Editor's Note: Figuring out what's on the minds of the nation's top hospitality industry experts is never an easy task, but National Real Estate Investor was fortunate enough to gather an elite group at a private roundtable luncheon on Sept. 12 in conjunction with the 1st Annual Hotel/Motel Summit at The Phoenician resort in Scottsdale, Ariz.

(As a side note, shortly after our discussion, Host Marriott announced that Robert Parsons Jr. has been promoted to executive vice president and chief financial officer.)

Q: Don, this morning your boss, Bob Hazard, said Choice's goal is one million franchisees. You've got 300,000 now, so what are your growth plans?

Don Landry: Franchising as we know it in the United States is still a relatively unknown concept throughout the rest of the world. There is tremendous potential opportunity. And Kirk (Kinsell) might agree with me, the rest of the world may be 15-20 years behind in terms of hotel franchising.

We've basically taken two approaches to franchising outside of the domestic United States. That's where we operate the franchise ourselves, as we do throughout Europe. We have a managing director of Europe and country managers in Germany, France and the U.K., and operate that franchise business similar to the way we operate in the United States. The difference is we have 2,500 hotels in the United States and we have 250 in Europe.

The other approach is a master-franchising approach, where we partner with a local entrepreneur who in some cases, owns entirely and in most cases, in partnership with us, the franchising rights for that country or region. That's been a method that's had slower growth than we desire, so we're focusing right now on how we can accelerate that growth. What we think will have to be done in order to reach the goals that we want to reach is that we will have to invest, or feed, those countries with certain products that we want developed so we have showcases quicker in those countries. We're doing that in the U.K. We're now going to do 10 Sleep Inns with a developer, and that feeding accelerates the franchise growth worldwide. In India, southeast Asia, China, the potential is mind-boggling. There are 1.2 million people in China. U.S. franchising companies thus far have built fairly large, fairly luxurious properties in gateway cities. As hotel investments they've been successful, but they haven't been terribly successful in franchising because you've got only so many opportunities to do that. The real opportunity is going to come as the middle class evolves in Russia and India and China.

Q: What's the potential for growth in the U.S. market?

Landry: The U.S. traveling public and the nature of our geography is tremendously conducive to hotels. What you have is a continuing growth in the population that wants to travel, you have the graying of America bubble that will increase travel demand substantially, and we talk about the age wave, and the age wave hasn't hit yet; those baby-boomers aren't senior citizens yet. As they get into the true senior citizens you could have a tremendous increase in travel and, therefore, a need for more rooms. At the same time, if you look at this country's history, the big growth bubble in hotels occurred in the late-'60s, throughout the '70s and early-'80s. Those hotels are aging and they're going to be on the down elevator going out of the system or they're going to require substantial reinvestment. Renovation loans are very difficult to get. You have a lot of product out there that desperately needs renovation and can't get the money to do it. And those properties are going to quickly get to a decision tree of either renovate or drop out of the race.

Q: Kirk, your new Four Points division has a goal of 50 properties by year's end?

Kirk Kinsell: That's what we wanted to do and we've accomplished that. The key for Four Points and its growth is to make sure that those 50 are indeed benefitting from what we had set as an expectation in terms of our value proposition, and make sure the properties feel comfortable with the transition that's occurred within the Sheraton family and those that are joining the Sheraton family for the first time.

Q: Why create a new brand?

Kinsell: It wasn't out of the interests of the company to try to grow from x number of rooms to y number of rooms, it was out of the interests of the company to maintain and strengthen the brand promise that Sheraton has experienced and enjoyed over the last 30 years.

Sheraton clearly has done a lot to invest in its product on a worldwide basis. Like a lot of other brands it got a little bit of a patina on it and, starting in the late-'80s or early-'90s the company took an interest in spending billions of dollars in its own estate to bring the quality of the brands up and bring the quality of the experience up. In doing so, it went through a strategic review of its entire estate, which includes the franchise properties.

