FelCor Lodging Trust Incorporated (NYSE: FCH) announces it has entered into a binding purchase and sale agreement to acquire the fee-simple interests in two midtown Manhattan hotels, The Royalton and Morgans, for $140.0 million from Morgans Hotel Group Co.
Transaction Highlights:
Attractive pricing and estimated returns. The purchase price of $496,000 per key is approximately 60% of replacement cost. The purchase price represents approximately ten times peak Hotel EBITDA. FelCor’s estimated internal rate of return on this investment exceeds 12%, which is above its weighted average cost of capital, creating incremental long-term shareholder value. MHGC is providing structural support by subordinating its management fees (if necessary) to a minimum return to FelCor. Hotel EBITDA in 2011, for our period of ownership, is expected to be between $6.0 and $6.5 million.
Additional opportunities to enhance value. FelCor has identified opportunities to enhance the hotels’ value, including adding guest rooms, and improving the fitness center and guest lounge at the Morgans, as well as food and beverage offerings. In addition, both hotels will benefit from increased oversight and heightened management focus typical of FelCor’s unique asset management approach, as well as from the vision and management of MHGC’s new executive team. FelCor has also identified revenue and customer mix management opportunities to increase market share and average rate, and is reviewing opportunities to complex various operational functions at the two hotels to reduce expenses.
Increases portfolio quality and diversification. These hotels will be FelCor’s first properties in New York. They would have accounted for approximately 5% of the company’s 2010 core hotel operating revenue on a pro forma basis. The hotels’ 2010 RevPAR ($250) is almost three times greater than FelCor’s 2010 portfolio average ($86). Once stabilized, EBITDA per key of these hotels is estimated to be greater than $40,000, significantly higher than the remaining portfolio.
High barrier-to-entry protection. The Manhattan submarkets benefit from consistently strong demand generators and have extremely high barriers to entry, which limit supply growth. New hotel room supply since 2003 represented 1% of existing rooms, which is significantly below the overall New York market and US averages, according to Smith Travel Research.
“We are very excited about this opportunity to gain entry in superb locations in Manhattan at a very favorable price per key and substantial discount to replacement cost. These two high-quality properties are in terrific condition and will require limited capital in the near-term. This submarket within Manhattan consistently performs at a high level compared to the industry and is expected to experience above-average RevPAR and EBITDA growth over the next few years and beyond. We feel confident in the abilities and vision of the new management team at Morgans and look forward to a rewarding long-term relationship,” said Richard A. Smith, FelCor’s President and Chief Executive Officer.
The Hotels:
The Royalton is located on West 44th Street, between fifth and sixth Avenues. It features a cutting-edge Philippe Starck design, comprising 168 guest rooms, including 24 lofts and alcove suites, 1,500 square feet of meeting space, the Brasserie 44 restaurant and adjacent Bar 44, as well as fitness and business centers. In 2007, the hotel underwent a $20.2 million renovation (approximately $120,000 per key), including re-establishing its legendary lobby as a prominent New York locale. In 2010, an additional lobby bar was added for $1.5 million.
The Royalton has an enviable location in the heart of midtown Manhattan. Bryant Park, Times Square, Rockefeller Center, shopping on Fifth and Madison Avenues and Grand Central Terminal are all located within five blocks. This area benefits from some of the highest barriers to new supply of any market in the world. Moreover, hotel development is not considered a “highest and best” use for most available sites within this area, and development of large-scale, new full-service hotels within this area will remain limited.
Morgans, the original “boutique” hotel, is located on Madison Avenue, between 37th and 38th Streets. The 19-story hotel comprises 114 guest rooms and 1,500 square feet of meeting space, as well as a “living room” and fitness center on the first guestroom level. Morgans also includes a full-service restaurant, Asia de Cuba. The hotel recently underwent a renovation in 2008, for $10.3 million (approximately $90,000 per key).
The area surrounding Morgans is among Manhattan’s most dynamic and desirable neighborhoods, with over six million square feet of office space. The hotel benefits from its proximity to many diverse, major corporate headquarters, including some of the biggest and most recognized names in advertising, banking, fashion, cosmetics and pharmaceuticals. The hotel is also centrally located near major tourist attractions, such as the Empire State Building, the Chrysler Building, the United Nations, Grand Central Terminal, Bryant Park and Madison Square Garden, as well as Fifth Avenue and Madison Avenue shopping.