10-K 1 a2014q410k.htm 2014 Q4 10-K 2014 Q4 10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
 
THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2014
 

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
 
THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from           to
 
 
Commission file number: 001-14236
 
(FelCor Lodging Trust Incorporated)
 
Commission file number: 333-39595-01
 
(FelCor Lodging Limited Partnership)
FelCor Lodging Trust Incorporated
FelCor Lodging Limited Partnership
(Exact Name of Registrant as Specified in Its Charter)

 
Maryland
(FelCor Lodging Trust Incorporated)
 
75-2541756
 
Delaware
(FelCor Lodging Limited Partnership)
 
75-2544994
 
(State or Other Jurisdiction of
 Incorporation or Organization)
 
 
(I.R.S. Employer
Identification No.)
 
 
 
 
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange
on which registered
FelCor Lodging Trust Incorporated:
 
 
Common Stock
 
New York Stock Exchange
$1.95 Series A Cumulative Convertible Preferred Stock
 
New York Stock Exchange
Depositary Shares representing 8% Series C Cumulative Redeemable Preferred Stock
 
New York Stock Exchange
FelCor Lodging Limited Partnership:
 
 
None
 
 

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
FelCor Lodging Trust Incorporated
 
þ
Yes
¨
No
 
FelCor Lodging Limited Partnership
 
¨
Yes
þ
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
FelCor Lodging Trust Incorporated
 
¨
Yes
þ
No
 
FelCor Lodging Limited Partnership
 
þ
Yes
¨
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
FelCor Lodging Trust Incorporated
 
þ
Yes
¨
No
 
FelCor Lodging Limited Partnership
 
¨
Yes
þ
No
Note: As a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) as if the registrant was subject to such filing requirements.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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.
FelCor Lodging Trust Incorporated:
 
 
 Large accelerated filer  þ
 
 Accelerated filer ¨
 Non-accelerated filer     o (Do not check if a smaller reporting company)
 
 Smaller reporting company o
FelCor Lodging Limited Partnership:
 
 
 Large accelerated filer  o
 
 Accelerated filer ¨
 Non-accelerated filer     þ (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). 
 
FelCor Lodging Trust Incorporated
 
o
Yes
þ
No
 
FelCor Lodging Limited Partnership
 
o
Yes
þ
No

The aggregate market value of shares of common stock held by non-affiliates of FelCor Lodging Trust Incorporated as of June 30, 2014, computed by reference to the price at which its common stock was last sold at June 30, 2014, was approximately $1.3 billion.
As of February 20, 2015, FelCor Lodging Trust Incorporated had issued and outstanding 124,872,546 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of FelCor Lodging Trust Incorporated’s definitive Proxy Statement pertaining to its 2015 Annual Meeting of Stockholders (the “Proxy Statement”), filed or to be filed not later than 120 days after the end of the fiscal year pursuant to Regulation 14A, is incorporated herein by reference into Part III.





EXPLANATORY NOTE
This annual report on Form 10-K for the fiscal year ended December 31, 2014, combines the filings for FelCor Lodging Trust Incorporated, or FelCor, and FelCor Lodging Limited Partnership, or FelCor LP. Where it is important to distinguish between the two, we either refer specifically to FelCor or FelCor LP. Otherwise we use the terms “we” or “our” to refer to FelCor and FelCor LP, collectively (including their consolidated subsidiaries), unless the context indicates otherwise.
FelCor is a Maryland corporation operating as a real estate investment trust, or REIT, and is the sole general partner, and the owner, of a greater than 99% partnership interest in, FelCor LP. Through FelCor LP, FelCor owns hotels and conducts business. As the sole general partner of FelCor LP, FelCor has exclusive and complete control of FelCor LP’s day-to-day management.
We believe combining periodic reports for FelCor and FelCor LP into a single combined report results in the following benefits:
presents our business as a whole (the same way management views and operates the business);
eliminates duplicative disclosure and provides a more streamlined presentation (a substantial portion of our disclosure applies to both FelCor and FelCor LP); and
saves time and cost by preparing combined reports instead of separate reports.
We operate the company as one enterprise. The employees of FelCor direct the management and operation of FelCor LP. With sole control of FelCor LP, FelCor consolidates FelCor LP for financial reporting purposes. FelCor has no assets other than its investment in FelCor LP and no liabilities separate from FelCor LP. Therefore, the reported assets and liabilities for FelCor and FelCor LP are substantially identical.
The substantive difference between the two entities is that FelCor is a REIT with publicly-traded equity, while FelCor LP is a partnership with no publicly-traded equity. This difference is reflected in the financial statements on the equity (or partners’ capital) section of the consolidated balance sheets and in the consolidated statements of equity (or partners’ capital). Apart from the different equity treatment, the consolidated financial statements for FelCor and FelCor LP are nearly identical, except the net income (loss) attributable to redeemable noncontrolling interests in FelCor LP is deducted from FelCor’s net income (loss) in order to arrive at net income (loss) attributable to FelCor common stockholders. The noncontrolling interest is included in net income (loss) attributable to FelCor LP common unitholders. The holders of noncontrolling interests in FelCor LP are unaffiliated with FelCor, and in aggregate, hold less than 1% of the operating partnership units.
We present the sections in this report combined unless separate disclosure is required for clarity.






FELCOR LODGING TRUST INCORPORATED and
FELCOR LODGING LIMITED PARTNERSHIP

INDEX

 
 
 
 
 
 
Item No.
 
Page
 
 
 
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
 PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
 
 
 
 
 PART III
 
Item 10.
Directors, Executive Officers of the Registrant and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
   Related Stockholder Matters
Item 13.
Certain Relationships, Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
 
PART IV 
 
Item 15.
Exhibits and Financial Statement Schedules

This Annual Report contains registered trademarks and service marks owned or licensed by companies other than us, including (but not limited to) DoubleTree by Hilton, DoubleTree Suites by Hilton, Embassy Suites Hotels, Fairmont, Hilton, Holiday Inn, Marriott, Morgans, Renaissance, Royalton, Sheraton, Sheraton Suites, Walt Disney World, Westin, Wyndham and Wyndham Grand.


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Disclosure Regarding Forward Looking Statements

Our disclosure and analysis in this Annual Report and in FelCor’s 2014 Annual Report to Stockholders may contain forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we may also provide forward-looking statements in other materials we release to the public. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify each such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” “target,” “forecast,” “continue” or similar expressions. In particular, these forward-looking statements may include those relating to future actions (including future acquisitions or dispositions and future capital expenditure plans) and future performance or expenses.

We cannot guarantee that any future results discussed in any forward-looking statements will be realized, although we believe that we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions, including those discussed in Item 1A “Risk Factors.” Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those results anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make or related subjects in our quarterly reports on Form 10-Q and Current Reports on Form 8-K that we file with the Securities and Exchange Commission, or the SEC. Also note that, in our risk factors, we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we believe could cause our actual results to differ materially from past results and those results anticipated, estimated or projected. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to predict or identify all such risk factors. Consequently, you should not consider the risk factor discussion to be a complete discussion of all of the potential risks or uncertainties that could affect our business.

The prospective financial information related to anticipated operating performance included in this report has been prepared by, and is the responsibility of, our management. PricewaterhouseCoopers LLP, or PwC, has neither examined nor compiled the accompanying prospective financial information and, accordingly, PwC does not express an opinion or any other form of assurance with respect thereto. The PwC reports included in this report relate to our historical financial information. They do not extend to the prospective financial information and should not be read to do so.


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PART I
Item 1.    Business
About FelCor and FelCor LP
FelCor Lodging Trust Incorporated (NYSE:FCH), or FelCor, is a Maryland corporation operating as a real estate investment trust, or REIT. FelCor is the sole general partner of, and the owner of a greater than 99% partnership interest in, FelCor Lodging Limited Partnership, or FelCor LP, through which we held ownership interests in 48 hotels with 14,435 rooms at December 31, 2014. At December 31, 2014, we had an aggregate of 125,216,536 shares and units outstanding, consisting of 124,605,074 shares of FelCor common stock and 611,462 units of FelCor LP limited partnership interest not owned by FelCor.

Business Strategy

Strategy and Objectives. Our goal is to provide superior appreciation in stockholder value through earnings growth, asset appreciation and sustainable dividend growth. We strive to achieve this by building an ever-improving, well-maintained portfolio of high quality hotels in great locations, while leveraging our core competencies, and continuing to enhance our balance sheet flexibility and strength while reducing cost of capital.

Our core portfolio consists primarily of upper-upscale and luxury hotels and resorts located in major markets and resort locations that have dynamic demand generators and high barriers-to-entry. We sell, acquire, rebrand and redevelop hotels to increase our return on invested capital, improve overall portfolio quality, enhance diversification and improve growth rates. Our long-term strategy has six critical components:

Utilize Our Unique Hands-On Asset Management Approach to Maximize Returns at Our Hotels. We seek to maximize revenue, market share, hotel operating margins and cash flow at every hotel. FelCor’s asset management is aggressive and hands-on. All of our asset managers have extensive hotel operating experience and thorough knowledge of the markets and overall demand dynamics where our hotels operate. Consequently, their interaction with our hotel managers is very effective. With our long-standing and extensive brand relationships, we have significant influence over how their policies and procedures (most notably, brand strategy for marketing and revenue enhancement programs) affect us as hotel owners.

Pursue Redevelopment Opportunities that Leverage Our Development and Operations Expertise. We consider expansion and redevelopment opportunities at our legacy and newly-acquired properties that offer attractive risk-adjusted returns by utilizing excess land, purchasing air rights and maximizing the use of existing space. Redevelopment opportunities may include adding guest rooms, meeting space and amenities, such as spas, and developing condominiums. We have successfully redeveloped and repositioned several hotels, including, most recently, the Fairmont Copley Plaza in Boston. From 2009 (prior to redevelopment) to 2014, revenue per available rooms, or RevPAR, and Hotel EBITDA1 at that hotel increased 42% to $229 and 130% to $10.1 million, respectively. We are currently seeking the necessary approvals and entitlements to redevelop several of our hotels, located in core markets, that offer attractive risk-adjusted returns that are significantly above our cost of capital.

__________________________________
1 We include a more detailed description and computation of EBITDA, Hotel EBITDA and Adjusted EBITDA in “Non-GAAP Financial Measures,” which is found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.