But still the Sheraton Inn name and the Sheraton Hotel name confused the customer. Half of our customers are smart enough to figure it out and half of them aren't. What we have to do is make sure that everyone gets the picture. At the same time what was happening with all of the limited-servs coming on, the new-builds particularly, it was screaming for trial, legitimately. A lot of the people who were in the middle market - the Holiday Inns, the Ramada Inns, the Sheraton Inns, the Hilton Inns, they all had Inns in the name - they started lowering their rates trying to compete with the new-builds rather than really competing on the strength of their product and that got into a vicious cycle and everybody then as we know got to a point where they didn't maintain the product. So to try to maintain their positioning they started eliminating some of their services, because they didn't have the wherewithal to hold their ground in the middle market.

Sheraton Inns continued to maintain that, but they were being dragged down by all of these other people below them, and Sheraton Inns tended to be hotels operating in suburban markets with full facilities and services and achieving very high REVPAR (revenue per available room) numbers. So one of the things we wanted to do was to therefore clarify the brand finally and distinguish each one of our line extensions - the middle market, upper market or luxury market - and to give the dignity, if you will, back to the franchisee of being a hotel. We believe that for the Sheraton Inn licensee, all of them that are out there in the system today are in good condition, good repair, great operators, good franchisees paying my bills and running a good business with a great REVPAR, but they can actually enjoy a higher revenue push through a rate strategy by going to a hotel with a distinguished product. So the company decided to spend $10 million on its advertising and another $3 million on its signage package and another $5 million in various other types of assistance to make sure the hotels all make this change, which we thought was appropriate as partners to invest along with them.

Q: Any plans for new construction?

Kinsell: Clearly for Sheraton Inns it's a morphing over for growth from a conversion profile believing that, because of the REVPAR performance of a Four Points hotel being at the top of the middle market hotels if they make investments in their product for the same level investment, you can get a higher REVPAR by making the change. That's really the key to bring people over from a conversion perspective. From a new-build, if you're building a new hotel, you may even think Courtyard. That's the highest REVPAR in the segment, but there aren't a lot of places to build a Courtyard anymore unless you want to be in the tertiary markets. Then maybe you might want to build a Holiday because the legacy of Holiday suggests that's a great flag you can get financing for, but there aren't many Holidays you can do either. Your choice is left with everybody else, and that's where we think we'll command more than our fair share of new-build opportunities.

We're not driving that through prototype designs or financing at this time. We're focusing on what we need to do well. We don't have aspirations of hotel stock in the thousands of rooms, or 10,000-room growth in a quarter. We really want to be very prudent and very diligent where we play. We do share a reservation system with Sheraton Hotels through the 800-number, so we have to be concerned about that encroachment and impact. So for that reason as well we offer area protection for each of our licensees.

Q: Don, you just introduced a new logo for your top-of-the-line Clarion brand, and you announced a new prototype product. Can you get into some of the reasoning behind those moves?

Landry: The reason behind it is that nobody is building full-service hotels. No one is building because the return on investment is not there. We moved Clarion into our new-product development division and said, "Let's rebuild it as a meeting, virtual reality full-service hotel that produces 40%-45% GOP (gross operating profit) and therefore justifies the investment. We didn't do this overnight. We started this three years ago when we developed the operating system, which is really what a franchise is all about. It's not selling the fun or selling the marketing program and the mass advertising, it's selling the success system. So we developed a success system and, to put our money where our mouth is, we purchased five hotels and converted them to Clarions and put these systems in and they're now hitting 40% GOP, so we had the tangible evidence that the systems worked. We feel that the opportunity is to develop the full-service hotel that will be built in the future and we think that if we can hit 40% GOPs with the conversion property with this system, if you build it from scratch you can hit 45%-50% GOP. We're pretty convinced of that.

Q: I'm surprised at the number of brands that are now competing in the marketplace. Michael Leven is doing Microtel, HFS is doing Wingate, we heard that Westin and Hilton are coming to the market next year with franchises. Is this one of the most active periods of market positioning in the hospitality industry?

Landry: Without a doubt there is a proliferation of brands. I'm not sure there's a true need justification for the brand as much as it's a me-too. It's pretty well known that it's relatively easy to create a brand beneath a current brand and have it succeed. Marriott did it with Courtyard and they did it with Fairfield. Other brands have done it. It's very difficult to go up and very few people have been able to do it. I think Kirk would agree that Ramada Plaza is going to be a tough row to hoe. Crowne Plaza has been a real long road uphill.

Kinsell: 15 years.

