The hotel assets from FelCor Lodging Trust officially joined RLJ Lodging Trust’s portfolio in the third quarter, and RLJ President and CEO Ross Bierkan said sales of noncore assets are imminent.
BETHESDA, Maryland—With the company’s merger with FelCor Lodging Trust complete, RLJ Lodging Trust executives are setting a course for continued growth in its new form, and part of that will include asset sales, RLJ President and CEO Ross Bierkan said during the company’s Q3 earnings call with analysts on Thursday.
“We are truly excited about what lies ahead,” Bierkan said, adding that the FelCor merger is “a continuation of (the company’s) approach” of “investing in high-quality, premium-branded focused-service and compact full-service hotels that have high margins and are located in attractive markets with multiple demand generators.”
Moving forward, Bierkan said the company is focused on four strategic initiatives, all with long-term growth in mind:
1. Realizing synergies: Bierkan said integration efforts between the two companies are well underway, and RLJ officials expect to have realized those synergies by Q3 2018, though it will take longer to implement hotel-level operating efficiencies.
2. Selling noncore assets: Bierkan said the company has “identified seven noncore hotels, which include boutiques, resorts and luxury properties in the FelCor portfolio that do not meet our investment strategy,” and expects to sell them in aggregate at “at least a 14X (earnings before interest, taxes, depreciation and amortization) multiple.”
Bierkan said the company is in “various stages of contract negotiation” regarding these properties, which it expects to sell within 12 to 18 months.
3. Balance-sheet optimization: Bierkan said balance-sheet management will reduce overall costs of capital and leverage, and future sales of both FelCor and legacy RLJ properties “will generate proceeds to use toward retiring higher-rated debt.”
4. Opportunistically reinvesting in assets: He said capital investment for renovation and conversion opportunities are in the works, and the company is in early conversations with brands.
The merger added 36 hotels from FelCor to RLJ’s portfolio, consisting in part of 21 Hilton-branded hotels—including 18 Embassy Suites—and eight Wyndham-branded hotels.
The company sold no hotels during the third quarter.
Regional performance highlights
Hurricane Harvey and Hurricane Irma had some impact on properties in RLJ’s portfolio in the quarter, Bierkan said. Several had water and other minor damage and others were part of mandatory evacuations, but he said none sustained “significant damage” that would result in future disruptions to earnings.
Houston in particular has seen what Bierkan called “robust demand” since Hurricane Harvey, and the company’s hotels in the market notched 41.8% revenue-per-available-room growth for the quarter, due in part to the company’s five extended-stay hotels in the market.
In south Florida, eight hotels were closed temporarily due to evacuations, but the market saw flat RevPAR growth “partially offset” by the lift in post-storm demand.
The company’s hotels in northern California saw 1.2% RevPAR declines, though Bierkan said he expects stronger performance in Q4 and throughout 2018, as San Francisco regains convention demand following the renovations at the Moscone Center.
Q3 holiday shifts, hurricane impact and comps contributed to RevPAR declines outside of RLJ’s top 10 markets as well, Bierkan said.
Q3 performance trends
Despite overall lowered RevPAR growth in the company’s major markets, the performance of the former FelCor properties “provided RevPAR lift” in the quarter, he said.
Pro forma RevPAR decreased 1.9% in the quarter compared to the same quarter in 2016, and adjusting for disruption from Hurricanes Harvey and Irma, RevPAR would have decreased 1.1%, according to a news release.
Leslie Hale, RLJ COO and CFO, split out performance for the legacy RLJ properties and FelCor properties for the quarter, saying that the RLJ assets saw 2.3% RevPAR decline in Q3, while the FelCor assets saw 1.4% RevPAR decline.
For the full-year 2017, the company adjusted its RevPAR performance up, from its prior outlook of a decline between 2% and 1% to a decline between 1.25% and 0.75%.
As of Thursday afternoon, RLJ Lodging Trust’s shares were trading at $21.17, down 13.6% year to date. The Baird/STR Hotel Stock Index was up 31.1% for the same period.