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 June 30, 2010

or

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

Commission File Number: 001-14236

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

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

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

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

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

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

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

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

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

At July 28, 2010, the registrant had issued and outstanding 97,050,021 shares of common stock.


 
 
 



FELCOR LODGING TRUST INCORPORATED

INDEX
 
Page
      PART I − FINANCIAL INFORMATION  
         
Item 1.
Financial Statements
 
3
   
Consolidated Balance Sheets June 30, 2010 and December 31, 2009 (unaudited)
3
   
Consolidated Statements of Operations – For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
4
   
Consolidated Statements of Comprehensive Loss – For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
5
   
Consolidated Statements of Changes in Equity – For the Six Months Ended June 30, 2010 and 2009 (unaudited)
6
   
Consolidated Statements of Cash Flows – For the Six Months Ended June 30, 2010 and 2009 (unaudited) Notes to Consolidated Financial Statements
7
   
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
   
General
 
19
   
Results of Operations
20
   
Non-GAAP Financial Measures
22
   
Pro Rata Share of Rooms Owned
24
   
Hotel Portfolio Composition
25
   
Hotel Operating Statistics
26
   
Hotel Portfolio
28
   
Liquidity and Capital Resources
30
   
Inflation
 
32
   
Seasonality
32
   
Disclosure Regarding Forward-Looking Statements
32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
33
Item 4.
Controls and Procedures
33
         
      PART II − OTHER INFORMATION  
         
Item 3.
Defaults Upon Senior Securities
34
Item 6.
Exhibits
   
34
         
SIGNATURE
   
35




 
2
 

PART I -- FINANCIAL INFORMATION


Item 1.                      Financial Statements.

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)

 
June 30, 2010
 
December 31, 2009
Assets
             
Investment in hotels, net of accumulated depreciation of $958,462 at June 30, 2010 and $916,604 at December 31, 2009
$
2,102,908
   
$
2,180,394
 
Investment in unconsolidated entities
 
104,372
     
82,040
 
Cash and cash equivalents
 
281,474
     
263,531
 
Restricted cash
 
17,288
     
18,708
 
Accounts receivable, net of allowance for doubtful accounts of $315 at June 30, 2010 and $406 at December 31, 2009
 
33,618
     
28,678
 
Deferred expenses, net of accumulated amortization of $13,993 at June 30, 2010 and $14,502 at December 31, 2009
 
22,828
     
19,977
 
Other assets
 
37,387
     
32,666
 
          Total assets
$
2,599,875
   
$
2,625,994
 
               
Liabilities and Equity
             
Debt, net of discount of $58,567 at June 30, 2010 and $64,267 at December 31, 2009
$
1,596,635
   
$
1,773,314
 
Distributions payable
 
56,936
     
37,580
 
Accrued expenses and other liabilities
 
156,808
     
131,339
 
          Total liabilities
 
1,810,379
     
1,942,233
 
               
Commitments and contingencies
             
               
Redeemable noncontrolling interests in FelCor LP at redemption value, 295 units issued and outstanding at June 30, 2010 and December 31, 2009
 
1,472
     
1,062
 
               
Equity:
             
Preferred stock, $0.01 par value, 20,000 shares authorized:
             
   Series A Cumulative Convertible Preferred Stock, 12,880 shares, liquidation value of $322,011, issued and outstanding at June 30, 2010 and December 31, 2009
 
309,362
     
309,362
 
   Series C Cumulative Redeemable Preferred Stock, 68 shares, liquidation value of $169,950, issued and outstanding at June 30, 2010 and December 31, 2009
 
169,412
     
169,412
 
Common stock, $.01 par value, 200,000 shares authorized and 101,038 and 69,413 shares issued, including shares in treasury, at June 30, 2010 and December 31, 2009, respectively
 
1,010
     
694
 
Additional paid-in capital
 
2,188,730
     
2,021,837
 
Accumulated other comprehensive income
 
22,879
     
23,528
 
Accumulated deficit
 
(1,852,962
)
   
(1,792,822
)
Less: Common stock in treasury, at cost, of 3,986 shares at June 30, 2010 and 3,845 shares at December 31, 2009
 
(72,237
)
   
(71,895
)
               
          Total FelCor stockholders’ equity
 
766,194
     
660,116
 
Noncontrolling interests in other partnerships
 
21,830
     
22,583
 
Total equity
 
788,024
     
682,699
 
               
          Total liabilities and equity
$
2,599,875
   
$
2,625,994
 

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

 
3
 


FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2010 and 2009
(unaudited, in thousands, except for per share data)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2010
 
2009
 
2010
 
2009
Revenues:
                             
   Hotel operating revenue
$
249,329
   
$
235,269
   
$
475,368
   
$
463,002
 
   Other revenue
 
1,007
     
988
     
1,372
     
1,274
 
Total revenues
 
250,336
     
236,257
     
476,740
     
464,276
 
                               
Expenses:
                             
   Hotel departmental expenses
 
86,974
     
81,487
     
168,756
     
160,732
 
   Other property related costs
 
67,466
     
63,956
     
133,070
     
129,310
 
   Management and franchise fees
 
11,884
     
11,043
     
22,419
     
22,184
 
   Taxes, insurance and lease expense
 
26,921
     
24,656
     
51,601
     
49,318
 
   Corporate expenses
 
6,510
     
5,236
     
16,357
     
11,358
 
   Depreciation and amortization
 
36,969
     
35,935
     
74,567
     
72,586
 
   Impairment loss
 
-   
     
-   
     
21,060
     
-   
 
   Other expenses
 
801
     
1,761
     
1,362
     
2,457
 
Total operating expenses
 
237,525
     
224,074
     
489,192
     
447,945
 
                               
Operating income (loss) (loss)
 
12,811
     
12,183
     
(12,452
)
   
16,331
 
   Interest expense, net
 
(37,174
)
   
(22,782
)
   
(73,414
)
   
(44,074
)
   Extinguishment of debt
 
46,060
     
(594
)
   
46,060
     
(594
)
Income (loss) before equity in income (loss) from unconsolidated entities
 
21,697
     
(11,193
)
   
(39,806
)
   
(28,337
)
   Equity in income (loss) from unconsolidated entities
 
286
     
(261
)
   
(1,188
)
   
(3,685
)
Income (loss) from continuing operations
 
21,983
     
(11,454
)
   
(40,994
)
   
(32,022
)
   Discontinued operations
 
7
     
486
     
42
     
(368
)
Net income (loss)
 
21,990
     
(10,968
)
   
(40,952
)
   
(32,390
)
Net income attributable to noncontrolling interests in other partnerships
 
(325
)
   
(324
)
   
(96
)
   
(108
)
Net loss (income) attributable to redeemable noncontrolling interests in FelCor LP
 
(51
)
   
97
     
274
     
239
 
Net income (loss) attributable to FelCor
 
21,614
     
(11,195
)
   
(40,774
)
   
(32,259
)
   Preferred dividends
 
(9,678
)
   
(9,678
)
   
(19,356
)
   
(19,356
)
Net income (loss) attributable to FelCor common stockholders
$
11,936
   
$
(20,873
)
 
$
(60,130
)
 
$
(51,615
)
                               
Basic and diluted per common share data:
                             
   Income (loss) from continuing operations
$
0.17
   
$
(0.34
)
 
$
(0.93
)
 
$
(0.81
)
   Net income (loss)
$
0.17
   
$
(0.33
)
 
$
(0.92
)
 
$
(0.82
)
   Basic and diluted weighted average common shares outstanding
 
66,531
     
 
63,101
     
65,014
     
63,132
 








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

 
4
 


FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Six Months Ended June 30, 2010 and 2009
(unaudited, in thousands)


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2010
 
2009
 
2010
 
2009
Net income (loss)  
$
21,990
   
$
(10,968
)
 
$
(40,952
)
 
$
(32,390
)
Foreign currency translation adjustment
 
(2,731
)
   
4,159
     
(652
)
   
2,450
 
Comprehensive income (loss)  
 
19,259
     
(6,809
)
   
(41,604
)
   
(29,940
)
Comprehensive income attributable to noncontrolling interests in other partnerships
 
(325
)
   
(324
)
   
(96
)
   
(108
)
Comprehensive loss (income) attributable to redeemable noncontrolling interests in FelCor LP
 
(39
)
   
78
     
277
     
228
 
Comprehensive income (loss) attributable to FelCor
$
18,895
   
$
(7,055
)
 
$
(41,423
)
 
$
(29,820
)


































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


 
5
 

FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Six Months Ended June 30, 2010 and 2009
(unaudited, in thousands)

 
Preferred Stock
 
Common Stock
     
Accumulated
         
Noncontrolling
       
 
Number of Shares
 
Amount
 
Number of Shares
 
 
 
Amount
 
Additional Paid-in Capital
 
Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Interests in Other Partnerships
 
 
Comprehensive Income (Loss)
 
 
Total Equity
Balance at December 31, 2008
12,948
   
$
478,774
   
69,413
 
$
694
 
$
2,045,482
   
$
15,347
   
$
(1,645,947
)
 
