ITEM 1. BUSINESS
At December 31, 2000, FelCor Lodging Limited Partnership and its subsidiaries (the "Company") owned interests in 186 hotels with nearly 50,000 rooms and suites (collectively the "Hotels"). The sole general partner of the Company is FelCor Lodging Trust Incorporated ("FelCor"), a Maryland corporation, the nation's second largest hotel real estate investment trust ("REIT"). At December 31, 2000, FelCor owned a greater than 86% equity interest in the Company. The Company owns 100% interests in 161 of the Hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels and 50% interests in separate entities that own 16 hotels. The Hotels are located in the United States (35 states) and Canada, with concentrations in Texas (41 hotels), California (19 hotels), Florida (18 hotels) and Georgia (15 hotels).
The Company is the owner of the largest number of Embassy Suites(R), Crowne Plaza(R), Holiday Inn(R), and independently owned Doubletree(R) branded hotels in the world. The following table provides a schedule of the Hotels, by brand, at December 31, 2000:
The Company seeks to increase operating cash flow through both internal growth and selective acquisitions, while maintaining a flexible and conservative capital structure. In addition to renovating, redeveloping and repositioning the Company's acquired hotels, the Company may seek to acquire new upscale properties that will benefit from affiliation with one of the premium brands available to the Company through its strategic brand owner and manager relationships with Hilton Hotels Corporation ("Hilton"), Bass plc ("Bass") and Starwood Hotels & Resorts Worldwide, Inc. ("Starwood").
On July 28, 1998, the Company merged Bristol Hotel Company into FelCor. FelCor then contributed the assets so acquired to the Company in exchange for approximately 31 million units of partnership interest, resulting in the Company acquiring 107 primarily full-service hotels (the "Merger"). These hotels added more than 28,000 rooms and suites to the Company's portfolio, more than doubling the Company's size. The merger also provided diversification, both geographically and by asset class, by adding hotels in many of its key markets and broadening its portfolio in the full-service, upscale and midscale hotel markets.
In the second quarter of 2000, the Company identified 25 non-strategic hotels and indicated its intent to sell these hotels. The Company expects gross sale proceeds from these sales to be approximately $150 million and net proceeds to be approximately $137 million (after deducting estimated transaction costs). The Company anticipates that the sale of these 25 hotels will result in a book loss of approximately $63 million. Accordingly, FelCor's Board of Directors approved the establishment of a $63 million reserve in the second quarter of 2000 for hotels held for sale, to reflect the difference between book value and the estimated market value of these hotels. In December 2000, the Company completed the sale of one of these hotels held for sale and recorded a gain of approximately $135,000.
In March 2001, the Company contributed eight of the hotels held for sale to an entity in which the Company holds a 50% equity interest, and subsidiary of Interstate Hotels Corporation ("IHC") holds the other 50% equity interest. Another subsidiary of IHC manages each of these hotels.
On January 1, 2001, the provisions of the REIT Modernization Act became effective. These provisions:
o reduce the percentage of taxable income required to be distributed by a REIT from 95% to 90% for taxable years after 2000; and
o subject to certain limitations, permit a REIT to own taxable subsidiaries that engage in businesses previously prohibited to a REIT, including, among other things, leasing hotels from a hotel REIT, provided that the hotels in question continue to be managed by unrelated third parties.
As a result of the REIT Modernization Act's enactment, the Company undertook steps to realize the benefits the Act offers to REIT's by
o effective January 1, 2001, acquiring DJONT Operations, L.L.C. and its consolidated subsidiaries ("DJONT") which leased 85 of the Company's hotels at December 31, 2000. The management contracts for all of the DJONT leased hotels remained in place.
o effective January 1, 2001, completing the acquisition of 12 hotels leased to Bristol Hotels & Resorts and its consolidated subsidiaries ("Bristol"), entering into management contracts with a subsidiary of Bass for two of the hotels, a subsidiary of IHC for eight of the hotels, with a subsidiary of Hilton for one of the hotels and one hotel was sold.
o effective July 1, 2001, acquiring leases for the remaining 88 hotels leased to Bristol and entering into long term management agreements with a subsidiary of Bass to manage these hotels.
o contributing the acquired Lessee and/or leases as acquired, to newly created wholly owned taxable REIT subsidiaries ("TRS").
The Company believes that the advantages of holding the Lessees in a TRS include (i) a more direct relationship with the hotel and the brand managers, (ii) elimination of potential conflicts of interest and (iii) the ability to present consolidated hotel level financial reporting.
As the Hotel leases are acquired, the Company's results of operations reflect hotel revenues and expenses rather than percentage lease revenue. Pro forma consolidated statements of operations for the years ended December 31, 2000 and 1999, which reflect the acquisition of all the Hotel leases, are contained in the Notes to the Consolidated Financial Statements of FelCor Lodging Limited Partnership appearing elsewhere herein.
The Leases
At December 31, 2000, the Company leased 85 hotels to DJONT and leased 99 hotels to Bristol (Bristol together with DJONT, the "Lessees"). Bristol became a subsidiary of Bass by virtue of a merger between Bristol and a subsidiary of Bass in March 2000. Two of the Hotels were operated without a lease.
At December 31, 2000, DJONT was a private company controlled by Thomas J. Corcoran, Jr. the President, Chief Executive Officer and a Director of FelCor. Subject to the receipt of certain lender consents, effective January 1, 2001, the Company acquired and contributed to a newly formed taxable REIT subsidiary, all of the equity interests in DJONT. In consideration for the acquisition of DJONT, the Company issued an aggregate of 416,667 units valued at approximately $10 million, which, together with DJONT's accumulated shareholders' deficit of $24.5 million, will be expensed in the first quarter of 2001 as a lease termination cost.
Effective January 1, 2001, the Company completed the acquisition of 12 of the Bristol leases which were held by Bass. In consideration for the acquisition of such leases, FelCor issued to Bass 413,585 shares of FelCor's common stock valued at approximately $10 million. FelCor then transferred these leases to the Company and the Company then issued a corresponding number of units. The Company has entered into an agreement with IHC to manage eight of the hotels, two hotels are being managed by a subsidiary of Bass under short term management contracts, one hotel is being managed by a subsidiary of Hilton and one hotel was sold. In March 2001, the Company entered into an agreement with Bass to acquire the remaining 88 leases effective July 1, 2001. In consideration for the acquisition of such leases, the Company will enter into long term management agreements with Bass with regard to these hotels and FelCor will issue to Bass 100 shares of FelCor common stock. A portion of the management fees with respect to the 88 hotels managed by Bass under long term management agreements will be considered to be lease termination costs and the Company will record a lease termination expense of approximately $125 million in the third quarter of 2001. The Company will record a corresponding liability of approximately $125 million that will be amortized over the term of the applicable management agreements.
At January 1, 2001, (i) subsidiaries of Bass managed 91 of the Hotels, (ii) subsidiaries of Hilton managed 72 of the Hotels, (iii) subsidiaries of Starwood managed 11 of the Hotels, (iv) subsidiaries of IHC managed eight of the Hotels and (v) three independent management companies managed the four remaining Hotels.
THE INDUSTRY
The United States hotel industry profitability has improved each year since 1992, the longest sustained growth in history. According to PricewaterhouseCoopers LLP's Lodging Research Journal, after a period of extended unprofitability in the late 1980's and early 1990's, during which time the increase in supply of new hotel rooms significantly outpaced growth in room demand, lodging industry revenues increased every year from 1992 through 2000. The percentage growth in room demand exceeded percentage growth in new room supply from 1992 through 1996. While 1997 and 1998 experienced the highest number of new room starts in the prior 10 years, 1999 showed a decline in new room starts from 1997-1998 levels. In spite of above-average increases in room supply, according to PricewaterhouseCoopers LLP's January 2001 Lodging Research Journal, room demand for the year 2000 reflected a growth rate of 3.7 percent, which was the strongest since 1989. Increases in room rates of an estimated 4.9 percent contributed to a growth in revenue per available room ("RevPAR") of 5.5 percent for the year. Although 2000 was the first year in which hotel occupancy had risen since 1995, PricewaterhouseCoopers indicated that occupancy in the U.S. lodging industry is expected to fall and estimated slower RevPAR growth during the first two quarters of 2001. However, it anticipates the lodging industry will regain momentum towards the end of 2001 and estimates RevPAR growth for 2001 to be 2.8%.
Smith Travel Research, another leading provider of industry data, classifies hotel chains into five distinct categories: Upper Upscale, Upscale, Midscale with Food & Beverage, Midscale Without Food & Beverage, and Economy. The Company remains focused primarily on properties in the Upper Upscale (including Doubletree Guest Suites, Embassy Suites, Sheraton and Westin hotels), Upscale (including Crowne Plaza, Doubletree hotels and Homewood Suites), and Midscale With Food & Beverage (including Holiday Inn and Holiday Inn Select hotels) categories, from which the Company derived approximately 97% of its room and suite revenues in 2000. PricewaterhouseCoopers LLP's January 2001 Lodging Research Journal projects that for 2001, RevPAR growth will be 2.3% for Upper Upscale hotels, 2.4% for Upscale hotels, and 2.1% for hotels in the Midscale With Food & Beverage category. The same publication projects 2001 changes in supply and demand for each segment: Upper Upscale hotels, supply growth of 3.7% with a demand growth of 2.3%; Upscale hotels, supply growth of 4.2% with a demand growth of 3.7%; and hotels in the Midscale With Food & Beverage category with a supply growth of 0.3% and a decline in demand of 0.5%.
BUSINESS STRATEGY
The Company seeks to increase operating cash flow through active asset management. In addition to actively overseeing the operation of its hotels by its lessees and their managers, the Company applies its asset management expertise to the renovation, redevelopment and rebranding of its hotels, to the maintenance of strong strategic relationships with its brand owners and managers, and to maintaining financial flexibility and a conservative balance sheet.
HOTEL RENOVATION, REDEVELOPMENT AND REBRANDING
The Company has historically sought to enhance the value of its portfolio through:
o its practice of upgrading, renovating and/or redeveloping most of its recently acquired hotels to enhance their competitive position, and, in certain instances, rebranding them to improve their revenue generating capacity; and
o its ongoing program for the maintenance of the Company's upgraded hotel assets, which includes:
o the contribution of approximately 4% of total annual room and suite revenue to a capital reserve, for routine capital replacements and improvements; and
o ensuring that the Lessees' adhere to a rigorous maintenance and repair program, resulting in the expenditure of more than 4% of annual hotel revenues on maintenance of the Hotels.
For information regarding the Company's renovation, redevelopment and rebranding activities during 2000 and 1999, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Renovations, Redevelopments and Rebrandings" contained elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2000.
MAINTENANCE OF STRONG STRATEGIC RELATIONSHIPS
The Company benefits from strategic brand owner and manager relationships with Hilton (Embassy Suites and Doubletree), Bass (Crowne Plaza and Holiday Inn) and Starwood (Sheraton and Westin).
o Hilton, which acquired Promus Hotel Corporation on November 30, 1999, has a hotel portfolio of more than 1,800 hotels with more than 300,000 guest rooms in 50 states and the District of Columbia, and is the largest operator of full-service, all-suite hotels in the United States. In addition to its Hilton and Conrad International(R)-branded hotels, Hilton owns the Embassy Suites, Doubletree and Doubletree Guest Suites brands and at December 31, 2000, managed 71 of the
Company's hotels. As a result of its acquisition of Promus Hotel Corporation, Hilton acquired an equity interest in the Company having an aggregate value of approximately $34 million at December 31, 2000, and became a 50% partner in unconsolidated entities with the Company in the ownership of 12 hotels and the holder of a 10% equity interest in certain consolidated subsidiaries owning six hotels. The relationship with Promus Hotel Corporation and its Embassy Suites brand provided the foundation for the Company's historical growth, and it expects to expand its relationship with Hilton, as the successor to Promus.
o Bass is one of the largest hotel operating companies in the world. Bass owns, operates or franchises more than 3,000 hotels worldwide, with over 490,000 guest rooms in more than 100 countries around the world. Among the brands owned by Bass are Crowne Plaza, Holiday Inn, Holiday Inn Select, Holiday Inn Express and Inter-Continental(R). Bass, which acquired Bristol on March 31, 2000, managed 99 of our hotels at December 31, 2000. Bass also owns FelCor common stock and limited partnership units of the Company aggregating approximately 16.2% of the Company and FelCor's outstanding common stock.
o Starwood is one of the world's largest hotel operating companies. Directly and through subsidiaries, Starwood owns, leases, manages or franchises more than 725 properties in 80 countries. The Company's strategic alliance with Starwood, coupled with the purchase of seven Sheraton hotels in 1997, provided the Company with its initial entry into the upscale, full-service, non-suite hotel market. Starwood manages 11 of the Company's hotels and is a 40% joint venture partner in the ownership of two hotels and a 50% joint venture partner in the ownership of one hotel.
MAINTENANCE OF FINANCIAL FLEXIBILITY
The Company is committed to maintaining substantial financial flexibility. In funding its growth, the Company has used a broad selection of financing sources to minimize the cost of capital, including public equity, collateralized mortgage-backed securities, public and private debt, and asset divestitures. It believes that its capital structure will continue to be among the most conservative in the hotel REIT industry. It further believes its financial flexibility should enable it to pursue selective expansion opportunities and to take advantage of renovation, redevelopment and rebranding opportunities to help it improve its hotels' competitive position.
FINANCING TRANSACTIONS
On April 26, 2000, the Company closed a 10-year, $145 million First Mortgage Term Loan, which is collateralized by seven Sheraton hotels and carries an 8.73% fixed interest rate. On May 2, 2000, the Company closed $186 million of 10-year, First Mortgage Term Loans which are collateralized by eight Embassy Suites hotels and carry an 8.70% fixed interest rate. These loans are non-recourse, mature in May 2010, and amortize over 25 years. The proceeds of these loans were used to reduce borrowings under the Company's Line of Credit.
