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    The Ultimate Host

    Nov. 4, 2002
    Host Marriott Corp. Strives For Best-in-class Status
    Good isn’t good enough. And better just doesn’t cut it. Host Marriott Corp., the Bethesda, MD-based hospitality real estate company, strives to be the best – and isn’t in the business of settling for anything less.The signature of Host Marriott is its overwhelmingly successful portfolio, strong leaders, and a strategy executed with discipline and dedication. It’s all about being the best – a dream and mission that, in the lodging industry, is quantifiable by the quality of the assets owned, the markets they serve, and the discriminating guests to whom they cater. Host Marriott has mastered the art of hotel ownership, discovered a profitable strategy, and successfully maneuvered through difficult economic times.The Makings of SuccessFrom soda shop to largest hospitality real estate investment trust, Host Marriott’s success has grown out of humble beginnings. “Many people get this wrong. We’re technically the successor company to Marriott Corp. dating back to the first root beer stand,” says Christopher J. Nassetta, president and CEO, Host Marriott Corp. After years in food service management (selling sodas and catering airline meals) and hotel ownership, Host Marriott Corp. was born from the split of two companies in 1993. It was then that Marriott Corp. dissolved and gave birth to Marriott Intl., the successful hospitality operating company, and Host Marriott Corp., the fifth largest real estate investment trust (REIT).On October 8th of that year, Host Marriott took possession of a real estate portfolio that was 53-percent limited-service assets. Shortly thereafter, company executives began restructuring, providing new goals and a new direction – one that focused exclusively on full-service assets (properties offering food and beverage services, spa, health/fitness center, meeting and banquet space, etc.), specifically in the luxury and upper-upscale segments.When reflecting on the years between 1995 and 1998, Nassetta explains, “We grew the company four-fold over that period of time because there were tremendous opportunities to buy hotels at the upper end of the business at significant discounts to replacement costs. During that timeframe alone, we bought $6 billion in full-service upper-upscale/luxury assets.”In 1998, Host Marriott reorganized its business operations as authorized by the Board of Directors, to qualify as a real estate investment trust. REIT status became effective Jan. 1, 1999. To-date, Host Marriott’s portfolio consists of 123 hotels (approximately 60,000 rooms), 99 percent of which are full-service, upper-upscale and luxury properties, with all but six located in the United States. Included in the portfolio are some of the most well-known and well-respected brands – including Marriott, Four Seasons, Hilton, Hyatt, and Swissôtel.Owning nearly 40 percent of the prestigious Ritz-Carlton hotels in the United States, many properties in Host Marriott’s portfolio have become the No. 1 choice of business and pleasure travelers desiring luxurious accommodations. “We are uniformly acknowledged within the industry to have the best – from a quality perspective – portfolio of hotels than any other major owner of hotels,” says Ed Walter, COO, Host Marriott Corp.The Disciplined ApproachEvery company has a strategy – a formula of the right variables that, when combined, equal success, profit, and growth. For Host Marriott, those variables are the company’s assets: quality hotels of the luxury or upper-upscale segment located in urban, airport, convention, or resort locations. The equation? The best assets in the best locations equal the best performing portfolio by comparison.“If you look at our performance over the last 15 years, we have achieved a premium over our competitive set, which we think is an indication that our strategy here is working,” explains Robert E. Parsons, CFO. Based on data from Smith Travel Research, Host Marriott hotels outperformed the competition in 2001, generating 24 percent and 26 percent RevPAR (Revenue per Available Room) premiums over similar brands last year.The difficult-to-duplicate location of Host Marriott hotels is part of what defines them as “premier” assets. “We believe that there are higher barriers to entry in these markets and that these types of properties hold their value longer,” says Parsons. Opportunities to develop competing properties are limited due to the difficulty of locating premier sites on which to build and because of the high costs of market entry. When Host Marriott built the New York Marriott Marquis on 44th and Broadway in the heart of Manhattan, project costs totaled $500 million.The majority of hotels owned by Host Marriott are the result of acquisition. “Although we have done several opportunistic development projects over the last few years, clearly if you look back at the growth of the company over the last five or six years, the largest contributor to our growth has been the acquisition of existing hotels,” says Matt Richardson, senior vice president, Development, Host Marriott. The company’s cautious approach to ground-up development is a result of making sure the opportunity to build balances the additional risk, with appropriate returns to shareholders.Acquisition criteria are simple. All hotels being considered MUST meet the requirements that define Host Marriott’s portfolio, and provide justifiable financial returns. Walter explains, “From a financial perspective, we’re fairly disciplined about what we buy. We need to feel comfortable that the property will generate a return that is 250 to 300 basis points over our average weighted cost of capital.”Host Marriott has been more active in the addition or expansion of existing properties than ground-up development – a means by which value is added and the potential for increased revenue results. “It’s very typical for us to come into an acquisition and make a decision to close unprofitable food and beverage outlets and turn that into much more profitable meeting space. It’s a good way for us to derive more value from