In a move unanimously approved by both company’s boards of directors, RLJ Lodging Trust swooped in with an all-stock deal to merge with FelCor Lodging Trust.
BETHESDA, Maryland—FelCor Lodging Trust has a new partner this morning, and it’s not Ashford Hospitality Trust.
Earlier today, RLJ Lodging Trust and FelCor issued a joint statement announcing their entrance into a definitive merger agreement in an all-stock transaction. Post-merger, RLJ (the combined company will retain that name) is expected to have a pro forma equity market capitalization of approximately $4.2 billion and a total enterprise value of $7 billion, according to the news release.
The terms of the deal, which RLJ is calling a “merger agreement,” call for each share of FelCor common stock to be converted into 0.362 shares of newly issued common shares of RLJ stock in a taxable merger. Following the consummation, which is expected by the end of this year, RLJ shareholders will own approximately 71% of the combined company’s diluted equity, and FelCor’s shareholders will own 29%.
Both companies’ boards of directors unanimously approved the deal, but it is still subject to votes from RLJ and FelCor shareholders.
“Both (Steven Goldman, FelCor’s CEO) and I have enormous confidence in this merger,” Ross Bierkan, RLJ’s president and CEO, said on a conference call with analysts this morning. “We’ll have a clear focus … and the ability to deliver results for all stakeholders.”
He said the timing and the structure of the deal make sense.
“The fact that we’re issuing stock here, it’s basically currency for currency,” Bierkan said. “If we believe we’re undervalued, then we also believe FelCor is undervalued. At this point in the cycle, it’s an opportune time to do this. The delta between us is historically low, and it’s a good opportunity.”
“We like the relative valuation here between the organizations,” he continued. “It also preserves cash on our balance sheet” for future asset acquisitions.
Benefits of the deal
Scale, location and assets were clear advantages in the deal, Bierkan said.
“All of the hotels in both portfolios are good hotels; there are no mutts,” he said. “We’re talking about continuing to refine the portfolio over time to make it even better.”
FelCor’s portfolio at the end of 2016 included 37 hotels, mostly upscale full-service properties. Notably, the portfolio includes 18 Embassy Suites hotels and seven Wyndham-branded hotels. Those, plus its three New York City properties—The Knickerbocker, Morgans New York and Royalton New York—were discussed at length on the Monday morning call.
“There’s no doubt that scale matters, and scale brings its own benefits,” Bierkan said. “We’ve always appreciated the quality of compact, full-service hotels … in major brand families. They capture much of the qualities of the upscale select-service hotels most people associate us with.”
He said in particular his team likes the Embassy Suites concentration in FelCor’s portfolio, for the brand and the real estate. On the Wyndham side, he said “we like the location of these, and we also liked the fact that Wyndham was all-in on (the deal).”
FelCor’s three New York City assets have been for sale since mid-2016, and Bierkan confirmed that Morgans is “tied up” in a deal, and “Royalton and The Knick both have offers on them.”
He said that while FelCor’s disposition strategy for these properties is ongoing, the company will “pause and take a look at” The Knickerbocker.
“The Knick is interesting real estate,” he said. “As a combined entity, it gives us optionality that we have to think about.”
RLJ’s portfolio includes 122 hotels with approximately 20,100 guestrooms, many of which are upscale select-service brands, including 24 Courtyard by Marriott hotels.
The combined company will have ownership interests in 160 hotels and 31,467 guestrooms coast to coast.
Leadership and operations
The combined company will retain RLJ’s name, stock ticker symbol and leadership under Executive Chairman Robert Johnson, Bierkan, and COO and CFO Leslie Hale. Headquarters will remain in Bethesda, Maryland.
“My role is to help with a smooth transition,” Goldman said. FelCor’s board of directors named Goldman to the position in February.
Operationally, Bierkan said RLJ isn’t anticipating any property-level management changes at this time.
“We think the GMs we’ve met along the road are an impressive bunch,” he said. “With our asset management approach, a fresh set of eyes may be invigorating. We’re looking forward to working with them.”
On the asset redevelopment side, Bierkan said the company will “tend toward a more conservative approach.”
“We appreciate there are some redevelopment opportunities at larger assets, but we’re a little more focused on conversion opportunities within the portfolio, and other small projects we think are needle-movers,” he said.
When it comes to dispositions, he said it’s “premature” to talk about individual FelCor assets the RLJ management team may want to recycle. But he did acknowledge that FelCor’s two resort properties are “least compliant with our strategy.”
At press time, RLJ Lodging Trust stock was trading at $22.15 per share, down 9.4% year to date, and FelCor stock was trading at $7.84 a share, down 2.1% year to date. The Baird/STR Hotel Stock Index is up 19% for the same time period.
Where Ashford stands
Today’s deal puts the brakes on months of back-and-forth between FelCor and Ashford Trust, which began negotiating to purchase FelCor in 2016, and which officially went public with its intention to purchase the real estate investment trust in February.
Through a series of public letters and U.S. Securities and Exchange Commission filings, Ashford Trust and FelCor battled over the terms of the proposed acquisition.
Ashford Trust initially offered an all-stock deal that would give FelCor shareholders a combination of Ashford Trust and Ashford Inc. stocks for a total consideration of $9.27 per share based on closing prices from 17 February.
FelCor officials stated their problems with the offer included Ashford Trust’s higher leverage and management structure, and qualms about the all-stock nature of the proposal.
Ultimately, Ashford Trust earlier this month amended its offer to include roughly $213 million in cash.
Ashford Trust officials have given no indication yet on if the proposed FelCor-RLJ deal changes their plans to run a slate of seven candidates for the FelCor Board of Directors during that company’s 2017 annual shareholders meeting. Ashford Trust officials had said their nominees would be more open to Ashford Trust’s purchase proposal.