Boring Buying FCH
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 http://www.nareit.com 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.
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