the acquisition,” explains Walter.Despite immense growth during the late ’90s, Host Marriott has not acquired hotels at the same rapid rate continuing into the 21st century. “We had been on the sidelines for three years on the acquisitions front. We did not feel that the dynamic in the marketplace was conducive to investing in acquisitions during that timeframe. A couple of things were happening in the market that caused us to temper our efforts. The pricing for hotel assets was at a peak, the performance for individual properties was at a peak, and we were approaching the top of the economic cycle. Market pricing didn’t deliver the premium to our cost of capital [that] we required,” says Jim Risoleo, executive vice president, Acquisitions and Development, Host Marriott.Management and OperationsHost Marriott’s status as a hospitality REIT for tax purposes prohibits it from operating its hotels. “We’re the owner. We’re the asset manager. We’ll play a role in overseeing what’s happening at the properties, but the actual day-to-day operations – those decisions are made by companies like Marriott Intl., Four Seasons, Ritz-Carlton, or Hyatt Corp., who are the operators that have the contract to operate the property,” Walter explains.To keep properties operating at peak, Host Marriott relies on its asset management team and their partnership with hotel operators. “Each asset manager has about 10 properties … What they will do is on a regular basis visit, communicate, and plan with the on-site hotel manager and with the regional management team from the hotel management company about operating, capital, and strategic issues for each property,” says Walter. It is the responsibility of asset managers in working with hotel operators to maximize the value of properties, contain operating costs, establish and refine operating benchmarks, and evaluate how best to invest capital for maximum benefit.Frequent reporting from hotel operators is essential to keeping asset managers and Host Marriott informed of hotel performance and the physical condition of each facility. “In terms of the level of quality, we require each hotel to do an analysis each year in terms of the integrity of their building … and lay out a projection of when they think material building systems are going to need to be updated or replaced,” notes Walter. Anytime complex problems with the facility arise, Host Marriott coordinates the use of independent consultants to provide advice on the most appropriate action – whether it is a roof redo, repair, or other necessary maintenance.Keeping operating costs in check requires constant examination of processes, products, and systems. One of the many ways the cost of operations has been significantly reduced at some California Host Marriott hotels includes the installation of new chillers, an opportunity that took advantage of rebates from the state to replace equipment nearing its expiration. Additionally, better management of energy usage has proved beneficial at select properties. “Energy management systems afford us with a much greater ability to plan and to implement in a careful way the conservation of utilities. We have found that the returns from these improvements, when implemented, will be north of 25 percent,” concludes Walter.Significant improvement to existing hotels via the creation of revenue sources like expanding meeting space, increasing guest rooms, or adding a restaurant generate growth. Since 1998, Host Marriott has spent $1 billion on maintenance and property enhancements to meet the needs and expectations of guests, drive future revenue growth, and maintain high-quality standards. The Effects of a Soft EconomyCreeping toward a recession, the attacks of 9/11/01 devastated an economy that had already begun to weaken. No one escaped the aftermath – including real estate companies owning hospitality properties. Host Marriott was likewise affected. Despite this, the No. 1 lodging real estate investment trust kept its chin above water as the hotel industry suffered through a weak economy and declining individual business travel. “Large group business and the individual business traveler – those are the two real drivers of our business. The group segment has been relatively strong and it makes up about 45 percent of our business. The transient business makes up the remaining 55 percent of our business. This segment, which includes the individual business traveler, has been very weak,” Nassetta explains.Like most other businesses chanting the mantra of cost containment, Host Marriott enacted a number of strategies to deal with the loss of revenue resulting from the soft economy. Many major capital expenditures have been temporarily suspended. However, the company is adamant about continuing necessary improvements to maintain the high level of quality for which its hotels are known. “We think it is a big mistake to get into a boom-and-bust mentality of ignoring the physical needs of our hotels in tough times and, conversely, spending exorbitantly in the good times. We try to make reasonable and appropriate reinvestments in all of our hotels on an annual basis to make sure that they are in top shape and meet the expectations of the guests,” Richardson explains.As a testament to its disciplined approach and high-quality assets, Host Marriott fared better than most in the hospitality real estate industry this year. Looking forward, the company anticipates a promising future. “If you want to look out three or four years, we think we are entering a period where we’ll have good, solid economic growth; very limited amounts of supply; and a good handle on the operating costs of the business, which should allow revenues to increase and then flow through to the bottom-line,” predicts Parsons.Devastating declines in business travelers rocked hospitality real estate companies coast to coast this year. Bruised but not battered, Host Marriott Corp. maintains its position at the top, projecting a favorable business outlook for 2003 and beyond.Jana J. Madsen ([email protected]) is senior editor at Buildings magazine.Photo www.LianeEnkelis.com

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