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Acquire Hotels That Further Improve Our Portfolio Quality and Earnings Growth Rates. We seek to acquire high-quality hotels in major urban and resort markets with high barriers-to-entry and high growth potential, typified by our most recent acquisitions of the iconic Fairmont Copley Plaza and the Knickerbocker. We target properties that are accretive to long-term stockholder value, will provide investment returns that exceed our weighted average cost of capital and provide attractive long-term yields. Additionally, we seek properties that will improve the overall quality and diversity of our portfolio and consider hotels that offer redevelopment and/or revenue repositioning opportunities that can further enhance returns on our investment.
Enhance Our Assets’ Long-Term Performance by Investing in High-ROI Capital Projects. We spend capital prudently. Our capital strategy involves efficiently maintaining our properties over the long-term and limiting future expenditure fluctuations, while maximizing return on investment. We generally renovate six to eight core hotels each year to maintain their competitive position and value. We routinely evaluate value-adding opportunities at our hotels, such as better use of public areas, new restaurant concepts and improved food and beverage operations. For example, after completing a $13 million renovation at the Embassy Suites Myrtle Beach Oceanfront Resort (which included renovating the public areas, adding food and beverage outlets, and upgrading the lobby, front desk and entrance), total revenues increased 69% to $20.2 million from 2011 to 2014, while Hotel EBITDA1 increased 72% to $5.3 million during the same time period.
Balance Sheet Management. We are committed to strengthening our balance sheet further by reducing leverage, extending debt maturities and taking advantage of opportunities to lower our cost of debt. Our much improved balance sheet provides the necessary flexibility and capacity to thrive throughout lodging industry cycles. We will continue to reduce our leverage (as measured by Debt to Adjusted EBITDA1) by, among other things, selling additional non-strategic hotels, increasing operating cash flow by improving RevPAR at our hotels and capturing the earning potential of our recently-opened Knickerbocker Hotel. We also expect to refinance or repay higher cost debt, resulting in lower borrowing costs and extended debt maturities.
Sell Hotels That No Longer Meet Our Investment Criteria. We believe selling non-strategic hotels, and reallocating capital to more attractive investments enhances our long-term growth, increases our return on capital and enables management to focus on long-term investments within our target markets. On an ongoing basis, we review our hotels in terms of projected performance, future capital expenditure requirements, market dynamics and concentration risk and sell those properties in markets that no longer offer an attractive return on our investment or are inconsistent with our long-term portfolio strategy.
Recent Achievements. We have made significant progress toward achieving our strategic objectives.
Since December 2010, we have sold 34 hotels (including eight hotels sold in 2014 and two sold in February 2015), for total gross proceeds of $764.5 million (our pro rata share was $698.4 million).
We successfully repositioned eight Wyndham hotels from Holiday Inns, which were rebranded on March 1, 2013. We completed renovations at two of these Wyndham hotels during 2014 (the remaining six were renovated in 2012 and 2013). Rebranding and repositioning these hotels demonstrates how we execute our long-term value creation strategy by maximizing the value and earnings potential of our hotels. RevPAR at these eight hotels increased 20% during 2014, compared to the prior year.
__________________________________
1 We include a more detailed description and computation of EBITDA, Hotel EBITDA and Adjusted EBITDA in “Non-GAAP Financial Measures,” which is found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

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Our Board of Directors reinstated the quarterly common dividend. We paid $0.02 per share for each of the first three quarters of 2014 in recognition of our ongoing and successful portfolio repositioning and balance sheet restructuring, as well as our positive funds available for distribution (“FAD”). Our Board of Directors increased the dividend by 100% to $0.04 per share beginning with the fourth quarter of 2014, which was paid in January 2015.

In 2014, we spent $83.7 million on capital expenditures, primarily for renovations and redevelopment at nine of our hotels, including the two Wyndham hotels.

We spent $138.0 million (excluding the initial acquisition costs and capitalized interest) through December 31, 2014 to redevelop the Knickerbocker Hotel, located in the heart of Times Square in Manhattan. Acquiring and developing this hotel exemplifies our efforts to reposition our portfolio. The luxury boutique hotel opened in February 2015.

We repaid $306 million of debt, including all of the debt scheduled to mature during 2014. We repaid $63 million of mortgage loans that were secured by five hotels using proceeds from asset sales. We also repaid the remaining $234 million of our 10% senior notes due in 2014 using proceeds from asset sales, cash on hand, funds drawn under our line of credit and a new $140 million term loan. As a result of these transactions, we extended our weighted-average debt maturity to 2021, while reducing our weighted-average cost of debt by roughly 100 basis points, to 5.35%.

Our Industry

The United States lodging industry is diverse and fragmented, operating a variety of hotels across multiple quality and service segments. The industry caters to a wide range of guests, including transient customers (both leisure and corporate), groups (both leisure and corporate) and long-term, or contract, customers. Average rates charged by hotels are dependent on multiple factors, including the potential customer mix, level of customer demand and rooms supply in the market. Many hotels are marketed under a brand or “flag”, such as Hilton and Marriott, among others. Franchisors, which own these brands, typically receive fees in exchange for brand recognition, marketing support and their reservations systems. Other hotels operate independently, often because they do not desire to fit within the standards of a particular brand or, in some cases, because operating as an independent “boutique” hotel actually enhances a hotel’s appeal to targeted guests. Hotels, and the underlying real estate, are owned by both public and private companies and partnerships. Franchisors or independent management companies often operate hotels on behalf of their owners. All of our hotels are operated on our behalf, mostly by managers affiliated with international franchisors.

Hotel Classification. Smith Travel Research (“STR”), a leading research provider for the lodging industry, classifies hotel chains into seven distinct segments: luxury, upper-upscale, upscale, upper-midscale, midscale, economy and independent. Nearly 90% of our portfolio is comprised of luxury (Fairmont) and upper-upscale (Embassy Suites, Hilton, Marriott, Renaissance, Sheraton, and Wyndham) hotels. We also own upscale (Doubletree), upper-midscale (Holiday Inn) and independent (Knickerbocker, Royalton and Morgans) hotels.

Industry Performance. Lodging industry fundamentals remain robust. The industry is cyclical, driven by supply and demand. Overall economic conditions and local market factors influence demand, as do GDP growth, employment growth and corporate profits. During the recent recession, demand fell faster than GDP, creating conditions for a more robust industry recovery compared to the overall U.S. economy. Since the recession ended, the corporate transient customer has led demand growth, as corporate profits continue to set records. Group demand also accelerated in 2014, augmenting the already strong transient demand.

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Lodging demand continued growing throughout 2014, while supply growth remained below historic norms. During 2014, average occupancy for the industry surpassed 2007 (pre-recession) levels, reflecting the continuing supply and demand imbalance. STR reported that supply increased only 0.9% during 2014, well below the roughly 2% historical average. New hotel construction remained constrained by limited construction financing. At December 2014, only 120,000 hotel rooms were under construction, 43% less than December 2007. The continued favorable supply and demand imbalance, and corresponding operator confidence, allowed our hotels, generally, to increase average rates. For 2014, STR reported:

RevPAR increased 8.3%, to $74.28, the highest RevPAR growth reported by STR for any year;
Average daily rate (ADR) increased 4.6% to $115.32, the highest ADR ever recorded by STR;
Occupancy increased 3.6% to 64.4%, as improving demand growth outpaced supply growth; and
Industry performance improved on a widespread basis, with all 25 of STR’s largest markets experiencing higher RevPAR in 2014 compared to 2013.


For 2015, PKF Hospitality Research, or PKF, another leading provider of hospitality industry research, projects that lodging fundamentals will continue to improve, with higher demand, improved pricing and historically low supply growth. Occupancy is expected to increase 2.1% in 2015, compared to 2014. As occupancy increases, hotels should have the opportunity to improve ADR further by remixing their business in favor of premium corporate guests, and ADR growth should be a more significant factor in RevPAR growth. PKF projects 2015 industry ADR will increase by 5.4%, contributing to a projected 7.6% RevPAR increase.

Competition

The lodging industry is highly competitive. Customers can choose from a variety of brands and products. The relationship between the supply of and demand for hotel rooms is cyclical and affects our industry significantly. Certain markets have low barriers-to-entry (e.g., inexpensive land, favorable zoning, etc.), making it easier to build new hotels and increase the supply of modern, high-quality hotel rooms. Lodging demand growth typically moves in tandem with the overall economy, in addition to local market factors that stimulate travel to specific destinations. Economic indicators, such as GDP, business investment and employment levels, are common indicators of lodging demand. Each of our hotels competes for guests, primarily with other full service and limited service hotels in the immediate vicinity

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and secondarily, with other hotels in its geographic market. Location, brand recognition, hotel quality, service levels and prices are the principal competitive factors affecting our hotels.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in a property. These laws may impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, certain environmental laws and common law principles could be used to impose liability for release of asbestos-containing materials, and third parties may seek recovery from owners or operators of real property for personal injury associated with exposure to related asbestos-containing materials. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require corrective modifications or other expenditures. In connection with our current or prior ownership or operation of hotels or other real estate, we may be potentially liable for various environmental costs or liabilities.
We customarily obtain a Phase I environmental survey from an independent environmental consultant before acquiring a hotel. The principal purpose of a Phase I survey is to identify indications of potential environmental contamination and, secondarily, to assess, to a limited extent, the potential for environmental regulatory compliance liabilities. The Phase I surveys of our hotels were designed to meet the requirements of the then current industry standards governing those surveys, and consistent with those requirements, none of the surveys involved testing of groundwater, soil or air. Accordingly, they do not represent evaluations of conditions at the studied sites that would be revealed only through such testing. In addition, Phase I assessments of environmental regulatory compliance issues are general in scope and not a detailed determination of a hotel’s environmental compliance. Similarly, Phase I reports do not involve comprehensive analysis of potential offsite liability. Our Phase I reports have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations, nor are we aware of any such liability. Nevertheless, it is possible that these reports do not reveal or accurately assess all material environmental conditions and that there are material environmental conditions of which we are unaware.
We believe that our hotels are in compliance, in all material respects, with all federal, state, local and foreign laws and regulations regarding hazardous substances and other environmental matters, to the extent violation of such laws and regulations have a material adverse effect on us. We have not been notified by any governmental authority or private party of any noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our current or former properties that we believe would have a material adverse effect on our business, assets or results of operations. However, obligations for compliance with environmental laws that arise or are discovered in the future may adversely affect our financial condition.

Tax Status
FelCor LP is a partnership for federal income tax purposes, and is not subject to federal income tax. However, under its partnership agreement, it is required to reimburse FelCor for any tax payments it is required to make. Accordingly, the tax information herein represents disclosures regarding FelCor and its taxable subsidiaries.
FelCor elected to be treated as a REIT under the federal income tax laws. As a REIT, FelCor generally is not subject to federal income taxation at the corporate level on taxable income that is distributed to its stockholders. FelCor may, however, be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. FelCor’s taxable REIT subsidiaries, or TRSs, formed to lease its hotels are subject to federal, state and local

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income taxes. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income to its stockholders. If FelCor fails to qualify as a REIT in any taxable year for which the statute of limitations remains open, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) for such taxable year and may not qualify as a REIT for four subsequent years. In connection with FelCor’s election to be treated as a REIT, its charter imposes restrictions on the ownership and transfer of shares of its common stock. FelCor LP expects to make distributions on its units sufficient to enable FelCor to meet its distribution obligations as a REIT. At December 31, 2014, FelCor had a federal income tax net operating loss carryforward of $534.8 million, and its TRSs had federal income tax loss carryforwards of $278.0 million.
Employees
At December 31, 2014, we had 61 full-time employees. None are involved in the day-to-day operation of our hotels.
Ownership of our Hotels
Of the 46 hotels in which we had an ownership interest at December 31, 2014 (which excludes two hotels held for sale), we owned a 100% interest in 43 hotels and 50% interests in entities owning three hotels. We consolidate our real estate interests in the 43 hotels in which we held majority interests, and we record the real estate interests of the three hotels in which we held 50% interests using the equity method. We lease 45 of our 46 hotels to our TRSs, of which we own a controlling interest. One 50% owned hotel is operated without a lease. Because we own controlling interests in these lessees, we consolidate our interests in these 45 hotels (which we refer to as our Consolidated Hotels) and reflect those hotels’ operating revenues and expenses in our statements of operations. Our Consolidated Hotels are located in 17 states, with concentrations in major markets and resort areas.
Segment Reporting

Our business is conducted in one operating segment because of the similar economic characteristics of our hotels. Additional segment information may be found in the footnotes to our consolidated financial statements elsewhere in this report.

Additional Information

Additional information relating to our hotels and our business, including the charters of our Executive Committee, Corporate Governance and Nominating Committee, Compensation Committee and Audit Committee; our corporate governance guidelines; and our code of business conduct and ethics can be found on our website at www.felcor.com. Information relating to our hotels and our business can also be found in the Notes to Consolidated Financial Statements located elsewhere in this report. Our annual, quarterly and current reports, and amendments to these reports, filed with the Securities and Exchange Commission, or SEC, under the Securities Exchange Act of 1934, or Exchange Act, are made available on our Web site, free of charge, under the “SEC Filings” tab on our “Investor Relations” page, as soon as practicable following their filing. The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a Web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.


