67 WALL STREET, New York - October 23, 2012 - The Wall Street Transcript has just published its REITs Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Acquisition and Financing Costs - Pricing Power Outlook - Residential and Commercial REITs - Real Estate New Supply - Inexpensive Access to Capital - Apartment, Lodging, Self-Storage and Office REITs
Companies include: FelCor Lodging Trust Inc. (FCH) and many others.
In the following excerpt from the REITs Report, the CEO of FelCor Lodging discusses the outlook for his company for investors:
TWST: Please start by introducing readers to FelCor with a company history and an overview of the business today.
Mr. Smith: Today, FelCor owns 69 primarily upper-upscale hotels across the country. When I arrived here in 2005, there were really two overhangs on the company. One was the overall quality of the portfolio, and the other was the balance sheet. When I started putting the plan together, there were a number of things that needed to change to fix that. We had about 125 hotels at that time. A number of those hotels were hotels that a REIT with a long-term focus shouldn't ever own. They were in secondary and tertiary markets, side-of-the-road hotels with no barriers to entry. If you're private equity or a private group that is buying at the low end of the cycle and selling at the peak, then you can make a lot of money. When you are in a long-term hold model, such as an REIT, those types of hotels are problematic.
For example, you own a 25-year-old hotel in a market, and it could be performing fine, but if someone comes in and sets a new Hilton Garden Inn or Courtyard or something like that next to you, it greatly diminishes the value. So one of the things we had to do from a strategic perspective was to fix that. By selling those hotels and acquiring upper-upscale quality hotels in markets where we weren't represented, we could fix both problems. We could get the overall quality of the portfolio where we needed it - which it will be after we finish the last of the asset sales - and by using the proceeds from those sales, we could restructure the balance sheet and get not only our debt level where it needs to be, but also the coverage level, our maturity profile staggered and pushed out long term, and so totally restructure the balance sheet.
The other couple of things I found that were really problematic were in asset management. We asset managed back then, much like most other guys asset manage, and we were very good on the cost side. But we had four asset managers handling 30 to 40 hotels apiece, and they were aligned by brand, not by region. Therefore, we were in a situation where our guys were handling too many hotels, and they were spread all over the country. They didn't travel much, and so they didn't know their markets well enough, they didn't understand demand generators, key feeder cities, comparable nature of product, quality and location against their competitors. So they weren't able to understand the mix of business that is available in the submarket and the optimal mix of business to us relative to our competition based on those factors. We completely changed that. Our asset managers now handle about 15 hotels and are aligned by region. They are in their markets all the time. They completely understand all of those factors now, so we can optimally mix manage our business.
The other thing that we had to change, tremendously, was that our hotels weren't in great shape from a capital perspective. Quality wise, they were ranked number four or five, out of five, in their competitive sets. So we spent about $0.5 billion between 2006 and 2008, getting our core hotels where they needed to be so that they could compete in the marketplace. Once we did that, they were number one or number two from a quality standpoint in their sets. So then we had all the tools in place, operationally and quality wise, to compete. That, coupled with strategic changes in the portfolio repositioning and the balance sheet restructure, is what we had to do to complete the turnaround here at FelCor.
Things have been going extraordinarily well. We have completed most of what we've had to do. The only things we have left to do is sell the remaining assets, pay down debt utilizing the proceeds from the asset sales and refinance two pieces of debt. Most of the execution risk is gone, and we are in tremendous shape, although that hasn't been factored into our stock price.
From an execution-risk standpoint, all of the harder stuff - all the changes we initially made that I described - was much, much more difficult than selling the remaining assets and refinancing two pieces of debt. So we feel really good about where we are, and we certainly have more room to move the needle than any of our hotel REIT peers, and that's not because we're necessarily better than them: it is simply because we had more room to move the needle by virtue of making the corrections and getting the company on the right track versus where we were.
TWST: FelCor has those remaining assets you've identified for sale. Do you anticipate the company growing its portfolio in terms of the property types and markets that it does want to continue to be in?
For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.