Publicly Held Hotel Chains Lose Steam

<B> Publicly Held Hotel Chains Lose Steam</B>

By Maria P. Vallejo

Public hotel companies, particularly the former paired-share real estate investment trusts, are feeling the quiet stir of a hurricane that is pushing their stock prices down--and making the few private companies left thankful for their structure.

As their stock prices continue to fall, publicly-held hotel companies now are facing slowdowns in development and possible acquisitions by private firms.

Many of the publicly traded hotel companies have shown a steady decline in stock prices, forcing them to shift their reliance for growth and survival from equity capital to earnings. This move can have two results--forcing hotels to cut back on their planned expansion projects and making them acquisition targets for privately held competitors.

"The stock market will cause some of the companies to take a good hard look at their overall cost structure and look for ways of improvement," said hospitality analyst Ted Mandigo, president of T.R. Mandigo & Co. in Chicago. "The public corporations will look internally to tighten the strings on overall operations and administration of properties, while they look to other ways to enhance their profitability."

Share prices have dropped over the past year in many public hotel companies, such as Bristol Hotel Co., Cendant Corp., Hilton Hotels Corp., Marriott International and Promus Hotel Corp. Some companies' stock prices have dropped as much as 78 percent since last year.

Analysts are unsure of any sound reasons why stock prices have dropped, merely attributing it to speculator nervousness. REITs, including Starwood Hotels & Resorts and Patriot American, and c-corporations, like Marriott International, have received some of the harshest unreasonable price decreases, analysts said.

"We don't understand what's happening with hotel stocks right now because the fundamentals are still fairly strong," said hospitality analyst Chuck Ross, vice president of Smith Travel Research in Hendersonville, Tenn. "Their stocks seem to be undervalued. It seems like skittishness on the part of investors that's not really based on objective analysis of the current market."

The paired-share REITs found shareholders losing confidence in their stocks because of the attention they drew from Congress over the past few months. Starwood and Patriot American shareholders showed great uncertainty about the survival of the companies' structure, analysts said. At press time, Starwood (HOT) stock was selling at 26.51 percent below last year's prices, and Patriot American (PAH) stock was down 41.97 percent.

<B>Equity Capital Deflation</B>

During the past two years, public firms have swallowed up hotel companies, using equity capital as the main source for their acquisitions. Starwood's acquisition of ITT Corp. became a prime example of the strength of equity. The healthy economy allowed public corporations to grow their market share, while some private firms could not afford to join the bidding wars.

Now, the tides have reversed. Early announcements of new acquisitions and growth may not come to fruition because public companies do not have sufficient equity capital to continue and complete those projects.

"Every lodging company has to rethink its development plans because both debt and equity markets are at ends with the lodging industry," said hospitality analyst Bjorn Hanson, global hospitality industry leader at PricewaterhouseCoopers in New York. "Earnings now are the only pool for development. There will be a slowing in projects because they don't have a choice."

Stifling development may be a mixed blessing for the industry because supply, especially in the midpriced and extended stay segments, was beginning to eclipse demand, hospitality analysts said. Both occupancy and rates have dropped in some major markets because of overzealous development plans (see story, page 22). At the same time, construction was too expensive in some cities, such as New York, creating an imbalance in markets.

"It's a fortunate thing given the pace of development we have been seeing in the past couple of years," Mandigo said. "Travelers will begin to see some very aggressive competition for their business. It will never be like the early 1990s, but you will see opportunities to save money, especially during off-business season."

While public companies may take a hiatus from development, the situation could turn into a great opportunity for private companies. Public firms supposedly leveraged their equity to make larger acquisition deals, sometimes leaving behind private companies with less buying power. Now, private and public companies will have the same strength. Both can bid for properties and chains, which may include public companies hurt by the stock market. Additionally, public firms may discard under-performing properties that can be picked up by their private counterparts.

Private companies, never concerned with increasing shareholder value or improving quarterly earnings reports, have saved their capital for situations just like this. "On a long-term basis, we can spend all of our time taking care of our properties, and I don't spend any of my time on the concerns of shareholders," said Hyatt president Doug Geoga. "Now we are doing lots of new deals. A lot of the opportunities that we have are coming to us because of our stability, credibility and focus. If we were public, we wouldn't be doing some of the deals that we are doing."

Chicago-based Hyatt Hotels Corp., owned by the Pritzker family, plans to add more hotels to its brand in the next two years than it has in the past ten years, dedicating $1 billion to expansion.

Besides rushed development plans, some industry experts said public companies were responsible for the rise in rates. Company officials supposedly placed constant pressure on property owners to increase rates and raise profitability.

"A public company with a strong focus on return to its stockholders, as opposed to a private company or chain operator, has a stronger focus on driving the bottom line and keeping pressure on the operator to keep rates as high as it can," Mandigo said. "A corporation tends to be less sensitive to the consumer in this particular case."

Agreeing with Mandigo, Ross said the need for raising rates was an inherent component of public companies' survival. "When you have a situation with moderately growing demand and supply growth exceeding that, it does put pressure on earnings. A primary method of maintaining earnings is to continue to raise rates," Ross said. "As a culture, they are more aggressive on price setting."

Public hotel officials contradicted those accusations. Instead, they attributed the rise in rates to simple economic principles of supply and demand.

"I think there may be a motivation from senior management to become more profitable, but supply and demand is the king. The marketplace is going to determine if it wants to buy it or not," said David Crowl, Four Season's vice president of sales. "I think it's a bit short-sighted of people to think a company could do that. We're still in an extremely competitive market here."

Officials recognize that public companies may feel more pressure for improved quarterly results, but both private and public companies share the same end goal--to maximize their earnings.

Private hotel companies supposedly can concentrate on long term benefits and earnings. "Even though privately owned companies are profit motivated, it is looked at over a longer period of time," Geoga said. "The business cycle will continue to change, and it won't always be a seller's market.