$
(99,245
)
 
$
23,784
           
$
818,889
 
Issuance of stock awards
-   
     
-   
   
-   
   
-   
   
(11,054
)
   
-   
     
-   
     
11,070
     
-   
             
16
 
Amortization of stock awards
-   
     
-   
   
-   
   
-   
   
2,702
     
-   
     
-   
     
-   
     
-   
             
2,702
 
Forfeiture of stock awards
-   
     
-   
   
-   
   
-   
   
63
     
-   
     
-   
     
(186
)
   
-   
             
(123
)
Allocation to redeemable noncontrolling interests
-   
     
-   
   
-   
   
-   
   
(410
)
   
-   
     
-   
     
-   
     
-   
             
(410
)
Contribution from noncontrolling interests
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
-   
     
362
             
362
 
Distribution to noncontrolling interests
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
-   
     
(725
)
           
(725
)
Other
-   
     
-   
   
-   
   
-   
   
(168
)
   
-   
     
(40
)
   
-   
     
168
             
(40
)
Preferred dividends accrued:
                                                                             
  $0.975 per Series A preferred share
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(12,558
)
   
-   
     
-   
             
(12,558
)
  $1.00 per Series C depositary preferred share
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(6,798
)
   
-   
     
-   
             
(6,798
)
Comprehensive loss:
                                                                             
Foreign exchange translation
-   
     
-   
   
-   
   
-   
   
-   
     
2,439
     
-   
     
-   
     
-   
   
$
2,439
         
Net income (loss)
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(32,259
)
   
-   
     
108
     
(32,151
)
       
Comprehensive loss
                                                               
$
(29,712
)
   
(29,712
)
Balance at June 30, 2009
12,948
   
$
478,774
   
69,413
 
$
694
 
$
2,036,615
   
$
17,786
   
$
(1,697,602
)
 
$
(88,361
)
 
$
23,697
           
$
771,603
 
                                                                               
Balance at December 31, 2009
12,948
   
$
478,774
   
69,413
 
$
694
 
$
2,021,837
   
$
23,528
   
$
(1,792,822
)
 
$
(71,895
)
 
$
22,583
           
$
682,699
 
Issuance of common stock
-   
     
-   
   
31,625
   
316
   
166,256
     
-   
     
-   
     
-   
     
-   
             
166,572
 
Issuance of stock awards
-   
     
-   
   
-   
   
-   
   
(229
)
   
-   
     
-   
     
297
     
-   
             
68
 
Amortization of stock awards
-   
     
-   
   
-   
   
-   
   
2,520
     
-   
     
-   
     
-   
     
-   
             
2,520
 
Forfeiture of stock awards
-   
     
-   
   
-   
   
-   
   
149
     
-   
     
-   
     
(639
)
   
-   
             
(490
)
Allocation to redeemable noncontrolling interests
-   
     
-   
   
-   
   
-   
   
(687
)
   
-   
     
-   
     
-   
     
-   
             
(687
)
Contribution from noncontrolling interests
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
-   
     
15
             
15
 
Distribution to noncontrolling interests
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
-   
     
-   
     
(980
)
           
(980
)
Other
-   
     
-   
   
-   
   
-   
   
(1,116
)
   
-   
     
(10
)
   
-   
     
116
             
(1,010
)
Preferred dividends accrued:
                                                                             
  $0.975 per Series A preferred share
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(12,558
)
   
-   
     
-   
             
(12,558
)
  $1.00 per Series C depositary preferred share
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(6,798
)
   
-   
     
-   
             
(6,798
)
Comprehensive loss:
                                                                             
Foreign exchange translation
-   
     
-   
   
-   
   
-   
   
-   
     
(649
)
   
-   
     
-   
     
-   
   
$
(649
)
       
Net income (loss)
-   
     
-   
   
-   
   
-   
   
-   
     
-   
     
(40,774
)
   
-   
     
96
     
(40,678
)
       
Comprehensive loss
                                                               
$
(41,327
)
   
(41,327
)
Balance at June 30, 2010
12,948
   
$
478,774
   
101,038
 
$
1,010
 
$
2,188,730
   
$
22,879
   
$
(1,852,962
)
 
$
(72,237
)
 
$
21,830
           
$
788,024
 


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

 
6
 

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2010 and 2009
(unaudited, in thousands)

 
Six Months Ended
June 30,
 
2010
 
2009
Cash flows from operating activities:
             
  Net loss
$
(40,952
)
 
$
(32,390
)
  Adjustments to reconcile net loss to net cash provided by operating activities:
             
              Depreciation and amortization
 
74,567
     
74,042
 
              Amortization of deferred financing fees and debt discount
 
8,608
     
1,722
 
              Amortization of unearned officers’ and directors’ compensation
 
3,257
     
2,802
 
              Equity in loss from unconsolidated entities
 
1,188
     
3,685
 
              Distributions of income from unconsolidated entities
 
1,110
     
1,388
 
              Extinguishment of debt
 
(46,060
)
   
594
 
              Impairment loss
 
21,060
     
1,368
 
        Changes in assets and liabilities:
             
              Accounts receivable
 
(5,469
)
   
(751
)
              Restricted cash – operations
 
4,066
     
(676
)
              Other assets
 
(4,059
)
   
(8,302
)
              Accrued expenses and other liabilities
 
23,924
     
3,075
 
                        Net cash flow provided by operating activities
 
41,240
     
46,557
 
               
Cash flows from investing activities:
             
    Improvements and additions to hotels
 
(18,393
)
   
(45,539
)
    Additions to condominium project
 
(162
)
   
(88
)
    Acquisition of noncontrolling interest
 
(1,000
)
   
-   
 
    Change in restricted cash – investing
 
(2,646
)
   
(1,255
)
    Redemption of investment securities
 
-   
     
632
 
    Distributions from unconsolidated entities
 
559
     
3,200
 
    Contributions to unconsolidated entities
 
(25,122
)
   
(409
)
                        Net cash flow used in investing activities
 
(46,764
)
   
(43,459
)
               
Cash flows from financing activities:
             
    Proceeds from borrowings
 
212,121
     
418,382
 
    Repayment of borrowings
 
(347,692
)
   
(336,243
)
    Payment of deferred financing fees
 
(6,615
)
   
(7,343
)
    Distributions paid to noncontrolling interests
 
(980
)
   
(725
)
    Contributions from noncontrolling interests
 
15
     
362
 
    Distributions paid to preferred stockholders
 
-   
     
(9,678
)
    Net proceeds from common stock issuance
 
166,704
     
-   
 
                        Net cash flow provided by financing activities
 
23,553
     
64,755
 
               
Effect of exchange rate changes on cash
 
(86
)
   
468
 
Net change in cash and cash equivalents
 
17,943
     
68,321
 
Cash and cash equivalents at beginning of periods
 
263,531
     
50,187
 
Cash and cash equivalents at end of periods
$
281,474
   
$
118,508
 
               
Supplemental cash flow information – interest paid
$
64,490
   
$
43,187
 





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

 
7
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.           Organization

FelCor Lodging Trust Incorporated (NYSE:FCH), or FelCor, a Maryland corporation, operates as a real estate investment trust, or REIT.  We are the sole general partner of, and the owner of a greater than 99% partnership interest in, FelCor Lodging Limited Partnership, or FelCor LP, through which we held ownership interests in 84 hotels with approximately 24,000 rooms at June 30, 2010.

We lease all but one of our hotels to our taxable REIT subsidiaries (or TRS).  These subsidiaries (our operating lessees) have engaged independent third-party management companies to manage the hotels.

Of the 84 hotels in which we had an ownership interest at June 30, 2010, we owned a 100% interest in 65 hotels, a 90% interest in entities owning three hotels, an 82% interest in an entity owning one hotel, a 60% interest in an entity owning one hotel and a 50% interest in entities owning 14 hotels.  We consolidate our real estate interests in the 70 hotels in which we held greater than 50% ownership interests, and we record the real estate interests of the 14 hotels in which we held 50% ownership interests using the equity method.

At June 30, 2010, 83 of the 84 hotels in which we had ownership interests were leased to operating lessees, and one 50%-owned hotel was operated without a lease.  We held greater than 50% ownership interests and had direct or indirect controlling interests in the lessees of the hotels that were leased to operating lessees.  Because we owned controlling interests in these lessees (including lessees of 13 of the 14 hotels in which we owned 50% of the real estate interests), we consolidated our lessee interests in these hotels (we refer to these 83 hotels as our Consolidated Hotels) and reflect 100% of the hotels’ revenues and expenses, including lease expenses, on our statement of operations.  Of our Consolidated Hotels, we owned 50% of the real estate interests in each of 13 hotels (we accounted for the ownership in our real estate interests of these hotels by the equity method) and more than 50% of the real estate interests in each of the remaining 70 hotels (we consolidate our real estate interest in these hotels).

At June 30, 2010, we had 97,346,569 shares and units outstanding consisting of 97,051,609 shares of FelCor common stock and 294,960 FelCor LP limited partnership units not owned by FelCor.

