FelCor Reports First Quarter 2015 Earnings

FelCor Lodging Trust Incorporated (NYSE: FCH) today reported operating results for the first quarter ended March 31, 2015.

First Quarter Highlights

• Same-store RevPAR increased 13.1%; core RevPAR increased 13.5%.
• Adjusted FFO per share improved to $0.14 from $0.03 in the same quarter in 2014.
• Adjusted EBITDA increased by $8.8 million to $49.9 million; same-store Adjusted EBITDA increased by $13.6 million, or 37.7%, to $49.7 million.
• Net loss per share improved $0.18 to $0.02 compared to the same quarter in 2014.
• Opened The Knickerbocker on February 12, a luxury boutique hotel in Manhattan’s Times Square.
• Sold three non-strategic hotels for gross proceeds of $93.1 million in the quarter and four additional non-strategic hotels (two with a non-refundable deposit) are expected to be sold during the second quarter of 2015.
• On April 14, called for redemption of $170 million of 8% Series C Cumulative Preferred Stock.

“Our strong results this quarter reflect our ongoing execution to deliver on the promises we made to our shareholders. Our portfolio repositioning program continues to produce exceptional returns. Better than expected market share growth, exposure to outperforming markets and a very robust lodging industry environment allowed us to beat our expectations,” said Richard A. Smith, President and Chief Executive Officer of FelCor.

Mr. Smith added, “This outperformance, combined with the ongoing ramp-ups of the Wyndham portfolio and The Knickerbocker, will drive incremental stockholder value well into the future. We have only five remaining non-strategic hotels which we intend to sell shortly, bringing our portfolio repositioning plan to completion. We have built a high-quality and well-positioned portfolio that will continue to outperform the industry. We will also continue to seek opportunities that provide incremental stockholder value by further enhancing returns on investments, improving our portfolio quality and strengthening our balance sheet. Our recent equity offering typifies this strategy, as we will use the proceeds to redeem high-cost preferred stock and fund future high-ROI redevelopment projects.”

RevPAR for our 39 core hotels was $135.78, a 13.5% increase over the same period in 2014. The change reflects a 6.7% increase in ADR to $181.65 and a 6.4% increase in occupancy to 74.7%. Hotel EBITDA for our 39 core hotels was up 32.7% to $52.4 million and Hotel EBITDA margin was 26.9% during the quarter, a 376 basis point increase. RevPAR for our four non-strategic hotels (five non-strategic hotels excluding one hotel held for sale at March 31, 2015) grew 7.0% during the quarter.

RevPAR for the eight Wyndham hotels (which were converted from Holiday Inn on March 1, 2013) was $109.03, up 19.8% from the same period in 2014. We expect our Wyndham hotels’ revenues and EBITDA will continue to grow meaningfully during 2015, supported by the properties’ upper-upscale positioning. Wyndham Worldwide Corporation has a guaranteed minimum annual NOI for these hotels over the ten-year terms of their management agreements. We recorded $411,000 of the guaranty for the three months ended March 31, 2015.

RevPAR for our 43 same-store hotels (39 core hotels plus four non-strategic hotels) increased 13.1% to $132.86 compared to the same period in 2014. The change reflects a 6.5% increase in ADR to $176.97 and a 6.2% increase in occupancy to 75.1%. Hotel EBITDA for our 43 same-store hotels was $55.9 million, a 31.1% increase, and Hotel EBITDA margin was 27.2% during the quarter, a 362 basis point increase.

See page 14 for hotel portfolio composition and pages 15-17 and 20-21 for more detailed hotel portfolio operating data.

Same-store Adjusted EBITDA was $49.7 million, a 37.7% increase from the same period in 2014. Adjusted EBITDA (which includes Adjusted EBITDA from sold hotels) was $49.9 million, a 21.4% increase for the same period in 2014.

