Filed Pursuant to
Rule 424(b)(4)
Registration Statement No. 333-166779
PROSPECTUS
27,500,000 Shares
FELCOR LODGING
TRUST INCORPORATED
Common Stock
FelCor Lodging Trust Incorporated, or FelCor, a Maryland
corporation, operates as a real estate investment trust, or
REIT. We are the sole general partner of, and the owner of a
greater than 99% partnership interest in, FelCor Lodging Limited
Partnership, or FelCor LP, through which we held ownership
interests in 84 hotels with approximately 24,000 rooms at
March 31, 2010. We own a diversified portfolio of high
quality,
upper-upscale
and upscale hotels located in major metropolitan and resort
markets. We focus on maximizing stockholder value and return on
invested capital by optimizing the use of our real estate and
enhancing property cash flow through renovations and
redevelopment, exploring new or enhanced revenue streams, and
executing an aggressive asset management approach. Our portfolio
management philosophy contemplates a continuous examination of
our portfolio to address market supply and demand, capital needs
of each hotel and concentration risk. As market conditions
permit, we sell hotels that no longer meet our investment
criteria and selectively acquire hotels based on strict
underwriting standards.
Our common stock is listed on the New York Stock Exchange, or
NYSE, under the symbol FCH. We are offering
27,500,000 shares of our common stock. The closing price of
our common stock on the NYSE on June 16, 2010 was $5.59 per
share.
We elected to be treated as a REIT under U.S. federal
income tax laws. To assist us in qualifying as a REIT, ownership
of our common stock by any person is generally limited to 9.9%
in value or in number of shares, whichever is more restrictive,
of any class or series of the outstanding shares of our capital
stock. In addition, our charter contains various other
restrictions on the ownership and transfer of our common stock.
See Description of Common Stock and Certain
Provisions of the Maryland General Corporation Law and Our
Charter and Bylaws.
Investing in our common stock involves risks. See Risk
Factors beginning on page 11 of this prospectus for a
discussion of those risks.
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Per share
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Total
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Public offering price
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$
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5.50000
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$
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151,250,000
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Underwriting discounts and commissions
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$
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0.22363
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$
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6,150,000
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Proceeds to us, before expenses
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$
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5.27637
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$
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145,100,000
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We have granted the underwriters a
30-day
option to purchase up to an additional 4,125,000 shares of
common stock from us on the same terms and conditions as set
forth above except that the underwriting discounts and
commissions will be $0.22 per share with respect to the
additional shares.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares of common stock to
investors on or about June 22, 2010.
Joint Bookrunners
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J.P.
Morgan
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Goldman, Sachs & Co.
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BofA Merrill Lynch
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Deutsche Bank Securities
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Senior Co-Managers
Co-Managers
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JMP
Securities
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Keefe, Bruyette & Woods
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The date of this prospectus is
June 16, 2010.
Table of
contents
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Page
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11
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49
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83
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89
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89
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89
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90
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We have not authorized anyone to provide any information or
to make any representations other than those contained in this
prospectus or in any free writing prospectuses we have prepared.
We take no responsibility for, and can provide no assurance as
to the reliability of, any other information that others may
give you. This prospectus is an offer to sell only the notes
offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
This prospectus contains registered trademarks and service marks
owned or licensed by companies other than us. In addition, this
prospectus contains references to Hotel EBITDA, which 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
Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, which is
incorporated by reference herein.
Prospectus
summary
This summary highlights some of the information contained
elsewhere in this prospectus or documents incorporated herein by
reference. It is not complete and does not contain all of the
information that you should consider before investing in our
common stock. You should carefully read this entire prospectus,
including the information set forth under Risk
Factors and Forward Looking Statements, our
financial statements and the related notes and the other
documents incorporated by reference, before you decide to invest
in our common stock. Unless otherwise indicated, the information
in this prospectus assumes no exercise by the underwriters of
their option to purchase up to an additional
4,125,000 shares of our common stock.
Unless otherwise indicated or the context otherwise requires,
the words we, our, ours,
us, and the Company refer to FelCor and
its subsidiaries, collectively.
General
FelCor is a Maryland corporation operating as a REIT. We are the
sole general partner of, and the owner of a greater than 99%
partnership interest in, FelCor LP through which we held
ownership interests in 84 hotels with approximately 24,000 rooms
at March 31, 2010.
Of the 84 hotels in which we had an ownership interest at
March 31, 2010, we owned a 100% interest in 64 hotels, a
90% or greater interest in entities owning four hotels, an 81%
interest in an entity owning one hotel, a 60% interest in an
entity owning one hotel and a 50% interest in entities owning 14
hotels. We consolidate our real estate interests in the 70
hotels in which we held greater than 50% ownership interests and
we record the real estate interests of the 14 hotels in which we
held 50% ownership interests using the equity method.
At March 31, 2010, 83 of the 84 hotels in which we had
ownership interest were leased to operating lessees, and one
50%-owned hotel was operated without a lease. We held greater
than 50% ownership interests and had direct or indirect
controlling interests in the lessees of the hotels that were
leased to operating lessees. Because we owned controlling
interests in these lessees (including lessees of 13 of the 14
hotels in which we owned 50% of the real estate interests), we
consolidated our lessee interests in these hotels (we refer to
these 83 hotels as our Consolidated Hotels) and reflect 100% of
the hotels revenues and expenses, including lease
expenses, on our statement of operations. Of our Consolidated
Hotels, we owned 50% of the real estate interests in each of 13
hotels (we accounted for the ownership in our real estate
interests of these hotels by the equity method) and more than
50% of the real estate interests in each of the remaining 70
hotels (we consolidate our real estate interest in these hotels).
At March 31, 2010, our Consolidated Hotels were located in
the United States (81 hotels in 23 states) and Canada (two
hotels in Toronto, Ontario), with concentrations in major
metropolitan and resort areas. Our hotel portfolio consists
primarily of
upper-upscale
and upscale hotels and resorts, which are flagged under global
brands such as Embassy Suites Hotels, Doubletree, Hilton,
Marriott, Renaissance, Sheraton, Westin and Holiday Inn.
Our business is conducted in one reportable segment:
hospitality. During 2009, we derived 97% of our revenues from
hotels located within the United States, with the balance
derived from our Canadian hotels.
1
We own a diversified portfolio of high quality,
upper-upscale
and upscale hotels located in major metropolitan and resort
markets. We focus on maximizing stockholder value and return on
invested capital by optimizing the use of our real estate and
enhancing property cash flow through renovations and
redevelopment, exploring new or enhanced revenue streams, and
executing an aggressive asset management approach. Our portfolio
management philosophy contemplates a continuous examination of
our portfolio to address market supply and demand, capital needs
of each hotel and concentration risk. As market conditions
permit, we sell hotels that no longer meet our investment
criteria and selectively acquire hotels based on strict
underwriting standards.
At March 31, 2010, we had an aggregate of
65,722,628 shares and units outstanding, consisting of
65,427,668 shares of FelCor common stock and
294,960 units of limited partnership interest of FelCor LP
not owned by FelCor.
The
properties
We own a diversified portfolio of globally branded hotels
managed and branded by Hilton Hotels Corporation, Starwood
Hotels & Resorts Worldwide, Inc., Marriott
International, Inc., and InterContinental Hotels Group PLC. We
consider our hotels to be 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. The hotels generally feature comfortable, modern
guest rooms with a full range of amenities, meeting and
convention facilities and full-service restaurant and catering
facilities.
The following table shows the distribution of hotel brands among
our 83 Consolidated Hotels at March 31, 2010:
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Number of properties
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Hilton Brands:
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Embassy Suites Hotels
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47
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Doubletree and Doubletree Guest Suites
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7
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Hilton and Hilton Suites
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2
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InterContinental Brands:
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Holiday Inn
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15
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Starwood Brands:
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Sheraton and Sheraton Suites
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8
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Westin
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1
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Marriott Brands:
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Renaissance
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2
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Marriott
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1
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Total Hotels
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83
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We are committed to maintaining the high standards of our
hotels. Our hotels have an average of 287 rooms, with seven
hotels having 400 or more rooms. In 2009, we completed the final
phase of a multi-year, portfolio-wide renovation program costing
more than $450 million. The program was designed to
upgrade, modernize and renovate all of our hotels to enhance or
maintain their competitive position. For 2009, our pro rata
share of capital expenditures spent
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on consolidated and unconsolidated hotels, including renovations
and redevelopment projects, was $79.3 million.
Business
strategy
Our long-term strategic plan is to own a diversified portfolio
of high quality,
upper-upscale
hotels located in major urban and resort markets. We focus on
maximizing stockholder value and return on invested capital by
optimizing the use of our real estate and enhancing property
cash flow through renovations and redevelopment, exploring new
or enhanced revenue streams, and executing an aggressive asset
management approach. Our portfolio management philosophy
contemplates continual examination of our portfolio to address
market supply and demand, capital needs of each hotel and
concentration risk. As market conditions permit, we sell hotels
that no longer meet our investment criteria and selectively
acquire hotels based on strict underwriting standards. In order
to achieve our objectives, we are focused on the following areas:
Asset Management.
We seek to improve the competitive
position of our hotels through aggressive asset management. We
benefit from our brand/manager alliances with Hilton Hotels
Corporation, Starwood Hotels & Resorts Worldwide,
Inc., Marriott International, Inc., and InterContinental Hotels
Group PLC. These relationships enable us to work effectively
with our managers to maximize Hotel EBITDA margins and operating
cash flow from our hotels. While REIT requirements prohibit us
from managing our hotels directly, we employ an intensive
approach to asset management. We press our brand/managers to
implement best practices in expense and revenue management at
our hotels, and we strive to influence brand strategy on
marketing and revenue enhancement programs. We work closely with
our brand/managers to monitor and review hotel operations. As
part of our focus on controlling hotel operating margins, we
work closely with our operators to align the cost structure of
our hotels with current business levels. During the current
downturn, we worked with our operators to lower hotel expenses
by reducing headcount and improving productivity and energy
efficiency, while maintaining guest satisfaction. At the same
time, we are very focused on revenue management and enhancement.
Our asset managers have exceptionally thorough knowledge of the
markets where our hotels operate, as well as overall demand
dynamics, which enables us to work closely with our
brand/managers to optimize revenue, customer mix and profit
generation. Our asset management approach also entails looking
for value-added enhancements at our hotels, such as maximizing
use of public areas, implementing new restaurant concepts,
changing management of food and beverage operations and seeking
new revenue sources.
Renovations.
In 2009, we completed the final phase
of a multi-year, portfolio-wide renovation program designed to
enhance the competitive positioning and value of our hotels. We
invested more than $450 million in our hotels and
successfully generated expected returns through growth in market
share. Our overall portfolio increased market share by an
average of 3.0% during 2008, while the 70 hotels that completed
renovations in 2007 and 2008 grew their aggregate market share
by more than 5%, from 114% to 120%. In 2009, our hotel portfolio
increased market share by an additional 1.4% compared to prior
year. Our ongoing capital expenditures will generally be
consistent with ordinary course improvements and maintenance of
our hotels. Given the substantial renovations and the current
industry conditions, we are able to limit near-term capital
expenditures without harming the value or quality of our hotels.
Redevelopment.
In June 2009, we completed the final
phase of the comprehensive redevelopment of the
San Francisco Marriott-Union Square, which is situated in
one of the premier hotel
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markets in the United States. The hotel was rebranded as a
Marriott hotel in April 2009. Revenue per available room, or
RevPAR, during the second half of 2009 (under the Marriott flag)
increased 64% at this hotel, compared to 2008, and its market
share increased by 105%. Its market share index during the
second half of 2009 was 106% compared to 80% for 2007 (before
renovation).
During 2008, we completed a new 35,000 square foot
convention center adjacent to our Hilton Myrtle Beach Resort,
added meeting space at the Doubletree Guest Suites in Dana
Point, California and added a spa and food and beverage areas at
the Embassy Suites Hotel Deerfield Beach Resort & Spa.
These new assets enhanced the hotels competitiveness in a
difficult environment, and contributed to their 5% increase in
market share in 2009.
We are progressing with the approval and entitlement process for
additional redevelopment projects, in the interest of building
long-term value. However, we are committed to a disciplined
approach toward capital allocation and will commit capital to
new projects only when prudent, especially in the light of
lingering effects of the global recession.
Balance Sheet Strategy.
We are committed to
strengthening our balance sheet to provide the necessary
capacity to withstand lodging cycles and also provide us with
capacity to take advantage of opportunities that may arise in
the future. We strive to maintain a flexible balance sheet,
utilizing a mix of common and preferred equity, public notes,
and utilizing floating rates on a portion of our debt as a hedge
against economic cycles. Although our leverage increased as a
result of the economic downturn, we expect to reduce our
leverage when operating performance improves, with future asset
sales and other opportunities. To preserve our liquidity, we
have limited 2010 capital expenditures, postponed further
redevelopment projects, suspended dividend payments and reduced
expenses at our hotels and corporate office. We have also
increased our cash balance by over $200 million in the past
year to ensure we have sufficient liquidity to cover any cash
flow needs during the current period of depressed RevPAR. We
continue to look for additional opportunities to reduce
financing costs, increase our flexibility and ensure adequate
liquidity on an economically sound basis.
We successfully refinanced all of our debt that matured in 2009,
refinanced all but two of our 2010 debt maturities on terms that
are significantly more favorable than the refinanced debt, and
refinanced nearly all of our corporate debt that was scheduled
to mature in 2011.
Portfolio Review.
In 2006, we implemented an initial
phase of asset sales, which totaled 45 hotels, and we received
total gross proceeds of $720 million. We regularly review
and evaluate our hotel portfolio and will identify additional
hotels to sell based upon strategic considerations, such as
future supply growth, changes in demand dynamics, concentration
risk, strategic fit, return on future capital needs and return
on invested capital. We expect to execute a second phase of
asset sales of 30 or more hotels when hotel cash flows recover
and the hotel transaction market improves, in order to maximize
proceeds. Proceeds from asset sales will be used to improve
stockholder value, including reducing debt. None of our hotels
are currently being marketed for sale.
External Growth.
While we are focused on preserving
liquidity and reducing leverage in the current environment, we
also are considering acquisitions that will improve the overall
quality of our portfolio and further diversify our portfolio by
market, customer type and brand. We may look for properties
where we can utilize our competitive strengths, such as ones
that have redevelopment opportunity to further enhance our
return on investment. We take a highly disciplined approach to
analyzing any potential acquisition, which must meet strict
criteria, including minimum targeted rates of return. We expect
future acquisitions will be restricted to
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high quality hotels in major urban and resort markets with high
barriers to entry and high growth potential. Consistent with our
acquisition strategy, we are continuously reviewing
opportunities to make hotel acquisitions in specific major urban
markets, and we intend to use a portion of the net proceeds of
this offering to pursue such acquisitions. Our ability to
complete acquisitions is subject to a variety of factors beyond
our control, including economic conditions in general,
availability of hotels meeting our standards and our ability to
obtain financing to fund such acquisitions. There can be no
assurance that we will be able to make acquisitions on terms
favorable to us or at all.
Recent
developments
In May 2010, we obtained a new $212 million loan, secured
by nine hotels, that matures in 2015. The new loan bears
interest at LIBOR (subject to a 3.0% floor) plus 5.1%. The
proceeds were used to repay $210 million in loans that were
secured by 11 hotels and were scheduled to mature in May 2010.
With this financing, we resolved all but two of our remaining
2010 debt maturities on terms that are significantly more
favorable than the refinanced debt, and we were able to
unencumber two previously mortgaged hotels. The two remaining
loans (totaling $32 million) were scheduled to mature in
May 2010. The cash flows for the hotels that secure those loans
do not cover debt service, and we stopped funding the shortfalls
in December 2009. We were unable to negotiate an acceptable debt
modification or reduction that would be in the best interests of
our stockholders with regard to these loans. Therefore, these
two hotels will be transferred to the lenders in full
satisfaction of the debt.
In June 2010, we agreed to repay approximately $177 million
principal amount of secured debt for $130 million (plus accrued
interest), a discount of more than $47 million, or roughly 27%,
to the principal balance. The loans bear interest at LIBOR plus
155 basis points and would otherwise mature in May 2012. The
agreement is subject to customary conditions. The discounted
repayment of this debt substantially reduces our leverage, is
accretive to our stockholders and enhances long-term stockholder
value.
Strategic
relationships
We benefit from our brand/manager alliances with Hilton Hotels
Corporation (Embassy Suites Hotels, Doubletree and Hilton),
Starwood Hotels & Resorts Worldwide, Inc. (Sheraton
and Westin), Marriott International, Inc. (Renaissance and
Marriott) and InterContinental Hotels Group PLC (Holiday Inn).
These relationships enable us to work effectively with our
managers to maximize Hotel EBITDA margins and operating cash
flow from our hotels.
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Hilton Hotels Corporation is recognized internationally as a
preeminent hospitality company. Hilton owns, manages or
franchises more than 3,500 hotels in 81 countries. Its portfolio
includes many of the worlds best-known and most highly
regarded hotel brands, including Waldorf Astoria, Conrad,
Hilton, Doubletree, Embassy Suites Hotels, Hilton Garden Inn,
Hampton Inn, Homewood Suites by Hilton, Home2 Suites by Hilton,
and Hilton Grand Vacations. Subsidiaries of Hilton managed 54 of
our Consolidated Hotels at March 31, 2010. Hilton is a 50%
partner in joint ventures with us that own 11 hotels and manage
residential condominiums. Hilton also holds 10% equity interests
in certain of our consolidated subsidiaries that own three
hotels.
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Starwood Hotels & Resorts Worldwide, Inc. is one of
the leading hotel and leisure companies in the world with 960
properties in 100 countries. With internationally renowned
brands,
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Starwood is a fully integrated owner, operator and franchisor of
hotels and resorts including: St. Regis, The Luxury Collection,
W, Westin, Le Méridien, Sheraton, Four Points by Sheraton,
Element and aloft. Subsidiaries of Starwood managed nine of our
Consolidated Hotels at March 31, 2010. Starwood is a 40%
joint venture partner with us in the ownership of one hotel and
a 50% joint venture partner with us in the ownership of one
hotel.
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Marriott International, Inc. is a leading lodging company with
more than 3,000 lodging properties located in the United
States and 67 other countries and territories. Its portfolio
includes 17 lodging and vacation resort ownership brands
including Ritz Carlton, Marriott Hotels & Resorts,
Renaissance Hotels & Resorts, JW Marriott
Hotels & Resorts, Courtyard by Marriott, Fairfield Inn
by Marriott and Residence Inn by Marriott. Subsidiaries of
Marriott managed three of our Consolidated Hotels at
March 31, 2010.
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InterContinental Hotels Group PLC of the United Kingdom is one
of the worlds largest hotel companies by number of rooms.
IHG owns, manages, leases or franchises, through various
subsidiaries, more than 4,400 hotels and over 640,000 guest
rooms in nearly 100 countries. IHG owns a portfolio of well
recognized and respected hotel brands including InterContinental
Hotels & Resorts, Crowne Plaza Hotels &
Resorts, Holiday Inn, Holiday Inn Express, Hotel Indigo,
Staybridge Suites and Candlewood Suites, and also manages the
worlds largest hotel loyalty program, Priority Club
Rewards. At March 31, 2010, subsidiaries of IHG managed 15
of our Consolidated Hotels.
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Tax
status
We elected to be treated as a REIT under U.S. federal
income tax laws. As a REIT, we generally are not subject to
federal income taxation at the corporate level on taxable income
that is distributed to our stockholders. We may, however, be
subject to certain state and local taxes on our income and
property and to federal income and excise taxes on our
undistributed taxable income. Our taxable REIT subsidiaries, or
TRSs, formed to lease our hotels are subject to federal, state
and local 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 (determined without
regard to the deductions for dividends paid and excluding net
capital gain). If we fail to qualify as a REIT in any taxable
year (including any prior taxable year for which the statute of
limitations remains open), we will be subject to federal income
taxes at regular corporate rates (including any applicable
alternative minimum tax) and may not qualify as a REIT for at
least four years after the failure is remedied. In connection
with our election to be treated as a REIT, our charter imposes
restrictions on the ownership and transfer of shares of our
common stock. FelCor LP expects to make distributions on its
units sufficient to enable us to meet our distribution
obligations as a REIT. At March 31, 2010, we had a federal
income tax loss carryforward of $106.6 million, which we
expect to use to offset future distribution requirements and our
TRSs had a federal income tax loss carryforward of
$337.6 million.
Restrictions on
ownership of our common stock
To assist us in complying with the limitations on the
concentration of ownership of REIT shares imposed by the
Internal Revenue Code of 1986, as amended, or Code, our charter
generally prohibits any stockholder from beneficially or
constructively (applying certain attribution rules under the
Code) owning more than 9.9% in value or in number of shares,
whichever is more restrictive, of any class or series of our
capital stock. Our board of directors may, in its sole
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discretion, waive the 9.9% ownership limit with respect to a
particular stockholder if it is presented with evidence
satisfactory to it that such ownership will not then or in the
future jeopardize our qualification as a REIT.
Competition
The lodging industry is highly competitive. Each of our hotels
is located in a developed area that includes other hotel
properties and competes for guests primarily with other full
service and limited service hotels in its immediate vicinity and
secondarily with other hotel properties in its geographic
market. We believe that price, location, brand recognition, the
quality of the hotel, and the services provided are the
principal competitive factors affecting our hotels.
Our corporate
information
Our principal executive offices are located at
545 E. John Carpenter Freeway, Suite 1300,
Irving, TX
75062-3933,
and our telephone number is
(972) 444-4900.
The website for the Company is www.felcor.com. The contents of
our website are not a part of this prospectus. We have included
our website address only as an inactive textual reference and do
not intend it to be an active link to our website. Information
contained on our website is not incorporated into this
prospectus and you should not consider information contained on
our website to be part of this prospectus.
7
Summary of the
offering
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Common stock offered by us
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27,500,000 shares (plus up to an additional
4,125,000 shares of our common stock that we may issue and
sell upon exercise of the underwriters option to purchase
additional shares).
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Common stock outstanding immediately after the
offering
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92,926,609 shares, based on 65,426,609 shares of
common stock outstanding on June 16, 2010.
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Dividend policy
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U.S. federal income tax law requires that a REIT distribute at
least 90% of its REIT taxable income for such tax year,
determined without regard to the deduction for dividends paid
and excluding net capital gain. For more information, please see
Certain United States Federal Income Tax
Considerations.
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We suspended payment of our common dividend in December 2008 and
our preferred dividend in March 2009 in light of the deepening
recession and dysfunctional capital markets, and the attendant
impact on our industry and us. In addition, and except to the
extent required to satisfy minimum REIT distribution
requirements, we are currently restricted by covenants
applicable to our senior secured notes from making distributions
on any capital stock. We cannot assure that we will make any
dividends or other cash distributions to our stockholders in the
future. Any future dividends that we make will be at the
discretion of our board of directors and will depend upon, among
other things, our actual results of operations. These results
and our ability to pay dividends will be affected by various
factors, including net interest expense, other income from our
hotel portfolio, operating expenses and other expenditures. For
more information, please see Dividend Policy.
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Trading market and symbol
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Our common stock is quoted on the NYSE under the symbol
FCH.
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Ownership and transfer restrictions
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In order to assist us in satisfying the limitations on the
concentration of ownership of interests imposed by the Code on
REITs, our charter generally prohibits, among other things, any
stockholder from beneficially or constructively owning more that
9.9% in value or in number of shares, whichever is more
restrictive, of any class or series of the outstanding shares of
our capital stock.
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Risk factors
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Investing in our common stock involves a high degree of risk.
You should carefully read and consider the information set forth
under the caption Risk Factors beginning on
page 11 and all other information in this prospectus before
investing in our common stock.
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Other information about this prospectus
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The number of shares of common stock outstanding after the
offering is based upon the number of shares outstanding as of
March 31, 2010 and, except as otherwise noted, assumes no
exercise of the
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underwriters option to purchase up to an additional
4,125,000 shares of our common stock, 40,000 shares
reserved for issuance upon exercise of stock options issued and
outstanding as of March 31, 2010 under our existing stock
option and restricted stock plans, or 303,993 shares
reserved for future grants under our existing stock option and
restricted stock plans as of March, 31 2010.
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Use of proceeds
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We estimate that our net proceeds from this offering, after
deducting the underwriting discount and other estimated offering
expenses payable by us, will be approximately $145 million
(approximately $167 million if the underwriters exercise
their option to purchase additional shares in full). We intend
to use a substantial portion of the net proceeds as described
below.
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We intend to use the net proceeds of this offering,
together with cash on hand, to further strengthen our balance
sheet, including repaying or repurchasing certain of our
mortgage debt at discounts. For example, we have agreed to repay
approximately $177 million principal amount of secured debt
for $130 million (plus accrued interest), a discount of
more than $47 million, or roughly 27%. The loans bear
interest at LIBOR plus 155 basis points and would otherwise
mature in May 2012. This substantially reduces our leverage, is
accretive to our stockholders and enhances long-term stockholder
value.
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We also intend to use the net proceeds of this
offering, together with cash on hand, to pursue acquisition
opportunities that are accretive to long-term stockholder value
and exceed our cost of capital on a risk-adjusted basis. We will
actively seek upper-upscale properties in our target markets
(
i.e.
, central Boston, New York City (Manhattan) and
Washington, DCs central business districts) that further
improve our portfolio quality, diversification and concentration
risk, have RevPAR growth rates that exceed our portfolio average
and high barriers to entry, and can be acquired at prices
significantly below replacement cost, which would allow for
substantial appreciation potential. Our pipeline of suitable
hotel acquisition opportunities continues to improve, and we are
reviewing and/or engaged in negotiations concerning various
potential transactions in our target markets that meet our
underwriting and strategic criteria. For example, we have made
an offer to purchase a hotel in one of our target markets, and
negotiations are ongoing.
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We intend to use any remaining net proceeds for
other general corporate purposes.
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Given market dynamics, it is critical that we have the ability
to act quickly when opportunities arise that fit our strategic
objectives. Under ordinary circumstances, we would seek to raise
additional equity capital through the public equity markets by
utilizing an effective shelf registration statement
on
Form S-3
that has been reviewed and declared effective in advance by the
SEC. Solely because our preferred stock dividends are in
arrears, we are ineligible to offer shares registered on
Form S-3.
