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EX-32.2 - 2017 Q1 EXHIBIT 32.2 - FelCor Lodging Trust Inca2017q110qexh322.htm
EX-32.1 - 2017 Q1 EXHIBIT 32.1 - FelCor Lodging Trust Inca2017q110qexh321.htm
EX-31.4 - 2017 Q1 EXHIBIT 31.4 - FelCor Lodging Trust Inca2017q110qexh314.htm
EX-31.3 - 2017 Q1 EXHIBIT 31.3 - FelCor Lodging Trust Inca2017q110qexh313.htm
EX-31.2 - 2017 Q1 EXHIBIT 31.2 - FelCor Lodging Trust Inca2017q110qexh312.htm
EX-31.1 - 2017 Q1 EXHIBIT 31.1 - FelCor Lodging Trust Inca2017q110qexh311.htm



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, 2017
 

OR
o
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)
 
Commission file number: 333-39595-01
 
(FelCor Lodging Limited Partnership)
FelCor Lodging Trust Incorporated
FelCor Lodging Limited Partnership
(Exact Name of Registrant as Specified in Its Charter)

 
Maryland
(FelCor Lodging Trust Incorporated)
 
75-2541756
 
Delaware
(FelCor Lodging Limited Partnership)
 
75-2544994
 
(State or Other Jurisdiction of Incorporation or Organization)
 
 
(I.R.S. Employer
Identification No.)
 
 
 
 
125 E. John Carpenter Freeway, Suite 1600, 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.
 
FelCor Lodging Trust Incorporated
 
þ
Yes
¨
No
 
FelCor Lodging Limited Partnership
(see Note)
¨
Yes
þ
No
Note: As a voluntary filer not subject to the filing requirements of the Securities Exchange Act of 1934, the registrant has filed all reports pursuant to Section 13 or 15(d) for the preceding 12 months as if it were subject to such filing requirements.



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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).
 
FelCor Lodging Trust Incorporated
 
þ
Yes
¨
No
 
FelCor Lodging Limited Partnership
 
þ
Yes
¨
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
FelCor Lodging Trust Incorporated:
 
 
 Large accelerated filer  þ
 
 Accelerated filer ¨
 Non-accelerated filer     ¨ (Do not check if a smaller reporting company)
 
 Smaller reporting company ¨
 
 
 Emerging growth company ¨
FelCor Lodging Limited Partnership:
 
 
 Large accelerated filer  ¨
 
 Accelerated filer ¨
 Non-accelerated filer     þ (Do not check if a smaller reporting company)
 
 Smaller reporting company ¨
 
 
 Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
FelCor Lodging Trust Incorporated
 
¨
Yes
þ
No
 
FelCor Lodging Limited Partnership
 
¨
Yes
þ
No

At May 3, 2017, FelCor Lodging Trust Incorporated had issued and outstanding 138,421,154 shares of common stock.




EXPLANATORY NOTE

This quarterly report on Form 10-Q for the quarter ended March 31, 2017, combines the filings for FelCor Lodging Trust Incorporated, or FelCor, and FelCor Lodging Limited Partnership, or FelCor LP. Where it is important to distinguish between the two, we either refer specifically to FelCor or FelCor LP. Otherwise we use the terms “we” or “our” to refer to FelCor and FelCor LP, collectively (including their consolidated subsidiaries), unless the context indicates otherwise.

FelCor is a Maryland corporation operating as a real estate investment trust, or REIT, and is the sole general partner of, and the owner of a greater than 99% partnership interest in, FelCor LP. Through FelCor LP, FelCor owns hotels and conducts business. As the sole general partner of FelCor LP, FelCor has exclusive and complete control of FelCor LP’s day-to-day management.

We believe combining periodic reports for FelCor and FelCor LP into single combined reports results in the following benefits:

presents our business as a whole (the same way management views and operates the business);
eliminates duplicative disclosure and provides a more streamlined presentation (a substantial portion of our disclosure applies to both FelCor and FelCor LP); and
saves time and cost by preparing combined reports instead of separate reports.

We operate the company as one enterprise. The employees of FelCor direct the management and operation of FelCor LP. With sole control of FelCor LP, FelCor consolidates FelCor LP for financial reporting purposes. FelCor has no assets other than its investment in FelCor LP and no liabilities separate from FelCor LP. Therefore, the reported assets and liabilities for FelCor and FelCor LP are substantially identical.

FelCor is a REIT with publicly-traded equity, while FelCor LP is a partnership with no publicly-traded equity. This difference is reflected in the financial statements in the equity (or partners’ capital) section of the consolidated balance sheets and in the consolidated statements of equity (or partners’ capital). Apart from the different equity treatment, the consolidated financial statements for FelCor and FelCor LP are nearly identical, except the net income (loss) attributable to redeemable noncontrolling interests in FelCor LP is deducted from FelCor’s net income (loss) in order to arrive at net income (loss) attributable to FelCor common stockholders. The noncontrolling interest is included in net income (loss) attributable to FelCor LP common unitholders. The holders of noncontrolling interests in FelCor LP are unaffiliated with FelCor, and in aggregate, hold less than 1% of the operating partnership units.

We present the sections in this report combined unless separate disclosure is required for clarity.



i


FELCOR LODGING TRUST INCORPORATED and
FELCOR LODGING LIMITED PARTNERSHIP

INDEX
 
 
 
Page
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements
 
FelCor Lodging Trust Incorporated:
 
 
 
Consolidated Balance Sheets - March 31, 2017 and December 31, 2016 (unaudited)
 
 
Consolidated Statements of Operations and Comprehensive Income (Loss) – For the Three Months Ended March 31, 2017 and 2016 (unaudited)
 
 
Consolidated Statements of Changes in Equity – For the Three Months Ended March 31, 2017 and 2016 (unaudited)
 
 
Consolidated Statements of Cash Flows – For the Three Months Ended March 31, 2017 and 2016 (unaudited)
 
FelCor Lodging Limited Partnership:
 
 
 
Consolidated Balance Sheets - March 31, 2017 and December 31, 2016 (unaudited)
 
 
Consolidated Statements of Operations and Comprehensive Income (Loss) – For the Three Months Ended March 31, 2017 and 2016 (unaudited)
 
 
Consolidated Statements of Partners’ Capital – For the Three Months Ended March 31, 2017 and 2016 (unaudited)
 
 
Consolidated Statements of Cash Flows – For the Three Months Ended March 31, 2017 and 2016 (unaudited)
 
 Notes to Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
General
 
 
Results of Operations
 
 
Non-GAAP Financial Measures
 
 
Pro Rata Share of Rooms Owned
 
 
Hotel Operating Statistics
 
 
Hotel Portfolio
 
 
Liquidity and Capital Resources
 
 
Inflation and Competition
 
 
Seasonality
 
 
Disclosure Regarding Forward-Looking Statements
 
 
Important Information for Investors and Stockholders
 
 
Participants in the Solicitation
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
Item 1A.
Risk Factors
Item 6.
Exhibits
 
 
 
 
SIGNATURES
 

ii


PART I -- FINANCIAL INFORMATION

Item 1.
Financial Statements.

FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par values)
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Investment in hotels, net of accumulated depreciation of $945,449 and $932,886 at March 31, 2017 and December 31, 2016, respectively
$
1,535,718

 
$
1,566,823

Investment in unconsolidated entities
7,532

 
8,312

Cash and cash equivalents
50,235

 
47,317

Restricted cash
22,319

 
19,491

Accounts receivable, net of allowance for doubtful accounts of $148 and $177 at March 31, 2017 and December 31, 2016, respectively
40,976

 
42,080

Deferred expenses, net of accumulated amortization of $3,427 and $2,959 at March 31, 2017 and December 31, 2016, respectively
4,059

 
4,527

Other assets
19,326

 
18,542

Total assets
$
1,680,165

 
$
1,707,092

 
 
 
 
Liabilities and Equity
 
 
 
Debt, net of unamortized debt issuance costs of $15,389 and $15,967 at March 31, 2017 and December 31, 2016, respectively
$
1,354,187

 
$
1,338,326

Distributions payable
14,853

 
14,858

Accrued expenses and other liabilities
123,505

 
116,437

Total liabilities
1,492,545

 
1,469,621

Commitments and contingencies


 


Redeemable noncontrolling interests in FelCor LP, 610 units issued and outstanding at March 31, 2017 and December 31, 2016
4,583

 
4,888

Equity:
 
 
 
 Preferred stock, $0.01 par value, 20,000 shares authorized:
 
 
 
Series A Cumulative Convertible Preferred Stock, 12,879 shares, liquidation value of $321,987, issued and outstanding at March 31, 2017 and December 31, 2016
309,337

 
309,337

Common stock, $0.01 par value, 200,000 shares authorized; 138,409 and 137,990 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
1,384

 
1,380

Additional paid-in capital
2,579,066

 
2,576,988

Accumulated deficit
(2,757,732
)
 
(2,706,408
)
Total FelCor stockholders’ equity
132,055

 
181,297

Noncontrolling interests in other partnerships
7,199

 
7,503

Preferred equity in consolidated joint venture, liquidation value of $44,694 and $44,667 at March 31, 2017 and December 31, 2016, respectively
43,783

 
43,783

Total equity
183,037

 
232,583

Total liabilities and equity
$
1,680,165

 
$
1,707,092




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

1


FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2017 and 2016
(unaudited, in thousands, except for per share data)
 
Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
Hotel operating revenue
$
187,696

 
$
209,457

Other revenue
408

 
687

Total revenues
188,104

 
210,144

Expenses:
 
 
 
Hotel departmental expenses
70,433

 
77,438

Other property-related costs
50,855

 
55,566

Management and franchise fees
7,550

 
9,225

Taxes, insurance and lease expense
13,902

 
13,582

Corporate expenses
6,940

 
8,400

Depreciation and amortization
27,838

 
29,183

Impairment
24,838

 

Other expenses
1,260

 
828

Total operating expenses
203,616

 
194,222

Operating income (loss)
(15,512
)
 
15,922

Interest expense, net
(19,286
)
 
(19,720
)
Loss before equity in loss from unconsolidated entities
(34,798
)
 
(3,798
)
Equity in loss from unconsolidated entities
(130
)
 
(154
)
Loss from continuing operations before income tax
(34,928
)
 
(3,952
)
Income tax
(547
)
 
(415
)
Loss from continuing operations before loss on sale of hotels
(35,475
)
 
(4,367
)
Loss on sale of hotels
(666
)
 
(714
)
Net loss and comprehensive loss
(36,141
)
 
(5,081
)
Net loss attributable to noncontrolling interests in other partnerships
404

 
471

Net loss attributable to redeemable noncontrolling interests in FelCor LP
186

 
48

Preferred distributions - consolidated joint venture
(360
)

(360
)
Net loss and comprehensive loss attributable to FelCor
(35,911
)
 
(4,922
)
Preferred dividends
(6,279
)
 
(6,279
)
Net loss attributable to FelCor common stockholders
$
(42,190
)
 
$
(11,201
)
Basic and diluted per common share data:
 
 
 
Net loss
$
(0.31
)
 
$
(0.08
)
Basic and diluted weighted average common shares outstanding
137,778

 
139,678



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

2


FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2017 and 2016
(unaudited, in thousands, except for per share data)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital 
 
Accumulated Deficit 
 
Noncontrolling Interests in Other Partnerships
 
Preferred Equity in Consolidated Joint Venture
 
Total Equity
 
Number of Shares
 
Amount
 
Number of Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2015
12,879

 
$
309,337

 
141,808

 
$
1,418

 
$
2,567,515

 
$
(2,618,117
)
 
$
7,806

 
$
43,186

 
$
311,145

Repurchase of common stock

 

 
(2,948
)
 
(29
)
 

 
(19,189
)
 

 

 
(19,218
)
Issuance of stock awards

 

 
545

 
5

 
39

 

 

 

 
44

Cumulative effect of change in accounting for stock compensation forfeitures

 

 

 

 
185

 
(185
)
 

 

 

Stock awards - amortization

 

 

 

 
2,235

 

 

 

 
2,235

Stock compensation shares withheld

 

 
(98
)
 
(1
)
 

 
(591
)
 

 

 
(592
)
Allocation to redeemable noncontrolling interests

 

 

 

 
(585
)
 

 

 

 
(585
)
Contribution from noncontrolling interests

 

 

 

 

 

 
68

 

 
68

Dividends declared:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

$0.06 per common share

 

 

 

 

 
(8,432
)
 

 

 
(8,432
)
$0.4875 per Series A preferred share

 

 

 

 

 
(6,279
)
 

 

 
(6,279
)
Preferred distributions - consolidated joint venture

 

 

 

 

 

 

 
(360
)
 
(360
)
Issuance of preferred equity - consolidated joint venture

 

 

 

 

 

 

 
598

 
598

Net income (loss) and comprehensive income (loss) (attributable to FelCor and noncontrolling interests in other partnerships)

 

 

 

 

 
(4,922
)
 
(471
)
 
360

 
(5,033
)
Balance at March 31, 2016
12,879

 
$
309,337

 
139,307

 
$
1,393

 
$
2,569,389

 
$
(2,657,715
)
 
$
7,403

 
$
43,784

 
$
273,591

Balance at December 31, 2016
12,879

 
$
309,337

 
137,990

 
$
1,380

 
$
2,576,988

 
$
(2,706,408
)
 
$
7,503

 
$
43,783

 
$
232,583

Issuance of stock awards

 

 
447

 
5

 
88

 

 

 

 
93

Stock awards - amortization

 

 

 

 
1,909

 

 

 

 
1,909

Stock compensation shares withheld

 

 
(28
)
 
(1
)
 

 
(813
)
 

 

 
(814
)
Allocation to redeemable noncontrolling interests

 

 

 

 
81

 

 

 

 
81

Contribution from noncontrolling interests

 

 

 

 

 

 
100

 

 
100

Dividends declared:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

$0.06 per common share

 

 

 

 

 
(8,321
)
 

 

 
(8,321
)
$0.4875 per Series A preferred share

 

 

 

 

 
(6,279
)
 

 

 
(6,279
)
Preferred distributions - consolidated joint venture

 

 

 

 

 

 

 
(360
)
 
(360
)
Net income (loss) and comprehensive income (loss) (attributable to FelCor and noncontrolling interests in other partnerships)

 

 

 

 

 
(35,911
)
 
(404
)
 
360

 
(35,955
)
Balance at March 31, 2017
12,879

 
$
309,337


138,409

 
$
1,384

 
$
2,579,066

 
$
(2,757,732
)
 
$
7,199

 
$
43,783

 
$
183,037



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

3


FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2017 and 2016
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(36,141
)
 
$
(5,081
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
27,838

 
29,183

Loss on sale of hotels
666

 
714

Amortization of deferred financing fees
1,046

 
867

Amortization of fixed stock and directors’ compensation
1,593

 
1,935

Equity in loss from unconsolidated entities
130

 
154

Distributions of income from unconsolidated entities
160

 
114

Impairment
24,838

 