On August 1, 2000, the Company renewed its Line of Credit. The Line of Credit was reduced from $850 million to $600 million and the maturity was extended from July 2001 to August 2003. The effective interest rate on the renewed Line of Credit ranges from 87.5 basis points to 250 basis points above LIBOR depending on the Company's leverage and corporate rating. An extraordinary charge of approximately $578,000 was recorded to write-off a portion of the deferred financing costs associated with the Line of Credit.
On September 15, 2000, the Company completed the private placement of $400 million of senior unsecured notes which mature in September, 2008 and bear an interest rate of 9 1/2%. The notes were issued at a discount to yield 9.75%. The proceeds were used to retire the $375 million floating rate senior term loan,
which matured in 2004, and to pay down the Line of Credit. An extraordinary charge of approximately $3.3 million was recorded to write-off unamortized deferred financing costs associated with the $375 million loan. On October 30, 2000, the Company subsequently completed an offer to exchange up to $400 million in aggregate principal amount of the private placement senior notes for notes with identical terms which were registered under the Securities Act of 1933.
On January 11, 2001, the Company completed the private placement of an additional $100 million in 9 1/2% senior unsecured notes that mature in December, 2008. These notes were issued at a premium to yield an effective interest rate of 91/8%. The proceeds were used initially to pay down the Company's Line of Credit.
HOTEL OPERATING PERFORMANCE
Upscale and full service hotels like Embassy Suites, Crowne Plaza, Holiday Inn and Holiday Inn Select, Doubletree Guest Suites, and Sheraton and Sheraton Suites hotels account for approximately 97% of the Company's Percentage Lease revenue.
For a detailed discussion of the Company's hotel operating performance, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-The Hotels-Actual" contained elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2000.
SEASONALITY
The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy rates primarily during the first three quarters of each year. This seasonality can be expected to cause fluctuations in quarterly hotel income, particularly during the fourth quarter. To the extent cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations, the Company expects to utilize other cash on hand or borrowings under the Line of Credit to make distributions to its equity holders.
COMPETITION
The hotel industry is highly competitive. Each of the Company's hotels is located in a developed area that includes other hotel properties and competes for guests primarily with other full-service hotels in its immediate vicinity and secondarily with other hotel properties in its geographic market. An increase in the number of competitive hotel properties in a particular area could have a material adverse effect on the occupancy, average daily rate ("ADR") and RevPAR of the Company's hotels in that area. The Company believes that brand recognition, location, the quality of the hotel and services provided, and price are the principal competitive factors affecting the Company's hotels.
The Company competes for investment opportunities with other entities, some of which have substantially greater financial resources than the Company. These larger entities may generally be able to accept more risk than the Company can prudently manage. Competition may generally reduce the number of suitable investment opportunities offered to the Company and may increase the bargaining power of owners seeking to sell their hotels.
PROPERTY TAXES
Each Hotel is subject to real and personal property taxes. During 2000, real and personal property taxes incurred by the Company amounted to $63.2 million, or 11.4 % of the Company's total revenues. Real and personal property taxes on the Hotels may increase as property tax rates change and as the properties are assessed or reassessed by taxing authorities. FelCor's Vice President, Taxes, Michael L. Hunter and his staff,
work with the numerous taxing authorities, both directly and through independent agents, to assure that the Hotels are fairly assessed and to minimize the Company's tax liabilities.
TAX STATUS OF FELCOR
FelCor has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its initial taxable year ending December 31, 1994. As a REIT, FelCor generally is not subject to federal income taxation at the corporate level, on its taxable income that is distributed to its shareholders. FelCor may, however, be subject to certain state and local taxes on its income and property. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute annually at least 90% of its taxable income. In connection with FelCor's election to be taxed as a REIT, FelCor's Charter imposes restrictions on the ownership and transfer of shares of its common stock. The Company expects to make distributions on its units sufficient to enable FelCor to meet its distribution obligations as a REIT. FelCor and the Company have adopted the calendar year as its taxable year.
REIT Modernization Act
On December 17, 1999, the provisions of the REIT Modernization Act were enacted into law. These provisions, which became effective January 1, 2001, will, among other things:
o reduce the percentage of taxable income required to be distributed by a REIT from 95% to 90%, and
o subject to certain limitations, permit a REIT to own taxable subsidiaries that engage in businesses previously prohibited to a REIT, including, among other things, leasing hotels from its parent hotel REIT, provided that the hotels in question continue to be managed by unrelated third parties.
This act and its potential impact on the Company are discussed in further detail in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Annual Report on Form 10-K for the year December 31, 2000.
LESSEE OPERATIONS
At December 31, 2000, the Lessees leased all but two of the Hotels under Percentage Leases, pursuant to which the Lessee is obligated to pay the Company the greater of a minimum Base Rent or Percentage Rent based on a percentage of revenues. The Lessees have entered into and are responsible for the payment of all fees under the franchise licenses and management agreements relating to the Hotels, may hold the liquor licenses applicable to the Hotels, own and maintain the inventories required for the operation of the Hotels, pay for normal maintenance and repair expenses, enter into various operating, maintenance and service agreements with respect to the Hotels, and are responsible for compliance with the license, management and other agreements affecting hotel operations. In addition, the Lessees provide asset management services to the Hotels, including the supervision of the day-to-day operations of the Hotels by the management companies engaged to manage such Hotels and the establishment and implementation of capital expenditure programs.
Audited financial statements for DJONT and Bristol Tenant Companies are filed with FelCor Lodging Trust Incorporated's annual report on Form 10-K for the year ended December 31, 2000.
REPAIRS AND MAINTENANCE
During the year ended December 31, 2000, approximately $41.0 million and $32.2 million was spent by the Lessees on routine repairs and maintenance at the Hotels leased by DJONT and Bristol, respectively. This represents approximately 4.4% of total hotel revenues.
EMPLOYEES
The Company has no employees. Management functions of the Company are performed by FelCor as the sole general partner. Mr. Corcoran entered into an employment agreement with FelCor in 1994 that continues through 2001. None of FelCor's other executive officers has an employment agreement with FelCor. In addition to Mr. Corcoran, FelCor had 50 other full-time employees at December 31, 2000. All persons employed in the day-to-day operation of the Company's Hotels are employees of the management companies engaged by the Lessees to operate such Hotels and are not employees of FelCor or the Company.
PERSONNEL AND OFFICE SHARING ARRANGEMENTS
The Company's general partner, FelCor, shares executive offices and certain employees with DJONT and FelCor, Inc. (a private company controlled by Mr. Corcoran). Each entity bears an allocated share of the costs thereof, including but not limited to rent, compensation of certain personnel (other than Mr. Corcoran, whose compensation is borne solely by FelCor), office supplies, telephones and depreciation of office furniture, fixtures and equipment. The Company reimburses FelCor for its share of such allocated costs. Any such allocation of shared expenses to the Company is required to be approved by a majority of FelCor's Independent Directors. During 2000, approximately $7.5 million (approximately 89.5% of all allocable expenses) were paid by the Company and FelCor under this arrangement.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
CERTAIN STATEMENTS AND ANALYSES CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, OR THAT MAY IN THE FUTURE BE MADE BY, OR BE ATTRIBUTABLE TO, THE COMPANY, MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AND CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. ALL OF SUCH FORWARD-LOOKING STATEMENTS ARE BASED UPON PRESENT EXPECTATIONS AND ASSUMPTIONS THAT MAY OR MAY NOT ACTUALLY OCCUR. THE FOLLOWING FACTORS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING MATERIAL RISKS AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS OR IN THE COMPANY'S HISTORICAL RESULTS. EACH OF THE FOLLOWING FACTORS, AMONG OTHERS, COULD ADVERSELY AFFECT THE ABILITY OF THE COMPANY TO MEET ITS CURRENT EXPECTATIONS.
The Company has had increases in leverage that could adversely affect its financial condition and the Company's corresponding unit redemptions
As a result of its 1998 merger with Bristol Hotel Company, the Company's leverage increased during 1998, and has increased further to fund its renovation, redevelopment and rebranding program and FelCor's share repurchases (and the Company's corresponding unit redemptions). FelCor's share repurchase program authorizes repurchases up to an aggregate maximum of $300 million. Through December 31, 2000, FelCor had repurchased approximately 10.2 million shares of common stock under this program at an aggregate cost of approximately $185 million.
At December 31, 2000 the Company had:
o approximately $1.8 billion in consolidated debt, of which approximately $783 million was collateralized by mortgages or capital leases;
o a ratio of consolidated debt to investment in hotels at cost of 39.9%;
o a ratio of EBITDA to interest expense for the year ended December 31, 2000, of 2.8-to-1; and
o $175 million of floating rate debt, which constituted 9.5% of its total debt.
Most of the Company's floating rate debt bears interest at a rate equal to 2.00% plus the one month LIBOR rate. At December 31, 2000, the one month LIBOR rate was 6.565%. Changes in economic conditions could result in higher interest rates, thereby increasing the Company's interest expense on its floating rate debt and reducing funds available for its current renovation, redevelopment and rebranding plans and its share repurchase program.
The Company's leverage could have important consequences. For example, it could:
o limit the Company's ability to obtain additional financing, if needed, for working capital, renovation, redevelopment and rebranding plans, acquisitions, debt service requirements or other purposes;
o increase the Company's vulnerability to adverse economic and industry conditions;
o require it to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing funds available for operations, future business opportunities or other purposes;
o limit its flexibility in planning for, or reacting to, changes in its business and the industry in which it competes; and
o place it at a competitive disadvantage compared to competitors that have less debt.
The Company may be unable to realize the anticipated benefits of its renovations
The majority of its hotels either recently have been, or are in the process of being, substantially renovated, redeveloped and, in certain cases, rebranded. If the completion of the current renovation projects are significantly delayed, the Company's operating results could be adversely affected. In addition, no assurance can be given that the recently completed and ongoing improvements will achieve the results anticipated when the decision was made to invest in the improvements.
Conflicts of interest could adversely affect the Company's business
Certain FelCor directors. Subsidiaries of Bass currently manage 89 of our hotels. Richard C. North, who joined FelCor's Board during 1998, is the Group Finance Director of Bass plc, which is also the parent of Holiday Hospitality Franchising, Inc. Holiday Hospitality is the franchisor of most of the hotels managed by Bass and, together with its affiliates, owns FelCor common stock and FelCor LP units aggregating approximately 16.2% of the Company's outstanding common stock and units.
Issues may arise under the franchise agreements and management contracts, and in the allocation of acquisition opportunities, that present conflicts of interests due to the relationship of Mr. North to the companies with which he is associated. As an example, in the event the Company enters into new or additional transactions with Bristol, the interests of Mr. North, by virtue of his relationship with Bass, may conflict with the Company's interests. For example, in the selection of franchises under which the Company's hotels will be operated, Mr. North by virtue of his relationship with Holiday Hospitality, may have interests that conflict with the Company's interest. It is anticipated that any director who has a conflict of interest with respect to an issue presented to the FelCor board will abstain from voting upon that issue, although he will have no legal obligation to do so. There are no provisions in FelCor's bylaws or charter that require an interested director to abstain from voting upon an issue. Although each director has a fiduciary duty of loyalty
to FelCor, there is a risk that, should an interested director vote upon an issue in which he or one of his affiliates has an interest, his vote may reflect a bias that could be contrary to the Company's or FelCor's best interests. In addition, even if an interested director abstains from voting, the director's participation in the meeting and discussion of an issue in which he or companies with which he is associated have an interest could influence the votes of other directors regarding the issue.
Acquisition of lessees. As a result of the passage of the REIT Modernization Act, FelCor was able to form or acquire taxable REIT subsidiaries (TRSs) to acquire its existing hotel leases, and to serve as the lessee for any hotels acquired after January 1, 2001. Subject to the receipt of consents from certain lenders, the acquisition of DJONT was completed effective January 1, 2001. The acquisition of DJONT required negotiations between the Company and the owners of DJONT, including Mr. Corcoran and the children of Charles N. Mathewson, a director of FelCor. The interests of Mr. Corcoran and Mr. Mathewson were in direct conflict with the interest of the Company and FelCor in these negotiations and, accordingly, they abstained from participation in the discussion and vote on this matter. In December 2000, the Company sold one Bristol hotel and effective January 1, 2001 completed the acquisition of leases with respect to 12 hotels. In consideration for the acquisition and termination of such leases, 413,585 shares of FelCor common stock valued at approximately $10 million were issued to Bass with a corresponding number of units issued. In March 2001, the Company entered into an agreement with Bass to acquire the remaining 88 leases held by Bristol effective July 1, 2001. The acquisition of the leases held by Bristol involved negotiations between the Company and Bass. Richard C. North, a director of FelCor, is the Group Finance Director of Bass plc. The interest of Bass in those negotiations was in direct conflict with the interests of the Company and FelCor. Mr. North abstained from participating in any discussion or vote by FelCor's Board of Directors relating to these transactions.
Adverse tax consequences to certain affiliates on a sale of certain hotels. Messrs. Corcoran and Mathewson may incur additional tax liability if the Company sells its investments in six hotels that were acquired in July 1994 from partnerships controlled by these individuals. Consequently, the Company's interests could differ from Messrs. Corcoran and Mathewson's interests in the event that a sale of any of these hotels is considered. Decisions regarding a sale of any of these six hotels must be made by a majority of FelCor's independent directors.