Instead, we must execute public offerings using a registration
statement on
Form S-11,
which does not
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provide the same market timing flexibility as an effective
shelf registration statement would provide. Pending
application of the net proceeds from this offering as described
above, we may invest such proceeds in short-term, interest
bearing investments. See Risk FactorsRisks Related
to The OfferingIf there are delays in applying the
proceeds of this offering, then receipts from investments and
our investment returns may take longer to attain.
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We have agreed to pay all costs and expenses incurred in
connection with the registration under the Securities Act of the
shares of our common stock being registered hereby, including,
without limitation, all registration and filing fees, printing
expenses and fees and disbursements of our counsel and our
accountants.
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10
Risk
factors
Investing in our common stock involves a high degree of risk. In
connection with the forward looking statements that appear in
this prospectus, you should carefully review and consider the
risks described below, as well as other information contained in
or incorporated by reference into this prospectus, before making
a decision to purchase our common stock in this offering. If any
of the risks described below should occur, our business,
prospects, financial condition, cash flows, liquidity, results
of operations, funds from operations, and our ability to make
cash distributions to our stockholders could be materially and
adversely affected. In that case, the trading price of our
common stock could decline and you may lose some or all of your
investment in our common stock.
The risks and uncertainties described below are not the only
risks that may have a material adverse effect on us. Additional
risks and uncertainties that we currently are unaware of, or
that we currently deem to be immaterial, also may become
important factors that adversely impact us and your investment
in our common stock. Further, the extent any of the information
contained in this prospectus constitutes forward-looking
information, the risk factors set forth below and incorporated
by reference into this prospectus are cautionary statements
identifying important factors that could cause our actual
results for various financial reporting periods to differ
materially from those expressed in any forward-looking
statements made by or on behalf of us.
Risks related to
the offering
We have
suspended paying dividends on our common and preferred stock and
all accrued and unpaid dividends on our preferred stock must be
paid before we can resume paying dividends on our common
stock.
Recognizing the need to maintain financial flexibility in light
of the current state of the capital markets, we suspended
payment of our common dividend in December 2008 and our
preferred dividend in March 2009. Unpaid preferred dividends
continue to accrue, and accrued and current preferred dividends
must be paid in full prior to payment of any common dividends.
At March 31, 2010, the aggregate amount of accrued and
unpaid dividends on our preferred stock was $47.3 million.
Dividends on our outstanding preferred stock continue to accrue
by approximately $9.7 million quarterly. If preferred
dividends accrue and remain unpaid for six or more quarters, our
preferred stockholders may seek to elect up to two directors (in
addition to the 10 directors elected by our common
stockholders). See Description of Preferred
StockDescription of Series A Preferred
StockVoting Rights and Description of
Preferred StockDescription of Series C Preferred
Stock and Depository SharesVoting Rights.
The decision to declare and pay dividends on our common and
preferred stock in the future, as well as the timing, amount,
and composition of any such future dividends, is at the sole
discretion of our board of directors and will depend on our
earnings, funds from operations, liquidity, financial condition,
capital requirements, contractual prohibitions, or other
limitations under our indebtedness and preferred shares, the
annual distribution requirements under the REIT provisions of
the Code, state law, and such other factors as our board of
directors deems relevant. Any change in our dividend policy
could have a material effect on the market price of our common
and preferred stock.
11
We are
currently prohibited from paying dividends on our common and
preferred stock.
Except to the extent required to satisfy minimum REIT
distribution requirements, we are restricted by the indenture
governing our senior secured notes from making any cash
distributions on our common and preferred stock. We are
currently below the minimum thresholds set forth in the
indenture for which discretionary cash distributions are
permitted.
Broad market
fluctuations could negatively impact the market price of our
common stock.
The capital markets continue to experience extreme price and
volume fluctuations that have affected the market price of the
shares of many companies in industries similar or related to
ours and that have been unrelated to these companies
operating performances. These broad market fluctuations could
reduce the market price of our common stock. Furthermore, our
operating results and prospects may be below the expectations of
public market analysts and investors or may be lower than those
of companies with comparable market capitalizations, which could
lead to a material decline in the market price of our common
stock.
You may
experience significant dilution as a result of additional
issuances of our securities, which could harm our stock
price.
Investors in this offering do not have preemptive rights to any
shares issued by us in the future. Therefore, investors
purchasing shares in this offering may experience dilution of
their equity investment if we:
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sell additional common shares in the future, whether publicly or
privately;
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sell securities that are convertible into common shares;
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issue restricted shares to our officers or directors; or
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issue common stock upon the exercise of options.
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After giving effect to the issuance of common stock in this
offering, the receipt of the expected net proceeds and the use
of those proceeds, we expect that this offering will have a
dilutive effect on our earnings per share and funds from
operations per share. The actual amount of dilution from this
offering, or from any future offering of common or preferred
stock, will be based on numerous factors and cannot be
determined at this time. Additionally, the market price of our
common stock could decline as a result of sales of a large
number of shares of our common stock in the market pursuant to
this offering, or otherwise, or as a result of the perception or
expectation that such sales could occur.
If there are
delays in applying the proceeds of this offering, then receipts
from investments and our investment returns may take longer to
attain.
We may delay applying the proceeds from this offering if we are
unable to identify or consummate the opportunities described
under Use of Proceeds on acceptable terms that are
accretive to our stockholders and are consistent with our
long-term objectives to enhance stockholder value. If we are not
able to consummate the transactions described under Use of
Proceeds, our management and board of directors will have
considerable discretion in the specific application of the net
proceeds and may apply the net proceeds in ways other than those
we currently expect, including in ways that may not increase our
revenues or our market value. Pending application of the net
proceeds from this offering as described above, we may invest
such proceeds in short-term, interest bearing investments.
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Future
offerings of debt securities, which would be senior to our
common stock upon liquidation, or equity securities, which would
dilute our existing stockholders and may be senior to our common
stock for the purposes of distributions, may harm the value of
our common stock.
In the future, we may attempt to increase our capital resources
by making additional offerings of debt or equity securities,
including commercial paper, medium-term notes, senior or
subordinated notes and classes of preferred stock. Upon our
liquidation, holders of our debt securities and shares of
preferred stock, lenders with respect to other borrowings and
all of our creditors will receive a distribution of our
available assets prior to the holders of our common stock.
Additional equity offerings by us may dilute the holdings of our
existing stockholders or reduce the value of our common stock,
or both. Our preferred stock, if issued, would have a preference
on distributions that could limit our ability to make
distributions to the holders of our common stock. Because our
decision to issue securities in any future offering will depend
on market conditions and other factors beyond our control, we
cannot predict or estimate the amount, timing or nature of our
future offerings. Thus, our stockholders bear the risk of our
future offerings reducing the value of our common stock and
diluting their stock holdings in us.
Risks related to
our business
We depend on
external sources of capital and recent disruptions in the
financial markets may affect our ability to obtain financing or
obtain financing on reasonable and acceptable
terms.
As a REIT our ability to reduce our debt and 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 (determined without regard to the deduction
for dividends paid and 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
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. The financial markets,
and specifically the credit markets, experienced significant
contraction and dysfunction in the recent recession. When the
financial markets are constrainedin particular, when the
availability of credit is severely diminishedour ability
to obtain financing on satisfactory terms or to extend maturing
loans has been substantially limited. Under such conditions,
when financing is available, it has been more expensive and
likely includes other terms, such as lower
loan-to-value
ratios and limitations or prohibitions of subordinated secured
debt, minimum debt service coverage, etc., that are more
restrictive. In addition, as loan default rates increase (as
they have recently), lenders impose more restrictive
underwriting criteria and tighten appraisal standards, further
limiting credit availability. Although we have successfully
resolved our 2010 maturities, we have various other loans that
will mature in 2011, and in order to refinance those loans,
adequate credit on reasonable terms must be available. With
regard to refinancing our maturing debt, our alternatives are
limited compared to refinancing in prior years. If credit is
only available at unacceptable cost or otherwise requires the
application of resources that unacceptably constrains our
liquidity, we may be unable to refinance maturing loans on
acceptable or reasonable terms. There can be no assurance that
the financial markets and credit availability will enable us to
refinance or extend maturing debt on acceptable terms. If we are
unable to refinance existing debt on acceptable terms or obtain
appropriate extensions of maturing debt, the relevant loans
could default, in which case the lenders may foreclose on the
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hotels mortgaged as security for the repayment of those loans.
Although our secured debt is generally non-recourse to us, loan
defaults under certain circumstances could adversely affect our
credit ratings and our ability to borrow funds in the future. If
our ability to borrow funds in the future is impaired, our
corresponding ability to reinvest in our hotels and pursue
growth through acquisitions, while maintaining targeted overall
leverage (which we believe helps us achieve desired overall
returns for our stockholders), could be constrained.
The global
recession has had an adverse effect on our revenue per available
room, or RevPAR, performance and results of operations. The
effects of a continued or deepening recession on our financial
condition could be material.
The overall weakness in the U.S. economy, particularly the
turmoil in the credit markets, weakness in the housing market,
and volatile energy and commodity costs, has resulted in
considerable negative pressure on both consumer and business
spending (this includes increased emphasis in cost containment
with focus on travel and entertainment limitations). While
demand has begun to improve, we anticipate that lodging demand
will not improve materially until economic trends show
consistent growth, particularly the weakened overall economy and
illiquid credit markets. For 2010, we believe RevPAR will begin
to grow, but at a moderate pace. Further, as hotels adjust to
new demand levels by shifting their occupancy mix, we expect to
see average room rates and ancillary spending decline in most
markets. Decreased occupancy and declining room rates have an
adverse effect on RevPAR, Hotel EBITDA margins and results of
operations.
Our RevPAR declined in 2009, reflecting decreases in both
average daily rate, or ADR, and occupancy. Hotel occupancy
trends have reversed and demand has begun to improve in 2010,
after reaching historic lows in 2009. Despite improving
occupancy, we expect continued pressure in ADR until demand
increases significantly. While we have experienced an increase
in demand in recent periods, consumers and business travelers
continue to take advantage of historically high number of
available rooms and a near-term shift in pricing power, as well
as correspondingly lower ADR. The combination of increased
occupancy and lower ADR results in additional pressure on hotel
margins because our hotels have more guests, who are paying
less. This has the potential to negatively affect our results of
operations unless we are able to reduce costs to mitigate that
effect. Because we are a REIT and do not directly manage our
hotels, we rely on third-party managers to drive both revenue
and contain costs, and while we make every effort to work with
our managers to maximize cost containment and improve revenue,
there can be no assurance that these efforts will be successful
or otherwise mitigate declining RevPAR, Hotel EBITDA margins or
results of operations.
In response to the economic decline, we suspended payment of all
dividends. Significant decreases in RevPAR or Hotel EBITDA
margins, or material deterioration in the capital markets in the
future, could reduce our ability to begin paying dividends again
or to service our debt.
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 to: (i) incur additional
indebtedness except to refinance maturing debt with replacement
debt, as defined under our indentures; (ii) pay dividends
in excess of the minimum distributions required to meet the REIT
qualification test; (iii) repurchase capital stock; or
(iv) merge. We are currently restricted from paying
dividends
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(except to the extent necessary to satisfy the REIT
qualification requirement that we distribute currently at least
90% of our taxable income) and repurchasing capital stock. 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 risks, uncertainties and events beyond our control could
affect our ability to comply with these covenants and financial
tests. 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 would permit
lenders to accelerate the maturity of the 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 might significantly impair our ability to obtain
other financing. We cannot assure you that we will be granted
waivers or amendments to these agreements 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 is non-recourse to
us. However, a breach of any of the recourse carve-out
provisions, including fraud, misapplication of funds and other
customary recourse carve-out provisions, could cause this debt
to become fully recourse to us.
We have
substantial financial leverage.
At March 31, 2010, our consolidated debt of
$1.8 billion represented approximately 72% of our total
enterprise value. Declines in revenues and cash flow may
adversely affect our public debt ratings, and may limit our
access to additional debt. Our senior secured notes, as
currently rated by Moodys Investors Service and
Standard & Poors, are considered below
investment grade. Historically, we have incurred debt for
acquisitions and to fund our renovation, redevelopment and
rebranding programs. Limitations upon our access to additional
debt could adversely affect our ability to fund these programs
or acquire hotels in the future.
Our financial leverage could have important consequences. For
example, it could:
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limit our ability to obtain additional financing for working
capital, renovation, redevelopment and rebranding plans,
acquisitions, debt service requirements and other purposes;
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limit our ability to refinance existing debt;
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require us to agree to additional restrictions and limitations
on our business operations and capital structure to obtain
financing;
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increase our vulnerability to adverse economic and industry
conditions, and to interest rate fluctuations;
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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;
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limit our flexibility to make, or react to, changes in our
business and our industry; and
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place us at a competitive disadvantage, compared to our
competitors that have less debt.
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Most of our hotel mortgage debt is recourse solely to the
specific assets securing the debt.
Our debt
agreements will allow us to incur additional debt that, if
incurred, could exacerbate the other risks described
herein.
We may be able to incur substantial debt in the future. Although
the instruments governing our indebtedness 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 new debt is added to our
current debt levels, the risks described above would intensify.
We have
substantial variable rate debt.
At March 31, 2010, approximately 35% of our consolidated
outstanding debt had variable interest rates. Significant
increases in variable interest rates could have a material
adverse impact on our liquidity, earnings, and financial
condition.
We are subject
to the risks of real estate ownership, which could increase our
costs of operations.
General Risks.
Our investment in hotels is subject
to the numerous risks generally associated with owning real
estate, including among others:
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adverse changes in general or local economic or real estate
market conditions;
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the ability to refinance debt on favorable terms at maturity;
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changes in zoning laws;
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increases in lodging supply or competition;
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decreases in demand;
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changes in traffic patterns and neighborhood characteristics;
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increases in assessed property taxes from changes in valuation
or real estate tax rates;
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increases in the cost of our property insurance;
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the potential for uninsured or underinsured property losses;
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costly governmental regulations and fiscal policies;
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changes in tax laws;
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our ability to acquire hotel properties at prices consistent
with our investment criteria;
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our ability to fund capital expenditures at our hotels to
maintain or enhance their competitive position; and
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other circumstances beyond our control.
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Moreover, real estate investments are relatively illiquid, and
we may not be able to adjust our portfolio in a timely manner to
respond to changes in economic and other conditions.
Compliance with environmental laws may adversely affect our
financial condition.
Owners of real estate are subject
to numerous federal, state, local and foreign 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 partys 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 owners 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, 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 believe that our hotels substantially
comply with the requirements of the Americans with Disabilities
Act and other applicable laws. However, a determination that our
hotels are not in compliance with these laws could result in
liability for both governmental fines and payments to private
parties. If we were required to make unanticipated major
modifications to our hotels to comply with the requirements of
the Americans with Disabilities Act and other similar laws, it
could adversely affect our ability to make distributions to our
stockholders and to satisfy our other obligations.
Lodging
industry-related risks may adversely affect our
business.
We are subject to the risks inherent to hotel
operations.
We have ownership interests 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:
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wage and benefit costs, including hotels that employ unionized
labor;
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repair and maintenance expenses;
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gas and electricity costs;
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insurance costs, including health, general liability and workers
compensation; and
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other operating expenses.
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In addition, 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 within the control of our independent
managers over whom we have limited control.
Investing in hotel assets involves special risks.
We
have invested in hotel-related assets, and our hotels are
subject to all of the risks common to the hotel industry. These
risks could adversely affect hotel occupancy and the rates that
can be charged for hotel rooms, and generally include:
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adverse effects of declines in general and local economic
activity;
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competition from other hotels;
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construction of more hotel rooms in a particular area than
needed to meet demand;
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any further increases in energy costs and other travel expenses;
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other events, such as terrorist acts or war that reduce business
and leisure travel;
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fluctuations in our revenue caused by the seasonal nature of the
hotel industry;
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an outbreak of a pandemic disease affecting the travel industry;
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a downturn in the hotel industry; and
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risks generally associated with the ownership of hotels and real
estate, as discussed herein.
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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
midprice, upscale and
upper-upscale
hotel rooms and suites, if demand fails to increase at least
proportionately, could have a material adverse effect on our
business, financial condition and results of operations.
We face reduced coverages and increased costs of
insurance.
Our property insurance has a $100,000
all-risk deductible, a deductible (5% of insured value) for
named windstorm coverage and a deductible (2% to 5% of insured
value) for 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 insurance costs, 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. We have established a self-insured
retention ($250,000 per occurrence) for general liability
insurance with regard to 56 of our hotels. The remainder of our
hotels participate in general liability programs sponsored by
our managers, with no deductible.
We could have property losses not covered by
insurance.
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
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
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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
as a part of our all-risk property insurance program, as well as
our general liability and directors and officers
coverages. However, our all-risk policies have limitations such
as per occurrence limits and
sub-limits
which 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 terrorismnamely those
which are committed on behalf of
non-United
States persons or interests. Furthermore, we do not have full
replacement coverage at all of our properties 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,
there is a possibility that Congress will not renew TRIA in the
future, which would eliminate the federal subsidy for terrorism
losses. Therefore, the extent and adequacy of terrorism coverage
that will be available 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 March 31, 2010, approximately 46%
of our hotel rooms were located in, and 45% of our 2009 Hotel
EBITDA was generated from, three states: California, Florida and
Texas. Additionally, at March 31, 2010, we had
concentrations in six major metropolitan areas, the
San Francisco Bay area, Atlanta, South Florida, Orlando,
Dallas and the Los Angeles area, which together represented
approximately 32% of our 2009 Hotel EBITDA. 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.
Transferability of franchise license and management
agreements and termination of such 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 license agreements
may expire by their terms, and we may not be able to obtain
replacement franchise license agreements.
The sale of a hotel, replacement of the brand, or material
default under a management or franchise license agreement may
give rise to payment of liquidated damages or termination fees
that may be guaranteed by us or certain of our subsidiaries. The
loss of a manager or franchise
19
license could have a material impact on the operations and value
of a 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. Most of our management agreements restrict our
ability to encumber our interests in the applicable hotels under
certain circumstances without the managers consent.
Terminating management agreements in connection with the sale
of two hotels may result in liquidated damages.
In
2009, we sold two non-strategic hotels in Florida operating
under management agreements with IHG. We will be required to pay
replacement management fees for up to one year and liquidated
damages (net of any replacement management fees previously paid)
in December 2010or reinvest in another hotel to be managed
by IHG and carrying an IHG brand. Substitution of a replacement
hotel appears unlikely prior to December 2010, and we will
likely have to pay IHG at least some portion of replacement
management fees
and/or
liquidated damages. Liquidated damages are computed based on
operating results prior to termination. The aggregate liability
related to these hotels, if paid, will be approximately
$11 million. We accrued the full amount of liquidated
damages in 2008.
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 standards and
restrictions in order to maintain uniformity within the brand.
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 on our indebtedness.
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.
The following table reflects the percentage of Hotel EBITDA from
our 83 Consolidated Hotels by brand:
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% of 2009
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hotel
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Hotels
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EBITDA(a)
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Embassy Suites Hotels
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47
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60
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Holiday Inn
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15
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18
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Sheraton and Westin
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9
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9
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Doubletree
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7
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7
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Renaissance and Marriott
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3
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3
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Hilton
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2
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3
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(a)
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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 Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, which is
incorporated by reference herein.
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If any of these brands suffer a significant decline in
popularity with the traveling public, the revenues and
profitability of our branded hotels could be adversely affected.
20
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.
Future
terrorist activities 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 terrorism
alerts have adversely affected the travel and hospitality
industries over the past several years. 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 risks
related to pandemic diseases, which could materially and
adversely affect travel and result in reduced demand for our
hotels.
Our business could be materially and adversely affected by the
effect of a pandemic disease on the travel industry. For
example, the outbreaks of SARS and avian flu in 2003 had a
severe impact on the travel industry, and the recent outbreaks
of H1N1 flu threatened to have a similar impact. A prolonged
recurrence of SARS, avian flu, H1N1 flu or another pandemic
disease also may result in health or other government
authorities imposing restrictions on travel. Any of these events
could result in a significant drop in demand for our hotels and
adversely affect our financial conditions and results of
operations.
If we 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.
We collect information relating to our guests for various
business purposes, including marketing and promotional purposes.
The collection and use of personal data are governed by privacy
laws and regulations enacted in the United States and other
jurisdictions around the world. Privacy regulations continue to
evolve and on occasion may be inconsistent from one jurisdiction
to another. Compliance with applicable privacy regulations may
increase our operating costs
and/or
adversely impact our ability to market our products, properties
and services to our guests. In addition, non-compliance with
applicable privacy regulations by us (or in some circumstances
non-compliance by third parties engaged by us) or a breach of
security on systems storing our data may result in fines,
payment of damages or restrictions on our use or transfer of
data.
As a REIT, we
are subject to specific tax laws and regulations, the violation
of which could subject us to significant tax
liabilities.
U.S. federal income tax laws governing REITs are
complex.
We have operated, and intend to continue to
operate, in a manner that is intended to enable us to qualify as
a REIT under U.S. federal income tax laws. The REIT
qualification requirements are extremely complicated, and
interpretations of U.S. 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.
21
U.S. federal income tax laws governing REITs are subject
to change.
At any time, U.S. 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 U.S. 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 U.S. federal corporate income
tax on our undistributed taxable income. In addition, we will be
subject to a 4% nondeductible 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.
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 (including any prior taxable year for which the
statute of limitations remains open), we would be subject to
federal income tax at regular corporate rates on our taxable
income for any such taxable year. 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 U.S. 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 may become subject to a 100% excise tax if the rent our
TRSs pay us is determined to be excessive.
While we
believe that the terms of the leases that exist between us and
our TRSs were negotiated at arms length and are consistent
with the terms of comparable leases in the hotel industry, there
can be no assurance that the Internal Revenue Service, or IRS,
would not challenge the rents paid to us by our TRSs as being
excessive, or that a court would not uphold such challenge. In
that event, we could owe a tax of 100% on the amount of rents
determined to be in excess of an arms length rate.
Imposition of a 100% excise tax could materially affect the
value of an investment in our stock.
We lack control over the management and operations of our
hotels.
Because U.S. 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 independent 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 managers 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
22
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 forego 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 U.S. federal income
tax purposes, we must continually satisfy tests concerning,
among other things, the sources of our income, the nature and
diversification 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% (20% for tax years
beginning prior to July 31, 2008) 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, we must correct such failure within
30 days after the end of the calendar quarter to avoid
losing our REIT status and suffering adverse tax consequences.
If we fail to comply with these requirements at the end of any
calendar quarter, we may be able to preserve our REIT status by
benefiting from certain statutory relief provisions. Except with
respect to a de minimis failure of the 5% asset test or the 10%
vote or value test, we can maintain our REIT status only if the
failure was due to reasonable cause and not to willful neglect.
In that case, we will be required to dispose of the assets
causing the failure within six months after the last day of the
quarter in which we identified the failure, and we will be
required to pay an additional tax of the greater of $50,000 or
the product of the highest applicable tax rate (currently 35%)
multiplied by the net income generated on those assets. As a
result, we may be required to liquidate otherwise attractive
investments.
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.
We own, through our subsidiaries, interests in several real
estate joint ventures with third parties. Joint ventures that
are not consolidated into our financial statements owned real
estate interests in a total of 14 hotels, in which we had an
aggregate investment of $80 million, at March 31,
2010. The lessee operations of 13 of these 14 hotels are
included in our consolidated results of operations due to our
majority ownership of those lessees. Our joint venture partners
are affiliates of Hilton with respect to 11 hotels, affiliates
of Starwood with respect to one hotel, and private entities or
individuals (all of whom are unaffiliated with us) with respect
to two hotels. The ventures and hotels were subject to
non-recourse mortgage loans aggregating $211 million at
March 31, 2010.
23
The personal liability of our subsidiaries under existing
non-recourse loans secured by the hotels owned by our joint
ventures is generally limited to the guaranty of the borrowing
ventures personal obligations to pay for the lenders
losses caused by misconduct, fraud or misappropriation of funds
by the ventures and other typical exceptions from the
non-recourse covenants in the mortgages, such as those relating
to environmental liability. We may invest in other ventures in
the future that own hotels and have recourse or non-recourse
debt financing. If a venture defaults under its mortgage loan,
the lender may accelerate the loan and demand payment in full
before taking action to foreclose on the hotel. As a partner or
member in any of these ventures, our subsidiary may be exposed
to liability for claims asserted against the venture, and the
venture may not have sufficient assets or insurance to discharge
the liability.
Our subsidiaries may be contractually or legally unable to
unilaterally control decisions regarding these ventures and
their hotels. In addition, the hotels in a joint venture may
perform at levels below expectations, resulting in potential
insolvency unless the joint venturers provide additional funds.
In some ventures, the joint venturers may elect not to make
additional capital contributions. We may be faced with the
choice of losing our investment in a venture or investing
additional capital in it with no guaranty of receiving a return
on that investment.
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 the legal standard of care applicable to
each director requires 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 directors 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.
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-serving officers could adversely affect our ability to
execute our business strategy.
Our charter
contains limitations on ownership and transfer of shares of our
stock that 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%, as determined in accordance with the Code and the Exchange
Act, 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
24
attempted transfer of shares in violation of the charter
prohibitions will be void, and the intended transferee will not
acquire any right in 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 board of directors 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 control of us through the election of new
directors is limited by the inability of stockholders to elect a
majority of our board at a single annual meeting.
Authority to Issue Additional Preferred
Shares.
Under our charter, our board of directors 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 March 31, 2010, we had outstanding
12,880,475 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 Anti-Takeover Statutes.
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 corporations outstanding 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. Thereafter, any of these
business combinations must be approved by a stockholder vote
meeting two separate super majority requirements, unless, among
other conditions, the corporations 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, other than a business combination with affiliates
or related entities of the chairman of our board of directors.
See Certain Provisions of the Maryland General Corporation
Law and Our Charter and BylawsMaryland Anti-takeover
Statute. 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. There can be no
assurance that this provision will not be amended or eliminated
in the future. If the foregoing exemption in the charter is
amended, the Control Share Statute could have the effect of
discouraging offers to acquire us and of increasing the
difficulty of consummating any such offer. 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.