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Item 1A.  Risk Factors
The risk factors described in this section describe the major risks to our business and should be considered carefully. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995.
Our revenues, expenses and the value of our hotels are subject to conditions affecting both the real estate and lodging industries.
Real estate investments are subject to numerous risks. Our investment in hotels is subject to numerous risks generally associated with owning real estate, including among others:
general economic conditions, including unemployment rates, major bank failures, unsettled capital markets and sovereign debt uncertainty;
changes in international, national, regional and local economic climate and real estate market conditions;
changes in zoning laws;
changes in traffic patterns and neighborhood characteristics;
increases in assessed property taxes from changes in valuation and real estate tax rates;
increases in the cost of property insurance;
potential for uninsured or underinsured property losses;
costly governmental regulations and fiscal policies;
changes in tax laws; and
other circumstances beyond our control.
Moreover, real estate investments are substantially illiquid, and we may not be able to adjust our portfolio in a timely manner to respond to changes in economic and other conditions.
Investing in hotel assets involves special risks. We have invested in hotels and related assets, and our hotels are subject to all the risks common to the hotel industry. These risks could adversely affect hotel occupancy, operating costs and rates that can be charged for hotel rooms, and generally include:

changes in business and leisure travel patterns;
decreases in demand for hotel rooms;
increases in lodging supply or competition, which may adversely affect demand at our hotels;
the effect of geopolitical disturbances, including terrorist attacks and terror alerts, that reduce business and leisure travel;
the attractiveness of our hotels to consumers relative to competing hotels;
fluctuations in our revenue caused by the seasonal nature of the hotel industry;
unionization of the labor force at our hotels;
the threat or outbreak of a pandemic disease affecting the travel industry;
increasing fuel costs and other travel expenses resulting in reductions of travel; and
increased transportation security precautions affecting the travel industry.

We are subject to risks inherent to hotel operations. We have ownership interest in the operating lessees of our hotels; consequently, we are subject to the risk of fluctuating hotel operating expenses at our hotels, including but not limited to:
increases in operating expenses due to inflation;
wage and benefit costs, including hotels that employ unionized labor;
repair and maintenance expenses;
gas and electricity costs;
insurance costs including health, general liability and workers compensation; and
other operating expenses.

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We could face increased competition. Each of our hotels competes with other hotels in its geographic area. A number of additional hotel rooms have been, or may be, built in a number of the geographic areas in which our hotels are located, which could adversely affect both occupancy and rates in those markets. A significant increase in the supply of upscale and upper-upscale hotel rooms, or if demand fails to increase at least proportionately, could have a material adverse effect on our business, financial condition and results of operations.

The lodging business is seasonal in nature. Generally, hotel revenues for our hotel portfolio 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 are generally substantially greater during tourist season than other times of the year. We expect that seasonal variations in revenue at our hotels will cause quarterly fluctuations in our revenues.

Compliance with environmental laws may adversely affect our financial condition. Owners of real estate are subject to numerous federal, state and local environmental laws and regulations. Under these laws and regulations, a current or former owner of real estate may be liable for the costs of remediating hazardous substances found on its property, whether or not they were responsible for its presence. In addition, if an owner of real property arranges for the disposal of hazardous substances at another site, it may also be liable for the costs of remediating the disposal site, even if it did not own or operate the disposal site. Such liability may be imposed without regard to fault or the legality of a party’s conduct and may, in certain circumstances, be joint and several. A property owner may also be liable to third parties for personal injuries or property damage sustained as a result of its release of hazardous or toxic substances, including asbestos-containing materials, into the environment. Environmental laws and regulations may require us to incur substantial expenses and limit the use of our properties. We could have substantial liability for a failure to comply with applicable environmental laws and regulations, which may be enforced by the government or, in certain instances, by private parties. The existence of hazardous substances on a property can also adversely affect the value of, and the owner’s ability to use, sell or borrow against the property.

We cannot provide assurances that future or amended laws or regulations, or more stringent interpretations or enforcement of existing environmental requirements, will not impose any material environmental liability, or that the environmental condition or liability relating to our hotels will not be affected by new information or changed circumstances, by the condition of properties in the vicinity of such hotels, such as the presence of leaking underground storage tanks, or by the actions of unrelated third parties.

Compliance with the Americans with Disabilities Act may adversely affect our financial condition. Under the Americans with Disabilities Act of 1990, as amended, (the “ADA”), all public accommodations, including hotels, are required to meet certain federal requirements for access and use by disabled persons. Various state and local jurisdictions have also adopted requirements relating to the accessibility of buildings to disabled persons. We make every reasonable effort to ensure that our hotels substantially comply with the requirements of the ADA and other applicable laws. However, we could be liable for both governmental fines and payments to private parties if it were determined that our hotels are not in compliance with these laws. We also may be subject to future changes in these laws. If we were required to make unanticipated major modifications to our hotels to comply with the requirements of the ADA and similar laws, it could materially adversely affect our ability to make distributions to our stockholders and to satisfy our other obligations.


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System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or service provided to guests at our hotels, and any such disruption could reduce our expected revenue, increase our expenses, damage the reputation of our hotels and adversely affect our stock price. Experienced computer programmers and hackers may be able to penetrate our network security or the network security of our third-party managers and franchisors, and misappropriate or compromise our confidential information or that of our hotel guests, create system disruptions or cause the shutdown of our hotels. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our computer systems or the computer systems operated by our third-party managers and franchisors, or otherwise exploit any security vulnerabilities of our respective networks. In addition, sophisticated hardware and operating system software and applications that we and our third-party managers or franchisors may procure from outside companies may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with our internal operations or the operations at our hotels. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential business at our hotels.
Portions of our information technology infrastructure or the information technology infrastructure of our third-party managers and franchisors also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We or our third-party managers and franchisors may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability of our third-party managers and franchisors to fulfill reservations for guestrooms and other services offered at our hotels. Delayed sales or bookings, lower margins or lost guest reservations resulting from these disruptions could adversely affect our financial results, stock price and the reputation of our hotels.
We seek to minimize the impact of these attacks through various technologies, processes and practices designed to protect our networks, systems, computers and data from attack, damage or unauthorized access. However, there are no guarantees that our cyber-security practices will be sufficient to thwart all attacks. While we carry property, business interruption, and cyber risk insurance, we may not be sufficiently compensated for all losses we may incur. These losses include not only a loss of revenues but also potential litigation, fines or regulatory action against us. Furthermore, we may also incur substantial remediation costs to repair system damage as well as satisfy liabilities for stolen assets or information that may further reduce our profits.
If we (or our managers) fail to comply with applicable privacy laws and regulations, we could be subject to payment of fines, damages or face restrictions on our use of guest data. Our managers collect information relating to our guests for various business purposes, including marketing and promotional purposes. Collecting and using personal data is governed by U.S. and other privacy laws and regulations. Privacy regulations continue to evolve and may be inconsistent from one jurisdiction to another. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our managers’ ability to market our products, properties and services to our guests. In addition, non-compliance (or in some circumstances non-compliance by third parties engaged by us (including our managers)), or a breach of security in systems storing privacy data, may result in fines, payment of damages or restrictions on our (or our managers’) use or transfer of data.
Future terrorist activities and political instability may adversely affect, and create uncertainty in, our business. Terrorism in the United States or elsewhere could have an adverse effect on our business, although the degree of impact will depend on a number of factors, including the U.S. and global economies and global financial markets. Previous terrorist attacks in the United States and subsequent

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terrorism alerts have adversely affected the travel and hospitality industries in the past. Such attacks, or the threat of such attacks, could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties, and/or our results of operations and financial condition, as a whole.
We face reduced insurance coverages and increasing premiums. Our property insurance has a $100,000 “all‑risk” deductible, as well as a 5% deductible (insured value) for named windstorm and California earthquake coverage. Substantial uninsured or not fully-insured losses would have a material adverse impact on our operating results, cash flows and financial condition. Catastrophic losses, such as the losses caused by hurricanes in 2005, could make the cost of insuring against these types of losses prohibitively expensive or difficult to find. In an effort to limit the cost of insurance, we purchase catastrophic insurance coverage based on probable maximum losses based on 250-year events and have only purchased terrorism insurance to the extent required by our lenders or franchisors. We have established a self-insured retention of $250,000 per occurrence for general liability insurance with regard to 37 of our hotels. The remainder of our hotels participate in general liability programs sponsored by our managers, with no deductible.
We could have uninsured or under-insured property losses. Our property policies provide that all of the claims from each of our properties resulting from a particular insurable event must be combined together for purposes of evaluating whether the aggregate limits and sub-limits contained in our policies have been exceeded. Therefore, if an insurable event occurs that affects more than one of our hotels, the claims from each affected hotel will be added together to determine whether the aggregate limit or sub-limits, depending on the type of claim, have been reached, and each affected hotel may only receive a proportional share of the amount of insurance proceeds provided for under the policy if the total value of the loss exceeds the aggregate limits available. We may incur losses in excess of insured limits, and as a result, we may be even less likely to receive sufficient coverage for risks that affect multiple properties such as earthquakes or catastrophic terrorist acts. Risks such as war, catastrophic terrorist acts, nuclear, biological, chemical, or radiological attacks, and some environmental hazards may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or may be too expensive to justify insuring against.
We may also encounter disputes concerning whether an insurance provider will pay a particular claim that we believe is covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.
We obtain terrorism insurance to the extent required by lenders or franchisors as a part of our all-risk property insurance program, as well as our general liability and directors’ and officers’ policies. However, our all-risk policies have limitations, such as per occurrence limits and sub-limits, that might have to be shared proportionally across participating hotels under certain loss scenarios. Also, all-risk insurers only have to provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Act, or TRIA, for “certified” acts of terrorism - namely those that are committed on behalf of non-United States persons or interests. Furthermore, we do not have full replacement coverage at all of our hotels for acts of terrorism committed on behalf of United States persons or interests (“non-certified” events) as our coverage for such incidents is subject to sub-limits and/or annual aggregate limits. In addition, property damage related to war and to nuclear, biological and chemical incidents is excluded under our policies. While TRIA will reimburse insurers for losses resulting from nuclear, biological and chemical perils, TRIA does not require insurers to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. Additionally, Congress may not renew TRIA in the future, which would eliminate the federal subsidy for terrorism losses. As a result of the above, the

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extent and adequacy of terrorism coverage that will be available in the future to protect our interests in the event of future terrorist attacks that impact our properties is uncertain.
We have geographic concentrations that may create risks from regional or local economic, seismic or weather conditions. At December 31, 2014, approximately 60% of our hotel rooms were located in, and 61% of our 2014 Hotel EBITDA was generated from, three states: California (34% of our hotel rooms and 35% of our Hotel EBITDA); Florida (15% of our hotel rooms and 15% of our Hotel EBITDA); and Texas (11% of our hotel rooms and 11% of our Hotel EBITDA). Additionally, at December 31, 2014, we had concentrations in five major metropolitan areas which together represented approximately 43% of our Hotel EBITDA for the year ended December 31, 2014 (the San Francisco Bay area (17%), Boston (9%), South Florida (7%), Los Angeles area (5%), and Myrtle Beach (5%)). Therefore, adverse economic, seismic or weather conditions in these states or metropolitan areas may have a greater adverse effect on us than on the industry as a whole.
Transfers and/or termination of franchise licenses and management agreements may be prohibited or restricted. Hotel managers and franchise licensors may have the right to terminate their agreements or suspend their services in the event of default under such agreements or other third-party agreements such as ground leases and mortgages, upon the loss of liquor licenses, or in the event of the sale or transfer of the hotel. Franchise licenses may expire by their terms, and we may not be able to obtain replacement franchise license agreements.
If a management agreement or franchise license were terminated, under certain circumstances (such as the sale of a hotel), we could be liable for liquidated damages (which may be guaranteed by us or certain of our subsidiaries). In addition, we may need to obtain a different franchise and/or engage a different manager, and the costs and disruption associated with those changes could be significant (and materially adverse to the value of the affected hotel) because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchise licensor or operations management provided by the manager. Additionally, most of our management agreements restrict our ability to encumber our interests in the applicable hotels under certain circumstances without the managers’ consent, which can make it more difficult to obtain secured financing on acceptable terms.
We are subject to possible adverse effects of management, franchise and license agreement requirements. All of our hotels are operated under existing management, franchise or license agreements with nationally recognized hotel companies. Each agreement requires that the licensed hotel be maintained and operated in accordance with specific brand standards and restrictions. Compliance with these standards, and changes in these standards, could require us to incur significant expenses or capital expenditures, which could adversely affect our results of operations and ability to pay dividends to our stockholders and service our debt.
We are subject to the risks of brand concentration. We are subject to the potential risks associated with the concentration of our hotels under a limited number of brands. A negative public image or other adverse event that becomes associated with the brand could adversely affect hotels operated under that brand. If any brands under which we operate hotels suffer a significant decline in appeal to the traveling public, the revenues and profitability of our branded hotels could be adversely affected. At December 31, 2014, approximately 23 hotels comprising 46% of our aggregate rooms were flagged as Embassy Suites, and we derived approximately 48% of our 2014 Hotel EBITDA from those hotels.
If revenue declines faster than operating expenses, our margins may shrink materially. We are subject to the risks of a decline in Hotel EBITDA margins, which occur when hotel operating expenses increase disproportionately to revenues or fail to shrink at least as fast as revenues decline. These operating expenses and Hotel EBITDA margins are controlled by our third-party managers over whom we have limited influence.

