UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

     [X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010

or

     [   ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to

Commission file number 001-14236

FelCor Lodging Trust Incorporated
(Exact name of registrant as specified in its charter)

Maryland
 
75-2541756
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

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

(972) 444-4900
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes    o   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o   Yes    o   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer                                                       o
 
Accelerated filer x
Non-accelerated filer                                            o (Do not check if a smaller reporting company)
 
Smaller reporting company o

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

At April 23, 2010, the registrant had issued and outstanding 65,427,139 shares of common stock.


 
 
 



FELCOR LODGING TRUST INCORPORATED

INDEX

 
Page
PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements
3
Consolidated Balance Sheets March 31, 2010 and December 31, 2009 (unaudited)
3
Consolidated Statements of Operations – For the Three Months Ended March 31, 2010 and 2009 (unaudited)
 
4
Consolidated Statements of Comprehensive Loss – For the Three Months Ended March 31, 2010 and 2009 (unaudited)
5
Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2010 and 2009 (unaudited)
6
Consolidated Statements of Cash Flows – For the Three Months Ended March 31, 2010 and 2009 (unaudited)
7
Notes to Consolidated Financial Statements
8
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
General
17
Financial Comparison
18
Results of Operations
18
Non-GAAP Financial Measures
19
Pro Rata Share of Rooms Owned
22
Hotel Portfolio Composition
23
Hotel Operating Statistics
24
Hotel Portfolio
26
Liquidity and Capital Resources
28
Inflation
30
Seasonality
30
Disclosure Regarding Forward-Looking Statements
30
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
31
Item 4.  Controls and Procedures
31
   
PART II – OTHER INFORMATION
   
Item 5.  Other Information
32
Item 6.  Exhibits
32
   
SIGNATURE
33
   



 
2
 

PART I -- FINANCIAL INFORMATION


Item 1.                      Financial Statements

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)

 
March 31, 2010
 
December 31, 2009
Assets
             
Investment in hotels, net of accumulated depreciation of $936,120 at  March 31, 2010 and $916,604 at December 31, 2009
$
2,131,646
   
$
2,180,394
 
Investment in unconsolidated entities
 
80,230
     
82,040
 
Cash and cash equivalents
 
276,008
     
263,531
 
Restricted cash
 
18,943
     
18,708
 
Accounts receivable, net of allowance for doubtful accounts of $317  at March 31, 2010 and $406 at December 31, 2009
 
35,285
     
28,678
 
Deferred expenses, net of accumulated amortization of $16,130 at  March 31, 2010 and $14,502 at December 31, 2009
 
19,825
     
19,977
 
Other assets
 
32,902
     
32,666
 
          Total assets
$
2,594,839
   
$
2,625,994
 
               
Liabilities and Equity
             
Debt, net of discount of $61,764 at March 31, 2010 and $64,267 at  December 31, 2009
$
1,771,115
   
$
1,773,314
 
Distributions payable
 
47,258
     
37,580
 
Accrued expenses and other liabilities
 
162,859
     
131,339
 
               
          Total liabilities
 
1,981,232
     
1,942,233
 
               
Commitments and contingencies
             
               
Redeemable noncontrolling interests in FelCor LP at redemption value, 295 units issued and outstanding at March 31, 2010 and December 31, 2009
 
1,681
     
1,062
 
               
Equity:
             
Preferred stock, $0.01 par value, 20,000 shares authorized:
             
   Series A Cumulative Convertible Preferred Stock, 12,880 shares,  liquidation value of $322,011, issued and outstanding at
     March 31, 2010 and December 31, 2009
 
309,362
     
309,362
 
   Series C Cumulative Redeemable Preferred Stock, 68 shares, liquidation  value of $169,950, issued and outstanding at
     March 31, 2010 and December 31, 2009
 
169,412
     
169,412
 
Common stock, $.01 par value, 200,000 shares authorized and 69,413 shares issued, including shares in treasury, at March 31,
     2010 and December 31, 2009
 
694
     
694
 
Additional paid-in capital
 
2,022,235
     
2,021,837
 
Accumulated other comprehensive income
 
25,598
     
23,528
 
Accumulated deficit
 
(1,864,898
)
   
(1,792,822
)
Less: Common stock in treasury, at cost, of 3,985 shares at March 31,  2010 and 3,845 shares at December 31, 2009
 
(72,229
)
   
(71,895
)
               
          Total FelCor stockholders’ equity
 
590,174
     
660,116
 
Noncontrolling interests in other partnerships
 
21,752
     
22,583
 
Total equity
 
611,926
     
682,699
 
               
          Total liabilities and equity
$
2,594,839
   
$
2,625,994
 

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

 
3
 


FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2010 and 2009
(unaudited, in thousands, except for per share data)


 
Three Months Ended
March 31,
 
2010
 
2009
Revenues:
             
   Hotel operating revenue
$
226,039
   
$
227,733
 
   Other revenue
 
365
     
286
 
Total revenues
 
226,404
     
228,019
 
Expenses:
             
   Hotel departmental expenses
 
81,782
     
79,245
 
   Other property related costs
 
65,604
     
65,354
 
   Management and franchise fees
 
10,535
     
11,141
 
   Taxes, insurance and lease expense
 
24,680
     
24,662
 
   Corporate expenses
 
9,847
     
6,122
 
   Depreciation and amortization
 
37,598
     
36,651
 
   Impairment loss
 
21,060
     
-   
 
   Other expenses
 
561
     
696
 
Total operating expenses
 
251,667
     
223,871
 
               
Operating income (loss)
 
(25,263
)
   
4,148
 
   Interest expense, net
 
(36,240
)
   
(21,292
)
Loss before equity in loss from unconsolidated entities
 
(61,503
)
   
(17,144
)
   Equity in loss from unconsolidated entities
 
(1,474
)
   
(3,424
)
Loss from continuing operations
 
(62,977
)
   
(20,568
)
   Discontinued operations
 
35
     
(854
)
Net loss
 
(62,942
)
   
(21,422
)
Net loss attributable to noncontrolling interests in other partnerships
 
229
     
216
 
Net loss attributable to redeemable noncontrolling interests in FelCor LP
 
325
     
142
 
Net loss attributable to FelCor
 
(62,388
)
   
(21,064
)
   Preferred dividends
 
(9,678
)
   
(9,678
)
Net loss attributable to FelCor common stockholders
$
(72,066
)
 
$
(30,742
)
Basic and diluted per common share data:
             
   Loss from continuing operations
$
(1.14
)
 
$
(0.47
)
   Net loss
$
(1.14
)
 
$
(0.49
)
   Basic and diluted weighted average common shares outstanding
 
63,475
     
62,989
 









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

 
4
 


FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2010 and 2009
(unaudited, in thousands)


 
Three Months Ended March 31,
 
2010
 
2009
Net loss                                                                                                                            
$
(62,942
)
 
$
(21,422
)
Foreign currency translation adjustment                                                                                                                            
 
2,079
     
(1,709
)
Comprehensive loss
 
(60,863
)
   
(23,131
)
Comprehensive loss attributable to noncontrolling interests in other partnerships
 
229
     
216
 
Comprehensive loss attributable to redeemable noncontrolling interests in FelCor LP
 
316
     
150
 
Comprehensive loss attributable to FelCor                                                                                                                            
$
(60,318
)
 
$
(22,765
)





































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


 
5
 

FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2010 and 2009
(unaudited, in thousands)

 
Preferred Stock
 
Common Stock
     
Accumulated
         
Noncontrolling
       
 
Number of Shares
 
Amount
 
Number of Shares
 
 
 
Amount
 
Additional Paid-in Capital
 
Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Interests in Other Partnerships
 
 
Comprehensive Income (Loss)
 
 
Total Equity
Balance at December 31, 2008
12,948
   
$
478,774
   
69,413
 
$
694
 
$
2,045,482
   
$
15,347
   
$
(1,645,947
)
 
$
(99,245
)
 
$
23,784
           
$
818,889
 
Issuance of stock awards
-   
     
-   
   
-   
   
-   
   
(11,362
)
   
-   
     
-   
     
11,070
     
-   
             
(292
)
Amortization of stock awards
-   
     
-   
   
-   
   
-   
   
1,660
     
-   
     
-   
     
-   
     
-   
             
1,660
 
Forfeiture of stock awards
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
(49
)
   
-   
             
(49
)
Allocation to redeemable noncontrolling interests
-   
     
-   
   
-   
   
-   
   
(7
)
   
-   
     
-   
     
-   
     
-   
             
(7
)
Contribution from noncontrolling interests
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
-   
     
85
             
85
 
Distribution to noncontrolling interests
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
-   
     
(397
)
           
(397
)
Other
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(6
)
   
-   
     
-    
             
(6
)
Preferred dividends:
                                                                             
  $0.4875 per Series A preferred share
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(6,279
)
   
-   
     
-   
             
(6,279
)
  $0.50 per Series C depositary preferred share
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(3,399
)
   
-   
     
-   
             
(3,399
)
Comprehensive loss:
                                                                             
Foreign exchange translation
-   
     
-   
   
-   
   
-   
   
-   
     
(1,701
)
   
-   
     
-   
     
-   
   
$
(1,701
)
       
Net loss
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(21,064
)
   
-   
     
(216
)
   
(21,280
)
       
Comprehensive loss
                                                               
$
(22,981
)
   
