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FelCor Lodging Trust Incorporated (NYSE:FCH)

Q4 2013 Results Earnings Conference Call

February 25, 2014 11:00 AM ET

Executives

Steve Schafer - Vice President Strategic Planning and IR

Rick Smith - President and CEO

Michael Hughes - Chief Financial Officer

Analysts

Patrick Scholes - SunTrust

Chris Woronka - Deutsche Bank

David Loeb - Baird

Lukas Hartwich - Green Street Advisors

Operator

Good morning. My name is Anastasia, and I will be your conference operator today. At this time, I would like to welcome everyone to the FelCor’s Fourth Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Steve Schafer, you may begin your conference.

Steve Schafer

Thank you and good morning. On behalf of the management team, I want to thank you for joining us for our fourth quarter earnings conference call. Rick Smith, President and CEO will provide an update on our strategic plan in the current operating environment. Michael Hughes, our Chief Financial Officer will address our balance sheet initiatives, results for the quarter and our outlook. Following their remarks, we will take your questions.

Before I turn the call over to Rick, let me remind you that with the exception of historical information, the matters discussed on this conference call may include forward-looking statements within the meaning of the federal securities laws.

These forward-looking statements are expressions of current expectations and are not guarantees of future performance. Numerous risks and uncertainties and the occurrence of future events may cause actual results to differ materially from those currently expected.

These risks and uncertainties are described in FelCor’s filings with the SEC. Although, we believe our current expectations to be based upon reasonable assumptions, we cannot assure you that our expectations will be attained or that actual results will not differ materially.

And with that, I will turn it over to Rick.

Rick Smith

Thanks, Steve. Good morning, everyone. We finished 2013 strong and accomplished a great deal throughout the year. Operationally, we exceeded our and analyst expectations during the fourth quarter with FFO per share $0.01 above the high-end of our guidance. We increased our comparable portfolio ADR index through remixing customer base and absolute rate growth.

Our six recently acquired redeveloped hotels again outperformed our expectations with RevPAR growth of 11% for the year and 15% for the fourth quarter. Our comparable portfolio once again outperformed the industry.

We achieved very strong flow-through of revenue growth to EBITDA. We made good progress on assets sales. We continued to make steady progress on the Knickerbocker redevelopment and we reestablished our common dividend.

Our primary focus for 2014 is simply to complete the plan, including the following items. Complete the asset sales and used proceeds to repay maturing debt, open and effectively position the Knickerbocker, complete the next phase of our Investor Relations program, focused on the continued ramp up of the recently acquired redeveloped hotels and continued to gain ADR index and improve flow-through.

Let start with asset sales, at January 1st we had 21 non-strategic hotels remaining for sale. Of those we sold one in January, the Embassy Suites, Atlanta-Airport. We have 100 contract that will close in March, the Embassy Suites in Bloomington that leaves 19.

We began marketing six hotels at Alice last month. We are currently evaluating offers on three of these hotels. We will put three more hotels on the market in the next few months and that will leave us with 10 joint venture hotels.

We are working diligently to unwind that joint venture, as a result we would own five of those hotels outright and our joint venture partner would own the other five. When the joint venture is unwound which is targeted to occur in the second quarter, we intend to begin marketing these hotels immediately.

Given the strong transactional environment and our expectations to have all of the remaining hotels on the market in the coming month, we expect to sell most of the hotels during 2014. Our guidance as is our normal practice assumes we sell all of the hotels during the year. Michael will further outline those expectations in his remarks.

Now the Knickerbocker, we continue to make steady progress redeveloping the hotel. Recent milestones include all pricing contracts have been completed, the core and shell is essentially complete, guestroom, mechanical, plumbing and framing has been completed on 11 and 12th floors or approximately 90% of the rooms. Public space, HVAC, mechanical and framing is in process.

FF&E has been ordered and will begin arriving in April. The hotel executive team and sales staff are on board and working toward the great opening. We remain on track operationally, with the pre-opening sales and marketing efforts. The team is averaging more than 70 activities each week, sales calls, site visits et cetera. And we finalized an agreement with Charlie Palmer to manage the F&B operations. His Michelin-starred flagship restaurant, Aureole is located adjacent to the hotel which offers sales and marketing synergies.

