**

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**Form 10-Q**

 

**(Mark One)**

 

|   | **/X/**   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF** |
|--------|---------------------|---------------------------------------------------------|

**THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended September 30, 2007**

 

**OR**

 

|   | **/**   | **/**   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF** |
|--------|-------------------|-------------------|----------------------------------------------------------|

**THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from           to**

 

**Commission file number 333-3959-01**

 

**FelCor Lodging Limited Partnership**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    |   | **75-2544994**      |
|---------------------------------|--------|---------------------|
| (State or other jurisdiction of |   | (I.R.S. Employer    |
| incorporation or organization)  |   | Identification No.) |

 

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

 

**(972) 444-4900**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all 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.  x Yes   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 o | Non-accelerated filer x |
|---------------------------|---------------------|-------------------------|

 

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

 

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**INDEX**

 

|      |                                                                                       | Page   |
|-----------|--------------------------------------------------------------------------------------------|--------|
|      | **PART I. -- FINANCIAL INFORMATION**                                                       |   |
|      |                                                                                       |   |
| Item 1.   | Financial Statements (unaudited)                                                           | 3      |
|      | Consolidated Balance Sheets – September 30, 2007 and December 31, 2006                | 3      |
|      | Consolidated Statements of Operations – For the Three and Nine Months Ended           |   |
|      | September 30, 2007 and 2006                                                                | 4      |
|      | Consolidated Statements of Comprehensive Income – For the Three and Nine Months       |   |
|      | Ended September 30, 2007 and 2006                                                          | 5      |
|      | Consolidated Statements of Cash Flows – For the Nine Months Ended                     |   |
|      | September 30, 2007 and 2006                                                                | 6      |
|      | Notes to Consolidated Financial Statements                                                 | 7      |
| Item 2.   | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24     |
|      | General

                                                                             | 24     |
|      | Financial Comparison                                                                       | 25     |
|      | Results of Operations                                                                      | 26     |
|      | Non-GAAP Financial Measures                                                                | 28     |
|      | Hotel Portfolio Composition                                                                | 34     |
|      | Hotel Operating Statistics                                                                 | 35     |
|      | Liquidity and Capital Resources                                                            | 37     |
|      | Inflation                                                                                  | 38     |
|      | Seasonality                                                                                | 38     |
|      | Disclosure Regarding Forward-Looking Statements                                            | 39     |
| Item 3.   | Quantitative and Qualitative Disclosures About Market Risk                                 | 39     |
| Item 4.   | Controls and Procedures                                                                    | 40     |
|      |                                                                                       |   |
|      | **PART II. – OTHER INFORMATION**                                                      |   |
|      |                                                                                       |   |
| Item 6.   | Exhibits                                                                                   | 41     |
|      |                                                                                       |   |
| SIGNATURE | 42                                                                                         |
|      |                                                                                       |

 

 

2

**PART I. -- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**CONSOLIDATED BALANCE SHEETS**

**(unaudited, in thousands)**

 

| * * | **September 30,**

**2007** |   | **December 31,**

**2006** |  
 
**ASSETS**

 
Investment in hotels, net of accumulated depreciation of $671,671 at

September 30, 2007 and $612,286 at December 31, 2006

 

$

 

2,163,812

 

 

 

$

 

2,044,285

 

Investment in unconsolidated entities

 

123,924

 

 

 

111,716

 

 
Hotels held for sale

 

-   

 

 

 

133,801

 

 
 
Cash and cash equivalents

 

155,583

 

 

 

124,179

 

 
Restricted cash

 

13,736

 

 

 

22,753

 

 
Accounts receivable, net of allowance for doubtful accounts of $862 at

September 30, 2007 and $962 at December 31, 2006

 

 

46,953

 

 

 

 

33,395

 

 
Deferred expenses, net of accumulated amortization of $10,208 at

September 30, 2007 and $8,841 at December 31, 2006

 

 

8,689

 

 

 

 

9,480

 

 
Condominium development project

 

2,245

 

 

 

70,661

 

 
Other assets

 

31,207

 

 

 

32,979

 

Total assets

$

2,546,149

 

 

$

2,583,249

 

 
 
 

 

 

 

 

 

 

 

**LIABILITIES AND PARTNERS’ CAPITAL**

 
 
Debt, net of discount of $900 at September 30, 2007 and $1,089 at 

December 31, 2006

 

$

 

1,294,550

 

 

 

$

 

1,369,153

 

Distributions payable

 

27,277

 

 

 

24,078

 

 
Accrued expenses and other liabilities

 

146,186

 

 

 

139,277

 

 
 

 

 

 

 

 

 

 

 
 
Total liabilities

 

1,468,013

 

 

 

1,532,508

 

 
 

 

 

 

 

 

 

 

 
Commitments and contingencies

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 
Redeemable units at redemption value, 1,354 and 1,355 units issued and 

outstanding at September 30, 2007 and December 31, 2006, respectively

 

 

26,985

 

 

 

 

29,593

 

 
Minority interest in other partnerships

 

25,124

 

 

 

28,172

 

 
 

 

 

 

 

 

 

 

 
Partners’ capital:

 

 

 

 

 

 

 

 
Preferred units, $.01 par value, 20,000 units authorized:

 

 

 

 

 

 

 

 
Series A Cumulative Convertible Preferred Units, 12,880 units, 

issued and outstanding at September 30, 2007 and December 31, 2006

 

 

309,362

 

 

 

 

309,362

 

 
Series C Cumulative Redeemable Preferred Units, 68 units, 

issued and outstanding at September 30, 2007 and December 31, 2006

 

 

169,412

 

 

 

 

169,412

 

 
Common units, 62,440 and 62,052 units issued and outstanding at 

September 30, 2007 and December 31, 2006, respectively

 

 

519,356

 

 

 

 

498,363

 

 
Accumulated other comprehensive income

 

27,897

 

 

 

15,839

 

 
 

 

 

 

 

 

 

 

 
Total partners’ capital

 

1,026,027

 

 

 

992,976

 

 
 

 

 

 

 

 

 

 

Total liabilities, redeemable units and partners’ capital

$

2,546,149

 

 

$

2,583,249

 

 
 

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

 

3

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**For the Three and Nine Months Ended September 30, 2007 and 2006**

**(unaudited, in thousands, except for per unit data)**

 

 

**Three Months Ended**

 

**Nine Months Ended**

 
 

**September 30,**

 

**September 30,**

 
 

**2007**

 

**2006**

 

**2007**

 

**2006**

 
Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

256,696

 

 

$

247,451

 

 

$

770,766

 

 

$

758,068

 

Other revenue

 

468

 

 

 

13

 

 

 

921

 

 

 

68

 

Total revenues

 

257,164

 

 

 

247,464

 

 

 

771,687

 

 

 

758,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel departmental expenses

 

82,321

 

 

 

79,059

 

 

 

246,134

 

 

 

241,190

 

Other property related costs

 

70,119

 

 

 

68,431

 

 

 

207,260

 

 

 

204,135

 

Management and franchise fees

 

13,652

 

 

 

12,026

 

 

 

40,718

 

 

 

39,463

 

Taxes, insurance and lease expense

 

31,736

 

 

 

28,726

 

 

 

92,387

 

 

 

84,126

 

Abandoned projects

 

-   

 

 

 

-   

 

 

 

22

 

 

 

-   

 

Corporate expenses

 

3,690

 

 

 

7,164

 

 

 

15,732

 

 

 

18,530

 

Depreciation

 

28,523

 

 

 

23,917

 

 

 

80,729

 

 

 

70,096

 

Total operating expenses

 

230,041

 

 

 

219,323

 

 

 

682,982

 

 

 

657,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

27,123

 

 

 

28,141

 

 

 

88,705

 

 

 

100,596

 

Interest expense, net

 

(22,655

)

 

 

(28,030

)

 

 

(68,734

)

 

 

(86,845

)

Charge-off of deferred financing costs

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(962

)

Early extinguishment of debt

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(438

)

Income before equity in income from unconsolidated

entities, minority interests and sale of assets

 

 

4,468

 

 

 

 

111

 

 

 

 

19,971

 

 

 

 

12,351

 

Equity in income from unconsolidated entities

 

3,030

 

 

 

3,948

 

 

 

19,511

 

 

 

9,708

 

Minority interests

 

314

 

 

 

187

 

 

 

1,102

 

 

 

1,559

 

Loss on sale of other assets

 

-   

 

 

 

(92

)

 

 

-   

 

 

 

(92

)

Gain on sale of condominiums

 

354

 

 

 

-   

 

 

 

18,493

 

 

 

-   

 

Income from continuing operations

 

8,166

 

 

 

4,154

 

 

 

59,077

 

 

 

23,526

 

Discontinued operations, net of minority interests

 

(209

)

 

 

16,135

 

 

 

34,629

 

 

 

16,784

 

Net income

 

7,957

 

 

 

20,289

 

 

 

93,706

 

 

 

40,310

 

Preferred distributions

 

(9,678

)

 

 

(9,665

)

 

 

(29,034

)

 

 

(29,022

)

Net income (loss) applicable to common unitholders

$

(1,721

)

 

$

10,624

 

 

$

64,672

 

 

$

11,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic per common unit data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(0.02

)

 

$

(0.09

)

 

$

0.48

 

 

$

(0.09

)

Net income (loss)

$

(0.03

)

 

$

0.17

 

 

$

1.03

 

 

$

0.18

 

Basic weighted average common units outstanding

 

63,006

 

 

 

62,503

 

 

 

62,937

 

 

 

62,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted per common unit data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(0.02

)

 

$

(0.09

)

 

$

0.47

 

 

$

(0.09

)

Net income (loss)

$

(0.03

)

 

$

0.17

 

 

$

1.02

 

 

$

0.18

 

Diluted weighted average common units outstanding

 

63,006

 

 

 

62,503

 

 

 

63,262

 

 

 

62,476

 

 

 

 

 

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

 

4

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**For the Three and Nine Months Ended September 30, 2007 and 2006**

**(unaudited, in thousands)**

 

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

**September 30,**

 

**September 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Net income

$

7,957

 

 

$

20,289

 

 

$

93,706

 

 

$

40,310

 

Unrealized holding loss from interest rate swaps

 

-   

 

 

 

(812

)

 

 

-   

 

 

 

(377

)

Foreign currency translation adjustment

 

4,879

 

 

 

16

 

 

 

12,058

 

 

 

1,449

 

Comprehensive income

$

12,836

 

 

$

19,493

 

 

$

105,764

 

 

$

41,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

5

**FELCOR LODGING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Nine Months Ended September 30, 2007 and 2006**

**(unaudited, in thousands)**

 

* *

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

93,706

 

 

$

40,310

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

80,743

 

 

 

83,198

 

Gain on sale of assets

 

(46,981

)

 

 

(16,963

)

Amortization of deferred financing fees

 

1,786

 

 

 

2,479

 

Accretion of debt discount

 

188

 

 

 

887

 

Amortization of unearned compensation

 

3,129

 

 

 

4,339

 

Equity in income from unconsolidated entities

 

(19,511

)

 

 

(9,708

)

Distributions of income from unconsolidated entities

 

947

 

 

 

2,996

 

Impairment loss

 

-   

 

 

 

15,142

 

Charge-off of deferred financing costs

 

119

 

 

 

1,044

 

Loss on early extinguishment of debt

 

782

 

 

 

596

 

Minority interests

 

(7

)

 

 

(1,050

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(8,816

)

 

 

2,147

 

Restricted cash – operating

 

868

 

 

 

(4,230

)

Other assets

 

(2,008

)

 

 

1,127

 

Accrued expenses and other liabilities

 

7,484

 

 

 

18,296

 

Net cash flow provided by operating activities

 

112,429

 

 

 

140,610

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Improvements and additions to hotels

 

(187,794

)

 

 

(108,623

)

Additions to condominium project

 

(8,381

)

 

 

(43,060

)

Proceeds from sale of hotels

 

165,107

 

 

 

177,105

 

Proceeds from sale of condominiums

 

20,202

 

 

 

-   

 

Proceeds received from property damage insurance

 

1,853

 

 

 

7,351

 

Decrease in restricted cash – investing

 

