$5B hotel sale still on?

Host Marriott's $274 million purchase of the Hyatt Regency in Washington, D.C. at the beginning of September shouldn't disqualify recent speculation that the hotel REIT may be planning to acquire a multibillion-dollar portfolio of hotel assets from Starwood Hotels, industry experts say.

It has been rumored that the two hotel companies have quietly been arranging for a transaction in which Starwood would potentially sell 10-20 hotel assets for between $2-5 billion.

Many questioned Host Marriott's commitment to such a deal when it acquired the Hyatt Regency however, a purchase that could be called uncharacteristic based on the assumption that a company gearing up for a major portfolio purchase typically wouldn't divert its capital towards smaller acquisitions.

But Robert Lafleur, a hotel stock analyst at the Susquehanna Financial Group, indicated that because of Host Marriott's size, $300 million wouldn't make or break a deal worth billions, especially after the company has hinted that major portfolio acquisitions are among its prime objectives.

"They're the biggest hotel REIT and they have great access to capital and they've made statements that they're confident they have advantages to do significant sized deals," Lafleur said. "Plus, as a publicly traded company, they can issue stock to do a deal, so if they want this deal, buying the Hyatt isn't necessarily an indicator they're not going to go through with it."

Analysts have been paying close attention to Starwood ever since it started unloading assets in an effort to convert itself mainly into a hotel manager rather than owner. Stock for hotel management companies typically commands a premium over firms that also own hotel property.

Rather than dumping properties in need of redevelopment, Starwood has focused instead on shedding stabilized hotels, like the 193-room St. Regis in Washington, D.C. it sold in mid August for $47 million. As part of that deal, Starwood will remain the manager.

The new owners, a joint venture between Brickman Associates and New Valley Corporation, will also be required to make capital improvements on the hotel.

The maintenance of Starwood's presence as manager in the hotel properties it decides to sell and the assurance that the new owners will provide a high level of upkeep in those properties are criteria that Kevin Mallory, a senior managing director at CB Richard Ellis and leader of the firm's hotel group, claimed are critical priorities for Starwood and ones that Host Marriott is perfectly suited to fulfill.

That fact, along with the REIT's considerable buying power have made it an overwhelming front runner among the short list of buyers with the financial capability to grab a loftily priced portfolio.

"Host Marriott is looking for exactly the types of properties that Starwood is looking to sell and it has a great track record of holding its assets long term and investing capital into its properties," Mallory said. "Plus Host Marriott is not a hotel manager and would most likely be more than happy to have Starwood in there managing the properties it buys."

"Starwood doesn't want to sell to someone they don't have confidence will invest in the properties and keep them on as managers. Clearly with Host Marriott, those concerns would be allayed."

Another advantage of selling assets to Host Marriott is that the REIT is able to issue operating partnership units to Starwood instead of providing the firm with cash, a capability that could help Starwood control its tax exposure. These OP units can be transferred into stock in the company that issues them, but are not recognized as income until they are converted.

Another attractive feature of OP units is if Starwood sees a potential upside in Host Marriott's share price from a deal that the two do together.

While timing for a potential deal is unknown, some industry experts feel it could come soon. Starwood has stopped buying back its own stock, a common practice for large hotel operators.

One scenario in which firms are prevented from buying back their own stock is when they are planning major transactions, like a large sale, that could affect their share price.

"Their lawyers won't let them buy back their shares," Lafleur said. "It means that they're preparing to do a deal soon."

"Host Marriott has its quarterly conference call in October," Mallory said.

"I'm speculating, but that's always a popular time in which to make such an announcement."