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 March 31, 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                                                                       | 3      |
|      | Consolidated Balance Sheets March 31, 2007 and December 31, 2006 (unaudited)               | 3      |
|      | Consolidated Statements of Operations – For the Three Months Ended                    |   |
|      | March 31, 2007 and 2006 (unaudited)                                                        | 4      |
|      | Consolidated Statements of Comprehensive Income – For the Three Months Ended          |   |
|      | March 31, 2007 and 2006 (unaudited)                                                        | 5      |
|      | Consolidated Statements of Cash Flows – For the Three Months Ended March 31,          |   |
|      | 2007 and 2006 (unaudited)                                                                  | 6      |
|      | Notes to Consolidated Financial Statements                                                 | 7      |
| Item 2.   | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20     |
|      | General

                                                                             | 20     |
|      | Financial Comparison                                                                       | 20     |
|      | Results of Operations                                                                      | 22     |
|      | Non-GAAP Financial Measures                                                                | 23     |
|      | Hotel Portfolio Composition                                                                | 28     |
|      | Hotel Operating Statistics                                                                 | 29     |
|      | Liquidity and Capital Resources                                                            | 31     |
|      | Inflation                                                                                  | 32     |
|      | Seasonality                                                                                | 32     |
|      | Disclosure Regarding Forward-Looking Statements                                            | 33     |
| Item 3.   | Quantitative and Qualitative Disclosures About Market Risk                                 | 33     |
| Item 4.   | Controls and Procedures                                                                    | 34     |
|      |                                                                                       |   |
|      | **PART II. – OTHER INFORMATION**                                                      |   |
|      |                                                                                       |   |
| Item 6.   | Exhibits                                                                                   | 35     |
|      |                                                                                       |   |
| SIGNATURE | 36                                                                                         |

 

 

2

**PART I. -- FINANCIAL INFORMATION**

 

| **Item 1.** | **Financial Statements** |
|-------------|--------------------------|

 

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**CONSOLIDATED BALANCE SHEETS**

**(unaudited, in thousands)**

 

| * * | **March 31,**

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

**2006** |  
**ASSETS**

Investment in hotels, net of accumulated depreciation of $631,943 at

March 31, 2007 and $612,286 at December 31, 2006

 

$

 

2,088,336

 

 

 

$

 

2,044,285

 

Investment in unconsolidated entities

 

115,824

 

 

 

111,716

 

 
Hotels held for sale

 

98,882

 

 

 

133,801

 

 
Cash and cash equivalents

 

116,527

 

 

 

124,179

 

Restricted cash

 

16,545

 

 

 

22,753

 

Accounts receivable, net of allowance for doubtful accounts of $847 at

March 31, 2007 and $962 at December 31, 2006

 

 

55,436

 

 

 

 

33,395

 

Deferred expenses, net of accumulated amortization of $9,390 at

March 31, 2007 and $8,841 at December 31, 2006

 

 

8,911

 

 

 

 

9,480

 

Condominium development project

 

59,853

 

 

 

70,661

 

Other assets

 

27,221

 

 

 

32,979

 

Total assets

$

2,587,535

 

 

$

2,583,249

 

 
 

 

 

 

 

 

 

 

**LIABILITIES AND PARTNERS’ CAPITAL**

 
Debt, net of discount of $1,026 at March 31, 2007 and $1,089 at 

December 31, 2006

 

$

 

1,356,760

 

 

 

$

 

1,369,153

 

Distributions payable

 

24,142

 

 

 

24,078

 

 
Accrued expenses and other liabilities

 

146,799

 

 

 

139,277

 

 
 

 

 

 

 

 

 

 

 
Total liabilities

 

1,527,701

 

 

 

1,532,508

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

outstanding at March 31, 2007 and December 31, 2006

 

 

27,534

 

 

 

 

29,593

 

Minority interest in other partnerships

 

28,928

 

 

 

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 March 31, 2007 and December 31, 2006

 

 

309,362

 

 

 

 

309,362

 

Series C Cumulative Redeemable Preferred Units, 68 units issued

and outstanding at March 31, 2007 and December 31, 2006

 

 

169,412

 

 

 

 

169,412

 

Common units 62,389 and 62,052 units issued and outstanding 

at March 31, 2007 and December 31, 2006, respectively

 

 

508,426

 

 

 

 

498,363

 

Accumulated other comprehensive income

 

16,172

 

 

 

15,839

 

 

 

 

 

 

 

 

 

Total partners’ capital

 

1,003,372

 

 

 

992,976

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable units and partners’ capital

$

2,587,535

 

 

$

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 Months Ended March 31, 2007 and 2006**

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

 

 

 

**Three Months Ended**

 

**March 31,**

 

**2007**

 

**2006**

Revenues:

 

 

 

 

 

 

 

Hotel operating revenue

$

248,541

 

 

$

251,380

 

Retail space rental and other revenue

 

131

 

 

 

27

 

Total revenues

 

248,672

 

 

 

251,407

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Hotel departmental expenses

$

78,265

 

 

$

79,018

 

Other property related costs

 

68,557

 

 

 

68,857

 

Management and franchise fees

 

13,123

 

 

 

13,222

 

Taxes, insurance and lease expense

 

29,229

 

 

 

26,532

 

Abandoned projects

 

22

 

 

 

-   

 

Corporate expenses

 

6,787

 

 

 

5,804

 

Depreciation

 

25,051

 

 

 

22,437

 

Total operating expenses

 

221,034

 

 

 

215,870

 

 

 

 

 

 

 

 

 

Operating income

 

27,638

 

 

 

35,537

 

Interest expense, net

 

(22,872

)

 

 

(30,508

)

Charge-off of deferred financing costs

 

-   

 

 

 

(667

)

Income before equity in income from unconsolidated entities, minority 

interests and gain on sale of assets

 

 

4,766

 

 

 

 

 

4,362

 

 

Equity in income from unconsolidated entities

 

12,771

 

 

 

1,948

 

Minority interests

 

282

 

 

 

489

 

Gain on sale of condominiums

 

3,281

 

 

 

-   

 

Income from continuing operations

 

21,100

 

 

 

6,799

 

Discontinued operations

 

8,488

 

 

 

3,061

 

Net income

 

29,588

 

 

 

9,860

 

Preferred distributions

 

(9,678

)

 

 

(9,678

)

Net income applicable to common unitholders

$

19,910

 

 

$

182

 

 

 

 

 

 

 

 

 

Basic and diluted per common unit data:

 

 

 

 

 

 

 

Net income (loss) from continuing operations

$

0.18

 

 

$

(0.05

)

Net income

$

0.32

 

 

$

-   

 

Basic weighted average common units outstanding

 

62,729

 

 

 

62,323

 

Diluted weighted average common units outstanding

 

63,117

 

 

 

62,323

 

Cash distributions declared on common units

$

0.25

 

 

$

0.15

 

 

 

 

 

 

 

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 Months Ended March 31, 2007 and 2006**

**(unaudited, in thousands)**

 

 

 

**Three Months Ended**

**March 31,**

 

**2007**

 

**2006**

Net income

$

29,588

 

 

$

9,860

 

Unrealized holding gains from interest rate swaps

 

-   

 

 

 

360

 

Foreign currency translation adjustment

 

333

 

 

 

(652

)

Comprehensive income

$

29,921

 

 

$

9,568

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

5

**FELCOR LODGING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Three Months Ended March 31, 2007 and 2006**

**(unaudited, in thousands)**

 

* *

**Three Months Ended March 31,**

 

**2007**

 

**2006**

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

29,588

 

 

$

9,860

 

Adjustments to reconcile net income to net cash provided by (used in)

operating activities:

 

 

 

 

 

 

 

Depreciation

 

25,051

 

 

 

27,351

 

Loss (gain) on sale of assets

 

(9,312

)

