FelCor s Missed Opportunities

UNITE HERE March 2016 Rosa Greenberg, Research Analyst 617-272-0698 FelCor s Missed Opportunities Rising interest rates, increasing supply pressures and a risky travel market are projected to challenge lodging REITs in 2016. At this critical moment, REITs must effectively manage their assets if they wish to outperform their peers. We find FelCor has failed to redevelop assets that could be profitably transformed. Redevelopment of Santa Monica and San Diego Wyndham properties could have been significant sources of revenue. However, the company has failed to effectively navigate redevelopment in both cities despite a claim in its 2014 annual report that it was progressing through the approval and entitlements process. 1 FelCor performed below average for hospitality REITs in 2015. Last year, FelCor s stock price dropped 33.58% while the NAREIT Lodging/Resorts Index dropped 24.52%. Shareholders should ask: 1. Does FelCor have the capacity to effectively manage its current portfolio? 2. Is FelCor effective at identifying which properties it should reposition to maximize shareholder value? 3. Is FelCor investing appropriate resources to ensure success in the redevelopment process? I. FelCor s Wyndham at the Santa Monica Pier HVS assessed that Santa Monica was one of the strongest lodging submarkets in the United States. 2 FelCor purchased the 132 room Santa Monica Holiday Inn for $27m in 2004. 3 In 2013, FelCor changed the franchise and operator from Holiday Inn to Wyndham and renovated its guestrooms, corridors and public areas. 4 Although PKF data shows Santa Monica/ Marina del Rey had a 2014 ADR of over $300 for upper priced hotels, the Wyndham s projected 2014 ADR was $233. 5 In 2004 FelCor boasted that the hotel had a premier location. 6 Since then the Wyndham s location has only become more coveted. The property is close to the

redeveloped and popular Santa Monica Pier and Promenade, the Santa Monica coastline and the Fourth Street/Colorado Expo light rail station 7 due to open in 2016. 8 The City of Santa Monica invested $42.3 million of redevelopment funds turning a parking lot directly north of the hotel into award winning Tongva Park, which opened in September 2013. 9 The City is also projected to have invested nearly $13.5m redeveloping the streetscape adjacent to the hotel 10 by 2016. 11 Notwithstanding the hotel s location, design flaws critically limit the hotel s earning potential. The west side of the property - which faces the Pacific Ocean - has no windows. There is no rooftop dining. 12 In 2013, FelCor co-founder and Chairman of the Board Thomas Corcoran asked, Why would you have a building with a wall facing the ocean with no windows? 13 As the LA Times reported, it can be dumbfounding to encounter a prominent downtown Santa Monica hotel that deliberately averts its gaze from the water. 14 Corcoran himself referred to the hotel as a very ugly building. 15 The hotel was built in 1967. 16 As Santa Monica has grown up, the Wyndham has not. A Missed Chance for Development? In February 2013, the Santa Monica City Council began fast tracking projects that would increase city revenue, such as hotels. 17 In June 2013, FelCor proposed redeveloping the Wyndham from a 132 room property to a 211 room hotel with 25 condo units and 13,860 square feet of restaurant space. 18 Crucially, this redevelopment would have ensured every room had an ocean view. 19 Development has become a hot button issue in the City of Santa Monica. In 2014, residents successfully qualified a mixed use housing, office space, and retail project adjacent to the light rail that had previously been approved by the City Council for referendum. 20 Instead of putting the matter on the ballot, the City Council rescinded the entitlements for the development. The same anti-development group that led the referendum plans to campaign in 2016 for a ballot initiative 21 that would mandate voter approval for most large developments like the Wyndham redevelopment. 22 Over the past several years, three other hotel projects - 1554 5th St / Courtyard by Marriott, 501 Colorado Ave/Hampton Inn & Suites and 710 Wilshire Hotel - have been approved. 23 There have been no public hearings on the FelCor proposal since January 2014. 24 As of January 2016 the project is still under review. 2

