When Rick Smith became chief financial officer of FelCor Lodging Trust in 2004, the Irving, Texas-based company owned a lot of assets that didn’t make sense in a REIT model. These 25- to 30-year-old, side-of-the-road hotels in secondary and tertiary markets were holding the company back from real growth.
“When somebody comes and sits a new hotel next to you, because there are no barriers to entry, your value is forever diminished. It’s not smart,” explains Smith, who assumed the role of president and CEO of FelCor in 2006. “It’s of too much risk to the shareholders to be holding on to a lot of properties like that.”
The operational performance of FelCor’s existing portfolio also was subpar because its asset managers handled 30 to 40 properties—aligned by brand instead of region—apiece. “If you’re not spending a lot of time in your properties, and you have that many of them to deal with, you can’t possibly understand the demand generators, the key feeder cities, the comparable nature of product quality and location, and you can’t understand the business that’s actually available in the marketplace,” Smith says. As a result, its hotels couldn’t optimize customer mix management, which hurt both the top and bottom line.
To improve the overall quality of its portfolio, mitigate risk, and shore up the balance sheet, FelCor laid out a multi-year repositioning plan. The new strategy encompassed selling off non-strategic assets, renovating “keeper” hotels, and making smart acquisitions (like The Knickerbocker in New York City). In the last decade, FelCor has drastically pared down its portfolio, from 125 hotels in 2005 to 40 today. And thanks to the operational and capital changes FelCor made in 2006 and 2007—prior to the credit crisis—the hotels the company held on to have been performing phenomenally, Smith says. “We spent about a half billion dollars getting our hotels in shape. They were 4 out of 5 across the board in their comp sets, and we’re now 1 or 2 out of 5 across our comp sets. We increased market share significantly.”
Just take a look at FelCor’s Crowne Plaza in Union Square San Francisco, in which the company invested $43 million in 2007 to completely overhaul and rebrand the hotel to a Marriott. This year, the property will make between $13 and $14 million, up from $1.5 million in 2007.
FelCor is also seeing dividends from its eight Wyndham hotels, which the company converted from Holiday Inns in 2013. Wyndham Worldwide has guaranteed the minimum annual net operating income for these hotels for the life of the deal. At stabilization, before the 3 percent kicker every year, the hotels will be doing 25 percent more EBITDA than they ever did in their very best years combined, Smith says. “When you look at strength of submarket and mitigation of volatility, I like our portfolio better than anyone’s in the industry.”
Since 2008, FelCor has outpaced all other REITs on a same-store basis in RevPAR growth, Smith says. “By virtue of cleaning up the portfolio, using some of the proceeds to pay down debt, and inching our way toward a complete balance sheet restructure, which is now complete, we were taking care of the two overhangs from an investor standpoint and getting the company into a position to where we could really go on offense versus being on defense and clean up all the time.”
In the current stage of the cycle, an asset would need to be located in the strongest submarket within a top 10 market and be undermanaged, underbranded, undercapitalized, and, therefore, underperforming in order to turn FelCor’s head. “If we could find owners who aren’t currently marketing their product who fit that bill and we can induce them to sell, even if we have to pay a little higher multiple, then we would take advantage of that,” Smith says.
Looking ahead, Smith says FelCor has seven or eight redevelopment opportunities in the pipeline that will increase value, and the company will also make a few more opportunistic asset sales to create capacity. Even though FelCor’s absolute leverage number will not get down to its goal level until next year, its overall balance sheet is as strong as anyone’s, Smith says. “As soon as we get through the end of next year and our leverage stabilizes, we’ll be in great shape to take advantage of the next downturn.”