 

 

1,077

 

Amortization of deferred financing fees

 

604

 

 

 

774

 

Accretion of debt discount

 

63

 

 

 

296

 

Amortization of unearned compensation

 

1,407

 

 

 

990

 

Equity in income from unconsolidated entities

 

(12,771

)

 

 

(1,948

)

Distributions of income from unconsolidated entities

 

100

 

 

 

510

 

Charge-off of deferred financing costs

 

119

 

 

 

667

 

Loss on early extinguishment of debt

 

782

 

 

 

-   

 

Minority interests

 

(46

)

 

 

(198

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(8,829

)

 

 

(5,950

)

Restricted cash – operating

 

1,447

 

 

 

(1,348

)

Other assets

 

4,139

 

 

 

1,659

 

Accrued expenses and other liabilities

 

7,858

 

 

 

16,477

 

Net cash flow provided by operating activities

 

40,200

 

 

 

50,217

 

 

 

 

 

 

 

 

 

Cash flows (used in) provided by investing activities:

 

 

 

 

 

 

 

Improvements and additions to hotels

 

(69,102

)

 

 

(34,037

)

Additions to condominium project

 

(5,629

)

 

 

(10,295

)

Proceeds from sale of assets

 

41,988

 

 

 

6,773

 

Decrease (increase) in restricted cash – investing

 

3,827

 

 

 

(752

)

Deposit on asset sale

 

1,000

 

 

 

-   

 

Distributions of capital from unconsolidated entities

 

8,562

 

 

 

1,540

 

Net cash flow used in investing activities

 

(19,354

)

 

 

(36,771

)

 

 

 

 

 

 

 

 

Cash flows (used in) provided by financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings

 

5,119

 

 

 

54,526

 

Repayment of borrowings

 

(10,645

)

 

 

(79,844

)

Payment of deferred financing fees

 

(155

)

 

 

(682

)

Decrease in restricted cash – financing

 

-   

 

 

 

2,825

 

Exercise of FelCor stock options

 

1,836

 

 

 

626

 

Contributions from minority interest holders

 

802

 

 

 

860

 

Distributions paid to other partnerships’ minority interests

 

-   

 

 

 

(800

)

Distributions paid to preferred unitholders

 

(9,678

)

 

 

(9,678

)

Distributions paid to common unitholders

 

(15,869

)

 

 

(24

)

Net cash flow used in financing activities

 

(28,590

)

 

 

(32,191

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

92

 

 

 

(23

)

Net change in cash and cash equivalents

 

(7,652

)

 

 

(18,768

)

Cash and cash equivalents at beginning of periods

 

124,179

 

 

 

94,564

 

Cash and cash equivalents at end of periods

$

116,527

 

 

$

75,796

 

 

 

 

 

 

 

 

 

Supplemental cash flow information — 

 

 

 

 

 

 

 

Interest paid

$

14,761

 

 

$

17,125

 

 

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

 

6

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**

**Organization**

 

In 1994, FelCor Lodging Limited Partnership, or FelCor LP, was formed with six hotels.  Our sole general partner is FelCor Lodging Trust Incorporated, or FelCor, a Real Estate Investment Trust, or REIT.  At March 31, 2007, FelCor owned approximately 98% interest in our operations.  At March 31, 2007, we held ownership interests in 96 hotels and were the nation’s largest owner of upper upscale all-suite hotels.  

 

At March 31, 2007,  we held 100% ownership interests (whether by fee, leasehold or otherwise) in 70 hotels, a 90% or greater interest in entities owning five hotels, a 75% interest in an entity owning one hotel, a 60% interest in an entity owning two hotels and 50% interests in unconsolidated entities that owned 18 hotels.  We held majority ownership interests in the operating lessees of 91 of these hotels; consequently, we include their operating revenues and expenses in our consolidated statements of operations.  The operations of 83 of these consolidated hotels were included in continuing operations at March 31, 2007, and eight hotels were designated as held for sale and included in discontinued operations.  The operating revenues and expenses of the remaining five hotels are unconsolidated.

 

At March 31, 2007, we had an aggregate of 63,743,383 redeemable and common units outstanding.

 

The following table reflects the distribution, by brand, of our 83 consolidated hotels included in continuing operations at March 31, 2007:

 

**Brand**

**Hotels**

 

**Rooms**

Embassy Suites Hotels®

 

47

 

 

12,130

Holiday Inn®-branded

 

17

 

 

6,301

Starwood-branded

 

9

 

 

3,217

Doubletree®-branded

 

7

 

 

1,471

Hilton-branded

 

2

 

 

559

Other brands

 

1

 

 

403

Total hotels

 

83

 

 

 

 

At March 31, 2007, we were the owner of the largest number of Embassy Suites Hotels and Doubletree Guest Suites® hotels in North America.  Our hotels are located in major metropolitan and resort areas in the United States (23 states) and Canada (two hotels), with concentrations in California (14 hotels), Florida (13 hotels) and Texas (11 hotels).  Approximately 53% of our hotel room revenues in continuing operations were generated from hotels in these states during the first three months of 2007.

 

At March 31, 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) other 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 months ended March 31, 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 months ended March 31, 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 months ended March 31, 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 18 hotels at March 31, 2007, and 19 hotels at December 31, 2006.  We also owned a 50% interest in joint venture entities owning real estate and providing condominium management services in Myrtle Beach, South Carolina, and leasing four hotels.  We account for our investments in these unconsolidated entities under the equity method.  We do not have any majority-owned subsidiaries that are not consolidated in our financial statements.  We make adjustments to our equity in income from unconsolidated entities related to the depreciation of our excess basis in investment in unconsolidated entities when compared to the historical basis of the assets recorded by the joint ventures.

 

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

 

 

**March 31,**

**2007**

 

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

Balance sheet information:  **

 

 

 

 

 

Investment in hotels, net of accumulated depreciation

$

257,335

 

$

260,628

Total assets

$

300,961

 

$

297,712

Debt

$

195,531

 

$

197,462

Total liabilities

$

204,117

 

$

203,659

Equity

$

96,844

 

$

94,053

 

Debt of our unconsolidated entities at March 31, 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 March 31,**

 

**2007**

 

**2006**

Total revenues

$

18,194

 

 

$

18,115

 

Net income

$

19,754

 

 

$

4,734

 

 

 

 

 

 

 

 

 

Net income attributable to FelCor LP

$

9,877

 

 

$

2,367

 

Additional gain on sale related to basis difference

 

3,336

 

 

 

-   

 

Depreciation of cost in excess of book value

 

(442

)

 

 

(419

)

Equity in income from unconsolidated entities

$

12,771

 

 

$

1,948

 

 

 

 

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

 

 

**March 31, 2007**

 

**December 31, 2006**

Hotel investments

$

50,007

 

 

$

48,641

 

Cost in excess of book value of hotel investments

 

64,147

 

 

 

61,253

 

Land and condominium investments

 

3,481

 

 

 

3,513

 

Hotel lessee investments

 

(1,811

)

 

 

(1,691

)

 

$

115,824

 

 

$

111,716

 

 

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

 

 

**Three Months Ended March 31,**

 

 

**2007**

 

 

 

**2006**

 

Hotel investments

$

12,882

 

 

$

2,073

 

Hotel lessee investments

 

(111

)

 

 

(125

)

 

$

12,771

 

 

$

1,948

 

 

In the first quarter of 2007 a 50% owned joint venture entity sold the Embassy Suites Hotel in Covina, California.  The sale of this hotel resulted in a gain of $15.6 million for this venture.