7,656

 

 

 

462

 

Distributions of capital from unconsolidated entities

 

8,812

 

 

 

4,793

 

Capital contributions to unconsolidated entities

 

(2,150

)

 

 

(250

)

Net cash flow provided by investing activities

 

5,305

 

 

 

37,778

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings

 

7,142

 

 

 

124,897

 

Repayment of borrowings

 

(16,978

)

 

 

(205,593

)

Payment of deferred financing fees

 

(1,115

)

 

 

(1,201

)

Decrease in restricted cash – financing

 

-   

 

 

 

2,825

 

Exercise of FelCor stock options

 

5,960

 

 

 

1,407

 

Contributions from minority interest holders

 

1,989

 

 

 

1,948

 

Distributions paid to other partnerships’ minority interests

 

(5,030

)

 

 

(13,167

)

Distributions paid to preferred unitholders

 

(29,034

)

 

 

(29,035

)

Distributions paid to common unitholders

 

(50,944

)

 

 

(22,173

)

Net cash flow used in financing activities

 

(88,010

)

 

 

(140,092

)

Effect of exchange rate changes on cash

 

1,680

 

 

 

194

 

Net change in cash and cash equivalents

 

31,404

 

 

 

38,490

 

Cash and cash equivalents at beginning of periods

 

124,179

 

 

 

94,564

 

Cash and cash equivalents at end of periods

$

155,583

 

 

$

133,054

 

 

 

 

 

 

 

 

 

Supplemental cash flow information — 

 

 

 

 

 

 

 

Interest paid

$

66,889

 

 

$

77,259

 

 

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

 

6

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**

**Organization**

 

At September 30, 2007, we held ownership interests in 87 hotels and were the owner of the largest number of Embassy Suites Hotels® and Doubletree Guest Suites® hotels in North America.  Our sole general partner is FelCor Lodging Trust Incorporated, or FelCor, a Real Estate Investment Trust, or REIT.  At September 30, 2007, FelCor owned approximately a 98% interest in our operations.

 

At September 30, 2007,  we held 100% ownership interests (whether by fee, leasehold or otherwise) in 64 hotels, a 90% or greater interest in entities owning four hotels, a 75% interest in an entity owning one hotel, a 60% interest in an entity owning one hotel and 50% interests in unconsolidated entities that owned 17 hotels.  We held majority ownership interests in the operating lessees of 83 of these hotels; consequently, we include their operating revenues and expenses in our consolidated statements of operations.  The operating revenues and expenses of our remaining four hotels are unconsolidated.

 

At September 30, 2007, we had an aggregate of 63,793,644 redeemable and common units outstanding.

 

The following table reflects the distribution, by brand, of our 83 consolidated hotels included in continuing operations at September 30, 2007:

 

**Brand**

**Hotels**

 

**Rooms**

Embassy Suites Hotels

 

47

 

 

12,127

Holiday Inn®

 

17

 

 

6,305

Sheraton®

 

8

 

 

2,681

Doubletree®

 

7

 

 

1,471

Hilton®

 

2

 

 

559

Westin®

 

1

 

 

536

Other

 

1

 

 

403

Total hotels

 

83

 

 

 

 

The hotels shown in the above table are located in the United States (81 hotels in 23 states) and Canada (two hotels in Ontario), with concentrations in California (14 hotels), Florida (13 hotels) and Texas (11 hotels).  Approximately 49% of our hotel room revenues in continuing operations were generated from hotels in these states during the nine months ended September 30, 2007.

 

At September 30, 2007, of our 83 consolidated hotels included in continuing operations, (i) subsidiaries of Hilton Hotels Corporation, or Hilton, managed 54, (ii) subsidiaries of InterContinental Hotels Group, or IHG, managed 18, (iii) subsidiaries of Starwood Hotels & Resorts Worldwide, Inc., or Starwood, managed nine, and (iv) independent management companies managed two.

 

7

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**

**Organization – (continued)**

 

The information in our consolidated financial statements for the three and nine months ended September 30, 2007 and 2006 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, 2007 and 2006, 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, 2006,included in our Annual Report on Form 10-K.  Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of actual operating results for the entire year. 

 

**2.**

**Investment in Unconsolidated Entities**

 

We owned 50% interests in joint venture entities that owned 17 hotels and leased three of these hotels at September 30, 2007, and owned 19 hotels and leased four hotels at December 31, 2006.  We also owned a 50% interest in joint venture entities that own real estate in Myrtle Beach, South Carolina and provide condominium management services.  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.

 

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

 

 

**September 30,**

**2007**

 

**December** **31, 2006**

Balance sheet information:  **

 

 

 

 

 

Investment in hotels, net of accumulated depreciation

$

277,577

 

$

260,628

Total assets

$

317,576

 

$

297,712

Debt

$

190,401

 

$

197,462

Total liabilities

$

201,729

 

$

203,659

Equity

$

115,847

 

$

94,053

 

Debt of our unconsolidated entities at September 30, 2007 and December 31, 2006, consisted entirely of non-recourse mortgage debt.

 

8

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**2.**

**Investment in Unconsolidated Entities – (continued)**

 

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,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Total revenues

$

21,690

 

 

$

23,062

 

 

$

62,538

 

 

$

64,572

 

Net income

$

7,606

 

 

$

8,734

 

 

$

35,712

(a)

 

$

21,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to FelCor LP

$

3,803

 

 

$

4,367

 

 

$

17,856

 

 

$

10,964

 

Additional gain on sale related to basis difference

 

-   

 

 

 

-   

 

 

 

3,336

(a)

 

 

-   

 

Tax related to sale of asset by venture(b)

 

(306

)

 

 

-   

 

 

 

(306

)

 

 

-   

 

Depreciation of cost in excess of book value

 

(467

)

 

 

(419

)

 

 

(1,375

)

 

 

(1,256

)

Equity in income from unconsolidated entities

$

3,030

 

 

$

3,948

 

 

$

19,511

 

 

$

9,708

 

 

 

(a)

In the first quarter of 2007, a 50% owned joint venture entity sold its Embassy Suites Hotel in Covina, California.  The sale of this hotel resulted in a gain of $15.6 million for this venture.  Our basis in this unconsolidated hotel was lower than the venture’s basis, resulting in an additional gain on sale.

 

(b)

In the third quarter of 2007, a 50% owned joint venture entity sold its Hampton Inn® in Hays, Kansas for an insignificant book gain.  This sale triggered a $0.3 million tax obligation for FelCor.

 

 

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

 

 

**September 30,**

**2007**

 

**December 31, 2006**

Hotel investments

$

50,116

 

 

$

39,975

 

Cost in excess of book value of hotel investments

 

63,213

 

 

 

61,253

 

Other investments

 

12,631

 

 

 

12,179

 

Hotel lessee investments

 

(2,036

)

 

 

(1,691

)

 

$

123,924

 

 

$

111,716

 

 

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,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Hotel investments

$

2,510

 

 

$

3,398

 

 

$

19,344

 

 

$

9,480

 

Other investments

 

667

 

 

 

719

 

 

 

548

 

 

 

666

 

Hotel lessee investments

 

(147

)

 

 

(169

)

 

 

(381

)

 

 

(438

)

 

$

3,030

 

 

$

3,948

 

 

$

19,511

 

 

$

9,708

 

 

 

9

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**3.**       **Debt**

 

Debt at September 30, 2007 and December 31, 2006 consisted of the following (in thousands):

 

* *

 

 

 

**Balance Outstanding,**

**Net of Discount**

 

**Encumbered**

**Interest Rate at**

**Maturity**

**September 30,**

**December 31,**

 

 

**Hotels**

 

 

**September 30, 2007**

 

 

**Date**

 

 

**2007**

 

 

**2006**

 

Line of credit(a)

none

 

L + 0.80

 

August 2011

$

-   

 

$

-   

 

Senior term notes

none

 

8.50

 

June 2011

 

299,100

 

 

298,911

 

Senior term notes

none

 

L + 1.875

 

December 2011

 

215,000

 

 

215,000

 

Total line of credit and 

senior debt(b)

 

 

 

7.98

 

 

 

 

514,100

 

 

 

513,911

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage debt(c)

 

12 hotels

 

 

L + 0.93

 

November 2008

 

250,000

 

 

250,000

 

Mortgage debt

 

7 hotels

 

 

6.57

 

June 2009-2014

 

89,560

 

 

97,553

 

Mortgage debt

 

7 hotels

 

 

7.32

 

March 2009

 

121,710

 

 

124,263

 

Mortgage debt

 

8 hotels

 

 

8.70

 

May 2010

 

166,884

 

 

169,438

 

Mortgage debt

 

6 hotels

 

 

8.73

 

May 2010

 

120,345

 

 

122,578

 

Mortgage debt

 

1 hotel

 

 

L + 2.85

 

August 2008

 

15,500

 

 

15,500

 

Mortgage debt

 

1 hotel

 

 

5.81

 

July 2016

 

12,600

 

 

12,861

 

Other

 

1 hotel   

 

 

9.17

 

August 2011

 

3,851

 

 

4,452

 

Construction loan(d)

 

-

 

 

-

 

-

 

-   

 

 

58,597

 

Total mortgage debt(b)

 

43 hotels

 

 

7.54

 

 

 

780,450

 

 

855,242

 

Total 

 

 

7.72

%

 

 

$

1,294,550

 

$

1,369,153

 

 

 

(a)

We have a borrowing capacity of $250 million on our line of credit.  The interest on this line can range from L + 80 to L + 150 basis points, based on our leverage ratio as defined in our line of credit agreement.  We can exercise a one-year extension option if we meet certain requirements under the agreement.  

 

(b)

Interest rates are calculated based on the weighted average debt outstanding at September 30, 2007.

 

(c)

This debt has three one-year extension options.

 

(d)

In the second quarter of 2007, we repaid in full a recourse construction loan facility for the development of a 184-unit condominium project in Myrtle Beach, South Carolina.

 

We reported interest expense of $22.7 million and $28.0 million for the three months ended September 30, 2007 and 2006, respectively, which is net of: (i) interest income of $2.2 million and $0.9 million, respectively, and (ii) capitalized interest of $1.1 million and $0.9 million, respectively.  We reported interest expense of $68.7 million and $86.8 million for the nine months ended September 30, 2007 and 2006, respectively, which is net of: (i) interest income of $4.9 million and $2.5 million, respectively, and (ii) capitalized interest of $3.9 million and $2.1 million, respectively.

 

In August 2007, we amended our line of credit agreement to increase the amount available under the line from $125 million to $250 million, provide the ability to further increase the facility up to $500 million under certain conditions, reduce certain fees and costs including the interest rates applicable to borrowings, improve certain financial covenants and extend the initial maturity from January 2009 to August 2011 with the right to extend for an additional one-year period under certain conditions.  At September 30, 2007, we had no borrowings outstanding under our line of credit.  

 

10

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**4.**

**Hotel Operating Revenue, Departmental Expenses and Other Property Related 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,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Room revenue

$

212,347

 

 

$

205,009

 

 

$

633,483

 

 

$

623,974

 

Food and beverage revenue

 

32,161

 

 

 

29,170

 

 

 

99,146

 

 

 

94,273

 

Other operating departments

 

12,188

 

 

 

13,272

 

 

 

38,137

 

 

 

39,821

 

Total hotel operating revenue

$

256,696

 

 

$

247,451

 

 

$

770,766

 

 

$

758,068

 

 

For the first nine months of both 2007 and 2006, more than 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, which are recorded as a bad debt expense.  