Changes in assets and liabilities:
 
 
 
Accounts receivable
1,101

 
(6,777
)
Other assets
(922
)
 
(3,111
)
Accrued expenses and other liabilities
5,655

 
1,655

Net cash flow provided by operating activities
25,964

 
19,653

Cash flows from investing activities:
 
 
 
Improvements and additions to hotels
(19,462
)
 
(14,008
)
Net payments related to asset sales
(812
)
 
(466
)
Change in restricted cash – investing
(2,828
)
 
(3,395
)
Insurance proceeds

 
94

Distributions from unconsolidated entities in excess of earnings
490

 
136

Net cash flow used in investing activities
(22,612
)
 
(17,639
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings
29,000

 
31,000

Repayment of borrowings
(13,717
)
 
(496
)
Payment of deferred financing fees

 
(10
)
Contributions from noncontrolling interests
100

 
68

Distributions paid to FelCor LP limited partners
(38
)
 
(36
)
Distributions paid to preferred stockholders
(6,279
)
 
(6,279
)
Repurchase of common stock

 
(19,218
)
Stock compensation withholding
(814
)
 
(592
)
Preferred distributions - consolidated joint venture
(360
)
 
(360
)
Distributions paid to common stockholders
(8,326
)
 
(8,508
)
Net proceeds from issuance of preferred equity - consolidated joint venture

 
598

Net cash flow used in financing activities
(434
)
 
(3,833
)
Effect of exchange rate changes on cash

 
(9
)
Net change in cash and cash equivalents
2,918

 
(1,828
)
Cash and cash equivalents at beginning of periods
47,317

 
59,786

Cash and cash equivalents at end of periods
$
50,235

 
$
57,958

Supplemental cash flow information – interest paid, net of capitalized interest
$
18,787

 
$
18,809

Supplemental cash flow information – income taxes paid
$
224

 
$
299




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

4


FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
March 31,
 
December 31,
 
2017
 
2016
Assets
 
 
 
Investment in hotels, net of accumulated depreciation of $945,449 and $932,886 at March 31, 2017 and December 31, 2016, respectively
$
1,535,718

 
$
1,566,823

Investment in unconsolidated entities
7,532

 
8,312

Cash and cash equivalents
50,235

 
47,317

Restricted cash
22,319

 
19,491

Accounts receivable, net of allowance for doubtful accounts of $148 and $177 at March 31, 2017 and December 31, 2016, respectively
40,976

 
42,080

Deferred expenses, net of accumulated amortization of $3,427 and $2,959 at March 31, 2017 and December 31, 2016, respectively
4,059

 
4,527

Other assets
19,326

 
18,542

Total assets
$
1,680,165

 
$
1,707,092

 
 
 
 
Liabilities and Partners’ Capital
 
 
 
Debt, net of unamortized debt issuance costs of $15,389 and $15,967 at March 31, 2017 and December 31, 2016, respectively
$
1,354,187

 
$
1,338,326

Distributions payable
14,853

 
14,858

Accrued expenses and other liabilities
123,505

 
116,437

Total liabilities
1,492,545

 
1,469,621

Commitments and contingencies


 


Redeemable units, 610 units issued and outstanding at March 31, 2017 and December 31, 2016
4,583

 
4,888

Capital:
 
 
 
Preferred units:
 
 
 
Series A Cumulative Convertible Preferred Units, 12,879 units issued and outstanding at March 31, 2017 and December 31, 2016
309,337

 
309,337

Common units, 138,409 and 137,990 units issued and outstanding at March 31, 2017 and December 31, 2016, respectively
(177,282
)
 
(128,040
)
Total FelCor LP partners’ capital
132,055

 
181,297

Noncontrolling interests
7,199

 
7,503

Preferred capital in consolidated joint venture
43,783

 
43,783

Total partners’ capital
183,037

 
232,583

Total liabilities and partners’ capital
$
1,680,165

 
$
1,707,092



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

5


FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2017 and 2016
(unaudited, in thousands, except for per unit data)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Revenues:
 
 
 
Hotel operating revenue
$
187,696

 
$
209,457

Other revenue
408

 
687

Total revenues
188,104

 
210,144

Expenses:
 
 
 
Hotel departmental expenses
70,433

 
77,438

Other property-related costs
50,855

 
55,566

Management and franchise fees
7,550

 
9,225

Taxes, insurance and lease expense
13,902

 
13,582

Corporate expenses
6,940

 
8,400

Depreciation and amortization
27,838

 
29,183

Impairment
24,838

 

Other expenses
1,260

 
828

Total operating expenses
203,616

 
194,222

Operating income (loss)
(15,512
)
 
15,922

Interest expense, net
(19,286
)
 
(19,720
)
Loss before equity in loss from unconsolidated entities
(34,798
)
 
(3,798
)
Equity in loss from unconsolidated entities
(130
)
 
(154
)
Loss from continuing operations before income tax
(34,928
)
 
(3,952
)
Income tax
(547
)
 
(415
)
Loss from continuing operations before loss on sale of hotels
(35,475
)
 
(4,367
)
Loss on sale of hotels
(666
)
 
(714
)
Net loss and comprehensive loss
(36,141
)
 
(5,081
)
Net loss attributable to noncontrolling interests
404

 
471

Preferred distributions - consolidated joint venture
(360
)
 
(360
)
Net loss and comprehensive loss attributable to FelCor LP
(36,097
)
 
(4,970
)
Preferred distributions
(6,279
)
 
(6,279
)
Net loss attributable to FelCor LP common unitholders
$
(42,376
)
 
$
(11,249
)
Basic and diluted per common unit data:
 
 
 
Net loss
$
(0.31
)
 
$
(0.08
)
Basic and diluted weighted average common units outstanding
138,388

 
140,289





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

6


FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
For the Three Months Ended March 31, 2017 and 2016
(unaudited, in thousands)
 
Preferred Units
 
Common Units
 
Noncontrolling Interests
 
Preferred Capital in Consolidated Joint Venture
 
Total Partners’ Capital
Balance at December 31, 2015
$
309,337

 
$
(49,184
)
 
$
7,806

 
$
43,186

 
$
311,145

Repurchase of common units

 
(19,218
)
 

 

 
(19,218
)
FelCor restricted stock compensation

 
1,687

 

 

 
1,687

Contributions

 

 
68

 

 
68

Distributions

 
(14,747
)
 

 
(360
)
 
(15,107
)
Allocation to redeemable units

 
(501
)
 

 

 
(501
)
Issuance of preferred capital - consolidated joint venture

 

 

 
598

 
598

Net income (loss) and comprehensive income (loss)

 
(4,970
)
 
(471
)
 
360

 
(5,081
)
Balance at March 31, 2016
$
309,337

 
$
(86,933
)
 
$
7,403

 
$
43,784

 
$
273,591

 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
309,337

 
$
(128,040
)
 
$
7,503

 
$
43,783

 
$
232,583

FelCor restricted stock compensation

 
1,188

 

 

 
1,188

Contributions

 

 
100

 

 
100

Distributions

 
(14,638
)
 

 
(360
)
 
(14,998
)
Allocation to redeemable units

 
305

 

 

 
305

Net income (loss) and comprehensive income (loss)

 
(36,097
)
 
(404
)
 
360

 
(36,141
)
Balance at March 31, 2017
$
309,337

 
$
(177,282
)
 
$
7,199

 
$
43,783

 
$
183,037



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

7


FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2017 and 2016
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(36,141
)
 
$
(5,081
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
27,838

 
29,183

Loss on sale of hotels
666

 
714

Amortization of deferred financing fees
1,046

 
867

Amortization of fixed stock and directors’ compensation
1,593

 
1,935

Equity in loss from unconsolidated entities
130

 
154

Distributions of income from unconsolidated entities
160

 
114

Impairment
24,838

 

Changes in assets and liabilities:
 
 
 
Accounts receivable
1,101

 
(6,777
)
Other assets
(922
)
 
(3,111
)
Accrued expenses and other liabilities
5,655

 
1,655

Net cash flow provided by operating activities
25,964

 
19,653

 Cash flows from investing activities:
 
 
 
Improvements and additions to hotels
(19,462
)
 
(14,008
)
Net payments related to asset sales
(812
)
 
(466
)
Change in restricted cash – investing
(2,828
)
 
(3,395
)
Insurance proceeds

 
94

Distributions from unconsolidated entities in excess of earnings
490

 
136

Net cash flow used in investing activities
(22,612
)
 
(17,639
)
 Cash flows from financing activities:
 
 
 
Proceeds from borrowings
29,000

 
31,000

Repayment of borrowings
(13,717
)
 
(496
)
Payment of deferred financing fees

 
(10
)
Contributions from noncontrolling interests
100

 
68

Distributions paid to FelCor LP limited partners
(38
)
 
(36
)
Distributions paid to preferred unitholders
(6,279
)
 
(6,279
)
Repurchase of common units

 
(19,218
)
FelCor stock compensation withholding
(814
)
 
(592
)
Preferred distributions - consolidated joint venture
(360
)
 
(360
)
Distributions paid to common unitholders
(8,326
)
 
(8,508
)
Net proceeds from issuance of preferred capital - consolidated joint venture

 
598

Net cash flow used in financing activities
(434
)
 
(3,833
)
 Effect of exchange rate changes on cash

 
(9
)
 Net change in cash and cash equivalents
2,918

 
(1,828
)
 Cash and cash equivalents at beginning of periods
47,317

 
59,786

 Cash and cash equivalents at end of periods
$
50,235

 
$
57,958

 
 
 
 
 Supplemental cash flow information – interest paid, net of capitalized interest
$
18,787

 
$
18,809

Supplemental cash flow information – income taxes paid
$
224

 
$
299



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

8



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
Organization
FelCor Lodging Trust Incorporated (NYSE:FCH), or FelCor, is a Maryland corporation operating as a real estate investment trust, or REIT. FelCor is the sole general partner of, and the owner of a greater than 99.5% partnership interest in, FelCor Lodging Limited Partnership, or FelCor LP, through which we held ownership interests in 39 hotels as of March 31, 2017. At March 31, 2017, we had an aggregate of 139,018,793 shares and units outstanding, consisting of 138,408,610 shares of FelCor common stock and 610,183 FelCor LP units not owned by FelCor.
Of our 39 hotels, as of March 31, 2017, we owned 100% interests in 36 hotels, a 95% interest in one hotel (The Knickerbocker) and 50% interests in entities owning two hotels. We consolidate our real estate interests in the 37 hotels in which we hold majority interests, and we record the real estate interests of the two hotels in which we hold indirect 50% interests using the equity method. We lease 38 of the 39 hotels to our taxable REIT subsidiaries, of which we own a controlling interest. We operate one 50% owned hotel without a lease. Because we own controlling interests in our operating lessees, we consolidate our interests in all 38 leased hotels (which we refer to as our Consolidated Hotels) and reflect their operating revenues and expenses in our statements of operations and comprehensive income (loss). We own 50% of the real estate interest in one Consolidated Hotel (we account for our real estate interest in this hotel by the equity method) and majority real estate interests in our remaining 37 Consolidated Hotels (we consolidate our real estate interests in these hotels).
The following table reflects the distribution by brand of our 38 Consolidated Hotels at March 31, 2017:
Brand
 
Hotels
 
Rooms
 Embassy Suites by Hilton® 
 
18

 
 
4,982

 Wyndham® and Wyndham Grand®
 
8

 
 
2,528

 Marriott® and Renaissance® 
 
2

 
 
761

 Holiday Inn® 
 
1

 
 
585

 DoubleTree by Hilton® and Hilton® 
 
3

 
 
802

 Sheraton®
 
2

 
 
673

 Fairmont® 
 
1

 
 
383

 The Knickerbocker®
 
1

 
 
330

 Morgans® and Royalton®
 
2

 
 
285

  Total
 
38

 
 
11,329

At March 31, 2017, our Consolidated Hotels were located in 14 states, with concentrations in California (10 hotels), Florida (six hotels) and Massachusetts (three hotels). We generated approximately 63% of our revenue from hotels in these three states during the first three months of 2017.
At March 31, 2017, of our Consolidated Hotels: (i) subsidiaries of Hilton Worldwide managed 20 hotels; (ii) subsidiaries of Wyndham Worldwide managed eight hotels; (iii) subsidiaries of Marriott International managed four hotels; (iv) subsidiaries of InterContinental Hotels Group managed one hotel; (v) Fairmont, a subsidiary of AccorHotels Group, managed one hotel; (vi) a subsidiary of Highgate Hotels managed one hotel; (vii) a subsidiary of SBE (who acquired Morgans Hotel Group) managed two hotels; and (viii) Aimbridge Hospitality managed one hotel.

9



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Organization — (continued)
FelCor LP is a variable interest entity of FelCor. As FelCor LP is consolidated in the balance sheets of FelCor, the identification of this entity as a variable interest entity has no impact on the consolidated financial statements of FelCor.
The information in our consolidated financial statements for the three months ended March 31, 2017 and 2016 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, 2017 and 2016, include adjustments based on management’s estimates (consisting of normal and recurring accruals), which we consider necessary for a fair statement 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, 2016, included in our Annual Report on Form 10-K. Operating results for the three months ended March 31, 2017 are not necessarily indicative of actual operating results for the entire year.

2.
Investment in Unconsolidated Entities
At March 31, 2017 and December 31, 2016, we owned 50% interests in joint ventures that owned two hotels. We also own 50% interests in entities that own real estate in Myrtle Beach, South Carolina and provide condominium management services at these locations. We account for our investments in these unconsolidated entities under the equity method. We consolidate all of our majority-owned subsidiaries 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,
 
December 31,
 
2017
 
2016
Investment in hotels and other properties, net of accumulated depreciation
$
20,471

 
 
$
20,898

 
Total assets
$
25,810

 
 
$
27,052

 
Debt, net of unamortized debt issuance costs
$
21,933

 
 
$
22,065

 
Total liabilities
$
24,437

 
 
$
24,311

 
Equity
$
1,373

 
 
$
2,741

 
Our unconsolidated entities’ debt at March 31, 2017 and December 31, 2016 consisted entirely of non-recourse mortgage debt.


