CEO Interview: Paul Whetsell / KPMG / 1998

-- CEO Interview: Paul Whetsell --

Paul W. Whetsell is President, Chief Executive Officer and Chairman of the Board of CapStar Hotel Company. Recently, he took some time out of his busy schedule to talk with us regarding CapStar's proposed merger with American General Hospitality Corporation.

KPMG: CapStar has grown rapidly since its formation in 1996 and has recently announced its planned merger with American General Hospitality Corporation, a REIT. What was Capstar's formula for growth and success prior to the merger's announcement?

Whetsell: Since its initial public offering in August 1996, CapStar has carried out external and internal growth strategies. On the external side, we've grown through acquisitions and by adding third party management contracts. Since our IPO, we've acquired 56 hotels with more than 13,000 rooms at a cost of approximately $1.2 billion.

There are two distinct phases to our internal growth strategy. Short-term growth results from property-specific operating procedures we institute during the first six months after our takeover of a hotel. Long-term internal growth is realized through major renovation, rebranding, and repositioning programs that drive earnings over a multi-year period.

KPMG: There will be two entities resulting from the merger. Can you give us some insight about the respective roles and responsibilities of the companies and their business growth strategies?

Whetsell: One company, MeriStar Hospitality Corporation, will be a hotel REIT and will own all of the hotel real estate. In 1998, we expect to buy larger, more upscale properties and portfolios in major metropolitan areas where the barriers to new competition are highest. We will also seek opportunities to acquire other companies and expect to see many such candidates on the market in 1998. With approximately $3 billion in market capitalization, the new REIT will be well positioned to compete for the larger portfolios, although we will continue to aggressively seek individual transactions.

Secondly, we plan to increase our involvement in resorts, a highly fragmented segment of the industry that can benefit from our operations expertise. CapStar recently announced an agreement to acquire South Seas Properties Company, a portfolio of nine resorts and a golf course. Following this acquisition and the merger, MeriStar Hospitality will own approximately 25 resorts. "We also see opportunities in hotel conference centers and time-share businesses, and we will explore ownership and management possibilities in these areas as well.

KPMG: How quickly and to what extent will your companies be integrated after the merger?

Whetsell: Both American General Hospitality Corporation and CapStar were growing rapidly prior to the merger, and both companies were staffing up rapidly to support their respective expansions. The merger couldn't have come at a better time. As a result of the merger, the operating company will be fully staffed in all of its senior level positions. The two organizations both go back more than a decade and have been through two complete hotel real estate cycles and know how to operate in good and bad economic conditions.

KPMG: In your view, what do you see as the most critical integration issues facing your companies and others involved in major mergers?

Whetsell: People are always the biggest issue. Because both companies had a number of openings at the time of the announcement, however, we won't have the layoffs associated with most mergers. This, in and of itself will dramatically reduce the human resources issues generally associated with a major merger. We are very focused on creating a new, unified corporate-wide culture.

KPMG: There seems to he a trend toward REITs acquiring proprietary brands as seems to be the case for Patriot American, Starwood, and Meditrust. Will the fact that CapStar and American General Hospitality Corporation will continue as a (combined) hotel company without their own proprietary brands be a strategic advantage or disadvantage for the merged companies?

Whetsell: We think that we have a significant strategic advantage by maintaining our current multi-brand approach. We already will be the largest U.S. franchisee of Hilton, Sheraton, and Westin. Because of our diversity, we will be able to objectively select the best brand for each of our properties.

KPMG: Once the merger is completed, the companies will own first-class and full-service hotels and operate first-class and mid-market hotels. Are plans in the works to move into other price segments and product types? Will these plans affect further acquisitions and /or integration strategies?

Whetsell: From an acquisition viewpoint, we see no reason to change our current strategy of focusing on first-class, full-service hotels. We know how to acquire them and we know how to operate them, and they
are the best fit with our growth strategy. However, we intend to leverage our operating skills with MeriStar Hotels & Resorts. This will allow us to participate in other sectors of the industry without committing significant dollars. CapStar already has organized into three operating divisions - hotels, inns, and resorts - to reflect what we believe are the three most important segments in the industry. This structure will carry over to MeriStar Hotel & Resorts, our operating company, after the merger.

KPMG: There's a lot of talk in the industry about hotel companies becoming strategically more customer focused and customer -oriented. Is this considered strategically important for MeriStar? How will MeriStar move ahead of the pack in this regard? How will technology play a role?

Whetsell: Both CapStar and American General Hospitality Corporations began as operators. I believe that operating excellence ultimately will be the deciding factor in determining who will be the survivors in our industry. If you don't deliver service, guests will walk across the street and pay more. That philosophical approach is the basis for our proprietary, service-oriented employee culture. We empower our employees and give them significant latitude to meet our customers' needs. This, in turn, makes both the guest and employee more satisfied. The success of these programs is seen in our double - digit improvements in RevPAR in 1996 and 1997.

KPMG: In shaping MeriStar's future, what would you consider to be the most influential market factors that will affect your company?

Whetsell: The entire industry is tied to the economy. Obviously, we keep a close watch on the economic indicators in each of our markets. Currently, the overall outlook is positive for at least the next few years, and our tactics reflect the current economic environment. The market for acquisitions will also play an important role. We currently are focused in major urban centers where barriers to new competition are highest. This should give us significant long-term protection. With our acquisition strategy focused on the markets with the highest barriers to competition, we feel that we are well-protected in all phases of the real estate cycle. When it matures, we'll be well-positioned to take advantage of new acquisition opportunities because of our well-capitalized structure.

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