 2006 and the purchased and sold interest rate cap agreements as of December 31, 2005 have not been designated as hedges. The fair value of both the purchased and sold interest rate caps were insignificant at both September 30, 2006 and December 31, 2005 and resulted in no significant net earnings impact.

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

The following table summarizes the components of hotel operating revenue from continuing operations (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Room revenue	$	235,909	$	221,524	$	713,536	$	646,630
Food and beverage revenue		34,036		32,169		108,947		102,553
Other operating departments		14,586		14,168		43,609		40,646

Total hotel operating revenue	$	284,531	$	267,861	$	866,092	$	789,829

For the first nine months of both 2006 and 2005, over 99% of our revenue was comprised of hotel operating revenue, 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

Hotel Operating Revenue, Departmental Expenses and Other Property Operating Costs — (continued)

The following table summarizes the components of hotel departmental expenses from continuing operations (in thousands):


	Three Months Ended September 30,
	2006					2005
			% of Total					% of Total
			Hotel					Hotel
	Dollars in		Operating			Dollars in		Operating
	Thousands		Revenue			Thousands		Revenue
Room	$	59,285		20.8	%	$	57,227		21.4	%
Food and beverage		26,876		9.4			26,147		9.8
Other operating departments		6,784		2.4			6,872		2.6

Total hotel departmental expenses	$	92,945		32.6	%	$	90,246		33.8	%


	Nine Months Ended September 30,
	2006					2005
			% of Total					% of Total
			Hotel					Hotel
	Dollars in		Operating			Dollars in		Operating
	Thousands		Revenue			Thousands		Revenue
Room	$	176,602		20.4	%	$	164,306		20.8	%
Food and beverage		84,584		9.8			80,416		10.2
Other operating departments		20,422		2.4			19,580		2.5

Total hotel departmental expenses	$	281,608		32.6	%	$	264,302		33.5	%

The following table summarizes the components of other property operating costs from continuing operations (in thousands):


	Three Months Ended September 30,
	2006					2005
			% of Total					% of Total
			Hotel					Hotel
	Dollars in		Operating			Dollars in		Operating
	Thousands		Revenue			Thousands		Revenue
Hotel general and administrative expense	$	25,882		9.1	%	$	25,470		9.5	%
Marketing		23,047		8.1			22,209		8.3
Repair and maintenance		15,168		5.3			14,455		5.4
Energy		15,765		5.5			14,557		5.4

Total other property operating costs	$	79,862		28.0	%	$	76,691		28.6	%


	Nine Months Ended September 30,
	2006					2005
			% of Total					% of Total
			Hotel					Hotel
	Dollars in		Operating			Dollars in		Operating
	Thousands		Revenue			Thousands		Revenue
Hotel general and administrative expense	$	76,589		8.8	%	$	73,589		9.3	%
Marketing		70,752		8.2			66,931		8.5
Repair and maintenance		45,924		5.3			43,331		5.5
Energy		44,143		5.1			40,024		5.1

Total other property operating costs	$	237,408		27.4	%	$	223,875		28.4	%

Hotel employee compensation and benefit expenses of $81.0 million and $81.5 million for the three months ended September 30, 2006 and 2005, respectively and $249.8 million and $241.5 million for the nine months ended September 30, 2006 and 2005, respectively, are included in hotel departmental expenses and other property operating costs.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Taxes, Insurance and Lease Expense

The following table summarizes the components of taxes, insurance and lease expense from continuing operations (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Operating lease expense^(a)	$	18,975	$	16,924	$	54,436	$	48,771
Real estate and other taxes		9,311		9,724		29,282		29,482
Property insurance, general liability insurance and other		2,942		2,740		7,874		8,614

Total taxes, insurance and lease expense	$	31,228	$	29,388	$	91,592	$	86,867


(a)		Operating lease expense includes hotel lease expense of $16.5 million and $14.7 million associated with 14 hotels leased by us from unconsolidated subsidiaries for the three months ended September 30, 2006 and 2005, respectively, and $47.9 million and $42.8 million for the nine months ended September 30, 2006 and 2005, respectively. We included in operating lease expense $10.3 million and $8.3 million of percentage rent based on operating results for the three months ended September 30, 2006 and 2005, respectively and $28.7 million and $22.7 million of percentage rent based on operating results for the nine months ended September 30, 2006 and 2005, respectively.

Impairment Charge

Our hotels are comprised of operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes, from the remainder of our operations. Accordingly, we consider our hotels to be components as defined by SFAS 144 for purposes of determining impairment charges and reporting discontinued operations.

In the second quarter of 2006, we designated seven hotels as non-strategic and tested these hotels under the provisions of SFAS No. 144. Of the hotels tested, one such hotel failed the test under SFAS No. 144, which resulted in an impairment charge of $9 million to write down the hotel asset to our then-current estimate of its fair market value. In addition, in the third quarter of 2006, we recorded an impairment charge of $6 million on two hotels that had previously been identified as non-strategic due to decreases in estimated fair values.

The non-strategic hotels held for investment, which are included in our continuing operations, were tested for impairment as required by SFAS 144 using the undiscounted cash flows for the shorter of the estimated remaining holding periods or the useful life of the hotels. Those hotels that failed the impairment test described in SFAS 144 were written down to their then current estimated fair value, before any selling expenses. These hotels continue to be depreciated over their remaining useful lives.

We may be subject to additional impairment charges in the event that operating results of individual hotels are materially different from our forecasts, the economy and lodging industry weaken, or if we shorten our contemplated holding period for certain of our hotels.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Discontinued Operations

Included in discontinued operations are the results of operations of one hotel designated as held for sale at September 30, 2006, 20 hotels sold in 2006 and 19 hotels sold or otherwise disposed of in 2005, through the date of disposition. The following table summarizes the condensed financial information for the hotels included in discontinued operations (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Operating revenue	$	12,858		$	49,984		$	63,769		$	162,736
Operating expenses^(a)		(11,584	)		(48,423	)		(56,956	)		(156,556	)

Operating income		1,274			1,561			6,813			6,180
Direct interest costs, net		(59	)		(1,120	)		(207	)		(4,395	)
Gain on sale of depreciable assets		19,345			9,450			16,483			9,235
Gain on sale of land		—			317			—			317
Income tax arising from disposals		(1,735	)		—			(1,735	)		—
Debt extinguishment gain (loss)		(216	)		2,538			(216	)		2,538
Minority interests		(453	)		(621	)		(578	)		(793	)

Income from discontinued operations	$	18,156		$	12,125		$	20,560		$	13,082


(a)		Impairment losses of $0.6 million and $1.9 million for the three and nine months ended September 30, 2005, respectively, are included in operating expenses.

In 2006, we sold eight hotels in the first quarter, four hotels in the second quarter, and eight hotels in the third quarter for aggregate gross proceeds of $340.5 million. We used the proceeds from the sale of those hotels and cash on hand to retire indebtedness aggregating $257.1 million ($150 million of which relates to sales proceeds provided directly to the lender at closing).

We have recognized $1.7 million of federal alternative minimum tax associated with gains from hotels sold by our taxable REIT subsidiaries in 2006. We consider this to be a cost directly associated with the sale of these hotels. We have not established a related net deferred tax asset because we are unable to conclude that the recovery of the asset is probable.