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The increasing use of Internet travel intermediaries by consumers may adversely affect our profitability. Some of our hotel rooms may be booked through Internet travel intermediaries. As these Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us and our management companies. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their reservations system rather than to the brands under which our hotels are franchised. If the amount of sales made through Internet travel intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be adversely affected.

We have substantial financial leverage.
At December 31, 2014, our consolidated debt ($1.6 billion) represented approximately 51% of our total enterprise value. Declining revenues and cash flow may adversely affect our public debt ratings and may limit our access to additional debt. Historically, we have incurred debt for acquisitions and to fund our renovation, redevelopment and rebranding programs. If our access to additional debt financing is limited, our ability to fund these programs or acquire hotels in the future could be adversely affected. Also, we cannot assure you that we will be able to refinance any of our debt on a timely basis or on satisfactory terms, if at all.

Financial leverage, while efficient and useful, could have negative consequences. For example, it could:
limit our ability to obtain additional financing for working capital, renovation, redevelopment and rebranding plans, acquisitions, debt service requirements and other purposes;
limit our ability to refinance existing debt;
limit our ability to pay dividends, invest in unconsolidated joint ventures, etc.;
require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain financing;
increase our vulnerability to adverse economic and industry conditions, and to interest rate fluctuations;
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for capital expenditures, future business opportunities, paying dividends or other purposes;
limit our flexibility to make, or react to, changes in our business and our industry; and
place us at a competitive disadvantage, compared to our competitors that have less leverage.

Compliance with, or failure to comply with, our financial covenants may adversely affect our financial position and results of operations.
The agreements governing our senior secured notes require that we satisfy total leverage, secured leverage and interest coverage tests in order, among other things, to: (i) incur certain additional indebtedness except to refinance maturing debt with replacement debt, as defined under our indentures; (ii) pay dividends other than to maintain FelCor’s REIT status; (iii) repurchase FelCor’s capital stock; or (iv) merge. These restrictions may adversely affect our ability to finance our operations or engage in other business activities that may be in our best interest.
Various political, economic, social or business risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and financial thresholds. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default could permit

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lenders to accelerate the maturity of obligations under these agreements and to foreclose upon any collateral securing those obligations. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions could significantly impair our ability to obtain other financing. We cannot assure you that we will be granted waivers or amendments if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all.
Certain of our subsidiaries have been formed as special purpose entities, or SPEs. These SPEs have incurred mortgage debt secured by the assets of those SPEs, which debt is non-recourse to us, except in connection with certain customary recourse “carve-outs,” including fraud, misapplication of funds, etc., in which case this debt could become fully recourse to us.

Our ability to pay dividends may be limited or prohibited by the terms of our debt or preferred stock.
We are currently party to agreements and instruments that can restrict or prevent the payment of dividends on our common and preferred stock (except as necessary to retain REIT status). Under the agreements governing our senior secured notes, dividend payments are permitted only to the extent that, at the time of the distribution, we can satisfy certain financial thresholds (concerning leverage and fixed charges) and meet other requirements. Under the terms of our outstanding preferred stock, we are not permitted to pay dividends on our common stock unless all accrued preferred dividends then payable have been paid. While our preferred dividends are current, if we fail to pay future dividends on our preferred stock for any reason, including to comply with the terms of our senior secured notes, our preferred dividends will accrue, and we will be prohibited from paying any common dividends until all such accrued but unpaid preferred dividends have been paid.

Our debt agreements will allow us to incur additional debt that, if incurred, could exacerbate the other risks described herein.
We may incur substantial debt in the future. Although the instruments governing our debt contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions could be substantial. If we add incremental debt, the leverage-related risks described above would intensify.

We may be unable to execute our deleveraging strategy successfully if we are unable to sell non-strategic hotels when anticipated, or at all, or sell them for satisfactory pricing or if we are unable to grow our cash flow.
Our ability to sell hotels is at least partially dependent on potential buyers obtaining financing. If adequate financing is not available or is only available at undesirable terms, we may be unable to sell hotels or sell them for desired pricing. If we are unable to sell non-strategic hotels or sell them for desired pricing, it could affect our ability to repay and refinance debt and slow the execution of our strategic plan. If we sell a mortgaged hotel for less than its outstanding debt balance, we would be required to use cash to make up the shortfall or substitute an unencumbered hotel as collateral, which would restrict future flexibility when refinancing debt or restrict us from using cash for other purposes. Similarly, if we are unsuccessful in growing the cash flow at our core hotels, our deleveraging strategy could be frustrated.
We depend on external sources of capital for future growth, and we may be unable to access capital when necessary.
As a REIT, our ability to finance our growth must largely be funded by external sources of capital because we are required to distribute to our stockholders at least 90% of our taxable income (other than net capital gains) including, in some cases, taxable income we recognize for federal income tax purposes but with regard to which we do not receive corresponding cash. Our ability to obtain the external capital

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we require could be limited by a number of factors, many of which are outside our control, including general market conditions, unfavorable market perception of our future prospects, lower current and/or estimated future earnings, excessive cash distributions or a lower market price for our common stock.

Our ability to access additional capital also may be limited by the terms of our existing debt, which, under certain circumstances, restrict our incurrence of debt and the payment of distributions. Any of these factors, individually or in combination, could prevent us from being able to obtain the external capital we require on terms that are acceptable to us, or at all. If our future cash flow from operations and external sources of capital are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional equity capital or restructure or refinance all or a portion of our debt on or before maturity. Failing to obtain necessary external capital could have a material adverse effect on our ability to finance our future growth. We may have only a limited number of unencumbered hotels and limited resources to raise additional capital or we may have difficulties obtaining consent of an applicable lessor on any of our hotels subject to a ground lease.

Departure of key personnel would deprive us of the institutional knowledge, expertise and leadership they provide.
Our executive management team includes our President and Chief Executive Officer, and four Executive Vice Presidents. In addition, we have several other long-tenured senior officers. These executives and officers generally possess institutional knowledge about our organization and the hospitality or real estate industries, have significant expertise in their fields, and possess leadership skills that are important to our operations. The loss of any of our executives or other long-tenured officers could adversely affect our ability to execute our business strategy.

As a REIT, we are subject to specific tax laws and regulations, the violation of which could subject us to significant tax liabilities.
The federal income tax laws governing REITs are complex. We have operated, and intend to continue to operate, in a manner that enables us to qualify as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complicated, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we have been, or will continue to be, successful in operating so as to qualify as a REIT.

The federal income tax laws governing REITs are subject to change. At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. These new laws, interpretations, or court decisions may change the federal income tax laws relating to, or the federal income tax consequences of, qualification as a REIT. Any of these new laws or interpretations may take effect retroactively and could adversely affect us, or you as a stockholder.

Failure to make required distributions would subject us to tax. Each year, a REIT must pay out to its stockholders at least 90% of its taxable income, other than any net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% non-deductible tax if the actual amount we pay out to our stockholders in a calendar year is less than the minimum amount specified under federal tax laws. Our only source of funds to make such distributions comes from distributions from FelCor LP. Accordingly, we may be required to borrow money or sell assets to enable us to pay out enough of our taxable income to satisfy the distribution requirements and to avoid corporate income tax and the 4% tax in a particular year.


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Failure to qualify as a REIT would subject us to federal income tax. If we fail to qualify as a REIT in any taxable year for which the statute of limitations remains open we would be subject to federal income tax at regular corporate rates (including any applicable alternative minimum tax) for such taxable year and may not qualify as a REIT for four subsequent years. We might need to borrow money or sell hotels in order to obtain the funds necessary to pay any such tax. If we cease to be a REIT, we no longer would be required to distribute most of our taxable income to our stockholders. Unless our failure to qualify as a REIT was excused under federal income tax laws, we could not re-elect REIT status until the fifth calendar year following the year in which we failed to qualify.

We lack control over the management and operations of our hotels. Because federal income tax laws restrict REITs and their subsidiaries from operating hotels, we do not manage our hotels. Instead, we are dependent on the ability of third-party managers to operate our hotels pursuant to management agreements. As a result, we are unable to directly implement strategic business decisions for the operation and marketing of our hotels, such as decisions with respect to the setting of room rates, the salary and benefits provided to hotel employees, the conduct of food and beverage operations and similar matters. While our taxable REIT subsidiaries monitor the third-party manager’s performance, we have limited specific recourse under our management agreements if we believe the third-party managers are not performing adequately. Failure by our third-party managers to fully perform the duties agreed to in our management agreements could adversely affect our results of operations. In addition, our third-party managers, or their affiliates, manage hotels that compete with our hotels, which may result in conflicts of interest. As a result, our third-party managers may have in the past made, and may in the future make, decisions regarding competing lodging facilities that are not or would not be in our best interests.

Complying with REIT requirements may cause us to forgo attractive opportunities that could otherwise generate strong risk-adjusted returns and instead pursue less attractive opportunities, or none at all.
To continue to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature of our assets, the amounts we distribute to our stockholders and the ownership of our stock. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for our stockholders.

Complying with REIT requirements may force us to liquidate otherwise attractive investments, which could result in an overall loss on our investments.
To continue to qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total securities can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, the REIT statutes provide a means to cure the exception. If we are unable to cure the exception we may be subject to an additional tax. As a result, we may be required to liquidate otherwise attractive investments.

We may become subject to a 100% excise tax if our TRSs pay us excessive rent.
The Internal Revenue Service, or IRS, could challenge the rents paid to us by our TRSs, as excessive, and a court could reach a similar conclusion. In either event, we could be taxed at 100% of the amount of rents determined to be excessive. There can be no assurance that we will not be subjected

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to that excise tax. If we are, and if the amount is material, our liquidity and ability to service our debt and pay dividends could be materially and adversely affected.
We own, and may acquire, interests in hotel joint ventures with third parties that expose us to some risk of additional liabilities or capital requirements.
Through our subsidiaries, we own interests in several real estate joint ventures. Our unconsolidated joint ventures owned three hotels, in which we had a $15.1 million aggregate investment at December 31, 2014. We include the lessee operations of two of these three hotels in our consolidated results of operations because we own majority interests in the lessees. All of our joint venture partners are unaffiliated with us. The joint ventures owned hotels that secured $34.2 million of non-recourse loans at December 31, 2014.

Our subsidiaries’ personal liability for existing non-recourse loans secured by our joint venture hotels is generally limited to guarantying the lender’s losses caused by misconduct, fraud or misappropriation of funds by the borrowers and other customary “bad boy” exceptions from the non-recourse covenants in the loans, (e.g., environmental liabilities). We may invest in other joint ventures in the future that own hotels and have recourse or non-recourse debt financing. If a joint venture defaults under a loan, the lender may accelerate the loan and demand payment in full before taking action to foreclose on the hotel. As a joint venturer, our subsidiary may be liable for claims asserted against the joint venture (including lenders’ claims for repayment), and the joint venture may have insufficient assets or insurance to cover the liability.

