FELCOR LODGING L P - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 333-3959-01

FelCor Lodging Limited Partnership

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		75-2544994 (I.R.S. Employer Identification No.)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o Nox

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

FELCOR LODGING LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands)


	June 30,		December 31,
	2004		2003
ASSETS
Investment in hotels, net of accumulated depreciation of $936,781 at June 30, 2004 and $886,168 at December 31, 2003	$	3,084,113	$	3,103,796
Investment in unconsolidated entities		116,973		116,553
Hotels held for sale		3,169		21,838
Cash and cash equivalents		148,146		246,036
Accounts receivable, net of allowance for doubtful accounts of $831 at June 30, 2004 and $1,104 at December 31, 2003		59,887		45,385
Deferred expenses, net of accumulated amortization of $18,450 at June 30, 2004 and $16,080 at December 31, 2003		19,955		24,278
Other assets		28,559		33,007

Total assets	$	3,460,802	$	3,590,893

LIABILITIES AND PARTNERS’ CAPITAL
Debt, net of discount of $4,610 at June 30, 2004 and $4,253 at December 31, 2003	$	1,872,795	$	2,037,355
Distributions payable		7,849		5,504
Accrued expenses and other liabilities		154,727		151,423
Minority interest in other partnerships		45,954		50,197

Total liabilities		2,081,325		2,244,479

Commitments and contingencies
Redeemable units at redemption value, 3,033 and 3,034 units issued and outstanding at June 30, 2004 and December 31, 2003, respectively		36,698		33,612

Preferred units, $.01 par value, 20,000 units authorized: Series A Cumulative Convertible Preferred Units, 10,580 and 5,980 units issued and outstanding at June 30, 2004 and December 31, 2003, respectively		256,600		149,512
Series B Cumulative Redeemable Preferred Units, 68 units issued and outstanding at June 30, 2004 and December 31, 2003		169,395		169,395
Common units, 59,423 and 59,120 units issued and outstanding at June 30, 2004 and December 31, 2003, respectively		908,276		984,417
Accumulated other comprehensive income		8,508		9,478

Total partners’ capital		1,342,779		1,312,802

Total liabilities, redeemable units and partners’ capital	$	3,460,802	$	3,590,893

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

FELCOR LODGING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months June 30, 2004 and 2003
(unaudited, in thousands, except for per unit data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues:
Hotel operating revenue	$	329,566		$	301,943		$	635,850		$	584,258
Retail space rental and other revenue		180			236			425			618

Total revenues		329,746			302,179			636,275			584,876

Expenses:
Hotel departmental expenses		118,694			104,487			229,307			203,321
Other property operating costs		92,549			84,355			183,841			168,048
Management and franchise fees		17,184			15,347			32,751			30,398
Taxes, insurance and lease expense		30,967			31,254			62,154			61,534
Corporate expenses		4,393			3,737			7,779			7,160
Depreciation		30,148			34,317			60,797			67,993

Total operating expenses		293,935			273,497			576,629			538,454

Operating income		35,811			28,682			59,646			46,422
Interest expense, net		(39,737	)		(41,007	)		(80,857	)		(80,826	)
Charge-off of deferred financing costs		(3,944	)		(2,834	)		(4,174	)		(2,834	)
Loss on early extinguishment of debt		(28,246	)		—			(28,246	)		—
Gain on swap termination		1,005			—			1,005			—

Loss before equity in income of unconsolidated entities, minority interests and gain on sales of assets		(35,111	)		(15,159	)		(52,626	)		(37,238	)
Equity in income from unconsolidated entities		2,691			726			3,673			578
Gain on sale of assets		—			153			—			153
Minority interests		314			293			243			(138	)

Loss from continuing operations		(32,106	)		(13,987	)		(48,710	)		(36,645	)
Discontinued operations		(1,645	)		(7,709	)		(7,147	)		(7,699	)

Net loss		(33,751	)		(21,696	)		(55,857	)		(44,344	)
Preferred distributions		(8,970	)		(6,728	)		(15,696	)		(13,454	)

Net loss applicable to common unitholders	$	(42,721	)	$	(28,424	)	$	(71,553	)	$	(57,798	)

Basic and diluted loss per common unit data:
Net loss from continuing operations	$	(0.66	)	$	(0.34	)	$	(1.04	)	$	(0.81	)

Net loss	$	(0.69	)	$	(0.46	)	$	(1.15	)	$	(0.93	)

Weighted average common units outstanding		61,983			61,845			61,985			61,833

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

FELCOR LODGING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2004 and 2003
(unaudited, in thousands)


	Six Months Ended
	June 30,
	2004			2003
Cash flows from operating activities:
Net loss	$	(55,857	)	$	(44,344	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		61,065			73,191
Loss on sale of assets		941			330
Amortization of deferred financing fees		2,370			2,375
Accretion of debt, net of discount		310			207
Amortization of unearned compensation		1,101			1,080
Equity in income from unconsolidated entities		(3,673	)		(578	)
Distributions of income from unconsolidated entities		403			780
Loss (gain) on early extinguishment of debt		28,246			(1,260	)
Impairment loss		—			7,824
Charge-off of deferred financing costs		4,174			2,834
Minority interests		(243	)		138
Changes in assets and liabilities:
Accounts receivable		(13,238	)		(4,058	)
Other assets		3,748			(4,316	)
Accrued expenses and other liabilities		172			2,556

Net cash flow provided by operating activities		29,519			36,759

Cash flows (used in) provided by investing activities:
Acquisition of hotel		(27,759	)		—
Improvements and additions to hotels		(34,005	)		(42,279	)
Proceeds from sale of assets		40,863			12,292
Cash from purchase of percentage interest in Interstate Joint Venture		—			2,705
Distributions of capital from unconsolidated entities		2,726			2,133

Net cash flow used in investing activities		(18,175	)		(25,149	)

Cash flows (used in) provided by financing activities:
Proceeds from borrowings		344,490			321,119
Repayment of borrowings		(537,606	)		(190,367	)
Payment of deferred financing fees		(2,221	)		(3,654	)
Net proceeds from sale of preferred units		104,461			—
Distributions paid to minority interest holders		(4,000	)		—
Distributions paid to preferred unitholders		(13,351	)		(13,455	)
Distributions paid to common unitholders		—			(9,307	)

Net cash flow provided by (used in) financing activities		(108,227	)		104,336

Effect of exchange rate changes on cash		(1,007	)		181
Net change in cash and cash equivalents		(97,890	)		116,127
Cash and cash equivalents at beginning of periods		246,036			66,542

Cash and cash equivalents at end of periods	$	148,146		$	182,669

Supplemental cash flow information —
Interest paid	$	89,538		$	80,937

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

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

In 1994, FelCor Lodging Limited Partnership, or FelCor LP, was established with six hotels and a market capitalization of $120 million. We are the largest owner of full service, all-suite hotels in the nation. Our sole general partner is FelCor Lodging Trust Incorporated, or FelCor, the second largest lodging real estate investment trust, or REIT. At June 30, 2004, FelCor owned an approximately 95% equity interest in our operations. At June 30, 2004, our portfolio of hotels in continuing operations included 71 upscale, all-suite hotels, and we are the owner of the largest number of Embassy Suites Hotels®, Crowne Plaza®, Holiday Inn® and independently-owned Doubletree® hotels in North America. Our portfolio also includes 72 hotels in the upscale and full service segments.

At June 30, 2004, we had ownership interests in 159 hotels. We owned a 100% real estate interest in 122 hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels, a 51% interest in an entity owning eight hotels and 50% interests in unconsolidated entities that own 20 hotels. As a result of our ownership interests in the operating lessees of 154 of these hotels, we reflect their operating revenues and expenses in our consolidated statements of operations. The operations of 153 of the 154 hotels were included in continuing operations at June 30, 2004. The remaining one hotel was held for sale as of June 30, 2004, and its operations are included in discontinued operations. The operating revenues and expenses of the remaining five hotels are unconsolidated.

At June 30, 2004, we had an aggregate of 62,455,439 redeemable and common units of FelCor LP limited partnership interest outstanding.

The following table reflects the distribution, by brand, of the 153 hotels included in our consolidated hotel continuing operations at June 30, 2004:


Brand	Hotels		Rooms
Embassy Suites Hotels		56		14,279
Doubletree and Doubletree Guest Suites^®		10		2,206
Holiday Inn - branded		43		13,751
Crowne Plaza and Crowne Plaza Suites^®		15		5,108
Sheraton^® and Sheraton Suites^®		10		3,269
Other brands		19		4,117

Total hotels		153

The hotels shown in the above table are located in the United States (33 states) and Canada (two hotels), with concentrations in Texas (35 hotels), California (19 hotels), Florida (16 hotels) and Georgia (14 hotels). Approximately 55% of our hotel room revenues were generated from hotels in these four states during the six months ended June 30, 2004.

At June 30, 2004, of the 153 consolidated hotels included in continuing operations, (i) subsidiaries of InterContinental Hotels Group, or IHG, managed 64, (ii) subsidiaries of Hilton Hotels Corporation, or Hilton, managed 66, (iii) subsidiaries of Starwood Hotels & Resorts Worldwide, Inc., or Starwood, managed 11, (iv) subsidiaries of Interstate Hotels & Resorts, or Interstate, managed 10, and (v) two independent management companies managed one each.

Certain reclassifications have been made to prior period financial information to conform to the current period’s presentation with no effect to previously reported net loss or partners’ capital.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization — (continued)

The financial information for the three and six months ended June 30, 2004, and 2003, is unaudited. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying financial statements for the three and six months ended June 30, 2004, and 2003, include adjustments based on management’s estimates (consisting of normal and recurring accruals), which we consider necessary for a fair presentation of the results for the periods. The financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2003, included in our Annual Report on Form 10-K for the year ended December 31, 2003 (“Form 10-K”). Operating results for the three and six months ended June 30, 2004, are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2004.

2. Acquisition of Hotels

Our hotel acquisitions consist almost exclusively of land, building, furniture, fixtures and equipment, and inventory. We allocate the purchase price among these asset classes based upon their respective values determined in accordance with Statement of Financial Accounting Standards, or SFAS 141, “Business Combinations.” When we acquire properties, we acquire them for use. The only intangible assets typically acquired consist of miscellaneous operating agreements, all of which are of short duration and at market rates. We do not acquire any significant in-place leases or other intangible assets (e.g., management agreements, franchise agreements or trademarks) when we acquire hotels. In conjunction with the acquisition of a hotel, we typically negotiate new franchise and management agreements with the selected brand owner and manager.

3. Investment in Unconsolidated Entities

We owned 50% interests in joint venture entities that owned 20 hotels at June 30, 2004, and December 31, 2003. We also owned a 50% interest in entities that own an undeveloped parcel of land, provide condominium management services, develop condominiums in Myrtle Beach, South Carolina, and lease four hotels. We account for our investments in these unconsolidated entities under the equity method. We do not have any majority-owned subsidiaries that are not consolidated in our financial statements.

Summarized unaudited combined financial information for 100% of these unconsolidated entities is as follows (in thousands):


	June 30,		December 31,
	2004		2003
Balance sheet information:
Investment in hotels, net of accumulated depreciation	$	359,460	$	326,835
Total assets	$	386,415	$	366,046
Debt	$	292,721	$	275,209
Total liabilities	$	293,391	$	276,773
Equity	$	93,024	$	89,273

Debt of our unconsolidated entities at June 30, 2004, included $210.2 million of non-recourse mortgage debt, of which our pro rata share is $105.1 million.