In the nine months ended September 30, 2005, we sold 11 hotels for gross proceeds of $79.2 million. Additionally, in 2005 we relinquished title to the non-recourse mortgage holder of eight limited service hotels, owned by a consolidated joint venture, in exchange for the extinguishment of $49.2 million of debt. In connection with these eight hotels we recorded $1.3 million of asset disposition costs, which were included in operating expenses, in the first quarter of 2005.

We consider a hotel as “held for sale” once we have executed a contract for sale, allowed the buyer to complete their due diligence review, and received a substantial non-refundable deposit. Until a buyer has completed its due diligence review of the asset, necessary approvals have been received and substantive conditions to the buyer’s obligation to perform have been satisfied, we do not consider a sale to be probable. At September 30, 2006, we owned one hotel that was held for sale. The operating results of this hotel are included in discontinued operations.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Earnings (Loss) Per Share

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005

Numerator:
Income (loss) from continuing operations	$	1,906		$	(867	)	$	19,499		$	513
Less: Preferred dividends		(9,665	)		(9,829	)		(29,022	)		(29,729	)
Issuance costs of redeemed preferred stock		—			(1,324	)		—			(6,522	)

Income (loss) from continuing operations applicable to common stockholders		(7,759	)		(12,020	)		(9,523	)		(35,738	)
Discontinued operations		18,156			12,125			20,560			13,082

Net income (loss) applicable to common stockholders	$	10,397		$	105		$	11,037		$	(22,656	)

Denominator:
Denominator for basic and diluted earnings per share		61,148			59,442			60,441			59,398


Earnings (loss) per share data:

Basic:
Income (loss) from continuing operations	$	(0.13	)	$	(0.20	)	$	(0.16	)	$	(0.60	)

Discontinued operations	$	0.30		$	0.20		$	0.34		$	0.22

Net income (loss)	$	0.17		$	—		$	0.18		$	(0.38	)

Diluted:
Income (loss) from continuing operations	$	(0.13	)	$	(0.20	)	$	(0.16	)	$	(0.60	)

Discontinued operations	$	0.30		$	0.20		$	0.34		$	0.22

Net income (loss)	$	0.17		$	—		$	0.18		$	(0.38	)

The following securities, which could potentially dilute basic earnings per share in the future, were not included in the computation of diluted earnings per share, because they would have been antidilutive for the periods presented (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Options and unvested restricted stock		414		620		356		543
Series A convertible preferred shares		9,985		9,985		9,985		9,985

Series A preferred dividends that would be excluded from net income (loss) applicable to common stockholders, if these Series A preferred shares were dilutive, were $6.3 million for both the three months ended September 30, 2006 and 2005, and $18.8 million for the nine months ended September 30, 2006 and 2005.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Stock Based Compensation Plans

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R), Share-Based Payment. This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for (i) all stock awards granted after the required date of adoption and to (ii) awards modified, repurchased, or cancelled after that date. In addition, we are required to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption as such previous awards continue to vest. We adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective application. The adoption of this standard did not have a material impact on our consolidated financial statements.

Prior to January 1, 2006, we applied 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. Had the compensation cost for these stock-based compensation plans been determined in accordance with SFAS No. 123 our net loss from continuing operations and net loss from continuing operations per common share for the three and nine months ended September 30, 2005, would approximate the pro forma amounts below (in thousands, except per share data):


	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005
Income (loss) from continuing operations, as reported	$	(867	)	$	513
Add stock based compensation included in the net income or loss, as reported		954			2,171
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		(957	)		(2,180	)

Income (loss) from continuing operations, pro forma	$	(870	)	$	504


Basic and diluted net loss per common share:
As reported	$	(0.20	)	$	(0.60	)
Pro forma	$	(0.20	)	$	(0.60	)

12. FelCor LP Units

During the first nine months of 2006, we issued an aggregate of 1,407,524 shares of our common stock from treasury to holders of FelCor LP units upon redemption of a like number of units.

13. Application of New Accounting Standards

In July 2006, the FASB issued FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes. The interpretation clearly scopes out income tax positions related to FASB Statement No. 5, Accounting for Contingencies. We are currently in the process of evaluating the impact of FIN 48, if any, and will adopt the provisions of this statement beginning in the first quarter of 2007. The cumulative effect of applying the provisions of FIN 48, if any, will be reported as an adjustment to the opening balance of retained earnings on January 1, 2007.

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Application of New Accounting Standards — (continued)

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. We believe that the adoption of this standard on January 1, 2008 will not have a material effect on our consolidated financial statements.

14. Subsequent Events

In October 2006, FelCor Lodging Limited Partnership sold $215 million of senior secured floating rate notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. These notes bear interest at LIBOR plus 1.875% and mature in 2011. In addition, payment of amounts due under these notes is guaranteed by us and certain of our subsidiaries who also guarantee payment of our line of credit and other senior debt (other than mortgage debt) and payment of these notes is secured by a pledge of our limited partnership interest in FelCor Lodging Limited Partnership. We are finalizing a $250 million mortgage facility at LIBOR plus 0.93% maturing in two years with three one year extensions at our option, which we expect to close by mid-November 2006.

On October 16, 2006, we initiated cash tender offers for all of our outstanding $290 million senior floating rate notes due 2011 and all of our outstanding $125 million 7⁵/8% senior notes due 2007. (In connection with these tender offers, we also solicited consents to proposed amendment to the relevant indentures to eliminate certain covenants and events of default.) In addition, we will repay $129 million of outstanding debt secured by mortgages on certain of our hotels. Proceeds from our October 2006 senior note offering and new mortgage debt, together with cash proceeds from hotel sales will be used to fund the purchase price payable for tendered notes and the repayment of a portion of our existing mortgage debt.

In connection with the repayment of our $290 million senior floating rate notes, we will unwind the floating to fixed interest rate swaps associated with these notes. Termination of these interest rate swaps will result in gain of approximately $1.7 million, which will be recorded in the fourth quarter 2006.

The early retirement of certain indebtedness in the fourth quarter of 2006, will result in prepayment expenses of approximately $15 million, which will be recorded in the fourth quarter of 2006. As a result of the foregoing refinancing transactions, our annual interest expense will be reduced by approximately $5 million, our weighted average cost of debt will be reduced by approximately 50 basis points and our next significant debt maturity will not be until 2009.

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

General

In the third quarter of 2006, our revenue per available room, or RevPAR, increased 6.0% for our consolidated hotels in continuing operations and our average daily room rate, or ADR, increased 8.5% while occupancy decreased 2.3%. The changes in ADR and occupancy are largely attributed to the remixing of our business (both pre-renovation and post-renovation), the impact of renovation related displacement and softness in those markets that benefited from temporary demand from the 2005 hurricanes. The significant increase in ADR at our hotels was largely responsible for a 200 basis point improvement in hotel earnings before interest, taxes, depreciation and amortization margin, or Hotel EBITDA margin, compared to the same period in 2005.

We are investing in our core hotels to improve their quality, returns on investment and competitive position. During the first nine months of 2006, our pro rata share of hotel capital expenditures totaled $117 million and the displacement associated with hotel renovations resulted in reductions to RevPAR (approximately 1%) and Hotel EBITDA (approximately $5 million), which negatively affected Hotel EBITDA margin by approximately 40 basis points. In the third quarter of 2006, we estimate that the displacement associated with hotel renovations resulted in reductions to RevPAR (approximately 1%) and Hotel EBITDA (approximately $2 million), which negatively affected Hotel EBITDA margin by approximately 50 basis points. We expect hotel capital expenditures will aggregate to approximately $175 million for 2006, and we plan to incur capital expenditures in 2007 at a similar or greater pace.

