General

In the first quarter of 2009, the lodging industry continued to see nationwide decreases in revenue per available room, or RevPAR (U.S. average RevPAR decreased 17.7% in the first quarter of 2009). However, in spite of reduced RevPAR, our hotels have generally been able to continue increasing their market share, which we believe is largely attributable to our recently completed $450 million hotel renovation program.

As lodging demand continues to slow in 2009, we are working closely with our brand-managers to cut operating costs in the lower RevPAR environment. Many of our hotels have been able to reduce labor costs permanently, and all of our hotels have trimmed non-critical functions. These cost reductions have enabled us to minimize EBITDA margin erosion.

We entered 2009 in the midst of a recession. Our hotels are focused on maintaining market share, protecting average daily rate, or ADR, and preserving EBITDA margins, while we are focused on managing our balance sheet, including maturing debt and compliance with debt covenants. We started 2009 with $132 million of non-recourse mortgage debt, in the aggregate, that would mature in 2009. In March 2009, we refinanced $116 million of our 2009 maturities with a new loan that matures in 2014. We have $15 million of non-recourse mortgage debt maturing in 2009 (two loans, each secured by different hotels) that we are seeking to extend.

Our line of credit contains certain restrictive financial covenants; we were in compliance with these at the date of this filing. Our compliance with these covenants in future periods will depend substantially on the financial results of our hotels. If current financial market conditions persist and our business continues to deteriorate, we may fail to comply with one or more of these covenants in 2009.

We have agreed in principle on the material terms with the lead lender of a new $200 million term loan, which would be secured by first mortgages on nine currently unencumbered hotels and, assuming all extension options are exercised, will not mature until 2013. This loan would not be subject to any corporate financial covenants and would only be recourse to the borrower, a to-be-formed wholly-owned subsidiary. While we believe that we will successfully close our new secured term loan, as discussed above, we have several other alternatives available to ensure continued compliance with our financial covenants or repay our line of credit, including identifying other sources of debt or equity financing, selling unencumbered hotels and/or implementing additional cost cutting measures. Of course, we can provide no assurance that we will be able to close our new secured term loan, identify additional sources of debt or equity financing or sell hotels on terms that are favorable or otherwise acceptable to us.

We have two non-recourse mortgage loans aggregating $277 million secured by 14 hotels that will mature in May 2010. We are in preliminary discussions with potential lenders to refinance all of our debt that will mature in 2010 and 2011.

On April 1, 2009, we opened our San Francisco Marriott Union Square Hotel, which had been operating as Hotel 480 during renovations that began in 2007. Renovations at this hotel were comprehensive and included guest rooms, guest baths, guest corridors, meeting space, food and beverage outlets, public areas and building exterior. Following the Marriott conversion, April RevPAR increased more than 40% at this hotel, compared to the prior year.

We suspended our common dividends in December 2008 and our preferred dividends in March 2009. Although dividends are not paid unless declared by our Board of Directors, unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to payment of any common dividends. Our Board of Directors will determine whether to declare future dividends based upon various factors, including operating results, economic conditions, other operating trends, our financial condition and capital requirements, as well as minimum REIT distribution requirements.

                                                    Three Months Ended March 31,          % Change
                                                      2009                 2008           2009-2008
RevPAR                                          $        81.60       $       101.55        (19.6 ) %
Hotel EBITDA(a)                                 $       56,705       $       82,165        (31.0 ) %
Hotel EBITDA margin(a)                                    24.2 %               28.2 %      (14.2 ) %
Loss from continuing operations attributable to
FelCor(b)                                       $      (21,064 )     $      (12,460 )      (69.1 ) %
FFO(a)(c)                                       $       10,188       $       14,689        (30.6 ) %
EBITDA(a)(d)                                    $       43,752       $       53,777        (18.6 ) %

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

(b) Included in loss from continuing operations attributable to FelCor are the following amounts

(in thousands):

                                            Three Months Ended
                                                March 31,
                                            2009         2008
Impairment loss                          $ (1,368 )   $ (17,131 )
Impairment loss on unconsolidated hotels   (2,068 )         -
Conversion costs                              (38 )        (259 )
Severance costs                              (145 )         -

(c) FFO has not been adjusted for the following amounts included in net loss attributable to FelCor

(in thousands):

                                                           Three Months Ended
                                                               March 31,
                                                           2009         2008
       Impairment loss                                  $ (1,368 )   $ (17,131 )
       Impairment loss on unconsolidated hotels           (2,068 )         -
       Conversion costs                                      (38 )        (259 )
       Severance costs, net of noncontrolling interests     (135 )         -

