**

 

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 June 30, 2007**

 

**OR**

 

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

**THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from           to**

 

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

 

**FelCor Lodging Limited Partnership**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

**(972) 444-4900**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes   oNo

 

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

 

| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|---------------------------|---------------------|-------------------------|

 

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

 

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**INDEX**

 

|      |                                                                                       | Page   |
|-----------|--------------------------------------------------------------------------------------------|--------|
|      | **PART I. -- FINANCIAL INFORMATION**                                                       |   |
|      |                                                                                       |   |
| Item 1.   | Financial Statements (unaudited)                                                           | 3      |
|      | Consolidated Balance Sheets - June 30, 2007 and December 31, 2006                          | 3      |
|      | Consolidated Statements of Operations – For the Three and Six Months Ended            |   |
|      | June 30, 2007 and 2006                                                                     | 4      |
|      | Consolidated Statements of Comprehensive Income – For the Three and Six Months        |   |
|      | Ended June 30, 2007 and 2006                                                               | 5      |
|      | Consolidated Statements of Cash Flows – For the Three and Six Months Ended            |   |
|      | June 30, 2007 and 2006                                                                     | 6      |
|      | Notes to Consolidated Financial Statements                                                 | 7      |
| Item 2.   | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23     |
|      | General

                                                                             | 23     |
|      | Financial Comparison                                                                       | 24     |
|      | Results of Operations                                                                      | 25     |
|      | Non-GAAP Financial Measures                                                                | 27     |
|      | Hotel Portfolio Composition                                                                | 32     |
|      | Hotel Operating Statistics                                                                 | 33     |
|      | Liquidity and Capital Resources                                                            | 35     |
|      | Inflation                                                                                  | 36     |
|      | Seasonality                                                                                | 36     |
|      | Disclosure Regarding Forward-Looking Statements                                            | 37     |
| Item 3.   | Quantitative and Qualitative Disclosures About Market Risk                                 | 37     |
| Item 4.   | Controls and Procedures                                                                    | 38     |
|      |                                                                                       |   |
|      | **PART II. – OTHER INFORMATION**                                                      |   |
|      |                                                                                       |   |
| Item 6.   | Exhibits                                                                                   | 39     |
|      |                                                                                       |
| SIGNATURE | 40                                                                                         |

 

 

2

**PART I. -- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**CONSOLIDATED BALANCE SHEETS**

**(unaudited, in thousands)**

 

| * * | **June 30,**

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

**2006** |  
 
**ASSETS**

 
Investment in hotels, net of accumulated depreciation of $654,557 at

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

 

$

 

2,139,372

 

 

 

$

 

2,044,285

 

Investment in unconsolidated entities

 

119,974

 

 

 

111,716

 

 
Hotels held for sale

 

-   

 

 

 

133,801

 

 
 
Cash and cash equivalents

 

188,626

 

 

 

124,179

 

 
Restricted cash

 

14,870

 

 

 

22,753

 

 
Accounts receivable, net of allowance for doubtful accounts of $953 at

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

 

 

43,488

 

 

 

 

33,395

 

 
Deferred expenses, net of accumulated amortization of $10,002 at

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

 

 

8,392

 

 

 

 

9,480

 

 
Condominium development project

 

2,677

 

 

 

70,661

 

 
Other assets

 

38,835

 

 

 

32,979

 

Total assets

$

2,556,234

 

 

$

2,583,249

 

 
 
 

 

 

 

 

 

 

 

**LIABILITIES AND PARTNERS’ CAPITAL**

 
 
Debt, net of discount of $963 at June 30, 2007 and $1,089 at 

December 31, 2006

 

$

 

1,297,699

 

 

 

$

 

1,369,153

 

Distributions payable

 

27,287

 

 

 

24,078

 

 
Accrued expenses and other liabilities

 

137,775

 

 

 

139,277

 

 
 

 

 

 

 

 

 

 

 
 
Total liabilities

 

1,462,761

 

 

 

1,532,508

 

 
 

 

 

 

 

 

 

 

 
Commitments and contingencies

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

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

and outstanding at June 30, 2007 and December 31, 2006, 

respectively

 

 

 

35,245

 

 

 

 

 

29,593

 

 
Minority interest in other partnerships

 

24,844

 

 

 

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 June 30, 2007 and December 31, 2006

 

 

309,362

 

 

 

 

309,362

 

 
Series C Cumulative Redeemable Preferred Units, 68 units 

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

 

 

169,412

 

 

 

 

169,412

 

 
Common units, 62,471 and 62,052 units issued and outstanding at

June 30, 2007 and December 31, 2006, respectively

 

 

531,592

 

 

 

 

498,363

 

 
Accumulated other comprehensive income

 

23,018

 

 

 

15,839

 

 
 

 

 

 

 

 

 

 

 
Total partners’ capital

 

1,033,384

 

 

 

992,976

 

 
 

 

 

 

 

 

 

 

Total liabilities, redeemable units and partners’ capital

$

2,556,234

 

 

$

2,583,249

 

 
 

 

 

 

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

 

3

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**For the Three and Six Months Ended June 30, 2007 and 2006**

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

 

 

 

**Three Months Ended**

 

**Six Months Ended**

 
 

**June 30,**

 

**June 30,**

 
 

**2007**

 

**2006**

 

**2007**

 

**2006**

 
Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

265,529

 

 

$

259,237

 

 

$

514,068

 

 

$

510,618

 

Other revenue

 

322

 

 

 

27

 

 

 

452

 

 

 

56

 

Total revenues

 

265,851

 

 

 

259,264

 

 

 

514,520

 

 

 

510,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel departmental expenses

 

85,548

 

 

 

83,113

 

 

 

163,813

 

 

 

162,132

 

Other property related costs

 

68,584

 

 

 

66,846

 

 

 

137,142

 

 

 

135,704

 

Management and franchise fees

 

13,943

 

 

 

14,214

 

 

 

27,066

 

 

 

27,437

 

Taxes, insurance and lease expense

 

31,422

 

 

 

28,868

 

 

 

60,651

 

 

 

55,400

 

Abandoned projects

 

-   

 

 

 

-   

 

 

 

22

 

 

 

-   

 

Corporate expenses

 

5,255

 

 

 

5,562

 

 

 

12,041

 

 

 

11,366

 

Depreciation

 

27,155

 

 

 

23,742

 

 

 

52,205

 

 

 

46,179

 

Total operating expenses

 

231,907

 

 

 

222,345

 

 

 

452,940

 

 

 

438,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

33,944

 

 

 

36,919

 

 

 

61,580

 

 

 

72,456

 

Interest expense, net

 

(23,207

)

 

 

(28,308

)

 

 

(46,079

)

 

 

(58,816

)

Charge-off of deferred financing costs

 

-   

 

 

 

(295

)

 

 

-   

 

 

 

(962

)

Early extinguishment of debt

 

-   

 

 

 

(438

)

 

 

-   

 

 

 

(438

)

Income before equity in income from

unconsolidated entities, minority interests 

and gain on sale of condominiums

 

 

 

10,737

 

 

 

 

 

7,878

 

 

 

 

 

15,501

 

 

 

 

 

12,240

 

Equity in income from unconsolidated entities

 

3,710

 

 

 

3,812

 

 

 

16,480

 

 

 

5,760

 

Minority interests

 

506

 

 

 

883

 

 

 

787

 

 

 

1,372

 

Gain on sale of condominiums

 

14,858

 

 

 

-   

 

 

 

18,139

 

 

 

-   

 

Income from continuing operations

 

29,811

 

 

 

12,573

 

 

 

50,907

 

 

 

19,372

 

Discontinued operations, net of minority interests

 

26,350

 

 

 

(2,412

)

 

 

34,840

 

 

 

649

 

Net income

 

56,161

 

 

 

10,161

 

 

 

85,747

 

 

 

20,021

 

Preferred distributions

 

(9,678

)

 

 

(9,678

)

 

 

(19,356

)

 

 

(19,356

)

Net income applicable to common unitholders

$

46,483

 

 

$

483

 

 

$

66,391

 

 

$

665

 

Basic per common unit data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.32

 

 

$

0.05

 

 

$

0.50

 

 

$

-   

 

Net income

$

0.74

 

 

$

0.01

 

 

$

1.06

 

 

$

0.01

 

Basic weighted average common units outstanding

 

62,941

 

 

 

62,457

 

 

 

62,866

 

 

 

62,447

 

Diluted per common unit data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.32

 

 

$

0.05

 

 

$

0.50

 

 

$

-   

 

Net income

$

0.73

 

 

$

0.01

 

 

$

1.05

 

 

$

0.01

 

Diluted weighted average common units outstanding

 

63,387

 

 

 

62,728

 

 

 

63,254

 

 

 

62,707

 

Cash distributions declared on common units

$

0.30

 

 

$

0.20

 

 

$

0.55

 

 

$

0.35

 

 

 

 

 

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

 

4

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**For the Three and Six Months Ended June 30, 2007 and 2006**

**(unaudited, in thousands)**

 

 

 

**Three Months Ended**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Net income

$

56,161

 

 

$

10,161

 

 

$

85,747

 

 

$

20,021

 

Unrealized holding gains from interest rate swaps

 

-   

 

 

 

75

 

 

 

-   

 

 

 

435

 

Foreign currency translation adjustment

 

6,846

 

 

 

2,085

 

 

 

7,179

 

 

 

1,433

 

Comprehensive income

$

63,007

 

 

$

12,321

 

 

$

92,926

 

 

$

21,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

5

**FELCOR LODGING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Six Months Ended June, 2007 and 2006**

**(unaudited, in thousands)**

 

* *

**Six Months Ended June 30,**

 

**2007**

 

**2006**

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

85,747

 

 

$

20,021

 

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

 

 

 

 

 

 

 

Depreciation

 

52,219

 

 

 

55,452

 

Loss (gain) on sale of assets

 

(46,627

)

 

 

2,862

 

Amortization of deferred financing fees

 

1,216

 

 

 

1,628

 

Accretion of debt discount

 

126

 

 

 

591

 

Amortization of unearned compensation

 

2,614

 

 

 

1,897

 

Equity in income from unconsolidated entities

 

(16,480

)

 

 

(5,760

)

Distributions of income from unconsolidated entities

 

660

 

 

 

2,866

 

Impairment loss

 

-   

 

 

 

9,268

 

Charge-off of deferred financing costs

 

119

 

 

 

962

 

Loss on early extinguishment of debt

 

782

 

 

 

438

 

Minority interests

 

294

 

 

 

(1,715

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(8,934

)

 

 

(1,540

)

Restricted cash – operating

 

189

 

 

 

(3,975

)

Other assets

 

(5,845

)

 

 

424

 

Accrued expenses and other liabilities

 

(3,560

)

 

 

9,406

 

Net cash flow provided by operating activities

 

62,520

 

 

 

92,825

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Improvements and additions to hotels

 

(137,129

)

