Boring Portfolio

Boring Buying
FelCor Hotel Suites

By Greg Markus (TMF Boring)
with Mark Weaver (MWEAV) and Michael Dowd (TMF Yorick)


To expand opportunities for individuals to participate in the benefits of real estate ownership, the U.S. tax code exempts a real estate investment trust, or REIT, from corporate taxes (thereby avoiding "double-taxing" of corporate profits) so long as the REIT adheres to certain rules. The most significant of those rules (for shareholders) is that a REIT must pay out at least 95% of its annual earnings in dividends. (See for further information.)

As a group, REITs provided an impressive 36% total return in 1996, easily beating the S&P 500 -- and did so with less volatility than the S&P. REITs have continued to be strong performers in 1997. Hotel REITS have been the top performers among all REITS since 1995, providing total returns of 30.8% in 1995 and 48.9% in 1996. Through Sept. 30, 1997, hotel REITS provided a 36.2% total return, compared to 29.6% for the S&P 500. Hotel REITS as a group are also projected to enjoy the highest rate of profit growth of all REIT classes for 1998, according to data from First Call and Prudential Securities.

In light of all this, it's no surprise that investors looking for a degree of safety in a volatile market and also a good total return on their investment are discovering REITs. Indeed, so much money has moved into REITs that it's become increasingly difficult to locate a good value in the group. But we think we've found one.


Just like in the game of Monopoly, FelCor makes money from the ownership of hotels ... lots of 'em, all over the board -- and presumably even more in the years to come.

How We Found It

FelCor first came to our attention when we recently explored REITs as an investment for the Boring Portfolio and performed a few simple screens to turn up stocks that were trading at attractive multiples relative to their projected total returns.

Any such list is, of course, merely a place to begin one's homework, not end it. In particular, we all know that when it comes to investing in stocks, it's generally best to focus on companies and products you know something about first-hand. So it is with REITS: you want to find out as much as you reasonably can about the properties the REIT owns -- because if you invest in the REIT, then those properties become partly yours.

As it happens, the Borefolio team spends a fair amount of time on the road, and so we know something about hotels from a customers' perspective. We've also stayed in a few of FelCor's hotels and walked through a few others. We like them.

Management: Check 'em Out

Another consideration that's important when you invest is the quality of the management in which you're placing your trust. We checked out FelCor's management in two ways.

First, we clicked over to the Real Estate section of The Motley Fool and asked its host, Michael Dowd (TMF Yorick) for his considered opinion of FelCor. Not only does Michael specialize in REITs, it so happens that his particular area of expertise is hotel real estate and operations. He gave the folks at FelCor the thumbs up, as did a number of other participants in TMF's REIT Industry community. Our resident REIT experts also helped us benchmark FCH's valuation relative to stocks of other hotel owners and operators.

Next we rang up FelCor and spoke with President and CEO Thomas Corcoran, Jr. (He's the "Cor" in FelCor, by the way. The "Fel" part belongs to board chairman Hervey Feldman.) We found Mr. Corcoran to be quite willing to talk to us and answer our questions, both in our initial phone call and a follow-up one. He also arranged for us to join the conference call the company held following its recent quarterly earnings report.

Altogether, our homework took about as much time as one typically takes in deciding what new hi-fi to buy, and all of it is entirely within the capacity of any reasonably diligent individual investor. Of course, we don't usually get to talk with the CEO when we call a company. On the other hand, this wasn't the first time it's happened.

Even if you don't end up getting put through to the Big Cheese, in many small- and mid-cap companies it's not uncommon for the chief financial officer to field your questions, provided you've done some preliminary study of the company (so as not to come off as a complete bozo) and have a few specific items you'd like to get clarified.

We Like FelCor ...

In a nutshell, we like FelCor's properties, the company's managers are highly respected in the real estate world and communicate honestly and openly with shareholders, and the company has demonstrated its capacity to grow aggressively yet sensibly. Beyond that, the stock is attractively priced and carries an appealing dividend, thereby offering good possibilities for an above-average return. Finally, an investment in FelCor helps diversify our portfolio in a way that helps insulate it from sector-specific shocks while plausibly enhancing its overall growth potential.

But You Might Not

That said, the stock is not without its risks, as detailed in our "buy" report. Furthermore -- and we cannot stress this too much -- the purpose of our report is NOT to recommend that you to run out tomorrow and buy FCH. Indeed, if you do, then you've missed the whole point of The Motley Fool, and our portfolio reports.

Instead, the purpose of our report on FelCor is to show why WE decided to invest in the stock and the due diligence we performed in arriving at that decision. The big idea is that by following along with our process and line of reasoning, you'll perhaps become a bit better equipped to select your own investments -- one's that work best for you. We learned a great deal in preparing this report, and the hope is that you'll learn something by reading it.

Also, it is a certainty that there will be folks reading our report who know more about real estate in general, and FelCor in particular, than we do. If we've overlooked something, we want to know about it. The thing about investing is that it's never over: decisions are forever subject to review and revision. In the online, 24-by-7 environment of The Motley Fool, there's always the time and place available to share one's information and opinions ... and thereby add to our collective store of knowledge.

Next: Buy Report, Part 1

**This trade is being made under the regular portfolio policy, namely, once The Boring Portfolio announces an intention to trade, that trade will be made within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section in the hall of portfolios.**