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Winston Hotels Finds Business Niche with Mezzanine Loans to Hotel
 Developers; New Direction May Lead to Up to $100 million
 in Outstanding Loans in Two Years

By Dudley Price, The News & Observer, Raleigh, N.C.
Knight Ridder/Tribune Business News

Nov. 16, 2004 - RALEIGH, N.C. -- Winston Hotels has spent the past decade developing dozens of inns nationwide. Now the Raleigh-based real estate investment trust is lending money to other companies to develop their own hotels.

Since 2000, Winston Hotels has loaned $20.7 million to companies to develop new hotels or renovate existing ones, including a $5.5 million loan last month to build a 188-room Residence Inn by Marriott in St. Louis. In two years, executives said outstanding loans to other hotel developers could total $100 million.

"We see this as a new direction for our company," said Chief Executive Robert W. Winston III.

Winston Hotels, which owns 51 hotels and had 2003 revenue of $128.8 million, isn't abandoning its core business of buying and developing motels across the country.

Instead, the company is entering the lending business as a sideline, taking advantage of a reluctance by traditional lenders to fully fund hotel construction or hotel redevelopment.

"They're just ramping up," said William Crow, a hotel industry analyst for Raymond James in Tampa. "It's a small part [of their business] but it has the opportunity to be pretty interesting."

For much of the 1990s, traditional lenders were eager to fund 100 percent of hotel projects' costs -- or more, Winston said. But after being stuck with many underperforming hotels in the wrong markets, most lenders now will loan only about 65 percent of a project's cost.

Most developers don't have enough to pay the difference and rely on secondary lenders such as Winston Hotels to make up the difference with what are called mezzanine loans. In September 2003, the company issued $50 million in stock to fund the loan program.

"We come in and plug the gap," said Winston Hotels' chief operating officer Kenneth R. Crockett.

Developers get the cash they need. If the developer defaults, the primary lender is protected because Winston Hotels, with years of hotel experience, will manage the inn and can even sell it.

In return, Winston Hotels receives a loan rate of 12 percent to 15 percent compared with a rate of 6 percent or 6.5 percent for the primary lender.

"It's not a loan-to-own program," said Winston Hotels president and chief financial officer Joseph V. Green. "We don't want to own these properties."

But "our benchmark is we won't loan on something we aren't willing to own," Green said.

Crow, the hotel analyst, said most hotel real-estate trusts don't make mezzanine loans, but he said it was a good direction for Winston Hotels.

"If there are no problems, you get a pretty high return on your investment. And if there are problems and it's nothing you wouldn't mind owning, you control the asset," Crow said.

Having another source of income could also help minimize volatility and risk from Winston Hotels' portfolio of hotel properties, Crow said.

Winston Hotels "may not have the greatest growth rate in up times but they won't have a big downside during the next downturn," Crow said. "I see it as a good program that ... can reduce the overall risk of the enterprise."


Winston Hotels is expanding outside its main business of owning and running hotels by acting as a lender to other hotel developers. Here are loans Winston has made during the past four years.

Hotel / Location / Loan (amount in millions):

--122-room Hilton Garden Inn, Sugarloaf, Ga. $1.1

--153-room Hilton Garden Inn, Tampa, Fla. $2.2

--116-room Hampton Inn & Suites, Baltimore $3.5

--290-room Marriott, Lincoln, Neb. $6.0

--200-room Sheraton Inn redevelopment, Atlantic Beach $2.4

--188-room Marriott Residence Inn, St. Louis $5.5

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(c) 2004, The News & Observer, Raleigh, N.C. Distributed by Knight Ridder/Tribune Business News. For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail WXN,

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