10



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.
Investment in Unconsolidated Entities — (continued)
The following table sets forth summarized combined statement of operations information for our unconsolidated entities (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Total revenues
$
5,226

 
$
5,503

Net loss
$
(67
)
 
$
(114
)
Net loss attributable to FelCor
$
(33
)
 
$
(57
)
Depreciation of cost in excess of book value
(97
)
 
(97
)
Equity in loss from unconsolidated entities
$
(130
)
 
$
(154
)
The following table summarizes the components of our investments in unconsolidated entities (in thousands):
 
March 31,
 
December 31,
 
2017
 
2016
Equity basis of hotel joint venture investments
$
(4,645
)
 
 
$
(4,533
)
 
Cost of hotel investments in excess of joint venture book value
6,846

 
 
6,942

 
Equity basis of land and condominium joint venture investments
5,331

 
 
5,903

 
Investment in unconsolidated entities
$
7,532

 
 
$
8,312

 
The following table summarizes the components of our equity in income from unconsolidated entities (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Hotel investments
$
441

 
$
375

Other investments
(571
)
 
(529
)
Equity in loss from unconsolidated entities
$
(130
)
 
$
(154
)

11



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.
Debt
Consolidated debt consisted of the following (dollars in thousands) at the dates shown:
 
Encumbered
 
Interest
 
Maturity
 
March 31,
 
December 31,
 
Hotels
 
Rate (%)
 
Date
 
2017
 
2016
Senior unsecured notes

 
 
6.00
 
 
June 2025
 
$
475,000

 
$
475,000

Senior secured notes
9

 
 
5.625
 
 
March 2023
 
525,000

 
525,000

Mortgage debt(a)
4

 
 
4.95
 
 
October 2022
 
119,536

 
120,109

Mortgage debt
1

 
 
4.94
 
 
October 2022
 
30,040

 
30,184

Line of credit(b)
7

 
 
LIBOR + 2.75
 
June 2019
 
135,000

 
119,000

Mortgage debt(c)
1

 
 
LIBOR + 3.00
 
November 2017
 
85,000

 
85,000

Total
22

 
 
 
 
 
 
 
$
1,369,576

 
$
1,354,293

Unamortized debt issuance costs
 
 
 
 
 
 
 
 
(15,389
)
 
(15,967
)
Debt, net of unamortized debt issuance costs
 
 
 
 
 
 
 
 
$
1,354,187

 
$
1,338,326

(a)
This debt is comprised of separate non-cross-collateralized loans, each secured by a mortgage encumbering a separate hotel.
(b)
Our line of credit can be extended for one year, subject to satisfying certain conditions. We may borrow up to $400 million under our line of credit.
(c)
This loan can be extended for one year, subject to satisfying certain conditions.

We reported $19.3 million and $19.7 million of interest expense for the three months ended March 31, 2017 and 2016, respectively, which is net of: (i) interest income of $33,000 and $12,000 and (ii) capitalized interest of $362,000 and $141,800, respectively.


4.
FelCor Capital Stock/FelCor LP Partners’ Capital

During the first three months of 2016, FelCor repurchased 2.9 million shares of common stock for $19.2 million (including commissions) at an average price of $6.49 per share. Since FelCor’s Board of Directors authorized the current $100 million repurchase program, which expires October 2017, FelCor has repurchased 6.6 million shares of common stock for $44.8 million (including commissions) at an average price of $6.78 per share. All repurchased shares have been retired and have been re-designated as authorized but unissued.



12



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.
Hotel Operating Revenue, Departmental Expenses, and Other Property-Related Costs
Hotel operating revenue was comprised of the following (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Room revenue
$
144,933

 
$
159,076

Food and beverage revenue
32,074

 
39,532

Other operating departments
10,689

 
10,849

Total hotel operating revenue
$
187,696

 
$
209,457

Nearly all of our revenue is comprised of hotel operating revenues. These revenues are recorded net of any sales or occupancy taxes collected from our guests. We record all rebates or discounts, 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. We make appropriate allowances for doubtful accounts, which we record as bad debt expense. The remainder of our revenue is from condominium management fee income and other sources.
Hotel departmental expenses were comprised of the following (in thousands, except for percentages):
 
 
Three Months Ended March 31,
 
2017
 
2016
 
Amount
 
% of Total Hotel Operating Revenue
 
Amount
 
% of Total Hotel Operating Revenue
Room
$
40,678

 
21.7
%
 
 
$
42,699

 
20.4
%
 
Food and beverage
26,222

 
14.0

 
 
30,956

 
14.8

 
Other operating departments
3,533

 
1.8

 
 
3,783

 
1.8

 
Total hotel departmental expenses
$
70,433

 
37.5
%
 
 
$
77,438

 
37.0
%
 
Other property-related costs were comprised of the following amounts (in thousands, except for percentages):
 
 
Three Months Ended March 31,
 
2017
 
2016
 
Amount
 
% of Total Hotel Operating Revenue
 
Amount
 
% of Total Hotel Operating Revenue
Hotel general and administrative expense
$
18,564

 
9.9
%
 
 
$
20,458

 
9.8
%
 
Marketing
17,371

 
9.3

 
 
18,873

 
9.0

 
Repair and maintenance
8,829

 
4.7

 
 
9,705

 
4.6

 
Utilities
6,091

 
3.2

 
 
6,530

 
3.1

 
Total other property-related costs
$
50,855

 
27.1
%
 
 
$
55,566

 
26.5
%
 
Wyndham guarantees minimum levels of annual net operating income at each of the hotels it manages for us. We recorded $1.0 million and $48,000 with respect to the pro rata portions of the projected aggregate full-year guaranties for the three months ended March 31, 2017 and 2016, respectively. We record these amounts as a reduction of Wyndham's contractual management and other fees.

13



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.
Taxes, Insurance and Lease Expense
Taxes, insurance and lease expense were comprised of the following (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Hotel lease expense(a) 
$
815

 
$
802

Land lease expense(b) 
3,404

 
3,262

Real estate and other taxes
7,915

 
7,575

Property insurance, general liability insurance and other
1,768

 
1,943

  Total taxes, insurance and lease expense
$
13,902

 
$
13,582

(a)
We record hotel lease expense for the consolidated operating lessees of hotels owned by unconsolidated entities and partially offset this expense through noncontrolling interests in other partnerships (generally 49%). We record our 50% share of the corresponding lease income through equity in income (loss) from unconsolidated entities. There was no percentage rent included in hotel lease expense for the three months ended March 31, 2017 and 2016.
(b)
We include in land lease expense percentage rent of $1.3 million and $1.1 million for the three months ended March 31, 2017 and 2016, respectively.


7.
Impairment Charges
Our hotels are comprised of operations and cash flows that can clearly be distinguished, operationally, and for financial reporting purposes, from the remainder of our operations. Accordingly, we consider our hotels to be components for purposes of determining impairment charges.
We test for impairment whenever changes in circumstances indicate a hotel’s carrying value may not be recoverable. We conduct the test using undiscounted cash flows for the shorter of the hotel’s estimated hold period or its remaining useful life. When testing for recoverability of hotels held for investment, we use projected cash flows over its expected hold period. Those hotels held for investment that fail the impairment test are written down to their then current estimated fair value, before any selling expense, and we continue to depreciate the hotels over their remaining useful lives.
In March 2017, we recorded a $24.8 million impairment charge for a hotel. The impairment charge was based on both third-party offers to purchase the hotel and observable market data on a price per room basis from transactions involving hotels in similar locations (a Level 2 input under authoritative guidance for fair value measurements).
We may record additional impairment charges if operating results of individual hotels are materially different from our forecasts, the economy and lodging industry weakens, or we shorten our contemplated holding period for additional hotels.


14



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.
Hotel Dispositions
In 2016, we sold two hotels. We included operations for the sold hotels in income (loss) from continuing operations as shown in the statements of operations and comprehensive income (loss) for the three months ended March 31, 2016, as disposition of these hotels did not represent a strategic shift in our business. Additionally, we included selling costs, which we expense as they are incurred, in the gain (loss) on the sale of hotels.
We designate a hotel as held for sale when the sale is probable within the next twelve months. Generally, we consider a sale to be probable when a buyer completes its due diligence review, we have an executed contract for sale and we have received a substantial non-refundable deposit. There were no hotels held for sale at March 31, 2017 or 2016.
Subsequent to March 31, 2017, two hotels became held for sale, both of which are expected to close in the third quarter. Based on the expected selling costs for the transactions, we estimate additional impairments of $9.5 million in the second quarter of 2017.
The following table includes condensed financial information primarily related to hotels sold in 2016 included in continuing operations (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Hotel operating revenue
$
274

 
$
19,017

Operating expenses
(128
)
 
(14,652
)
Operating income from continuing operations
146

 
4,365

Loss on sale of hotels
(666
)
 
(714
)
Net income (loss)
(520
)
 
3,651

Net loss (income) attributable to redeemable noncontrolling interests in FelCor LP
3

 
(16
)
Net income (loss) attributable to FelCor
$
(517
)
 
$
3,635

 


15



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.
Loss Per Share/Unit

The following tables set forth the computation of basic and diluted loss per share/unit (in thousands, except per share/unit data):

FelCor Loss Per Share
 
Three Months Ended
 
March 31,
 
2017
 
2016
Numerator:
 
 
 
Net loss attributable to FelCor
$
(35,911
)
 
$
(4,922
)
Less: Preferred dividends
(6,279
)
 
(6,279
)
Less: Dividends declared on unvested restricted stock
(37
)
 
(38
)
Numerator for basic and diluted loss attributable to FelCor common stockholders
$
(42,227
)
 
$
(11,239
)
Denominator:
 
 
 
Denominator for basic and diluted loss per share
137,778

 
139,678

Basic and diluted loss per share data:
 
 
 
Net loss
$
(0.31
)
 
$
(0.08
)


FelCor LP Loss Per Unit
 
Three Months Ended
 
March 31,
 
2017
 
2016
Numerator:
 
 
 
Net loss attributable to FelCor LP
$
(36,097
)
 
$
(4,970
)
Less: Preferred distributions
(6,279
)
 
(6,279
)
Less: Distributions declared on FelCor unvested restricted stock
(37
)
 
(38
)
Numerator for basic and diluted loss attributable to FelCor common unitholders
$
(42,413
)
 
$
(11,287
)
Denominator:
 
 
 
Denominator for basic and diluted loss per unit
138,388

 
140,289

Basic and diluted loss per unit data:
 
 
 
Net loss
$
(0.31
)
 
$
(0.08
)

The loss from continuing operations attributable to FelCor/FelCor LP share/unit in the above calculations includes the net loss on sale of hotels attributable to FelCor/FelCor LP.




16



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.
Loss Per Share/Unit — (continued)

Securities that could potentially dilute earnings (loss) per share/unit in the future that were not included in the computation of diluted income (loss) per share/unit, because they would have been antidilutive for the periods presented, are as follows (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Series A convertible preferred shares/units
9,984

 
 
9,984

FelCor restricted stock units, less shares assumed purchased at market
207

 
 
619


Series A preferred dividends (distributions) that would be excluded from net income (loss) attributable to FelCor common stockholders (or FelCor LP common unitholders), if these preferred shares/units were dilutive, were $6.3 million for the three months ended March 31, 2017 and 2016.

We grant our executive officers restricted stock units each year, which provides them with the potential to earn shares of our common stock. We amortize the fixed cost of these grants over the vesting period. We calculate the potential dilutive impact of these awards on our earnings per share using the treasury stock method.

10.
Fair Value of Financial Instruments

We base disclosures about fair value of our financial instruments on pertinent information available to management as of March 31, 2017 and December 31, 2016. We exercise considerable judgment when interpreting market data and developing 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. Different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

We base our estimates of the fair value of: (i) cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses on their carrying values due to their relatively short maturity; (ii) our debt for which trading prices are publicly available on observable market data (a Level 2 input) (that debt had an estimated fair value of $1.0 billion at March 31, 2017 and December 31, 2016); and (iii) our debt for which trading prices are not publicly available on a discounted cash flow model using effective borrowing rates for debt with similar terms, loan to estimated fair value of collateral and remaining maturities (a Level 3 input) (that debt had an estimated fair value of $377.6 million and $364.6 million at March 31, 2017 and December 31, 2016, respectively). The estimated fair value of all our debt was $1.4 billion at March 31, 2017 and December 31, 2016. The carrying value of our debt was $1.4 billion and $1.3 billion at March 31, 2017 and December 31, 2016, respectively.


17



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.
Redeemable Noncontrolling Interests in FelCor LP/Redeemable Units
We record redeemable noncontrolling interests in FelCor LP, in the case of FelCor, and redeemable units, in the case of FelCor LP, in the mezzanine section (between liabilities and equity or partners’ capital) of our consolidated balance sheets because of the redemption feature of these units. Additionally, FelCor’s consolidated statements of operations and comprehensive income (loss) separately present earnings attributable to redeemable noncontrolling interests. We adjust redeemable noncontrolling interests in FelCor LP (or redeemable units) each period to reflect the greater of its carrying value based on the accumulation of historical cost or its redemption value. We base the historical cost on the proportionate relationship between the carrying value of equity associated with FelCor’s common stockholders relative to that of FelCor LP’s unitholders. We base redemption value on the closing price of FelCor’s common stock at period end. FelCor allocates net income (loss) to FelCor LP’s noncontrolling partners based on their weighted average ownership percentage during the period.
At March 31, 2017, we carried 610,183 outstanding limited partnership units at $4.6 million. We base the value of these outstanding units on the closing price of FelCor’s common stock at March 31, 2017 ($7.51 per share).

Changes in redeemable noncontrolling interests (or redeemable units) for the three months ended March 31, 2017 and 2016 are shown below (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Balance at beginning of period
$
4,888

 
 
$
4,464

 
Redemption value allocation
(81
)
 
 
585

 
Distributions paid to unitholders
(38
)
 
 
(36
)
 
Net loss
(186
)
 
 
(48
)
 
Balance at end of period
$
4,583

 
 
$
4,965

 

12.    Consolidated Joint Venture Preferred Equity/Capital
Our joint venture that redeveloped The Knickerbocker raised $45 million through the sale of redeemable preferred equity under the EB-5 Immigrant Investor Program. The purchasers receive a 3.25% current annual return (which increases to 8% if we do not redeem this equity interest before the fifth anniversary of its issuance), plus a 0.25% non-compounding annual return payable at redemption. To date, the venture has received $44.4 million in gross proceeds ($43.8 million net of issuance costs), including $600,000 in gross proceeds received in the first three months of 2016. The venture will receive the remaining $600,000 if additional investors’ visas are approved.
13.    Contingency
In April 2016, an affiliate of InterContinental Hotels Group PLC, or IHG, which had formerly operated three hotels on our behalf (two of which we sold in 2006, and one of which we converted to Wyndham operation and brand in 2013), notified us that the pension fund in which the employees at those hotels had participated has assessed $8.3 million in withdrawal liability in connection with the termination of IHG’s operation of those hotels. Under our hotel management agreements with IHG, we may be obligated to indemnify and hold IHG harmless for some or all of any amount ultimately contributed to the pension fund with respect to these hotels.