 

 

(69,900

)

Additions to condominium project

 

(8,046

)

 

 

(26,908

)

Proceeds from sale of hotels

 

165,107

 

 

 

80,588

 

Proceeds from sale of condominiums

 

19,000

 

 

 

-   

 

Proceeds received from property damage insurance

 

1,812

 

 

 

5,973

 

Decrease (increase) in restricted cash – investing

 

7,152

 

 

 

(1,897

)

Distributions of capital from unconsolidated entities

 

8,812

 

 

 

4,243

 

Net cash flow provided by (used in) investing activities

 

56,708

 

 

 

(7,901

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings

 

7,142

 

 

 

98,764

 

Repayment of borrowings

 

(13,765

)

 

 

(185,167

)

Payment of deferred financing fees

 

(248

)

 

 

(990

)

Decrease in restricted cash – financing

 

-   

 

 

 

2,825

 

Exercise of FelCor stock options

 

5,960

 

 

 

625

 

Contributions from minority interest holders

 

1,407

 

 

 

1,417

 

Distributions paid to other partnerships’ minority interests

 

(5,030

)

 

 

(800

)

Distributions paid to preferred unitholders

 

(19,356

)

 

 

(19,356

)

Distributions paid to common unitholders

 

(31,805

)

 

 

(9,517

)

Net cash flow used in financing activities

 

(55,695

)

 

 

(112,199

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

914

 

 

 

201

 

Net change in cash and cash equivalents

 

64,447

 

 

 

(27,074

)

Cash and cash equivalents at beginning of periods

 

124,179

 

 

 

94,564

 

Cash and cash equivalents at end of periods

$

188,626

 

 

$

67,490

 

 

 

 

 

 

 

 

 

Supplemental cash flow information — 

 

 

 

 

 

 

 

Interest paid

$

52,068

 

 

$

61,453

 

 

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

 

6

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**

**Organization**

 

At June 30, 2007, FelCor Lodging Limited Partnership, or FelCor LP, held ownership interests in 88 hotels and was the nation’s largest owner of Embassy Suites Hotels® and Doubletree Guest Suites®.  Our sole general partner is FelCor Lodging Trust Incorporated, or FelCor, a Real Estate Investment Trust, or REIT.  At June 30, 2007, FelCor owned approximately 98% interest in our operations.  

 

At June 30, 2007,  we held 100% ownership interests (whether by fee, leasehold or otherwise) in 64 hotels, a 90% or greater interest in entities owning four hotels, a 75% interest in an entity owning one hotel, a 60% interest in an entity owning one hotel and 50% interests in unconsolidated entities that owned 18 hotels.  We held majority ownership interests in the operating lessees of 83 of these hotels; consequently, we include their operating revenues and expenses in our consolidated statements of operations.  The operating revenues and expenses of the remaining five hotels are unconsolidated.

 

At June 30, 2007, we had an aggregate of 63,824,849 redeemable and common units outstanding.

 

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

 

**Brand**

**Hotels**

 

**Rooms**

Embassy Suites Hotels

 

47

 

 

12,127

Holiday Inn®

 

17

 

 

6,305

Starwood (Sheraton® and Westin®)

 

9

 

 

3,217

Doubletree®

 

7

 

 

1,471

Hilton®

 

2

 

 

559

Other

 

1

 

 

403

Total hotels

 

83

 

 

 

 

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 50% of our hotel room revenues in continuing operations were generated from hotels in these states during the six months ended June 30, 2007.

 

At June 30, 2007, of our 83 consolidated hotels included in continuing operations, (i) subsidiaries of Hilton Hotels Corporation, or Hilton, managed 54, (ii) subsidiaries of InterContinental Hotels Group, or IHG, managed 18, (iii) subsidiaries of Starwood Hotels & Resorts Worldwide, Inc., or Starwood, managed nine, and (iv) 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 and six months ended June 30, 2007 and 2006 is unaudited.  Preparing financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  The accompanying financial statements for the three and six months ended June 30, 2007 and 2006, include adjustments based on management’s estimates (consisting of normal and recurring accruals), which we consider necessary for a fair presentation of the results for the periods.  The financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2006, included in ourAnnual Report on Form 10-K.  Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of actual operating results for the entire year. 

 

**2.**

**Investment in Unconsolidated Entities**

 

We owned 50% interests in joint venture entities that owned 18 hotels at June 30, 2007, and 19 hotels at December 31, 2006.  We also owned a 50% interest in joint venture entities that own real estate in Myrtle Beach, South Carolina, provide condominium management services and lease four hotels.  We account for our investments in these unconsolidated entities under the equity method.  We do not have any majority-owned subsidiaries that are not consolidated in our financial statements.  We make adjustments to our equity in income from unconsolidated entities related to the 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):

 

 

**June 30,**

**2007**

 

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

Balance sheet information:  **

 

 

 

 

 

Investment in hotels, net of accumulated depreciation

$

264,912

 

$

260,628

Total assets

$

307,524

 

$

297,712

Debt

$

193,616

 

$

197,462

Total liabilities

$

202,394

 

$

203,659

Equity

$

105,130

 

$

94,053

 

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

 

8

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**2.**

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

 

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

 

 

**Three Months Ended**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Total revenues

$

22,653

 

 

$

23,395

 

 

$

40,848

 

 

$

41,509

 

Net income

$

8,354

 

 

$

8,462

 

 

$

28,106

 

 

$

13,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to FelCor LP

$

4,177

 

 

$

4,231

 

 

$

14,053

 

 

$

6,598

 

Additional gain on sale related to basis difference

 

-   

 

 

 

-   

 

 

 

3,336

 

 

 

-   

 

Depreciation of cost in excess of book value

 

(467

)

 

 

(419

)

 

 

(909

)

 

 

(838

)

Equity in income from unconsolidated entities

$

3,710

 

 

$

3,812

 

 

$

16,480

 

 

$

5,760

 

 

 

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

 

 

**June 30,**

**2007**

 

**December 31, 2006**

Hotel investments

$

54,762

 

 

$

48,641

 

Cost in excess of book value of hotel investments

 

63,681

 

 

 

61,253

 

Land and condominium investments

 

3,449

 

 

 

3,513

 

Hotel lessee investments

 

(1,918

)

 

 

(1,691

)

 

$

119,974

 

 

$

111,716

 

 

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

 

 

**Three Months Ended**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Hotel investments

$

3,833

 

 

$

3,956

 

 

$

16,714

 

 

$

6,029

 

Hotel lessee investments

 

(123

)

 

 

(144

)

 

 

(234

)

 

 

(269

)

 

$

3,710

 

 

$

3,812

 

 

$

16,480

 

 

$

5,760

 

 

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

 

9

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**3.**       **Debt**

 

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

 

* *

 

 

 

**Balance Outstanding**

 

**Encumbered**

**Interest Rate at**

**Maturity**

**June 30,**

**December 31,**

 

 

**Hotels**

 

 

**June 30, 2007**

 

 

**Date**

 

 

**2007**

 

 

**2006**

 

Line of credit(a)

none

 

L + 1.75

 

January 2009

$

-   

 

$

-   

 

Senior term notes

none

 

8.50

 

June 2011

 

299,037

 

 

298,911

 

Senior term notes

none

 

L + 1.875

 

December 2011

 

215,000

 

 

215,000

 

Total line of credit and 

senior debt(b)

 

 

 

7.98

 

 

 

 

514,037

 

 

 

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

 

90,010

 

 

97,553

 

Mortgage debt

 

7 hotels

 

 

7.32

 

March 2009

 

122,576

 

 

124,263

 

Mortgage debt

 

8 hotels

 

 

8.70

 

May 2010

 

167,727

 

 

169,438

 

Mortgage debt

 

6 hotels

 

 

8.73

 

May 2010

 

121,106

 

 

122,578

 

Mortgage debt

 

1 hotel

 

 

L + 2.85

 

August 2008

 

15,500

 

 

15,500

 

Mortgage debt

 

1 hotel

 

 

5.81

 

July 2016

 

12,687

 

 

12,861

 

Other

 

1 hotel   

 

 

9.17

 

August 2011

 

4,056

 

 

4,452

 

Construction loan(d)

 

-

 

 

-

 

-

 

-   

 

 

58,597

 

Total mortgage debt(b)

 

43 hotels

 

 

7.41

 

 

 

783,662

 

 

855,242

 

Total 

 

 

7.64

%

 

 

$

1,297,699

 

$

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 weighted average debt outstanding at June 30, 2007.

 

(c)

This debt has three one-year extension options.

 

(d)

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

 

We reported interest expense of $23.2 million and $28.3 million for the three months ended June 30, 2007 and 2006, respectively, which is net of: (i) interest income of $1.4 million and $0.8 million, respectively, and (ii) capitalized interest of $1.2 million and $0.7 million, respectively.  We reported interest expense of $46.1 million and $58.8 million for the six months ended June 30, 2007 and 2006, respectively, which is net of: (i) interest income of $2.7 million and $1.6 million, respectively, and (ii) capitalized interest of $2.8 million and $1.2 million, respectively.

 

**4.**

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

 

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

 

 

**Three Months Ended**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Room revenue

$

216,813

 

 

$

210,980

 

 

$

421,135

 

 

$

418,966

 

Food and beverage revenue

 

35,212

 

 

 

34,689

 

 

 

66,985

 

 

 

65,103

 

Other operating departments

 

13,504

 

 

 

13,568

 

 

 

25,948

 

 

 

26,549

 

Total hotel operating revenue

$

265,529

 

 

$

259,237

 

 

$

514,068

 

 

$

510,618

 

 

 

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 six months of both 2007 and 2006, more than 99% of our revenue was comprised of hotel operating revenue, which included room revenue, food and beverage revenue, and revenue from other hotel operating departments (such as telephone, parking and business centers).  These revenues are recorded net of any sales or occupancy taxes collected from our guests. All rebates or discounts are recorded, when allowed, as a reduction in revenue, and there are no material contingent obligations with respect to rebates or discounts offered by us. All revenues are recorded on an accrual basis, as earned.  Appropriate allowances are made for doubtful accounts, which are recorded as a bad debt expense.  