 

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

 

 

**Three Months Ended September 30,**

 

**2007**

 

**2006**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

Room

$

52,553

 

 

20.5

%

 

$

50,617

 

 

20.4

%

Food and beverage

 

25,023

 

 

9.8

 

 

 

22,563

 

 

9.1

 

Other operating departments

 

4,745

 

 

1.8

 

 

 

5,879

 

 

2.4

 

Total hotel departmental expenses

$

82,321

 

 

32.1

%

 

$

79,059

 

 

31.9

%

 

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

Room

$

154,394

 

 

20.0

%

 

$

151,593

 

 

20.0

%

Food and beverage

 

76,213

 

 

9.9

 

 

 

71,764

 

 

9.5

 

Other operating departments

 

15,527

 

 

2.0

 

 

 

17,833

 

 

2.3

 

Total hotel departmental expenses

$

246,134

 

 

31.9

%

 

$

241,190

 

 

31.8

%

 

 

11

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**4.**

**Hotel Operating Revenue, Departmental Expenses and Other Property Related Costs – (continued)**

 

The following table summarizes the components of other property related costs from continuing operations

(in thousands):

 

 

**Three Months Ended September 30,**

 

**2007**

 

**2006**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

Hotel general and administrative expense

$

21,694

 

 

8.5

%

 

$

22,020

 

 

9.0

%

Marketing

 

21,085

 

 

8.2

 

 

 

20,025

 

 

8.1

 

Repair and maintenance

 

13,886

 

 

5.4

 

 

 

12,971

 

 

5.2

 

Energy

 

13,454

 

 

5.2

 

 

 

13,415

 

 

5.4

 

Total other property related costs

$

70,119

 

 

27.3

%

 

$

68,431

 

 

27.7

%

 

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

Hotel general and administrative expense

$

65,585

 

 

8.5

%

 

$

65,711

 

 

8.7

%

Marketing

 

63,281

 

 

8.2

 

 

 

61,518

 

 

8.1

 

Repair and maintenance

 

41,347

 

 

5.4

 

 

 

39,411

 

 

5.2

 

Energy

 

37,047

 

 

4.8

 

 

 

37,495

 

 

4.9

 

Total other property related costs

$

207,260

 

 

26.9

%

 

$

204,135

 

 

26.9

%

 

Hotel employee compensation and benefit expenses of $72.7 million and $68.4 million for the three months ended September 30, 2007 and 2006, respectively, and $218.1 million and $212.0 million for the nine months ended September 30, 2007 and 2006, respectively, are included in hotel departmental expenses and other property related costs.

 

12

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**5.**

**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,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Operating lease expense(a)

$

18,783

 

 

$

18,193

 

 

$

54,471

 

 

$

52,126

 

Real estate and other taxes

 

8,707

 

 

 

8,014

 

 

 

25,926

 

 

 

25,390

 

Property insurance, general liability insurance and other

 

4,246

 

 

 

2,519

 

 

 

11,990

 

 

 

6,610

 

Total taxes, insurance and lease expense

$

31,736

 

 

$

28,726

 

 

$

92,387

 

 

$

84,126

 

 

 

(a)

Operating lease expense includes hotel lease expense of $16.2 million and $15.9 million associated with 13 hotels leased by us from unconsolidated subsidiaries and $2.6 million and $2.3 million of ground lease expense for the three months ended September 30, 2007 and 2006, respectively, and hotel lease expense of $47.7 million and $45.9 million and $6.7 million and $6.2 million of ground lease expense for the nine months ended September 30, 2007 and 2006, respectively.  Included in operating lease expense is percentage rent based on operating results of $10.4 million and $9.9 million, respectively, for the three months ended September 30, 2007 and 2006, and $29.4 million and $27.3 million, respectively, for the nine months ended September 30, 2007 and 2006.

 

**6.**

**Condominium Project**

 

Development of our 184-unit Royale Palms condominium project in Myrtle Beach, South Carolina was substantially completed in the first quarter of 2007.  During the three months ended September 30, 2007, we recognized gains, net of tax, under the completed contract method of $0.4 million from the sale of one unit, and for the nine months of $18.5 million from the sale of 178 units.  We expect that the remaining six condominium units will be sold on a selective basis to maximize the selling price.  The sale of the 178 units resulted in net proceeds of $87.2 million, of which $67.0 million was paid directly to the construction lender as payment in full of the outstanding balance of our construction loan.  

 

13

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**7.**

**Discontinued Operations**

 

The results of operations of 11 hotels sold in 2007 and 31 hotels sold in 2006 are included in discontinued operations.  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,**

 

**2007**(a)

 

**2006**

 

**2007**

 

**2006**

Operating revenue

$

74

 

 

$

50,136

 

 

$

26,522

 

 

$

172,226

 

Operating expenses(b)

 

(276

)

 

 

(50,789

)

 

 

(18,371

)

 

 

(169,068

)

Operating income

 

(202

)

 

 

(653

)

 

 

8,151

 

 

 

3,158

 

Direct interest costs, net

 

4

 

 

 

(303

)

 

 

(15

)

 

 

(946

)

Gain (loss) on sale of hotels

 

-   

 

 

 

18,182

 

 

 

28,488

 

 

 

15,320

 

Charge-off of deferred debt costs

 

-   

 

 

 

(82

)

 

 

(119

)

 

 

(82

)

Loss on early extinguishment of debt

 

-   

 

 

 

(158

)

 

 

(782

)

 

 

(158

)

Minority interests

 

(11

)

 

 

(851

)

 

 

(1,094

)

 

 

(508

)

Income (loss) from discontinued operations

$

(209

)

 

$

16,135

 

 

$

34,629

 

 

$

16,784

 

 

 

(a)

The activity during the three months ended September 30, 2007, related to changes in accrual estimates on hotels sold in prior periods.

 

(b)

Includes $5.9 million and $15.1 million of impairment losses for the three and nine months ended September 30, 2006, respectively.

 

During the nine months ended September 30, 2007, we sold ten consolidated hotels for aggregate gross proceeds of $169.0 million and one unconsolidated hotel for gross proceeds of $22.0 million for which the operations were consolidated because of our majority ownership of the lessee.  

 

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 144.  Of the hotels tested, one such hotel failed the test under SFAS No. 144, 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 addition, in the third quarter of 2006, we recorded an impairment charge of $5.9 million on two hotels that had previously been identified as non-strategic due to decreases in estimated fair values.

 

The hotels 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.

 

14

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**8.**

**Earnings (Loss) Per Unit**

 

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

 

 

**Three Months Ended**

 

**Nine Months Ended**

 
 

**September 30,**

 

**September 30,**

 
 

**2007**

 

**2006**

 

**2007**

 

**2006**

 
 
Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income from continuing operations

$

8,166

 

 

$

4,154

 

 

$

59,077

 

 

$

23,526

 

 
Less: Preferred distributions

 

(9,678

)

 

 

(9,665

)

 

 

(29,034

)

 

 

(29,022

)

 
Income (loss) from continuing operations 

applicable to common unitholders

 

 

(1,512

 

)

 

 

 

(5,511

 

)

 

 

 

30,043

 

 

 

 

(5,496

 

)

 
Discontinued operations

 

(209

)

 

 

16,135

 

 

 

34,629

 

 

 

16,784

 

 
Net income (loss) applicable to common unitholders

$

(1,721

)

 

$

10,624

 

 

$

64,672

 

 

 

11,288

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Denominator for basic earnings per unit

 

63,006

 

 

 

62,503

 

 

 

62,937

 

 

 

62,476

 

 
Denominator for diluted earnings per unit

 

63,006

 

 

 

62,503

 

 

 

63,262

 

 

 

62,476

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Earnings (loss) per unit data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income (loss) from continuing operations

$

(0.02

)

 

$

(0.09

)

 

$

0.48

 

 

$

(0.09

)

 
Discontinued operations

$

(0.01

)

 

$

0.26

 

 

$

0.55

 

 

$

0.27

 

 
Net income (loss)

$

(0.03

)

 

$

0.17

 

 

$

1.03

 

 

$

0.18

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Income (loss) from continuing operations

$

(0.02

)

 

$

(0.09

)

 

$

0.47

 

 

$

(0.09

)

 
Discontinued operations

$

(0.01

)

 

$

0.26

 

 

$

0.55

 

 

$

0.27

 

 
Net income (loss)

$

(0.03

)

 

$

0.17

 

 

$

1.02

 

 

$

0.18

 

 

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

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

**September 30,**

 

**September 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

FelCor’s options and unvested restricted stock

 

346

 

 

 

414

 

 

 

-   

 

 

 

356

 

Series A convertible preferred units

 

9,985

 

 

 

9,985

 

 

 

9,985

 

 

 

9,985

 

 

Series A preferred distributions that would be excluded from net income applicable to common unitholders, if these Series A preferred units were dilutive, were $6.3 million for both the three months ended September 30, 2007 and 2006, and $18.8 million for the nine months ended September 30, 2007 and 2006.

 

15

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**9.**

**Accounting for Uncertainty in Income Taxes**

 

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 Statement109, *Accounting for Income Taxes*.  We recorded no cumulative effect as a result of our adoption of FIN 48 on January 1, 2007.

 

**10.**

**Application of New Accounting Standards**

 

In September 2006, the FASB issued Statement of Financial Accounting Standards Number 157, *Fair Value Measurements*(SFAS 157).  SFAS 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 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data.  SFAS 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. 

 

In February 2007, the FASB issued Statement of Financial Accounting Standards Number 159, *The Fair Value Option for Financial Assets and Financial Liabilities* (SFAS 159).  SFAS 159 permits companies to choose to measure many financial assets and liabilities at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each reporting date.  SFAS 159 is effective on January 1, 2008, and if adopted the provisions of this statement are required to be applied prospectively.  We are currently assessing the impact of SFAS 159 on our consolidated financial statements.

 

16

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

**Consolidating Financial Information**

 

Certain of our wholly-owned subsidiaries (FelCor/CSS Holdings, L.P.; FelCor Pennsylvania Company, L.L.C.; FelCor Lodging Holding Company, L.L.C.; Myrtle Beach Hotels, L.L.C.; FelCor TRS Borrower 1, L.P.; FelCor TRS Borrower 3, L.P.; FelCor TRS Borrower 4, L.L.C.; FelCor TRS Guarantor, L.P.; Center City Hotel Associates; FelCor Lodging Company, L.L.C.; FelCor TRS Holdings, L.P.; FHAC Texas Holdings, L.P.; FelCor Omaha Hotel Company, L.L.C.; FelCor Canada Co.; FelCor/St. Paul Holdings, L.P. and FelCor Hotel Asset Company, L.L.C., collectively, “Subsidiary Guarantors”), together with FelCor, guarantee, unconditionally and jointly and severally, of our senior debt.  The following tables present consolidating information for the Subsidiary Guarantors.

 

**CONSOLIDATING BALANCE SHEET**

**September 30, 2007**

**(in thousands)**

 

**ASSETS**

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

 

Net investment in hotel properties

$

119,436

 

 

$

973,275

 

$

1,071,101

 

 

$

-   

 

 

$

2,163,812

 

Equity investment in consolidated entities

 

1,314,656

 

 

 

-   

 

 

-   

 

 

 

(1,314,656

)

 

 

-   

 

Investment in unconsolidated entities

 

93,776

 

 

 

28,487

 

 

1,661

 

 

 

-   

 

 

 

123,924

 

Cash and cash equivalents

 

91,327

 

 

 

55,266

 

 

8,990

 

 

 

-   

 

 

 

155,583

 

Restricted cash

 

488

 

 

 

2,857

 

 

10,391

 

 

 

-   

 

 

 

13,736

 

Accounts receivable

 

7,295

 

 

 

39,416

 

 

242

 

 

 

-   

 

 

 

46,953

 

Deferred assets

 

4,024

 

 

 

417

 

 

4,248

 

 

 

-   

 

 

 

8,689

 

Condominium development project

 

-   

 

 

 

-   

 

 

2,245

 

 

 

-   

 

 

 

2,245

 

Other assets

 

14,087

 

 

 

16,759

 

 

361

 

 

 

-   

 

 

 

31,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,645,089

 

 

$

1,116,477

 

$

1,099,239

 

 

$

(1,314,656

)

 

$

2,546,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**LIABILITES AND PARTNERS’CAPITAL**

Debt

$

529,600

 

 

$

125,561

 

$

639,389

 

 

$

-   

 

 

$

1,294,550

 

Distributions payable

 

27,277

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

27,277

 

Accrued expenses and other liabilities

 

35,200

 

 

 

97,547

 

 

13,439

 

 

 

-   

 

 

 

146,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

592,077

 

 

 

223,108

 

 

652,828

 

 

 

-   

 

 

 

1,468,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units, at redemption value

 

26,985

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

26,985

 

Minority interest – other partnerships

 