Landry: Even Marriott with its J.W. They've all had a tough time going upstream. And of course Hilton did sort of stub their toe with, was it Cresthill or Hillcrest, I can't remember?

Kinsell: It started out as Hillcrest and then it went to Cresthill.

Landry: What's the new one called, Hillstop?

Kinsell: I think the announcement they'll make will be Horizon, which is the revisit of the original Hillcrest.

There is clearly a proliferation of brands, but every hotel company is essentially trying to do what other commodities do in a consumer environment and that is to grab a customer when they're young and own them for a lifetime, because its' so damn expensive to create new customers. Secondly , we know the stork isn't helping out either because they're not delivering to us. So the strategies are different because there's a finite group of people out there, so we've got to grab them while they're young and go through it. Certainly Sheraton's effort is to clarify the offerings and have a distinguishable brand for each one of your occasional uses, which also fits into a demographic use as well. We are all trying to find ways of controlling share, because share is best gotten by getting your competitor's hotel as opposed to trying to take the one or two customers out of their hotel with your newest frequency program or cookies on the pillow or whatever.

Q: How should the brands go about differentiating themselves?

Morris Lasky: We went through the whole issue of segmentation in the '70s and '80s, and very frankly my concern is that I don't know if the customer can really differentiate. They didn't before and I'm not so sure they're going to now, especially when the names in a very large way do not denote what the product is. If you ask the average customer even going back to the '80s about all of these hotels, they would have no idea if they were in the middle market, high end or low end of the market.

What I'm seeing is there's such a pressure to build the economy hotels. Theoretically you can build them cheaper than you can buy them based on the productivity of the hotel today. We don't know that we're not getting into another cycle. There's a lot of new product coming on. And we always talk about the reality that product is coming out of the market because it's getting obsolete. I haven't heard or seen too many properties go out of the market because they're obsolete. So as long as they stay in the market they're part of the inventory, whatever part of the inventory they are.

After 40 years and having done $3 billion worth of turunarounds in the business, I believe in seven-year cycles, and I think we're in another cycle. Luxury hotels have not gotten to the point where they can be built because you can buy them cheaper than you can build them. Midrange is entering the possibility, especially at the low end of the middle range, and the economy could very likely be overbuilt sometime in the near future if everybody is right about the fact that everybody wants to build economy hotels.

Paul Novak: It's very interesting. Bob Hazard, whom we all love dearly, was very boisterous and firm on his position that overbuilding wasn't going to occur in the economy segment, but I tend to agree with Morris. One of the issues laying out there is not so much that the budget chains, the better ones, aren't going to do well, but what people tend to miss is that an awful lot of the economy product or budget product right now is 1970-generation Holiday Inns, Ramadas and Howard Johnsons that have been repositioned now that are the ones that are extremely vulnerable. While the new generation of economy may not be overbuilt and may do well financially because of the strength of their new product and their brand, those products that are branded old facilities are going to get left behind.

Steve Brenner, the last few years of his life, screamed for product to go out of the market, but he had no control over it. We're now five years since he really began preaching that, and we're not seeing much product going out of the market. There are a lot of 30-year-old Holiday Inns out there still that carry the Holiday Inn name.

David Mumford: A lot of those properties have been down-cycled and have been acquired at such low bases by the operators that they're going to he a downward drag on the pricing on some of these mid-market and budget segments. Number two, we talk about demolishment needed to take out some of the supply, but the guy who's got $1 million or $2 million in it, they're not going to demolish it.

Lasky: With the old properties not coming out of the market, no matter what they are, they are in the inventory of the marketplace. Other hotels are being added in and feasibility companies are now taking the attitude "If we build it they will come." And it's not true.

Bjorn Hanson: In 1995, we're going to see new starts, and we follow starts because they are a fairly good predictor of new supply, of about 68,600 rooms. Being removed from service, either being bulldozed or the doors shut, about 17,000 rooms. What's most worth watching is that 90% of the hotels being built with those 68,600 rooms are between 60 and 90 rooms each. So they are budget properties.

Kinsell: If you look on a unit basis, there are probably hundreds of individual hotel locations vs. 17,000, so that's probably a lot of 200-room hotels.

Lasky: Let me point out something here. They may all be economy hotels, but those economy hotels are probably seven to 10 years newer than any other hotels in that market. So given the choice, the traveler might select that newer property as opposed to an older product. So that's a problem too.