The Company has restrictive debt covenants that could adversely affect its ability to run its business
At December 31, 2000, it had approximately $362 million borrowed under its line of credit. It also had issued and outstanding an aggregate of $700 million of senior notes. The indentures governing the senior notes and the agreements governing the line of credit contain various restrictive covenants including, among others, provisions restricting the Company from:
o incurring indebtedness;
o making distributions;
o making investments;
o engaging in transactions with affiliates;
o incurring liens;
o merging or consolidating with another person;
o disposing of all or substantially all of its assets; or
o permitting limitations on the ability of its subsidiaries to make payments to it.
These restrictions may adversely affect the Company's ability to finance its operations or engage in other business activities that may be in its best interest.
In addition, certain of these agreements require the Company to maintain certain specified financial ratios. Its ability to comply with such ratios may be affected by events beyond its control. Under the most restrictive of these provisions, the maximum additional debt that the Company could incur for investment in hotel properties was limited to approximately $1 billion at December 31, 2000. These covenants also may restrict its ability to engage in certain transactions. In addition, any breach of these limitations could result in the acceleration of most of the Company's debt. It may not be able to refinance or repay this debt in full under such circumstances.
The Company will encounter industry related risks that may adversely affect its business
Investing in hotel assets involves special risks. The Company has invested only in hotel-related assets, and its hotels are subject to all of the risks common to the hotel industry. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms, and generally include:
o competition from other hotels;
o construction of more hotel rooms in a particular area than needed to meet demand;
o increases in energy costs and other travel expenses that reduce business and leisure travel;
o adverse effects of declines in general and local economic activity;
o fluctuations in revenue caused by the seasonal nature of the hotel industry;
o adverse effects of a downturn in the hotel industry; and
o risks generally associated with the ownership of hotels and real estate, as discussed below.
The Company will be subject to the risks of hotel operations. Prior to January 1, 2001, substantially all of its hotels were leased to Bristol or DJONT under leases providing for the payment of rent based, in part, upon revenues from the hotels. Accordingly, the Company's operating risks were essentially limited to changes in hotel revenues and to the lessees' ability to pay the rent due under the leases. Following completion of the acquisition of DJONT and leases held by Bristol, the acquisition of such leases, in addition to the ownership expenses previously not borne by it, the Company will become subject to the risk of fluctuating hotel operating expenses, including but not limited to:
o wage and benefit costs;
o repair and maintenance expenses;
o the costs of gas and electricity, which have increased significantly in recent months;
o the costs of liability insurance; and
o other operating expenses.
These operating expenses are more difficult to predict and control than revenue, resulting in an increased risk of volatility in the Company's results of operations.
The Company could face increased competition. Each of its hotels competes with other hotels in a given geographic area. A number of additional hotel rooms have been or may be built in a number of the geographic areas in which the Company's hotels are located, which could adversely affect the results of operations of these hotels. An oversupply of hotel rooms could adversely affect both occupancy and rates in the markets in which the Company's hotels are located. A significant increase in the supply of Midprice, Upscale and Upper Upscale hotel rooms and suites, if demand fails to increase proportionately, could have a severe adverse effect on the Company's business, financial condition, and results of operations.
Acquisition growth opportunities have decreased. There has been substantial consolidation in, and capital allocated to, the U.S. lodging industry since the early 1990's. This generally has resulted in higher prices for hotels. In addition, current market prices of FelCor's common stock make its cost of equity capital relatively high. These conditions have resulted in fewer attractive acquisition opportunities. An important part of the Company's historical growth strategy has been the acquisition and, in many instances, the renovation and repositioning of hotels at less than replacement cost. Continued industry consolidation and competition for acquisitions could adversely affect its growth prospects. The Company competes for hotel investment opportunities with other companies, some of which have greater financial or other resources than it has. Certain competitors may have a lower cost of capital and may be able to pay higher prices or assume greater risks than would be prudent for the Company to pay or assume.
The Company must comply with requirements of franchise agreements. Most of its hotels are operated under various franchise licenses. Each license agreement requires that the franchised hotel be maintained and operated in accordance with certain standards. The franchisors also may require substantial improvements to the hotels as a condition to the renewal or continuation of these franchise licenses. If a franchise license terminates due to the Company's failure to make required improvements or to otherwise comply with its terms, the Company may be liable to the franchisor for a termination payment. These termination payments would vary by franchise agreement and by hotel. The loss of a substantial number of franchise licenses and the related termination payments could have a material adverse effect on the Company's business, financial condition and results of operations.
The ability to grow may be limited by the Company's ability to attract debt financing
Since the merger with Bristol Hotel Company, the Company has focused on its internal growth strategy, which includes the renovation, redevelopment and rebranding of the Hotels to achieve improved revenue performance. It may not be able to fund growth solely from cash provided from operating activities because FelCor must distribute at least 90% of taxable income each year to maintain its status as a REIT. Consequently, the Company must rely primarily upon the availability of debt or equity capital to fund hotel acquisitions and improvements. The ability of the Company to issue new equity securities is largely dependent on the market prices of such securities, which have not been high enough to effect a public offering of equity securities in recent years. Consequently, the Company may be largely dependent upon its ability to attract debt financing from public or institutional lenders. The Company can make no assurance that it will be successful in attracting sufficient debt financing to fund future growth at an acceptable cost. In addition, it currently has a policy of limiting debt to not more than 50% of its investment in hotel assets, at cost, which (unless waived or modified by its board of directors) could also limit its ability to incur additional debt to fund continued growth. At December 31, 2000, the Company's consolidated debt represented 39.9% of its investment in hotels at cost.
The recent mergers of Promus and Bristol create uncertainties for the future
While the Company expects its positive historical relationships with Promus and Bristol to continue with their successors, the mergers of Promus Hotel Corporation into a subsidiary of Hilton Hotels Corporation, and of Bristol Hotels & Resorts into a subsidiary of Bass plc, give rise to some uncertainties. Changes in personnel, brand standards or operating methods could adversely affect relationships, result in increases in required capital expenditures, reductions in hotel revenues or other adverse consequences of which the Company is not presently aware.
FelCor is subject to potential tax risks
The federal income tax laws governing REITs are complex. FelCor has operated and intends to continue to operate in a manner that is intended to qualify it as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complicated, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, FelCor cannot be certain that it has been or will continue to be successful in operating so as to qualify as a REIT. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax consequences of qualification as a REIT.
Failure to make required distributions would subject FelCor to tax. In order to qualify as a REIT, each year FelCor must pay out to its shareholders at least 90% of its taxable income (other than any net capital gain). To the extent that FelCor satisfies the applicable distribution requirement, but distributes less than 100% of its taxable income, it will be subject to federal corporate income tax on its undistributed taxable income. In addition, FelCor will be subject to a 4% nondeductible tax if the actual amount it pays out to its shareholders in a calendar year is less than a minimum amount specified under federal tax laws. FelCor's only source of funds to make such distributions comes from distributions to FelCor from the Company on its units. Accordingly, the Company may be required to borrow money or sell assets to make distributions sufficient to enable FelCor to pay out enough of its taxable income to satisfy the applicable distribution requirement and to avoid corporate income tax and the 4% tax in a particular year.
Failure to qualify as a REIT would subject FelCor to federal income tax. If FelCor fails to qualify as a REIT, FelCor would be subject to federal income tax on its taxable income. The Company might need to borrow money or sell hotels in order to distribute to FelCor the funds to pay any such tax. If FelCor ceases to be a REIT, it no longer would be required to distribute most of its taxable income to its shareholders. Unless its failure to qualify as a REIT were excused under federal income tax laws, FelCor could not re-elect REIT status until the fifth calendar year following the year in which it failed to qualify.
Failure to have distributed Bristol Hotel Company's earnings and profits in 1998 could cause FelCor to fail to qualify as a REIT. At the end of any taxable year, a REIT may not have any accumulated earnings and profits (described generally for federal income tax purposes as cumulative undistributed net income) from a non-REIT corporation. Arthur Andersen LLP prepared and provided to FelCor its computation of the accumulated earnings and profits of Bristol Hotel Company through the date of the merger of Bristol Hotel Company into FelCor, and FelCor made a corresponding special one-time distribution to its shareholders. Corresponding distributions were made by the Company on its units. However, the determination of accumulated earnings and profits for federal income tax purposes is extremely complex and the computations by Arthur Andersen LLP are not binding upon the IRS. Should the IRS successfully assert that the accumulated earnings and profits of Bristol Hotel Company were greater than the amount so distributed by FelCor, it may fail to qualify as a REIT.
Sale of assets acquired from Bristol Hotel Company within ten years after the merger may result in tax. If, within ten years after the Bristol merger, the Company sells any assets acquired in the merger and
recognizes a taxable gain on such sale, FelCor will be taxed at the highest corporate rate on an amount equal to the lesser of (i) the amount of gain that FelCor recognizes at the time of the sale or (ii) the amount of gain that FelCor would have recognized if it had sold the asset at the time of the merger for its then fair market value. The sales of Bristol hotels that have been made to date have not resulted in any material amount of tax liability. If FelCor is successful in selling all of the hotels shown as assets held for sale, FelCor could incur a significant tax liability, the amount of which cannot yet be determined.
Departure of key personnel, including Mr. Corcoran, could adversely affect the Company's future operating results
The Company will encounter risks that may adversely affect real estate ownership
General Risks. The Company's investments in hotels are subject to the numerous risks generally associated with owning real estate, including among others:
o adverse changes in general or local economic or real estate market conditions;
o changes in zoning laws;
o changes in traffic patterns and neighborhood characteristics;
o increases in assessed valuation and tax rates;
o increases in the cost of property insurance;
o governmental regulations and fiscal policies;
o the potential for uninsured or underinsured property losses;
o the impact of environmental laws and regulations; and
o other circumstances beyond its control.
Moreover, real estate investments are relatively illiquid, and the Company may not be able to vary its portfolio in response to changes in economic and other conditions.
Compliance with environmental laws may adversely affect the Company's financial condition. Real estate owners are subject to numerous federal, state and local environmental laws and regulations. Under these laws, a current or prior owner of real estate may be liable for costs of cleaning up and removing hazardous or toxic substances found on his property, whether or not he was responsible for their presence. In addition, if an owner of real property arranges for the disposal of hazardous or toxic substances at another site, it may also be liable for the costs of cleaning up and removing such substances from the disposal site, even if it did not own or operate the disposal site. A property owner may also be liable to third parties for personal injuries or property damage sustained as a result of its release of hazardous or toxic substances (including asbestos-containing materials) into the environment. Environmental laws may require one to incur substantial expenses and limit the use of his properties. The Company could be liable for substantial amounts for a failure to comply with applicable environmental laws, which may be enforced by the government or, in certain instances, by private parties. The existence of hazardous or toxic substances on a property can also adversely affect the value of, and the owner's ability to use, sell or borrow against, the property.
No assurances can be given that future or amended laws, ordinances or regulations or more stringent interpretations or enforcement policies of existing environmental requirements, will not impose any material environmental liability, or that the environmental condition of the hotels will not be affected by changes (of which the Company is unaware) occurring subsequent to the dates of such audits, by the condition of properties in the vicinity of such hotels (such as the presence of leaking underground storage tanks) or by the actions or unrelated third parties.
Compliance with Americans with Disabilities Act may adversely affect the Company's financial condition. Under the Americans with Disabilities Act of 1990, all public accommodations (including hotels) are required to meet certain federal requirements for access and use by disabled persons. The Company believes that its hotels substantially comply with the requirements of the Americans with Disabilities Act. However, a determination that the hotels are not in compliance with that Act could result in liability for both governmental fines and damages to private parties. If the Company were required to make unanticipated major modifications to the hotels to comply with the requirements of the Americans with Disabilities Act, it could adversely affect its ability to pay its obligations.
ITEM 2.
ITEM 2. PROPERTIES
THE HOTELS
The following table sets forth certain descriptive information regarding the Hotels in which the Company had ownership interests at December 31, 2000:
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(1) Encumbered by mortgage debt.
(2) Situated on land leased under a long-term ground lease.
(3) This hotel is one of the 24 remaining non-strategic hotels that the Company intends to sell.
(4) This hotel is one of 16 hotels owned by unconsolidated entities in which the Company owns a 50% equity interest.
(5) Owned subject to a capitalized industrial revenue bond lease that expires in 2011 and permits the Company to purchase the fee interest at expiration for a nominal amount.
(6) This hotel is one of 2 hotels owned by a joint venture in which the Company owns a 60% equity interest.
(7) This hotel is one of 6 hotels in which the Company owns a 90% equity interest.
THE PERCENTAGE LEASES
At December 31, 2000, each of the Hotels (with two exceptions) was leased pursuant to a Percentage Lease. As a result of the acquisition of DJONT on January 1, 2001, and acquisition of the Bristol leases on July 1, 2001, all of the hotel leases will be held by our taxable REIT subsidiaries.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There is no litigation pending or known to be threatened against the Company or affecting any of its Hotels other than claims arising in the ordinary course of business or which are not considered to be material. Furthermore, most of such claims are substantially covered by insurance. FelCor's management does not believe that any claims known to it (individually or in the aggregate) will have a material adverse effect on the Company, without regard to any potential recoveries from insurers or other third parties.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is not established public trading market for the Company's units. The units, however, are redeemable at the option of the holder for a like number of shares of common stock of FelCor or, at the option of FelCor, for the cash equivalent thereof. The following information is provided regarding the common stock of FelCor.
FelCor's common stock is traded on the New York Stock Exchange under the symbol "FCH." The following table sets forth for the indicated periods the high and low sale prices for the common stock, as traded on such exchange.
STOCKHOLDER INFORMATION
At March 15, 2001, the Company had approximately 40 record and beneficial owners of its units.
DISTRIBUTION INFORMATION
The Company has adopted a policy of paying regular quarterly distributions on its units, and cash distributions have been paid on the Company's units with respect to each quarter since its inception. The following table sets forth information regarding the declaration and payment of distributions by the Company on its units during 1999 and 2000.