 

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

 

 

**Three Months Ended June 30,**

 

**2007**

 

**2006**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

Room

$

53,058

 

 

20.0

 

 

$

51,562

 

 

19.9

 

Food and beverage

 

26,655

 

 

10.0

 

 

 

25,541

 

 

9.9

 

Other operating departments

 

5,835

 

 

2.2

 

 

 

6,010

 

 

2.3

 

Total hotel departmental expenses

$

85,548

 

 

32.2

 

 

$

83,113

 

 

32.1

 

 

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

Room

$

101,841

 

 

19.8

 

 

$

100,977

 

 

19.9

 

Food and beverage

 

51,190

 

 

10.0

 

 

 

49,201

 

 

9.6

 

Other operating departments

 

10,782

 

 

2.1

 

 

 

11,954

 

 

2.3

 

Total hotel departmental expenses

$

163,813

 

 

31.9

 

 

$

162,132

 

 

31.8

 

 

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

(in thousands):

 

 

**Three Months Ended June 30,**

 

**2007**

 

**2006**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

Hotel general and administrative expense

$

21,452

 

 

8.1

 

 

$

21,397

 

 

8.3

 

Marketing

 

21,459

 

 

8.1

 

 

 

20,788

 

 

8.0

 

Repair and maintenance

 

13,908

 

 

5.2

 

 

 

13,243

 

 

5.1

 

Energy

 

11,765

 

 

4.4

 

 

 

11,418

 

 

4.4

 

Total other property related costs

$

68,584

 

 

25.8

 

 

$

66,846

 

 

25.8

 

 

 

11

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**4.**

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

 

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

 

 

 

**Dollars in**

**Thousands**

 

**% of Total Hotel**

**Operating Revenue**

Hotel general and administrative expense

$

43,893

 

 

8.6

 

 

$

43,690

 

 

8.6

 

Marketing

 

42,195

 

 

8.2

 

 

 

41,493

 

 

8.1

 

Repair and maintenance

 

27,461

 

 

5.3

 

 

 

26,440

 

 

5.2

 

Energy

 

23,593

 

 

4.6

 

 

 

24,081

 

 

4.7

 

Total other property operating costs

$

137,142

 

 

26.7

 

 

$

135,704

 

 

26.6

 

 

Hotel employee compensation and benefit expenses of $74.0 million and $73.4 million for the three months ended June 30, 2007 and 2006, respectively,  and $145.4 million and $143.6 million for the six months ended June 30, 2007 and 2006, respectively, are included in hotel departmental expenses and other property related costs.

 

**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**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Operating lease expense(a)

$

19,524

 

 

$

18,549

 

 

$

35,687

 

 

$

33,933

 

Real estate and other taxes

 

8,618

 

 

 

8,364

 

 

 

17,220

 

 

 

17,376

 

Property insurance, general liability insurance and 

other

 

 

3,280

 

 

 

 

1,955

 

 

 

 

7,744

 

 

 

 

4,091

 

Total taxes, insurance and lease expense

$

31,422

 

 

$

28,868

 

 

$

60,651

 

 

$

55,400

 

 

 

(a)

Operating lease expense includes hotel lease expense of $17.3 million and $16.4 million associated with 13 hotels leased by us from unconsolidated subsidiaries and $2.3 million and $2.1 million of ground lease expense for the three months ended June 30, 2007 and 2006, respectively, and hotel lease expense of $31.5 million and $30.0 million and $4.2 million and $3.9 million of ground lease expense for the six months ended June 30, 2007 and 2006, respectively.  Included in operating lease expense is percentage rent based on operating results of $11.2 million and $10.3 million, respectively, for the three months ended June 30, 2007 and 2006, and $19.0 million and $17.4 million, respectively, for the six months ended June 30, 2007 and 2006.

 

**6.**

**Condominium Project**

 

Development of our 184-unit Royale Palms condominium project in Myrtle Beach, South Carolina was substantially completed in the first quarter of 2007.  During the three months ended June 30, 2007, we recognized gains under the completed contract method, net of income tax, of $14.9 million from the sale of 146 units, and for the six months we recognized gains of $18.1 million from the sale of 177 units.  We expect that the remaining seven condominium units will be sold on a selective basis to maximize the selling price.  The sale of the 177 units resulted in net proceeds of $86.5 million, of which $67.0 million was paid directly to the construction lender as payment in full of the outstanding balance of our construction loan and $0.5 million was receivable at June 30, 2007.  This has been treated as a non-cash transaction for cash flow purposes.  

 

12

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**7.**

**Discontinued Operations**

 

The results of operations of 11 hotels sold in 2007 through June 30, 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**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Operating revenue

$

10,949

 

 

$

58,088

 

 

$

26,447

 

 

$

122,089

 

Operating expenses(a)

 

(6,215

)

 

 

(59,032

)

 

 

(18,094

)

 

 

(118,278

)

Operating income

 

4,734

 

 

 

(944

)

 

 

8,353

 

 

 

3,811

 

Direct interest costs, net

 

6

 

 

 

(317

)

 

 

(19

)

 

 

(643

)

Gain (loss) on sale of hotels

 

22,457

 

 

 

(1,785

)

 

 

28,488

 

 

 

(2,862

)

Charge-off of deferred debt costs

 

-   

 

 

 

-   

 

 

 

(119

)

 

 

-   

 

Loss on early extinguishment of debt

 

-   

 

 

 

-   

 

 

 

(782

)

 

 

-   

 

Minority interests

 

(847

)

 

 

634

 

 

 

(1,081

)

 

 

343

 

Income (loss) from discontinued operations

$

26,350

 

 

$

(2,412

)

 

$

34,840

 

 

$

649

 

 

 

(a)

Includes $9.3 million of impairment losses for the three and six months ended June 30, 2006.

 

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

 

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

 

In the second quarter of 2006, we designated seven hotels as non-strategic and tested these hotels under the provisions of SFAS 144.  The hotels, which were held for investment at the time of the impairment charge, were tested for impairment using the undiscounted cash flows for the shorter of the estimated remaining holding periods or the useful life of the hotels.  Of the hotels tested, one hotel failed the test under SFAS 144, which resulted in an impairment charge of $9.3 million to write down the hotel asset to our then-current estimate of its fair market value.

 

13

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**8.**

**Earnings Per Unit**

 

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

 

 

**Three Months Ended**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

29,811

 

 

$

12,573

 

 

$

50,907

 

 

$

19,372

 

Less: Preferred distributions

 

(9,678

)

 

 

(9,678

)

 

 

(19,356

)

 

 

(19,356

)

Income from continuing operations 

applicable to common unitholders

 

 

20,133

 

 

 

 

2,895

 

 

 

 

31,551

 

 

 

 

16

 

Discontinued operations

 

26,350

 

 

 

(2,412

)

 

 

34,840

 

 

 

649

 

Net income applicable to common unitholders

$

46,483

 

 

$

483

 

 

$

66,391

 

 

 

665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per unit

 

62,941

 

 

 

62,457

 

 

 

62,866

 

 

 

62,447

 

Denominator for diluted earnings per unit

 

63,387

 

 

 

62,728

 

 

 

63,254

 

 

 

62,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.32

 

 

$

0.05

 

 

$

0.50

 

 

$

-   

 

Discontinued operations

$

0.42

 

 

$

(0.04

)

 

$

0.56

 

 

$

0.01

 

Net income

$

0.74

 

 

$

0.01

 

 

$

1.06

 

 

$

0.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.32

 

 

$

0.05

 

 

$

0.50

 

 

$

-   

 

Discontinued operations

$

0.41

 

 

$

(0.04

)

 

$

0.55

 

 

$

0.01

 

Net income

$

0.73

 

 

$

0.01

 

 

$

1.05

 

 

$

0.01

 

 

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**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Series A convertible preferred units

 

9,985

 

 

 

9,985

 

 

 

9,985

 

 

 

9,985

 

 

Series A preferred distributions that would be excluded from net income applicable to common unitholders, if these Series A preferred units were dilutive, were $6.3 million for both the three months ended June 30, 2007 and 2006, and $12.6 million for the six months ended June 30, 2007 and 2006.

 

14

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**9.**

**Accounting for Uncertainty in Income Taxes**

 

In July 2006, the FASB issued FASB Interpretation Number 48, *Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109*(FIN 48).  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return.  The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements.  FIN 48 applies to all tax positions related to income taxes subject to FASB Statement109, *Accounting for Income Taxes*.  The interpretation clearly scopes out income tax positions related to FASB Statement 5, *Accounting for Contingencies*.  We recorded no cumulative effect as a result of our adoption of FIN 48 on January 1, 2007.

 

**10.**

**Application of New Accounting Standards**

 

In September 2006, the FASB issued Statement of Financial Accounting Standards Number 157, *Fair Value Measurements*(SFAS 157).  SFAS 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability.  SFAS 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data.  SFAS 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007.  We believe that the adoption of this standard on January 1, 2008 will not have a material effect on our consolidated financial statements. 

 

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

 

15

**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.; 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**

**June 30, 2007**

**(in thousands)**

 

**ASSETS**

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

 

Net investment in hotel properties

$

117,150

 

 

$

968,492

 

$

1,053,730

 

 

$

-   

 

 

$

2,139,372

 

Equity investment in consolidated entities

 

1,291,289

 

 

 

-   

 

 

-   

 

 

 

(1,291,289

)

 

 

-   

 

Investment in unconsolidated entities

 

90,247

 

 

 

28,048

 

 

1,679

 

 

 

-   

 

 

 

119,974

 

Cash and cash equivalents

 

128,200

 

 

 

52,476

 

 

7,950

 

 

 

-   

 

 

 

188,626

 

Restricted cash

 

326

 

 

 

3,265

 

 

11,279

 

 

 

-   

 

 

 

14,870

 

Accounts receivable

 

3,602

 

 

 

39,385

 

 

501

 

 

 

-   

 

 

 

43,488

 

Deferred assets

 

3,390

 

 

 

489

 

 

4,513

 

 

 

-   

 

 

 

8,392

 

Condominium development project

 

-   

 

 

 

-   

 

 

2,677

 

 

 

-   

 

 

 

2,677

 

Other assets

 

17,875

 

 

 

17,290

 

 

3,670

 

 

 

-   

 

 

 

38,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,652,079

 

 

$

1,109,445

 

$

1,085,999

 

 

$

(1,291,289

)

 

$

2,556,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**LIABILITES AND PARTNERS’CAPITAL**

Debt

$

529,537

 

 

$

126,632

 

$

641,530

 

 

$

-   

 

 

$

1,297,699

 

Distributions payable

 

27,287

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

27,287

 

Accrued expenses and other liabilities

 

26,626

 

 

 

99,289

 

 

11,860

 

 

 

-   

 

 

 

137,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

583,450

 

 

 

225,921

 

 

653,390

 

 

 

-   

 

 

 

1,462,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units, at redemption value

 

35,245

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

35,245

 

Minority interest – other partnerships

 

-   

 

 

 

163

 

 

24,681

 

 

 

-   

 

 

 

24,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred units

 

478,774

 

 

 

-   

 

 

-   

 

 

 

-   

 

 

 

478,774

 

Common units

 

554,610

 

 

 

860,343

 

 

407,928

 

 

 

(1,291,289

)

 

 

531,592

 

Accumulated other comprehensive income

 

-   

 

 

 

23,018

 

 

-   

 

 

 

-   

 

 

 

23,018

 

Total partners’ capital

 

1,033,384

 

 

 

883,361

 

 

407,928

 

 

 

(1,291,289

)

 

 

1,033,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable units

and partners' capital

$

1,652,079

 

 

$

1,109,445

 

