Boring Portfolio

Atlas Air Profits Soar
... and FelCor meets its targets
By Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (July 22, 1998) -- Two more Boring companies reported their quarterly results, and both posted strong numbers.

Late last night (around 9 p.m. ET?), FelCor Suite Hotels (NYSE: FCH) published results for its June quarter. Funds from operations (FFO), the criterion that most REITsters watch, totaled $45.0 million or $1.01 per share. That represented an increase of 17% over the year-ago period and matched analysts' consensus forecast, as provided by First Call. (FFO is what's known in the non-REIT world as "cash flow," or earnings plus depreciation and amortization.)

Total revenue for the second quarter of $67.4 million represented a 64% increase over the comparable period last year.

The strong revenue and FFO results were driven by thoroughly respectable "same store sales" numbers. For example, at the 43 hotels that FelCor owned at the end of both 1996 and 1997, revenues per available room (or "RevPAR" -- ya gotta know the lingo) rose 6.3%.

FelCor acquired 11 hotels during the quarter. Eight upscale, full-service all-suite hotels were acquired from Starwood Hotels & Resorts (NYSE: HOT) for an aggregate cash price of $245 million. The eight hotels have a total of 1,898 suites and are located in geographically diverse U.S. markets. After planned conversions, six of the hotels will be Embassy Suites hotels managed by Promus Hotel Corp. (NYSE: PRH) and two hotels will be Sheraton Suites hotels managed by Sheraton.

FelCor also acquired two Doubletree hotels (one in Dallas and one in Denver) and the Meadowlands Hilton hotel in Secaucus, NJ, representing a gross investment of approximately $80 million.

Next week, shareholders at FelCor and Bristol Hotels (NYSE: BH) will vote on the proposed merger of the two companies, which is expected to close on July 28. The merger will add 109 primarily full-service hotels (mostly Crowne Plazas and Holiday Inns) with more than 28,000 rooms to the FelCor portfolio.

Management anticipates that after the Bristol merger and related transactions, FelCor's consolidated debt-to-total market capitalization will be approximately 37%, fixed interest rate debt will comprise 61% of total indebtedness, and only 7% of total assets will be encumbered with secured debt.

I'll have more to say later this week about FelCor, after we post a summary of the follow-up conference call. For now, I'll merely say that from the day we first invested in FelCor, the REIT's management has done exactly what they said they would do, has consistently delivered quarterly results that meet or beat the Street's expectations, and has managed the financial side of the operation admirably. Revenue and FFO gains are well above the industry average. Yet the share price has sagged as investors have worried about the health of the REIT industry.

I continue to believe that FelCor's share price will eventually reflect the very good value that is there. The annual dividend that has now climbed to 7.4% is almost certainly catching some folks' eyes.

FelCor's stock eased $1/16 to $29 3/4 in light trading.

As for Atlas Air (NYSE: CGO), the folks from Golden, Colorado topped the Street's expectation of $0.41 per share in earnings by four pennies.

Despite the fact that the company had two fewer aircraft in the fleet than in the year-earlier quarter, Atlas produced nearly as many block hours flown (16,828 versus 17,541) and nearly as much operating revenue ($88.0 million versus $93.9 million).

The big difference was in operating costs. Last year, Atlas was limping along with five troubled aircraft on lease from FedEx (NYSE: FDX). This year, those lemons are gone. Operating cost per block hour dropped 24% over the second quarter of 1997.

The other big event at Atlas is its plan to introduce a covey of new 747-400 freighters into its fleet. The company will be taking delivery of its first 747-400F in Seattle next week, and expects to commence its contract with British Airways (NYSE: BAB) in August using that aircraft. The second 747-400F aircraft is scheduled for a mid-August delivery, and Cargolux has dibs on it. Three additional new freighters are scheduled to be delivered later in the balance of 1998.

Atlas's management is so convinced of this aircraft's future at the company that they advanced the delivery of two additional aircraft into 1999, giving Atlas a total of four aircraft next year. In a follow-up conference call, Atlas's management said they believe this will increase total block-hour production in 1999 to perhaps 109,000. That would represent an increase of approximately 35% over 1998's projected block-hour production.

Here is the summary of Atlas's conference call, from the call area (where FelCor's summary will later appear -- probably tomorrow morning).

Atlas's customers continued to carry strong cargo loads, particularly out of the Far East. The directional imbalance in trade with Asia does not impact Atlas at all, as the increase in exports from Asia continues to offset any weakening in their imports. Atlas execs pointed out that Standard & Poor's DRI economic analysis firm is projecting holiday season imports to be up 25% from last year's level, which would set an import record.

Finally, as noted here earlier this week, Atlas confirmed that the recent problems at the new Hong Kong airport affected British Airways flights under contract with Atlas to a limited degree. Those problems have been substantially resolved and are not expected to have an appreciable impact on Q3 results.

All in all, I'd say it was a good quarter for FelCor and a great quarter for Atlas.

FoolWatch -- It's what's going on at the Fool today.

07/22/98 Close

Stock  Change    Bid 
 ANDW  +  1/4   18.19 
 CGO   +  1/2   37.31 
 BGP   -  15/16 36.81 
 CSL   +  1/2   47.50 
 CSCO  -  1/2   98.38 
 FCH   -  1/16  29.75 
 PNR   +  1/16  40.25 
 TBY   -  1/8   8.44 
                   Day   Month    Year  History 
         BORING   -0.42%   2.27%   6.64%  34.19% 
         S&P:     -0.08%   2.67%  19.96%  87.27% 
         NASDAQ:  -0.47%   3.96%  25.43%  89.22% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     36.81   227.04% 
   6/26/96  150 Cisco Syst    35.93     98.38   173.77% 
   8/13/96  200 Carlisle C    26.32     47.50    80.44% 
    3/5/97  150 Atlas Air     23.06     37.31    61.82% 
   4/14/98  100 Pentair       43.74     40.25    -7.98% 
   5/20/98  400 TCBY Enter    10.05      8.44   -16.00% 
   11/6/97  200 FelCor Sui    37.59     29.75   -20.86% 
   1/21/98  200 Andrew Cor    26.09     18.19   -30.29% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  14725.00 $10222.51 
   6/26/96  150 Cisco Syst  5389.99  14756.25  $9366.26 
   8/13/96  200 Carlisle C  5264.99   9500.00  $4235.01 
    3/5/97  150 Atlas Air   3458.74   5596.88  $2138.14 
   4/14/98  100 Pentair     4374.25   4025.00  -$349.25 
   5/20/98  400 TCBY Enter  4018.00   3375.00  -$643.00 
   11/6/97  200 FelCor Sui  7518.00   5950.00 -$1568.00 
   1/21/98  200 Andrew Cor  5218.00   3637.50 -$1580.50 
                              CASH   $5528.69 
                             TOTAL  $67094.32