 

9

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**3.**       **Debt**

 

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

 

* *

 

 

 

**Balance Outstanding**

 

**Encumbered**

**Interest Rate at**

**Maturity**

**March 31,**

**December 31,**

 

 

**Hotels**

 

 

**March 31, 2007**

 

 

**Date**

 

 

**2007**

 

 

**2006**

 

Line of credit(a)

none

 

L + 1.75

 

January 2009

$

-   

 

$

-   

 

Senior term notes

none

 

8.50

 

June 2011

 

298,974

 

 

298,911

 

Senior term notes

none

 

L + 1.875

 

December 2011

 

215,000

 

 

215,000

 

Total line of credit and 

senior debt(b)

 

 

 

7.96

 

 

 

 

513,974

 

 

 

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

 

90,452

 

 

97,553

 

Mortgage debt

 

7 hotels

 

 

7.32

 

March 2009

 

123,427

 

 

124,263

 

Mortgage debt

 

8 hotels

 

 

8.70

 

May 2010

 

168,552

 

 

169,438

 

Mortgage debt

 

6 hotels

 

 

8.73

 

May 2010

 

121,850

 

 

122,578

 

Mortgage debt

 

1 hotel

 

 

L + 2.85

 

August 2008

 

15,500

 

 

15,500

 

Mortgage debt

 

1 hotel

 

 

5.81

 

July 2016

 

12,745

 

 

12,861

 

Other

 

1 hotel   

 

 

9.17

 

August 2011

 

4,256

 

 

4,452

 

Construction loan(d)

 

-      

 

 

L + 2.00

 

October 2007

 

56,004

 

 

58,597

 

Total mortgage debt(b)

 

43 hotels

 

 

7.40

 

 

 

842,786

 

 

855,242

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 

 

 

7.61

%

 

 

$

1,356,760

 

$

1,369,153

 

 

 

(a)

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

 

(b)

Interest rates are calculated based on the average outstanding debt at March 31, 2007.

 

(c)

This debt has three one-year extension options.

 

(d)

We have a recourse construction loan facility for the development of a 184-unit condominium project in Myrtle Beach, South Carolina.  This loan was repaid in full May 1, 2007.

 

We reported interest expense of $22.9 million and $30.5 million for the three months ended March 31, 2007 and 2006, respectively, which is net of: (i) interest income of $1.2 million and $0.8 million and (ii) capitalized interest of $1.6 million and $0.6 million, respectively.  

 

**4.**

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

 

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

 

 

**Three Months Ended March 31,**

 

 

**2007**

 

 

 

**2006**

 

Room revenue

$

204,323

 

 

$

207,986

 

Food and beverage revenue

 

31,773

 

 

 

30,414

 

Other operating departments

 

12,445

 

 

 

12,980

 

Total hotel operating revenue

$

248,541

 

 

$

251,380

 

 

 

10

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**4.**

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

 

For the first three 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 remaining 1% of our revenue was derived from retail space rental revenue and other sources.

 

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

 

 

**Three Months Ended March 31,**

 
 
 

**2007**

 

**2006**

 
 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 
Room

$

48,783

 

 

19.6

%

 

 

$

49,414

 

 

19.7

%

 

 
Food and beverage

 

24,535

 

 

9.9

 

 

 

 

23,660

 

 

9.4

 

 

 
Other operating departments

 

4,947

 

 

2.0

 

 

 

 

5,944

 

 

2.3

 

 

 
Total hotel departmental expenses

$

78,265

 

 

31.5

%

 

 

$

79,018

 

 

31.4

%

 

 

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

 

 

**Three Months Ended March 31,**

 
 
 

**2007**

 

**2006**

 
 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 
Hotel general and administrative expense

$

22,439

 

 

9.0

%

 

 

$

22,292

 

 

8.9

%

 

 
Marketing

 

20,737

 

 

8.3

 

 

 

 

20,705

 

 

8.2

 

 

 
Repair and maintenance

 

13,553

 

 

5.5

 

 

 

 

13,197

 

 

5.3

 

 

 
Energy

 

11,828

 

 

4.8

 

 

 

 

12,663

 

 

5.0

 

 

 
Total other property operating costs

$

68,557

 

 

27.6

%

 

 

$

68,857

 

 

27.4

%

 

 

Hotel employee compensation and benefit expenses of $71.4 million and $70.3 million for the three months ended March 31, 2007 and 2006, respectively, are included in hotel departmental expenses and other property operating costs.

 

11

**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 March 31,**

 

 

**2007**

 

 

 

**2006**

 

Operating lease expense(a)

$

16,164

 

 

$

15,385

 

Real estate and other taxes

 

8,601

 

 

 

9,013

 

Property insurance, general liability insurance and other

 

4,464

 

 

 

2,134

 

Total taxes, insurance and lease expense

$

29,229

 

 

$

26,532

 

 

 

(a)

Operating lease expense includes hotel lease expense of $14.3 million and $13.6 million associated with 13 hotels leased by us from unconsolidated subsidiaries and $1.9 million and $1.8 million of ground lease expense for the three months ended March 31, 2007 and 2006, respectively.  Included in operating lease expense is percentage rent based on operating results of $7.9 million and $6.9 million, respectively, for the three months ended March 31, 2007 and 2006.

 

**6.**

**Condominium Project**

 

Development of our Royale Palms condominium project in Myrtle Beach, South Carolina was substantially completed in the first quarter of 2007.  We finalized the sale of 31 of the 184 units in the quarter and recognized a gain on sale of $3.3 million under the completed contract method.  We expect substantially all the remaining unit sales to be finalized in the second quarter of 2007, at which time we will recognize the remainder of the gain on sale and repay the outstanding construction loan.  Net proceeds from the sale of the 31 units were $15.3 million, of which $8.8 million was paid directly to the construction lender prior to March 31, 2007 as a reduction in the outstanding balance of our construction loan.  The remaining $6.5 million was in-transit to the lender at March 31, 2007 and has been recorded as a receivable on the accompanying March 31, 2007balance sheet.  At March 31, 2007, the outstanding balance of the construction loan was $56.0 million.

 

**7.**

**Discontinued Operations**

 

The results of operations of eight hotels designated as held for sale at March 31, 2007, three hotels sold in 2007 through March 31, 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 March 31,**

 

 

**2007**

 

 

 

**2006**

 

Operating revenue

$

15,498

 

 

$

64,001

 

Operating expenses

 

(11,879

)

 

 

(59,246

)

Operating income

 

3,619

 

 

 

4,755

 

Direct interest costs, net

 

(25

)

 

 

(326

)

Gain (loss) on sale of depreciable assets

 

6,031

 

 

 

(1,077

)

Charge-off of deferred debt costs

 

(119

)

 

 

-   

 

Loss on early extinguishment of debt

 

(782

)

 

 

-   

 

Minority interests

 

(236

)

 

 

(291

)

Income from discontinued operations

$

8,488

 

 

$

3,061

 

 

 

12

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**7.**

**Discontinued Operations – (continued)**

 

In 2007, we sold two consolidated hotels in the first quarter, for aggregate gross proceeds of $42.7 million, and one unconsolidated hotel for gross proceeds of $22.0 million.  The operations of the unconsolidated hotel are consolidated because of our majority ownership of the lessee.  

 

We consider a hotel as “held for sale” once we determine it is probable that the hotel will be sold within the next 12 months.  At March 31, 2007, we owned eight hotels that were held for sale.  The operating results of these hotels were included in discontinued operations.