The following table illustrates the distribution of our 83 Consolidated Hotels among our various brands at June 30, 2010:

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

At June 30, 2010, our Consolidated Hotels were located in the United States (81 hotels in 23 states) and Canada (two hotels in Toronto, Ontario), with concentrations in California (15 hotels), Florida (12 hotels) and Texas (11 hotels).  Approximately 50% of our hotel room revenues were generated from hotels in these three states during the first six months of 2010.

 
8
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.
Organization – (continued)

At June 30, 2010, of our 83 Consolidated Hotels: (i) subsidiaries of Hilton Hotels Corporation, or Hilton, managed 54 hotels, (ii) subsidiaries of InterContinental Hotels Group, or IHG, managed 15 hotels, (iii) subsidiaries of Starwood Hotels & Resorts Worldwide Inc., or Starwood, managed nine hotels, (iv) subsidiaries of Marriott International Inc., or Marriott, managed three hotels, and (iv) independent management companies managed two hotels.

Our hotels managed by Marriott are accounted for on a fiscal year comprised of 52 or 53 weeks ending on the Friday closest to December 31.  Our quarterly period ending June 30, 2010 and 2009 includes the results of operations for our Marriott-managed hotels for the 12 week period ending June 18, 2010 and June 19, 2009, respectively.

The information in our consolidated financial statements for the three and six months ended June 30, 2010 and 2009 is unaudited.  Preparing financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  The accompanying financial statements for the three and six months ended June 30, 2010 and 2009, include adjustments based on management’s estimates (consisting of normal and recurring accruals), which we consider necessary for a fair presentation of the results for the periods.  The financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2009, included in our Annual Report on Form 10-K.  Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of actual operating results for the entire year.

2.
Investment in Unconsolidated Entities

We owned 50% interests in joint ventures that owned 14 hotels at June 30, 2010 and 15 hotels at December 31, 2009.  We also own a 50% interest in entities that own real estate in Myrtle Beach, South Carolina and provide condominium management services.  We account for our investments in these unconsolidated entities under the equity method.  We do not have any majority-owned subsidiaries that are not consolidated in our financial statements.  We make adjustments to our equity in income from unconsolidated entities related to the difference between our basis in investment in unconsolidated entities compared to the historical basis of the assets recorded by the joint ventures.

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

 
June 30, 2010
 
December 31, 2009
 
Balance sheet information:
               
     Investment in hotels, net of accumulated depreciation
$
246,415
   
$
259,977
   
     Total assets
$
272,004
   
$
279,611
   
     Debt
$
160,261
   
$
214,963
   
     Total liabilities
$
166,630
   
$
220,389
   
     Equity
$
105,374
   
$
59,222
   

Our unconsolidated entities’ debt at June 30, 2010 and December 31, 2009 consisted entirely of non-recourse mortgage debt.


 
9
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2.
Investment in Unconsolidated Entities – (continued)

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

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2010
 
2009
 
2010
 
2009
Total revenues
$
19,648
   
$
18,182
   
$
32,387
   
$
32,920
 
Net income (loss)
$
1,022
   
$
374
   
$
(2,114
)
 
$
(4,588
) (a)
                               
Net income (loss) attributable to FelCor
$
751
   
$
187
   
$
(817
)
 
$
(2,295
)
Impairment loss
 
-   
     
-   
     
-   
     
(476
) (b)
Gain on joint venture liquidation
 
-   
     
-   
     
559
(b)
   
-   
 
Depreciation of cost in excess of book value
 
(465
)
   
(448
)
   
(930
)
   
(914
)
Equity in income (loss) from unconsolidated entities
$
286
   
$
(261
)
 
$
(1,188
)
 
$
(3,685
)

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

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

 
June 30, 2010
 
December 31, 2009
Hotel-related investments
$
42,739
   
$
18,969
 
Cost in excess of book value of hotel investments
 
51,565
     
52,429
 
Land and condominium investments
 
10,068
     
10,642
 
 
$
104,372
   
$
82,040
 

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2010
 
2009
 
2010
 
2009
Hotel investments
$
292
   
$
(371
)
 
$
(613
)
 
$
(3,196
)
Other investments
 
(6
)
   
110
     
(575
)
   
(489
)
Equity in income (loss) from unconsolidated entities
$
286
   
$
(261
)
 
$
(1,188
)
 
$
(3,685
)


 
10
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3.           Debt

Consolidated debt consisted of the following (in thousands):

 
Encumbered
         
June 30,
 
December 31,
 
Hotels
 
Interest Rate
 
Maturity Date
 
2010
 
2009
Mortgage debt (a)
none
   
8.73
%
 
May 2010
 
$
-   
 
$
112,703
Mortgage debt (b)
none
   
8.70
   
May 2010
   
-   
   
98,639
Mortgage debt (c)(d)
2 hotels
   
8.62
   
May 2010
   
31,740
   
31,740
Other
none
   
4.25
   
May 2011
   
477
   
354
Senior notes
none
   
8.50
(e)
 
June 2011
   
86,640
   
86,604
Mortgage debt (f)
1 hotel
   
6.15
   
June 2011 (g)
   
4,402
   
4,922
Mortgage debt
1 hotel
   
6.15
   
June 2011 (g)
   
8,607
   
9,228
Capital lease (f)
1 hotel
   
10.50
   
August 2011
   
1,236
   
1,735
Mortgage debt
9 hotels
 
L +
3.50
(h)
 
August 2011 (i)
   
199,300
   
200,425
Mortgage debt
12 hotels
 
L +
0.93
(j)
 
November 2011 (k)
   
250,000
   
250,000
Mortgage debt (l)
none
 
L +
1.55
   
May 2012
   
-   
   
176,555
Mortgage debt
1 hotel
   
8.77
   
May 2013 (m)
   
27,770
   
27,829
Mortgage debt
7 hotels
   
9.02
   
April 2014
   
115,368
   
117,422
Mortgage debt (c)
5 hotels
   
6.66
   
June - August 2014
   
70,069
   
70,917
Senior secured notes (n)
14 hotels
   
10.00
   
October 2014
   
577,493
   
572,500
Mortgage debt
9 hotels
 
L+
5.10
(o)
 
April 2015
   
212,000
   
-   
Mortgage debt
1 hotel
   
5.81
   
July 2016
   
11,533
   
11,741
  Total
63 hotels
             
$
1,596,635
 
$
1,773,314

(a)
This loan was refinanced in May 2010, as a consequence of which two hotels were unencumbered.
(b)
These loans were refinanced in May 2010.
(c)
The hotels securing this debt are subject to separate loan agreements and are not cross-collateralized.
(d)
We are in the process of transferring the two hotels securing this debt to the lenders in full satisfaction of the debt.
(e)
As a result of a rating down-grade in February 2009, the interest rate on our 8½% senior notes increased to 9%.
(f)
Since the end of the second quarter 2010, we have repaid this debt.
(g)
In February 2010, the maturity date on these loans was extended to June 2011.
(h)
LIBOR for this loan is subject to a 2% floor.
(i)
This loan can be extended for as many as two years (to 2013), subject to satisfying certain conditions.
(j)
We purchased an interest rate cap that caps LIBOR at 7.8% and expires November 2010 for a $250 million notional amount.
(k)
The maturity date assumes that we will exercise the remaining one-year extension option that is exercisable, at our sole discretion, and would extend the current November 2010 maturity to 2011.
(l)
This loan was repaid in June 2010 for a payment of $130 million plus accrued interest.
(m)
In February 2010, the maturity date on this loan was extended to May 2013.
(n)
These notes have $636 million in aggregate principal outstanding and were sold at a discount that provides an effective yield of 12.875% before transaction costs.
(o)
LIBOR for this loan is subject to a 3% floor .   We purchased an interest rate cap that caps LIBOR at 5.0% and expires May 2012 for a $212 million notional amount.

 
11
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3.           Debt – (continued)

In June 2010, we repaid $177 million of secured debt scheduled to mature in 2012 for $130 million, plus accrued interest, representing a 27% discount to the principal balance.  This allowed us to reduce our leverage substantially and unencumber two hotels.

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

We reported $37.2 million and $22.8 million of interest expense for the three months ended June 30, 2010 and 2009, respectively, which is net of: (i) interest income of $97,000 and $167,000 and (ii) capitalized interest of $138,000 and $175,000, respectively.  We reported $73.4 million and $44.1 million of interest expense for the six months ended June 30, 2010 and 2009, respectively, which is net of: (i) interest income of $202,000 and $344,000 and (ii) capitalized interest of $283,000 and $407,000, respectively.

4.           Common Stock Offering

In June 2010, we completed a public offering of 31,625,000 shares of our common stock at $5.50 per share.  The net proceeds from the offering were $166.7 million.  These proceeds together with cash on hand were used to repay $177 million of secured debt for $130 million, representing a 27% discount, and will be used to fund our $98.5 million acquisition of the Fairmont Copley Plaza in Boston, which is expected to close in the third quarter of 2010.

