Splits, Mergers Stir Hotel Firms: Specialization Fuels Frenzy of Industry Restructuring
Kopecki, Dawn, The Washington Times (Washington, DC)
By many measures, Choice Hotels International is a huge success. The Silver Spring company is one of the nation's largest franchisers of mid-priced and economy brands such as Quality, Comfort, Econo Lodge and Mainstay suites.
Its real estate division has revenue growth of about 54 percent annually. Cash flow, which is important in valuing real estate, has been rising by about 64 percent each year.
But company officials said it wasn't until Choice divided its operations into two parts Oct. 16 that Wall Street analysts recognized just how successful the business was. Sunburst Hospitality Corp., the new company formed in the spinoff, is already one of the top ten largest hotel owner/operators in the country.
The combined value of the two stocks, even after last week's roller coaster ride on Wall Street, is about $60 million more than before the split.
"It's unlocking the hidden value of a company. Choice had always been a successful company, but it was always viewed as a stepchild of Manor Care," said Bill Floyd, chief executive officer of Choice International.
Until a year ago, Choice's hotel operations were a division of Manor Care in Gaithersburg, which was known primarily as a health care organization, focused on building elder care facilities, not hotels.
"There was value in Choice that hadn't been realized," Mr. Floyd said.
Wall Street analysts are discovering hotel companies and in many cases driving vast changes within the industry. The industry as a whole has turned losses from as recently as 1992 into steadily rising profits. And in the wake of its split, the increased value of Choice is not an anomaly.
"The sum of the parts of both companies will be worth more than the whole company before the spinoff," said Jason Ader, the lodging, gaming and leisure analyst for Bear, Stearns & Co. in New York City.
Choice is one of three prominent local hotel companies that have been restructured in recent years to attract investors, who in turn provide the capital needed to grow.
Marriott Corp. has acquired, merged and spun off so much from its corporate parent over the last four years that three new Marriott companies now exist and a fourth one was announced last month.
Analysts call Washington-based franchiser Marriott International the envy of its competitors. Sister company Host Marriott is one of the largest owners of upscale, full-service hotels in the United States.
CapStar Hotel Co. in Washington, a virtual unknown last year, had the best performance among lodging stocks over the past year. It went public in August 1996 at about $18 a share. It's now trading at about $33.
To top that off, CapStar just completed its third public offering about two weeks ago.
"Our industry has always been considered a fairly stodgy conservative industry," said David McCaslin, chief operating officer of CapStar Hotel Co. in Washington. "Like in any industry, if you can do something better, quicker, faster, you'll grow."
That's evident by CapStar's announcement last week that it plans to buy Winston Hospitality Inc. in Raleigh, N.C. for $34 million.
CapStar, like many other lodging companies, is growing better, quicker and faster than ever before. What used to be a sluggish market with uninspiring sales growth is bursting at the seams, analysts said.
As little as 18 months ago, there were 19 public hotel companies and five real estate investment trusts, or REITs, many of which own hotel property, trading on Wall Street. Today there are 42 hotel companies and 14 REITs trading on the American exchanges.
In the beginning of 1988, the Standard & Poor's Hotel-Motel Index was at about 193. It closed at about 540 in the middle of last week. Hotel stocks certainly weren't shielded from last week's thrashing of the stock market. Like the Dow Jones Industrial average, the S&P hotel index dropped by about 7 percent on Monday. …