-- U.S.-based FelCor Lodging L.P. is issuing $500 million senior secured
notes due 2022 and using the proceeds to repay debt.
-- We are assigning the notes our 'B-' issue-level rating with a recovery
rating of '3'.
-- The stable outlook reflects credit measures that we expect to be in
line with the current rating through 2013.
On Dec. 12, 2012, Standard & Poor's Ratings Services affirmed all existing
ratings, including the 'B-' corporate credit rating, on Irving, Texas-based
FelCor Lodging L.P. The outlook is stable.
At the same time, we assigned the company's proposed $500 million senior
secured notes due 2022 its 'B-' issue-level rating (at the same level as our
'B-' corporate credit rating on FelCor Lodging Trust Inc.). We also assigned
this debt a recovery rating of '3', indicating our expectation for meaningful
(50% to 70%) recovery for lenders in the event of a payment default. The
company expects to use the proceeds from the proposed notes to repay the
$186.5 million outstanding principal on its mortgage debt due 2015, pay a
portion of the company's 10% senior secured notes due 2014, and pay fees and
expenses related to the transaction.
We also placed our issue-level rating on the company's 10% senior secured
notes on CreditWatch with positive implications. The repayment of a portion of
the company's 10% senior secured notes using the proposed notes proceeds would
result in a lower level of secured debt outstanding under our simulated
default scenario compared with our previous analysis. This would increase the
recovery prospects for the 10% senior secured notes enough to warrant an
upward revision to our recovery rating on the notes. Upon closing of the
proposed senior secured notes, we expect to revise our recovery rating on the
10% senior secured notes to '1' (90% to 100% recovery expectation) from '3'
(50% to 70% recovery expectation) and raise our issue-level rating to 'B+'
(two notches higher than the corporate credit rating) from 'B-' (the same as
the corporate credit rating), in accordance with our notching criteria.
Our corporate credit rating reflects our assessment of the company's financial
risk profile as "highly leveraged" and our assessment of the company's
business risk profile as "fair," according to our criteria.
Our assessment of FelCor's financial risk profile as highly leveraged reflects
very high debt levels, with our measure of lease- and preferred stock-adjusted
total debt to EBITDA in the low-10x area (pro forma for the proposed
transaction) and funds from operations (FFO) coverage of interest and
preferred dividends anticipated to be in the low-1x area at the end of 2012.
We expect leverage to improve to the low-9x area and coverage to remain in the
low-1x area at the end of 2013. These measures incorporate the completed sale
of 10 hotels in 2012 for an estimated $207 million in gross proceeds, and the
expected sale of an additional 10 hotels in 2013 for approximately $235
million in gross proceeds based upon FelCor's current estimates. Slightly
offsetting high leverage and weak coverage measures is our expectation for
revenue per available room (RevPAR) growth in the U.S. lodging industry
Our assessment of FelCor's business risk profile as fair is based on its
geographically diversified hotel portfolio in the U.S. and its good
relationships with key brand owners. Risk factors include FelCor's reliance on
external sources of capital for growth as a REIT, the cyclical nature of the
lodging industry, and the associated revenue and earnings volatility of the
company's owned hotel portfolio. Additionally, concurrent with completed and
planned hotel sales, the company recently completed hotel acquisitions at high
multiples and is investing in hotel development in order to expand its
presence in the Manhattan hotel market. While we view the demand
characteristics of the Manhattan market favorably, we believe FelCor's use of
its balance sheet to pursue growth initiatives at high multiples will limit
leverage reduction through 2013 stemming from the company's current
significant asset sale program. Earlier this year, FelCor said it expects the
Knickerbocker to be its last acquisition in this cycle.
Through the first nine months of 2012, same-store consolidated RevPAR at
FelCor increased 5.1%, driven by a 5.8% increase in ADR and partially offset
by a 50-basis-point decrease in occupancy. Displacement from renovations was
the primary cause for the occupancy decline. Same-store adjusted EBITDA
(excluding hotels sold or acquired during the year) increased approximately
8%. FelCor recently lowered its guidance for 2012 same-store RevPAR to 5.25%
to 5.75% from 5.5% to 6% due to the effects of Hurricane Sandy on some of the
company's properties. Over the past year, FelCor completed several hotel
-- In February 2012, FelCor announced the acquisition and redevelopment
of the Knickerbocker Hotel in Times Square in a joint venture with manager
Highgate Partners (FelCor owns 95%). The joint venture paid $115 million for
the Knickerbocker land and shell currently in place, and will spend
approximately $115 million to develop the hotel for a late-2013 opening. The
aggregate cost is approximately $700,000 per key, and FelCor expects the
property to generate $14 million in EBITDA in its first year of operation in
2014 and ramp up to $25 million in 2016.
-- In June 2012, FelCor announced that it completed the sale of six out
of a total 16 currently listed non-strategic hotels for $103 million as part
of its planned asset sale program. FelCor said the purchase price represented
a 6.8% capitalization rate based on 2011 net operating income. The company
used the proceeds to repay $73 million in secured debt and other costs at
closing and used the remaining $30 million of proceeds to pay down a portion
of its $67.7 million in accrued preferred dividends on July 31, 2012.
-- In August 2012, the company sold one hotel for $25.5 million and in
October 2012, the company sold two hotels for $70 million. The proceeds were
used to repay a portion of the CMBS loan due 2013 and the remaining $38
million of accrued preferred dividends on Oct. 31. In addition, the company
closed five single asset mortgage loans totaling $160.8 million that mature in
2022. A portion of the proceeds from the new loans was used to repay the $107
million balance of the mortgage loan due 2014 and the remaining balance of the
CMBS loan. The repaid 2014 mortgage loan was secured by a pool of seven
hotels, including four of the five hotels mortgaged to support the new loans.