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

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2010
 
2009
 
2010
 
2009
Room revenue
$
195,876
   
$
185,567
   
$
373,136
   
$
363,746
 
Food and beverage revenue
 
38,792
     
35,063
     
74,288
     
70,914
 
Other operating departments
 
14,661
     
14,639
     
27,944
     
28,342
 
     Total hotel operating revenue
$
249,329
   
$
235,269
   
$
475,368
   
$
463,002
 

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


 
12
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5.
Hotel Operating Revenue, Departmental Expenses, and Other Property Operating Costs – (continued)

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

 
Three Months Ended June 30,
 
2010
 
2009
 
Amount
 
% of Total Hotel
Operating Revenue
 
Amount
 
% of Total Hotel
Operating
Revenue
Room
$
51,115
   
20.5
%
 
$
47,685
   
20.3
%
Food and beverage
 
29,373
   
11.8
     
27,589
   
11.7
 
Other operating departments
 
6,486
   
2.6
     
6,213
   
2.6
 
Total hotel departmental expenses
$
86,974
   
34.9
%
 
$
81,487
   
34.6
%

 
Six Months Ended June 30,
 
2010
 
2009
 
Amount
 
% of Total Hotel
Operating Revenue
 
Amount
 
% of Total Hotel
Operating
Revenue
Room
$
98,902
   
20.8
%
 
$
92,907
   
20.0
%
Food and beverage
 
57,282
   
12.1
     
55,476
   
12.0
 
Other operating departments
 
12,572
   
2.6
     
12,349
   
2.7
 
Total hotel departmental expenses
$
168,756
   
35.5
%
 
$
160,732
   
34.7
%

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

 
Three Months Ended June 30,
 
2010
 
2009
 
Amount
 
% of Total Hotel
Operating Revenue
 
Amount
 
% of Total Hotel
Operating Revenue
Hotel general and administrative expense
$
21,833
   
8.8
%
 
$
20,325
   
8.6
%
Marketing
 
21,056
   
8.5
     
19,648
   
8.4
 
Repair and maintenance
 
12,833
   
5.1
     
12,030
   
5.1
 
Utilities
 
11,744
   
4.7
     
11,953
   
5.1
 
Total other property operating costs
$
67,466
   
27.1
%
 
$
63,956
   
27.2
%


 
13
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5.
Hotel Operating Revenue, Departmental Expenses, and Other Property Operating Costs – (continued)

 
Six Months Ended June 30,
 
2010
 
2009
 
 
 
Amount
 
% of Total Hotel
Operating Revenue
 
 
 
Amount
 
% of Total Hotel
Operating Revenue
Hotel general and administrative expense
$
42,940
   
9.0
%
 
$
41,219
   
8.9
%
Marketing
 
40,618
   
8.6
     
39,173
   
8.4
 
Repair and maintenance
 
25,782
   
5.4
     
24,590
   
5.3
 
Utilities
 
23,730
   
5.0
     
24,328
   
5.3
 
Total other property operating costs
$
133,070
   
28.0
%
 
$
129,310
   
27.9
%

Hotel departmental expenses and other property operating costs include hotel employee compensation and benefit expenses of $75.7 million and $71.7 million for the three months ended June 30, 2010 and 2009, respectively, and $149.0 million and $143.8 million for the six months ended June 30, 2010 and 2009, respectively.

6.           Taxes, Insurance and Lease Expense

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2010
 
2009
 
2010
 
2009
Hotel lease expense (a)  
$
11,769
   
$
10,853
   
$
21,263
   
$
20,913
 
Land lease expense (b)  
 
2,550
     
2,438
     
4,704
     
4,625
 
Real estate and other taxes
 
9,744
     
8,499
     
19,207
     
17,516
 
Property insurance, general liability insurance and other
 
2,858
     
2,866
     
6,427
     
6,264
 
     Total taxes, insurance and lease expense
$
26,921
   
$
24,656
   
$
51,601
   
$
49,318
 

 
(a )
Hotel lease expense is recorded by the consolidated operating lessees of 13 hotels owned by unconsolidated entities, and is partially offset through noncontrolling interests in other partnerships.  Our 50% share of the corresponding lease income is recorded through equity in income from unconsolidated entities.  Hotel lease expense includes percentage rent of $4.7 million and $3.8 million for the three months ended June 30, 2010 and 2009, respectively, and $7.1 million and $6.9 million for the six months ended June 30, 2010 and 2009, respectively.
 
(b)
Land lease expense includes percentage rent of $1.0 million and $1.1 million for the three months ended June 30, 2010 and 2009, respectively, and $1.6 million and $1.8 million for the six months ended June 30, 2010 and 2009, respectively.

7.           Impairment

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

 
14
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.           Impairment – (continued)

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

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

We did not have any hotels held for sale at June 30, 2010.  We consider a sale to be probable within the next twelve months (for purposes of determining whether a hotel is held for sale) when a buyer completes its due diligence review of the asset, we have an executed contract for sale, and we have received a substantial non-refundable deposit.

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

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

8.           Discontinued Operations

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

 
Three Months Ended June 30,
 
Six Months Ended June 30
 
2010
 
2009
 
2010
 
2009
Hotel operating revenue
$
9
   
$
6,309
     
$
44
   
$
12,578
 
Operating expenses
 
(2
)
   
(5,823
)
     
(2
)
   
(12,946
) (a)
Income (loss) from discontinued operations
$
7
   
$
486
     
$
42
   
$
(368
)

 
(a)
  Includes impairment charges of $1.4 million.

 
15
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



9.           Income (Loss) Per Share

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

 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2010
 
2009
 
2010
 
2009
Numerator:
                             
   Net income (loss) attributable to FelCor
$
21,614
   
$
(11,195
)
 
$
(40,774
)
 
$
(32,259
)
   Discontinued operations attributable to FelCor
 
(7
)
   
(484
)
   
(42
)
   
366
 
   Income (loss) from continuing operations attributable to FelCor
 
21,607
     
(11,679
)
   
(40,816
)
   
(31,893
)
      Less: Preferred dividends
 
(9,678
)
   
(9,678
)
   
(19,356
)
   
(19,356
)
      Less: Undistributed earnings allocated to unvested restricted stock
 
(352
)
   
-   
     
-   
     
-   
 
   Numerator for continuing operations attributable to FelCor common stockholders
 
11,577
     
(21,357
)
   
(60,172
)
   
(51,249
)
   Discontinued operations attributable to FelCor
 
7
     
484
     
42
     
(366
)
Numerator for basic and diluted income (loss) attributable to FelCor common stockholders
$
11,584
   
$
(20,873
)
 
$
(60,130
)
 
$
(51,615
)
Denominator:
                             
   Denominator for basic and diluted income (loss) per share
 
66,531
(a)
   
63,101
     
65,014
     
63,132
 
Basic and diluted income (loss) per share data:
                             
   Income (loss) from continuing operations
$
0.17
   
$
(0.34
)
 
$
(0.93
)
 
$
(0.81
)
   Discontinued operations
$
-   
   
$
0.01
   
$
-   
   
$
(0.01
)
   Net income (loss)
$
0.17
   
$
(0.33
)
 
$
(0.92
)
 
$
(0.82
)

(a)
Reflects issuance of 31.6 million shares on June 22, 2010.

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2010
 
2009
 
2010
 
2009
Series A convertible preferred shares
9,985
   
9,985
     
9,985
     
9,985
 

Series A preferred dividends that would be excluded from net income (loss) attributable to FelCor common stockholders, if these Series A preferred shares were dilutive, were $6.3 million for the three months ended June 30, 2010 and 2009, and $12.6 million for the six months ended June 30, 2010 and 2009.


 
16
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



10.            Suspension of Dividends

We suspended payment of our common dividend in December 2008 and our preferred dividend in March 2009 (we paid $9.7 million of preferred dividends in January 2009).  Our ability to pay cash dividends is limited by the indenture governing our senior secured notes whenever we fail to meet a defined financial ratio threshold, as in the current circumstances; consequently, we do not expect to pay any common or preferred cash dividends during 2010.  Dividends are not paid unless declared by our Board of Directors; however, any unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to reinstatement of our common dividend.  Our Board of Directors will determine whether to declare future dividends based upon various factors, including operating results, economic conditions, other operating trends, our financial condition including the outcome of refinancing debt maturities and capital requirements, as well as minimum REIT distribution requirements.  We had accrued $56.9 million and $37.6 million in dividends payable on our Series A and Series C preferred stock at June 30, 2010 and December 31, 2009, respectively.

11.           Noncontrolling Interests

We record the noncontrolling interests of other consolidated partnerships as a separate component of equity in the condensed consolidated balance sheets.  Additionally, the condensed consolidated statements of operations separately present earnings and other comprehensive income attributable to controlling and non-controlling interests.  We adjust the noncontrolling interests of FelCor LP each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption value.  The historical cost of the noncontrolling interests of FelCor LP is based on the proportional relationship between the carrying value of equity associated with our common stockholders relative to that of the unitholders of FelCor LP.  Net income (loss) is allocated to the noncontrolling partners of FelCor LP based on their weighted average ownership percentage during the period.  At June 30, 2010, approximately $1.5 million of cash or FelCor common stock, at our option, would be paid to the noncontrolling interests of FelCor LP if the partnership were terminated.  This balance is calculated based on the 294,960 partnership units held by third parties, valued at the June 30, 2010 closing price for our common stock ($4.99/share), which we have assumed would be equal to the value provided to outside partners upon liquidation of FelCor LP on that date.