Debt of our unconsolidated entities at June 30, 2004, also included $41.3 million of mortgage debt guaranteed by us and $41.2 million of mortgage debt guaranteed by Hilton, one of our joint venture partners. The debt guaranteed by us consisted primarily of 50% of a loan related to the construction of a residential condominium project in Myrtle Beach, South Carolina. The loan commitment is for $97.6 million of which approximately $82.4 million was outstanding as of June 30, 2004. Our guarantee reduces from 50% to 25% of the outstanding balance when the condominium project is completed and receives a certificate of occupancy, which we expect to occur in third quarter 2004.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Investment in Unconsolidated Entities – (continued)

Our guarantee is a payment guarantee and will become payable in the event that the joint venture fails to pay interest or principal due under the debt agreement. The loan matures in August 2005, and bears interest at LIBOR plus 200 basis points. As of June 30, 2004, we had not established any liability related to our guarantees of debt because it was not probable that we would be required to perform under these guarantees.

Summarized combined statement of operations information for 100% of our unconsolidated entities is as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Total revenues	$	18,093	$	21,720	$	32,411	$	42,868
Net income	$	6,076	$	2,806	$	8,782	$	3,717

4. Debt

Debt at June 30, 2004 and December 31, 2003, consists of the following (in thousands):


						Balance Outstanding
	Encumbered	Interest Rate at			Maturity	June 30,		December 31,
	Hotels	June 30, 2004			Date	2004		2003
Promissory note	none		3.13	%^(a)	June 2016	$	650	$	650
Senior unsecured term notes	none		—		Oct. 2004		—		174,888
Senior unsecured term notes	none		5.84	^(a)	June 2011		175,000		—
Senior unsecured term notes	none		7.63		Oct. 2007		122,375		124,617
Senior unsecured term notes	none		10.00		Sept. 2008		273,386		596,865
Senior unsecured term notes	none		9.00		June 2011		298,283		298,158

Total unsecured debt^(e)			8.48				869,694		1,195,178

Mortgage debt	1 hotel		7.23		Sept. 2005		10,934		11,286
Mortgage debt	14 hotels		5.01	(b)	July 2009 – 2014		169,490		—
Mortgage debt	10 hotels		3.63	(c)	May 2006		146,393		148,080
Mortgage debt	15 hotels		5.92	(d)	Nov. 2007		130,143		131,721
Mortgage debt	1 hotel		4.00	(a)	August 2008		15,500		15,500
Mortgage debt	7 hotels		7.54		April 2009		91,470		92,445
Mortgage debt	6 hotels		7.55		June 2009		68,841		69,566
Mortgage debt	8 hotels		8.70		May 2010		176,840		178,118
Mortgage debt	7 hotels		8.73		May 2010		137,071		138,200
Mortgage debt	8 hotels		7.48		April 2011		49,898		50,305
Other	1 hotel		9.17		August 2011		6,521		6,956

Total secured debt^(e)	78 hotels		6.96				1,003,101		842,177

Total^(e)			7.45	%		$	1,872,795	$	2,037,355

(a) Variable interest rate based on LIBOR, which was 1.1% at June 30, 2004.

(b) $99 million of this debt had a variable interest rate based on LIBOR, which was 1.1% at June 30, 2004.

(c) Variable interest rate based on LIBOR. This debt may be extended at our option for up to two, one-year periods.

(d) $100 million of this note was matched with interest rate swap agreements that effectively converted the fixed interest rate of 7.46% on this note to a variable interest rate based on LIBOR.

(e) Interest rates are calculated based on the weighted average outstanding debt at June 30, 2004.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Debt — (continued)

We reported interest expense of $39.7 million (net of interest income of $0.6 million, and capitalized interest of $0.2 million), and $41.0 million (net of interest income of $0.6 million and capitalized interest of $0.1 million) for the three months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004 and 2003, respectively, we reported interest expense of $80.9 million (net of interest income of $1.3 million and capitalized interest of $0.2 million) and $80.8 million (net of interest income of $0.9 million and capitalized interest of $0.5 million). Ratings downgrades in 2003 on our senior unsecured debt resulted in a 50 basis point step-up in interest rates on our senior unsecured debt due in September 2008 ($275 million outstanding par value as of June 30, 2004) and our senior unsecured debt due in June 2011 ($300 million outstanding par value as of June 30, 2004).

In March 2004, we elected to terminate our line of credit, which resulted in the first quarter charge-off of unamortized loan costs of $0.2 million.

In May 2004, we issued $175 million in aggregate principal amount of Senior Floating Notes due 2011, the 2011 Notes. We received net proceeds of $174.1 million. The 2011 Notes will mature on June 1, 2011. The 2011 Notes bear interest, adjusted semi annually, at the six-month LIBOR rate plus 4.25% and rank equally with our other existing senior unsecured debt. The Notes are callable on or after December 1, 2006, at an initial redemption price of 102%. In July 2004, we issued an additional $115 million of the 2011 Notes with identical terms and conditions as the original $175 million.

On June 9, 2004, we redeemed all $175 million in principal amount of our outstanding 7.375% Senior Notes due 2004. The redemption price was $1,018.14 per $1,000 of the principal amount plus accrued interest. With the retirement of this debt we recorded a loss on redemption of $3.2 million and wrote off $0.3 million of debt issue costs. We also recorded a $1 million gain on the unwinding of the swaps tied to this debt.

During the second quarter of 2004, we purchased $325.3 million principal amount of our 9.5% Senior Notes due 2008 (which currently bear interest at 10% as a result of the 2003 downgrades of the credit ratings on our senior notes) through a tender offer and by purchases on the open market at an average price of 107.21. With the partial retirement of this debt we recorded a loss on early extinguishment of debt of $25 million ($23.4 million related to the premium paid in excess of par and $1.6 million related to the unamortized discount) and wrote off debt issue costs of $3.7 million. In July 2004, we purchased an additional $115 million of these notes and recorded a $7.6 million loss on early extinguishment of debt and wrote off debt issue costs of $1.2 million. After the July 2004 purchases, $160 million of par value remained outstanding on these notes.

In June 2003, we entered into a new secured delayed draw facility with JPMorgan Chase Bank for up to $200 million. At June 30, 2004, we had drawn down $169 million on this facility (collateralized by 14 hotels) and in July 2004, an additional $25 million was funded under the facility and an additional hotel was added to the collateral. The amount drawn under the facility has been converted into: (1) $107 million of nine separate fixed rate CMBS loans secured by nine hotels and weighted average rate of 6.5% and maturity dates ranging from 2009 to 2014, and (2) $87 million of a cross-collateralized floating rate CMBS loan secured by six hotels at a rate of LIBOR plus 2.11% and a maturity date of 2014. On July 28, 2004 we cancelled the balance of the $200 million facility.

Most of our mortgage debt is non-recourse to us and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of our mortgage debt is prepayable, subject to various prepayment penalties, yield maintenance or defeasance obligations. Our liability with regard to non-recourse debt is generally limited to the guarantee of the borrowing entity’s obligations to pay for the lender’s losses caused by misconduct, fraud or misappropriation of funds and other typical exceptions from the non-recourse provisions in the mortgages, such as for environmental liabilities.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Debt — (continued)

Our publicly-traded senior unsecured notes require that we satisfy total leverage, secured leverage and interest coverage tests in order to: incur additional indebtedness, except to refinance maturing debt with replacement debt, as defined under our indentures; pay distributions in excess of the minimum distribution required to meet FelCor’s REIT qualification test; repurchase units; or merge. As of the date of this filing, we have satisfied all such tests; however, under the terms of two of our indentures, we are prohibited from repurchasing any of our units, whether common or preferred, subject to certain exceptions, so long as our debt-to-EBITDA ratio, as defined in the indentures, exceeds 4.85 to 1. Our current debt-to-EBITDA ratio exceeds that ratio and is expected to do so for at least the remainder of 2004. Accordingly, we are prohibited from purchasing any of our units, except as permitted under limited exceptions, such as from the proceeds of a substantially concurrent issuance of other partnership units.

If actual operating results fail to meet our current expectations or if interest rates increase unexpectedly, we may be unable to continue to satisfy the incurrence test under the indentures governing our senior unsecured notes and may be prohibited from, among other things, incurring any additional indebtedness or paying distributions on our preferred or common units, except to the extent necessary to satisfy FelCor’s REIT qualification requirement that it distribute currently at least 90% of its taxable income. In the event of our failure of this incurrence test, based upon our current estimates of taxable income for 2004, we would be unable to distribute the full amount of distributions accruing under our outstanding preferred units in 2004 and, accordingly, could pay no distributions on our common units.

5. Derivatives

In the normal course of business, we are exposed to the effect of interest rate changes. We limit these risks by following established risk management policies and procedures including the use of derivatives. It is our objective to use interest rate hedges to manage our fixed and floating interest rate position and not to engage in speculation on interest rates. We manage interest rate risk based on the varying circumstances of anticipated borrowings and existing floating and fixed rate debt. We will generally seek to pursue interest rate risk mitigation strategies that will result in the least amount of reported earnings volatility under generally accepted accounting principles, while still meeting strategic economic objectives and maintaining adequate liquidity and flexibility. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

To manage the relative mix of our debt between fixed and variable rate instruments, through June 30, 2004, we had entered into four interest rate swap agreements with two financial institutions with an aggregate notional value of $100 million. These interest rate swap agreements modify a portion of the interest characteristics of our outstanding fixed rate debt, without an exchange of the underlying principal amount, and effectively convert fixed rate debt to a variable rate.

During June we unwound six interest rate swap agreements with an aggregate notional amount of $175 million that were matched with the $175 million notes due 2004 that were redeemed. A $1 million gain was recorded offsetting the loss on the redemption of the debt. Also during June, five additional swaps with an aggregate amount of $125 million that were matched to the $125 million senior unsecured notes due 2007 were unwound at a cost of $2.3 million. The $2.3 million cost will decrease the value of these notes and will be amortized to interest expense over the life of the debt. During July 2004 the remaining four interest rate swap agreements having a notional value of $100 million, were unwound at a cost of $1.3 million. The $1.3 million cost will decrease the mortgage debt due November 2007 and will be amortized to interest expense over the life of this debt.

To determine the fair values of our derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Derivatives — (continued)

The interest rate swap agreements held at June 30, 2004, are designated as fair value hedges, are marked to market through the income statement, but are offset by the change in fair value of our swapped outstanding fixed rate debt. The estimated unrealized net loss on these interest rate swap agreements was approximately $1.8 million at June 30, 2004, and represents the amount we would pay if the agreements were terminated, based on then current market rates.

The amounts paid or received by us under the terms of the interest rate swap agreements are accrued as interest rates change, and we recognize them as an adjustment to interest expense, which will have a corresponding effect on our future cash flows. The interest rate swaps decreased interest expense by $1.4 million and $1.7 million during the three months ended June 30, 2004 and 2003, respectively. The swaps decreased interest expense $4.2 million and $3.3 million during the six months ended June 30, 2004 and 2003, respectively. Our interest rate swaps have monthly to semi-annual settlement dates. Agreements such as these contain a credit risk in that the counterparties may be unable to fulfill the terms of the agreement. We minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties.