25
Forward looking
statements
This prospectus and the documents incorporated by reference in
this prospectus, as well as other written and oral statements
made or incorporated by reference from time to time by us and
our representatives in other reports, filings with the SEC,
press releases, conferences, or otherwise, may contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Exchange Act that involve a number of
risks and uncertainties. Forward-looking statements can be
identified by the use of forward-looking terminology, including,
without limitation, believes, expects,
anticipates, may, will,
should, seeks, pro forma or
other variations of these terms, including their use in the
negative, or by discussions of strategies, plans or intentions.
A number of factors could cause actual results to differ
materially from those anticipated by these forward-looking
statements. Among these factors are:
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general economic and lodging industry conditions, adverse
changes in the overall economy, the impact of the United
States military involvement in the Middle East and
elsewhere, future acts of terrorism, the threat or outbreak of a
pandemic disease affecting the travel industry, the impact on
the travel industry of high fuel costs and increased security
precautions;
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our overall debt levels and our ability to obtain new financing
and service debt;
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our inability to retain earnings;
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our liquidity and capital expenditures;
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our growth strategy and acquisition activities; and
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competitive conditions in the lodging industry.
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In addition, these forward-looking statements are necessarily
dependent upon assumptions and estimates that may prove to be
incorrect. Accordingly, while we believe that the plans,
intentions and expectations reflected in these forward-looking
statements are reasonable, we cannot assure you that these
plans, intentions or expectations will be achieved. The
forward-looking statements included in this prospectus, and all
subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf, are
expressly qualified in their entirety by the information
contained in this prospectus, including Risk
Factors, and the documents incorporated by reference,
which identify important factors that could cause these
differences. All forward-looking statements speak only as of the
date of this prospectus. We undertake no obligation to update
any forward-looking statements to reflect future events or
circumstances.
26
Price range of
common stock
Our common stock is traded on the NYSE under the symbol
FCH. The following table sets forth the high and low
intraday sales prices per share of our common stock, as reported
by the NYSE, and dividends declared on our common stock, for the
periods indicated.
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Common dividends
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High
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Low
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declared
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Year Ended December 31, 2010:
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First Quarter
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$
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6.42
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$
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3.49
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$
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Second Quarter (through June 16, 2010)
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$
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8.99
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$
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5.41
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$
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Year Ended December 31, 2009:
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First Quarter
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$
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2.19
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$
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0.72
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$
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Second Quarter
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$
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3.60
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$
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1.22
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$
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Third Quarter
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$
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5.31
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$
|
1.86
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$
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Fourth Quarter
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$
|
4.90
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$
|
2.85
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$
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Year Ended December 31, 2008:
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First Quarter
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$
|
15.69
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$
|
11.90
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$
|
0.35
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Second Quarter
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$
|
15.87
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|
$
|
10.39
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|
$
|
0.35
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Third Quarter
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$
|
10.67
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|
|
$
|
6.27
|
|
|
$
|
0.15
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Fourth Quarter
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$
|
7.12
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$
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0.66
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$
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27
Dividend
policy
We suspended payment of our common dividend in December 2008 and
our preferred dividend in March 2009 in light of the deepening
recession and dysfunctional capital markets, and the attendant
impact on our industry and us. Our board of directors will
determine the amount of future common and preferred dividends
for each quarter, if any, based upon various factors including
operating results, economic conditions, other operating trends,
our financial condition and capital requirements, as well as the
minimum REIT distribution requirements. Unpaid preferred
dividends continue to accrue, and accrued and current preferred
dividends must be paid in full prior to payment of any common
dividends.
Except to the extent required to satisfy minimum REIT
distribution requirements, we are restricted by the indenture
governing our senior secured notes from making any cash
distributions on our capital stock. We are currently below the
minimum thresholds set forth in the indenture for which
discretionary cash distributions are permitted. While we are
below the thresholds, we do not expect to pay any dividends in
the near-term and we expect to retain all available funds for
use in the operation and expansion of our business, including
growth through acquisitions. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, incorporated
by reference herein.
28
Use of
proceeds
We estimate that our net proceeds from this offering, after
deducting the underwriting discount and other estimated offering
expenses payable by us, will be approximately $145 million
(approximately $167 million if the underwriters exercise
their option to purchase additional shares in full). We intend
to use a substantial portion of the net proceeds as described
below.
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|
|
We intend to use the net proceeds of this offering, together
with cash on hand, to further strengthen our balance sheet,
including repaying or repurchasing certain of our mortgage debt
at discounts. For example, we have agreed to repay approximately
$177 million principal amount of secured debt for
$130 million (plus accrued interest), a discount of more
than $47 million, or roughly 27%. The loans bear interest
at LIBOR plus 155 basis points and would otherwise mature in May
2012. This substantially reduces our leverage, is accretive to
our stockholders and enhances long-term stockholder value.
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|
|
We also intend to use the net proceeds of this offering,
together with cash on hand, to pursue acquisition opportunities
that are accretive to long-term stockholder value and exceed our
cost of capital on a risk-adjusted basis. We will actively seek
upper-upscale properties in our target markets (
i.e.
,
central Boston, New York City (Manhattan) and Washington,
DCs central business districts) that further improve our
portfolio quality, diversification and concentration risk, have
RevPAR growth rates that exceed our portfolio average and high
barriers to entry, and can be acquired at prices significantly
below replacement cost, which would allow for substantial
appreciation potential. Our pipeline of suitable hotel
acquisition opportunities continues to improve, and we are
reviewing and/or engaged in negotiations concerning various
potential transactions in our target markets that meet our
underwriting and strategic criteria. For example, we have made
an offer to purchase a hotel in one of our target markets, and
negotiations are ongoing.
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We intend to use any remaining net proceeds for other general
corporate purposes.
|
Given market dynamics, it is critical that we have the ability
to act quickly when opportunities arise that fit our strategic
objectives. Under ordinary circumstances, we would seek to raise
additional equity capital through the public equity markets by
utilizing an effective shelf registration statement
on
Form S-3
that has been reviewed and declared effective in advance by the
SEC. Solely because our preferred stock dividends are in
arrears, we are ineligible to offer shares registered on
Form S-3.
Instead, we must execute public offerings using a registration
statement on
Form S-11,
which does not provide the same market timing flexibility as an
effective shelf registration statement would
provide. Pending application of the net proceeds from this
offering as described above, we may invest such proceeds in
short-term, interest bearing investments. See Risk
FactorsRisks Related to The OfferingIf there are
delays in applying the proceeds of this offering, then receipts
from investments and our investment returns may take longer to
attain.
We have agreed to pay all costs and expenses incurred in
connection with the registration under the Securities Act of the
shares of our common stock being registered hereby, including,
without limitation, all registration and filing fees, printing
expenses and fees and disbursements of our counsel and our
accountants.
29
Capitalization
The following table sets forth (1) our cash and cash
equivalents and (2) our capitalization as of March 31,
2010, in each case:
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|
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on an actual basis
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|
|
on an adjusted basis to reflect the sale of our common stock
offered hereby and the completion of the May 2010 secured debt
transaction, including the incurrence of $212 million
principal amount of mortgage debt in connection therewith (as
discussed under Prospectus SummaryRecent
Developments), as if these transactions had been completed
on March 31, 2010 and assuming:
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|
|
|
|
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net proceeds of the offering are $145 million, after
deducting the estimated offering expenses and the underwriting
discount and commissions;
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|
|
|
$177 million principal amount of secured debt is repaid for
$130 million (plus accrued interest), reflecting a roughly
$47 million discount; and
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|
|
|
the underwriters option to purchase additional shares is
not exercised.
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You should review this information together with Use of
Proceeds and our consolidated financial statements and
related notes incorporated by reference in this prospectus.
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|
|
|
|
|
|
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|
|
|
|
|
March 31, 2010
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|
(in thousands)
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
276,008
|
|
|
$
|
286,858
|
|
|
|
|
|
|
|
|
|
|
Short term debt:
|
|
|
|
|
|
|
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|
Current portion of mortgage and capital leases debt
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|
$
|
252,286
|
|
|
$
|
42,596
|
|
|
|
|
|
|
|
|
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Long term debt:
|
|
|
|
|
|
|
|
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Unsecured debt
|
|
|
86,622
|
|
|
|
86,622
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New mortgage debt
|
|
|
|
|
|
|
212,000
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|
Senior Secured Notes due 2014 (net of discount)
|
|
|
574,913
|
|
|
|
574,913
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|
Mortgage and capital lease debt
|
|
|
857,294
|
|
|
|
680,667
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,518,829
|
|
|
|
1,554,202
|
|
|
|
|
|
|
|
|
|
|
Redeemable FelCor LP Units at redemption value
|
|
|
1,681
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
478,774
|
|
|
|
478,774
|
|
Common stock
|
|
|
694
|
|
|
|
969
|
|
Additional paid in capital
|
|
|
2,022,235
|
|
|
|
2,166,939
|
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Accumulated other comprehensive income
|
|
|
25,598
|
|
|
|
25,598
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|
Accumulated deficit
|
|
|
(1,864,898
|
)
|
|
|
(1,818,580
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)
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Less: Common stock in treasury
|
|
|
(72,229
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)
|
|
|
(72,229
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)
|
|
|
|
|
|
|
|
|
|
Total FelCor stockholders equity
|
|
|
590,174
|
|
|
|
781,471
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|
Non-controlling interest in other partnerships
|
|
|
21,752
|
|
|
|
21,752
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|
|
|
|
|
|
|
|
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Total capitalization
|
|
$
|
2,384,722
|
|
|
$
|
2,401,702
|
|
|
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30
Investment
policies and policies with
respect to capital activities
The following is a discussion of our investment policies and our
policies with respect to certain other activities, including
financing matters and conflicts of interest. These policies may
be amended or revised from time to time at the discretion of our
board of directors, without a vote of our stockholders. Any
change to any of these policies by our board of directors,
however, would be made only after a thorough review and analysis
of that change, in light of then existing business and other
circumstances, and then only if, in the exercise of its business
judgment, our board of directors believes that it is advisable
to do so in our and our stockholders best interests. We
cannot assure you that our investment objectives will be
attained.
Investments in
real estate or interests in real estate
We invest, directly and indirectly, in hotel properties, and all
such transactions are reviewed and approved by our board of
directors. Management generally negotiates the terms of such
transactions, but does not have the authority to approve such
transactions. We conduct substantially all of our investment
activities through our operating partnership, FelCor LP, and its
subsidiaries. Our primary investment objectives are to maximize
stockholder value over time and return on invested capital by
optimizing the use of our real estate and enhancing property
cash flow. Additional criteria with respect to our hotel
properties and acquisition criteria is described in
Prospectus SummaryBusiness Strategy.
We are not limited as to (i) the amount or percentage of
our total assets that may be invested in any single property, or
(ii) the concentration of investments by location or type.
We seek hotel acquisitions that will improve the overall quality
of our portfolio, further diversify our portfolio by market,
customer type and brand, and improve future Hotel EBITDA growth.
We may look for hotel properties where we can utilize our
competitive strengths, such as ones that have redevelopment
opportunity to further enhance our return on investment. We take
a highly disciplined approach to analyzing any potential hotel
acquisition, which must meet strict criteria, including minimum
targeted rates of return. We will seek properties that we can
acquire at prices significantly below replacement cost with
substantial appreciation potential in high-growth markets as the
economy recovers from the recent recession. We expect potential
future acquisitions will be restricted to high quality hotels in
major urban and resort markets with high barriers to entry and
high growth potential.
Investments in
mortgages, structured financings, and other lending
policies
We do not currently invest in loans secured by real estate and
we have no current intention of investing in loans secured by
properties or making loans to persons, other than in connection
with the acquisition of mortgage loans through which we expect
to achieve equity ownership of the underlying hotel property in
the near-term.
Investments in
securities of or interests in persons primarily engaged in real
estate activities and other issuers
We may consider joint venture investments with other investors
for the purpose of investing in hotels. We may also invest in
the securities of other issuers in connection with acquisitions
of
31
indirect interests in hotels (normally general or limited
partnership interests in special purpose partnerships owning
hotels). We may in the future acquire some, all or substantially
all of the securities or assets of other REITs or similar
entities where that investment would be consistent with our
investment policies and the REIT qualification requirements.
There are no limitations on the amount or percentage of our
total assets that may be invested in any one issuer, other than
those imposed by the gross income and asset tests that we must
satisfy to qualify as a REIT. Any acquisition of securities of
or interests in persons primarily engaged in real estate
activities is reviewed and approved by our board of directors.
Management generally negotiates the terms of such transactions,
but does not have the authority to approve such transactions.
We do not intend that our investments in securities will require
us to register as an investment company under the
Investment Company Act of 1940, as amended, and we intend to
divest securities before any registration would be required. We
do not currently, and we do not intend to, engage in trading,
underwriting, agency distribution, or sales of securities of
other issuers.
Policies with
respect to certain activities
Purchase and Sale (or Turnover) of Investments.
We
regularly review and evaluate our hotel portfolio based upon
strategic considerations, such as future supply growth, changes
in demand dynamics, concentration risk, strategic fit, return on
future capital needs and return on invested capital. When timing
is appropriate, we sell those hotels that no longer meet our
investment criteria and minimum return thresholds. Such
transactions are reviewed and approved by our board of
directors. Management generally negotiates the terms of such
transactions, but does not have the authority to approve such
transactions. Subject to REIT qualification and prohibited
transaction rules under the Code, we may dispose of hotel
properties if our management determines that a sale of a
property would be in our best interests based on the price being
offered for the hotel, the operating performance of the hotel,
the tax consequences of the sale, and other factors and
circumstances surrounding the proposed sale. See Risk
FactorsRisks Related to Our Business. In 2009, we
sold two consolidated hotels (Holiday Inn Cocoa
BeachOceanfront and Holiday Inn OrlandoInternational
Drive) for aggregate gross proceeds of $26 million. In
2007, we (i) acquired two hotels (the Renaissance Esmeralda
Resort & Spa in Indian Wells, California and the
Renaissance Vinoy Resort & Golf Club in St.
Petersburg, Florida) for $225 million, in the aggregate,
(ii) sold 11 consolidated hotels for $191 million, in
the aggregate (completing the disposition of non-strategic
hotels that were originally identified for sale in 2005), and
(iii) completed construction of the Royale Palms
condominium project at Kingston Plantation in Myrtle Beach,
South Carolina and sold 179 (out of 184) units.
Senior Securities.
We have no formal policy
concerning the issuance of senior securities other than that
such transactions are reviewed and approved by our board of
directors. Management generally negotiates the terms of such
transactions, but does not have the authority to approve such
transactions. Our charter authorizes the issuance of up to
20,000,000 shares of preferred stock, which can be issued
from time to time upon authorization of the board of directors.
Any increase in the number of shares of preferred stock
authorized for issuance (including outstanding preferred stock)
must be approved by our common stockholders. Any change to the
foregoing must be approved by our board of directors and, with
respect to amending our charter, our common stockholders.
Borrowing Money.
Such transactions are reviewed and
approved by our board of directors. Management generally
negotiates the terms of such transactions, but does not have the
authority to approve such transactions. We consider a number of
factors when evaluating our
32
leverage and borrowing money, such as the interest rate, timing
of debt maturity, prepayment penalty, flexibility to prepay
prior to maturity, overall impact to our capital structure,
fixed to floating ratio and purchase price of properties that
are acquired with financing. During the past three years, we
have borrowed money as follows:
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May 2010.
We obtained a $212 million
non-recourse loan secured by nine hotels.
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|
|
October 2009.
Our subsidiary, FelCor LP, issued
$636 million of senior secured notes, which notes were
guaranteed by us.
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|
|
June 2009.
We obtained a $201 million
non-recourse loan secured by nine hotels.
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|
March 2009.
We obtained a $120 million
non-recourse loan secured by seven hotels.
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|
|
December 2007.
We assumed (i) an existing loan
in the original principal amount of $88.0 million in
connection with the acquisition of a hotel and (ii) an
existing loan in the original principal amount of
$89.3 million in the connection with the acquisition of a
second hotel.
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August 2007.
We amended our line of credit agreement
to increase the amount available under the line from
$125 million to $250 million and to provide the
ability to further increase the facility up to $500 million
under certain conditions. (In June 2009, we repaid all balances
then outstanding and terminated this line of credit.)
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Loans to Other Persons.
We have no formal policy
concerning making loans to third parties other than that such
transactions are reviewed and approved by our board of
directors. We do not currently make loans to third parties.
Invest in the Securities of Other Issuers for the Purpose of
Exercising Control.
We have no formal policy concerning
our investing in the securities of other issuers other than that
such transactions are reviewed and approved by our board of
directors. Management generally negotiates the terms of such
transactions, but does not have the authority to approve such
transactions. We may in the future acquire some, all or
substantially all of the securities or assets of other REITs or
similar entities where that investment would be consistent with
our investment policies and the REIT qualification requirements.
However, we do not currently invest in securities of other
issuers for the purpose of exercising control nor do we
anticipate investing in other issuers for the purpose of
acquiring any investments primarily for sale in the ordinary
course of business or holding any investments with a view to
making short-term profits from their sale.
Underwrite Securities of Other Issuers.
We have no
formal policy concerning our underwriting securities of other
issuers other than that such transactions are reviewed and
approved by our board of directors. We do not currently
underwrite securities of other issues.
Securities in Exchange for Property.
We have no
formal policy concerning our offering of securities in exchange
for property other than that such transactions are reviewed and
approved by our board of directors. Management generally
negotiates the terms of such transactions, but does not have the
authority to approve such transactions. Subject to applicable
law and the requirements for listed companies on the NYSE, our
board of directors has the authority, without further
stockholder approval, to issue additional authorized common
shares and preferred shares or otherwise raise capital,
including through the issuance of senior securities, in any
manner and on the terms and for the consideration it deems
appropriate, including in exchange for property. Existing
stockholders will have no preemptive right to additional shares
issued in any offering, and any offering might cause a dilution
of investment. We have
33
previously used limited partnership units of FelCor LP to
acquire hotels. We have not offered securities in exchange for
property during the past three years.
Repurchase or Reacquire Shares or Other
Securities.
We have no formal policy concerning our
repurchase or re-acquisition of shares or other securities other
than that such transactions are reviewed and approved by our
board of directors. Management generally negotiates the terms of
such transactions, but does not have the authority to approve
such transactions. Under certain circumstances, our charter
restricts our ability to repurchase or otherwise reacquire our
shares, and any change to those provisions would require an
amendment of our charter, which would be subject to stockholder
approval under Maryland corporate law. The indenture governing
our senior secured notes restricts our ability, under certain
circumstances, to repurchase or otherwise reacquire our shares,
and any change to those provisions would require an amendment of
our indenture, which would be subject to trustee and noteholder
consent.
Reporting Policy.
We are subject to the information
reporting requirements of the Exchange Act and the NYSE, as a
consequence of which, we file periodic reports, proxy statements
and other information, including audited financial statements,
with the SEC and distribute our annual report and proxy
statement to our stockholders.
Policies with
respect to conflicts of interest
Our Code of Business Conduct and Ethics, or CBCE, covers
conflicts of interest, generally, and applies to all of our
officers, directors, and employees, but not directly to 10% or
greater stockholders. Under the CBCE, conflicts of interest are
prohibited as a matter of policy. If any officer, director, or
employee becomes aware of any material transaction or
relationship that reasonably could be expected to give rise to a
conflict of interest, that person is required to report the
transaction or relationship in writing to our president or
general counsel. The CBCE also provides guidelines on what may
constitute conflicts of interest and sets forth standards to be
followed in common situations where potential conflicts of
interest may arise.
34
Description of
common stock
The description of our common stock set forth below describes
certain general terms and provisions of the common stock. The
following description of our common stock is a summary and is
not intended to be complete. You also should review our charter
and bylaws, copies of which are available from us upon request.
See Certain Provisions of the Maryland General Corporation
Law and Our Charter and Bylaws and Where You Can
Find More Information.
General
Under our charter, we have the authority to issue up to
200,000,000 shares of common stock, par value $0.01 per
share. Under Maryland law, stockholders generally are not
responsible for the corporations debts or obligations. At
March 31, 2010, we had outstanding 65,427,668 shares
of common stock.
Terms
Subject to the preferential rights of any series of our
preferred stock outstanding, the holders of our common stock are
entitled to one vote per share on all matters voted on by
stockholders, including in the election of directors. Our
charter does not provide for cumulative voting in the election
of directors. Except as otherwise required by law or provided in
articles supplementary relating to preferred stock of any
series, the holders of our common stock exclusively possess all
voting power.
Subject to any preferential rights of any series of our
preferred stock outstanding, the holders of our common stock are
entitled to those dividends, if any, as may be declared from
time to time by our board of directors from funds legally
available therefor and, upon liquidation, are entitled to
receive, pro rata, all assets of FelCor available for
distribution to holders of shares of common stock. All shares of
common stock, when issued, will be fully paid and nonassessable
and will have no preemptive rights. FelCor may, however, enter
into contracts with certain stockholders to grant those holders
preemptive rights.
Restrictions on
ownership and transfer
The shares of our common stock are subject to certain
restrictions upon their ownership and transfer, which were
adopted for the purpose of enabling FelCor to preserve its
status as a REIT. For a description of these restrictions and
the Maryland anti-takeover statutes, see Certain
Provisions of the Maryland General Corporation Law and Our
Charter and Bylaws.
Exchange
listing
The common stock is listed on the NYSE under the symbol
FCH.
Transfer
agent
The transfer agent and registrar for the common stock is
American Stock Transfer Company, New York, New York.
35
Description of
preferred stock
General
Under our charter, we have the authority to issue up to
20,000,000 shares of preferred stock, par value $0.01 per
share, of which 12,880,475 shares designated as the $1.95
Series A Cumulative Convertible Preferred Stock and
67,980 shares designated as the 8% Series C Cumulative
Redeemable Preferred Stock were outstanding as of March 31,
2010. Accordingly, up to 7,051,545 additional shares of
preferred stock may be issued from time to time, in one or more
classes or series, as authorized by our board of directors and
without any further vote or action by the stockholders, subject
to the rights of the holders of the outstanding $1.95
Series A Cumulative Convertible Preferred Stock and 8%
Series C Cumulative Redeemable Preferred Stock. See
Description of Series A Preferred Stock
and Description of Series C Preferred Stock and
Depositary Shares. Subject to the limitations prescribed
by Maryland law and our charter and bylaws, our board of
directors is authorized to establish the number of shares
constituting each series of preferred stock and to designate and
issue, from time to time, one or more classes or series of
preferred stock with the preferences, conversion and other
rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption
as may be fixed by our board of directors or duly authorized
committee of our board of directors. Our board of directors
could authorize the issuance of shares of preferred stock with
terms and conditions that could have the effect of delaying or
preventing a change of control or other transaction that holders
of our common stock might believe to be in their best interests
or in which holders of some, or a majority, of the shares of
common stock might receive a premium for their shares over the
then market price of those shares of common stock.
Description of
Series A preferred stock
The following is a summary of the material terms and provisions
of our $1.95 Series A Cumulative Convertible Preferred
Stock, or the Series A preferred stock. This summary is not
intended to be complete. Accordingly, you also should review the
terms and provisions of our charter (including the articles
supplementary to the charter setting forth the particular terms
of the Series A preferred stock), and bylaws, copies of
which are available from us upon request. See Where You
Can Find More Information.
General
In April 1996, our board of directors adopted articles
supplementary that classified and created a series of preferred
stock originally consisting of 6,900,000 shares, which was
subsequently reduced to 6,050,000 shares, designated $1.95
Series A Cumulative Convertible Preferred Stock. In March
and August 2004, our board of directors adopted articles
supplementary that classified an additional
4,600,000 shares and 2,300,000 shares, respectively,
of Series A preferred stock thereby increasing the
aggregate number of authorized shares of the Series A
preferred stock to 12,950,000. As of March 31, 2010, we had
12,880,475 shares of Series A preferred stock
outstanding.
The outstanding shares of Series A preferred stock are
validly issued, fully paid and nonassessable. The holders of the
Series A preferred stock have no preemptive rights with
respect to any shares of our capital stock or any of our other
securities convertible into, or carrying rights or options to
purchase, any shares of our capital stock. The shares of
Series A preferred stock are
36
not subject to any sinking fund or other obligation of us to
redeem or retire the Series A preferred stock. Unless
converted or redeemed by us into common stock, the Series A
preferred stock will have a perpetual term, with no maturity.
Ranking
The Series A preferred stock ranks
pari passu
with
our outstanding Series C preferred stock (as described
below), and senior to our common stock, with respect to the
payment of dividends and amounts upon liquidation, dissolution
or winding up.
While any shares of Series A preferred stock are
outstanding, we may not authorize, create or increase the
authorized amount of any class or series of stock that ranks
senior to the Series A preferred stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or
winding up without the consent of the holders of two-thirds of
the outstanding Series A preferred stock (voting as one
class with any other class or series of parity stock). We,
however, may create additional classes of stock, increase the
authorized number of shares of preferred stock or issue series
of preferred stock ranking junior to, or on a parity with, the
Series A preferred stock with respect, in each case, to the
payment of dividends and amounts upon liquidation, dissolution
or winding up without the consent of any holder of Series A
preferred stock.
Dividends
Holders of shares of Series A preferred stock are entitled
to receive, when, as and if declared by our board of directors,
out of funds legally available for payment, cash dividends for
the corresponding period in an amount per share equal to the
greater of $0.4875 per quarter (equivalent to $1.95 per annum)
or the cash distributions declared or paid for the corresponding
period (determined as of the record date for each of the
respective quarterly dividend payment dates referred to below)
on the number of shares of common stock, or portion thereof,
into which a share of Series A preferred stock is then
convertible. Dividends on the Series A preferred stock are
payable quarterly in arrears on the last calendar day of
January, April, July and October of each year. Each dividend is
payable in arrears to holders of record as they appear on our
stock records at the close of business on the record dates that
are fixed by our board of directors so long as those dates do
not exceed 60 days preceding the payment dates. Dividends
are cumulative, whether or not in any dividend period there are
funds legally available for the payment of the dividends and
whether or not the dividends are authorized. Accumulations of
dividends on the shares of Series A preferred stock do not
bear interest. Dividends payable on the Series A preferred
stock are computed on the basis of a
360-day
year
consisting of twelve
30-day
months.