The changes in redeemable noncontrolling interests for the six months ended June 30, 2010 and 2009 are shown below (in thousands):

 
Six Months Ended
June 30,
 
 
2010
 
2009
 
Balance at beginning of period
$
1,062
   
$
545
   
Redemption value allocation
 
687
     
411
   
Comprehensive income (loss):
               
Foreign exchange translation
 
(3
)
   
11
   
Net loss
 
(274
)
   
(239
)
 
Balance at end of period
$
1,472
   
$
728
   


 
17
 
FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



12.           Fair Value of Financial Instruments

Disclosures about fair value of our financial instruments are based on pertinent information available to management as of June 30, 2010.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize on disposition of the financial instruments.  The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Our estimates of the fair value of (i) accounts receivable, accounts payable and accrued expenses approximate carrying value due to the relatively short maturity of these instruments; (ii) our publicly-traded debt is based on observable market data; and (iii) our debt that is not traded publicly is based on estimated effective borrowing rates for debt with similar terms, loan to estimated fair value and remaining maturities (the estimated fair value of all our debt was $1.7 billion at June 30, 2010).

13.           Recently Adopted Accounting Standards

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

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





 
18
 

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

General

Hotel occupancy in 2010 has improved based on higher demand and moderating supply growth, after reaching historic lows in 2009.  While our hotels have experienced higher demand recently, consumers and business travelers continued to take advantage of the historically lower occupancy and a short-term shift in pricing power.  However, as occupancies continue to improve and corporate travel demand increases, we expect a sustained improvement in average daily rates, or ADR.

In June, our consolidated hotels experienced a 0.2% increase in ADR, the first increase in ADR since September 2008.  We expect demand growth to continue to outstrip supply growth, resulting in further improvements in ADR.  This should strengthen margins and improve earnings in future periods.

In the first six months of 2010, revenue per available room, or RevPAR, at our hotels increased 2.6%, compared to the first six months of 2009.  Occupancy at our hotels increased by 7.8%, compared to the prior year, but this was offset by a 4.8% decrease in ADR.  The combination of increased occupancy and lower ADR further compressed hotel margins, because our hotels have more guests who are paying less.  We continue to work closely with our brand-managers on extensive cost containment initiatives to minimize margin erosion at our hotels.  Many of our hotels have been able to reduce labor costs permanently, and all of our hotels have trimmed non-critical functions.  To this end, while overall costs have increased because of increased occupancy, our hotels have been able to reduce hotel departmental expenses per occupied room by 2.5% and limited loss in margins to 94 basis points, compared to the same period last year.

In June 2010, we completed a public offering of 31,625,000 shares of our common stock at $5.50 per share.  The net proceeds from the offering, after underwriting discounts and commissions, were approximately $167 million.  These proceeds together with cash on hand were used to repay $177 million of secured debt for $130 million, representing a 27% discount, and will be used to fund our $98.5 million acquisition of the Fairmont Copley Plaza in Boston, which is expected to close in the third quarter of 2010.

In May 2010, we obtained a new $212 million loan, secured by nine hotels, that matures in 2015.  The new loan bears interest at LIBOR (subject to a 3.0% floor) plus 5.1%.  The proceeds were used to repay $210 million in loans that were secured by 11 hotels and scheduled to mature in May 2010.  The terms of this financing are significantly more favorable than the refinanced debt, and we unencumbered two previously mortgaged hotels.  Two remaining loans (totaling $32 million) matured in May 2010.   The cash flows for the hotels that secure those loans do not cover debt service, and we stopped funding the shortfalls in December 2009.  We have been unable to negotiate an acceptable debt modification or reduction that made sense for our stockholders, with regard to these loans.  We are in the process of transferring these two hotels to the lenders in full satisfaction of the debt.
 
With these transactions, we have resolved all of our significant debt maturities until the end of 2011.

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


 
19
 


Results of Operations

Comparison of the Three Months ended June 30, 2010 and 2009

For the three months ended June 30, 2010, we recorded $11.9 million, or $0.17 per share, of net income attributable to common stockholders compared to $20.9 million, or $0.33 per share, of net loss attributable to common stockholders for the same period in 2009.  A $46.1 million gain from debt extinguishment, which was partially offset by a $14.4 million increase in net interest expense, was the most significant item contributing to the improvement in income compared to 2009.

In the second quarter of 2010:

 
·
Total revenue was $250.3 million, a 6.0% increase compared to the same period in 2009.  The increase in revenue is attributed principally to a 5.6% increase in RevPAR, which reflects a 7.6% increase in occupancy and a 1.9% decrease in ADR.

 
·
Hotel departmental expenses increased $5.5 million compared to the same period in 2009 due to higher occupancies.  As a percentage of total revenue, hotel departmental expenses remained essentially flat compared to the same period in 2009.  The increase in occupancy between periods occurred in the face of decreasing ADR, but declining ADR was partially mitigated by lower hotel departmental expenses per occupied room.

 
·
Other property related costs increased $3.5 million due to higher occupancies.  As a percentage of total revenue, they remained essentially flat compared to the same period in 2009.

 
·
Management and franchise fees increased $841,000 compared to the same period in 2009 due to higher revenues. As a percent of total revenue, management and franchise fees remained unchanged.

 
·
Taxes, insurance and lease expense increased $2.3 million and increased as a percentage of total revenue from 10.4% to 10.8% compared to the same period in 2009.  This primarily reflects a $1.0 million increase in operating lease expense (computed as a percentage of hotel revenues in excess of base rent) and a $1.2 million increase in real estate and other taxes (primarily as a result of 2009 reductions in property taxes on some of our properties).

 
·
Corporate expenses increased $1.3 million and increased as a percentage of total revenue from 2.2% to 2.6%.  This principally reflects increased corporate bonus accruals that resulted from stronger than anticipated performance.

 
·
Depreciation and amortization expense increased $1.0 million compared to the same period in 2009, which reflects increased depreciation related to hotel capital expenditures completed in 2009.

 
·
Other expenses decreased $1.0 million compared to the same period in 2009, primarily due to the following non-recurring expenses incurred in 2009: hotel-level severance expenses, restaurant lease termination costs, and brand conversion costs at the San Francisco Marriott Union Square.

 
·
Net interest expense increased $14.4 million compared to the same period in 2009.  This increase primarily reflects additional interest from our $636 million senior secured notes issued in October 2009.

 
·
Extinguishment of debt.   During the quarter ended June 30, 2010, we repaid $177 million of mortgage debt secured by two hotels for $130 million and recorded a related $46.1 million gain on extinguishment of debt.


 
20
 


Comparison of the Six Months ended June 30, 2010 and 2009

For the six months ended June 30, 2010, we recorded $60.1 million, or $0.92 per share of net loss attributable to common stockholders compared to $51.6 million, or $0.82 per share of net loss attributable to common stockholders for the same period in 2009.  The increase in the current year loss compared to the same period in 2009 is attributable primarily to a $29.3 million increase in net interest expense, a $21.1 million impairment charge, and reduced margins all offset by a $46.1 million gain from debt extinguishment.

During the six months ended June 30, 2010:

 
·
Total revenue was $476.7 million, a 2.7% increase compared to the same period in 2009.  The increase in revenue is attributed principally to a 2.6% increase in RevPAR, which reflects a 7.8% increase in occupancy and a 4.8% decrease in ADR.

 
·
Hotel departmental expenses increased $8.0 million compared to the same period in 2009 due to increased occupancies.  As a percentage of total revenue, hotel departmental expenses increased from 34.6% to 35.4% compared to the same period in 2009.  This increase in expense compared to revenue reflects costs associated with the increased occupancy in the face of decreasing ADR.

 
·
Other property related costs increased $3.8 million due to increased occupancies.  As a percentage of total revenue they remained unchanged compared to the same period in 2009.

 
·
Management and franchise fees increased $235,000 compared to the same period in 2009 due to higher revenues. As a percent of total revenue, management and franchise fees remained essentially unchanged.

 
·
Taxes, insurance and lease expense increased $2.3 million and increased as a percentage of total revenue from 10.6% to 10.8% compared to the same period in 2009.  This primarily reflects a $429,000 increase in operating lease expense (computed as a percentage of hotel revenues in excess of base rent) and a $1.7 million increase in real estate and other taxes (primarily as a result 2009 favorable resolutions of assessed values on some of our properties).

