Felcor: The Turnaround Continues

03/09/2015 8:00 am EST


Bret Jensen

Editor, Biotech Gems

Our latest feature is a turnaround story in the hotel sector; management continues to execute against its well thought out strategy and that will create significant shareholder value, suggests Bret Jensen, editor of The Turnaround Stock Report.

FelCor Lodging Trust (FCH) is a real estate investment (REIT) that went public in 1994. It owns a diversified portfolio of primarily upper-upscale and luxury hotels that are located in major and resort markets.

FelCor partners with leading hotel companies to operate its hotels, such as Marriott and Wyndham. FelCor currently owns interests in over 50 hotels with just over 15,000 rooms.

Like a lot of real estate investment trusts in the lodging and commercial property spaces, FelCor was severely impacted by the financial crisis and the freezing of the credit markets back in 2008 and early 2009.

The shares plunged from over $20 a share to under $2 a share at the depth of the crisis. The REIT was forced to eliminate its dividend completely in order to survive the financial crisis.

The near death experience focused FelCor’s management to come up with a compelling strategy that could bring it back from the brink and drive substantial shareholder value as well.

The REIT decided to sell 70% of its hotels in non-primary markets as well as 50% of its airport hotels.

It has used the proceeds from these ongoing sales to renovate its remaining primary hotels in core urban markets, reduce debt, and invest in the New Knickerbocker Hotel in New York City, which should be FelCor’s flagship.

The Knickerbocker Hotel is on one of most desired hotel locations in the world at 42nd & Broadway in New York City.

The reopening of the Knickerbocker is going to make major differences to the company’s cash flow, FFO, dividend payouts, and the way the REIT is perceived over the next 12-18 months.

Felcor Lodging Trust was selling for about $6 a share when I purchased this REIT just over a year and a half ago. The shares now go for just under $11. But the best still lies ahead.

The next year, or two, is going bring into focus the benefits of all of FelCor’s efforts in recent years. FFO is going to increase substantially over the next few years with $1 a share of FFO likely in FY2015 or soon thereafter.

This REIT reinstituted its dividend in the second quarter of 2014 and then doubled its dividend payouts to start 2015. The shares now yield 1.5%.

I expect the company to be paying a dividend of at least 3-4% over the next 18-24 months based on the current price of its shares.

FelCor was selling for north of $20 a share before the financial crisis. Over time, I think the REIT can achieve its previous levels and investors can expect significant capital appreciation and dividend increases over the next 2-3 years.

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