Boring Portfolio

FelCor Reviewed
...while the market sees Starrs

by Mark Weaver (MWEAV)

SPRINGFIELD, IL (Sept. 10, 1998) -- The stock market went red in honor of our red-faced president who is now waiting for the grading of his performance on Starr search. There are some who believe he won't be going to the finals. The "tale of the tape" was as ugly as the spectre of learning the details of the tales of the tapes. Let's just say the markets were... er... Tripp'ed up.

On the day, the S&P 500 lost 2.58%, the Nasdaq was pounded for a 2.41% loss, and the Bore joined in the slaughter dropping 2.05%.

Borefolio holding TCBY (NYSE: TBY) reported earnings today. The report contained some one-time items that will require some clarification before coming to meaningful conclusions. Greg will have a full report on the report in tomorrow's recap. For the curious, the press release contains the basic information. The report was well received as TBY was up slightly on an otherwise down day.

Tonight I am going to continue our portfolio review with a look at FelCor Lodging Trust (NYSE: FCH). Greg and I are trying to give an update of the pros and cons of ownership of the Borefolio holdings in preparation for our impending exit.

In Tuesday's Recap, Greg reviewed Atlas Air (NYSE: CGO) and in last night's recap he reviewed Borders Group (Nasdaq: BGP), the world's second largest book retailer.

Tonight's focus, FelCor, is a hotel REIT that is the largest owner of Embassy Suites, Crown Plaza, and Holiday Inn branded hotels. The company also owns hotels under the Doubletree and Sheraton brand names. This hotel portfolio consists of upscale, all-suite upscale, and full-service hotels. Currently, the company owns 193 hotels with almost 50,000 rooms. These hotels are in 34 states and in Canada.

In November of 1997, we purchased 200 shares of FelCor at $37.59 per share. It has been a losing stock for the Bore almost every day since its purchase. The rationale for buying the stock was simple: we wanted some shelter from what we felt would be an uncertain market in the year ahead. We were right on one count! However, FelCor has not provided much shelter as the entire REIT sector went into a funk coinciding with our purchase. Hotel REITs have been particularly hard hit. The relative difficulty for hotel REITs has come through concerns about congressional action related to paired-share REITs. FelCor is not structured as a paired-share REIT, but was included in the nervous selloff anyway.

At the time of our original purchase, FelCor owned 71 hotels and 17,500 rooms. In the past 10 months the company has more than doubled in size. This impressive growth was, in large part, the result of the recent merger with Bristol Hotels, which brought the Crowne Plaza and Holiday Inn brand names into FelCor's stable.

The Upside from Here

While the expectation that FelCor stock would be a shelter from market storms did not materialize, FelCor has met its earnings growth targets with regularity. The company has also announced that it plans to increase the quarterly dividend, which now stands at $0.55, providing a 10.23% yield. We have no quarrel with the performance of the company, only with the performance of the stock.

Looking at First Call I see that EPS estimates for FY 1999 are $4.34, putting the stock's current price at a bit less than 5 times these estimates. The stock is trading at only 10 times trailing estimates. On the surface, FelCor would appear to be a stock with a very reasonable valuation.

Reasonable valuation with solid growth prospects were the very same reasons we bought the stock last fall. If FelCor can continue to find properties to buy and can succeed in integrating the Bristol Hotel properties into its fold, this stock should indeed be a shelter in the market's storm.


One of the more intelligent "point-counterpoint" discussions regarding a stock's prospects is being conducted on the FelCor message board at the Fool website.

The principal "bear" on the stock is participant AuFaitFool. This Fool has posted some very well thought out and detailed criticisms of FelCor, which focus primarily on the Bristol Hotels acquisition. To his/her reckoning, FelCor overpaid by some $500 million for the hotels. S/he sums up the prospects for FelCor as follows:

"In terms of FCH stock returns, in the good days, the market extracted a low dividend, 6%, and a high expection of FFO growth, 12%-15%, for a total return of 18%-21%. In these bad days, the market is requiring a 10.3% dividend while the consensus 5-year FFO growth is 11%. So, what gives? I think the answer is the market is putting a low probability on FCH achieving the 11% over the next 5 years. The reasons are that the FFO growth generated by financial leverage and accretive acquisitions is no longer available to FCH and the industry REVPAR growth is slowing, which will make it harder for FCH to get the same REVPAR growth even with renovations. "

In a nutshell, the risk for FelCor is an inability to buy new properties and a slowdown in the hotel industry. If, indeed, FelCor does not achieve its targeted FFO growth, the upside in the stock will be limited.

Bottom Line

I believe that FelCor's management has done everything that it said it would do over the past 10 months. If it continues to perform according to plan, the FFO growth will be there. Once the Bristol Hotels acquisition has been digested I would look for continued property purchases by FelCor. If there are none then, yes, share price appreciation will be limited. You pays your money, you takes your chances.

At the present time, a big hunk of FelCor's total return will come in the form of dividends. In addition to the regular dividend there is an additional income "kicker" in the form of a special one-time dividend in the $0.40 range due near the end of the year. This dividend is part of the Bristol merger package. Over the next 12 months an investor will receive $2.60 in income (more if the expected dividend increase actually happens) for an annual yield of over 12%. If the stock doesn't gain a penny you will get the historic return equal to the S&P 500 from dividends alone.

The yield alone seems a compelling reason to hold the stock. It is amazing to these eyes that in the absence of material negative news (missed estimates, accounting problems, declining economy, loss of key personnel, insider selling) the stock has been pounded relentlessly. I can't help but think that a more understandable view of the stock will be forthcoming from "the Street."

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

09/10/98 Close

Stock  Change    Bid 
 ANDW  -  5/16  13.75 
 CGO   -  11/16 21.13 
 BGP   -  3/16  24.31 
 CSL   -2       36.00 
 CSCO  -2 3/8   88.44 
 FCH   -1 1/16  20.44 
 PNR   -  7/16  29.94 
 TBY   +  7/16  6.75 
                   Day   Month    Year  History 
         BORING   -2.05%   5.62% -17.92%   3.28% 
         S&P:     -2.58%   2.37%   1.01%  57.69% 
         NASDAQ:  -2.41%   5.74%   0.95%  52.30% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     88.44   146.12% 
   2/28/96  400 Borders Gr    11.26     24.31   115.99% 
   8/13/96  200 Carlisle C    26.32     36.00    36.75% 
    3/5/97  150 Atlas Air     23.06     21.13    -8.38% 
   4/14/98  100 Pentair       43.74     29.94   -31.56% 
   5/20/98  400 TCBY Enter    10.05      6.75   -32.80% 
   11/6/97  200 FelCor Sui    37.59     20.44   -45.63% 
   1/21/98  200 Andrew Cor    26.09     13.75   -47.30% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  13265.63  $7875.64 
   2/28/96  400 Borders Gr  4502.49   9725.00  $5222.51 
   8/13/96  200 Carlisle C  5264.99   7200.00  $1935.01 
    3/5/97  150 Atlas Air   3458.74   3168.75  -$289.99 
   5/20/98  400 TCBY Enter  4018.00   2700.00 -$1318.00 
   4/14/98  100 Pentair     4374.25   2993.75 -$1380.50 
   1/21/98  200 Andrew Cor  5218.00   2750.00 -$2468.00 
   11/6/97  200 FelCor Sui  7518.00   4087.50 -$3430.50 
                              CASH   $5750.59 
                             TOTAL  $51641.22