 
·
Corporate expenses increased $5.0 million and increased as a percentage of total revenue from 2.4% to 3.4%.  This increase primarily reflects a temporary change in how our long term compensation program is implemented and increased corporate bonus accruals.  Because of the impact of the recession on the trading price of our common stock, our Board of Directors determined that issuing restricted stock at exceptionally low trading prices would be unduly dilutive to our stockholders.  In lieu of issuing restricted stock, restricted cash, with which employees could purchase stock, was granted.  Because those grants were subject to payroll tax withholding, amounts withheld were recognized as an expense in the first quarter of 2010, rather than expensed over the normal three-year vesting period.  Another contributing factor is an increase in corporate bonus accruals that resulted from stronger than anticipated performance.

 
·
Depreciation and amortization expense increased $2.0 million compared to the same period in 2009, which reflects increased depreciation related to hotel capital expenditures completed in 2009.

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

 
·
Other expenses decreased $1.1 million compared to the same period in 2009, primarily due to the following non-recurring expenses incurred in 2009: hotel-level severance expenses, restaurant lease termination costs and brand conversion costs at the San Francisco Marriott Union Square.

 
21
 



 
·
Net interest expense increased $29.3 million compared to the same period in 2009.  This increase primarily reflects additional interest from our $636 million senior secured notes issued in October 2009.

 
·
Extinguishment of debt.   During the quarter ended June 30, 2010, we repaid $177 million of mortgage debt secured by two hotels, for $130 million and recorded a related $46.1 million gain on extinguishment of debt.

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

Non-GAAP Financial Measures

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

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
June 30,
 
Six Months Ended
June 30,
 
2010
 
2009
 
2010
 
2009
Total revenues
$
250,336
   
$
236,257
   
$
476,740
   
$
464,276
 
Other revenue
 
(1,007
)
   
(988
)
   
(1,372
)
   
(1,274
)
Hotel operating revenue
 
249,329
     
235,269
     
475,368
     
463,002
 
Hotel operating expenses
 
(183,342
)
   
(172,373
)
   
(358,337
)
   
(344,649
)
Hotel EBITDA
$
65,987
   
$
62,896
   
$
117,031
   
$
118,353
 
Hotel EBITDA margin (a)  
 
26.5%
     
26.7%
     
24.6%
     
25.6%
 

(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
 
Six Months Ended
 
June 30,
 
June 30,
 
2010
 
2009
 
2010
 
2009
Total operating expenses
$
237,525
   
$
224,074
   
$
489,192
   
$
447,945
 
   Unconsolidated taxes, insurance and lease expense
 
1,866
     
2,084
     
3,754
     
4,018
 
   Consolidated hotel lease expense
 
(11,769
)
   
(10,853
)
   
(21,263
)
   
(20,913
)
   Corporate expenses
 
(6,510
)
   
(5,236
)
   
(16,357
)
   
(11,358
)
   Depreciation and amortization
 
(36,969
)
   
(35,935
)
   
(74,567
)
   
(72,586
)
   Impairment loss
 
-   
     
-   
     
(21,060
)
   
-   
 
   Other expenses
 
(801
)
   
(1,761
)
   
(1,362
)
   
(2,457
)
Hotel operating expenses
$
183,342
   
$
172,373
   
$
358,337
   
$
344,649
 


 
22
 
The following tables reconcile net income (loss) to Hotel EBITDA and the ratio of operating income (loss) to total revenue to Hotel EBITDA margin.


Reconciliation of Net Income (Loss) to Hotel EBITDA
(in thousands)

 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2010
 
2009
 
2010
 
2009
Net income (loss)
$
21,990
   
$
(10,968
)
 
$
(40,952
)
 
$
(32,390
)
   Discontinued operations
 
(7
)
   
(486
)
   
(42
)
   
368
 
   Equity in loss (income) from unconsolidated entities
 
(286
)
   
261
     
 
1,188
     
 
3,685
 
   Consolidated hotel lease expense
 
11,769
     
10,853
     
21,263
     
20,913
 
   Unconsolidated taxes, insurance and lease expense
 
(1,866
)
   
(2,084
)
   
(3,754
)
   
(4,018
)
   Interest expense, net
 
37,174
     
22,782
     
73,414
     
44,074
 
   Extinguishment of debt
 
(46,060
)
   
594
     
(46,060
)
   
594
 
   Corporate expenses
 
6,510
     
5,236
     
16,357
     
11,358
 
   Depreciation and amortization
 
36,969
     
35,935
     
74,567
     
72,586
 
   Impairment loss
 
-   
     
-   
     
21,060
     
-   
 
   Other expenses
 
801
     
1,761
     
1,362
     
2,457
 
   Other revenue
 
(1,007
)
   
(988
)
   
(1,372
)
   
(1,274
)
Hotel EBITDA
$
65,987
   
$
62,896
   
$
117,031
   
$
118,353
 

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2010
 
2009
 
2010
 
2009
Ratio of operating income (loss) to total revenues
 
5.1
%
   
5.2
%
 
(2.6
)%
 
3.5
%
   Other revenue
 
(0.4
)
   
(0.4
)
 
(0.3
)
 
(0.3
)
   Unconsolidated taxes, insurance and lease expense
 
(0.7
)
   
(0.9
)
 
(0.8
)
 
(0.9
)
   Consolidated hotel lease expense
 
4.7
     
4.6
   
4.5
   
4.5
 
   Other expenses
 
0.4
     
0.7
   
0.3
   
0.6
 
   Corporate expenses
 
2.6
     
2.2
   
3.4
   
2.5
 
   Depreciation and amortization
 
14.8
     
15.3
   
15.7
   
15.7
 
   Impairment loss
 
-   
     
-   
   
4.4
   
-   
 
Hotel EBITDA margin
 
26.5
%
   
26.7
%
 
24.6
%
 
25.6
%

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 but not limited to corporate-level expenses; impairment losses; gains or losses on disposition of assets; and gains and losses related to extinguishment of debt.  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 exclude the effect of impairment losses, gains or losses on disposition of assets, and gains or losses related to extinguishment of debt because we believe that including these is not consistent with reflecting the ongoing performance of our remaining 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.  Hotel EBITDA and Hotel EBITDA margins are presented on a same-store basis.
 
 
23
 

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

Pro Rata Share of Rooms Owned

The following table sets forth, at June 30, 2010, the pro rata share of hotel rooms owned by us after giving consideration to the portion of rooms attributed to our partners in our consolidated and unconsolidated joint ventures:

 
 
Hotels
 
Room Count at June 30, 2010
 
Consolidated Hotels
83
     
23,854
   
Unconsolidated hotel operations
1
     
171
   
Total hotels
84
     
24,025
   
               
   50% joint ventures
14
     
(1,794
)
 
   60% joint venture
1
     
(214
)
 
   82% joint venture
1
     
(40
)
 
   90% joint ventures
3
     
(68
)
 
Pro rata rooms attributed to joint venture partners
       
(2,116
)
 
Pro rata share of rooms owned
       
21,909
   


 
24
 

Hotel Portfolio Composition

     The following table illustrates the distribution of our 83 Consolidated Hotels by brand, market and location at June 30, 2010.

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

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


 
25
 

Hotel Operating Statistics

The following tables set forth occupancy, ADR and RevPAR for the three and six months ended June 30, 2010 and 2009, and the percentage changes thereto between the periods presented, for our Consolidated Hotels.

Operating Statistics by Brand

 
Occupancy (%)
 
Three Months Ended June 30,
       
Six Months Ended June 30,
   
 
2010
 
2009
 
%Variance
   
2010
 
2009
 
%Variance
Embassy Suites Hotels
75.1
 
70.1
 
7.2
     
72.7
 
68.3
 
6.4
 
Holiday Inn
76.9
 
71.8
 
7.0
     
72.3
 
67.2
 
7.6
 
Sheraton and Westin
69.0
 
64.2
 
7.5
     
66.2
 
59.6
 
11.0
 
Doubletree
77.0
 
67.5
 
14.1
     
73.5
 
65.5
 
12.2
 
Renaissance and Marriott
67.8
 
62.0
 
9.3
     
66.6
 
59.2
 
12.5
 
Hilton
73.0
 
70.6
 
3.4
     
59.7
 
59.0
 
1.1
 
                             
Total hotels
74.4
 
69.1
 
7.6
     
71.1
 
66.0
 
7.8
 
                             
                             
                             
 
ADR ($)
 
Three Months Ended June 30,
       
Six Months Ended June 30,
   
 
2010
 
2009
 
%Variance
   
2010
 
2009
 
%Variance
Embassy Suites Hotels
123.82
 
127.79
 
(3.1
)
   
126.21
 
133.05
 
(5.1
)
Holiday Inn
116.56
 
115.01
 
1.4
     
110.86
 
112.90
 
(1.8
)
Sheraton and Westin
108.02
 
110.54
 
(2.3
)
   
106.52
 
114.01
 
(6.6
)
Doubletree
117.30
 
125.47
 
(6.5
)
   
117.99
 
132.08
 
(10.7
)
Renaissance and Marriott
168.37
 
168.11
 
0.2
     
175.96
 
184.08
 
(4.4
)
Hilton
123.45
 
119.80
 
3.0
     
112.80
 
110.95
 
1.7
 
                             
Total hotels
121.86
 
124.26
 
(1.9
)
   
121.96
 
128.10
 
(4.8
)
                             
                             
                             