Our subsidiaries may be unable to control decisions unilaterally regarding these joint venture hotels. In addition, joint venture hotels may perform at levels below expectations, raising concerns about joint venture liquidity and solvency unless the joint venturers provide additional funds. In some cases, the joint venturers may elect to forgo additional capital contributions. We may be confronted with the choice of losing our investment or investing additional capital with no guaranty of any return on that investment.

Our charter limits ownership and transferring shares of our stock, which could adversely affect attempted transfers of our capital stock.
To maintain our status as a REIT, no more than 50% in value of our outstanding stock may be owned, actually or constructively, under the applicable tax rules, by five or fewer persons during the last half of any taxable year. Our charter prohibits, subject to some exceptions, any person from owning more than 9.9% of the number of outstanding shares of any class of our stock. Our charter also prohibits any transfer of our stock that would result in a violation of the 9.9% ownership limit, reduce the number of stockholders below 100 or otherwise result in our failure to qualify as a REIT. Any attempted transfer of shares in violation of the charter prohibitions is void, and the intended transferee acquires no right to those shares. We have the right to take any lawful action that we believe is necessary or advisable to ensure compliance with these ownership and transfer restrictions and to preserve our status as a REIT, including refusing to recognize any transfer of stock in violation of our charter.

Some provisions in our charter and bylaws and Maryland law make a takeover more difficult.
Ownership Limit. The ownership and transfer restrictions of our charter may have the effect of discouraging or preventing a third party from attempting to gain control of us without the approval of our Board of Directors. Accordingly, it is less likely that a change in control, even if beneficial to stockholders, could be effected without the approval of our Board.

Staggered Board. Our charter provides that our Board is divided into three classes. Directors in each class are elected for terms of three years. As a result, the ability of stockholders to effect a change in

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control of us through the election of new directors is limited by the inability of stockholders to elect a majority of our Board at any particular meeting.

Authority to Issue Additional Shares. Under our charter, our board may issue up to an aggregate of 20 million shares of preferred stock without stockholder action. The preferred stock may be issued, in one or more series, with the preferences and other terms designated by our board that may delay or prevent a change in control of us, even if the change is in the best interests of stockholders. At December 31, 2014, we had outstanding 12,879,475 shares of our Series A preferred stock and 67,980 shares, represented by 6,798,000 depositary shares, of our Series C preferred stock.

Maryland Law. As a Maryland corporation, we are subject to various provisions under the Maryland General Corporation Law, including the Maryland Business Combination Act, that may have the effect of delaying or preventing a transaction or a change in control that might involve a premium price for the stock or otherwise be in the best interests of stockholders. Under the Maryland business combination statute, some “business combinations,” including some issuances of equity securities, between a Maryland corporation and an “interested stockholder,” which is any person who beneficially owns 10% or more of the voting power of the corporation’s shares, or an affiliate of that stockholder, are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Any of these business combinations must be approved by a stockholder vote meeting two separate super majority requirements, unless, among other conditions, the corporation’s common stockholders receive a minimum price, as defined in the statute, for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its common shares. Our charter currently provides that the Maryland Control Share Acquisition Act will not apply to any of our existing or future stock. That statute may deny voting rights to shares involved in an acquisition of one-tenth or more of the voting stock of a Maryland corporation. To the extent these or other laws are applicable to us, they may have the effect of delaying or preventing a change in control of us even though beneficial to our stockholders.

In addition, under the Maryland General Corporation Law, unless prohibited by charter or resolution (which we are not), our Board can elect by resolution without stockholder approval to be subject to certain corporate governance provisions that may be inconsistent with our charter and bylaws. Under Sections 8-301 through 8-305 of that statute, our Board may adopt corporate governance provisions (including, conditions to action by written consent, classification of directors, prerequisites for calling special meetings of stockholders, etc.) that may, individually or in the aggregate, affect board structure or stockholders’ ability to alter corporate policies directly, or may delay or prevent a strategic transaction or a change in control.

Our directors may have interests that may conflict with our interests.
A director who has a conflict of interest with respect to an issue presented to our Board will have no inherent legal obligation to abstain from voting upon that issue. We do not have provisions in our bylaws or charter that require an interested director to abstain from voting upon an issue, and we do not expect to add provisions in our charter and bylaws to this effect. Although each director has a duty of loyalty to us, there is a risk that, should an interested director vote upon an issue in which a director or one of his or her affiliates has an interest, his or her vote may reflect a bias that could be contrary to our best interests. In addition, even if an interested director abstains from voting, that director’s participation in the meeting and discussion of an issue in which they have, or companies with which he or she is associated have, an interest could influence the votes of other directors regarding the issue.
Item 1B.    Unresolved Staff Comments
None.

20


Item 2.    Properties
We own a diversified portfolio of hotels managed by Hilton, Starwood, Marriott, Fairmont, Morgans, Wyndham, Intercontinental Hotels Group and one independent management company. Our hotels are high-quality lodging properties with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Our hotels are designed to appeal to a broad range of hotel customers, including frequent business travelers, groups and conventions, as well as leisure travelers. They generally feature comfortable, modern guest rooms, meeting facilities and full-service restaurant and catering facilities. At December 31, 2014, our Consolidated Hotels were located in the United States (45 hotels in 17 states), with concentrations in major gateway cities and resort areas. Our hotels average 300 rooms. The following table sets forth the distribution of our 45 Consolidated Hotels at December 31, 2014.


Brand
 


Hotels
 


Rooms
 
2014 Hotel Operating Revenue
(in thousands)
 
2014
Hotel EBITDA(a)
(in thousands)
Embassy Suites Hotels
 
18

 
 
4,982

 
 
$
282,866

 
 
$
95,000

 
Wyndham and Wyndham Grand(b)
 
8

 
 
2,528

 
 
125,354

 
 
43,126

 
Renaissance and Marriott
 
3

 
 
1,321

 
 
128,770

 
 
26,089

 
DoubleTree by Hilton and Hilton
 
3

 
 
802

 
 
45,383

 
 
15,484

 
Sheraton
 
2

 
 
673

 
 
39,639

 
 
10,623

 
Fairmont
 
1

 
 
383

 
 
53,451

 
 
10,011

 
Holiday Inn
 
2

 
 
968

 
 
51,511

 
 
8,967

 
Morgans and Royalton
 
2

 
 
285

 
 
33,895

 
 
3,314

 
Core hotels
 
39

 
 
11,942

 
 
760,869

 
 
212,614

 
Non-strategic hotels(c)
 
6

 
 
1,561

 
 
58,028

 
 
17,837

 
Same-store hotels
 
45

 
 
13,503

 
 
$
818,897

 
 
$
230,451

 
Market
 
 
 
 
 

 

 
San Francisco area
 
5

 
 
1,903

 
 
$
139,692

 
 
$
39,470

 
Boston
 
3

 
 
916

 
 
85,670

 
 
21,834

 
South Florida
 
3

 
 
923

 
 
55,561

 
 
17,009

 
Los Angeles area
 
2

 
 
481

 
 
28,696

 
 
12,406

 
Myrtle Beach
 
2

 
 
640

 
 
41,149

 
 
12,219

 
Philadelphia
 
2

 
 
728

 
 
38,680

 
 
9,631

 
Tampa
 
1

 
 
361

 
 
49,358

 
 
9,302

 
New York area
 
3

 
 
546

 
 
48,456

 
 
7,259

 
Austin
 
1

 
 
188

 
 
13,935

 
 
6,177

 
Atlanta
 
1

 
 
316

 
 
13,899

 
 
5,701

 
Other markets
 
16

 
 
4,940

 
 
245,773

 
 
71,606

 
Core hotels
 
39

 
 
11,942

 
 
760,869

 
 
212,614

 
Non-strategic hotels(c)
 
6

 
 
1,561

 
 
58,028

 
 
17,837

 
Same-store hotels
 
45

 
 
13,503

 
 
$
818,897

 
 
$
230,451

 
Location
 
 
 
 
 
 
 
 
 
 
 
 
Urban
 
17

 
 
5,310

 
 
$
360,177

 
 
$
97,594

 
Resort
 
9

 
 
2,733

 
 
203,370

 
 
51,684

 
Airport
 
8

 
 
2,621

 
 
136,144

 
 
43,208

 
Suburban
 
5

 
 
1,278

 
 
61,178

 
 
20,128

 
Core hotels
 
39

 
 
11,942

 
 
760,869

 
 
212,614

 
Non-strategic hotels(c)
 
6

 
 
1,561

 
 
58,028

 
 
17,837

 
Same-store hotels
 
45

 
 
13,503

 
 
$
818,897

 
 
$
230,451

 
(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 7 of this Annual Report.
(b)
These hotels were converted from Holiday Inn (brand and management) on March 1, 2013.
(c)
Excludes two hotels held for sale as of December 31, 2014, both of which were sold in February.

21


Hotel Operating Statistics
The following tables set forth 2014 and 2013 occupancy, ADR and RevPAR and the year-over-year percentage changes to those statistics for our 45 Consolidated Hotels.
Hotel Operating Statistics by Brand
 
Occupancy (%)
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
%Variance
Embassy Suites Hotels
79.0

 
 
76.7

 
 
3.0

 
Renaissance and Marriott
72.0

 
 
70.2

 
 
2.6

 
DoubleTree by Hilton and Hilton
73.6

 
 
68.3

 
 
7.7

 
Sheraton
69.4

 
 
68.0

 
 
2.0

 
Fairmont
74.4

 
 
74.2

 
 
0.4

 
Holiday Inn
77.6

 
 
78.0

 
 
(0.5
)
 
Morgans and Royalton
87.9

 
 
87.6

 
 
0.4

 
Comparable core hotels (31)
76.8

 
 
74.8

 
 
2.7

 
Non-strategic hotels (6)(a)
77.0

 
 
76.2

 
 
1.1

 
Comparable hotels (37)
76.9

 
 
75.0

 
 
2.5

 
Wyndham and Wyndham Grand(b)
71.8

 
 
65.7

 
 
9.3

 
Same-store hotels (45)
75.9

 
 
73.3

 
 
3.6

 
 
ADR ($)
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
%Variance
Embassy Suites Hotels
164.11

 
 
153.17

 
 
7.1

 
Renaissance and Marriott
223.51

 
 
209.58

 
 
6.6

 
DoubleTree by Hilton and Hilton
155.15

 
 
148.99

 
 
4.1

 
Sheraton
146.75

 
 
145.71

 
 
0.7

 
Fairmont
307.77

 
 
285.06

 
 
8.0

 
Holiday Inn
164.21

 
 
144.29

 
 
13.8

 
Morgans and Royalton
308.05

 
 
315.50

 
 
(2.4
)
 
Comparable core hotels (31)
180.73

 
 
169.91

 
 
6.4

 
Non-strategic hotels (6)(a)
120.68

 
 
115.29

 
 
4.7

 
Comparable hotels (37)
172.17

 
 
162.03

 
 
6.3

 
Wyndham and Wyndham Grand(b)
158.35

 
 
144.37

 
 
9.7

 
Same-store hotels (45)
169.72

 
 
159.07

 
 
6.7

 
 
RevPAR ($)
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
%Variance
Embassy Suites Hotels
129.71

 
 
117.55

 
 
10.4

 
Renaissance and Marriott
160.92

 
 
147.11

 
 
9.4

 
DoubleTree by Hilton and Hilton
114.12

 
 
101.71

 
 
12.2

 
Sheraton
101.78

 
 
99.09

 
 
2.7

 
Fairmont
229.14

 
 
211.41

 
 
8.4

 
Holiday Inn
127.41

 
 
112.52

 
 
13.2

 
Morgans and Royalton
270.69

 
 
276.27

 
 
(2.0
)
 
Comparable core hotels (31)
138.84

 
 
127.13

 
 
9.2

 
Non-strategic hotels (6)(a)
92.95

 
 
87.83

 
 
5.8

 
Comparable hotels (37)
132.32

 
 
121.54

 
 
8.9

 
Wyndham and Wyndham Grand(b)
113.63

 
 
94.79

 
 
19.9

 
Same-store hotels (45)
128.82

 
 
116.54

 
 
10.5

 
(a)Excludes two hotels held for sale as of December 31, 2014, both of which were sold in February.
(b)These hotels were converted from Holiday Inn (brand and management) on March 1, 2013.

