Boring Portfolio

Boring Buying FCH
November 05, 1997

Buying: 200 shares, FelCor Hotels Inc. (NYSE: FCH).

Closing Price, Nov. 4, 1997: $36 5/8

FelCor Suite Hotels Inc. (NYSE: FCH)
545 E. John Carpenter Fwy, Ste. 1300
Irving, TX 75062
(972) 444-4900

The Company

ANN ARBOR, Mich. (Nov. 4, 1997) /FOOLWIRE/ -- FelCor Suite Hotels Inc., an umbrella partnership REIT (UPREIT), is the third-largest hotel equity REIT -- following the paired-share REITS of STARWOOD LODGING (NYSE: HOT) and PATRIOT AMERICAN (NYSE: PAH) -- and currently the largest owner of full-service, all-suite hotels. FelCor Inc. derives most of its income from its 92.7% ownership of FelCor Suites Limited Partnership, the balance of which is owned by FelCor chair Hervey Feldman and FelCor president and CEO Thomas Corcoran, Jr.

To qualify as a REIT, neither FelCor Inc. nor FelCor LP can operate the hotels in which they invest. To date, the partnership has therefore leased all of its properties to DJONT Operations LLC, which is responsible for securing management for the hotels and otherwise overseeing operations. Feldman and Corcoran each own 25% of DJONT, and the remaining half is owned by RGC Leasing Inc. -- which in turn is owned by the children of Charles N. Mathewson, who is a director of FelCor. Because of this arrangement, FelCor may be described as an "affiliated, single-lessee hotel UPREIT." You got all that?

One other complication: FelCor Inc. has equity interests in 13 hotel joint ventures that are accounted for on its financial statements as "unconsolidated subsidiaries." From here on, unless the context otherwise requires, whenever we refer to "FelCor" or "the company" in this report, we're referring to the combined business and assets of FelCor Inc., FelCor partnership, and the unconsolidated subsidiaries.

FelCor Executive Officers

Hervey A. Feldman, age 59, is chairman and co-founder of FelCor, Inc. Previously, he served as president and CEO of Embassy Suites from its founding in Jan. 1983 to April 1990 and as chairman from June 1990 until Jan. 1992. Altogether, Feldman had spent more than 30 years in the hotel industry, including serving in various management positions with Brock Hotel Corp., as Executive VP for North American Development of Holiday Inns, and president and CEO of Brock Residence Inns Inc., which founded the extended-stay, all-suite chain now known as Residence Inns by Marriott.

Thomas J. Corcoran, Jr., 48, is the other co-founder of FelCor. He has served as president and CEO of the company since its formation. From Oct. 1990 to Dec. 1991 he served as chair, president and CEO of Fiesta Foods Inc. From 1979 to 1990, Mr. Corcoran held various positions with Integra (formerly Brock Hotel Corp.), including president and CEO from 1986 to 1990.

FelCor's former CFO, William McCalmont was recently hired away to become a senior executive at LA QUINTA INNS (NYSE: LQI). On Oct. 30, FelCor announced that Randall Churchey would replace McCalmont as senior VP, CFO and treasurer. Churchey, 37, is a 15-year veteran and partner with Coopers and Lybrand where he chaired the firm's hospitality and real estate practice for the southwestern U.S.

Other executive officers of FelCor include: Lawrence Robinson, Sr. VP, General Counsel and Secretary; Jack Eslick, VP and Director of Asset Management; June McCutchen, VP and Director of Design and Construction; and William Stadler, VP and Director of Acquisition and Development. All have extensive experience in the hotel industry.

The Properties

With proceeds from its initial public offering in July, 1994, FelCor Inc. acquired an equity interest in six Embassy Suites hotels controlled by Feldman and Corcoran. From that beginning, FelCor has increased its revenues rapidly through a two-pronged strategy: acquisition and quality improvement.


FelCor's acquisition strategy has focused on hotels that may be converted to, or that already are, Embassy Suites or Doubletree Guest Suites, although it has also acquired some other all-suite hotels and upscale non-suite hotel properties. In general, FelCor considers investments in hotels that are in markets with projected growth potential; which may be underperforming due to poor management, weak franchise affiliation or a need for renovation; with relatively stable operating histories; and/or with attractive purchase prices below replacement cost.

Using a combination of four stock offerings since its IPO, a preferred stock offering, debt, and cash from operations, FelCor gobbled up one hotel to add to its original six in 1994, 13 more in 1995, and 23 more in 1996, bringing the 1996 year-end total to 43 hotels and 10,196 suites.

