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FCH > SEC Filings for FCH > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for FELCOR LODGING TRUST INC

Form 10-Q for FELCOR LODGING TRUST INC


2-Nov-2012

Quarterly Report


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

General
Our strategic plan involves increasing stockholder value by creating a high-growth diversified portfolio and a strong and flexible balance sheet with a low cost of capital.
Since the second quarter, we continued to progress on our strategic plan:
During the third quarter, we sold a non-strategic hotel for gross proceeds of $25.5 million. In addition, we sold two additional non-strategic hotels for gross proceeds of $70 million in October 2012 and one non-strategic hotel (with hard-money deposit received in October) for gross proceeds of $8.7 million in November 2012.

          We used proceeds from asset sales to pay the remaining accrued
           preferred dividends ($37.7 million) in October 2012.


          We obtained $160.8 million in proceeds from five single-asset ten-year
           mortgage loans that closed in September 2012. Proceeds from the new
           loans were used to repay $107 million on a 9.02% mortgage loan that
           would otherwise mature in 2014. We also used those proceeds (plus
           asset sale proceeds) to repay the remaining $60.3 million balance of
           another mortgage loan. The average interest rate on the new loans
           (4.95%) is more than 400 basis points lower than the repaid 9.02%
           loan, and we were able to unencumber seven hotels.

In the third quarter, RevPAR increased 6.2%, which exceeded the industry average of 5.1%. ADR increased 6.9%, offset by a slight decline in occupancy of 50 basis points. RevPar at the core 45 hotels increased 6.6%, compared to 4.7% for the 21 non-strategic hotels. Hotel EBITDA margins increased 58 basis points to 25.2% for the quarter.
Results of Operations

Comparison of the Three Months ended September 30, 2012 and 2011

For the three months ended September 30, 2012, we recorded a $19.6 million net loss compared to a $23.4 million net loss for the same period in 2011. Our 2012 net loss included $11.8 million in debt extinguishment charges (of which $126,000 are included in discontinued operations) and $1.1 million of hurricane-related charges (of which $228,000 are included in discontinued operations). The 2012 charges are partially offset by a $9.9 million net gain from an asset sale included in discontinued operations. In the third quarter of 2012:
Total revenue was $236.2 million, 5.9% more than the same period in 2011. This increase primarily reflects a 6.2% increase in same-store RevPAR (6.6% at our core hotels and 4.7% at our non-strategic hotels), reflecting a 6.9% increase in ADR (partially offset by a 50 basis point decrease in occupancy).

Hotel departmental expenses increased $3.9 million. As a percentage of total revenue, hotel departmental expenses decreased from 36.2% to 35.8% compared to the same period in 2011. This improvement primarily reflects revenue increases being driven by ADR as opposed to occupancy.


Other property-related costs increased $2.0 million due primarily to higher marketing costs. As a percentage of total revenue, other property-related costs decreased from 27.8% to 27.1% compared to the same period in 2011. This improvement primarily reflects revenue increases being driven by ADR as opposed to occupancy.

Management and franchise fees increased $650,000 compared to the same period in 2011, primarily reflecting higher revenues (which serve as the basis for determining such fees). As a percentage of total revenue, these costs remained essentially unchanged from the same period in 2011.

Taxes, insurance and lease expense increased $2.3 million and as a percentage of total revenue from 10.3% to 10.7% compared to the same period in 2011. The higher percentage of revenue reflects a combination of increased percentage lease expense (computed as a percentage of hotel revenues in excess of base rent; as revenue increases, percentage rent increases at a faster rate) in 2012, as well as lower property taxes (reductions received after appeals) and lower general liability insurance (due to favorable claims experience) in 2011.

Corporate expenses decreased $563,000 (as a percentage of total revenue decreasing from 2.8% to 2.4%), which primarily reflects lower restricted stock amortization in 2012, as a significant amount of restricted stock vested in 2011.

Depreciation and amortization expense increased $1.9 million, compared to the same period in 2011, which is primarily attributable to hotel capital expenditures of $89.0 million in 2011 and $100.0 million in 2012.

Other expenses increased $955,000 compared to the same period in 2011. This increase primarily reflects $851,000 in hurricane-related charges at three of our hotels affected by Hurricane Isaac.

Net interest expense decreased $1.5 million compared to the same period in 2011, which primarily reflects lower average debt outstanding and higher capitalized interest related to the Knickerbocker Hotel development, all of which was partially offset by an increase in our weighted-average interest rate.