We sold twenty hotels during the nine months ended September 30, 2006 for aggregate gross proceeds of $340 million. We used the proceeds from the sale of these hotels and cash on hand to retire approximately $257 million of aggregate indebtedness. During the second quarter of 2006 in connection with the finalization of our capital improvement program, we identified seven additional hotels as non-strategic and recorded an impairment charge of $9 million related to one of these hotels. During the third quarter of 2006 we recorded impairment charges of $6 million resulting from decreases in estimated fair values of two previously identified non-strategic hotels that are not expected to be recovered during the remaining hold period.

At September 30, 2006, we had 22 non-strategic hotels we were marketing for sale, including five hotels that were under contract for sale. The contract for one of these hotels had a non-refundable deposit and we designated this hotel as held for sale and included it in discontinued operations. At the date of this filing, we had 15 non-strategic hotels under contract for sale and 11 of these hotels had substantial non-refundable deposits. We estimate that the gross proceeds from the disposition of these 22 non-strategic hotels will be approximately $350 to $375 million.

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

Financial Comparison (in thousands of dollars, except RevPAR and Hotel EBITDA margin)


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
							% Change									% Change
	2006			2005			2005-2006			2006			2005			2005-2006
RevPAR	$	86.52		$	81.60			6.0	%	$	87.34		$	79.88			9.3	%
Total revenues from continuing operations		284,742			269,493			5.7	%		866,593			791,737			9.5	%
Hotel EBITDA⁽¹⁾		81,050			70,948			14.2	%		253,061			212,809			18.9	%
Hotel EBITDA margin⁽¹⁾		28.5	%		26.5	%		7.5	%		29.2	%		26.9	%		8.6	%
Income (loss) from continuing operations		1,906			(867	)		319.8	%		19,499			513			3,701.0	%
Funds From Operations (“FFO”)^{(1) (2)}		23,707			23,705			—			88,014			65,561			34.2	%
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)⁽¹⁾⁽³⁾	$	84,039		$	81,166			3.5	%	$	231,047		$	221,268			4.4	%


(1)		Included in the Financial Comparison are non-GAAP financial measures, including FFO, EBITDA, Hotel EBITDA and Hotel EBITDA margin. Further discussions of the use, limitations and importance, 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)		In accordance with the guidance provided by the United States Securities and Exchange Commission, or SEC, with respect to non-GAAP financial measures, FFO has not been adjusted to add back the following items included in net income (loss) applicable to common stockholders (in thousands):


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006			2005
Impairment loss, continuing operations	$	5,874	$	—		$	15,142		$	—
Impairment loss, discontinued operations		—		569			—			1,860
Minority interest share of impairment loss		—		—			(927	)		—
Debt extinguishment loss (gain)		216		(2,538	)		1,686			(2,538	)
Issuance costs of redeemed preferred stock		—		1,324			—			6,522
Asset disposition costs		—		—			—			1,300


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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Gain on sale of depreciable assets	$	(19,345	)	$	(9,449	)	$	(16,483	)	$	(9,624	)
Income tax arising from disposals		1,735			—			1,735			—
Impairment loss, continuing operations		5,874			—			15,142			—
Impairment loss, discontinued operations		—			569			—			1,860
Minority interest share of impairment loss								(927	)		—
Debt extinguishment loss (gain)		216			(2,538	)		1,686			(2,538	)
Asset disposition costs		—			—			—			1,300

Results of Operations

Comparison of the Three Months Ended September 30, 2006 and 2005

For the three months ended September 30, 2006, we recorded net income applicable to common stockholders of $10.4 million, or $0.17 per share, compared to net income of $0.1 million for the same period in 2005. We had income from continuing operations of $1.9 million in the third quarter of 2006, compared to a $0.9 million loss from continuing operations for the same period in 2005. We recorded a $5.9 million impairment charge in the third quarter of 2006, reducing income from continuing operations.

Total revenue from continuing operations was $284.7 million, a 5.7% increase compared to the same period in 2005. The increase in revenue is principally attributed to a 6.0% increase in RevPAR compared to same period in 2005, which is consistent with the overall performance of the sector. Our hotel renovation program adversely affected our results from the third quarter by taking rooms out of service and displacing revenues. We estimate that displacement from hotel renovations reduced RevPAR by approximately 1% in the third quarter of 2006.

In the third quarter of 2006, our increased RevPAR was attributed to increases in ADR, offset by decreases in occupancy. The changes in ADR and occupancy are largely attributed to the remixing of our business (both pre-renovation and post-renovation), the impact of renovation related displacement and softness in those markets that benefited from temporary demand from the 2005 hurricanes. Increased ADR typically improves Hotel EBITDA margin because hotels are receiving more revenue for each guest. In the third quarter of 2006, our Hotel EBITDA margin improved by 200 basis points over the same period in 2005. We estimate that displacement from hotel renovations reduced our Hotel EBITDA margin by approximately 50 basis points in the third quarter of 2006.

Total operating expenses for the third quarter of 2006 increased by $18.1 million or 7.5%, and increased as a percentage of total revenue from 89.2% to 90.8%, compared to the same period in 2005. The increase was largely the result of an impairment charge related to two hotels included in continuing operations, which increased total operating expenses by $5.9 million, or 2.1% of total revenue, in the third quarter of 2006.

In the third quarter of 2006, hotel departmental expenses, which consist of rooms expense, food and beverage expense and other operating departments, increased by $2.7 million, but decreased as a percentage of total revenue from 33.5% to 32.6%, compared to the same period in 2005. These costs are directly related to the number of hotel guests and as ADR increases relative to total revenue, should continue to improve as a percentage of total revenue.

In the third quarter of 2006, other property operating costs, which consist of general and administrative costs, marketing costs, repairs and maintenance and utility expense, increased by $3.2 million, but decreased as a percentage of total revenue from 28.5% to 28.1%, compared to the third quarter of 2005. All of the components of other property operating costs improved as a percentage of total revenue, except for utility cost, which increased from 5.4% to 5.5% principally from increased energy rates.

In the third quarter of 2006, management and franchise fee expense increased $0.6 million and remained substantially unchanged as a percentage of total revenue, compared to the same period in 2005. The increase in management and franchise fees reflects increased incentive management fees earned from improved hotel profits.

In the third quarter of 2006, taxes, insurance and lease expense increased by $1.8 million and increased as a percentage of total revenue from 10.9% to 11.0%, compared to the same period in 2005. Increases in lease expenses (resulting from increased revenues) and property insurance were partially offset by reductions in general liability insurance and taxes.

In the third quarter of 2006, corporate expenses increased by $2.4 million and increased as a percentage of total revenue from 1.8% to 2.5%, compared to the same period in 2005. The increase in corporate expenses is attributed principally to severance costs, additional asset management positions, and current year stock grants compared to the same period in 2005.

In the third quarter of 2006, depreciation expense increased $1.7 million, compared to the same period in 2005. This increase is attributed to the $118 million of hotel capital expenditures incurred in 2005 and the $117 million of hotel capital expenditures incurred in the nine months ended September 30, 2006.

In the third quarter of 2006, we recorded impairment charges for two hotels that had been previously identified as non-strategic. The impairment charge of $5.9 million resulted from decreases in estimated fair values that were not expected to be recovered during the remaining hold period.