(d) EBITDA has not been adjusted for the following amounts included in net loss attributable to FelCor (in thousands):

                                                     Three Months Ended March 31,
                                                       2009                2008
Impairment loss                                  $      (1,368 )     $      (17,131 )
Impairment loss on unconsolidated hotels                (2,068 )                -
Conversion costs                                           (38 )               (259 )
Severance costs, net of noncontrolling interests          (135 )                -

Comparison of the Three Months Ended March 31, 2009 and 2008

For the three months ended March 31, 2009, we recorded a $30.7 million net loss applicable to common stockholders, or $0.49 per share, compared to $22.2 million net loss applicable to common stockholders, or $0.36 per share, for the same period in 2008. The current year loss is attributable primarily to the 19.7% decrease in revenue compared to the same period in 2008. We were able to limit our margin loss in the first quarter of 2009 compared to the first quarter of 2008, primarily by reducing hotel labor costs by $10.5 million and reducing other costs associated with non-critical functions. Hotel expenses decreased 15.3% compared to first quarter 2008. The current year loss included impairment charges of $3.5 million ($1.4 million related to a consolidated hotel and $2.1 million related to an unconsolidated entity), while the prior year loss included a $17.1 million impairment charge on two consolidated hotels.

In the first quarter of 2009, total revenue from continuing operations was $234.3 million, a 19.7% decrease compared to the same period in 2008. The decrease in revenue is attributed principally to a 19.6% decrease in RevPAR, which was driven by an 11.6% decrease in occupancy and a 9.1% decrease in ADR.

In the first quarter of 2009, hotel departmental expenses decreased $15.5 million (16.0%) compared to the same period in 2008. As a percentage of total revenue, hotel departmental expenses increased from 33.3% to 34.8% compared to the same period in 2008. The $15.5 million expense reduction reflects: (i) an 11.6% decrease in occupancy; (ii) a $7.7 million decrease in labor costs, which includes permanent reductions related to a decrease in hotel departmental employees; (iii) a decrease in non-critical room expenses, such as guest transportation, in-room amenities, bath linen quantities, and newspaper service; and (iv) menu modifications in food and beverage.

In the first quarter of 2009, other property operating costs decreased $9.8 million (12.7%) compared to the same period in 2008. As a percentage of total revenue, other property operating costs increased from 26.4% to 28.7% compared to the same period in 2008. The $9.8 million reduction includes: (i) a $2.8 million decrease in labor costs; (ii) a $2.8 million decrease in marketing assessments, credit card commissions and frequent guest expense (all of which reflect the decrease in revenue); (iii) a $1.2 million decrease in repairs and maintenance, partially attributable to our recently completed renovation program; and (iv) reductions in other non-critical expenses.

In the first quarter of 2009, management and franchise fees decreased $4.4 million compared to the same period in 2008. As a percent of total revenue, franchise fees and base management fees were essentially unchanged from 2008 to 2009 since both fees are based on a percentage of revenue. Incentive fees decreased from 0.9% to 0.2% of total revenue because these fees are based on the profitability of the hotel operations, which significantly decreased from 2008 to 2009.

In the first quarter of 2009, taxes, insurance and lease expense decreased $4.3 million compared to the same period in 2008. This decrease was primarily related to a $2.1 million decrease in percentage rent, which is attributable to the decreased revenue at our consolidated hotel lessees, and a $1.7 million decrease in real estate and other taxes, which related to the successful resolution of estimated tax accruals related to prior years. Taxes, insurance and lease expense increased as a percentage of total revenue from 10.0% to 10.7% compared to the same period in 2008.

Corporate expenses decreased $700,000 in the first quarter of 2009 compared to the same period in 2008, principally due to general cost reduction efforts in our corporate office.

In the first quarter of 2009, depreciation and amortization expense increased $3.6 million, compared to the same period in 2008, which reflects $142.9 million of consolidated hotel capital expenditures incurred in 2008.

Net interest expense included in continuing operations for the first quarter decreased $4.7 million compared to the same period in 2008. This decrease reflects declining interest rates for our floating-rate debt.

Equity in loss from unconsolidated entities increased $2.8 million in the first quarter of 2009 from the first quarter of 2008. This is primarily attributed to $2.1 million impairment charge on one of our unconsolidated investments.

Non-GAAP Financial Measures

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

The following tables detail our computation of FFO and EBITDA (in thousands, except per share data):