Debt extinguishment charges during the third quarter of 2012 ($11.7 million) include prepayment penalties and the write-off of deferred loan costs primarily related to the repayment of $167.6 million in debt secured by properties in continuing operations.

Discontinued operations included the results of operations for two hotels held for sale at September 30, 2012, and one hotel sold in August 2012. In addition to these three hotels, discontinued operations for the same period in 2011 included results of operations for six hotels sold in May 2012 and five hotels sold in 2011 subsequent to June 30, 2011. Discontinued operations in 2012 primarily consisted of a $9.9 million net gain on the sale of one hotel. Discontinued operations for the third quarter of 2011 included a $946,000 impairment charge and a $701,000 net gain on the sale of hotels.


Comparison of the Nine Months ended September 30, 2012 and 2011

For the nine months ended September 30, 2012, we recorded a $36.4 million net loss compared to a $97.5 million net loss for the same period in 2011. Our 2012 net loss included $26.6 million in net gains from asset sales included in discontinued operations. The net gains were offset by (i) $12.6 million in net losses from debt extinguishment charges (of which $790,000 is included in discontinued operations), (ii) $1.3 million in impairment charges for a non-strategic hotel, and (iii) $1.1 million in hurricane-related charges (of which $228,000 is included in discontinued operations). Our 2011 net loss included $24.3 million of net losses from debt extinguishment charges (of which a $3.3 million offsetting net gain is included in discontinued operations) and $13.3 million of impairment charges (of which $6.2 million is included in discontinued operations). These 2011 charges were partially offset by $7.4 million in net gains from asset sales included in discontinued operations.

In the nine months ended September 30, 2012:

Total revenue was $695.0 million, 6.5% more than the same period in 2011. This increase primarily reflects a 5.1% increase in same-store RevPAR (for both our core hotels and our non-strategic hotels), reflecting a 5.8% increase in ADR (partially offset by a 50 basis point decrease in occupancy), as well as $11.5 million in incremental revenue from our recently-acquired hotels (Royalton and Morgans, acquired in May 2011). Several of our core hotels were under significant renovation or redevelopment during the nine months ended September 30, 2012.

Hotel departmental expenses increased $14.7 million (including $6.8 million of incremental hotel departmental expenses from our recently-acquired hotels). As a percentage of total revenue, hotel departmental expenses decreased slightly from 36.2% to 36.1% in the current period. Improvement from increases in ADR was offset by decreasing food and beverage margins.

Other property-related costs increased $9.0 million due to a combination of higher costs (such as marketing programs) and $3.5 million of incremental other property-related costs from our recently-acquired hotels. As a percentage of total revenue, other property-related costs decreased from 27.5% to 27.1% compared to the same period in 2011. This improvement primarily reflects revenue increases being driven by ADR as opposed to occupancy.

Management and franchise fees increased $2.2 million compared to the same period in 2011, primarily reflecting higher revenues (which serve as the basis for determining such fees). As a percentage of total revenue, these costs remained essentially unchanged from the same period in 2011.

Taxes, insurance and lease expense increased $7.8 million (including $999,000 of incremental taxes, insurance, and lease expenses from our recently-acquired hotels) and as a percentage of total revenue from 9.8% to 10.4% compared to the same period in 2011. The higher percentage of revenue reflects a combination of increased percentage lease expense (computed as a percentage of hotel revenues in excess of base rent; as revenue increases, percentage rent increases at a faster rate) in 2012, as well as lower property taxes (reductions received after appeals) and lower estimated Canadian taxes in 2011.


Corporate expenses decreased $2.6 million (decreasing as a percentage of total revenue from 3.5% to 2.9%), which reflects: (i) lower restricted stock amortization in 2012, as a significant amount of restricted stock vested in 2011 and (ii) lower payroll tax withholding with respect to restricted cash awards, which were lower in 2012 than in 2011. With respect to the restricted cash awards, amounts withheld decreased as a result of a decrease in the amount of restricted cash granted compared to the prior year. We recognize payroll tax withholding on these awards as an expense when awarded rather than expensed over the normal three-year vesting periods (as is the case with the remainder of the awards).

Depreciation and amortization expense increased $3.6 million compared to the same period in 2011, which includes $1.3 million of incremental depreciation expense related to our recently-acquired hotels. The remainder of the increase primarily reflects depreciation associated with hotel capital expenditures of $89.0 million in 2011 and $100.0 million in 2012.

Impairment loss. In 2012 and 2011, with respect to hotels currently marketed for sale, we recorded impairment charges of $1.3 million (one hotel) and $7.0 million (two hotels), respectively. The charges are based on revised estimated fair values obtained through the marketing process that were lower than the net book values for these hotels.

