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Video: Tom Corcoran discusses rational debt and the 2016 hotel market


Tom Corcoran, Chairman of the Board of FelCor Lodging Trust, speaks with David Sudeck, senior member of JMBM’s Global Hospitality Group® at JMBM’s 2016 Meet the Money® – the national hotel finance and investment conference. They discuss “rational debt,” redevelopment opportunities, and the evolution of FelCor.

A transcript follows the video. See other videos in this series on the Jeffer Mangels YouTube channel.

David Sudeck: I’m David Sudeck, I’m at the 26th annual Meet the Money® conference with Tom Corcoran, the founder of FelCor Lodging Trust. Thank you for joining us. You just got off your panel and you did a great job, so thank you for that. I wanted to hear about in this uncertain time, 2016, where you see us in the market at this point and how it may differ from 2015.

Tom Corcoran: Actually, I think it’s going to be a lot like ’15. I think ’16 and ’15 are going to be very similar. I think we’re going to continue to have positive RevPAR above the GDP and so I think it makes a lot of sense to me that the industry remains very strong; robust. There’s some clouds out there, people are trying to say there’s a storm coming, and I just don’t happen to believe there is. I think those clouds are artificially made up and aren’t really in the real world.

David Sudeck: My experience is some of our lender clients are pulling back in terms of the provisions, particularly of construction lending.

Tom Corcoran: Yeah, I think that’s probably good, I’m okay with that. When people go through getting nervous before things really are bad, it has the net effect of acting as a governor – which is why I call it a governor – because it kind of stops irrational lending. Most people believe supply is the worst enemy of the hotel industry and I would argue that it’s debt that creates the supply. The source, historically, of all the downturns has been where people have borrowed too much money – even in some of the worst cycles we’ve gone through – people had non-recourse, 100% financing. Then people can build hotels that make no rational, economic sense at all.

David Sudeck: So where do you see opportunities in this market given the lack of liquidity? I think that the number of hotel developers is going to shrink, supply will pull back to some extent. Do you see any specific opportunities in this marketplace?

Tom Corcoran: Well, as a public REIT today with our share price basically trading at a discount to net asset value, it really doesn’t make sense in this part of the cycle for us to be acquiring hotels. In fact, we are a net seller of hotels and we’re using those proceeds to pay down debt and buy back stock. At the same time, we’re looking at redevelopment opportunities of our existing portfolio, like we’re doing in St. Petersburg, Florida at the Vinoy, as we’re doing in Napa. We see more opportunity to create value for our shareholders with those redevelopment opportunities.

David Sudeck: Are you repositioning through change of brand or through renovation and upgrading of finishes?

Tom Corcoran: Well, at the Vinoy we also have a golf course, we’re redoing the club, we’re redoing the facilities, we’re upgrading the whole place and then we’re coming back on the hotel which is on the water and we’re going to be doing a new spa, a bunch of upgrades to the tennis courts, and basically the overall features of the hotel to create more of a resort-like environment. St. Pete is a very great, historic market. And then in Napa, we’re looking at repositioning that hotel and that currently is the in works, along with an addition to the existing building.

David Sudeck: That’s an Embassy Suites property?

Tom Corcoran: Correct.

David Sudeck: And it will stay an Embassy Suites?

Tom Corcoran: Don’t know. We’re looking at some other opportunities to reposition it.

David Sudeck: I noticed on your website you have various brands – Morgans Hotels and then Marriott, IHG. Is there a different perspective on the part of the investor in terms of how they look at sort of the mainstream brands versus some of the more lifestyle hotels?

Tom Corcoran: Well, Morgans – basically, you’ve got the Morgan Hotel and the Royalton and we’ve publicly said we are selling those two hotels. And we recently opened the Knickerbocker last year, which is a phenomenal hotel at 42nd and Broadway. It’s got a rooftop bar and a lounge; it’s really, truly, very spectacular. So, I think when the market looks at FelCor they see us with some very unique hotels, a strong relationship with Hilton, with eighteen Embassy Suites – but I think they also see some of the value that we’ve created in some of our existing hotels and the opportunity to create additional value as we look at enhancing them in a redevelopment phase.

David Sudeck: How have your assets changed since you founded the company in what, 1991?

Tom Corcoran: In ’91 we started out with one Holiday Inn, went public with six Embassy Suites. We got up to about close to 80 all-suite hotels before we actually ventured into other brands and then changed the name from FelCor Suite Hotels to FelCor Lodging Trust. Then we did some Doubletree Guest Suites, we did some Sheraton Suites and then we did the big Bristol merger in 1998 and got fairly heavy into the IHG business.

And then we spent most of 2002 through the end of the decade selling off most of the IHG hotels. The problem we had is that we bought a lot of hotels in secondary and tertiary markets which just didn’t make sense for FelCor, in hindsight, to be in those markets because those weren’t necessarily unique locations. They were very susceptible to new construction and new development.

David Sudeck: So today FelCor’s 40 hotels, give or take, are in primary markets?

Tom Corcoran: That’s correct.

David Sudeck: And what do you think in terms of select serve versus full serve, versus extended stay – you clearly started in the extended stay market.

Tom Corcoran: No, all-suite business is not extended stay. Embassy Suites is an upper upscale brand, its mainstay is it’s an all-suite hotel, number one. Number two, it tends to be very businesslike during the week, and then very family oriented on the weekend. Most people know it was the first brand that came out with cook-to-order breakfast, so it’s not unusual on a Sunday morning to see 800 to 1,000 people with a lot of families going through breakfast.

So, I’d say the all-suite segment is upper, upscale primarily, which is what most of our hotels are. When you look at the Knickerbocker you’re talking, you know, probably a four-and-a-half star hotel, the Copley Fairmont in Boston I’d say is four-and-a-half stars.

David Sudeck: What percentage of your asset at this point is extended stay?

Tom Corcoran: No extended stay, we have zero extended stay.

David Sudeck: And what about all-suite?

Tom Corcoran: All-suite? We have eighteen of forty-one hotels.

David Sudeck: Okay, so you’ve stuck to your roots.

Tom Corcoran: Right.

David Sudeck: Sounds good. What do you think we’ll be talking about this time next year?

Tom Corcoran: Same thing. (Laughter)

David Sudeck: Right, but hopefully there’ll be debt.

Tom Corcoran: Well, again for me, it’s the question of rational debt. If it’s rational debt, and whether it’s 50% or 75% but they require the right kind of sponsor, they require a significant amount of equity, and they’re being built for the right economic reason – that’s okay.

David Sudeck: Right. And frankly, when I say there’s a pull-back in debt, it’s really construction lending. My clients who own, and are refinancing their operating, stabilized hotels are not having an issue.

Tom Corcoran: That’s correct, that’s right, and that’s because of a need for people to get yield for things, for hotels, that are actually performing.

David Sudeck: It’s a good time to buy REIT stock?

Tom Corcoran: I think so.

David Sudeck: Anything you want to add about your experience here at Meet the Money®?

Tom Corcoran: I like the size of it; I like Butler’s party the night before. I like the networking opportunity to see people and it’s of the size that really makes a lot of sense for people who visit. I call them these mini hotel conferences, and they have become actually more popular in many cases than the big ones, which end up sometimes being a blur.

David Sudeck: Well, when you have thousands of people in the same venue, it’s hard to find the people you really want to see.

Tom Corcoran: It’s true, it’s true.

David Sudeck: How many have you attended do you think of the 26 (Meet the Money® conferences)?

Tom Corcoran: Oh, I can’t remember. (Laughter) More than 10.

David Sudeck: Well, thank you for your support, we appreciate it.

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