Except as provided in the next sentence, no dividend will be
declared or paid, or set apart for payment, on any parity stock
unless full cumulative dividends have been, or contemporaneously
are, declared and paid, or set apart for payment, on the
Series A preferred stock for all prior dividend periods and
the then current dividend period. If accrued dividends on the
Series A preferred stock and any parity stock for all prior
dividend periods have not been paid in full, then any dividend
declared on the Series A preferred stock and any parity
stock for any dividend period will be declared ratably in
proportion to accrued and unpaid dividends on the Series A
preferred stock and any parity stock.
37
Unless full cumulative dividends then required to be paid on the
Series A preferred stock and any parity stock have been, or
contemporaneously are, declared and paid, or set apart for
payment, we will not declare, pay or set apart funds for the
payment of any dividend or other distribution with respect to
any junior stock or redeem, purchase or otherwise acquire for
consideration any junior stock, subject to certain exceptions as
described in our charter. Notwithstanding the foregoing
limitations, we may, at any time, acquire shares of our stock,
without regard to rank, for the purpose of preserving our status
as a REIT.
As used for these purposes,
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|
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the term dividend does not include dividends or
distributions payable solely in shares of junior stock on junior
stock, or in options, warrants or rights to holders of junior
stock to subscribe for or purchase any junior stock;
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|
|
the term junior stock means the common stock, and
any other class or series of our stock now or hereafter issued
and outstanding that ranks junior to the Series A preferred
stock as to the payment of dividends or amounts upon the
liquidation, dissolution or winding up of FelCor; and
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the term parity stock means any other class or
series of our stock now or hereafter issued and outstanding
(including the Series C preferred stock) that ranks equally
with the Series A preferred stock as to the payment of
dividends and amounts upon the liquidation, dissolution or
winding up of FelCor.
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FelCor LP issued to us Series A preferred units in FelCor
LP, the economic terms of which are substantially identical to
the Series A preferred stock. FelCor LP is required to make
all required distributions to us on the Series A preferred
units that mirror our payment of dividends on the Series A
preferred stock, including accrued and unpaid dividends upon
redemption and the liquidation preference amount of the
Series A preferred stock. These distributions have priority
over any distribution of cash or assets to the holders of the
common partnership units of FelCor LP or to the holders of any
other interests in FelCor LP, except for distributions required
in connection with any of our other shares ranking senior to, or
on a parity with, the Series A preferred stock as to
dividends or liquidation rights and except for distributions
required to enable us to maintain our qualification as a REIT.
The indenture under which our senior secured notes are issued
includes covenants that restrict our ability to declare and pay
dividends. In general, the indenture contains exceptions to the
limitations to allow FelCor LP to make distributions necessary
to allow us to maintain our status as a REIT. We are currently
below the minimum thresholds set forth in the indenture for
which discretionary cash distributions are permitted, and as a
result, we are unable to distribute the full amount of dividends
accruing under our outstanding preferred stock.
Optional
redemption
Shares of Series A preferred stock are redeemable, in whole
or in part, at our option, for either:
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the number of shares of common stock that are issuable at a
conversion rate of 0.7752 shares of common stock for each
share of Series A preferred stock, subject to adjustment in
certain circumstances; or
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cash in an amount per share equal to the aggregate market value
(determined as of the date of the notice of redemption) of such
number of shares of common stock that are issuable at a
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conversion rate of 0.7752 shares of common stock for each
share of Series A preferred stock, subject to adjustment in
certain circumstances.
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We may not exercise this redemption option, however, unless for
20 trading days within any period of 30 consecutive trading
days, including the last trading day of that period, the closing
price of the common stock on the NYSE equals or exceeds the
conversion price per share, currently $32.25, subject to
adjustment in certain circumstances. In order to exercise our
redemption option, we must issue a press release announcing the
redemption prior to the opening of business on the second
trading day after the conditions in the preceding sentences have
been met.
Notice of redemption will be given by mail or by publication in
The Wall Street Journal
or
The New York Times
or,
if neither is then being published, in any other daily newspaper
of national circulation (with subsequent prompt notice by mail)
to the holders of the Series A preferred stock not more
than four business days after we issue the press release. No
failure to give notice or any defect therein or in the mailing
thereof will affect the sufficiency of the notice or the
validity of the proceedings for the redemption of any
Series A preferred stock, except as to the holder to whom
notice was defective or not given. The redemption date will be a
date selected by us not less than 30 nor more than 60 days
after the date on which we issue the press release announcing
our intention to redeem the Series A preferred stock. If
fewer than all of the shares of Series A preferred stock
are to be redeemed, the shares shall be selected by lot or pro
rata or in some other equitable manner determined by us.
On the redemption date, we must pay on each share of
Series A preferred stock to be redeemed any accrued and
unpaid dividends, in arrears, for any full dividend period
ending on or prior to the redemption date. In the case of a
redemption date falling after a dividend payment record date and
prior to the related payment date, the holders of the
Series A preferred stock at the close of business on that
record date will be entitled to receive the dividend payable on
those shares on the corresponding dividend payment date,
notwithstanding the redemption of their shares prior to the
dividend payment date. Except as provided for in the preceding
sentence, no payment or allowance will be made for accrued
dividends on any shares of Series A preferred stock called
for redemption or on the shares of common stock issuable upon
that redemption.
Unless full cumulative dividends then required to be paid on the
Series A preferred stock and any parity stock have been, or
contemporaneously are, declared and paid, or declared and a sum
sufficient for the payment thereof set apart for payment, the
Series A preferred stock may not be redeemed in whole or in
part, and we may not, except as set forth in the following
sentence, redeem, purchase or otherwise acquire for
consideration any shares of Series A preferred stock,
otherwise than pursuant to a purchase or exchange offer made on
the same terms to all holders of shares of Series A
preferred stock. Notwithstanding the foregoing limitations, we
may, at any time, acquire shares of our stock, without regard to
rank, for the purpose of preserving our status as a REIT.
On and after the date fixed for redemption, provided that we
have made available at the office of the registrar and transfer
agent a sufficient number of shares of common stock or a
sufficient amount of cash to effect the redemption, dividends
will cease to accrue on the Series A preferred stock called
for redemption, those shares shall no longer be deemed to be
outstanding and all rights of the holders of those shares of
Series A preferred stock shall cease, except for the right
to receive the shares of common stock or any cash payable upon
redemption, without interest from the date of redemption, and
except that, in the case of a redemption date after a dividend
payment record date and prior to the related dividend payment
date,
39
holders of Series A preferred stock on the dividend payment
record date will be entitled on the dividend payment date to
receive the dividend payable on those shares. At the close of
business on the redemption date, each holder of Series A
preferred stock (unless we default in the delivery of the shares
of common stock or cash) will be, without any further action,
deemed a holder of the number of shares of common stock for
which the Series A preferred stock is redeemable, or be
entitled to receive the cash amount applicable to those shares.
Fractional shares of common stock will not be issued upon
redemption of the Series A preferred stock, but, in lieu
thereof, we will pay a cash adjustment based on the current
market price of the common stock on the day prior to the
redemption date.
Liquidation
preference
The holders of shares of Series A preferred stock are
entitled to receive, in the event of any liquidation,
dissolution or winding up of FelCor, whether voluntary or
involuntary, a liquidation preference (the Series A
Liquidation Preference) of $25 per share of Series A
preferred stock, plus an amount per share of Series A
preferred stock equal to all accrued and unpaid dividends,
whether or not earned or declared, to the date of final
distribution to such holders and will not be entitled to any
other payment.
Until the holders of the Series A preferred stock have been
paid the Series A Liquidation Preference in full, no
payment will be made to any holder of junior stock upon the
liquidation, dissolution or winding up of FelCor. If, upon any
liquidation, dissolution or winding up of FelCor, the assets of
FelCor or proceeds thereof distributable among the holders of
the shares of Series A preferred stock and any parity stock
are insufficient to pay in full the Series A Liquidation
Preference and the liquidation preference applicable to any
parity stock, then those assets will be distributed among the
holders of shares of Series A preferred stock and any
parity stock, ratably, in accordance with the respective amounts
that would be payable on those shares if all amounts payable on
those shares were to be paid in full. Neither a consolidation or
merger of us with another corporation, a statutory share
exchange by us, nor a sale or transfer of all or substantially
all of our assets will be considered a liquidation, dissolution
or winding up, voluntary or involuntary, of us.
Voting
rights
If six quarterly dividends, whether or not consecutive, payable
on the Series A preferred stock, or any parity stock, are
in arrears, whether or not earned or declared, the number of
directors then constituting our board of directors will be
increased by two, and the holders of shares of Series A
preferred stock and any other parity stock, voting together as a
single class, which are referred to as the voting preferred
shares, will have the right to elect two additional directors to
serve on our board of directors. This voting right will be
applicable to any annual meeting or special meeting of
stockholders, or a properly called special meeting of the
holders of the voting preferred shares, until all the delinquent
dividends, together with the dividends for the current quarterly
period, on the voting preferred shares have been paid or
declared and set aside for payment.
The approval of two-thirds of the outstanding shares of
Series A preferred stock and any parity stock similarly
affected, voting together as a single class, is required in
order to:
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amend our charter to affect materially and adversely the rights,
preferences or voting power of the holders of the Series A
preferred stock and the parity stock; or
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amend our charter to authorize, reclassify, create or increase
the authorized amount of any class of stock having rights senior
to the Series A preferred stock with respect to the payment
of dividends or amounts upon the liquidation, dissolution or
winding up of FelCor.
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We may, however, increase the authorized number of shares of
preferred stock and may create additional classes of parity
stock and junior stock, increase the authorized number of shares
of parity stock and junior stock and issue additional series of
parity stock and junior stock, all without the consent of any
holder of Series A preferred stock.
Except as required by law, the holders of Series A
preferred stock will not be entitled to vote on any merger or
consolidation involving us or a sale, lease or transfer of all
or substantially all of our assets.
See
Conversion
Price Adjustments below.
Conversion
rights
Shares of Series A preferred stock are convertible, in
whole or in part, at any time, at the option of the holders,
into a number of shares of common stock obtained by dividing the
aggregate liquidation preference (equal to $25.00 per share of
Series A preferred stock), excluding any accrued but unpaid
dividends, by a conversion price of $32.25 per share of common
stock (equivalent to a conversion rate of 0.7752 shares of
common stock for each share of Series A preferred stock),
subject to adjustment as described below (Conversion Price
Adjustments). The right to convert shares of Series A
preferred stock called for redemption will terminate at the
close of business on the redemption date. For information as to
notices of redemption, see Optional Redemption above.
Conversion of shares of Series A preferred stock, or a
specified portion thereof, may be effected by delivering a
certificate or certificates evidencing these shares, together
with written notice of conversion and a proper assignment of the
certificate or certificates to us or in blank, to the office or
agency to be maintained by us for that purpose. That office is
currently the principal corporate trust office of American Stock
Transfer Company located in New York, New York.
Each conversion will be deemed to have been effected immediately
prior to the close of business on the date on which the
certificates for shares of Series A preferred stock shall
have been surrendered and notice shall have been received by us
as aforesaid (and if applicable, payment of an amount equal to
the dividend payable on those shares shall have been received by
us as described below), and the conversion shall be at the
conversion price in effect at that time and date.
Holders of shares of Series A preferred stock at the close
of business on a dividend payment record date will be entitled
to receive the dividend payable on those shares on the
corresponding dividend payment date, notwithstanding the
conversion of those shares following the dividend payment record
date and prior to the dividend payment date. Shares of
Series A preferred stock surrendered for conversion during
the period between the close of business on any dividend payment
record date and the opening of business on the corresponding
dividend payment date (except shares converted after the
issuance by us of a notice of redemption providing for a
redemption date during that period, which shares will be
entitled to the dividend), however, must be accompanied by
payment of an amount equal to the dividend payable on those
shares on the dividend payment date. A holder of shares of
Series A preferred stock on a dividend payment record date
who (or whose transferee) tenders any shares for conversion into
shares of common stock on a dividend payment date will receive
the dividend payable by us on those shares of Series A
preferred stock on that date, and the converting
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holder need not include payment of the amount of the dividend
upon surrender of shares of Series A preferred stock for
conversion. Except as provided above, we will make no payment or
allowance for unpaid dividends, whether or not in arrears, on
converted shares or for dividends on the shares of common stock
issued upon conversion.
Fractional shares of common stock will not be issued upon
conversion, but, in lieu thereof, we will pay a cash adjustment
based on the current market price of the common stock on the day
prior to the conversion date.
Conversion price
adjustments
The conversion price is subject to adjustment upon certain
events, including:
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dividends (and other distributions) payable in shares of our
common stock;
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the issuance to all holders of our common stock of certain
rights, options or warrants entitling them to subscribe for or
purchase common stock at a price per share less than the fair
market value per share of common stock;
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subdivisions, combinations and reclassifications of our common
stock; and
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distributions to all holders of our common stock of shares of
capital stock (other than common stock) or evidences of our
indebtedness or assets (including securities, but excluding
those dividends, rights, warrants and distributions referred to
above for which an adjustment previously has been made and
excluding permitted common stock cash distributions, as
described below).
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As used for these purposes, permitted common stock cash
distributions means cash dividends and distributions paid
with respect to the common stock after December 31, 1995,
not in excess of the sum of our cumulative undistributed net
earnings at December 31, 1995, plus the cumulative amount
of funds from operations, as determined by our board of
directors on a basis consistent with our financial reporting
practices, after December 31, 1995, minus the cumulative
amount of dividends accrued or paid on the Series A
preferred stock or any other class of preferred stock after
January 1, 1996.
In addition to the foregoing adjustments, we will be permitted
to make such reductions in the conversion price as we consider
to be advisable in order that any event treated for federal
income tax purposes as a dividend of stock or stock rights will
not be taxable to the holders of the common stock, or, if that
is not possible, to diminish any income taxes that are otherwise
payable because of such event.
In case we shall be a party to any transaction (including,
without limitation, a merger, consolidation, statutory share
exchange, tender offer for all or substantially all of the
shares of common stock or sale of all or substantially all of
our assets), in each case as a result of which shares of common
stock will be converted into the right to receive stock,
securities or other property (including cash or any combination
thereof), each share of Series A preferred stock, if
convertible after the consummation of the transaction, will
thereafter be convertible into the kind and amount of shares of
stock and other securities and property receivable (including
cash or any combination thereof) upon the consummation of such
transaction by a holder of that number of shares, or fraction
thereof, of common stock into which one share of Series A
preferred stock was convertible immediately prior to such
transaction (assuming that a holder of common stock failed to
exercise any rights of election and received per share the kind
and
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amount received per share by a plurality of non-electing
shares). We may not become a party to any of these transactions
unless the terms thereof are consistent with the foregoing.
No adjustment of the conversion price will be required to be
made in any case until cumulative adjustments amount to one
percent or more of the conversion price. Any adjustments not so
required to be made will be carried forward and taken into
account in subsequent adjustments.
Exchange
listing
The Series A preferred stock is listed on the NYSE under
the symbol FCHPRA.
Transfer
agent
The transfer agent and registrar for the Series A preferred
stock is American Stock Transfer Company, New York, New York.
Description of
Series C preferred stock and depositary shares
The following is a summary of the material terms and provisions
of our 8% Series C Cumulative Redeemable Preferred Stock,
or the Series C preferred stock. This summary is not
intended to be complete. Accordingly, you also should review the
terms and provisions of our charter (including the articles
supplementary to the charter setting forth the particular terms
of the Series C preferred stock), and bylaws, copies of
which are available from us upon request. See Where You
Can Find More Information.
General
In March 2005, our board of directors adopted articles
supplementary that classified and created a series of preferred
stock consisting of 54,000 shares, designated 8%
Series C Cumulative Redeemable Preferred Stock. In August
2005, our board of directors adopted articles supplementary that
classified an additional 13,980 shares of Series C
preferred stock thereby increasing the aggregate number of
authorized shares of the Series C preferred stock to
67,980. At March 31, 2010, we had outstanding
67,980 shares of Series C preferred stock represented
by 6,798,000 depositary shares.
The outstanding shares of Series C preferred stock are
validly issued, fully paid and nonassessable. The holders of the
Series C preferred stock have no preemptive rights with
respect to any shares of our capital stock or any of our other
securities convertible into, or carrying rights or options to
purchase, any shares of our capital stock. The shares of
Series C preferred stock are not subject to any sinking
fund or other obligation of us to redeem or retire the
Series C preferred stock. Unless converted or redeemed by
us into common stock, the Series C preferred stock will
have a perpetual term, with no maturity.
Each depositary share represents a 1/100 fractional interest in
a share of Series C preferred stock. The shares of
Series C preferred stock are deposited with American Stock
Transfer Company, or the Series C Preferred Stock
Depositary, under a Deposit Agreement, or the Depositary
Agreement, among FelCor, the Series C Preferred Stock
Depositary and the holders from time to time of the depositary
receipts issued by the Series C Preferred Stock Depositary
under the Depositary Agreement. The depositary receipts evidence
the depositary shares. Subject to the terms of the Depositary
Agreement, each holder of a depositary receipt evidencing a
depositary share is
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entitled to all the rights and preferences of a
1
/100
fractional interest in a share of Series C preferred stock
(including dividend, voting, redemption and liquidation rights
and preferences).
Ranking
The Series C preferred stock ranks
pari passu
with
our outstanding Series A preferred stock (as described
above) and senior to our common stock with respect to the
payment of dividends and amounts upon liquidation, dissolution
or winding up.
While any shares of Series C preferred stock are
outstanding, we may not authorize, create or increase the
authorized amount of any class or series of stock that ranks
senior to the Series C preferred stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or
winding up without the consent of the holders of two-thirds of
the outstanding shares of Series C preferred stock. We,
however, may create additional classes of stock, increase the
authorized number of shares of preferred stock or issue series
of preferred stock ranking junior to, or on a parity with, the
Series C preferred stock with respect, in each case, to the
payment of dividends and amounts upon liquidation, dissolution
and winding up without the consent of any holder of
Series C preferred stock.
Dividends
Holders of the Series C preferred stock are entitled to
receive, when, as and if declared by our board of directors, out
of funds legally available for payment, cash distributions
declared or paid for the corresponding period payable at the
rate of 8% of the liquidation preference per year (equivalent to
$2.00 per year per depositary share). Dividends on the
Series C preferred stock are payable quarterly in arrears
on the last calendar day of January, April, July and October
(or, if not a business day, on the next succeeding business day)
of each year (and, in the case of any accrued but unpaid
dividends, at such additional times and for such interim
periods, if any, as determined by our board of directors). Each
dividend is payable to holders of record as they appear on our
stock records at the close of business on the record dates, not
exceeding 60 days preceding the payment dates thereof, as
shall be fixed by our board of directors. Dividends will be
cumulative, whether or not in any dividend period or periods
FelCor shall have funds legally available for the payment of
dividends and whether or not such dividends are authorized.
Accumulations of dividends on the Series C preferred stock
do not bear interest. Dividends payable on the Series C
preferred stock are computed on the basis of a
360-day
year
consisting of twelve
30-day
months.
Except as provided in the next sentence, no dividend will be
declared or paid, or set apart for payment, on any parity stock
unless full cumulative dividends have been, or contemporaneously
are, declared and paid, or set apart for payment, on the
Series C preferred stock for all prior dividend periods and
the then current dividend period. If accrued dividends on the
Series C preferred stock and any parity stock for all prior
dividend periods have not been paid in full, then any dividend
declared on the Series C preferred stock and any parity
stock for any dividend period will be declared ratably in
proportion to accrued and unpaid dividends on the Series C
preferred stock and any parity stock.
Unless full cumulative dividends then required to be paid on the
Series C preferred stock and any parity stock have been, or
contemporaneously are, declared and paid, or declared and a sum
sufficient for the payment thereof is set apart for payment, we
will not declare, pay or set apart funds for the payment of any
dividend or other distribution with respect to any junior
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stock or, except as set forth in the following sentence, redeem,
purchase or otherwise acquire for consideration any junior stock
(subject to certain exceptions as described in our charter),
through a sinking fund or otherwise. Notwithstanding the
foregoing limitations, we may, at any time, acquire shares of
our stock, without regard to rank, for the purpose of preserving
our status as a REIT.
As used for these purposes,
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the term dividend does not include dividends or
distributions payable solely in shares of junior stock on junior
stock, or in options, warrants or rights to holders of junior
stock to subscribe for or purchase any junior stock;
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the term junior stock means the common stock, and
any other class or series of our capital stock now or hereafter
issued and outstanding that ranks junior to the Series C
preferred stock as to the payment of dividends or amounts upon
the liquidation, dissolution or winding up of FelCor; and
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the term parity stock means any other class or
series of our capital stock now or hereafter issued and
outstanding (including the Series A preferred stock) that
ranks equally with the Series C preferred stock as to the
payment of dividends and amounts upon the liquidation,
dissolution or winding up of FelCor.
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FelCor LP issued to us Series E preferred units in FelCor
LP, the economic terms of which are substantially identical to
the Series C preferred stock. FelCor LP is required to make
all required distributions on the Series E preferred units
(which will mirror the payments of dividends, including accrued
and unpaid dividends upon redemption, and of the liquidation
preference amount of the Series C preferred stock) prior to
any distribution of cash or assets to the holders of the common
units or to the holders of any other interests in FelCor LP,
except for any other series of preference units ranking on a
parity with the Series E preferred units as to
distributions or liquidation rights and except for distributions
required to enable us to maintain our qualification as a REIT.
The indenture under which our senior secured notes are issued
includes covenants that restrict our ability to declare and pay
dividends. In general, the indenture contains exceptions to the
limitations to allow FelCor LP to make distributions necessary
to allow us to maintain our status as a REIT. We are currently
below the minimum thresholds set forth in the indenture for
which discretionary cash distributions are permitted, and as a
result, we are unable to distribute the full amount of
distributions accruing under our outstanding preferred stock.
Optional
redemption
At our option, upon not less than 30 nor more than 60 days
prior written notice, we may redeem the Series C preferred
stock (and the Series C Preferred Stock Depositary will
redeem a number of depositary shares representing the shares of
Series C preferred stock so redeemed upon not less than
30 days prior written notice to the holders thereof), in
whole or in part, at any time or from time to time, at a
redemption price of $2,500 per share (equivalent to $25 per
depositary share), plus all accrued and unpaid distributions
thereon, if any, to the date fixed for redemption without
interest, to the extent we have funds legally available
therefor. The redemption price of the Series C preferred
stock may be paid from any source. Holders of depositary
receipts evidencing depositary shares to be redeemed shall
surrender such depositary receipts at the place designated in
the notice and shall be entitled to the redemption price and
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any accrued and unpaid distributions payable upon redemption
following the surrender. If notice of redemption of any
depositary shares has been given and if the funds necessary for
such redemption have been set aside by us in trust for the
benefit of the holders of any depositary shares so called for
redemption, then from and after the redemption date,
distributions will cease to accrue on those depositary shares,
those depositary shares will no longer be deemed outstanding and
all rights of the holders of those shares will terminate, except
the right to receive the redemption price. If fewer than all of
the outstanding depositary shares are to be redeemed, the
depositary shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional
depositary shares) or by any other equitable method determined
by us.
Notice of redemption will be given by mail or by publication
(with subsequent prompt notice by mail) in
The Wall Street
Journal
or
The New York Times
or, if neither is then
being published, in any other daily newspaper of national
circulation, to the holders of the Series C preferred stock
not less than 30 days nor more than 60 days prior to
the redemption date. A similar notice furnished by us will be
mailed by the Series C Preferred Stock Depositary, by first
class mail, postage prepaid, not less than 30 nor more than
60 days prior to the redemption date, addressed to the
respective holders of record of the depositary receipts
evidencing the depositary shares to be redeemed at their
respective addresses as they appear on the share transfer
records of the Series C Preferred Stock Depositary. No
failure to give notice or any defect therein or in the mailing
thereof will affect the sufficiency of the notice or the
validity of the proceedings for the redemption of any shares of
Series C preferred stock or depositary shares, except as to
the holder to whom notice was defective or not given. Each
notice will state:
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the redemption date;
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the redemption price;
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the number of shares of Series C preferred stock to be
redeemed (and the corresponding number of depositary shares)
from that holder;
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the place or places where the depositary receipts evidencing the
depositary shares are to be surrendered for payment of the
redemption price; and
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that dividends on the shares to be redeemed will cease to accrue
on the redemption date.
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Unless full cumulative dividends then required to be paid on the
Series C preferred stock and any parity stock have been, or
contemporaneously are, declared and paid, or declared and a sum
sufficient for the payment thereof set apart for payment, the
Series C preferred stock may not be redeemed in part and we
may not, except as set forth in the following sentence, purchase
or otherwise acquire for value any shares of Series C
preferred stock, otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of shares
of Series C preferred stock. Notwithstanding the foregoing
limitations, we may, at any time, acquire shares of our shares
of stock, without regard to rank, for the purpose of preserving
our status as a REIT.
Liquidation
preference
The holders of shares of Series C preferred stock are
entitled to receive in the event of the liquidation, dissolution
or winding up of FelCor, whether voluntary or involuntary, a
liquidation preference (the Series C Liquidation
Preference) $2,500 per share of Series C preferred
stock (equivalent to $25 per depositary share), plus an amount
per share of Series C preferred stock
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equal to all dividends (whether or not earned or declared)
accrued and unpaid thereon to the date of final distribution to
such holders and shall not be entitled to any further payment.
Until the holders of the Series C preferred stock have been
paid the Series C Liquidation Preference in full, no
payment will be made to any holder of junior stock upon the
liquidation, dissolution or winding up of FelCor. If, upon the
liquidation, dissolution or winding up of FelCor, the assets of
FelCor, or proceeds thereof, distributable among the holders of
the shares of Series C preferred stock and any parity stock
are insufficient to pay in full the Series C Liquidation
Preference and the liquidation preference applicable with
respect to any parity stock, then such assets, or the proceeds
thereof, will be distributed among the holders of shares of
Series C preferred stock and any parity stock, ratably, in
accordance with the respective amounts that would be payable on
the shares of Series C preferred stock and any parity stock
if all amounts payable thereon were to be paid in full. Neither
a consolidation or merger of us with another corporation, a
statutory share exchange by us, nor a sale, lease or transfer of
all or substantially all of our assets will be considered a
liquidation, dissolution or winding up, voluntary or
involuntary, of us.