Other expenses increased $471,000 compared to the same period in 2011, which primarily reflects 2012 hurricane-related charges and other expenses, offset by a reduction in acquisition costs.

Net interest expense decreased $4.6 million compared to the same period in 2011, which primarily reflects lower average debt outstanding and increased capitalized interest related to the Knickerbocker Hotel, all of which was partially offset by an increase in our average interest rate.

Debt extinguishment charges during the nine months ended September 30, 2012 ($11.8 million) include prepayment penalties and the write-off of deferred loan costs primarily related to the repayment of $167.6 million in mortgage debt secured by properties in continuing operations. During the nine months ended September 30, 2011, we redeemed $144.0 million of our 10% senior notes which were due October 2014 and recognized a $27.4 million debt extinguishment charge related to the 10% prepayment premium and the write-off of a pro rata portion of the debt discount and deferred loan costs.

Discontinued operations included the results of operations for two hotels held for sale at September 30, 2012, one hotel sold in August 2012, and six hotels sold in May 2012. In addition to these nine properties, discontinued operations for the same period in 2011 included results of operations for eight hotels sold in 2011. Discontinued operations in 2012 included a $26.6 million net gain on the sale of hotels. Discontinued operations in 2011 reflects a $7.4 million net gain on the sale of hotels, $3.3 million in net gains from debt extinguishment, and $6.2 million in impairment charges.


Non-GAAP Financial Measures
We refer in this report to certain "non-GAAP financial measures." These measures, including FFO, Adjusted FFO, EBITDA, 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.
The following tables detail our computation of FFO and Adjusted FFO (in thousands, except for per share data):
Reconciliation of Net Loss to FFO and Adjusted FFO

(in thousands, except per share data)

                                                          Three Months Ended September 30,
                                                  2012                                          2011
                               Dollars      Shares      Per Share Amount      Dollars      Shares      Per Share Amount
Net loss                     $ (19,555 )                                    $ (23,376 )
Noncontrolling interests           530                                            544
Preferred dividends             (9,678 )                                       (9,678 )
Net loss attributable to
FelCor common stockholders     (28,703 )   123,640     $          (0.23 )     (32,510 )   123,062     $          (0.26 )
Depreciation and
amortization                    31,749           -                 0.26        29,891           -                 0.24
Depreciation, discontinued
operations and
unconsolidated entities          3,664           -                 0.03         7,508           -                 0.06
Gain on involuntary
conversion                           -           -                    -          (109 )         -                    -
Impairment loss,
discontinued operations              -           -                    -           946           -                 0.01
Gain on sale of hotels          (9,922 )         -                (0.08 )        (701 )         -                (0.01 )
Noncontrolling interests in
FelCor LP                         (144 )       626                (0.01 )        (166 )       638                    -
Conversion of unvested
restricted stock                     -           -                    -             -         709                    -
FFO                             (3,356 )   124,266                (0.03 )       4,859     124,409                 0.04
Acquisition costs                   16           -                    -           413           -                 0.01
Hurricane loss                     851           -                 0.01             -           -                    -
Hurricane loss, discontinued
operations and
unconsolidated entities            231           -                    -             -           -                    -
Debt extinguishment,
including discontinued
operations                      11,786           -                 0.09           355           -                    -
Severance costs                     71           -                    -             -           -                    -
Abandoned projects                 219           -                    -             -           -                    -
Pre-opening costs                  202           -                    -             -           -                    -
Conversion of unvested
restricted stock                     -         358                 0.01             -           -                    -
Adjusted FFO                 $  10,020     124,624     $           0.08     $   5,627     124,409     $           0.05