 

**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**

**March 31,**

 

**2007**

 

**2006**

Numerator:

 

 

 

 

 

 

 

Income from continuing operations

$

21,100

 

 

$

6,799

 

Less: Preferred distributions

 

(9,678

)

 

 

(9,678

)

Income (loss) from continuing operations applicable to common unitholders

 

11,422

 

 

 

(2,879

)

Discontinued operations

 

8,488

 

 

 

3,061

 

Net income applicable to common unitholders

$

19,910

 

 

$

182

 

Denominator:

 

 

 

 

 

 

 

Denominator for basic earnings per unit

 

62,729

 

 

 

62,323

 

Denominator for diluted earnings per unit

 

63,117

 

 

 

62,323

 

 

 

 

 

 

 

 

 

Earnings (loss) per unit data:

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.18

 

 

$

(0.05

)

Discontinued operations

$

0.14

 

 

$

0.05

 

Net income

$

0.32

 

 

$

-   

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.18

 

 

$

(0.05

)

Discontinued operations

$

0.14

 

 

$

0.05

 

Net income

$

0.32

 

 

$

-   

 

 

 

13

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**8.**

**Earnings (Loss) Per Unit – (continued)**

 

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**

**March 31,**

 

**2007**

 

**2006**

FelCor’s options and unvested restricted stock

 

-   

 

 

 

316

 

Series A convertible preferred units

 

9,985

 

 

 

9,985

 

 

Series A preferred distributions that would be excluded from net income (loss) applicable to common unitholders, if these Series A preferred units were dilutive, were $6.3 million for both the three months ended March 31, 2007 and 2006.

 

**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 FASBStatement No. 109, *Accounting for Income Taxes*.  The interpretation clearly scopes out income tax positions related to FASB Statement No. 5, *Accounting for Contingencies*.  There was no cumulative effect as a result of FIN 48’s adoption in the first quarter of 2007.

 

**10.**

**Application of New Accounting Standards**

 

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

 

 

14

**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, are guarantors of our senior debt.  The following tables present consolidating information for the Subsidiary Guarantors.

 

**CONSOLIDATING BALANCE SHEET**

**March 31, 2007**

**(in thousands)**

 

**ASSETS**

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

 

Net investment in hotel properties

$

112,154

 

 

$

949,185

 

$

1,026,997

 

 

$

-   

 

 

$

2,088,336

 

Equity investment in consolidated entities

 

1,341,202

 

 

 

-   

 

 

-   

 

 

 

(1,341,202

)

 

 

-   

 

Investment in unconsolidated entities

 

85,939

 

 

 

28,188

 

 

1,697

 

 

 

-   

 

 

 

115,824

 

Hotels held for sale

 

-   

 

 

 

53,970

 

 

44,912

 

 

 

-   

 

 

 

98,882

 

Cash and cash equivalents

 

57,318

 

 

 

51,967

 

 

7,242

 

 

 

-   

 

 

 

116,527

 

Restricted cash

 

357

 

 

 

3,431

 

 

12,757

 

 

 

-   

 

 

 

16,545

 

Accounts receivable

 

7,541

 

 

 

41,301

 

 

6,594

 

 

 

-   

 

 

 

55,436

 

Deferred assets

 

4,139

 

 

 

564

 

 

4,208

 

 

 

-   

 

 

 

8,911

 

Condominium development project

 

-   

 

 

 

-   

 

 

59,853

 

 

 

-   

 

 

 

59,853

 

Other assets

 

10,904

 

 

 

16,136

 

 

181

 

 

 

-   

 

 

 

27,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,619,554

 

 

$

1,144,742

 

$

1,164,441

 

 

$

(1,341,202

)

 

$

2,587,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**LIABILITES AND PARTNERS’CAPITAL**

Debt

$

529,474

 

 

$

127,684

 

$

699,602

 

 

$

-   

 

 

$

1,356,760

 

Distributions payable

 

24,142

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

24,142

 

Accrued expenses and other liabilities

 

35,032

 

 

 

102,453

 

 

9,314

 

 

 

-   

 

 

 

146,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

588,648

 

 

 

230,137

 

 

708,916

 

 

 

-   

 

 

 

1,527,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units, at redemption value

 

27,534

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

27,534

 

Minority interest – other partnerships

 

-   

 

 

 

95

 

 

28,833

 

 

 

-   

 

 

 

28,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred units

 

478,774

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

478,774

 

Common units

 

524,598

 

 

 

898,338

 

 

426,692

 

 

 

(1,341,202

)

 

 

508,426

 

Accumulated other comprehensive income

 

-   

 

 

 

16,172

 

 

-   

 

 

 

-   

 

 

 

16,172

 

Total partners’ capital

 

1,003,372

 

 

 

914,510

 

 

426,692

 

 

 

(1,341,202

)

 

 

1,003,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable units

and partners' capital

$

1,619,554

 

 

$

1,144,742

 

$

1,164,441

 

 

$

(1,341,202

)

 

$

2,587,535

 

 

 

15

**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

 

 

 

16

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

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

 

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

**For the Three Months Ended March 31, 2007**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

248,541

 

 

$

-   

 

 

$

-   

 

 

$

248,541

 

Percentage lease revenue

 

5,578

 

 

 

-   

 

 

 

42,000

 

 

 

(47,578

)

 

 

-   

 

Other revenue

 

115

 

 

 

-   

 

 

 

16

 

 

 

-   

 

 

 

131

 

Total revenue

 

5,693

 

 

 

248,541

 

 

 

42,016

 

 

 

(47,578

)

 

 

248,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

159,945

 

 

 

-   

 

 

 

-   

 

 

 

159,945

 

Taxes, insurance and lease expense

 

985

 

 

 

70,458

 

 

 

5,364

 

 

 

(47,578

)

 

 

29,229

 

Abandoned projects

 

-   

 

 

 

22

 

 

 

-   

 

 

 

-   

 

 

 

22

 

Corporate expenses

 

719

 

 

 

3,793

 

 

 

2,275

 

 

 

-   

 

 

 

6,787

 

Depreciation

 

2,083

 

 

 

12,079

 

 

 

10,889

 

 

 

-   

 

 

 

25,051

 

Total operating expenses

 

3,787

 

 

 

246,297

 

 

 

18,528

 

 

 

(47,578

)

 

 

221,034

 

Operating income

 

1,906

 

 

 

2,244

 

 

 

23,488

 

 

 

-   

 

 

 

27,638

 

Interest expense, net

 

(6,013

)

 

 

(1,838

)

 

 

(15,021

)

 

 

-   

 

 

 

(22,872

)

Income (loss) before equity in income

from unconsolidated entities, minority 

interests and gain on sale of assets

 

 

 

(4,107

)

 

 

 

 

406

 

 

 

8,467

 

 

 

-   

 

 

 

4,766

 

Equity in income from consolidated entities

 

20,135

 

 

 

-   

 

 

 

-   

 

 

 

(20,135

)

 

 

-   

 

Equity in income from unconsolidated entities

 

13,442

 

 

 

(653

)

 

 

(18

)

 

 

-   

 

 

 

12,771

 

Minority interests in other partnerships

 

-   

 

 

 

592

 

 

 

(310

)

 

 

-   

 

 

 

282

 

Gain on condominiums

 

-   

 

 

 

-   

 

 

 

3,281

 

 

 

-   

 

 

 

3,281

 

Income from continuing operations

 

29,470

 

 

 

345

 

 

 

11,420

 

 

 

(20,135

)

 

 

21,100

 

Discontinued operations from consolidated 

entities

 

118

 

 

 

7,286

 

 

 

1,084

 

 

 

-   

 

 

 

8,488

 

Net income

 

29,588

 

 

 

7,631

 

 

 

12,504

 

 

 

(20,135

)

 

 

29,588

 

Preferred distributions

 

(9,678

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(9,678

)

Net income applicable to unitholders

$

19,910

 

 

$

7,631

 

 

$

12,504

 

 

$

(20,135

)

 

$

19,910

 

 

 

 

 

17

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

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

 

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

**For the Three Months Ended March 31, 2006**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

251,380

 

 

$

-   

 

 

$

-   

 

 

$

251,380

 

Percentage lease revenue

 

5,294

 

 

 

-   

 

 

 

40,812

 

 

 

(46,106

)

 

 

-   

 

Other revenue

 

27

 

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

27

 

Total revenue

 

5,321

 

 

