Financial Services Industry

Host Marriott takes a new turn

Kiplinger's Personal Finance Magazine, July, 1998 by Nathaniel Kennedy

As a real estate investment trust, it will own 350-plus hotels.

Investors can be forgiven if they have a hard time keeping up with what's going on at Host Marriott's headquarters, in Bethesda, Md. Marriott has been reinventing itself ever since it started out in 1927 as an A&W root-beer stand.

The root-beer stand, run by J. Willard Marriott, evolved into the Hot Shoppes restaurant chain and then into Marriott, one of the largest hotel chains in the country. In 1993 Marriott split into two separate publicly held companies: Host Marriott (which owns the hotels) and Marriott International (which manages them).

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Now, Host Marriott is again reorganizing. In April, Host Marriott announced that it would convert to a real estate investment trust (REIT), essentially a real estate mutual fund that owns income-producing properties and trades like a stock. The new REIT, which will be in business on January 1, 1999, will own 99 Marriott and Ritz-Carlton hotels and hold minority interests in 241 other hotels and properties. The REIT will also own 13 other luxury hotels that Host Marriott announced it is planning to buy from the Blackstone Group for $1.8 billion. At the same time, Host Marriott will spin off its 31 retirement communities into a separate publicly held company.

Analysts have nothing but praise for the reorganization. Among other things, as a REIT the company will increase its access to cheap capital for future expansions. Merrill Lynch's Denise Warren says the deal is worth $26.50 per share to current shareholders, who will receive stock in the new Host Marriott and the spun-off retirement centers, as well as a one-time cash distribution of $3.50 per share. Recent share price was $20.

Analyst Joyce Minor of Lehman Brothers estimates that the Host Marriott REIT will generate funds from operations (the REIT equivalent of earnings) of $1.82 per share in 1998 and $2.44 in 1999. Analysts surveyed by Zacks Investment Research universally recommend the stock as a buy, with no hold or sell warnings. PaineWebber's Jonathan Litt warns, however, that the lodging industry is highly dependent on the strength of the economy--if business slows, so will the demand for hotel rooms.