Ashford execs respond to criticism of FelCor proposal
 
Ashford execs respond to criticism of FelCor proposal
24 FEBRUARY 2017 3:41 PM

On the same day FelCor Lodging Trust issued a statement criticizing a proposed acquisition by Ashford Hospitality Trust, Ashford officials used their fourth-quarter earnings call to address FelCor executives’ concerns one by one.

DALLAS—The ongoing back-and-forth on Ashford Hospitality Trust’s unsolicited proposal to acquire FelCor Lodging Trust continued Friday when the latter company issued a statement criticizing the potential deal and Ashford Trust officials dedicated a portion of their fourth-quarter and full-year 2016 earnings call to addressing those complaints.

Earlier in the week, Ashford Trust officials went public with an all-stock proposal to buy FelCor for $9.27 a share.

In their statement, FelCor officials slammed the deal, claiming it would:

  • Dilute the value of shares for both current Ashford Trust and FelCor shareholders;
  • cost the combined company tens of millions of dollars in management fees to Ashford Trust’s external advisor Ashford Inc., more than wiping out the synergies of the deal;
  • provide a disproportionate benefit to Ashford Inc. shareholders instead of those who hold Ashford Trust and FelCor stock;
  • result in a combined company with “extremely high leverage”; and
  • only give FelCor three designated seats on the Ashford Trust board, which would not be “commensurate with FelCor’s 58% pro forma combined company ownership.”

But during Ashford Trust’s earnings call, President and CEO Douglas Kessler said there are easy fixes to each of those issues.

“We’ve heard these concerns several times, have provided solutions to each one of them, and have been unable to advance further with their existing transactions committee,” he said, arguing the concerns are based “more on form than substance.”

On FelCor’s first concern, Kessler said his company looks at transitions on a leverage-neutral basis, which makes the math of the deal more compelling.

“On that basis, we believe this is accretive to both stock price and (adjusted funds from operations) per share,” he said, noting shareholders likely care more about total returns.

On the second point, Kessler said he’s confident in his team’s ability to cut costs and operate FelCor’s portfolio significantly more efficiently than it is today.

“In the end, we’re confident we can run the FelCor platform for materially less than what their management team can today,” he said.

Kessler disputed an argument that suggested benefits of the deal would be funneled away from current FelCor shareholders via Ashford Inc., calling those claims “both false and disingenuous.”

“FelCor shareholders would effectively receive 25% ownership in Ashford Inc. plus additional warrants,” he said. “So any increase in the value of Ashford Inc. would directly benefit FelCor shareholders.”

Addressing FelCor’s fourth concern, Kessler noted that Ashford Trust does typically run at a higher leverage level than FelCor’s stated strategy, but the proposed combination of the two real estate investment trusts would bring Ashford’s leverage down from current levels. He also said he believes worries over Ashford’s leverage are misguided.

“We believe running a lodging REIT in the 55% to 60% net-debt-to-gross-asset range makes both strategic and financial sense,” he said. “Our track record proves this. … We believe our strategy will produce better returns.”

Regarding the complaints that FelCor would get too little representation on the combined company’s board, Kessler said he viewed the current offer as “generous.”

“Our belief is that three board spots is quite generous given that—one—we are paying a 28% control premium for the company and—two—the underwhelming track record of FelCor’s Board of Directors,” he said.

Ultimately, Kessler said the public back-and-forth on the deal could play out in Ashford’s favor as he’s hopeful that it will win over shareholder sentiment to Ashford’s proposal. If that prediction is accurate, it would benefit his company in one of two ways: either by putting enough investor pressure on FelCor officials that they decide to recommit to negotiations with Ashford, which began last October, or by fueling support for a slate of FelCor board candidates proposed by Ashford who would be more willing to entertain the deal.

“Investors can now see how solvable these concerns are and why we believe there’s an easy path to consummating this transaction,” he said.

Ashford holds a significant stake in FelCor, Kessler noted, holding 4.5% of the company’s stock.

Q4/full-year performance
Ashford officials said their company saw revenue per available room for comparable hotels not under renovation grow 3.2% for the fourth quarter, according to a news release. The company reported adjusted earnings before interest, taxes, depreciation and amortization of $84.1 million in the quarter and $431.1 million for full-year 2016.

The company is continuing to sell off select-service assets officials have determined to be “noncore” after refining their strategy to focus on full-service, upper upscale hotels. In the fourth quarter, Ashford completed the sales of the 162-room SpringHill Suites Gaithersburg for $13.2 million and the two-hotel portfolio of the 151-room Courtyard Palm Desert and the 130-room Residence Inn Palm Desert for $36 million.

In total, the company has sold nine properties for roughly $218 million since announcing plans to sell off select-service properties.

As of press time, Ashford Trust’s stock was trading at $6.36, down 18% year to date and down 13.7% since opening bell Friday. The Baird/STR Hotel Stock Index is up 16.3% year to date.

Kessler noted that both Ashford Trust’s and FelCor’s stocks (down 11.3% year to date and 5.9% for the day at press time) were “down materially” following FelCor’s statement on the potential deal.

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