To fulfill requirements under a $150 million secured loan facility executed in April 2003, we purchased 6% interest rate caps on LIBOR with a notional amount of $146.4 million. We concurrently sold interest rate caps with identical terms. These interest rate cap agreements, which terminate in May 2006, have not been designated as hedges. The fair value of both the purchased and sold interest rate caps was $0.1 million at June 30, 2004, resulting in no net earnings impact.

6. Preferred Units

On April 5, 2004, FelCor completed the sale of 4.6 million shares of its $1.95 Series A Cumulative Convertible Preferred Stock. The shares were sold at a price of $23.79 per share, which included accrued dividends of $0.51 per share through April 5, 2004, resulting in net proceeds to FelCor of approximately $104.5 million. The proceeds from the Series A preferred stock were contributed to us in exchange for a like number of Series A preferred units. The preference on these units is the same as FelCor’s Series A preferred stock. The proceeds were used for the retirement of debt.

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

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Room revenue	$	260,699	$	238,347	$	504,218	$	462,613
Food and beverage revenue		51,875		47,553		98,455		90,637
Other operating departments		16,992		16,043		33,177		31,008

Total hotel operating revenues	$	329,566	$	301,943	$	635,850	$	584,258

Approximately 99.9% of our revenue was comprised of hotel operating revenues, which included room revenue, food and beverage revenue, and revenue from other hotel operating departments (such as telephone, parking and business centers), in 2004 and 2003. These revenues are recorded net of any sales or occupancy taxes collected from our guests. All rebates or discounts are recorded, when allowed, as a reduction in revenue, and there are no material contingent obligations with respect to rebates or discounts offered by us. All revenues

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

are recorded on an accrual basis, as earned. Appropriate allowances are made for doubtful accounts and are recorded as a bad debt expense. The remaining 0.1% of our revenue was from retail space rental revenue and other sources in 2004 and 2003.

We do not have any time-share arrangements and do not sponsor any guest frequency programs for which we would have any contingent liability. We participate in guest frequency programs sponsored by the brand owners of our hotels, and we expense the charges associated with those programs (typically consisting of a percentage of the total guest charges incurred by a participating guest), as incurred. When a guest redeems accumulated guest frequency points at one of our hotels, the hotel bills the sponsor for the services provided in redemption of such points and records revenue in the amount of the charges billed to the sponsor. Associated with the guest frequency programs, we have no loss contingencies or ongoing obligation beyond what is paid to the brand owner at the time of the guest’s stay.

Included in total hotel operating revenue was $6.1 million and $2.1 million for the three months ended June 30, 2004 and 2003, respectively, and $13.2 million and $2.1 million for the six months ended June 30, 2004 and 2003, respectively, related to the consolidation of our joint venture with Interstate. This joint venture became consolidated on June 1, 2003 and it was accounted for by the equity method prior to June 2003.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Room	$	69,322	$	60,801	$	134,285	$	118,354
Food and beverage		40,674		36,511		78,143		71,031
Other operating departments		8,698		7,175		16,879		13,936

Total hotel departmental expenses	$	118,694	$	104,487	$	229,307	$	203,321

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Hotel general and administrative expense	$	30,715	$	28,167	$	60,577	$	56,678
Marketing		28,361		25,371		55,594		50,101
Repair and maintenance		17,901		16,164		35,813		32,276
Utilities		15,572		14,653		31,857		28,993

Total other property operating costs	$	92,549	$	84,355	$	183,841	$	168,048

Included in hotel departmental expenses and other property operating costs are hotel employee compensation and benefit expenses of $108.0 million and $96.6 million for the three months ended June 30, 2004 and 2003, respectively and $210.7 million and $191.0 million for the six months ended June 30, 2004 and 2003, respectively.

Included in total hotel departmental expenses and other property operating costs was $4.9 million and $1.4 million for the three months ended June 30, 2004 and 2003, respectively, and $9.9 million and $1.4 million for the six months ended June 30, 2004 and 2003, respectively, related to the consolidation of our joint venture with Interstate which became effective June 1, 2003.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Taxes, Insurance and Lease Expense

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Operating lease expense ^(a)	$	16,636	$	15,077	$	31,009	$	27,910
Real estate and other taxes		11,042		12,030		24,013		24,911
Property and general liability insurance		3,289		4,147		7,132		8,713

Total taxes, insurance and lease expense	$	30,967	$	31,254	$	62,154	$	61,534

(a) Includes lease expense associated with 15 hotels owned by unconsolidated entities. Included in lease expense are $7.4 million and $5.6 million in percentage rent for the three months ended June 30, 2004 and 2003, respectively, and $12.1 million and $9.1 million in percentage rent for the six months ended June 30, 2004 and 2003, respectively.

9. Discontinued Operations

Included in discontinued operations are the results of operations of the eight hotels sold or otherwise disposed of in 2004, one hotel designated as held for sale at June 30, 2004, and 16 hotels sold in 2003. Condensed financial information for the hotels included in discontinued operations is as follows:


	Three Months Ended						Six Months Ended
	June 30,						June,
	2004			2003			2004			2003
Hotel operating revenue	$	5,690		$	26,377		$	14,776		$	51,026
Hotel operating expenses		6,121			25,842			16,082			51,000

Operating income (loss)		(431	)		535			(1,306	)		26
Direct interest costs		—			(244	)					(678	)
Gain on the early extinguishment of debt		—			307						1,260
Impairment		—			(7,824	)		—			(7,824	)
Lease termination expense		—			—			(4,900	)		—
Loss on sale of assets		(1,214	)		(483	)		(941	)		(483	)

Loss from discontinued operations	$	(1,645	)	$	(7,709	)	$	(7,147	)	$	(7,699	)

In the first quarter of 2004 we sold four hotels for net proceeds of $28.8 million. In the second quarter of 2004 we sold three hotels for net proceeds of $12.0 million and transferred our interest in one hotel to the ground lessor. From the sale of these hotels we recognized a loss of $0.9 million and recorded a lease termination expense of $4.9 million.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Loss Per Unit

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Numerator:
Loss from continuing operations	$	(32,106	)	$	(13,987	)	$	(48,710	)	$	(36,645	)
Less: Preferred distributions		(8,970	)		(6,728	)		(15,696	)		(13,454	)

Loss from continuing operations applicable to common unitholders		(41,076	)		(20,715	)		(64,406	)		(50,099	)
Discontinued operations		(1,645	)		(7,709	)		(7,147	)		(7,699	)

Net loss applicable to common unitholders	$	(42,721	)	$	(28,424	)	$	(71,553	)	$	(57,798	)

Denominator:
Denominator for basic earnings per units		61,982			61,845			61,985			61,833

Denominator for diluted earnings per units – adjusted weighted average units and assumed conversions		61,982			61,845			61,985			61,833

Loss per unit data:
Basic:
Loss from continuing operations	$	(0.66	)	$	(0.34	)	$	(1.04	)	$	(0.81	)
Discontinued operations		(0.03	)		(0.12	)		(0.11	)		(0.12	)

Net loss	$	(0.69	)	$	(0.46	)	$	(1.15	)	$	(0.93	)

Diluted:
Loss from continuing operations	$	(0.66	)	$	(0.34	)	$	(1.04	)	$	(0.81	)
Discontinued operations		(0.03	)		(0.12	)		(0.11	)		(0.12	)

Net loss	$	(0.69	)	$	(0.46	)	$	(1.15	)	$	(0.93	)

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
FelCor’s restricted shares granted but not vested		382		309		255		309
Series A convertible preferred units		8,202		4,636		8,202		4,636

Series A preferred distributions that would be excluded from net loss applicable to common unitholders, if these Series A preferred units were dilutive, were $5.2 million and $2.9 million for the three months and $8.1 million and $5.8 million for the six months ended June 30, 2004 and 2003, respectively.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. FelCor’s Stock Based Compensation Plans

FelCor applies Accounting Principles Board, or APB, Opinion 25 and related interpretations in accounting for its stock based compensation plans for stock based compensation issued prior to January 1, 2003. In 1995, SFAS 123, “Accounting for Stock-Based Compensation,” was issued, which, if fully adopted by FelCor, would have changed the methods it applies in recognizing the cost of the plans. As permitted under the transition provisions of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” FelCor began recognizing compensation expense in accordance with SFAS 123 for all new awards issued after December 31, 2002. Had the compensation cost for FelCor’s stock-based compensation plans been determined in accordance with SFAS 123 prior to January 1, 2003, our net income or loss and net income or loss per common unit for the periods presented would approximate the pro forma amounts below (in thousands, except per unit data):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Loss from continuing operations, as reported	$	(32,106	)	$	(13,987	)	$	(48,710	)	$	(36,645	)
Add stock based compensation included in the net loss, as reported		519			565			1,022			1,080
Less stock based compensation expense that would have been included in the determination of net loss if the fair value method had been applied to all awards		(597	)		(589	)		(1,107	)		(1,177	)

Loss from continuing operations, pro forma	$	(32,184	)	$	(14,011	)	$	(48,795	)	$	(36,742	)

Basic and diluted net loss per common unit:
As reported	$	(0.66	)	$	(0.34	)	$	(1.04	)	$	(0.81	)
Pro forma	$	(0.66	)	$	(0.34	)	$	(1.04	)	$	(0.81	)

The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts.

12. Lease Termination Costs

We leased the San Francisco Holiday Inn Select Downtown & Spa hotel under a lease that expired at June 30, 2004. In May 2003, the lessor asserted that we were in default of our obligations for maintenance, repair and replacement under the lease, and asserted that the cost of correcting the alleged deficiencies was approximately $13.9 million. The lessor subsequently asserted that we were also in default of our capital expenditure obligations under the lease in the approximate amount of $3 million. In October 2003, we reached a partial settlement with the lessor, pursuant to which we paid the lessor $296,000 in full satisfaction and discharge of certain maintenance obligations that the lessor had valued in its original claim at $470,300. On May 3, 2004, we executed a settlement agreement. Under the terms of the settlement, we have paid the lessor $5 million which has been recorded as lease termination expense in the accompanying financial statements. We transferred our interest in the hotel to the lessor as of June 30, 2004, and have been relieved of the obligation to make any additional capital improvements to the hotel and have received a full release of all known and unknown claims and further obligations under the lease. We have also received a release of termination liability to IHG under their management agreement with respect to this hotel upon its termination in connection with the above settlement. The operations of this hotel are included in discontinued operations for the three and six months ended June 30, 2004 and 2003.

13. Consolidating Financial Information

Certain of the Company’s wholly-owned subsidiaries (FelCor/CSS Holdings, L.P.; FelCor/CSS Hotels, L.L.C.; FelCor/LAX Hotels L.L.C.; FelCor Eight Hotels, L.L.C.; FelCor/St. Paul Holdings, L.P.; FelCor/LAX Holdings, L.P.; FHAC Nevada Holdings, L.L.C.; FelCor TRS Holdings, L.P.; Kingston Plantation Development Corp.; FHAC Texas Holdings, L.P.; FelCor Omaha Hotel Company, L.L.C.; FelCor Country Villa Hotel, L.L.C.; FelCor Moline Hotel, L.L.C.; FelCor Canada Co. and FelCor Hotel Asset Company, L.L.C., collectively, “Subsidiary Guarantors”), together with FelCor and two of its wholly-owned subsidiaries (FelCor Holdings Trust and FelCor Nevada Holdings, L.L.C.), are guarantors of senior debt. The following tables present consolidating information for the Subsidiary Guarantors.

