Host Marriott to announce it's a REIT As real estate trust it expects to avoid millions in taxes

Conversion began in April

Bethesda hotel giant predicts tax savings of $70 million in '99

Real estate

December 31, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Host Marriott Corp. expects to announce today that it has completed a long-planned conversion to a real estate investment trust, a move expected to save the company tens of millions of dollars in taxes each year.

"This will be the biggest day in the company's history," said Terence C. Golden, Host Marriott's president and chief executive. "Converting to a REIT will substantially lower our corporate taxes and positively influence our ability to obtain capital."

REITs are allowed to avoid paying corporate taxes, in exchange for paying out 95 percent of their earnings each year to shareholders. Host Marriott will thus avoid paying an estimated $70 million in taxes in 1999.

The switch by the Bethesda hotel owner comes despite Wall TTC Street's penchant for hammering real estate stocks throughout 1998. Host Marriott's common stock price fell 25 cents yesterday, to close at $13.625.

In the past year, while returns for the Standard & Poor's 500 have grown 27 percent, REIT stocks tracked by CIBC Oppenheimer, a New York investment firm, have fallen 14 percent.

Analysts contend that the switch is a positive move.

"There are a lot of benefits for them," said Sara Grootwassink, a hotel industry analyst with Johnston, Lemon & Co. Inc., in Washington. "They'll be able to buy properties with operating partnership units and thereby benefit sellers, and they will likely broaden their shareholder base."

Host Marriott announced plans to convert to a REIT in April, joining a legion of other hotel owners and operators.

The conversion, along with $2.2 billion in debt refinancing and $1 billion in new equity, is intended to strengthen the company's balance sheet. The last major local company to convert to a real estate investment trust was the Rouse Co. in January.

Host Marriott also is expected to announce today the acquisition of 12 luxury hotels from the Blackstone Group Inc. for about $1.5 billion.

The deal will add roughly 5,800 hotel rooms -- with brand names such as Grand Hyatt, Hyatt Regency, Four Seasons and Swissotel -- and generate earnings before interest expense, taxes and noncash charges of about $183 million next year.

Host Marriott also picks up a 25 percent stake in Swissotel's management arm and two Atlanta office properties.

The Blackstone deal will raise the number of properties in Host Marriott's portfolio to 126.

On a per-share basis, analysts expect the REIT conversion and subsequent Blackstone deal to add 30 cents per share to its 1999 earnings.

Blackstone, in exchange, will become Host Marriott's largest single shareholder, with a 19 percent stake in the REIT. The New York investment firm, formed in 1985, also will obtain a seat on Host Marriott's board.

Host Marriott, as part of the REIT conversion, also has spun off a subsidiary that owns and operates 31 senior living facilities valued at $700 million. Crestline Capital Corp., which controls more than 7,200 units for seniors in 12 states, will lease substantially all of the REIT's hotels.

As part of the spinoff, Host Marriott stockholders who own 10 shares in the hotel concern will receive one share of Crestline stock.

Pub Date: 12/31/98

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