Voting
rights
In any matter in which the Series C preferred stock is
entitled to vote (as expressly described herein or as may be
required by law), including any action by written consent, each
share of Series C preferred stock shall be entitled to 100
votes, each of which 100 votes may be directed separately by the
holder thereof (or by any proxy or proxies of such holder). With
respect to each share of Series C preferred stock, the
holder thereof may designate up to 100 proxies, with each such
proxy having the right to vote a whole number of votes (totaling
100 votes per share of Series C preferred stock). As a
result, each depositary share will be entitled to one vote.
If six quarterly dividends (whether or not consecutive) payable
on the Series C preferred stock or any parity stock are in
arrears, whether or not earned or declared, the number of
directors then constituting our board of directors will be
increased by two and the holders of the depositary shares
representing the Series C preferred stock and any other
parity stock, voting together as a single class, identified as
voting preferred shares, will have the right to elect two
additional directors to serve on our board of directors at an
annual meeting of stockholders or a special meeting held in
place thereof, or at a special meeting of the holders of the
voting preferred shares, until all delinquent dividends,
together with the dividends for the current quarterly period, on
the voting preferred shares have been paid or declared or set
aside for payment.
The approval of two-thirds of the outstanding depositary shares
representing the Series C preferred stock and any parity
stock similarly affected, voting together as a single class, is
required in order to:
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amend our charter, whether by way of merger, consolidation or
otherwise, to affect materially and adversely the rights,
preferences or voting power of the holders of the Series C
preferred stock and any parity stock,
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enter into a share exchange that affects the Series C
preferred stock, consolidate with or merge into another entity,
or permit another entity to consolidate with or merge into us,
unless in each such case, each share of Series C preferred
stock remains outstanding without a material and adverse change
to its terms and rights or is converted into, or exchanged for,
a share of preferred stock of the surviving entity having
preferences, rights, voting powers, restrictions, limitations as
to distributions, qualifications and terms and conditions of
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47
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redemption identical to those of a share of Series C
preferred stock (except for changes that do not materially and
adversely affect the holders of the Series C preferred
stock); or
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amend our charter to authorize, reclassify, create or increase
the authorized amount of any class of stock having rights senior
to the Series C preferred stock with respect to the payment
of dividends or amounts upon liquidation, dissolution or winding
up of FelCor.
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We may, however, increase the authorized number of shares of
preferred stock and may create additional classes of parity
stock and junior stock, increase the authorized number of shares
of parity stock and junior stock and issue additional series of
parity stock and junior stock, all without the consent of any
holder of Series C preferred stock.
Conversion
rights
Shares of Series C preferred stock are not convertible
into, or exchangeable for, any other property or securities of
us.
Exchange
listing
The depositary shares representing the Series C preferred
stock are listed on the NYSE under the symbol FCHPRC.
Transfer
agent
The transfer agent and registrar for the depositary shares
representing the Series C preferred stock is American Stock
Transfer Company, New York, New York.
48
Certain
provisions of the Maryland General
Corporation Law and our charter and bylaws
Charter and bylaw
provisions
Restrictions on
ownership and transfer
For us to qualify as a REIT under U.S. federal income tax
laws, we must meet certain requirements concerning the ownership
of our outstanding stock. Specifically, not more than 50% in
value of our outstanding stock may be owned, actually and
constructively under the applicable attribution provisions of
U.S. federal income tax laws, by five or fewer individuals
(as defined to include certain entities) during the last half of
a taxable year, or the 5/50 Rule, and we must be beneficially
owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable
year. See Certain United States Federal Income Tax
ConsequencesRequirements for Qualification. For the
purpose of preserving our REIT qualification, our charter
contains certain provisions that restrict the ownership and
transfer of our stock under certain circumstances, or the
Ownership Limitation Provisions.
The Ownership Limitation Provisions provide that, subject to
certain exceptions specified in our charter, no person may own,
or be deemed to own by virtue of the applicable attribution
provisions of the Code, more than 9.9% of the outstanding shares
of any class of our stock, or the Ownership Limit. Our board of
directors may, but in no event will be required to, waive the
Ownership Limit if it determines that such ownership will not
jeopardize our status as a REIT. As a condition of such waiver,
the board of directors may require opinions of counsel
satisfactory to it
and/or
undertakings or representations from the applicant with respect
to preserving our REIT status. The board of directors has waived
the Ownership Limit, subject to certain conditions, for certain
parties. In determining that it is appropriate to provide such
waivers of the Ownership Limit, the board of directors has
consulted with counsel, has obtained, or will obtain,
appropriate undertakings or representations and has imposed, or
will impose, appropriate conditions with respect to such waivers
to assure that the 5/50 Rule will not be violated. The Ownership
Limitation Provisions will not apply if the board of directors
and the holders of
66
2
/
3
%
of the outstanding shares of stock entitled to vote on such
matter determine that it is no longer in our best interests to
attempt to qualify, or to continue to qualify, as a REIT.
Any purported transfer of our stock, and any other event that
would otherwise result in any person or entity violating the
Ownership Limit, will be void and of no force or effect as to
that number of shares in excess of the Ownership Limit, and the
purported transferee, or Prohibited Transferee, shall acquire no
right or interest (or, in the case of any event other than a
purported transfer, the person or entity, or Prohibited Owner,
holding record title to any such shares in excess of the
Ownership Limit, or the Excess Shares, shall cease to own any
right or interest) in the Excess Shares. In addition, if any
purported transfer of our stock or any other event otherwise
would cause us to become closely held under the Code
or otherwise fail to qualify as a REIT under the Code (other
than as a result of a violation of the requirement that a REIT
have at least 100 stockholders) then any such purported transfer
will be void and of no force or effect as to that number of
shares in excess of the number that could have been transferred
without such result, and the Prohibited Transferee shall acquire
no right or interest (or, in the case of any event other than a
transfer, the Prohibited Owner shall cease to own any right or
interest) in such Excess Shares. Also, if any purported transfer
of our capital stock or any other event would otherwise cause us
to violate the 5/50 Rule or to own, or be deemed to own by
49
virtue of the applicable attribution provisions of the Code, 10%
or more of the ownership interests in any entity that leases any
hotels or in any sublessee, other than a TRS, then any such
purported transfer will be void and of no force or effect as to
that number of shares in excess of the number that could have
been transferred without such result, and the Prohibited
Transferee shall acquire no right or interest (or, in the case
of any event other than a transfer, the Prohibited Owner shall
cease to own any right or interest) in such Excess Shares.
Any such Excess Shares will be transferred automatically, by
operation of law, to a trust, the beneficiary of which will be a
qualified charitable organization selected by us, or the
Beneficiary. The trustee of the trust, who shall be designated
by us and be unaffiliated with us and any Prohibited Owner, will
be empowered to sell such Excess Shares to a qualified person or
entity and distribute to a Prohibited Transferee an amount equal
to the lesser of the price paid by the Prohibited Transferee for
such Excess Shares or the sales proceeds received by the trust
for such Excess Shares. In the case of any Excess Shares
resulting from any event other than a transfer, or from a
transfer for no consideration, the trustee will be empowered to
sell such Excess Shares to a qualified person or entity and
distribute to the Prohibited Owner an amount equal to the lesser
of the fair market value of such Excess Shares on the date of
such event or the sales proceeds received by the trust for such
Excess Shares. Prior to a sale of any such aggregate fractional
shares by the trust, the trustee will be entitled to receive, in
trust for the benefit of the Beneficiary, all dividends and
other distributions paid by us with respect to such Excess
Shares, and also will be entitled to exercise all voting rights
with respect to the Excess Shares.
Any purported transfer of our stock that would otherwise cause
us to be beneficially owned by fewer than 100 persons will
be null and void in its entirety, and the intended transferee
will acquire no rights in such stock.
All certificates representing shares of stock will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as may be
required under U.S. federal income tax laws) of the
outstanding shares of our stock must file a written notice with
us containing the information specified in our charter no later
than January 30 of each year. In addition, each stockholder
shall, upon demand, be required to disclose to us in writing
such information as we may request in order to determine the
effect, if any, of such stockholders actual and
constructive ownership on our status as a REIT and to ensure
compliance with the Ownership Limit.
The Ownership Limitation Provisions may have the effect of
precluding an acquisition of control of us without approval of
our board of directors.
Staggered board
of directors
Our charter provides that our board of directors is divided into
three classes of directors, each class constituting
approximately one-third of the total number of directors and
with the classes serving staggered three-year terms. The
classification of directors will have the effect of making it
more difficult for stockholders to change the composition of our
board of directors. We believe, however, that the longer time
required to elect a majority of our board of directors will help
to ensure continuity and stability of our management and
policies.
50
The classification provisions could also have the effect of
discouraging a third party from accumulating large blocks of our
stock or attempting to obtain control of us, even though such an
attempt might be beneficial to us and our stockholders.
Accordingly, stockholders could be deprived of certain
opportunities to sell their securities at a higher price than
might otherwise be the case.
Number of
directors; removal; filling vacancies
Our charter and bylaws provide that, subject to any rights of
holders of shares of preferred stock to elect additional
directors under specified circumstances, the number of directors
will consist of not less than three nor more than nine persons,
subject to increase or decrease by the affirmative vote of 80%
of the members of the entire board of directors,
provided
,
however
, that in no event shall the
number of directors be less than the minimum required by the
Maryland General Corporation Law. At all times a majority of the
directors shall be Independent Directors, as defined by our
charter, except that upon the death, removal or resignation of
an Independent Director, such requirement shall not be
applicable for 60 days. As of October 31, 2008, in
accordance with the bylaws, the number of directors was fixed at
ten directors, eight of whom are Independent Directors. The
holders of shares of common stock shall be entitled to vote on
the election or removal of directors, with each share entitled
to one vote. Our charter provides that, subject to any rights of
holders of shares of preferred stock any vacancies may be filled
by the affirmative vote of a majority of the remaining
directors, even if less than a quorum. Any director so elected
may qualify as an Independent Director only if he has received
the affirmative vote of at least a majority of the remaining
Independent Directors, if any. Accordingly, our board of
directors could temporarily prevent any holder of shares of
common stock from enlarging our board of directors and filling
the new directorships with such stockholders own nominees.
In accordance with Maryland law, any director so elected by our
board of directors shall serve until the next annual meeting of
our stockholders, even if the term of the class to which the
director was elected does not expire at that annual meeting of
stockholders.
Any director or the entire board may be removed with cause by
the vote of the holders of a majority of the outstanding shares
of common stock at a special meeting of the stockholders called
for the purpose of removing him or them.
Additionally, our charter and Maryland law provide that if
stockholders of any class of our capital stock are entitled
separately to elect one or more directors, such directors may
not be removed except by the affirmative vote of a majority of
all of the shares of such class or series entitled to vote for
such directors.
Limitation of
liability
Our charter provides that, to the maximum extent that Maryland
law in effect from time to time permits limitation of liability
of directors and officers, none of our directors or officers
shall be liable to us or our stockholders for money damages.
Under Maryland law, the effect of our charter provision will be
that our directors and officers will not be liable to us or our
stockholders for money damages, except to the extent of an
improper benefit actually received by them or a finding of
active and deliberate dishonesty on their part.
51
Indemnification
of directors and officers
Our charter and bylaws require us to indemnify our directors,
officers, employees and agents to the fullest extent permitted
from time to time by Maryland law. Maryland law permits a
corporation to indemnify its directors, officers, employees and
agents against judgments, penalties, fines, settlements and
reasonable expenses (including attorneys fees) actually
incurred by them in connection with any proceeding to which they
may be made a party by reason of their service to, or at the
request of, the corporation, unless it is established that:
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the act or omission of the indemnified party was material to the
matter giving rise to the proceeding and the act or omission was
committed in bad faith or was the result of active and
deliberate dishonesty; or
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the indemnified party actually received an improper personal
benefit in money, property or services; or
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in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was
unlawful.
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Indemnification is mandatory if the indemnified party has been
successful on the merits or otherwise in the defense of any
proceeding unless such indemnification is not otherwise
permitted as provided in the preceding sentence. In addition to
the foregoing, a court of competent jurisdiction, under certain
circumstances, may order indemnification if it determines that
the indemnified party is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances. An
indemnified party may not be indemnified if the proceeding was
an action by or in the right of the Company and the indemnified
party was adjudged to be liable to the Company, or the
indemnified party was adjudged to be liable on the basis that he
received an improper personal benefit.
Reasonable expenses incurred by an indemnified party may be paid
or reimbursed by the Company in advance of the final disposition
of the proceeding if the indemnified provides the Company with a
written affirmation of the indemnified partys good faith
belief that the requisite standard of conduct has been met and
that the expenses will be repaid if it is ultimately determined
that the standard of conduct has not been met.
Our board of directors approved a form of indemnification
agreement for our officers and directors. The rights of an
indemnitee under that indemnification agreement complement any
rights such an indemnitee may already have under our charter or
bylaws, under Maryland law or otherwise. This indemnification
agreement requires us to indemnify and advance expenses and
costs incurred by an indemnitee in connection with any claims,
suits or proceedings arising as a result of the
indemnitees service as our officer or director.
Amendment
Subject to the rights of any shares of preferred stock
outstanding from time to time (including the rights of the
Series A preferred stock and the Series C preferred
stock), our charter may be amended by the affirmative vote of
the holders of a majority of the outstanding shares of stock
entitled to vote on the matter after the directors have adopted
a resolution approving the amendment and submitted the amendment
to the stockholders at either an annual or special meeting for
approval by the stockholders; provided, that our charter
provision providing for the classification of our board of
directors into three classes may not be amended, altered,
changed or repealed without the affirmative vote of at least 80%
of the members of our board of
52
directors and the affirmative vote of holders of 75% of the
outstanding shares of capital stock entitled to vote on that
matter. The provisions relating to restrictions on transfer,
designation of
shares-in-trust,
shares-in-trust
and ownership of the lessee may not be amended, altered, changed
or repealed without the affirmative vote of a majority of the
members of our board of directors and approved by an affirmative
vote of the holders of not less than
66
2
/
3
%
of the outstanding shares of our stock entitled to vote on that
matter. Similarly, we may not take any action to cause us not to
qualify as a REIT or to revoke our election to be taxed as a
REIT without the affirmative vote of the holders of not less
than
66
2
/
3
%
of the outstanding shares of our stock entitled to vote on the
matter.
Operations
We generally are prohibited from engaging in certain activities,
including acquiring or holding property or engaging in any
activity that would cause us to fail to qualify as a REIT.
Maryland
anti-takeover statutes
Under the Maryland General Corporation Law, the MGCL, certain
business combinations (including a merger,
consolidation, share exchange or, in certain circumstances, an
asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and (i) any
person who beneficially owns 10% or more of the voting power of
the outstanding voting stock of the corporation, (ii) an
affiliate of the corporation who, at any time within the
two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then
outstanding stock of the corporation, or an Interested
Stockholder, or (iii) an affiliate thereof are prohibited
for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder.
Thereafter, any business combination must be
recommended by the board of directors of the corporation and
approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting
shares of the corporation voting together as a single group and
(b) two-thirds of the votes entitled to be cast by holders
of outstanding voting shares of the corporation other than
voting shares held by the Interested Stockholder with whom (or
with whose affiliate) the business combination is to be
effected, voting together as a single group unless, among other
conditions, the corporations stockholders receive a
minimum price (as defined under Maryland law) for their shares
and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares.
These provisions of the MGCL do not apply, however, to business
combinations of a corporation (i) that are, with
specifically identified or unidentified existing or future
Interested Stockholders, approved or exempted by the board of
directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder, or
(ii) if the stockholders of the corporation adopt a charter
amendment electing not to be governed by the business
combination statute by a vote of at least 80% of the votes
entitled to be cast by outstanding shares of voting stock of the
corporation, voting together in a single group, and two-thirds
of the votes entitled to be cast by persons (if any) who are not
Interested Stockholders or affiliates thereof voting together as
a single group, provided that the charter amendment may not be
effective for 18 months after the vote and may not apply to
a business combination with any person who became an Interested
Stockholder on or before the date of the vote. Our charter has
exempted from these provisions of the MGCL, any business
combination involving the chairman of our board, or any present
or future affiliates, associates or other persons acting in
concert or as a group with our chairman of the board.
53
Sections 3-701
et seq. of the MGCL, or the Control Share Statute, provides that
control shares of a Maryland corporation acquired in
a control share acquisition have no voting rights
except to the extent approved by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares of
stock owned by the acquiring person, or by officers or directors
who are employees of the corporation. Control shares
are voting shares of stock which, if aggregated with all other
shares of stock previously acquired by that person or in respect
of which the acquiring person is able to exercise or direct the
exercise of voting power, would entitle the acquiror to exercise
voting power in electing directors within one of the following
ranges of voting power: (i) one-tenth or more but less than
one-third, (ii) one-third or more but less than a majority,
or (iii) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition
means the acquisition of control shares, subject to certain
exceptions. Voting rights will not be denied to control
shares if the acquisition of such shares, as to
specifically identified or unidentified future or existing
stockholders or their affiliates, has been approved in the
charter or bylaws of the corporation prior to the acquisition of
such shares.
A person who has made, or proposes to make, a control share
acquisition, upon satisfaction of certain conditions (including
an undertaking to pay expenses), may compel the board of
directors of the corporation to call a special meeting of
stockholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question
at any stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then, subject to certain conditions
and limitations, the corporation may redeem any or all of the
control shares (except those for which voting rights have
previously been approved) for fair value determined, without
regard to the absence of voting rights for the control shares,
as of the date of the last control share acquisition or of any
meeting of stockholders at which the voting rights of such
shares are considered and not approved. If voting rights for
control shares are approved at a stockholders meeting and
the acquiring person becomes entitled to vote a majority of the
shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for
purposes of the appraisal rights may not be less than the
highest price per share paid by the acquiring person in the
control share acquisition. Certain limitations and restrictions
otherwise applicable to the exercise of dissenters rights
do not apply in the context of a control share acquisition.
The Maryland Control Share Statute does not apply to shares
acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction, or to acquisitions
approved or exempted by a provision contained in the
corporations charter or bylaws prior to the acquisition.
Our charter contains a provision exempting any and all
acquisitions of shares of our stock from the Control Share
Statute. There can be no assurance that this provision will not
be amended or eliminated in the future. If the foregoing
exemption in the charter is amended, the Control Share Statute
could have the effect of discouraging offers to acquire us and
of increasing the difficulty of consummating any such offer.
Maryland law also provides that a Maryland corporation that is
subject to the Exchange Act and has at least three outside
directors can elect by resolution of the board of directors to
be subject to some corporate governance provisions that may be
inconsistent with the corporations charter
54
and bylaws. Under the applicable statute, a board of directors
may classify itself without the vote of stockholders. A board of
directors classified in that manner cannot be altered by
amendment to the charter of the corporation. Further, the board
of directors may, by electing into the applicable statutory
provisions and notwithstanding the charter or bylaws:
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provide that a special meeting of stockholders will be called
only at the request of stockholders entitled to cast at least a
majority of the votes entitled to be cast at the meeting;
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reserve for itself the right to fix the number of directors;
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provide that a director may be removed only by the vote of the
holders of two-thirds of the stock entitled to vote; and
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retain for itself sole authority to fill vacancies created by
the death, removal or resignation of a director.
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In addition, a director elected to fill a vacancy under this
provision will serve for the balance of the unexpired term
instead of until the next annual meeting of stockholders. A
board of directors may implement all or any of these provisions
without amending the charter or bylaws and without stockholder
approval. A corporation may be prohibited by its charter or by
resolution of its board of directors from electing any of the
provisions of the statute. We are not prohibited from
implementing any or all of the statute. If implemented, these
provisions could discourage offers to acquire our stock and
could increase the difficulty of completing an offer.
55
Partnership
agreement
The following summary of the Second Amended and Restated
Agreement of Limited Partnership of FelCor LP, or the
Partnership Agreement, and the descriptions of certain
provisions thereof set forth in this prospectus, are qualified
in their entirety by reference to the Partnership Agreement,
which is an exhibit to the registration statement of which this
prospectus is a part.
Management
FelCor LP is a limited partnership organized under the laws of
the State of Delaware and was formed pursuant to the terms of
the Partnership Agreement. Pursuant to the Partnership
Agreement, FelCor, as the sole general partner of FelCor LP, has
full, exclusive and complete responsibility and discretion in
the management and control of FelCor LP, and the limited
partners of FelCor LP, or the Limited Partners, have no
authority to transact business for, or participate in the
management activities or decisions of, FelCor LP. Any amendment
to the Partnership Agreement that would, however,
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affect the Redemption Rights described under
Redemption Rights below;
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adversely affect the Limited Partners rights to receive
cash distributions;
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alter FelCor LPs allocations of income; or
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impose on the Limited Partners any obligations to make
additional contributions to the capital of FelCor LP,
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requires the consent of Limited Partners holding at least a
majority of the Units.
Transferability
of interests
FelCor may not voluntarily withdraw from FelCor LP or transfer
or assign its interest in FelCor LP unless the transaction in
which such withdrawal or transfer occurs results in the Limited
Partners receiving property in an amount equal to the amount
they would have received had they exercised their redemption
rights immediately prior to such transaction, or unless the
successor to FelCor contributes substantially all of its assets
to FelCor LP in return for an interest in FelCor LP. The Limited
Partners may not transfer their interests in FelCor LP without
the consent of FelCor, which FelCor may withhold in its sole
discretion. FelCor may not consent to any transfer that would
cause FelCor LP to be treated as a separate corporation for
federal income tax purposes.
Capital
contributions
FelCor and the original Limited Partners contributed cash and
certain interests in FelCors six initial hotels to FelCor
LP in connection with FelCors initial public offering of
common stock in 1994, or the IPO. Subsequently, FelCor LP issued
additional Units in exchange for cash contributions and for
interests in additional hotels. FelCor will contribute all of
the net proceeds from the sale of capital stock to FelCor LP in
exchange for additional Units having distribution, liquidation
and conversion provisions substantially identical to the capital
stock so offered by FelCor. As required by the Partnership
Agreement, immediately prior to a capital contribution by
FelCor, the Partners capital accounts and the Carrying
Value (as that term is defined in Partnership Agreement) of
FelCor LP property shall be adjusted to reflect the unrealized
gain or
56
unrealized loss attributable to FelCor LP property as if such
items had actually been recognized immediately prior to such
issuance and had been allocated to the Partners at such time.
The Partnership Agreement provides that if FelCor LP requires
additional funds at any time or from time to time in excess of
funds available to FelCor LP from borrowing or capital
contributions, FelCor may borrow such funds from a financial
institution or other lender and lend such funds to FelCor LP on
the same terms and conditions as are applicable to FelCors
borrowing of such funds. As an alternative to borrowing funds
required by FelCor LP, FelCor may contribute the amount of such
required funds as an additional capital contribution to FelCor
LP. If FelCor so contributes additional capital to FelCor LP,
FelCor will receive additional Units. FelCor will contribute the
proceeds from this offering to FelCor LP in exchange for the
number of additional Units in FelCor LP equal to the number of
shares of FelCor common stock sold in this offering.
Redemption rights
Pursuant to the Partnership Agreement, the Limited Partners are
entitled to certain rights of redemption, or
Redemption Rights, which enable them to cause FelCor to
redeem their interests in FelCor LP (subject to certain
restrictions) in exchange for shares of common stock of FelCor,
cash or a combination thereof, at the election of FelCor. The
Redemption Rights may not be exercised if the issuance of
shares of common stock by FelCor, as general partner, for any
part of the interest in FelCor LP sought to be redeemed would:
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result in any person violating the Ownership Limit contained in
FelCors charter;
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cause FelCor to be closely held within the meaning
of the Code;
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cause FelCor to be treated as owning 10% or more of the lessee
or any sublessee within the meaning of the Code; or
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otherwise cause FelCor to fail to qualify as a REIT.
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In any case, FelCor LP or FelCor (as the case may be) may elect,
in its sole and absolute discretion, to pay the redemption
amount in cash. The Redemption Rights may be exercised by
the Limited Partners, in whole or in part (in either case,
subject to the above restrictions), at any time or from time to
time, following the satisfaction of any applicable holding
period requirements. At March 31, 2010, the aggregate
number of shares of common stock issuable upon exercise of the
Redemption Rights by the Limited Partners, other than by
us, was 294,960. The number of shares issuable upon the exercise
of the Redemption Rights will be adjusted upon the
occurrence of stock splits, mergers, consolidations or similar
pro rata share transactions, which otherwise would have the
effect of diluting the ownership interests of the Limited
Partners or the stockholders of FelCor.
Registration
rights
The Limited Partners had certain rights to the registration for
resale of any shares of common stock of FelCor held by them or
received by them upon redemption of their Units. Such rights
included piggyback rights and the right to include such shares
in a registration statement. In connection therewith, FelCor has
filed and caused to become effective registration statements
relating to the resale of shares issued upon redemption of
certain outstanding Units. FelCor was
57
required to bear the costs of such registration statements,
exclusive of underwriting discounts, commissions and certain
other costs attributable to, and borne by, the selling
stockholders.
Tax
matters
Pursuant to the Partnership Agreement, FelCor is the tax matters
partner of FelCor LP and, as such, has authority to make tax
elections under the Code on behalf of FelCor LP.
Profit and loss of FelCor LP generally are allocated among the
partners in accordance with their respective interests in FelCor
LP based on the number of Units held by the partners.
Operations
The Partnership Agreement requires that FelCor LP be operated in
a manner that enables FelCor to satisfy the requirements for
being classified as a REIT and to avoid any federal income tax
liability.
Distributions
The Partnership Agreement provides that FelCor LP will
distribute cash from operations (including net sale or
refinancing proceeds, but excluding net proceeds from the sale
of FelCor LPs property in connection with the liquidation
of FelCor LP) quarterly, in amounts determined by FelCor in its
sole discretion, to the partners in accordance with their
respective percentage interests in FelCor LP. Upon liquidation
of FelCor LP, after payment of, or adequate provision for, debts
and obligations of FelCor LP, including any partner loans, any
remaining assets of FelCor LP will be distributed to all
partners with positive capital accounts in accordance with their
respective positive capital account balances. If any partner,
including FelCor, has a negative balance in its capital account
following a liquidation of FelCor LP, it will be obligated to
contribute cash to FelCor LP equal to the negative balance in
its capital account.