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Consolidating Financial Information – (continued)

CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2004
(in thousands)


			Subsidiary			Non-Guarantor					Total
	FelCor L.P.		Guarantors			Subsidiaries		Eliminations			Consolidated
ASSETS
Net investment in hotel properties	$	226,277	$	1,069,189		$	1,788,647	$			$	3,084,113
Equity investment in consolidated entities		1,951,862		—			—		(1,951,862	)		—
Investment in unconsolidated entities		85,352		31,621			—		—			116,973
Assets held for sale		—		3,169			—		—			3,169
Cash and cash equivalents		57,969		71,073			19,104		—			148,146
Accounts receivable		2,420		57,459			8		—			59,887
Deferred assets		11,291		708			7,956		—			19,955
Other assets		3,868		21,442			3,249		—			28,559

Total assets	$	2,339,039	$	1,254,661		$	1,818,964	$	(1,951,862	)	$	3,460,802

LIABILITIES AND PARTNERS’ CAPITAL
Debt	$	935,442	$	122,257		$	815,096	$	—		$	1,872,795
Distributions payable		7,849		—			—		—			7,849
Accrued expenses and other liabilities		11,392		118,965			24,370		—			154,727
Minority interest - other partnerships		4,879		(4,673	)		45,748		—			45,954

Total liabilities		959,562		236,549			885,214		—			2,081,325

Redeemable units, at redemption value		36,698		—			—		—			36,698

Preferred units		425,995		—			—		—			425,995
Common units		916,784		1,009,604			933,750		(1,951,862	)		908,276
Accumulated other comprehensive income		—		8,508			—		—			8,508

Total partners’ capital		1,342,779		1,018,112			933,750		(1,951,862	)		1,342,779

Total liabilities, redeemable units and partners’ capital	$	2,339,039	$	1,254,661		$	1,818,964	$	(1,951,862	)	$	3,460,802

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Consolidating Financial Information – (continued)

CONSOLIDATING BALANCE SHEET
December 31, 2003
(in thousands)


			Subsidiary			Non-Guarantor					Total
	FelCor L.P.		Guarantors			Subsidiaries		Eliminations			Consolidated
ASSETS
Net investment in hotel properties	$	276,342	$	1,080,594		$	1,746,860	$	—		$	3,103,796
Equity investment in consolidated entities		2,079,399		—			—		(2,079,399	)		—
Investment in unconsolidated entities		93,337		23,216			—		—			116,553
Assets held for sale		—		6,238			15,600		—			21,838
Cash and cash equivalents		170,057		59,317			16,662		—			246,036
Accounts receivable		2,214		40,568			2,603		—			45,385
Deferred assets		15,133		783			8,362		—			24,278
Other assets		10,467		16,907			5,633		—			33,007

Total assets	$	2,646,949	$	1,227,623		$	1,795,720	$	(2,079,399	)	$	3,590,893

LIABILITIES AND PARTNERS’ CAPITAL
Debt	$	1,261,460	$	123,519		$	652,376	$	—		$	2,037,355
Distributions payable		5,504		—			—		—			5,504
Accrued expenses and other liabilities		25,009		(217,023	)		343,437		—			151,423
Minority interest - other partnerships		8,562		(3,797	)		45,432		—			50,197

Total liabilities		1,300,535		(97,301	)		1,041,245		—			2,244,479

Redeemable units, at redemption value		33,612		—			—		—			33,612

Preferred units		318,907		—			—		—			318,907
Common units		993,895		1,315,446			754,475		(2,079,399	)		984,417
Accumulated other comprehensive income		—		9,478			—		—			9,478

Total partners’ capital		1,312,802		1,324,924			754,475		(2,079,399	)		1,312,802

Total liabilities, redeemable units and partners’ capital	$	2,646,949	$	1,227,623		$	1,795,720	$	(2,079,399	)	$	3,590,893

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Consolidating Financial Information – (continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2004
(in thousands)


				Subsidiary			Non-Guarantor						Total
	FelCor L.P.			Guarantors			Subsidiaries			Eliminations			Consolidated
Revenues:
Hotel operating revenue	$	—		$	329,566		$	—		$			$	329,566
Percentage lease revenue		9,851			44,609			52,006			(106,466	)		—
Other revenue		180			—			—			—			180

Total revenue		10,031			374,175			52,006		$	(106,466	)		329,746

Expenses:
Hotel operating expense		—			228,427			—			—			228,427
Taxes, insurance and lease expense		(352	)		130,902			6,883			(106,466	)		30,967
Corporate expenses		761			2,000			1,632			—			4,393
Depreciation		2,799			11,776			15,573			—			30,148

Total operating expenses		3,208			373,105			24,088			(106,466	)		293,935

Operating income		6,823			1,070			27,918			—			35,811
Interest expense, net		(24,237	)		(2,716	)		(12,784	)		—			(39,737	)
Charge-off of deferred financing cost		(3,944	)		—			—			—			(3,944	)
Loss on early extinguishment of debt		(28,246	)		—			—			—			(28,246	)
Gain on swap termination		1,005			—			—			—			1,005

Income (loss) before equity in income from unconsolidated entities, minority interests and gain on sale of assets		(48,599	)		(1,646	)		15,134			—			(35,111	)
Equity in income from consolidated entities		12,754			—			—			(12,754	)		—
Equity in income from unconsolidated entities		2,570			121			—			—			2,691
Minority interests in other partnerships		(476	)		970			(180	)		—			314

Income (loss) from continuing operations		(33,751	)		(555	)		14,954			(12,754	)		(32,106	)
Discontinued operations from consolidated entities		—			(1,645	)		—			—			(1,645	)

Net income (loss)		(33,751	)		(2,200	)		14,954			(12,754	)		(33,751	)
Preferred distributions		(8,970	)		—			—			—			(8,970	)

Net income (loss) applicable to unitholders	$	(42,721	)	$	(2,200	)	$	14,954		$	(12,754	)	$	(42,721	)

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Consolidating Financial Information – (continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2003
(in thousands)


				Subsidiary			Non-Guarantor						Total
	FelCor L.P.			Guarantors			Subsidiaries			Eliminations			Consolidated
Revenues:
Hotel operating revenue	$	—		$	303,273		$	(1,330	)	$	—		$	301,943
Percentage lease revenue		11,277			44,277			42,924			(98,478	)		—
Other revenue		520			(284	)		—			—			236

Total revenue		11,797			347,266			41,594			(98,478	)		302,179

Expenses:
Hotel operating expense		—			203,855			334			—			204,189
Taxes, insurance and other		1,865			120,714			7,153			(98,478	)		31,254
Corporate expenses		445			2,249			1,043			—			3,737
Depreciation		4,883			14,397			15,037			—			34,317

Total operating expenses		7,193			341,215			23,567			(98,478	)		273,497

Operating income		4,604			6,051			18,027			—			28,682
Interest expense, net		(25,423	)		(3,205	)		(12,379	)		—			(41,007	)
Charge-off of deferred financing costs		(2,830	)		(4	)		—			—			(2,834	)

Income (loss) before equity in income from unconsolidated entities, minority interests, and gain on sale of assets		(23,649	)		2,842			5,648			—			(15,159	)
Equity in loss from consolidated entities		(483	)		—			—			483			—
Equity in income from unconsolidated entities		1,017			(291	)		—			—			726
Gain on sale of assets		—			153			—			—			153
Minority interests in other partnerships		(14	)		(89	)		396			—			293

Income (loss) from continuing operations		(23,129	)		2,615			6,044			483			(13,987	)
Discontinued operations from consolidated entities		1,433			(1,820	)		(7,322	)		—			(7,709	)

Net income (loss)		(21,696	)		795			(1,278	)		483			(21,696	)
Preferred distributions		(6,728	)		—			—			—			(6,728	)

Net income (loss) applicable to unitholders	$	(28,424	)	$	795		$	(1,278	)	$	483		$	(28,424	)

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Consolidating Financial Information – (continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2004
(in thousands)


				Subsidiary			Non-Guarantor						Total
	FelCor L.P.			Guarantors			Subsidiaries			Eliminations			Consolidated
Revenues:
Hotel operating revenue	$	—		$	635,850		$			$			$	635,850
Percentage lease revenue		18,539			84,697			107,661			(210,897	)		—
Other revenue		425			—			—			—			425

Total revenue		18,964			720,547			107,661			(210,897	)		636,275

Expenses:
Hotel operating expense		—			445,899			—			—			445,899
Taxes, insurance and lease expense		1,287			257,179			14,585			(210,897	)		62,154
Corporate expenses		1,037			3,874			2,868			—			7,779
Depreciation		6,063			22,670			32,064			—			60,797

Total operating expenses		8,387			729,622			49,517			(210,897	)		576,629

Operating income (loss)		10,577			(9,075	)		58,144			—			59,646
Interest expense, net		(49,996	)		(5,441	)		(25,420	)		—			(80,857	)
Charge-off of deferred financing cost		(4,174	)		—			—			—			(4,174	)
Loss on early extinguishment of debt		(28,246	)		—			—			—			(28,246	)
Gain on swap termination		1,005			—			—			—			1,005

Income (loss) before equity in income from unconsolidated entities, minority interests and gain on sale of assets		(70,834	)		(14,516	)		32,724			—			(52,626	)
Equity in income from consolidated entities		11,198			—			—			(11,198	)		—
Equity in income from unconsolidated entities		4,096			(423	)		—			—			3,673
Minority interests in other partnerships		(317	)		876			(316	)		—			243

Income (loss) from continuing operations		(55,857	)		(14,063	)		32,408			(11,198	)		(48,710	)
Discontinued operations from consolidated entities		—			(6,810	)		(337	)		—			(7,147	)

Net income (loss)		(55,857	)		(20,873	)		32,071			(11,198	)		(55,857	)
Preferred distributions		(15,696	)		—			—			—			(15,696	)

Net income (loss) applicable to unitholders	$	(71,553	)	$	(20,873	)	$	32,071		$	(11,198	)	$	(71,553	)

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Consolidating Financial Information – (continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2003
(in thousands)


				Subsidiary			Non-Guarantor						Total
	FelCor L.P.			Guarantors			Subsidiaries			Eliminations			Consolidated
Revenues:
Hotel operating revenue	$	—		$	584,258		$	—		$	—		$	584,258
Percentage lease revenue		26,143			81,814			81,477			(189,434	)		—
Other revenue		332			286			—			—			618

Total revenue		26,475			666,358			81,477			(189,434	)		584,876

Expenses:
Hotel operating expense		121			400,777			869			—			401,767
Taxes, insurance and lease expense		5,188			232,931			12,849			(189,434	)		61,534
Corporate expenses		849			4,323			1,988			—			7,160
Depreciation		10,214			29,550			28,229			—			67,993

Total operating expenses		16,372			667,581			43,935			(189,434	)		538,454

Operating income (loss)		10,103			(1,223	)		37,542			—			46,422
Interest expense, net		(51,209	)		(6,359	)		(23,258	)		—			(80,826	)
Charge-off of deferred financing cost		(2,830	)		(4	)		—			—			(2,834	)

Income (loss) before equity in income from unconsolidated entities, minority interests and gain on sale of assets		(43,936	)		(7,586	)		14,284			—			(37,238	)
Equity in income from unconsolidated entities		1,087			(509	)		—			—			578
Gain on sale of assets		—			153			—			—			153
Equity in loss from consolidated entities		(5,218	)		—			—			5,218			—
Minority interests in other partnerships		(14	)		(89	)		(35	)		—			(138	)