18



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13.    Contingency — (continued)
Because of the rules and regulations governing the pension trust, we have paid $1.4 million (of which $285,000 was paid in the first quarter of 2017) through March 31, 2017 and expect to continue making such payments, on a quarterly basis, while the dispute is ongoing, subject to an overall contribution limit corresponding to the amount sought by the pension trust. While we aggressively oppose the pension trust’s position, we believe that resolution of this matter may not occur until mid-2018. Accordingly, in the third quarter of 2016, we accrued approximately $2.3 million for payments to be made through that time. The accrual recorded in the third quarter of 2016, in addition to payments made prior to that time, was recorded as a loss on the sale of hotels included in discontinued operations (because it primarily relates to hotels sold prior to 2013).
Despite these payments and accruals, we believe that (i) the pension trust was in error in assessing the withdrawal liability in this situation and (ii) even if the pension trust was not in error, we are not responsible for a significant portion (or perhaps any) of the withdrawal liability assessed by the pension trust for other reasons and that we are likely to recover a significant portion (if not all) of what we have paid, and may pay in the future, to the pension trust with respect to its claim. Consequently, we are vigorously disputing the underlying claims and, if appropriate, IHG’s demand for indemnification. The matter involves significant legal, actuarial and factual analysis with respect to each hotel, and we have not determined whether any loss to us is probable or that any such loss is estimable (other than the payments and accrual noted in the previous paragraph, for which we intend to seek recovery).


14.    Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach.
Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted but not before the original effective date (for annual reporting periods beginning after December 15, 2016). The Company expects to adopt this guidance on January 1, 2018, on a modified retrospective basis. Based on the company’s assessment of this standard, it is not expected to have a material effect on the amount of revenue, or the timing of recognizing revenue, from our hotel operations.
In February 2016, the FASB issued ASU 2016-02 - Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to

19



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.    Recently Issued Accounting Standards — (continued)
account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The ASU is expected to impact our consolidated financial statements as we have certain operating lease arrangements. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. While we are still in the process of evaluating the impact of this new guidance, we do expect that the application of this standard will result in the recording of a right-of-use asset and a related lease liability on our ground leases.
In August 2016, the FASB issued ASU 2016-18, Restricted Cash, which addresses classification issues related to the statement of cash flows which may impact our classification of cash activity related to restricted cash. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.


15.    Proposed Merger
On April 23, 2017, FelCor, FelCor LP, RLJ Lodging Trust (“RLJ”), RLJ Lodging Trust, L.P. (the “Operating Partnership”) and certain subsidiaries thereof entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”).
The Merger Agreement provides for the merger of an indirect wholly-owned subsidiary of the Operating Partnership with and into FelCor LP, with FelCor LP surviving as a wholly-owned subsidiary of the Operating Partnership (the “Partnership Merger”), and immediately thereafter, the merger of FelCor with and into another wholly-owned subsidiary of the Operating Partnership, with such subsidiary surviving as a wholly-owned subsidiary of the Operating Partnership (the “REIT Merger” and, together with the Partnership Merger, the “Mergers”). The Mergers are expected to close by the end of 2017.
At the effective time of the REIT Merger, each outstanding share of FelCor common stock will be converted into the right to receive 0.362 (the “Common Exchange Ratio”) common shares of RLJ, and each share of FelCor Series A preferred stock will be converted into the right to receive one share of newly created Series A cumulative convertible preferred shares of RLJ with equivalent terms and conditions as the existing FelCor Series A preferred stock. Each external limited partner of FelCor LP will be entitled to redeem or exchange its outstanding common limited partnership units in FelCor LP for shares of FelCor common stock, which will in turn be converted into the right to receive RLJ common shares. Each outstanding FelCor LP common unit of any holder who does not make the foregoing election will be converted into the right to receive a number of common limited partnership units in the Operating Partnership based on the Common Exchange Ratio.
Immediately preceding the Mergers, each outstanding share of FelCor restricted stock and each outstanding restricted stock unit of FelCor will vest in accordance with the applicable award agreement, and the holders of such vested shares will receive common shares of RLJ in exchange therefor based on the Common Exchange Ratio.
The parties to the Merger Agreement have made certain customary representations and warranties in the Merger Agreement and have agreed to customary covenants, including a “no-shop” provision. The completion of the Mergers is subject to customary closing conditions, including the approval of the REIT Merger by FelCor’s stockholders and approval of the issuance of RLJ common shares by RLJ’s shareholders. The Merger Agreement may be terminated under certain circumstances, including by either

20



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


15.    Proposed Merger — (continued)
party if the Mergers have not been consummated on or before December 28, 2017. In connection with the termination of the Merger Agreement under specified circumstances, RLJ may be required to pay to FelCor a termination fee of $95 million and/or reimburse FelCor’s transaction expenses in an amount equal to $20 million, or FelCor may be required to pay to RLJ a termination fee of $39 million and/or reimburse RLJ’s transaction expenses in an amount equal to $20 million. If either party pays the expense reimbursement amount and subsequently becomes obligated to pay the termination fee, the termination fee is reduced by the expense reimbursement amount previously paid.
For more information regarding the Mergers and the Merger Agreement, see our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 25, 2017. The Mergers are subject to certain risks and uncertainties, and we cannot assure you that we will be able to complete the Merger on the expected timeline or at all. See “Item 1A. Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.


16.
FelCor LP’s Consolidating Financial Information
Certain of FelCor LP’s 100% owned subsidiaries (FCH/PSH, L.P.; FelCor/CMB Buckhead Hotel, L.L.C.; FelCor/CMB Marlborough Hotel, L.L.C.; FelCor/CMB Orsouth Holdings, L.P.; FelCor/CMB SSF Holdings, L.P.; FelCor/CSS Holdings, L.P.; FelCor Dallas Love Field Owner, L.L.C.; FelCor Milpitas Owner, L.L.C.; FelCor TRS Borrower 4, L.L.C.; FelCor TRS Holdings, L.L.C.; FelCor Hotel Asset Company, L.L.C.; FelCor St. Pete (SPE), L.L.C.; FelCor Esmeralda (SPE), L.L.C.; FelCor S-4 Hotels (SPE), L.L.C.; Madison 237 Hotel, L.L.C.; Myrtle Beach Owner, L.L.C.; and Royalton 44 Hotel, L.L.C., collectively, “Subsidiary Guarantors”), together with FelCor, guaranty, fully and unconditionally, except where subject to customary release provisions as described below, and jointly and severally, our senior debt.
The guaranties by the Subsidiary Guarantors may be automatically and unconditionally released upon (i) the sale or other disposition of all of the capital stock of the Subsidiary Guarantor or the sale or disposition of all or substantially all of the assets of the Subsidiary Guarantor, if, in each case, as a result of such sale or disposition, such Subsidiary Guarantor ceases to be a subsidiary of FelCor LP, (ii) the consolidation or merger of any such Subsidiary Guarantor with any person other than FelCor LP, or a subsidiary of FelCor LP, if, as a result of such consolidation or merger, such Subsidiary Guarantor ceases to be a subsidiary of FelCor LP, (iii) a legal defeasance or covenant defeasance of the indenture, (iv) the unconditional and complete release of such Subsidiary Guarantor in accordance with the modification and waiver provisions of the indenture, or (v) the designation of a restricted subsidiary that is a Subsidiary Guarantor as an unrestricted subsidiary under and in compliance with the indenture.

21



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16.
FelCor LP’s Consolidating Financial Information — (continued)
The following tables present consolidating information for the Subsidiary Guarantors.
FELCOR LODGING LIMITED PARTNERSHIP

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2017
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Net investment in hotels
$

 
$
459,587

 
$
1,076,131

 
$

 
$
1,535,718

Equity investment in consolidated entities
1,136,432

 

 

 
(1,136,432
)
 

Investment in unconsolidated entities
2,200

 
4,125

 
1,207

 

 
7,532

Cash and cash equivalents
18,723

 
27,586

 
3,926

 

 
50,235

Restricted cash

 
17,436

 
4,883

 

 
22,319

Accounts receivable, net
1,934

 
33,171

 
5,871

 

 
40,976

Deferred expenses, net

 

 
4,059

 

 
4,059

Other assets
4,610

 
11,104

 
3,612

 

 
19,326

Total assets
$
1,163,899

 
$
553,009

 
$
1,099,689

 
$
(1,136,432
)
 
$
1,680,165

 
 
 
 
 
 
 
 
 
 
Debt, net
$
986,166

 
$

 
$
407,457

 
$
(39,436
)
 
$
1,354,187

Distributions payable
14,729

 

 
124

 

 
14,853

Accrued expenses and other liabilities
26,366

 
89,012

 
8,127

 

 
123,505

 
 
 
 
 
 
 
 
 
 
Total liabilities
1,027,261

 
89,012

 
415,708

 
(39,436
)
 
1,492,545

 
 
 
 
 
 
 
 
 
 
Redeemable units, at redemption value
4,583

 

 

 

 
4,583

 
 
 
 
 
 
 
 
 
 
Preferred units
309,337

 

 

 

 
309,337

Common units
(177,282
)
 
465,118

 
631,878

 
(1,096,996
)
 
(177,282
)
Total FelCor LP partners’ capital
132,055

 
465,118

 
631,878

 
(1,096,996
)
 
132,055

Noncontrolling interests

 
(1,121
)
 
8,320

 

 
7,199

Preferred capital in consolidated joint venture

 

 
43,783

 

 
43,783

Total partners’ capital
132,055

 
463,997

 
683,981

 
(1,096,996
)
 
183,037

Total liabilities and partners’ capital
$
1,163,899

 
$
553,009

 
$
1,099,689

 
$
(1,136,432
)
 
$
1,680,165


22



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16.    FelCor LP’s Consolidating Financial Information — (continued)

FELCOR LODGING LIMITED PARTNERSHIP

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2016
(in thousands)

 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Net investment in hotels
$

 
$
488,528

 
$
1,078,295

 
$

 
$
1,566,823

Equity investment in consolidated entities
1,190,737

 

 

 
(1,190,737
)
 

Investment in unconsolidated entities
2,410

 
4,800

 
1,102

 

 
8,312

Cash and cash equivalents
13,532

 
29,141

 
4,644

 

 
47,317

Restricted cash

 
16,433

 
3,058

 

 
19,491

Accounts receivable, net
2,804

 
33,338

 
5,938

 

 
42,080

Deferred expenses, net

 

 
4,527

 

 
4,527

Other assets
5,634

 
10,009

 
2,899

 

 
18,542

Total assets
$
1,215,117

 
$
582,249

 
$
1,100,463

 
$
(1,190,737
)
 
$
1,707,092

 
 
 
 
 
 
 
 
 
 
Debt, net
$
985,767

 
$

 
$
391,995

 
$
(39,436
)
 
$
1,338,326

Distributions payable
14,734

 

 
124

 

 
14,858

Accrued expenses and other liabilities
28,431

 
79,439

 
8,567

 

 
116,437

 
 
 
 
 
 
 
 
 
 
Total liabilities
1,028,932

 
79,439

 
400,686

 
(39,436
)
 
1,469,621

 
 
 
 
 
 
 
 
 
 
Redeemable units, at redemption value
4,888

 

 

 

 
4,888

 
 
 
 
 
 
 
 
 
 
Preferred units
309,337

 

 

 

 
309,337

Common units
(128,040
)
 
503,765

 
647,536

 
(1,151,301
)
 
(128,040
)
Total FelCor LP partners’ capital
181,297

 
503,765

 
647,536

 
(1,151,301
)
 
181,297

Noncontrolling interests

 
(955
)
 
8,458

 

 
7,503

Preferred capital in consolidated joint venture

 

 
43,783

 

 
43,783

Total partners’ capital
181,297

 
502,810

 
699,777

 
(1,151,301
)
 
232,583

Total liabilities and partners’ capital
$
1,215,117

 
$
582,249

 
$
1,100,463

 
$
(1,190,737
)
 
$
1,707,092



23



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.    FelCor LP’s Consolidating Financial Information — (continued)
 
 
FELCOR LODGING LIMITED PARTNERSHIP
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2017
(in thousands)
 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Hotel operating revenue
$

 
$
187,696

 
$

 
$

 
$
187,696

Percentage lease revenue

 

 
38,044

 
(38,044
)
 

Other revenue
4

 
343

 
61

 

 
408

Total revenues
4

 
188,039

 
38,105

 
(38,044
)
 
188,104

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Hotel operating expenses

 
128,838

 

 

 
128,838

Taxes, insurance and lease expense
40

 
45,952

 
5,954

 
(38,044
)
 
13,902

Corporate expenses

 
3,630

 
3,310

 

 
6,940

Depreciation and amortization
115

 
10,858

 
16,865

 

 
27,838

Impairment

 
24,838

 

 

 
24,838

Other expenses
473

 
741

 
46

 

 
1,260

Total operating expenses
628

 
214,857

 
26,175

 
(38,044
)
 
203,616

Operating loss
(624
)
 
(26,818
)
 
11,930

 

 
(15,512
)
Interest expense, net
(14,453
)
 
15

 
(4,848
)
 

 
(19,286
)
Loss before equity in loss from unconsolidated entities
(15,077
)
 
(26,803
)
 
7,082

 

 
(34,798
)
Equity in loss from consolidated entities
(21,435
)
 

 

 
21,435

 

Equity in loss from unconsolidated entities
441

 
(560
)
 
(11
)
 

 
(130
)
Loss from continuing operations before income tax
(36,071
)
 
(27,363
)
 
7,071

 
21,435

 
(34,928
)
Income tax
(26
)
 
(521
)
 

 

 
(547
)
Loss from continuing operations before loss on sale of hotels
(36,097
)
 
(27,884
)
 
7,071

 
21,435

 
(35,475
)
Loss on sale of hotels

 
(526
)
 
(140
)
 

 
(666
)
Net loss and comprehensive loss
(36,097
)
 
(28,410
)
 
6,931

 
21,435

 
(36,141
)
Loss attributable to noncontrolling interests

 
266

 
138

 

 
404

Preferred distributions - consolidated joint venture

 

 
(360
)
 

 
(360
)
Net loss and comprehensive loss attributable to FelCor LP
(36,097
)
 
(28,144
)
 
6,709

 
21,435

 
(36,097
)
Preferred distributions
(6,279
)
 

 

 

 
(6,279
)
Net loss attributable to FelCor LP common unitholders
$
(42,376
)
 
$
(28,144
)
 
$
6,709

 
$
21,435

 
$
(42,376
)

24



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.    FelCor LP’s Consolidating Financial Information — (continued)

FELCOR LODGING LIMITED PARTNERSHIP
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2016
(in thousands)
 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Hotel operating revenue
$

 
$
209,457

 
$

 
$

 
$
209,457

Percentage lease revenue

 

 
43,545

 
(43,545
)
 

Other revenue
186

 
432

 
69

 

 
687

Total revenues
186

 
209,889

 
43,614

 
(43,545
)
 
210,144

 
 
 
 
 
 
 
 
 

Expenses:
 
 
 
 
 
 
 
 

Hotel operating expenses

 
142,229

 

 

 
142,229

Taxes, insurance and lease expense
27

 
51,484

 
5,616

 
(43,545
)
 
13,582

Corporate expenses

 
4,335

 
4,065

 

 
8,400

Depreciation and amortization
51

 
11,997

 
17,135

 

 
29,183

Other expenses
232

 
553

 
43

 

 
828

Total operating expenses
310

 
210,598

 
26,859

 
(43,545
)
 