22


Hotel Operating Statistics by Market for Comparable Core Hotels
 
 
Occupancy (%)
 
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
%Variance
San Francisco area
 
82.2

 
 
81.4

 
 
1.0

 
Boston
 
73.6

 
 
73.5

 
 
0.1

 
South Florida
 
83.4

 
 
81.4

 
 
2.5

 
Los Angeles area
 
80.1

 
 
82.2

 
 
(2.6
)
 
Myrtle Beach
 
66.5

 
 
62.3

 
 
6.8

 
Philadelphia
 
69.7

 
 
66.3

 
 
5.2

 
Tampa
 
81.2

 
 
80.5

 
 
0.9

 
New York area
 
83.3

 
 
83.2

 
 
0.2

 
Austin
 
79.9

 
 
78.9

 
 
1.2

 
Atlanta
 
77.2

 
 
75.4

 
 
2.3

 
Other markets
 
73.1

 
 
69.6

 
 
5.0

 
Comparable core hotels (31)
 
76.8

 
 
74.8

 
 
2.7

 
 
 
ADR ($)
 
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
%Variance
San Francisco area
 
210.51

 
 
187.91

 
 
12.0

 
Boston
 
253.57

 
 
234.97

 
 
7.9

 
South Florida
 
160.25

 
 
147.49

 
 
8.7

 
Los Angeles area
 
145.73

 
 
136.89

 
 
6.5

 
Myrtle Beach
 
152.64

 
 
147.36

 
 
3.6

 
Philadelphia
 
164.54

 
 
166.52

 
 
(1.2
)
 
Tampa
 
195.98

 
 
183.55

 
 
6.8

 
New York area
 
252.90

 
 
250.72

 
 
0.9

 
Austin
 
214.22

 
 
200.90

 
 
6.6

 
Atlanta
 
141.85

 
 
140.41

 
 
1.0

 
Other markets
 
150.64

 
 
143.47

 
 
5.0

 
Comparable core hotels (31)
 
180.73

 
 
169.91

 
 
6.4

 
 
 
RevPAR ($)
 
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
%Variance
San Francisco area
 
173.02

 
 
152.91

 
 
13.2

 
Boston
 
186.57

 
 
172.68

 
 
8.0

 
South Florida
 
133.64

 
 
120.00

 
 
11.4

 
Los Angeles area
 
116.68

 
 
112.54

 
 
3.7

 
Myrtle Beach
 
101.51

 
 
91.75

 
 
10.6

 
Philadelphia
 
114.69

 
 
110.32

 
 
4.0

 
Tampa
 
159.21

 
 
147.71

 
 
7.8

 
New York area
 
210.72

 
 
208.57

 
 
1.0

 
Austin
 
171.17

 
 
158.59

 
 
7.9

 
Atlanta
 
109.44

 
 
105.87

 
 
3.4

 
Other markets
 
110.08

 
 
99.88

 
 
10.2

 
Comparable core hotels (31)
 
138.84

 
 
127.13

 
 
9.2

 

23


Hotel Portfolio

The following table sets forth certain descriptive information regarding our hotels at December 31, 2014.

Core Hotels
 
Brand
 
State
 
Rooms
 
Birmingham
Embassy Suites Hotel
 
 AL
 
242
 
Phoenix – Biltmore
Embassy Suites Hotel
 
 AZ
 
232
 
Indian Wells – Esmeralda Resort & Spa
Renaissance
 
 CA
 
560
 
Los Angeles – International Airport/South
Embassy Suites Hotel
 
 CA
 
349
 
Mandalay Beach – Hotel & Resort
Embassy Suites Hotel
 
 CA
 
250
 
Milpitas – Silicon Valley
Embassy Suites Hotel
 
 CA
 
266
 
Napa Valley
Embassy Suites Hotel
 
 CA
 
205
 
San Diego – Bayside
Wyndham
 
 CA
 
600
 
San Francisco – Airport/Waterfront
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
 
Santa Monica – At the Pier
Wyndham
 
 CA
 
132
 
Deerfield Beach – Resort & Spa
Embassy Suites Hotel
 
 FL
 
244
 
Ft. Lauderdale – 17th Street
Embassy Suites Hotel
 
 FL
 
361
 
Miami – International Airport
Embassy Suites Hotel
 
 FL
 
318
 
Orlando – International Drive South/Convention
Embassy Suites Hotel
 
 FL
 
244
 
Orlando – Walt Disney World Resort
DoubleTree Suites by Hilton
 
 FL
 
229
 
St. Petersburg – Vinoy Resort & Golf Club
Renaissance
 
 FL
 
361
 
Atlanta – Buckhead
Embassy Suites Hotel
 
 GA
 
316
 
New Orleans – French Quarter
Wyndham
 
 LA
 
374
 
Boston – Beacon Hill
Wyndham
 
 MA
 
304
 
Boston – Copley Plaza
Fairmont
 
 MA
 
383
 
Boston/Marlborough
Embassy Suites Hotel
 
 MA
 
229
 
Minneapolis – Airport
Embassy Suites Hotel
 
 MN
 
310
 
Secaucus – Meadowlands(a)
Embassy Suites Hotel
 
 NJ
 
261
 
New York – Morgans
Independent
 
 NY
 
117
 
New York – Royalton
Independent
 
 NY
 
168
 
Philadelphia – Historic District
Wyndham
 
 PA
 
364
 
Philadelphia – Society Hill
Sheraton
 
 PA
 
364
 
Pittsburgh – University Center
Wyndham
 
 PA
 
251
 
Charleston – The Mills House
Wyndham Grand
 
 SC
 
216
 
Myrtle Beach – Oceanfront Resort
Embassy Suites Hotel
 
 SC
 
255
 
Myrtle Beach Resort
Hilton
 
 SC
 
385
 
Nashville – Opryland – Airport (Briley Parkway)
Holiday Inn
 
 TN
 
383
 

24


Hotel Portfolio (continued)

Core Hotels
 
Brand
 
State
 
Rooms
 
Austin
DoubleTree Suites by Hilton
 
 TX
 
188
 
Dallas – Love Field
Embassy Suites Hotel
 
 TX
 
248
 
Houston – Medical Center
Wyndham Hotel & Suites
 
 TX
 
287
 
Burlington Hotel & Conference Center
Sheraton
 
 VT
 
309
 
 
 
 
 
 
 
 
Non-strategic Hotels
 
 
 
 
 
 
Orlando – International Airport
Holiday Inn
 
 FL
 
288
 
Chicago – Lombard/Oak Brook
Embassy Suites Hotel
 
 IL
 
262
 
Charlotte(a)
Embassy Suites Hotel
 
 NC
 
274
 
Austin – Central
Embassy Suites Hotel
 
 TX
 
260
 
San Antonio – International Airport
Embassy Suites Hotel
 
 TX
 
261
 
San Antonio – NW I-10
Embassy Suites Hotel
 
 TX
 
216
 
 
 
 
 
 
 
 
 
Hotels Held for Sale
 
 
 
Dallas – Park Central(b)(c)
Westin
 
 TX
 
536
 
Raleigh – Crabtree(c)
Embassy Suites Hotel
 
 NC
 
225
 
 
 
 
 
 
 
 
Unconsolidated Hotel
 
 
 
 
 
 
New Orleans – French Quarter Chateau Lemoyne(a)
Holiday Inn
 
 LA
 
171
 
 
 
 
 
 
 
 
 
Hotel under Development
 
 
 
 
 
 
New York – Knickerbocker Hotel(d)
Independent
 
 NY
 
330
 

(a)
We own a 50% interest in this property.
(b)
We owned a 60% interest in this property.
(c)
This property was sold in February 2015.
(d)
The Knickerbocker Hotel, of which we own 95%, began operations in February 2015.


25


Management Agreements
At December 31, 2014, of our 45 Consolidated Hotels, (i) Hilton subsidiaries managed 25 hotels, (ii) Wyndham managed eight hotels, (iii) Marriott subsidiaries managed three hotels, (iv) IHG subsidiaries managed three hotels, (v) a subsidiary of Morgans managed two hotels, (vi) Starwood subsidiaries managed two hotels, (vii) a Fairmont subsidiary managed one hotel, and (viii) an independent management company managed one hotel.
The management agreements relating to 22 Consolidated Hotels contain the right and license to operate the hotels under specified brands. No separate franchise agreements exist, and no separate franchise fee is required, for these hotels. These hotels are managed by (i) Wyndham, under the Wyndham brand, (ii) Hilton, under the DoubleTree and Hilton brands, (iii) Marriott, under the Renaissance and Marriott brands, (iv) IHG, under the Holiday Inn brand, (v) Morgans, (vi) Starwood, under the Sheraton brand, and (vii) Fairmont, under the Fairmont brand.
Management Fees. Minimum base management fees generally range from 1 to 3% of total revenue, with the exception of our IHG-managed hotels, where base management fees are 2% of total revenue plus 5% of room revenue. The performance of our Wyndham-managed hotels is subject to a $100 million guaranty from Wyndham Worldwide Corporation over the initial 10-year term (which can be extended for an additional five years), with an annual performance guaranty of up to $21.5 million, which ensures minimum annual NOI for those hotels.
Most of our management agreements also provide for incentive management fees that are subordinated to our return on investment. Incentive management fees are generally capped at 2 to 3% of total revenue, except that incentive management fees payable to Wyndham and Marriott are not limited.
We incurred the following management fees (in thousands) included in continuing operations during each of the past three years:
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
Base fees
 
$
19,583

 
$
19,527

 
$
24,699

Incentive fees
 
3,316

 
2,667

 
2,265

Total management fees
 
$
22,899

 
$
22,194

 
$
26,964


The Wyndham management agreements were effective on March 1, 2013. Wyndham’s guaranty of a minimum level of net operating income has reduced Wyndham’s contractual management fees during 2014 and 2013 by $1.3 million and $1.5 million, respectively. This guaranty (in addition to the more favorable Wyndham base management fees compared to their predecessor, IHG) more than offset increases compared to 2012 resulting from higher revenues.

Term and Termination. The Wyndham management agreements terminate in 2022 but may be extended by Wyndham subject to certain conditions. The IHG management agreements terminate in 2018 for one hotel and 2025 for two hotels. The Marriott management agreements terminate in 2026 for our Renaissance hotels and 2029 for our Marriott hotel, and these agreements may be extended to 2056 and 2039, respectively, at Marriott’s option. The Fairmont management agreement terminates in 2030 and may be extended to 2040 and 2050 at Fairmont’s option. The Morgans management agreements terminate in 2026 and may be extended to 2036 at Morgans’s option. The management agreements with our other managers generally have initial terms of between five and 20 years, and these agreements are generally renewable beyond the initial term only upon the mutual written agreement of the parties. The management agreements covering our 45 Consolidated Hotels that expire after 2014, subject to any renewal rights, are as follows:

26


 
 
Number of Management Agreements Expiring
Manager
 
2015
 
2016
 
Thereafter
Hilton
 
3

 
 
13

 
 
9

 
Wyndham
 

 
 

 
 
8

 
Marriott
 

 
 

 
 
3

 
IHG
 

 
 

 
 
3

 
Starwood
 

 
 

 
 
2

 
Morgans
 

 
 

 
 
2

 
Fairmont
 

 
 

 
 
1

 
Other
 
1

 
 

 
 

 
Total
 
4

 
 
13

 
 
28

 

Management agreements are generally terminable upon the occurrence of customary events of default or if the subject hotel fails to meet certain performance hurdles. Upon termination for any reason, we are generally required to pay all amounts due and owing under the management agreement through the effective date of termination. If an agreement is terminated as a result of our default, or by us other than for cause, we may also be liable for damages suffered by the manager.

