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Expanding by Going After Weaker Hotels in Key Markets |
By Sandi Cain
June 2003 Two Orange County hotel operators are expanding during the industry�s slump by going after weaker hotels in key markets. The strategy has San Clemente based Sunstone Hotel Investors LLC on the verge of becoming a major national player. Costa Mesa based Tarsadia Hotels, meanwhile, has broadened its reach by going into Atlanta, Orlando and Las Vegas. Sunstone, along with Boston based investor Westbrook Hotel Partners, has grown into a pivotal owner of four-star hotels. The company, which Chief Executive Bob Alter took private three years ago, has 77 hotels in 23 states in every region. Sunstone owns nearly 17,000 rooms at 11 different brands of hotels, including Hyatt, Marriott and Hilton. Nearly two-thirds are upscale hotels. Recent Southern California buys�including the Warner Center Marriott in Los Angeles, the Hilton Del Mar, Ontario Marriott and Hyatt Newporter � are getting face-lifts. The Riverside Marriott (formerly the Holiday Inn Select) got a makeover last year. Other Southern California properties include Embassy Suites LAX and Hollywood Holiday Inn. Sunstone now is among the 10 largest hotel owners without their own brand, according to Alter. �Sunstone is becoming more influential,� said Michael Mahoney, director
of hospitality consulting for PricewaterhouseCoopers in Los Angeles. A
bigger portfolio on the East Coast may not be a good move for Sunstone,
Mahoney said. East Coast hotels often see wider swings in profitability
than those in
That also makes them appealing. �Those markets hold up the longest,� Mahoney said. While Sunstone has made a conscious national play, Greg Casserly, Tarsadia�s president and chief operating officer, said his company isn�t thinking as big. Even so, Tarsadia has expanded regionally and moved into new markets. �We�re not aiming to be a national company,� Casserly said, �just to take advantage of opportunities that come along.� Sunstone is roughly three times the size of Tarsadia. The most recent Business Journal list of the county�s largest private companies ranked Sunstone at No. 23 with $317 million in 2002 revenue. Tarsadia ranked No. 43 with an estimated $150 million. Tarsadia has about 1,000 workers, while Sunstone counts 7,000. The strategies of Sunstone and Tarsadia overlap in some ways. Both are known for buying hotels and turning them around. And they�re savvy real estate players. �That�s to their advantage,� said Alan Reay, president of Costa Mesa-based Atlas Hospitality Group. Other similarities: a focus on technology and customer service. Tarsadia, which is owned by the Patel family, has most of its hotels in the Anaheim Resort area, including the Anaheim Marriott, Hyatt Regency Orange County and Portofino Inn & Suites. Recently, the company expanded in San Diego, Los Angeles and Las Vegas. �Tarsadia made a good move by balancing their portfolio outside Anaheim,� Mahoney said. At a recent industry conference in Los Angeles, Casserly said Tarsadia has done 100 hotel deals in the past 10 years, each involving 100 to 1,000 rooms. The company now has 20 hotels�seven are in OC and six in San Diego. Casserly said he wishes Tarsadia had bought even more, given the real estate boom. �In the early �90s, hotels were priced so low,� he said. �If you had the wherewithal to buy enough then and hang on to them without stressing, there�s a huge upside later. It would have been an effective strategy.� One hotel the company passed on in the early �90s was priced at $40,000 per room, Casserly said. �Now it�s on the market at $150,000 per room,� he said.
In OC, the company is set to open a new Residence Inn in Garden Grove July 1. A newly built Residence Inn opened in San Diego�s Mission Valley early this year. �We�re quiet about it,� Casserly said, �but we want to do a couple a year in good long-term markets.� Sunstone hasn�t focused on hotel development in recent years. Company President Mark Mance told attendees at a recent Los Angeles conference the company always is looking for good real estate. �We want real estate with a story,� he said. �We�ll buy one (hotel) with no cash flow if it�s a good market.� Buying isn�t always easy these days, Alter said. �Hotels are hard to buy,� he said. �Sellers always think they�re undervalued and that things will get better.� The travel downturn and tighter purse strings at lenders means fewer hotels are getting built. �The ones that are getting built � the Residence Inns and Courtyards by Marriott � can�t compete in the meetings market,� Alter said. �We think it results in less competition for meetings.� Technology is a big push for Sunstone. It runs a subsidiary called Buyefficient � an electronic buying system used by 400 hotels besides those owned by Sunstone, Alter said. All Sunstone-owned hotels have fast Internet access, an internal Web site for financial data and worker information, and Web-based reporting and buying systems. The company even has a vice president of technology, something that isn�t as common in the hotel industry. �Our highest priority right now is high-speed Internet and wireless access,� Alter said. Tarsadia also makes use of online hotel management and has a Web presence. The company has started rolling out a new interactive arrival system that lets guests find directions to their rooms and provide maps of area attractions. In Las Vegas, Tarsadia is hoping to lure business travelers who want to avoid the Strip and casinos. �We�d like to have six or seven (hotels) there and be like San Diego: a solid hotel operator in a good meetings market,� Casserly said. Sunstone has focused recent efforts on bolstering its management. In March, the company made 23 management hires and promotions, including regional vice presidents. It also added new executive vice president and chief financial officer, Jon Kline, who came to the firm from Merrill Lynch & Co. �We spend a lot of energy hiring an �A� team to run the hotels,� Alter said. Sunstone Hotel Investors Inc. started in 1995 as a real estate investment trust focused on the Western U.S. In 1997, it acquired 17 hotels for $372 million as part of the buy of Rochester, Minn. based Kahler Realty Corp. The company then began to focus on upscale and luxury hotels. In 1999, Alter and Westbrook Partners teamed to buy the outstanding shares of Sunstone Hotel Investors Inc., taking the company private and forming Sunstone Hotel Investors LLC. In 2002, they moved east of the Rockies with the acquisition of 15 hotels put on the market by Dallas-based Wyndham Hotels & Resorts. Sunstone could go public again, Alter said. But he said market cycles and conditions would be the deciding factor. B.U. Patel founded Tarsadia in 1976 by buying a small motel in Anaheim. Named for Patel�s home village in India, the fledgling company began to buy and sell hotels, moving into the more lucrative first-class hotel market during the recession of the early 1990s. In 1999, the company made its largest buy: the 1,033-room Anaheim Marriott. B.U. Patel�s sons � Tushar and Mike � began working in the business as teenagers. Today, Tushar is chairman and directs the company�s strategic investment and financial matters. Mike is vice chairman, focusing on design and construction. Founder B.U. Patel, who says he doesn�t believe in retirement, still is active as a vice chairman. Casserly came on board in 1998. He was executive vice president of HFS Inc. (now Cendant Corp.) and is a graduate of Cornell University�s School of Hotel Administration. Bruce Baltin, senior vice president of Los Angeles-based PKF Consulting, which tracks the hotel industry, said he thinks there�s a place for companies like Sunstone and Tarsadia. �People think you have to be big�and that�s true in one sense,� he said.
�But there�s a niche of assets that need a smaller company that brings
�TLC� to the assets. These companies are becoming more national players
because of that.�
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Sandi Cain Laguna Beach CA 949-497-2680 [email protected] |