The remaining three hotels that secured the repaid loan are now unencumbered.
-- In November 2012, the company announced its plan to sell one hotel for
$8.7 million. The proceeds of the sale will be used to repay a portion of the
company's line of credit.
On its third-quarter earnings call, FelCor said it plans to close the sale of
the remaining 10 hotels currently on the market in 2013. It has an additional
10 hotels yet to be brought to market. Key aspects of our operating
performance expectations for FelCor are:
-- The rating is supported by the good expected lodging environment. We
expect U.S. RevPAR to increase between 5% and 7% in 2012 and between 3% and 6%
-- Given U.S. RevPAR strength, we believe management's RevPAR growth
guidance for 2012 at FelCor is reasonable, and that the company could produce
same-store EBITDA growth in the high-single-digit percentage area this year.
We have incorporated into the rating that FelCor's RevPAR grows in the
mid-single digits and EBITDA grows in the high-single digits in 2013.
-- However, primarily because of increased leverage from the
Knickerbocker acquisition and redevelopment and a smaller number of hotel
sales in 2012 than we previously expected, we believe FelCor's total lease-
and preferred stock-adjusted debt to EBITDA will be in the low-10x (pro forma
for the proposed transaction), and that FFO coverage of interest and preferred
dividends will be in the low-1x area in 2012, with leverage improving to the
low-9x area and coverage remaining in the low-1x area in 2013.
-- These measures incorporate the sale of 10 hotels in 2012 for $207
million and the sale of the remaining 10 hotels currently on the market in
2013 for approximately $235 million based upon FelCor's current estimates, and
use of proceeds to eliminate the accrued preferred dividend in arrears and for
Based on its likely sources and uses of cash over the next 12 to 18 months and
incorporating our performance expectations, FelCor has an adequate liquidity
profile, according to our criteria. Relevant expectations and assumptions in
our assessment of FelCor's liquidity profile include:
-- We expect sources of liquidity over the next 12 to 18 months to cover
uses by at least 1.2x.
-- Net sources of liquidity should remain positive, even if EDITDA
declines by 15%.
-- FelCor's $225 million secured revolving line of credit imposes a
minimum debt service coverage ratio (DSCR) of 1.35x between March 5, 2012, and
March 4, 2013. Drawings under the revolver were $117 million at September
2012, and coverage of debt service was significantly higher than the covenant
level. The DSCR steps up to 1.4x between March 5, 2013, and Aug. 1, 2014, and
to 1.5x thereafter. Starting Sept. 4, 2012, an additional financial covenant
became effective: the loan-to-value ratio for collateralized properties cannot
-- As a REIT, FelCor pays out at least 90% of its taxable income as
dividends, and relies on external sources of liquidity and asset sales to fund
As of September 2012, FelCor had $112 million in cash on hand and a $225
million line of credit of which $117 million was drawn. Cash balances do not
include restricted cash of $82 million, $65 million of which is currently
pledged as collateral for a loan assumed to purchase the Knickerbocker. FelCor
expects capital spending in 2012 to be $120 million and we expect FelCor to
fund it with operating cash flow and cash balances.
In 2011, FelCor generated approximately $46 million in operating cash flow, a
decline from $67 million in 2010, primarily on a decrease in accrued expenses
and liabilities. In 2011, FelCor generated $161 million in net proceeds from
common stock issuance and $133 million in net asset sale proceeds, largely
used to finance hotel acquisitions and repay debt balances. In 2012, we expect
FelCor to generate between $70 million and $80 million in operating cash flow.
We expect approximately $115 million in spending related to the Knickerbocker
redevelopment to occur over two years, partly funded with a bank construction
loan. Through the nine months ended September 2012, FelCor received $207
million in gross proceeds from asset sales, which it used for debt repayment
and to eliminate the preferred dividend in arrears. Pro forma for this
transaction, FelCor currently has no debt maturities until 2014.
The stable rating outlook reflects credits measures that we expect to be in
line with the current rating through 2013. The company is currently
experiencing good operating momentum. However, notwithstanding the company's
significant asset sale program, we expect FelCor's recent use of its balance
sheet to pursue growth initiatives will likely result in modest leverage
reduction through 2013. At the end of 2012, we expect our measure of adjusted
leverage to be in the low-10x area (pro forma for the proposed transaction)
and FFO coverage of interest and preferred dividends to be in the low-1x area.
Also, these measures include a pro forma level of EBITDA from acquired hotels
and exclude a pro forma level of EBITDA for planned hotel sales. We anticipate
credit metrics will improve modestly in 2013 because of planned asset sales
and continued lodging recovery.
A lower rating could result from an unexpected significant slowdown or
downturn in the U.S. lodging industry, which would likely drive FFO coverage
of interest and preferred dividends closer to 1x and strain FelCor's liquidity
profile. A one-notch higher rating would require a sustained improvement in
FFO coverage of interest and preferred dividends to at least the mid-1x area,
as well as a reduction in the company's total adjusted debt to EBITDA to the
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
FelCor Lodging Trust Inc.
Corporate Credit Rating B-/Stable/--
FelCor Lodging L.P.
Senior Secured B-
Recovery Rating 3
FelCor Lodging Trust Inc.
Preferred Stock CCC-
Ratings Affirmed; CreditWatch Action
FelCor Lodging L.P.
$636 mil. sr sec notes due 2014 B-/Watch Pos B-
Recovery Rating 3 3
FelCor Lodging L.P.
US$500 mil nts due 09/01/2022 B-
Recovery Rating 3