April 13, 2012--HEI Hotels and Resorts, a Norwalk-based hotel investment firm, has lost some heavy-hitting university investors in the past two years, but a hospitality industry analyst suggests that the company should have little difficulty in attracting others to fill its coffers.

The privately held company, which owns and manages 41 locations, operates three funds totaling more than $1.2 billion, and has a history of solid returns for investors, said Mark Woodworth, president of PKF Consulting, an Atlanta-based hospitality consulting firm.

"There's an extraordinary amount of equity capital looking to find a way into the lodging industry," he said. "Fundamentals as you move from city to city are extremely positive, and are expected to remain so for the foreseeable future. HEI's track record established over a long period of time is clearly very successful. It tells me that they will not have a difficult time finding investors to back them in their future efforts in the domestic lodging industry."

But the decisions by Harvard, Brown, Princeton, Pennsylvania and Yale not to reinvest millions of dollars in upcoming funds is sure to have the company digging a little deeper in its search for quality investors.

After reports of disgruntled employees complaining of unfair labor practices at an Embassy Suites Hotel in Irvine, Calif., one by one the schools decided not to invest in upcoming HEI funds. HEI sold the hotel in late 2010, but still manages it.

Unite Here!, which is attempting to unionize employees at the hotel, trumpeted Harvard's decision in late March not to make future investments in HEI funds. The attraction of solid returns for the foreseeable future may be hard to ignore for investors, though.

A PKF study released last month projects a strong 2012 for the hotel industry, with six years of room-occupancy growth. Room revenue will increase by 5.8 percent in 2012, according to the report, the result of a 1.6 percent increase in occupancy and a 4.1 percent gain in average rates.

"With solid financial footing more assured, PKF-HR predicts greater profitability for the next two years and an increase in hotel investment. Ever since the first quarter of 2010, growth in lodging demand has greatly exceeded the supply increase," Woodworth said in the report. "We expect to see average daily room rates increase in excess of 4 percent per year through 2014. U.S. hoteliers have never enjoyed such an extended period of favorable market conditions."

Those statistics apparently were not enough to convince Harvard and the other schools to re-think investing in upcoming HEI funds. The universities, including Harvard, with its $32 million endowment, have not gone into depth to explain their decisions to avoid reinvesting in HEI.

"Harvard Management Co. has decided not to reinvest in funds managed by HEI," said spokesman Kevin Galvin in prepared comments. "Importantly, this decision was based on factors related to the HMC portfolio and its strategy and needs; not on concerns about HEI's practices."

HEI would not disclose how much each school has invested in its funds, but based on data from Form D filings with the U.S. Securities and Exchange Commission, Harvard has invested at least $70 million, Princeton has invested about $94 million and Yale has invested at least $121.5 million -- the top three out of five endowments to have declined to be a part of HEI's future funds.

Princeton spokesman Martin Mbugua said in March, following the New Jersey university's decision to make no future investments in HEI, that the decision was based on the Princeton University Investment Co.'s review of its investments.

"Every year PRINCO reviews hundreds of funds and declines to invest in the vast majority, and it is generally against PRINCO's policy to make comments on any specific decision or on funds in which it invests."

The University of Pennsylvania invested in HEI's first fund in 2004, but not in the two subsequent funds, said Penn spokesman Anthony Sorrentino.

Noting that HEI operates unionized properties, Penn in a March 2011 statement said the dispute between HEI and United Here! centers on the method of union recognition. The university said it has no plans to make future investments in HEI-sponsored funds.

HEI is upbeat about garnering support for upcoming funds.

"With respect to the future, we continue to get encouraging interest from investors in a future fund," said HEI spokesman Nigel Hurst. "To be clear, no HEI investor has ever made a decision to invest or not invest in any HEI fund on the basis of employment allegations. Harvard stressed that they were not influenced by external factors related to any allegations regarding HEI employment practices."

HEI has focused on its principals of excellence and continuous improvement in terms of its management and operation practices, he said, adding that HEI has never been found to be in violation of any labor laws. A California case was settled out of court.

"HEI remains well positioned to provide significant value for current and future investors while offering a rewarding career opportunity for employees," Hurst said.

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(c)2012 The Stamford Advocate (Stamford, Conn.)

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