Lost Revenue Redevelopment of the Wyndham would have increased the hotel s profitability. In 2013, FelCor commissioned PKF to do a market analysis of the project. PKF estimated that Rev Par from the redeveloped property would rise to $453.18 by 2022, or be left at $227.20 without it. 25 This rise in Rev Par would put the Wyndham on par with luxury properties like Shutters on the Beach and Casa del Mar. Shutters and Casa are the only beachfront Santa Monica properties. In a 2015 pre-sale CMBS report, Morningstar underwrote Shutters for Rev Par of $480 and Casa for $430. 26 Projected Rev Par for Wyndham As Is vs. New Project $500.00 $450.00 $400.00 $350.00 $300.00 $250.00 $200.00 $150.00 $100.00 $50.00 $0.00 $356.04 New Project $214.84 As Is $392.94 New Project $216.27 $426.66 $439.92 $453.18 $218.40 $222.40 $227.20 As Is New As Is New As Is New As Is Project Project Project 2018 2019 2020 2021 2022 PKF estimated that after the new hotel reopened in 2018, FelCor would earn approximately $5M more than it would with the property as is. By 2022 the new hotel would be bringing in almost $10 M more than would otherwise be earned. 27 FelCor recorded $94.2m in net income in the year ended 2014. 28 As Thomas Corcoran said in 2013, [the hotel as it exists] does make money. It s not like we have to do [redevelopment]. It s just the right thing to do long term. 29 II. FelCor s Wyndham San Diego Bayside FelCor purchased the 600 room, 14 story Holiday Inn Bayside in 1998. 30 FelCor rebranded the hotel to become a Wyndham in 2013 and renovated its rooms, public areas, exterior and meeting spaces. 31 The hotel sits on land owned by the Port of San Diego; FelCor s lease will expire in 2029. It is unclear whether FelCor will be given the opportunity to renew the lease if not its claim on the property will expire in 14 years. 32 3

Prime Location, but Can FelCor s Wyndham Compete? The Wyndham is located in San Diego s downtown business district which is among the most profitable in the region. The San Diego Tourism Authority estimates that hotels in this area supply 35% of the region s rooms but accrue 42% of its revenue. 33 Hotels in the district earned $634m in 2013. FelCor s Wyndham has performed well below average for the area. Upper priced Hotels in San Diego s Business District averaged over $150 RevPar in 2014 compared with the Wyndham s $92.55. 35 The hotel also performed 35.1% below the average RevPar for FelCor s eight hotel Wyndham portfolio. Wyndham San Diego vs. FelCor Wyndham Portfolio 34 ADR RevPar 2015 2014 2015 2014 Wyndham San Diego $147.63 $126.05 $115.33 $92.55 Wyndham Portfolio $183.42 $167.53 $141.13 $125.08 % Difference -24.2% -32.9% -22.4% -35.1% FelCor s San Diego Wyndham is made up of three separate towers connected by walkways. 36 Other properties in the downtown business area include the Manchester Grand Hyatt. The Hyatt is the tallest urban waterfront resort on the West Coast and offers a luxury spa. 37 The Marriott Marquis San Diego is also nearby and offers 240,000 square feet of meeting space, a 446 slip marina and a resort style pool with cabanas and a bar. 38 FelCor s recent attempts to add more amenities to its property have not yet succeeded. On 5/12/15, the San Diego Port Authority tabled FelCor s proposal to add an Applebee s Restaurant to the hotel. 39 It is unclear whether Felcor s property, as currently configured can compete with the top hotels in the district. Uncertain Future The San Diego Port Authority and San Diego County have made significant investments in redeveloping the area surrounding the Wyndham to create increased access to the Bay. The public investment is likely to make the hotel more attractive, but raises the question of whether FelCor will be able to renew its lease with the Port in 2029 without redevelopment. The Wyndham sits between two expensive projects that seek to increase public access to the Bay. The Wyndham is one block north of the Port s North Embarcadero Visionary Plan (NEVP) area. NEVP began construction in 2011 and seeks to increase public area access to the Bay and create more open 4

space near the water. 40 The Wyndham is one block south of San Diego s $49.4m Waterfront Park which opened in 2014. 41 Waterfront Park opens space along the water, and provides new public access to the Bay. The Wyndham opens directly onto the Bay. It is only separated from the Bay by North Harbor Drive. As the hotel currently stands, it does not seem to fit within the goals of the Waterfront Park or NEVP Plan of increasing public access to the water. FelCor has not yet redeveloped the property to fit with the vision that the Port has for the zone. FelCor s inability to secure approval for a new restaurant raises the question of whether it will be able to redevelop the hotel to the Port s approval or maintain its lease for the property in 2029. As of January 2016, the Port of San Diego does not list any proposed plans for redevelopment of the property on its website. FelCor s Failures to Redevelop FelCor s southern California Wyndhams are not maximizing their potential. Both occupy prime waterfront locations but were built over forty years ago. Redevelopment beyond FelCor s 2013 renovations could elevate the properties to better compete with newer hotels in the markets. As of January 2016, FelCor has failed to effectively navigate the development process in both cities. In Santa Monica, FelCor s proposal has stalled. It has been almost two years since the last city meeting on the project. In San Diego, FelCor has failed to produce a plan for the property that fits with the Port and city s vision for the area. The property sits on land owned by the Port, and it is unclear whether FelCor will be able to renew its lease in 2029. While FelCor has trumpeted its success at reopening the historic Knickerbocker Hotel in New York, it has allowed opportunities to languish in California. FelCor needs to make a choice: it should either sell these properties or reposition them. Holding onto them without successfully doing either does not maximize returns for shareholders. Santa Monica and San Diego raise the question of whether FelCor has the capacity to appropriately reposition opportunities in its portfolio. 5