 
RevPAR ($)
 
Three Months Ended June 30,
       
Six Months Ended June 30,
   
 
2010
 
2009
 
%Variance
   
2010
 
2009
 
%Variance
Embassy Suites Hotels
93.00
 
89.52
 
3.9
     
91.72
 
90.86
 
0.9
 
Holiday Inn
89.64
 
82.63
 
8.5
     
80.13
 
75.88
 
5.6
 
Sheraton and Westin
74.53
 
70.98
 
5.0
     
70.54
 
68.01
 
3.7
 
Doubletree
90.33
 
84.66
 
6.7
     
86.75
 
86.55
 
0.2
 
Renaissance and Marriott
114.15
 
104.23
 
9.5
     
117.12
 
108.89
 
7.6
 
Hilton
90.17
 
84.62
 
6.6
     
67.32
 
65.48
 
2.8
 
                             
Total hotels
90.62
 
85.85
 
5.6
     
86.77
 
84.58
 
2.6
 



 
26
 

Operating Statistics for Our Top Markets

 
Occupancy (%)
 
Three Months Ended June 30,
     
Six Months Ended June 30,
   
 
2010
 
2009
 
% Variance
 
2010
 
2009
 
%Variance
South Florida
75.6
 
73.5
 
2.9
   
80.3
 
76.4
 
5.2
 
Los Angeles area
77.7
 
74.2
 
4.7
   
74.1
 
71.4
 
3.7
 
Atlanta
75.0
 
73.7
 
1.7
   
75.1
 
69.7
 
7.8
 
Orlando
74.0
 
75.9
 
(2.5
)
 
77.4
 
75.5
 
2.6
 
Philadelphia
80.4
 
74.5
 
7.9
   
70.5
 
62.0
 
13.6
 
Minneapolis
76.6
 
65.6
 
16.7
   
71.8
 
63.2
 
13.6
 
San Francisco area
78.8
 
70.8
 
11.3
   
72.1
 
63.4
 
13.7
 
Dallas
66.2
 
60.8
 
9.0
   
65.8
 
60.1
 
9.5
 
Central California Coast
80.4
 
76.9
 
4.5
   
75.1
 
76.7
 
(2.2
)
San Antonio
76.7
 
73.9
 
3.8
   
75.7
 
71.8
 
5.5
 
Myrtle Beach
73.4
 
69.8
 
5.2
   
58.9
 
59.1
 
(0.4
)
Boston
85.2
 
80.0
 
6.4
   
81.2
 
75.3
 
7.7
 
San Diego
78.8
 
74.1
 
6.4
   
75.2
 
69.1
 
8.8
 
Northern New Jersey
76.1
 
62.7
 
21.4
   
68.1
 
61.2
 
11.3
 
 
ADR ($)
 
Three Months Ended June 30,
     
Six Months Ended June 30,
   
 
2010
 
2009
 
% Variance
 
2010
 
2009
 
%Variance
South Florida
114.69
 
121.55
 
(5.6
)
 
140.49
 
146.86
 
(4.3
)
Los Angeles area
136.03
 
133.85
 
1.6
   
134.27
 
136.06
 
(1.3
)
Atlanta
102.89
 
105.19
 
(2.2
)
 
104.18
 
108.01
 
(3.6
)
Orlando
107.18
 
114.20
 
(6.1
)
 
110.97
 
122.78
 
(9.6
)
Philadelphia
131.80
 
143.10
 
(7.9
)
 
123.10
 
137.76
 
(10.6
)
Minneapolis
126.25
 
127.91
 
(1.3
)
 
126.01
 
129.45
 
(2.7
)
San Francisco area
129.18
 
126.45
 
2.2
   
126.28
 
123.90
 
1.9
 
Dallas
110.87
 
115.04
 
(3.6
)
 
111.92
 
120.89
 
(7.4
)
Central California Coast
157.51
 
154.55
 
1.9
   
148.58
 
145.60
 
2.0
 
San Antonio
98.55
 
106.08
 
(7.1
)
 
98.44
 
105.87
 
(7.0
)
Myrtle Beach
144.16
 
145.05
 
(0.6
)
 
126.35
 
126.13
 
0.2
 
Boston
142.16
 
137.63
 
3.3
   
131.78
 
132.21
 
(0.3
)
San Diego
118.10
 
127.62
 
(7.5
)
 
116.68
 
129.78
 
(10.1
)
Northern New Jersey
132.81
 
144.27
 
(7.9
)
 
132.57
 
147.86
 
(10.3
)
 
RevPAR ($)
 
Three Months Ended June 30,
     
Six Months Ended June 30,
   
 
2010
 
2009
 
% Variance
 
2010
 
2009
 
%Variance
South Florida
86.68
 
89.30
 
(2.9
)
 
112.86
 
112.15
 
0.6
 
Los Angeles area
105.64
 
99.26
 
6.4
   
99.47
 
97.16
 
2.4
 
Atlanta
77.13
 
77.55
 
(0.5
)
 
78.24
 
75.28
 
3.9
 
Orlando
79.29
 
86.65
 
(8.5
)
 
85.93
 
92.71
 
(7.3
)
Philadelphia
105.94
 
106.65
 
(0.7
)
 
86.74
 
85.47
 
1.5
 
Minneapolis
96.68
 
83.93
 
15.2
   
90.51
 
81.88
 
10.5
 
San Francisco area
101.79
 
89.51
 
13.7
   
91.00
 
78.52
 
15.9
 
Dallas
73.43
 
69.89
 
5.1
   
73.66
 
72.65
 
1.4
 
Central California Coast
126.61
 
118.84
 
6.5
   
111.55
 
111.72
 
(0.2
)
San Antonio
75.62
 
78.43
 
(3.6
)
 
74.55
 
75.97
 
(1.9
)
Myrtle Beach
105.87
 
101.28
 
4.5
   
74.38
 
74.53
 
(0.2
)
Boston
121.06
 
110.15
 
9.9
   
106.95
 
99.61
 
7.4
 
San Diego
93.04
 
94.51
 
(1.6
)
 
87.71
 
89.65
 
(2.2
)
Northern New Jersey
101.13
 
90.50
 
11.7
   
90.24
 
90.43
 
(0.2
)


 
27
 

Hotel Portfolio

The following table sets forth certain descriptive information regarding the 84 hotels in which we held ownership interest at June 30, 2010.

   
Brand
   
State
   
Rooms
 
% Owned (a)
 
Consolidated Hotels
         
Birmingham
Embassy Suites Hotel
AL
  242
 
Phoenix – Biltmore
Embassy Suites Hotel
AZ
  232
 
Phoenix – Crescent
Sheraton
AZ
  342
 
Phoenix – Tempe
Embassy Suites Hotel
AZ
  224
 
Anaheim – North
Embassy Suites Hotel
CA
  222
 
Dana Point – Doheny Beach
Doubletree Guest Suites
CA
  196
 
Indian Wells – Esmeralda Resort & Spa
Renaissance Resort
CA
560
 
Los Angeles – International Airport/South
Embassy Suites Hotel
CA
  349
 
Milpitas – Silicon Valley
Embassy Suites Hotel
CA
  266
 
Napa Valley
Embassy Suites Hotel
CA
  205
 
Oxnard – Mandalay Beach – Hotel & Resort
Embassy Suites Hotel
CA
  248
 
San Diego – On the Bay
Holiday Inn
CA
  600
 
San Francisco – Airport/Burlingame
Embassy Suites Hotel
CA
  340
 
San Francisco – Airport/South San Francisco
Embassy Suites Hotel
CA
  312
 
San Francisco – Fisherman’s Wharf
Holiday Inn
CA
  585
 
San Francisco – Union Square
Marriott
CA
  400
 
San Rafael – Marin County
Embassy Suites Hotel
CA
  235
50%
Santa Barbara – Goleta
Holiday Inn
CA
  160
 
Santa Monica Beach – at the Pier
Holiday Inn
CA
132
 
Wilmington
Doubletree
DE
  244
90%
Boca Raton
Embassy Suites Hotel
FL
  263
 
Deerfield Beach – Resort & Spa
Embassy Suites Hotel
FL
  244
 
Ft. Lauderdale – 17th Street
Embassy Suites Hotel
FL
  361
 
Ft. Lauderdale – Cypress Creek
Sheraton Suites
FL
  253
 
Jacksonville – Baymeadows
Embassy Suites Hotel
FL
  277
 
Miami – International Airport
Embassy Suites Hotel
FL
  318
 
Orlando – International Airport
Holiday Inn
FL
  288
 
Orlando – International Drive South/Convention
Embassy Suites Hotel
FL
  244
 
Orlando– North
Embassy Suites Hotel
FL
  277
 
Orlando – Walt Disney World Resort
Doubletree Guest Suites
FL
  229
 
St. Petersburg – Vinoy Resort & Golf Club
Renaissance Resort
FL
361
 
Tampa – Tampa Bay
Doubletree Guest Suites
FL
  203
 
Atlanta – Airport
Embassy Suites Hotel
GA
  232
 
Atlanta – Buckhead
Embassy Suites Hotel
GA
  316
 
Atlanta – Galleria
Sheraton Suites
GA
  278
 
Atlanta – Gateway – Atlanta Airport
Sheraton
GA
  395
 
Atlanta – Perimeter Center
Embassy Suites Hotel
GA
  241
50%
Chicago – Lombard/Oak Brook
Embassy Suites Hotel
IL
262
50%
Chicago – North Shore/Deerfield
Embassy Suites Hotel
IL
237
 
