The building formerly housing the Knickerbocker Hotel in Times Square.
FelCor Lodging Trust Inc., which owns 76 U.S. hotels, plans to spend roughly $115 million to convert the Beaux Arts building at 42nd Street and Broadway back into a 330-room, luxury hotel by late 2013. In recent decades, the property has been operated as an office building.
Plans call for the hotel to include restaurants, a rooftop bar, meeting rooms, a fitness center and guest rooms averaging 400 square feet. For now, FelCor intends to operate it as an independent hotel under the Knickerbocker name.
Marketing 16 Non-Strategic Hotels to Support Portfolio Repositioning Strategy and Strengthen Balance Sheet – Expects Majority to Be Sold in 2012
FelCor Lodging Trust Incorporated (NYSE: FCH) today announced the acquisition of the landmark Knickerbocker Hotel in midtown Manhattan, New York, for $115 million. Consistent with its portfolio repositioning strategy, the company also announced it is marketing 16 non-strategic hotels. FelCor will apply the sale proceeds to strengthen its balance sheet and reduce leverage.
Knickerbocker Hotel Acquisition
FelCor formed a joint venture with an affiliate of Highgate Holdings LLC ("Highgate") which acquired the Knickerbocker Hotel in midtown Manhattan, New York. Located at Broadway and 42nd Street, the Knickerbocker Hotel boasts one of the world's premier addresses for both business and leisure travelers, and will serve as FelCor's flagship upon opening in late 2013. The four-plus star hotel will feature approximately 330 large guest rooms (average in excess of 420 square feet), several food and beverage outlets – including a large rooftop sky bar and lounge directly overlooking Times Square – state-of-the-art meeting space, and a full-service fitness facility.
This acquisition underscores FelCor's commitment to enhancing and diversifying its portfolio into core markets such as New York City, where the company now owns three properties. New York City has significantly outperformed the industry in long-term RevPAR growth. Given the Knickerbocker's superior location in Manhattan, FelCor expects the hotel will produce strong long-term EBITDA growth. FelCor expects the Knickerbocker to be its last acquisition in this cycle, as the company focuses on strengthening its balance sheet through the sale of non-strategic hotels and reducing leverage.
The purchase price reflects a 30 percent discount per square foot, compared to recent similar transactions, and is meaningfully below replacement cost. The redevelopment cost will be primarily funded by a development loan for an aggregate investment of approximately $697,000 per key. FelCor expects the project will generate an internal rate of return that exceeds the Company's weighted average cost of capital, and the property is expected to generate nearly $24 million of EBITDA at the first year of stabilization, yielding strong future cash flow.
"With its unique architecture and Times Square location, the Knickerbocker is an irreplaceable asset in a marquee location. To acquire a landmark hotel at a meaningful discount to replacement cost is a rare opportunity, and we are confident this acquisition is a strategic investment that will enhance future stockholder value," said Richard A. Smith, FelCor's President and Chief Executive Officer. "This acquisition is perfectly aligned with a central element of our long-term strategy – investing in the future of the business – as we continue to focus on other components of our strategy, specifically strengthening our balance sheet through non-strategic asset sales and debt reduction."
FelCor owns 95 percent of the joint venture and partnered with Highgate, which will manage the hotel upon opening. The joint venture will leverage the development expertise of both companies to realize the full value of this iconic New York building. The hotel floors have been cleared and abated and are ready for immediate redevelopment, which greatly mitigates the risks typically associated with adaptive reuse projects. In addition, the redevelopment plan has been approved by New York City's Landmarks Commission and New York City's Board of Standards and Appeals.
FelCor has completed more than $300 million of high-rise, ground-up development projects, including three upscale, high-rise condominium buildings containing over 600 units. In addition, the company successfully redeveloped high-density, urban properties, including the San Francisco Marriott Union Square and Fairmont Copley Plaza. Highgate has an extensive track record of developing successful hotels in Manhattan that have generated superior returns for its investors and is a premier Manhattan hotel operator.
FelCor is marketing a total of 16 non-strategic hotels as part of its long-term portfolio repositioning strategy. The funds resulting from the sale of these hotels will allow the company to continue to reduce debt, improve future funds from operations ("FFO"), increase long-term EBITDA growth and contribute to a sound and flexible balance sheet.
FelCor has 16 non-strategic hotels for sale:
The company expects to generate approximately $350 million in gross proceeds with the sale of these hotels. FelCor is committed to using these funds to repay all accrued preferred dividends, reduce debt and strengthen its balance sheet. Nine of the 16 hotels secure approximately $150 million of mortgage debt. The company has received strong interest from potential buyers and expects to sell the majority of the hotels in 2012.
FelCor has brought to market a total of 25 hotels since December 2010. Nine of which have been sold to date, for gross proceeds of $222 million, representing approximately 12 times 2010 hotel EBITDA. The Company expects to sell a majority of the remaining 16 hotels in 2012.
With a focus on creating a high-value portfolio of superior hotels, FelCor intends to sell a total of up to 40 non-strategic hotels as part of its portfolio repositioning plan, representing 72 percent of its suburban hotels and 44 percent of its airport hotels. FelCor's core hotels are located primarily in major, urban markets and resort destinations. The remaining suburban and airport hotels are generally located in gateway cities and benefit from relatively high barriers-to-entry. The remaining non-strategic hotels will be brought to market at the appropriate time.
FelCor, a real estate investment trust, is the nation's largest owner of upper-upscale, all-suite hotels. FelCor owns interests in 82 properties located in major markets throughout 22 states. FelCor's diversified portfolio of hotels and resorts are flagged under global brands, such as Doubletree ®, Embassy Suites Hotels®, Hilton®, Fairmont®, Marriott®, Renaissance®, Sheraton®, Westin® and Holiday Inn®. Additional information can be found on the Company's Web site atwww.felcor.com.
"If you allowed me to pick a location anywhere in the world [for a hotel], this would be the one," FelCor President and Chief Executive Officer Rick Smith said in an interview. "This will be the flagship of the company."
FelCor is just the latest investor to become transfixed by the 16-story building steeped in history. Others have purchased it with an eye toward restoring it to a hotel but never achieved that dream. The building today is mostly empty because previous owners spent the past five years emptying it of office tenants and stripping its interior.
But FelCor has substantial financial resources and experience in the New York hotel industry. It purchased a 95% stake in the top 14 floors of the building for $109 million late last year from a partnership led by private-equity investor Walton Street Capital LLC, hotelier Highgate Holdings and Crown Acquisitions Inc.
FelCor now owns three hotels in New York, having added two in Manhattan last year when it bought the trendy Royalton and Morgans hotels from Morgans Hotel Group Co. for $140 million.
Built by investor and developer John Jacob Astor IV in 1906, the Knickerbocker Hotel drew wealthy and famous clientele, including John D. Rockefeller and Italian tenor Enrico Caruso. The Knickerbocker often is described as the birthplace of the martini, though it isn't the only venue to claim that distinction.
Indeed, Manhattan hotels posted strong results even as a flood of new competitors came onto the market. Manhattan's supply of rooms increased by 7.5% in 2010 and 2% last year to more than 77,000 rooms, according to Lodging Econometrics. The research company anticipates additional increases of 2.8% both this year and next.
While FelCor has purchased a 95% stake, Highgate retained a 5% stake and will manage the hotel. The property's first two stories, which are mostly occupied by a Gap, still are owned by the investment group that sold the hotel to FelCor.