Hanson: There is a measurable new-property bias, so I share Morris' concern that that's not a justification for building new hotels under the assumption that they'll perform enough better. The long-term 25-year average occupancy for the country was 64.4%. This year we're going to he at 65.9%. If you look at a chart, we go above 64.5%, then we go below. There's only a certain amount of time before we start to see a down cycle. The good news is it doesn't look like we're in it yet. We do a forecast that goes out for three years.

The really good news is the profits. 1994, after adjusting for inflation, was the most profitable year in history on an aggregate basis. It wasn't quite a record on a per-room basis, but 1995 will be, and that's due in substantial credit to the management of the lodging industry restructuring itself, to bring break even from what it was in 1982, 66.3%, to a break even now of about 63.4%. So we've really re-engineered the business. So the profit picture is good.

Now some things to watch out for. Occupancy growth is falling dramatically. There was a failure to recognize that when demand was growing by 5%, a portion of that was recovery, it wasn't true growth. You were getting back to a normal level. So whereas in 1994 demand grew by 4%, in 1995 it's only going to be 2.7%, a 30% drop in the growth of demand, and our forecast is for it to go down even further in 1996.

So it's good news. Occupancy is growing. Demand is growing more than supply. But the pace is starting to slow. One of the firms came out with its forecast for 70% occupancy year after next. That's very unlikely. People who are in the business of watching bookings and such have some trouble with that forecast.

We are all so pleased that rates are going up faster than inflation, but we're in the highest occupancy in 14 years, and we should be getting more than a 1.1% premium over inflation, especially when inflation is so low. I think the reason is it's been 10 years since we saw a substantial premium over inflation and there's a generation of hoteliers managing hotels that have never been in an environment where you can raise rates by $5. In 1979, rates in the country went up 18.6%, a 6.5% premium over inflation. We need rates to go up, and when we hit that down cycle, whether it's three years or five years or seven years from now, we're going to need the rates to be built up to help us stay out of trouble.

Q: A lot of that comes down to the management team. How important is that?

Tom Engel: From a sponsorship standpoint, whether it's a chain or a management company, I always found it profoundly easier and certainly more effective if the team was strong. There are a couple of exceptions to that. We own 11 Marriott hotels in our-portfolio and, for the most part, the conclusion I've drawn is that brand is managing a manual. There's a formalized formula for success, and it generally becomes confusing at the unit level when that general manager is caught in a jam because the solution is not always readily available. I've supervised a lot of Marriott hotels and this is the way it is. But that's an exceptional brand in this business.

What we've experienced is that management is the difference. I don't think investors like surprises. I don't think investors like change. I think what investors like is continuity of management and management philosophy. I think investors like continuity of business strategies. Say what you will about Marriott International or Host Marriott, there is a moniker of continuity in that company. I think Promus, despite the fact that there has been continuous turmoil in that company, Mike Rose still represents continuity of management philosophy and brand integrity. And that's not something this industry has. There's a lot of talent in this industry, there's a lot of talent in this room. But the unfortunate reality is that investors don't trust this industry lots of times because they think it's really flaky. How would you like to have just broken ground on a Holiday Inn today. Who's in charge, and who's been in charge of this brand for 10 years?

Lasky: Bring back Kirk.

Engel: And there's no offense to Kirk, but I've listened now for the better part of 10 years since I left Holiday and created the Crowne Plaza brand about how much everybody seemed to know what was right for Crowne Plaza or not right for Crowne Plaza. But the fact of the matter is that Crowne Plaza struggled because Mike Rose hated full-service hotels. And that's why he got rid of Holiday, because he couldn't fix something that was in a body bag.

These are real issues from an investor standpoint. They size up what people are doing, who's in charge, what the management philosophy is and, if that flip-flops all over the place, they're going to be very hard pressed to get investor acceptance in that brand and in that company.

Kinsell: Tom when you were talking about property management and the strength in the continuity, what struck me is that we as an industry tend to move our general managers a lot. From an owner's perspective and from a lender's perspective, that seems to be a cost that is a heavy burden on the hotel. What's your view on that? The argument is that they get stale and we need to move them, and a fresh look improves the asset and the operations. On the other hand it's a heavy cost.

