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Marriott's ploy begins to pay off Buying spree: Host Marriott's strategy of buying full-service hotels has paid off handsomely with a 9 percent rise in earnings and some of the world's most prestigious properties.

THE BALTIMORE SUN

In a story Sunday about Host Marriott Corp., the amount reported for revenues of the company's hotel operations should have been $315 million.

The Sun regrets the errors.

With his round-rimmed glasses, soft smile and disarming voice, Terence C. Golden doesn't look the part of an empire builder.

But that's exactly what the new 55-year-old president and chief executive of Host Marriott Corp. is -- thanks to a unique set of events that are both shaping the lodging industry and setting the course for the Bethesda-based hotel owner.

With demand for rooms and room rates increasing at a time when few upscale, so-called full-service hotels are being constructed, Host Marriott is acquiring properties at a cheetah's pace, and much more cheaply than it would cost to build them.

"We're seeing an extended window of opportunity," said Mr. Golden, who joined Host Marriott in September after chairing Bailey Realty Co., a Washington real estate investment firm. "We don't see anyone starting a new full-service hotel for the next two to three years, and even when they do, those projects will take another three to five years to complete."

With the clock ticking, Host Marriott has set an ambitious goal: Double from 50 the number of full-service hotels it owns by the end of the decade.

It's already off to a fast start.

Since January, Host Marriott has invested $356 million to purchase eight new full-service hotels containing 3,500 rooms, including such signature assets as the 22-story Vista Hotel in Manhattan, part of the World Trade Center complex.

In most cases, the hotels were bought at a 30 percent discount off replacement cost, thanks to lenders eager to shed hotels they foreclosed on when the market became saturated a decade ago.

On average, Host Marriott's full-service properties maintain a 77 percent occupancy rate (vs. the industry average of 66 percent) and command daily room rates of $110. In all, Host Marriott now owns 88 hotels containing 29,390 rooms.

The recent buying spree comes after the company's acquisitions last year, when Host Marriott spent $530 million to add 18 full-service hotels with 7,390 rooms.

"What they're doing is logical because at some point, full-service hotels will again trade at their replacement costs," said Bjorn Hanson, chairman of Coopers & Lybrand LLP's hospitality group. "So if you can buy now at 70 percent of that figure, it puts you in good stead down the road."

Thus far, the strategy to acquire full-service properties -- orchestrated by Stephen F. Bollenbach, who left Host Marriott as CEO in May to become the Walt Disney Co.'s principal financial officer -- appears to be working.

In the first nine months of this year, Host Marriott's hotel group generated earnings before interest, taxes and noncash charges (EBITDA) of $118 million, a 9.3 percent bump from the comparable 1994 period. Revenue growth was even more impressive, rising 22 percent to $391 million.

Not too poor a showing for a company that was labeled the "bad" Marriott after a controversial October 1993 split that divided Marriott Corp. into two companies, Host Marriott and Marriott International Inc.

Tremendous debt

The company was so labeled because of its tremendous debt load and -- at the time -- its unattractive assets.

It also gained the dubious distinction because of a lawsuit that alleged the value of $400 million in bonds plummeted after the split. The case was eventually dismissed.

"Prior to October 1993, few people had the foresight to buy real estate," said Joseph J. Doyle, a Smith Barney analyst who tracks Host Marriott. "They did, and they've done well because the perception of the industry has changed."

When the split occurred, for instance, Host Marriott interest coverage ratio -- earnings before interest, taxes and noncash charges divided by interest expense -- was a paltry 1.3 times. By 1997, the company expects to reach the 2.3 times level.

Although Mr. Golden acknowledges the magnitude of Host Marriott's $2 billion in debt, he refuses to apologize for it. Real estate firms always carry large amounts of mortgages, he said.

Still, the debt level has hampered better results. With interest expense, Host Marriott suffered a $13 million loss from continuing operations in the first three quarters, nearly double the $7 million from last year.

For Mr. Golden, taking the helm at Host Marriott and executing its stated strategy represents the pinnacle in a long real estate career, which has included stints with such industry luminaries as the Trammell Crow Residential Co. and the Oliver Carr Co.

"We knew where we had to go, but we needed someone special to organize us and lead us into the future," said Richard E. Marriott, Host Marriott's chairman. "A lot of times, when a new CEO comes in, employees are apprehensive. But Terry has worked so well. He's been a real team builder, and since he's been here, the pace of our activities has really accelerated."

But neither Mr. Golden's nor Host Marriott's strategy is limited to buying upscale properties.

New spinoff

Host Marriott plans by the end of this month to spin off its operating group, which has stores and restaurants in 203 airports, highway travel plazas and stadiums.

Those operations have generated EBITDA this year of $79 million -- money that in the past had gone to finance the buying spree.

Mr. Golden said the spinoff stems from the desire to realize the maximum shareholder value, which in 1994 generated revenues of $1.1 billion. On Dec. 29, Host Marriott shareholders will get one share in the new Host Marriott Services Corp. for every five shares of Host Marriott they own.

"Host Marriott Services is hidden under a rock right now," Mr. Golden said. "No one realizes what a dominant company we have here. It has a 65 percent market share, and everything is working in the company's direction -- enplanements are up, airlines like Southwest are cutting back on in-flight food service, and people are eating in terminals more."

Host Marriott is making up for the financing lost through a $630 million credit line from sister company Marriott International and another $230 million revolving line from Bankers Trust Co. and a series of other banks.

