Business Context and Reporting Period
This Form 8-K, filed on August 7, 2017, by RLJ Lodging Trust ("RLJ"), serves as a supplement to the Definitive Proxy Statement regarding the proposed merger with FelCor Lodging Trust Incorporated ("FelCor"). The filing addresses ongoing litigation challenging the merger and provides amended financial projections and valuation analyses used by financial advisors Barclays and BofA Merrill Lynch. Special shareholder meetings for both companies are scheduled for August 15, 2017.
Key Financial Metrics and Projections
The filing details unaudited prospective financial information for both entities on a standalone basis for fiscal years 2017 through 2021. These are forward-looking estimates, not historical results.
RLJ Adjusted Projections (Standalone)
| Year | 2017E | 2018E | 2019E | 2020E | 2021E |
|---|---|---|---|---|---|
| Adjusted EBITDA ($ millions) | $368 | $371 | $370 | $381 | $394 |
| Unlevered Free Cash Flow ($ millions) | $285 | $186 | $185 | $245 | $256 |
| Total Revenue ($ millions) | $1,118 | $1,143 | $1,163 | $1,200 | $1,237 |
FelCor Adjusted Projections (Standalone)
| Year | 2017E | 2018E | 2019E | 2020E | 2021E |
|---|---|---|---|---|---|
| Adjusted EBITDA ($ millions) | $235 | $221 | $220 | $231 | $240 |
| Unlevered Free Cash Flow ($ millions) | $77 | $69 | $106 | $139 | $179 |
| Total Revenue ($ millions) | $836 | $862 | $835 | $863 | $891 |
Note: FelCor projections assume net proceeds from asset sales of $514 million and exclude select assets identified for disposition.
Material Changes and Litigation
The primary material event disclosed is the filing of four putative class action lawsuits challenging the merger:
- Three Maryland Lawsuits: Filed in June and July 2017 (Assad, Johnson, and Sachs cases) alleging violations of the Securities Exchange Act regarding false and misleading disclosures in the proxy statement.
- One Texas Lawsuit: Filed July 17, 2017 (Bagheri case) with similar allegations.
- Injunction Motion: A motion for a preliminary injunction to stop the merger was filed in the Johnson Lawsuit, with a hearing scheduled for August 14, 2017.
RLJ and FelCor maintain that the claims are without merit but are providing supplemental disclosures regarding financial advisor relationships and valuation methodologies.
Guidance, Valuation, and Management Commentary
Financial advisors provided updated valuation ranges based on Discounted Cash Flow (DCF), Comparable Company, and Precedent Transaction analyses:
- RLJ Implied Equity Value Range: $22.80 to $26.30 (DCF) and $24.40 to $26.40 (Net Asset Value).
- FelCor Implied Equity Value Range: $7.00 to $8.80 (DCF) and $7.60 to $8.80 (Net Asset Value).
- Advisor Fees: Barclays is to receive approximately $11 million upon consummation of the merger. BofA Merrill Lynch has received fees for past services and will receive customary fees for the consent solicitation.
- Post-Merger Management: Except for certain executive officers remaining for a transitional period, none of FelCor's executive officers will continue as officers of the Combined Company. The specific FelCor director to be appointed to the RLJ Board has not yet been determined.
Investor Verification Checklist
- Litigation Status: Verify the outcome of the preliminary injunction hearing scheduled for August 14, 2017, and any subsequent rulings on the four class action lawsuits.
- Shareholder Vote: Confirm the results of the special shareholder meetings held on August 15, 2017, for both RLJ and FelCor.
- Projection Assumptions: Review the "RLJ Adjusted Projections" and "FelCor Projections" tables to understand the conservative capital expenditure assumptions and asset disposition proceeds ($514 million for FelCor) used in the valuation.
- Advisor Conflicts: Note the disclosed relationships between the financial advisors (Barclays and BofA Merrill Lynch) and the companies, including past banking services and contingent fees.
- Definitive Proxy Statement: Read the full Definitive Proxy Statement and all supplements, as this 8-K is intended to be read in conjunction with those documents.