Operating income for the third quarter of 2006 decreased by $2.9 million compared to the same period in 2005. This decrease in operating income reflects the $5.9 million impairment charge described above, which was partially offset by increased revenue and improvements in Hotel EBITDA margins, which resulted principally from increased ADR.

Net interest expense included in continuing operations for the third quarter decreased $3.8 million, or 11.8%, compared to the same period in 2005. This reflects the $259.1 million reduction in our average outstanding debt compared to the same period in 2005.

Discontinued operations includes the operating income, direct interest costs, net gains on disposition related to 20 hotels sold during the first nine months of 2006, 19 hotels disposed in 2005 and one hotel held for sale at September 30, 2006. In the third quarter of 2006, income from discontinued operations increased $6.1 million, compared to the same period in 2005 primarily from an $8.7 million increase in net gains from hotel dispositions offset by a $2.5 million decrease in gains from debt extinguishment.

Comparison of the Nine Months Ended September 30, 2006 and 2005

For the nine months ended September 30, 2006, we recorded net income applicable to common stockholders of $11.0 million or $0.18 per share, compared to a loss of $22.7 million, or $0.38 per share, for the same period in 2005. We had income from continuing operations of $19.5 million in the first nine months of 2006, compared to $0.5 million for the same period in 2005. We recorded impairment charges aggregating $15.1 million in the second and third quarters of 2006, reducing income from continuing operations.

Total revenue from continuing operations was $866.6 million, a 9.5% increase compared to the same period in 2005. The increase in revenue is principally attributed to a 9.3% increase in RevPAR compared to the same nine month period of 2005. Our hotel renovation program adversely affected our results from the nine months ended September 30, 2006, by taking rooms out of service and displacing revenues. We estimate that displacement from hotel renovations reduced RevPAR by approximately 1% in the nine months ended September 30, 2006.

In the first nine months of 2006, 91% of our increased RevPAR was attributed to increases in ADR. The changes in ADR and occupancy are largely attributed to the remixing of our business (both pre-renovation and post-renovation), the impact of renovation related displacement and softness in those markets that benefited from temporary demand from the 2005 hurricanes. Increased ADR typically improves Hotel EBITDA margin because hotels are receiving more revenue for each guest. In the first nine months of 2006, our Hotel EBITDA margin improved by 228 basis points over the same period in 2005. We estimate that displacement from hotel renovations reduced our Hotel EBITDA margin by approximately 40 basis points in the nine months ending September 30, 2006, but this was partially offset by business interruption proceeds which contributed 20 basis points of Hotel EBITDA margin.

Total operating expenses for the first nine months of 2006 increased by $65.4 million, or 9.3%, but remained substantially the same as a percentage of total revenue compared to the same period in 2005. We recorded impairment charges for three hotels included in continuing operations, which increased total operating expenses by $15.1 million, or 1.7% of total revenue in the nine months ended September 30, 2006.

In the nine months ended September 30, 2006, hotel departmental expenses, which consist of rooms expense, food and beverage expense and other operating departments, increased by $17.3 million, but decreased as a percentage of total revenue from 33.4% to 32.5% compared to the same period in 2005. These costs are directly related to the number of hotel guests and, as ADR increases relative to total revenue, should continue to improve as a percentage of total revenue.

In the nine months ended September 30, 2006, other property operating costs, which consist of general and administrative costs, marketing costs, repairs and maintenance and utility expense, increased by $13.5 million, but decreased as a percentage of total revenue from 28.3% to 27.4% compared to the same period in 2005. All of the components of other property operating costs improved as a percentage of total revenue, except for utility cost, which remained constant as a percentage of total revenue.

In the nine months ended September 30, 2006, management and franchise fee expense increased $5.5 million and increased as a percentage of total revenue from 5.1% to 5.3% compared to the same period in 2005. The increase as a percentage of total revenue reflects increased incentive management fees earned from improved hotel profits.

In the nine months ended September 30, 2006, taxes, insurance and lease expense increased by $4.7 million, but decreased as a percentage of total revenue from 11.0% to 10.6% compared to the same period in 2005. Increases in lease expenses (resulting from increased revenues) and property insurance were partially offset by reductions in general liability insurance and taxes.

In the nine months ended September 30, 2006, corporate expenses increased by $4.4 million and increased as a percentage of total revenue from 1.8% to 2.1% compared to the same period in 2005. The increase in corporate expenses is attributed principally to severance costs, additional asset management positions, and current year stock grants compared to the same period in 2005.

In the nine months ended September 30, 2006, depreciation expense increased $4.6 million compared to the same period in 2005. This increase is attributed to the $118 million of hotel capital expenditures incurred in 2005 and $117 million of hotel capital expenditures incurred in the nine months ended September 30, 2006.

In the second quarter of 2006, we designated seven additional hotels as non-strategic and tested these hotels under the provisions of SFAS No. 144 periods. Of the hotels tested, one such hotel’s projected cash flows under a reduced holding period was less than its net book value, which resulted in an impairment charge of $9.2 million to write down the hotel asset to our then-current estimate of its fair market value. In the third quarter of 2006 we recorded impairment charges for two hotels that had been previously identified as non-strategic. The impairment charge of $5.9 million was a result of decreases in estimated fair values that are not expected to be recovered during the remaining hold period.

Operating income for the nine months ended September 30, 2006 increased by $9.5 million or 10.9% compared to the same period in 2005. This improvement in operating income reflected the increased revenue and improvements in Hotel EBITDA margins, which resulted principally from increased ADR and was partially offset by impairment charges of $15.1 million.

Net interest expense included in continuing operations decreased $7.9 million, or 8.3% in the nine months ended September 30, 2006, compared to the same period in 2005. This reflects the $260.3 million reduction in our average outstanding debt compared to the same period in 2005.

In the nine months ended September 30, 2006, equity in income from unconsolidated entities increased by $1.5 million, compared to the same period in 2005. This reflects the increased RevPAR of our unconsolidated hotels and an improvement in their Hotel EBITDA margins in the nine months ended September 30, 2006.

Discontinued operations includes the operating income, direct interest costs, net gains on disposition related to 20 hotels sold during the first nine months of 2006, 19 hotels disposed in 2005 and one hotel held for sale at September 30, 2006. In the nine months ended September 30, 2006, income from discontinued operations increased $7.5 million, compared to the same period in 2005. Of this increase, $6.1 million resulted from an increase in net gains from hotel dispositions partially offset by a $0.2 million loss from debt extinguishment in 2006 compared to a $2.5 million gain from debt extinguishment in 2005. The remaining $3.7 million primarily resulted from decreased interest expense.

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 EBITDA and Hotel EBITDA 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 the limitations of such measures.