-   

 

 

 

74

 

 

25,050

 

 

 

-   

 

 

 

25,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred units

 

478,774

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

478,774

 

Common units

 

547,253

 

 

 

865,398

 

 

421,361

 

 

 

(1,314,656

)

 

 

519,356

 

Accumulated other comprehensive income

 

-   

 

 

 

27,897

 

 

-   

 

 

 

-   

 

 

 

27,897

 

Total partners’ capital

 

1,026,027

 

 

 

893,295

 

 

421,361

 

 

 

(1,314,656

)

 

 

1,026,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable units

and partners' capital

$

1,645,089

 

 

$

1,116,477

 

$

1,099,239

 

 

$

(1,314,656

)

 

$

2,546,149

 

 

 

17

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

**Consolidating Financial Information – (continued)**

 

**CONDENSED CONSOLIDATING BALANCE SHEET**

**December 31, 2006**

**(in thousands)**

 

**ASSETS**

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

 

Net investment in hotel properties

$

114,833

 

 

$

923,778

 

$

1,005,674

 

 

$

-   

 

 

$

2,044,285

 

Equity investment in consolidated entities

 

1,320,816

 

 

 

-   

 

 

-   

 

 

 

(1,320,816

)

 

 

-   

 

Investment in unconsolidated entities

 

81,160

 

 

 

28,841

 

 

1,715

 

 

 

-   

 

 

 

111,716

 

Hotels held for sale

 

-   

 

 

 

88,926

 

 

44,875

 

 

 

-   

 

 

 

133,801

 

Cash and cash equivalents

 

69,728

 

 

 

46,966

 

 

7,485

 

 

 

-   

 

 

 

124,179

 

Restricted cash

 

453

 

 

 

3,248

 

 

19,052

 

 

 

-   

 

 

 

22,753

 

Accounts receivable

 

239

 

 

 

33,154

 

 

2

 

 

 

-   

 

 

 

33,395

 

Deferred assets

 

4,236

 

 

 

639

 

 

4,605

 

 

 

-   

 

 

 

9,480

 

Condominium development project

 

-   

 

 

 

-   

 

 

70,661

 

 

 

-   

 

 

 

70,661

 

Other assets

 

15,421

 

 

 

16,398

 

 

1,160

 

 

 

-   

 

 

 

32,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,606,886

 

 

$

1,141,950

 

$

1,155,229

 

 

$

(1,320,816

)

 

$

2,583,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**LIABILITES AND PARTNERS’CAPITAL**

Debt

$

529,411

 

 

$

128,715

 

$

711,027

 

 

$

-   

 

 

$

1,369,153

 

Distributions payable

 

24,078

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

24,078

 

Accrued expenses and other liabilities

 

30,828

 

 

 

98,345

 

 

10,104

 

 

 

-   

 

 

 

139,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

584,317

 

 

 

227,060

 

 

721,131

 

 

 

-   

 

 

 

1,532,508

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units, at redemption value

 

29,593

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

29,593

 

Minority interest – other partnerships

 

-   

 

 

 

(115

)

 

28,287

 

 

 

-   

 

 

 

28,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred units

 

478,774

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

478,774

 

Common units

 

514,202

 

 

 

899,166

 

 

405,811

 

 

 

(1,320,816

)

 

 

498,363

 

Accumulated other comprehensive income

 

-   

 

 

 

15,839

 

 

-   

 

 

 

-   

 

 

 

15,839

 

Total partners’ capital

 

992,976

 

 

 

915,005

 

 

405,811

 

 

 

(1,320,816

)

 

 

992,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable units

and partners' capital

$

1,606,886

 

 

$

1,141,950

 

$

1,155,229

 

 

$

(1,320,816

)

 

$

2,583,249

 

 

 

18

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

**Consolidating Financial Information -- (continued)**

 

**CONDENSED****CONSOLIDATING STATEMENT OF OPERATIONS**

**For the Three Months Ended September 30, 2007**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

256,696

 

 

$

-   

 

 

$

-   

 

 

$

256,696

 

Percentage lease revenue

 

7,859

 

 

 

-   

 

 

 

33,864

 

 

 

(41,723

)

 

 

-   

 

Other revenue

 

2

 

 

 

-   

 

 

 

466

 

 

 

-   

 

 

 

468

 

Total revenue

 

7,861

 

 

 

256,696

 

 

 

34,330

 

 

 

(41,723

)

 

 

257,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

166,092

 

 

 

-   

 

 

 

-   

 

 

 

166,092

 

Taxes, insurance and lease expense

 

853

 

 

 

67,006

 

 

 

5,600

 

 

 

(41,723

)

 

 

31,736

 

Corporate expenses

 

220

 

 

 

2,524

 

 

 

946

 

 

 

-   

 

 

 

3,690

 

Depreciation

 

2,383

 

 

 

13,562

 

 

 

12,578

 

 

 

-   

 

 

 

28,523

 

Total operating expenses

 

3,456

 

 

 

249,184

 

 

 

19,124

 

 

 

(41,723

)

 

 

230,041

 

Operating income

 

4,405

 

 

 

7,512

 

 

 

15,206

 

 

 

-   

 

 

 

27,123

 

Interest expense, net

 

(5,760

)

 

 

(1,696

)

 

 

(15,199

)

 

 

-   

 

 

 

(22,655

)

Income (loss) before equity in income from

unconsolidated entities, minority interests and

sale of assets

 

(1,355

)

 

 

5,816

 

 

 

7

 

 

 

-   

 

 

 

4,468

 

Equity in income from consolidated entities

 

6,341

 

 

 

-   

 

 

 

-   

 

 

 

(6,341

)

 

 

-   

 

Equity in income from unconsolidated entities

 

2,916

 

 

 

132

 

 

 

(18

)

 

 

-   

 

 

 

3,030

 

Minority interests in other partnerships

 

-   

 

 

 

675

 

 

 

(361

)

 

 

-   

 

 

 

314

 

Gain on condominiums

 

-   

 

 

 

-   

 

 

 

354

 

 

 

-   

 

 

 

354

 

Income (loss) from continuing operations

 

7,902

 

 

 

6,623

 

 

 

(18

)

 

 

(6,341

)

 

 

8,166

 

Discontinued operations from consolidated 

entities

 

55

 

 

 

(295

)

 

 

31

 

 

 

-   

 

 

 

(209

)

Net income

 

7,957

 

 

 

6,328

 

 

 

13

 

 

 

(6,341

)

 

 

7,957

 

Preferred distributions

 

(9,678

)

 

 

-   

 

 

 

-

 

 

 

-   

 

 

 

(9,678

)

Net income applicable to unitholders

$

(1,721

)

 

$

6,328

 

 

$

13

 

 

$

(6,341

)

 

$

(1,721

)

 

 

 

 

19

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

**Consolidating Financial Information -- (continued)**

 

**CONDENSED****CONSOLIDATING STATEMENT OF OPERATIONS**

**For the Three Months Ended September 30, 2006**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

247,451

 

 

$

-   

 

 

$

-   

 

 

$

247,451

 

Percentage lease revenue

 

6,920

 

 

 

-   

 

 

 

33,599

 

 

 

(40,519

)

 

 

-   

 

Other revenue

 

(7

)

 

 

-   

 

 

 

20

 

 

 

-   

 

 

 

13

 

Total revenue

 

6,913

 

 

 

247,451

 

 

 

33,619

 

 

 

(40,519

)

 

 

247,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

159,516

 

 

 

-   

 

 

 

-   

 

 

 

159,516

 

Taxes, insurance and lease expense

 

920

 

 

 

63,901

 

 

 

4,424

 

 

 

(40,519

)

 

 

28,726

 

Corporate expenses

 

423

 

 

 

4,632

 

 

 

2,109

 

 

 

-   

 

 

 

7,164

 

Depreciation

 

2,139

 

 

 

11,712

 

 

 

10,066

 

 

 

-   

 

 

 

23,917

 

Total operating expenses

 

3,482

 

 

 

239,761

 

 

 

16,599

 

 

 

(40,519

)

 

 

219,323

 

Operating income

 

3,431

 

 

 

7,690

 

 

 

17,020

 

 

 

-   

 

 

 

28,141

 

Interest expense, net

 

(14,993

)

 

 

(2,628

)

 

 

(10,409

)

 

 

-   

 

 

 

(28,030

)

Income (loss) before equity in income from

unconsolidated entities, minority interests and

sale of assets

 

(11,562

)

 

 

5,062

 

 

 

6,611

 

 

 

-   

 

 

 

111

 

Equity in income from consolidated entities

 

27,960

 

 

 

-   

 

 

 

-   

 

 

 

(27,960

)

 

 

-   

 

Equity in income from unconsolidated entities

 

3,411

 

 

 

555

 

 

 

(18

)

 

 

-   

 

 

 

3,948

 

Minority interests in other partnerships

 

-   

 

 

 

545

 

 

 

(358

)

 

 

-   

 

 

 

187

 

Loss on sale of assets

 

-   

 

 

 

(92

)

 

 

-   

 

 

 

-   

 

 

 

(92

)

Income from continuing operations

 

19,809

 

 

 

6,070

 

 

 

6,235

 

 

 

(27,960

)

 

 

4,154

 

Discontinued operations from consolidated 

entities

 

480

 

 

 

8,915

 

 

 

6,740

 

 

 

-   

 

 

 

16,135

 

Net income

 

20,289

 

 

 

14,985

 

 

 

12,975

 

 

 

(27,960

)

 

 

20,289

 

Preferred distributions

 

(9,665

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(9,665

)

Net income applicable to unitholders

$

10,624

 

 

$

14,985

 

 

$

12,975

 

 

$

(27,960

)

 

$

10,624

 

 

 

20

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

**Consolidating Financial Information -- (continued)**

 

**CONDENSED****CONSOLIDATING STATEMENT OF OPERATIONS**

**For the Nine Months Ended September 30, 2007**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

770,766

 

 

$

-   

 

 

$

-   

 

 

$

770,766

 

Percentage lease revenue

 

20,609

 

 

 

-   

 

 

 

114,650

 

 

 

(135,259

)

 

 

-   

 

Other revenue

 

119

 

 

 

-   

 

 

 

802

 

 

 

-   

 

 

 

921

 

Total revenue

 

20,728

 

 

 

770,766

 

 

 

115,452

 

 

 

(135,259

)

 

 

771,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

494,112

 

 

 

-   

 

 

 

-   

 

 

 

494,112

 

Taxes, insurance and lease expense

 

3,111

 

 

 

207,829

 

 

 

16,706

 

 

 

(135,259

)

 

 

92,387

 

Abandoned projects

 

-   

 

 

 

22

 

 

 

-   

 

 

 

-   

 

 

 

22

 

Corporate expenses

 

870

 

 

 

9,841

 

 

 

5,021

 

 

 

-   

 

 

 

15,732

 

Depreciation

 

6,555

 

 

 

38,862

 

 

 

35,312

 

 

 

-   

 

 

 

80,729

 

Total operating expenses

 

10,536

 

 

 

750,666

 

 

 

57,039

 

 

 

(135,259

)

 

 

682,982

 

Operating income

 

10,192

 

 

 

20,100

 

 

 

58,413

 

 

 

-   

 

 

 

88,705

 

Interest expense, net

 

(18,229

)

 

 

(5,363

)

 

 

(45,142

)

 

 

-   

 

 

 

(68,734

)

Income (loss) before equity in income from

unconsolidated entities, minority interests

and sale of assets

 

(8,037

)

 

 

14,737

 

 

 

13,271

 

 

 

-   

 

 

 

19,971

 

Equity in income from consolidated entities

 

81,408

 

 

 

-   

 

 

 

-   

 

 

 

(81,408

)

 

 

-   

 

Equity in income from unconsolidated entities

 

19,975

 

 

 

(410

)

 

 

(54

)

 

 

-   

 

 

 

19,511

 

Minority interests in other partnerships

 

-   

 

 

 

1,800

 

 

 

(698

)

 

 

-   

 

 

 

1,102

 

Gain on condominiums

 

-   

 

 

 

-   

 

 

 

18,493

 

 

 

-   

 

 

 

18,493

 

Income from continuing operations

 