$

1,085,999

 

 

$

(1,291,289

)

 

$

2,556,234

 

 

 

16

**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

 

 

 

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 June 30, 2007**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

265,529

 

 

$

-   

 

 

$

-   

 

 

$

265,529

 

Percentage lease revenue

 

7,173

 

 

 

-   

 

 

 

38,786

 

 

 

(45,959

)

 

 

-   

 

Other revenue

 

1

 

 

 

-   

 

 

 

321

 

 

 

-   

 

 

 

322

 

Total revenue

 

7,174

 

 

 

265,529

 

 

 

39,107

 

 

 

(45,959

)

 

 

265,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

168,075

 

 

 

-   

 

 

 

-   

 

 

 

168,075

 

Taxes, insurance and lease expense

 

1,273

 

 

 

70,364

 

 

 

5,744

 

 

 

(45,959

)

 

 

31,422

 

Corporate expenses

 

296

 

 

 

3,278

 

 

 

1,681

 

 

 

-   

 

 

 

5,255

 

Depreciation

 

2,088

 

 

 

13,221

 

 

 

11,846

 

 

 

-   

 

 

 

27,155

 

Total operating expenses

 

3,657

 

 

 

254,938

 

 

 

19,271

 

 

 

(45,959

)

 

 

231,907

 

Operating income

 

3,517

 

 

 

10,591

 

 

 

19,836

 

 

 

-   

 

 

 

33,944

 

Interest expense, net

 

(6,456

)

 

 

(1,830

)

 

 

(14,921

)

 

 

-   

 

 

 

(23,207

)

Income (loss) before equity in income

from unconsolidated entities, minority 

interests and gain on sale of assets

 

(2,939

)

 

 

8,761

 

 

 

4,915

 

 

 

-   

 

 

 

10,737

 

Equity in income from consolidated entities

 

55,296

 

 

 

-   

 

 

 

-   

 

 

 

(55,296

)

 

 

-   

 

Equity in income from unconsolidated entities

 

3,617

 

 

 

110

 

 

 

(17

)

 

 

-   

 

 

 

3,710

 

Minority interests in other partnerships

 

-   

 

 

 

534

 

 

 

(28

)

 

 

-   

 

 

 

506

 

Gain on condominiums

 

-   

 

 

 

-   

 

 

 

14,858

 

 

 

-   

 

 

 

14,858

 

Income from continuing operations

 

55,974

 

 

 

9,405

 

 

 

19,728

 

 

 

(55,296

)

 

 

29,811

 

Discontinued operations from consolidated 

entities

 

187

 

 

 

25,038

 

 

 

1,125

 

 

 

-   

 

 

 

26,350

 

Net income

 

56,161

 

 

 

34,443

 

 

 

20,853

 

 

 

(55,296

)

 

 

56,161

 

Preferred distributions

 

(9,678

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(9,678

)

Net income applicable to unitholders

$

46,483

 

 

$

34,443

 

 

$

20,853

 

 

$

(55,296

)

 

$

46,483

 

 

 

 

 

18

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

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

 

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

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

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

259,237

 

 

$

-   

 

 

$

-   

 

 

$

259,237

 

Percentage lease revenue

 

6,567

 

 

 

-   

 

 

 

37,589

 

 

 

(44,156

)

 

 

-   

 

Other revenue

 

1

 

 

 

-   

 

 

 

26

 

 

 

-   

 

 

 

27

 

Total revenue

 

6,568

 

 

 

259,237

 

 

 

37,615

 

 

 

(44,156

)

 

 

259,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

164,173

 

 

 

-   

 

 

 

-   

 

 

 

164,173

 

Taxes, insurance and lease expense

 

1,745

 

 

 

66,535

 

 

 

4,744

 

 

 

(44,156

)

 

 

28,868

 

Corporate expenses

 

257

 

 

 

3,774

 

 

 

1,531

 

 

 

-   

 

 

 

5,562

 

Depreciation

 

2,048

 

 

 

11,439

 

 

 

10,255

 

 

 

-   

 

 

 

23,742

 

Total operating expenses

 

4,050

 

 

 

245,921

 

 

 

16,530

 

 

 

(44,156

)

 

 

222,345

 

Operating income (loss)

 

2,518

 

 

 

13,316

 

 

 

21,085

 

 

 

-   

 

 

 

36,919

 

Interest expense, net

 

(15,146

)

 

 

(2,692

)

 

 

(10,470

)

 

 

-   

 

 

 

(28,308

)

Charge-off of deferred financing costs

 

-   

 

 

 

(212

)

 

 

(83

)

 

 

-   

 

 

 

(295

)

Early extinguishment of debt

 

-   

 

 

 

-   

 

 

 

(438

)

 

 

-   

 

 

 

(438

)

Income (loss) before equity in income

from unconsolidated entities, minority 

interests and gain on sale of assets

 

(12,628

)

 

 

10,412

 

 

 

10,094

 

 

 

-   

 

 

 

7,878

 

Equity in income from consolidated entities

 

19,097

 

 

 

-   

 

 

 

-   

 

 

 

(19,097

)

 

 

-   

 

Equity in income from unconsolidated entities

 

3,365

 

 

 

459

 

 

 

(12

)

 

 

-   

 

 

 

3,812

 

Minority interests in other partnerships

 

-   

 

 

 

379

 

 

 

504

 

 

 

-   

 

 

 

883

 

Income from continuing operations

 

9,834

 

 

 

11,250

 

 

 

10,586

 

 

 

(19,097

)

 

 

12,573

 

Discontinued operations from consolidated 

entities

 

327

 

 

 

3,676

 

 

 

(6,415

)

 

 

-   

 

 

 

(2,412

)

Net income

 

10,161

 

 

 

14,926

 

 

 

4,171

 

 

 

(19,097

)

 

 

10,161

 

Preferred distributions

 

(9,678

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(9,678

)

Net income applicable to unitholders

$

483

 

 

$

14,926

 

 

$

4,171

 

 

$

(19,097

)

 

$

483

 

 

 

19

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

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

 

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

**For the Six Months Ended June 30, 2007**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

514,068

 

 

$

-   

 

 

$

-   

 

 

$

514,068

 

Percentage lease revenue

 

12,750

 

 

 

-   

 

 

 

80,785

 

 

 

(93,535

)

 

 

-   

 

Other revenue

 

116

 

 

 

-   

 

 

 

336

 

 

 

-   

 

 

 

452

 

Total revenue

 

12,866

 

 

 

514,068

 

 

 

81,121

 

 

 

(93,535

)

 

 

514,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

328,021

 

 

 

-   

 

 

 

-   

 

 

 

328,021

 

Taxes, insurance and lease expense

 

2,258

 

 

 

140,821

 

 

 

11,107

 

 

 

(93,535

)

 

 

60,651

 

Abandoned projects

 

-   

 

 

 

22

 

 

 

-   

 

 

 

-   

 

 

 

22

 

Corporate expenses

 

622

 

 

 

7,270

 

 

 

4,149

 

 

 

-    

 

 

 

12,041

 

Depreciation

 

4,172

 

 

 

25,299

 

 

 

22,734

 

 

 

-   

 

 

 

52,205

 

Total operating expenses

 

7,052

 

 

 

501,433

 

 

 

37,990

 

 

 

(93,535

)

 

 

452,940

 

Operating income

 

5,814

 

 

 

12,635

 

 

 

43,131

 

 

 

-   

 

 

 

61,580

 

Interest expense, net

 

(12,468

)

 

 

(3,668

)

 

 

(29,943

)

 

 

-   

 

 

 

(46,079

)

Income (loss) before equity in income

from unconsolidated entities, minority 

interests and gain on sale of assets

 

(6,654

)

 

 

8,967

 

 

 

13,188

 

 

 

-   

 

 

 

15,501

 

Equity in income from consolidated entities

 

75,035

 

 

 

-   

 

 

 

-   

 

 

 

(75,035

)

 

 

-   

 

Equity in income from unconsolidated entities

 

17,059

 

 

 

(543

)

 

 

(36

)

 

 

-   

 

 

 

16,480

 

Minority interests in other partnerships

 

-   

 

 

 

1,125

 

 

 

(338

)

 

 

-   

 

 

 

787

 

Gain on condominiums

 

-   

 

 

 

-   

 

 

 

18,139

 

 

 

-   

 

 

 

18,139

 

Income from continuing operations

 

85,440

 

 

 

9,549

 

 

 

30,953

 

 

 

(75,035

)

 

 

50,907

 

Discontinued operations from consolidated 

entities

 

307

 

 

 

32,323

 

 

 

2,210

 

 

 

-   

 

 

 

34,840

 

Net income

 

85,747

 

 

 

41,872

 

 

 

33,163

 

 

 

(75,035

)

 

 

85,747

 

Preferred distributions

 

(19,356

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(19,356

)

Net income applicable to unitholders

$

66,391

 

 

$

41,872

 

 

$

33,163

 

 

$

(75,035

)

 

$

66,391

 

 

 

 

 

20

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

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

 

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

**For the Six Months Ended June 30, 2006**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Eliminations**

 

**Total Consolidated**

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating revenue

$

-   

 

 

$

510,618

 

 

$

-   

 

 

$

-   

 

 

$

510,618

 

Percentage lease revenue

 

11,861

 

 

 

-   

 

 

 

78,401

 

 

 

(90,262

)

 

 

-   

 

Other revenue

 

30

 

 

 

-   

 

 

 

26

 

 

 

-   

 

 

 

56

 

Total revenue

 

11,891

 

 

 

510,618

 

 

 

78,427

 

 

 

(90,262

)

 

 

510,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

-   

 

 

 

325,273

 

 

 

-   

 

 

 

-   

 

 

 

325,273

 

Taxes, insurance and lease expense

 

2,368

 

 

 

133,964

 

 

 

9,330

 

 

 

(90,262

)

 

 

55,400

 

Corporate expenses

 

494

 

 

 

7,496

 

 

 

3,376

 

 

 

-   

 

 

 

11,366

 

Depreciation

 

3,833

 

 

 

22,619

 

 

 

19,727

 

 

 

-   

 

 

 

46,179

 

Total operating expenses

 

6,695

 

 

 

489,352

 

 

 

32,433

 

 

 

(90,262

)

 

 

438,218

 

Operating income (loss)

 

5,196

 

 

 

21,266

 

 

 

45,994

 

 

 

-   

 

 

 

72,456

 

Interest expense, net

 

(30,712

)

 

 

(6,449

)

 

 

(21,655

)

 

 

-   

 

 

 

(58,816

)

Charge-off of deferred financing costs

 

-   

 

 

 

(879

)

 

 

(83

)

 

 

-   

 

 

 

(962

)

Early extinguishment of debt

 

-   

 

 

 

-   

 

 

 

(438

)

 

 

-   

 

 

 

(438

)

Income (loss) before equity in income

from unconsolidated entities, minority 

interests and gain on sale of assets

 