 

251,380

 

 

 

40,812

 

 

 

(46,106

)

 

 

251,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

161,097

 

 

 

-   

 

 

 

-   

 

 

 

161,097

 

Taxes, insurance and lease expense

 

623

 

 

 

67,430

 

 

 

4,585

 

 

 

(46,106

)

 

 

26,532

 

Corporate expenses

 

4,398

 

 

 

1,402

 

 

 

4

 

 

 

-   

 

 

 

5,804

 

Depreciation

 

1,786

 

 

 

11,179

 

 

 

9,472

 

 

 

-   

 

 

 

22,437

 

Total operating expenses

 

6,807

 

 

 

241,108

 

 

 

14,061

 

 

 

(46,106

)

 

 

215,870

 

Operating income (loss)

 

(1,486

)

 

 

10,272

 

 

 

26,751

 

 

 

-   

 

 

 

35,537

 

Interest expense, net

 

(15,567

)

 

 

(3,760

)

 

 

(11,181

)

 

 

-   

 

 

 

(30,508

)

Charge-off of deferred financing costs

 

-   

 

 

 

(667

)

 

 

-   

 

 

 

-   

 

 

 

(667

)

Income (loss) before equity in income

from unconsolidated entities, minority 

interests and gain on sale of assets

 

(17,053

)

 

 

5,845

 

 

 

15,570

 

 

 

-   

 

 

 

4,362

 

Equity in income from consolidated entities

 

24,336

 

 

 

-   

 

 

 

-   

 

 

 

(24,336

)

 

 

-   

 

Equity in income from unconsolidated entities

 

2,310

 

 

 

(349

)

 

 

(13

)

 

 

-   

 

 

 

1,948

 

Minority interests in other partnerships

 

-   

 

 

 

771

 

 

 

(282

)

 

 

-   

 

 

 

489

 

Income from continuing operations

 

9,593

 

 

 

6,267

 

 

 

15,275

 

 

 

(24,336

)

 

 

6,799

 

Discontinued operations from consolidated 

entities

 

267

 

 

 

946

 

 

 

1,848

 

 

 

-   

 

 

 

3,061

 

Net income

 

9,860

 

 

 

7,213

 

 

 

17,123

 

 

 

(24,336

)

 

 

9,860

 

Preferred distributions

 

(9,678

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(9,678

)

Net income applicable to unitholders

$

182

 

 

$

7,213

 

 

$

17,123

 

 

$

(24,336

)

 

$

182

 

 

 

18

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

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

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the Three Months Ended March 31, 2007**

**(in thousands)**

 

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Total Consolidated**

Cash flows from (used in) operating activities

$

(660

)

 

$

16,768

 

 

$

24,092

 

 

$

40,200

 

Cash flows from (used in) investing activities

 

770

 

 

 

14,025

 

 

 

(34,149

)

 

 

(19,354

)

Cash flows from (used in) financing activities

 

(12,520

)

 

 

(25,884

)

 

 

9,814

 

 

 

(28,590

)

Effect of exchange rates changes on cash

 

-   

 

 

 

92

 

 

 

-   

 

 

 

92

 

Change in cash and cash equivalents

 

(12,410

)

 

 

5,001

 

 

 

(243

)

 

 

(7,652

)

Cash and cash equivalents at beginning of period

 

69,728

 

 

 

46,966

 

 

 

7,485

 

 

 

124,179

 

Cash and equivalents at end of period

$

57,318

 

 

$

51,967

 

 

$

7,242

 

 

$

116,527

 

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the Three Months Ended March 31, 2006**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Total Consolidated**

Cash flows from (used in) operating activities

$

(14,993

)

 

$

30,209

 

 

$

35,001

 

 

$

50,217

 

Cash flows from (used in) investing activities

 

(296

)

 

 

(8,589

)

 

 

(27,886

)

 

 

(36,771

)

Cash flows from (used in) financing activities

 

(7,383

)

 

 

(16,307

)

 

 

(8,501

)

 

 

(32,191

)

Effect of exchange rates changes on cash

 

-   

 

 

 

(23

)

 

 

-   

 

 

 

(23

)

Change in cash and cash equivalents

 

(22,672

)

 

 

5,290

 

 

 

(1,386

)

 

 

(18,768

)

Cash and cash equivalents at beginning of period

 

48,393

 

 

 

36,189

 

 

 

9,982

 

 

 

94,564

 

Cash and equivalents at end of period

$

25,721

 

 

$

41,479

 

 

$

8,596

 

 

$

75,796

 

 

 

19

**Item 2.**

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

 

**General**

 

We started on a three year $430 million capital improvement program in late 2006 designed to improve the quality, returns on investment and competitive position of our core hotel portfolio.  In 2007, we expect to complete renovations on 62 hotels and spend approximately $225 million on these renovations.  During 2007, through April 30, we have completed renovations on 21 hotels.

 

Our hotels experienced displacement associated with the renovation program, which resulted in reductions to revenue per available room, or RevPAR, of approximately 3% and hotel earnings before interest, taxes, depreciation and amortization, or EBITDA, of approximately $4.5 million.  The displacement effects on RevPAR and Hotel EBITDA negatively affected our Hotel EBITDA margin by approximately 100 basis points during the quarter.  In the first quarter of 2006, business interruption insurance proceeds improved Hotel EBITDA margin by 57 basis points.

 

During the first quarter of 2007, our RevPAR increased 1.0% for our consolidated hotels in continuing operations as a result of a 7.8% increase in average daily room rate, or ADR.  However, our occupancy decreased in the same period by 6.3%, compared to the same period last year, largely because of displacement.  We attribute the increase in ADR, and to a lesser extent, the decrease in occupancy (to the extent not attributable to displacement) to a change in our customer mix through room rate management and a reduction in the number of lower-ADR rooms that we make available at any point in time, which in turn makes more rooms available for higher-ADR transient business.  This change in customer mix is affecting both pre-renovation and post-renovation hotels.  

 

At March 31, 2007, we had eight non-strategic hotels, all of which were under contract for sale.  We estimate that the aggregate gross proceeds from the disposition of these hotels will be approximately $126 million.

 

Our Royale Palms condominium project in Myrtle Beach, South Carolina was substantially completed in the first quarter of 2007.  We closed on the sale of 31 of the 184 units in the quarter and recognized a gain of $3.3 million. We expect substantially all the remaining condominium sales to be closed in the second quarter of 2007, with some units closing in the third quarter.  We will recognize the remainder of the gain on sale and pay off the construction loan outstanding as the condominium units are closed. We currently expect to earn net income of at least $18 million from this project, and we expect that between 50 and 60% of the condominium units will enter our rental program, which will result in additional continuing income.

 

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

 

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

 

 

**Three Months Ended March 31,**

 

 

**2007**

 

 

**2006**

 

**% Change****2007-2006**

RevPAR

$

94.28

 

 

$

93.33

 

 

1.0

 

%

Hotel EBITDA(1)

$

71,923

 

 

$

75,767

 

 

(5.1

)

%

Hotel EBITDA margin(1)

 

28.9

%

 

 

30.1

%

 

(4.0

)

%

Income from continuing operations

$

21,100

 

 

$

6,799

 

 

210.3

 

%

Funds From Operations (“FFO”)(1) (2)

$

30,611

 

 

$

31,333

 

 

(2.4

)

%

Earnings Before Interest, Taxes, Depreciation and Amortization

(“EBITDA”)(1)(3)

 

$

 

84,601

 

 

 

$

 

74,149

 

 

 

14.1

 

 

 

%

 

_____________

 

(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.