We are very excited to have Charlie on board and look forward to a great working relationship. We expect to open the hotel in early fall as the recent winter weather has caused slight delays in the schedule.

The most important thing is to open strong. Overall, we feel very good about the process, both from development and operational perspective. The project remains within 5% of budget which is very good considering the delays and we look forward to a great openings, given the ongoing pre-opening sales and marketing activity and the fantastic product.

Turning to the investor communications, during the quarter, we completed another road show in San Francisco and follow-up meetings in the North East. Overall, we had more investor meetings in 2013 than in 2012.

The feedback continues to be very positive. As we progress with asset sales, the Knickerbocker and further ramp-up, we will stay out in front of investors to update them throughout this year. Our six recently acquired and redeveloped hotels as a whole continue to be on track operationally.

During the year, EBITDA increased 28% which was ahead of budget. Four of the six are right where they need to be. We have more work to do at Morgans and the Royalton on overall mixed management and F&B operability. The good news is that the development work is complete at Morgans and we have a verbal agreement with the union related to F&B changes at both hotels.

We expect a vote to ratify the changes this week and those changes will help profitability significantly. As we enter the first year with all six out of renovation or redevelopment, we expect strong performance to continue at these hotels.

The Wyndham hotels as expected are going through a period of transition but we expect performance to improve significantly as the transitional disruption subsides. The performance continues to improve sequentially. For example, in March, their first month as Wyndham, RevPar declined 30% to prior year.

In December, RevPar declined only 9%. Importantly, we budgeted the EBITDA at these hotels at the guarantee level, which is approximately $43 million in 2014. This represents an $8 million increase or 20% from 2013 EBITDA for the eight hotels.

We have completed renovations at six of these hotels, two in 2012 and four in 2013 and renovating the final two, San Diego and New Orleans in 2014. Given positive operational momentum and less renovation disruption, we expect these hotels to perform close to the guarantee level in ‘14 and above the guarantee in ‘15 after all renovation and transitional issues are behind us.

Operationally, we had a very solid quarter. Comparable RevPar which excludes the eight Wyndham hotels increased 7.7%, reflecting acceleration from the third quarter. Generally, our primary operational focus continues to be on mix management as we continue to shift away from lower rated segments such as government and into higher rated corporate segments.

Corporate transient room nights for the whole portfolio which make up the largest concentration of demand for our hotels increased 12%. Conversely room nights for the lower rated segments like government, tour and wholesale and other discount segments declined 18%. Corporate group room nights were flat.

Group pace for ‘13 began to weaken last spring and slowly improved throughout the year. The good news is that group pace is currently at its highest mark, up 5% since the end of the recession. Group rates increased 5%, corporate negotiated rates increased 4% and discount segment rates increased 4% in ‘13. Looking into ‘14, we expect very strong increases in corporate transient rate at about 6%.

And few comments before I turn it over to Michael. Our well diversified high quality portfolio continues to perform relatively well and exceeded the industry average during the quarter. The fundamentals for the industry remain strong and we continue to expect very solid growth for the foreseeable future.

PKF is projecting RevPar growth in ‘14 of 6.6% which reflects acceleration from 2013 growth of 5.2%. Demand growth continues to outpace supply. Benign supply growth is contributing to our ability to continue experiencing solid RevPAR increases in 14 of our largest 24 markets, no new hotels opened in the last 12 months. Additionally, roughly half of our core markets have little or nothing in the construction pipeline.

Enhanced ADR growth at our hotels, particularly where we've recently completed renovations or redevelopment projects, and low supply growth provides tailwinds that will drive superior portfolio performance. Our core portfolio will also drive outstanding performance. But for us the only hotel REIT to outperform the upper upscale segments since 2007, based on same-store RevPAR change and we expect that to continue.

Our strong balance sheet will provide critical flexibility throughout the lodging cycle, enabling us to seize strategic opportunities while providing a meaningful common dividend.

And with that, I will turn the call over to Michael.