(25,516

)

 

 

13,938

 

 

 

 

 

23,818

 

 

 

-   

 

 

 

12,240

 

Equity in income from consolidated entities

 

39,270

 

 

 

-   

 

 

 

-   

 

 

 

(39,270

)

 

 

-   

 

Equity in income from unconsolidated entities

 

5,675

 

 

 

111

 

 

 

(26

)

 

 

-   

 

 

 

5,760

 

Minority interests in other partnerships

 

-   

 

 

 

1,150

 

 

 

222

 

 

 

-   

 

 

 

1,372

 

Income from continuing operations

 

19,429

 

 

 

15,199

 

 

 

24,014

 

 

 

(39,270

)

 

 

19,372

 

Discontinued operations from consolidated 

entities

 

592

 

 

 

4,623

 

 

 

(4,566

)

 

 

-   

 

 

 

649

 

Net income

 

20,021

 

 

 

19,822

 

 

 

19,448

 

 

 

(39,270

)

 

 

20,021

 

Preferred distributions

 

(19,356

)

 

 

-   

 

 

 

-   

 

 

 

-   

 

 

 

(19,356

)

Net income applicable to unitholders

$

665

 

 

$

19,822

 

 

$

19,448

 

 

$

(39,270

)

 

$

665

 

 

 

21

**FELCOR LODGING LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**11.**

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

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the Six Months Ended June 30, 2007**

**(in thousands)**

 

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Total Consolidated**

Cash flows from (used in) operating activities

$

1,264

 

 

$

30,044

 

 

$

31,212

 

 

$

62,520

 

Cash flows from (used in) investing activities

 

(5,586

)

 

 

67,609

 

 

 

(5,315

)

 

 

56,708

 

Cash flows from (used in) financing activities

 

62,794

 

 

 

(93,057

)

 

 

(25,432

)

 

 

(55,695

)

Effect of exchange rates changes on cash

 

-   

 

 

 

914

 

 

 

-   

 

 

 

914

 

Change in cash and cash equivalents

 

58,472

 

 

 

5,510

 

 

 

465

 

 

 

64,447

 

Cash and cash equivalents at beginning of period

 

69,728

 

 

 

46,966

 

 

 

7,485

 

 

 

124,179

 

Cash and equivalents at end of period

$

128,200

 

 

$

52,476

 

 

$

7,950

 

 

$

188,626

 

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the Six Months Ended June 30, 2006**

**(in thousands)**

 

 

**FelCor L.P.**

 

**Subsidiary Guarantors**

 

**Non-Guarantor Subsidiaries**

 

**Total Consolidated**

Cash flows from (used in) operating activities

$

(15,549

)

 

$

55,373

 

 

$

53,001

 

 

$

92,825

 

Cash flows from (used in) investing activities

 

(1,418

)

 

 

52,550

 

 

 

(59,033

)

 

 

(7,901

)

Cash flows from (used in) financing activities

 

(16,900

)

 

 

(97,423

)

 

 

2,124

 

 

 

(112,199

)

Effect of exchange rates changes on cash

 

-   

 

 

 

201

 

 

 

-   

 

 

 

201

 

Change in cash and cash equivalents

 

(33,867

)

 

 

10,701

 

 

 

(3,908

)

 

 

(27,074

)

Cash and cash equivalents at beginning of period

 

48,393

 

 

 

36,189

 

 

 

9,982

 

 

 

94,564

 

Cash and equivalents at end of period

$

14,526

 

 

$

46,890

 

 

$

6,074

 

 

$

67,490

 

 

 

 

 

22

**Item 2.**

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

 

**General**

 

In late 2006, we started on a three year, $430 million renovation program on our 83 hotels, designed to improve the quality, returns on investment and competitive position of our hotel portfolio.  Through August 1, 2007, we completed renovations at 42 of these hotels and expect to complete renovations at 70 hotels by the end of 2007.

 

Our renovation program has produced better than anticipated second quarter results at the 25 hotels where renovations were completed by the end of the first quarter 2007.  These hotels had revenue per available room, or RevPAR, growth of 14.1% for the second quarter of 2007 compared to the same period in the prior year.  The RevPAR growth at these hotels was made up of increases in average daily rate, or ADR, of 6.9% and increases in occupancy of 6.7%.  The operating results for these 25 hotels was greater than we had expected for the quarter demonstrating that they are exceeding our projected returns on investment for the guest impact portion of our capital expenditures.  These hotels also increased their market share by an average of 10.3% in the quarter, with increases in both occupancy and ADR.  Our second quarter 2007 RevPAR growth was strong at our 47 hotels not affected by renovationdisplacement or located in New Orleans.  However, our operating results were adversely affected by our major renovation projects, renovation delays at five hotels and the overall weakness of the New Orleans market following the devastation of Hurricane Katrina in 2005.

 

During the second quarter of 2007, our RevPAR increased 2.6% for our consolidated hotels in continuing operations, largely from a 5.8% increase in ADR.  However, our occupancy decreased in the same period by 3.0%, compared to the same period last year.  For the six months ended June 30, 2007, our consolidated RevPAR from continuing operations increased by 1.8%, driven by a 6.8% increase in ADR and offset by a 4.6% decrease in occupancy.

 

Through the end of the second quarter, we recognized a gain of $18.1 million from the sale of 177 condominium units at our 184-unit Royale Palms condominium project in Myrtle Beach, South Carolina.  We expect that the remaining seven units will be sold on a selective basis to maximize their selling price.  We currently expect to recognize an additional gain of approximately $1 million upon the sale of the remaining units.

 

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

 

23

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

 

 

**Three Months Ended June 30,**

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

**% Change**

**2007-2006**

 

**2007**

 

**2006**

 

**% Change**

**2007-2006**

RevPAR

$

98.94

 

 

$

96.40

 

 

2.6

 

 

 

$

96.62

 

 

$

94.87

 

 

1.8

 

 

Hotel EBITDA(1)

$

81,403

 

 

$

81,033

 

 

0.5

 

 

 

$

153,322

 

 

$

156,799

 

 

(2.2

)

 

Hotel EBITDA margin(1)

 

30.7%

 

 

 

31.3%

 

 

(1.9

)

 

 

 

29.8%

 

 

 

30.7%

 

 

(2.9

)

 

Income from continuing operations

$

29,811

 

 

$

12,573

 

 

137.1

 

 

 

 

50,907

 

 

 

19,372

 

 

162.8

 

 

Funds From Operations (“FFO”)(1) (2)

$

54,687

 

 

$

32,974

 

 

65.8

 

 

 

 

85,295

 

 

 

64,307

 

 

32.6

 

 

Earnings Before Interest, Taxes, 

Depreciation and Amortization 

(“EBITDA”)(1)(3)

 

 

$

 

113,487

 

 

 

 

$

 

72,858

 

 

 

55.8

 

 

 

 

$

198,086

 

 

 

 

$

147,006

 

 

 

 

34.7

 

 

 

_____________

 

(1)

A discussion of the use, limitations and importance of these non-GAAP financial measures and detailed reconciliations to the most comparable GAAP measure are found elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

(2)

In accordance with the guidance provided by the United States Securities and Exchange Commission, or SEC, with respect to non-GAAP financial measures, FFO has not been adjusted for the following items included in net income applicable to common unitholders (in thousands):

 

 

**Three Months Ended**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Impairment loss, net of minority interests

$

-   

 

 

$

(8,341

)

 

$

-   

 

 

$

(8,341

)

Charges related to debt extinguishment, net of 

minority interests

 

 

-   

 

 

 

 

(803

 

)

 

 

 

(811

 

)

 

 

 

(1,470

 

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

 

 

(3)

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

 

 

**Three Months Ended**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Gain (loss) on sale of hotels, net of income tax and 

minority interests

 

$

 

21,799

 

 

$

 

(1,785

 

)

 

$

 

27,830

 

 

$

 

(2,862

 

)

Gain on sale of unconsolidated entities

 

-   

 

 

 

-   

 

 

 

11,182

 

 

 

-   

 

Impairment loss, net of minority interests

 

-   

 

 

 

(8,341

)

 

 

-   

 

 

 

(8,341

)

Charges related to debt extinguishment, net of 

minority interests

 

 

-   

 

 

 

 

(803

 

)

 

 

 

(811

 

)

 

 

 

(1,470

 

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

 

 

24

**Results of Operations**

 

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

 

For the three months ended June 30, 2007, we recorded net income applicable to common unitholders of $46.5 million, or $0.73 per dilutive unit, compared to $0.5 million for the same period in 2006.  We had income from continuing operations of $29.8 million in the second quarter of 2007, compared to $12.6 million for the same period in 2006.  During the second quarter of 2007, we recorded in income from continuing operations a $14.9 million net gain from the sale of 146 condominium units in Myrtle Beach, South Carolina.  We also recorded $26.4 million of income from discontinued operations, of which $22.5 million related to the net gains on the sale of eight hotels.

 

In the second quarter of 2007, total revenue from continuing operations increased $6.6 million, or 2.5%, compared to the same period in 2006.  The increase in revenue is principally attributed to a 2.6% increase in RevPAR compared to 2006.  The increase in RevPAR resulted from a 5.8% increase in ADR, net of a 3.0% decrease in occupancy.  We experienced stronger than expected ADR growth at hotels where we completed renovations in 2006 and first quarter 2007 and we continued to see strong overall ADR growth except for those hotels affected by ongoing renovation and the New Orleans market.  The decrease in occupancy for the quarter is generally attributed to an overall change in customer mix by taking less of the lower ADR business resulting in fewer rooms sold at higher rates as well as displacement from renovation.  The demand for rooms in New Orleans also continues to be weak becausethe convention business has not returned following Hurricane Katrina.

 

In the second quarter of 2007, total operating expenses increased by $9.6 million and increased as a percentage of total revenue from 85.8% to 87.2%, compared to the same period in 2006.  Most of the increase as a percentage of total revenue is attributed to depreciation expense and taxes, insurance, and lease expense, offset by a slight decrease as a percentage of total revenue in management and franchise fees.

 

In the second quarter of 2007, hotel departmental expenses (which consist of rooms expense, food and beverage expense, and other operating departments) increased $2.4 million and other property related costs (which consist of general and administrative costs, marketing costs, repairs and maintenance, utilities expense, and other costs) increased $1.7 million, compared to the same period in 2006, but remained substantially unchanged as a percentage of total revenue.  

 

In the second quarter of 2007, management and franchise fees decreased $0.3 million compared to the same period in 2006 and decreased as a percentage of total revenue from 5.5% to 5.2%, primarily from incentive management fees decreasing slightly as a percent of total revenues.  

 

In the second quarter of 2007, taxes, insurance and lease expense increased $2.5 million compared to the same period in 2006 and increased as a percentage of total revenue from 11.1% to 11.8%.  The increase as a percentage of total revenue relates primarily to percentage lease expense and property insurance.  Percentage lease expense is computed as a percentage of hotel revenues in excess of a base rent.  Therefore, as revenues increase, percentage rent expense increases at a faster rate.  Property insurance reflects the nationwide trend of increases in rates for catastrophic coverage.  