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

                                                       Nine Months Ended September 30,
                                             2012                                           2011
                          Dollars       Shares      Per Share Amount      Dollars       Shares      Per Share Amount
Net loss                $ (36,388 )                                     $  (97,499 )
Noncontrolling
interests                     769                                              738
Preferred dividends       (29,034 )                                        (29,034 )
Net loss attributable
to FelCor common
stockholders              (64,653 )    123,648     $          (0.52 )     (125,795 )   113,908     $          (1.10 )
Depreciation and
amortization               92,544            -                 0.75         88,960           -                 0.78
Depreciation,
discontinued operations
and unconsolidated
entities                   13,315            -                 0.11         25,750           -                 0.23
Gain on involuntary
conversion                      -            -                    -           (292 )         -                    -
Loss on involuntary
conversion,
discontinued operations         -            -                    -             12           -                    -
Impairment loss             1,335            -                 0.01          7,003           -                 0.06
Impairment loss,
discontinued operations         -            -                    -          6,247           -                 0.05
Gain on sale of hotels    (26,641 )          -                (0.22 )       (7,362 )         -                (0.06 )
Noncontrolling
interests in FelCor LP       (329 )        630                    -           (469 )       453                (0.01 )
Conversion of unvested
restricted stock                -          280                    -              -           -                    -
FFO                        15,571      124,558                 0.13         (5,946 )   114,361                (0.05 )
Acquisition costs             114            -                    -          1,359           -                 0.01
Hurricane loss                851            -                 0.01              -           -                    -
Hurricane loss,
discontinued operations
and unconsolidated
entities                      231            -                    -              -           -                    -
Debt extinguishment,
including discontinued
operations                 12,598            -                 0.10         24,316           -                 0.21
Severance costs               451            -                    -              -           -                    -
Abandoned projects            219            -                    -              -           -                    -
Pre-opening costs             245            -                    -              -           -                    -
Conversion of unvested
restricted stock                -            -                    -              -         828                    -
Adjusted FFO            $  30,280      124,558     $           0.24     $   19,729     115,189     $           0.17


The following table details our computation of EBITDA and Adjusted EBITDA (in thousands):

            Reconciliation of Net Loss to EBITDA and Adjusted EBITDA
                                 (in thousands)

                                           Three Months Ended             Nine Months Ended
                                              September 30,                 September 30,
                                           2012           2011           2012           2011
Net loss                               $  (19,555 )   $  (23,376 )   $  (36,388 )   $  (97,499 )
Depreciation and amortization              31,749         29,891         92,544         88,960
Depreciation, discontinued operations
and unconsolidated entities                 3,664          7,508         13,315         25,750
Interest expense                           31,393         32,924         93,664         98,323
Interest expense, discontinued
operations and unconsolidated entities        934          2,009          4,060          8,016
Noncontrolling interests in other
partnerships                                  386            378            440            269
EBITDA                                     48,571         49,334        167,635        123,819
Impairment loss                                 -              -          1,335          7,003
Impairment loss, discontinued
operations                                      -            946              -          6,247
Hurricane loss                                851              -            851              -
Hurricane loss, discontinued
operations and unconsolidated entities        231              -            231              -
Debt extinguishment, including
discontinued operations                    11,786            355         12,598         24,316
Acquisition costs                              16            413            114          1,359
Gain on sale of hotels                     (9,922 )         (701 )      (26,641 )       (7,362 )
Gain on involuntary conversion                  -           (109 )            -           (292 )
Loss on involuntary conversion,
discontinued operations                         -              -              -             12
Amortization of stock compensation          1,210          1,766          3,748          5,343
Severance costs                                71              -            451              -
Abandoned projects                            219              -            219              -
Pre-opening costs                             202              -            245              -
Adjusted EBITDA                        $   53,235     $   52,004     $  160,786     $  160,445


The following tables detail our computation of Hotel EBITDA, Hotel EBITDA margin, hotel operating expenses on our same-store hotels, and includes the reconciliation of hotel operating expenses to total operating expenses at the dates presented.

Hotel EBITDA and Hotel EBITDA Margin
(dollars in thousands)

                                      Three Months Ended           Nine Months Ended
                                         September 30,               September 30,
                                      2012          2011          2012          2011
Same-store operating revenue:
Room                               $ 188,886     $ 177,858     $ 544,664     $ 516,384
Food and beverage                     33,673        30,288       109,472       105,999
Other operating departments           12,237        13,488        38,177        39,140
Same-store operating revenue         234,796       221,634       692,313       661,523
Same-store operating expense:
Room                                  49,794        47,805       144,419       139,330
Food and beverage                     29,176        26,892        89,354        85,343
Other operating departments            5,593         5,979        16,976        17,719
Other property related costs          63,940        61,944       188,428       182,859
Management and franchise fees         10,895        10,245        32,188        30,376
Taxes, insurance and lease expense    16,170        14,149        46,135        41,099
Same-store operating expense         175,568       167,014       517,500       496,726
Hotel EBITDA                       $  59,228     $  54,620     $ 174,813     $ 164,797
Hotel EBITDA Margin                     25.2 %        24.6 %        25.3 %        24.9 %


Reconciliation of Same-store Operating Revenue and Same-store Operating Expense to Total Revenue, Total Operating Expense and Operating Income

(in thousands)

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