Term
FelCor LP will continue in perpetuity or until sooner dissolved
upon:
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the bankruptcy, dissolution or withdrawal of FelCor as general
partner (unless the Limited Partners elect to continue FelCor
LP);
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the sale or other disposition of all or substantially all the
assets of FelCor LP;
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the redemption of all limited partnership interests in FelCor LP
(other than those held by FelCor, if any); or
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the election by general partner.
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Certain United
States federal income tax considerations
The following discussion is a summary of certain
U.S. federal income tax consequences and, in the case of
non-U.S. stockholders
(as defined below), U.S. federal estate tax consequences of
qualification and taxation as a REIT and of the ownership and
disposition of our common stock. Because this section is a
summary, it does not address all of the tax issues that may be
important to you in light of your personal investment or tax
circumstances. In addition, this section does not address the
tax issues that may be important to certain types of holders of
our common stock that are subject to special treatment under
U.S. federal income tax laws, such as insurance companies,
partnerships or other pass-through entities (or investors in
such entities), expatriates, taxpayers subject to the
alternative minimum tax, tax-exempt organizations (except as
discussed herein), financial institutions or broker-dealers, and
dealers in securities. This discussion applies only to persons
who purchase our common stock described in this prospectus in
this offering and who hold our common stock as a capital asset
for U.S. federal income tax purposes. In addition, this
discussion does not address any consequences resulting from the
newly enacted Medicare tax on investment income.
The statements of law in this discussion are based on current
provisions of the Code, existing temporary and final Treasury
regulations thereunder, and current administrative rulings and
court decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions,
any of which may take effect retroactively, will not affect the
accuracy of any statements in this discussion. We have not and
will not seek any rulings or opinions from the IRS regarding the
matters discussed below. There can be no assurance that the IRS
will not take positions which are different from those discussed
below.
As used in this discussion, a U.S. stockholder
is a beneficial owner of our common stock that, for United
States federal income tax purposes, is:
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an individual who is a citizen or resident of the United States;
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a corporation or other entity taxable as a corporation created
or organized in or under the laws of the United States, any
state thereof or the District of Columbia;
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an estate if its income is subject to U.S. federal income
taxation regardless of its source; or
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a trust, if a U.S. court is able to exercise primary
supervision over administration of the trust and one or more
U.S. persons have authority to control all substantial
decisions of the trust, or if the trust has validly elected to
continue to be treated as a domestic trust.
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As used in this discussion, a
non-U.S. stockholder
is a beneficial owner of our common stock that, for United
States federal income tax purposes, is an individual,
corporation, estate or trust and is not a U.S. stockholder.
If any entity or arrangement that is treated as a partnership
for U.S. federal income tax purposes is a beneficial owner
of our common stock, the treatment of a partner in the
partnership will generally depend on the status of the partner
and the activities of the partnership. If you are a partner in a
partnership that is considering purchasing our common stock, you
should consult with your tax advisor.
This discussion assumes that a stockholder will structure its
ownership of our common stock so as to not be subject to the
newly enacted withholding tax discussed in
Additional Holding Requirements.
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THIS SUMMARY IS FOR GENERAL INFORMATION PURPOSES ONLY AND IS
NOT INTENDED TO BE CONSTRUED AS TAX ADVICE. WE URGE YOU TO
CONSULT YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF INVESTING IN OUR COMMON STOCK AND OF OUR
ELECTION TO BE TAXED AS A REIT. SPECIFICALLY, WE URGE YOU TO
CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL, STATE,
LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES (INCLUDING ANY
FEDERAL ESTATE OR GIFT TAX CONSEQUENCES AND ANY CONSEQUENCES
RESULTING FROM THE NEWLY ENACTED MEDICARE TAX ON INVESTMENT
INCOME) OF SUCH INVESTMENT AND ELECTION, AND REGARDING POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
Our
taxation
We are currently taxed as a REIT under U.S. federal income
tax laws. We elected to be taxed as a REIT under
U.S. federal income tax laws beginning with our short
taxable year ended December 31, 1994. We believe that since
our election to be a REIT we have operated in such a manner as
to qualify for taxation as a REIT, and we intend to continue to
operate in such a manner, but no assurance can be given that we
have or will continue to qualify as a REIT under the Code. This
section discusses the laws governing the U.S. federal
income tax treatment of a REIT and holders of its common stock.
These laws are highly technical and complex.
Our qualification as a REIT depends on our ability to meet on a
continuing basis qualification tests set forth in the
U.S. federal income tax laws. Those qualification tests
involve the percentage of income that we earn from specified
sources, the percentages of our assets that fall within
specified categories, the diversity of our share ownership and
the percentage of our taxable income that we distribute. We
describe the REIT qualification tests in more detail below. For
a discussion of the federal income tax consequences of our
failure to qualify as a REIT, see Requirements For
QualificationFailure To Qualify.
If we qualify as a REIT, we generally will not be subject to
U.S. federal income tax on the taxable income that we
distribute to our stockholders. The benefit of that tax
treatment is that we avoid the double taxation, or
taxation at both the corporate and stockholder levels, that
generally results from owning stock in a corporation. We will,
however, be subject to federal tax in the following
circumstances:
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We will pay federal income tax on our taxable income, including
net capital gain, that we do not distribute to our stockholders
during, or within a specified time period after, the calendar
year in which the income is earned.
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Under certain circumstances we may be subject to the
alternative minimum tax on items of tax preference
that we do not distribute to our stockholders.
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We will pay income tax at the highest corporate rate on
(1) net income from the sale or other disposition of
property acquired through foreclosure (foreclosure
property) that we hold primarily for sale to customers in
the ordinary course of our business and (2) other
non-qualifying income from foreclosure property.
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We will pay a 100% tax on net income from sales or other
dispositions of property, other than foreclosure property, that
we hold primarily for sale to customers in the ordinary course
of our business.
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If we fail to satisfy the 75% gross income test or the 95% gross
income test, as described below under Requirements
For QualificationIncome Tests, and nonetheless
continue to qualify as a REIT because we meet other
requirements, we will pay a 100% tax on (1) the
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greater of the amount by which we fail the 75% gross income test
or the amount by which 95% of our gross income exceeds the
amount of our income qualifying under the 95% gross income test,
multiplied by (2) a fraction intended to reflect our
profitability.
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In the event of a more than de minimis failure of any of the
asset tests as described below under Requirements
For QualificationAsset Tests, as long as the failure
was due to reasonable cause and not to willful neglect, we
dispose of the assets or otherwise comply with the asset tests
within six months after the last day of the quarter in which we
discovered the failure of the asset test and we provide a
schedule of the disqualifying assets to the IRS, we will pay a
tax equal to the greater of (1) $50,000, or (2) the
amount determined by multiplying the highest rate of income tax
for corporations (currently 35%) by the net income from the
nonqualifying assets during the period in which we failed to
satisfy the asset test or tests.
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If we fail to satisfy one or more requirements for REIT
qualification during a taxable year, other than a gross income
test or an asset test, and continue to qualify as a REIT because
we meet other requirements, we will be required to pay a penalty
of $50,000 for each such failure.
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If we fail to distribute during a calendar year at least the sum
of (1) 85% of our REIT ordinary income for such year,
(2) 95% of our REIT capital gain net income for such year,
and (3) any undistributed taxable income from prior
periods, we will pay a 4% excise tax on the excess of this
required distribution over the amount we actually distributed.
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We will incur a 100% excise tax on transactions with a
taxable REIT subsidiary that are not conducted on an
arms-length basis.
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We may elect to retain and pay income tax on our net long-term
capital gain.
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If we acquire any asset from a C corporation, or a corporation
that generally is subject to full corporate-level tax, in a
merger or other transaction in which we acquire a basis in the
asset that is determined by reference to the C
corporations basis in the asset or another asset we will
pay tax at the highest regular corporate rate applicable if we
recognize gain on the sale or disposition of such asset during
the ten-year period after we acquire such asset, provided no
election is made for the transaction to be taxable on a current
basis. The amount of gain on which we will pay tax is generally
the lesser of (1) the amount of gain that we recognize at
the time of the sale or disposition of the asset and
(2) the amount of gain that we would have recognized if we
had sold the asset at the time we acquired the asset.
Accordingly, any gain we recognize on the disposition of any
such asset during the ten-year period beginning on the date of
acquiring the asset, to the extent of such assets
built-in gain, will be subject to tax at the highest
regular corporate rate.
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Requirements for
qualification
A REIT is a corporation, trust, or association that meets the
following requirements:
1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable
shares, or by transferable certificates of beneficial interest;
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3. it would be taxable as a domestic corporation, but for
the REIT provisions of U.S. federal income tax laws;
4. it is neither a financial institution nor an insurance
company subject to special provisions of U.S. federal
income tax laws;
5. at least 100 persons are beneficial owners of its
shares or ownership certificates;
6. no more than 50% in value of its outstanding shares or
ownership certificates is owned, directly or indirectly, by five
or fewer individuals, as defined in U.S. federal income tax
laws to include certain entities, during the last half of any
taxable year;
7. it elects to be a REIT, or has made such election for a
previous taxable year, and satisfies all relevant filing and
other administrative requirements established by the IRS that
must be met to elect and maintain REIT status;
8. it uses a calendar year for federal income tax purposes
and complies with the recordkeeping requirements of
U.S. federal income tax laws; and
9. it meets certain other qualification tests, described
below, regarding the nature of its income and assets, and the
amount of its distributions.
We must meet requirements 1 through 4 during our entire taxable
year and must meet requirement 5 during at least 335 days
of a taxable year of 12 months, or during a proportionate
part of a taxable year of less than 12 months. If we comply
with all the requirements for ascertaining the ownership of our
outstanding shares in a taxable year and have no reason to know
that we violated requirement 6, we will be deemed to have
satisfied requirement 6 for such taxable year. For purposes of
determining share ownership under requirement 6, an
individual generally includes a supplemental
unemployment compensation benefit plan, a private foundation, or
a portion of a trust permanently set aside or used exclusively
for charitable purposes. An individual, however,
generally does not include a trust that is a qualified employee
pension or profit sharing trust under U.S. federal income
tax laws, and beneficiaries of such a trust will be treated as
holding our shares in proportion to their actuarial interests in
the trust for purposes of requirement 6. In addition, for
purposes of applying requirement 6, a look-through rule applies
so that generally shares of our capital stock that are held by a
corporation, partnership, estate or trust (except as summarized
above) will be considered owned proportionately by their
respective stockholders, partners or beneficiaries.
We have issued sufficient stock with sufficient diversity of
ownership to satisfy requirements 5 and 6 set forth above. In
addition, our charter restricts the ownership and transfer of
our stock so that we should continue to satisfy requirements 5
and 6. The provisions of the charter restricting the ownership
and transfer of our stock are described in Certain
Provisions of the Maryland General Corporation Law and Our
Charter and Bylaws.
A corporation that is a qualified REIT subsidiary
(
i.e.
, a corporation that is 100% owned by a REIT with
respect to which no taxable REIT subsidiary (TRS election has
been made) is not treated as a corporation separate from its
parent REIT. All assets, liabilities, and items of income,
deduction, and credit of a qualified REIT subsidiary
are treated as assets, liabilities, and items of income,
deduction, and credit of the parent REIT. Thus, in applying the
requirements described in this section, any qualified REIT
subsidiary that we own will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of that
subsidiary will be treated as our assets, liabilities, and items
of income, deduction, and credit.
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In the case of a REIT that is a partner in a partnership, in
general, the REIT is treated as owning its proportionate share
(based on capital interests) of the assets of the partnership
and as earning its allocable share of the gross income of the
partnership for purposes of the applicable REIT qualification
tests. Thus, our proportionate share of the assets, liabilities,
and items of gross income of FelCor LP and of any other
partnership or joint venture or limited liability company that
is treated as a partnership for federal income tax purposes in
which we own, or will acquire an interest, directly or
indirectly (together, the Subsidiary Partnerships),
are treated as our assets and gross income for purposes of
applying the various REIT qualification requirements.
A REIT may own up to 100% of the stock of a TRS. A TRS can lease
hotels from its parent REIT as long as it engages an
eligible independent contractor to manage and
operate the hotels. In addition, a TRS may earn income that
would not be qualifying income if earned directly by the parent
REIT. Both the subsidiary and the REIT must jointly elect to
treat the subsidiary as a TRS by jointly filing Form 8875
with the IRS. A corporation of which a TRS directly or
indirectly owns more than 35% of the voting power or value of
the stock will automatically be treated as a TRS. A TRS will pay
tax at regular corporate rates on any income that it earns. In
addition, special rules limit the deductibility of interest paid
or accrued by a TRS to its parent REIT to assure that the TRS is
subject to an appropriate level of corporate taxation. Further,
the rules impose a 100% excise tax on transactions between a TRS
and its parent REIT or the REITs tenants that are not
conducted on an arms-length basis. We hold ownership
interests in several TRSs through FelCor LP.
Income
tests
We must satisfy two gross income tests annually to maintain our
qualification as a REIT. First, at least 75% of our gross income
for each taxable year must consist of defined types of income
that we derive, directly or indirectly, from investments
relating to real property or mortgages on real property or
temporary investment income. Qualifying income for purposes of
the 75% gross income test generally includes:
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rents from real property;
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interest on debt secured by mortgages on real property or on
interests in real property;
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dividends or other distributions on and gain from the sale of
shares in other REITs;
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gain from the sale of certain real estate assets;
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income and gain derived from qualifying foreclosure
property; and
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income derived from the temporary investment of new capital that
is attributable to the issuance of our shares or a public
offering of our debt with a maturity date of at least five years
and that we receive during the one-year period beginning on the
date on which we received such new capital.
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Second, in general, at least 95% of our gross income for each
taxable year must consist of (1) income that is qualifying
income for purposes of the 75% gross income test, (2) other
types of dividends and interest, (3) gain from the sale or
disposition of stock or securities, or (4) any combination
of the foregoing. Gross income from our sale of any property
that we hold primarily for sale to customers in the ordinary
course of our business is excluded from both income tests.
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In addition, if we enter into a transaction in the normal course
of our business primarily to manage risk of interest rate, price
changes or currency fluctuations with respect to any item of
income or gain that would be qualified income under the 75% or
95% gross income tests (or any property which generates such
qualified income or gain), including gain from the termination
of such a transaction, and we properly identify the
hedges as required by the Code and Treasury
regulations, the income from the transaction will be excluded
from gross income for purposes of the 95% gross income test and
the 75% gross income test (after July 30, 2008). In
addition, our gross income, for purposes of the 75% (after
July 30, 2008) and 95% gross income tests, will not
include any of our gross income from properly identified
hedges, including any gain from the sale or
disposition of such a transaction, to the extent the transaction
hedges any indebtedness incurred (or to be incurred) by us to
acquire or carry real estate assets. If we have any foreign
currency gain, certain real estate foreign exchange
gain is excluded from both gross income tests (after
July 30, 2008). In addition, if we have any foreign
currency gain, certain passive foreign exchange gain
is excluded from our gross income for purposes of the 95% gross
income test (but is included in our gross income and treated as
non-qualifying income to the extent such gain is not also
considered real estate foreign exchange gain for
purposes of the 75% gross income test) (after July 30,
2008). If we acquire any qualified business unit
that remits certain foreign currency gain to us, such gain will
not be included in our gross income for purposes of the 75% or
95% gross income tests (after July 30, 2008). Provided
that, if we become dealers or regular traders in securities, any
foreign currency gain will be gross income to us that
doesnt qualify under either gross income test (after
July 30, 2008).
The following paragraphs discuss the specific application of the
gross income tests to us.
Rent that we receive from real property that we own and lease to
tenants will qualify as rents from real property,
which is qualifying income for purposes of the 75% and 95% gross
income tests, only if the following conditions are met:
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First, the rent must not be based, in whole or in part, on the
income or profits of any person, but may be based on a fixed
percentage or percentages of gross receipts or gross sales.
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Second, neither we nor a direct or indirect owner of 10% or more
of our stock may own, actually or constructively, 10% or more of
a tenant, other than a TRS, from whom we receive rent. If the
tenant is a TRS leasing a hotel, such TRS may not directly or
indirectly operate or manage the related hotel. Instead, the
property must be operated on behalf of the TRS by a person who
qualifies as an independent contractor and who is,
or is related to a person who is, actively engaged in the trade
or business of operating qualified lodging facilities for any
person unrelated to us and the TRS.
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Third, if the rent attributable to personal property leased in
connection with a lease of real property exceeds 15% of the
total rent received under the lease, then the portion of rent
attributable to that personal property will not qualify as
rents from real property.
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Finally, we generally must not operate or manage our real
property or furnish or render services to our tenants, other
than through an independent contractor who is
adequately compensated and from whom we do not derive revenue,
and who does not, directly or through its stockholders, own more
than 35% of our shares of capital stock, taking into
consideration the applicable ownership attribution rules.
However, we need not provide services through an
independent contractor, but instead may provide
services directly to our tenants, if the services are
usually or customarily rendered in the geographic
area in connection with the rental of space for occupancy only
and are not considered to be provided
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for the tenants convenience. In addition, we may provide a
minimal amount of noncustomary services to the
tenants of a property, other than through an independent
contractor, as long as our income from the services (valued at
not less than 150% of our direct cost of performing such
services) does not exceed 1% of our income from the related
property. Furthermore, we may own up to 100% of the stock of a
TRS which may provide customary and noncustomary services to our
tenants without tainting our rental income from the related
properties.
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Pursuant to percentage leases, our lessees lease from FelCor LP
and the Subsidiary Partnerships the land, buildings,
improvements, furnishings and equipment comprising our hotels,
for terms of five to ten years, with options to renew for total
terms, including the initial term, of not more than
15 years. The percentage leases provide that the lessees
are obligated to pay to FelCor LP and the Subsidiary
Partnerships (1) the greater of a minimum base rent or
percentage rent and (2) additional charges or
other expenses, as defined in the leases. Percentage rent is
calculated by multiplying fixed percentages by gross room or
suite revenues, and food and beverage revenues and rent for each
of our hotels. Both base rent and the thresholds in the
percentage rent formulas are adjusted for inflation. Base rent
and percentage rent accrue and are due monthly.
In order for the base rent, percentage rent, and additional
charges to constitute rents from real property, the
percentage leases must be respected as true leases for federal
income tax purposes and not treated as service contracts, joint
ventures, or some other type of arrangement. The determination
of whether the percentage leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In
making such a determination, courts have considered a variety of
factors, including the following:
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the intent of the parties;
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the form of the agreement;
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the degree of control over the property that is retained by the
property owner, or whether the lessee has substantial control
over the operation of the property or is required simply to use
its best efforts to perform its obligations under the
agreement; and
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the extent to which the property owner retains the risk of loss
with respect to the property, or whether the lessee bears the
risk of increases in operating expenses or the risk of damage to
the property or the potential for economic gain or appreciation
with respect to the property.
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In addition, federal income tax law provides that a contract
that purports to be a service contract (or a partnership
agreement) will be treated instead as a lease of property if the
contract is properly treated as such, taking into account all
relevant factors, including whether:
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the service recipient is in physical possession of the property;
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the service recipient controls the property;
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the service recipient has a significant economic or possessory
interest in the property, or whether the propertys use is
likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the
recipient shares the risk that the property will decline in
value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the
propertys operating costs, or the recipient bears the risk
of damage to or loss of the property;
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the service provider bears the risk of substantially diminished
receipts or substantially increased expenditures if there is
nonperformance under the contract;
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the service provider uses the property concurrently to provide
significant services to entities unrelated to the service
recipient; and
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the total contract price substantially exceeds the rental value
of the property for the contract period.
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Since the determination of whether a service contract should be
treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every
case.
We believe that the percentage leases will be treated as true
leases for federal income tax purposes. Such belief is based, in
part, on the following facts:
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FelCor LP and the Subsidiary Partnerships, on the one hand, and
the lessees, on the other hand, intend for their relationship to
be that of a lessor and lessee and such relationship is
documented by lease agreements;
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the lessees have the right to the exclusive possession, use and
quiet enjoyment of our hotels during the term of the percentage
leases;
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the lessees bear the cost of, and are responsible for,
day-to-day
maintenance and repair of our hotels, other than the cost of
maintaining underground utilities, structural elements and
capital improvements, and generally dictate how our hotels are
operated, maintained, and improved;
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the lessees bear all of the costs and expenses of operating our
hotels, including the cost of any inventory used in their
operation, during the term of the percentage leases, other than
real estate and personal property taxes and property and
casualty insurance premiums;
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the lessees benefit from any savings in the costs of operating
our hotels during the term of the percentage leases;
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the lessees generally have indemnified FelCor LP and the
Subsidiary Partnerships against all liabilities imposed on
FelCor LP and the Subsidiary Partnerships during the term of the
percentage leases by reason of (1) injury to persons or
damage to property occurring at our hotels, (2) the
lessees use, management, maintenance or repair of our
hotels, (3) any environmental liability caused by acts or
grossly negligent failures to act of the lessees, (4) taxes
and assessments in respect of our hotels that are the
obligations of the lessees, or (5) any breach of the
percentage leases or of any sublease of a hotel by the lessees;
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the lessees are obligated to pay substantial fixed rent for the
period of use of our hotels;
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the lessees stand to incur substantial losses or reap
substantial gains depending on how successfully they operate our
hotels; and
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FelCor LP and the Subsidiary Partnerships cannot use our hotels
concurrently to provide significant services to entities
unrelated to the lessees.
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Investors should be aware that there are no controlling Treasury
regulations, published rulings or judicial decisions involving
leases with terms substantially the same as the percentage
leases that discuss whether such leases constitute true leases
for federal income tax purposes. If the percentage leases are
characterized as service contracts or partnership agreements,
rather than
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as true leases, part or all of the payments that FelCor LP and
the Subsidiary Partnerships receive from the lessees may not be
considered rent or may not otherwise satisfy the various
requirements for qualification as rents from real
property. In that case, we likely would not be able to
satisfy either the 75% or 95% gross income test and, as a
result, could lose our REIT status (unless we qualify for
relief, as described below under Failure to Satisfy
Gross Income Tests).
As described above, in order for the rent received by us to
constitute rents from real property, several other
requirements must be satisfied. One requirement is that the
percentage rent must not be based in whole or in part on the
income or profits of any person. The percentage rent, however,
will qualify as rents from real property if it is
based on percentages of gross receipts or gross sales and the
percentages:
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are fixed at the time the percentage leases are entered into;
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are not renegotiated during the term of the percentage leases in
a manner that has the effect of basing percentage rent on income
or profits; and
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conform with normal business practice.
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More generally, the percentage rent will not qualify as
rents from real property if, considering the
percentage leases and all the surrounding circumstances, the
arrangement does not conform with normal business practice, but
is in reality used as a means of basing the percentage rent on
income or profits. Since the percentage rent is based on fixed
percentages of the gross revenues from our hotels that are
established in the percentage leases, and we have represented
that the percentages (1) will not be renegotiated during
the terms of the percentage leases in a manner that has the
effect of basing the percentage rent on income or profits and
(2) conform with normal business practice, the percentage
rent should not be considered based in whole or in part on the
income or profits of any person. Furthermore, we have
represented that, with respect to other hotel properties that we
acquire in the future, we will not charge rent for any property
that is based in whole or in part on the income or profits of
any person, except by reason of being based on a fixed
percentage of gross revenues, as described above.
Another requirement for qualification of our rent as rents
from real property is that we must not own, actually or
constructively, 10% or more of the stock or voting power of any
corporate lessee (other than a TRS) or 10% or more of the assets
or net profits of any non-corporate lessee (a related
party tenant). The constructive ownership rules generally
provide that, if 10% or more in value of our stock is owned,
directly or indirectly, by or for any person, we are considered
as owning the stock owned, directly or indirectly, by or for
such person. We do not own any stock or assets or net profits of
any non-TRS lessee directly. In addition, our charter prohibits
transfers of our stock that would cause us to constructively own
10% or more of the ownership interests in a lessee. Those
charter provisions will not apply to our indirect ownership of
several of our lessees through our TRS because transfers of our
stock will not affect our indirect ownership of such lessees,
and we will not constructively own stock in such lessees as a
result of attribution of stock ownership from our stockholders
(although, as noted below, rents received from the TRS generally
will not be disqualified as related party rents). Thus, we
should never own, actually or constructively, 10% or more of any
non-TRS lessee. Furthermore, we have represented that, with
respect to other hotel properties that we acquire in the future,
we will not rent any property to a related party tenant.
However, because the constructive ownership rules are broad and
it is not possible to monitor continually direct and indirect
transfers of our stock, no absolute assurance can be given that
such transfers or other events of which we have
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no knowledge will not cause us to own constructively 10% or more
of a lessee at some future date.
As described above, we may own up to 100% of the stock of a TRS.
Rent received by us from a TRS will qualify as rents from
real property if the TRS engages an eligible
independent contractor to manage and operate our hotels
leased by the TRS. An eligible independent
contractor must either be, or be related to a person who
is, actively engaged in the trade or business of operating
qualified lodging facilities for any person who is
not related to us or the TRS. A qualified lodging
facility is a hotel, motel, or other establishment in
which more than one-half of the dwelling units are used on a
transient basis, unless wagering activities are conducted at or
in connection with such facility by any person who is engaged in
the business of accepting wagers and who is legally authorized
to engage in such business at or in connection with such
facility. In addition, we cannot directly or indirectly derive
any income from an eligible independent contractor, an eligible
independent contractor cannot own 35% or more of our stock, and
no more than 35% of an eligible independent contractors
ownership interests can be owned by persons owning 35% or more
of our stock, taking into account applicable constructive
ownership rules. We hold ownership interests in several TRSs
that lease our hotels. Each of those TRSs has engaged a
third-party hotel manager to manage and operate our hotels
leased by that TRS. We believe that all of the existing
third-party hotel managers of hotels leased by our TRSs qualify
as eligible independent contractors, and we
anticipate that all of the third-party hotel managers that will
be retained by our TRSs in the future to manage our hotels
leased by the TRSs from us will qualify as eligible
independent contractors.
We will be subject to a 100% excise tax to the extent that the
IRS successfully asserts that the rents received from our TRSs
exceed an arms-length rate. We believe that the terms of
the leases that exist between us and our TRSs were negotiated at
arms length and are consistent with the terms of
comparable leases in the hotel industry, and that the excise tax
on excess rents therefore should not apply. There can be no
assurance, however, that the IRS would not challenge the rents
paid to us by our TRSs as being excessive, or that a court would
not uphold such challenge. In that event, we could owe a tax of
100% on the amount of rents determined to be in excess of an
arms-length rate.