Income (loss) from continuing operations		(48,081	)		(8,031	)		14,249			5,218			(36,645	)
Discontinued operations from consolidated entities		3,737			(4,560	)		(6,876	)		—			(7,699	)

Net income (loss)		(44,344	)		(12,591	)		7,373			5,218			(44,344	)
Preferred distributions		(13,454	)		—			—			—			(13,454	)

Net loss applicable to unitholders	$	(57,798	)	$	(12,591	)	$	7,373		$	5,218		$	(57,798	)

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Consolidating Financial Information — (continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2004
(in thousands)


				Subsidiary			Non-Guarantor			Total
	FelCor L.P.			Guarantors			Subsidiaries			Consolidated
Cash flows from (used in) operating activities	$	(38,357	)	$	2,336		$	65,540		$	29,519
Cash flows from (used in) investing activities		(77	)		(16,049	)		(2,049	)		(18,175	)
Cash flows from (used in) financing activities		(73,654	)		26,476			(61,049	)		(108,227	)
Effect of exchange rates changes on cash		—			(1,007	)		—			(1,007	)

Change in cash and cash equivalents		(112,088	)		11,756			2,442			(97,890	)
Cash and cash equivalents at beginning of period		170,057			59,317			16,662			246,036

Cash and equivalents at end of period	$	57,969		$	71,073		$	19,104		$	148,146

CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2003
(in thousands)


				Subsidiary			Non-Guarantor			Total
	FelCor L.P.			Guarantors			Subsidiaries			Consolidated
Cash flows from (used in) operating activities	$	(19,491	)	$	12,326		$	39,490		$	32,325
Cash flows used in investing activities		(6,747	)		(2,440	)		(15,182	)		(24,369	)
Cash flows from (used in) financing activities		124,608			6,800			(23,418	)		107,990
Effect of exchange rates changes on cash		—			181			—			181

Change in cash and cash equivalents		98,370			16,867			890			116,127
Cash and cash equivalents at beginning of period		24,725			24,479			17,338			66,542

Cash and equivalents at end of period	$	123,095		$	41,346		$	18,228		$	182,669

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

General

In the second quarter of 2004, revenue per available room, or RevPAR, for our consolidated hotel portfolio in continuing operations, increased 7.3% compared to the same period last year, which surpassed our original expectations of a 5% to 6% increase. Through June 30, 2004, we will have had seven consecutive months with year-over-year RevPAR increases and our first quarterly year-over-year increase in average daily rates, or ADR, since the first quarter of 2001. Occupied rooms at our hotels, or occupancy, increased 5.5% for the quarter, compared to the same quarter last year, while the ADR of our hotel portfolio increased 1.7%. Hotel demand continues to get stronger and, similar to past lodging cycles, as our hotel occupancy increases, ADR should improve. As a result of the increased ADR, in June 2004 we experienced our first improvement in hotel operating margins since December of 2002.

We continue to invest in our core hotels to maintain their competitive position and to take advantage of the current recovery phase of the lodging cycle. During the first six months of 2004, we have spent $34 million for capital improvements and replacements, and anticipate capital spending on our hotels to approximate $75 million to $100 million for the full year.

At June 30, 2004, we had 26 hotels that we had previously designated as non-strategic and intend to sell by the end of 2005, with expected proceeds of approximately $200 million. We expect to complete hotel sales in 2004 of approximately $125 million. In 2004, through June 30, we have disposed of eight non-strategic hotels, receiving aggregate net proceeds of $41 million.

Financial Comparison (in thousands of dollars, except RevPAR and operating margin)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
RevPAR	$	67.04		$	62.47		$	64.96		$	61.38
Operating Margin⁽¹⁾		30.7	%		31.4	%		29.9			30.3	%
Funds From Operations (“FFO”)^{(1) (2)}	$	(9.5	)	$	11.8		$	(1.0	)	$	21.4
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)⁽¹⁾⁽²⁾	$	41.7		$	63.0		$	100.6		$	122.8
Net loss⁽³⁾	$	(33.8	)	$	(21.7	)	$	(55.9	)	$	(44.3	)

	(1)		Included in the Financial Comparison are non-GAAP financial measures, including operating margin, FFO and EBITDA. Further discussion, and a detailed reconciliation, of these non-GAAP financial measures to our financial statements are found elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	(2)		Included in FFO and EBITDA are the following amounts (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Charge off of deferred debt costs	$	3,944		$	2,834		$	4,174		$	2,834
Loss (gain) on early extinguishment of debt		28,246			(307	)		28,246			(1,260	)
Gain from swap termination		(1,005	)		—			(1,005	)		—
Impairment		—			7,824			—			7,824

	$	31,185		$	10,351		$	31,415		$	9,398

(3) Included in net loss are the following amounts (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Lease termination costs	$	—		$	—		$	4,900		$	—
Charge off of deferred debt costs		3,944			2,834			4,174			2,834
Loss (gain) on early extinguishment of debt		28,246			(307	)		28,246			(1,260	)
Gain from swap termination		(1,005	)		—			(1,005	)		—
Impairment		—			7,824			—			7,824

	$	31,185		$	10,351		$	36,315		$	9,398

Results of Operations

Comparison of the Three Months Ended June 30, 2004 and 2003

At June 30, 2004, we had 153 hotels included in our consolidated continuing operations, of which 26 hotels had been identified as non-strategic. The 26 non-strategic hotels included in continuing operations at June 2004, represented 16% of the rooms in our hotel portfolio, but only 8% of our 2003 consolidated hotel operating profit. The operating margin for these 26 hotels was 21.2%, compared to 30.9% for the remainder of our portfolio.

For the three months ended June 30, 2004, we recorded a loss applicable to common unitholders of $43 million, or a loss per unit of $0.69. Included in the loss for the quarter was $31 million ($0.50 per unit) of net expenses associated with the early retirement of $500 million of senior notes. For the same period in 2003, we recorded a loss of $28 million, or a loss per unit of $0.46. Results of operations for the second quarter of 2003 included $10 million ($0.17 per unit) of expenses related to impairment losses and the charge-off of deferred financing costs, net of gain on early extinguishment of debt.

Revenues from continuing operations for the second quarter were $330 million, reflecting an increase of $28 million, or 9%, compared to the same quarter in 2003. The increase in revenues was primarily related to a 7.3% increase in our hotel portfolio’s RevPAR, compared to the same quarter in 2003. Occupancy increased 5.5%, to 68.6%, and ADR increased 1.7% to $97.78, compared to the same quarter of 2003. The increases in occupancy and ADR are attributable to the strengthening lodging market.

Included in total hotel operating revenue was $6.1 million and $2.1 million for the three months ended June 30, 2004 and 2003, respectively, related to the consolidation of our joint venture with Interstate Hotels & Resorts. This joint venture became consolidated on June 1, 2003 and it was accounted for by the equity method prior to June 2003.

Our second quarter 2004 hotel operating profit from continuing operations increased by $3 million over the same period in 2003. Operating margin, which is hotel operating profit divided by hotel revenue, decreased from 32.4% to 30.7%. We attribute the decrease in operating margin principally to increased hotel occupancy of 5.5% with only a 1.7% increase in average rate, coupled with increases in labor related costs.

Discontinued operations for the quarter represent the operating income, direct interest costs and gains or losses on sale of eight hotels disposed during 2004, one hotel that was designated as held for sale at June 30, 2004, and 16 hotels disposed of in 2003.

Comparison of the Six Months Ended June 30, 2004 and 2003

For the six months ended June 30, 2004, we recorded a loss applicable to common unitholders of $72 million ($1.15 per unit) compared to a loss in 2003 of $58 million ($0.93 per unit). Results of operations for the six months ended June 30, 2004, included $31 million ($0.51 per unit) of net expenses principally associated with the early retirement of $500 million of senior notes and a nonrecurring lease termination cost of $5 million ($0.08 per unit). Included in the prior year loss was $9 million ($0.15 per unit) of expenses related to impairment losses and the charge-off of deferred financing costs, net of a gain on early extinguishment of debt.

Revenues from continuing operations for the six months 2004 were $636 million, reflecting an increase of $51 million, or 9% compared to the same period in 2003. The increase in revenues was primarily related to the 5.8% increase in our hotel portfolio’s RevPAR, compared to the same period in 2003. Occupancy increased 5.3% to 66.5% and ADR increased 0.5% to $97.62, compared to the same quarter of 2003. The increases in occupancy and ADR are attributed to the strengthening lodging market.

Included in total hotel operating revenue was $13.2 million and $2.1 million for the six months ended June 30, 2004 and 2003, respectively, related to the consolidation of our joint venture with Interstate Hotels & Resorts. This joint venture became consolidated on June 1, 2003 and it was accounted for by the equity method prior to June 2003.

Our six month 2004 hotel operating profit from continuing operations increased by $7 million over the same period in 2003. Operating margin decreased from 31.3% to 29.9%. We attribute the decrease in operating margin principally to the 5.3% increase in occupied rooms with only a 0.5% increase in average room rate, coupled with increases in labor related costs, compared to the same period in 2003.

Non-GAAP Financial Measures

Funds From Operations and EBITDA

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminish predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider supplemental measurements of performance to be helpful in evaluating a real estate company’s operations. We consider Funds From Operations, or FFO, and Earnings Before Interest, Taxes, Depreciation, and Amortization, or EBITDA, to be supplemental measures of a REIT’s performance and should be considered along with, but not as an alternative to, net income as a measure of our operating performance.

The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income or loss (computed in accordance with generally accepted accounting principles), excluding gains or losses from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. FFO and EBITDA are not measures of operating performance under generally accepted accounting principles in the U.S., or GAAP. However, we believe that FFO and EBITDA are helpful to management and investors as supplemental measures of the performance of an equity REIT. We compute FFO in accordance with standards established by NAREIT. This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.

FFO and EBITDA should not be considered as alternatives to net income, operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. Neither should FFO, FFO per unit and EBITDA be considered as measures of our liquidity or indicative of funds available for our cash needs, including our ability to make cash distributions. FFO per unit does not measure, and should not be used as a measure of amounts that accrue directly to the benefit of unitholders.

The following tables detail our computation of FFO and EBITDA (in thousands):

Reconciliation of Net Loss to FFO
(in thousands, except per unit data)


	Three Months Ended June 30,
	2004								2003
						Per Unit								Per Unit
	Dollars			Units		Amount			Dollars			Units		Amount
Net loss	$	(33,751	)						$	(21,696	)
Preferred distributions		(8,970	)							(6,728	)

Net loss applicable to common unitholders	$	(42,721	)		61,983	$	(0.69	)	$	(28,424	)		61,845	$	(0.46	)
Depreciation from continuing operations		30,148			—		0.49			34,317			—		0.55
Depreciation from unconsolidated entities and discontinued operations		1,870			—		0.03			5,609			—		0.09
Loss on sale of assets		1,214			—		0.02			330			—		0.01
Conversion of options and unvested restricted stock		—			—		—			—			309		—

FFO	$	(9,489	)		61,983	$	(0.15	)	$	11,832			62,154	$	0.19


	Six Months Ended June 30,
	2004								2003
						Per Unit								Per Unit
	Dollars			Units		Amount			Dollars			Units		Amount
Net loss	$	(55,857	)						$	(44,344	)
Preferred distributions		(15,696	)							(13,454	)

Net loss applicable to common stockholders	$	(71,553	)		61,985	$	(1.15	)	$	(57,798	)		61,833	$	(0.93	)
Depreciation from continuing operations		60,797			—		0.98			67,993			—		1.09
Depreciation from unconsolidated entities and discontinued operations		3,888			—		0.06			10,899			—		0.17
Loss on sale of assets		941			—		0.01			330			—		0.01
Lease termination costs^(a)		4,900			—		0.08						—
Conversion of options and unvested restricted stock					—		—			—			309		—

FFO	$	(1,027	)		61,985	$	(0.02	)	$	21,424			62,142	$	0.34

(a) We consider this lease termination cost, associated with the early termination of a lease, to be unusual or nonrecurring in accordance with Item 10 of Regulation S-K.

