Hotels to settle investor lawsuits

Chains that made up former Marriott to pay $434 million

February 25, 2000|By Sean Somerville | Sean Somerville,SUN STAFF

Marriott International Inc. and Host Marriott Corp. said yesterday that they have tentatively agreed to pay $434 million to settle lawsuits filed by hundreds of investors in hotels who had accused the Bethesda-based companies of fraud.

The investors had argued, in lawsuits that were set to go to trial in San Antonio, that Marriott Corp., the predecessor to the two companies, had sold hotels at excessive prices and inflated projected returns when it sold limited partnerships in the mid- to late-1980s.

The agreement calls for the two companies to form a joint venture to pay $372 million for the interests of two limited partnerships, which together own 120 Courtyard by Marriott hotels. Marriott International and Host Marriott also agreed to each pay $31 million -- a total of $62 million -- to the partners in four other limited partnerships. Those include two Marriott Residence Inn partnerships, as well as Fairfield Inn by Marriott and Desert Springs Marriott partnerships.

"We are pleased to have found a vehicle to bring this dispute to a close," said Arne Sorenson, executive vice president and chief financial officer of Marriott International. "By investing in the Courtyard partnerships, we were able to provide the limited partners with liquidity and break a logjam in our earlier discussions."

Sorenson, who dismissed the claims as without merit, also said "this agreement allows the company to bring to a conclusion litigation that focused on matters which occurred long ago."

Chris Nassetta, executive vice president and chief operating officer of Host Marriott, said he was pleased by the prospect of settling the disputes. "The proposed settlement would involve a cash outlay that is consistent with our earlier expectations and budgeting," he said.

The agreement is subject to approval by the Texas court that was about to hear the case.

Don Burklew, who invested in one of the two limited partnerships that would sell its interests to the joint venture, said he was generally pleased. A 60-year-old consulting engineer who lives in King George, Va., Burklew said he invested $100,000 in 1987 after receiving projections that the payout would be about $300,000 by the end of next year.

"Basically, I made the investment at that juncture in 1987, which was the first time in my life I had any money to invest at all," he said. He added that he chose Marriott because of its good reputation. "Needless to say at the end, it was anything but that," he said.

Burklew and other investors had argued that Marriott, which split into two companies in 1993, knew it had given investors inflated projections of returns and that the company took advantage of their lack of expertise. The investors also accused Marriott of overpricing its hotel properties and charging exorbitant management fees.

The Courtyard by Marriott II partnership bought 70 Courtyard by Marriott hotels in 1987 for $643 million. The investors, who call that price excessive, said Marriott knew the hotel market was glutted. They also said a supposedly independent appraisal was conducted by a company with ties to Marriott. Investors, who expected an annual return of at least 16 percent, have received annual returns averaging 7 percent.

The $372 million portion of the settlement would be financed with $185 million loaned to the joint venture by Marriott International, and with equity contributed in equal shares by the two companies.

Marriott International said the agreement will result in a one-time, pretax charge of between $30 million and $40 million. Host Marriott expects a one-time, pretax charge between $40 million and $50 million.

Marielle Jan de Beur, an analyst who follows Host Marriott for Baltimore-based Legg Mason Wood Walker, said the settlement was in line with her expectations based on recent contact with the company. "I take this as a positive because a question mark out there has been resolved," she said.

She added that the equity interest that Host Marriott would gain makes the agreement more favorable than she had expected. "I think this is probably the best scenario you can ask for in terms of resolution of this issue," she said.

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