A third requirement for qualification of the rent received by us
as rents from real property is that the rent
attributable to the personal property leased in connection with
the lease of a hotel must not be greater than 15% of the total
rent received under the lease. The rent attributable to the
personal property contained in a hotel is the amount that bears
the same ratio to total rent for the taxable year as the average
of the fair market values of the personal property at the
beginning and at the end of the taxable year bears to the
average of the aggregate fair market values of both the real and
personal property contained in the hotel at the beginning and at
the end of such taxable year (the 15% test ratio).
With respect to each hotel, we believe either that the 15% test
ratio is 15% or less or that any income attributable to excess
personal property will not jeopardize our ability to qualify as
a REIT. There can be no assurance, however, that the IRS would
not challenge our calculation of the 15% test ratio, or that a
court would not uphold such assertion. If such a challenge were
successfully asserted, we could fail to satisfy the 95% or 75%
gross income test and thus could lose our REIT status.
A fourth requirement for qualification of the rent received by
us as rents from real property is that, other than
within the 1% de minimis exception described above, we cannot
furnish or render noncustomary services to the tenants of our
hotels, or manage or operate our hotels, other than through an
eligible independent contractor who is adequately compensated
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from whom we do not derive or receive any income. However, we
may own up to 100% of the stock of a TRS, and the TRS may
provide customary and noncustomary services to our tenants
without tainting our rental income. Provided that the percentage
leases are respected as true leases, we should satisfy that
requirement, because FelCor LP and the Subsidiary Partnerships
do not perform any services other than customary ones for the
lessees (other than within the 1% de minimis exception or
through a TRS). Furthermore, we have represented that, with
respect to other hotel properties that we acquire in the future,
we will not perform impermissible noncustomary services with
respect to the tenant of the property.
If a portion of the rent received by us from a hotel does not
qualify as rents from real property because the rent
attributable to personal property exceeds 15% of the total rent
for a taxable year, the portion of the rent that is attributable
to personal property will not be qualifying income for purposes
of either the 75% or 95% gross income tests. Thus, if such rent
attributable to personal property, plus any other income that is
nonqualifying income for purposes of the 95% gross income test,
during a taxable year exceeds 5% of our gross income during the
year, we could lose our REIT status. In addition, if the rent
from a particular hotel does not qualify as rents from
real property because either (1) the percentage rent
is considered based on the income or profits of the related
lessee, (2) we own, actually or constructively, 10% or more
of a non-TRS lessee, or (3) we furnish noncustomary
services to the tenants of the hotel, or manage or operate our
hotels, other than through a qualifying independent contractor
or a TRS, none of the rent from that hotel would qualify as
rents from real property. In that case, we also
could lose our REIT status because we would be unable to satisfy
either the 75% or 95% gross income test.
In addition to the rent, the lessees are required to pay to
FelCor LP and the Subsidiary Partnerships certain additional
charges. To the extent that such additional charges represent
either (1) reimbursements of amounts that the FelCor LP and
the Subsidiary Partnerships are obligated to pay to third
parties such as a lessees proportionate share of a
propertys operational or capital expenses, or
(2) penalties for nonpayment or late payment of such
amounts, such charges should qualify as rents from real
property. However, to the extent that such charges
represent interest that is accrued on the late payment of the
rent or additional charges, such charges will not qualify as
rents from real property, but instead should be
treated as interest that qualifies for the 95% gross income test.
Interest
The term interest generally does not include any
amount received or accrued, directly or indirectly, if the
determination of such amount depends in whole or in part on the
income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term
interest solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Furthermore, to
the extent that interest from a loan that is based on the
residual cash proceeds from the sale of the property securing
the loan constitutes a shared appreciation
provision, income attributable to such participation
feature will be treated as gain from the sale of the secured
property.
Prohibited
transactions
A REIT will incur a 100% tax on the net income (including any
foreign currency gain or loss, if any, included in such net
income after July 30, 2008) derived from any sale or
other disposition of property, other than foreclosure property,
that the REIT holds primarily for sale to customers
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in the ordinary course of a trade or business. We believe that
none of our or FelCor LPs assets is held for sale to
customers and that a sale of any such asset would not be in the
ordinary course of a trade or business. Whether a REIT holds an
asset primarily for sale to customers in the ordinary
course of a trade or business depends on the facts and
circumstances in effect from time to time, including those
related to a particular asset. We believe that none of our
assets are held primarily for sale to customers and that a sale
of any such assets would not be in the ordinary course of the
owning entitys business. We will attempt to comply with
the terms of the safe-harbor provisions in U.S. federal
income tax laws prescribing when an asset sale will not be
characterized as a prohibited transaction. We cannot provide
assurance, however, that we can comply with such safe-harbor
provisions or that we or FelCor LP will avoid owning property
that may be characterized as property held primarily for
sale to customers in the ordinary course of a trade or
business.
Foreclosure
property
We will be subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that would
be qualifying income for purposes of the 75% gross income test,
less expenses directly connected with the production of such
income. However, income from qualified foreclosure property will
be included in our gross income for purposes of the 75% and 95%
gross income tests and the gain from the sale of such qualified
foreclosure property should be exempt from the 100% tax on
prohibited transactions. Foreclosure property is any
real property, including interests in real property, and any
personal property incident to such real property:
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that is acquired by a REIT as the result of such REIT having bid
in such property at foreclosure, or having otherwise reduced
such property to ownership or possession by agreement or process
of law, after there was a default or default was imminent on a
lease of such property or on an indebtedness that such property
secured;
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for which the related loan was acquired by the REIT at a time
when the default was not imminent or anticipated; and
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for which such REIT makes a proper election to treat such
property as foreclosure property.
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However, a REIT will not be considered to have foreclosed on a
property where the REIT takes control of the property as a
mortgagee-in-possession
and cannot receive any profit or sustain any loss except as a
creditor of the mortgagor. Property generally ceases to be
foreclosure property with respect to a REIT at the end of the
third taxable year following the taxable year in which the REIT
acquired such property, or longer if an extension is granted by
the Secretary of the Treasury. The foregoing grace period is
terminated and foreclosure property ceases to be foreclosure
property on the first day:
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on which a lease is entered into with respect to such property
that, by its terms, will give rise to income that does not
qualify for purposes of the 75% gross income test or any amount
is received or accrued, directly or indirectly, pursuant to a
lease entered into on or after such day that will give rise to
income that does not qualify for purposes of the 75% gross
income test;
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on which any construction takes place on such property, other
than completion of a building, or any other improvement, where
more than 10% of the construction of such building or other
improvement was completed before default became imminent; or
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which is more than 90 days after the day on which such
property was acquired by the REIT and the property is used in a
trade or business which is conducted by the REIT, other than
through an independent contractor from whom the REIT itself does
not derive or receive any income.
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As a result of the rules with respect to foreclosure property,
if (1) a lessee defaults on its obligations under a
percentage lease, (2) we terminate the lessees
leasehold interest, and (3) we are unable to find a
replacement lessee for the hotel within 90 days of such
foreclosure, gross income from hotel operations conducted by us
from such hotel would cease to qualify for the 75% and 95% gross
income tests unless we are able to hire an independent
contractor to manage and operate the hotel. In such event, we
might be unable to satisfy the 75% and 95% gross income tests
and, thus, might fail to qualify as a REIT.
Hedging
transactions
From time to time, we or FelCor LP may enter into hedging
transactions with respect to one or more of our assets or
liabilities. Our hedging activities may include entering into
interest rate, commodity or currency swaps, caps, and floors,
options to purchase such items, and futures and forward
contracts. A hedging transaction means any
transaction entered into in the normal course of our trade or
business primarily to manage the risk of interest rate or price
changes, or currency fluctuations with respect to borrowings
made or to be made, or ordinary obligations incurred or to be
incurred, to acquire or carry real estate assets.
If we enter into a transaction in the normal course of our
business primarily to manage risk of currency fluctuations with
respect to any item of income or gain that would be qualified
income under the 75% or 95% gross income tests (or any property
which generates such qualified income or gain), including gain
from the termination of such a transaction, and we properly
identify the hedges as required by the Code and
Treasury regulations, the income from the transaction will be
excluded from gross income for purposes of the 95% gross income
test and the 75% gross income test (after July 30, 2008).
In addition, our gross income, for purposes of the 75% (after
July 30, 2008) and 95% gross income tests, will not
include any of our gross income from properly identified
hedges, including any gain from the sale or
disposition of such a transaction, to the extent the transaction
hedges any indebtedness incurred (or to be incurred) by us to
acquire or carry real estate assets.
We intend to structure any hedging transactions in a manner that
does not jeopardize our status as a REIT. The REIT income and
asset rules may limit our ability to hedge loans or securities
acquired as investments.
Failure to
satisfy gross income tests
If we fail to satisfy one or both of the gross income tests for
any taxable year, we nevertheless may qualify as a REIT for such
year if we qualify for relief under certain provisions of
U.S. federal income tax laws. Those relief provisions
generally will be available if:
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our failure to meet those tests is due to reasonable cause and
not to willful neglect, and
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following our identification of the failure to meet one or both
gross income tests for a taxable year, a description of each
item of our gross income included in the 75% and 95% gross
income tests is set forth in a schedule for such taxable year
and filed as specified by Treasury regulations.
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We cannot predict, however, whether in all circumstances we
would qualify for the relief provisions. In addition, as
discussed above in Our Taxation, even if the
relief provisions apply, we would incur a 100% tax on the gross
income attributable to the greater of the amounts by which we
fail the 75% and 95% gross income tests, multiplied by a
fraction intended to reflect our profitability.
Asset
tests
To maintain our qualification as a REIT, we also must satisfy
the following asset tests at the close of each quarter of each
taxable year. First, at least 75% of the value of our total
assets must consist of:
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cash or cash items, including certain receivables and certain
foreign currency;
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government securities;
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real property and interests in real property, including
leaseholds and options to acquire real property and leaseholds;
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interests in mortgages on real property;
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stock in other REITs; and
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investments in stock or debt instruments during the one-year
period following our receipt of new capital that we raise
through equity offerings or public offerings of debt with at
least a five-year term.
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Second, of our investments not included in the 75% asset class,
the value of our interest in any one issuers securities
may not exceed 5% of the value of our total assets.
Third, of our investments not included in the 75% asset class,
we may not own more than 10% of the voting power or value of any
one issuers outstanding securities.
Fourth, no more than 20% of the value of our total assets (25%
for tax years beginning after July 30, 2008) may
consist of the securities of one or more TRSs.
Fifth, no more than 25% of the value of our total assets may
consist of the securities of TRSs and other non-TRS taxable
subsidiaries and other assets that are not qualifying assets for
purposes of the 75% asset test.
For purposes of the second and third asset tests, the term
securities does not include stock in another REIT,
equity or debt securities of a qualified REIT subsidiary or TRS,
mortgage loans that constitute real estate assets, or equity
interests in a partnership. For purposes of the 10% value test,
the term securities does not include:
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Straight debt, defined as a written unconditional
promise to pay on demand or on a specified date a sum certain in
money if (i) the debt is not convertible, directly or
indirectly, into stock, and (ii) the interest rate and
interest payment dates are not contingent on profits, the
borrowers discretion, or similar factors. Straight
debt securities do not include any securities issued by a
partnership or a corporation in which we or any (
i.e.
a
TRS in which we own, directly or indirectly, more than 50% of
the voting power or value of the stock) holds non-straight
debt securities that have an aggregate value of more than
1% of the issuers
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outstanding securities. However, straight debt
securities include debt subject to the following contingencies:
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a contingency relating to the time of payment of interest or
principal, as long as either (i) there is no change to the
effective yield of the debt obligation, other than a change to
the annual yield that does not exceed the greater of 0.25% or 5%
of the annual yield, or (ii) neither the aggregate issue
price nor the aggregate face amount of the issuers debt
obligations held by us exceeds $1 million and no more than
12 months of unaccrued interest on the debt obligations can
be required to be prepaid; and
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a contingency relating to the time or amount of payment upon a
default or prepayment of a debt obligation, as long as the
contingency is consistent with customary commercial practice;
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any loan to an individual or an estate;
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any section 467 rental agreement, other
than an agreement with a related party tenant;
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any obligation to pay rents from real property;
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certain securities issued by governmental entities;
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any security issued by a REIT;
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any debt instrument issued by an entity treated as a partnership
for federal income tax purposes to the extent of our interest as
a partner in the partnership; or
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any debt instrument issued by an entity treated as a partnership
for federal income tax purposes not described in the preceding
bullet points if at least 75% of the partnerships gross
income, excluding income from prohibited transactions, is
qualifying income for purposes of the 75% gross income test
described above in Requirements for
Qualification-Income Tests.
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If we failed to satisfy the asset tests at the end of a calendar
quarter, we would not lose our REIT status if (1) we
satisfied the asset tests at the close of the preceding calendar
quarter, and (2) the discrepancy between the value of our
assets and the asset test requirements arose from changes in the
market values of our assets or because of a change in the
foreign currency exchange rates used to value any foreign
assets, and, in either case, was not wholly or partly caused by
the acquisition of one or more non-qualifying assets. If we did
not satisfy the condition described in clause (2) of the
preceding sentence, we still could avoid disqualification as a
REIT by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which the discrepancy arose.
If we fail to satisfy the 5% asset test or the 10% vote or value
test for a particular quarter and do not correct it within the
30-day
period described in the prior sentence, we will not lose our
REIT status if the failure is due to the ownership of assets,
the total value of which does not exceed the lesser of
(i) 1% of the total value of our assets at the end of the
quarter for which such measurement is done or
(ii) $10,000,000; provided in either case that, we either
dispose of the assets within 6 months after the last day of
the quarter in which we identify the failure (or such other time
period prescribed by the Treasury), or otherwise meet the
requirements of those rules by the end of such time period. In
addition, if we fail to meet any asset test for a particular
quarter, other than a de minimis failure described in the
preceding sentence, we still will be deemed to have satisfied
the requirements if: (1) following our identification of
the failure, we
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file a schedule with a description of each asset that caused the
failure in accordance with regulations prescribed by the
Treasury; (2) the failure was due to reasonable cause and
not willful neglect; (3) we dispose of the assets within
6 months after the last day of the quarter in which the
identification occurred (or such other time period prescribed by
the Treasury) or the requirements of the rules are otherwise met
within such period; and (4) we pay a tax on the failure
which is the greater of $50,000 or the amount determined by
multiplying the highest rate of income tax for corporations
(currently 35%) by the net income generated by the assets for
the period beginning on the first date of the failure and ending
on the date we have disposed of the assets or otherwise satisfy
the requirements.
Distribution
requirements
Each taxable year, we must distribute dividends, other than
capital gain dividends and deemed distributions of retained
capital gain, to our stockholders in an aggregate amount at
least equal to:
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the sum of (1) 90% of our REIT taxable income,
computed without regard to the dividends paid deduction and our
net capital gain or loss, and (2) 90% of our after-tax net
income, if any, from foreclosure property; minus
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the sum of certain items of non-cash income.
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We must pay such distributions in the taxable year to which they
relate, or in the following taxable year if we declare the
distribution before we timely file our federal income tax return
for such year, pay the distribution on or before the first
regular dividend payment date after such declaration and we
elect on our federal income tax return for the prior year to
have a specified amount of the subsequent dividend treated as if
paid in the prior year.
We will pay federal income tax on our taxable income, including
net capital gain, that we do not distribute to stockholders.
Furthermore, if we fail to distribute during a calendar year, or
by the end of January following such calendar year in the case
of distributions with declaration and record dates falling in
the last three months of the calendar year, at least the sum of:
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85% of our REIT ordinary income for such year;
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95% of our REIT capital gain net income for such year; and
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any undistributed taxable income from prior periods,
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we will incur a 4% nondeductible excise tax on the excess of
such required distribution over the amounts we actually
distributed. We may elect to retain and pay income tax on the
net long-term capital gain we receive in a taxable year. If we
so elect, we will be treated as having distributed any such
retained amount for purposes of the 4% excise tax described
above. We have made, and we intend to continue to make, timely
distributions sufficient to satisfy the annual distribution
requirements.
It is possible that, from time to time, we may experience timing
differences between (1) the actual receipt of income and
actual payment of deductible expenses and (2) the inclusion
of that income and deduction of such expenses in arriving at our
REIT taxable income. For example, we may not deduct recognized
capital losses from our REIT taxable income.
Further, it is possible that, from time to time, we may be
allocated a share of net capital gain attributable to the sale
of depreciated property that exceeds our allocable share of cash
attributable to that sale. As a result of the foregoing, we may
have less cash than is necessary to distribute all of our
taxable income and thereby avoid corporate income tax and the 4%
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nondeductible excise tax imposed on certain undistributed
income. In such a situation, we may need to borrow funds or
issue additional common or preferred stock.
Under certain circumstances, we may be able to correct a failure
to meet the distribution requirement for a year by paying
deficiency dividends to our stockholders in a later
year. We may include such deficiency dividends in our deduction
for dividends paid for the earlier year. Although we may be able
to avoid income tax on amounts distributed as deficiency
dividends, we will be required to pay interest to the IRS based
upon the amount of any deduction we take for deficiency
dividends in order to raise sufficient cash to satisfy the
distribution requirement.
Recordkeeping
requirements
We must maintain certain records in order to qualify as a REIT.
In addition, to avoid a monetary penalty, we must request on an
annual basis information from our stockholders designed to
disclose the actual ownership of our outstanding stock. We have
complied, and we intend to continue to comply, with such
requirements.
Failure to
qualify
If we failed to qualify as a REIT in any taxable year for which
the statute of limitations remains open, and no relief provision
applied, we would be subject to federal income tax and any
applicable alternative minimum tax on our taxable income at
regular corporate rates. In calculating our taxable income in a
year in which we failed to qualify as a REIT, we would not be
able to deduct amounts paid out to stockholders. In fact, we
would not be required to distribute any amounts to stockholders
in such year. In such event, to the extent of our current and
accumulated earnings and profits, all distributions to
stockholders would be taxable as dividend income. Unless we
qualified for relief under specific statutory provisions, we
also would be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to
qualify as a REIT. We cannot predict whether in all
circumstances we would qualify for such statutory relief.
If we fail to satisfy one or more requirements for REIT
qualification, other than the gross income tests and the asset
tests, we could avoid disqualification if our failure is due to
reasonable cause and not to willful neglect and we pay a penalty
of $50,000 for each such failure. In addition, there are relief
provisions for a failure of the gross income tests and asset
tests, as described above in Income Tests and
Asset Tests.
Federal income
taxation of U.S. stockholders
Distributions
As long as we qualify as a REIT, distributions made to our
taxable U.S. stockholders out of current or accumulated
earnings and profits (and not designated as capital gain
dividends) generally will be taken into account by such
U.S. stockholders as ordinary income and will not be
eligible for the qualified dividends rate generally available to
non-corporate holders or for the dividends received deduction
generally available to corporations. Distributions in excess of
current and accumulated earnings and profits will not be taxable
to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholders common stock
(determined on a
share-by-share
basis), but rather will reduce the adjusted basis of those
shares. To the extent that distributions in excess of current
and accumulated earnings and profits exceed the adjusted
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basis of a stockholders shares, such distributions will be
included in income as long-term capital gain if the stockholder
has held its shares for more than one year and otherwise as
short-term capital gain. In addition, any distribution declared
by us in October, November or December of any year and payable
to a stockholder of record on a specified date in any such month
shall be treated as both paid by us and received by the
stockholder on December 31 of such year, provided that the
distribution is actually paid by us during January of the
following calendar year.
Distributions that are designated as capital gain dividends will
be taxed as long-term capital gain (to the extent such
distributions do not exceed our actual net capital gain for the
taxable year) without regard to the period for which the
stockholder has held our common shares. However, corporate U.S.
stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. The tax rates
applicable to such capital gains are discussed below.
We may elect to treat all or a part of our undistributed net
capital gain as if it had been distributed to our stockholders
(including for purposes of the 4% excise tax discussed above).
If we make such an election, our U.S. stockholders would be
required to include in their income as long-term capital gain
their proportionate share of our undistributed net capital gain,
as designated by us. Each such U.S. stockholder would be
deemed to have paid its proportionate share of the income tax
imposed on us with respect to such undistributed net capital
gain, and this amount would be credited or refunded to the
U.S. stockholder. In addition, the tax basis of the
U.S. stockholders shares would be increased by its
proportionate share of undistributed net capital gains included
in its income, less its proportionate share of the income tax
imposed on us with respect to such gains.
U.S. stockholders may not include in their individual
income tax returns any of our net operating losses or net
capital losses. Instead, such losses would be carried over by us
for potential offset against our future income (subject to
certain limitations). Taxable distributions from us and gain
from the disposition of our common stock will not be treated as
passive activity income, and, therefore, U.S. stockholders
generally will not be able to apply any passive activity
losses (such as losses from certain types of limited
partnerships in which the U.S. stockholder is a limited
partner) against such income. In addition, taxable distributions
from us generally will be treated as investment income for
purposes of the investment interest limitations. Capital gains
from the disposition of common stock (or distributions treated
as such) will be treated as investment income only if the
U.S. stockholder so elects, in which case such capital
gains will be taxed at ordinary income rates.
We will notify U.S. stockholders after the close of our
taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income,
return of capital and capital gain. Except as noted below, the
maximum tax rate on long-term capital gain applicable to
non-corporate taxpayers is 15% for sales and exchanges of assets
held for more than one year occurring in tax years beginning on
or before December 31, 2010 (or 20% thereafter). The
maximum tax rate on long-term capital gain from the sale or
exchange of section 1250 property, or
depreciable real property, is 25% to the extent that such gain
would have been treated as ordinary income if the property were
section 1245 property (
i.e.,
to the
extent of depreciation recapture). With respect to distributions
that we designate as capital gain dividends and any retained
capital gain that we are deemed to distribute, we generally will
designate whether such a distribution is taxable to our
non-corporate U.S. stockholders at a 15% or 25% tax rate.
Thus, the tax rate differential between capital gain and
ordinary income for non-corporate taxpayers may be significant.
In addition, the characterization of income as
76
capital gain or ordinary income may affect the deductibility of
capital losses. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income
only up to a maximum annual amount of $3,000. A non-corporate
taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at
ordinary corporate rates. A corporate taxpayer may deduct
capital losses only to the extent of capital gains, with unused
losses being carried back three years and forward five years.
Taxation of U.S.
stockholders on the disposition of shares of common
stock
Upon the taxable disposition of common stock, a
U.S. stockholder generally will recognize gain or loss
equal to the difference between (i) the amount of cash and
the fair market value of any property received (less any portion
thereof attributable to accumulated and declared but unpaid
dividends, which will be taxable as a dividend to the extent of
our current and accumulated earnings and profits) and
(ii) the U.S. stockholders adjusted tax basis in
such stock. In general, a U.S. stockholder must treat any
gain or loss realized upon a taxable disposition of our common
stock as long-term capital gain or loss if the
U.S. stockholder has held the shares for more than one
year, and otherwise as short-term capital gain or loss. However,
a U.S. stockholder must treat any loss upon a sale or
exchange of shares of our common stock held for six months or
less (after applying certain holding period rules) as a
long-term capital loss to the extent of capital gain dividends
and any other actual or deemed distributions from us which the
U.S. stockholder treats as long-term capital gain. All or a
portion of any loss that a U.S. stockholder realizes upon a
taxable disposition of our common stock may be disallowed if the
U.S. stockholder purchases substantially identical stock
within 30 days before or after the disposition.
Treatment of
tax-exempt stockholders
While many investments in real estate generate unrelated
business taxable income, or UBTI, the IRS has issued a ruling
that dividend distributions from a REIT to an exempt employee
pension trust do not constitute UBTI, provided that the shares
of the REIT are not otherwise used in an unrelated trade or
business of the exempt employee pension trust. Based on that
ruling, except as otherwise provided below, distributions by us
to a tax-exempt U.S. stockholder generally should not
constitute UBTI provided that (i) the U.S. stockholder
has not financed the acquisition of its common stock with
acquisition indebtedness within the meaning of the
Code and (ii) our common stock is not otherwise used in an
unrelated trade or business of such tax-exempt
U.S. stockholder.
Notwithstanding the preceding paragraph, under certain
circumstances, qualified trusts that hold more than 10% (by
value) of our shares of stock may be required to treat a certain
percentage of dividends as UBTI. This requirement will only
apply if we are treated as a pension-held REIT.
Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and
qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20),
respectively, of Section 501(c) of the Code, are subject to
different UBTI rules, which generally will require them to
characterize income or gain from us as UBTI.
77
Federal income
taxation of
non-U.S.
stockholders
The following discussion addresses the rules governing the
U.S. federal income taxation of the ownership and
disposition of common stock by
non-U.S. stockholders.
These rules are complex, and no attempt is made herein to
provide more than a brief summary of such rules. Accordingly,
the discussion does not address all aspects of U.S. federal
income taxation and does not address state, local or foreign tax
consequences that may be relevant to a
non-U.S. stockholder
in light of its particular circumstances.
Non-U.S. stockholders
should consult their own tax advisors to determine the impact of
U.S. federal, state, local and foreign tax consequences to
them of an investment in our common stock, including tax return
filing requirements and withholding requirements.
Distributions
Distributions to a
non-U.S. stockholder
that are neither attributable to gain from sales or exchanges by
us of U.S. real property interests nor
designated as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made
out of current or accumulated earnings and profits. These
distributions ordinarily will be subject to withholding of
U.S. federal income tax on a gross basis at a rate of 30%,
or a lower rate as permitted under an applicable income tax
treaty, unless the dividends are treated as effectively
connected with the conduct by the
non-U.S. stockholder
of a U.S. trade or business. Under some treaties, however,
lower withholding rates generally applicable to dividends do not
apply to dividends from REITs. Applicable certification and
disclosure requirements must be satisfied to be exempt from
withholding under the effectively connected income exemption.
Dividends that are effectively connected with a trade or
business generally will be subject to tax on a net basis in the
same manner as U.S. stockholders are taxed, and are
generally not subject to withholding. Any dividends received by
a corporate
non-U.S. stockholder
that is engaged in a U.S. trade or business also may be
subject to an additional branch profits tax at a 30% rate, or
lower applicable treaty rate, on its effectively connected
earnings and profits attributable to such dividends.