(22,981
)
Balance at March 31, 2009
12,948
   
$
478,774
   
69,413
 
$
694
 
$
2,035,773
   
$
13,646
   
$
(1,676,695
)
 
$
(88,224
)
 
$
23,256
           
$
787,224
 
                                                                               
Balance at December 31, 2009
12,948
   
$
478,774
   
69,413
 
$
694
 
$
2,021,837
   
$
23,528
   
$
(1,792,822
)
 
$
(71,895
)
 
$
22,583
           
$
682,699
 
Issuance of stock awards
-   
     
-   
   
-   
   
-   
   
(229
)
   
-   
     
-   
     
297
     
-   
             
68
 
Amortization of stock awards
-   
     
-   
   
-   
   
-   
   
1,413
     
-   
     
-   
     
-   
     
-   
             
1,413
 
Forfeiture of stock awards
-   
     
-   
   
-   
   
-   
   
149
     
-   
     
-   
     
(631
)
   
-   
             
(482
)
Allocation to redeemable noncontrolling interests
-   
     
-   
   
-   
   
-   
   
(935
)
   
-   
     
-   
     
-   
     
-   
             
(935
)
Distribution to noncontrolling interests
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
-   
     
(602)
             
(602
)
Other
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(10
)
   
-   
     
-   
             
(10
)
Preferred dividends:
                                                                             
  $0.4875 per Series A preferred share
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(6,279
)
   
-   
     
-   
             
(6,279
)
  $0.50 per Series C depositary preferred share
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(3,399
)
   
-   
     
-   
             
(3,399
)
Comprehensive loss:
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
-   
     
-   
             
-   
 
Foreign exchange translation
-   
     
-   
   
-   
   
-   
   
-   
     
2,070
     
-   
     
-   
     
-   
   
$
2,070
         
Net loss
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(62,388
)
   
-   
     
(229
)
   
(62,617
)
       
Comprehensive loss
                                                               
$
(60,547
)
   
(60,547
)
Balance at March 31, 2010
12,948
   
$
478,774
   
69,413
 
$
694
 
$
2,022,235
   
$
25,598
   
$
(1,864,898
)
 
$
(72,229
)
 
$
21,752
           
$
611,926
 

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

 
6
 

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2010 and 2009
(unaudited, in thousands)

 
Three Months Ended
March 31,
 
2010
 
2009
Cash flows from operating activities:
             
  Net loss
$
(62,942
)
 
$
(21,422
)
  Adjustments to reconcile net loss to net cash provided by operating activities:
             
              Depreciation and amortization
 
37,598
     
37,385
 
              Amortization of deferred financing fees and debt discount
 
4,131
     
714
 
              Amortization of unearned officers’ and directors’ compensation
 
1,616
     
1,398
 
              Equity in loss from unconsolidated entities
 
1,474
     
3,424
 
              Distributions of income from unconsolidated entities
 
142
     
585
 
              Impairment loss
 
21,060
     
1,368
 
        Changes in assets and liabilities:
             
              Accounts receivable
 
(7,269
)
   
(1,776
)
              Restricted cash – operations
 
984
     
897
 
              Other assets
 
(1,879
)
   
1,242
 
              Accrued expenses and other liabilities
 
33,597
     
634
 
                        Net cash flow provided by operating activities
 
28,512
     
24,449
 
               
Cash flows from investing activities:
             
    Improvements and additions to hotels
 
(8,200
)
   
(25,274
)
    Additions to condominium project
 
(110
)
   
(48
)
    Change in restricted cash – investing
 
(1,219
)
   
(56
)
    Redemption of investment securities
 
-   
     
473
 
    Distributions from unconsolidated entities
 
559
     
2,200
 
    Contributions to unconsolidated entities
 
(300
)
   
-   
 
                        Net cash flow used in investing activities
 
(9,270
)
   
(22,705
)
               
Cash flows from financing activities:
             
    Proceeds from borrowings
 
81
     
198,317
 
    Repayment of borrowings
 
(4,783
)
   
(184,980
)
    Payment of deferred financing fees
 
(1,695
)
   
(1,982
)
    Distributions paid to noncontrolling interests
 
(602
)
   
(397
)
    Contributions from noncontrolling interests
 
-   
     
85
 
    Distributions paid to preferred stockholders
 
-   
     
(9,678
)
                        Net cash flow provided by (used in) financing activities
 
(6,999
)
   
1,365
 
               
Effect of exchange rate changes on cash
 
234
     
(340
)
Net change in cash and cash equivalents
 
12,477
     
2,769
 
Cash and cash equivalents at beginning of periods
 
263,531
     
50,187
 
Cash and cash equivalents at end of periods
$
276,008
   
$
52,956
 
               
Supplemental cash flow information – interest paid
$
14,166
   
$
13,105
 





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

 
7
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.           Organization

FelCor Lodging Trust Incorporated (NYSE:FCH), or FelCor, a Maryland corporation, operates as a real estate investment trust, or REIT.  We are the sole general partner of, and the owner of a greater than 99% partnership interest in, FelCor Lodging Limited Partnership, or FelCor LP, through which we held ownership interests in 84 hotels with approximately 24,000 rooms at March 31, 2010.

Of the 84 hotels in which we had an ownership interest at March 31, 2010, we owned a 100% interest in 64 hotels, a 90% or greater interest in entities owning four hotels, an 81% interest in an entity owning one hotel, a 60% interest in an entity owning one hotel and a 50% interest in entities owning 14 hotels.  We consolidate our real estate interests in the 70 hotels in which we held greater than 50% ownership interests, and we record the real estate interests of the 14 hotels in which we held 50% ownership interests using the equity method.

At March 31, 2010, 83 of the 84 hotels in which we had ownership interests, were leased to operating lessees, and one 50%-owned hotel was operated without a lease.  We held greater than 50% ownership interests and had direct or indirect controlling interests in the lessees of the 83 hotels that were leased to operating lessees.  Because we owned controlling interests in these lessees (including 13 of the 14 hotels in which we owned 50% of the real estate interests), we consolidated our lessee interests in these hotels (we refer to these 83 hotels as our Consolidated Hotels).  Of our Consolidated Hotels, we owned 50% of the real estate interests in each of 13 hotels (we accounted for the ownership in our real estate interests of these hotels by the equity method) and more than 50% of the real estate interests in each of the remaining 70 hotels.

At March 31, 2010, we had 65,722,628 shares and units outstanding, consisting of 65,427,668 shares of FelCor common stock and 294,960 FelCor LP limited partnership units not owned by FelCor.

The following table illustrates the distribution of our 83 Consolidated Hotels among our various brands at March 31, 2010:

Brand
 
Hotels
 
Rooms
 
Embassy Suites Hotels ®  
 
47
   
12,132
   
Holiday Inn ®  
 
15
   
5,154
   
Sheraton ® and Westin ®  
 
9
   
3,217
   
Doubletree ®  
 
7
   
1,471
   
Marriott ® and Renaissance ®  
 
3
   
1,321
   
Hilton ®  
 
2
   
559
   
Total
 
83
   
23,854
   

At March 31, 2010, our Consolidated Hotels were located in the United States (81 hotels in 23 states) and Canada (two hotels in Toronto, Ontario), with concentrations in California (15 hotels), Florida (12 hotels) and Texas (11 hotels).  Approximately 53% of our hotel room revenues were generated from hotels in these three states during the first three months of 2010.

At March 31, 2010, of our 83 Consolidated Hotels: (i) subsidiaries of Hilton Hotels Corporation, or Hilton, managed 54 hotels, (ii) subsidiaries of InterContinental Hotels Group, or IHG, managed 15 hotels, (iii) subsidiaries of Starwood Hotels & Resorts Worldwide Inc., or Starwood, managed nine hotels, (iv) subsidiaries of Marriott International Inc., or Marriott, managed three hotels, and (iv) independent management companies managed two hotels.



 
8
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.
Organization – (continued)

Our hotels managed by Marriott are accounted for on a fiscal year comprised of 52 or 53 weeks ending on the Friday closest to December 31.  Our quarterly period ending March 31, 2010 and 2009 includes the results of operations for our Marriott-managed hotels for the 12 week period ending March 26, 2010 and March 27, 2009, respectively.

The information in our consolidated financial statements for the three months ended March 31, 2010 and 2009 is unaudited.  Preparing financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  The accompanying financial statements for the three months ended March 31, 2010 and 2009, include adjustments based on management’s estimates (consisting of normal and recurring accruals), which we consider necessary for a fair presentation of the results for the periods.  The financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2009, included in our Annual Report on Form 10-K.  Operating results for the three months ended March 31, 2010 are not necessarily indicative of actual operating results for the entire year.

2.
Investment in Unconsolidated Entities

We owned 50% interests in joint ventures that owned 14 hotels at March 31, 2010 and 15 hotels at December 31, 2009.  We also own a 50% interest in entities that own real estate in Myrtle Beach, South Carolina and provide condominium management services.  We account for our investments in these unconsolidated entities under the equity method.  We do not have any majority-owned subsidiaries that are not consolidated in our financial statements.  We make adjustments to our equity in income from unconsolidated entities related to the difference between our basis in investment in unconsolidated entities compared to the historical basis of the assets recorded by the joint ventures.