The foregoing distributions represent approximately a 0% return of capital in 2000 and an approximate 7.2% return of capital in 1999. In order to maintain its qualification as a REIT, FelCor must make annual distributions to its shareholders of at least 90% (95% prior to January 1, 2001) of its taxable income (which does not include net capital gains). For the years ended December 31, 2000 and December 31, 1999, FelCor had annual distributions totaling $2.20 per common share, of which only $2.09 and $1.84 per share, respectively, were required to satisfy the 95% REIT distribution test in the respective years. All of such funds were provided by the Company through distributions on its units. Under certain circumstances the Company may be required to make distributions in excess of cash available for distribution in order to meet FelCor's REIT distribution requirements. In such event, the Company presently would expect to borrow funds, or to sell assets for cash, to the extent necessary to obtain cash sufficient to make the distributions required to enable FelCor to retain its qualification as a REIT for federal income tax purposes.
The Company currently anticipates that it will maintain at least the current distribution rate for the immediate future, unless actual results of operations, economic conditions or other factors differ from its current expectations. Future distributions, if any, paid by the Company will be at the discretion of the Board of Directors of FelCor and will depend on the Company's actual cash flow, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the internal revenue code and such other factors as the Board of Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data for the Company for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 that has been derived from the financial statements of the Company and the notes thereto, audited by PricewaterhouseCoopers LLP, independent accountants. Such data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto.
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
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(1) In the second quarter of 2000 the Company recorded a $63 million reserve for the sale of non-strategic hotel assets, which is reflected in the income statements presented for the period.
(2) On July 28, 1998, FelCor completed the merger of Bristol Hotel Company's real estate holdings with and into FelCor. FelCor then contributed the assets so acquired to the Company in exchange for approximately 31 million units of partnership interest. The merger resulted in the net acquisition of 107 primarily full-service hotels.
(3) In 1998, the Company declared a special one-time distribution of accumulated but undistributed earnings and profits as a result of the merger of Bristol Hotel Company into FelCor, in addition to the regular quarterly dividend of $0.55 per unit and $0.4875 per Series A preferred units. The amount of the one-time distribution was $0.345 per unit and $0.207 per Series A preferred unit.
(4) A more detailed description of FFO and EBITDA is contained in the "Funds From Operations" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
FelCor, the Company's sole general partner, is the nation's second largest hotel REIT. At December 31, 2000, the Company owned interests in 186 hotels with nearly 50,000 rooms and suites. Additional organizational information relating to the Company, and the definitions of certain capitalized terms, are contained in the Notes to Consolidated Financial Statements of FelCor Lodging Limited Partnership appearing elsewhere herein.
The Company is the owner of the largest number of Embassy Suites(R), Crowne Plaza(R), Holiday Inn(R) and independently owned Doubletree(R) branded hotels in the world. The Hotels are located in 35 states and Canada with concentrations in Texas (41), California (19), Florida (18) and Georgia (15 hotels). The following table provides a schedule of the Hotels, by brand, operated by each of the Company's Lessees at December 31, 2000:
The principal factors affecting the Company's results of operations are changes in room and suite revenues reflected by revenue per available room ("RevPAR"), renovations, redevelopments, and rebrandings of hotels and acquisitions.
The Company seeks to increase operating cash flow through both internal growth and selective acquisitions, while maintaining a flexible and conservative capital structure. In addition to renovating, redeveloping and repositioning the Company's acquired hotels, the Company may seek to acquire existing or new upscale properties that will benefit from affiliation with one of the premium brands available to the Company through its strategic brand owner and manager relationships with Hilton Hotels Corporation ("Hilton"), Bass plc ("Bass") and Starwood Hotels & Resorts Worldwide, Inc. ("Starwood").
On July 28, 1998, the Company merged Bristol Hotel Company into FelCor, acquiring its 107 primarily full-service hotels (the "Merger"). These hotels added more than 28,000 rooms and suites to the Company's portfolio, more than doubling the Company's size. The Merger also provided diversification, both geographically and by asset class, by adding hotels in many of its key markets and broadening its portfolio in the full-service, upscale and midscale hotel markets.
In 1999 and 2000, the Company completed the major portion of its program of renovation, redevelopment and rebranding of hotels, which was undertaken to improve under-performing assets and increase revenues. The Company spent nearly $220 million in 1998, $222 million in 1999 and $95 million in 2000 on renovations, redevelopment, rebrandings, room additions to existing hotels and other hotel improvements. Management believes that its strategy of renovating, redeveloping and rebranding selected hotels continues to be effective in improving revenue performance.
The Company's historical results of operations for 2000, 1999, and 1998 are summarized as follows (in millions, except percentages and hotel counts):
(a) Includes a reserve of $63 million established for the proposed sale of 25 non-strategic hotels described under "Liquidity and Capital Resources" below.
(b) Reflects the acquisition of the Bristol hotels effective July 28, 1998.
Historically the Company has been financed primarily with equity, resulting in a conservative financial structure. The Company's emphasis on maintaining this conservative approach is evidenced in part, by the following, as of December 31, 2000:
o Interest coverage ratio of 2.8x
o Total debt to annual EBITDA of 4.1x
o Borrowing capacity under its Line of Credit of $238 million
o Consolidated debt equal to 39.9% of its investment in hotels at cost
o Fixed interest rate debt comprising 91% of total debt
o Secured mortgage debt to total assets of 19%
o Debt of approximately $24 million maturing in 2001
On January 1, 2001, the provisions of the REIT Modernization Act became effective. These provisions:
o reduce the percentage of taxable income required to be distributed by a REIT from 95% to 90% for taxable years after 2000; and
o subject to certain limitations, permit a REIT to own taxable subsidiaries that engage in businesses previously prohibited to a REIT, including, among other things, leasing hotels from a hotel REIT, provided that the hotels continue to be managed by unrelated third parties.
As a result of the REIT Modernization Act's enactment, the Company, undertook steps to realize the benefits the Act offers to REIT's by:
o effective January 1, 2001, acquiring DJONT which leased 85 of the Company's hotels at December 31, 2000. The management contracts for all of the DJONT leased hotels remained in place.
o effective January 1, 2001, completing the acquisition of 12 hotels leased to Bristol and entering into management contracts with a subsidiary of Bass for two of the hotels, a subsidiary of Interstate Hotels Corporation for eight hotels, with a subsidiary of Hilton for one of the hotels and one hotel was sold.
o effective July 1, 2001, acquiring leases for the remaining 88 hotels leased to Bristol and entering into long term management agreements with a subsidiary of Bass to manage these hotels.
o contributing the acquired lessee and/or leases as acquired, to newly created, wholly-owned taxable REIT subsidiaries ("TRS").
The Company believes that the advantages of holding the lessees and leases in a TRS include (i) a more direct relationship with the hotel and the brand managers, (ii) elimination of potential conflicts of interest and (iii) the ability to present consolidated hotel level financial reporting.
As a result of the acquisition of the hotel leases the Company will report its results of operations showing hotel revenues and expenses rather than percentage lease revenue. Pro forma consolidated statements of operations for the years ended December 31, 2000 and 1999, which reflect the acquisition of the hotel leases, are contained in the Notes to the Consolidated Financial Statements of FelCor Lodging Limited Partnership appearing elsewhere herein.
RESULTS OF OPERATIONS
THE COMPANY -- ACTUAL
Comparison of the Years Ended December 31, 2000 and 1999
For the year ended December 31, 2000, the Company recorded net income of $66.4 million compared to $135.8 million for the year ended December 31, 1999. Included in expense for the year ended December 31, 2000, is a one-time reserve of $63.0 million related to 25 non-strategic hotels that the Company has identified as held for sale. The reserve represents the difference between the net book value of the hotels and their estimated net sale proceeds. Net income excluding the reserve would have been $129.4 million.
The Company's total revenues increased $52.7 million to $556.7 million for the year ended December 31, 2000, compared to $504.0 million for the year end December 31, 1999. This increase is principally from increased Percentage Lease revenues of $46.0 million, which increased to $536.9 million from $490.9 million in the prior year.
Changes in the Hotels' room and suite revenues significantly affect the Company because its principal source of revenue historically has been rent payments from the Lessees under the Percentage Leases. The Percentage Leases provide for rent based on a percentage of room and suite revenue, food and beverage revenue, food and beverage rents, and in some instances, other hotel revenues. During 2000 and 1999, Percentage Lease revenue derived from room and suite revenue represented 90% and 91% of total Percentage Lease revenue, respectively. RevPAR, which is a measure of room and suite revenue, increased by 7.0% in 2000 for all Hotels. This increase in RevPAR resulted from both increases in average daily rate ("ADR") at the Hotels and increases in occupied rooms ("Occupancy"). For the year ended December 31, 2000, ADR increased by 3.7% over the prior year and Occupancy increased by 2.2 percentage points. The Company's ability to achieve increases in room and suite revenue and RevPAR at its Hotels is affected, among other things, by overall demand in the marketplace, room supply and the success of the Company's renovation, redevelopment and rebranding program. The Company had 59 hotels which had undergone renovation, redevelopment or rebranding in either 1999 or 2000, which are identified by the Company as non-comparable hotels. The non-comparable hotels reflected increases in RevPAR of 10.1% which was greater than the results for hotels that had not recently undergone renovation. (A more detailed discussion of hotel room and suite revenue is contained in "The Hotels - Actual" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations).
The Company generally seeks to improve those of its Hotels that management believes can achieve increases in room and suite revenue and RevPAR as a result of renovation, redevelopment and rebranding.
Since the beginning of 1998, the Company spent nearly $440 million in capital improvements to its Hotels. Management attributes much of the improvement in RevPAR to these capital improvements.
Equity in income from unconsolidated entities increased by $6.3 million in 2000 compared to 1999. The principal reasons for this increase in 2000 were (i) a $3.7 million gain recorded in 2000 from the development and sale of the Brighton Beach condominiums at Kingston Plantation in Myrtle Beach, South Carolina, by an entity in which the Company owns a 50% equity interest and (ii) the operations of a hotel in which the Company acquired a 50% equity interest in the fourth quarter of 1999.
Total expenses increased $123.5 million in the year ended December 31, 2000, to $490.8 million from $367.3 million in 1999. Included in total expenses is a reserve of $63.0 million, recorded in the second quarter of 2000, related to the 25 non-strategic hotels the Company has identified as held for sale. Total expenses, excluding the $63.0 million reserve for sale of non-strategic hotels, increased by $60.5 million, and as a percentage of total revenue increased to 77% from 73% in 1999. The major components of the increase in expenses were interest expense; taxes, insurance and other; and depreciation expense.
Interest expense increased by $33.2 million for the year ended December 31, 2000, compared to 1999, and increased as a percentage of total revenue from 24.9% to 28.5%. This increase is principally the result of the following items:
o The Company increased its average debt outstanding in 2000 by approximately $197 million over the prior year. The increase in average debt resulted principally from stock repurchases in 2000 of approximately $87 million and capital expenditures in 2000 totaling approximately $101.4 million.
o The average interest rate on the Company's indebtedness increased from about 7% in 1999 to nearly 8% in 2000.
o The Company capitalized interest related to major renovations of approximately $5.2 million in 1999, but because of reduced renovation activity in 2000, the Company had only $1.1 million of interest capitalized in 2000.
Taxes, insurance and other increased by $11.1 million in 2000, compared to the prior year, and increased as a percentage of total revenue from 11.8% to 12.6%. This increase in expenses was principally from increases in real estate and personal property taxes. The Company's real estate and personal property taxes increased from higher assessed values generally resulting from the major renovations completed over the past three years.
Depreciation expense increased by $7.8 million in 2000, compared to the prior year, and decreased as a percentage of total revenue from 30.3% to 28.9%. Depreciation expense increased principally as a result of additional depreciation related to fixed asset additions of $95 million in 2000 and $222 million in 1999.
The Company also recorded gains on the sale of two hotels of $2.6 million and $1.8 million for the sale of excess land during the year ended December 31, 2000 and an extraordinary charge of $3.9 million for the write-off of deferred loan costs associated with debt which was retired prior to maturity.
Comparison of the Years Ended December 31, 1999 and 1998
For the years 1999 and 1998, the Company had total revenue of $504.0 million and $339.6 million, respectively, consisting primarily of Percentage Lease revenue of $490.9 million and $328.0 million. The increase in revenue is primarily attributable to the Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of interests in more than 100 hotels in 1998, including the hotels that were acquired
through the Merger on July 28, 1998. The hotels which were acquired during 1998, including those acquired through the Merger, accounted for $151.1 million (93%) of the change in Percentage Lease revenue for the twelve months ended December 31, 1999, compared to 1998. The 73 hotels owned throughout both of the years ended December 31, 1999 and 1998 produced an increase in Percentage Lease revenues of $10.9 million (or 1.9%) between 1998 and 1999.
Changes in room and suite revenues significantly affect the Company because, historically, its principal source of revenue is rent payments from the Lessees under the Percentage Leases. The Percentage Leases provide for rent based on a percentage of room and suite revenue, food and beverage revenue, food and beverage rents, and in some instances, other hotel revenues. In 1999 and 1998, Percentage Lease revenue derived from room and suite revenue represented 91% and 93% of total Percentage Lease revenue, respectively. The 73 hotels owned throughout both 1999 and 1998 increased room and suite revenue by $11.6 million (or 2%) in 1999, compared to 1998, and increased RevPAR by 1.4%. The RevPAR increase was driven by an increase in ADR of 1.5%, despite a slight drop in Occupancy of 0.1 percentage points. Of the 73 hotels, 18 had undergone renovation in either 1998 or 1999. Those renovated hotels reflected increases in ADR of 2.2% and in RevPAR of 1.9%, which was greater than the results for hotels that had not undergone renovation. This reflects both the improvement from renovation and the impact of taking rooms out of service for such renovation.