Consistent with SEC guidance on non-GAAP financial measures, FFO has not been adjusted for the following amounts included in net loss (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Charge off of deferred debt costs	$	3,944		$	2,834		$	4,174		$	2,834
Loss (gain) on early extinguishment of debt		28,246			(307	)		28,246			(1,260	)
Gain from swap termination		(1,005	)		—			(1,005	)		—
Impairment		—			7,824			—			7,824

	$	31,185		$	10,351		$	31,415		$	9,398

Per unit amounts	$	0.50		$	0.17		$	0.51		$	0.15

Reconciliation of Net Loss to EBITDA
(in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Net loss	$	(33,751	)	$	(21,696	)	$	(55,857	)	$	(44,344	)
Depreciation from continuing operations		30,148			34,317			60,797			67,993
Depreciation from unconsolidated entities and discontinued operations		1,870			5,609			3,888			10,899
Loss on sale of assets		1,214			330			941			330
Lease termination costs		—			—			4,900			—
Interest expense		40,334			41,561			82,178			81,751
Interest expense from unconsolidated entities and discontinued operations		1,407			2,296			2,727			5,073
Amortization expense		519			564			1,022			1,080

EBITDA	$	41,741		$	62,981		$	100,596		$	122,782

Consistent with SEC guidance on non-GAAP financial measures, EBITDA has not been adjusted for the following amounts included in net loss (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30
	2004			2003			2004			2003
Charge off of deferred debt costs	$	3,944		$	2,834		$	4,174		$	2,834
Loss (gain) on early extinguishment of debt		28,246			(307	)		28,246			(1,260	)
Gain on swap termination		(1,005	)		—			(1,005	)		—
Impairment		—			7,824			—			7,824

	$	31,185		$	10,351		$	31,415		$	9,398

Hotel Operating Profit and Operating Margin

Hotel operating profit and operating margin are commonly used non-GAAP measures of performance that we utilize to measure the relative performance of our individual hotels and groups of hotels and give investors a more complete understanding of the operating results over which our individual hotels and operating managers have direct control. We believe that hotel operating profit and operating margin are useful to investors by providing greater transparency with respect to significant measures used by management in its financial and operational decision-making.

Hotel Operating Profit
(dollars in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Total revenue	$	329,746		$	302,179		$	636,275		$	584,876
Retail space rental and other revenue		(180	)		(236	)		(425	)		(618	)

Hotel revenue		329,566			301,943			635,850			584,258
Hotel operating expenses		(228,427	)		(204,189	)		(445,899	)		(401,767	)

Hotel operating profit	$	101,139		$	97,754		$	189,951		$	182,491

Operating margin		30.7	%		32.4	%		29.9	%		31.2	%

Hotel Operating Expense Composition
(dollars in thousands)


	Three Months Ended June 30,										Six Months Ended June 30,
	2004					2003					2004					2003
													% of
			% of Hotel					% of Hotel					Hotel					% of Hotel
			Revenue					Revenue					Revenue					Revenue
Hotel departmental expenses:
Room	$	69,322		21.0	%	$	60,801		20.1	%	$	134,285		21.1	%	$	118,354		20.2	%
Food and beverage		40,674		12.4			36,511		12.1			78,143		12.3			71,031		12.2
Other operating departments		8,698		2.6			7,175		2.4			16,879		2.7			13,936		2.4

Total hotel departmental expenses		118,694		36.0			104,487		34.6			229,307		36.1			203,321		34.8

Other property related costs:
Administrative and general		30,715		9.3			28,167		9.3			60,577		9.5			56,678		9.7
Marketing and advertising		28,361		8.6			25,371		8.4			55,594		8.8			50,101		8.6
Repairs and maintenance		17,901		5.5			16,164		5.3			35,813		5.6			32,276		5.5
Energy		15,572		4.7			14,653		4.9			31,857		5.0			28,993		5.0

Total other property related costs		92,549		28.1			84,355		27.9			183,841		28.9			168,048		28.8
Management and franchise fees		17,184		5.2			15,347		5.1			32,751		5.1			30,398		5.2

Hotel operating expenses	$	228,427		69.3	%	$	204,189		67.6	%	$	445,899		70.1	%	$	401,767		68.8	%


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Reconciliation of total operating expenses to hotel operating expenses:
Total operating expenses	$	293,935		$	273,497		$	576,629		$	538,454
Taxes, insurance and lease expense		(30,967	)		(31,254	)		(62,154	)		(61,534	)
Corporate expenses		(4,393	)		(3,737	)		(7,779	)		(7,160	)
Depreciation		(30,148	)		(34,317	)		(60,797	)		(67,993	)

Hotel operating expenses	$	228,427		$	204,189		$	445,899		$	401,767

Hotel Portfolio Composition

The following tables set forth, as of June 30, 2004, for our consolidated hotel portfolio of 153 hotels included in continuing operations, distribution by brand, by our top metropolitan markets, by selected states, by type of location, and by market segment.


					% of			% of 2003 Hotel
Brand	Hotels		Rooms		Total Rooms			Operating Profit^(b)
Embassy Suites^®		56		14,279		33	%		48	%
Holiday Inn^®-branded		43		13,751		32			24
Sheraton^®-branded		10		3,269		8			8
Crowne Plaza^®		15		5,108		12			7
Doubletree^®-branded		10		2,206		5			6
Other		19		4,117		10			7


					% of			% of 2003 Hotel
Top Markets	Hotels		Rooms		Total Rooms			Operating Profit^(b)
Atlanta		12		3,514		8	%		7	%
Dallas		15		4,724		11			6
San Francisco Bay Area		8		2,690		6			6
Los Angeles Area		6		1,492		3			4
Boca Raton/Ft. Lauderdale		4		1,118		3			4
Orlando		6		2,219		5			4
Chicago		4		1,239		3			4
New Orleans		2		746		2			3
San Diego		1		600		1			3
Minneapolis		4		955		2			3
Houston		8		1,969		5			3
Phoenix		4		1,016		2			3
Philadelphia		3		1,174		3			3


					% of			% of 2003 Hotel
Top Four States	Hotels		Rooms		Total Rooms			Operating Profit^(b)
California		19		5,593		13	%		17	%
Texas		35		9,659		23			15
Florida		16		5,343		13			11
Georgia		14		3,868		9			8


					% of			% of 2003 Hotel
Location	Hotels		Rooms		Total Rooms			Operating Profit^(b)
Suburban		69		17,649		41	%		40	%
Urban		32		9,978		23			27
Airport		30		9,206		22			22
Resort		12		3,677		9			9
Highway		10		2,220		5			2


Categories as defined by					% of			% of 2003 Hotel
Smith Travel Research	Hotels		Rooms		Total Rooms			Operating Profit^(b)
Upscale all-suite		71		17,324		40	%		56	%
Full service		45		14,492		34			26
Upscale		27		9,232		22			17
Limited service		10		1,682		4			1


					% of			% of 2003 Hotel
	Hotels		Rooms		Total Rooms			Operating Profit^(b)
Core Hotels		127		35,734		84	%		92	%
Non-Strategic Hotels^(a)		26		6,996		16			8

(a) Excludes one hotel that met the “held for sale” accounting requirements, and was included in discontinued operations.

(b) A detailed description of Hotel Operating Profit is contained in the “Non-GAAP Financial Measures” section found elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Hotel Operating Statistics

The following tables set forth historical occupancy, ADR and RevPAR at June 30, 2004 and 2003, and the percentage changes therein between the periods presented, for our 153 consolidated hotels included in continuing operations:

Operating Statistics by Brand


	Occupancy (%)
	Three Months Ended June 30,						Six Months Ended June 30,
	2004		2003		% Variance		2004		2003		% Variance
Embassy Suites Hotels		72.3		69.3		4.3		70.7		68.0		4.1
Holiday Inn-branded hotels		67.9		65.1		4.4		64.7		62.5		3.5
Crowne Plaza hotels		65.4		59.5		9.9		63.2		57.3		10.3
Doubletree-branded hotels		70.1		68.9		1.7		69.4		66.4		4.4
Sheraton-branded hotels		66.0		60.3		9.5		65.0		59.6		9.1
Other hotels		63.0		58.1		8.5		62.1		57.5		8.1
Total hotels		68.6		65.0		5.5		66.5		63.2		5.3


	ADR ($)
	Three Months Ended June 30,						Six Months Ended June 30,
	2004		2003		% Variance		2004		2003		% Variance
Embassy Suites Hotels		117.60		115.67		1.7		118.43		117.64		0.7
Holiday Inn-branded hotels		80.50		78.98		1.9		79.60		78.79		1.0
Crowne Plaza hotels		93.95		93.69		0.3		90.87		92.77		(2.0	)
Doubletree-branded hotels		105.10		102.83		2.2		104.45		103.40		1.0
Sheraton-branded hotels		96.82		94.26		2.7		97.19		96.30		0.9
Other hotels		82.53		80.30		2.8		82.83		81.90		1.1
Total hotels		97.78		96.17		1.7		97.62		97.13		0.5


	RevPAR ($)
	Three Months Ended June 30,						Six Months Ended June 30,
	2004		2003		% Variance		2004		2003		% Variance
Embassy Suites Hotels		84.99		80.15		6.0		83.78		79.96		4.8
Holiday Inn-branded hotels		54.69		51.38		6.4		51.48		49.21		4.6
Crowne Plaza hotels		61.42		55.72		10.2		57.43		53.17		8.0
Doubletree-branded hotels		73.65		70.85		4.0		51.44		47.07		9.3
Sheraton-branded hotels		63.89		56.82		12.4		63.22		57.40		10.1
Other hotels		52.03		46.67		11.5		51.44		47.07		9.3
Total hotels		67.04		62.47		7.3		64.96		61.38		5.8

Operating Statistics for Our Top Markets


	Occupancy (%)
	Three Months Ended June 30,							Six Months Ended June 30,
	2004		2003		% Variance			2004		2003		% Variance
Atlanta		66.9		63.7		5.0			66.9		65.0		2.8
Dallas		55.1		49.7		10.8			55.4		49.9		11.0
San Francisco Bay Area		67.5		64.5		4.7			64.6		62.7		3.1
Los Angeles Area		69.1		71.0		(2.6	)		69.6		70.9		(1.7	)
Boca Raton/Ft. Lauderdale		77.0		72.1		6.9			82.0		77.5		5.9
Orlando		79.3		74.4		6.6			77.6		70.1		10.8
Chicago		76.4		72.4		5.5			69.3		65.4		6.0
New Orleans		75.5		73.0		3.5			70.8		67.6		4.8
San Diego		83.3		76.9		8.3			84.8		77.5		9.5
Minneapolis		69.4		64.1		8.2			66.0		61.9		6.7
Houston		69.4		65.6		5.8			70.7		65.4		8.0
Phoenix		67.1		67.3		(0.3	)		73.3		73.6		(0.4	)
Philadelphia		72.8		67.0		8.7			64.5		59.8		7.8