To further focus the company, Host Marriott also is shedding its limited-service Residence Inn and Courtyard hotels and using the roughly $400 million raised to buy other full-service hotels.

Sold 16 Courtyard hotels

In August, Host Marriott completed a deal to sell 16 Courtyard hotels to Hospitality Properties Trust for $150 million.

The transaction, involving 2,235 rooms, came six months after it sold 21 other Courtyards in a $179 million sale with Hospitality Properties. The Massachusetts-based real estate investment trust also owns an option until June 1996 to purchase Host Marriott's remaining 17 Courtyard hotels, the company's moderately-priced line.

"That business is profitable, but competitive issues arise," Mr. Golden said. "Full-service hotels have irreplaceable locations, and are built to the highest standards. With a limited-service hotel, you run the risk that someone could come in and build one right next to you."

Host Marriott isn't alone in thinking the lodging industry's future rests with full-service lines.

"Full-service hotels are a terrific place to be positioned now," said Camille E. Humphries, an Alex. Brown & Sons Inc. analyst who follows the company and the lodging industry.

"As the industry recovers, a lot of inadvertent owners such as insurance companies and banks are beginning to sell properties they took through foreclosure, but at discounts to replacement costs. Even when the industry fully recovers, no one will be able to buy land to compete with the New York Marriott Marquis."

"The other wild card is the Japanese, who bought about $10 billion worth of U.S. hotels between 1985 and 1990," Ms. Humphries added. "With the pressure on their economy, many owners there are beginning to sell."

Host Marriott isn't waiting, however. Thanks to Marriott International's March acquisition of a 49 percent stake in the Ritz-Carlton Hotel Co. for $200 million, Host Marriott is exploring buying several overcapitalized properties in the luxury chain built in the mid-1980s, Mr. Golden said.

Bidding on Omni chain

The company also is among a number of bidders vying to buy the Omni hotel chain from Hong Kong-based Wharf Holdings Ltd., whose 12 property portfolio is expected to sell for about $500 million. The 703-room Omni Inner Harbor Hotel, owned by Patriot American Investors Ltd. Partnership of Dallas, will not be affected by the sale of the chain.

"We're not at all averse to those types of transactions," said Mr. Golden, who declined to discuss specifics of Host Marriott's effort. "But we don't want to buy an 'ego' hotel. We want hotels that make good economic sense."

Even so, Host Marriott knows the day will come when the opportunities to buy at attractive prices in the U.S. will diminish. With that in mind, the company is looking internationally, banking on a further globalization of business -- and business travelers.

The company already has dipped a toe into international waters, most recently through a purchase of the Eaton Centre hotel in Toronto.

By early next year, it hopes to complete the acquisition of two hotels in Mexico City from Grupo Sidek, a 600-room Continental Plaza Airport hotel and the brand new but never-opened 314-room Mandarin Oriental downtown.

Host Marriott will say only that it is "studying" the two hotels, which industry experts valued at more than $40 million.

"Internationally, there's been so much political and economic change in the past five years, especially in Eastern Europe," said Kenneth Wilson, hospitality group director for New York real estate counsultant Landauer Associates Inc. "Countries that are emerging will need full-service hotels. The door is wide open for them."

Company officials also say they are interested in hotels in the the Caribbean, France and Germany.

"Host Marriott has matured as a company," Mr. Golden said. "In terms of its own financial strength, it's getting stronger. We have a 54 percent debt to market capitalization now. We're a different company due to the money we've raised, the moves we've made and the industry's improvement."

"They own some wonderful assets, and they're upgrading the quality of their portfolio. As they keep doing what they're saying, we believe the company will continue to grow and produce better results," said Michael Kassen, a partner in Neuberger & Berman Management, a New York investment firm which owns 2.5 million shares of Host Marriott's stock. "That's what attracted us."

In other words, when it comes to Host Marriott's future, things look just golden.

Host Marriott at a glance

Headquarters:Bethesda, Md.

Chief executive officer: Terence C. Golden

Assets: $3.8 billion (as of 12/31/94)

Portfolio: 88 hotel properties in 31 states and the District of Columbia

Employees: 23,000

Earnings before interest, taxes, depreciation and amortization (9 mos.): $291 million, up9 percent from 1994

Revenues (9 mos.): $319 million, up 22 percent from 1994

1995 hotel acquisitions

Property .. .. .. .. .. .. .. ..Date .. .. ..Price .. .. .. ..Rooms

.. .. .. .. .. .. .. .. .. .. .. .. .. .. .(millions)

Vista Hotel, New York .. .. ...Nov. 9 .. .. .$141.5 .. .. .. ...820

Doubletree Hotel .. .. .. .. ..Nov. 6 .. .. ..$16.5 .. .. .. ...372

Marina Del Rey, Calif.

Toronto Eaton Centre Marriott .Nov. 3 .. .. . .31.5 .. .. .. ...459

Dallas/Ft. Worth Airport

Marriott .. .. .. .. .. .. ...Aug. 23 .. .. .. ..44 .. .. .. ...491

Plaza San Antonio Hotel .. ...Aug. 23 .. .. .. ..30 .. .. .. ...252

Marriott Grand Hotel .. .. ...July 19 .. .. .. ..27 .. .. .. ...306

Point Clear, Ala.

San Antonio Marriott

Riverwalk .. .. .. .. .. .. ..June 19 .. .. .. ..50 .. .. .. ..500

Charlotte Marriott Executive

Park .. .. .. .. .. .. .. .. ..Jan. 6 ... .. ..15.6 .. .. .. ..300

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