Michael Hughes

Thanks, Rick, and good morning. Let's start with the balance sheet. At December 31st, we had $1.7 billion of consolidated debt bearing a weighted-average interest rate of 6.3%, with a six-year weighted-average maturity.

For the quarter, and year-to-date, our consolidated interest expense declined $6 million and $23 million respectively, compared to the same period in 2012. We continue to focus on completing the balance sheet restructuring by selling non-strategic hotels and using the net proceeds to repay debt.

This year, $52 million of individual non-cross-collateralized mortgages mature between June and August. These loans bear interest at a weighted average rate of 6.6% and $234 million of our 10% notes mature in October. As Rick mentioned, we have 20 non-strategic hotels left to sell, of which one is under contract and we are actively marketing six.

We will have three more hotels on the market in the next few months and we will begin marketing the remainder once an agreement with our joint venture partner is finalized. We feel very good about the progress and pace of our asset sales. Interest from perspective buyers is robust and we expect to sell mostly non-strategic hotels this year.

However, if there is a timing gap between the asset sale proceeds and the debt maturity payments, we have a plan in motion to secure a very flexible, low-cost term loan with some of relationship lenders to cover this contingency. If implemented, we do expect this loan to be outstanding for very long.

I’m pleased to announce that our Knickerbocker Hotel venture successfully raised $45 million through the EB-5 immigrant investor program to fund a portion of the development project. The preferred equity pays 3.5% distributions on invested capital for five years, which increases to 8% thereafter if not redeemed.

Our venture received proceeds of $40 million in February. The remaining $5 million will be received at investors visas are approved by the government. We are repaying borrowings under a lot of credit with our 95% share of the proceeds.

And now, I will turn to guidance. We forecasted 6.25% to 7.25% full year RevPAR growth for our 51 comparable hotels, and 7.5% to 8.5% for our 59 same-store hotels. As previously mentioned, we expect to sell majority of our non-strategic hotels this year. However, for purposes of guidance, our outlook reflects the sale of all 20 hotels.

Both the low and high end of our guidance includes the March sale of one hotel under contract. The low end of our outlook assumes that nine hotels are sold in the second quarter and the remaining hotels are sold during the third quarter. The high-end assumes that six hotels are sold in the third quarter and the remaining hotels are sold during the fourth quarter.

Both the low and high end of our outlook includes $1.1 million of EBITDA from the Knickerbocker, reflecting an early fall opening. Our full year outlook also assumes the NOI guaranty amounts for the eight Wyndham hotels. We forecast full year adjusted FFO per share to be between $0.50 and $0.58 and adjusted EBITDA between $202 million to $217 million.

And with that, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Patrick Scholes with SunTrust. Your line is open.

Patrick Scholes - SunTrust

Good morning. Just a couple questions here. Just a clarification, first question is your FFO guidance, does that in fact, include the debt pay down or is that just keeping the money in cash? And if it is debt pay down, that will be for the 12% debt in the fall, I assume?

Michael Hughes

It includes debt pay down based on the timing of asset sales and the applicable debt to be paid off at that time.

Patrick Scholes - SunTrust

Okay

Rick Smith

Does that answer your question, Patrick?

Patrick Scholes - SunTrust

Yes. I can figure -- I can model it accordingly from there. And then secondly, sort of a bigger picture question here on -- thoughts on considering bringing the Morgans and/or the Royalton to market this year, next year, what are your thoughts on that? The reason I ask is, I know your target debt is heading towards 5 times, but come 2016, 2017, 5 times debt, let's say it is assumed the cycle turns in 2017 is still pretty high, Morgans to Royalton obviously sort of trophy assets, not generating that much EBITDA compared to what you could sell them for. So thoughts in that regard.

Rick Smith

There’s a few answers to that question. First of all, I mean, I think that as it relates to 5 times being too high, I think you have to look at the big picture. And I think if you’ve got the 19 pushed out of that time, and your maturities 7 to 10 years down the road -- your maturity profile seven to 10 years down the road and you’ve got very strong kind of cash and availability, and you’ve got very strong coverage on your debt, then I think it’s a little different going into downturn 4.5 to 5 times with those circumstances than it is if you’ve got a 1 billion or so coming due in the next three years etcetera, etcetera. There will be some additional assets down the road that will be delevering, continuing to be delevering.

