For FelCor, Less-Is-More Strategy Pays Off
Real-Estate Investment Trust Has Shrunk Its Portfolio of Properties and Seen Its Share Price Soar
By Craig Karmin
For FelCor Lodging Trust Inc., a top-performing real-estate investment trust, it was about getting small.
The Irving, Texas, investment firm expects early next year to complete a decadelong process of shrinking its hotel portfolio to 40 properties from 125 in 2005.
“We felt the overall quality of our portfolio was less than that of other REITs, and the balance sheet needed to be cleaned up,” said Richard Smith, FelCor’s chief executive officer, who helped develop the plan when he was the firm’s chief financial officer. Sales proceeds went to pay down debt and toward renovations of the hotels it kept.
The less-is-more strategy has paid off. FelCor’s share price is up 1,009% from the market low in 2009. That is nearly double the returns of other hotel REITs and more than triple the gains for REITs overall, according to Baird Research.
FelCor’s performance is a reminder that even during a period when the lodging industry has enjoyed broad gains, higher-end hotels in major cities often lead the way. Room revenue for the upscale-hotel category during the first 11 months of 2014 is up 12% compared with the same period last year, according to hotel data company STR Inc. That was the biggest gain for any hotel category.
FelCor has been putting “For Sale” signs on many of its older properties in secondary and tertiary markets. Recent sales include a Holiday Inn at the Toronto airport and a Doubletree in Charlotte, N.C.
Meanwhile, it has selectively added higher-end properties. FelCor bought the stylish boutique Royalton and Morgans hotels in New York in 2011 and Boston’s luxury Fairmont Copley Plaza hotel in 2010. The moves have helped double the REIT’s revenue per available room to about $150 projected for the end of 2015. That is still below many peers that focus on better-quality hotels, but analysts said the sharp rise in the figure helped drive FelCor’s share price higher.
In February, the Knickerbocker Hotel in Manhattan’s Times Square, which FelCor spent $240 million to acquire and restore, will reopen as the firm’s flagship property.
The Beaux-Arts building, which John Jacob Astor IV opened in 1906 for the Gilded Age elite, has 330 rooms including 40 suites. It boasts a 7,500-square-foot rooftop bar and terrace with views of the city skyline. The Knickerbocker expects an average daily rate of $475 in 2015 and is aiming for $575 in 2016. In November, New York average daily rates were $260, according to STR.
Analysts said FelCor too aggressively expanded its portfolio during the early part of the last decade, picking up a mixed bag of properties for the sake of growth. Some said those problems could linger despite the number of hotel sales.
Lukas Hartwich, hotel analyst at real-estate research firm Green Street Advisors, said the company’s debt levels still look worrisome. He said FelCor’s ratio of debt to earnings before interest, taxes, depreciation and amortization is 6.5 times, compared with about three times for the sector.
Moreover, about a quarter of its debt is floating rate, which would be vulnerable to a rise in interest rates, said Mr. Hartwich.
Mr. Smith, FelCor’s CEO, said the company will look to pay down more debt and reduce that ratio to five times in 2015. Meanwhile, FelCor has extended its debt maturities and plans to reduce its floating-rate debt next year to about 10% of total debt, as it completes final hotel sales, he said.
The CEO said that when the last few sales close in the first quarter, FelCor will be the right size and have the right mix of higher-end hotels.
“Nobody else shrank that much, and clearly it has been successful for them,” said David Loeb, a hotel analyst for financial firm R.W. Baird. The challenge, he said, is that “the assets they like are in cities that are expensive.”
The Knickerbocker Hotel in New York will reopen in February as FelCor’s flagship property.Back