93,346

 

 

 

16,127

 

 

 

31,012

 

 

 

(81,408

)

 

 

59,077

 

Discontinued operations from consolidated 

entities

 

360

 

 

 

32,030

 

 

 

2,239

 

 

 

-   

 

 

 

34,629

 

Net income

 

93,706

 

 

 

48,157

 

 

 

33,251

 

 

 

(81,408

)

 

 

93,706

 

Preferred distributions

 

(29,034

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(29,034

)

Net income applicable to unitholders

$

64,672

 

 

$

48,157

 

 

$

33,251

 

 

$

(81,408

)

 

$

64,672

 

 

 

 

 

21

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

**Consolidating Financial Information -- (continued)**

 

**CONDENSED****CONSOLIDATING STATEMENT OF OPERATIONS**

**For the Nine Months Ended September 30, 2006**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

758,068

 

 

$

-   

 

 

$

-   

 

 

$

758,068

 

Percentage lease revenue

 

18,781

 

 

 

-   

 

 

 

112,000

 

 

 

(130,781

)

 

 

-   

 

Other revenue

 

22

 

 

 

-   

 

 

 

46

 

 

 

-   

 

 

 

68

 

Total revenue

 

18,803

 

 

 

758,068

 

 

 

112,046

 

 

 

(130,781

)

 

 

758,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

484,788

 

 

 

-   

 

 

 

-   

 

 

 

484,788

 

Taxes, insurance and lease expense

 

3,289

 

 

 

197,863

 

 

 

13,755

 

 

 

(130,781

)

 

 

84,126

 

Corporate expenses

 

897

 

 

 

12,111

 

 

 

5,522

 

 

 

-   

 

 

 

18,530

 

Depreciation

 

5,971

 

 

 

34,331

 

 

 

29,794

 

 

 

-   

 

 

 

70,096             

 

Total operating expenses

 

10,157

 

 

 

729,093

 

 

 

49,071

 

 

 

(130,781

)

 

 

657,540

 

Operating income

 

8,646

 

 

 

28,975

 

 

 

62,975

 

 

 

-   

 

 

 

100,596

 

Interest expense, net

 

(45,706

)

 

 

(9,077

)

 

 

(32,062

)

 

 

-   

 

 

 

(86,845

)

Charge-off of deferred financing costs

 

-   

 

 

 

(879

)

 

 

(521

)

 

 

-   

 

 

 

(1,400

)

Income (loss) before equity in income from

unconsolidated entities, minority interests and

sale of assets

 

(37,060

)

 

 

19,019

 

 

 

30,392

 

 

 

-   

 

 

 

12,351

 

Equity in income from consolidated entities

 

67,211

 

 

 

-   

 

 

 

-   

 

 

 

(67,211

)

 

 

-   

 

Equity in income from unconsolidated entities

 

9,086

 

 

 

666

 

 

 

(44

)

 

 

-   

 

 

 

9,708

 

Minority interests in other partnerships

 

-   

 

 

 

1,695

 

 

 

(136

)

 

 

-   

 

 

 

1,559

 

Loss on sale of assets

 

-   

 

 

 

(92

)

 

 

-   

 

 

 

-   

 

 

 

(92

)

Income from continuing operations

 

39,237

 

 

 

21,288

 

 

 

30,212

 

 

 

(67,211

)

 

 

23,526

 

Discontinued operations from consolidated 

entities

 

1,073

 

 

 

13,536

 

 

 

2,175

 

 

 

-   

 

 

 

16,784

 

Net income

 

40,310

 

 

 

34,824

 

 

 

32,387

 

 

 

(67,211

)

 

 

40,310

 

Preferred distributions

 

(29,022

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(29,022

)

Net income applicable to unitholders

$

11,288

 

 

$

34,824

 

 

$

32,387

 

 

$

(67,211

)

 

$

11,288

 

 

 

22

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

**Consolidating Financial Information -- (continued)**

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the Nine Months Ended September 30, 2007**

**(in thousands)**

 

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Total Consolidated**

Cash flows from (used in) operating activities

$

3,916

 

 

$

56,690

 

 

$

51,823

 

 

$

112,429

 

Cash flows from (used in) investing activities

 

(17,587

)

 

 

55,801

 

 

 

(32,909

)

 

 

5,305

 

Cash flows from (used in) financing activities

 

35,270

 

 

 

(105,871

)

 

 

(17,409

)

 

 

(88,010

)

Effect of exchange rates changes on cash

 

-   

 

 

 

1,680

 

 

 

-   

 

 

 

1,680

 

Change in cash and cash equivalents

 

21,599

 

 

 

8,300

 

 

 

1,505

 

 

 

31,404

 

Cash and cash equivalents at beginning of period

 

69,728

 

 

 

46,966

 

 

 

7,485

 

 

 

124,179

 

Cash and equivalents at end of period

$

91,327

 

 

$

55,266

 

 

$

8,990

 

 

$

155,583

 

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the Nine Months Ended September 30, 2006**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Total Consolidated**

Cash flows from (used in) operating activities

$

(25,140

)

 

$

85,930

 

 

$

79,820

 

 

$

140,610

 

Cash flows from (used in) investing activities

 

(4,120

)

 

 

104,257

 

 

 

(62,359

)

 

 

37,778

 

Cash flows from (used in) financing activities

 

58,900

 

 

 

(178,460

)

 

 

(20,532

)

 

 

(140,092

)

Effect of exchange rates changes on cash

 

-   

 

 

 

194

 

 

 

-   

 

 

 

194

 

Change in cash and cash equivalents

 

29,640

 

 

 

11,921

 

 

 

(3,071

)

 

 

38,490

 

Cash and cash equivalents at beginning of period

 

48,393

 

 

 

36,189

 

 

 

9,982

 

 

 

94,564

 

Cash and equivalents at end of period

$

78,033

 

 

$

48,110

 

 

$

6,911

 

 

$

133,054

 

 

 

 

 

23

**Item 2.**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

 

**General**

 

In late 2006, we started on a three year, $440 million renovation program on our 83 hotels, to improve the quality, returns on investment and competitive position of our hotel portfolio.  Through September 30, 2007, we completed renovations at 49 of these hotels and expect to complete renovations at 64 hotels by the end of 2007.

 

During the third quarter of 2007, 32 of our hotels were undergoing some form of renovation, and we had more room-nights out of service for renovation than any other quarter this year.  We completed major renovations at 12 hotels during the third quarter, and an additional two hotels in October.  Since we started our renovation program last year, we have completed renovations at 51 hotels, representing almost two thirds of our portfolio.  We expect to complete renovations at an additional 13 hotels during the fourth quarter of 2007, for a total of 64 renovated hotels by the end of 2007.  We originally expected to complete renovations at 70 hotels by the end of 2007.  However, renovation delays have shifted the completion date at six hotels to the first quarter of 2008.  The delays at these hotels are related primarily to increases in scope for major mechanical items and/or permitting andinspection issues in the public areas.  

 

Our hotels with completed renovations, in aggregate, are exceeding our expected return of 12% on the guest impact portion of the total capital expenditures.  During the third quarter, RevPAR, Hotel EBITDA and Hotel EBITDA margin exceeded budget for these hotels in aggregate.  For our 37 hotels where renovations were completed by June 30, 2007, RevPAR growth was 12.5% during the third quarter, compared to the same period in the prior year.  Those hotels, in aggregate, also improved their market share index in both occupancy and ADR, compared to their competitive sets.  For those hotels, Hotel EBITDA was $1.1 million higher than budget and Hotel EBTIDA margin was 85 basis points greater than budget.

 

We spent $204.0 million on renovations and redevelopment projects at our hotels through the nine months ended September 30, 2007, including our pro rata share of joint ventures.  

 

During the third quarter of 2007, our RevPAR increased 3.7% for our consolidated hotels largely from a 6.2% increase in ADR.  Our occupancy decreased in the same period by 2.4%, compared to the same period last year.  For the nine months ended September 30, 2007, our consolidated RevPAR from continuing operations increased by 2.5%, driven by a 6.6% increase in ADR and offset by a 3.9% decrease in occupancy.  The increase in ADR and decrease in occupancy reflected in the quarter and nine month numbers result primarily from a combination of our renovation program and customer mix strategy.

 

Through the end of the third quarter, we recognized a gain of $18.5 million from the sale of 178 condominium units at our 184-unit Royale Palms condominium project in Myrtle Beach, South Carolina.  We expect that the remaining six units will be sold on a selective basis to maximize their selling price.  

 

During the nine months ended September 30, 2007, we sold 11 hotels for gross proceeds of $191 million.  These were the remaining hotels to be sold pursuant to our disposition program announced in early 2006.  During the course of that disposition program, we sold 45 hotels for aggregate gross proceeds of $720 million.  We continue to review and evaluate our hotel portfolio and may identify additional hotels to sell based upon various factors.

 

24

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

 

 

**Three Months Ended**

**September 30,**

 

**Nine Months Ended**

**September 30,**

 

**2007**

 

**2006**

 

**% Change**

**2007-2006**

 

**2007**

 

**2006**

 

**% Change**

**2007-2006**

RevPAR

$

95.84

 

 

$

92.43

 

 

3.7

 

%

 

$

96.36

 

 

$

94.05

 

 

2.5

 

%

Hotel EBITDA(1)

$

73,082

 

 

$

73,323

 

 

(0.3

)

%

 

$

226,408

 

 

$

230,122

 

 

(1.6

)

%

Hotel EBITDA margin(1)

 

28.5%

 

 

 

29.6%

 

 

(3.7

)

%

 

 

29.4%

 

 

 

30.4%

 

 

(3.3

)

%

Income from continuing operations

$

8,166

 

 

$

4,154

 

 

96.6

 

%

 

$

59,077

 

 

$

23,526

 

 

151.1

 

%

Funds From Operations (“FFO”)(1) (2)

$

29,886

 

 

$

23,707

 

 

26.1

 

%

 

$

115,184

 

 

$

88,014

 

 

30.9

 

%

Earnings Before Interest, Taxes, 

Depreciation and Amortization 

(“EBITDA”)(1)(3)

 

 

$

 

 

66,264

 

 

 

 

$

 

 

84,039

 

 

 

 

(21.2

)

%

 

 

$

264,352

 

 

 

 

$

 

 

231,047

 

 

 

 

14.4

 

%

 

_____________

 

(1)

A discussion of the use, limitations and importance of these non-GAAP financial measures and detailed reconciliations to the most comparable GAAP measure 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 for the following items included in net income applicable to common unitholders (in thousands):

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

**September 30,**

 

**September 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Impairment loss, net of minority interests

$

-   

 

 

$

(5,874

)

 

$

-   

 

 

$

(14,215

)

Charges related to debt extinguishment, net of 

minority interests

 

 

-   

 

 

 

 

(216

 

)

 

 

 

(811

 

)

 

 

 

(1,686

 

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

 

 

(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,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Gain on sale of hotels, net of income tax 

and minority interests

 

$

 

-   

 

 

 

$

 

17,610

 

 

$

 

27,830

 

 

$

 

14,748

 

Gain (loss) on sale of hotels in unconsolidated 

entities

 

 

(189

 

)

 

 

 

-   

 

 

 

 

10,993

 

 

 

 

-   

 

Impairment loss, net of minority interests

 

-   

 

 

 

(5,874

)

 

 

-   

 

 

 

(14,215

)

Charges related to debt extinguishment, net of 

minority interests

 

 

-   

 

 

 

 

(216

 

)

 

 

 

(811

 

)

 

 

 

(1,686

 

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

 

 

25

**Results of Operations**

 

*Comparison of the Three Months Ended September 30, 2007 and 2006*

 

For the three months ended September 30, 2007, we recorded a net loss applicable to common unitholders of $1.7 million, or $0.03 per unit, compared to $10.6 million of net income applicable to common unitholders, or $0.17 per unit, for the same period in 2006.  We recorded income from continuing operations of $8.2 million in the quarter, compared to $4.2 million for the same period in 2006.  