	ADR ($)
	Three Months Ended June 30,							Six Months Ended June 30,
	2004		2003		% Variance			2004		2003		% Variance
Atlanta		86.23		84.00		2.7			87.38		86.73		0.8
Dallas		84.12		83.36		0.9			84.05		85.30		(1.5	)
San Francisco Bay Area		114.24		113.08		1.0			111.28		112.65		(1.2	)
Los Angeles Area		111.17		101.87		9.1			109.28		101.66		7.5
Boca Raton/Ft. Lauderdale		107.17		107.19		0.0			124.07		125.84		(1.4	)
Orlando		75.20		73.96		1.7			79.41		78.40		1.3
Chicago		108.45		113.98		(4.8	)		102.09		108.36		(5.8	)
New Orleans		144.35		130.99		10.2			145.94		142.51		2.4
San Diego		124.69		115.84		7.6			119.72		118.99		0.6
Minneapolis		123.37		123.53		(0.1	)		121.97		121.77		0.2
Houston		68.61		71.49		(4.0	)		71.76		71.96		(0.3	)
Phoenix		94.36		88.72		6.4			112.19		105.22		6.6
Philadelphia		110.20		109.51		0.6			104.08		105.12		(1.0	)


	RevPAR ($)
	Three Months Ended June 30,						Six Months Ended June 30,
	2004		2003		% Variance		2004		2003		% Variance
Atlanta		57.70		53.52		7.8		58.42		56.40		3.6
Dallas		46.35		41.46		11.8		46.56		42.56		9.4
San Francisco Bay Area		77.10		72.90		5.8		71.91		70.59		1.9
Los Angeles Area		76.83		72.28		6.3		76.10		72.04		5.6
Boca Raton/Ft. Lauderdale		82.54		77.24		6.9		101.72		97.47		4.4
Orlando		59.65		55.01		8.4		61.64		54.94		12.2
Chicago		82.91		82.57		0.4		70.77		70.89		(0.2	)
New Orleans		109.04		95.61		14.1		103.39		96.36		7.3
San Diego		103.87		89.14		16.5		101.58		92.19		10.2
Minneapolis		85.62		79.21		8.1		80.52		75.34		6.9
Houston		47.60		46.87		1.6		50.72		47.07		7.7
Phoenix		63.29		59.68		6.0		82.26		77.43		6.2
Philadelphia		80.25		73.36		9.4		67.13		62.91		6.7

Liquidity and Capital Resources

Our principal source of cash to meet our cash requirements, including distributions to unitholders and repayments of indebtedness, is from the results of operations of our hotels. For the six months ended June 30, 2004, net cash flow provided by operating activities, consisting primarily of hotel operations, was $30 million. At June 30, 2004, we had cash on hand of approximately $148 million. Included in cash on hand are approximately $33 million held under our hotel management agreements to meet our hotel minimum working capital requirements and $21 million held in escrow under certain of our debt agreements.

We currently expect that our cash flow provided by operating activities for 2004 will be approximately $98 million to $103 million (full year 2003 cash flow from operating activities was $48 million). Included in our projection of cash flow from operating activities is a third quarter $8 million gain from our joint venture interest in the development and sale of the Margate condominium project in Myrtle Beach, South Carolina. Our cash flow forecasts assume a full year RevPAR increase of 4% to 5% and operating margin of approximately 29% to 30%. For 2004, our current operating plan contemplates preferred distribution payments of $34 million, capital expenditures of approximately $75 to $100 million ($34 million had been spent at June 30, 2004), debt maturities of $175 million (which was prepaid in June 2004), $17 million in normal recurring principal payments and sales of approximately $125 million in non-strategic hotels. We expect cash necessary to fund cash flow shortfalls and distributions, if any, will be funded from our cash balances and proceeds from the sale of hotels. We currently anticipate that FelCor’s board of directors will defer the resumption of common distributions until the anticipated recovery in our business is more firmly established, and to determine the amount of preferred distributions, if any, for each quarterly period, based upon the actual operating results of that quarter, economic conditions, other operating trends, our financial condition and capital requirements, as well as the minimum REIT distribution requirements.

In March 2004, we elected to terminate our line of credit, which resulted in the first quarter charge-off of unamortized loan costs of $0.2 million.

On April 5, 2004, FelCor completed the sale of 4,600,000 shares of its $1.95 Series A Cumulative Convertible Preferred Stock. The shares were sold at a price of $23.79 per share, which included accrued distributions of $0.51 per share through April 5, 2004, resulting in net proceeds to FelCor of approximately $104 million. The proceeds were contributed to us in exchange for a like number of Series A preferred units. The proceeds were used to retire senior unsecured debt.

In May 2004, we issued $175 million in aggregate principal amount of Senior Floating Notes due 2011, the 2011 Notes. We received net proceeds of $174.1 million. The 2011 Notes will mature on June 1, 2011. The 2011 Notes bear interest, adjusted semi annually, at the six-month LIBOR rate plus 4.25%. The Notes are callable on or after December 1, 2006, and will rank equally with our other existing senior unsecured debt. In July 2004, we issued an additional $115 million of the 2011 Notes.

On June 9, 2004, we redeemed all $175 million in principal amount of our outstanding 7.375% Senior Notes due 2004. The redemption price was $1,018.14 per $1,000 of the principal amount plus accrued interest. With the retirement of this debt we recorded a loss on redemption of $3.2 million and wrote off $0.3 million of debt issue costs. The loss was offset by a $1 million gain on the unwinding of the swaps tied to this debt.

During the second quarter of 2004 we purchased $325.3 million principal amount of our 9.5% Senior Notes due 2008 (which currently bear interest at 10% as a result of the 2003 downgrades of the credit ratings on our senior notes) through a tender offer and by purchases on the open market. With the partial retirement of this debt we recorded a loss on early extinguishment of debt of $25 million ($23.4 million related to the premium paid in excess of par and $1.6 million related to the unamortized discount) and wrote off debt issue costs of $3.6 million. In July 2004, we purchased an additional $115 million of these notes and recorded a $7.6 million loss on early extinguishment of debt and wrote off debt issue costs of $1.2 million. We expect to retire the remaining $160 million of these senior notes during 2004 or 2005 using cash on hand, proceeds from asset sales or proceeds from capital transactions.

Our publicly-traded senior unsecured notes require that we satisfy total leverage, secured leverage and interest coverage tests in order to: incur additional indebtedness except to refinance maturing debt with replacement debt, as defined under our indentures; pay distributions in excess of the minimum distribution required for FelCor to meet the REIT qualification test; repurchase units; or merge. As of the date of this filing, we have satisfied all such tests; however, under the terms of two of our indentures, we are prohibited from repurchasing any of our capital units, whether common or preferred, subject to certain exceptions, so long as our debt-to-EBITDA ratio, as defined in the indentures, exceeds 4.85 to 1. Our current debt-to-EBITDA ratio exceeds that ratio and is expected to do so for the foreseeable future. Accordingly, we are prohibited from purchasing any of our units, except as permitted under limited exceptions, such as from the proceeds of a substantially concurrent issuance of other units.

If actual operating results fail to meet our current expectations or if interest rates increase unexpectedly, we may be unable to continue to satisfy the incurrence test under the indentures governing our senior unsecured notes. In such an event, we may be prohibited from utilizing the undrawn amounts currently available to us under our secured debt facility, except to repay or refinance maturing debt with similar priority in the capital structure, and may be prohibited from, among other things, incurring any additional indebtedness or paying distributions on our preferred or common units, except to the extent necessary to satisfy FelCor’s REIT qualification requirement that they distribute currently at least 90% of their taxable income. In the event of our failure of this incurrence test, based upon our current estimates of taxable income for 2004, we would be unable to distribute the full amount of distributions accruing under our outstanding preferred units in 2004 and, accordingly, could pay no distributions on our common units. We currently anticipate that we will continue to meet our financial covenant and incurrence tests.

Quantitative and Qualitative Disclosures About Market Risk

At June 30, 2004, approximately 71% of our consolidated debt had fixed interest rates. Currently, market rates of interest are below the rates we are obligated to pay on our fixed-rate debt.

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

Expected Maturity Date
at June 30, 2004
(dollars in thousands)


																						Fair
	2004			2005			2006			2007			2008			Thereafter			Total			Value
Liabilities
Fixed rate:
Debt	$	7,841		$	25,770		$	16,561		$	260,220		$	289,996		$	840,765		$	1,441,153		$	1,499,956
Average interest rate		7.77	%		7.62	%		7.89	%		7.47	%		9.90	%		8.39	%		8.51	%
Floating rate:
Debt		2,868			5,927			143,559			2,561			18,168			263,169			436,252			436,252
Average interest rate^(a)		3.72	%		3.72	%		3.63	%		3.88	%		3.98	%		5.18	%		4.58	%
Interest rate swaps (fixed to floating)^(b)
Notional amount		—			—			—			100,000	^(c)		—			—			100,000			(1,647	)
Pay rate^(b)		—			—			—			5.58	%		—			—			5.58	%
Receive rate		—			—			—			7.46	%		—			—			7.46	%
Total debt	$	10,709		$	31,697		$	160,120		$	262,781		$	308,164		$	1,103,934			1,877,405
Average interest rate		6.69	%		6.89	%		4.07	%		6.76	%		9.55	%		7.63	%		7.45	%
Net discount																				(4,610	)
Total debt																			$	1,872,795

(a) The average floating rate of interest represents the implied forward rate in the yield curve at June 30, 2004.

(b) The interest rate swaps decreased our interest expense by $4.2 million during the six months ended June 30, 2004.

(c) All interest rate swaps were unwound in July 2004.

Swap contracts, such as described above, contain a credit risk, in that the counterparties may be unable to fulfill the terms of the agreement. We minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties. The Standard & Poor’s credit ratings for the financial institutions that are counterparties to the interest rate swap agreements range from A+ to AA-.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, require us to reduce room rates in the near term and may limit our ability to raise room rates in the future. We are also subject to the risk that inflation will cause increases in hotel operating expenses disproportionately to revenues.

Seasonality

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

Disclosure Regarding Forward Looking Statements

Portions of this Quarterly Report on Form 10-Q include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. The risks, uncertainties and assumptions that may affect our actual results, some of which are discussed more fully in our previous filings under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (collectively, “Cautionary Disclosures”) include: general economic conditions, including the timing and magnitude of any recovery from the current soft economy; future acts of terrorism; the impact on the travel industry of increased security precautions; the availability of capital; the impact of U.S. military involvement in the Middle East and elsewhere; the ability to effect sales of non-strategic hotels at anticipated prices and numerous other factors that may affect results, performance and achievements. The forward looking statements included herein, 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 Cautionary Disclosures. We undertake no obligation to update any forward-looking statements to reflect future events or circumstances.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information and disclosures regarding market risks applicable to us is incorporated herein by reference to the discussion under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Quantitative and Qualitative Disclosures About Market Risks” contained elsewhere in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

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

(a) Changes in internal controls.

Not applicable.

