Boring Portfolio

Boring Buying FCH
FelCor Appendices

November 05, 1997

Appendix 1. What is an UPREIT?

To address various tax matters related to the formation of a REIT when various pre-existing partnerships owning multiple properties are involved, a new form of REIT has emerged in the early 1990s: the "umbrella partnership REIT, or UPREIT. Since 1992, more than 75% of new REITs have taken this form, according to NAREIT.

In the typical UPREIT, the partners of the pre-existing partnerships and a newly-formed REIT become partners in a new partnership termed the "operating partnership." The partners in the pre-existing partnership contribute their properties in exchange for "units" in the new operating partnership, and the REIT contributes the cash proceeds from its public stock offering. The REIT typically is the general partner and majority owner of the operating partnerships units.

Appendix 2. What is a Paired-share REIT?

When they were created by law, REITs were intended to be passive investment vehicles. In the early 1980s, however, a handful of REITsters figured out how to affiliate with real estate managers, giving the combined entity the tax advantages of a traditional REIT plus the flexibility (and profits) of an active management operation. Formally, the REIT and the management firm were separate entities, but their shares were paired and traded as one. Hence the name "paired REIT."

In effect, the REIT leased properties back to itself, thereby enabling REITs to operate as well as own hotels, casinos, race tracks, parking lots, and healthcare facilities. REITs that own these types of properties but lack a paired-share structure must hire outside lessees and managers to run them, which can result in significant "leakage" in the REIT's income stream.

Congress considered the pairing arrangements to be an abuse of the original legislation, and so it curbed the practice in 1984, while "grandfathering" in four paired REITS: STARWOOD (NYSE: HOT), PATRIOT AMERICAN (NYSE: PAH), HOLLYWOOD PARK (Nasdaq: HPRK), and Santa Anita Realty. MEDITRUST (NYSE: MT), a healthcare REIT, assumed paired-share status by acquiring Santa Anita recently. Hollywood Park relinquished its pair-share status five years ago but is currently seeking to regain it.

Some industry analysts are worried that the publicity given the Starwood-ITT deal -- and Hilton's complaints about alleged unfair advantages that Starwood enjoys as a result of its paired-share status -- might prompt Washington to further clamp down on paired REITs.

Appendix 3. Hotels owned by FelCor as of Sept. 1997.

      Hotels through Dec. 31, 1996
      Year #
      Location                 Opened    Suites
      Embassy Suites:
      Boston-Marlborough, MA   1988      100
      Brunswick, GA            1988      130
      Chicago-Lombard          1990      262
      Corpus Christi, TX       1984      150
      Dallas (Love Field),     1986      248
      Dallas (Park Central)    1985      279
      Flagstaff, AZ            1988      119
      Jacksonville, FL         1985      210
      Nashville                1986      296
      New Orleans              1984      282
      Orlando (North)          1985      210
      Orlando (South)          1985      244
      Tulsa, OK                1985      240
      Anaheim, CA              1987      222
      Baton Rouge, LA          1985      224
      Birmingham, AL           1987      242
      Burlingame SF Airport S. 1986      339
      Deerfield Beach, FL      1987      244
      El Segundo LAX South, CA 1985      350
      Ft Lauderdale            1986      359
      Miami Airport            1987      314
      Milpitas, CA             1987      267
      Minneapolis (Airport)    1986      311
      Minneapolis (Downtown)   1984      218
      Napa, CA                 1985      205
      Oxnard Mandalay Bch, CA  1986      249
      Phoenix (Camelback)      1985      233
      San Francisco Airport N. 1988      312
      St Paul, MN              1983      210
      Atlanta (Buckhead)       1988      317
      Beaver Creek Resort, CO  1990       72
      Boca Raton, FL           1989      263
      Charlotte, NC            1989      274
      Cleveland                1990      268
      Deerfield, IL            1987      237
      Indianapolis (North)     1985      222
      Kingston Plantation, SC  1987      255
      Parsippany, NJ           1989      274
      Piscataway, NJ           1988      225
      San Rafael, CA           1990      235

      Doubletree Suites:
      Tampa/Busch Gardens      1985      129
      Boca Raton, FL           1989      182

      Hilton Suites:
      Lexington, KY            1987      174

      1997 Acquisitions

      Embassy Suites:
      Atlanta (Perimeter Ctr.) 1985      241
      Austin (Airport N.), TX  1984      261
      Covina, CA 1980 264
      Kanss Cty(Cntry Clb), MO 1976      226
      Los Angeles (LAX N.)     1990      215
      Overland Park, KS        1984      199
      Raleigh, NC              1987      225
      San Antonio (Airpt), TX  1985      261
      San Antonio, (NW), TX    1979      217
      Secaucus, NJ             1986      261
      Syracuse, NY             1989      215
      Dallas (Mkt Ctr), TX     1980      244

      Doubletree Suites:
      Austin (Downtown), TX    1987      189
      Baltimore, MD            1987      251
      Bloomington, MN          1980      219
      Dana Point, CA           1992      198
      Omaha, NE                1973      189
      Troy, MI                 1987      251
      Lake Buena Vista, FL     1987      229
      Tampa (Rocky Pt), FL     1986      203
      Raleigh/Durham, NC       1987      203
      Nashville Airport, TN    1988      138

      Sheraton Hotel:
      Phoenix (Crescent), AZ   1986      342
      Atlanta (Airport), GA    1986      395
      Dallas (Park Cntrl), TX  1983      545
      Philadelphia, PA         1986      365

      Sheraton Suites:
      Atlanta (Galleria), GA   1990      278
      Chicago (O'hare), IL     1986      297

Appendix 4. Why FFO?

REITs provide income and earnings information in their SEC filings that is consistent with generally accepted accounting principles (GAAP). However, the National Association of Real Estate Investment Trusts (NAREIT) has adopted a supplemental measurement called Funds From Operations (FFO) as an industry-wide measure of REIT operating performance. (See for further information.)

GAAP implicitly assumes that the value of assets diminishes predictably over time. Real estate values have historically risen (often) or fallen (sometimes) with market conditions, however, and therefore GAAP methods for depreciating capital assets can lead to misleading results with real estate. NAREIT therefore defines FFO as net income plus depreciation and amortization costs (and excluding gains or losses from sales of property or debt restructuring).

FFO is thus comparable to a common definition of a business's "cash flow," such as the one used by Value Line.

Many securities analysts judge a REIT's performance according to its FFO growth, and First Call tracks only FFO projections for REITs (rather than EPS). Some critics claim that FFO can convey an overly rosy picture of a REIT's finances, because FFO may effectively exclude certain routine, recurring cash expenses. Alas, short of doing your own audit (or making some sort of rough, arbitrary adjustment of nominal FFO), FFO is the data we have, and so FFO it is.

**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.**