194,222

Operating income
(124
)
 
(709
)
 
16,755

 

 
15,922

Interest expense, net
(14,661
)
 
9

 
(5,068
)
 

 
(19,720
)
Loss before equity in loss from unconsolidated entities
(14,785
)
 
(700
)
 
11,687

 

 
(3,798
)
Equity in income from consolidated entities
9,867

 

 

 
(9,867
)
 

Equity in loss from unconsolidated entities
64

 
(207
)
 
(11
)
 

 
(154
)
Loss from continuing operations before income tax
(4,854
)
 
(907
)
 
11,676

 
(9,867
)
 
(3,952
)
Income tax
(116
)
 
(299
)
 

 

 
(415
)
Loss from continuing operations before loss on sale of hotels
(4,970
)
 
(1,206
)
 
11,676

 
(9,867
)
 
(4,367
)
Loss on sale of hotels

 
(457
)
 
(257
)
 

 
(714
)
Net loss and comprehensive loss
(4,970
)
 
(1,663
)
 
11,419

 
(9,867
)
 
(5,081
)
Loss attributable to noncontrolling interests

 
369

 
102

 

 
471

Preferred distributions - consolidated joint venture

 

 
(360
)
 

 
(360
)
Net loss and comprehensive loss attributable to FelCor LP
(4,970
)
 
(1,294
)
 
11,161

 
(9,867
)
 
(4,970
)
Preferred distributions
(6,279
)
 

 

 

 
(6,279
)
Net loss attributable to FelCor LP common unitholders
$
(11,249
)
 
$
(1,294
)
 
$
11,161

 
$
(9,867
)
 
$
(11,249
)

25



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16.    FelCor LP’s Consolidating Financial Information — (continued)
FELCOR LODGING LIMITED PARTNERSHIP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2017
(in thousands)
 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Operating activities:
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
$
(16,563
)
 
$
17,875

 
$
24,652

 
$

 
$
25,964

Investing activities:
 
 
 
 
 
 
 
 
 
Improvements and additions to hotels
2

 
(5,719
)
 
(13,745
)
 

 
(19,462
)
Net payments related to asset sales
(306
)
 
(406
)
 
(100
)
 

 
(812
)
Change in restricted cash - investing

 
(1,002
)
 
(1,826
)
 

 
(2,828
)
Distributions from unconsolidated entities
490

 

 

 

 
490

Intercompany financing
37,025

 

 

 
(37,025
)
 

Cash flows from investing activities
37,211

 
(7,127
)
 
(15,671
)
 
(37,025
)
 
(22,612
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 

 
29,000

 

 
29,000

Repayment of borrowings

 

 
(13,717
)
 

 
(13,717
)
Contributions from noncontrolling interests

 
100

 

 

 
100

Distributions paid to preferred unitholders
(6,279
)
 

 

 

 
(6,279
)
Distributions paid to common unitholders
(8,326
)
 

 

 

 
(8,326
)
Intercompany financing

 
(12,403
)
 
(24,622
)
 
37,025

 

Other
(852
)
 

 
(360
)
 

 
(1,212
)
Cash flows from financing activities
(15,457
)
 
(12,303
)
 
(9,699
)
 
37,025

 
(434
)
Change in cash and cash equivalents
5,191

 
(1,555
)
 
(718
)
 

 
2,918

Cash and cash equivalents at beginning of period
13,532

 
29,141

 
4,644

 

 
47,317

Cash and cash equivalents at end of period
$
18,723

 
$
27,586

 
$
3,926

 
$

 
$
50,235


26



FELCOR LODGING TRUST INCORPORATED AND FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16.    FelCor LP’s Consolidating Financial Information — (continued)
FELCOR LODGING LIMITED PARTNERSHIP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2016
(in thousands)
 
FelCor LP
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total Consolidated
Operating activities:
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
$
(16,847
)
 
$
7,399

 
$
29,101

 
$

 
$
19,653

Investing activities:
 
 
 
 
 
 
 
 
 
Improvements and additions to hotels
3

 
(6,104
)
 
(7,907
)
 

 
(14,008
)
Net payments related to asset sales
(66
)
 
(278
)
 
(122
)
 

 
(466
)
Insurance proceeds

 

 
94

 

 
94

Change in restricted cash - investing

 
(1,627
)
 
(1,768
)
 

 
(3,395
)
Distributions from unconsolidated entities
136

 

 

 

 
136

Intercompany financing
51,999

 

 

 
(51,999
)
 

Cash flows from investing activities
52,072

 
(8,009
)
 
(9,703
)
 
(51,999
)
 
(17,639
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 

 
31,000

 

 
31,000

Repayment of borrowings

 

 
(496
)
 

 
(496
)
Payment of deferred financing fees

 

 
(10
)
 

 
(10
)
Distributions paid to preferred unitholders
(6,279
)
 

 

 

 
(6,279
)
Distributions paid to common unitholders
(8,508
)
 

 

 

 
(8,508
)
Repurchase of common units
(19,218
)
 

 

 

 
(19,218
)
Contributions from noncontrolling interests

 
68

 

 

 
68

Net proceeds from issuance of preferred capital- consolidated joint venture

 

 
598

 

 
598

Intercompany financing

 
1,743

 
(53,742
)
 
51,999

 

Other
(628
)
 

 
(360
)
 

 
(988
)
Cash flows from financing activities
(34,633
)
 
1,811

 
(23,010
)
 
51,999

 
(3,833
)
Effect of exchange rate changes on cash

 

 
(9
)
 

 
(9
)
Change in cash and cash equivalents
592

 
1,201

 
(3,621
)
 

 
(1,828
)
Cash and cash equivalents at beginning of period
21,219

 
33,873

 
4,694

 

 
59,786

Cash and cash equivalents at end of period
$
21,811

 
$
35,074

 
$
1,073

 
$

 
$
57,958


27


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

General
Revenue per available room, or RevPAR, for our 38 same-store hotels decreased 1.3% in the first quarter of 2017 compared to the same period last year, driven by a 1.2% decrease in occupancy and a 0.1% decrease in average daily rate, or ADR.
In our continuing effort to increase long-term stockholder value, we look for opportunities to redeploy capital to achieve higher returns and strengthen our balance sheet. Subsequent to March 31, 2017, two hotels became held for sale, both of which are expected to close in the third quarter. Based on the expected selling costs for the transactions, we estimate additional impairments of $9.5 million in the second quarter of 2017. We continue to market The Knickerbocker.
On April 23, 2017, FelCor, FelCor LP, RLJ Lodging Trust (“RLJ”), RLJ Lodging Trust, L.P. (the “Operating Partnership”) and certain subsidiaries thereof entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”).
The Merger Agreement provides for the merger of an indirect wholly-owned subsidiary of the Operating Partnership with and into FelCor LP, with FelCor LP surviving as a wholly-owned subsidiary of the Operating Partnership (the “Partnership Merger”), and immediately thereafter, the merger of FelCor with and into another wholly-owned subsidiary of the Operating Partnership, with such subsidiary surviving as a wholly-owned subsidiary of the Operating Partnership (the “REIT Merger” and, together with the Partnership Merger, the “Mergers”).  The Mergers are expected to close by the end of 2017.
At the effective time of the REIT Merger, each outstanding share of FelCor common stock will be converted into the right to receive 0.362 (the “Common Exchange Ratio”) common shares of RLJ, and each share of FelCor Series A preferred stock will be converted into the right to receive one share of newly created Series A cumulative convertible preferred shares of RLJ with equivalent terms and conditions as the existing FelCor Series A preferred stock. Each external limited partner of FelCor LP will be entitled to redeem or exchange its outstanding common limited partnership units in FelCor LP for shares of FelCor common stock, which will in turn be converted into the right to receive RLJ common shares. Each outstanding FelCor LP common unit of any holder who does not make the foregoing election will be converted into the right to receive a number of common limited partnership units in the Operating Partnership based on the Common Exchange Ratio.
Immediately preceding the Mergers, each outstanding share of FelCor restricted stock and each outstanding restricted stock unit of FelCor will vest in accordance with the applicable award agreement, and the holders of such vested shares will receive common shares of RLJ in exchange therefor based on the Common Exchange Ratio.
The parties to the Merger Agreement have made certain customary representations and warranties in the Merger Agreement and have agreed to customary covenants, including a “no-shop” provision. The completion of the Mergers is subject to customary closing conditions, including the approval of the REIT Merger by FelCor’s stockholders and approval of the issuance of RLJ common shares by RLJ’s shareholders. The Merger Agreement may be terminated under certain circumstances, including by either party if the Mergers have not been consummated on or before December 28, 2017. In connection with the termination of the Merger Agreement under specified circumstances, RLJ may be required to pay to FelCor a termination fee of $95 million and/or reimburse FelCor’s transaction expenses in an amount equal to $20 million, or FelCor may be required to pay to RLJ a termination fee of $39 million and/or reimburse RLJ’s transaction expenses in an amount equal to $20 million. If either party pays the expense

28


reimbursement amount and subsequently becomes obligated to pay the termination fee, the termination fee is reduced by the expense reimbursement amount previously paid.
For more information regarding the Mergers and the Merger Agreement, see our Current Report on Form 8-K filed with the SEC on April 25, 2017. The Mergers are subject to certain risks and uncertainties, and we cannot assure you that we will be able to complete the Merger on the expected timeline or at all. See “Item 1A. Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.

Results of Operations
Comparison of the Three Months ended March 31, 2017 and 2016
For the three months ended March 31, 2017, we recorded a net loss of $36.1 million, compared to a net loss of $5.1 million for the same period last year. Our 2017 net loss includes a $24.8 million impairment charge related to one hotel.
For the three months ended March 31, 2017:
Hotel operating revenue decreased $21.8 million, including an $18.7 million net reduction in revenue for sold hotels. Excluding these hotels, hotel operating revenue decreased 1.6% from last year. We attribute the decrease primarily to the 1.3% decrease in same-store RevPAR, reflecting a 1.2% decrease in occupancy and a 0.1% decrease in ADR.
Hotel departmental expenses decreased $7.0 million, which includes a $7.2 million net reduction in expense for sold hotels. Excluding these hotels, hotel departmental expenses increased to 37.6% of hotel operating revenue from 36.9% for the same period last year, primarily attributable to increased labor costs for certain brands and markets in the current period.
Other property-related costs decreased $4.7 million, including a $4.6 million net reduction in expense for sold hotels. Excluding these hotels, other property-related costs increased slightly to 27.1% of hotel operating revenue from 26.8% for the same period last year.
Management and franchise fees decreased $1.7 million, including a $639,000 net reduction in expense for sold hotels. Excluding these hotels, these costs decreased to 4.0% of hotel operating revenue from 4.4% for the same period last year. The decrease as a percent of hotel operating revenue is primarily attributable to our new management agreements with Hilton, which shift a substantial portion of fees from base fees as a percent of revenue to incentive fees based on hotel profitability and also eliminate separate franchise fees. Additionally, Wyndham’s guaranty reduced management fees by an additional $580,000 compared to the same period last year.
Taxes, insurance and lease expense increased $320,000, including a $567,000 net reduction in expense for sold hotels. Excluding these hotels, these expenses increased to 7.4% of hotel operating revenue from 6.8% for the same period last year. We attribute this increase primarily to increased taxable values for certain hotels in the current period and successful property tax appeals during the same period last year. Land lease expense also increased for certain hotels in the current period, as a consequence of improved operations at those hotels and lower capitalized lease expense in the current year due to the wind-down of capital projects at the properties.
Impairment was $24.8 million in the current period, and we had no impairment charge in the same period last year. The 2017 charge reflects a reduction in the fair value of one hotel reflecting a third-party offer to purchase the hotel.
Corporate expenses decreased $1.5 million, primarily reflecting a change in stock compensation expense. We did not have a Chief Executive Officer for a portion of the current period, resulting in lower compensation expense compared to the same period last year. Additionally, awards

29


granted in the current period have a different vesting period for time-based stock grants compared to the awards granted last year.
Depreciation and amortization expense decreased $1.3 million, including a $1.5 million net reduction in expense for sold hotels.

Non-GAAP Financial Measures
We refer in this report to certain “non-GAAP financial measures.” These measures, including FFO (Funds from Operations), Adjusted FFO, EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization), Adjusted EBITDA, Same-store Adjusted EBITDA, Hotel EBITDA, and Hotel EBITDA margin, are measures of our financial performance that are not calculated and presented in accordance with GAAP. The following tables reconcile 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.
 

30



Reconciliation of Net Loss to FFO and Adjusted FFO
(in thousands, except per share data)

 
Three Months Ended March 31,
 
2017
2016
 
Dollars
 
Shares
 
Per Share Amount
 
Dollars
 
Shares
 
Per Share Amount
Net loss
$
(36,141
)
 
 
 
 
 
$
(5,081
)
 
 
 
 
Noncontrolling interests
590

 
 
 
 
 
519

 
 
 
 
Preferred dividends
(6,279
)
 
 
 
 
 
(6,279
)
 
 
 
 
Preferred distributions - consolidated joint venture
(360
)
 
 
 
 
 
(360
)
 
 
 
 
Net loss attributable to FelCor common stockholders
(42,190
)
 
 
 
 
 
(11,201
)
 
 
 
 
Less: Dividends declared on unvested restricted stock
(37
)
 
 
 
 
 
(38
)
 
 
 
 
Basic and diluted earnings per share data
(42,227
)
 
137,778

 
$
(0.31
)
 
(11,239
)
 
139,678

 
$
(0.08
)
Depreciation and amortization
27,838

 

 
0.20

 
29,183

 

 
0.22

Depreciation, unconsolidated entities and other partnerships
455

 

 

 
467

 

 

Impairment
24,838

 

 
0.18

 

 

 

Loss on sale of hotels
666

 

 
0.01

 
714

 

 

Noncontrolling interests in FelCor LP
(186
)
 
610

 

 
(48
)
 
611

 

Dividends declared on unvested restricted stock
37

 
55

 

 
38

 
8

 

Conversion of unvested restricted stock units

 
207

 

 

 
619

 

FFO*
11,421

 
138,650

 
0.08

 
19,115

 
140,916

 
0.14

Hurricane loss
17

 

 

 

 

 

Hurricane loss, unconsolidated entities
4

 

 

 

 

 

Variable stock compensation

 

 

 
761

 

 

Cost of potential transaction
473

 

 
0.01

 

 

 

Abandoned projects

 

 

 
232

 

 

Pre-opening costs
132

 

 

 
54

 

 

Adjusted FFO*
$
12,047

 
138,650


$
0.09


$
20,162


140,916


$
0.14


* FFO and Adjusted FFO are attributable to FelCor common stockholders and FelCor LP common unitholders other than FelCor.