The following table summarizes combined balance sheet information for our unconsolidated entities (in thousands):

 
March 31, 2010
 
December 31, 2009
 
Balance sheet information:
               
     Investment in hotels, net of accumulated depreciation
$
252,764
   
$
259,977
   
     Total assets
$
271,538
   
$
279,611
   
     Debt
$
211,271
   
$
214,963
   
     Total liabilities
$
215,136
   
$
220,389
   
     Equity
$
56,402
   
$
59,222
   

Our unconsolidated entities’ debt at March 31, 2010 and December 31, 2009 consisted entirely of non-recourse mortgage debt.

In April 2010, we contributed $23 million to an unconsolidated joint venture.  That contribution, along with a $23 million contribution from our joint venture partner, was used to pay-off the joint venture’s $46 million mortgage debt.



 
9
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2.
Investment in Unconsolidated Entities – (continued)

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

 
Three Months Ended
March 31,
 
2010
 
2009
Total revenues
$
12,739
   
$
14,738
 
Net loss
$
(3,136
)
 
$
(4,962
) (a)
               
Net loss attributable to FelCor
$
(1,568
)
 
$
(2,481
)
Impairment loss
 
-   
     
(476
) (b)
Gain on joint venture liquidation
 
559
(b)
   
-   
 
Depreciation of cost in excess of book value
 
(465
)
   
(467
)
Equity in loss from unconsolidated entities
$
(1,474
)
 
$
(3,424
)

 
  (a)
Net loss includes a $3.2 million impairment charge with regard to the sales of two hotels then-owned by one of our joint ventures.  The impairment was based on actual sales contracts (a Level 2 input).
 
  (b)
As a result of a 2009 impairment charge recorded by a joint venture, the net book value of the joint venture’s assets no longer supported the recovery of our investment.  Therefore, we recorded an additional 2009 impairment charge to reduce our investment in the joint venture to zero.  In March 2010, the joint venture sold its remaining hotel asset for $3.7 million, with respect to which we received $559,000 in net proceeds.  We have no obligation to provide this joint venture with future funding.

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

 
March 31, 2010
 
December 31, 2009
Hotel-related investments
$
18,192
   
$
18,969
 
Cost in excess of book value of hotel investments
 
51,965
     
52,429
 
Land and condominium investments
 
10,073
     
10,642
 
 
$
80,230
   
$
82,040
 

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

 
Three Months Ended
March 31,
 
2010
 
2009
Hotel investments
$
(905
)
 
$
(2,826
)
Other investments
 
(569
)
   
(598
)
Equity in loss from unconsolidated entities
$
(1,474
)
 
$
(3,424
)


 
10
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3.           Debt

Consolidated debt consisted of the following (in thousands):

 
Encumbered
         
March 31,
 
December 31,
 
Hotels
 
Interest Rate
 
Maturity Date
 
2010
 
2009
Mortgage debt (a)
6 hotels
   
8.73
%%
 
May 2010
 
$
111,758
 
$
112,703
Mortgage debt (b)(c)
5 hotels
   
8.70
   
May 2010
   
97,933
   
98,639
Mortgage debt (b)(d)
2 hotels
   
8.62
   
May 2010
   
31,740
   
31,740
Senior notes
none
   
8.50
(e)
 
June 2011
   
86,622
   
86,604
Mortgage debt (b)
2 hotels
   
6.15
   
June 2011 (f)
   
13,631
   
14,150
Mortgage debt
9 hotels
 
L +
3.50
(g)
 
August 2011 (h)
   
199,675
   
200,425
Mortgage debt
12 hotels
 
L +
0.93
(i)
 
November 2011 (j)
   
250,000
   
250,000
Mortgage debt (b)
2 hotels
 
L +
1.55
(k)
 
May 2012 (l)
   
176,627
   
176,555
Mortgage debt
1 hotel
   
8.77
   
May 2013 (m)
   
27,770
   
27,829
Mortgage debt
7 hotels
   
9.02
   
April 2014
   
116,407
   
117,422
Mortgage debt (b)
5 hotels
   
6.66
   
June - August 2014
   
70,484
   
70,917
Senior secured notes (n)
14 hotels
   
10.00
   
October 2014
   
574,913
   
572,500
Mortgage debt
1 hotel
   
5.81
   
July 2016
   
11,636
   
11,741
Capital lease and other
1 hotel   
   
9.09
   
various
   
1,919
   
2,089
  Total
67 hotels
             
$
1,771,115
 
$
1,773,314

(a)
This loan was refinanced in May 2010, as a consequence of which two hotels were unencumbered.
(b)
The hotels securing this debt are subject to separate loan agreements and are not cross-collateralized.
(c)
These loans were refinanced in May 2010.
(d)
We have been unable to negotiate an acceptable debt modification or reduction that made sense for our stockholders, with regard to these loans.  Therefore, these two hotels will be transferred to the lenders in full satisfaction of the debt.
(e)
As a result of a rating down-grade in February 2009, the interest rate on our 8½% senior notes increased to 9%.
(f)
In February 2010, the maturity date on these loans was extended to June 2011.
(g)
LIBOR for this loan is subject to a 2% floor.
(h)
This loan can be extended for as many as two years, subject to satisfying certain conditions.
(i)
We have purchased an interest rate cap that caps LIBOR at 7.8% and expires in November 2010 for this notional amount.
(j)
The maturity date assumes that we will exercise the remaining one-year extension option that is exercisable, at our sole discretion, and would extend the current November 2010 maturity to 2011.
(k)
We have purchased interest rate caps that cap LIBOR at 6.5% and expire in May 2010 for aggregate notional amounts of $177 million.
(l)
We have exercised the first of three successive one-year extension options that extend, at our sole discretion, maturity to 2012.
(m)
In February 2010, the maturity date on this loan was extended to May 2013.
(n)
These notes have $636 million in aggregate principal outstanding and were sold at a discount that provides an effective yield of 12.875% before transaction costs.

We reported $36.2 million and $21.3 million of interest expense for the three months ended March 31, 2010 and 2009, respectively, which is net of: (i) interest income of $105,000 and $177,000, respectively, and (ii) capitalized interest of $145,000 and $232,000, respectively.


 
11
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

Hotel operating revenue from continuing operations was comprised of the following (in thousands):

 
Three Months Ended
March 31,
 
 
2010
 
2009
 
Room revenue
$
177,260
   
$
178,179
   
Food and beverage revenue
 
35,496
     
35,851
   
Other operating departments
 
13,283
     
13,703
   
     Total hotel operating revenue
$
226,039
   
$
227,733
   

Nearly 100% of our revenue in all periods presented was comprised of hotel operating revenue, which includes room revenue, food and beverage revenue, and revenue from other hotel operating departments (such as telephones, parking and business centers).  These revenues are recorded net of any sales or occupancy taxes collected from our guests. All rebates or discounts are recorded, when allowed, as a reduction in revenue, and there are no material contingent obligations with respect to rebates or discounts offered by us.  All revenues are recorded on an accrual basis, as earned.  Appropriate allowances are made for doubtful accounts, which are recorded as a bad debt expense.  The remainder of our revenue was derived from other sources.

Hotel departmental expenses from continuing operations were comprised of the following (in thousands):

 
Three Months Ended March 31,
 
2010
 
2009
 
Amount
 
% of Total Hotel
Operating Revenue
 
Amount
 
% of Total Hotel
Operating Revenue
Room
$
47,787
   
21.1
%
 
$
45,222
   
19.9
%
Food and beverage
 
27,909
   
12.4
     
27,887
   
12.2
 
Other operating departments
 
6,086
   
2.7
     
6,136
   
2.7
 
Total hotel departmental expenses
$
81,782
   
36.2
%
 
$
79,245
   
34.8
%

Other property operating costs from continuing operations were comprised of the following (in thousands):

 
Three Months Ended March 31,
 
2010
 
2009
 
 
 
 
Amount
 
% of Total Hotel
Operating Revenue
 
 
 
 
Amount
 
% of Total Hotel
Operating Revenue
Hotel general and administrative expense
$
21,107
   
9.3
%
 
$
20,894
   
9.2
%
Marketing
 
19,562
   
8.7
     
19,525
   
8.6
 
Repair and maintenance
 
12,949
   
5.7
     
12,560
   
5.5
 
Utilities
 
11,986
   
5.3
     
12,375
   
5.4
 
Total other property operating costs
$
65,604
   
29.0
%
 
$
65,354
   
28.7
%

Hotel departmental expenses and other property operating costs include hotel employee compensation and benefit expenses of $73.4 million and $72.1 million for the three months ended March 31, 2010 and 2009, respectively.

 
12
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5.           Taxes, Insurance and Lease Expense

Taxes, insurance and lease expense from continuing operations were comprised of the following (in thousands):

 
Three Months Ended
March 31,
 
2010
 
2009
Operating lease expense (a)  
$
11,648
   
$
12,247
 
Real estate and other taxes
 
9,463
     
9,018
 
Property insurance, general liability insurance
 
3,569
     
3,397
 
     Total taxes, insurance and lease expense
$
24,680
   
$
24,662
 

 
(a)
Includes hotel lease expense of $9.5 million and $10.1 million for the three months ended March 31, 2010 and 2009, respectively, associated with hotels owned by unconsolidated entities and leased to our consolidated lessees.  Lease expense includes $3.0 million and $4.4 million in percentage rent for hotel leases and ground leases for the three months ended March 31, 2010 and 2009, respectively.

