- Although hotel REITs have been out of favor, several stocks failed to approach their real share value. FelCor Lodging Trust is a great example.
- FelCor management is actively engaged in selling non-core hotels and using the proceeds to repurchase stocks.
- Moreover, although being an activist target doesn’t necessarily lead to gains, the company has worked cooperatively with activists in an effort to improve governance.
- Finally, the company is actively looking to reduce its leverage level and improve its debt profile.
- May and June’s share dip was a great opportunity to buy.
That hotels, one of 2016’s poorest REIT performers, are out of favor is not news. Recent chase for yield have not propelled hotel REIT share price performance. Although dividend yields have been the highest among equity REITs, share price performance has been flat all year. This is because many believe hotel REITs have either already reached or are currently reaching their peak in the real estate cycle.
A promising hotel REIT that has failed to realize its value so far in FelCor Lodging Trust. FelCor’s share price has been 40% below its 52 week high and 20% below its 2016 high. While hotel REIT shares dropped by 0.4% this year, shares of FelCor dropped by 12%. The strongest activity has been in May, when its share dropped by 8%.
One good thing is that management is focused on propping up shares by selling 5 of its 41 hotels and using the cash to repurchase stocks and redevelop several hotels. Also, the sale of non-core assets will raise FelCor’s portfolio profile, improving hotel metrics, such as RevPAR, Hotel EBITDA per key, and hotel EBITDA margins. The company’s core assets have been in gateway urban markets and resort locations that can be more difficult to break into.
In addition, the company has also been the target of activist Land and Buildings, which owns approximately 4% of its shares. Although being an activist target doesn’t necessarily lead to future gains, they did make the management improve its governance by including two independent directors. In the end, the company seems to be working cooperatively with the activist, something that is positive in itself.
Finally, the company is actively looking to reduce its leverage level and improve its debt profile. The company doesn’t have any major debt maturity in the next two years as interest expense has decreased over time and debt metrics have improved.
If you buy FelCor, you’re buying it for long term appreciation, not for dividend yield, which has been one of the lowest among its peer group. Since the company is only reserving 43% of its AFFO to fund dividends, the company is concentrating its efforts on internal growth.
In summary, FelCor demonstrates the chance to be a good opportunity, but I’d limit its exposure in the portfolio because FelCor performance has been conditioned to the successful hotel sales.
Source: FelCor Lodging Trust Incorporated (NYSE: FCH)
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Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.