FelCor Lodging Trust (NYSE: FCH), a real estate investment trust, went public in 1994. FelCor owns a diversified portfolio of primarily upper-upscale and luxury hotels that are located in major and resort markets. FelCor partners with leading hotel companies to operate its 66 hotels, which are flagged under globally recognized names and premier independent hotels in New York.
Strategic Plan and Objective
We are committed to enhancing stockholder value and delivering superior returns on invested capital by assembling a diversified portfolio of high-quality hotels located in major markets and resort locations that have dynamic demand generators and high barriers to entry. At the same time we seek to improve cash flow and real estate value through disciplined portfolio management, unique asset management and smart allocation of capital. In 2006, we developed a long-term strategic plan to achieve these objectives. This plan focuses on four critically important areas: create a high-quality portfolio to improve future growth rates and return on investment, create a sound and flexible balance sheet with low leverage to withstand lodging cycles, enhance organic growth through asset management and high return on investment redevelopment projects, and selectively acquire hotels in our core markets that meet our strict underwriting criteria.
During 2011, we made significant progress toward achieving the objectives of our strategic plan.
We sold nine hotels since December 2010 (out of 15 hotels initially brought to market in late 2010) for total gross proceeds of $138 million. We used $80 million of those proceeds to repay indebtedness secured by four of those hotels and the remainder to repay other indebtedness.
- We also completed several other balance sheet initiatives during 2011:
- Established a $225 million secured line of credit (we had no borrowings under the line at December 31, 2011, and the full $225 million is available for general corporate purposes).
- Issued $525 million of 6.75% senior secured notes due 2019 and used the net proceeds to repay existing higher-cost debt (including the remaining $46 million of outstanding 9.0% senior notes due 2011 and the $145 million balance on our line of credit) and fund our $140 million purchase of Royalton and Morgans.
- Sold 27.6 million shares of common stock in an underwritten public offering and used the net proceeds to redeem $144 million (of face value) of our 10% senior secured notes due 2014.
- Extended a maturing mortgage loan for two years. The loan now bears an average interest rate of LIBOR plus 2.2% and is prepayable at any time, in whole or in part, with no penalty. At the same time, we repaid $20 million of the principal balance, reducing the outstanding balance to $158 million.
- Repaid all other existing mortgage loans that were scheduled to mature in 2011, totaling $32.0 million.
- In May 2011, we acquired two midtown Manhattan hotels, Royalton and Morgans.
- In December 2011, we acquired and commenced redevelopment of the four-plus star Knickerbocker Hotel in Times Square.
- Throughout 2011, we continued to reinvest in our portfolio, spending $92 million, primarily to renovate six hotels and redeveloping significant portions of the Fairmont Copley Plaza and Morgans. We expect to complete work at the Fairmont Copley Plaza in 2012 that will reposition the hotel closer to its luxury competitors, including upgrading 12 rooms to Fairmont Gold, adding a new rooftop fitness center and spa, and redeveloping the food and beverage outlets and the public areas.
- In early 2012, we began marketing an additional 10 hotels for sale. As those hotels are sold, we expect to use a substantial amount of the net proceeds to repay outstanding debt and to repay all the accrued preferred dividends
Balance Sheet Strategy
A healthy balance sheet provides the necessary flexibility and capacity to withstand lodging cycles, and we are committed to strengthening our blalance sheet by reducing leverage, lowering our cost of debt and extending debt maturities.
- Reduced leverage (measured as total net debt to Adjusted EBITDA) from 9.0 times in 2009, to 7.5 times, at the end of 2011. As cash flow increases from continued RevPAR growth and we sell non-strategic hotels, we expect to materially reduce our leverage. Our targeted leverage is 4.5 times, which we expect to achieve around the end of 2014 (assuming the economic recovery continues and lodging growth follows historical patterns).
- We expect to restructure our balance sheet as we repay debt with proceeds from asset sales and refinance remaining debt on more favorable terms.
- We also expect to bring our accrued preferred dividends current using net proceeds from asset sales, which will allow us to resume paying our common stock dividend.
- During the last two years, we successfully refinanced or repaid all of our near-term debt, and we refinanced or resolved $1.6 billion of consolidated debt and extended our weighted average debt maturity to the end of 2016.
- We have no consolidated debt maturing until the end of 2012.
Our portfolio composition (by segment, brand and location) continues to evolve as we sell non-strategic hotels, acquire superior hotels in our target markets and invest in our core portfolio. We sold 59 non-strategic hotels (primarily liimited service and midscale hotels located in secondary and tertiary markets and markets with low barriers to entry) from 2006-10. Today, our portfolio consists primarily of upper-upscale hotels and resorts located in more than 30 major markets. Most are operated under well-recognized brands such as Doubletree, Embassy Suites Hotels, Fairmont, Hilton, Holiday Inn, Marriott, Renaissance, Sheraton and Westin, Royalton and Morgans, in midtown Manhattan, are operated independent of any brand because demand in their submarket more than offsets the potential net brand contribution. We sell and acquire hotels to improve our overall portfolio quality, enhance diversification and improve growth rates.