6.           Impairment

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

During the quarter ended March 31, 2010, we determined that we would be unable to negotiate satisfactory modifications or reductions on loans secured by two hotels that make sense for our stockholders.  Therefore, we recorded a $21.1 million impairment charge in connection with our decision to transfer these hotels to the lenders in full satisfaction of the debt secured by that hotel.  These hotels’ cash flows did not cover debt service, and we stopped funding shortfalls in December 2009.  We consider these hotels as part of continuing operations until the hotels are transferred, and the debt satisfied, whereupon we expect to record gains on extinguishment of debt aggregating approximately $12 million.  We estimated the hotels’ fair value by using estimated future cash flows, terminal values based on the projected cash flows and capitalization rates in the range of what is reported in industry publications for operationally similar assets and other available market information.  The cash flows used for determining the fair values were discounted using market based discounts generally used for operationally and geographically similar assets.  The inputs used to determine the fair values of these hotels are classified as Level 3 under the authoritative guidance for fair value measurements.

During the quarter ended March 31, 2009, we recorded a $1.4 million impairment charge related to one of our sale candidate hotels.  This valuation was based on a third-party offer to purchase (a Level 2 input) at a price less than our previously estimated fair value.

We did not have any hotels held for sale at March 31, 2010.  We consider a sale to be probable within the next twelve months (for purposes of determining whether a hotel is held for sale) when a buyer completes its due diligence review of the asset, we have an executed contract for sale, and we have received a substantial non-refundable deposit.

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

 
13
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.           Discontinued Operations

Discontinued operations include results of operations of two hotels sold in December 2009.  The following table summarizes the condensed financial information for those hotels (in thousands):

 
Three Months Ended March 31,
 
2010
 
2009
Hotel operating revenue
$
35
   
$
6,269
 
Operating expenses (a)  
 
-   
     
(7,123
)
Income (loss) from discontinued operations
$
35
   
$
(854
)

 
(a)
  Includes impairment charges of $1.4 million during the three months ended March 31, 2009.

8.           Loss Per Share

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

 
Three Months Ended
March 31,
 
2010
 
2009
Numerator:
             
   Net loss attributable to FelCor                                                                                                         
$
(62,388
)
 
$
(21,064
)
   Discontinued operations attributable to FelCor                                                                                                         
 
(35
)
   
850
 
   Loss from continuing operations attributable to FelCor
 
(62,423
)
   
(20,214
)
      Less: Preferred dividends                                                                                                         
 
(9,678
)
   
(9,678
)
   Loss from continuing operations attributable to FelCor common stockholders
 
(72,101
)
   
(29,892
)
   Discontinued operations attributable to FelCor                                                                                                         
 
35
     
(850
)
Numerator for basic and diluted loss attributable to FelCor common stockholders
$
(72,066
)
 
$
(30,742
)
Denominator:
             
   Denominator for basic and diluted loss per share                                                                                                         
 
63,475
     
62,989
 
Basic and diluted loss per share data:
             
   Loss from continuing operations                                                                                                         
$
(1.14
)
 
$
(0.47
)
   Discontinued operations                                                                                                         
$
-   
   
$
(0.01
)
   Net loss                                                                                                         
$
(1.14
)
 
$
(0.49
)

Securities that could potentially dilute earnings per share in the future that were not included in the computation of diluted loss per share, because they would have been antidilutive for the periods presented, are as follows (in thousands):

 
Three Months Ended
 
 
March 31,
 
 
2010
 
2009
 
Series A convertible preferred stock
9,985
   
9,985
   

Series A preferred dividends that would be excluded from net loss attributable to FelCor common stockholders, if these Series A preferred shares were dilutive, were $6.3 million for the three months ended March 31, 2010 and 2009.

 
14
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



9.            Suspension of Dividends

We suspended payment of our common dividend in December 2008 and our preferred dividend in March 2009 (we paid approximately $10 million of preferred dividends in January 2009).  Our ability to pay cash dividends is limited by the indenture governing our senior secured notes whenever we fail to meet a defined financial ratio threshold, as in the current circumstances; consequently, we do not expect to pay any common or preferred cash dividends during 2010.  Dividends are not paid unless declared by our Board of Directors; however, any unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to reinstatement of our common dividend.  Our Board of Directors will determine whether to declare future dividends based upon various factors, including operating results, economic conditions, other operating trends, our financial condition including the outcome of refinancing debt maturities and capital requirements, as well as minimum REIT distribution requirements.  We had accrued $47.3 million and $37.6 million in dividends payable on our Series A and Series C preferred stock at March 31, 2010 and December 31, 2009, respectively.

10.           Noncontrolling Interests

We record the noncontrolling interests of other consolidated partnerships as a separate component of equity in the condensed consolidated balance sheets.  Additionally, the condensed consolidated statements of operations separately present earnings and other comprehensive income attributable to controlling and non-controlling interests.  We adjust the noncontrolling interests of FelCor LP each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption value.  The historical cost of the noncontrolling interests of FelCor LP is based on the proportional relationship between the carrying value of equity associated with our common stockholders relative to that of the unitholders of FelCor LP.  Net income (loss) is allocated to the noncontrolling partners of FelCor LP based on their weighted average ownership percentage during the period.  At March 31, 2010, approximately $1.7 million of cash or FelCor common stock, at our option, would be paid to the noncontrolling interests of FelCor LP if the partnership were terminated.  This balance is calculated based on the 294,960 partnership units held by third parties, valued at the March 31, 2010 closing price for our common stock ($5.70/share), which we have assumed would be equal to the value provided to outside partners upon liquidation of FelCor LP on that date.

The changes in redeemable noncontrolling interests for the three months ended March 31, 2010 and 2009 are shown below (in thousands):

 
Three Months Ended
March 31,
 
 
2010
 
2009
 
Balance at beginning of period
$
1,062
   
$
545
   
Redemption value allocation
 
935
     
7
   
Comprehensive income (loss):
               
Foreign exchange translation
 
9
     
(8
)
 
Net loss
 
(325
)
   
(142
)
 
Balance at end of period
$
1,681
   
$
402
   


 
15
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



11.           Fair Value of Financial Instruments

Disclosures about fair value of our financial instruments are based on pertinent information available to management as of March 31, 2010.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize on disposition of the financial instruments.  The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Our estimates of 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) our publicly-traded debt is based on observable market data; and (iii) our debt that is not traded publicly is based on estimated effective borrowing rates for debt with similar terms, loan to estimated fair value and remaining maturities (the estimated fair value of all our debt was $1.8 billion at March 31, 2010).

12.           Recently Adopted Accounting Standards

The FASB recently amended its guidance surrounding a company’s analysis to determine whether any of its variable interests constitute controlling financial interests in a variable interest entity.  This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance.  The new guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  The guidance was effective for us beginning January 1, 2010, and accordingly, we have reevaluated our interests in our entities to determine that the entities are reflected properly in the financial statements as investments or consolidated entities.  Based on our evaluation, we have concluded that we do not have any variable interest entities that are impacted by this new accounting standard.

13.           Subsequent Events

In May 2010, we entered into a new $212 million loan, secured by nine hotels, that matures in 2015.  The new loan bears interest at LIBOR (subject to a 3.0% floor) plus 5.1%.  The proceeds were used to repay $210 million in loans that were secured by 11 hotels and were scheduled to mature in May.  With this financing, we resolved all of our remaining 2010 debt maturities on terms that are significantly more favorable than the refinanced debt, and we were able to unencumber two previously mortgaged hotels.




 
16
 

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

General

Hotel occupancy trends have reversed and demand has begun to improve in 2010, after reaching historic lows in 2009.  Despite improving occupancy, we expect continued pressure on average daily room rates, or ADR, until demand increases significantly.  While we have experienced an increase in demand in recent periods, consumers and business travelers continue to take advantage of the historically high number of available rooms and a near-term shift in pricing power, as well as correspondingly lower ADR.

In the first quarter of 2010, revenue per available room, or RevPAR, at our hotels decreased 0.5%, compared to the first quarter of 2009.  Occupancy at our hotels increased by 7.9%, compared to the prior year, but this was offset by decreases in ADR of 7.8%.  This combination of increased occupancy and lower ADR results in additional pressure on hotel margins because our hotels have more guests, who are paying less.  We continue to work closely with our brand-managers on extensive cost containment initiatives to minimize margin erosion at our hotels.  Many of our hotels have been able to reduce labor costs permanently, and all of our hotels have trimmed non-critical functions.  To this end, while overall costs have increased because of increased occupancy, our hotels have been able to reduce hotel departmental expenses per occupied room by more than 4%, compared to the same quarter last year.

In 2009, we gained more than 1% market share at our hotels, and through the first quarter of 2010, our hotels have been able to slightly improve their overall market position.

In May 2010, we obtained a new $212 million loan, secured by nine hotels, that matures in 2015.  The new loan bears interest at LIBOR (subject to a 3.0% floor) plus 5.1%.  The proceeds were used to repay $210 million in loans that were secured by 11 hotels and were scheduled to mature in May.  With this financing, we resolved all of our remaining 2010 debt maturities on terms that are significantly more favorable than the refinanced debt, and we were able to unencumber two previously mortgaged hotels.  Two remaining loans (totaling $32 million) mature in May 2010.   The cash flows for the hotels that secure those loans do not cover debt service, and we stopped funding the shortfalls in December 2009.  We have been unable to negotiate an acceptable debt modification or reduction that made sense for our stockholders, with regard to these loans.  Therefore, these two hotels will be transferred to the lenders in full satisfaction of the debt.