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

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


	Three Months Ended September 30,
	2006								2005
						Per Share								Per Share
	Dollars			Shares		Amount			Dollars			Shares		Amount
Net income	$	20,062							$	11,258
Preferred dividends		(9,665	)							(9,829	)
Issuance costs of redeemed preferred stock		—								(1,324	)

Net income applicable to common stockholders		10,397			61,148	$	0.17			105			59,442	$	—
Depreciation, continuing operations		27,154			—		0.44			25,487			—		0.43
Depreciation, unconsolidated entities and discontinued operations		3,539			—		0.06			7,557			—		0.13
Gain on sale of depreciable assets, before income tax		(19,345	)		—		(0.32	)		(9,449	)		—		(0.16	)
Income tax arising from dispositions		1,735			—		0.03			—			—		—
Minority interest in FelCor LP		227			1,355		—			5			2,773		(0.02	)
Conversion of options and unvested restricted stock		—			414		—			—			620		—

FFO	$	23,707			62,917	$	0.38		$	23,705			62,835	$	0.38

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


	Nine Months Ended September 30,
	2006								2005
						Per Share								Per Share
	Dollars			Shares		Amount			Dollars			Shares		Amount
Net income	$	40,059							$	13,595
Preferred dividends		(29,022	)							(29,729	)
Issuance costs of redeemed preferred stock		—								(6,522	)

Net income (loss) applicable to common stockholders		11,037			60,441	$	0.18			(22,656	)		59,398	$	(0.38	)
Depreciation, continuing operations		79,729			—		1.32			75,108			—		1.26
Depreciation, unconsolidated entities and discontinued operations		11,745			—		0.19			23,788			—		0.40
Gain on sale of depreciable assets, before income tax		(16,483	)		—		(0.27	)		(9,624	)		—		(0.16	)
Income tax arising from dispositions		1,735			—		0.03			—			—		—
Minority interest in FelCor LP		251			2,035		(0.05	)		(1,055	)		2,783		(0.07	)
Conversion of unvested restricted stock		—			356		—			—			543		—

FFO	$	88,014			62,832	$	1.40		$	65,561			62,724	$	1.05

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


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006			2005
Impairment loss, continuing operations	$	5,874	$	—		$	15,142		$	—
Impairment loss, discontinued operations		—		569			—			1,860
Minority interest share of impairment loss		—		—			(927	)		—
Debt extinguishment loss (gain)		216		(2,538	)		1,686			(2,538	)
Issuance costs of redeemed preferred stock		—		1,324			—			6,522
Asset disposition costs		—		—			—			1,300

Reconciliation of Net Income to EBITDA
(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Net income	$	20,062	$	11,258	$	40,059	$	13,595
Depreciation, continuing operations		27,154		25,487		79,729		75,108
Depreciation, unconsolidated entities and discontinued operations		3,539		7,557		11,745		23,788
Minority interest in FelCor Lodging LP		227		5		251		(1,055	)
Interest expense		29,171		33,240		90,131		98,149
Interest expense from unconsolidated entities and discontinued operations		1,444		2,799		4,793		9,512
Amortization expense		2,442		820		4,339		2,171

EBITDA	$	84,039	$	81,166	$	231,047	$	221,268

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005

Gain on sale of depreciable assets, before income tax	$	(19,345	)	$	(9,449	)	$	(16,483	)	$	(9,624	)
Income tax arising from dispositions		1,735			—			1,735			—
Impairment loss, continuing operations		5,874			—			15,142			—
Impairment loss, discontinued operations		—			569			—			—
Minority interest share of impairment loss								(927	)		1,860
Debt extinguishment loss (gain)		216			(2,538	)		1,686			(2,538	)
Asset disposition costs		—			—			—			1,300

The following tables detail our computation of Hotel EBITDA, Hotel EBITDA 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 September 30, 2006.

Hotel EBITDA and Hotel EBITDA Margin
(dollars in thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Total revenue	$	284,742		$	269,493		$	866,593		$	791,737
Retail space rental and other revenue		(211	)		(1,632	)		(501	)		(1,908	)

Hotel operating revenue		284,531			267,861			866,092			789,829
Hotel operating expenses		(203,481	)		(196,913	)		(613,031	)		(577,020	)

Hotel EBITDA	$	81,050		$	70,948		$	253,061		$	212,809

Hotel EBITDA margin⁽¹⁾		28.5	%		26.5	%		29.2	%		26.9	%


⁽¹⁾ Hotel EBITDA as a percentage of hotel revenue.

Hotel Operating Expense Composition
(dollars in thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Continuing Operations
Hotel departmental expenses:
Room	$	59,285		$	57,227		$	176,602		$	164,306
Food and beverage		26,876			26,147			84,584			80,416
Other operating departments		6,784			6,872			20,422			19,580

Other property related costs:
Administrative and general		25,882			25,470			76,589			73,589
Marketing and advertising		23,047			22,209			70,752			66,931
Repairs and maintenance		15,168			14,455			45,924			43,331
Energy		15,765			14,557			44,143			40,024

Total other property related costs		79,862			76,691			237,408			223,875
Management and franchise fees		14,302			13,702			45,642			40,088
Taxes, insurance and lease expense		16,372			16,274			48,373			48,755

Hotel operating expenses	$	203,481		$	196,913		$	613,031		$	577,020


Reconciliation of total operating expense to hotel operating expense:
Total operating expenses	$	258,529		$	240,353		$	769,651		$	704,348
Unconsolidated taxes, insurance and lease expense		1,663			1,596			4,688			4,649
Consolidated hotel lease expense		(16,519	)		(14,710	)		(47,907	)		(42,761	)
Corporate expenses		(7,164	)		(4,839	)		(18,530	)		(14,108	)
Impairment loss		(5,874	)		—			(15,142	)		—
Depreciation		(27,154	)		(25,487	)		(79,729	)		(75,108	)

Hotel operating expenses	$	203,481		$	196,913		$	613,031		$	577,020


Supplemental information:
Compensation and benefits expense (included in hotel operating expenses)	$	80,951		$	81,525		$	249,798		$	241,461

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

Reconciliation of Net Income to Hotel EBITDA
(in thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Net income	$	20,062		$	11,258		$	40,059		$	13,595
Discontinued operations		(18,156	)		(12,125	)		(20,560	)		(13,082	)
Equity in income from unconsolidated entities		(3,948	)		(3,260	)		(9,708	)		(8,229	)
Minority interests		(110	)		(1,015	)		(1,926	)		(2,263	)
Consolidated hotel lease expense		16,519			14,710			47,907			42,761
Unconsolidated taxes, insurance and lease expense		(1,663	)		(1,596	)		(4,688	)		(4,649	)
Interest expense, net		28,273			32,053			87,585			95,528
Charge-off of deferred financing costs		—			—			962			—
Early extinguishment of debt		—			—			438			—
Impairment loss		5,874			—			15,142			—
Corporate expenses		7,164			4,839			18,530			14,108
Hurricane loss		—			2,309			—			2,309
Depreciation		27,154			25,487			79,729			75,108
Loss (gain) on sale of assets		92			(80	)		92			(469	)
Retail space rental and other revenue		(211	)		(1,632	)		(501	)		(1,908	)

Hotel EBITDA	$	81,050		$	70,948		$	253,061		$	212,809

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Ratio of operating income to total revenue		9.2	%		10.8	%		11.2	%		11.0	%
Retail space rental and other revenue		—			(0.6	)		—			(0.2	)
Unconsolidated taxes, insurance and lease expense		(0.6	)		(0.6	)		(0.5	)		(0.6	)
Consolidated hotel lease expense		5.8			5.5			5.5			5.4
Corporate expenses		2.5			1.8			2.1			1.8
Impairment loss		2.1			—			1.7			—
Depreciation		9.5			9.6			9.2			9.5

Hotel EBITDA margin		28.5	%		26.5	%		29.2	%		26.9	%

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 EBITDA and Hotel EBITDA margin, are not measures of operating performance under GAAP. However, we consider these non-GAAP measures to be supplemental measures of a 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, or 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 EBITDA and Hotel EBITDA Margin

Hotel EBITDA and Hotel EBITDA 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 EBITDA and Hotel EBITDA margin are useful to investors by providing greater transparency with respect to two significant measures used by us in our financial and operational decision-making. Additionally, using these measures facilitates comparisons with other hotel REITs and hotel owners. We present Hotel EBITDA and Hotel EBITDA 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 into the ongoing operational performance of our hotels and the effectiveness of management on a property-level basis. We eliminate depreciation and amortization because, even though depreciation and amortization are property-level expenses, 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 diminishes predictably over time, accurately reflect an adjustment in the value of our assets. We also eliminate consolidated percentage rent paid to unconsolidated entities, which is effectively eliminated by minority interest expense and equity in income from unconsolidated subsidiaries, and include the cost of unconsolidated taxes, insurance and lease expense, to reflect the entire operating costs applicable to our hotels.

