FelCor Lodging Trust on Wednesday announced the acquisition of the landmark Knickerbocker Hotel in midtown Manhattan, New York City, for US$115 million. Consistent with its portfolio repositioning strategy, the company also announced it is marketing 16 non-strategic hotels. FelCor will apply the sale proceeds to strengthen its balance sheet and reduce leverage.
FelCor formed a joint venture with an affiliate of Highgate Holdings LLC to acquire the Knickerbocker and will serve as the company’s flagship when it reopens the 330-room hotel in late 2013. FelCor owns 95% of the joint venture and Highgate will manage the hotel upon opening.
This acquisition underscores FelCor’s commitment to enhancing and diversifying its portfolio into core markets such as New York City, where the company now owns three properties.
The purchase price reflects a 30% discount per square foot, compared to recent similar transactions, and is meaningfully below replacement cost. The redevelopment cost will be primarily funded by a development loan – for an aggregate investment of approximately US$697,000 per key. FelCor expects the project will generate an internal rate of return that exceeds the company’s weighted average cost of capital, and the property is expected to generate nearly US$24 million of EBITDA at the first year of stabilization, yielding strong future cash flow.
The company expects to generate approximately US$350 million in gross proceeds with the sale of the 16 non-strategic hotels and is committed to using these funds to repay all accrued preferred dividends, reduce debt and strengthen its balance sheet. Nine of the 16 hotels secure approximately US$150 million of mortgage debt. The company has received strong interest from potential buyers and expects to sell the majority of the hotels in 2012.
FelCor intends to sell a total of up to 40 non-strategic hotels as part of its portfolio repositioning plan, representing 72% of its suburban hotels and 44% of its airport hotels.
Commenting on the deal equity researchers Robert W. Baird & Co. said that FelCor noted this redevelopment project would be its last acquisition this cycle and that it would focus on improving its balance sheet. “Non-core dispositions have been slow, and with limited debt financing available for potential buyers, we expect non-core sales to remain a challenge for FelCor. …While we estimate this project creates NAV (assuming full credit for the development), it ties up a significant amount of capital with little cash flow before 2014 and adds to the company’s already above-peer leverage. There is execution risk on both this development and the disposition program.”