We suspended our common dividend in December 2008 and our preferred dividend in March 2009.  Although dividends are not paid unless declared by our Board of Directors, unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to payment of any common dividends.  Our senior notes currently restrict us from paying any dividends so long as we remain below certain financial ratio thresholds, except to the extent necessary to satisfy the REIT distribution requirement.  Our Board of Directors will determine whether to declare future dividends based upon various factors, including operating results, economic conditions, other operating trends, our financial condition and capital requirements, as well as minimum REIT distribution requirements.


 
17
 


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

 
Three Months Ended
March 31,
 
 
% Change
 
2010
 
2009
 
2010-2009
RevPAR
$
82.87
   
$
83.30
     
(0.5
)
%
Hotel EBITDA (a)  
$
51,043
   
$
55,457
     
(8.0
)
%
Hotel EBITDA margin (a)  
 
22.6
%
   
24.4
%
   
(7.4
)
%
Net loss attributable to FelCor (b)  
$
(62,388
)
 
$
(21,064
)
   
(196.2
)
%
____________

 
(a)
Hotel EBITDA and Hotel EBITDA margin are non-GAAP financial measures.  A discussion of the use, limitations and importance of these non-GAAP financial measures and detailed reconciliations to the most comparable GAAP measure are found elsewhere in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the section “Non-GAAP Financial Measures.”

 
(b)
The following amounts are included in net loss attributable to FelCor (in thousands):

   
Three Months Ended
 March 31,
   
2010
 
2009
 
Impairment loss                                                                                           
$
(21,060
)
 
$
-   
 
 
Gain on sale of unconsolidated subsidiary                                                                                           
 
559
     
-   
 


Results of Operations

Comparison of the Three Months Ended March 31, 2010 and 2009

For the three months ended March 31, 2010, we recorded a net loss attributable to common stockholders of $72.1 million, or $1.14 per share, compared to a net loss attributable to common stockholders of $30.7 million, or $0.49 per share, for the same period in 2009.  The increase in the current year loss compared to the same period in 2009 is attributable primarily to a $14.9 million increase in net interest expense, a $21.1 million impairment charge and reduced margins (which reflects increasing occupancy in the face of decreasing ADR).

In the first quarter of 2010:

 
·
Total revenue was $226.4 million, a 0.7% decrease compared to the same period in 2009.  The decrease in revenue is attributed principally to a 0.5% decrease in RevPAR, which reflects a 7.9% increase in occupancy and a 7.8% decrease in ADR.

 
·
Hotel departmental expenses increased $2.5 million compared to the same period in 2009.  As a percentage of total revenue, hotel departmental expenses increased from 34.8% to 36.1% compared to the same period in 2009.  This increase in expense compared to revenue reflects costs associated with the increased occupancy in the face of decreasing ADR.

 
·
Other property related costs increased $250,000 and increased as a percentage of revenue from 28.7% to 29.0% compared to the same period in 2009.

 
·
Management and franchise fees decreased $606,000 compared to the same period in 2009, due to lower revenues. As a percent of total revenue, management and franchise fees remained essentially unchanged.

 
18
 



 
·
Taxes, insurance and lease expense were $24.7 million, consistent with the same period in 2009.  This reflects a $599,000 decrease in operating lease expense (computed as a percentage of hotel revenues in excess of base rent) offset by increases in real estate and other taxes, as well as property and general liability insurance.  Taxes, insurance, and lease expense remained essentially unchanged, relative to total revenue.

 
·
Corporate expenses increased $3.7 million and increased as a percentage of total revenue from 2.7% to 4.3%.  This increase primarily reflects a temporary change in how our long term compensation program is implemented.  Because of the impact of the recession on the trading price of our common stock, our Board of Directors determined that issuing restricted stock at exceptionally low trading prices would be unduly dilutive to our stockholders.  In lieu of issuing restricted stock, restricted cash, with which employees could purchase stock, was granted.  To the extent those grants were subject to payroll tax withholding, amounts withheld were recognized as an expense in the first quarter of 2010, rather than expensed over the normal three-year vesting period.

 
·
Depreciation and amortization expense increased $947,000, compared to the same period in 2009, which is attributable to increased depreciation related to hotel capital expenditures completed in 2009.

 
·
Impairment charge.   During the quarter ended March 31, 2010, we determined that we would be unable to negotiate satisfactory modifications or reductions on loans secured by two hotels that make sense for our stockholders.  Therefore, we recorded a $21.1 million impairment charge in connection with our decision to transfer these hotels to the lenders in full satisfaction of the debt secured by that hotel.  These hotels’ cash flows did not cover debt service, and we stopped funding shortfalls in December 2009.  We consider these hotels as part of continuing operations until the hotels are transferred, and the debt satisfied, whereupon we expect to record gains on extinguishment of debt aggregating approximately $12 million.

 
·
Net interest expense increased $14.9 million compared to the same period in 2009.  This increase is primarily attributable to our $636 million senior secured notes issued in October 2009.

 
·
Equity in loss of unconsolidated entities decreased $2.0 million compared to the same period in 2009 because one of our unconsolidated joint ventures recorded a $2.1 million impairment in the prior year.

 
·
Discontinued operations relates to two hotels sold in December 2009.  We recorded a $1.4 million impairment charge in the first quarter of 2009 with respect to one of those hotels.


Non-GAAP Financial Measures

We refer in this report to certain “non-GAAP financial measures.”  These measures, including Hotel EBITDA and Hotel EBITDA margin, are measures of our financial performance that are not calculated and presented in accordance with GAAP.  The following tables reconcile these non-GAAP measures to the most comparable GAAP financial measure.  Immediately following the reconciliations, we include a discussion of why we believe these measures are useful supplemental measures of our performance and the limitations of such measures.


 
19
 


The following tables detail our computation of Hotel EBITDA, Hotel EBITDA margin, hotel operating expenses and the reconciliation of hotel operating expenses to total operating expenses with respect to our Consolidated Hotels at the dates presented.

Hotel EBITDA and Hotel EBITDA Margin
(dollars in thousands)

 
Three Months Ended
March 31,
 
2010
 
2009
Total revenues
$
226,404
   
$
228,019
 
Other revenue
 
(365
)
   
(286
)
Hotel operating revenue
 
226,039
     
227,733
 
Hotel operating expenses
 
(174,996
)
   
(172,276
)
Hotel EBITDA
$
51,043
   
$
55,457
 
Hotel EBITDA margin (a)  
 
22.6%
     
24.4%
 

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

Reconciliation of Total Operating Expenses to Hotel Operating Expenses
(dollars in thousands)

 
Three Months Ended
March 31 2010
 
2010
 
2009
Total operating expenses
$
251,667
   
$
223,871
 
   Unconsolidated taxes, insurance and lease expense
 
1,888
     
1,934
 
   Consolidated hotel lease expense
 
(9,493
)
   
(10,060
)
   Corporate expenses
 
(9,847
)
   
(6,122
)
   Depreciation and amortization
 
(37,598
)
   
(36,651
)
   Impairment loss
 
(21,060
)
   
-   
 
   Other expenses
 
(561
)
   
(696
)
Hotel operating expenses
$
174,996
   
$
172,276
 

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

Reconciliation of Net Loss to Hotel EBITDA
(in thousands)

 
Three Months Ended
March 31,
 
2010
 
2009
Net loss
$
(62,942
)
 
$
(21,422
)
   Discontinued operations
 
(35
)
   
854
 
   Equity in loss (income) from unconsolidated entities
 
1,474
     
3,424
 
   Consolidated hotel lease expense
 
9,493
     
10,060
 
   Unconsolidated taxes, insurance and lease expense
 
(1,888
)
   
(1,934
)
   Interest expense, net
 
36,240
     
21,292
 
   Corporate expenses
 
9,847
     
6,122
 
   Depreciation and amortization
 
37,598
     
36,651
 
   Impairment loss
 
21,060
     
-   
 
   Other expenses
 
561
     
696
 
   Other revenue
 
(365
)
   
(286
)
Hotel EBITDA
$
51,043
   
$
55,457
 

 
20
 



Reconciliation of Ratio of Operating Income (Loss) to Total Revenues to Hotel EBITDA Margin

 
Three Months Ended March 31,
 
2010
 
2009
Ratio of operating income (loss) to total revenues
 
(11.2
)%
   
1.8
%
   Other revenue
 
(0.2
)
   
(0.1
)
   Unconsolidated taxes, insurance and lease expense
 
(0.8
)
   
(0.8
)
   Consolidated hotel lease expense
 
4.2
     
4.4
 
   Other expenses
 
0.3
     
0.3
 
   Corporate expenses
 
4.4
     
2.7
 
   Depreciation and amortization
 
16.6
     
16.1
 
   Impairment loss
 
9.3
     
-   
 
Hotel EBITDA margin
 
22.6
%
   
24.4
%

Hotel EBITDA and Hotel EBITDA Margin

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

Limitations of Non-GAAP Measures

Our management and Board of Directors use Hotel EBITDA and Hotel EBITDA margin to evaluate the performance of our hotels and to facilitate comparisons between us and other hotel owners, in evaluating hotel-level performance and the operating efficiency of our hotel managers.

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

 
21
 



These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP.  They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP.  Hotel EBITDA and Hotel EBITDA margin reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure.  Management strongly encourages investors to review our financial information in its entirety and not to rely on a single financial measure.

