General

We expect the current economic conditions will continue to negatively affect hospitality demand for the remainder of 2009. We believe hotel occupancy, currently near historical lows, will begin to improve in 2010, but we also expect continued pressure on average daily room rates, or ADR, until demand increases significantly. While we have experienced some slowing of negative trends in recent periods and an increase in transient demand, consumers are taking advantage of the historically high number of available rooms to shift pricing power and accordingly, lower ADR. Gross domestic product and capacity utilization have historically been highly correlated to travel demand. These indicators have recently started improving and we expect hotel demand to follow.

In the first nine months of 2009, the lodging industry experienced nationwide decreases in revenue per available room, or RevPAR (U.S. upper-upscale average RevPAR decreased 19.8% in the first nine months of 2009). However, in spite of reduced RevPAR, our hotels increased portfolio market share by approximately 1.5% in the first nine months of 2009 and 1.8% for the quarter. We believe our market share gain is attributable largely to our recently completed comprehensive hotel renovation program, well-located high quality hotels, asset management and strong brand affiliations.

We are focused on increasing market share, protecting ADR, preserving margins and managing our balance sheet. With contracting lodging demand in 2009, we continue to work closely with our brand-managers on extensive cost containment initiatives in the face of a 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 margin erosion at our hotels despite reduced hotel revenues.

In light of the global recession, we have taken the following steps to build additional flexibility into our capital structure:

· In October 2009, we completed the private placement of $636 million in aggregate principal amount of our 10% senior secured notes due 2014. Our net proceeds from these notes were approximately $558 million after original issue discount and other fees and expenses related to the offering. The proceeds of these notes were used to repurchase approximately $427 million in aggregate principal amount of our existing senior notes due in 2011 and for general corporate purposes.

· In June 2009, we obtained a $201 million non-recourse term loan secured by nine hotels that matures in 2011. This loan can be extended for up to two years subject to satisfying certain conditions that we expect to satisfy.

· In June 2009, we repaid and terminated our line of credit. By terminating our line of credit, we eliminated certain restrictive corporate debt covenants.

· In March 2009, we refinanced our $116 million loan maturing in 2009, with a new non-recourse term loan secured by the same seven hotels that matures in 2014.

· We are continuing our discussions with current and potential lenders to modify and/or refinance all of our remaining debt scheduled to mature in 2010.

In June, we completed the final phase of the comprehensive redevelopment of our San Francisco Marriott Union Square hotel. Third quarter RevPAR increased 53% at this hotel (which operated as Hotel 480 prior to April), compared to the prior year, and its market share increased by 98%, exceeding expectations. The market share index for this hotel was 107% in the third quarter compared to 80% for calendar year 2007 (before its renovation and rebranding).

We suspended our common dividend in December 2008 and our preferred dividend in March 2009. Although dividends are not paid unless declared by our Board of Directors, unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to payment of any common dividends. Our 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.

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

margin)

                        Three Months Ended                          Nine Months Ended
                           September 30,           % Change           September 30,           % Change
                        2009          2008        2009-2008        2009          2008        2009-2008
RevPAR               $   80.39     $   97.80        (17.8 ) %   $   82.00     $  101.69        (19.4 ) %
Hotel EBITDA(a)      $  50,895     $  74,972        (32.1 ) %   $ 171,744     $ 254,490        (32.5 ) %
Hotel EBITDA
margin(a)                 22.2 %        27.1 %      (18.1 ) %        24.4 %        29.1 %      (16.2 ) %
Net loss
attributable to
FelCor(b)            $ (25,140 )   $ (41,640 )       39.6   %   $ (57,399 )   $ (30,851 )      (86.1 ) %

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

                                            Three Months Ended         Nine Months Ended
                                              September 30,              September 30,
                                            2009         2008          2009         2008
Impairment loss                          $ (2,080 )   $ (36,692 )   $ (3,448 )   $ (53,823 )
Impairment loss on unconsolidated hotels      -          (3,750 )     (2,068 )      (3,750 )
Hurricane loss                                -          (1,669 )        -          (1,669 )
Hurricane loss on unconsolidated hotels       -             (50 )        -             (50 )
Charges related to debt extinguishment        -                         (594 )         -
Gain on sale of assets                        723           -            723           -
Gain on involuntary conversion                -             -            -           3,095
Conversion costs                             (117 )        (118 )       (447 )        (481 )
Severance costs                               (46 )         -           (572 )         -
Lease termination costs                      (117 )         -           (469 )         -

Results of Operations

Comparison of the Three Months Ended September 30, 2009 and 2008

For the three months ended September 30, 2009, we recorded a net loss applicable to common stockholders of $34.8 million, or $0.55 per share, compared to a net loss applicable to common stockholders of $51.3 million, or $0.83 per share, for the same period in 2008. The current year loss is attributable primarily to a 17.1% decrease in revenue compared to the same period in 2008. Despite the decrease in revenue, we were able to limit our margin loss in the third quarter of 2009 compared to the same period in 2008, primarily by reducing hotel labor costs by $8.9 million and reducing other costs associated with non-critical functions. Our hotel expenses decreased by 11.6% compared to third quarter of 2008. Our 2009 net loss also includes a $2.1 million impairment charge associated with one hotel. Our 2008 net loss included a $36.7 million impairment charge associated with two hotels and a $1.7 million hurricane-related loss.