Endnotes 1 FelCor Annual Report 2014 2 White, Jessica. HVS Hotel Market Insight: Santa Monica. September 2013. 3 FelCor S4-A, 10/13/04 4 FelCor 8K, 2/19/13 5 PKF Analysis of FelCor Wyndham redevelopment project. Estimates in addendum. (5, part II) 6 FelCor S4-A, 10/13/04 7 See map 8 Expo Line Light Rail to Santa Monica Should be Ready to Open in April or May, Curbed Los Angeles, 12/10/15 9 Tongva Park Opens to the Public, Santa Monica Daily Press, 9/9/13 10 City of Santa Monica City Council Report, 5/14/13 11 Estimated Project Timelines, City of Santa Monica 12 Hotel website only describes a lobby restaurant. 13 Downtown Hotel Gets a New Name, Santa Monica Daily Press 3/8/13 14 Santa Monica Hotel That Shunned Ocean to be Replaced, LA Times, 6/13/13 15 Downtown Hotel Gets a New Name, Santa Monica Daily Press 3/8/13 16 Santa Monica Hotel That Shunned Ocean to be Replaced, LA Times, 6/13/13 17 City Council Sets Priorities for Future Development in Santa Monica, Santa Monica Lookout 2/14/13 18 Four Downtown Santa Monica Projects Slated for Review This Year, Santa Monica Lookout 3/16/15 19 Santa Monica Hotel That Shunned Ocean to be Replaced, LA Times, 6/13/13 20 In Santa Monica, large development projects are approved as ordinances, which then are subject to a referendum of voters. A City Council can then decide to rescind the ordinance, or to place the ordinance on the next ballot for a popular vote. See City of Santa Monica Bergamot Transit Village Hines Project Veto Referendum. 21 Petition Drive for Santa Monica Slow-Growth Intiative to Start Early Next Year, Santa Monica Lookout, 10/8/15 http://www.surfsantamonica.com/ssm_site/the_lookout/news/news-2015/october-2015/10_08_2015_petition_ Drive_for_Santa_Monica_Slow_Growth_Initiative_Set_to_Start_Early_Next_Year.htm 22 Residocracy LUVE Initiative 23 City of Santa Monica s Planning and Development website 24 City of Santa Monica s Planning and Development 120 Colorado Ave Hotel Project by the Pier 25 PKF Analysis of FelCor Wyndham redevelopment project 26 CSMC 2015-SAND Report on Shutters on the Beach and Casa del Mar. Shutters pg 23, Casa pg 24 27 PKF estimates $28,441,000 in NOI after reserve for project as is between 2018 and 2022. PKF predicts $68,505,000 in NOI after reserve for new project between 2018 and 2022. See spreadsheet Hotel Project Profits for calculations 28 FelCor Annual Report 2014 29 Downtown Hotel Gets a New Name, Santa Monica Daily Press 3/8/13 30 FelCor 10K 1998, 3/31/99 31 Bay View Holiday Inn Gets New Name, San Diego Union-Tribune, 4/3/13 32 Resolution by Port consenting to a new 10 year management agreement between FelCor and Wyndham. References lease expiring in 2029. 33 San Diego Tourism Authority Sub Region Marketing Program Report 34 FelCor 10K 2015, 2/26/16 35 FelCor Wyndham San Diego performance information from FelCor 2015 10K 36 Bay View Holiday Inn Gets New Name, San Diego Tribune, 4/3/13 http://www.sandiegouniontribune.com/ news/2013/apr/03/holiday-inn-has-new-name/ 37 http://manchestergrand.hyatt.com/en/hotel/our-hotel/hotel-features.html 38 http://www.marriott.com/hotels/travel/sandt-marriott-marquis-san-diego-marina/ 39 San Diego Board of Port Commissioners Meeting Results, 5/12/15 40 Port of San Diego Phase 1 Description NEVP. The Wyndham is one block north of the B Street Pier, and the NEVP Phase 1 includes improvement of the esplanade from the B Street Pier to the former Navy Pier. 41 Waterfront Park Opening With Splash, San Diego Union-Tribune 6