Engel: The bottom line Kirk, I believe when you are in the commodities game it tends to be less important, but when you're trying to establish either to bring life to a brand character by running one right, which is why I think you'll be successful (with Four Points), is that on a brand system basis you have to have people breathing character and personality into their brands, because that's what it's all about. I learned that after 14 years as a brand manager at Lever Brothers and Revlon. That brand is a personification of the value you're striving to present.

On a street-corner basis I think it's critical for all hotels, and certainly whether it's Four Points or Crowne Plaza or those that are attempting to establish themselves as widely perceived by clients as winning, boy they better stand for something the consumer can fully understand and differentiate from the next brand or they're destined for failure.

Q: You have $105 million worth of acquisitions year-to-date. Are hotels a good Play for Pension funds?

Engel: We publish an annual periodical called Emerging Trends, and hotels have gone from the least desirable to the most desirable form of real estate, and under the category of opportunity, where would you put your money if you were to lay it on the biggest opportunity, and hotels and resorts emerged in that respect, primarily because the total return (the sum of the current income or yield plus appreciated value) was perceived to be the greatest.

All of that is driven because this is a product category that fell the furthest.

Hanson: If you took the whole industry together it's trading at almost 70% of replacement cost, and here we had a recordsetting year for profits, twice the most profitable year in history and, in 1995, we'll get to almost three times the most profitable prior year in history, and yet those properties still don't have the economics to justify their replacement cost.

Mumford: I think particularly it's in the upper end of the market too, because if you look at the limited-service and mid-market segment, the reason they are building in those segments is that you can't find Hampton Inns or Comfort Inns or other brands that you can acquire at a discount to replacement.

Hanson: We did an analysis using absolute numbers using HMBA (Hotel & Motel Brokers of America). In the limited-service segment, putting together budget and economy, you can buy for $34,000 what you can build for $32,000. In the full-service segment it's $66,000 VS. $102,000 to build, so that's approximately 67%. In the luxury segment it's about $240,000 to build and about $112,000 to buy.

If you buy good economics, particularly in the luxury segment, because of that tremendous discrepancy between to-build and to-buy, with the long-term protection there against future competition, it may be the safest investment.

Novak: I think this industry, from an investment perspective, truly is breaking in half right in the middle of the moderate price segment, and everything below it is where everybody thinks is where the investment opportunity is, although a lot of people clearly see it above. The real opportunity to create value is in the middle and up. There isn't any opportunity to create value in the middle and below.

Engel: A partial explanation that I never realized until I had the experience first hand is a regional or metropolitan loan officer at a branch bank may have governance over local commercial loans.

In a macro sense, this industry's future is being dictated by factors that are yet to be experienced, partially being experienced right now motivated by a need on Wall Street. We are beneficiaries of scarcity. People who must produce results to make money for bigger summer homes and more cars, to pay for their kids' education at Hanover and Yale, are going to find creative solutions for our problems. And that's what may make Four Points work, but we're entering a phase in our industry in which variables may have more to do with what we took like three to five years down the line.

Lasky: I realize one basic thing - we have the most uneducated industry in the world. This is a business, it's not real estate. We all agree on that, we've all talked about it and the fact is that the business is being run primarily by people who don't understand the business. It's evidenced by the fact that I've gone into name-brand hotels with "good" management where the yield management problems were totally absurd.

Q: Nomura has done about $2 billion in hotel financings, including a recent $225 million acquisition and renovation facility with Paul Novak. Give me the Wall Street perspective. What do you like about hotels?

Ray Anthony: I would say initially what we liked about it, going back about two and a half years ago when we first got into it, is what I refer to as the "You can't fall out of a ditch" kind of perspective.

Engel: You want to bet Ray? Try the Bonaventure!

Anthony: I actually have the benefit of not having financed commercial property in the 1980s. In the 1980s I was doing single-family. Two and a half years ago it looked to me like a pretty good bet and we started looking at it and all of the statistics that were mentioned here before in terms of fractions of replacement costs that we were financing things at, looking at trends where it appeared to us that occupancies and ADRs (average daily rates) had absolutely bottomed out and were on the increase. I think we really did hit the market at the right time without maybe the tainted perspective that some of the commercial banks and insurance companies have had having gone through the cycle in the 1980s that we hadn't. So we really saw an opportunity and went head-long into the hotel market.