 

20

 

(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 March 31,**

 

**2007**

 

**2006**

Abandoned projects

$

(22

)

 

$

-   

 

Charge-off of deferred financing costs

 

(119

)

 

 

(667

)

Loss on early extinguishment of debt

 

(692

)

 

 

-   

 

 

 

(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 March 31,**

 

**2007**

 

**2006**

Gain (loss) on sale of hotels

$

6,031

 

 

$

(1,077

)

Gain on sale of unconsolidated entities

 

11,182

 

 

 

-   

 

Abandoned projects

 

(22

)

 

 

-   

 

Charge-off of deferred financing costs

 

(119

)

 

 

(667

)

Loss on early extinguishment of debt

 

(692

)

 

 

-   

 

 

 

21

**Results of Operations**

 

*Comparison of the Three Months Ended March 31, 2007 and 2006*

 

For the three months ended March 31, 2007, we recorded net income applicable to common unitholders of $19.9 million, or $0.32 per unit, compared to $0.2 million for the same period in 2006.  We had income from continuing operations of $21.1 million in the first quarter of 2007, compared to $6.8 million for the same period in 2006.  During the first quarter of 2007, we recorded in income from continuing operations an $11.2 million gain in equity in income from unconsolidated entities from the sale of a hotel by one of our unconsolidated entities, as well as a $3.3 million gain from the sale of 31 condominium units in Myrtle Beach, South Carolina.

 

Operating income for the first quarter of 2007 decreased by $7.9 million compared to the same period in 2006.  This decrease in operating income is principally attributed to: (i) a $2.7 million decrease in revenue; (ii) a $2.7 million increase in taxes, insurance and lease expense and (iii) a $2.6 million increase in depreciation expense.

 

Total revenue from continuing operations was $248.7 million, a 1.1% decrease compared to the same period in 2006.  The decrease in revenue is principally attributed to $6.3 million of business interruption revenue from the 2005 hurricanes recorded in the first quarter of 2006, offset in part by a 1.0% increase in RevPAR compared to same period in 2006.  

 

In the first quarter of 2007, taxes, insurance and lease expense increased by $2.7 million and increased as a percentage of total revenue from 10.6% to 11.8% compared to the same period in 2006.  The increase was principally attributed to increases in property insurance expense ($1.5 million) and general liability expense ($0.9 million).  

 

In the first quarter of 2007, depreciation expense increased $2.6 million, compared to the same period in 2006.  This increase is attributed to the $168.5 million of consolidated hotel capital expenditures incurred in 2006 and the $69.1 million of consolidated hotel capital expenditures incurred in the first quarter of 2007.

 

In the first quarter of 2007, the remainder of our operating expenses (hotel departmental expenses, other property related costs, management and franchise fees, abandoned projects, and corporate expenses) decreased by $0.1 million on a combined basis and increased as a percentage of total revenue from 66.4% to 67.1% compared to the first quarter of 2006.  None of the comparisons of these expenses, individually, from the first quarter of 2006 to the first quarter of 2007 were significant.

 

Net interest expense included in continuing operations for the first quarter decreased $7.6 million, or 25.0%, compared to the same period in 2006.  This decrease was primarily attributable to the $212.7 million reduction in our average outstanding debt and a 53 basis point decrease in average interest rate compared to the first quarter of 2006.

 

We finalized the sale of 31 of the 184 units at our Royale Palms condominium project in the quarter and recognized a gain on sale of $3.3 million under the completed contract method.

 

Discontinued operations includes the operating income, direct interest costs, and net gains on disposition related to three hotels sold through March 31, 2007, 31 hotels sold in 2006 and eight hotels held for sale at March 31, 2007.  In the first quarter of 2007, income from discontinued operations increased by $5.4 million, compared to the first quarter of 2006, primarily from a $7.1 million increase in net gains from hotel dispositions which were partially offset by a $1.1 million decrease in operating income attributable to hotels sold subsequent to March 31, 2006, and a $0.9 million increase in losses related to debt extinguishment. 

 

22

**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 March 31,**

 

**2007**

 

**2006**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

**Net income**

$

29,588

 

 

 

 

 

 

 

 

$

9,860

 

 

 

 

 

 

 

Preferred distributions

 

(9,678

)

 

 

 

 

 

 

 

 

(9,678

)

 

 

 

 

 

 

**Net income applicable to common unitholders**

 

19,910

 

 

63,117

 

$

0.32

 

 

 

182

 

 

62,323

 

$

-   

 

Depreciation, continuing operations

 

25,051

 

 

-   

 

 

0.40

 

 

 

22,437

 

 

-   

 

 

0.36

 

Depreciation, unconsolidated entities and discontinued operations

 

2,863

 

 

-   

 

 

0.04

 

 

 

7,637

 

 

-   

 

 

0.12

 

Loss (gain) on sale of hotels, net of income tax

 

(6,031

)

 

-   

 

 

(0.10

)

 

 

1,077

 

 

-   

 

 

0.02

 

Gain on sale of unconsolidated entities

 

(11,182

)

 

-   

 

 

(0.18

)

 

 

-   

 

 

-   

 

 

-   

 

Conversion of options and unvested restricted units

 

-   

 

 

-   

 

 

-   

 

 

 

-   

 

 

316

 

 

-   

 

**FFO**

$

30,611

 

 

63,117

 

$

0.48

 

 

$

31,333

 

 

62,639

 

$

0.50

 

 

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 March 31,**

 

**2007**

 

**2006**

Abandoned projects

$

(22

)

 

$

-   

 

Charge-off of deferred financing costs

 

(119

)

 

 

(667

)

Loss on early extinguishment of debt

 

(692

)

 

 

-   

 

 

 

23

**Reconciliation of Net Income to EBITDA**

 (in thousands)

 

 

**Three Months Ended****March 31,**

 

**2007**

 

 

**2006**

 

**Net income**

$

29,588

 

 

$

9,860

 

Depreciation, continuing operations

 

25,051

 

 

 

22,437

 

Depreciation, unconsolidated entities and discontinued operations

 

2,863

 

 

 

7,637

 

Interest expense

 

24,118

 

 

 

31,295

 

Interest expense, unconsolidated entities and discontinued operations

 

1,574

 

 

 

1,930

 

Amortization expense

 

1,407

 

 

 

990

 

**EBITDA**

$

84,601

 

 

$

74,149

 

 

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 March 31,**

 

**2007**

 

**2006**

Gain (loss) on sale of hotels

$

6,031

 

 

$

(1,077

)

Gain on sale of unconsolidated entities

 

11,182

 

 

 

-   

 

Abandoned projects

 

(22

)

 

 

-   

 

Charge-off of deferred financing costs

 

(119

)

 

 

(667

)

Loss on early extinguishment of debt

 

(692

)

 

 

-   

 

 

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 March 31, 2007.

 

**Hotel EBITDA and Hotel EBITDA Margin**

(dollars in thousands)

 

 

**Three Months Ended March 31,**

 

 

**2007**

 

**2006**

 

Total revenue

$

248,672

 

 

$

251,407

 

Retail space rental and other revenue

 

(131

)

 

 

(27

)

Hotel operating revenue

 

248,541

 

 

 

251,380

 

Hotel operating expenses

 

(176,618

)

 

 

(175,613

)

Hotel EBITDA

$

71,923

 

 

$

75,767

 

Hotel EBITDA margin(1)

 

28.9%

 

 

 

30.1%

 

 
 
 

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

 

 

24

**Hotel Operating Expense Composition**

(dollars in thousands)

 

 

**Three Months Ended March 31,**

 

**2007**

 

**2006**

Reconciliation of total operating expense to hotel operating expense:

 

 

 

 

 

 

 

Total operating expenses

$

221,034

 

 

$

215,870

 

Unconsolidated taxes, insurance and lease expense

 

1,703

 

 

 

1,583

 

Consolidated hotel lease expense

 

(14,259

)

 

 

(13,599

)

Corporate expenses

 

(6,787

)

 

 

(5,804

)

Abandoned projects

 

(22

)

 

 

