Today’s recommendation is for bargain-hunters. A REIT that was forced to discontinue dividend payments, sell properties and streamline after the 2008 financial crisis, this stock’s recovery plan recently got it recommended in George Putnam’s Turnaround Letter.
“Founded in 1991, FelCor Lodging Trust, Inc. (FCH) is a real estate investment trust (REIT) that owns 67 hotels located in 22 states. It focuses on upper-scale properties, and it partners with many of the leading hotel operators, including Sheraton, Marriott, Fairmont and Embassy Suites.
“FelCor grew steadily during the mid-2000’s, and it went into the recession in 2008 with too many hotels in weaker markets and too much debt. As a result, the stock was crushed in 2008-09, and it has rebounded only modestly since then.
Analysis
“We believe that FelCor is poised to benefit from both industry-wide macro trends and company-specific steps being taken by management. On the macro front, construction of new hotel rooms remains at an historic low. New building has declined 74% since 2007, and it is likely to stay depressed for some time because financing remains difficult to obtain. This lack of new competition allows existing hotels to raise their room prices as the economy gradually improves.
“On the company level, FelCor is repositioning its hotel portfolio to focus on markets with high barriers to entry and good growth characteristics. It plans to sell a total of 39 hotels, 16 of which have been sold to date. It will use the proceeds to reduce debt. The company has already reinstated its preferred dividends, which had been in arrears for a number of quarters.
“At the same time, FelCor has acquired a few upscale hotels in strong urban markets, and is renovating and repositioning several others. These moves should create value by attracting higher paying customers. The company is also working with its operating partners to improve revenues at all of its properties.
“In addition to paying down borrowings, the company plans to refinance much of its existing high-cost debt. The interest savings will drop straight to the bottom line. This, together with the other actions the company is taking, should allow FelCor to resume paying dividends on its common stock in the next year or so. Resumption of the dividend is likely to attract many new investors to the stock.
“So far, FelCor has executed well on its strategic plan. As it continues to do so, it should also benefit from rising room prices across the hotel industry. This should boost profits and push the stock price up significantly. We recommend buying FelCor up to 7.”
- George Putnam, III, The Turnaround Letter, November 2012