Assignment. Generally, neither party to a management agreement may sell, assign or transfer the agreement to an unaffiliated third party without the prior written consent of the other party, which consent shall not be unreasonably withheld. A change in control of FelCor will require manager or franchisor consent under most of our management and franchise agreements.

Franchise Agreements

Twenty-three of our Consolidated Hotels operate under franchise or license agreements with Embassy Suites that are separate from our management agreements.

Our Embassy Suites franchise agreements grant us the right to the use of the Embassy Suites Hotels name, system and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the licensed hotel must comply. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our Embassy Suites franchise agreements provide for a license fee, or royalty, of 4 to 5% of room revenues. In addition, we pay approximately 3.5 to 4% of room revenues as marketing and reservation system contributions for the systemwide benefit of Embassy Suites Hotels. We incurred marketing and reservation systems fees of $12.3 million, $12.7 million and $12.3 million in 2014, 2013 and 2012, respectively. We incurred license fees included in continuing operations with respect to our hotels operated as Embassy Suites of $13.2 million, $13.4 million and $12.8 million in 2014, 2013 and 2012, respectively.

Our typical Embassy Suites franchises extend 10 to 20 years. The agreements provide no renewal or extension rights and are not assignable. If we breach a franchise agreement, we may lose the right to use the Embassy Suites name for the applicable hotel and be liable, under certain circumstances, for liquidated damages (generally equal to the fees paid to the franchisor with respect to that hotel during the three immediately preceding years). Of our Embassy Suites franchise agreements, three expire in 2015, 13 expire in 2016, and the remainder expire later.


27


Item 3.    Legal Proceedings

There is no litigation pending or known to be threatened against us or affecting any of our hotels, other than claims arising in the ordinary course of business or which are not considered to be material. Furthermore, most of these claims are substantially covered by insurance. We do not believe that any claims known to us, individually or in the aggregate, will have a material adverse effect on us.

Item 4.     Mine Safety Disclosures

Not applicable.

28


PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “FCH.” The following table sets forth the high and low sale prices for our common stock for the indicated periods, as traded on that exchange, and dividends declared per share.
 
High
 
Low
 
Dividends
Declared
Per Share
2014
 
 
 
 
 
 
 
 
First quarter
$
9.35

 
 
$
7.49

 
 
$
0.02

 
Second quarter
10.61

 
 
8.59

 
 
0.02

 
Third quarter
10.92

 
 
9.16

 
 
0.02

 
Fourth quarter
11.18

 
 
8.99

 
 
0.04

 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
First quarter
$
6.03

 
 
$
4.71

 
 
$

 
Second quarter
6.47

 
 
5.38

 
 

 
Third quarter
6.33

 
 
5.49

 
 

 
Fourth quarter
8.23

 
 
5.83

 
 
0.02

 
Stockholder Information
At February 20, 2015, we had approximately 154 record holders of our common stock and 20 record holders of our Series A preferred stock (which is convertible into common stock). However, because many of the shares of our common stock and Series A preferred stock are held by brokers and other institutions on behalf of stockholders, we believe there are substantially more beneficial holders of our common stock and Series A preferred stock than record holders. At February 20, 2015, there were 19 holders (other than FelCor) of FelCor LP units. FelCor LP units are redeemable for cash, or, at our election, for shares of FelCor common stock.
IN ORDER TO COMPLY WITH CERTAIN REQUIREMENTS RELATED TO OUR QUALIFICATION AS A REIT, OUR CHARTER LIMITS, SUBJECT TO CERTAIN EXCEPTIONS, THE NUMBER OF SHARES OF ANY CLASS OR SERIES OF OUR CAPITAL STOCK THAT MAY BE OWNED BY ANY SINGLE PERSON OR AFFILIATED GROUP TO 9.9% OF THE OUTSTANDING SHARES OF THAT CLASS OR SERIES.
Distribution Information
In order to maintain our qualification as a REIT, we must distribute at least 90% of our annual taxable income (other than net capital gains) to our stockholders each year. We had no taxable income for either 2014 or 2013. We had common distributions that qualified as distributions for tax purposes for 2014 but had no such qualifying tax distributions for 2013. Under certain circumstances, we may be required to make distributions that exceed cash available for distribution in order to meet REIT distribution requirements. In that event, we expect to borrow funds or sell assets to obtain cash sufficient to make the required distribution.
Our senior notes indentures limit our ability to pay dividends and make other payments based on our ability to satisfy certain financial requirements (except as necessary to retain REIT status). The terms of our outstanding preferred stock prohibit us from paying dividends on our common stock unless all accrued preferred dividends then payable have been paid. None of these restrictions prevent us from paying dividends under current circumstances. We discuss these limitations further in “Liquidity and Capital Resources” in Item 7 and “Risk Factors” in Item 1A.

29


Item 6.    Selected Financial Data
The following tables set forth selected financial data derived from our audited consolidated financial statements and the related notes. This data should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and our audited consolidated financial statements and the related notes.
SELECTED FINANCIAL DATA
(in millions, except per share/unit data)
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
Statement of Operations Data:(a)
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
922

 
$
893

 
$
862

 
$
808

 
$
730

Income (loss) from continuing operations(b)
 
28

 
(84
)
 
(187
)
 
(134
)
 
(100
)
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share/unit:
 
 
 
 
 
 
 
 
 
 
FelCor - income (loss) from continuing operations
 
$
0.43

 
$
(0.95
)
 
$
(1.81
)
 
$
(1.46
)
 
$
(1.70
)
FelCor LP - income (loss) from continuing operations
 
0.43

 
(0.95
)
 
(1.81
)
 
(1.46
)
 
(1.70
)
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
 
Cash distributions declared per common share/unit(c)
 
$
0.10

 
$
0.02

 
$

 
$

 
$

Adjusted FFO per share/unit(d)
 
$
0.65

 
$
0.39

 
$
0.23

 
$
0.14

 
$
(0.09
)
Adjusted EBITDA(d)
 
221

 
200

 
203

 
203

 
188

Cash flows provided by operating activities
 
105

 
68

 
47

 
46

 
59

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at end of period):
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
2,105

 
$
2,144

 
$
2,202

 
$
2,403

 
$
2,359

Total debt, net of discount
 
1,586

 
1,663

 
1,631

 
1,596

 
1,548

FelCor’s redeemable noncontrolling interests in FelCor LP, at redemption value
 
7

 
5

 
3

 
3

 
2


(a)
Hotels that were designated as held for sale at December 31, 2013 or disposed of prior to that date are included in discontinued operations.

30



(b)
We include the following amounts in income (loss) from continuing operations (in millions):
 
 
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
Gain on sale of investment in unconsolidated entities, net
 
$
30

 
 
$

 
 
$

 
 
$

 
 
$

 
 
Gain from remeasurement of unconsolidated entities
 
21

 
 

 
 

 
 

 
 

 
 
Impairment loss
 

 
 
(24
)
 
 

 
 
(4
)
 
 
(41
)
 
 
Hurricane and earthquake loss
 

 
 

 
 
(1
)
 
 

 
 

 
 
Debt extinguishment
 
(5
)
 
 

 
 
(72
)
 
 
(28
)
 
 
45

 
 
Conversion expenses
 

 
 
(1
)
 
 
(31
)
 
 

 
 

 
 
Pre-opening expenses
 
(8
)
 
 
(2
)
 
 

 
 

 
 

 
 
Contract dispute contingency
 
(6
)
 
 

 
 

 
 

 
 

 
 
Severance expenses
 
(1
)
 
 
(3
)
 
 
(1
)
 
 

 
 

 

(c)
Our Board of Directors reinstated a quarterly common dividend in October 2013. In 2014 and 2013, FelCor declared aggregate common dividends of $0.10 and $0.02 per share, respectively. Future quarterly dividends will be based on estimates of FAD, reinvestment opportunities within our portfolio and taxable income, among other things.
(d)
We include a more detailed description and computation of Adjusted FFO per share and Adjusted EBITDA in “Non-GAAP Financial Measures,” which is found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

31


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Strong demand and tepid supply growth provide a favorable dynamic for average daily rate, or ADR. ADR grew 6.7%, while occupancy increased 3.6%, driving 10.5% RevPAR (revenue per available room) growth, as we continued remixing our customer base in favor of higher-rated segments. RevPAR for our 37 comparable hotels (our Consolidated Hotels excluding the Wyndham portfolio) increased 8.9% in 2014 compared to 2013. Sustained ADR growth has also allowed our hotels to improve Hotel EBITDA margins (up 204 basis points over 2013).
We have made continued progress toward completing the first phase of our strategic objectives.
Since December 2010, we have sold 34 hotels (including 8 hotels sold in 2014 and two sold in February 2015), for total gross proceeds of $764.5 million (our pro rata share was $698.4 million, after taking into account hotels sold or otherwise disposed of by less than wholly owned entities). Of the six non-strategic hotels remaining to sell under our current disposition programs, we have agreed to sell four, two of which are under contract.
In July 2014, we unwound joint ventures that owned 10 non-strategic hotels. We retained five of those hotels (comprising 1,224 rooms) outright, and our joint venture partner owns the other five (comprising 1,215 rooms). We sold one of the retained hotels in February 2015. Of the remaining four, two are under contract to be sold. In connection with unwinding those joint ventures, we now wholly-own our DoubleTree Suites hotel located in downtown Austin.
In July 2014, we obtained a $140 million term loan secured by three hotels. The loan bears interest at LIBOR (no floor) plus 2.5%. The loan, which matures in 2017 and may be extended for up to two years, subject to satisfaction of certain conditions, is freely pre-payable. In August 2014, we used proceeds from the loan, cash on hand and borrowings under our line of credit to redeem the remaining $234 million 10% senior secured notes due late 2014.
Our Board of Directors doubled our quarterly common dividend per share from $0.02 to $0.04 in the fourth quarter of 2014.
We completed renovating and repositioning our Wyndham portfolio. RevPAR at these eight hotels increased 19.9% in 2014.
Our 4+ star Knickerbocker Hotel (www.TheKnickerbocker.com), located in the heart of Times Square on the corner of 42nd Street and Broadway in New York City, opened on February 12, 2015. The newly redeveloped hotel boasts 330 spacious guest rooms, including 31 suites, a state-of-the-art fitness center, a 2,200 square-foot event space, upscale food and dining options, and a 7,500 square-foot rooftop bar and terrace with unrivaled views of New York City’s skyline. The 4+ star luxury property is a member of The Leading Hotels of the World. As of December 31, 2014, we invested $138.0 million (excluding initial acquisition costs and capitalized interest) to redevelop the property.


