|By Dudley Price, The News & Observer,
Knight Ridder/Tribune Business News
Jan. 3, 2006 - RALEIGH -- Winston Hotels, which began as a handful of North Carolina inns, in 2005 spent $164 million adding to a portfolio that consists of 57 hotels in 18 states.
During the year, the Raleigh-based real estate investment trust bought eight properties, and began development on four others in its most ambitious expansion.
"It's 11 1/2 years of building a national platform, and it's beginning to bear some fruit," said CEO Robert W. Winston III, who founded the company in 1994.
Don't expect a slowdown in 2006.
Starwood Hotels & Resorts, one of the world's largest hotel owners, designated Winston as one of its 20 "preferred developers" for a new brand, named Aloft, that is being rolled out to compete with Hilton Garden Inns, and Courtyard by Marriott. Winston isn't saying how many Alofts will be built, but analysts expect about 10 by the end of 2007.
Separately, Winston has a $215 million line of credit from GE Capital for acquisitions and development.
"It's certainly possible the portfolio could expand 15 to 20 percent in 2006," said William Crow, a hospitality industry analyst for Raymond James in St. Petersburg, Fla.
Winston's loan program to other hotel developers is expanding, too. Interest from the loans generates a higher rate of return than Winston receives from hotel ownership.
Thus far, the loans have been funded by a $50 million stock issue in 2003. But in 2005, Winston teamed with GE Capital Finance to add more juice to its loan program. Winston made $22 million in loan investments in 2005, and had $31 million in debt investments as of Nov. 30.
The result is a larger, more diverse Winston Hotels with little resemblance to the original company, whose total holdings were 10 limited-service hotels -- inexpensive inns without lounges, restaurants or nightclubs -- all located in North Carolina.
About 41 percent of the company's revenue now comes from full-service hotels, which have more amenities and higher room rates.
Still, Wall Street hasn't been impressed.
Share values have dropped about 15 percent since Dec. 31, 2004, primarily, analysts said, because Winston didn't buy more as the industry rebounded from the travel slump that began in 2001.
"In retrospect, the company was too conservative in the last few years in making decisions to acquire or not acquire assets," Crow said. "What appeared to be expensive prices for assets has proved to be attractive buying opportunities. And while a number of competitors have been active acquirers, Winston has stayed largely on the sideline, which is one reason for the underperformance on the growth front."
Winston share prices also have been hurt because the company doesn't own hotels in markets with the biggest increases in room demand -- New York, Washington and southern California, Crow said.
With a dividend that's almost twice the industry average, Winston has managed to outperform many of its peers.
Since 2000, the company has a 101 percent total return, compared with an average return of 76 percent on the Bloomberg REIT Hotels Index. The average dividend paid by the 19 index members was 3.5 percent; Winston Hotels' dividend is about 6 percent.
Winston describes his hotel acquisition strategy as "opportunistic" -- buying underpriced or underdeveloped properties in areas with high demand. In 2005, the company began converting an art deco apartment building in Kansas City, Mo., into a 123-room Courtyard by Marriott. The building was priced at $25 million, but with tax credits for historic preservation, the cost was $17 million.
"They don't want to be big for big's sake," said Gustavo Sarago, a hospitality industry analyst for Friedman, Billings Ramsey in Arlington, Va.
Winston's hotels may not be in current hot spots, but that might have been a plus during the most recent downturn, when hotels concentrated in airport or convention markets suffered the largest declines in business, Sarago said.
Winston's average occupancy rate was 70 percent through the third quarter of 2005, compared with 64 percent for the industry.
"Management has done a good job focusing on the right things," Sargo said. "They just need to communicate it."
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