The Company generally seeks to improve those of its hotels that management believes can achieve increases in room and suite revenue and RevPAR as a result of renovation, redevelopment and rebranding. However, during the course of such improvements hotel revenue performance is often adversely affected, compared to the prior year, by such temporary factors as rooms and suites out of service and disruptions of hotel operations. During 1999, the Company spent $177 million on the renovation, redevelopment and rebranding of its hotels. As a result of the extensive renovations, the Company's portfolio experienced significant disruption during 1999, with approximately 350,000 room nights out of service, or 2% of its portfolio. (A more detailed discussion of hotel room and suite revenue is contained in the "The Hotels--Actual" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.)
Total expenses increased $151.7 million in the year ended December 31, 1999, to $367.3 million from $215.7 million in 1998. This increase resulted primarily from the additional hotels acquired in July 1998 through the Merger.
Total expenses as a percentage of total revenue increased to 72.9% for the twelve months ended December 31, 1999, compared to 63.4% in 1998. The major components of the increase in expenses, as a percentage of total revenue, are depreciation, land leases, and interest expense.
Depreciation increased, as a percentage of total revenue, to 30.4% in the twelve months ended December 31, 1999, from 26.8% in 1998. The relative increase in depreciation expense is primarily attributed to depreciation on $341.4 million in capital expenditures made over the past two years, approximately 40% of which are short-lived assets that are depreciated over 3 to 5 years.
Land lease expenses represent 3.5% of total revenue in 1999, as compared to 2.4% in 1998. This increase, as a percentage of total revenue, results primarily from the larger percentage of hotels subject to land leases among those acquired through the Merger.
Interest expense increased, as a percentage of total revenue, to 24.9% in the twelve months ended December 31, 1999, from 21.6% in 1998. This increase in interest expense is attributed to the increased debt used to finance renovations, higher interest rates on debt that was refinanced to extend maturities and convert such debt from variable to fixed rates, the assumption of debt related to the more highly leveraged Bristol assets, and borrowings to fund the Company's stock repurchase program.
General and administrative expenses and taxes, insurance and other expense remained relatively constant as a percentage of total revenue in 1999 and 1998.
FUNDS FROM OPERATIONS AND EBITDA
The Company and FelCor considers Funds From Operations ("FFO") and earnings before interest, taxes, depreciation and amortization ("EBITDA") to be key measures of a REIT's performance and should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company's and FelCor's operating performance and liquidity.
The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from extraordinary items and sales of properties, plus real estate related depreciation and amortization, after comparable adjustments for the Company's portion of these items related to unconsolidated entities and joint ventures. The Company and FelCor believes that FFO and EBITDA are helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, they provide investors with an indication of the ability of the Company and FelCor to incur and service debt, to make capital expenditures, to pay dividends and to fund other cash needs. The Company computes FFO in accordance with standards established by NAREIT. This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. FFO and EBITDA do not represent cash generated from operating activities as determined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company 's liquidity, nor do they necessarily reflect the funds available to fund the Company's cash needs, including its ability to make cash distributions. FFO and EBITDA may include funds that may not be available for management's discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties.
The following table details the computation of Funds From Operations (in thousands):
(a) Weighted average units outstanding are computed including dilutive options, unvested stock grants and assuming conversion of Series A preferred units to units.
The following table details the computation of EBITDA (in thousands):
(a) Weighted average units outstanding are computed including dilutive options, unvested stock grants and assuming conversion of Series A preferred units to units.
THE HOTELS -- ACTUAL
Upscale and full service hotels like Embassy Suites, Crowne Plaza, Holiday Inn and Holiday Inn Select, Doubletree and Doubletree Guest Suites, and Sheraton and Sheraton Suites hotels account for approximately 97% of the Company's Percentage Lease revenue and 98% of the Hotels' room and suite revenue.
The Company believes that when analyzing the performance of the Hotels, looking at "Comparable Hotels" is the most meaningful. The Company defines "Comparable Hotels" as those not undergoing renovation, redevelopment or rebranding in either of the comparison years. Major renovations generally have an adverse affect on hotel earnings by taking rooms out of service and disrupting hotel operations. "Non-comparable Hotels" are those undergoing renovation, redevelopment or rebranding during either year.
Comparison of the Hotels' Operating Statistics for the Years Ended December 31, 2000 and 1999
The following table sets forth historical Occupancy, ADR and RevPAR at December 31, 2000 and 1999, and the percentage changes therein between the years presented for the Hotels in which the Company had an ownership interest at December 31, 2000. This information is presented regardless of the date of acquisition.
(a) Bristol Comparable Hotels include 44 hotels and DJONT Comparable Hotels include 59 hotels which were not undergoing renovation, redevelopment, or rebranding in either the 2000 or 1999 periods reported and exclude hotels held for sale.
(b) Non-comparable Hotels include 59 hotels undergoing redevelopment in either the 2000 or 1999 periods reported and exclude hotels held for sale.
(c) Hotels held for sale include three DJONT leased hotels and 21 Bristol leased hotels, consisting of two Courtyard by Marriott hotels, five Fairfield Inn hotels, six Hampton Inn hotels, eight Holiday-branded hotels, and three Doubletree Guest Suites hotels.
For the twelve months ended December 31, 2000, the Company's Comparable Hotels' RevPAR increased compared to the same period in 1999, by 6.2%. For the same period, the Comparable Hotels' ADR and Occupancy increased 4.3% and 1.3 percentage points, respectively. The total hotel portfolio RevPAR, excluding hotels held for sale, increased 7.4%. The ADR and Occupancy for these hotels increased 3.7% and 2.5 percentage points, respectively.
The DJONT Comparable Hotels are predominately Embassy Suites, Doubletree and Doubletree Guest Suites, and Sheraton hotels. The Bristol Comparable Hotels are predominately Holiday Inn and Crowne Plaza hotels. The following table shows the Comparable Hotel RevPAR changes for the year ended December 31, 2000, compared to 1999, by brand:
The Company attributes much of the improvement in RevPAR to the renovation, rebranding and repositioning program in which the Company and, prior to the Merger, Bristol Hotel Company has spent nearly $500 million since the beginning of 1998. The Company's Hotels outperformed most other hotels in their respective markets during the year and the Company expects its Hotels to continue to favorably compare to other hotels in their markets.
Through the fourth quarter of 2000, the Company's Embassy Suites hotels had experienced their sixth consecutive quarterly increase in Occupancy. The Company's 47 Comparable Embassy Suites hotels achieved a 7.0% growth in RevPAR for 2000, compared to the prior year. These hotels, which provide 41.0% of the Comparable Hotel room revenues, increased their ADR by 5.2% and Occupancy by 1.3 percentage points. The Company's Comparable Doubletree-branded hotels had a 6.7% RevPAR gain for the year, made up of increases in both Occupancy and ADR of 3.4 percentage points and 1.7%, respectively. The Company believes that, in addition to recent renovations at the majority of these hotels, the Hilton/Promus merger and the addition of the Hilton HHonors(R) guest frequency program has had and will continue to have a positive impact on its Embassy Suites and Doubletree-branded hotel revenues.
Bass completed its merger with Bristol Hotels & Resorts at the end of the first quarter of 2000. The Company expects the integration of the Bristol management team with Bass will continue to be beneficial to the development and strengthening of the Crowne Plaza and Holiday brands.
The Company's 13 Comparable Crowne Plaza hotels (all of which were renovated and rebranded from Holiday Inn and Harvey hotels), reported increased RevPAR of 4.6% for 2000, compared to 1999. This increase resulted primarily from a 2.6 percentage point increase in Occupancy between the periods. In addition to the recent renovations, the Company attributes a portion of this improvement to the change in marketing for the brand, which now supports the marketing of Crowne Plaza with the Inter-Continental(R) brand.
The Company's Comparable Holiday-branded hotels increased RevPAR for the year by 7.7%. The increase in RevPAR resulted from a 1.1 percentage point increase in Occupancy and a 6.1% increase in ADR. The Company's 29 Comparable Holiday-branded hotels with greater than 250 rooms (representing nearly 80% of the Company's Holiday-branded revenue) reported an increase in RevPAR of 6.8% for the full year 2000, which came from Occupancy and ADR increases of 2.2 percentage points and 3.6%, respectively.
Approximately 63% of the Company's 2000 Comparable Hotel room revenues were derived from four states: Texas, California, Florida and Georgia. Changes in Comparable Hotel RevPAR during 2000 for hotels in these states, compared to the same period in 1999, are illustrated in the following table:
The Comparable Hotels in Texas, which account for approximately 20.9% of the Company's Comparable Hotel total room revenue, experienced the fourth consecutive quarter with positive RevPAR growth compared to prior year. The growth in supply from new hotels in most major markets in Texas appears to have slowed and management believes that their recently renovated hotels will continue to effectively compete in their market segments. The Company's 14 Comparable Hotels located in Dallas, which had been adversely affected by new competition in recent years, had RevPAR increases of 5.5% for the fourth quarter 2000 and 3.8% for the year.
The Company's 59 Non-comparable Hotels reported an increase in RevPAR of 10.1% for the twelve months ended December 31, 2000. These hotels were profoundly affected by the Allerton Crowne Plaza (increased RevPAR by 89.5% for the twelve month period), which was closed for renovation in 1998 and partially reopened in the second quarter of 1999. The Non-comparable Hotels, excluding the Allerton, reported increased RevPAR of 7.5%.
RENOVATIONS, REDEVELOPMENTS AND REBRANDINGS
The Company has historically sought to enhance the value of its portfolio through:
o its practice of upgrading, renovating and/or redeveloping most of its recently acquired hotels to enhance their competitive position, and, in certain instances, rebranding them to improve their revenue generating capacity; and
o its ongoing program for the maintenance of the Company's upgraded hotel assets, which includes:
o the contribution of approximately 4% of total annual hotel revenue to a capital reserve, for routine capital replacements and improvements; and
o ensuring that the Lessees' adhere to a rigorous maintenance and repair program, resulting in the expenditure of more than 4% of annual hotel revenues on maintenance of the Hotels.
Renovation and Redevelopment Program
The Company has demonstrated its ability to successfully generate returns on investments in renovations. Its renovation and rebranding of the 18 Crown Sterling Suites hotels, which were acquired during 1996 and 1997, achieved an overall RevPAR increase of 47.7% between 1996 and 2000. During 1998, 1999, and 2000, an aggregate of approximately $550 million in capital improvements and other capital expenditures were made to the Company's hotels, with approximately 3% of total hotel room nights being lost due to renovation in 1998, 2% in 1999 and 1% in 2000. During 2000, the Company spent approximately $55.8 million under its renovation and redevelopment program.
During 2001, the Company currently expects to spend approximately $20 million on the renovation of 8 hotels, approximately $28 million to complete renovations started in 2000 at 46 hotels, and approximately $50 million for other capital expenditures. The Company is currently reviewing the feasibility of undertaking up to $64 million of additional renovations and room additions during 2001. The Company currently expects an insignificant number of room nights to be lost during 2001 as a result of renovations. By the end of 2001, the Company will have spent more than $1 billion since 1994 on renovations and other capital expenditures to its hotel portfolio, which should limit the need for future renovation expenditures primarily to those necessary to maintain the Hotels in their upgraded condition or to enhance a hotel's earning capability through room addition or rebranding as deemed appropriate.
Capital Reserve
During 2000, approximately $45.0 million was contributed to the capital reserve for capital replacements and improvements and approximately $45.6 million was spent on such replacements and improvements (which is in addition to the $55.8 million spent under the renovation and redevelopment program described above).
Repairs and Maintenance
During the year ended December 31, 2000, approximately $41.0 million and $66.7 million were spent by the Lessees on routine repairs and maintenance at the Hotels leased by DJONT and Bristol, respectively. This represents approximately 4.4% of total 2000 hotel revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements, including distributions and repayments of indebtedness, has historically been its share of the cash flow from the Percentage Leases. For the year ended December 31, 2000, cash flow provided by operating activities, consisting primarily of Percentage Lease revenue, was $277.3 million and Funds From Operations was $288.6 million.
DJONT recorded a net loss of $11.2 million for the year ended December 31, 2000. DJONT's accumulated deficit totaled $24.5 million at December 31, 2000. The losses in the current year are partially attributed to increased costs of frequent guest programs instituted during the year and increased operating costs which resulted in lower than anticipated operating margins.
Subject to the receipt of consents from certain lenders, effective January 1, 2001, the Company acquired and contributed to a taxable REIT subsidiary, all of the equity interests in DJONT. In consideration for the acquisition of DJONT, the Company issued an aggregate of 416,667 units of its limited partner interest (valued at $10 million based upon the $23.125 closing share price of FelCor common stock on December 29, 2000), 50% to an entity owned by Thomas J. Corcoran, Jr. and Hervey A. Feldman and 50% to an entity owned by the children of Charles N. Mathewson. The Company will treat the acquisition of DJONT, for financial reporting purposes, as a termination of the DJONT leases and, accordingly, will expense the value of the units issued as consideration together with the $24.5 million accumulated shareholders' deficit of DJONT, in the first quarter of 2001.