31


Reconciliation of Net Loss to EBITDA, Adjusted EBITDA and Same-store Adjusted EBITDA
(in thousands)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net loss
$
(36,141
)
 
$
(5,081
)
Depreciation and amortization
27,838

 
29,183

Depreciation, unconsolidated entities and other partnerships
455

 
467

Interest expense
19,319

 
19,732

Interest expense, unconsolidated entities and other partnerships
84

 
99

Income taxes
547

 
415

Noncontrolling interests in preferred distributions, consolidated joint venture
(18
)
 
(18
)
Noncontrolling interests in other partnerships
404

 
471

EBITDA*
12,488

 
45,268

Impairment loss
24,838

 

Hurricane loss
17

 

Hurricane loss, unconsolidated entities
4

 

Loss on sale of hotels
666

 
714

Amortization of fixed stock and directors’ compensation
1,593

 
1,935

Cost of potential transaction
473

 

Abandoned projects

 
232

Variable stock compensation

 
761

Pre-opening costs
132

 
54

Adjusted EBITDA*
40,211

 
48,964

Adjusted EBITDA from sold hotels
(146
)
 
(5,881
)
Same-store Adjusted EBITDA*
$
40,065

 
$
43,083


* EBITDA, Adjusted EBITDA and Same-store Adjusted EBITDA are attributable to FelCor common stockholders and FelCor LP unitholders other than FelCor.


32



Hotel EBITDA and Hotel EBITDA Margin
(dollars in thousands)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Same-store operating revenue:
 
 
 
Room
$
144,933

 
$
148,423

Food and beverage
32,074

 
31,990

Other operating departments
10,415

 
10,027

Same-store operating revenue
187,422

 
190,440

Same-store operating expense:
 
 
 
Room
40,669

 
40,417

Food and beverage
26,221

 
26,284

Other operating departments
3,533

 
3,489

Other property-related costs
50,863

 
51,011

Management and franchise fees
7,424

 
8,459

Taxes, insurance and lease expense
13,525

 
12,665

Same-store operating expense
142,235

 
142,325

Hotel EBITDA
$
45,187

 
$
48,115

Hotel EBITDA Margin
24.1
%
 
25.3
%


33


Reconciliation of Same-store Operating Revenue and Same-store Operating Expense to Total Revenue, Total Operating Expense and Operating Income (Loss)
(in thousands)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Same-store operating revenue
$
187,422

 
$
190,440

Other revenue
408

 
687

Revenue from sold hotels(a)
274

 
19,017

Total revenue
188,104

 
210,144

Same-store operating expense
142,235

 
142,325

Consolidated hotel lease expense(b)
815

 
802

Unconsolidated taxes, insurance and lease expense
(438
)
 
(452
)
Corporate expenses
6,940

 
8,400

Depreciation and amortization
27,838

 
29,183

Impairment
24,838

 

Expenses from sold hotels(a)
128

 
13,136

Other expenses
1,260

 
828

Total operating expense
203,616

 
194,222

Operating income (loss)
$
(15,512
)
 
$
15,922

(a)
Under GAAP, we include the operating performance for sold hotels in continuing operations in our statements of operations. However, for purposes of our Non-GAAP reporting metrics, we have excluded the results of these hotels to provide a meaningful same-store comparison.
(b)
Consolidated hotel lease expense represents the lease expense of our 51% owned operating lessees. The offsetting lease revenue is included in equity in income from unconsolidated entities.
Substantially all of our non-current assets consist of real estate. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider supplemental measures of performance, which are not measures of operating performance under GAAP, to be helpful in evaluating a real estate company’s operations. These supplemental measures are not measures of operating performance under GAAP. However, we consider these non-GAAP measures to be supplemental measures of a hotel REIT’s performance and should be considered along with, but not as an alternative to, net income (loss) attributable to FelCor as a measure of our operating performance.


34



FFO and EBITDA

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

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

Adjustments to FFO and EBITDA
We adjust FFO and EBITDA when evaluating our performance because management believes that the exclusion of certain additional items provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted FFO, and Adjusted EBITDA when combined with GAAP net income (loss) attributable to FelCor, EBITDA and FFO, is beneficial to an investor’s better understanding of our operating performance.
Gains and losses related to extinguishment of debt and interest rate swaps - We exclude gains and losses related to extinguishment of debt and interest rate swaps from Adjusted FFO and Adjusted EBITDA because we believe that it is not indicative of ongoing operating performance of our hotel assets. This also represents an acceleration of interest expense or a reduction of interest expense, and interest expense is excluded from EBITDA.
Cumulative effect of a change in accounting principle - Infrequently, the Financial Accounting Standards Board promulgates new accounting standards that require the consolidated statements of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments in computing Adjusted FFO and Adjusted EBITDA because they do not reflect our actual performance for that period.
Other expenses and costs - From time to time, we periodically incur expenses or transaction costs that are not indicative of ongoing operating performance. Such costs include, but are not limited to, conversion costs, acquisition costs, pre-opening costs, severance costs and certain non-cash adjustments. We exclude these costs from the calculation of Adjusted FFO and Adjusted EBITDA.

Variable stock compensation - We exclude the cost associated with our variable stock compensation. This cost is subject to volatility related to the price and dividends of our common stock that does not necessarily correspond to our operating performance.
In addition, to derive Adjusted EBITDA, we exclude gains or losses on the sale of depreciable assets and impairment losses because including them in EBITDA is inconsistent with reporting the ongoing performance of our remaining assets. Additionally, the gain or loss on sale of depreciable assets and impairment losses represents either accelerated depreciation or excess depreciation in previous periods, and depreciation is excluded from EBITDA. We also exclude the amortization of our fixed stock and directors’ compensation, which is included in corporate expenses and is not separately stated on our statements of operations. Excluding amortization of our fixed stock and directors’ compensation maintains consistency with the EBITDA definition.

35


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 brand/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 that we use 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 in a manner consistent with Adjusted EBITDA, however, we also eliminate all revenues and expenses from continuing operations not directly associated with hotel operations, including other income and corporate-level expenses. We eliminate these additional items because we believe property-level results provide investors with supplemental information regarding the ongoing operational performance of our hotels and the effectiveness of management on a property-level basis. 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 Consolidated Hotels. Hotel EBITDA and Hotel EBITDA margins are presented on a same-store basis.
Use and Limitations of Non-GAAP Measures
We use FFO, Adjusted FFO, EBITDA, Adjusted EBITDA, Same-store Adjusted EBITDA, Hotel EBITDA and Hotel EBITDA margin to evaluate the performance of our hotels and to facilitate comparisons between us and other hotel REITs, hotel owners who are not REITs and other capital intensive companies. We use Hotel EBITDA and Hotel EBITDA margin in evaluating hotel-level performance and the operating efficiency of our hotel managers.
The use of these non-GAAP financial measures has certain limitations. As we present them, these non-GAAP financial measures may not be comparable to similar non-GAAP financial measures as presented by other real estate companies. These measures do not reflect certain expenses or expenditures that we incurred and will incur, such as depreciation, interest and capital expenditures. We compensate 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.
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. These non-GAAP financial measures 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. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.


36


Pro Rata Share of Rooms Owned

The following table sets forth, at March 31, 2017, our pro rata share of hotel rooms after giving consideration to the portion of rooms attributed to our partners in our consolidated and unconsolidated joint ventures:
 
 
 
 
Room Count at
 
Hotels
 
March 31, 2017
Consolidated Hotels
38

 
 
11,329

 
Unconsolidated hotel operations
1

 
 
171

 
Total hotels
39

 
 
11,500

 
 
 
 
 
 
 
    50% joint ventures
2

 
 
(216
)
 
    95% joint venture
1

 
 
(17
)
 
Pro rata rooms attributed to joint venture partners
 
 
 
(233
)
 
Pro rata share of rooms owned
 
 
 
11,267

 




37


Hotel Operating Statistics
 

 
 
Occupancy (%)
 
ADR ($)
 
RevPAR ($)
 
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
Three Months Ended March 31,
Same-store Hotels
 
2017
 
2016
 
%Change
 
2017
 
2016
 
%Change
 
2017
 
2016
 
%Change
Embassy Suites Atlanta-Buckhead
73.4
 
80.9
 
(9.4
)
 
165.91

 
159.13

 
4.3

 
121.70

 
128.79

 
(5.5
)
DoubleTree Suites by Hilton Austin
85.3
 
82.8
 
3.0

 
251.65

 
240.06

 
4.8

 
214.75

 
198.87

 
8.0

Embassy Suites Birmingham
79.3
 
80.7
 
(1.6
)
 
133.91

 
133.82

 
0.1

 
106.25

 
107.92

 
(1.6
)
The Fairmont Copley Plaza, Boston
62.3
 
64.0
 
(2.6
)
 
245.20

 
252.18

 
(2.8
)
 
152.80

 
161.36

 
(5.3
)
Wyndham Boston Beacon Hill
73.1
 
63.8
 
14.7

 
149.02

 
164.42

 
(9.4
)
 
108.99

 
104.87

 
3.9

Embassy Suites Boston-Marlborough
57.0
 
64.8
 
(12.0
)
 
160.42

 
167.60

 
(4.3
)
 
91.49

 
108.56

 
(15.7
)
Sheraton Burlington Hotel & Conference Center
63.6
 
68.5
 
(7.2
)
 
91.82

 
93.17

 
(1.4
)
 
58.43

 
63.86

 
(8.5
)
The Mills House Wyndham Grand Hotel, Charleston
77.0
 
78.1
 
(1.3
)
 
219.17

 
205.75

 
6.5

 
168.80

 
160.63

 
5.1

Embassy Suites Dallas-Love Field
78.9
 
85.3
 
(7.4
)
 
153.71

 
143.51

 
7.1

 
121.35

 
122.36

 
(0.8
)
Embassy Suites Deerfield Beach-Resort & Spa
83.5
 
88.2
 
(5.4
)
 
253.56

 
269.69

 
(6.0
)
 
211.69

 
237.96

 
(11.0
)
Embassy Suites Fort Lauderdale 17th Street
87.3
 
93.4
 
(6.5
)
 
236.33

 
231.31

 
2.2

 
206.43

 
215.99

 
(4.4
)
Wyndham Houston-Medical Center Hotel & Suites
77.7
 
86.0
 
(9.7
)
 
163.88

 
159.64

 
2.7

 
127.30

 
137.32

 
(7.3
)
The Knickerbocker- New York
69.5
 
58.5
 
18.8

 
270.32

 
264.35

 
2.3

 
187.97

 
154.74

 
21.5

Embassy Suites Los Angeles-International Airport/South
89.8
 
90.0
 
(0.2
)
 
171.13

 
162.70

 
5.2

 
153.73

 
146.41

 
5.0

Embassy Suites Mandalay Beach-Hotel & Resort
74.4
 
76.7
 
(3.0
)
 
186.58

 
207.31

 
(10.0
)
 
138.84

 
158.98

 
(12.7
)
Embassy Suites Miami-International Airport
85.7
 
91.5
 
(6.3
)
 
182.81

 
197.22

 
(7.3
)
 
156.74

 
180.41

 
(13.1
)
Embassy Suites Milpitas-Silicon Valley
79.8
 
80.8
 
(1.2
)
 
200.18

 
211.62

 
(5.4
)
 
159.78

 
170.92

 
(6.5
)
Embassy Suites Minneapolis-Airport
66.4
 
68.7
 
(3.4
)
 
135.95

 
143.73

 
(5.4
)
 
90.27

 
98.80

 
(8.6
)
Embassy Suites Myrtle Beach-Oceanfront Resort
65.6
 
68.6
 
(4.3
)
 
129.18

 
129.48

 
(0.2
)
 
84.79

 
88.83

 
(4.5
)
Hilton Myrtle Beach Resort
45.5
 
48.1
 
(5.4
)
 
107.81

 
106.90

 
0.8

 
49.11

 
51.47

 
(4.6
)
Embassy Suites Napa Valley
73.2
 
79.9
 
(8.4
)
 
191.45

 
182.08

 
5.1

 
140.15

 
145.56

 
(3.7
)
Wyndham New Orleans-French Quarter
78.1
 
73.7
 
6.0

 
160.31

 
155.37

 
3.2

 
125.23

 
114.53

 
9.3

Morgans New York
75.9
 
72.9
 
4.2

 
184.26

 
212.76

 
(13.4
)
 
139.83

 
155.01

 
(9.8
)
Royalton New York
74.5
 
76.2
 
(2.3
)
 
216.27

 
237.95

 
(9.1
)
 
161.11

 
181.40

 
(11.2
)
Embassy Suites Orlando-International Drive South/Convention Center
81.2
 
88.1
 
(7.9
)
 
186.16

 
176.25

 
5.6

 
151.10

 
155.36

 
(2.7
)
DoubleTree Suites by Hilton Orlando-Lake Buena Vista
89.9
 
92.3
 
(2.6
)
 
162.75

 
165.40

 
(1.6
)
 
146.32

 
152.60

 
(4.1
)
Wyndham Philadelphia Historic District
59.8
 
55.0
 
8.7

 
124.29

 
125.93

 
(1.3
)
 
74.29

 
69.26

 
7.3

Sheraton Philadelphia Society Hill Hotel
56.4
 
55.0
 
2.4

 
151.09

 
151.24

 
(0.1
)
 
85.16

 
83.24

 
2.3

Embassy Suites Phoenix-Biltmore
77.0
 
78.0
 
(1.3
)
 
229.70

 
243.29

 
(5.6
)
 
176.88

 
189.88

 
(6.8
)
Wyndham Pittsburgh University Center
60.8
 
55.4
 
9.8

 
131.56

 
132.08

 
(0.4
)
 
80.05

 
73.21

 
9.4

Wyndham San Diego Bayside
79.2
 
77.5
 
2.2

 
157.83

 
137.19

 
15.0

 
124.99

 
106.31

 
17.6

Embassy Suites San Francisco Airport-South San Francisco
85.5
 
85.4
 
0.1

 
200.19

 
197.13

 
1.6

 
171.15

 
168.39

 
1.6

Embassy Suites San Francisco Airport-Waterfront
84.7
 
85.3
 
(0.7
)
 
214.24

 
204.40

 
4.8

 
181.36

 
174.25

 
4.1

Holiday Inn San Francisco-Fisherman’s Wharf
84.9
 
82.0
 
3.6

 
185.45

 
194.67

 
(4.7
)
 
157.53

 
159.58

 
(1.3
)
San Francisco Marriott Union Square
83.3
 
88.6
 
(6.0
)
 
321.37

 
319.58

 
0.6

 
267.59

 
283.21

 
(5.5
)
Wyndham Santa Monica at the Pier
84.1
 
87.8
 
(4.2
)
 
255.78

 
258.44

 
(1.0
)
 
215.04

 
226.83

 
(5.2
)
Embassy Suites Secaucus-Meadowlands
60.2
 
54.6
 
10.2

 
167.01

 
171.47

 
(2.6
)
 
100.48

 
93.62

 
7.3

The Vinoy Renaissance St. Petersburg Resort & Golf Club
86.2
 
88.2
 
(2.2
)
 