 

In the third quarter of 2007, total revenue from continuing operations increased $9.7 million, or 3.9%, compared to the same period in 2006.  The increase in revenue is principally attributed to a 3.7% increase in RevPAR compared to 2006.  The increase in RevPAR reflects a 6.2% increase in ADR, net of a 2.4% decrease in occupancy.  We continue to experience strong RevPAR growth in aggregate at our 37 hotels where we have completed the renovations for at least a full quarter.  For those 37 renovated hotels RevPAR increased 12.5% compared to prior year.  These hotels experienced greater increases in ADR (6.7%) than occupancy (5.4%) principally from the change in our customer mix toward higher ADR business following our renovation upgrades.  The remaining 46 hotels had a 3.3% drop in RevPAR for the quarter, compared to the same quarter last year.  The change in RevPAR reflects a 5.9%increase in ADR and an 8.7% drop in occupancy, due largely to renovation displacement at these hotels.  The improvement in ADR at these hotels principally comes from the intentional displacement of lower-ADR business during the renovation rather than the more profitable higher-ADR business.  We continue to experience weakness in the Louisiana market because the convention business has not returned following Hurricane Katrina in 2005 and the Atlanta market because of weak group demand.

 

Our third quarter 2007 total operating expenses increased by $10.7 million and increased as a percentage of total revenues from 88.6% to 89.5%, compared to the same period in 2006.  Most of the increase as a percentage of total revenues is attributed to increased depreciation expense and taxes, insurance and lease expense, offset by a slight decrease in corporate expenses.

 

In the third quarter of 2007, hotel departmental expenses (which consist of rooms expense, food and beverage expense, and other operating departments) increased $3.3 million, other property related costs (which consist of general and administrative costs, marketing costs, repairs and maintenance, utilities expense, and other costs) increased $1.7 million, and management and franchise fees increased $1.6 million compared to the same period in 2006.  However, these expenses remained substantially unchanged as a percentage of total revenues compared to the same period in 2006.  

 

In the third quarter of 2007, taxes, insurance and lease expense increased $3.0 million compared to the same period in 2006 and increased as a percentage of total revenue from 11.6% to 12.3%.  The increase as a percentage of total revenue related primarily to increases in the cost of insurance and reflects the nationwide trend of increases in rates for catastrophic coverage and adverse claims experience for general liability claims that we do not expect to be recurring.  

 

In the third quarter of 2007, depreciation expense increased by $4.6 million compared to the same period in 2006, increasing as a percent of total revenues from 9.7% to 11.1%.  The increase in depreciation expense reflects our substantial capital expenditures in 2006 and the first nine months of 2007.

 

In the third quarter of 2007, corporate expense decreased by $3.5 million compared to the same period in 2006, decreasing as a percent of total revenues from 2.9% to 1.4%.  The decrease relates primarily to a third quarter 2007 reduction in estimated corporate bonuses and severance costs recorded in the third quarter of 2006.

 

In the third quarter of 2007, net interest expense included in continuing operations decreased $5.4 million, or 19.2%, compared to the same period in 2006.  This decrease is primarily attributable to a $163 million reduction in our average outstanding debt and a reduction in our average interest rate of approximately 16 basis points.

 

26

Discontinued operations includes the operating income, direct interest costs, and net gains on disposition related to 11 hotels sold in 2007 and 31 hotels sold in 2006.  In the third quarter of 2007, our loss from discontinued operations was $0.2 million, compared to our third quarter 2006 income from discontinued operations of $16.1 million.  The third quarter 2007 loss related to changes in accrual estimates for hotels sold in prior periods.  The third quarter 2006 income related primarily to an $18.2 million gain on the sale related to eight hotels.  The third quarter 2006 operating loss from the discontinued hotels was $0.7 million and included an impairment charge for two hotels of $5.9 million partially offset by $5.2 million of income from hotel operations, exclusive of the impairment charge.  

 

*Comparison of the Nine Months Ended September 30, 2007 and 2006*

 

For the nine months ended September 30, 2007, we recorded net income applicable to common unitholders of $64.7 million, or $1.02 per unit, compared to $11.3 million, or $0.18 per unit for the same period in 2006.  We had income from continuing operations of $59.0 million for the nine months ended September 30, 2007, compared to $23.5 million for the same period in 2006.  During the nine months ended September 30, 2007, we recorded an $11.0 million gain in equity in income from unconsolidated entities, related to the sale of hotels by our unconsolidated entities, and an $18.5 million gain from the sale of 178 condominium units in Myrtle Beach, South Carolina.  We also had income from discontinued operations of $34.6 million, of which $28.5 million related to net gains on the sale of 11 hotels and the remainder is attributed to hotel operationsprior to sale.

 

For the nine months ended September 30, 2007, total revenues from continuing operations increased $13.6 million, or 1.8%, compared to the same period in 2006.  The increase in revenue is principally attributed to a 2.5% increase in RevPAR in the current year, partially offset by $6.2 million of revenue recorded in 2006 related to business interruption proceeds from hurricane losses.  The current year increase in RevPAR resulted from a 6.6% increase in ADR, net of a 3.9% decrease in occupancy.  We continue to see strong RevPAR growth in the aggregate for those hotels that renovations have been completed for a full quarter, compared to the same period in 2006.  However, renovation displacement has a significant impact on the occupancy of those hotels under renovation. The improvement in ADR at these hotels principally comes from the intentional displacement of lower ADR business duringthe renovation rather than the more profitable higher ADR business.  We also continue to experience weakness in the Louisiana market because the convention business has not returned following Hurricane Katrina in 2005 and in the Atlanta market because of weak group demand.

 

For the nine months ended September 30, 2007, our total operating expenses increased by $25.4 million and increased as a percentage of total revenues from 86.7% to 88.5%, compared to the same period in 2006.  Most of the increase as a percentage of total revenues can be attributed to depreciation expense and taxes, insurance, and lease expense.

 

For the nine months ended September 30, 2007, hotel departmental expenses (which consist of rooms expense, food and beverage expense, and other operating departments) increased $4.9 million, other property related costs (which consist of general and administrative costs, marketing costs, repairs and maintenance, utilities expense, and other costs) increased $3.1 million, and management and franchise fees increased $1.3 compared to the same period in 2006.  However, these expenses remained substantially unchanged as a percentage of total revenues compared to the same period in 2006.  

 

For the nine months ended September 30, 2007, taxes, insurance and lease expense increased $8.3 million compared to the same period in 2006 and increased as a percentage of total revenues from 11.1% to 12.0%.  The increase as a percentage of total revenue related primarily to percentage lease expense and insurance.  Percentage lease expense is computed as a percentage of hotel revenues in excess of a base rent.  Therefore, as revenues increase, percentage rent expense increases at a faster rate.  Our property insurance increase reflects the nationwide trend of increases in rates for catastrophic coverage, and our increases in general liability insurance costs reflect some adverse claims experience that we do not expect to be recurring.  

 

27

For the nine months ended September 30, 2007, depreciation expense increased by $10.6 million compared to the same period in 2006, increasing as a percent of total revenues from 9.2% to 10.5%.  The increase in depreciation expense reflects our substantial capital expenditures in 2006 and the first nine months of 2007.

 

For the nine months ended September 30, 2007, net interest expense included in continuing operations for the third quarter decreased $18.1 million, or 20.9%, compared to the same period in 2006.  This decrease is primarily attributable to the $167 million reduction in our average outstanding debt and a reduction in our average interest rate of approximately 37 basis points.

 

Discontinued operations includes the operating income, direct interest costs, and net gains on disposition related to 11 hotels sold in 2007 and 31 hotels sold in 2006.  In the nine months ended September 30, 2007, our income from discontinued operations increased $17.8 million, compared to the same period in 2006.  This change is principally attributed to: (i) $28.5 million in net gains from hotel dispositions in the nine months ended September 30, 2007 compared to $15.3 million in net gains from hotel dispositions in the same period of 2006; (ii) a $15.1 million impairment loss in the nine months ended September 30, 2006; and (iii) a decrease in operating income, before impairment losses, from sold hotels of $10.1 million.

 

**Non-GAAP Financial Measures**

 

We refer in this report 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 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 unit data)

 

 

**Three Months Ended September 30,**

 

**2007**

 

**2006**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

**Net income**

$

7,957

 

 

 

 

 

 

 

 

$

20,289

 

 

 

 

 

 

 

Preferred distributions

 

(9,678

)

 

 

 

 

 

 

 

 

(9,665

)

 

 

 

 

 

 

**Net income (loss) applicable to common unitholders**

 

 

(1,721

)

 

63,006

 

$

(0.03

)

 

 

 

10,624

 

 

 

62,503

 

$

 

0.17

 

Depreciation, continuing operations

 

28,523

 

 

-   

 

 

0.45

 

 

 

23,917

 

 

-   

 

 

0.38

 

Depreciation, unconsolidated entities and discontinued operations

 

2,895

 

 

-   

 

 

 

0.05

 

 

 

6,776

 

 

-   

 

 

 

0.11

 

Gain on sale of hotels, net of income tax and minority interests

 

-   

 

 

-   

 

 

 

-   

 

 

 

 

(17,610

)

 

-   

 

 

 

(0.28

)

Loss on sale of hotels in unconsolidated entities

 

189

 

 

-   

 

 

-   

 

 

 

-   

 

 

-   

 

 

-   

 

Conversion of FelCor options and unvested restricted stock

 

 

-   

 

 

346

 

 

 

-   

 

 

 

 

-   

 

 

 

414

 

 

 

-   

 

**FFO**

$

29,886

 

 

63,352

 

$

0.47

 

 

$

23,707

 

 

62,917

 

$

0.38

 

 

 

28

**Reconciliation of Net Income to FFO**

(in thousands, except per unit data)

 

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

**Net income**

$

93,706

 

 

 

 

 

 

 

 

$

40,310

 

 

 

 

 

 

 

Preferred distributions

 

(29,034

)

 

 

 

 

 

 

 

 

(29,022

)

 

 

 

 

 

 

**Net income applicable to common unitholders**

 

64,672

 

 

63,262

 

$

 

1.02

 

 

 

11,288

 

 

 

62,476

 

$

0.18

 

Depreciation, continuing operations

 

80,729

 

 

-   

 

 

1.28

 

 

 

70,096

 

 

-   

 

 

1.12

 

Depreciation, unconsolidated entities and discontinued operations

 

8,606

 

 

-   

 

 

 

0.13

 

 

 

21,378

 

 

-   

 

 

0.34

 

Gain on sale of hotels, net of income tax and minority interests

 

(27,830

)

 

-   

 

 

 

(0.44

)

 

 

(14,748

)

 

-   

 

 

(0.24

)

Gain on sale of hotels in unconsolidated entities

 

(10,993

)

 

-   

 

 

 

(0.17

)

 

 

-   

 

 

-   

 

 

 

 

Conversion of FelCor options and unvested restricted stock

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

356

 

 

-   

 

**FFO**

$

115,184

 

 

63,262

 

$

1.82

 

 

$

88,014

 

 

62,832

 

$

1.40

 

 

 

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

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

**September 30,**

 

**September 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Impairment loss, net of minority interests

$

-   

 

 

$

(5,874

)

 

$

-   

 

 

$

(14,215

)

Charges related to debt extinguishment, net of 

minority interest

 

 

-   

 

 

 

 

(216

 

)

 

 

 

(811

 

)

 

 

 

(1,686

 

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

 

 

**Reconciliation of Net Income to EBITDA**

 (in thousands)

 

 

**Three Months Ended****September 30,**

 

**Nine Months Ended****September 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

**Net income**

$

7,957

 

 

$

20,289

 

 

$

93,706

 

 

$

40,310

 

Depreciation, continuing operations

 

28,523

 

 

 

23,917

 

 

 

80,729

 

 

 

70,096

 

Depreciation, unconsolidated entities and discontinued operations

 

2,895

 

 

 

6,776

 

 

 

8,606

 

 

 

21,378

 

Interest expense

 

24,865

 

 

 

28,919

 

 

 

73,611

 

 

 

89,371

 

Interest expense, unconsolidated entitiesand discontinued operations

 

1,508

 

 

 

 

1,696

 

 

 

4,570

 

 

 

5,553

 

Amortization expense

 

516

 

 

 

2,442

 

 

 

3,130

 

 

 

4,339

 

**EBITDA**

$

66,264

 

 

$

84,039

 

 

$

264,352

 

 

$

231,047

 

 

 

29

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,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Gain on sale of hotels, net of income tax 

and minority interests

 

$

 

-   

 

 

$

 

17,610

 

 

$

 

27,830

 

 

$

 

14,748

 

Gain (loss) on sale of hotels in unconsolidated entities

 

(189

)

 

 

-   

 

 

 

10,993

 

 

 

-   

 

Impairment loss, net of minority interests

 

-   

 

 

 

(5,874

)

 

 

-   

 

 

 

(14,215

)

Charges related to early extinguishment of debt, 

net of minority interests

 

 

-   

 

 

 

 

(216

 

)

 

 

 

(811

 

)

 

 

 

(1,686

 

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

 

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, 2007.