Effective January 1, 2001, the Company completed the acquisition of 12 of the Bristol leases which were held by Bass. In consideration for the acquisition of such leases, the Company issued to Bass 413,585 shares of FelCor common stock valued at approximately $10 million and a corresponding number of units. Of the 12 hotels, (i) the Company has entered into an agreement with Interstate Hotels Corporation ("IHC") to manage eight of the hotels, (ii) two hotels are being managed by a subsidiary of Bass under short term management contracts, (iii) one hotel is being managed by a subsidiary of Hilton and (iv) one hotel was sold. In March 2001, the Company has entered into an agreement with Bass to acquire the remaining 88 leases
effective July 1, 2001. In consideration for the acquisition of such leases, the Company will enter into long term management agreements with Bass with regard to these hotels and FelCor will issue to Bass 100 shares of FelCor common stock. A portion of the management fees with respect to the 88 hotels managed by Bass under long term management agreements will be considered to be lease termination costs for financial reporting purposes and the Company will record a lease termination expense of approximately $125 million in the third quarter of 2001. At that time, the Company will record a corresponding liability of approximately $125 million that will be amortized over the term of the applicable management agreements.
As a result of the effectiveness of the REIT Modernization Act, which, among other things, allows the Company to own its lessees in taxable REIT subsidiaries, and the acquisition of the Hotel leases in 2001, the Company will be reporting the income and expenses of operating hotels rather than lease income from the Percentage Leases. Any profits or losses from the TRS entities holding the hotel leases, after applicable corporate taxes, will be reflected in the Company's results of operations. Pro forma consolidated statements of operations for the years ended December 31, 2000 and 1999, which reflect the acquisition of the hotel leases, are contained in the Notes to the Consolidated Financial Statements of FelCor Lodging Limited Partnership, appearing elsewhere herein.
In 2000, the Company identified 25 non-strategic hotels and indicated its intent to sell these hotels. The Company expects gross sale proceeds from these sales to be approximately $150 million and net proceeds to be approximately $137 million (after deducting estimated transaction costs). The Company anticipates that the sale of these 25 hotels will result in a book loss of approximately $63 million. Accordingly, FelCor's Board of Directors approved the establishment of a $63 million reserve in the second quarter of 2000 for hotels held for sale, to reflect the difference between book value and the estimated market value of these hotels. In December 2000, the Company completed the sale of one of these hotels held for sale and recorded a gain of approximately $135,000.
In March 2001, the Company contributed eight of the hotels held for sale to an entity in which the Company holds a 50% equity interest, and a subsidiary of IHC holds the other 50% equity interest. Another subsidiary of IHC manages each of these hotels.
In January 2000, FelCor's Board of Directors authorized an increase in its share repurchase program to an aggregate of $300 million. The stock repurchases have been and, at the discretion of FelCor's management, may be made from time to time at prevailing prices in the open market or through privately negotiated transactions. FelCor funds the repurchase of stock through redemption of the Company's units, which redemptions are funded from existing credit facilities and proceeds from the sale of assets. During 2000, FelCor repurchased approximately 4.5 million shares of its outstanding common stock on the open market for approximately $86.7 million and the Company has redeemed a like number of units. Since inception of the program, FelCor has repurchased an aggregate of 10.3 million shares of its common stock for a total of approximately $185.1 million.
The Company may incur indebtedness to make property acquisitions, to purchase shares of its capital stock or to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to the extent that working capital and cash flow from the Company's investments are insufficient for such purposes. At December 31, 2000, the Company had $26.1 million of cash and cash equivalents and had utilized $362 million under its $600 million revolving line of credit (the "Line of Credit").
The following details the Company's debt outstanding at December 31, 2000 and 1999 (in thousands):
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(a) The senior term loan was retired early from the proceeds of publicly traded term notes issued in 2000.
The Line of Credit contains various affirmative and negative covenants, including limitations on total indebtedness, total secured indebtedness, and cash distributions, as well as the obligation to maintain a certain minimum tangible net worth and certain minimum interest and debt service coverage ratios. At December 31, 2000, the Company was not in default with respect to such covenants.
The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the Line of Credit. The mortgage debt is nonrecourse to the Company (with certain exceptions) and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of the mortgage debt is prepayable, subject, however, to various prepayment penalties, yield maintenance, or defeasance obligations.
The Company took several steps, during the year ended December 31, 2000, to increase its proportion of fixed rate debt, improve its debt maturity profile, diversify its funding sources and expand its financial flexibility.
On April 26, 2000, the Company closed a 10-year, $145 million First Mortgage Term Loan, which is collateralized by seven Sheraton hotels and carries an 8.73% fixed interest rate. On May 2, 2000, the Company closed $186 million of 10-year, First Mortgage Term Loans which are collateralized by eight Embassy Suites hotels and carry an 8.70% fixed interest rate. These loans are non-recourse, mature in May 2010, and amortize over 25 years. The proceeds of these loans were used to reduce borrowings under the Company's Line of Credit.
On August 1, 2000, the Company renewed its Line of Credit. The Line of Credit was reduced from $850 million to $600 million and the maturity was extended from July 2001 to August 2003. The effective interest rate on the renewed Line of Credit ranges from 87.5 basis points to 250 basis points above LIBOR depending on the Company's leverage and corporate rating. An extraordinary charge of approximately $578,000 was recorded to write-off a portion of the deferred financing costs associated with the Line of Credit.
On September 15, 2000, the Company completed the private placement of $400 million of senior unsecured notes that mature in September 2008 and bear an interest rate of 9 1/2%. The notes were issued at a discount to yield 9 3/4%. The proceeds were used to retire the $375 million floating rate senior term loan, which matured in 2004, and to pay down the Line of Credit. An extraordinary charge of approximately $3.3 million was recorded to write-off unamortized deferred financing costs associated with the $375 million loan. The Company subsequently completed an offer to exchange $400 million in aggregate principal amount of the private placement senior notes for notes with identical terms which were registered under the Securities Act of 1933.
On January 11, 2001, the Company completed the private placement of an additional $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a premium to yield an effective rate of 9 1/8%. The proceeds were used initially to pay down the Company's Line of Credit.
The Company had interest rate swap agreements with a total notional amount of $250 million that were outstanding at December 31, 2000 and which were designated as cash flow hedges. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding debt under its line of credit without an exchange of the underlying principal amount and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid, and the variable rate to be received by the Company at December 31, 2000 are summarized in the following table:
(a) The variable rate payer has the option to terminate this swap in July 2001; if not so terminated, it matures July 2003.
To provide for additional financing flexibility, FelCor has approximately $946 million of common stock, preferred stock, debt securities, and/or common stock warrants available for offerings under shelf registration statements previously declared effective.
In the event of a significant economic downturn, the Company believes that its Hotels will continue to benefit from the Company's extensive capital expenditure programs. Most future renovation and redevelopment expenditures are discretionary and are expected to be funded from the Company's cash flow.
The Company's $252.6 million in cash flow used in financing activities for the year ended December 31, 2000, relates primarily to the repurchase of approximately 4.5 million shares of FelCor's common stock for approximately $86.7 million and distributions aggregating $168.8 million.
INFLATION
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the Company's ability to raise room rates. Recently, some utility costs have increased at a faster rate than overall inflation. The Company may not be able to increase room rates sufficiently to offset the increased utility costs. However, in certain markets, the Company's Hotels have charged their guests a utility surcharge to help offset such increases.
SEASONALITY
The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy rates primarily during the first three quarters of each year. This seasonality can be expected to cause fluctuations in the Company's quarterly revenue, particularly during the fourth quarter. To the extent cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or borrowings under the Line of Credit to make distributions to its equity holders.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. A number of important factors which, among others, could adversely affect the ability of the Company to meet its current expectations are disclosed in conjunction with the forward-looking statements and under "Cautionary Factors That May Affect Future Results" in Item 1 of this Annual Report on Form 10-K ("Cautionary Statements"). Subsequent written and oral forward-looking statements made by or attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 2001, the Company will adopt SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133" or the "Statement"). SFAS 133 will be adopted as a change in accounting principle and cannot be applied retroactively to financial statements of prior periods.
SFAS 133 requires derivatives to be recorded on the balance sheet as an asset or liability at fair value. The Statement also requires that the Company record derivatives that are not hedges at fair value through earnings, unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows the Company to offset a derivative instrument's gains and losses against related results on the hedged item in the income statement, to the extent effective, and requires that the Company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company's interest rate swap contracts outstanding as of January 1, 2001, have been designated as cash flow hedges.
Cash Flow Hedges
The Company has entered into six interest rate swap agreements, with a total notional amount of $250 million. Three of these agreements, at the option of the variable rate payer, may be terminated in July 2001 or otherwise terminate in July 2003 along with the other three agreements. Under these arrangements, the Company receives the one month LIBOR rate and pays a fixed rate of 5.548% to 5.826%. Prior to adoption of FAS 133, the Company treated these swaps as hedges and accounted for them as such. The Company has not recorded any amounts on the Consolidated Balance Sheet as of December 31, 2000 in connection with these instruments and the net effect of the hedges was to record interest expense at the fixed rate of 7.548% to 7.826% on $250 million of variable rate debt. The Company has designated these swaps as cash flow hedges of variable future cash flows associated with the interest on its Line of Credit facility through July 2003. Upon adoption, the Company will record the fair value of these swaps as an asset on its balance sheet valued at $248,000, with a corresponding credit to other comprehensive income. The Company will record subsequent changes in fair value of the swaps through other comprehensive income, except for changes related to ineffectiveness, during the period these instruments are designated as hedges.
The Company has no other derivative instruments, including embedded derivatives under SFAS 133.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is to changes in interest rates on its floating rate debt. The Company manages the risk of increasing interest rates on its floating rate debt through the use of interest rate swaps, which effectively convert variable rate debt to a fixed rate, by locking the interest rates paid. The Company had entered into interest rate swap contracts relating to debt of $250 million at December 31, 2000.
The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations at December 31, 2000, the table presents scheduled maturities and weighted average interest rates by maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by contractual maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve as of December 31, 2000. The fair value of the Company's fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements which could have been borrowed at December 31, 2000 at then current market interest rates. The fair value of the Company's variable to fixed interest rate swaps indicates the estimated amount that would have been received by the Company had they been sold at December 31, 2000.
EXPECTED MATURITY DATE (IN THOUSANDS)
(a) The variable rate payer has the option to terminate this swap in July 2001; if not so terminated, it matures July 2003.
Swap contracts, such as those described above, contain a credit risk, in that the counterparties may be unable to fulfill the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, who are limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herein beginning at page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company has no directors or officers. Management functions of the Company are performed by FelCor as the sole general partner. Information about the directors and executive officers of FelCor is contained in FelCor's definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, and incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Company has no directors or officers. Management functions of the Company are performed by FelCor as the sole general partner. Information about the directors and executive officers of FelCor is contained in FelCor's definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, and incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is contained in FelCor's definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, and incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is contained in FelCor's definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, and incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included herein at pages through.
2. Financial Statement Schedules
The following financial statement schedule is included herein at page.
Schedule III - Real Estate and Accumulated Depreciation for FelCor Lodging Limited Partnership
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted.
3. Exhibits
The following exhibits are filed as part of this Annual Report on Form 10-K:
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* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FELCOR LODGING LIMITED PARTNERSHIP a Delaware Limited Partnership
By: FelCor Lodging Trust Incorporated Its General Partner
By: /s/ Lawrence D. Robinson ----------------------------------- Lawrence D. Robinson Executive Vice President
Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
FELCOR LODGING LIMITED PARTNERSHIP
PART I - FINANCIAL INFORMATION
FELCOR LODGING LIMITED PARTNERSHIP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of FelCor Lodging Trust Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners' capital and cash flows present fairly, in all material respects, the financial position of FelCor Lodging Limited Partnership at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas February 5, 2001, except for footnotes 1 and 20, as to which the date is March 28, 2001
FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Lodging Limited Partnership and its subsidiaries (the "Company") at December 31, 2000, owned interests in 186 hotels with nearly 50,000 rooms and suites (collectively the "Hotels"). The sole general partner of the Company is FelCor Lodging Trust Incorporated ("FelCor") which is the nation's second largest hotel real estate investment trust ("REIT"). At December 31, 2000, FelCor owned greater than 86% equity interest in the Company. At December 31, 2000, the Company owned 100% of the interest in 161 of the Hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels and 50% interests in separate entities that own 16 hotels.
The following table provides a schedule of the Hotels, by brand, operated by each of the Company's lessees at December 31, 2000:
The Hotels are located in the United States (35 states) and Canada, with a concentration in Texas (41 hotels), California (19 hotels), Florida (18 hotels) and Georgia (15 hotels). The following table provides information regarding the net acquisition and disposition of hotels through December 31, 2000:
On January 1, 2001, the provisions of the REIT Modernization Act became effective. These provisions reduce the percentage of taxable income required to be distributed by a REIT from 95% to 90% for taxable years after 2000 and subject to certain limitations, permit a REIT to own taxable subsidiaries that engage in businesses previously prohibited to a REIT, including, among other things, leasing hotels from a hotel REIT, provided that the hotels continue to be managed by unrelated third parties.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION -- (CONTINUED)
At December 31, 2000, the Company leased 85 hotels to DJONT Operations, L.L.C., a Delaware limited liability company, or a consolidated subsidiary thereof (collectively "DJONT") and leased 99 hotels to Bristol Hotels & Resorts and its consolidated subsidiaries ("Bristol" and, together with DJONT, the"Lessees"). Bristol became a subsidiary of Bass plc ("Bass") by virtue of a merger between Bristol and a subsidiary of Bass on March 31, 2000. Two of the Hotels were operated without a lease.
At December 31, 2000, DJONT was a private company controlled by Thomas J. Corcoran, Jr., the President, Chief Executive Officer and a Director of FelCor. Subject to the receipt of certain lender consents, effective January 1, 2001, the Company acquired and contributed to a newly formed taxable REIT subsidiary, all of the equity interests in DJONT. In consideration for the acquisition of DJONT, the Company issued an aggregate of 416,667 units valued at approximately $10 million, which, together with DJONT's accumulated shareholders' deficit of $24.5 million, will be expensed in the first quarter of 2001 as a lease termination cost.
