FelCor Lodging Trust Inc. on Friday offered clarification on the unsolicited, non-binding and conditional proposal to combine its business with Ashford Hospitality Trust (AHT).
AHT’s February 21 proposal follows several months of discussions between FelCor and AHT, during which FelCor repeatedly expressed numerous concerns regarding the value and structure of AHT’s various proposals. Notable concerns include:
Dilution to AHT shareholders. The proposed offer would dilute AHT’s Funds From Operations (FFO) by more than 30% (based on current consensus estimates for 2017 and not including any incremental costs or synergies), thereby affecting both the value of AHT’s all-stock, fixed exchange ratio proposal and creating uncertainty around the ability to obtain the shareholder approval required from both AHT and FelCor shareholders.
External management fees negate synergies. AHT’s proposal for a one-year guarantee of $18 million in cost and operating synergies would be more than offset by external management fees to its external advisor, Ashford Inc., in excess of $25 million. Further, AHT has only offered to guarantee synergies for the first year, whereas these external management fees will be paid every year. Moreover, transferring hotel management to its affiliate, Remington Hotels, would further increase the fees paid to Ashford Inc. after it completes its pending acquisition of Remington.
Value transfer to external manager. A potential combination would result in a significant value transfer to Ashford Inc. in the form of future external management fees and property management fees, for which neither FelCor nor AHT shareholders would be compensated. Under its external management contract, AHT paid Ashford Inc. over $46 million in fees during the twelve-month period ending September 30, 2016. Bringing FelCor assets under that same external management contract would increase those fees, at a minimum, by more than $25 million annually. Tellingly, the shares that have benefitted the most to date since AHT made its offer public have been the shares of Ashford Inc., not FelCor or AHT.
Extremely high leverage. A combination of AHT and FelCor would result in a new company with leverage of approximately 8.5x EBITDA, or approximately 1.5x higher than FelCor on a standalone basis, including preferred shares. This increase in leverage is contrary to FelCor’s stated strategy, which most long-term REIT investors, including many FelCor investors, support.
Disproportionate governance. AHT’s offer of three FelCor-designated seats on the AHT board is not commensurate with FelCor’s 58% pro forma combined company ownership, particularly given that the proposal would leave FelCor’s shareholders as shareholders in an externally-managed REIT with a manager that is not accountable to FelCor’s shareholders.
The items referenced above are neither a complete list of concerns expressed to AHT nor should they be taken as FelCor’s response to AHT’s proposal. As previously announced on February 21, 2017, together with its financial and legal advisors, FelCor’s Board of Directors is reviewing AHT’s latest proposal and its proposed board nominees, and will respond in detail in due course. FelCor’s shareholders are advised to take no action at this time.