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 61 hotels, which are flagged under globally recognized names and premier independent hotels.
We exist to provide superior stockholder returns by assembling a high-growth and diverse portfolio of hotels, combined with a sound and flexible balance sheet reflecting low cost of capital. Our long-term strategy has four critical components:
- Portfolio Quality and Diversity - we are assembling a portfolio of high-growth hotels located in gateway and resort markets with high barriers-to-entry and limited supply growth that will provide stable returns through the lodging cycles. We seek to dispose of non-strategic hotels that don’t meet our investment criteria and acquire properties that further our strategic plan and provide returns above our cost of capital.
- Long-Term Leverage - we are steadily reducing our outstanding indebtedness, primarily from proceeds from asset sales, to achieve leverage levels that are readily managed through economic and industry cycles.
- Cost of Debt; Staggered and Extended Maturities - we opportunistically refinance higher-cost debt, taking advantage of low interest rates to reduce our cost of debt and stagger and extend maturities well into the future.
- Organic Growth - we invest in our core portfolio to enhance our assets’ long-term performance and return on invested capital and seek high ROI redevelopment opportunities that leverage our expertise to achieve superior returns on redevelopment capital.
We have made significant progress toward achieving the objectives of our strategic plan.
- From December 2010 to December 2012, we sold 19 hotels (including 10 hotels in 2012), for total gross proceeds of $429 million (our pro rata share was $387 million).
- In December 2012, we issued $525 million aggregate principal amount of 5.625% senior secured notes due 2023, significantly reducing our cost of borrowing. We used the proceeds to redeem $258 million in aggregate face amount of 10% senior notes due 2014 and repay a $187 million 8.1% mortgage loan with the remaining proceeds used to repay a portion of the balance on our outstanding line of credit.
- In December 2012, we amended and restated our $225 million secured line of credit facility. The facility now matures in June 2017 (extended from August 2015), inclusive of a one-year extension option, subject to satisfaction of certain conditions. Borrowings under the facility bear interest at LIBOR (no floor) plus 3.375% (reduced from LIBOR plus 4.50%). The unused commitment fee decreased 10 basis points. The facility is secured by mortgages and related security interests on eight hotels.
- In October 2012, we raised $160.8 million in proceeds from five single-asset mortgage loans that closed in September 2012, and bear an average interest rate of 4.95%. Proceeds from these loans were used to repay a $107 million 9.02% mortgage loan that would have matured in 2014. We also repaid the remaining $60 million balance of a mortgage loan using excess proceeds from the new loan, as well as asset sale proceeds.
- In December 2011, we acquired the landmark Knickerbocker Hotel in midtown Manhattan for $115 million. We are redeveloping the property as a four-plus star hotel featuring 330 large guest rooms, a rooftop sky bar and lounge directly overlooking Times Square, state-of-the-art meeting space and a full-service fitness center. In November 2012, we closed on an $85 million construction loan to finance redeveloping the Knickerbocker.
- During 2012, we spent $121.5 million on capital expenditures, including renovation and redevelopment on our operating hotels. During this time, we completed renovations at seven hotels. We also completed redevelopment projects at two properties, the Fairmont Boston Copley Plaza and the Embassy Suites Myrtle Beach Oceanfront Resort. We completed the redevelopment of the Fairmont Boston Copley Plaza in September 2012, repositioning the hotel closer to its luxury competitors, including a complete renovation of rooms and corridors, upgrading 12 rooms to Fairmont Gold, adding a new rooftop fitness center and spa, and redeveloping the food and beverage and other public areas. We are currently redeveloping Morgans to add three guest rooms, build a brand new fitness facility, relocate the lounge and re-concept the food and beverage areas.
Balance Sheet Strategy
A healthy balance sheet provides the necessary flexibility and capacity to withstand lodging cycles, and we are committed to strengthening our balance sheet by reducing leverage, lowering our cost of debt and extending debt maturities.
- As cash flow increases from continued revenue per available room, or RevPAR, growth and we sell additional non-strategic hotels, we expect to continue to materially reduce our leverage.
- During 2012, we completed the refinancing portion of our balance sheet restructuring. We extended our weighted-averaged debt maturity to 2020 and reduced our weighted-average interest rate to 6.4%.
- Following the debt repayment of our 2014 debt maturities, using proceeds from asset sales, our weighted average interest rate will be below 6%, significantly lower than historical levels. In addition, our weighted average debt maturity will be extended to 2021, with no debt maturing prior to 2019 (except for the Knickerbocker loan).