Pro Rata Share of Rooms Owned

The following table sets forth, at March 31, 2010, the pro rata share of hotel rooms owned by us after giving consideration to the portion of rooms owned by our partners in our consolidated and unconsolidated joint ventures:

 
 
Hotels
 
Room Count at
March 31, 2010
 
Consolidated Hotels
83
     
23,854
   
Unconsolidated hotel operations
1
     
171
   
Total hotels
84
     
24,025
   
               
   50% joint ventures
14
     
(1,795
)
 
   60% joint venture
1
     
(214
)
 
   81% joint venture
1
     
(42
)
 
   90% joint ventures
3
     
(68
)
 
   97% joint venture
1
     
(10
)
 
Total rooms owned by joint venture partners
       
(2,129
)
 
Pro rata share of rooms owned
       
21,896
   


 
22
 

Hotel Portfolio Composition

The following table illustrates the distribution of our 83 Consolidated Hotels by brand, market and location at March 31, 2010.

Brand
   
 
Hotels
 
 
Rooms
 
% of
Total Rooms
 
% of 2009
Hotel EBITDA (a)
 
Embassy Suites Hotels
 
47
   
12,132
   
51
   
60
   
Holiday Inn
 
15
   
5,154
   
22
   
18
   
Sheraton and Westin
 
9
   
3,217
   
13
   
9
   
Doubletree
 
7
   
1,471
   
6
   
7
   
Renaissance and Marriott
 
3
   
1,321
   
6
   
3
   
Hilton
 
2
   
559
   
2
   
3
   
                           
Market
                           
South Florida
 
5
   
1,439
   
6
   
8
   
Los Angeles area
 
4
   
899
   
4
   
6
   
Atlanta
 
5
   
1,462
   
6
   
6
   
Orlando
 
4
   
1,038
   
4
   
4
   
Philadelphia
 
2
   
729
   
3
   
4
   
Minneapolis
 
3
   
736
   
3
   
4
   
San Francisco area
 
6
   
2,138
   
9
   
4
   
Dallas
 
4
   
1,333
   
6
   
4
   
Central California Coast
 
2
   
408
   
2
   
4
   
San Antonio
 
3
   
874
   
4
   
3
   
Myrtle Beach
 
2
   
640
   
3
   
3
   
Boston
 
2
   
532
   
2
   
3
   
San Diego
 
1
   
600
   
3
   
3
   
Northern New Jersey
 
3
   
756
   
3
   
3
   
Other
 
37
   
10,270
   
42
   
41
   
                           
Location
                           
Suburban
 
35
   
8,781
   
37
   
32
   
Urban
 
20
   
6,358
   
27
   
27
   
Airport
 
18
   
5,788
   
24
   
24
   
Resort
 
10
   
2,927
   
12
   
17
   

(a)
Hotel EBITDA is a non-GAAP financial measure.  A detailed reconciliation and further discussion of Hotel EBITDA is contained in the “Non-GAAP Financial Measures” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this Quarterly Report on Form 10-Q.


 
23
 

Hotel Operating Statistics

The following tables set forth occupancy, ADR and RevPAR for three months ended March 31, 2010 and 2009, and the percentage changes thereto between the periods presented, for our Consolidated Hotels.

Operating Statistics by Brand

 
Occupancy (%)
 
Three Months Ended March 31,
   
 
2010
 
2009
 
%Variance
Embassy Suites Hotels
70.2
 
66.5
 
5.6
 
Holiday Inn
67.6
 
62.5
 
8.1
 
Sheraton and Westin
63.4
 
55.0
 
15.2
 
Doubletree
70.0
 
63.6
 
10.1
 
Renaissance and Marriott
65.3
 
56.3
 
16.0
 
Hilton
46.2
 
47.3
 
(2.3
)
             
Total hotels
67.9
 
62.9
 
7.9
 
             
             
             
 
ADR ($)
 
Three Months Ended March 31,
   
 
2010
 
2009
 
%Variance
Embassy Suites Hotels
128.79
 
138.64
 
(7.1
)
Holiday Inn
104.30
 
110.45
 
(5.6
)
Sheraton and Westin
104.88
 
118.11
 
(11.2
)
Doubletree
118.75
 
139.17
 
(14.7
)
Renaissance and Marriott
183.84
 
201.68
 
(8.8
)
Hilton
95.75
 
97.59
 
(1.9
)
             
Total hotels
122.06
 
132.37
 
(7.8
)
             
             
             
 
RevPAR ($)
 
Three Months Ended March 31,
   
 
2010
 
2009
 
%Variance
Embassy Suites Hotels
90.43
 
92.22
 
(1.9
)
Holiday Inn
70.52
 
69.06
 
2.1
 
Sheraton and Westin
66.51
 
65.01
 
2.3
 
Doubletree
83.12
 
88.47
 
(6.0
)
Renaissance and Marriott
120.08
 
113.55
 
5.8
 
Hilton
44.21
 
46.13
 
(4.2
)
             
Total hotels
82.87
 
83.30
 
(0.5
)



 
24
 

Operating Statistics for Our Top Markets

 
Occupancy (%)
 
Three Months Ended March 31,
   
 
2010
 
2009
 
% Variance
South Florida
85.1
   
79.3
   
7.4
 
Los Angeles area
70.5
   
68.6
   
2.7
 
Atlanta
75.2
   
65.6
   
14.7
 
Orlando
80.9
   
75.1
   
7.7
 
Philadelphia
60.4
   
49.4
   
22.3
 
Minneapolis
67.0
   
60.9
   
10.1
 
San Francisco area
65.3
   
55.9
   
16.8
 
Dallas
65.4
   
59.4
   
10.0
 
Central California Coast
69.7
   
76.6
   
(8.9
)
San Antonio
74.7
   
69.6
   
7.4
 
Myrtle Beach
44.1
   
48.2
   
(8.5
)
Boston
77.1
   
70.6
   
9.2
 
San Diego
71.5
   
64.0
   
11.7
 
Northern New Jersey
59.9
   
59.6
   
0.5
 
 
ADR ($)
 
Three Months Ended March 31,
   
 
2010
 
2009
 
% Variance
South Florida
163.64
   
170.57
   
(4.1
)
Los Angeles area
132.32
   
138.48
   
(4.4
)
Atlanta
105.48
   
111.22
   
(5.2
)
Orlando
114.47
   
131.55
   
(13.0
)
Philadelphia
111.42
   
129.62
   
(14.0
)
Minneapolis
125.73
   
131.14
   
(4.1
)
San Francisco area
122.73
   
120.64
   
1.7
 
Dallas
112.99
   
126.94
   
(11.0
)
Central California Coast
138.16
   
136.52
   
1.2
 
San Antonio
98.33
   
105.65
   
(6.9
)
Myrtle Beach
96.37
   
98.43
   
(2.1
)
Boston
120.19
   
126.00
   
(4.6
)
San Diego
115.09
   
132.31
   
(13.0
)
Northern New Jersey
132.26
   
151.68
   
(12.8
)
 
RevPAR ($)
 
Three Months Ended March 31,
   
 
2010
 
2009
 
% Variance
South Florida
139.33
   
135.25
   
3.0
 
Los Angeles area
93.23
   
95.04
   
(1.9
)
Atlanta
79.36
   
72.99
   
8.7
 
Orlando
92.65
   
98.84
   
(6.3
)
Philadelphia
67.34
   
64.05
   
5.1
 
Minneapolis
84.26
   
79.80
   
5.6
 
San Francisco area
80.11
   
67.43
   
18.8
 
Dallas
73.89
   
75.44
   
(2.1
)
Central California Coast
96.33
   
104.53
   
(7.8
)
San Antonio
73.46
   
73.48
   
-   
 
Myrtle Beach
42.53
   
47.49
   
(10.4
)
Boston
92.67
   
88.95
   
4.2
 
San Diego
82.33
   
84.72
 
.8
(2.8
)
Northern New Jersey
79.22
   
90.37
   
(12.3
)


 
25
 

Hotel Portfolio

The following table sets forth certain descriptive information regarding the 84 hotels in which we held ownership interest at March 31, 2010.

