Check-In Time for Hotels

FelCor Lodging Trust (FCH Quote) may be the latest hotel owner to be exploring a sale of its assets. Barry Vinocur, editor of REIT Zone Publications, reported Wednesday morning that General Electric's (GE Quote) real estate division is close to buying Felcor for $23 to $25 a share in a deal that could be announced next week. Vinocur, who cited unnamed sources for the information, cautioned that the deal could still fall through.

Following up on this news, UBS analyst William Truelove noted in a report that over the past six months, three of the lodging companies he covered -- La Quinta, Fairmont and MeriStar -- have been sold to private equity investors.

Blackstone Group purchased La Quinta and Meristar, while Fairmont was sold to Colony Capital and a Saudi prince.

Truelove believes a reasonable takeover price metric for hotel stocks is an enterprise value of 13 times to 14 times forward earnings before interest, taxes depreciation and amortization. For Felcor, that would equate to a $28 to $33 per-share takeout price based on his second-quarter 2006 to first-quarter 2007 EBITDA estimate of $279 million, he noted.

But Frankel, the portfolio manager, says FelCor is already overvalued. The company's EBITDA doesn't paint a true picture of its cash flow since it excludes capital expenditures, which for Felcor, average about 20% of EBITDA, he says. If you adjust for capital expenditures, Felcor is trading at an expensive value to its cash flow relative to its peers, and the company's high amount of debt makes the valuation too pricey, he says.

"If Felcor gets bought, I don't see much, if any, premium from here," he says, adding that the buyout could occur at either a premium or discount of 3% to 4% from where the stock is trading. Felcor shares have jumped about 5% to $22.43 since the buyout news was announced before the market opened Wednesday.

However, if Felcor does get bought for a decent price, it would only signal good prospects for the rest of the hotel stocks, Frankel says.