So far in 1997, FelCor has added 28 hotels to its empire, bringing the total to 71 hotels and approximately 17,500 suites/rooms. Of those 71 hotels, 52 are Embassy Suites (one of which is currently being converted from another brand), 12 are Doubletree Suites, two are Sheraton Suites, one is a Hilton Suites, and four are traditional non-suite Sheraton hotels. The last group includes FelCor's most recent purchase, the 365-room Sheraton Society Hill, in Philadelphia, for $51 million.

Also among the 1997 acquisitions are the 203-suite Raleigh/Durham Doubletree Guest Suites hotel, the 203-suite Tampa (Rocky Point) Doubletree Guest Suites hotel, and the 229-suite Lake Buena Vista Doubletree Guest Suites hotel, located inside the Walt Disney World Resort in Lake Buena Vista, Fla.

FelCor's hotels are located in 25 states, with concentrations in California, Florida, and Texas.

Twelve of FelCor's hotels are 50/50 joint ventures with PROMUS HOTELS (NYSE: PRH) and two others are 50/50 joint ventures with private co-owners. Promus manages 50 of the Embassy Suites hotels, DOUBLETREE (Nasdaq: TREE) manages the 12 Doubletree Suites, and Sheraton manages the six properties bearing its name. Coastal Hotel Group manages one Embassy Suites and American General Hospitality manages one Embassy Suites and the Hilton Suites.

Embassy Suites hotels are upscale, full-service, all-suite hotels typically providing two-room suites, free cooked-to-order breakfasts, complimentary evening cocktails, a fitness center, indoor heated pool, saunas, whirlpool and steam room, all in an atrium environment. Each suite usually contains two telephones (with voice mail), a mini-refrigerator, coffee maker, microwave oven, wet bar, a 25" color television in the living room and a 19" color television in the bedroom. Restaurant, banquet and lounge facilities also are typically available at each hotel. Embassy Suites draws heavily upon weekend and leisure customers, but it also attracts many individual business travelers. Industry statistics show that Embassy Suites achieved a 93% satisfaction rating by its guests in 1996, the highest rating of all hotel brands in its segment. There are approximately 140 Embassy Suites hotels in the U.S. The Embassy Suites brand is owned by Promus.

Doubletree Guest Suites is the all-suites division of Doubletree, which in September agreed to be acquired by Promus. Doubletree Guest Suites tends to focus on the business traveler and, to a somewhat lesser degree, families and vacationers. There are presently 42 Doubletree Guest Suites in operation in the U.S.

Internal Growth

FelCor's internal growth strategy is to improve the revenue production of its hotels through quality improvements, such as renovation, upgrading and repositioning. Improvements in suite revenue are important to FelCor because its principal source of income is lease payments from DJONT, and those payments are based on a percentage of suite revenues and food and beverage revenues (or a minimum base rent). In 1996 the portion of the percentage lease revenue derived from suite revenues was over 97%.

FelCor made capital expenditures of approximately $51 million during 1996 in converting and upgrading acquired hotels. The majority of these expenditures were made in connection with the renovation and conversion to Embassy Suites of 18 Crown Sterling Suites (CSS) hotels acquired during late 1995 and early 1996. During 1996 FelCor also completed construction of 17 additional suites at its Flagstaff hotel and 31 additional suites at its New Orleans hotel at a total cost of approximately $5.3 million.

In 1997 FelCor completed the net addition of 129 suites, additional meeting rooms, and other public area improvements to its Boston-Marlborough hotel at an estimated cost of approximately $15.8 million. FelCor is also adding an aggregate of 134 suites in Florida at its Jacksonville and Orlando (North) Embassy Suites hotels, at an estimated cost of approximately $10.2 million.

In addition to the conversion and upgrade costs typically incurred by FelCor in connection with newly acquired hotels, the company is required under its percentage lease agreements to provide a capital replacement reserve, consisting of 4% of suite revenues for recurring capital improvements. FelCor spent approximately $9.2 million (or about 4.3% of suite revenues) during 1996 on recurring capital improvements. DJONT also spent approximately $14.5 million (6.2% of suite revenues) during 1996 on routine maintenance and repair, for which DJONT is responsible under its leases with FelCor.

RevPAR. The measure of revenue production in the hotel industry is "revenue per available room/suite," or RevPAR. The more desirable your property is, the higher the RevPAR it can yield. In the third quarter of 1997, the 71 hotels owned by FelCor at the end of quarter showed an increase in RevPAR of 7.3% to $82.81 from $77.17 during the same period in 1996. Excluding 12 hotels that were located in Atlanta (and thus skewed by the presence of the Olympics in 1996) or else were undergoing rebranding, renovation or room additions, RevPAR increased 12.3% for the quarter. The 18 converted CSS Hotels achieved a RevPAR of $84.49 for the third quarter of 1997 compared to $69.14 during the third quarter of 1996, an increase of 22.2%.

Next: Buy Report, Part 2

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