-   

 

Depreciation

 

(25,051

)

 

 

(22,437

)

Hotel operating expenses

$

176,618

 

 

$

175,613

 

 

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

 

**Reconciliation of Net Income to Hotel EBITDA**

(in thousands)

 

 

**Three Months Ended****March 31,**

 

**2007**

 

**2006**

Net income

$

29,588

 

 

$

9,860

 

Discontinued operations

 

(8,488

)

 

 

(3,061

)

Equity in income from unconsolidated entities

 

(12,771

)

 

 

(1,948

)

Minority interests

 

(282

)

 

 

(489

)

Consolidated hotel lease expense

 

14,259

 

 

 

13,599

 

Unconsolidated taxes, insurance and lease expense

 

(1,703

)

 

 

(1,583

)

Interest expense, net

 

22,872

 

 

 

30,508

 

Charge-off of deferred financing costs

 

-   

 

 

 

667

 

Corporate expenses

 

6,787

 

 

 

5,804

 

Depreciation

 

25,051

 

 

 

22,437

 

Abandoned projects

 

22

 

 

 

-   

 

Gain on sale of condominiums

 

(3,281

)

 

 

-   

 

Retail space rental and other revenue

 

(131

)

 

 

(27

)

**Hotel EBITDA**

$

71,923

 

 

$

75,767

 

 

 

25

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

 

 

**Three Months Ended**

**March 31,**

* *

**2007**

 

**2006**

Ratio of operating income to total revenue

11.2

%

 

14.1

%

Retail space rental and other revenue

(0.1

)

 

-  

 

Unconsolidated taxes, insurance and lease expense

(0.7

)

 

(0.6

)

Consolidated hotel lease expense

5.7

 

 

5.4

 

Corporate expenses

2.7

 

 

2.3

 

Depreciation

10.1

 

 

8.9

 

Hotel EBITDA margin

28.9

%

 

30.1

%

 

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

 

*FFO and EBITDA*

 

The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis.  We compute FFO in accordance with standards established by NAREIT.  This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do.

 

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

 

*Hotel EBITDA and Hotel EBITDA Margin*

 

Hotel EBITDA and Hotel EBITDA margin are commonly used measures of performance in the hotel industry and give investors a more complete understanding of the operating results over which our individual hotels and operating managers have direct control.  We believe that Hotel EBITDA and Hotel EBITDA margin are useful to investors by providing greater transparency with respect to two significant measures used by us in our financial and operational decision-making.  Additionally, using these measures facilitates comparisons with other hotel REITs and hotel owners.  We present Hotel EBITDA and Hotel EBITDA margin by eliminating corporate-level expenses, depreciation and expenses related to our capital structure.  We eliminate corporate-level costs and expenses because we believe property-level results provide investors with supplemental information into the ongoing operational performance of 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 

26

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.

 

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.  

 

27

**Hotel Portfolio Composition**

 

The following tables set forth, as of March 31, 2007, for 83 hotels included in our consolidated portfolio of continuing operations, distribution by brand, by our top metropolitan markets, by selected states, by type of location, and by market segment.  

 

**Brand**

 

 

 

**Hotels**

 

 

**Rooms**

 

**% of**

**Total Rooms**

 

**% of 2006**

**Hotel** **EBITDA**

Embassy Suites Hotels

 

47

 

12,130

 

51

 

57

 

Holiday Inn-branded

 

17

 

6,301

 

26

 

18

 

Starwood-branded

 

9

 

3,217

 

13

 

15

 

Doubletree-branded

 

7

 

1,471

 

6

 

7

 

Hilton-branded

 

2

 

559

 

2

 

2

 

Other

 

1

 

403

 

2

 

1

 

 

 

 

 

 

 

 

 

 

 

 

**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

 

739

 

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

 

32

 

8,200

 

34

 

37

 

Urban

 

20

 

6,361

 

26

 

25

 

Airport

 

20

 

6,203

 

26

 

24

 

Resort

 

11

 

3,317

 

14

 

14

 

 

 

 

 

 

 

 

 

 

 

**Segment**

 

 

 

 

 

 

 

 

 

 

Upper-upscale 

 

65

 

17,377

 

72

 

81

 

Full service

 

17

 

6,301

 

26

 

18

 

Upscale

 

1

 

403

 

2

 

1

 

 

 

28

**Hotel Operating Statistics**

 

The following tables set forth historical occupancy, ADR and RevPAR at March 31, 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 March 31,**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites Hotels

72.5

 

76.5

 

(5.3

)

Holiday Inn-branded hotels

63.4

 

70.5

 

(10.1

)

Starwood-branded hotels(a)

68.8

 

71.0

 

(3.2

)

Doubletree-branded hotels

71.7

 

74.4

 

(3.7

)

Other hotels(b)

53.9

 

61.0

 

(11.6

)

 

 

 

 

 

 

 

Total hotels 

68.8

 

73.5

 

(6.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**ADR ($)**

 

**Three Months Ended March 31,**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites Hotels

148.43

 

137.62

 

7.9

 

Holiday Inn-branded hotels

112.82

 

106.37

 

6.1

 

Starwood-branded hotels(a)

131.69

 

123.26

 

6.8

 

Doubletree-branded hotels

149.54

 

133.69

 

11.9

 

Other hotels(b)

126.96

 

118.80

 

6.9

 

 

 

 

 

 

 

 

Total hotels 

137.01

 

127.05

 

7.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**RevPAR ($)**

 

**Three Months Ended March 31,**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites Hotels

107.55

 

105.27

 

2.2

 

Holiday Inn-branded hotels

71.54

 

75.02

 

(4.6

)

Starwood-branded hotels(a)

90.56

 

87.56

 

3.4

 

Doubletree-branded hotels

107.18

 

99.50

 

7.7

 

Other hotels(b)

68.47

 

72.48

 

(5.5

)

 

 

 

 

 

 

 

Total hotels 

94.28

 

93.33

 

1.0

 

 

 

(a)

Starwood-branded hotels include eight Sheraton-branded and one Westin.

 

(b)

Other hotels include two Hilton-branded and one Crowne Plaza.

 

29

**Operating Statistics for Our Top Markets**

 

* *

**Occupancy (%)**

 

**Three Months Ended March 31,**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

86.8

 

88.6

 

(2.0

)

Atlanta

74.5

 

80.0

 

(7.0

)

San Francisco Bay area

66.8

 

72.3

 

(7.7

)

Los Angeles area

77.5

 

78.0

 

(0.6

)

Orlando

79.2

 

79.7

 

(0.6

)

Dallas

70.4

 

74.5

 

(5.4

)

Phoenix

81.9

 

83.3

 

(1.6

)

San Diego

78.5

 

82.1

 

(4.4

)

Minneapolis

69.1

 

65.7

 

5.2

 

Northern New Jersey

59.8

 

65.8

 

(9.1

)

Washington, D.C.

62.7

 

61.8

 

1.4

 

Philadelphia

55.8

 

59.8

 

(6.6

)

Chicago

60.0

 

67.6

 

(11.3

)

San Antonio

71.9

 

78.2

 

(8.1

)

Boston

51.9

 

65.6

 

(20.9

)

 

**ADR ($)**

 

**Three Months Ended March 31,**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

198.07

 

181.50

 

9.1

 

Atlanta

125.34

 

120.13

 

4.3

 

San Francisco Bay area

131.09

 

121.58

 

7.8

 

Los Angeles area

150.64

 

132.45

 

13.7

 

Orlando

122.71

 

112.64

 

8.9

 

Dallas

130.64

 

116.12

 

12.5

 

Phoenix

180.43

 

160.65

 

12.3

 

San Diego

152.53

 

135.86

 

12.3

 

Minneapolis

139.03

 

132.37

 

5.0

 

Northern New Jersey

152.06

 

146.23

 

4.0

 

Washington, D.C.

