FelCor execs detail concerns about Ashford proposal
 
FelCor execs detail concerns about Ashford proposal
24 FEBRUARY 2017 9:19 AM

Executives at FelCor Lodging Trust have issued a news release outlining potential problems with Ashford Hospitality Trust’s offer to buy the REIT, including dilution of shares and high leverage.

IRVING, Texas—Though FelCor Lodging Trust executives declined to comment on Ashford Hospitality Trust’s proposal to acquire the company during FelCor’s fourth-quarter earnings call, company officials issued a statement explaining their concerns about the offer the day after.

“AHT's February 21, 2017 proposal follows several months of discussions between FelCor and AHT, during which FelCor repeatedly expressed numerous concerns regarding the value and structure of AHT's various proposals,” according to the statement.

Among the concerns listed were the dilution of value for Ashford’s shareholders, external management fees negating synergies, transferring value to an external manager, high leverage and disproportional governance.

“AHT's offer of three FelCor-designated seats on the AHT board is not commensurate with FelCor’s 58% pro forma combined company ownership, particularly given that the proposal would leave FelCor's shareholders as shareholders in an externally-managed REIT with a manager that is not accountable to FelCor's shareholders,” according to the statement.

FelCor officials were particularly pointed in their criticism of Ashford Hospitality Trust’s external management agreement with Ashford Inc., saying the agreement’s ongoing costs more than negate the amount saved in “cost and operating synergies” and will undermine the possible benefits of the deal for both FelCor and Ashford Hospitality Trust shareholders.

Company officials were very careful to note, though, that the press release was not “a complete list of concerns expressed to AHT nor should they be taken as FelCor's response to AHT's proposal.”

Tough quarter
FelCor’s same-store portfolio saw revenue per available room decline 2% during the fourth quarter, said Troy Pentecost, president, interim senior executive officer and COO, during the earnings call. The unfavorable interplay between supply and demand, the loss of business at some properties because of Hurricane Matthew in October and competitors driving down rate to attract shrinking demand were all contributing factors, he said.

“While we seek to maximize total revenues whenever possible, our long-term revenue management strategy prioritizes rate position as rate integrity is harder to build than occupancy once it’s lost,” he said.

In return, the company sacrificed 3.2% in occupancy during the quarter, he said, but earnings ended up exceeding executives’ expectations.

“First, our rate-focused revenue management strategy drove 1.2% of ADR growth, which helped improve revenue flow through (earnings before interest, taxes, depreciation and amortization),” he said. “Second, the cost containment initiatives that we implemented several months ago continue to be effective, particularly in managing labor and giving us favorable marketing costs.”

A performance guarantee from Wyndham Hotel Group continued to safeguard approximately 25% of its adjusted EBITDA and offset weak revenue performance within the Wyndham portfolio by contributing $2 million in EBITDA during the fourth quarter, Pentecost said.

The industry is in a challenging part of the cycle, he said, but FelCor’s asset managers are making the necessary adjustments market-wide to continue maximizing profitability, he said. The company will continue to benefit from the protection of the Wyndham guarantee, he said.

Asset sales
In 2016, FelCor sold the Renaissance Esmeralda Indian Wells Resort & Spa and the Holiday Inn Nashville Airport for aggregated gross proceeds of $108 million, Pentecost said.

FelCor is also in the midst of selling three New York City properties: Morgans New York, Royalton New York and The Knickerbocker.

EVP and CFO Michael Hughes said the company’s 2017 outlook assumes FelCor will sell Morgans during the second quarter of the year followed by the Royalton and The Knickerbocker in the fourth quarter. He couldn’t provide a much detail until the properties are under a hard contract, he said. The company began broadly marketing Morgans and Royalton in June 2016 and The Knickerbocker in September 2016, he said.

The company is more optimistic about the Morgans than the other two, he said. He noted there are a lot of people looking at them, but it remains to be seen whether a deal gets done.

Looking back at the company’s history, Pentecost said, it takes about 12 to 18 months once a property is marketed for sale.

“We’re really still on a pretty good path with these properties,” he said.

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