RLJ Lodging Trust (NYSE:RLJ) and FelCor Lodging Trust Incorporated (NYSE:FCH) today announced that they 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, creating the largest pure-play public REIT dedicated to owning focused-service and compact full-service hotels.
The merger will establish the third biggest pure-play lodging REIT by enterprise value, creating meaningful scale to capitalize on cost efficiencies, negotiate leverage and access to capital, and the opportunity to strategically recycle assets and optimize the portfolio. The combined company will have ownership interests in 160 hotels, including premium-branded hotels located primarily in urban and coastal markets with multiple demand generators. The combination also provides significant penetration within key high-growth markets and broad geographic and brand diversity. With a strong and flexible balance sheet and disciplined approach to portfolio and asset management, the combined company will have the attributes and capabilities to drive accretive growth and to pursue additional opportunities to enhance value.
Robert L. Johnson, Executive Chairman of RLJ Lodging Trust, stated, “As Chairman of RLJ Lodging Trust, I would like to say that we are very excited about this combination with FelCor. I am confident that, under the management of our seasoned team of executives, this portfolio will yield significant benefits to the shareholders of both companies.”
“We are truly excited about this unique opportunity as we transform our two companies into one of the largest pure-play lodging REITs. Combining these two complementary portfolios creates a best-in-class platform that is well positioned to deliver long-term growth and generate significant shareholder value,” commented Ross H. Bierkan, RLJ’s President and Chief Executive Officer. “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. 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.”
Steven R. Goldman, FelCor’s Chief Executive Officer, 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.”
Under the terms of the Merger 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. Following the merger, RLJ’s shareholders are expected to own approximately 71 percent of the combined company’s fully diluted equity, and FelCor’s shareholders are expected to own the remaining 29 percent.
This strategic merger was unanimously approved by the Boards of both companies. Once the merger is consummated, the company will retain the RLJ Lodging Trust name and will trade under the ticker symbol “RLJ” (NYSE).
Summary of Strategic Benefits
Merging RLJ and FelCor positions the combined company to enhance shareholder value as an industry leader among lodging REITs, with the following highlights:
- Combination creates the third largest pure-play lodging REIT with a combined enterprise value of $7 billion
- Increased shareholder liquidity and cost of capital efficiencies
- Stock transaction allows both sets of shareholders to participate in the upside
- Enhanced positioning with brands and operators
- Leading upscale portfolio of compact full-service and premium focused-service hotels generating strong operating margins
- Combined portfolio will include 160 hotels in 26 states and the District of Columbia, diversified across Marriott, Hilton, Hyatt and Wyndham flags
- Broad geographic diversity and strengthened presence in key markets such as California, Florida and Boston
- Positive financial impact and positioning for future value creation
- Accretive in first full year
- Expected cash G&A expense savings of approximately $12 million and approximately $10 million of potential savings from stock-based compensation expense and capitalized cash G&A
- Opportunity for additional ongoing operating and cash flow improvements through greater purchasing power, market leverage and capital expenditure efficiencies
- Future opportunities to unlock value from portfolio repositioning
- Potential conversion and redevelopment opportunities
- Opportunity to actively refine portfolio
- Strong and flexible balance sheet
- Significant liquidity, minimal near-term maturities and opportunity to lower cost of capital
Pro Forma Operations and Balance Sheet
The combined entity will have 31,467 rooms across 160 hotels. The merger will be immediately accretive to RLJ’s RevPAR with Pro forma 2016 RevPAR increasing 5.4% to $137.
The merger of RLJ and FelCor will 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 talented FelCor professionals to the RLJ team.
The combined entity will have significant financial strength and flexibility, including approximately $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.
Leadership and Organization
The combined company will continue to be led by Robert L. Johnson as Executive Chairman, Ross H. Bierkan as President and Chief Executive Officer, and Leslie D. Hale as Chief Operating Officer and Chief Financial Officer. Upon completion, the company’s headquarters will remain in Bethesda, Maryland. 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.
Dividend Policy and Declaration
Both RLJ and FelCor are expected to continue to follow their respective dividend policies until the closing of the merger. Following the closing of the transaction, the new company expects to pay a quarterly dividend of $0.33 per common share of beneficial interest, consistent with RLJ’s current dividend policy. Any post-merger dividends are subject to the approval of RLJ’s Board.
Closing of the Transaction
A joint proxy statement/prospectus will be filed with the Securities and Exchange Commission and, following its effectiveness, will be mailed to the shareholders of both companies. The transaction is expected to close by the end of 2017. The merger is subject to customary closing conditions, including the approval of both RLJ and FelCor shareholders.
Barclays is acting as the financial advisor to RLJ and Hogan Lovells and Arent Fox are serving as legal advisors. BofA Merrill Lynch is acting as the financial advisor to FelCor, and Sidley Austin, Polsinelli and Jones Day provided legal advice to FelCor. ICR, LLC and Financial Profiles, Inc. are serving as communications advisors for the transaction.
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