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 hotels, which are flagged under globally recognized names and premier independent hotels.
Strategy and Objectives
We seek to provide superior stockholder returns by assembling a diversified portfolio of high-growth hotels, combined with a sound and flexible balance sheet reflecting low cost debt, an extended maturity profile and substantial liquidity. Our long-term strategy has five critical components:
- Portfolio Quality and Diversity - we are investing in our core portfolio of high-growth hotels located in gateway and resort markets with high barriers-to-entry with limited supply growth, while we sell hotels that do not meet our criteria for continued investment (non-strategic hotels).
- Long-Term Leverage - we are steadily reducing our outstanding debt 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 to lower our weighted average interest rates as well as stagger and extend maturities well into the future.
- Organic Growth - we invest in our core portfolio to enhance our assets’ long-term performance and achieve favorable returns on invested capital.
- Acquisitions - we look to acquire hotels in targeted markets that meet our strict underwriting criteria, such as those that provide returns in excess of our weighted average cost of capital, are located in markets with high barriers-to-entry with limited supply growth, and may contain 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.
- Since December 2010, we have sold 28 hotels (including five hotels sold in 2013 and four sold in January 2014), for total gross proceeds of $627 million (our pro rata share was $580 million).
- We successfully rebranded eight Wyndham hotels from Holiday Inns on March 1, 2013. The management agreement includes a $100 million performance guaranty from Wyndham Worldwide Corporation over the initial 10-year term (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. 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.
- Our Board of Directors reinstated a quarterly common dividend in October 2013 in recognition of our ongoing and successful portfolio repositioning and balance sheet restructuring, as well as our positive funds available for distribution (:FAD") during 2013. At that time, we declared a $0.02 per share fourth quarter common stock dividend, which was paid in January. Future quarterly dividends will be based on estimates of FAD, reinvestment opportunities within our portfolio and taxable income, among other things.
- 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 2013, we spent $101.4 million on capital expenditures, primarily for renovation and redevelopment of our hotels. During this time, we redeveloped Morgans by adding three new guest rooms, building a new fitness facility, relocating the lounge and reconcepting the food and beverage areas. We also completed significant renovations at four of our Wyndham properties. Of the remaining four Wyndham properties, two were recently renovated in 2012, and the remaining two will be renovated in 2014.
- We have spent $85.6 million (excluding the initial acquisition costs and capitalized interest) through March 31, 2014 to redevelop the 4+ star Knickerbocker Hotel, located in the heart of Times Square in Manhattan. Our total project cost is expected to be $240 million (net of historic tax credits), which is within 5% of our original estimate. We expect the hotel to open in the fall of 2014. The hotel's executive team is in place and fully engaged in the sales and marketing efforts to ensure a successful and strong opening. In early 2014, we finalized an agreement with one of the nation's most recognized Master Chefs, Charlie Palmer, to manage the food and beverage operations. Mr. Palmer's flagship restaurant, the Michelin starred Aureole, is located adjacent to the hotel, which will create sales and marketing synergies.
- Our Knickerbocker Hotel venture raised $45 million through the sale of 3.5% preferred equity under the EB-5 immigrant investor program. We are using our 95% share of the proceeds to repay borrowings under our line of credit.
Balance Sheet Strategy
A healthy balance sheet provides the necessary flexibility and capacity to thrive throughout lodging industry cycles. We are committed to strengthening our balance sheet by reducing leverage, lowering our cost of debt and extending debt maturities.
- We expect to continue to reduce our leverage by selling additional non-strategic hotels, increasing our cash flow (driven by growth in revenue per available rooms, or RevPAR, on our core and recently-acquired and redeveloped hotels), opening the Knickerbocker Hotel and moving it to stabilization.
- We have successfully extended our weighted-average debt maturity to 2020 and reduced our weighted-average interest rate to 6.3%, significantly lower than our historical levels.
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 Fairmont, Doubletree, Embassy Suites, Hilton, Marriott, Renaissance, Sheraton, Westin, Wyndham and Holiday Inn. Royalton and Morgans, in midtown manhattan, are operated independent of any brand. We sell, acquire and rebrand hotels to increase our return on invested capital, improve overall portfolio quality, enhance diversification and improve growth rates.
Hotel Sales: On an ongoing basis, we review our hotels 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, increases our return on capital and enables management to focus on "core" long-term investments.
- We expect to dispose of our interests in 45 hotels, of which we have already sold 29 hotels since December 2010 for total gross proceeds of $627 million. We have 17 remaining non-strategic hotels. Of those, we currently have four under contract. We indirectly own 50% interests in 10 of those non-strategic hotels, which are owned by a joint venture with one of our brand-managers. We are working diligently to unwind that joint venture, as consequence of which we would own five of those hotels outright (our joint venture partner would own the other five). When the joint venture is unwound, we intend to begin marketing those hotels immediately.
- 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 consider purchasing hotels that meet or exceed our strict investment criteria.
- We target properties that are accretive to long-term stockholder value and will provide for 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 iconic Fairmont Copley Plaza and (at stabilization) the Knickerbocker.
- We focus on properties that will improve the overall quality and diversity of our portfolio.
- We also consider hotels that offer redevelopment and/or revenue positioning opportunities that can further enhance returns on our investment.
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. Because of their experience, their interaction with our hotels 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 routinely evaluate value-adding opportunities 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 spending capital. Our strategy 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 the Fairmont Boston Copley Plaza in Boston. From 2009 (prior to redevelopment) to 2013, RevPAR and EBITDA at that hotel increased 31% to $211 and 81% to $7.8 million, respectively. We also recently completed successful redevelopment projects at the Embassy Suites Myrtle Beach Oceanfront Resort and Morgans in New York. We are currently evaluating additional projects at several of its hotels.