264.31

 
256.26

 
3.1

 
227.86

 
225.92

 
0.9

Same-store Hotels
75.0
 
75.9
 
(1.2
)
 
189.63

 
189.76

 
(0.1
)
 
142.15

 
143.97

 
(1.3
)



38



Hotel Portfolio
The following table provides room counts for the hotels in which we held an ownership interest at March 31, 2017.
Consolidated Hotels
 
 
Rooms
Embassy Suites Atlanta-Buckhead
 
316

DoubleTree Suites by Hilton Austin
 
188

Embassy Suites Birmingham
 
242

The Fairmont Copley Plaza, Boston
 
383

Wyndham Boston Beacon Hill
 
304

Embassy Suites Boston-Marlborough
 
229

Sheraton Burlington Hotel & Conference Center
 
309

The Mills House Wyndham Grand Hotel, Charleston
 
216

Embassy Suites Dallas-Love Field
 
248

Embassy Suites Deerfield Beach-Resort & Spa
 
244

Embassy Suites Fort Lauderdale 17th Street
 
361

Wyndham Houston-Medical Center Hotel & Suites
 
287

Embassy Suites Los Angeles-International Airport/South
 
349

Embassy Suites Mandalay Beach-Hotel & Resort
 
250

Embassy Suites Miami-International Airport
 
318

Embassy Suites Milpitas-Silicon Valley
 
266

Embassy Suites Minneapolis-Airport
 
310

Embassy Suites Myrtle Beach-Oceanfront Resort
 
255

Hilton Myrtle Beach Resort
 
385

Embassy Suites Napa Valley
 
205

Wyndham New Orleans-French Quarter
 
374

The Knickerbocker New York(a)
 
330

Morgans New York
 
117

Royalton New York
 
168

Embassy Suites Orlando-International Drive South/Convention Center
 
244

DoubleTree Suites by Hilton Orlando-Lake Buena Vista
 
229

Wyndham Philadelphia Historic District
 
364

Sheraton Philadelphia Society Hill Hotel
 
364

Embassy Suites Phoenix-Biltmore
 
232

Wyndham Pittsburgh University Center
 
251

Wyndham San Diego Bayside
 
600

Embassy Suites San Francisco Airport-South San Francisco
 
312

Embassy Suites San Francisco Airport-Waterfront
 
340

Holiday Inn San Francisco-Fisherman’s Wharf
 
585

San Francisco Marriott Union Square
 
400

Wyndham Santa Monica At the Pier
 
132

Embassy Suites Secaucus-Meadowlands(b)
 
261

The Vinoy Renaissance St. Petersburg Resort & Golf Club
 
361

 
 
11,329

Unconsolidated Hotel
 
 
Chateau LeMoyne-French Quarter, New Orleans(b)
 
171
(a)
We own a 95% interest in this property.
(b)
We own a 50% interest in this property.

39


Liquidity and Capital Resources
Operating Activities
For the three months ended March 31, 2017, RevPAR at our same-store hotels decreased 1.3%, as compared to the same period in 2016, driven by a 1.2% decrease in occupancy and a 0.1% decrease in ADR. We expect our RevPAR will increase 0.5% to 2.5% during 2017, as compared to 2016, primarily from higher ADR, and our operations will generate $142 million to $152 million of cash flow in 2017.
At March 31, 2017, we had $50.2 million of cash and cash equivalents, including $27.6 million held by third-party management companies. During the first three months of 2017, our operations (primarily hotel operations) provided $26.0 million in cash compared to $19.7 million for the same period last year. In the current period, Wyndham paid $3.9 million more under its annual adjusted net operating income guaranty compared to the same period last year. Additionally, our increased operating cash flow reflects a change in the timing of property taxes made for certain properties.
Investing Activities
During the three months ended March 31, 2017, cash used in investing activities was $22.6 million compared to $17.6 million during the same period last year. Through March 31, 2017, we have spent $5.5 million more on renovation and redevelopment projects at our hotels compared to the same period last year.
Any future renovations and redevelopments will be funded using operating cash flow, cash on hand and borrowings under our line of credit.
We expect to have gross proceeds of $92 million from the sale of two hotels in the third quarter.
Financing Activities
During the three months ended March 31, 2017, cash used in financing activities was $434,000, $3.4 million less than cash used for the same period last year.
In 2015, our Board approved a stock repurchase program, under which we may spend up to $100 million repurchasing shares of our common stock through October 2017, in accordance with applicable securities laws and other restrictions. During the first three months of 2016, we repurchased 2.9 million shares of common stock for $19.2 million (including commissions) at an average price of $6.49 per share. We did not repurchase any shares during the first three months of 2017. Since the program was authorized, FelCor has repurchased 6.6 million shares for a total of $44.8 million (including commissions) at an average share price of $6.78 per share.
In the current period, we repaid $13.2 million more in debt borrowings and drew $2.0 million less on our line of credit compared to the same period last year.
In 2017, we expect to make approximately $3 million of scheduled principal payments and pay $25 million of preferred dividends and $33 million in common dividends (assuming no change to our current quarterly dividend), all of which we expect to fund with operating cash flow and cash on hand.
FelCor LP, which is our operating partnership, distributes funds to FelCor to pay common and preferred dividends. Our Board determines the amount of common and preferred dividends for each quarter, if any, based upon various factors including operating results, economic conditions, other operating trends, our financial condition and capital requirements, as well as the minimum REIT distribution requirements.

40


As discussed herein, on April 23, 2017, we entered into a Merger Agreement with RLJ, pending shareholder approval. We expect to incur significant costs in connection with the completion of the mergers.
Except for our 5.625% senior secured notes due 2023 and our line of credit, our secured debt is generally recourse solely to the specific hotels securing the debt, except in case of fraud, misapplication of funds and certain other customary limited recourse carve-out provisions that could extend recourse to us. Much of our secured debt allows us to substitute collateral under certain conditions and is freely prepayable, subject in some instances to various prepayment, yield maintenance or defeasance obligations.
Most of our secured debt (other than our 5.625% senior secured notes) is subject to lock-box arrangements under certain circumstances. We are permitted to spend an amount required to cover our hotel operating expenses, taxes, debt service, insurance and capital expenditure reserves, even if revenues are flowing through a lock-box triggered by a specified debt service coverage ratio not being met. All of our consolidated loans subject to lock-box provisions currently exceed the applicable minimum debt service coverage ratios.
Senior Notes. Our senior notes, which are guaranteed by FelCor, 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 qualify as a REIT; (iii) repurchase capital stock; or (iv) merge. We currently exceed all minimum thresholds. In addition, our 5.625% senior secured notes are secured by a combination of first lien mortgages and related security interests on nine hotels, as well as pledges of equity interests in certain subsidiaries of FelCor LP, and our 6.0% senior unsecured notes require us to maintain a minimum amount of unencumbered assets.
Interest Rate Caps. To fulfill requirements under one of our loans, we entered into an interest rate cap agreement with an aggregate notional amount of $140 million at March 31, 2016. We did not designate the interest rate cap as a hedge, and it had an insignificant fair value at March 31, 2016, resulting in no significant impact on earnings. We had no outstanding interest rate caps at March 31, 2017 or December 31, 2016.
Inflation and Competition
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures 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 that are disproportionate to increases in 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.

41



Disclosure Regarding Forward-Looking Statements
The information presented herein may contain forward-looking statements. These forward-looking statements, which are based on current expectations, estimates and projections about the industry and markets in which FelCor and RLJ operate and beliefs of and assumptions made by FelCor management and RLJ management, involve significant risks and uncertainties, which are difficult to predict and are not guarantees of future performances, that could significantly affect the financial results of FelCor or RLJ or the combined company. Words such as “projects,” “will,” “could,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “forecast,” “guidance,” “outlook,” “may,” and “might” and variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. Such forward-looking statements may include, but are not limited to, statements about the anticipated benefits of the proposed merger between FelCor and RLJ, including future financial and operating results, the attractiveness of the value to be received by FelCor stockholders, the attractiveness of the value to be received by RLJ, the combined company’s plans, objectives, expectations and intentions, the timing of future events, anticipated administrative and operating synergies, the anticipated impact of the merger on net debt ratios, cost of capital, future dividend payment rates, forecasts of FFO accretion, projected capital improvements, expected sources of financing, and descriptions relating to these expectations. All statements that address operating performance, events or developments that FelCor expects or anticipates will occur in the future - including statements relating to expected synergies, improved liquidity and balance sheet strength - are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. FelCor’s ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although FelCor believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, FelCor can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may materially and adversely affect FelCor’s or the combined company’s business, financial condition, liquidity, results of operations and prospects, as well as the ability to make distributions to shareholders, include, but are not limited to: (i) national, regional and local economic climates, (ii) changes in the real estate industry, financial markets and interest rates, or to the business or financial condition of either company or business, (iii) increased or unanticipated competition for the companies’ properties, (iv) risks associated with acquisitions, including the integration of the combined companies’ businesses, (v) the potential liability for the failure to meet regulatory requirements, including the maintenance of REIT status, (vi) availability of financing and capital, (vii) risks associated with achieving expected revenue synergies or cost savings, (viii) risks associated with the companies’ ability to consummate the merger and the timing of the closing of the merger, (ix) the outcome of any claims and litigation involving or affecting either company, (x) applicable regulatory changes, and (xi) those additional risks and factors discussed in reports filed with the SEC by FelCor and RLJ from time to time, including those discussed under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and our and RLJ’s other filings with the SEC. Neither FelCor nor RLJ, except as required by law, undertakes any duty to update any forward-looking statements appearing in this document or any other document, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Important Information for Investors and Stockholders
In connection with the proposed Mergers described elsewhere in this Quarterly Report on Form 10-Q, RLJ expects to file with the SEC a registration statement on Form S-4 that will include a joint proxy statement of RLJ and FelCor that also constitutes a prospectus of RLJ, which joint proxy statement/prospectus will be mailed or otherwise disseminated to RLJ shareholders and FelCor stockholders when it becomes available. RLJ and FelCor also plan to file other relevant documents with the SEC regarding the proposed transaction. INVESTORS ARE URGED TO READ THE JOINT PROXY STATEMENT/

42



PROSPECTUS AND OTHER RELEVANT DOCUMENTS FILED WITH THE SEC IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. You may obtain a free copy of the joint proxy statement/prospectus and other relevant documents (if and when they become available) filed by RLJ and FelCor with the SEC at the SEC’s website at www.sec.gov. Copies of the documents filed by RLJ with the SEC will be available free of charge on RLJ’s website at www.rljlodgingtrust.com or by emailing RLJ Investor Relations at ir@rljlodgingtrust.com or calling 301-280-7774. Copies of the documents filed by FelCor with the SEC will be available free of charge on FelCor’s website at www.felcor.com or by contacting FelCor Investor Relations at asalami@felcor.com or calling 972-444-4967.
This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.

Participants in the Solicitation
RLJ and FelCor and their respective trustees, directors and executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies in respect of the proposed merger. You can find information about RLJ’s executive officers and trustees in RLJ’s definitive proxy statement filed with the SEC on March 28, 2017 in connection with its 2017 annual meeting of shareholders and in Form 4s of RLJ’s trustees and executive officers filed with the SEC. You can find information about FelCor’s executive officers and directors in FelCor’s Form 10-K/A filed with the SEC on April 28, 2017 and in Form 4s of FelCor’s directors and executive officers filed with the SEC. Additional information regarding the interests of such potential participants will be included in the joint proxy statement/prospectus and other relevant documents filed with the SEC, if and when they become available. You may obtain free copies of these documents from RLJ or FelCor using the sources indicated above.


43


Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
At March 31, 2017, approximately 84% of our consolidated debt bears fixed-rate interest.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents scheduled maturities and weighted average interest rates by maturity dates. The fair value of our 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 yields.
Expected Maturity Date
at March 31, 2017
(dollars in thousands)
 
Expected Maturity Date
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
Fair Value
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt
$
2,724

 
$
2,954

 
$
3,106

 
$
3,245

 
$
3,432

 
$
1,134,115

 
$
1,149,576

 
$
1,202,762

Average
  interest rate
4.95
%
 
4.95
%
 
4.95
%
 
4.95
%
 
4.95
%
 
5.70
%
 
5.69
%
 
 

Floating-rate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Debt
$
85,000

 

 
$
135,000

 

 

 

 
$
220,000

 
$
219,212

Average
  interest rate (a)
4.31
%
 

 
4.81
%
 

 

 

 
4.62
%
 
 

Total debt
$
87,724

 
$
2,954

 
$
138,106

 
$
3,245

 
$
3,432

 
$
1,134,115

 
$
1,369,576

 
 

Average
   interest rate
4.33
%
 
4.95
%
 
4.82
%
 
4.95
%
 
4.95
%
 
5.70
%
 
5.52
%
 
 

Unamortized debt issuance costs
 

 
 
 
 
 
 
 
 
 
 

 
$
(15,389
)
 
 

Debt, net of unamortized debt issuance costs
 

 
 
 
 
 
 
 
 
 
 

 
$
1,354,187

 
 


(a)
The average floating interest rate considers the implied forward rates in the yield curve at March 31, 2017.


44


Item 4.
Controls and Procedures.
FelCor Lodging Trust Incorporated
Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Changes to Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FelCor Lodging Limited Partnership
Controls and Procedures
Under the supervision and with the participation of our management, including FelCor’s Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, FelCor’s Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Changes to Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


45


PART II – OTHER INFORMATION

Item 1A.    Risk Factors.
Risks Related to the Mergers
The Mergers are subject to a number of conditions which, if not satisfied or waived in a timely manner, would delay the Mergers or adversely impact our ability to complete the transactions.

The completion of the Mergers is subject to the satisfaction or waiver of a number of conditions. In addition, under circumstances specified in the Merger Agreement, we or RLJ may terminate the Merger Agreement. In particular, completion of the Mergers requires (i) the approval of the REIT Merger by our common stockholders, or the REIT Merger Proposal, and (ii) the approval of the proposed issuance of RLJ common shares in connection with the REIT Merger by RLJ’s common shareholders, or the RLJ Share Issuance Proposal. If either of these required votes is not obtained at the applicable special meeting (including any adjournment or postponement thereof), either we or RLJ may terminate the Merger Agreement. While it is currently anticipated that the Mergers will be completed promptly following our stockholder meeting to approve the REIT Merger Proposal and RLJ’s shareholder meeting to approve the RLJ Share Issuance Proposal, there can be no assurance that the conditions to closing will be satisfied in a timely manner or at all, or that an effect, event, circumstance, occurrence, development or change will not transpire that could delay or prevent these conditions from being satisfied. Accordingly, we cannot provide any assurances with respect to the timing of the closing of the Mergers, whether the Mergers will be completed at all and when FelCor’s stockholders would receive the consideration for the Mergers, if at all.

Failure to consummate the Mergers as currently contemplated or at all could adversely affect the price of our stock and our future business and financial results.

