Private-Equity Firm Sees
Room for Value in Hotels

With real-estate prices soaring, many investors are complaining about how hard it is to put money to work. Private-equity firm Blackstone Group thinks it has solved that riddle by pouring nearly $5 billion into hotel companies in the past 17 months, trading the sector's volatility for better valuations.

John Kukral, president of Blackstone Real Estate Advisors, says hotels still have some room to appreciate in value. "We were buying assets where you had very limited supply coming on," he says. "You actually have shrinking supply of hotel rooms in New York, Hawaii and in other resort markets" because many hotels are being converted to condominiums to cash in on the boom in that sector. "We felt that that was bullish." The firm's investment jumps to $8 billion when assumed debt is included.

Blackstone is "fairly bullish" on the overall economy, too, Mr. Kukral says, and likes the demographic trends ahead for leisure travel. That is why part of the firm's focus has been on resorts, to get ahead of the wave of baby-boom retirees who presumably will increase their travel in the coming years.

'Attractive Risk-Adjusted Returns'

Analysts agree that compared with apartments and office buildings, hotels are reasonably priced. "The lodging sector versus other real-estate types offers very attractive risk-adjusted returns," says John Arabia, a hotel analyst with Green Street Advisors, a real-estate research firm in Newport Beach, Calif.

Blackstone's recent buying spree began in May 2004 when it acquired Extended Stay America for $1.99 billion. Before the end of last year, it had bought Prime Hospitality Corp. for $564 million and Boca Resorts for $1 billion. The latest big purchase is Wyndham International Inc., which is expected to close in the next couple of weeks, for $1.44 billion.

Some analysts speculated that Blackstone was trying to create another Marriott or Starwood with hotels in several different categories, but Mr. Kukral says that is giving the firm "too much credit."

"My philosophy has always been that every asset has to stand on its own," Mr. Kukral says. "I've never been a believer -- and some people have done this -- in assuming if you take a handful of assets and put it together they'll be worth more down the road."

The firm made its first big splash in extended-stay hotels a couple of months after Sept. 11, 2001, when the travel industry was flat on its back. Blackstone paid about $600 million for closely held Homestead Village, a midprice extended-stay chain. The 130 hotel chain subsequently saw revenue per available room, an industry measure, fall for more than 30 months. "We were probably early when we bought Homestead," Mr. Kukral says.

When it saw the turning point coming, Blackstone bought Extended Stay America. "We felt we could buy ESA and combine operations," Mr. Kukral says. "We get all those efficiencies and buy at a time when the cycle is turning where we'd actually see growth in demand in that segment."

Blackstone then bought Prime because it had a number of assets that fit well in its new extended-stay franchise and now with Wyndham it will have half-interest in Summerfield Suites, a 25-property chain of upscale extended-stay hotels.

Creating an Appealing Company

By integrating those hotels into its extended-stay division, which has its own management, Blackstone can create an appealing company that ultimately can be taken public. "We underwrite it asset by asset," Mr. Kukral says. "But if the market allows us to and gives us a better valuation we'll look at doing it."

Wyndham also has a valuable portfolio of Caribbean resorts, which could fit well with the Boca Resorts properties in a separate company. Mr. Kukral declines to predict what Blackstone will do with its wealth of hotels, but said the company isn't a long-term holder of real estate.

While Blackstone has made its biggest buys taking over public companies, it also has picked off individual assets here and there and has a portfolio of about a dozen of those. "They like buying real estate," says Arthur Adler, managing director and chief executive for the hotel division of Jones Lang LaSalle, a commercial real-estate services firm based in Chicago.

"But they also like buying control of management and the brand and the whole thing."

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