FelCor nears completion of transformation
02 MAY 2014 7:06 AM
FelCor Lodging Trust is nearing the final stages of a plan to sell non-strategic assets and use the proceeds to repay debt.
IRVING, Texas—By the end of the year, FelCor Lodging Trust will complete a corporate strategy to transform the real estate investment trust and secure its financial position, executives told analysts on Thursday during a first-quarter earnings call.
“Our focus for 2014 remains the same,” said Richard A. Smith, president and CEO. “We plan to complete our asset sales and use the proceeds to repay debt; open the Knickerbocker Hotel and effectively position it in the market; focus on continued ramp up of recently acquired and redeveloped hotels; and continue to aggressively attack our (average daily rate) indexes through mix management and flow through.”
At the beginning of the year, the REIT had 21 non-strategic hotels it intended to sell. During the first quarter, it sold two Embassy Suites properties—one in Atlanta and one in Bloomington, Minnesota—for a combined $41.2 million.
“We have five under contract to sell, including two with hard deposits on them and which are expected to close later this month,” Smith said. “We will be receiving second-round bids on two more hotels in the next week. We recently brought one hotel to market and have another one coming to market later this year.”
Once those properties are sold, FelCor will have 10 remaining non-core hotels in which it owns a 50% interest. Smith said the company is working to unwind the joint venture and will retain ownership of five hotels. The deal should be done during the second quarter, and FelCor will immediately place those properties on the market, he said.
Another major initiative Smith discussed during the call is redevelopment of the Knickerbocker Hotel, a 330-room property in New York. Smith said the project is on time for an early fall opening and in line with its budgeted cost of $240 million.
He said the hotel, which will be part of Leading Hotels of the World, should attract high-end travelers, with approximately 40% of guests coming from outside the United States.
“The mix will be four-night corporate and three-night high-end leisure, a lot of which will be international,” he said.
Strong quarterly results
Improved group business and a shift in customer mix toward higher-rated business helped FelCor achieve a solid performance in the first quarter. The REIT’s 57 hotels posted a 6.4% increase in revenue per available room on a 4.8% rise in ADR and a 1.6% increase in occupancy to 70.5%.
FelCor’s group of eight Wyndham-branded hotels it converted from Holiday Inns in March 2013 recorded a RevPAR increase of 2.7% for the quarter, with a 35% hike in March.
“Our primary operational focus has been on mix management to shift away from lower-rated segments, such as government, into higher-rated corporate segments,” Smith said. “Corporate transient roomnights increased 8% while lower segments like government, tour and travel and other discount segments declined 9%.”
Group business was especially strong in the quarter, with roomnights up 9%. Corporate group roomnights increased 9%, and government group business increased 4% after several years of decline, Smith said.
“While it isn’t a primary focus for us, the increase in government business produces additional compression, which assists with overall mix management,” Smith said.
Shares of FelCor rose 0.7% in trading on Thursday and are up 15.5% year to date. The R.W. Baird/STR Hotel Stock Index is up 5.1% year to date.
In response to an analyst’s question, Smith said the REIT isn’t necessarily interested in acquiring hotels, even after its disposition program is complete.
“There is not a strategic need to acquire at this time because we’re completely focused on selling the remainder of the assets and getting our leverage where it needs to be,” he said. “Once the asset sales are complete and the Knickerbocker is open, would acquisitions be part of the analysis? Yes, but so would other opportunities. … For the first time in a long time, we will be able to be opportunistic rather than be on the defensive.”