Host Marriott thrives with luxury hotel pricing power Cash flow soars as company expands

THE BALTIMORE SUN

Business doesn't get much better than what Host Marriott Corp. has these days: hot products, low costs and limited competition.

Its key profit gauge soared 58 percent last quarter, the Bethesda-based company said yesterday, pleasing industry analysts and sending its stock to another high.

The results were "better than good," said Jack Kasprzak, who follows Host Marriott for Davenport & Co., a Richmond, Va.-based investment firm. "They surprised everyone, myself included. I didn't think the hotel business would be as strong as it is after three really good years. It's still getting better."

Host Marriott's cash flow for the quarter ended Sept. 6 came to $101 million, up 58 percent. Year-to-date cash flow is $283 million, up 34 percent. Host Marriott's stock closed at $16 per share yesterday, up 63 cents on the day and up 56 percent in the last 12 months.

Host Marriott's net loss for the third quarter was $2 million, compared with a loss of $4 million for the same period last year. Its net loss for the year to date was $7 million, compared with $13 million for the same period in 1995.

Revenue increased 52 percent to $167 million for the quarter, 45 percent to $464 million for the nine months.

The secret to Host Marriott's success: It buys luxury hotels at depressed prices and rents their rooms at booming occupancies and rates. A formula that measures Host Marriott's occupancies and prices is growing 15 percent annually, "and you don't see pricing power like that in any other industry," Kasprzak said.

Terence C. Golden, Host Marriott's president and CEO, said the company is "optimistic that our full-year results will show similar strength. Our ongoing ability to add high-quality, full-service hotels should enable us to continue to experience substantial growth," he said.

Investors in Host Marriott and other real estate companies focus on cash flow because net-profit accounting includes misleading subtractions for depreciation. To measure cash flow, investors look at a company's profit without factoring in costs for interest, taxes, depreciation and amortization.

Accounting authorities require depreciation of real estate assets to determine net profit -- even when the property gains market value, as hotels have.

In fact, hotel prices have improved every year since the depths of the last recession, when a tax-break-induced, 1980s building boom fizzled and cities nationwide boasted thousands of new rooms that were plush, pricey and empty.

Values haven't recovered completely. You can still buy a luxury hotel for three-fourths the cost of building one, and that's what Host Marriott has been doing.

It has bought 16 upscale hotels just this year, including three Ritz-Carlton properties. But, unlike the early 1990s, occupancies are up. Construction costs and strict urban zoning codes have kept new competition off the market, and Host Marriott and other operators have been able to jack up their rates.

Analysts keep expecting the economy to slow down and hotel results to do likewise -- but it hasn't happened yet.

Pub Date: 10/08/96

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