PART II. — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

(a) The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K:


Exhibit Number		Description of Exhibit
10.28.6		Termination Agreement, dated July 28, 2004, by and among FCH/DT BWI Hotel, L.L.C., FCH/DT BWI Holdings, L.P., FelCor Hotel Asset Company, L.L.C., FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin HI Holdings, L.P., FelCor/JPM Austin Holdings, L.P., FelCor/JPM Boca Raton Hotel, L.L.C., FelCor/JPM BWI Hotel, L.L.C., FelCor/JPM Denver Hotel, L.L.C., FelCor/JPM LBV Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Nashville Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Orlando I-Drive Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM Troy Hotel, L.L.C., FelCor/JPM Wilmington Hotel, L.L.C., BHR Operations, L.L.C., DJONT Leasing, L.L.C., DJONT Operations, L.L.C., DJONT/JPM Atlanta CP Leasing, L.L.C., DJONT/JPM Atlanta ES Leasing, L.L.C., DJONT/JPM Austin HI Leasing, L.P., DJONT/JPM Austin Leasing, L.P., DJONT/JPM Boca Raton Leasing, L.L.C., DJONT/JPM BWI Leasing, L.L.C., DJONT/JPM Denver Leasing, L.L.C., DJONT/JPM LBV Leasing, L.L.C., DJONT/JPM Mandalay Leasing, L.L.C., DJONT/JPM Orlando I-Drive Leasing, L.L.C., DJONT/JPM Orlando Leasing, L.L.C., DJONT/JPM Phoenix Leasing, L.L.C., DJONT/JPM Troy Leasing, L.L.C., DJONT/JPM Wilmington Leasing, L.L.C., FCH/DT Leasing, L.L.C., FCH/DT Leasing II, L.L.C., FelCor TRS Holdings, L.P., FelCor Lodging Limited Partnership and JPMorgan Chase Bank. (filed as Exhibit 10.31.6 to FelCor Lodging Trust Incorporated’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the “FelCor June 2004 10-Q”) and incorporated herein by reference).

10.31		Form of Loan Agreement, each dated either May 26, 2004, June 10, 2004 or July 19, 2004, between JPMorgan Chase Bank, as lender, and each of FelCor/JPM Boca Raton Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM Wilmington Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Denver Hotel, L.L.C., FelCor/JPM Troy Hotel, L.L.C. and FelCor/JPM BWI Hotel, L.L.C. and FCH/DT BWI Hotel, L.L.C., as borrowers, and acknowledged and agreed by FelCor Lodging Limited Partnership (filed as Exhibit 10.34 to the FelCor June 2004 10-Q and incorporated herein by reference).

10.31.1		Form of Mortgage, Renewal Mortgage, Deed of Trust, Deed to Secure Debt, Indemnity Deed of Trust and Assignment of Leases and Rents, Security Agreement and Fixture Filing, each dated either May 26, 2004, June 10, 2004 or July 19, 2004, from FelCor/JPM Wilmington Hotel, L.L.C., DJONT/JPM Wilmington Leasing, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C., DJONT/JPM Phoenix Leasing, L.L.C., FelCor/JPM Boca Raton Hotel, L.L.C., DJONT/JPM Boca Raton Leasing, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., DJONT/JPM Atlanta ES Leasing, L.L.C., FelCor/JPM Austin Holdings, L.P., DJONT/JPM Austin Leasing, L.P., FelCor/JPM Orlando Hotel, L.L.C., DJONT/JPM Orlando Leasing, L.L.C., FelCor/JPM Denver Hotel, L.L.C., DJONT/JPM Denver Leasing, L.L.C., FelCor/JPM Troy Hotel, L.L.C., DJONT/JPM Troy Leasing, L.L.C., FCH/DT BWI Holdings, L.P., FCH/DT BWI Hotel, L.L.C. and DJONT/JPM BWI Leasing, L.L.C., to, and for the benefit of, JPMorgan Chase Bank, as mortgagee or beneficiary (filed as Exhibit 10.34.1 to the FelCor June 2004 10-Q and incorporated herein by reference).


Exhibit Number		Description of Exhibit
10.31.2		Form of nine separate Promissory Notes, each dated either May 26, 2004, June 10, 2004 or July 19, 2004, made by FelCor/JPM Wilmington Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM Boca Raton Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Denver Hotel, L.L.C., FelCor/JPM Troy Hotel, L.L.C. and FelCor/JPM BWI Hotel, L.L.C., each separately payable to the order of JPMorgan Chase Bank in the respective original principal amounts of $11,000,000 (Wilmington, Delaware), $21,368,000 (Phoenix, Arizona), $5,500,000 (Boca Raton, Florida), $13,500,000 (Atlanta, Georgia), $9,616,000 (Austin, Texas), $9,798,000 (Orlando, Florida), $5,000,000 (Aurora, Colorado), $6,900,000 (Troy, Michigan) and $24,120,000 (Linthicum, Maryland) (filed as Exhibit 10.34.2 to the FelCor June 2004 10-Q and incorporated herein by reference).

10.31.3		Form of Guaranty of Recourse Obligations of Borrower, each dated either May 26, 2004, June 10, 2004 or July 19, 2004, made by FelCor Lodging Limited Partnership in favor of JPMorgan Chase Bank (filed as Exhibit 10.34.3 to the FelCor June 2004 10-Q and incorporated herein by reference).

10.32		Loan Agreement, dated July 28, 2004, by and among FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Austin HI Holdings, L.P., FelCor/JPM Brunswick Hotel, L.L.C., FelCor/JPM LBV Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C. and FelCor/JPM Orlando I-Drive Hotel, L.L.C., as borrowers, and JPMorgan Chase Bank, as lender, and acknowledged and agreed to by FelCor Lodging Limited Partnership (filed as Exhibit 10.35 to the FelCor June 2004 10-Q and incorporated herein by reference).

10.32.1		Form of Mortgage, Leasehold Mortgage, Deed of Trust, Deed to Secure Debt and Assignment of Leases and Rents, Security Agreement and Fixture Filing, each dated July 28, 2004, from FelCor/JPM Atlanta CP Hotel, L.L.C., DJONT/JPM Atlanta CP Leasing, L.L.C., FelCor/JPM Austin HI Holdings, L.P., DJONT/JPM Austin HI Leasing, L.P., FelCor/JPM Brunswick Hotel, L.L.C., DJONT/JPM Brunswick Leasing, L.L.C., FelCor/JPM LBV Hotel, L.L.C., DJONT/JPM LBV Leasing, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., DJONT/JPM Mandalay Leasing, L.L.C., FelCor/JPM Orlando I-Drive Hotel, L.L.C. and DJONT/JPM Orlando I-Drive Leasing, L.L.C., to, and for the benefit of, JPMorgan Chase Bank, as mortgagee or beneficiary (filed as Exhibit 10.35.1 to the FelCor June 2004 10-Q and incorporated herein by reference).

10.32.2		Promissory Note, dated July 28, 2004, in the original principal amount of $87,000,000 made by FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Austin HI Holdings, L.P., FelCor/JPM Brunswick Hotel, L.L.C., FelCor/JPM LBV Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C. and FelCor/JPM Orlando I-Drive Hotel, L.L.C., payable to the order of JPMorgan Chase Bank (filed as Exhibit 10.35.2 to the FelCor June 2004 10-Q and incorporated herein by reference).

10.32.3		Guaranty of Recourse Obligations of Borrower, dated July 28, 2004, made by FelCor Lodging Limited Partnership in favor of JPMorgan Chase Bank (filed as Exhibit 10.35.3 to the FelCor June 2004 10-Q and incorporated herein by reference).

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


Exhibit Number		Description of Exhibit
31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2		Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

(b) Since March 31, 2004, the Partnership has filed the following Current Reports on Form 8-K:

A Current Report on Form 8-K, dated May 11, 2004, was filed by the Partnership on May 14, 2004. This filing, under Item 5, disclosed that FelCor Lodging Trust Incorporated (“FelCor”), the sole general partner of the Partnership, issued press releases announcing the redemption of the 7 3/8% senior notes due 2004 of the Partnership, the Partnership’s proposed senior unsecured notes offering and the commencement by the Partnership of a tender offer for its outstanding 9 1/2% senior notes due 2008. Copies of the press releases were filed as Exhibits 99.1, 99.2 and 99.3, respectively.

A Current Report on Form 8-K, dated May 17, 2004, was filed by the Partnership on May 21, 2004. This filing, under Item 5, disclosed that FelCor issued press releases announcing the pricing of the Partnership’s senior unsecured notes being offered and an amendment to the Partnership’s tender offer for its outstanding 9 1/2% senior notes due 2008. Copies of the press releases were filed as Exhibits 99.1 and 99.2, respectively.

A Current Report on Form 8-K, dated June 24, 2004, was filed by the Partnership on June 29, 2004. This filing, under Item 5, disclosed that FelCor issued press releases announcing the pricing of the Partnership’s senior unsecured notes being offered and the commencement by the Partnership of a tender offer for its outstanding 9 1/2% senior notes due 2008. Copies of the press releases were filed as Exhibits 99.1 and 99.2, respectively.

A Current Report on Form 8-K, dated July 22, 2004, was filed by the Partnership on July 22, 2004. This filing, under Item 5, updates Items 6, 7 and 8 of the Partnership’s annual report on Form 10-K for the year ended December 31, 2003, to reflect the hotels sold during the first quarter of 2004 and the hotels held for sale at March 31, 2004 as discontinued operations, pursuant to the requirements of Statement of Financial Accounting Standards 144 “Accounting for the Impairment or Disposal of Long Lived Assets,” for the three years ended December 31, 2003, 2002 and 2001, and to reflect the effect of this reclassification on Management’s Discussion and Analysis of Financial Condition and Results of Operations and Selected Financial Data. These updated items were filed as Exhibit 99.1.

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		Page
	PART I. -- FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Consolidated Balance Sheets June 30, 2004 (unaudited) and December 31, 2003		3
	Consolidated Statements of Operations – For the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)		4
	Consolidated Statements of Comprehensive Loss – For the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)		5
	Consolidated Statements of Cash Flows – For the Six Months Ended June 30, 2004 and 2003 (unaudited)		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	General		24
	Financial Comparison		24
	Results of Operations		25
	Liquidity and Capital Resources		33
	Inflation		35
	Seasonality		35
	Disclosure Regarding Forward Looking Statements		36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		36
	PART II. – OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		37
SIGNATURE			40
Certification of the Chief Executive Officer
Certification of the Principal Financial Officer
Certification of the Chief Executive Officer
Certification of the Principal Financial Officer

(a)		Variable interest rate based on LIBOR, which was 1.1% at June 30, 2004.

(b)		$99 million of this debt had a variable interest rate based on LIBOR, which was 1.1% at June 30, 2004.

(c)		Variable interest rate based on LIBOR. This debt may be extended at our option for up to two, one-year periods.

(d)		$100 million of this note was matched with interest rate swap agreements that effectively converted the fixed interest rate of 7.46% on this note to a variable interest rate based on LIBOR.

(e)		Interest rates are calculated based on the weighted average outstanding debt at June 30, 2004.

(a)		Excludes one hotel that met the “held for sale” accounting requirements, and was included in discontinued operations.

(b)		A detailed description of Hotel Operating Profit is contained in the “Non-GAAP Financial Measures” section found elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(a)		The average floating rate of interest represents the implied forward rate in the yield curve at June 30, 2004.

(b)		The interest rate swaps decreased our interest expense by $4.2 million during the six months ended June 30, 2004.

(c)		All interest rate swaps were unwound in July 2004.


		FELCOR LODGING LIMITED PARTNERSHIP

		a Delaware Limited Partnership

		By:		FelCor Lodging Trust Incorporated
				Its General Partner


		By:		/s/ Lester C. Johnson

				Lester C. Johnson
				Senior Vice President and
				Principal Accounting Officer