In the third quarter of 2009:

· Total revenue was $230.2 million, a 17.1% decrease compared to the same period in 2008. The decrease in revenue is attributed principally to a 17.8% decrease in RevPAR, which was driven by a 6.0% decrease in occupancy and a 12.5% decrease in ADR.

· Hotel departmental expenses decreased $9.8 million (10.5%) compared to the same period in 2008. As a percentage of total revenue, hotel departmental expenses increased from 33.7% to 36.4% compared to the same period in 2008. This expense reduction reflects: (i) the 6.0% decrease in occupancy;
(ii) a $5.4 million decrease in labor costs, which included permanent reductions related to a decrease in hotel 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.

· Other property related costs decreased $10.5 million (13.6%) compared to the same period in 2008. As a percentage of total revenue, other property related costs increased from 27.7% to 28.9% compared to the same period in 2008. This expense reduction reflects: (i) a $3.5 million decrease in labor costs; (ii) a $2.4 million decrease in marketing assessments, credit card commissions and frequent guest expense (all of which reflect the decrease in revenue); (iii) a $1.5 million decrease in repairs and maintenance, partially attributable to our recently completed renovation program; and (iv) reductions in other non-critical expenses.

· Management and franchise fees decreased $2.2 million compared to the same period in 2008, due to the decrease in revenues. As a percent of total revenue, management and franchise fees remained essentially unchanged.

· Taxes, insurance and lease expense decreased $4.4 million compared to the same period in 2008. This decrease relates primarily to: (i) a $3.6 million decrease in percentage rent, attributable to decreased revenue; (ii) an $832,000 decrease in property and general liability insurance, attributable to improved claims experience; and (iii) an $812,000 decrease in land leases, attributable to decreased revenue. The decrease in the period was partially offset by a $900,000 increase in real estate and other taxes, attributable to decreases in estimated accruals recorded in the third quarter of 2008. As a percentage of total revenue, taxes, insurance and lease expense increased from 10.7% to 11.0% compared to the same period in 2008.

· Depreciation and amortization expense increased $1.9 million, compared to the same period in 2008, which is attributable to increased depreciation due to the $142.9 million of consolidated hotel capital expenditures completed in 2008.

· Impairment charge. In 2008 we identified eight hotels as candidates to be sold. We recorded impairment charges of $2.1 million for one of these hotels in the third quarter of 2009 and $36.7 million for two of these hotels in the third quarter of 2008.

· Hurricane loss. In the third quarter of 2008, we recorded $1.7 million in hurricane-related expenses, all of which related to remediation at 14 of our hotels affected by four hurricanes in 2008.

· Net interest expense increased $313,000 compared to the same period in 2008. This increase is primarily attributable to a $116 million increase in our average debt outstanding, which was partially offset by a 44 basis point decrease in the average interest rate applicable to our floating-rate debt.

· Equity in income of unconsolidated entities was $488,000, compared to $2.8 million of equity in loss from unconsolidated entities from the third quarter of 2008. The 2008 loss included $3.8 million of impairment charges related to our equity method investments.

Comparison of the Nine Months Ended September 30, 2009 and 2008

For the nine months ended September 30, 2009, we recorded an $86.4 million net loss applicable to common stockholders, or $1.37 per share, compared to a $59.9 million net loss applicable to common stockholders, or $0.99 per share, for the same period in 2008. The increase in current year loss is attributable primarily to a 19.3% decrease in revenue compared to the same period in 2008. Despite the decrease in revenue, we were able to limit our margin loss in the first nine months of 2009 compared to the first nine months of 2008, primarily by reducing hotel labor costs by $31.9 million and reducing other costs associated with non-critical functions. Hotel expenses decreased 13.9% compared to first nine months of 2008. The current year loss includes impairment charges of $5.5 million ($3.4 million related to two consolidated hotels and $2.1 million related to an unconsolidated entity), while the prior year loss included a $53.8 million impairment charge on four consolidated hotels, hurricane-related losses of $1.7 million, and a $3.1 million gain related to involuntary conversions from the final settlement of 2005 hurricane claims.

In the first nine months of 2009:

· Total revenue was $707.1 million, a 19.3% decrease compared to the same period in 2008. The decrease in revenue is attributed principally to a 19.4% decrease in RevPAR, which was driven by a 9.2% decrease in occupancy and an 11.2% decrease in ADR.

