Now, it'll run hotels, too

Bethesda-based Crestline Capital shifts its focus

Lodging industry

March 21, 2000|By M. William Salganik | M. William Salganik,SUN STAFF

Crestline Capital Corporation, a spinoff of Host Marriott Inc., yesterday spun itself in a new direction.

Bethesda-based Crestline, which owns and leases hotels and senior living communities, said it is shifting its focus to being a hotel-operating company.

In the past, the company's hotel holdings have been operated by others.

Crestline announced it bought two hotel operators, Stormont Trice Management Corp. of Atlanta and Durbin Companies Inc. of McLean, Va., for $20.5 million, forming a new subsidiary, Crestline Hotels & Resorts, Inc.

The acquisitions gave Crestline 27 management contracts, making it one of the 20 largest hotel management firms in the country.

The company said it will invest $600 million over the next few years to expand. "Our goal is to be in the top five," said Bruce W. Wardinski, chairman, president and chief executive officer of Crestline Capital.

The deal takes Crestline from a company with about 80 employees to a company with about 5,000 -- all but about 100 of them at hotel properties and a regional office in Atlanta.

"Management seems to be what people want to be doing now," said Jeff Higley, managing editor of the Cleveland-based trade publication Hotel & Motel Management. "Wall Street is shunning the real estate market, but the lodging industry is booming, and they want to take advantage of that."

The management side of the hotel business "has higher margins and lower risk," said Jake Fuller, an analyst with Donaldson, Lufkin & Jenrette who follows Crestline. "Looking at the broader picture, this is a positive move for them."

Crestline's corporate genealogy helps explain the different type of hotel companies. Marriott International, the original parent, operates some hotels, but is primarily a franchiser. Host Marriott Corp., spun off from Marriott International in 1993, was set up to own hotel real estate.

In 1998, however, Host Marriott converted itself to a real estate investment trust, giving it tax advantages, but limiting what it could do with the hotels it owned. So, when it became a REIT, it, in turn, spun off Crestline, which leased the hotels from the REIT and assumed ownership of an assisted living portfolio. (While some companies are purely franchisers, operators or owners, some have a mix of business lines.)

But new changes in federal laws governing REITs mean that Host Marriott, Crestline's largest client, no longer needs to lease the hotels it owns, and it plans to cancel Crestline's leases. Crestline decided to move in a new direction -- but a direction it had been eyeing from the beginning.

"The idea was always there," Wardinski said.

Donald R. Trice, former president of Stormont Trice who will be president and CEO of Crestline Hotels & Resorts, said, "The REIT Modernization Act facilitated the strategy." Host Marriott will pay Crestline a fee for canceling the leases, which gives Crestline capital to invest in acquiring operating companies and making other hotel-related investments.

Crestline will also generate capital by leveraging its assisted-living portfolio, Wardinski said.

"They have a lot of capital to deploy," said Fuller, "and there hasn't been a lot of capital thrown at hoteliers lately."

In the context of the industry, the deals announced yesterday are "not huge, but the potential is huge," said Higley. "It shows Crestline is serious about getting into the management game. You have to have critical mass to be taken seriously, and this gives them that."

While there are some 600 independent hotel management companies, Fuller said, fewer than 10 have annual revenues of more than $100 million, so there is great potential for consolidation.

Stormont Trice Management and Durbin, both privately held, had combined 1999 revenues of about $200 million. Among them, they managed hotels with the Marriott, Hyatt, Hilton, Crowne Plaza and Holiday Inn nameplates. The new operating company has 27 properties with 5,550 rooms in nine states and the District of Columbia.

Crestline Capital continues to be majority owner of more than two dozen properties, including the 207-room Baltimore Courtyard by Marriott, now under construction near the 750-room hotel being developed at Inner Harbor East.

In its new business, it will be, in a sense, competing with its original parent, Marriott International, although several members of the Marriott family retain significant stakes in Crestline. "But the difference," said Higley, "is that Mother will only manage Mother's children, while the spinoff can manage anything."

Since franchising is an important part of Marriott's strategy, Trice said, Marriott wants to encourage good franchisers.

Crestline's stock closed yesterday at $17.1875 a share, up 12.5 cents for the day.

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