Completion of the Mergers is subject to the satisfaction or waiver of a number of conditions, including approval by RLJ’s shareholders of the RLJ Share Issuance Proposal and approval by FelCor’s stockholders of the REIT Merger Proposal. We cannot guarantee when or if these conditions will be satisfied or that the Mergers will be successfully completed. The consummation of the Mergers may be delayed, the Mergers may be consummated on terms different than those contemplated by the Merger Agreement, or the Mergers may not be consummated at all. If the Mergers are not completed, or are completed on different terms than as contemplated by the Merger Agreement, we could be adversely affected and subject to a variety of risks associated with the failure to complete the Mergers, or to complete the Mergers as contemplated by the Merger Agreement, including the following:
our stockholders may be prevented from realizing the anticipated benefits of the Mergers;
the market price of our stock could decline significantly;
we may experience reputational harm due to the adverse perception of any failure to successfully complete the Mergers;
we may be required, under certain circumstances, to pay to RLJ a termination fee or expense amount;
we may incur substantial costs relating to the proposed Mergers, such as legal, accounting, financial advisor, filing, printing and mailing fees; and
the attention of our management and employees may be diverted from their day-to-day business and operational matters and our relationships with our hotel properties may be disrupted as a result of efforts relating to attempting to consummate the Mergers.


46


Any delay in the consummation of the Mergers or any uncertainty about the consummation of the Mergers on terms other than those contemplated by the Merger Agreement, or if the Mergers are not completed, could materially adversely affect our business, financial results and share price.

If the Mergers do not occur, we may incur significant payment obligations to RLJ.

Under the terms of the Merger Agreement, we may be required to pay to RLJ a termination fee of $39 million or pay RLJ an expense amount equal to $20 million if the Merger Agreement is terminated under certain circumstances. Circumstances that may require the payment by us of the termination fee include the following: (i) if we terminate to enter into a superior proposal; (ii) if an acquisition proposal to us is pending and the Merger Agreement is terminated because (a) the REIT Merger Proposal was not approved by our stockholders or (b) of a material uncured breach, and, with respect to each of clauses (a) and (b), within 12 months we consummate an acquisition proposal; and (iii) if our Board changes its recommendation regarding the REIT Merger Proposal in a manner adverse to RLJ or we enter into an alternative acquisition agreement (with respect to an acquisition proposal or superior proposal). Circumstances that may require the payment by us of the expense amount include the following: (i) if RLJ terminates the Merger Agreement because the REIT Merger Proposal was not approved by our stockholders and (ii) if RLJ terminates the Merger Agreement due only to our material uncured breach. If we pay the expense amount and subsequently become obligated to pay the termination fee, the termination fee will be reduced by the amount of the previously paid expense amount. For purposes of these termination provisions, the term “acquisition proposal” means a proposal for more than 50% of FelCor and the term “superior proposal” means a proposal for more than 50% of FelCor that our Board determines in good faith is more favorable to FelCor and our stockholders from a financial point of view than the transactions contemplated by the Merger Agreement.

These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us from considering or proposing a competing acquisition, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than that market value proposed to be received or realized in the Mergers, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee or expense amount that may become payable in certain circumstances under the Merger Agreement.

We have incurred substantial expenses related to the Mergers and expect to incur additional expenses.

We have incurred substantial legal, accounting, financial advisory and other costs, and our management team has devoted considerable time and effort in connection with the Mergers. We may incur significant additional costs in connection with the completion of the Mergers or in connection with any delay in completing the Mergers or termination of the Merger Agreement, in addition to the other costs we have already incurred. If the Mergers are not completed, we will separately bear certain fees and expenses associated with the Mergers without realizing the benefits of the Mergers. If the Mergers are completed, the combined company expects to incur substantial expenses in connection with integrating the business, operations, network, systems, technologies, policies and procedures of the two companies. The fees and expenses may be significant and could have an adverse impact on the combined company’s results of operations.

Although we have assumed that a certain level of transaction and integration expenses would be incurred, there are a number of factors beyond the control of either RLJ or FelCor that could affect the total amount or the timing of the integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction and integration expenses associated with the Mergers could, particularly in the near term, exceed the savings that the combined

47


company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the integration of the businesses following the completion of the Mergers.

The pendency of the Mergers could adversely affect our business and operations.

In connection with the pending Mergers, some of our current or prospective hotel management companies or lenders may delay or defer decisions, which could negatively impact our revenues, earnings, cash flows and expenses, regardless of whether the Mergers are completed. In addition, under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Mergers. These restrictions may prevent us from pursuing certain strategic transactions, acquiring and disposing assets, undertaking certain capital projects, undertaking certain financing transactions and otherwise pursuing other actions that are not in the ordinary course of business, even if such actions could prove beneficial. These restrictions may impede our growth which could negatively impact our revenue, earnings and cash flows. Additionally, the pendency of the Mergers may make it more difficult for us to effectively retain and incentivize key personnel.

An adverse judgment in any litigation challenging the Mergers may prevent the Mergers from becoming effective or from becoming effective within the expected timeframe.

It is possible that our stockholders may file lawsuits challenging the Mergers or the other transactions contemplated by the Merger Agreement, which may name us and/or our board of directors as defendants. We cannot assure you as to the outcome of such lawsuits, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Mergers on the agreed-upon terms, such an injunction may delay the consummation of the Mergers in the expected timeframe, or may prevent the Mergers from being consummated altogether. Whether or not any plaintiff’s claim is successful, this type of litigation may result in significant costs and divert management’s attention and resources, which could adversely affect the operation of our business.

Following the Mergers, the combined company may be unable to integrate RLJ’s business and FelCor’s business successfully and realize the anticipated synergies and other expected benefits of the Mergers on the anticipated timeframe or at all.

The Mergers involve the combination of two companies that currently operate as independent public companies. The combined company expects to benefit from the elimination of duplicative costs associated with supporting a public company platform and the resulting economies of scale. These savings are expected to be realized upon full integration, which is expected to occur in 2018. The combined company will be required to devote significant management attention and resources to the integration of RLJ’s and FelCor’s business practices and operations. The potential difficulties the combined company may encounter in the integration process include the following:
the inability to successfully combine RLJ’s and FelCor’s business in a manner that permits it to achieve the cost savings anticipated to result from the Mergers, which would result in the anticipated benefits of the Mergers not being realized in the timeframe currently anticipated or at all;
the complexities associated with integrating personnel from the two companies;
the complexities of combining two companies with different histories, cultures, geographic footprints and hotel properties;
potential unknown liabilities and unforeseen increased expenses, delays or conditions associated with the Mergers; and

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performance shortfalls as a result of the diversion of management’s attention caused by completing the Mergers and integrating the companies’ operations.

For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in its operations, services, standards, controls, policies and procedures, any of which could adversely affect the combined company’s ability to deliver exceptional service to its hotel guests, to maintain relationships with its guests, vendors and employees, to achieve the anticipated benefits of the Mergers, or could otherwise materially and adversely affect its business and financial results.

Because the number of common shares of RLJ exchanged per share of our common stock is fixed and will not be adjusted in the event of any change in RLJ’s share price or FelCor’s stock price, the value of the RLJ common shares issued by RLJ and received by FelCor’s stockholders may be higher or lower at the closing of the Mergers than when the Merger Agreement was executed.

Upon the consummation of the REIT Merger, each share of our common stock (other than shares, if any, held by RLJ, any of RLJ’s subsidiaries or any wholly-owned subsidiaries of FelCor) will be converted into 0.362 common shares of RLJ, or the Common Exchange Ratio, and each share of FelCor Series A Preferred Stock will be converted into one Series A Preferred Share of RLJ, or the Preferred Exchange Ratio. The Common Exchange Ratio and the Preferred Exchange Ratio are referred to herein as the “Exchange Ratios.” The Exchange Ratios are fixed in the Merger Agreement and will not be adjusted for changes in the market price of either RLJ’s common shares or our common stock. Changes in the market price of RLJ’s common shares prior to the REIT Merger will affect the market value of the consideration that our stockholders will receive on the closing date of the Mergers. Stock price changes may result from a variety of factors (many of which are beyond the control of either RLJ or FelCor), including the following factors:
market reaction to the announcement of the Mergers;
changes in RLJ’s or FelCor’s respective businesses, operations, assets, liabilities and prospects;
changes in market assessments of the business, operations, financial position and prospects of either RLJ or FelCor or the combined company;
market assessments of the likelihood that the Mergers will be completed;
interest rates, general market and economic conditions and other factor generally affecting the market prices of RLJ’s common shares and our common stock;
the actual or perceived impact of U.S. monetary policy;
federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and RLJ operate; and
other factors beyond the control of either RLJ or FelCor, including those described or referred to elsewhere in this “Risk Factors” section.

The market price of RLJ’s common shares at the closing of the REIT Merger may vary from its price on the date the Merger Agreement was executed, on the date of the joint proxy statement/prospectus to be prepared in connection with the Mergers, and on the dates of the RLJ’s and FelCor’s special meetings. As a result, the market value of the consideration for the REIT Merger represented by the Common Exchange Ratio also will vary.

Therefore, while the number of RLJ common shares to be issued per share of our common stock is fixed, our stockholders cannot be sure of the market value of the consideration they will receive upon completion of the Mergers. Neither we nor RLJ have the right to terminate the Merger Agreement based on an increase or decrease in the market price of RLJ’s common shares.


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The REIT Merger and related transactions are subject to approval by RLJ’s shareholders and FelCor’s stockholders.

The REIT Merger cannot be completed unless (i) FelCor’s stockholders approve the REIT Merger Proposal by the affirmative vote of the holders of at least a majority of all outstanding shares of FelCor common stock and (ii) RLJ’s shareholders approve the RLJ Share Issuance Proposal by the affirmative vote of a majority of the votes cast. If shareholder approval is not obtained by FelCor’s stockholders or RLJ’s shareholders, the REIT Merger and related transactions cannot be completed.

If the Mergers are not consummated by December 28, 2017 (unless extended under certain circumstances), we or RLJ may terminate the Merger Agreement.

Either we or RLJ may terminate the Merger Agreement under certain circumstances, including if the Mergers have not been consummated by December 28, 2017. However, this termination right will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was the cause of, or resulted in, the failure to consummate the Mergers.

The combined company’s future results will suffer if it does not effectively manage its expanded operations following the Mergers.

Following the Mergers, RLJ and FelCor expect that the combined company will expand its operations through additional acquisitions of properties, some of which may involve complex challenges. The combined company’s future success will depend, in part, upon its ability to manage its expansion opportunities, which may pose substantial challenges for it to integrate new operations into its existing business in an efficient and timely manner, and upon its ability to successfully monitor its operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. There is no assurance that the combined company’s expansion or acquisition opportunities will be successful, or that it will realize its expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.

The market price of RLJ’s common shares may decline as a result of the Mergers and the market price of RLJ’s common shares after the consummation of the Mergers may be affected by factors different from those affecting the price of RLJ’s common shares or our common stock before the Mergers.

The market price of RLJ’s common shares may decline as a result of the Mergers if the combined company does not achieve the perceived benefits of the Mergers or the effect of the Mergers on the combined company’s financial results is not consistent with the expectations of financial or industry analysts.

In addition, upon consummation of the Mergers, RLJ’s shareholders and FelCor’s stockholders will own interests in the combined company operating an expanded business with a different mix of properties, risks and liabilities. RLJ’s current shareholders and FelCor’s current stockholders may not wish to continue to invest in the combined company, or for other reasons may wish to dispose of some or all of their RLJ common shares. If, following the effective time of the Mergers, large amounts of RLJ common shares are sold, the price of RLJ common shares could decline.

Further, the combined company’s results of operations, as well as the market price of RLJ common shares after the Mergers may be affected by factors in addition to those currently affecting RLJ’s or FelCor’s results of operations and the market prices of RLJ common shares and our common stock, particularly the increase in the combined company’s leverage compared to that in place for RLJ and FelCor today, and other differences in assets and capitalization. Accordingly, RLJ’s and FelCor’s historical market prices and financial results may not be indicative of these matters for the combined company after the Mergers.


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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
 
 
 
2.1
 
Agreement and Plan of Merger, dated April 23, 2017, by and among RLJ Lodging Trust, RLJ Lodging Trust, L.P., Rangers Sub I, LLC, Rangers Sub II, LP, FelCor Lodging Trust Incorporated (“FelCor”), and FelCor Lodging Limited Partnership (“FLLP”) (filed as Exhibit 2.1 to FelCor’s and FLLP’s Form 8-K, dated April 23, 2017, and incorporated herein by reference).

 
 
 
10.1
 
Form of Amendment to Change in Control and Severance Agreement, dated as of April 23, 2017, by and between FelCor and each of Steven R. Goldman, Troy A. Pentecost, Thomas C. Hendrick, Michael C. Hughes, and Jonathan H. Yellen (filed as Exhibit 10.1 FelCor’s Form 8-K, dated April 23, 2017, and incorporated herein by reference).

 
 
 
31.1*
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for FelCor.
 
 
 
31.2*
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for FelCor.
 
 
 
31.3*
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for FelCor LP.
31.4*
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for FelCor LP.
 
 
 
32.1†*
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for FelCor.
 
 
 
32.2†*
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for FelCor LP.
 
 
 
101.INS
 
XBRL Instance Document. Submitted electronically with this report.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document. Submitted electronically with this report.
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document. Submitted electronically with this report.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. Submitted electronically with this report.
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document. Submitted electronically with this report.
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document. Submitted electronically with this report.

----------------------
*    Filed herewith.

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This certificate is being furnished solely to accompany the report pursuant to 18 U.S.C. 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) FelCor’s Consolidated Balance Sheets at March 31, 2017 and December 31, 2016; (ii) FelCor’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2017 and 2016; (iii) FelCor’s Consolidated Statements of Changes in Equity for the three months ended March 31, 2017 and 2016; (iv) FelCor’s Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; (v) FelCor LP’s Consolidated Balance Sheets at March 31, 2017 and December 31, 2016; (vi) FelCor LP’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2017 and 2016; (vii) FelCor LP’s Consolidated Statements of Partners’ Capital for the three months ended March 31, 2017 and 2016; (viii) FelCor LP’s Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; and (ix) the Notes to Consolidated Financial Statements.

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SIGNATURES

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
 
a Maryland corporation
 
 
 
 
 
 
 
 
Date: May 9, 2017
 By:
/s/ Jeffrey D. Symes
 
 
Name:
Jeffrey D. Symes
 
 
Title:
Senior Vice President, Chief Accounting Officer
and Treasurer


 
FELCOR LODGING LIMITED PARTNERSHIP
 
a Delaware limited partnership
 
 
 
 
By:
FelCor Lodging Trust Incorporated
 
 
Its General Partner
 
 
 
 
 
 
Date: May 9, 2017
By:
/s/ Jeffrey D. Symes
 
 
Name:
Jeffrey D. Symes
 
 
Title:
Senior Vice President, Chief Accounting Officer
and Treasurer


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