Felcor Lodging Trust (FCH) Receives Letter from Snow Park Capital; Calls for Evaluation of Strategic Alternatives
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Snow Park Capital Partners, LP (“Snow Park”), an investment advisor focused on publicly traded real estate securities, that beneficially owns approximately 2.4% of the outstanding common shares of FelCor Lodging Trust Inc. (NYSE: FCH), sent the following letter to the Board of Directors of FelCor (the “Board”).
October 27, 2016
FelCor Lodging Trust
545 E. John Carpenter Freeway
Irving, Texas 75062
Attn: Members of the Board of Directors
Dear Messrs. and Mmes. Carlin, Corcoran, Cotter, Gibson, Hamilton, Hartung, Ledsinger, Lutz, Pentecost, and Rozells:
Thank you for making certain members of the Board available to meet with us on September 27th. While we are encouraged that the Board is taking initial steps to better understand the concerns of its shareholders, including committing to sell certain of its assets and returning some capital to shareholders, we feel these steps do not go far enough to address the significant structural issues that have plagued the Company for years. We are particularly concerned that the Board may delay and defer to a new CEO important decisions regarding capital allocation, strategic vision, and a “new” FelCor much like it did when it appointed Rick Smith in 2006. Shareholders shouldn’t be expected to take the risk of another CEO-led vision, and so we hereby request that the Board establish a definitive full capital return plan for FelCor and then hire a CEO or an administrator who is capable, committed, and economically incentivized to implement it.
As shareholders owning approximately 2.4% percent of FelCor’s outstanding shares, we strongly believe that FelCor’s 22-year long experiment as a publicly-traded company is a failure by any objective measure. And now with the Company in the midst of yet another disruptive management change and potential strategy transition, the time for the Board to recognize this sobering point is long overdue.
In the past ten years alone, the Company has delivered a negative 60% shareholder return, a run that destroyed over $750 million in market value despite spending more than $260 million of shareholder capital on G&A expenses during the same period1. Additionally, we believe that FelCor’s subscale size and lack of access to reasonably priced equity capital makes it inherently inefficient as a public company. We believe the following realities have caused FelCor shareholders to lose faith in the Board implementing any strategy but capital return:
- Including dividends, a share purchased in FelCor’s 1994 IPO at $21.25 would be worth $16.612 today, representing a cumulative 22% destruction of shareholder capital over 22 years. This compares to the positive total return of the RMZ index of over 840% since 12/31/1994;
- FelCor’s current market value of $900 million compares to nearly $1.5 billion raised in the 1994 IPO and subsequent follow-on capital raises completed since 1994;
- G&A expense as a percentage of EBITDA averaged 13.1% versus FelCor’s peer set at 9.9%3 highlighting the current inefficiency of FelCor’s public ownership structure;
- Portfolio lacks coherence spanning geography and asset type4. This puts the Company at a daunting disadvantage to access reasonably priced capital compared to nearly every other publicly listed US lodging REIT, which we believe in most cases are more efficient owners in their respective markets.
As the board is aware, there are no fewer than 20 publicly listed US lodging REITs, and it is unrealistic given FelCor’s track record to expect shareholders to believe in a viable medium or long term path to compete with the other more efficient public companies. Or, said another way, we do not see a compelling reason for the FelCor Board to authorize the spending of hundreds of millions of dollars of shareholders’ capital on G&A over the next ten years in what has been a tragic 22-year experiment.
Accordingly, we believe that the only realistic way for the Board to regain investor confidence is to immediately undertake a strategic alternatives process that includes exploration of the sale of the Company and also concurrently commit to allow shareholders to vote on a formal liquidation of FelCor’s assets, with either path leading to a return of all capital to shareholders. In the meantime, in order preserve capital, we urge the Board to:
- Immediately explore all strategic alternatives including a sale of the company with a nationally recognized advisor;
- Reinvigorate confidence in the Board by publicly committing to give shareholders a vote on a plan of liquidation at or before the 2018 annual meeting;
- Rationalize all non-discretionary G&A – given the negative return over the past 22 years on G&A spend we do not believe it would be responsible for the Board as fiduciaries to continue to invest discretionary shareholder capital into this structure;
- Focus any incremental capital expenditures on the preservation and enhancement of estate value as opposed to some of the large scale, speculative redevelopment projects that the Company has embarked on historically;
- Better align management compensation to create accountability and incentivize them to execute a plan that will deliver shareholders an NAV outcome over a defined period of time; and
- Reduce the Board’s excessive and out of touch fees that have increased by over 369% from 2000 to 20155 and consume material portions of property NOI.
Since its IPO in 1994, FelCor has had no fewer than a half dozen substantive corporate strategy shifts and reinventions as it struggled to effectively compete with its publicly-listed peers for shareholder capital. Accordingly, we call upon the Board to publicly commit to the plan outlined in this letter to return all shareholder capital.
Snow Park looks forward to working constructively with the Board after the Company reports its third quarter 2016 earnings, as we discussed over electronic mail, and based on our previous discussion we believe there is ample common ground to work together. We intend to continually evaluate all options we have as a major shareholder to unlocking value including the nomination of directors.
Jeffrey Pierce, Managing Partner
About Snow Park
Snow Park Capital Partners, LP (“Snow Park”) is an investment advisor that focuses on publicly traded real estate securities.
1 Source: Bloomberg and SNL. Total shareholder returns calculated with dividends reinvested in the stock from 10/25/2006 through 10/25/2016 multiplied by the market cap at 10/25/2006.
2 Source: Bloomberg assuming dividends reinvested in stock from IPO at 7/22/1994 to 10/25/2016.
3 Source: SNL and company filings. Peer set includes HST, SHO, LHO, and DRH.
4 The current portfolio is approximately 50% urban, 9% suburban, 18% airport, and 23% resort hotels (38 disparate, owned assets located in 14 different states that span from the West to the East Coast and in between).
5 Median board fees have increased from $35.7K in 2000 to $77.1K in 2006 to $167.5K in 2015.
Gasthalter & Co.
Jonathan Gasthalter/Nathaniel Garnick
Source: Snow Park Capital Partners, LP
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