Hotel Sales: Selling non-strategic hotels increases our long-term growth, reduces future capital expenditures and enables management to focus on "core" long-term investments. We regularly review each hotel in our portfolio in terms of projected performance, future capital expenditure requirements and market dynamics and concentration risk. We developed a plan to sell 39 hotels (including the 15 hotels and 10 hotels we began marketing in late 2010 and early 2012, respectively). We intend to sell the hotels through 2013, based on market conditions, and expect to use the net proceeds to repay debt, pay our accrued preferred dividends and invest in high return on investment redevelopment opportunities at our core hotels.
Hotel Acquisitions: Our hotel acquisition process is exceptionally disciplined, and we will only purchase hotels that meet or exceed strict criteria.
- We only consider acquisition candidates that are accretive to long-term stockholder value, improve the overall quality of our portfolio, further diversify our portfolio by market, customer type and brand and improve future Hotel EBITDA growth.
- We limit our acquisitions to high-quality hotels in major urban and resort markets with high barriers to entry and high growth potential, as typified by our 2010 purchase of the iconic Fairmont Copley Plaza located in Boston's Back Bay neighborhood and our 2011 purchase of two midtown Manhattan hotels, Royalton and Morgans.
- We seek hotels that are priced at a significant discount to replacement cost with investment returns that exceed our weighted average cost of capital and hotels that produce attractive long-term yields.
- We also consider whether hotels offer redevelopment opportunities that can further enhance our return on investment.
- In December 2011, we acquired and commenced redevelopment of the four-plus star Knickerbocker Hotel in Times Square. We expect The Knickerbocker to be our last acquisition in this cycle, as we focus on strengthening our balance sheet through the sale of non-strategic hotels and reducing leverage.
We seek to maximize revenue and market share, hotel operating margins and cash flow at every hotel. FelCor's asset management uses an aggressive, hand-on approach. All of our asset managers have extensive hotel operating experience. They also have thorough knowledge of the markets and overall demand dynamics where our hotels operate. As a consequence, their interaction and credibility with our hotel managers is very effective. We encourage our hotel managers to implement best practices in expense and revenue management, and we work closely with them to monitor and review hotel operations and align cost structures with current business. For example, because our hotels reduced their departmental expenses per room from 2008 to 2011, we realized cost savings in excess of $20 million. Notably, most of these savings are permanent. With our strong brand relationships, we have significant influence over how their policies and procedures (most notably, brand strategy on marketing and revenue enhancement programs) affect us as hotel owners. In addition to working with our hotel managers to maximize hotel operating performance, we consider value-added enhancements at our hotels, such as maximizing use of public areas, implementing new restaurant concepts and changing management of food and beverage operations.
Renovations & Redevelopment
We take a long-term approach to capital spending. Our plan involves efficiently maintaining our properties and limiting future fluctuations of expenditures while maximizing return on investment. We invested more than $450 million in a multi-year, portfolio-wide renovation program (completed in 2008) that enhanced the competitive position and value of our hotels, as evidenced by the increase in market share during 2008-10. We anticipate renovating between six and eight core hotels each year. We regularly consider expansion or redevelopment opportunities at our properties that offer attractive returns. For example, we redeveloped the San Francisco Marriott Union Square (formerly, a Crowne Plaza). The hotel is currently ranked thirteenth in guest satisfaction and fourth in fewest guest complaints out of 341 full-service Marriott hotels. From 2007 (prior to redevelopment) to 2011, RevPAR and EBITDA increased 35% to $162 and 270% to $5.4 million, respectively. In addition, we expect this hotel to continue to grow significantly more than the San Francisco market. As discussed above, we are currently improving the Fairmont Copley Plaza, including upgrading 12 rooms to Fairmont Gold, building a rooftop fitness center and spa and redeveloping the food and beverage and other public areas, all of which will reposition the hotel closer to its luxury competitors.
We benefit from our brand manager alliances with Hilton Woldwide (Embassy Suites Hotels, Doubletree and Hilton), Starwood Hotels & Resorts Worldwide, Inc. (Sheraton and Westin), Marriott International, Inc. (Renaissance and Marriott), Fairmont Hotels & Resorts and InterContinental Hotels Group PLC (Holiday Inn). These relationships enable us to work effectively with our managers to maximize margins and operating cash flow from our hotels.
Portfolio Restructuring Program
As part of our long-term strategic plan to enhance stockholder value and achieve or exceed targeted returns on invested capital, we sell and selectively acquire hotels to improve our overall portfolio quality, enhance diversification and improve growth rates. On an ongoing basis, we review each hotel in our portfolio in terms of projected performance, future capital expenditure requirements and market dynamics and concentration risk. Based on this analysis at the end of 2010, we announced our intention to sell our interest in as many as 40 hotels. We began marketing 14 hotels for sale in the last quarter of 2010 and 10 more hotels in early 2012. We sold nine of the first 15 hotels through 2011 for total gross proceeds of $220 million, of which we received $180 million for our pro rata share. We continue to monitor the transaction environment and will bring our remaining non-strategic hotels to market at the appropriate time.