Felcor Lodgings Inc. (NYSE: FCH) is a REIT that owns 80 hotels - however, Felcor neither manages the hotel itself (operation are contracted out to third parties), nor does it own the hotel brand (which are operated as franchises of hotel brands such as Hilton, Sheraton, and Holiday Inn). With the exception of two properties, Felcor Lodgings Inc. is exclusively located in the United States. Their holdings tend to center around major metropolitan areas in the outlying suburbs. Three states, California, Texas, and Florida account for 49% of Felcor’s rooms and 46% of its overall EBITDA. Felcor owns the hotels, but contracts the day-to-day management of the properties to third-party management firms which are paid a fixed percentage of their respective hotel revenue.
In 2006, Felcor launched a major overhaul of its infrastructure as it shed nearly all holdings outside of its central hotel management segment and began a 440 million dollar renovation of its hotels to increase their competitiveness. The proceeds from the sale of non-core properties went to paying down its sizable debt to improve the company’s unfavorable debt ratio. In line with it’s larger strategy of shifting its focus from lower- and mid-level hotels to more upscale hotels, Felcor purchased the Renaissance Esmeralda Resort & Spa in Indian Wells, California and the Renaissance Vinoy Resort & Golf Club in St. Petersburg, Florida for $225 million.
The concentration of its properties in California, Florida, and Texas means that Felcor is more vulnerable to natural disasters than other REITs. Felcor’s hotels are also mainly located in suburban locations which makes entry by competitors easier than in an urban setting. However, management has taken steps to limit this exposure by attempting to refocus the vast majority of hotel management operations into the upscale category which makes competitor entry more difficult. Felcor hopes to accomplish this primarily by shedding holdings in the low-to-mid-scale range and using those proceeds and additional capital to purchase more upscale locations.
Felcor Lodging’s Inc. owns 89 hotels with approximately 25,000 rooms across the United States. Hotel occupancy is Felcor Lodging Inc.’s revenue source, and anything that would lower hotel occupancy or the demand for hotels would have a negative impact on Felcor. California, Texas, and Florida account for a disproportionate amount of Felcor’s holdings. In 2007, the Felcor’s key industry metrics all trended upwards. The Average Daily Rate (ADR) was up 6.6% rising from $125.98 to $134.21. This increase helped offset a slight decrease in overall occupancy which dipped from 72.6% to 70.4%, but this decrease mirrored an industry wide decline. RevPar also showed modest gains rising from $91.45 to $94.48. The increase in the ADR can be attributed to the renovations which have already been completed on over 90% of Felcor’s properties. The renovations have improved the competitiveness of those hotels and allowed them to charge higher prices with hotels that have completed renovations posting a 13.9% increase in ADR. Overall Felcor still tops industry wide averages in every key metric.
Felcor's business structure puts an upper limit on the margins that it can earn. The 3rd party firms that manage its hotels are paid a percentage of the total revenue from the hotel. The percentage varies from contract to contract but is generally within the 2-3% range. The largest contractor, Embassy Suites,with 45 hotels under its management, charges 2% of total revenue per month.
In addition to the management fees, 48 of Felcor’s hotels have an additional licensing fee that is paid for the use of that particular brand name. 47 of those hotels are run under the Embassy Suites name, and the licensing fee typically runs between 4-5% of total revenue. Felcor’s other properties already have the licensing fee built into their management contract. In addition to the licensing fee, Felcor also pays 3.5-4% of suite revenue for the benefit of the brand as a whole, which uses the money to advertise and run a universal reservation system.
These three performance measures are good indicators of the business health of Felcor's hotels and are widely used across the industry. They include
|Felcor Occupancy Rate||62.4||65.5||69.3||72.6||70.4|
|US Upscale Hotel Average Occupancy Rate||60.8||63.0||65.2||65.5||64.8|
|Felcor's ADR ($)||94.92||99.07||107.18||125.98||134.21|
|US Upscale Hotel Average ADR||90.55||94.05||101.60||107.37||113.56|
|Felcor's RevPar ($)||59.19||64.91||74.29||91.45||94.48|
|US Upscale Hotel Average RevPar ($)||55.06||59.26||66.21||70.31||73.61|
Long Term Hotel Industry Trends-- STR predicts that in 2008 supply growth of 2.2 percent will slightly exceed 1.9%, the historical average, while demand growth of 1.4% will fall short of the long-term historical average at 1.8%. If the supply growth exceeds demand growth as predicted, the 2008 occupancy rate is expected to drop 0.8%, to 62.4%. Felcor is particularly vulnerable to supply growth outpacing demand growth since many of Felcor’s hotels are located in the suburbs where the barriers to entry are significantly lower than in the cities. The proliferation of competitors in these suburban areas has the potential to lower Felcor’s margins. Felcor is shifting its focus to higher-end hotels with higher barriers to entry in an attempt to mitigate the risk posed by potential entrants.
As a heavily leveraged institution, Felcor requires access to an affordable line of credit to finance its actions as well as to survive the cyclical nature of the lodgings industry. Felcor, as of the end of the 2007 fiscal year, had 1.5 billion dollars worth of debt and has access to 653 million dollars of money at roughly a 7.3% interest rate. 45% of the debt has variable interest rates, such that interest rate increases by the Federal Reserve Bank will adversely effect Felcor’s profitability. Furthermore, covenants within the credit lines stipulate certain condition and declines in revenue and cash flow could limit Felcor’s ability to finance additional debt. Their bonds are already considered below investment grade with ratings of Ba3+ by Moody’s and B+ by Standard and Poor’s.
The overall condition of the economy affects all business, but it has an acute effect on the travel and lodging industry in particular. A large percentage of Felcor’s occupants are business traveler’s, and during an economic downturn businesses tend to cutback on travel. A shrinking of this sizable pool of customers will adversely affect occupancy rates and ADR. The second effect from a poor economy, is that families have less disposable income and as a result cut back on vacation spending. This has clear ramifications on hotels and an extended economic downturn will lower occupancy rates and ADR. Since Felcor is not an international entity, only the domestic economy is important, and conversely a strong overseas economy and the relative strength or weakness of the dollar could result in an increase in international travelers.
47% of Felcor’s EBITDA comes from three states, California, Texas, and Florida. A local economic downturn or fallout from the housing crisis which has affected each locale slightly differently could have a negative impact on the region to which Felcor would by particularly susceptible. However, the greater danger lies in the vulnerability of this locations to natural disasters. Florida is prone to hurricanes as is the Gulf Coast of Texas, and California is notorious for seismic activity. An sizable earthquake or hurricane in these regions would erode travel to the regions and cut into Felcor’s revenue and net income.
Felcor is substantially smaller than some other REITs in the travel industry market. For example, Hospitality Properites Trust (HPT) and Host Hotels & Resorts (HST) are much larger than Felcor, and Felcor is still getting smaller. Felcor is downsizing to improve profitability and its debt ratio. REITs do not compete directly, but they can compete by purchasing and operating hotels in close proximity. The suburban location of many of Felcor's properties leave them open to entrants in the hotel industry. Felcor also operates in a slightly different sector of the hotel and lodgings industry than many REITs, as it continues to expand into the upscale sector while its competitors remain diversified through all sectors.
Felcor differes from other REITS in that it does not have an international presence save for two hotels in Canada.The lack of an international presence means that Felcor does not have the luxury of an international cushion should the US market weaken.