Hanson: What Ray failed to say about what he did, in an understated way, was he took a major risk when no one else was doing this. With the rating agencies, hotels were the "h" word and he kind of created a market by going to the rating agencies, explaining the fundamentals and was able to sell a community. I don't know how he did it.

Anthony: At the time we were terrified. We took down some hotel loans that in 1995 would seem like some incredible spreads, but at the time we took that down we didn't have a lot of rating agency experience to go on. We did not know how we were going to be treated by the rating agencies. We knew they hated hotels. We just tried to took at it if the deal made sense it was a fraction of replacement cost, it was below the cost of putting it up. One of the things about commercial real estate is there's no such thing as good or bad, it's just what your basis is and where you own it.

When we first started doing this we thought we were taking a major risk. But what's a major risk to us is not just credit risk. We were pretty comfortable that the loans we were taking down were good loans and that we structured them well and made sure that there were reserves for replacement on an ongoing basis. The risk we have as a securities firm is not just that the loan is a good loan but we will also be able to get it rated and securitized and to sell it. That was the greatest risk we took.

Engel: Ray, what motivated investors to buy the securities?

Anthony: One of the initial deals we did was broken up into three classes of securities. This particular deal was a private placement, a 144(A). There was a AA tranche of securities, there was a BBB class of securities and there was an unrated class of securities. AA and BBB securities are fairly straightforward. They're investment-grade bonds and there is a market for those securities at some reasonable spread to Treasuries.

What motivated the bottom portion was yield. The unrated bonds we broke into two classes of securities, both unrated but one senior to the other. When the borrower saw the yields on the bottom class of bonds, the borrower bought the bonds, which made a lot of sense. The borrower was the natural purchaser for that class of bonds because the borrower understood the quality of the hotels, the quality of management and the fact that those bonds were not going to default. From their perspective they were buying Treasuries at a phenomenal yield. The middle class of securities essentially went into an opportunistic fund that was buying the yield. The people who bought those bonds visited every hotel, interviewed management and did substantial due diligence. They don't buy bonds based on anything we're going to tell them.

The rating agency requirements have probably gotten more onerous. On one of our first deals we were reserving for ongoing capital expenditures on essentially what ended up being a 20-year no-call deal at 3% of revenues. That gradually went to 4% of revenues, which became the benchmark standard with loan transactions that we've closed. Now one rating agency at least is making very strong voices that they don't think that 4% number is adequate and it looks like we're going to 5% in terms of capex reserves. Our underwriting criteria has gotten stricter, our structure has gotten stricter. Counter-balancing that, spreads have come in tremendously over the past couple of years. Right now I think there is an extremely liquid market on Wall Street for somebody that wants a secured debt financing on a hotel, and on top of that a layer of mezzanine financing.

Hanson: The rating agencies have gotten smarter and more rigorous in asking for documentation on reserves, understanding management agreements, what comes first, who gets paid first.

Anthony: What we're doing with Paul is somewhat of a unique line because it does incorporate not only the purchase but also the substantial rehabilitation of the properties, along the theory that right now in a certain segment you can certainly buy and rehab the good locations much cheaper than you can build.

Engel: That example is an enormous sea-change in the creation and successful marketing of a brand. Ten years ago, Paul was instrumental in the creation of the Courtyard by Marriott brand, a single product standard operating format in appearance, funded in large part I suspect out of equity syndications with a master limited partnership. Here you have an agent over here churning out millions and millions of dollars on behalf of what is largely an entrepreneurial-driven machine in which no new bricks and mortar are being laid.

Novak: These are massive repositionings. The interesting thing is that a lot of times the products that we take were actually at the level we ended up putting them back at when they were originally built. They were upper-moderate priced in their segment. They might not have been full-service quality or luxury hotels but they were a notch below. In some cases they were Sheratons or Holiday Inns of 20 years ago.

With all of the properties we acquire, their market share had deteriorated, but their markets never left and the sites never left. There was really nothing wrong with the asset itself except that it was just neglected.

Q: Randy Heller, recently you said that you think there is too much money chasing too few deals. How's the competition for financing properties these days?