· Hotel departmental expenses decreased $41.6 million (14.3%) compared to the same period in 2008. As a percentage of total revenue, hotel departmental expenses increased from 33.2% to 35.2% compared to the same period in 2008. This expense reduction reflects: (i) the 9.2% decrease in occupancy;
(ii) a $21.9 million decrease in labor costs, which included permanent reductions related to a decrease in hotel 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.

· Other property related costs decreased $30.9 million (13.4%) compared to the same period in 2008, due to the decrease in revenues. As a percentage of total revenue, other property related costs increased from 26.3% to 28.2% compared to the same period in 2008. This expense reduction reflects: (i) a $10.0 million decrease in labor costs; (ii) a $8.5 million decrease in marketing assessments, credit card commissions and frequent guest expense (all of which reflect the decrease in revenue); (iii) a $5.2 million decrease in repairs and maintenance, partially attributable to our recently completed renovation program; and (iv) reductions in other non-critical expenses.

· Management and franchise fees decreased $11.2 million compared to the same period in 2008. As a percent of total revenue, franchise fees and base management fees remained essentially unchanged from 2008 to 2009 (both fees are based on a percentage of revenue). Incentive management fees, which are based on the profitability of the hotels, decreased $3.6 million.

· Taxes, insurance and lease expense decreased $12.5 million compared to the same period in 2008. This decrease relates primarily to: (i) a $10.6 million decrease in hotel lease expense, attributable to decreased revenue at our consolidated hotel lessees; (ii) a $1.8 million decrease in property and general liability insurance, attributable to improved insurance rates and liability claims experience; and (iii) a $1.8 million decrease in land leases, attributable to decreases in revenue. This was partially offset by a $1.8 million increase in real estate and other taxes, attributable to decreases in estimated accruals recorded in the first nine months of 2008. As a percentage of total revenue, taxes, insurance and lease expense increased from 10.0% to 10.7% compared to the same period in 2008.

· Depreciation and amortization expense increased $7.1 million, compared to the same period in 2008, which is attributable to increased depreciation due to the $142.9 million of consolidated hotel capital expenditures completed in 2008.

· Impairment charge. In 2008, we identified eight hotels as candidates to be sold. We recorded impairment charges of $3.4 million for two of these hotels in the first nine months of 2009 and $53.8 million for two of these hotels in the first nine months of 2008.

· Hurricane loss. In the third quarter of 2008, we recorded $1.7 million in hurricane-related expenses, all of which related to remediation at 14 of our hotels affected by four hurricanes in 2008.

· Other expenses increased $649,000, compared to the same period in 2008, primarily due to $572,000 of severance expenses (from a reduction in the number of employees at our hotels) and lease termination costs of $469,000 associated with the termination of one of our third-party restaurant lessees, this was partially offset by a decrease in condominium management fee expenses.

· Net interest expense decreased $6.4 million compared to the same period in 2008. This decrease is primarily attributable to a 104 basis point decrease in our average interest rate for our floating-rate debt, which was partially offset by a $96 million increase in our average debt outstanding.

· Charges related to debt extinguishment. In the second quarter of 2009, we terminated our line of credit and wrote off deferred loan costs of $594,000 associated with this facility.

· Equity in loss of unconsolidated entities was $3.2 million compared to $1.1 million of equity in loss from unconsolidated entities for the same period in 2008. We recorded impairment charges of $2.1 million and $3.8 million on our equity method investments in the first nine months of 2009 and the first nine months of 2008, respectively. The remainder of the change is attributable to decreases in current year revenue at our unconsolidated hotels.

· Discontinued operations in 2008 consisted of a $1.2 million adjustment to gain on sales resulting from a revision in the tax liability associated with gains of $71.2 million from hotel sales in 2006 and 2007.

Non-GAAP Financial Measures

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

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

                      Hotel EBITDA and Hotel EBITDA Margin
                             (dollars in thousands)

                             Three Months Ended            Nine Months Ended
                                September 30,                September 30,
                             2009           2008           2009          2008
Total revenues           $  230,209     $  277,729     $  707,065     $  875,772
Other revenue               (1,280  )       (1,396 )       (2,554 )       (2,655 )
Hotel operating revenue     228,929        276,333        704,511        873,117
Hotel operating expenses   (178,034 )     (201,361 )     (532,767 )     (618,627 )
Hotel EBITDA             $   50,895     $   74,972     $  171,744     $  254,490
Hotel EBITDA margin(a)        22.2%          27.1%          24.4%          29.1%

