Oct. 3 (Bloomberg) -- The stretch of southern California shoreline made famous in the Beach Boys' 1960s hit ``Surfin' U.S.A.'' is the proving ground for Chief Executive Officer Richard Smith's plan to revive FelCor Lodging Trust Inc., whose shares plunged 63 percent this year.

The biggest U.S. suite-hotel owner is pouring $450 million into renovations nationwide, including turning an undistinguished property in Dana Point, 64 miles (103 kilometers) north of San Diego, into a corporate resort with $599-a-night rooms overlooking the Pacific.

The overhaul came just as soaring gasoline prices and a slowing economy cut into business travel and pummeled hotel owners such as Irving, Texas-based FelCor. It slashed the quarterly dividend 57 percent to 15 cents on Sept. 30, the biggest reduction since 2001.

The 4,600-square-foot conference center at FelCor's Doubletree Guest Suites Doheny Beach opened in June as investors soured on the real-estate investment trust. The shares are now half as expensive as those of the company's peers, according to data compiled by Bloomberg. The valuation is based on price to trailing 12-month funds from operations, a measure used by REITs to exclude acquisitions and sales.

FelCor's multiple of 5.1 compares with an average of 10 for competitors and is ``ridiculous,'' said Raymond Mathis, a portfolio manager at Spirit of America Funds.

``If you are a value investor, you have to buy things when they are cheap,'' said Mathis, who's purchasing FelCor ``like crazy. The company is poised to have industry-leading growth.''

His Syosset, New York-based mutual fund owned 1.23 million shares as of Aug. 29, according to a regulatory filing.

$4 Gasoline

Smith started fixing up his hotels in 2006 to attract high- spending business travelers. Then gasoline climbed to a record $4.11 a gallon in the U.S. As room revenue weakened, investors focused on FelCor's debt, which totaled $1.5 billion as of June 30 and had a weighted average life of four years and interest rate of 6.3 percent, according to the company.

About 47 percent of the debt has a floating rate, the second highest among its peers, Robert W. Baird & Co. analyst David Loeb said in a Sept. 5 report.

The REIT reduced net debt by 4.8 percent over the last five years and is ``very comfortable'' about refinancing a $119 million commercial mortgage-backed security coming due in 2009, Smith said in an interview.

FelCor has finished upgrading 78 of its 85 hotels, which also carry the brands of Hilton, Renaissance, Embassy Suites, Westin, Sheraton and Holiday Inn.

``Exceeding Our Returns''

``We are exceeding our returns on these renovations,'' gaining 5 percentage points of market share in the areas FelCor serves, said Smith, 46. ``We had too much dependence on side-of- the-road hotels that were older properties.''

Smith, who joined FelCor in 2004 as chief financial officer and became CEO in 2006, almost doubled his stake in the first quarter. A University of Tennessee graduate with bachelor's degrees in accounting and business law, he was previously CFO at Dallas-based Wyndham International Inc.

FelCor fell 37 cents, or 6.4 percent, to $5.43 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have tumbled 63 percent since May 30, while the Bloomberg Hotel REIT Index dropped 40 percent and the Russell 2000 Index declined 17 percent.

Average revenue per available room, a measure of rates and occupancy, grew 43 percent to $105.76 in the second quarter from $74 in 2005, before the renovations began. The U.S. industry average rose 15 percent to $66.03 in the same period, according to Smith Travel Research, a Hendersonville, Tennessee-based marketing firm that tracks lodging data.

7.4 Percent

While revenue growth per room will probably slow to 1.5 percent next year, FelCor will beat the industry average of 0.4 percent, analyst Loeb said.

FelCor's yield will be 7.4 percent even after the dividend cut, meaning an investor may see a 22 percent total return if the shares rise to $9.25 by August 2009, estimated UBS analyst William Truelove in New York. He rates the shares ``buy.''

Short interest has fallen 28 percent since mid-July, a signal that the REIT may be near a bottom. In a short sale, investors sell borrowed securities and try to profit by repurchasing them later at a lower price, returning them to the holder and pocketing the difference.

Merrill Lynch & Co.'s Amanda Bryant, whose estimate of FelCor's total return over the past year was the most accurate in a Bloomberg survey, reduced her target price three times in 2008. Competitors have lower debt ratios and the company may suffer if the industry's number of hotel rooms grows more than forecast and travel weakens further, the New York-based analyst said in an Oct. 1 report.

Renaissance Sells

Bryant is one of two analysts who recommended selling. Four say to buy and eight advise holding.

Columbia Partners LLC sold 1.32 million FelCor shares in the second quarter. Renaissance Technologies Corp., a quantitative investor based in East Setauket, New York, dumped almost half its holdings. Columbia Chief Investment Officer Robert von Pentz in Washington didn't return a call and Renaissance spokesman Jonathan Gasthalter declined to comment.

FelCor's properties, in 23 U.S. states and Canada, serve tourist magnets including Walt Disney World in Florida and Myrtle Beach, South Carolina. The company was started in 1991 by Embassy Suites founder Hervey Feldman and former ShowBiz Pizza Time CEO Thomas J. Corcoran Jr., the current chairman.

Signs of the overhaul at the Doheny Beach hotel start at the driveway, where embossed bricks replaced bare cement. A waterfall graces the lobby and pygmy palm trees shade the pool. Room rates jumped to $169 to $599 a night, from $89 to $265, General Manager Denise Pflum said.

FelCor turned a former valet-parking garage into a 300-seat conference center, winning customers from Boeing Co. to the Dana Point Chamber of Commerce.

``It was something that was really needed in this area,'' said Nichole Chambers, the business group's CEO.

To contact the reporter on this story: Peter J. Brennan in Los Angeles at pbrennan3@bloomberg.net.

Last Updated: October 3, 2008 16:33 EDT