Adjusted FFO was $18.3 million ($0.14 per share), compared to $4.1 million ($0.03 per share) for the same period in 2014. Net loss attributable to common stockholders was $2.9 million ($0.02 per share) in 2015, compared to a net loss of $24.5 million ($0.20 per share) for the same period in 2014. Net loss in 2015 included a $16.9 million net gain on the sale of our consolidated hotels, while the net loss in 2014 included a $5.8 million net gain on the sale of consolidated hotels.

EBITDA, Adjusted EBITDA, Same-store Adjusted EBITDA, Hotel EBITDA, Hotel EBITDA margin, FFO, Adjusted FFO and Adjusted FFO per share are all non-GAAP financial measures. See our discussion of “Non-GAAP Financial Measures” beginning on page 17 for a reconciliation of each of these measures to the most comparable GAAP financial measure and for information regarding the use, limitations and importance of these non-GAAP financial measures.

Portfolio Repositioning

As part of our portfolio repositioning program, we sold 35 non-strategic hotels for total gross proceeds of $728 million (reflects our pro rata share) since December 2010. We expect to complete the repositioning program in the next few months.

During the first quarter of 2015, we sold three hotels - the 225-room Embassy Suites Hotel-Raleigh on February 10, the 536-room Westin-Dallas Park Central on February 12 and the 261-room Embassy Suites Hotel-San Antonio Airport on March 17 - for total gross proceeds of $93.1 million.

We have five non-strategic hotels remaining to be sold, of which we have agreed to sell four (the 216-room Embassy Suites Hotel-San Antonio Northwest, the 274-room Embassy Suites Hotel-Charlotte, the 260-room Embassy Suites Hotel-Austin Central and the 288-room Holiday Inn-Orlando Airport) for total gross proceeds of $104 million (we hold a non-refundable deposit for two of these hotels). We are currently marketing the remaining hotel.

Capital Expenditures

During the quarter, we invested $13.8 million in capital improvements at our hotels (excluding The Knickerbocker). During 2015, we plan to invest approximately $45 million in capital improvements and renovations, concentrated at five hotels, as part of our long-term capital plan. Please see page 13 of this release for more detail on renovations.

The Knickerbocker

The Knickerbocker Hotel (www.theknickerbocker.com), located in the heart of Manhattan’s Times Square on the corner of 42nd Street and Broadway, 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 spectacular 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 March 31, 2015, we have invested $143.2 million (excluding initial acquisition costs and capitalized interest) to redevelop the property.

Balance Sheet

At March 31, 2015, we had $1.5 billion of consolidated debt bearing a 5.41% weighted-average interest rate and a seven-year weighted-average maturity. We had $58.9 million of cash and cash equivalents and $22.2 million of restricted cash, of which $6.3 million secured our Knickerbocker construction loan.

We will use proceeds from selling the five remaining non-strategic hotels to repay debt.

On April 14, 2015, we sold 18.4 million shares of our common stock for net proceeds of approximately $199 million. On April 14, 2015, we called all of our outstanding shares of 8% Series C Cumulative Redeemable Preferred Stock and all depositary shares representing the Series C Preferred Stock for redemption. These shares will be redeemed on May 14, 2015 with proceeds from our recent equity offering, in exchange for our aggregate redemption price of $170.4 million, which includes accrued dividends. The remaining net proceeds from our equity offering, along with cash on hand and proceeds from future asset sales, will be used to fund future high-ROI redevelopment projects and other growth opportunities.

Common Dividend

In late 2014, we doubled our quarterly dividend to $0.04 per share. Future quarterly common stock dividends will be determined by our Board of Directors based on funds available for distribution, reinvestment opportunities within our portfolio and taxable income, among other things.

Outlook

We increased our RevPAR and EBITDA outlook primarily to reflect better than expected first quarter results. Our 2015 outlook reflects continuing strong lodging industry fundamentals. We expect continued robust demand growth reflecting strength in both the leisure and corporate segments. Consequently, we expect occupancy will increase, as demand growth broadly outpaces new supply. Average occupancy for the U.S. is at record levels, allowing for strong ADR growth. Our projected 2015 RevPAR growth exceeds projected 2015 overall industry RevPAR growth because of our high-quality and diverse portfolio, which is over-weighted to higher growth markets with favorable fundamentals.

