Felcor Lodging Trust: Activity In 2 Preferred Issues Potentially More Interesting Than Earnings

| About: FelCor Lodging (FCH)

Felcor Lodging Trust (NYSE:FCH), the Irving, TX based hotel REIT, will release its fourth quarter financial results prior to market open on February 29th and host a conference call at 10:00 a.m. Central Time. Depending on how those results compare to expectations, as well as the general trends in Wednesday morning's financial markets, FCH shares might move significantly higher, lower, or not at all.

Potentially more interesting will be the market activity in Felcor's two, thinly traded preferred issues, FCH-A and FCH-C.

ISSUE Series A Cumulative Convertible Preferred Stock Series C Cumulative Redeemable Preferred Stock
Ticker FCH-A FCH-C
Nominal Par $25.00 $25.00
Shares Outstanding 12,880,000 6,800,000
Recent Price $24.85 $24.95
Annual Dividend $1.95 $2.00
Current Yield 7.85% 8.02%

At current prices, the preferreds offer attractive yields, but the real appeal may be the seven quarters of accrued but unpaid dividends that each issue carries. The lodging industry suffered extreme hardships in the great recession and Felcor was no exception. FCH last paid a common dividend on 10/10/2008 and after a January `09 payment, suspended the payment of preferred dividends until their reinstatement in January `11. FCH-A is due $3.4125/share and FCH-C is due $3.50/share, so, if management can get current, that's a 13.65% and 14% additional return, respectively, against purchases at par.

In a February 1st press release, Felcor announced the acquisition of the Knickerbocker Hotel in Manhattan: FCH closed at $4.14, up 8.6% for the day. The release's sub-title announced that 16 non-strategic hotels were being marketed for sale and that proceeds would be used to pay all accrued preferred dividends, reduce debt, and strengthen the balance sheet. FCH-A closed at $24.06, up 2.5% for the day. FCH-C closed at $24.10, up 3.1%. Trading in each preferred has drifted closer to par since then.

While the Knickerbocker purchase was news, announcement of the hotels offered for sale and promised payment of accrued preferred dividends had each been made previously and were seemingly more credibly received. Last April, the preferreds A and C traded as high as $27.77 and $27.57, respectively, implying that investors not only sensed that payment of the accrued was imminent , but that they were willing to pay up to get it.

Like so many small preferred stock issues, Felcor's preferred shares got clobbered in the sovereign debt crisis fueled stock market exodus of late last summer. Trading in the high teens to low 20s last fall, FCH-A and FCH-C didn't really start to recover their pricing until Felcor's February 1 press release. It's possible that the unpaid accrued dividends were forgotten or that management's ability to execute on the hotel sales was in doubt, but these preferreds might have some appeal to studied risk takers. Indeed, in Paulson & Co. Inc's recent 13F-HR filing it was disclosed that as of 12/31/11 they were long not only 5,700,000 Felcor common, but held 518,000 FCH-A, as well.

Disclosure: I am long FCH. 2nd Market Capital Advisory and its affiliated accounts are long FCH-A and FCH-C at the time of this writing.