Private-equity windfall

National Report - Private-equity managers increase interest in lodging solidifies the industry's status as a viable investment class, according to industry experts.

The most recent (and most expensive) example is The Blackstone Group's planned acquisition of Hilton Hotels Corp. for an estimated $26 billion. Other publicly held hospitality companies that recently have taken the private plunge: Four Seasons Hotels and Resorts, MeriStar Hospitality, Innkeepers USA Trust, Eagle Hospitality Properties Trust, Harrah's Entertainment, Winston Hotels and Highland Hospitality.

"[Hilton] is but yet the most recent example of sophisticated bets being placed on the lodging industry," said Mark Woodworth, executive v.p., RFK Hospitality Research. "Fundamentally so much more is understood on what drives performance and the factors in profitability. The level of sophistication of better managers and more capital sources that have historically shied away have become increasingly comfortable. And that is extremely good for all participants. There is more investment, and debt capital is more available than we have seen before."

Private equity is considered smart money, according to Jack Corgel, the Robert C. Baker professor of real estate at Cornell University's School of Hospitality Administration.

"When private equity makes these kinds of investments in terms of dollar and breadth, it means there were inefficiencies that could be exploited." he said.

Daniel Lesser, senior managing director-industry leader act CB Richard Ellis, said the sector has become more mainstream due in part to the transparency of data. "People see that they don't have to be hotel operators; a lot of it is financial engineering," he said.

And while there still will be cyclical changes, mainstream magic of lodging might take away some of the "manic highs and lows" and provide superior risk-adjusted returns, Lesser said.

Jay Witzel, president and c.e.o., Carlson Hotels Worldwide, said the lodging industry is maturing.

"It's beginning to be ruled by a few dominant players,' he said. " There are a lot of brands being introduced and those are two signs of maturity."

Although private-equity investment is not new to lodging, it's different this time, according to Steve Porter, president, the Americas, global leader of franchise strategy and an executive director, Intercontinental Hotel Group.

"Private equity traditionally looked at conglomerates to break up and create value, " he said. "They then moved on to companies that have real-estate with a view to selling the property before exiting. Property deals are now drying up and the Hilton deal suggest that they may now look at companies with clear brand potential."

The global aspect becomes critical, said Kapila K. Anand, partner and national director, real estate and hospitality advisory services at KPMG LLP,

"So far, private equity companies looking at hospitality are primarily looking at brand and real-estate," she said. "If they are going to buy brand that doesn't have reap-estate, then it's got to be its global reach."

Corgel said public ownership could be falling out of favor.

"The real question is, are we systematically seeing unraveling of public ownership? We'll probably know more in five years,: he said. "Valuations are favorable to private. The costs of Sarbanes Oxley, public company restriction on the amount of debt taken on, being able to raise the debt levels and do it at an effective cost has been another big push for private equity investment."

Corgel said he wouldn't be surprised if more companies went private.

And while private companies aren't subject to Sarbanes-Oxley Act regulations, many operate with fiscal diligence.

"[Carlson] doesn't have to disclose earnings or earnings per share, but the methodology of how we account ... is all in place anyway," Witzel said.

Theoretically , Woodworth said, the level of access to information decreases, but private companies still share performance metrics with Smith Travel Research and PKF and they still will analyze the data to create insights.

"I sense that there is a significant number of private firms that behave and account for their activities that aren't dissimilar from how public firms have to do it," he said. "And they practice that philosophy thinking they might go public someday."

Page 1 2 Next