Our outlook assumes we sell eight non-strategic hotels during 2015 (including three already sold in the first quarter). The low-end of our guidance assumes that we sell all five remaining non-strategic hotels in the second quarter. The high-end of our guidance assumes that we sell three of the remaining five non-strategic hotels in the second quarter and the remaining two non-strategic in the third quarter. Our outlook assumes EBITDA for the Wyndham hotels equals the amount guaranteed by Wyndham.

During 2015, we expect:

• RevPAR for same-store hotels will increase 8.5 - 9.5%;
• Adjusted EBITDA will be $240.0 million - $248.5 million;
• Adjusted FFO per share will be $0.84 - $0.90;
• Net income attributable to FelCor will be $34.8 million - $43.1 million; and
• Interest expense, including our pro rata share from joint ventures, will be approximately $85.0 million.

The following table reconciles our Adjusted EBITDA outlook (in millions):

About FelCor

FelCor, a real estate investment trust, owns a diversified portfolio of primarily upper-upscale and luxury hotels that are located in major and resort markets. FelCor partners with leading hotel companies to operate its hotels, which are flagged under globally renowned brands and premier independent hotels. Additional information can be found on the Company’s website at www.felcor.com.

We invite you to listen to our first quarter earnings Conference Call on Wednesday, April 29, 2015 at 11:00 a.m. (Central Time). The conference call will be webcast simultaneously on FelCor’s website at www.felcor.com. Interested investors and other parties who wish to access the call can go to FelCor’s website and click on the conference call microphone icon on the “Investor Relations” page. The conference call replay will also be archived on the Company’s website.

With the exception of historical information, the matters discussed in this news release include “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “continue” and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties, and the occurrence of future events, may cause actual results to differ materially from those anticipated at the time the forward-looking statements are made. Current economic circumstances or an economic slowdown and the impact on the lodging industry, operating risks associated with the hotel business, relationships with our property managers, risks associated with our level of indebtedness and our ability to meet debt covenants in our debt agreements, our ability to complete acquisitions, dispositions and debt refinancing, the availability of capital, the impact on the travel industry from security precautions, our ability to continue to qualify as a Real Estate Investment Trust for federal income tax purposes and numerous other factors may affect future results, performance and achievements. Certain of these risks and uncertainties are described in greater detail in our filings with the Securities and Exchange Commission. Although we believe our current expectations to be based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that actual results will not differ materially. We undertake no obligation to update any forward-looking statement to conform the statement to actual results or changes in our expectations.

SUPPLEMENTAL INFORMATION

INTRODUCTION

The following information is presented in order to help our investors understand FelCor’s financial position as of and for the three months ended March 31, 2015.

Non-GAAP Financial Measures

We refer in this release to certain “non-GAAP financial measures.” These measures, including FFO, Adjusted FFO, EBITDA, Adjusted EBITDA, Same-store 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 (“GAAP”). The following tables reconcile each of these non-GAAP measures to the most comparable GAAP financial measure. Immediately following the reconciliations, we include a discussion of why we believe these measures are useful supplemental measures of our performance and the limitations of such measures.

Substantially all of our non-current assets consist of real estate. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider supplemental measures of performance, which are not measures of operating performance under GAAP, to be helpful in evaluating a real estate company’s operations. These supplemental measures are not measures of operating performance under GAAP. However, we consider these non-GAAP measures to be supplemental measures of a hotel REIT’s performance and should be considered along with, but not as an alternative to, net income (loss) attributable to FelCor as a measure of our operating performance.

FFO and EBITDA

The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income or loss attributable to parent (computed in accordance with GAAP), excluding gains or losses from sales of property, plus depreciation, amortization and impairment losses. FFO for unconsolidated partnerships and joint ventures are calculated on the same basis. We compute FFO in accordance with standards established by NAREIT. This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do.