 

In the second quarter of 2007, depreciation expense increased by $3.4 million compared to the same period in 2006, increasing as a percent of total revenue from 9.2% to 10.2%.  The increase in depreciation expense reflects substantial capital expenditures in 2006 and the first six months of 2007.

 

In the second quarter of 2007, net interest expense included in continuing operations for the second quarter decreased $5.1 million, or 18.0%, compared to the same period in 2006.  This decrease was primarily attributable to the $140 million reduction in our average outstanding debt and a reduction in our average interest rate of approximately 35 basis points.

 

25

Discontinued operations includes the operating income, direct interest costs, and net gains on disposition related to 11 hotels sold in the first six months of 2007 and 31 hotels sold in 2006.  In the second quarter of 2007, income from discontinued operations was $26.4 million, compared to the second quarter 2006 loss from discontinued operations of $2.4 million.  This change is principally attributed to: (i) $22.5 million in net gains from hotel dispositions in the second quarter of 2007 compared to $1.8 million in net losses from hotel dispositions in the second quarter of 2006; (ii) a $9.3 million impairment loss in the second quarter of 2006; and (iii) a decrease in operating income, before impairment losses, from discontinued hotels sold since June 30, 2006, of $3.6 million.

 

*Comparison of the Six Months Ended June 30, 2007 and 2006*

 

For the six months ended June 30, 2007, we recorded net income applicable to common unitholders of $66.4 million, or $1.05 per dilutive unit, compared to $0.6 million for the same period in 2006.  We had income from continuing operations of $50.9 million for the six months ended June 30, 2007, compared to $19.4 million for the same period in 2006.  During the six months ended June 30, 2007, we recorded in income from continuing operations an $11.2 million gain, which is included in equity in income from unconsolidated entities, from the sale of a hotel by one of our unconsolidated entities, and an $18.1 million gain from the sale of 177 condominium units in Myrtle Beach, South Carolina.  We also recorded $34.8 million of income from discontinued operations, of which $28.5 million related to net gains on the sale of 11 hotels.

 

In the six months ended June 30, 2007, total revenue from continuing operations increased $3.8 million, or 0.8%, compared to the same period in 2006.  The increase in revenue is principally attributed to a 1.8% increase in RevPAR in the current year, partially offset by a $5.9 million of revenue recorded in 2006 for business interruption proceeds related to hurricane losses.  The current year increase in RevPAR resulted from a 6.8% increase in ADR, net of a 4.6% decrease in occupancy.  We experienced stronger than expected ADR growth at hotels where we completed renovations in 2006 and first quarter 2007 and we continued to see strong overall ADR growth except for those hotels affected by ongoing renovation and the New Orleans market.  The decrease in occupancy for the quarter is generally attributed to an overall change in customer mix by taking less of the lower ADR business andtargeting fewer rooms sold at a higher rate as well as displacement from renovation.  The demand for rooms in New Orleans also continues to be weak because the convention business has not returned following Hurricane Katrina.

 

In the six months ended June 30, 2007, total operating expenses increased by $14.7 million and increased as a percentage of total revenue from 85.8% to 88.0%, compared to the same period in 2006.  Most of the increase as a percentage of total revenue can be attributed to depreciation expense and taxes, insurance, and lease expense.

 

In the six months ended June 30, 2007, hotel departmental expenses (which consist of rooms expense, food and beverage expense, and other operating departments) and other property operating costs (which consist of general and administrative costs, marketing costs, repairs and maintenance, utilities expense, and other costs) increased $1.7 million and $1.4 million, respectively, compared to the same period in 2006, but remained substantially unchanged as a percentage of total revenue.  

 

In the six months ended June 30, 2007, taxes, insurance and lease expense increased $5.3 million compared to the same period in 2006 and increased as a percentage of total revenue from 10.8% to 11.8%.  The increase as a percentage of total revenue related primarily to percentage lease expense and property insurance.  Percentage lease expense is computed as a percentage of hotel revenues in excess of a base rent.  Therefore, as revenues increase, percentage rent expense increases at a faster rate.  Property insurance reflects the nationwide trend of increases in rates for catastrophic coverage.  

 

In the six months ended June 30, 2007, depreciation expense increased by $6.0 million compared to the same period in 2006, increasing as a percent of total revenue from 9.0% to 10.2%.  The increase in depreciation expense reflects the substantial capital expenditures in 2006 and the first six months of 2007.

 

26

In the six months ended June 30, 2007, net interest expense included in continuing operations for the second quarter decreased $12.7 million, or 21.7%, compared to the same period in 2006.  This decrease was primarily attributable to the $169 million reduction in our average outstanding debt and a reduction in our average interest rate of approximately 48 basis points.

 

Discontinued operations includes the operating income, direct interest costs, and net gains on disposition related to 11 hotels sold in the first six months of 2007 and 31 hotels sold in 2006.  In the six months ended June 30, 2007, income from discontinued operations increased $34.2 million, compared to the same period in 2006.  This change is principally attributed to: (i) $28.5 million in net gains from hotel dispositions in the six months ended June 30, 2007 compared to $2.9 million in net losses from hotel dispositions in the same period of 2006; (ii) a $9.3 million impairment loss in the six months ended June 30, 2006; and (iii) a decrease in operating income, before impairment losses, from discontinued hotels of $4.7 million as a result of the disposition of hotels subsequent to the June 30, 2006.

 

**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 June 30,**

 

**2007**

 

**2006**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

**Net income**

$

56,161

 

 

 

 

 

 

 

 

$

10,161

 

 

 

 

 

 

 

Preferred distributions

 

(9,678

)

 

 

 

 

 

 

 

 

(9,678

)

 

 

 

 

 

 

**Net income applicable to common unitholders**

 

46,483

 

 

63,387

 

$

0.73

 

 

 

483

 

 

62,728

 

$

0.01

 

Depreciation, continuing operations

 

27,155

 

 

-   

 

 

0.43

 

 

 

23,742

 

 

-   

 

 

0.38

 

Depreciation, unconsolidated entities and discontinued operations

 

2,848

 

 

-   

 

 

0.04

 

 

 

 

6,964

 

 

-   

 

 

0.11

 

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

 

(21,799

)

 

-   

 

 

(0.34

)

 

 

1,785

 

 

-   

 

 

0.03

 

**FFO**

 

54,687

 

 

 

 

 

 

 

 

$

32,974

 

 

62,728

 

$

0.53

 

Preferred distributions on Series A Preferred Units

 

6,279

 

 

9,985

 

 

(0.03

)

 

 

 

 

 

 

 

 

 

 

**FFO per unit calculation assuming Series** **A Preferred Unit conversion**

$

60,966

 

 

73,372

 

$

0.83

 

 

 

 

 

 

 

 

 

 

 

 

 

27

**Reconciliation of Net Income to FFO**

(in thousands, except per unit data)

 

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

 

**Dollars**

 

**Units**

 

**Per Unit Amount**

**Net income**

$

85,747

 

 

 

 

 

 

 

 

$

20,021

 

 

 

 

 

 

 

Preferred distributions

 

(19,356

)

 

 

 

 

 

 

 

 

(19,356

)

 

 

 

 

 

 

**Net income applicable to common unitholders**

 

66,391

 

 

63,254

 

$

1.05

 

 

 

665

 

 

62,707

 

$

0.01

 

Depreciation, continuing operations

 

52,205

 

 

-   

 

 

0.83

 

 

 

46,179

 

 

-   

 

 

0.74

 

Depreciation, unconsolidated entities and discontinued operations

 

5,711

 

 

-   

 

 

0.09

 

 

 

14,601

 

 

-   

 

 

0.23

 

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

 

(27,830

)

 

-   

 

 

(0.45

)

 

 

2,862

 

 

-   

 

 

0.05

 

Gain on sale of hotels in unconsolidated entities

 

(11,182

)

 

-   

 

 

(0.18

)

 

 

-   

 

 

-   

 

 

-   

 

**FFO**

 

85,295

 

 

 

 

 

 

 

 

$

64,307

 

 

62,707

 

$

1.03

 

Preferred distributions on Series A Preferred Units

 

12,558

 

 

9,985

 

 

-   

 

 

 

 

 

 

 

 

 

 

 

**FFO for per unit calculation assuming****Series A Preferred Unit****conversion**

$

97,853

 

 

73,239

 

$

1.34

 

 

 

 

 

 

 

 

 

 

 

 

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**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Impairment loss, net of minority interests

$

-   

 

 

$

(8,341

)

 

$

-   

 

 

$

(8,341

)

Charges related to debt extinguishment, net of 

minority interest

 

 

-   

 

 

 

 

(803

 

)

 

 

 

(811

 

)

 

 

 

(1,470

 

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

 

**Reconciliation of Net Income to EBITDA**

 (in thousands)

 

 

**Three Months Ended****June 30,**

 

**Six Months Ended****June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

**Net income**

$

56,161

 

 

$

10,161

 

 

$

85,747

 

 

$

20,021

 

Depreciation, continuing operations

 

27,155

 

 

 

23,742

 

 

 

52,205

 

 

 

46,179

 

Depreciation, unconsolidated entities and discontinued operations

 

2,848

 

 

 

6,964

 

 

 

5,711

 

 

 

14,601

 

Interest expense

 

24,627

 

 

 

29,155

 

 

 

48,746

 

 

 

60,452

 

Interest expense, unconsolidated entitiesand discontinued operations

 

1,489

 

 

 

1,928

 

 

 

3,063

 

 

 

3,856

 

Amortization expense

 

1,207

 

 

 

908

 

 

 

2,614

 

 

 

1,897

 

**EBITDA**

$

113,487

 

 

$

72,858

 

 

$

198,086

 

 

$

147,006

 

 

 

28

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**

 

**Six Months Ended**

 

**June 30,**

 

**June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Gain (loss) on sale of hotels, net of income tax 

and minority interests

 

$

 

21,799

 

 

$

 

(1,785

 

)

 

$

 

27,830

 

 

$

 

(2,862

 

)

Gain on sale of unconsolidated entities

 

-   

 

 

 

-   

 

 

 

11,182

 

 

 

-   

 

Impairment loss, net of minority interests

 

-   

 

 

 

(8,341

)

 

 

-   

 

 

 

(8,341

)

Charges related to early extinguishment of debt, 

net of minority interests

 

 

-   

 

 

 

 

(803

 

)

 

 

 

(811

 

)

 

 

 

(1,470

 

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

 

The following tables detail our computation of Hotel EBITDA, Hotel EBITDA margin, hotel operating expenses and the reconciliation of hotel operating expenses to total operating expenses with respect to our hotels included in continuing operations at June 30, 2007.

