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Repositionings take a toll on FelCor
August 2 2013

FelCor’s otherwise solid earnings were blemished by the repositioning of eight Holiday Inn hotels as well as continued struggles at the Morgans and Royalton hotels in New York.

Highlights
  • Eight Holiday Inn hotels were reflagged to Wyndham Hotels and Resorts.
  • Comparable hotels experienced a RevPAR boost of 5.7%.
  • Performance also was hampered by continued ramp-up at the Royalton and Morgans hotels.
By Jason Q. Freed
Contributing Editor, Tech Impact Report

IRVING, Texas—FelCor Lodging Trust’s second-quarter earnings were blemished by a portfolio repositioning. Therefore the real estate investment trust is encouraging analysts to look at a slice of its portfolio for year-over-year comparisons.

FelCor announced in January it would re-brand, renovate and reposition eight Holiday Inn hotels to the Wyndham Hotels and Resorts brand. The agreement includes a $100-million guaranty from Wyndham Worldwide Corporation over the 10-year term of the agreement.

The hotels have been rebranded, and management teams have been transitioned. Rick Smith, president and CEO of FelCor, said Thursday revenue per available room at the eight hotels declined 17% in the second quarter compared to the second quarter of 2012 because of the impact of changing brands and management companies, including related renovations. “As expected, the hotels are going through a period of transition and operational ramp up as well as related renovation work,” Smith said, adding that RevPAR at the hotels fell by 30% in March alone.

Smith said cutting off InterContinental Hotels Group’s distribution system cold and creating a new one from Wyndham Hotel Group has created challenges. However, the Wyndham team is “working very diligently on it,” he said. “We have a great relationship, and so far everything is going well,” he said. “We knew it was going to be a tough transition … but we feel really good about the progress we’re making.”

Performance
Otherwise, the quarter was “solid,” Smith said.

At the 55 hotels outside of the eight Wyndham properties, RevPAR was $116.12, a 5.7% increase over the second quarter in 2012. The increase reflects a 3.7% boost to average daily rate and a 1.9% increase in occupancy.

Including the Wyndham properties, RevPAR for the 63-hotel portfolio increases 2.1% over the second quarter of 2012, reflecting a 2.5% boost in ADR and a 30-basis-point decrease in occupancy.

“We believe comparable hotels is the most appropriate measure on which to assess the operating performance of our portfolio,” Smith said. “We expect the performance of our Wyndham portfolio to improve meaningfully throughout the year as the transitional disruption subsides.”

Morgans drama
On top of the rebranding, FelCor’s second-quarter performance also was hampered by continued ramp-up at the Royalton and Morgans hotels in New York, which the company acquired for $140 million in 2011. Morgans Hotel Group itself is embattled in shareholder tumult, with OTK Associates recently gaining control of the board among calls for the hotel operator to sell itself.

However, Smith said FelCor “continues to make progress” at the two hotels, evidenced by the fact that the Royalton has increased market share for 15 consecutive months. The two hotels grew RevPAR 7.4% during the second quarter.

“Both hotels are finally beginning to show consistent results,” he said. “Generally, our primary operational focus continues to be mix management as we continue to shift away from lower-rated segments such as government and into higher rated corporate segments.”

He said the shareholder upheaval and potential sale of Morgans is not hampering performance. Rather, underperformance can be attributed to segmentation mix that is being corrected by new management, Smith said.

“There was a huge segmentation foul up under previous management,” he said. “Lehman (Brothers) was a huge account for the hotels, particularly for the Royalton, at a really huge rate. When they lost that there was some panic involved; there was extreme discounting to the opaque side. There is a combination of things that are being done to address that.”

The recovery in New York this cycle has been different than in past cycles, Smith said. Group business normally has returned at this point, but the Morgans and Royalton hotels aren’t seeing normal group demand yet.

“So GMs don’t feel comfortable enough to (raise rate),” he said. “Once you start to see that, you will see things move more quickly in New York, and if it doesn’t happen then you have a more moderate, longer-term cycle.”

One analyst asked whether FelCor has termination rights built in with Morgans should the hotels not boost performance as expected.

“There are clauses within the contract that if we don’t make certain earmarks by 2015 that we could take action separately,” Smith said. “We need to make sure that they are staying focused and we believe they are staying focused.”

He said Morgans Hotel Group is not earning any management fees at the two hotels “and they won’t until the performance gets to where it needs to be.”

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