EBITDA is a commonly used measure of performance in many industries. We define EBITDA as net income or loss attributable to parent (computed in accordance with GAAP) plus interest expenses, income taxes, depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect EBITDA on the same basis.

Adjustments to FFO and EBITDA

We adjust FFO and EBITDA when evaluating our performance because management believes that the exclusion of certain additional items provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted FFO, and Adjusted EBITDA when combined with GAAP net income attributable to FelCor, EBITDA and FFO, is beneficial to an investor’s better understanding of our operating performance.

• Gains and losses related to extinguishment of debt and interest rate swaps - We exclude gains and losses related to extinguishment of debt and interest rate swaps from FFO and EBITDA because we believe that it is not indicative of ongoing operating performance of our hotel assets. This also represents an acceleration of interest expense or a reduction of interest expense, and interest expense is excluded from EBITDA.
• Cumulative effect of a change in accounting principle - Infrequently, the Financial Accounting Standards Board promulgates new accounting standards that require the consolidated statements of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments in computing Adjusted FFO and Adjusted EBITDA because they do not reflect our actual performance for that period.
• Other transaction costs - From time to time, we periodically incur costs that are not indicative of ongoing operating performance. Such costs include, but are not limited to, conversion costs, acquisition costs, pre-opening costs and severance costs. We exclude these costs from the calculation of Adjusted FFO and Adjusted EBITDA.
• Variable stock compensation - We exclude the cost associated with our variable stock compensation. This cost is subject to volatility related to the price and dividends of our common stock that does not necessarily correspond to our operating performance.

In addition, to derive Adjusted EBITDA, we exclude gains or losses on the sale of depreciable assets and impairment losses because including them in EBITDA is inconsistent with reporting the ongoing performance of our remaining assets. Additionally, the gain or loss on sale of depreciable assets and impairment losses represents either accelerated depreciation or excess depreciation in previous periods, and depreciation is excluded from EBITDA. We also exclude the amortization of our fixed stock and directors’ compensation, which is included in corporate expenses and is not separately stated on our statements of operations. Excluding amortization of our fixed stock and directors’ compensation maintains consistency with the EBITDA definition.

Hotel EBITDA and Hotel EBITDA Margin

Hotel EBITDA and Hotel EBITDA margin are commonly used measures of performance in the hotel industry and give investors a more complete understanding of the operating results over which our individual hotels and brand/managers have direct control. We believe that Hotel EBITDA and Hotel EBITDA margin are useful to investors by providing greater transparency with respect to two significant measures that we use in our financial and operational decision-making. Additionally, using these measures facilitates comparisons with other hotel REITs and hotel owners. We present Hotel EBITDA and Hotel EBITDA margin in a manner consistent with Adjusted EBITDA, however, we also eliminate all revenues and expenses from continuing operations not directly associated with hotel operations, including other income and corporate-level expenses. We eliminate these additional items because we believe property-level results provide investors with supplemental information into the ongoing operational performance of our hotels and the effectiveness of management on a property-level basis. We also eliminate consolidated percentage rent paid to unconsolidated entities, which is effectively eliminated by noncontrolling interests and equity in income from unconsolidated subsidiaries, and include the cost of unconsolidated taxes, insurance and lease expense, to reflect the entire operating costs applicable to our Consolidated Hotels. Hotel EBITDA and Hotel EBITDA margins are presented on a same-store basis.

Use and Limitations of Non-GAAP Measures

We use FFO, Adjusted FFO, EBITDA, Adjusted EBITDA, Same-store Adjusted EBITDA, Hotel EBITDA and Hotel EBITDA margin to evaluate the performance of our hotels and to facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital intensive companies. We use Hotel EBITDA and Hotel EBITDA margin in evaluating hotel-level performance and the operating efficiency of our hotel managers.

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

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