As far as Morgans and Royalton specifically goes, there is a number of things that are all going on, on a parallel path. As I mentioned, we made some progress from a union perspective. We expect to have that ratified this week. That’s going to help profitability fairly significantly from an F&B standpoint at the hotel. I think that we also have a great deal of room left in mix and absolute rate at the hotel. It is the first year that Morgans is kind of not under the knife in quite some time.

So I think there is a lot of things that will improve the cash flow there. Obviously on a parallel path with that, we continue to look at every option and that is, well I am not going to get into the details of that with you Patrick for obvious reasons, but we are continuing to look at every option with regard to those hotels and we will continuously monitor that and make the right decision from a shareholder value standpoint as we move into that decision making mode.

Patrick Scholes - SunTrust

Okay. Fair enough. Thank you.

Rick Smith

Thanks.

Operator

Your next question comes from the line of Chris Woronka with Deutsche Bank. Your line is open.

Chris Woronka - Deutsche Bank

Hey, guys.

Rick Smith

Good morning.

Chris Woronka - Deutsche Bank

As you guys kind of finish up the Knickerbocker project and get that opened, and you pretty much every thing else, I think you've got renovated pretty recently. Do you start to think about acquisitions again? And realizing there could be a lot of different ways in which you could go about that, but just your thought on -- thoughts on the acquisition environment?

Rick Smith

Okay. Yeah, I think that as we said before, I think that what we’re looking to do is continue to do the best thing that we can to move shareholder value. We’ve got a ton of opportunity. We have moved shareholder value pretty considerably with the things that we’ve gotten accomplished, but I think that there is still a number of ways to continue to, finalizing the plan will continue to move the needle.

Post that, once we are finish with the asset sales and the balance sheet restructuring and we’ve got the Knick open and up and going and blowing so to speak, what we will do is as we continue to create capacity post those things, we will look at the best opportunity to continue to move the needle, it could be acquisitions if you find opportunities such as the Fairmont which we get at a very good price. And we’re able to kind of reposition and add tremendous value and those kind of things can certainly value for shareholders. And that acquisitions of that sort would be one of the things we would look at. We will also look at the redevelopment opportunities that we’ve got available to us. We have 5 or 6 remaining redevelopment opportunities that are very lucrative and could add lot of shareholder value.

And as we get through entitlement processes on various projects and look at the visibility, we will continue to monitor that as well. We also depending on how the stock reacts, whether it be in this cycle or in the next downturn with that capacity, we could look at going after the share count. We could also take out the Cs to further improve the preferred -- to further improve the balance sheet.

So there's a number of opportunities for us kind of next step wise that we will continue to monitor as we go and whatever based on this specific of the opportunities as we get closer, we’ll move the shareholder value best and that will probably be a mix of all those things is how we will proceed with the use of that capacity.

Chris Woronka - Deutsche Bank

Okay. Got you. And then, a couple of guidance questions, one, does your guidance include the changes you are expecting from F&B at Royalton and Morgans? And then, secondly, can you just remind us how much of a guarantee you are underwriting from Wyndham in 2014?

Rick Smith

Yeah. The guarantee on Wyndham is 43, Morgans and Royalton, it does include the changes. There might be a slight difference in timing, based on when we finally get everything on kind of up and going post-ratification but it is baked in. Was there another question in there, Chris?

Chris Woronka - Deutsche Bank

No. That was it. Thanks.

Rick Smith

Okay. Thanks.

Operator

Your next question comes from the line of David Loeb with Baird. Your line is open.

David Loeb - Baird

Good morning, Rick. I also have a handful on the Knickerbocker.

Rick Smith

Okay.

David Loeb - Baird

What do think pre-opening costs will be for the Knickerbocker?

Rick Smith

Well, pre-opening costs, we’re not really disclosing that, but we are -- it's reasonably substantial and there's some reason for that, obviously, with regard to the, everything that we're doing from a pre-opening sales and marketing standpoint. It is we are doing that because we are independent. We did all of that considerably in advance, knowing full well that that was going to cost us money, but it was absolutely the best way to move forward from an operational perspective to put our best put forward and to open the hotel as strongly as possible.

