BETHESDA, MD—RLJ Lodging Trust and FelCor Lodging Trust Inc. have entered into a definitive merger agreement under which FelCor will merge with and into a wholly owned subsidiary of RLJ in an all-stock transaction. Post-merger, RLJ is expected to have a pro forma equity market capitalization of approximately $4.2 billion and a total enterprise value of $7 billion.
“In addition to being immediately accretive to our RevPAR, merging with FelCor expands our geographic footprint in highly desirable markets on the West Coast, while strengthening our presence in other coastal markets in the East and the South,” said Ross H. Bierkan, RLJ’s president and CEO. “RLJ’s enhanced scale post-merger is expected to generate both corporate- and property-level operating cost benefits and market leverage opportunities, which will drive shareholder value over time.”
The combined portfolio will include 31,467 rooms across 160 hotels in 26 states and the District of Columbia—diversified across Marriott (41%), Hilton (36%), Hyatt (8%) and Wyndham (8%). Combined flags include Embassy Suites (21%), Courtyard (13%), Residence Inn (11%), Wyndham (8%), Marriott (6%), Hyatt House (6%), DoubleTree (5%), Hilton Garden Inn (5%), Renaissance (4%), SpringHill Suites (3%) and other (18%). Ninety percent of the combined company’s EBITDA will be focused on service and compact full-service properties.
“We always have appreciated the qualities of compact full-service hotels,” Bierkan said during a conference call with investors. “They capture most of the qualities of the upscale select-service hotels that people also associate us with. Already 30% of the EBITDA in the RLJ portfolio is generated by our compact full-service hotels, and so this really is a continuation of that strategy.” The deal is also expected to broaden geographic diversity and strengthen RLJ’s presence in key markets such as California and Boston.
Under the terms of the agreement, each share of FelCor common stock will be converted into 0.362 shares of newly issued common shares of RLJ common stock in a taxable merger. FelCor’s operating units will be exchanged for limited partnership units in RLJ’s operating partnership at a similar exchange ratio of 0.362.
“We like the relative valuation here between the organizations, and we’re comfortable using our currency for their currency,” said Bierkan, who noted RLJ believes it and FelCor are both undervalued. “It also preserves cash on our balance sheet for strategic options.” Following the merger, RLJ’s shareholders are expected to own approximately 71% of the combined company’s fully diluted equity, and FelCor’s shareholders are expected to own the remaining 29%.
The merger of RLJ and FelCor is expected to produce significant economies of scale, including approximately $22 million of expected savings from the elimination of duplicative corporate general and administrative costs. The combined company is also expected to benefit from long-term, property-level savings in the areas of energy/utility contracts, insurance and furniture, fixture and equipment (FF&E) procurement. Finally, the merger will augment RLJ’s human capital by adding a number of FelCor professionals to the RLJ team.
The combined entity is expected to have $700 million of available liquidity, which includes approximately $400 million of an undrawn credit facility. The combined entity’s projected pro forma net debt to EBITDA ratio during the first full year of operations is expected to be less than 4.5x (or less than 5.0x including convertible perpetual preferred equity) and is expected to improve each year thereafter.
Steven R. Goldman, FelCor’s CEO, stated, “We are very pleased to combine with RLJ Lodging Trust to create a leading lodging REIT that is positioned for significant long-term growth. This merger creates a company that has greater reach in key markets with a streamlined operating structure and more advantageous cost of capital. FelCor shareholders are receiving an attractive valuation for the company’s hotel assets and have the opportunity to benefit from a highly respected management team with a history of value creation.”
The combined company will continue to be led by Robert L. Johnson as executive chairman; Bierkan as president and CEO; and Leslie D. Hale as COO and CFO. Upon completion, the company’s headquarters will remain here. The number of trustees on RLJ’s board will be increased to eight, with one existing FelCor director mutually acceptable to FelCor and RLJ being appointed to the RLJ board upon closing.
As far as his role in the combined organization going forward, Goldman said: “My role is to help for a smooth transition, to support Ross and the team to the best of my ability, and to…do whatever I can to help this company really launch off well.”