FCH Felcor Lodging Trust Incorporated (delisted)

Morgans Hotel Group Co. (MHGC) recently inked a definitive agreement to sell its Royalton and Morgans hotels for $140 million to an affiliate of FelCor Lodging Trust Inc. (FCH). The sale price for the two hotels represents a value of approximately $500,000 per room.  The hotels generated 3.8 million of EBITDA in 2010 before internal management fees.

Per the deal, Morgans Hotel will continue to operate the hotels under a 15-year management agreement. The tenure can be extended for another 10 years. The transaction is expected to close in the second quarter of 2011 and is subject customary closing conditions. Morgans Hotel has already received security deposit worth $7 million, which will be refunded only if the company defaults.

Since late 2010, transition to an “asset light” business model has gained momentum in the hotels and REIT industry. Asset sale remains a long-term strategy to strengthen financial flexibility, which would help the companies grow through management and licensing arrangements instead of direct ownership of real estate. A higher concentration of management and franchise fees reduces earnings volatility and provides a more stable growth profile.

Following the industry trend, many of Morgans’ peers embarked on an asset disposition strategy. Last month, Great Wolf Resorts Inc. (WOLF) sold its Blue Harbor property, while in mid-January, Red Lion Hotels Corporation (RLH) announced its plan to put its Seattle and Denver based hotels up for sale. In early-March, Red Lion planned its Helena-based hotel to offer for sale.

The hotel giant Starwood Hotels & Resorts Worldwide Inc. (HOT) is waking the same path. Starwood remains committed to reducing its exposure to owned real estate and timeshare businesses. During its third quarter, Starwood sold one St. Regis Aspen in accordance with a long-term management contract for gross proceeds of $70 million.

For Morgans Hotel, the latest transaction will help in restructuring its balance sheet. The deal will generate approximately $100 million in net proceeds after the company pays down the $37.7 million outstanding under its revolving credit facility.

Morgans Hotel intends to use the remaining net proceeds to further reduce debt and arrange capital for future growth. Morgans Hotel currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

 
FELCOR LODGING (FCH): Free Stock Analysis Report
 
STARWOOD HOTELS (HOT): Free Stock Analysis Report
 
MORGANS HOTEL (MHGC): Free Stock Analysis Report
 
RED LION HOTELS (RLH): Free Stock Analysis Report
 
GREAT WOLF RSRT (WOLF): Free Stock Analysis Report
 
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