Distributions in excess of current and accumulated earnings and
profits that exceed the
non-U.S. stockholders
basis in its common stock will be taxable to a
non-U.S. stockholder
as gain from the sale of common stock, which is discussed below.
Distributions in excess of current or accumulated earnings and
profits that do not exceed the adjusted basis of the
non-U.S. stockholder
in its common stock (determined on a
share-by-share
basis) will reduce the
non-U.S. stockholders
adjusted basis in its common stock and will not be subject to
U.S. federal income tax, but will be subject to
U.S. withholding tax as described below.
Because we generally cannot determine at the time a distribution
is made whether or not it will be in excess of earnings and
profits, we expect to withhold on the gross amount of each
distribution made to a
non-U.S. stockholder
at the 30% rate (other than distributions subject to the 35%
FIRPTA withholding rules discussed below) unless: (i) a
lower treaty rate applies and the
non-U.S. stockholder
files an IRS
Form W-8BEN
evidencing eligibility for that reduced treaty rate; or
(ii) the
non-U.S. stockholder
files an IRS
Form W-8ECI
claiming that the distribution is income effectively connected
with the
non-U.S. stockholders
trade or business. A
non-U.S. stockholder
may seek a refund of these amounts from the IRS if the
non-U.S. stockholders
U.S. tax liability with respect to the distribution is less
than the amount withheld.
78
Distributions to a
non-U.S. stockholder
that are designated at the time of the distribution as capital
gain dividends, other than those arising from the disposition of
a U.S. real property interest, generally should not be
subject to U.S. federal income taxation unless:
(i) the investment in our common stock is effectively
connected with the
non-U.S. stockholders
U.S. trade or business, in which case the
non-U.S. stockholder
generally will be subject to the same treatment as
U.S. stockholders with respect to any gain, and a
stockholder that is a foreign corporation also may be subject to
the 30% branch profits tax, as discussed above, or (ii) the
non-U.S. stockholder
is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and
certain other conditions are met, in which case the nonresident
alien individual will be subject to a 30% tax on the
individuals capital gains (which gains may be offset by
certain United States source capital losses).
Except as hereinafter discussed, under the Foreign Investment in
Real Property Tax Act of 1980 (FIRPTA),
distributions to a
non-U.S. stockholder
that are attributable to gain from sales or exchanges by us of
U.S. real property interests, whether or not designated as
a capital gain dividend, will cause the
non-U.S. stockholder
to be treated as recognizing gain that is income effectively
connected with a U.S. trade or business.
Non-U.S. stockholders
generally will be taxed on this gain at the same rates
applicable to U.S. stockholders, and a 30% branch profits
tax may apply to any
non-U.S. stockholder
that is a corporation. However, even if a distribution is
attributable to a sale or exchange of U.S. real property
interests, the distribution will not be treated as gain
recognized from the sale or exchange of U.S. real property
interests, but as an ordinary dividend subject to the general
withholding regime discussed above, if
(i) the distribution is made with respect to a class of
stock that is considered regularly traded under applicable
Treasury regulations on an established securities market located
in the United States, such as the New York Stock
Exchange; and
(ii) the stockholder owns 5% or less of that class of stock
at all times during the one-year period ending on the date of
the distribution.
We will be required to withhold and remit to the IRS 35% of any
distributions made to
non-U.S. stockholders
that own more than 5% of our common shares if such distributions
are, or, if greater, could have been, designated as capital gain
dividends and are attributable to gain recognized from the sale
or exchange of U.S. real property interests. Distributions
can be designated as capital gains to the extent of our net
capital gain for the taxable year of the distribution. Moreover,
if we designate previously made distributions as capital gain
dividends attributable to U.S. real property interests,
subsequent distributions (up to the amount of such prior
distributions) will be treated as capital gain dividends subject
to FIRPTA withholding. The amount withheld, which for individual
non-U.S. stockholders
may substantially exceed the actual tax liability, is creditable
against the
non-U.S. stockholders
U.S. federal income tax liability and is refundable to the
extent such amount exceeds the
non-U.S. stockholders
actual U.S. federal income tax liability, and the
non-U.S. stockholder
timely files an appropriate claim for refund.
Sale of common
stock
Gain recognized by a
non-U.S. stockholder
upon the sale or exchange of our common stock generally will not
be subject to U.S. federal income taxation unless:
(i) the investment in our common stock is effectively
connected with the
non-U.S. stockholders
U.S. trade or business, in which case the
non-U.S. stockholder
generally will be
79
subject to the same treatment as U.S. stockholders with
respect to any gain (and a foreign corporation also may be
subject to the 30% branch profits tax, as discussed above);
(ii) the
non-U.S. stockholder
is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and
certain other conditions are met, in which case the nonresident
alien individual will be subject to a 30% tax on the
individuals net capital gains for the taxable year (which
gains may be offset by certain United States source capital
losses);
(iii) our common stock constitutes a U.S. real
property interest within the meaning of FIRPTA, as described
below; or
(iv) our common stock is disposed of in a wash
sale by a person owning more than 5% of the common stock.
Whether our
common stock is a U.S. real property interest
Our common stock will not constitute a U.S. real property
interest if we are a domestically controlled REIT.
We will be a domestically controlled REIT if, at all times
during a specified testing period, less than 50% in value of our
stock is held directly or indirectly by
non-U.S. stockholders.
We believe that, currently, we are a domestically controlled
REIT and, therefore, that the sale of our common stock would not
be subject to taxation under FIRPTA. Because our common stock is
publicly traded, however, we cannot guarantee that we are or
will continue to be a domestically controlled REIT. Even if we
do not qualify as a domestically controlled REIT at the time a
non-U.S. stockholder
sells our common stock, gain arising from the sale still would
not be subject to FIRPTA tax if:
(i) our common stock is considered regularly traded under
applicable Treasury regulations on an established securities
market, such as the New York Stock Exchange; and
(ii) the selling
non-U.S. stockholder
owned, actually or constructively, 5% or less in value of our
common stock during the shorter of (i) the five-year period
ending on the date of the sale or exchange or (ii) the
period in which the stockholder held our common stock.
If gain on the sale or exchange of our common stock were subject
to taxation under FIRPTA, the
non-U.S. stockholder
generally would be subject to regular U.S. income tax with
respect to any gain in the same manner as a taxable
U.S. stockholder.
Wash
sales
In general, a wash sale of common stock occurs if a stockholder
of a domestically controlled REIT (at any time during the
one-year period preceding the taxable distribution discussed in
this paragraph) avoids a taxable distribution of gain recognized
from the sale or exchange of U.S. real property interests
by selling common stock before the ex-dividend date of the
distribution and then, within a designated period, acquires or
enters into an option or contract to acquire common stock.
However, the wash sale rules will not apply to a sale of our
common stock if (i) our common is considered regularly
traded under applicable Treasury regulations on an established
securities market, such as the New York Stock Exchange and
(ii) the
non-U.S. stockholder
does not own more than 5% of our common stock at any time during
the one-year period ending on the date of the distribution. If a
wash sale occurs, then the seller/repurchaser
80
will be treated as having gain recognized from the sale or
exchange of U.S. real property interests in the same amount
as if the avoided distribution had actually been received.
Federal estate
tax
Our common stock that is owned (or treated as owned) by
non-U.S. stockholder
at the time of death will be included in such stockholders
gross estate for United States federal estate tax purposes,
unless an applicable estate or other tax treaty provides
otherwise, and, therefore, may be subject to United States
federal estate tax.
Information
reporting requirements and backup withholding tax
Information reporting to our stockholders and to the IRS will
apply to the amount of distributions paid during each calendar
year and distributions required to be treated as so paid during
a calendar year, and the amount of tax withheld, if any, and to
the proceeds of a sale or other disposition of our common stock.
Under the backup withholding rules, a stockholder may be subject
to backup withholding at the applicable rate (currently 28%)
with respect to distributions paid and proceeds from a
disposition of our common stock unless such holder (i) is a
corporation,
non-U.S. person
or comes within certain other exempt categories and, when
required, demonstrates this fact or (ii) in the case of a
U.S. stockholder, provides a taxpayer identification
number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable
requirements of the backup withholding rules. A
U.S. stockholder who does not provide us with its correct
taxpayer identification number also may be subject to penalties
imposed by the IRS.
As a general matter, backup withholding and information
reporting will not apply to a payment of the proceeds of a sale
of our common stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will
apply, however, to a payment of the proceeds of a sale of our
common stock by a foreign office of a broker that (i) is a
U.S. person, (ii) is a foreign partnership that
derives 50% or more of its gross income for certain periods from
the conduct of a trade or business in the United States, or more
than 50% of whose capital or profit interests are owned during
certain periods by U.S. persons, or (iii) is a
controlled foreign corporation for U.S. tax
purposes, unless the broker has documentary evidence in its
records that the holder is a
Non-U.S. stockholder
and certain other conditions are satisfied, or the stockholder
otherwise establishes an exemption. Payment to or through a
U.S. office of a broker of the proceeds of a sale of our
common stock is subject to both backup withholding and
information reporting unless the stockholder certifies under
penalties of perjury that the stockholder is a
Non-U.S. stockholder
or otherwise establishes an exemption.
Stockholders should consult their own tax advisors regarding
their qualifications for an exemption from backup withholding
and the procedure for obtaining such an exemption. Backup
withholding is not an additional tax. Rather, the amount of any
backup withholding with respect to a payment to a stockholder
will be allowed as a credit against the stockholders
U.S. federal income tax liability and may entitle the
stockholder to a refund, provided that the required information
is furnished timely to the IRS.
Additional
withholding requirements
Under recently enacted legislation, the relevant withholding
agent may be required to withhold 30% of any dividends and the
proceeds of a sale of our common stock paid after
December 31,
81
2012 to (i) a foreign financial institution (whether
holding stock for its own account or on behalf of its account
holders/investors) unless such foreign financial institution
agrees to verify, report and disclose its U.S. account
holders and meets certain other specified requirements or
(ii) a non-financial foreign entity that is the beneficial
owner of the payment unless such entity certifies that it does
not have any substantial U.S. owners or provides the name,
address and taxpayer identification number of each substantial
United States owner and such entity meets certain other
specified requirements. Stockholders should consult their own
tax advisors regarding the effect of this newly enacted
legislation.
State and local
taxes
We
and/or
you may be subject to state and local tax in various states and
localities, including those states and localities in which we or
you transact business, own property, or reside. The state and
local tax treatment in those jurisdictions may differ from the
federal income tax treatment described above. Consequently, you
should consult your own tax advisor regarding the effect of
state and local tax laws upon your investment in our common
stock.
82
Underwriting
J.P. Morgan Securities Inc., Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Deutsche Bank Securities Inc. are acting as joint book running
managers of the offering and as representatives of the
underwriters named below.
We and the underwriters named below have entered into an
underwriting agreement covering the common stock to be sold in
this offering. Each underwriter has severally agreed to
purchase, and we have agreed to sell to each underwriter, the
number of shares of common stock set forth opposite its name in
the following table. The offering of the shares by the
underwriters is subject to receipt and acceptance in whole or in
part.
|
|
|
|
|
|
|
|
|
Number of
|
|
Name
|
|
shares
|
|
|
|
|
J.P. Morgan Securities Inc.
|
|
|
8,250,000
|
|
Goldman, Sachs & Co.
|
|
|
6,875,000
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
4,125,000
|
|
Deutsche Bank Securities Inc.
|
|
|
4,125,000
|
|
Citigroup Global Markets Inc.
|
|
|
1,650,000
|
|
FBR Capital Markets & Co.
|
|
|
1,375,000
|
|
JMP Securities LLC
|
|
|
550,000
|
|
Keefe, Bruyette & Woods, Inc.
|
|
|
550,000
|
|
|
|
|
|
|
Total
|
|
|
27,500,000
|
|
|
|
The underwriting agreement provides that if the underwriters
take any of the shares presented in the table above, then they
must take all of the shares. No underwriter is obligated to take
any shares allocated to a defaulting underwriter except under
limited circumstances. The underwriting agreement provides that
the obligations of the underwriters are subject to certain
conditions precedent, including the absence of any material
adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and our
independent auditors.
The underwriters are offering the shares of common stock,
subject to the prior sale of shares, when, as and if such shares
are delivered to and accepted by them. The underwriters will
initially offer to sell shares to the public at the public
offering price shown on the front cover page of this prospectus.
The underwriters may sell shares to securities dealers at a
discount of up to $0.13200 per share from the public offering
price. Any such securities dealers may resell shares to certain
other brokers or dealers at a discount of up to $0.10000 per
share from the public offering price. After the public offering
commences, the underwriters may vary the public offering price
and other selling terms.
If the underwriters sell more shares than the total number shown
in the table above, the underwriters have the option to buy up
to an additional 4,125,000 shares of common stock from us
to cover such sales. They may exercise this option during the
30-day
period from the date of this prospectus. If any shares are
purchased under this option, the underwriters will purchase
shares in approximately the same proportion as shown in the
table above.
83
The following table shows the per share and total underwriting
discounts and commissions that we will pay to the underwriters.
These amounts are shown assuming both no exercise and full
exercise of the underwriters option to purchase additional
shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
Without
|
|
|
With full
|
|
|
|
option to purchase
|
|
|
option to purchase
|
|
|
|
additional shares
|
|
|
additional shares
|
|
|
|
exercise
|
|
|
exercise
|
|
|
|
|
Per share
|
|
$
|
0.22363
|
|
|
$
|
0.22316
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,150,000
|
|
|
$
|
7,057,500
|
|
|
|
The underwriters have advised us that they may make short sales
of our common stock in connection with this offering, resulting
in the sale by the underwriters of a greater number of shares
than they are required to purchase pursuant to the underwriting
agreement. The short position resulting from those short sales
will be deemed a covered short position to the
extent that it does not exceed the shares subject to the
underwriters option to purchase additional shares and will
be deemed a naked short position to the extent that
it exceeds that number. A naked short position is more likely to
be created if the underwriters are concerned that there may be
downward pressure on the trading price of the common stock in
the open market that could adversely affect investors who
purchase shares in this offering. The underwriters may reduce or
close out their covered short position either by exercising
their option to purchase additional shares or by purchasing
shares in the open market. In determining which of these
alternatives to pursue, the underwriters will consider the price
at which shares are available for purchase in the open market as
compared to the price at which they may purchase shares through
their option to purchase additional shares. Any
naked short position will be closed out by
purchasing shares in the open market. Similar to the other
stabilizing transactions described below, open market purchases
made by the underwriters to cover all or a portion of their
short position may have the effect of preventing or retarding a
decline in the market price of our common stock following this
offering. As a result, our common stock may trade at a price
that is higher than the price that otherwise might prevail in
the open market.
The underwriters have advised us that, pursuant to
Regulation M under the Exchange Act, they may engage in
transactions, including stabilizing bids or the imposition of
penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open
market. A stabilizing bid is a bid for or the
purchase of shares of common stock on behalf of the underwriters
for the purpose of fixing or maintaining the price of the common
stock. A penalty bid is an arrangement permitting
the underwriters to claim the selling concession otherwise
accruing to an underwriter or syndicate member in connection
with the offering if the common stock originally sold by that
underwriter or syndicate member is purchased by the underwriters
in the open market pursuant to a stabilizing bid or to cover all
or part of a syndicate short position. The underwriters have
advised us that stabilizing bids and open market purchases may
be effected on the New York Stock Exchange, in the
over-the-counter
market or otherwise and, if commenced, may be discontinued at
anytime.
One or more of the underwriters may facilitate the marketing of
this offering online directly or through one of its affiliates.
In those cases, prospective investors may view offering terms
and a prospectus online and, depending upon the particular
underwriter, place orders online or through their financial
advisor.
84
We estimate that our total expenses for this offering, excluding
underwriting discounts and commissions, will be approximately
$330,000.
We have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities
Act.
We have agreed that for a period ending 60 days after the
date of this prospectus, we will not, directly or indirectly,
offer, sell, offer to sell, contract to sell or otherwise
dispose of any shares of our common stock or common stock
equivalents without the prior written consent of
J.P. Morgan Securities Inc. and Goldman, Sachs &
Co., other than the offering and sale in this offering and the
issuance by us of any securities or options to purchase common
stock under our current employee benefit plans.
Our directors and executive officers have entered in to
lock-up
agreements with the underwriters prior to the commencement of
this offering pursuant to which each of these persons for a
period ending 60 days after the date of this prospectus,
may not, directly or indirectly, offer, sell, pledge, offer to
sell, contract to sell or otherwise dispose of any shares of our
common stock or common stock equivalents without the prior
written consent of J.P. Morgan Securities Inc. and Goldman,
Sachs & Co., other than (a) transfers of shares
of common stock as a bona fide gift or gifts or by will or
intestacy, (b) transfer to a member or members of such
persons immediate family or to a trust, the beneficiary of
which are such person an or a member or members of such
persons immediate family and (c) distributions of
shares of common stock to members or stockholders of the
undersigned; provided, that in the case of any transfer or
distribution pursuant to clause (a), (b) or (c), each donee
or distributee shall execute and deliver to the underwriters a
lock-up
letter; and provided further that in the case of any transfer or
distribution pursuant to clause (a), (b) or (c), no filing
by any party (donor, donee, transferor or transferee) under the
Exchange Act shall be required, and no such filing or public
announcement, as the case maybe, shall be made voluntarily, in
connection with such transfer or distribution (other than a
filing on a Form 5). In addition, they have agreed that,
without the prior written consent of J.P. Morgan Securities
Inc. and Goldman, Sachs & Co., they will not, during
the period ending 60 days after the date of this
prospectus, make any demand for or exercise any right with
respect to, the registration of any shares of common stock or
any security convertible into or exercisable or exchangeable for
common stock. For purposes of the
lock-up
agreements, immediate family shall mean any
relationship by blood, marriage or adoption, not more remote
than first cousin. Notwithstanding the foregoing, if
(1) during the last 16 days of the
60-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs; or (2) prior to
the expiration of the
60-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
60-day
period, the restrictions imposed by the
lock-up
agreement shall continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
which may include securities trading, commercial and investment
banking, financial advisory, investment management, principal
investment, hedging, financing and brokerage activities. Certain
of the underwriters and their respective affiliates have, from
time to time, performed, and may in the future perform, various
financial advisory and investment banking services for the
issuer, for which they received or will receive customary fees
and expenses. In the ordinary course of their various business
activities, the underwriters and their respective affiliates may
make or hold a broad array of investments and actively trade
debt and
85
equity securities (or related derivative securities) and
financial instruments (including bank loans) for their own
account and for the accounts of their customers and may at any
time hold long and short positions in such securities and
instruments. Such investment and securities activities may
involve securities and instruments of the issuer. Certain of the
underwriters and their respective affiliates have provided and
may in the future provide financial advisory, investment banking
and commercial banking services in the ordinary course of
business to, or hold equity positions in, entities with which we
are, or in the future may be, engaged in discussions concerning
acquisition opportunities. To the extent any net proceeds from
this offering are used to complete any such acquisition
opportunities, proceeds from this offering may be directed to
such underwriters.
Our common stock is listed on the New York Stock Exchange under
the symbol FCH.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
shares to the public in that Relevant Member State at any time:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representatives
for any such offer; or
(d) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue
86
or sale of the shares in circumstances in which
Section 21(1) of the FSMA does not apply to the
Issuer; and
(b) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
We have not and will not register with the Swiss Financial
Market Supervisory Authority (FINMA) as a foreign collective
investment scheme pursuant to Article 119 of the Federal
Act on Collective Investment Scheme of 23 June 2006, as
amended (CISA), and accordingly the shares being offered
pursuant to this prospectus have not and will not be approved,
and may not be licenseable, with FINMA. Therefore, the shares
have not been authorized for distribution by FINMA as a foreign
collective investment scheme pursuant to Article 119 CISA
and the shares offered hereby may not be offered to the public
(as this term is defined in Article 3 CISA) in or from
Switzerland. The shares may solely be offered to qualified
investors, as this term is defined in Article 10
CISA, and in the circumstances set out in Article 3 of the
Ordinance on Collective Investment Scheme of 22 November
2006, as amended (CISO), such that there is no public offer.
Investors, however, do not benefit from protection under CISA or
CISO or supervision by FINMA. This prospectus and any other
materials relating to the shares are strictly personal and
confidential to each offeree and do not constitute an offer to
any other person. This prospectus may only be used by those
qualified investors to whom it has been handed out in connection
with the offer described herein and may neither directly or
indirectly be distributed or made available to any person or
entity other than its recipients. It may not be used in
connection with any other offer and shall in particular not be
copied
and/or
distributed to the public in Switzerland or from Switzerland.
This prospectus does not constitute an issue prospectus as that
term is understood pursuant to Article 652a
and/or
1156
of the Swiss Federal Code of Obligations. We have not applied
for a listing of the shares on the SIX Swiss Exchange or any
other regulated securities market in Switzerland, and
consequently, the information presented in this prospectus does
not necessarily comply with the information standards set out in
the listing rules of the SIX Swiss Exchange and corresponding
prospectus schemes annexed to the listing rules of the SIX Swiss
Exchange.
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
document nor taken steps to verify the information set out in
it, and has no responsibility for it. The shares which are the
subject of the offering contemplated by this prospectus may be
illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered should conduct their own due diligence on
the shares. If you do not understand the contents of this
document you should consult an authorised financial adviser.
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), or (ii) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap.571, Laws of Hong Kong)
and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any
87
person for the purpose of issue (in each case whether in Hong
Kong or elsewhere), which is directed at, or the contents of
which are likely to be accessed or read by, the public in Hong
Kong (except if permitted to do so under the laws of Hong Kong)
other than with respect to shares which are or are intended to
be disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Financial Instruments and Exchange Law of Japan (the
Financial Instruments and Exchange Law) and each underwriter has
agreed that it will not offer or sell any securities, directly
or indirectly, in Japan or to, or for the benefit of, any
resident of Japan (which term as used herein means any person
resident in Japan, including any corporation or other entity
organized under the laws of Japan), or to others for re-offering
or resale, directly or indirectly, in Japan or to a resident of
Japan, except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the Financial
Instruments and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
88
Legal
matters
The validity of the securities offered by this prospectus will
be passed upon for us by Akin Gump Strauss Hauer &
Feld LLP, Dallas, Texas. In addition, the description of federal
income tax consequences contained in the prospectus under the
caption Certain United Stated Federal Income Tax
ConsiderationsFederal Income Tax Consequences Of Our
Status As A REIT is based upon an opinion of Akin Gump
Strauss Hauer & Feld LLP, Dallas, Texas. The validity
of the securities offered hereby will be passed upon for the
Underwriters by Cahill Gordon &
Reindel
LLP
, New York,
New York. Akin Gump Strauss Hauer & Feld LLP and
Cahill Gordon &
Reindel
LLP
will rely
on the opinion of Miles & Stockbridge P.C., Baltimore,
Maryland, with respect to all matters involving Maryland law.
Experts
The financial statements and managements assessment of the
effectiveness of internal control over financial reporting
(which is included in Managements Report on Internal
Control over Financial Reporting) incorporated in this
prospectus by reference to the Annual Report on
Form 10-K
for the year ended December 31, 2009, have been so
incorporated in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
Where you can
find more information
We are subject to the informational requirements of the Exchange
Act. Accordingly, we file periodic reports, proxy statements,
and other information with the SEC. You may inspect or copy
these materials at the Public Reference Room at the SEC at
Room 1580, 100 F Street, N.E.,
Washington, D.C. 20549. For a fee, you may also obtain
copies of these materials by writing to the Public Reference
Section of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the SEC public
reference room. Our filings are also available to the public on
the SECs website on the Internet at
http://www.sec.gov.
We have filed with the SEC a registration statement on
Form S-11
(together with all amendments, schedules and exhibits thereto,
the Registration Statement) with respect to the common stock
offered by this prospectus. This prospectus, filed as part of
the Registration Statement, does not contain all of the
information included in the Registration Statement. Certain
items were omitted from this prospectus as permitted by the
rules and regulations of the SEC. Statements made in this
prospectus as to the contents of any contract, agreement, or
document are summaries and are not necessarily complete and, in
each instance, we refer you to a copy of the contract,
agreement, or other document filed as an exhibit to the
Registration Statement and each such statement is qualified in
its entirety by such reference. You may read and copy any
contract, agreement or other document that we have filed as an
exhibit to the Registration Statement or any other portion of
our Registration Statement at the SECs Public Reference
Room. For further information about us and the shares of common
shares offered by this prospectus, please refer to the
Registration Statement and its exhibits. You may obtain a copy
of the Registration Statement through the public reference
facilities of the SEC described above. You may also access a
copy of the Registration Statement by means of the SECs
website at
http://www.sec.gov.
89
Information
incorporated by reference
This prospectus is part of a registration statement on
Form S-11
filed with the SEC. This prospectus does not contain all of the
information included in the registration statement, certain
parts of which are omitted in accordance with the rules and
regulations of the SEC.
The SEC allows us to incorporate by reference
certain documents that we filed with the SEC prior to the date
of this prospectus, which means that we can disclose important
information to you by referring to those documents that are
considered part of this prospectus. We incorporate by reference
the documents listed below (excluding current reports or
portions thereof which are furnished to but are not filed with
the Commission under Items 2.02, 7.01 or 8.01 of
Form 8-K,
unless such current reports or portions thereof specifically
reference their contents as being filed):
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Our annual report on
Form 10-K
for the fiscal year ended December 31, 2009, as filed with
the SEC on February 26, 2010;
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Our quarterly report on
Form 10-Q
for the three months ended March 31, 2010, as filed with
the SEC on May 3, 2010; and
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Our current reports on
Form 8-K
filed with the SEC on February 19, 2010 and May 17,
2010.
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Our definitive Proxy Statement pertaining to the 2010 Annual
Meeting of Stockholders, as filed with the SEC on April 2,
2010.
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Any statement contained in this prospectus or in a document
incorporated by reference shall be deemed to be modified or
superseded for all purposes to the extent that a statement
contained in this prospectus or in any other document which is
also incorporated by reference modifies or supersedes that
statement.
You may request a copy of any or all of these documents, at no
cost, upon written or oral request made to us at our principal
executive offices at the following address and phone number:
545 E. John Carpenter Frwy., Suite 1300, Irving,
Texas, 75062,
(972) 444-4900,
attention Investor Relations. You can also access the
Companys filings with the SEC at
www.felcor.com.
90