Our core portfolio consists primarily of upper-upscale and luxury hotels and resorts located in major markets and resort locations that have dynamic demand generators and high barriers to entry. Most of our hotels are operated under well-recognized brands, such as Westin, Fairmont, Hilton, Doubletree, Embassy Suites, Renaissance, Marriott, Sheraton, Westin, Wyndham, Wyndham Grand and Holiday Inn, as well as premier independent hotels. We sell, acquire and re-brand hotels to increase our return on invested capital and to improve overall portfolio quality, enhance diversification and improve growth rates.
Hotel Sales: On an ongoing basis, we review each hotel in our portfolio in terms of projected performance, future capital expenditure requirements, market dynamics and concentration risk. We believe selling non-strategic hotels enhances our long-term growth, reduces future capital expenditures and enables management to focus on "core" long-term investments.
- In 2010, we announced our intention to sell our interests in 39 hotels. As of December 2012, we have sold 19 hotels for total gross proceeds of $429 million (our pro rata share was $387 million). Twenty non-strategic hotels remain to be sold.
- During 2013, we sold two hotels for total gross proceeds of $45 million.
- As of July 2013, we are marketing nine of the remaining 18 hotels and have three hotels under contract.
- The other nine non-strategic hotels are held in joint ventures, and we and our partners are analyzing the best timing to begin marketing those properties.
- We continually review opportunities to sell additional non-strategic hotels in the future and reinvest proceeds to earn a higher return on our investments.
Hotel Acquisitions: We only consider purchasing hotels that meet or exceed our strict investment criteria.
- We consider properties that are accretive to long-term stockholder value, are priced at a significant discount to replacement cost with investment returns that exceed our weighted average cost of capital and can provide attractive long-term yields.
- We seek high-quality hotels in major urban and resort markets with high barriers-to-entry and high growth potential, as typified by the recently-acquired hotels - the iconic Fairmont Copley Plaza, Royalton, Morgans and the Knickerbocker.
- We focus on properties that will improve the overall quality and diversity of our portfolio and increase our future growth.
- We also consider hotels that offer redevelopment and/or revenue enhancement opportunities that can further enhance returns on our investment.
Hotel Brand Conversions: We rebranded and repositioned eight, mid-scale, Holiday Inn properties with Wyndham Hotels & Resorts, effective March 1, 2013. Wyndham Hotel Group manages the hotels under long-term management agreements. The agreement includes a $100 million performance guaranty from Wyndham Worldwide Corporation over the initial 10-year terms which can be extended for an additional five years), with an annual performance guaranty of up to $21.5 million that ensures minimum annual NOI for the eight hotels. The management fee structure is more consistent with prevailing industry practices, and we expect to save approximately $50 million in management fees over the initial term. In effect, this agreement protects approximately 20 percent of FelCor's EBITDA from future lodging cycle fluctuations, in addition to providing a return on investment that is superior to the hotels' historical performance. Rebranding and repositioning these hotels demonstrates our efforts to execute our long-term value creation strategy, which includes moving more of our portfolio into the upper-upscale segment.
We seek to maximize revenue, market share, hotel operating margins and cash flow at every hotel. FelCor's asset management is aggressive and hands-on. All of our asset managers have extensive hotel operating experience and thorough knowledge of the markets and overall demand dynamics where our hotels operate. As a consequence, their interaction and credibility with our hotel managers is very effective. With our long-standing 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 use of public areas, new restaurant concepts and improved management of food and beverage operations.
Renovation and Redevelopment
We take a prudent approach to capital spending. Our plan involves efficiently maintaining our properties and limiting future fluctuations of expenditures while maximizing return on investment. We generally renovate between six to eight core hotels each year to maintain the competitive position and value of our hotels. In addition, we consider expansion or redevelopment opportunities at our properties that offer attractive risk-adjusted returns. Most recently, we redeveloped a former Crowne Plaza into the San Francisco Marriott Union Square. From 2007 (prior to redevelopment) to 2012, RevPAR and EBITDA at that hotel increased 53% to $182 and 370% to $6.9 million, respectively. In 2012, the hotel was recognized as Hotel of the Year, which honors the best hotel in the Marriott Hotels & Resorts brand across the Americas, and won the inaugural BLT (Breakthrough Leadership Training) Excellence award, recognizing leadership and accountability, as well as financial excellence and operational excellence awards. During 2012, we also completed redevelopments at the Fairmont Boston Copley Plaza and the Embassy Suites Myrtle Beach Oceanfront Resort. We are currently evaluating additional projects at several of its hotels that will provide future enhancements to stockholder value.