 

**Hotel EBITDA and Hotel EBITDA Margin**

(dollars in thousands)

 

 

**Three Months Ended****June 30,**

 

 

**Six Months Ended****June 30,**

 

**2007**

 

**2006**

 

 

**2007**

 

**2006**

Total revenue

$

265,851

 

 

$

259,264

 

 

$

514,520

 

 

$

510,674

 

Other revenue

 

(322

)

 

 

(27

)

 

 

(452

)

 

 

(56

)

Hotel operating revenue

 

265,529

 

 

 

259,237

 

 

 

514,068

 

 

 

510,618

 

Hotel operating expenses

 

(184,126

)

 

 

(178,204

)

 

 

(360,746

)

 

 

(353,819

)

Hotel EBITDA

$

81,403

 

 

$

81,033

 

 

$

153,322

 

 

$

156,799

 

Hotel EBITDA margin(1)

 

30.7%

 

 

 

31.3%

 

 

 

29.8%

 

 

 

30.7%

 

 
 
 

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

 

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

(dollars in thousands)

 

 

**Three Months Ended****June 30,**

 

**Six Months Ended****June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

 

Total operating expenses

$

231,907

 

 

$

222,345

 

 

$

452,940

 

 

$

438,218

 

Unconsolidated taxes, insurance and lease expense

 

1,896

 

 

 

1,567

 

 

 

3,599

 

 

 

3,149

 

Consolidated hotel lease expense

 

(17,267

)

 

 

(16,404

)

 

 

(31,525

)

 

 

(30,003

)

Corporate expenses

 

(5,255

)

 

 

(5,562

)

 

 

(12,041

)

 

 

(11,366

)

Abandoned projects

 

-   

 

 

 

-   

 

 

 

(22

)

 

 

-   

 

Depreciation

 

(27,155

)

 

 

(23,742

)

 

 

(52,205

)

 

 

(46,179

)

Hotel operating expenses

$

184,126

 

 

$

178,204

 

 

$

360,746

 

 

$

353,819

 

 

 

29

                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****June 30,**

 

**Six Months Ended****June 30,**

 

**2007**

 

**2006**

 

**2007**

 

**2006**

Net income

$

56,161

 

 

$

10,161

 

 

$

85,747

 

 

$

20,021

 

Discontinued operations

 

(26,350

)

 

 

2,412

 

 

 

(34,840

)

 

 

(649

)

Equity in income from unconsolidated entities

 

(3,710

)

 

 

(3,812

)

 

 

(16,480

)

 

 

(5,760

)

Minority interests

 

(506

)

 

 

(883

)

 

 

(787

)

 

 

(1,372

)

Consolidated hotel lease expense

 

17,267

 

 

 

16,404

 

 

 

31,525

 

 

 

30,003

 

Unconsolidated taxes, insurance and lease expense

 

(1,896

)

 

 

(1,567

)

 

 

(3,599

)

 

 

(3,149

)

Interest expense, net

 

23,207

 

 

 

28,308

 

 

 

46,079

 

 

 

58,816

 

Charge-off of deferred financing costs

 

-    

 

 

 

295

 

 

 

-   

 

 

 

962

 

Early extinguishment of debt

 

-   

 

 

 

438

 

 

 

-   

 

 

 

438

 

Corporate expenses

 

5,255

 

 

 

5,562

 

 

 

12,041

 

 

 

11,366

 

Depreciation

 

27,155

 

 

 

23,742

 

 

 

52,205

 

 

 

46,179

 

Abandoned projects

 

-   

 

 

 

-   

 

 

 

22

 

 

 

-   

 

Gain on sale of condominiums

 

(14,858

)

 

 

-   

 

 

 

(18,139

)

 

 

-   

 

Other revenue

 

(322

)

 

 

(27

)

 

 

(452

)

 

 

(56

)

**Hotel EBITDA**

$

81,403

 

 

$

81,033

 

 

$

153,322

 

 

$

156,799

 

 

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

 

 

**Three Months Ended**

**June 30,**

 

**Six Months Ended**

**June 30,**

* *

**2007**

 

**2006**

 

**2007**

 

**2006**

Ratio of operating income to total revenue

12.8

%

 

14.2

%

 

12.0

%

 

14.2

%

Other revenue

(0.1

)

 

-  

 

 

(0.1

)

 

-  

 

Unconsolidated taxes, insurance and lease expense

(0.7

)

 

(0.5

)

 

(0.7

)

 

(0.6

)

Consolidated hotel lease expense

6.5

 

 

6.3

 

 

6.1

 

 

5.9

 

Corporate expenses

2.0

 

 

2.1

 

 

2.3

 

 

2.2

 

Depreciation

10.2

 

 

9.2

 

 

10.2

 

 

9.0

 

Hotel EBITDA margin

30.7

%

 

31.3

%

 

29.8

%

 

30.7

%

 

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 

 

30

established by NAREIT.  This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do.

 

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

 

*Hotel EBITDA and Hotel EBITDA Margin*

 

Hotel EBITDA and Hotel EBITDA margin are commonly used measures of performance in the hotel industry and give investors a more complete understanding of the operating results over which our individual hotels and operating managers have direct control.  We believe that Hotel EBITDA and Hotel EBITDA margin are useful to investors by providing greater transparency with respect to two significant measures used by us in our financial and operational decision-making.  Additionally, using these measures facilitates comparisons with other hotel REITs and hotel owners.  We present Hotel EBITDA and Hotel EBITDA margin by eliminating corporate-level expenses, depreciation and expenses related to our capital structure.  We eliminate corporate-level costs and expenses because we believe property-level results provide investors with supplemental information into the ongoing operational performance of ourhotels and the effectiveness of management on a property-level basis.  We eliminate depreciation and amortization because, even though depreciation and amortization are property-level expenses, we do not believe that these non-cash expenses, which are based on historical cost accounting for real estate assets and implicitly assume that the value of real estate assets diminishes predictably over time, accurately reflect an adjustment in the value of our assets.    We also eliminate consolidated percentage rent paid to unconsolidated entities, which is effectively eliminated by minority interest expense and equity in income from unconsolidated subsidiaries, and include the cost of unconsolidated taxes, insurance and lease expense, to reflect the entire operating costs applicable to our hotels.

 

*Limitations of Non-GAAP Measures*

 

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

 

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

 

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.  

 

31

**Hotel Portfolio Composition**

 

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

 

**Brand**

 

 

 

**Hotels**

 

 

**Rooms**

 

**% of**

**Total Rooms**

 

**% of 2006**

**Hotel** **EBITDA**

Embassy Suites 

 

47

 

12,127

 

51

 

57

 

Holiday Inn

 

17

 

6,305

 

26

 

18

 

Starwood (Sheraton and Westin)

 

9

 

3,217

 

13

 

15

 

Doubletree

 

7

 

1,471

 

6

 

7

 

Hilton

 

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

 

736

 

3

 

4

 

Northern New Jersey

 

3

 

756

 

3

 

3

 

Washington, D.C.

 

1

 

443

 

2

 

3

 

Philadelphia

 

2

 

729

 

3

 

3

 

Chicago

 

3

 

795

 

3

 

3

 

San Antonio

 

3

 

874

 

4

 

3

 

Boston

 

2

 

532

 

2

 

3

 

 

 

 

 

 

 

 

 

 

 

**Location**

 

 

 

 

 

 

 

 

 

 

Suburban

 

32

 

8,200

 

34

 

37

 

Urban

 

20

 

6,362

 

26

 

25

 

Airport

 

20

 

6,203

 

26

 

24

 

Resort

 

11

 

3,317

 

14

 

14

 

 

 

 

 

 

 

 

 

 

 

**Segment**

 

 

 

 

 

 

 

 

 

 

Upper-upscale 

 

65

 

17,374

 

72

 

81

 

Full service

 

17

 

6,305

 

26

 

18

 

Upscale

 

1

 

403

 

2

 

1

 

 

 

32

**Hotel Operating Statistics**

 

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

**Operating Statistics by Brand**

 

* *

**Occupancy (%)**

 

**Three Months Ended June 30,**

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites 

75.3

 

77.5

 

(2.8

)

 

73.9

 

77.0

 

(4.0

)

Holiday Inn

73.6

 

76.3

 

(3.6

)

 

68.5

 

73.4

 

(6.7

)

Starwood(a)

71.6

 

72.5

 

(1.2

)

 

70.2

 

71.8

 

(2.2

)

Doubletree

71.2

 

78.7

 

(9.4

)

 

71.4

 

76.6

 

(6.7

)

Other(b)

77.3

 

74.1

 

4.4

 

 

65.7

 

67.6

 

(2.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 

74.2

 

76.5

 

(3.0

)

 

71.5

 

75.0

 

(4.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**ADR ($)**

 

**Three Months Ended June 30,**

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites 

140.99

 

133.49

 

5.6

 

 

144.62

 

135.53

 

6.7

 

Holiday Inn

117.03

 

109.66

 

6.7

 

 

115.10

 

108.09

 

6.5

 

Starwood(a)

127.65

 

124.27

 

2.7

 

 

129.62

 

123.77

 

4.7

 

Doubletree

146.22

 

130.87

 

11.7

 

 

147.88

 

132.23

 

11.8

 

Other(b)

140.86

 

137.48

 

2.5

 

 

135.19

 

129.10

 

4.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 

133.35

 

126.09

 

5.8

 

 

135.10

 

126.56

 

6.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**RevPAR ($)**

 

**Three Months Ended June 30,**

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

Embassy Suites 

106.18

 

103.45

 

2.6

 

 

106.86

 

104.36

 

2.4

 

Holiday Inn

86.11

 

83.70

 

2.9

 

 

78.87

 

79.39

 

(0.7

)

Starwood(a)

91.38

 

90.07

 

1.5

 

 

90.97

 

88.82

 

2.4

 

Doubletree

104.15

 

102.93

 

1.2

 

 

105.65

 

101.23

 

4.4

 

Other(b)

108.90

 

101.81

 

7.0

 

 

88.80

 

87.23

 

1.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 

98.94

 

96.40

 

2.6

 

 

96.62

 

94.87

 

1.8

 

 

 

(a)

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

 

(b)

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

 

33

**Operating Statistics for Our Top Markets**

 

* *

**Occupancy (%)**

 

**Three Months Ended June 30,**

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

72.4

 

78.5

 

(7.8

)

 

79.5

 

83.5

 

(4.7

)

Atlanta

78.1

 

77.2

 

1.1

 

 

76.3

 

78.6

 

(3.0

)

San Francisco Bay area

78.9

 

77.3

 

2.1

 

 

72.9

 

74.8

 

(2.6

)

Los Angeles area

79.1

 

74.3

 

6.4

 

 

78.3

 

76.2

 

2.8

 

Orlando

80.6

 

84.5

 

(4.6

)

 

79.9

 

82.1

 

(2.7

)

Dallas

65.9

 

72.1

 

(8.7

)

 

68.1

 

73.3

 

(7.0

)

Phoenix

68.0

 

74.1

 

(8.2

)

 

74.9

 

78.6

 

(4.7

)

San Diego

73.9

 

80.4

 

(8.0

)

 

76.2

 

81.3

 

(6.2

)

Minneapolis

78.5

 

70.7

 

11.0

 

 

73.9

 

68.2

 

8.2

 

Northern New Jersey

76.7

 

74.5

 

2.9

 

 

68.3

 

70.2

 

(2.7

)

Washington, D.C.