   
Brand
   
State
   
Rooms
 
% Owned (a)
 
Consolidated Hotels
         
Birmingham
Embassy Suites Hotel
AL
  242
 
Phoenix – Biltmore
Embassy Suites Hotel
AZ
  232
 
Phoenix – Crescent
Sheraton
AZ
  342
 
Phoenix – Tempe
Embassy Suites Hotel
AZ
  224
 
Anaheim – North
Embassy Suites Hotel
CA
  222
 
Dana Point – Doheny Beach
Doubletree Guest Suites
CA
  196
 
Indian Wells – Esmeralda Resort & Spa
Renaissance Resort
CA
560
 
Los Angeles – International Airport/South
Embassy Suites Hotel
CA
  349
97%
Milpitas – Silicon Valley
Embassy Suites Hotel
CA
  266
 
Napa Valley
Embassy Suites Hotel
CA
  205
 
Oxnard – Mandalay Beach – Hotel & Resort
Embassy Suites Hotel
CA
  248
 
San Diego – On the Bay
Holiday Inn
CA
  600
 
San Francisco – Airport/Burlingame
Embassy Suites Hotel
CA
  340
 
San Francisco – Airport/South San Francisco
Embassy Suites Hotel
CA
  312
 
San Francisco – Fisherman’s Wharf
Holiday Inn
CA
  585
 
San Francisco – Union Square
Marriott
CA
  400
 
San Rafael – Marin County
Embassy Suites Hotel
CA
  235
50%
Santa Barbara – Goleta
Holiday Inn
CA
  160
 
Santa Monica Beach – at the Pier
Holiday Inn
CA
132
 
Wilmington
Doubletree
DE
  244
90%
Boca Raton
Embassy Suites Hotel
FL
  263
 
Deerfield Beach – Resort & Spa
Embassy Suites Hotel
FL
  244
 
Ft. Lauderdale – 17th Street
Embassy Suites Hotel
FL
  361
 
Ft. Lauderdale – Cypress Creek
Sheraton Suites
FL
  253
 
Jacksonville – Baymeadows
Embassy Suites Hotel
FL
  277
 
Miami – International Airport
Embassy Suites Hotel
FL
  318
 
Orlando – International Airport
Holiday Inn
FL
  288
 
Orlando – International Drive South/Convention
Embassy Suites Hotel
FL
  244
 
Orlando– North
Embassy Suites Hotel
FL
  277
 
Orlando – Walt Disney World Resort
Doubletree Guest Suites
FL
  229
 
St. Petersburg – Vinoy Resort & Golf Club
Renaissance Resort
FL
361
 
Tampa – Tampa Bay
Doubletree Guest Suites
FL
  203
 
Atlanta – Airport
Embassy Suites Hotel
GA
  232
 
Atlanta – Buckhead
Embassy Suites Hotel
GA
  316
 
Atlanta – Galleria
Sheraton Suites
GA
  278
 
Atlanta – Gateway – Atlanta Airport
Sheraton
GA
  395
 
Atlanta – Perimeter Center
Embassy Suites Hotel
GA
  241
50%
Chicago – Lombard/Oak Brook
Embassy Suites Hotel
IL
262
50%
Chicago – North Shore/Deerfield
Embassy Suites Hotel
IL
237
 
Chicago – Gateway – O’Hare
Sheraton Suites
IL
296
 
Indianapolis – North
Embassy Suites Hotel
IN
221
81%
Kansas City – Overland Park
Embassy Suites Hotel
KS
199
50%
Lexington – Lexington Green
Hilton Suites
KY
174
 
Baton Rouge
Embassy Suites Hotel
LA
223
 


 
26
 

Hotel Portfolio (continued)


   
Brand
   
State
 
Rooms
 
% Owned (a)
New Orleans – Convention Center
Embassy Suites Hotel
LA
370
 
New Orleans – French Quarter
Holiday Inn
LA
374
 
Boston – at Beacon Hill
Holiday Inn
MA
303
 
Boston – Marlborough
Embassy Suites Hotel
MA
229
 
Baltimore – at BWI Airport
Embassy Suites Hotel
MD
251
90%
Bloomington
Embassy Suites Hotel
MN
218
 
Minneapolis – Airport
Embassy Suites Hotel
MN
310
 
St. Paul – Downtown
Embassy Suites Hotel
MN
208
 
Kansas City – Plaza
Embassy Suites Hotel
MO
266
50%
Charlotte
Embassy Suites Hotel
NC
274
50%
Charlotte – SouthPark
Doubletree Guest Suites
NC
208
 
Raleigh/Durham
Doubletree Guest Suites
NC
203
 
Raleigh – Crabtree
Embassy Suites Hotel
NC
225
50%
Parsippany
Embassy Suites Hotel
NJ
274
50%
Piscataway – Somerset
Embassy Suites Hotel
NJ
221
 
Secaucus – Meadowlands
Embassy Suites Hotel
NJ
261
50%
Philadelphia – Historic District
Holiday Inn
PA
364
 
Philadelphia – Society Hill
Sheraton
PA
365
 
Pittsburgh – at University Center (Oakland)
Holiday Inn
PA
251
 
Charleston – Mills House
Holiday Inn
SC
214
 
Myrtle Beach – Oceanfront Resort
Embassy Suites Hotel
SC
255
 
Myrtle Beach Resort
Hilton
SC
385
 
Nashville – Airport – Opryland Area
Embassy Suites Hotel
TN
296
 
Nashville – Opryland – Airport (Briley Parkway)
Holiday Inn
TN
383
 
Austin
Doubletree Guest Suites
TX
188
90%
Austin – Central
Embassy Suites Hotel
TX
260
50%
Corpus Christi
Embassy Suites Hotel
TX
150
 
Dallas – DFW International Airport South
Embassy Suites Hotel
TX
305
 
Dallas – Love Field
Embassy Suites Hotel
TX
248
 
Dallas – Market Center
Embassy Suites Hotel
TX
244
 
Dallas – Park Central
Westin
TX
536
60%
Houston – Medical Center
Holiday Inn
TX
287
 
San Antonio – International Airport
Embassy Suites Hotel
TX
261
50%
San Antonio – International Airport
Holiday Inn
TX
397
 
San Antonio – NW I-10
Embassy Suites Hotel
TX
216
50%
Burlington Hotel & Conference Center
Sheraton
VT
309
 
Vienna – Premiere at Tysons Corner
Sheraton
VA
443
50%
         
Canada
       
Toronto – Airport
Holiday Inn
Ontario
446
 
Toronto – Yorkdale
Holiday Inn
Ontario
370
 
         
Unconsolidated Hotel
   
New Orleans – French Quarter – Chateau LeMoyne
Holiday Inn
LA
171
50%

 
(a)
We own 100% of the real estate interests unless otherwise noted.


 
27
 

Liquidity and Capital Resources

Operating Activities

During the first quarter of 2010, cash from hotel operations satisfied most of our cash requirements.  For the quarter, cash provided by operating activities (primarily hotel operations) was $28.5 million, which reflects a $4.1 million increase, from the same period in 2009, due primarily to increases in accrued expenses (largely from a change in interest payment dates and increased rates on our senior debt), partially offset by declining hotel revenues. At March 31, 2010, we had $276.0 million of cash on hand, including approximately $46.7 million held under management agreements to meet working capital needs.

Travel spending has fallen sharply in the face of the global recession.  Lodging demand was weak in 2009, which adversely affected our Consolidated Hotel RevPAR.  In the first quarter of 2010, occupancy strengthened but was offset by weaker ADR.  We expect our 2010 RevPAR will range from flat to a 3% improvement compared to 2009, which assumes growth in occupancy and a decline in ADR (creating pressure on operating margins).  We expect our cash from operating activities in 2010 to range from $20 million to $30 million.

We are subject to increases in hotel operating expenses, including wage and benefit costs, repair and maintenance expenses, utilities and insurance expenses that can fluctuate disproportionately to revenues.  Some of these operating expenses are difficult to predict and control, which lends volatility in our operating results.  We have implemented extensive cost containment initiatives at our hotels, including reducing headcount and improving productivity and energy efficiency.  If RevPAR decreases and/or Hotel EBITDA margins shrink, our operations, earnings and/or cash flow could be materially adversely affected.

Investing Activities

During the first quarter of 2010 cash used in investing activities decreased $13.4 million, compared to the same period in 2009, due primarily to lower spending on hotel capital expenditures. We made extensive capital investments in our hotels from 2006 to 2008, and now nearly all of our hotels have been renovated.  We expect to spend a normal amount of capital going forward to maintain the quality of our hotels.  As a result, we were able to limit capital spending significantly in 2009, and we expect to spend a limited amount of capital in the near future without compromising the value and quality of our hotels.  In the first quarter of 2010, we completed approximately $8.2 million of capital improvements at our hotels and we expect to spend approximately $42 million in 2010.

Our liquidity-preservation efforts also extend to acquisitions and redevelopment projects. We did not acquire any hotels during 2008 or 2009 and postponed spending on redevelopment projects, other than to advance ongoing approval and entitlement processes.

In order to enhance long-term shareholder value, as part of our strategic plan (as in the past and as market conditions allow), we intend to sell lower-growth hotels that no longer meet our investment criteria, thereby freeing our capital for redeployment ( e.g. , reduce overall leverage, acquire other hotels and invest in remaining FelCor properties).  We regularly evaluate demand and supply trends for each hotel, portfolio concentration risk and future capital needs.  We expect to identify additional hotels for sale when hotel cash flows recover and the hotel transaction market improves.

Financing Activities

During the first quarter of 2010, cash provided by financing activities decreased by $8.4 million compared to the same period in 2009, due primarily to first quarter 2009 borrowing under our line of credit.  We expect to pay approximately $13 million in normally occurring principal payments in 2010, which will be funded from operating cash flow and cash on hand.

 
28
 



We suspended payment of our common dividend in December 2008 and our preferred dividend in March 2009 (we paid approximately $10 million of preferred dividends in January 2009).  Our ability to pay cash dividends is limited by the indenture governing our senior secured notes whenever we fail to meet a defined financial ratio threshold, as in the current circumstances; consequently, we do not expect to pay any common or preferred cash dividends during 2010.  Dividends are not paid unless declared by our Board of Directors; however, any unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to reinstatement of our common dividend.  Our Board of Directors will determine whether to declare future dividends based upon various factors, including operating results, economic conditions, other operating trends, our financial condition including the outcome of refinancing debt maturities and capital requirements, as well as minimum REIT distribution requirements.