David Loeb - Baird

So is that figured into your EBITDA guidance and particularly for the roughly $1 million in EBITDA in 2014, is that net of the pre-opening?

Rick Smith

No. I mean, that’s a $1 million of EBITDA post-opening, its not net of pre-opening.

David Loeb - Baird

Okay. So your overall EBITDA guidance then does include all of that pre-opening expense?

Rick Smith

Correct.

David Loeb - Baird

Okay. And are your projections for 2016 still intact given the delays or is that more kind of a second have ‘16, first half ‘17 timing now for those projections?

Rick Smith

No. We’re still look pretty good for ’16, I mean, when you given the things that we have lost people through the last two years. We put some numbers together at the beginning of ’12, ’12 was right on, ‘13 was within a $1 million, ‘14 is a little deep to what was out there because of the timing on the Knick and the final ramp-up of Wyndham.

And that’s it, other than that we are right on track and by the time we get to ’16, obviously the Knick will be ramped up and so that, that is just a timing issue between now and then and so we’ll be -- we will still right on track.

David Loeb - Baird

Okay. And then, finally, on the historic tax credits. Are you still thinking of selling those, what is the timing, what is the amount and can you just explain a little more about how that works and if there are any restrictions post-sale as a result of that?

Rick Smith

Well, I mean, the Safe Harbor guidance came out. We’re working with that, we're in the process of doing that right now. We’re not prepared to disclosure right now but, yes, we’re still pursuing that.

David Loeb - Baird

Okay. Good enough. Thanks.

Rick Smith

Thanks, Dave.

Operator

Our next question comes from the line of Patrick Scholes with SunTrust. Your line is open.

Patrick Scholes - SunTrust

Just one additional question here.

Rick Smith

Sure.

Patrick Scholes - SunTrust

Any change on the valuation multiple you are assuming to get for the asset sales. Has that changed at all over the last several months?

Rick Smith

It’s across the board and some assets are better than others and on an asset-to-asset basis, the multiples vary pretty widely but it’s pretty consistently on the assets, we're looking at kind of going forward in that similar range, 11-ish times. And so we still feel pretty good about that. The market is pretty robust right now.

When we put Dana Point in SouthPark out, we got -- it was almost back to like ‘07 kinds of things. We got a ton more interest from a standpoint of copy that we're signed and tours that we've done and offers that were received. Then we had been getting kind of throughout last year on assets. So we feel pretty good that the market is moving in the right direction for us this year to finalize the sale process and get the pricing we expect and it will be somewhere in that range.

Patrick Scholes - SunTrust

Got it. Thank you.

Rick Smith

Thanks.

Operator

Your next question comes from the line of Lukas Hartwich with Green Street Advisor. Your line is open.

Lukas Hartwich - Green Street Advisors

Thank you. Hi guys. Your stock had an impressive run over the past year. I'm just curious with your thought in issuing equity?

Michael Hughes

We are not using any equity.

Lukas Hartwich - Green Street Advisors

So, just you're comfortable with the leverage obviously just would have thought with the stock price that you guys outperformed considerably last year. Is there any sort of weighing when you are thinking about funding for the development or potential acquisition down the road how does the equity raising come into the equation then?

Michael Hughes

Well, I think we expect our plan, Lukas, for our shareholders and we need to say true to that plan. And from a leverage standpoint, the combination of the ramp up on the recently acquired and redevelop including the Knick coming online and the asset sales gives the leverage to a stabilized place and that is what our focus is.

As once we are completely done with everything what we look at all opportunities at that point and what we think would drive future shareholder value the most. Yes, we will look at all opportunities, nothing will be foreclosed to that point but we need to get to that stabilized place and continue and complete our plan before we think about that.

Lukas Hartwich - Green Street Advisors

Thanks.

Michael Hughes

Thanks.

Operator

(Operator Instructions) There are no further questions in queue at this time. I’d like to turn the call back over to the presenters.

Rick Smith

Thank you all very much for joining us. And we will talk to you next time.

Operator

This concludes today's conference call, you may now disconnect.

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