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.

December 10, 1995|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF Sun staff writer Ginger Thompson in Mexico City contributed to this report.

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.

FOR THE RECORD - CORRECTION

"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."

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