73.8

 

70.9

 

4.0

 

 

68.2

 

66.4

 

2.8

 

Philadelphia

72.4

 

82.5

 

(12.2

)

 

64.2

 

71.2

 

(9.9

)

Chicago

73.7

 

81.0

 

(9.0

)

 

66.9

 

74.3

 

(10.0

)

San Antonio

83.3

 

82.7

 

0.8

 

 

77.6

 

80.4

 

(3.5

)

Boston

70.2

 

81.1

 

(13.5

)

 

61.1

 

73.4

 

(16.8

)

 

**ADR ($)**

 

**Three Months Ended June 30,**

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

136.12

 

131.30

 

3.7

 

 

169.74

 

157.77

 

7.6

 

Atlanta

121.00

 

121.26

 

(0.2

)

 

123.11

 

120.69

 

2.0

 

San Francisco Bay area

138.57

 

130.87

 

5.9

 

 

135.16

 

126.40

 

6.9

 

Los Angeles area

158.32

 

144.69

 

9.4

 

 

154.54

 

138.46

 

11.6

 

Orlando

103.44

 

98.39

 

5.1

 

 

112.94

 

105.27

 

7.3

 

Dallas

122.26

 

113.01

 

8.2

 

 

126.57

 

114.58

 

10.5

 

Phoenix

136.17

 

122.69

 

11.0

 

 

160.24

 

142.68

 

12.3

 

San Diego

156.12

 

138.75

 

12.5

 

 

154.28

 

137.30

 

12.4

 

Minneapolis

142.94

 

136.96

 

4.4

 

 

141.12

 

134.76

 

4.7

 

Northern New Jersey

157.64

 

148.57

 

6.1

 

 

155.21

 

147.48

 

5.2

 

Washington, D.C.

169.09

 

166.46

 

1.6

 

 

170.86

 

165.76

 

3.1

 

Philadelphia

145.77

 

135.14

 

7.9

 

 

135.85

 

126.83

 

7.1

 

Chicago

136.50

 

124.31

 

9.8

 

 

130.22

 

119.40

 

9.1

 

San Antonio

111.04

 

107.06

 

3.7

 

 

110.33

 

103.01

 

7.1

 

Boston

157.89

 

157.03

 

0.5

 

 

150.49

 

146.59

 

2.7

 

 

**RevPAR ($)**

 

**Three Months Ended June 30,**

 

**Six Months Ended June 30,**

 

**2007**

 

**2006**

 

**%Variance**

 

**2007**

 

**2006**

 

**%Variance**

South Florida area

98.50

 

103.08

 

(4.4

)

 

135.02

 

131.76

 

2.5

 

Atlanta

94.51

 

93.67

 

0.9

 

 

93.92

 

94.89

 

(1.0

)

San Francisco Bay area

109.33

 

101.15

 

8.1

 

 

98.48

 

94.59

 

4.1

 

Los Angeles area

125.21

 

107.54

 

16.4

 

 

121.04

 

105.44

 

14.8

 

Orlando

83.32

 

83.10

 

0.3

 

 

90.21

 

86.41

 

4.4

 

Dallas

80.52

 

81.50

 

(1.2

)

 

86.23

 

83.97

 

2.7

 

Phoenix

92.55

 

90.87

 

1.9

 

 

120.05

 

112.20

 

7.0

 

San Diego

115.43

 

111.55

 

3.5

 

 

117.54

 

111.56

 

5.4

 

Minneapolis

112.26

 

96.86

 

15.9

 

 

104.23

 

91.95

 

13.3

 

Northern New Jersey

120.84

 

110.70

 

9.2

 

 

105.98

 

103.53

 

2.4

 

Washington, D.C.

124.72

 

118.07

 

5.6

 

 

116.59

 

110.05

 

5.9

 

Philadelphia

105.59

 

111.47

 

(5.3

)

 

87.19

 

90.30

 

(3.4

)

Chicago

100.61

 

100.67

 

(0.1

)

 

87.11

 

88.78

 

(1.9

)

San Antonio

92.51

 

88.50

 

4.5

 

 

85.65

 

82.85

 

3.4

 

Boston

110.77

 

127.42

 

(13.1

)

 

91.92

 

107.63

 

(14.6

)

 

 

34

**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 six months ended June 30, 2007, net cash flow provided by operating activities, consisting primarily of hotel operations, was $62.5 million.  At June 30, 2007, we had cash on hand of $188.6 million, including approximately $43.0 million held under management agreements to meet minimum working capital requirements.

 

We have committed to spend at least $430 million over a three year period, commencing in late 2006, to renovate our core hotels.  At June 30, 2007 we had approximately $200 million remaining to spend on these renovation projects, which will be funded from cash.  In the second quarter of 2007, we completed the sale program of all our non-strategic hotels.  From December 2005 through June 30, 2007, we sold 45 non-strategic hotels, generating aggregate gross proceeds of $720 million.  We used a portion of these proceeds to repay approximately $400 million of debt in 2006, and we are using the remaining proceeds to fund our hotel renovations and redevelopment projects.

 

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

 

Development of our 184-unit Royale Palms condominium project in Myrtle Beach, South Carolina, was substantially completed in the first quarter of 2007.  Through June 30, 2007, we closed on the sale of 177 units and received aggregate net proceeds, after repayment of the construction loan of $19.0 million.  We expect sales of the remaining seven units to be sold on a selective basis to maximize the selling price, and upon sale we expect to receive additional proceeds of approximately $3.8 million.  

 

We expect that our cash flow provided by operating activities for 2007 will be approximately $172 to $176 million.  During the six months ended June 30, 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.  Our cash flow forecast assumes that RevPAR increases by approximately 4% to 5% and Hotel EBITDA margins to be flat for the full year.  Our current operating plan for 2007 contemplates that we will make aggregate common distribution payments of $70 million, preferred distribution payments of $39 million and $13 million in normal recurring principal payments, leaving surplus cash flow (before capital expenditures, additional debt reduction or sale of hotels) of approximately $50 to$54 million.  For the full year 2007, we plan to spend approximately $225 million for capital expenditures, which will be funded from 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.  

 

35

*Debt*

 

 

*Line of Credit*

At June 30, 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 June 30, 2007.

 

 

*Construction Loan*

Development of our 184-unit Royale Palms condominium project in Myrtle Beach, South Carolina was substantially completed in the first quarter of 2007.  Through June 30, 2007, we closed on the sale of 177 units, and a portion of the proceeds of those sales were used to repay the outstanding balance on our construction loan.

 

*Mortgage Debt*

At June 30, 2007, we had aggregate mortgage indebtedness of approximately $783.7 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*

We have various financial covenant and incurrence tests under the indentures governing our senior notes.  If we were unable to continue to satisfy the incurrence test, we may be prohibited from, among other things, incurring any additional indebtedness, except under certain specific exceptions,******or paying distributions on our preferred or common units, except to the extent necessary to satisfy FelCor’s REIT qualification requirement that it distribute 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.  

 

36

**Disclosure Regarding Forward-Looking Statements**

 

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

 

 

**•**

general economic and lodging industry conditions, including the anticipated continuation of economic growth, the realization of anticipated job growth, the impact of the United States’ military involvement in the Middle East and elsewhere, future acts of terrorism, the threat or outbreak of a pandemic disease affecting the travel industry, the impact on the travel industry of high fuel costs and increased security precautions, and the impact that the bankruptcy of additional major air carriers may have on our revenues and receivables;

 

 

**•**

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

 

 

**•**

our inability to retain earnings;

 

 

**•**

our liquidity and capital expenditures;

 

 

**•**

the impact of renovations on hotel operations;

 

 

**•**

our growth strategy and acquisition activities; and

 

 

**•**

competitive conditions in the lodging industry.

 

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

 

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

 

**Item 3.  Quantitative and Qualitative Disclosures About Market Risk**

 

*Quantitative and Qualitative Disclosures About Market Risk*

 

At June 30, 2007, approximately 63% of our consolidated debt had fixed interest rates.  Currently, market interest rates are below the rates we are obligated to pay on our fixed-rate debt.  The following table provides information about our financial instruments that are sensitive to changes in interest rates.  For debt obligations, the table presents scheduled maturities and weighted average interest rates, by maturity dates.  The fair value of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at the date presented, at then current market interest rates.

 

37

******

**Expected Maturity Date**

**at June 30, 2007**

**(dollars in thousands)**

 

* *

**2007**

 

 

**2008**

 

 

**2009**

 

 

**2010**

 

 

**2011**

 

**Thereafter**

 

 

 

**Total**

 

 

**Fair Value**

**Liabilities**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

$ 

6,467

 

$

13,733

 

$

142,240

 

$

274,457

 

$

303,030

 

$

78,235

 

$

818,162

 

$

861,490

Average interest rate

 

7.98%

 

 

7.99%

 

 

7.27%

 

 

8.70%

 

 

8.49%

 

 

6.53%

 

 

8.15%

 

 

 

Floating rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

-   

 

 

265,500

 

 

-   

 

 

-   

 

 

215,000

 

 

-   

 

 

480,500

 

 

480,500

Average interest rate

 

-   

 

 

6.22%

 

 

-   

 

 

-   

 

 

7.48%

 

 

-   

 

 

6.79%

 

 

 

Total debt

$

6,467

 

$

279,233

 

$

142,240

 

$

274,457

 

$

518,030

 

$

78,235

 

$

1,298,662

 

 

 

Average interest rate

 

7.98%

 

 

6.31%

 

 

7.27%

 

 

8.70%

 

 

8.07%

 

 

6.53%

 

 

7.64%

 

 

 

Net discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(963

)

 

 

Total debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,297,699

 

 

 

 

**Item 4.  Controls and Procedures**

 

 

(a)

*Evaluation of disclosure controls and procedures.*

We have no employees as FelCor as our sold 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.

 

38

**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.

 

 

 

 

39

**SIGNATURE**

 

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

 

 

 

 

 

**FELCOR LODGING LIMITED PARTNERSHIP**

a Delaware Limited Partnership

 

 

 

 

 

 

 

 

 

 

 

By:

FelCor Lodging Trust Incorporated

Its General Partner

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/Lester C. Johnson

 

 

 

By:

Lester C. Johnson

Senior Vice President and 

Chief Accounting Officer

 

 

 

 

 

Date:

August 9, 2007

 

 

 

 

 

 

 

40

 

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