172.96

 

164.94

 

4.9

 

Philadelphia

122.85

 

115.24

 

6.6

 

Chicago

122.42

 

113.47

 

7.9

 

San Antonio

109.50

 

98.68

 

11.0

 

Boston

140.39

 

133.53

 

5.1

 

 

**RevPAR ($)**

 

**Three Months Ended March 31,**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

171.95

 

160.77

 

7.0

 

Atlanta

93.32

 

96.14

 

(2.9

)

San Francisco Bay area

87.51

 

87.96

 

(0.5

)

Los Angeles area

116.81

 

103.31

 

13.1

 

Orlando

97.17

 

89.75

 

8.3

 

Dallas

92.01

 

86.46

 

6.4

 

Phoenix

147.85

 

133.77

 

10.5

 

San Diego

119.68

 

111.56

 

7.3

 

Minneapolis

96.13

 

87.00

 

10.5

 

Northern New Jersey

90.95

 

96.27

 

(5.5

)

Washington, D.C.

108.36

 

101.94

 

6.3

 

Philadelphia

68.60

 

68.90

 

(0.4

)

Chicago

73.46

 

76.76

 

(4.3

)

San Antonio

78.71

 

77.14

 

2.0

 

Boston

72.87

 

87.62

 

(16.8

)

 

 

30

**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 three months ended March 31, 2007, net cash flow provided by operating activities, consisting primarily of hotel operations, was $40.2 million.  At March 31, 2007, we had cash on hand of $116.5 million, including approximately $43.4 million held under management agreements to meet minimum working capital requirements.

 

We paid common distributions of $0.25 per unit for the first quarter of 2007 and are increasing the common distribution to $0.30 per unit effective the second quarter.  FelCor’s board of directors will determine the amount of future common and preferred distributions for each quarter, based upon the actual operating results for that quarter, economic conditions, other operating trends, our financial condition and capital requirements, as well as FelCor’s minimum REIT distribution requirements.  

 

We have committed to spend approximately $430 million over a three year period, commencing in late 2006, to renovate our core hotels.  In 2006, we completed approximately $43 million of our capital program, and in 2007, through March 31, we completed approximately $79 million more.  Starting in December 2005, and through the first quarter of 2007, we sold 37 non-strategic hotels (one of which was unconsolidated) from which we generated gross proceeds of $593.8 million.  We expect the sale of the remaining eight non-strategic hotels to provide gross proceeds of approximately $126 million.  We used a portion of proceeds from hotel sales to pay down debt by approximately $400 million in 2006 and are using these proceeds to fund our hotel renovations.

 

In 2005, we started construction on the 184-unit Royale Palms condominium development in Myrtle Beach, South Carolina.  The project was approximately 98% presold.  Through March 31, 2007, we closed on the sale of 31 units.  We expect sales of these pre-sold units to be substantially completed in the second quarter of 2007 and expect to receive aggregate net proceeds after construction loan repayment of at least $21 million at the completion of the project.  

 

We currently expect that our cash flow provided by operating activities for 2007 will be approximately $179 to $183 million.  During the three months ended March 31, 2007, we experienced significant displacement from hotel renovation that reduced revenues and Hotel EBITDA margins.  We expect that the effect of ongoing renovation displacement for the remainder of 2007 will be significant.  This cash flow forecast assumes that RevPAR increases by approximately 6% to 7% and Hotel EBITDA margin increases by approximately 35 basis points.  Our current operating plan for 2007 contemplates that we will make aggregate common distribution payments of $54 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) ofapproximately $73 to $77 million.  In 2007, we plan to spend approximately $225 million for capital expenditures, which will be funded with proceeds from the sale of non-strategic hotels 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 suffer a material adverse effect.  

 

31

*Debt*

 

 

*Line of Credit*

At March 31, 2007, we had no borrowings outstanding under our $125 million line of credit.  The interest rate on our line of credit was LIBOR plus 1.75% at March 31, 2007.

 

 

*Construction Loan*

In 2005, we started construction on the 184 unit Royale Palms condominium development in Myrtle Beach, South Carolina.  This project was more than 98% pre-sold.  At March 31, 2007, we had substantially completed construction and closed on the sale of 31 units, the proceeds of those sales were used to repay a portion of the construction loan.  We expect to sell substantially all the remaining pre-sold units in the second quarter of 2007.  At March 31, 2007, there was $56 million outstanding on the $70 million construction loan facility.  This loan was repaid in full May 1, 2007.

 

*Mortgage Debt*

At March 31, 2007, we had aggregate mortgage indebtedness of approximately $786.8 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 contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions.  Most of our mortgage debt is prepayable, subject to various prepayment, yield maintenance or defeasance obligations.

 

 

*Senior Notes*

If we were unable to continue to satisfy the incurrence test under the indentures governing our senior unsecured notes, we may be prohibited from, among other things, incurring any additional indebtedness, except under certain specific exceptions,******or paying distributions on our preferred or common units, except to the extent necessary to satisfy FelCor’s REIT qualification requirement that it distribute currently 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 us to reduce room rates in the near term and may limit our ability to raise room rates in the future.  We are also subject to the risk that inflation will cause increases in hotel operating expenses disproportionately to revenues.  If competition requires us to reduce room rates or limits our ability to raise room rates in the future, we may not be able to adjust our room rates to reflect the effects of inflation in full, in which case our operating results and liquidity could be adversely affected.

 

**Seasonality**

 

The lodging business is seasonal in nature.  Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme

weather conditions, economic factors and other considerations affecting travel.  To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may utilize cash on hand or borrowings to satisfy our obligations or make distributions to our equity holders.  

 

32

**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;

 

 

**•**

our growth strategy and acquisition activities;

 

 

**•**

our inability to sell the hotels being marketed for sale at anticipated prices; and

 

 

**•**

competitive conditions in the lodging industry.

 

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 March 31, 2007, approximately 60% of our consolidated debt had fixed interest rates.  Currently, market rates of interest are below the rates we are obligated to pay on our fixed-rate debt.  

 

The following table provides information about our financial instruments that are sensitive to changes in interest rates.  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.

 

33

******

**Expected Maturity Date**

**at March 31, 2007**

**(dollars in thousands)**

 

* *

**2007**

 

 

**2008**

 

 

**2009**

 

 

**2010**

 

 

**2011**

 

**Thereafter**

 

 

 

**Total**

 

 

**Fair Value**

**Liabilities**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

$

9,575

 

$

13,733

 

$

142,240

 

$

274,497

 

$

303,030

 

$

78,207

 

$

821,282

 

$

875,267

Average interest rate

 

7.98%

 

 

7.99%

 

 

7.26%

 

 

8.70%

 

 

8.49%

 

 

6.54%

 

 

8.15%

 

 

 

Floating rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

56,004

 

 

265,500

 

 

-   

 

 

-   

 

 

215,000

 

 

-   

 

 

536,504

 

 

536,504

Average interest rate

 

7.16%

 

 

5.71%

 

 

-   

 

 

-   

 

 

6.92%

 

 

-   

 

 

6.34%

 

 

 

Total debt

$

65,579

 

$

279,233

 

$

142,240

 

$

274,497

 

$

518,030

 

$

78,207

 

$

1,357,786

 

 

 

Average interest rate

 

7.28%

 

 

5.82%

 

 

7.26%

 

 

8.70%

 

 

7.84%

 

 

6.54%

 

 

7.43%

 

 

 

Net discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,026

)

 

 

Total debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,356,760

 

 

 

 

**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.

 

34

**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.

 

 

 

 

35

**SIGNATURE**

 

Pursuant to the requirements of Section 13 or 15 (d) 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 and 

Chief Accounting Officer

 

 

 

 

 

Date:

May 9, 2007

 

 

 

 

 

 

36

 

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