Randy Heller: That's the way it feels from our standpoint, coming from the perspective of guys who are putting money out year after year in this business. We're not a big outfit, we're a billion and a half in real estate overall. A good share of that is either timeshare lending, resort lending or hotel lending, so it's a good chunk of what we do. In any given year it's measured in hundreds of millions of dollars. When a lot of tenders booked their highest percentage of deals that went bad, probably in 1987 to 1990, we did very little business in real estate then. Then we had a field day from '91 to '93 when we did a lot of deals on 10-year amortizations where people were just glad to have them. But we'll only go to where we think is the right level to underwrite it as a business-oriented piece of real estate or as a business loan.

We're not going to allocate a couple hundred million to it and then get out of it. That's not our style. When the next '91 to '93 period comes our way, we're going to be ready to do quite a bit more business than we maybe will get done this year.

Q: Host Marriott has been a major player in the acquisition market recently. In the last 18 months you've purchased 23 hotels for $700 million. What types of hotels are they and why the spending spree?

Robert Parsons: We have bought almost exclusively quality full-service hotels located in the United States. We're looking at all of the quality hotels, particularly where we would be able to change the management to a Marriott operating property, because we believe we can increase the cashflow significantly.

We now believe there is great opportunity to acquire full-service hotels that can be purchased for significantly below replacement cost. Over the next few years we feel the economy will continue to improve and the operating performance of this particular segment of the lodging industry will continue to improve at a rate in excess of inflation.

Q: What are some significant trends you see on the hotel financing horizon?

Parsons: We've worked for years to have pension plans play a major role in our financing and have not been overly successful. I think that pension plans will play a minor role in hotel financing. The securitization that you see in the marketplace today will continue to grow and will continue to play a greater role. I think conduits also will continue to play a major role. I think the traditional lenders will play an increasing, although conservative, role in hotel financing. In general a number of players are re-entering the hotel lending market and they are looking for quality borrowers with track records. They are not willing to lend on pro forma projections. They want to lend on actual cashflow. They are more conservative in their loan-to-value and their lending parameters, and they are going to require amortization in their loans.

One thing you are seeing in the lodging, industry right now is significantly operating leverage. You have a high element of fixed costs, but as revenues go up, the bottom line cashflow goes up proportionally higher. For instance if you look at our numbers this year, you see that our cashflow has increased significantly faster than our revenues on full-service hotels, and that's because of the operating leverage that is inherent in the business itself.

Q: David, you specialize in transactions in the budget and mid-priced ranges. How has that business been for you?

Mumford: Activity in the mid-market segment is strong. Going back, we really had a downturn in values in the late-'80s and early-'90s. Generally we bottomed out in '92, '93, and the last couple of years we've seen strong increases in values. We haven't had new supply coming into the market with any great numbers that Bjorn's talked about earlier. We've had great operating performances as Bjorn's also mentioned. Financial people have put money back into the marketplace. And the SBA community, in the economy and mid-market segment of our industry, those lenders have been a tremendous force in the acquisition of hotel product over the last few years.

We've seen a tremendous increase invalues, particularly amongst the better-quality limited-service product, the Comfort Inn, the Hampton Inn. A lot of that was fueled in the last year or so by the REITs. They've driven prices up to the point where you've got new product coming to the market that in a lot people's opinion is at disturbing levels in the next few years.

Going forward, I'd say we have continued value increases in '96 to the middle to end of '97 if we're lucky. At that point in the bottom half of the industry I think we will see new-build numbers twice what Bjorn is talking about.

Lasky: The turnaround business is going to be great.

Engel: $3 billion and growing!

Roundtable Participants

Raymond M. Anthony Director, Commercial Mortgage Financing Nomura Securities

Thomas Engel Executive Vice President Equitable Real Estate

Dr. Bjorn Hanson, Ph.D. Industry Chairman Coopers & Lybrand

Randy Heller Vice President Commercial Real Estate Finova Capital Corp.

S. Kirk Kinsell President-Franchise ITT Sheraton Corp.

Donald J. Landry President Choice Hotels

Morris Lasky Chairman Lodging Unlimited Inc.

David Mumford President The Mumford Co.

Paul Novak President & CEO Bedrock Partners

Robert E. Parsons Jr. Executive VP/CFO Host Marriott Corp.