Chicago – Gateway – O’Hare
Sheraton Suites
IL
296
 
Indianapolis – North
Embassy Suites Hotel
IN
221
82%
Kansas City – Overland Park
Embassy Suites Hotel
KS
199
50%
Lexington – Lexington Green
Hilton Suites
KY
174
 
Baton Rouge
Embassy Suites Hotel
LA
223
 


 
28
 

Hotel Portfolio (continued)


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

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


 
29
 

Liquidity and Capital Resources

Operating Activities

Cash provided by operating activities (primarily hotel operations) for the six months ended June 30, 2010, was $41.2 million, which reflects a $5.3 million decrease from the same period in 2009.  This decrease is due primarily to an increase in interest paid (largely resulting from a 270 basis point increase in average interest rates) offset by an increase in accrued expenses and other liabilities.  At June 30, 2010, we had $281.5 million of cash, including approximately $47.5 million held under management agreements to meet working capital needs.

Travel spending fell sharply during the global recession.  Lodging demand was weak in 2009, which adversely affected our Consolidated Hotels RevPAR.  In the first six months of 2010, occupancy strengthened but was partially offset by weak ADR.  We expect our 2010 RevPAR will increase from 2.5% to 4.5% compared to 2009, which assumes a continued recovery in occupancy and ADR growth in the second half of the year.  We expect 2010 cash from operating activities of $36 million to $44 million.

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

Investing Activities

During the first six months of 2010 cash used in investing activities increased $3.3 million compared to the same period in 2009, due primarily to increased contributions to unconsolidated ventures (we contributed $23 million to pay-off our share of a joint venture’s mortgage debt), which was largely offset by lower spending on hotel capital expenditures.  We made extensive capital investments in our hotels from 2006 to 2008, and all of our hotels have been renovated.  We expect to spend a normal amount of capital going forward to maintain the quality of our hotels.  As a result, we were able to limit capital spending significantly in 2009, and we expect to spend a limited amount of capital in 2010 without compromising the value and quality of our hotels.  In the first six months of 2010, we completed approximately $18.4 million of capital improvements at our hotels, and we expect to spend approximately $42 million in 2010 in total.

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

Financing Activities

During the first six months of 2010, cash provided by financing activities decreased by $41.2 million compared to the same period in 2009, due primarily to first quarter 2009 funds borrowed under our since terminated line of credit, partially offset by proceeds from our June 2010 public common stock offering.  We expect to pay approximately $13 million in normally occurring principal payments in 2010, which payments will be funded from operating cash flow and cash on hand.

 
30
 


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

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

Common Stock Offering.   In June 2010, we completed a public offering of 31,625,000 shares of our common stock at $5.50 per share.  The net proceeds from the offering, after underwriting discounts and commissions, were approximately $167 million.  These proceeds together with cash on hand were used to repay $177 million of secured debt for $130 million, representing a 27% discount, and will be used to fund our $98.5 million acquisition of the Fairmont Copley Plaza in Boston, which is expected to close in the third quarter of 2010.

Secured Debt .  At June 30, 2010, we had a total of $1.5 billion of consolidated secured debt with 63 encumbered consolidated hotels with a $1.7 billion aggregate net book value (including 14 hotels that are collateral for our senior secured notes).

In June 2010, we repaid $177 million of secured debt scheduled to mature in 2012 for $130 million, plus accrued interest, representing a 27% discount to the principal balance.  This allowed us to reduce our leverage substantially and unencumber two hotels.

In May 2010, we obtained a new five-year loan for approximately $212 million secured by nine hotels.  The loan proceeds were used to repay $210 million in loans scheduled to mature in May 2010, secured by 11 hotels (including the nine hotels securing the new loan).  The new loan bears interest at LIBOR (subject to a 3% floor) plus 5.10%.  The terms of this new financing are significantly more favorable than the refinanced debt, and we unencumbered two previously mortgaged hotels.  In February 2010, we extended the maturity of a loan secured by a hotel from May 2010 to May 2013.  Two remaining loans (totaling $32 million) matured in May 2010.  The cash flows for the hotels that secure those loans do not cover debt service, and we stopped funding the shortfalls in December 2009.  We have been unable to negotiate an acceptable debt modification or reduction that made sense for our stockholders, with regard to these loans.  We are in the process of transferring these two hotels to the lenders in full satisfaction of the debt.
 
With these transactions, we have resolved all of our significant debt maturities until the end of 2011.

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

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

 
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Senior Notes.   In October 2009, we issued $636 million in aggregate principal amount of our 10% senior secured notes due 2014.  These notes require that we satisfy total leverage, secured leverage and interest coverage tests in order to: (i) incur additional indebtedness except to refinance maturing debt with replacement debt, as defined under our indentures; (ii) pay dividends in excess of the minimum distributions required to meet the REIT qualification test; (iii) repurchase capital stock; or (iv) merge.  We are currently prohibited from paying dividends on our preferred or common stock, except to the extent necessary to satisfy the REIT qualification requirement that we distribute currently at least 90% of our taxable income.  These notes are guaranteed by us, and payment of those obligations is secured by a pledge of the limited partner interests in FelCor LP owned by FelCor, a combination of first lien mortgages and related security interests and/or negative pledges on up to 14 hotels, and pledges of equity interests in certain subsidiaries of FelCor LP.  In addition, we redeemed all of our floating-rate senior notes and all but $87 million of our 8½% senior notes and amended the indenture governing the latter to eliminate substantially all of the restrictive covenants, guarantees, collateral and certain events of default provisions. 

Interest Rate Caps.   To fulfill requirements under certain loans, we entered into interest rate cap agreements with aggregate notional amounts of $639.2 million at June 30, 2010 and $427.2 million at December 31, 2009.  These interest rate caps were not designated as hedges and had insignificant fair values at both June 30, 2010 and December 31, 2009, resulting in no significant net earnings impact.

Inflation

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

Seasonality

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

Disclosure Regarding Forward-Looking Statements

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

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

 
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Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

At June 30, 2010, approximately 59% of our consolidated debt had fixed interest rates.

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

Expected Maturity Date
at June 30, 2010
(dollars in thousands)

 
Expected Maturity Date
 
2010
 
2011
 
2012
 
2013
 
2014
 
Thereafter
 
Total
 
Fair Value
Liabilities
 
Fixed-rate:
                                             
  Debt
$
35,992
 
$
105,834
 
$
4,550
 
$
32,696
 
$
804,980
 
$
9,376
 
$
993,428
   
1,032,666
  Average interest rate
 
8.57%
   
8.62%
   
7.68%
   
8.61%
   
9.61%
   
5.81%
   
9.39%
     
Floating-rate:
                                             
  Debt
 
1,000
   
449,916
   
1,832
   
1,986
   
2,153
   
204,887
   
661,774
   
640,636
  Average interest rate (a)
 
5.50%
   
3.57%
   
8.10%
   
8.10%
   
8.17%
   
8.17%
   
5.04%
     
Total debt
$
36,992
 
$
555,750
 
$
6,382
 
$
34,682
 
$
807,133
 
$
214,263
 
$
1,655,202
     
  Average interest rate
 
8.48%
   
4.53%
   
7.80%
   
8.58%
   
9.60%
   
8.07%
   
7.65%
     
Net discount
                                     
(58,567
)
   
    Total debt
                                   
$
1,596,635
     

 
(a)
The average floating interest rate represents the implied forward rates in the yield curve at June 30, 2010.

Item 4.  Controls and Procedures.

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

(b)            Changes in internal control over financial reporting.

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


 
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PART II -- OTHER INFORMATION

Item 3.                      Defaults Upon Senior Securities.

In March 2009, we suspended payment of dividends on our Series A Cumulative Convertible Preferred Stock (“Series A Preferred”) and our 8% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred”).  The aggregate quarterly Series A Preferred and Series C Preferred dividends are $6.3 million and $3.4 million, respectively.  As of the date of this Quarterly Report, the aggregate Series A Preferred and Series C Preferred dividends in arrears are $37.7 million and $19.3 million, respectively.

Except to the extent required to satisfy minimum REIT distribution requirements, we are restricted by the indenture governing our senior secured notes from making any cash distributions on our common and preferred stock.  We are currently below the minimum thresholds set forth in the indenture for which discretionary cash distributions are permitted.

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
 
31.1
 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
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SIGNATURE

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



   
FELCOR LODGING TRUST INCORPORATED
 
       
       
       
Date:  August 4, 2010
By:
/s/ Lester C. Johnson
 
   
Name:
Title:
Lester C. Johnson
Senior Vice President, Chief Accounting Officer
 



 
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