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

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

                                Three Months Ended            Nine Months Ended
                                   September 30,                September 30,
                                2009          2008           2009           2008
Total operating expenses     $ 232,467     $ 294,604     $  693,360     $  835,102
  Unconsolidated taxes,
insurance and lease
   expense                       2,023         2,132          6,041          6,328
  Consolidated hotel lease
expense                        (10,892 )     (14,511 )      (31,805 )      (42,444 )
  Corporate expenses            (4,471 )      (5,388 )      (15,829 )      (17,079 )
  Depreciation and
amortization                   (37,982 )     (36,069 )     (112,024 )     (104,909 )
  Impairment loss               (2,080 )     (36,692 )       (3,448 )      (53,823 )
  Hurricane loss                   -          (1,669 )          -           (1,669 )
  Other expenses                (1,031 )      (1,046 )       (3,528 )       (2,879 )
Hotel operating expenses     $ 178,034     $ 201,361     $  532,767     $  618,627

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

                   Reconciliation of Net Loss to Hotel EBITDA
                                 (in thousands)

                                       Three Months Ended           Nine Months Ended
                                          September 30,               September 30,
                                       2009          2008          2009          2008
Net loss                            $ (25,474 )   $ (42,569 )   $ (57,864 )   $ (31,005 )
  Discontinued operations                 -          (1,193 )         -          (1,180 )
  Equity in loss (income) from
unconsolidated entities                  (488 )       2,773         3,197         1,064
  Consolidated hotel lease expense     10,892        14,511        31,805        42,444
  Unconsolidated taxes, insurance
and lease expense                      (2,023 )      (2,132 )      (6,041 )      (6,328 )
  Interest expense, net                24,427        24,114        68,501        74,886
  Charges related to debt
extinguishment                            -             -             594           -
  Corporate expenses                    4,471         5,388        15,829        17,079
  Depreciation and amortization        37,982        36,069       112,024       104,909
  Impairment loss                       2,080        36,692         3,448        53,823
  Hurricane loss                          -           1,669           -           1,669
  Gain on sale of assets                 (723 )         -            (723 )         -
  Gain on involuntary conversion          -             -             -          (3,095 )
  Other expenses                        1,031         1,046         3,528         2,879
  Other revenue                        (1,280 )      (1,396 )      (2,554 )      (2,655 )
Hotel EBITDA                        $  50,895     $  74,972     $ 171,744     $ 254,490

Reconciliation of Ratio of Operating Income to Total Revenues to Hotel EBITDA

                                     Margin

                                                                                  Nine Months Ended
                                        Three Months Ended September 30,            September 30,
                                           2009                   2008            2009         2008
Ratio of operating income (loss) to
total revenues                               (1.0 )%                 (6.1 )%       1.9 %         4.6 %
  Other revenue                              (0.6 )                  (0.5 )       (0.4 )        (0.3 )
  Unconsolidated taxes, insurance
and lease expense                            (0.9 )                  (0.7 )       (0.8 )        (0.7 )
  Consolidated hotel lease expense            4.8                     5.2          4.5           4.9
  Other expenses                              0.4                     0.4          0.5           0.3
  Corporate expenses                          2.0                     2.0          2.3           2.0
  Depreciation and amortization              16.6                    13.0         15.9          12.0
  Impairment loss                             0.9                    13.2          0.5           6.1
  Hurricane loss                              -                       0.6          -             0.2
Hotel EBITDA margin                          22.2 %                  27.1 %       24.4 %        29.1 %

Hotel EBITDA and Hotel EBITDA Margin

Hotel EBITDA and Hotel EBITDA margin are commonly used measures of performance in the hotel industry and give investors a more complete understanding of the operating results over which our individual hotels and operating managers have direct control. We believe that Hotel EBITDA and Hotel EBITDA margin are useful to investors by providing greater transparency with respect to two significant measures used by us in our financial and operational decision-making. Additionally, using these measures facilitates comparisons with other hotel REITs and hotel owners. We present Hotel EBITDA and Hotel EBITDA margin by eliminating from continuing operations all revenues and expenses not directly associated with hotel operations including corporate-level expenses, depreciation and amortization and expenses related to our capital structure. We eliminate corporate-level costs and expenses because we believe property-level results provide investors with supplemental information into the ongoing operational performance of our hotels and the effectiveness of management on a property-level basis.

We eliminate depreciation and amortization because, even though depreciation and amortization are property-level expenses, we do not believe that these non-cash expenses, which are based on historical cost accounting for real estate assets and implicitly assume that the value of real estate assets diminishes predictably over time, accurately reflect an adjustment in the value of our assets. We also eliminate consolidated percentage rent paid to unconsolidated entities, which is effectively eliminated by noncontrolling interests and equity in income from unconsolidated subsidiaries, and include the cost of unconsolidated taxes, insurance and lease expense, to reflect the entire operating costs applicable to our hotels.

Limitations of Non-GAAP Measures

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

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

These non-GAAP financial measures are used in addition to and in conjunction . . .