Capital markets, and our access to financing on reasonably acceptable terms, have historically been affected by external events and circumstances, such as recessions, major bank failures, rising unemployment, shrinking GDP, acts of terrorism, etc.  Events or circumstances of similar magnitude or impact could adversely affect the availability and cost of our capital going forward.

Secured Debt . At March 31, 2010, we had a total of $1.7 billion of consolidated secured debt with 67 encumbered consolidated hotels with a $2.0 billion aggregate net book value (including 14 hotels that are encumbered by our senior secured notes).  In May 2010, we obtained a new five-year loan for approximately $212 million secured by nine hotels.  The loan proceeds were used to repay $210 million in loans scheduled to mature in May 2010, secured by 11 hotels (including the nine hotels securing the new loan).  The new loan bears interest at LIBOR (subject to a 3% floor) plus 5.10%.   With this new financing, we resolved all of our remaining 2010 maturities on terms that are significantly more favorable than the refinanced debt, and we were able to unencumber two previously mortgaged hotels.  In February 2010, we extended the maturity of a loan secured by a hotel from May 2010 to May 2013.  Two remaining loans (totaling $32 million) mature in May 2010.  The cash flows for the hotels that secure those loans do not cover debt service, and we stopped funding the shortfalls in December 2009.  We have been unable to negotiate an acceptable debt modification or reduction that made sense for our stockholders, with regard to these loans.  Therefore, these two hotels will be transferred to the lenders in full satisfaction of the debt.

Except in the case of our senior secured notes, our mortgage debt is generally recourse solely to the specific hotels securing the debt except in case of fraud, misapplication of funds and other customary recourse carve-out provisions, which could extend recourse to us.  Much of our secured debt allows us to substitute collateral under certain conditions and is prepayable, subject to various prepayment, yield maintenance or defeasance obligations.

Some of our secured debt includes lock-box arrangements under certain circumstances. We are generally permitted to retain an amount required to cover our budgeted hotel operating expenses, taxes, debt service, insurance and capital expenditure reserves, but the remaining revenues flow through a lock-box if a specified debt service coverage ratio is not met.  With the exception of one hotel, all of our hotels subject to lock-box provisions currently exceed the applicable minimum debt service coverage ratios.

Senior Notes.    In October 2009, we issued $636 million in aggregate principal amount of our 10% senior secured notes due 2014.  These notes require that we satisfy total leverage, secured leverage and interest coverage tests in order to: (i) incur additional indebtedness except to refinance maturing debt with replacement debt, as defined under our indentures; (ii) pay dividends in excess of the minimum distributions required to meet the REIT qualification test; (iii) repurchase capital stock; or (iv) merge.  We are currently prohibited from paying dividends on our preferred or common stock, except to the extent necessary to satisfy the REIT qualification requirement that we distribute currently at least 90% of our taxable income.  These notes are guaranteed by us, and payment of those obligations is secured by a pledge of the limited partner interests in FelCor LP owned by FelCor,
 
29
 


a combination of first lien mortgages and related security interests and/or negative pledges on up to 14 hotels, and pledges of equity interests in certain subsidiaries of FelCor LP.  In addition, we redeemed all of our floating-rate senior notes and all but $87 million of our 8½% senior notes and amended the indenture governing the latter to eliminate substantially all of the restrictive covenants, guarantees, collateral and certain events of default provisions. 

Interest Rate Caps.   To fulfill requirements under certain loans, we entered into interest rate cap agreements with aggregate notional amounts of $427.2 million at March 31, 2010 and December 31, 2009.  These interest rate caps were not designated as hedges and had insignificant fair values at both March 31, 2010 and December 31, 2009, resulting in no significant net earnings impact.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation.  Competition may, however, require us to reduce room rates in the near term and may limit our ability to raise room rates in the future.  We are also subject to the risk that inflation will cause increases in hotel operating expenses disproportionately to revenues.  If competition requires us to reduce room rates or limits our ability to raise room rates in the future, we may not be able to adjust our room rates to reflect the effects of inflation in full, in which case our operating results and liquidity could be adversely affected.

Seasonality

The lodging business is seasonal in nature.  Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors and other considerations affecting travel.  To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may utilize cash on hand or borrowings to satisfy our obligations.

Disclosure Regarding Forward-Looking Statements

This report and the documents incorporated by reference in this report include forward-looking statements that involve a number of risks and uncertainties.  Forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks”, or other variations of these terms (including their use in the negative), or by discussions of strategies, plans or intentions.  A number of factors could cause actual results to differ materially from those anticipated by these forward-looking statements.  Certain of these risks and uncertainties are described in greater detail under “Risk Factors” in our Annual Report on Form 10-K or in our other filings with the Securities and Exchange Commission, or the SEC.

These forward-looking statements are necessarily dependent upon assumptions and estimates that may prove to be incorrect. Accordingly, while we believe that the plans, intentions and expectations reflected in these forward-looking statements are reasonable, we cannot assure you that deviations from these plans, intentions or expectations will not be material.  The forward-looking statements included in this report, and all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are expressly qualified in their entirety by the risk factors and cautionary statements discussed in our filings to the SEC.  We undertake no obligation to publicly update any forward-looking statements to reflect future circumstances or changes in our expectations.

 
30
 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Quantitative and Qualitative Disclosures About Market Risk

At March 31, 2010, approximately 65% of our consolidated debt had fixed interest rates.

The following table provides information about our financial instruments that are sensitive to changes in interest rates.  For debt obligations, the table presents scheduled maturities and weighted average interest rates, by maturity dates.  The fair value debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at the date presented, at then current market interest rates.

Expected Maturity Date
at March 31, 2010
(dollars in thousands)

 
Expected Maturity Date
 
2010
 
2011
 
2012
 
2013
 
2014
 
Thereafter
 
Total
 
Fair Value
Liabilities
 
Fixed-rate:
                                             
  Debt
$
247,918
 
$
105,965
 
$
4,544
 
$
32,690
 
$
805,052
 
$
9,376
 
$
1,205,545
   
1,234,079
  Average interest rate
 
8.70%
   
8.62%
   
7.68%
   
8.61%
   
9.61%
   
5.81%
   
9.27%
     
Floating-rate:
                                             
  Debt
 
1,809
   
448,300
   
177,225
   
-   
   
-   
   
-   
   
627,334
   
558,681
  Average interest rate (a)
 
5.20%
   
3.76%
   
4.26%
   
-   
   
-   
   
-   
   
3.91%
     
Total debt
$
249,727
 
$
554,265
 
$
181,769
 
$
32,690
 
$
805,052
 
$
9,376
 
$
1,832,879
     
  Average interest rate
 
8.67%
   
4.69%
   
4.35%
   
8.61%
   
9.61%
   
5.81%
   
7.43%
     
Net discount
                                     
(61,764
)
   
    Total debt
                                   
$
1,771,115
     

 
(a)
The average floating interest rate represents the implied forward rates in the yield curve at March 31, 2010.

Item 4.  Controls and Procedures

(a)            Evaluation of disclosure controls and procedures.
 
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934) as of the end of the period covered by this report (the “Evaluation Date”).  Based on this evaluation, our chief executive officer and chief financial officer concluded, as of the Evaluation Date, that our disclosure controls and procedures were effective, such that the information relating to us required to be disclosed in our reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

(b)            Changes in internal control over financial reporting.

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


 
31
 

PART II -- OTHER INFORMATION

Item 5.                      Other Information

On May 3, 2010, certain of our subsidiaries entered into a Credit Agreement (the “Loan Agreement”) with Fortress Credit Corp., as the administrative agent and lender, and the other lenders thereto, providing for a loan in the original principal amount of $212,000,000 (the “Loan”).  The Loan has a term of five years, and bears a variable interest rate (LIBOR, subject to a floor of 3%, plus 5.10%).  The Loan is secured by first priority mortgages on nine hotel properties owned by certain of the borrowers and a pledge of the equity interests of the borrowers.  The Loan Agreement, which contains no corporate-level financial covenants, includes prepayment rights and allows for partial release of collateral, subject to certain conditions.  The loan is subject to acceleration upon the occurrence of certain events of default.  The Loan is nonrecourse, except for certain customary recourse carveouts.  Our operating partnership, FelCor LP, has guaranteed the recourse carveouts.  The proceeds from the Loan were used to repay existing $210 million in loans maturing in May 2010, which were secured by 11 hotels, including the nine hotels securing the new loan, leaving two hotels unencumbered.

Item 6.                      Exhibits

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

Exhibit Number
 
Description of Exhibit
 
4.1
 
Third Supplemental Indenture, dated as of March 23, 2010, by and among FelCor Lodging Trust Incorporated, FelCor Lodging Limited Partnership, certain of their subsidiaries, as guarantors, and U.S. Bank National Association, as trustee and collateral agent, relating to the 10% Senior Secured Notes due 2014.
     
10.1
 
Form of Mortgage, Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing by and among FelCor Lodging Trust Incorporated, FelCor Lodging Limited Partnership, certain of their subsidiaries, as guarantors, and U.S. Bank National Association, as trustee and collateral agent, relating to the 10% Senior Secured Notes due 2014.
     
31.1
 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
32
 


SIGNATURE

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



   
FELCOR LODGING TRUST INCORPORATED
     
     
     
Date:  May 3, 2010
By:
/s/ Lester C. Johnson
   
Name:
Title:
Lester C. Johnson
Senior Vice President, Chief Accounting Officer


 
33
 

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