 

**Hotel EBITDA and Hotel EBITDA Margin**

(dollars in thousands)

 

 

**Three Months Ended****September 30,**

 

 

**Nine Months Ended****September 30,**

 

**2007**

 

**2006**

 

 

**2007**

 

**2006**

Total revenues

$

257,164

 

 

$

247,464

 

 

$

771,687

 

 

$

758,136

 

Other revenue

 

(468

)

 

 

(13

)

 

 

(921

)

 

 

(68

)

Hotel operating revenue

 

256,696

 

 

 

247,451

 

 

 

770,766

 

 

 

758,068

 

Hotel operating expenses

 

(183,614

)

 

 

(174,128

)

 

 

(544,358

)

 

 

(527,946

)

Hotel EBITDA

$

73,082

 

 

$

73,323

 

 

$

226,408

 

 

$

230,122

 

Hotel EBITDA margin(1)

 

28.5%

 

 

 

29.6%

 

 

 

29.4%

 

 

 

30.4%

 

 
 
 

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

 

**Reconciliation of Total Operating Expense to Hotel Operating Expense**

(dollars in thousands)

 

 

**Three Months Ended****September 30,**

 

**Nine Months Ended****September 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

 

Total operating expenses

$

230,041

 

 

$

219,323

 

 

$

682,982

 

 

$

657,540

 

Unconsolidated taxes, insurance and lease expense

 

1,990

 

 

 

1,747

 

 

 

5,588

 

 

 

4,896

 

Consolidated hotel lease expense

 

(16,204

)

 

 

(15,861

)

 

 

(47,729

)

 

 

(45,864

)

Corporate expenses

 

(3,690

)

 

 

(7,164

)

 

 

(15,732

)

 

 

(18,530

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

Depreciation

 

(28,523

)

 

 

(23,917

)

 

 

(80,729

)

 

 

(70,096

)

Hotel operating expenses

$

183,614

 

 

$

174,128

 

 

$

544,358

 

 

$

527,946

 

 

 

30

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

 

**Reconciliation of Net Income to Hotel EBITDA**

(in thousands)

 

 

**Three Months Ended****September 30,**

 

**Nine Months Ended****September 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Net income

$

7,957

 

 

$

20,289

 

 

$

93,706

 

 

$

40,310

 

Discontinued operations

 

209

 

 

 

(16,135

)

 

 

(34,629

)

 

 

(16,784

)

Equity in income from unconsolidated entities

 

(3,030

)

 

 

(3,948

)

 

 

(19,511

)

 

 

(9,708

)

Minority interests

 

(314

)

 

 

(187

)

 

 

(1,102

)

 

 

(1,559

)

Consolidated hotel lease expense

 

16,204

 

 

 

15,861

 

 

 

47,729

 

 

 

45,864

 

Unconsolidated taxes, insurance and lease expense

 

(1,990

)

 

 

(1,747

)

 

 

(5,588

)

 

 

(4,896

)

Interest expense, net

 

22,655

 

 

 

28,030

 

 

 

68,734

 

 

 

86,845

 

Charge-off of deferred financing costs

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

962

 

Early extinguishment of debt

 

-   

 

 

 

-    

 

 

 

-   

 

 

 

438

 

Corporate expenses

 

3,690

 

 

 

7,164

 

 

 

15,732

 

 

 

18,530

 

Depreciation

 

28,523

 

 

 

23,917

 

 

 

80,729

 

 

 

70,096

 

Abandoned projects

 

-   

 

 

 

-    

 

 

 

22

 

 

 

-   

 

Loss on sale of other assets

 

-   

 

 

 

92

 

 

 

-   

 

 

 

92

 

Gain on sale of condominiums

 

(354

)

 

 

-   

 

 

 

(18,493

)

 

 

-   

 

Other revenue

 

(468

)

 

 

(13

)

 

 

(921

)

 

 

(68

)

**Hotel EBITDA**

$

73,082

 

 

$

73,323

 

 

$

226,408

 

 

$

230,122

 

 

**Reconciliation of Ratio of Operating Income to Total Revenues to Hotel EBITDA Margin**

 

 

**Three Months Ended**

**September 30,**

 

**Nine Months Ended**

**September 30,**

* *

**2007**

 

**2006**

 

**2007**

 

**2006**

Ratio of operating income to total revenues

10.5

%

 

11.4

%

 

11.5

%

 

13.3

%

Other revenues

(0.2

)

 

-   

 

 

(0.1

)

 

-   

 

Unconsolidated taxes, insurance and lease expense

(0.6

)

 

(0.8

)

 

(0.7

)

 

(0.6

)

Consolidated hotel lease expense

6.3

 

 

6.4

 

 

6.2

 

 

6.1

 

Corporate expenses

1.4

 

 

2.9

 

 

2.0

 

 

2.4

 

Depreciation

11.1

 

 

9.7

 

 

10.5

 

 

9.2

 

Hotel EBITDA margin

28.5

%

 

29.6

%

 

29.4

%

 

30.4

%

 

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.

 

31

*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 ourhotels 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*

 

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

 

The use of these non-GAAP financial measures has certain limitations.  FFO, EBITDA, Hotel 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 theusefulness of our non-GAAP financial measures.

 

32

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 unit 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 unit does not measure, and should not be used as a measure of, amounts that accrue directly to the benefit of unitholders.  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 andtrends 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.  

 

33

**Hotel Portfolio Composition**

 

The following tables set forth, for 83 hotels included in our consolidated portfolio of continuing operations as of September 30, 2007, distribution by brand, by our top metropolitan markets, by selected states, by type of location, and by market segment.  

 

**Brand**

 

 

 

**Hotels**

 

 

**Rooms**

 

**% of**

**Total Rooms**

 

**% of 2006**

**Hotel** **EBITDA**

Embassy Suites 

 

47

 

12,127

 

51

 

57

 

Holiday Inn

 

17

 

6,305

 

26

 

18

 

Sheraton and Westin

 

9

 

3,217

 

13

 

15

 

Doubletree

 

7

 

1,471

 

6

 

7

 

Other

 

3

 

962

 

4

 

3

 

 

 

 

 

 

 

 

 

 

 

**Top Markets**

 

 

 

 

 

 

 

 

 

 

South Florida area

 

5

 

1,434

 

6

 

7

 

Atlanta

 

5

 

1,462

 

6

 

7

 

San Francisco Bay area

 

6

 

2,141

 

9

 

6

 

Los Angeles area

 

4

 

898

 

4

 

5

 

Orlando

 

5

 

1,690

 

7

 

5

 

Dallas

 

4

 

1,333

 

6

 

5

 

Phoenix

 

3

 

798

 

3

 

4

 

San Diego

 

1

 

600

 

2

 

4

 

Minneapolis

 

3

 

736

 

3

 

4

 

Northern New Jersey

 

3

 

756

 

3

 

3

 

Washington, D.C.

 

1

 

443

 

2

 

3

 

Philadelphia

 

2

 

729

 

3

 

3

 

Chicago

 

3

 

795

 

3

 

3

 

San Antonio

 

3

 

874

 

4

 

3

 

Boston

 

2

 

532

 

2

 

3

 

 

 

 

 

 

 

 

 

 

 

**Location**

 

 

 

 

 

 

 

 

 

 

Suburban

 

33

 

8,360

 

35

 

38

 

Urban

 

20

 

6,362

 

26

 

25

 

Airport

 

20

 

6,203

 

26

 

24

 

Resort

 

10

 

3,157

 

13

 

13

 

 

 

 

 

 

 

 

 

 

 

**Segment**

 

 

 

 

 

 

 

 

 

 

Upper-upscale 

 

65

 

17,374

 

72

 

81

 

Full service

 

17

 

6,305

 

26

 

18

 

Upscale

 

1

 

403

 

2

 

1

 

 

 

34

**Hotel Operating Statistics**

 

The following tables set forth historical occupancy, ADR and RevPAR at September 30, 2007 and 2006, and the percentage changes therein between the periods presented, for our hotels included in our consolidated portfolio of continuing operations.  

**Operating Statistics by Brand**

 

* *

**Occupancy (%)**

 

**Three Months Ended September 30,**

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites 

70.9

 

75.0

 

(5.5

)

 

72.9

 

76.3

 

(4.5

)

Holiday Inn

73.9

 

71.1

 

4.0

 

 

70.3

 

72.6

 

(3.2

)

Sheraton and Westin(a)

68.9

 

73.0

 

(5.6

)

 

69.8

 

72.2

 

(3.4

)

Doubletree

75.5

 

76.3

 

(1.1

)

 

72.8

 

76.5

 

(4.8

)

Other(b)

82.2

 

77.9

 

5.5

 

 

71.3

 

71.1

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 

72.1

 

73.9

 

(2.4

)

 

71.7

 

74.6

 

(3.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**ADR ($)**

 

**Three Months Ended September 30,**

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites 

141.35

 

132.27

 

6.9

 

 

143.55

 

134.45

 

6.8

 

Holiday Inn

120.11

 

112.46

 

6.8

 

 

116.87

 

109.53

 

6.7

 

Sheraton and Westin(a)

120.30

 

115.38

 

4.3

 

 

126.51

 

120.91

 

4.6

 

Doubletree

137.62

 

126.73

 

8.6

 

 

144.29

 

130.38

 

10.7

 

Other(b)

144.53

 

140.70

 

2.7

 

 

138.82

 

133.39

 

4.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 

132.87

 

125.06

 

6.2

 

 

134.35

 

126.06

 

6.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**RevPAR ($)**

 

**Three Months Ended September 30,**

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites 

100.17

 

99.23

 

0.9

 

 

104.61

 

102.63

 

1.9

 

Holiday Inn

88.75

 

79.91

 

11.1

 

 

82.20

 

79.56

 

3.3

 

Sheraton and Westin(a)

82.89

 

84.23

 

(1.6

)

 

88.25

 

87.28

 

1.1

 

Doubletree

103.90

 

96.74

 

7.4

 

 

105.06

 

99.72

 

5.4

 

Other(b)

118.86

 

109.64

 

8.4

 

 

98.93

 

94.78

 

4.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 

95.84

 

92.43

 

3.7

 

 

96.36

 

94.05

 

2.5

 

 

 

(a)

Includes eight Sheraton hotels and one Westin hotel.

 

(b)

Other hotels include two Hilton hotels and one Crowne Plaza® hotel.

 

35

**Operating Statistics for Our Top Markets**

 

* *

**Occupancy (%)**

 

**Three Months Ended September 30,**

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

61.5

 

72.6

 

(15.3

)

 

73.5

 

79.8

 

(8.0

)

Atlanta

74.3

 

75.0

 

(0.9

)

 

75.6

 

77.4

 

(2.3

)

San Francisco Bay area

85.6

 

84.0

 

2.0

 

 

77.2

 

77.9

 

(1.0

)

Los Angeles area

79.7

 

78.6

 

1.4

 

 

78.8

 

77.0

 

2.3

 

Orlando

73.2

 

72.6

 

0.8

 

 

77.6

 

78.9

 

(1.6

)

Dallas

59.0

 

69.0

 

(14.5

)

 

65.1

 

71.8

 

(9.4

)

Phoenix

56.1

 

64.5

 

(13.0

)

 

68.6

 

73.9

 

(7.2

)

San Diego

76.3

 

88.4

 

(13.7

)

 

76.2

 

83.7

 

(8.9

)

Minneapolis

84.0

 

77.9

 

7.8

 

 

77.3

 

71.5

 

8.1

 

Northern New Jersey

77.8

 

70.7

 

10.0

 

 

71.5

 

70.4

 

1.6

 

Washington, D.C.