32


Financial Comparison (Hotel EBITDA and Income (Loss) from Continuing Operations, $ in millions)

 
 
Year Ended December 31,
 
 
 
2014
 
2013
 
% Change
2014-13
 
2012
 
 
% Change
2013-12
RevPAR(a)
 
$
128.82

 
 
$
116.54

 
 
10.5
%
 
 
$
112.37

 
 
3.7
%
 
Hotel EBITDA(a)(b)
 
230

 
 
194

 
 
18.8
%
 
 
180

 
 
7.6
%
 
Hotel EBITDA margin(a)(b)
 
28.1
%
 
 
26.1
%
 
 
7.8
%
 
 
25.2
%
 
 
3.8
%
 
Income (loss) from continuing operations(c)
 
28

 
 
(84
)
 
 
133.1
%
 
 
(187
)
 
 
55.3
%
 

(a)
Data shown is for our 45 same-store Consolidated Hotels for all years presented.
(b)
Hotel EBITDA and Hotel EBITDA margin are non-GAAP financial measures. A discussion of the use, limitations and importance of these non-GAAP financial measures and detailed reconciliations to the most comparable GAAP measure are found below in “Non-GAAP Financial Measures.”
(c)
We included the following amounts in income (loss) from continuing operations:
 
 
Year Ended December 31,
 
 
 
2014
 
2013
 
2012
Gain on sale of investment in unconsolidated entities, net
 
$
30

 
 
$

 
 
$

 
Gain from remeasurement of unconsolidated entities
 
21

 
 

 
 

 
Impairment loss
 

 
 
(24
)
 
 

 
Hurricane and earthquake loss
 

 
 

 
 
(1
)
 
Debt extinguishment
 
(5
)
 
 

 
 
(72
)
 
Conversion expenses
 

 
 
(1
)
 
 
(31
)
 
Pre-opening expenses
 
(8
)
 
 
(2
)
 
 

 
Contract dispute contingency
 
(6
)
 
 

 
 

 
Severance expenses
 
(1
)
 
 
(3
)
 
 
(1
)
 



33


Results of Operations

Comparison of the Years Ended December 31, 2014 and 2013

For the year ended December 31, 2014, we recorded net income of $94.2 million compared to a $65.8 million net loss in 2013. Our 2014 net income includes a $66.7 million net gain on hotel sales (of which $24.4 million resulted from foreign currency translation previously recorded in accumulated other comprehensive income and a loss on sale of $102,000 is included in discontinued operations), a $30.2 million gain on the disposition of our interest in unconsolidated hotels, and a $20.7 million gain on the fair value remeasurement of previously unconsolidated hotels. These gains were offset by a $5.9 million charge for a contract dispute contingency and $5.0 million of debt extinguishment charges (including $245,000 in discontinued operations). Our 2013 net loss includes a $28.8 million impairment charge ($24.4 million related to two hotels included in continuing operations and $4.4 million related to two hotels included in discontinued operations), offset by a $19.4 million net gain on hotel sales included in discontinued operations.

In 2014:

Total revenue increased $28.2 million, net of a $47.4 million decrease in revenue for hotels that have been disposed of or are classified as held for sale. Excluding these hotels, revenue increased 10.1% from last year. The increase was driven by a 10.5% increase in same-store RevPAR, reflecting a 6.7% increase in ADR and a 3.6% increase in occupancy. RevPAR for our Wyndham portfolio increased 19.9% , driven by a 9.7% increase in ADR and a 9.3% increase in occupancy. The Wyndham portfolio’s increased revenue primarily reflects less transitional disruption compared to the same period in 2013 and market share gains from renovations.

Hotel departmental expenses increased $4.8 million, net of a $15.9 million decrease related to hotels that have been disposed of or are classified as held for sale. Excluding these hotels, hotel departmental expenses decreased as a percentage of total revenue to 35.9% in the current year from 36.7% last year. In 2014, we experienced a favorable shift in banquet and catering operations, which typically have higher margins than other food and beverage operations. Hotel departmental operations also recognized improved profitability margins for the rooms department, driven by increased ADR.

Other property-related costs increased $55,000, net of a $13.9 million decrease related to hotels that have been disposed of or are classified as held for sale. Excluding these hotels, other property-related costs as a percentage of total revenue decreased to 25.2% in the current year from 25.9% last year, primarily driven by ADR growth.

Management and franchise fees increased $332,000, net of a $2.3 million reduction in expense for hotels that have been disposed of or are classified as held for sale. Excluding these hotels, these costs as a percentage of total revenue were 3.9% for 2014 and 2013.

Taxes, insurance and lease expense decreased $11.3 million and decreased as a percentage of total revenue to 9.2% from 10.8% in 2013. The decrease primarily reflects a $13.3 million reduction in hotel lease expense resulting from unwinding our unconsolidated 10‑hotel joint ventures and was partially offset by an increase in hotel percentage rent (computed as a percentage of hotel revenues in excess of base rent) for our remaining joint ventures. Historically, hotel lease expense was recorded by the 12 consolidated operating lessees of our hotels that were owned by unconsolidated entities. We recorded the corresponding lease income through equity in income from unconsolidated entities, and the hotel lease expense was not eliminated in consolidation. We unwound the joint ventures in July 2014, as a consequence of which we recorded lower hotel lease expense for 2014. We also experienced a decrease in expense in the current year due to more favorable property insurance rates and improved general

34


liability claims experience. These expense reductions were partially offset by increased land lease percentage rent expense, resulting from higher revenue for the period, as well as higher property taxes. In 2014, we had fewer significant property renovations compared to 2013, as a consequence of which the amount of property taxes capitalized in the current year was lower than 2013.

Corporate expenses increased $2.6 million and increased slightly as a percentage of total revenue to 3.2% from 3.0% in 2013. This increase primarily reflects the additional stock compensation expense associated with our market-based equity incentive awards and adjustments made to our corporate bonus expense.

Depreciation and amortization expense decreased $3.8 million primarily attributable to selling hotels in 2014. This reduction is offset by depreciation resulting from $83.7 million and $101.4 million of hotel capital expenditures in 2014 and 2013, respectively.

We recorded no impairment loss in 2014. Impairment loss for 2013 was $24.4 million reflecting reduced estimated hold periods for two hotels included in continuing operations.

Conversion expenses. We converted eight hotels to Wyndham brands and management in March 2013. We classified related expenses of $1.1 million as conversion expense in our 2013 statements of operations. We had no such expenses in 2014.

Other expenses increased $9.2 million compared to 2013, primarily related to a $5.9 million contract dispute contingency and increased pre-opening costs of $5.5 million incurred in 2014 for the Knickerbocker Hotel, partially offset by lower severance costs.

Net interest expense decreased $13.1 million, primarily reflecting increased capitalized interest (attributable to renovation and redevelopment projects), lower average outstanding debt and a lower blended interest rate for the period.

Debt extinguishment. In 2014, we recorded $4.8 million in debt extinguishment charges primarily related to repaying the remaining $234.0 million of our 10% senior secured notes otherwise due in 2014 and repaying a $9.6 million loan in connection with selling a hotel. We recorded no debt extinguishment charges in continuing operations in 2013.

Equity in income from unconsolidated entities increased $424,000. The increase in income reflects increased revenues at our unconsolidated hotels offset by lower income after we unwound our 10-hotel unconsolidated joint ventures in July 2014.

Discontinued operations include the results of operations for one hotel sold in January 2014 and five hotels sold in 2013. Discontinued operations in 2014 included a $102,000 net loss on sale and debt extinguishment charges of $245,000 (related to repaying $10.9 million of debt for a hotel sold in 2014). Discontinued operations in 2013 included a $19.4 million net gain on sale primarily related to five sold hotels, offset by a $4.4 million impairment charge related to two hotels. Effective January 1, 2014, we no longer record hotel operations for disposed hotels in discontinued operations if the hotel was not disposed of or held for sale prior to the effective date.


35


Comparison of the Years Ended December 31, 2013 and 2012

For the year ended December 31, 2013, we recorded a net loss of $65.8 million compared to a $129.4 million net loss in 2012. Our 2013 net loss includes a $28.8 million impairment charge (including $4.4 million in discontinued operations related to two hotels), offset by a $19.4 million net gain on hotel sales included in discontinued operations (primarily from the sale of five hotels). Our 2012 net loss includes $31.2 million of conversion costs related to rebranding and repositioning eight hotels, a $75.1 million loss from the extinguishment of debt (including $2.8 million in discontinued operations), $1.3 million in hurricane-related charges (including $478,000 in discontinued operations), and a $1.3 million impairment charge included in discontinued operations. These 2012 charges were partially offset by a $54.5 million net gain on hotel sales included in discontinued operations.

In 2013:
Total revenue increased $31.3 million, or 3.6%, from 2012. The increase was driven by a 3.8% increase in same-store RevPAR, reflecting a 3.4% increase in ADR and a slight increase in occupancy.
Hotel departmental expenses increased $11.0 million. Hotel departmental expenses decreased slightly as a percentage of total revenue to 36.6% in 2013 from 36.7% in 2012.

Other property-related costs increased $6.2 million. Other property-related costs decreased as a percentage of total revenue to 26.7% in 2013 from 26.9% in 2012, primarily driven by ADR growth, rather than occupancy.

Management and franchise fees decreased $4.1 million. These costs decreased as a percentage of total revenue to 4.0% in 2013 from 4.6% in 2012. We converted eight hotels to Wyndham brands and management on March 1, 2013. Wyndham earns lower management fees than the prior management company. Wyndham Worldwide Corporation guaranteed a minimum annual NOI for our eight Wyndham hotels. We account for amounts recorded under the guaranty, to the extent available, as a reduction in contractual management fees. In 2013, Wyndham’s guaranty reduced Wyndham’s management fees. These arrangements with Wyndham more than offset increases in fees resulting from higher revenue.

Taxes, insurance and lease expense increased $4.0 million and increased slightly as a percentage of total revenue to 10.8% in 2013 from 10.7% in 2012. The increase primarily reflects an increase in hotel lease expense (computed as a percentage of hotel revenues in excess of base rent; as revenue increases, percentage rent increases at a faster rate than other expenses), higher property taxes (in 2012 we achieved significant reductions after appeals), and higher general liability insurance due to a less favorable claims experience compared to 2012.

Corporate expenses increased $868,000 and remained relatively flat as a percentage of total revenue compared to 2012. This increase primarily reflects additional fixed and variable stock compensation expense associated with our market-based incentive compensation awards.

Depreciation and amortization expense increased $3.2 million primarily reflecting additional depreciation after investing $101.4 million in our hotels in 2013 and $121.5 million in 2012.

Impairment loss for 2013 was $24.4 million resulting from reduced estimated hold periods for two hotels included in continuing operations. No impairment charges were included in continuing operations for 2012.

36


Conversion expenses. We classified expenses related to converting eight Holiday Inn hotels to Wyndham brands and management as conversion expense in 2013 and 2012. The expenses incurred in 2012 include $30.7 million of termination fees related to terminating the management agreements with IHG.

Other expenses increased $4.1 million compared to 2012, primarily related to severance costs for certain employees and pre-opening costs for the Knickerbocker Hotel, which were partially offset by non-recurring hurricane-related charges incurred in 2012.

Net interest expense decreased $17.8 million, primarily reflecting our lower average interest rate. Lower interest rates in 2013 were partially offset by an increase in average debt for the year, as well as less capitalized interest attributable to renovation and redevelopment projects.

Debt extinguishment. In 2013, we had no debt extinguishment charges included in continuing operations. In 2012, we recorded $72.4 million in debt extinguishment charges, which includes $17.4 million of prepayment penalties and the write-off of deferred loan costs recorded when we repaid $315.1 million of loans secured by properties in continuing operations. In addition, when we redeemed $258.0 million of our 10% senior notes, we recognized a $55.0 million debt extinguishment charge for prepayment penalties, as well as a pro rata portion of the original issue discount and deferred loan costs.

Discontinued operations include the results of operations for one hotel designated as held for sale at December 31, 2013, five hotels sold in 2013, and ten hotels sold in 2012. Discontinued operations in 2013 included a $19.4 million net gain on sale primarily related to five hotels, offset by an impairment charge of $4.4 million related to one hotel sold in 2013 and one hotel designated as held for sale at December 31, 2013. Discontinued operations in 2012 included a $54.5 million net gain on hotel sales, offset by $2.8 million in debt extinguishment charges and a $1.3 million impairment charge.

Non-GAAP Financial Measures

We refer in this Annual Report to certain “non-GAAP financial measures.” These measures, including FFO, Adjusted FFO, EBITDA, Adjusted EBITDA, Hotel EBITDA and Hotel EBITDA margin, are measures of our financial performance that are not calculated and presented in accordance with generally accepted accounting principles, or GAAP. The following tables reconcile these non-GAAP measures to FelCor’s 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 of the limitations upon such measures.

37




Reconciliation of Net Income (Loss) to FFO and Adjusted FFO
(in thousands, except per share data)
 
Year Ended December 31,
 
2014
 
2013
 


Dollars
 


Shares
 
Per
Share
Amount
 


Dollars
 


Shares
 
Per
Share
Amount
Net income (loss)
$
94,152

 
 
 
 
 
$
(65,783
)
 
 
 
 
Noncontrolling interests
(834
)
 
 
 
 
 
4,279

 
 
 
 
Preferred dividends
(38,712
)
 
 
 
 
 
(38,713
)