Hotels Shed Real Estate Holdings

As a flurry of mergers build mega hotel chains, publicly traded hotel companies are separating their real estate investments to spur growth and to stay focused.

Since last month, Dallas-based Bristol bought 61 full-service Holiday Inns, becoming the chain's largest franchisee. Former Choice co-chairmen Robert Hazard and Gerald Petitt as well as former Choice executives Richard Kaden and Steven Mullinger-launched their own hotel development company, aiming to become a key Choice franchisee. Wyndham Hotels Corp. struck a deal with American Hospitality Corp., investing in the real estate company in exchange for an option to franchise its newly acquired hotels.

In August, Doubletree Corp. forged an alliance with Dallas-based Patriot American Hospitality, which will buy as much as $200 million worth of hotels in the next two years to be reflagged as Doubletrees.

"The average stock market investor doesn't see the appreciation of the underlying hotel real estate, so a company that tends to be heavily real estate doesn't look as good," said Ted Mandigo, director of Chicago-based Landauer Associates Inc.

Hotel companies tended to bail out of real estate in the mid-'80s slump, selling to international buyers, said Scott Brush, president of Miami-based Brush & Co.

Now that owning properties has become profitable, hotel companies "want to keep the two businesses separate," Brush said. "It allows a much cleaner look at things, and it's probably a better approach. As these companies get bigger, it's better to concentrate on one thing rather than trying to do everything all at once."

Before breaking out the real estate, the operators sometimes built hotels as showcases, Brush added. "At the Miami airport, we have hotels that are nicer than they would be otherwise, because the chains are using them as samples for a push into Latin America."

Hilton, which recently bought Prudential Insurance Co. of America's stakes in six of its hotels after a 20-year partnership, seems to go against the trend. The chain has stated that it plans to acquire full-service hotels in locations where it expects to see little new competition. Yet its strong gaming revenues puts the chain in a different stock-trading category, said Mandigo.

The chain also had some older properties that needed a substantial upgrade in investment, Mandigo said. "Prudential is a fairly conservative company as a real estate investor," he said. "When the hotel company wants to take the property to the next step, Prudential tends to throw it against some internal rate-of-return requirements or other hurdle rates before they will invest in it. So Hilton, wanting to be aggressive in upgrading their properties, needed to take control of the properties back."

Many real estate investment trusts, however, excel in tailoring their portfolios to specific markets.

Bristol, which bought every company-owned Holiday Inn and Holiday Inn Select in the United States and Canada, focuses on large, meetings-oriented hotels in the midpriced segment. "We've carved out a niche that everyone else seemed to be abandoning," said Bristol president and CEO Peter Kline. "Most of the full-service hotels had gone upscale in a big way over the last 10 years, while the midmarket has gone toward the limited-service product."

Bristol's Holiday Inns will gain a $150 million, three-year renovation program "to reposition them into competitors with many of the upscale brands for the corporate traveler and corporate meeting planner," Kline said. Many will reap stronger food and beverage operations, Kline added. "Expect banquet service to be the most dramatic change."

In the Bristol deal, valued at $659 million, the company became the largest owner-operator of full-service hotels in North America and the largest Holiday Inn franchisee, acquiring more than 15 percent of the Holiday Inns that have more than 250 rooms. Bristol also will transform many of its Harvey hotels into Holiday Inns. Bass, Holiday Inn's British parent, will wind up with a 36 percent interest in Bristol. Bass chose not to sell the Crowne Plaza properties at this stage because it wants to oversee further development of the brand.

Hazard and Petitt, meanwhile, who forged Creative Hotel Associates to develop the products they pioneered, will focus on limited service-without pressure to build an empire. "We won't do anything for the sizzle aspect, so we can trumpet that we have a huge portfolio," said Kaden, CHA development executive and former senior vice president of operations for Choice. "We'd consider '97 a good year if we had 10 or 12 hotels by year-end."

While the team will mine the relationships it has developed over the years, CHA eventually will branch out into other travel-related ventures, Kaden said. Those plans are under wraps for at least another few months.

While CHA aims to become a dominant Choice licensee and Hazard and Petitt still serve on Choice's board of directors, the group plans to develop other hotel brands as well. With 1,500 Comfort Inns blanketing the country, the team will have to turn to Hampton and Fairfield types in many markets. CHA will invest in a 10 to 20 percent piece of every hotel, gathering the remaining capital from outside sources. The group, which plans to build more than acquire, will focus on the United States at first, then possibly expand abroad, Kaden said.