Limitations of Non-GAAP Measures

The use of these non-GAAP financial measures has certain limitations. FFO, EBITDA, Hotel EBITDA and Hotel EBITDA margin, as presented by us, may not be comparable to FFO, EBITDA, Hotel EBITDA and Hotel EBITDA 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 stockholders. FFO, EBITDA, Hotel EBITDA and Hotel EBITDA 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 a single financial measure.

Hotel Portfolio Composition

The following tables set forth, as of September 30, 2006, for 104 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.


					% of		% of 2005
	Hotels		Rooms		Total Rooms		Hotel EBITDA
Brand
Embassy Suites Hotels		54		13,652		46		55
Holiday Inn-branded		26		8,858		30		21
Sheraton-branded		10		3,274		11		12
Doubletree-branded		7		1,471		5		6
Other		7		2,473		8		6

Top Markets
Atlanta		8		2,385		8		8
South Florida area		5		1,434		5		6
Los Angeles area		5		1,100		4		5
Orlando		5		1,690		6		5
Dallas		7		2,359		8		4
Minneapolis		4		955		3		4
New Orleans		2		746		3		4
Phoenix		3		798		3		4
Chicago		4		1,238		4		4
Washington, D.C.		1		443		1		4
San Diego		1		600		2		3
Northern New Jersey		3		756		3		3
San Francisco Bay area		6		2,141		7		3
Philadelphia		2		729		2		3
San Antonio		3		874		3		3

Location
Suburban		45		11,167		37		37
Urban		24		7,711		26		26
Airport		23		7,335		25		23
Resort		12		3,515		12		14

Segment
Upper-upscale all-suite		65		16,035		54		64
Full service		26		8,858		30		21
Upscale		12		4,526		15		14
Limited service		1		309		1		1

Core Hotels		83		24,083		81		91
Non-Strategic Hotels		21		5,645		19		9

Hotel Operating Statistics

The following tables set forth historical occupancy, ADR and RevPAR at September 30, 2006 and 2005, and the percentage changes therein between the periods presented, for our hotels included in our consolidated portfolio of continuing operations.

Operating Statistics by Brand^(a)


	Occupancy (%)
	Three Months Ended September 30,							Nine Months Ended September 30,
	2006		2005		%Variance			2006		2005		% Variance
Embassy Suites Hotels		74.3		75.0		(0.9	)		75.4		74.4		1.4
Holiday Inn-branded hotels		69.7		73.8		(5.5	)		70.3		70.2		0.2
Sheraton-branded hotels		64.0		67.1		(4.6	)		63.0		65.4		(3.6	)
Doubletree-branded hotels		76.3		75.1		1.7			76.5		73.4		4.2
Other hotels		71.9		70.6		1.8			67.7		65.5		3.3

Total hotels		71.7		73.4		(2.3	)		71.9		71.4		0.8


	ADR ($)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2006		2005		% Variance		2006		2005		% Variance
Embassy Suites Hotels		130.44		121.00		7.8		132.54		122.87		7.9
Holiday Inn-branded hotels		101.78		94.85		7.3		99.97		93.66		6.7
Sheraton-branded hotels		116.70		106.06		10.0		122.09		108.30		12.7
Doubletree-branded hotels		126.73		112.81		12.3		130.38		117.84		10.6
Other hotels		130.47		119.81		8.9		125.54		114.29		9.8

Total hotels		120.63		111.18		8.5		121.40		111.94		8.5


	RevPAR ($)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2006		2005		% Variance		2006		2005		% Variance
Embassy Suites Hotels		96.98		90.76		6.9		99.97		91.40		9.4
Holiday Inn-branded hotels		70.97		69.95		1.5		70.32		65.75		6.9
Sheraton-branded hotels		74.72		71.21		4.9		76.96		70.82		8.7
Doubletree-branded hotels		96.74		84.67		14.3		99.72		86.45		15.3
Other hotels		93.75		84.54		10.9		84.94		74.86		13.5

Total hotels		86.52		81.60		6.0		87.34		79.88		9.3


(a)		Hotels have been excluded in both the current and prior year for those months directly impacted by hurricanes.

Operating Statistics for Our Top Markets^(a)


	Occupancy (%)
	Three Months Ended September 30,							Nine Months Ended September 30,
	2006		2005		% Variance			2006		2005		% Variance
Atlanta		68.7		74.6		(7.9	)		70.7		71.8		(1.6	)
South Florida area		72.6		74.9		(3.1	)		79.8		82.3		(3.0	)
Los Angeles area		77.2		81.8		(5.5	)		76.4		77.1		(0.9	)
Orlando		72.6		74.5		(2.5	)		78.9		79.3		(0.5	)
Dallas		53.9		53.1		1.5			56.4		50.8		10.9
Minneapolis		78.4		79.7		(1.6	)		71.5		73.6		(2.9	)
New Orleans		44.3		64.2		(31.0	)		68.1		71.3		(4.5	)
Phoenix		64.5		64.5		0.0			73.9		73.6		0.4
Chicago		80.2		79.3		1.0			74.6		74.0		0.9
Washington, D.C.		69.6		76.1		(8.5	)		67.5		75.5		(10.6	)
San Diego		88.4		88.2		0.2			83.7		84.6		(1.1	)
Northern New Jersey		70.7		69.8		1.2			70.4		70.7		(0.5	)
San Francisco Bay area		84.0		85.6		(1.9	)		77.9		75.7		2.9
Philadelphia		82.1		78.7		4.3			74.9		75.5		(0.8	)
San Antonio		77.0		81.8		(5.9	)		79.3		78.1		1.5


	ADR ($)
	Three Months Ended September 30,							Nine Months Ended September 30,
	2006		2005		% Variance			2006		2005		% Variance
Atlanta		98.96		92.42		7.1			103.15		92.77		11.2
South Florida area		105.94		102.47		3.4			141.89		125.85		12.8
Los Angeles area		148.00		129.91		13.9			139.02		124.98		11.2
Orlando		89.52		84.21		6.3			100.38		94.19		6.6
Dallas		106.95		98.11		9.0			110.23		101.46		8.6
Minneapolis		141.57		134.88		5.0			136.02		127.53		6.7
New Orleans		93.84		107.48		(12.7	)		132.64		133.74		(0.8	)
Phoenix		104.57		98.04		6.7			131.46		120.43		9.2
Chicago		141.98		120.22		18.1			132.62		113.81		16.5
Washington, D.C.		152.17		141.80		7.3			161.03		145.80		10.4
San Diego		144.02		128.40		12.2			139.69		129.92		7.5
Northern New Jersey		146.47		137.98		6.2			147.14		137.31		7.2
San Francisco Bay area		137.42		125.58		9.4			130.40		119.41		9.2
Philadelphia		128.58		114.83		12.0			127.48		115.08		10.8
San Antonio		107.27		94.19		13.9			104.40		93.16		12.1