66.6

 

69.6

 

(4.2

)

 

67.7

 

67.5

 

0.3

 

Philadelphia

77.6

 

82.1

 

(5.5

)

 

68.7

 

74.9

 

(8.2

)

Chicago

82.1

 

80.2

 

2.3

 

 

72.0

 

76.3

 

(5.7

)

San Antonio

78.7

 

77.0

 

2.2

 

 

78.0

 

79.3

 

(1.6

)

Boston

79.6

 

82.3

 

(3.2

)

 

67.3

 

76.4

 

(11.9

)

 

**ADR ($)**

 

**Three Months Ended September 30,**

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

111.43

 

105.94

 

5.2

 

 

153.29

 

141.89

 

8.0

 

Atlanta

119.91

 

114.86

 

4.4

 

 

122.05

 

118.78

 

2.7

 

San Francisco Bay area

149.81

 

137.42

 

9.0

 

 

140.64

 

130.40

 

7.8

 

Los Angeles area

170.50

 

154.15

 

10.6

 

 

159.98

 

143.86

 

11.2

 

Orlando

90.58

 

89.52

 

1.2

 

 

105.83

 

100.38

 

5.4

 

Dallas

119.49

 

108.51

 

10.1

 

 

124.41

 

112.61

 

10.5

 

Phoenix

109.45

 

104.57

 

4.7

 

 

146.23

 

131.46

 

11.2

 

San Diego

157.76

 

144.02

 

9.5

 

 

155.45

 

139.69

 

11.3

 

Minneapolis

147.92

 

142.85

 

3.5

 

 

143.61

 

137.73

 

4.3

 

Northern New Jersey

157.09

 

146.47

 

7.2

 

 

155.90

 

147.14

 

6.0

 

Washington, D.C.

156.22

 

152.17

 

2.7

 

 

166.00

 

161.03

 

3.1

 

Philadelphia

137.41

 

128.58

 

6.9

 

 

136.45

 

127.48

 

7.0

 

Chicago

133.57

 

128.36

 

4.1

 

 

131.51

 

122.57

 

7.3

 

San Antonio

110.80

 

107.27

 

3.3

 

 

110.49

 

104.40

 

5.8

 

Boston

164.62

 

159.21

 

3.4

 

 

156.12

 

151.17

 

3.3

 

 

**RevPAR ($)**

 

**Three Months Ended September 30,**

 

**Nine Months Ended September 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

68.52

 

76.88

 

(10.9

)

 

112.61

 

113.27

 

(0.6

)

Atlanta

89.14

 

86.15

 

3.5

 

 

92.31

 

91.95

 

0.4

 

San Francisco Bay area

128.30

 

115.42

 

11.2

 

 

108.53

 

101.61

 

6.8

 

Los Angeles area

135.86

 

121.19

 

12.1

 

 

126.03

 

110.75

 

13.8

 

Orlando

66.29

 

65.01

 

2.0

 

 

82.15

 

79.19

 

3.7

 

Dallas

70.55

 

74.89

 

(5.8

)

 

80.95

 

80.91

 

0.1

 

Phoenix

61.45

 

67.48

 

(8.9

)

 

100.30

 

97.13

 

3.3

 

San Diego

120.38

 

127.32

 

(5.5

)

 

118.50

 

116.87

 

1.4

 

Minneapolis

124.22

 

111.25

 

11.7

 

 

110.95

 

98.46

 

12.7

 

Northern New Jersey

122.14

 

103.55

 

18.0

 

 

111.43

 

103.53

 

7.6

 

Washington, D.C.

104.12

 

105.91

 

(1.7

)

 

112.39

 

108.65

 

3.4

 

Philadelphia

106.62

 

105.55

 

1.0

 

 

93.74

 

95.44

 

(1.8

)

Chicago

109.60

 

102.93

 

6.5

 

 

94.69

 

93.54

 

1.2

 

San Antonio

87.16

 

82.57

 

5.6

 

 

86.16

 

82.76

 

4.1

 

Boston

131.01

 

130.96

 

0.0

 

 

105.10

 

115.49

 

(9.0

)

 

 

36

**Liquidity and Capital Resources**

 

Our principal source of cash to meet our cash requirements, including distributions to unitholders and repayments of indebtedness, is from hotel operations.  For the nine months ended September 30, 2007, net cash flow provided by operating activities, consisting primarily of hotel operations, was $112.4 million.  At September 30, 2007, we had cash and cash equivalents of $155.6 million, including approximately $44.1 million held under management agreements to meet minimum working capital requirements.

 

We have committed to spend approximately $440 million over a three-year period, commencing in late 2006, to renovate our core hotels.  We have also committed to spend approximately $60 million for four previously announced redevelopment projects.  At September 30, 2007, we had approximately $150 million remaining to spend on the renovation projects and approximately $47 million for redevelopment projects, which will be funded from cash on hand.  In the second quarter of 2007, we completed the sale of our non-strategic hotels.  From December 2005 through June 30, 2007, we sold 45 non-strategic hotels, generating aggregate gross proceeds of approximately $720 million.  In 2006, we used a portion of these proceeds to repay approximately $400 million of debt, and we are using the remaining proceeds to fund our hotel renovations and redevelopment projects.

 

In 2007, we paid common distributions of $0.25 per unit for both the fourth quarter 2006 and first quarter 2007, and $0.30 per unit for both second and third quarter 2007.  Our board of directors will determine the amounts of future common and preferred distributions for each quarter, by taking into consideration the actual operating results for that quarter, general economic conditions, other operating trends, our financial condition, capital requirements, and FelCor’s minimum REIT distribution requirements.  

 

Development of our 184-unit Royale Palms condominium project in Myrtle Beach, South Carolina, was substantially completed in the first quarter of 2007.  Through September 30, 2007, we closed on the sale of 178 units and received aggregate net proceeds, after repayment of the construction loan, of $20.2 million.  We expect sales of the remaining six units to be sold on a selective basis to maximize the selling price.  

 

We expect that our cash flow provided by operating activities for 2007 will be approximately $165 to $167 million.  During the nine months ended September 30, 2007, we experienced significant displacement from hotel renovation that reduced revenues and Hotel EBITDA margins and we expect the effect of ongoing renovation displacement for the remainder of 2007 to be significant.  Our cash flow forecast assumes RevPAR will increase by approximately 3% to 4%, and our Hotel EBITDA margin will decrease approximately 60 basis points.  Our current operating plan for 2007 contemplates that we will make aggregate common distribution payments of $70 million, preferred distribution payments of $39 million and $13 million in normal recurring principal payments, leaving surplus cash flow (before capital expenditures, additional debt reduction or sale of hotels) of approximately $43to $45 million.  For the full year 2007, we plan to spend approximately $250 million for capital expenditures, which will be funded from hotel and condominium sale proceeds and cash. 

 

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.  If our hotel RevPAR decreases and/or Hotel EBITDA margins shrink, our operations, earnings and/or cash flow could be adversely affected.  

 

37

*Debt*

 

 

*Line of Credit*

In August 2007, we amended our line of credit agreement to increase the amount available under the line from $125 million to $250 million, provide the ability to further increase the facility up to $500 million under certain conditions, reduce certain fees and costs including the interest rates applicable to borrowings, improve certain financial covenants and extend the initial maturity from January 2009 to August 2011 with the right to extend for an additional one-year period under certain conditions.  At September 30, 2007, we had no borrowings outstanding under our line of credit.  The interest rate on our line of credit was LIBOR plus 0.80% at September 30, 2007.

 

 

*Construction Loan*

Development of our 184-unit Royale Palms condominium project in Myrtle Beach, South Carolina was substantially completed in the first quarter of 2007.  Through September 30, 2007, we closed on the sale of 178 units, and a portion of the proceeds of those sales were used to repay the outstanding balance on our construction loan in May 2007.

 

*Mortgage Debt*

At September 30, 2007, we had aggregate mortgage indebtedness of approximately $780.5 million that was secured by 43 of our consolidated hotels with an aggregate book value of approximately $1.0 billion.  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.  Our mortgage debt generally contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions.  All of our mortgage debt is prepayable, subject to various prepayment, yield maintenance or defeasance obligations.

 

 

*Senior Notes*

We are subject to various financial covenants and debt incurrence tests with respect to our senior notes.  If we were unable to continue to satisfy the incurrence test, we may be prohibited from, among other things, incurring any additional indebtedness, except under certain specific exceptions,******or paying distributions on our preferred or common units, except to the extent necessary to satisfy FelCor’s REIT qualification requirement that it distribute at least 90% of its taxable income.  We currently anticipate that we will meet our financial covenant and incurrence tests, based on current RevPAR expectations.  

 

**Inflation**

 

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation.  Competition may, however, require our hotels to reduce room rates in the near term and may limit their 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 our hotels to reduce room rates or limits their ability to raise room rates in the future, they may not be able to adjust their 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.  

 

38

**Disclosure Regarding Forward-Looking Statements**

 

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

 

 

**•**

general economic and lodging industry conditions, including the anticipated continuation of 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;

 

 

**•**

the impact of renovations on hotel operations;

 

 

**•**

our growth strategy and acquisition activities; and

 

 

**•**

competitive conditions in the lodging industry.

 

Certain of these risks and uncertainties are described in greater detail under “Risk Factors” in our Annual Report on Form 10-K or in our other filings with the Securities and Exchange Commission.

 

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, 2007, approximately 62.9% of our consolidated debt had fixed interest rates.  Currently, market interest rates 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.  For debt obligations, the table presents scheduled maturities and weighted average interest rates, by maturity dates.  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.

 

39

******

**Interest Rate Sensitivity**

**at September 30, 2007**

**(dollars in thousands)**

 

* *

**Expected Maturity Date**

 

 

 

 

 

 

* *

**2007**

 

 

**2008**

 

 

**2009**

 

 

**2010**

 

 

**2011**

 

**Thereafter**

 

 

 

**Total**

 

 

**Fair Value**

**Liabilities**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

$ 

3,295

 

$

13,733

 

$

142,240

 

$

274,417

 

$

303,030

 

$

78,235

 

$

814,950

 

$

848,406

Average interest rate

 

7.98%

 

 

7.99%

 

 

7.27%

 

 

8.70%

 

 

8.49%

 

 

6.53%

 

 

8.15%

 

 

 

Floating rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

-   

 

 

265,500

 

 

-   

 

 

-   

 

 

215,000

 

 

-   

 

 

480,500

 

 

480,500

Average interest rate

 

-   

 

 

5.47%

 

 

-   

 

 

-   

 

 

7.00%

 

 

-   

 

 

6.15%

 

 

 

Total debt

$

3,295

 

$

279,233

 

$

142,240

 

$

274,417

 

$

518,030

 

$

78,235

 

$

1,295,450

 

 

 

Average interest rate

 

7.98%

 

 

5.59%

 

 

7.27%

 

 

8.70%

 

 

7.87%

 

 

6.53%

 

 

7.41%

 

 

 

Net discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(900

)

 

 

Total debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,294,550

 

 

 

 

**Item 4.**  **Controls and Procedures**

 

 

(a)

*Evaluation of disclosure controls and procedures.*

We have no employees as FelCor as our sole general partner performs our management functions.  Under the supervision and with the participation of FelCor’s management, including its 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, FelCor’s 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 isaccumulated and communicated to FelCor’s management, including its 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.

 

40

**PART II. -- OTHER INFORMATION**

 

**Item 6.**

**Exhibits**

 

 

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

 

Exhibit Number

Description of Exhibit

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.

 

 

41

**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

**FELCOR LODGING LIMITED PARTNERSHIP**

a Delaware Limited Partnership

 

 

 

 

 

 

 

 

 

 

 

By:

FelCor Lodging Trust Incorporated

Its General Partner

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/Lester C. Johnson

 

 

 

By:

Lester C. Johnson

Senior Vice President, Chief Accounting Officer

 

 

 

 

 

Date:

November 8, 2007

 

 

 

 

 

 

 

42

 

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