Effective January 1, 2001, the Company completed the acquisition of the 12 of the Bristol leases which were held by Bass. In consideration for the acquisition of such leases, FelCor issued to Bass 413,585 shares of FelCor common stock valued at approximately $10 million and the Company issued the corresponding number of units. Of the 12 hotels, (i) the Company has entered into an agreement with Interstate Hotels Corporation ("IHC") to manage eight of the hotels, (ii) two hotels are being managed by a subsidiary of Bass under short term management contracts, (iii) one hotel is being managed by a subsidiary of Hilton Hotels Corporation ("Hilton") and (iv) one hotel was sold. In March 2001, the Company entered into an agreement with Bass to acquire the remaining 88 leases effective July 1, 2001. In consideration for the acquisition of such leases, the Company will enter into long term management agreements with Bass with regard to these hotels and FelCor will issue to Bass 100 shares of FelCor common stock. A portion of the management fees with respect to the 88 hotels managed by Bass under long term management agreements will be considered to be lease termination costs and the Company will record a lease termination expense of approximately $125 million in the third quarter of 2001. At that time, the Company will record a corresponding liability of approximately $125 million that will be amortized over the term of the applicable management agreements.
At January 1, 2001, (i) subsidiaries of Bass managed 91 of the Hotels, (ii) subsidiaries of Hilton managed 72 of the Hotels, (iii) subsidiaries of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood") managed 11 of the Hotels, (iv) subsidiaries of IHC managed eight of the Hotels and (v) three independent management companies managed the four remaining Hotels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates -- The preparation of the financial statements in conformity with generally accepted accounting principles 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.
Investment in Hotels -- Hotels are stated at cost and are depreciated using the straight-line method over estimated useful lives ranging from 31 to 40 years for buildings and improvements and three to seven years for furniture, fixtures, and equipment.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The Company periodically reviews the carrying value of each Hotel to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel based on discounted future cash flows. The Company does not believe that there are any factors or circumstances indicating impairment of any of its investment in the Hotels except as reflected in reserve established for the assets held for sale.
Maintenance and repairs are the responsibility of the Lessees; major renewals and betterments by the Company are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is included in operations.
Investment in Unconsolidated Entities --The Company owns a 50% interest in various partnerships or limited liability companies in which the partners jointly make all material decisions concerning the business affairs and operations. The Company also owns a 97% nonvoting interest in an entity. Accordingly, the Company does not control these entities and carries its investment in unconsolidated entities at cost, plus its equity in net earnings, less distributions received since the date of acquisition. Equity in net earnings is adjusted for the straight-line amortization, over a 40-year period, of the difference between the Company's cost and its proportionate share of the underlying net assets at the date of acquisition.
Cash and Cash Equivalents -- All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
Deferred Expenses -- Deferred expenses, consisting primarily of loan costs, are recorded at cost. Amortization is computed using the interest method over the maturity of the related debt.
Revenue Recognition -- Percentage lease revenue is reported as income when earned.
Capitalized Interest -- The Company capitalizes interest and certain other costs relating to hotels undergoing major renovations and redevelopments. Such costs capitalized in 2000, 1999 and 1998 were approximately $2.0 million, $7.4 million and $5.9 million, respectively.
Net Income Per Unit -- Basic earnings per unit have been computed by dividing net income available to unitholders by the weighted average number of units outstanding. Diluted earnings per unit have been computed by dividing net income available to unitholders by the weighted average number of units and equivalents outstanding. Unit equivalents represent units issuable upon exercise of stock options and unvested officers' restricted FelCor stock grants.
At December 31, 2000, 1999, and 1998, the Company's Series A Cumulative preferred units, if converted to units, would be antidilutive; accordingly the Series A Cumulative preferred units are not assumed to be converted in the computation of diluted earnings per unit.
Distributions -- The Company pays regular quarterly distributions on its units. Additionally, the Company pays regular quarterly distributions on preferred units in accordance with its preferred units distributions requirements.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
For 2000, the Company paid distributions of $2.20 per unit, $1.95 per unit of $1.95 Series A Cumulative Preferred Units ("Series A preferred units"), and $2.25 per depositary share evidencing its 9% Series B Redeemable Preferred Units ("Series B preferred units").
Income Taxes -- No provision for federal income taxes has been reflected in the financial statements because all taxable income or loss, or tax credits are passed through to the partners.
3. INVESTMENT IN HOTELS
Investment in hotels at December 31, 2000 and 1999, consists of the following (in thousands):
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
At December 31, 2000, the Company owned 50% interests in separate entities owning 16 hotels, a parcel of undeveloped land, and a condominium management company. The Company also owned a 97% nonvoting interest in an entity that owns an annex to a hotel owned by the Company and holds a 50% interest in an entity that has developed condominiums for sale. The Company accounts for its investments in these unconsolidated entities under the equity method.
Summarized unaudited combined financial information for 100% of these unconsolidated entities is as follows (in thousands):
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ASSETS HELD FOR SALE
In the second quarter of 2000, the Company identified 25 hotels that it considered non-strategic and announced its intention to sell such hotels by June 30, 2001. In connection with the decision to sell these hotels, the Company recorded a reserve of $63 million representing the difference between the net book value of these hotels and the estimated net proceeds. No depreciation expense has been recorded on these hotels since June 30, 2000. Percentage rent income related to the assets held for sale, less costs associated with those assets, were included in the Company's results of operations for the year ended December 31, 2000, and represented net income of approximately $16 million. During 2000, one of these hotels was sold and the Company recognized a gain of approximately $135,000. At December 31, 2000, assets held for sale, which represent the 24 remaining hotels, are reported net of the $63 million reserve.
6. DEBT
Debt at December 31, 2000 and 1999, consists of the following (in thousands):
(a) Collateralized by stock and partnership interests in certain subsidiaries of FelCor. The senior term loan was retired early from the proceeds of publicly traded term notes issued in 2000.
One month LIBOR at December 31, 2000 was 6.565%.
The Company's $600 million line of credit (the "Line of Credit") contains various affirmative and negative covenants including limitations on total indebtedness, total secured indebtedness, and cash distributions, as well as the obligation to maintain certain minimum tangible net worth and certain minimum interest and debt service coverage ratios. At December 31, 2000, the Company was in compliance with all such covenants.
The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the Line of Credit. Most of the mortgage debt is non-recourse to the Company (with certain exceptions) and contains provisions allowing for the substitution of collateral upon satisfaction of
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT -- (CONTINUED)
certain conditions. Most of the mortgage debt is prepayable, subject, however, to various prepayment penalties, yield maintenance, or defeasance obligations.
On April 26, 2000, the Company completed a 10-year, $145 million First Mortgage Term Loan, which is collateralized by seven Sheraton hotels and carries an 8.73% fixed interest rate. On May 2, 2000, the Company closed $186 million of 10-year, First Mortgage Term Loans which are collateralized by eight Embassy Suites hotels and carry an 8.70% fixed interest rate. These loans are non-recourse, mature in May 2010, and amortize over 25 years. The proceeds of these loans were used to reduce borrowings under the Company's Line of Credit.
On August 1, 2000, the Company renewed its Line of Credit. The Line of Credit was reduced from $850 million to $600 million and the maturity was extended from July 2001 to August 2003. The effective interest rate on the renewed Line of Credit ranges from 87.5 basis points to 250 basis points above LIBOR depending on the Company's leverage and corporate rating. An extraordinary charge of approximately $578,000 was recorded to write-off a portion of the deferred financing costs associated with the Line of Credit.
On September 15, 2000, the Company completed the private placement of $400 million of senior unsecured notes which mature in September, 2008 and bear an interest rate of 9 1/2%. The notes were issued at a discount to yield 9 3/4%. The proceeds were used to retire the $375 million floating rate senior term loan, which matured in 2004, and to pay down the Line of Credit. An extraordinary charge of approximately $3.3 million was recorded to write-off unamortized deferred financing costs associated with the $375 million loan. During the fourth quarter of 2000, the Company exchanged the $400 million in aggregate principal amount of the private placement senior notes for notes with identical terms which were registered under the Securities Act of 1933.
Future scheduled principal payments on debt obligations at December 31, 2000 are as follows (in thousands):
To manage the relative mix of its debt between fixed and variable rate instruments, the Company has entered into interest rate swap agreements with four financial institutions. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding debt under its Line of Credit without an exchange of the underlying principal amount and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid and the variable rate to be received by the Company at December 31, 2000, are summarized in the following table:
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT -- (CONTINUED)
(a) The variable rate payer has the option to terminate this swap in July 2001; if not so terminated, it matures July 2003.
The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company, pursuant to the terms of its interest rate agreement, and will have a corresponding effect on its future cash flows. During 2000, the Company received a net $1.8 million under the interest rate swaps and paid a net $1.7 million and $383,000 during 1999 and 1998, respectively. Agreements such as these contain a credit risk in that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, who are limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosures about the fair value for all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about fair value of financial instruments are based on pertinent information available to management as of December 31, 2000. Considerable judgement is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Management estimates the fair value of (i) accounts receivable, accounts payable and accrued expenses approximate carrying value due to the relatively short maturity of these instruments; (ii) the note receivable approximates carrying value based upon effective borrowing rates for issuance of debt with similar terms and remaining maturities; (iii) the borrowings under the Line of Credit and various other mortgage notes approximate carrying value because these borrowings accrue interest at floating interest rates based on market. The estimated fair value of the Company's fixed rate debt of $1.4 billion is $1.2 billion at December 31, 2000, based on current market interest rates estimated by the Company for similar debt with similar maturities.
The Company manages its debt portfolio by using interest rate swaps to achieve an overall desired position of fixed and floating rates. The fair value of interest rate hedge contracts is estimated based on quotes from the market makers of these instruments and represents the estimated amounts the Company would expect to receive or pay to terminate the contracts. Credit and market risk exposures are limited to the net interest differentials. The estimated unrealized net gain on these instruments was approximately $248,000 at December 31, 2000, which represents the amount the Company would receive to terminate the agreements based on current market rates.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. REDEEMABLE OPERATING PARTNERSHIP UNITS AND PREFERRED UNITS
FelCor is the sole general partner of the Company and is obligated to contribute the net proceeds from any issuance of its equity securities to the Company in exchange for units corresponding in number and terms to the equity securities issued by it. Units may also be issued by the Company to third parties in exchange for cash or property, and units so issued to third parties are redeemable at the option of the holders thereof for a like number of shares of FelCor common stock or, at the option of FelCor, for the cash equivalent thereof. Due to these redemption rights, these limited partnership units have been excluded from partners' capital and are included in redeemable units and measured at redemption value as of the end of the periods presented. At December 31, 2000 and 1999 there were 8,597,379 and 2,990,762 redeemable units outstanding. The value of the redeemable units are based on the closing market price of FelCor's common stock at the balance sheet date, which at December 31, 2000 and 1999 was $23.9375 and $17.50, respectively.
In connection with the efforts of Bass to acquire Bristol, a Bass subsidiary contributed approximately 4.7 million and 1 million outstanding FelCor common shares held by it to the Company in exchange for a like number of units on February 28 and November 1, 2000, respectively. This exchange reduced FelCor's percentage ownership in the Company from approximately 95% to approximately 86%.
As of December 31, 2000, FelCor had approximately $946 million of common stock, preferred stock, debt securities, and/or common stock warrants available for offerings under shelf registration statements previously declared effective.
Preferred Units
FelCor's Board of Directors is authorized to provide for the issuance of up to 20,000,000 shares of preferred stock in one or more series, to establish the number of shares in each series, to fix the designation, powers preferences and rights of each such series, and the qualifications, limitations or restrictions thereof.
In 1996, FelCor issued 6.1 million shares of its Series A preferred stock at $25 per share. The Series A preferred stock bears an annual dividend equal to the greater of $1.95 per share or the cash distributions declared or paid for the corresponding period on the number of shares of common stock into which the Series A preferred stock is then convertible. Each share of the Series A preferred stock is convertible at the shareholder's option to 0.7752 shares of common stock, subject to certain adjustments, and may not be redeemed by the Company before April 30, 2001. The proceeds from the Series A preferred stock were contributed to the Company in exchange for Series A preferred units. The preference on these units are the same as FelCor's Series A preferred stock. During 2000, holders of 69,400 shares of Series A preferred stock converted their shares to 53,798 common shares which were issued from treasury shares and an equivalent number of units were issued.
On May 1, 1998, FelCor issued 5.75 million depositary shares, representing 57,500 shares of its Series B preferred stock, at $25 per depositary share. The Series B preferred stock and the corresponding depositary shares may be called by FelCor at par on or after May 7, 2003, have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any other securities of FelCor. The Series B preferred stock has a liquidation preference of $2,500 per share (equivalent to $25 per depositary share) and is entitled to annual dividends at the rate of 9% of the liquidation preference (equivalent to $2.25 annually per depositary share). The proceeds from the Series B preferred stock were contributed to the Company in exchange for Series B preferred units. The preference on these units are the same as FelCor's Series preferred stock.
At December 31, 2000, all distributions then payable on the Series A and Series B preferred units had been paid.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. REDEEMABLE OPERATING PARTNERSHIP UNITS AND PREFERRED UNITS -- (CONTINUED)
Treasury Stock Repurchase Program
On September 3, 1999, FelCor announced that its Board of Directors (the "Board") had authorized FelCor to repurchase up to $100 million of its outstanding common shares. On January 4, 2000, the Board approved a $200 million increase in its stock repurchase program. At December 31, 2000, FelCor had completed the repurchase of approximately 10.3 million shares of FelCor common stock at a cost of approximately $185.1 million (of the $300 million authorized). This has been recorded as a reduction to Partners' Capital as a result of the redemption of units held by FelCor to fund the repurchase.
9. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the years ended December 31, 2000, 1999, and 1998 (in thousands):
10. LAND LEASES
The Company leases land occupied by certain hotels from third parties under various operating leases. Certain leases contain contingent rent features based on gross revenue at the respective hotels. Future minimum lease payments under the Company's land lease obligations at December 31, 2000, are as follows (in thousands):
11. GAIN ON SALE OF ASSETS
On December 11, 2000, the Company completed the sale of its Four Points by Sheraton(R) hotel - Leominster, Massachusetts (one of the 25 hotels designated as held for sale), for a gross price of $10.5 million which resulted in a gain of approximately $135,000.
On September 27, 2000, the Company completed the sale of its Embassy Suites hotel, Los Angeles International Airport - North, California for a gross price of approximately $23.3 million. The Company recorded a gain of approximately $2.5 million.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. GAIN ON SALE OF ASSETS -- (CONTINUED)
During the third quarter of 2000, the Company sold two acres of vacant excess land adjacent to its Embassy Suites hotel - Fort Lauderdale, Florida and a billboard in Dallas, Texas, for an aggregate of $1.3 million and recorded a gain of approximately $0.9 million.
On June 30, 2000, the Company sold 31 acres of vacant excess land adjacent to its Whispering Woods Hotel in Olive Branch, Mississippi, for approximately $1 million and recorded a gain of $0.9 million.
12. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Through December 31, 2000, the Company's general partner, FelCor, shared its executive offices and certain employees with FelCor, Inc., and DJONT, and each company paid its share of the costs thereof, including an allocated portion of the rent, compensation of certain personnel (other than Mr. Corcoran, whose compensation is borne solely by FelCor), office supplies, telephones, and depreciation of office furniture, fixtures, and equipment. The Company reimburses FelCor for its share of such allocated costs. Any such allocation of shared expenses to FelCor is required to be approved by a majority of FelCor's Independent Directors. During 2000, 1999, and 1998, the Company and FelCor paid approximately $6.7 million (approximately 89.4%), $5.7 million (approximately 89.5%), and $2.8 million (approximately 63%), respectively, of the allocable expenses under this arrangement.
Included in the mortgage debt of the unconsolidated entities is a mortgage loan payable to the Company in the amount of $7.7 million and $7.8 million for 2000 and 1999, respectively. The note bears a fixed interest rate of 8% per annum with a 30 year amortization, matures on December 31, 2004, and is collateralized by a Mortgage and Assignment of Leases and Rents with respect to a hotel annex owned by an entity in which the Company has a 97% nonvoting interest.
13. SUPPLEMENTAL CASH FLOW DISCLOSURE
The Company purchased certain assets and assumed certain liabilities in connection with the acquisition of hotels in 1998. During 1999 the Company purchased the land related to three hotels, which previously had been leased. These purchases were recorded under the purchase method of accounting. The fair values of the acquired assets and liabilities recorded at the date of acquisition are as follows (in thousands):
Approximately $34.0 million, $39.7 million, and $67.3 million of aggregate preferred unit distributions and unit distributions had been declared as of December 31, 2000, 1999, and 1998, respectively. These amounts were paid in the following January of each year.
In 1998, the Company entered into a joint venture, in which the Company contributed a hotel with a net book value of $53.9 million for a 60% equity interest in the venture. The Company has consolidated this venture in the financial statements and recorded increases of $34.4 million in investment in hotels and minority interest in other partnerships.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. STOCK BASED COMPENSATION PLANS
FelCor sponsors three restricted stock and stock option plans (the "FelCor Plans"). In addition, upon completion of the merger with Bristol Hotel Company (the "Merger"), FelCor assumed two stock option plans previously sponsored by Bristol Hotel Company (the "Bristol Plans"). FelCor was initially obligated to issue up to 1,271,103 shares of its common stock pursuant to the Bristol Plans. No additional options may be awarded under the Bristol Plans. The FelCor Plans and the Bristol Plans are referred to collectively as the "Plans". Upon issuance of any stock, FelCor is obligated to contribute the proceeds to the Company in exchange for a like number of units.
Stock Options
FelCor is authorized to issue 2,950,000 shares of common stock under the FelCor Plans pursuant to awards granted in the form of incentive stock options, non-qualified stock options, and restricted stock. All options have 10-year contractual terms and vest over five equal annual installments (20% per year), beginning in the year following the date of grant.
The options outstanding under the Bristol Plans generally vest either in four equal annual installments (25% per year) beginning in the second year following the original date of award, in five equal annual installments (20% per year) beginning in the year following the original date of award, or on a single date that is three to five years following the original date of the award.
A summary of the status of FelCor's non-qualified stock options under the Plans as of December 31, 2000, 1999, and 1998, and the changes during the years are presented below:
(a) 1998 grants include options covering 1,271,103 shares of common stock issuable as a result of the assumption of the Bristol Plans.
(b) To enable FelCor to preserve its stock options as a meaningful element of compensation in 1998, existing option holders under the FelCor Plans employed by FelCor on a full-time basis were offered the opportunity to exchange their existing options (having exercise prices ranging from $26.44 to $38.56 per share) for a lesser number of new options having an equal value under the Black-Scholes option pricing model. Twenty-two employees accepted this offer in 1998, surrendering for cancellation existing options covering an aggregate of 1,151,500 shares of common stock at a weighted average exercise price of $32.807 per share for new options covering an aggregate of 840,393 shares of common stock at an exercise price of $22.125 per share. The new options have the same expiration dates and vesting schedules as the options surrendered for cancellation; however, none of the new options were exercisable prior to January 1, 2000.
(c) In the second quarter of 2000 FelCor purchased options covering an aggregate of 349,443 shares of FelCor's common stock for approximately $1.9 million. These options were held by employees of Bristol and were issued in substitution for stock options previously granted by Bristol Hotel Company that were outstanding at the time of its
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
merger with FelCor in 1998. These options so purchased and retired had exercise prices ranging from $10.33 to $16.95 per share and the majority of these options were scheduled to vest in the third quarter of 2000. The purchase price was recorded as a reduction in partners' capital.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 11.28%; risk free interest rates are different for each grant and range from 4.65% to 6.58%; the expected lives of options are 6 years; and volatility of 18.22% for 2000 grants, 18.44% for 1999 grants, and 32.90% for grants issued in 1998. The weighted average fair value of options granted during 2000, 1999, and 1998 was $0.90, $1.07, and $3.35 per share, respectively.
Restricted Stock
A summary of the status of FelCor's restricted stock grants as of December 31, 2000, 1999, and 1998 and the changes during the years are presented below:
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are consistent with the Company's method of internal reporting, which segments its business by Lessee. The Company's Lessees at December 31, 2000, were DJONT and Bristol. Prior to July 28, 1998 (the date of the Merger), the Company had only one lessee, DJONT.
The following tables present information about the reportable segments for the years ended December 31, 2000, 1999 and 1998 (in thousands):
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENT INFORMATION -- (CONTINUED)
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENT INFORMATION -- (CONTINUED)
(a) Weighted average units outstanding are computed including dilutive FelCor options and unvested stock grants, and assuming conversion of Series A preferred units to units.
The following table sets forth Percentage Lease revenue and investment in hotel assets represented by the following geographical areas as of and for the years ended December 31, 2000, 1999 and 1998 (in thousands):
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Statements of Operations for the years ended December 31, 2000 and 1999 are presented as if the acquisition of DJONT and acquisition of the Bristol leases occurred on January 1, 1999.
The following unaudited Pro Forma Consolidated Statements of Operations for the periods presented are not necessarily indicative of what actual results operations of the Company would have been assuming such transactions had been completed at the beginning of the respective periods presented, nor does it purport to represent the results of operations for future periods.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 2001, the Company will adopt SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133" or the "Statement"). SFAS 133 will be adopted as a change in accounting principle and cannot be applied retroactively to financial statements of prior periods.
SFAS 133 requires that the Company record derivatives on the balance sheet as an asset or liability at fair value. The Statement also requires that the Company record derivatives that are not hedges at fair value through earnings, unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows the Company to offset a derivative instrument's gains and losses against related results on the hedged item in the income statement, to the extent effective, and requires that the Company formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
The Company's interest rate swap contracts outstanding as of January 1, 2001, have been designated as cash flow hedges.
Cash flow hedges
The Company has entered into six interest rate swap agreements, with a total notional amount of $250 million. Three of these agreements, at the option of the variable rate payer, may be terminated in July 2001 or otherwise terminate in July 2003 along with the other three agreements. Under these arrangements, the Company receives the one month LIBOR rate and pays a fixed rate of 5.548% to 5.826%. Prior to adoption of FAS 133, the Company treated these swaps as hedges and accounted for them as such. The Company has not recorded any amounts on the Consolidated Balance Sheet as of December 31, 2000 in connection with these instruments and the net effect of the hedges was to record interest expense at the fixed rate of 7.548% to 7.826% on $250 million of variable rated debt. The Company has designated these swaps as cash flow hedges of variable future cash flows associated with the interest on its Line of Credit facility through July 2003. Upon adoption, the Company will record the fair value of these swaps as an asset on its balance sheet valued at $248,000, with a corresponding credit to other comprehensive income. The Company will record subsequent changes in fair value of the swaps through other comprehensive income, except for changes related to ineffectiveness, during the period these instruments are designated as hedges.
The Company has no other derivative instruments, including embedded derivatives under SFAS 133.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY OPERATING RESULTS (UNAUDITED)
The Company's unaudited consolidated quarterly operating data for the years ended December 31, 2000 and 1999, follows (in thousands, except per unit data). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data. It is also management's opinion, however, that quarterly operating data for hotel enterprises are not indicative of results to be achieved in succeeding quarters or years. In order to obtain a more accurate indication of performance, there should be a review of operating results, changes in partners' equity and cash flows for a period of several years.
19. CONSOLIDATING FINANCIAL INFORMATION
Certain of the Company's wholly-owned subsidiaries (FelCor/CSS Holdings, L.P.; FelCor/CSS Hotels, L.L.C.; FelCor/LAX Hotels L.L.C.; FelCor Eight Hotels, L.L.C.; FelCor/St. Paul Holdings, L.P.; FelCor/LAX Holdings, L.P.; FHAC Nevada Holdings, L.L.C.; FHAC Texas Holdings, L.P., FelCor Omaha Hotel Company, L.L.C., FelCor Country Villa Hotel, L.L.C., FelCor Moline Hotel, L.L.C., FelCor Canada Co. and FelCor Hotel Asset Company, L.L.C., collectively "Subsidiary Guarantors"), together with FelCor and one of its wholly-owned subsidiaries (FelCor Nevada Holdings, L.L.C.), are guarantors of senior unsecured debt. The following tables present consolidating information for the Subsidiary Guarantors.
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000 (IN THOUSANDS)
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1999 (IN THOUSANDS)
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SUBSEQUENT EVENTS
Effective January 1, 2001, subject to the receipt of certain lender consents, the Company acquired and contributed to a newly formed taxable REIT subsidiary, all of the equity interests in DJONT. In consideration for the acquisition of DJONT, the Company issued an aggregate of 416,667 units valued at approximately $10 million, which, together with DJONT's accumulated shareholders' deficit of $24.5 million, will be expensed in the first quarter of 2001 as a lease termination cost.
Effective January 1, 2001, the Company completed the acquisition of 12 of the Bristol leases. In consideration for the acquisition of such leases, FelCor issued to Bass 413,585 shares of FelCor common stock valued at approximately $10 million and the Company issued a like number of units. In March 2001, the Company entered into an agreement with Bass to acquire the remaining 88 leases effective July 1, 2001. In consideration for the acquisition of such leases, the Company will enter into long term management agreements with Bass with regard to these hotels and FelCor will issue to Bass 100 shares of FelCor common stock. A portion of the management fees with respect to the 88 hotels managed by Bass under long term management agreements will be considered to be lease termination costs and the Company will record a lease termination expense of approximately $125 million in the third quarter of 2001. At that time, the Company will record a corresponding liability of approximately $125 million, that will be amortized over the term of the applicable management agreements.
On January 11, 2001, the Company completed the private placement of an additional $100 million in 9 1/2% senior unsecured notes that mature in September, 2008. These notes were issued at a premium to yield an effective rate of 91/8%. The proceeds were used initially to pay down the Company's Line of Credit.
In March 2001, the Company contributed eight of the hotels held for sale to an entity in which the Company holds a 50% equity interest and a subsidiary of IHC holds the other 50% equity interest. The Company contributed assets with a book value of approximately $77 million. Another subsidiary of IHC manages each of these hotels.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of FelCor Lodging Trust Incorporated:
Our audits of the consolidated financial statements referred to in our report dated February 5, 2001, except for footnotes 1 and 20 as to which the date is March 28, 2001, appearing on page of the Annual Report on Form 10-K of FelCor Lodging Limited Partnership (which report and consolidated financial statements are included in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas February 5, 2001
FELCOR LODGING LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2000 (IN THOUSANDS)
FELCOR LODGING LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION-- (CONTINUED)
FELCOR LODGING LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION-- (CONTINUED)
FELCOR LODGING LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION-- (CONTINUED)
1. Embassy Suites 2. Holiday Inn 3. Sheraton 4. Fairfield Inn 5. Doubletree Guest Suites 6. Crowne Plaza 7. Doubletree 8. Independents 9. Holiday Inn Select 10. Courtyard by Marriott 11. Sheraton Suites 12. Hampton Inn 13. Holiday Inn Express 14. Hilton Suites 15. Holiday Inn Hotel & Suites 16. Homewood Suites 17. Bristol House(R) 18. Crowne Plaza Suites 19. Harvey Hotel 20. Westin 21. Harvey Suites
INDEX TO EXHIBITS
E-49
E-50
E-51
E-52
E-53
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* Filed herewith.
E-54