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 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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