	RevPAR ($)
	Three Months Ended September 30,							Nine Months Ended September 30,
	2006		2005		% Variance			2006		2005		% Variance
Atlanta		67.95		68.91		(1.4	)		72.95		66.65		9.5
South Florida area		76.88		76.77		0.1			113.27		103.56		9.4
Los Angeles area		114.32		106.24		7.6			106.26		96.39		10.2
Orlando		65.01		62.75		3.6			79.19		74.66		6.1
Dallas		57.69		52.14		10.6			62.15		51.57		20.5
Minneapolis		111.05		107.51		3.3			97.18		93.87		3.5
New Orleans		41.59		69.04		(39.8	)		90.33		95.35		(5.3	)
Phoenix		67.48		63.27		6.6			97.13		88.59		9.6
Chicago		113.82		95.39		19.3			98.97		84.18		17.6
Washington, D.C.		105.91		107.89		(1.8	)		108.65		110.02		(1.2	)
San Diego		127.32		113.30		12.4			116.87		109.94		6.3
Northern New Jersey		103.55		96.37		7.4			103.53		97.07		6.7
San Francisco Bay area		115.42		107.55		7.3			101.61		90.45		12.3
Philadelphia		105.55		90.42		16.7			95.44		86.84		9.9
San Antonio		82.57		77.08		7.1			82.76		72.76		13.7


(a)		Hotels have been excluded in both the current and prior year for those months directly impacted by hurricanes.

Liquidity and Capital Resources

Our principal source of cash to meet our cash requirements, including distributions to stockholders and repayments of indebtedness, is from hotel operations. For the nine months ended September 30, 2006, net cash flow provided by operating activities, consisting primarily of hotel operations, was $141 million. At September 30, 2006, we had cash on hand of $133 million, including approximately $41 million held under management agreements to meet minimum working capital requirements.

In 2006 through the date of this filing, we paid common dividends aggregating $0.55 per share for the first three quarters of 2006. Our board of directors will determine the amount of future common and preferred dividends for each quarter, based upon the actual operating results for that quarter, economic conditions, other operating trends, our financial condition and capital requirements, as well as the minimum REIT distribution requirements.

We have committed to spend in excess of $400 million over a three year period, commencing in 2006, to renovate our core hotels. We expect to use proceeds from hotel sales to fund these renovations. During the three and nine months ended September 30, 2006, we experienced significant displacement from hotel renovation that reduced revenues and Hotel EBITDA margins. We expect that the effect of ongoing renovation displacement for the remainder of 2006 and for 2007 will be significant.

We currently expect that our cash flow provided by operating activities for 2006 will be approximately $170 to $173 million. This cash flow forecast assumes that RevPAR increases by approximately 8% and Hotel EBITDA margin increases of approximately 175 basis points. Our current operating plan contemplates that we will make aggregate common dividend payments of $35 million, preferred dividend payments of $39 million and $17 million in normal recurring principal payments, leaving surplus cash flow (before capital expenditures, additional debt reduction or sale of hotels) of approximately $79 to $82 million. In 2006, we plan to spend approximately $175 million for capital expenditures, which will be funded with proceeds from the sale of non-strategic hotels and cash. In the first nine months of 2006, we sold 20 non-strategic hotels for gross proceeds aggregating $341 million. At September 30, 2006, we had 22 non-strategic hotels that we are marketing for sale, including 15 hotels that were under contract for sale. The proceeds from the sale of these remaining non-strategic hotels are expected to be approximately $350 to $375 million, and we expect to sell substantially all of these hotels by the end of 2007.

During the first quarter of 2006, our hotels in New Orleans and surrounding markets, such as Atlanta, Baton Rouge, Houston, San Antonio, and Dallas, benefited from the increase in demand for hotel rooms, resulting from the displacement of New Orleans residents and the influx of relief and construction workers following Hurricane Katrina. In the second quarter of 2006, the initial relief work was completed in New Orleans, and there was an exodus of first responders from the area. The shift away from relief workers and temporary housing to ongoing construction workers has dramatically reduced the demand in New Orleans; however, the surrounding markets continued to benefit from a strong demand for convention and group business that was moved from New Orleans, through the second quarter. In the third quarter of 2006, we began to see the temporary hurricane demand from surrounding markets subside. We expect to continue to have relatively weak performance from New Orleans in 2007 until convention and tourism return in force.

Events, including terrorist attacks, natural disasters, U.S. military involvement in the Middle East and the bankruptcy of several major corporations, had an adverse impact on the capital markets in prior years. Events, or circumstances of similar magnitude or impact, could adversely affect the availability and cost of our capital. In addition, any slowdown of the overall economy and of the lodging industry could adversely affect our operating cash flow and the availability and cost of capital for our business.

We are subject to increases in hotel operating expenses, including wage and benefit costs, repair and maintenance expenses, utilities and insurance expenses, that can fluctuate disproportionately to revenues. Operating expenses are difficult to predict and control, which can produce volatility in our operating results. Our Hotel EBITDA margins from continuing operations increased in 2005 and the first nine months of 2006. However, if our hotel RevPAR decreases and/or Hotel EBITDA margins shrink, our operations, earnings and/or cash flow could suffer a material adverse effect.

Debt

On October 16, 2006, we initiated cash tender offers for all of our outstanding $290 million senior floating rate notes due 2011 and all of our outstanding $125 million 7⁵/8% senior notes due 2007. (In connection with these tender offers, we also solicited consents to proposed amendment to the relevant indentures to eliminate certain covenants and events of default.) In addition, we will repay $129 million of outstanding debt secured by mortgages on certain of our hotels. Proceeds from our October 2006 senior note offering and new mortgage debt, together with cash proceeds from hotel sales will be used to fund the purchase price payable for tendered note and the repayment of our a portion of our existing mortgage debt.

In the first nine months of 2006, we retired approximately $257.1 million of aggregate debt with proceeds of hotel sales and cash. In connection with the early debt retirement, we recorded $1.6 million of expense in the nine months ended September 30, 2006. In the same time period we borrowed $38.9 million on our Royale Palms condominium development construction loan.

Line of Credit

Our $125 million line of credit contains certain restrictive covenants, including a leverage ratio, fixed charge coverage ratio, unencumbered leverage ratio and a maximum payout ratio. The interest on our line ranges from 175 to 225 basis points over LIBOR, based on our leverage ratio as defined in our line of credit agreement. In addition to financial covenants, our line of credit includes certain other affirmative and negative covenants, including restrictions on our ability to create or acquire wholly-owned subsidiaries; restrictions on the operation/ownership of our hotels; limitations on our ability to lease property or guarantee leases of other persons; limitations on our ability to make restricted payments (such as distributions on common and preferred stock, share repurchases and certain investments); limitations on our ability to merge or consolidate with other persons, to issue stock of our subsidiaries and to sell all or substantially all of our assets; restrictions on our ability to make investments in condominium developments; limitations on our ability to change the nature of our business; limitations on our ability to modify certain instruments, to create liens, to enter into transactions with affiliates; and limitations on our ability to enter into joint ventures. At the date of this filing, we were in compliance with all of these covenants. If operating results fall significantly below our current expectations, we may not be able to meet some or all of these covenants in which case we may be unable to borrow under our line of credit.

The breach of any of the covenants and limitations under our line of credit could result in the acceleration of amounts outstanding. Our failure to satisfy any accelerated recourse indebtedness, if in the amount of $10 million or more, could result in the acceleration of most of our other unsecured recourse indebtedness. We may not be able to refinance or repay our debt in full under those circumstances.

Our other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than our line of credit.

Payment of amounts due under our line of credit is guaranteed by us and certain of our subsidiaries who also guarantee payment of our senior debt and payment is secured by a pledge of our limited partnership interest in FelCor LP.

At September 30, 2006 we had no borrowings under our line of credit. Our interest rate on our line of credit has decreased from LIBOR plus 2.25% to LIBOR plus 1.75% during 2006 based on our leverage ratio as defined in our line of credit agreement.

Construction Loan

In 2005, we started construction on the 184 unit Royale Palms condominium development in Myrtle Beach, South Carolina. This project is more than 98% pre-sold and is expected to be completed in the summer of 2007. In conjunction with this development, we entered into a $70 million recourse construction loan facility. Through September 30, 2006, we had spent $56 million on this project and had drawn $48 million on the construction loan. On July 1, 2006, the interest on this construction loan was reduced from LIBOR plus 2.25% to LIBOR plus 2.0% under the terms of the original loan agreement.

Mortgage Debt

At September 30, 2006, we had aggregate mortgage indebtedness of approximately $735 million that was secured by 45 of our consolidated hotels with an aggregate book value of approximately $1.1 billion and by our Royale Palms condominium development. Our hotel mortgage 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 10 hotels provide for lock-box arrangements under certain circumstances. With respect to these loans, we are permitted to retain 115% of budgeted hotel operating expenses, but the remaining revenues would become subject to a lock-box arrangement if a specified debt service coverage ratio is not met. The mortgage loans secured by eight of these 10 hotels also provide that, if the debt service coverage ratios remain below a second, even lower minimum level, the lender may retain any excess cash (after deduction for 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 us. Eight of these 10 hotels, which accounted for 6% of our total revenues in 2005, are currently subject to the lock-box provisions because they failed to meet the debt service coverage ratio in 2004. These hotels currently exceed the minimum debt service coverage ratio, however, under the terms of the loan agreement, the lock-box provisions remain in place until the loan is repaid. None of these hotels have ever fallen below the lower minimum debt service coverage ratio.

Our hotel mortgage debt is non-recourse to us and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of our mortgage debt is prepayable, subject to various prepayment, yield maintenance or defeasance obligations.

Senior Notes

As a result of the strong economy, its impact on the travel and lodging industries, and our lower secured debt levels, Standard & Poor’s raised its ratings on our senior unsecured debt twice in 2006, from B- to B in January 2006 and then to B+ in October 2006 and Moody’s Investor Service raised its ratings from B1 to Ba3. As a result of the Moody’s upgrade, effective April 3, 2006, the interest rate applicable to $300 million of our senior unsecured debt maturing in 2011 decreased from 9.0% to 8.5%, reducing annualized interest expense by $1.5 million. If the credit rating on our senior debt is downgraded by Moody’s to B1 and Standard & Poor’s rating remains below BB-, the interest rate on this debt will again increase to 9%. Our publicly-traded senior unsecured notes require that we satisfy total leverage, secured leverage and interest coverage tests in order to: incur additional indebtedness except to refinance maturing debt with replacement debt, as defined under our indentures; pay dividends in excess of the minimum dividend required to meet the REIT qualification test; repurchase capital stock; or merge. As of the date of this filing, we have satisfied all such tests. Under the terms of certain of our indentures, we are prohibited from repurchasing any of our capital stock, whether common or preferred, subject to certain exceptions, so long as our debt-to-EBITDA ratio, as defined in the indentures, exceeds 4.85 to 1. Debt, as defined in the indentures, approximates our consolidated debt. EBITDA is defined in the indentures as consolidated GAAP net income, adjusted for minority interest in FelCor LP, actual cash distributions by unconsolidated entities, gains or losses from asset sales, dividends on preferred stock and extraordinary gains and losses (as defined at the date of the indentures), plus interest expense, income taxes, depreciation expense, amortization expense and other non-cash

items. Although our current debt-to-EDITDA ratio is below 4.85 to 1, a decline in our EBITDA, as a result of asset sales, adverse economic developments or an increase in our debt, could make us subject to this limitation. In addition, if we were unable to continue to satisfy the incurrence test under the indentures governing our senior unsecured notes, we may be prohibited from, among other things, incurring any additional indebtedness, except under certain specific exceptions, 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.

We currently anticipate that we will meet our financial covenant and incurrence tests based on current RevPAR expectations. For 2006, we currently anticipate that our full year 2006 portfolio RevPAR will be approximately 8% above the prior year.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competition 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. If competition requires us to reduce room rates or limits our ability to raise room rates in the future, we may not be able to adjust our room rates to reflect the effects of inflation in full, in which case our operating results and liquidity could be adversely affected.

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:

	•		our general economic and lodging industry conditions, including the anticipated continued economic growth, the realization of anticipated job growth, the impact of the United States’ military involvement in the Middle East and elsewhere, future acts of terrorism, the threat or outbreak of a pandemic disease affecting the travel industry, the impact on the travel industry of high fuel costs and increased security precautions, and the impact that the bankruptcy of additional 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 being marketed 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 September 30, 2006, approximately 76% 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 September 30, 2006
(dollars in thousands)


																						Fair
	2006			2007			2008			2009			2010			Thereafter			Total			Value
Liabilities
Fixed rate:
Debt	$	3,537		$	139,897		$	16,342		$	178,924		$	282,462		$	386,786		$	1,007,948		$	1,065,611
Average interest rate		7.92	%		7.66	%		7.88	%		7.32	%		8.70	%		8.06	%		8.05	%
Floating rate:
Debt		727			135,345			15,500			—			—			290,650			442,222			442,222
Average interest rate		6.59	%		6.76	%		7.69	%		—			—			9.36	%		8.50	%

Total debt	$	4,264		$	275,242		$	31,842		$	178,924		$	282,462		$	677,436		$	1,450,170
Average interest rate		7.69	%		7.22	%		7.79	%		7.32	%		8.70	%		8.62	%		8.19	%
Net discount																				(2,095	)

Total debt																			$	1,448,075


Interest rate swaps (floating to fixed)
Notional amount		—			—			—			—			—			100,000			100,000			2,443
Pay rate		—			—			—			—			—			7.80	%		7.80	%

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 chief 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 chief 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 chief 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.


Exhibit Number				Description of Exhibit

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

31.2				Certification of the Chief 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.

32.2				Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	FELCOR LODGING TRUST INCORPORATED
	By:	/s/ Lester C. Johnson
		Lester C. Johnson
		Senior Vice President and Principal Accounting Officer


Exhibit Number				Description of Exhibit

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

31.2				Certification of the Chief 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.

32.2				Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


		Page
PART I. — FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets September 30, 2006 and December 31, 2005 (unaudited)	3
	Consolidated Statements of Operations — For the Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)	4
	Consolidated Statements of Comprehensive Income — For the Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)	5
	Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2006 and 2005 (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	19
	Results of Operations	20
	Non-GAAP Financial Measures	23
	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 6.	Exhibits	37
SIGNATURE		38
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906