When Paul Whetsell, CEO of MeriStar Hospitality and MeriStar Hotels & Resorts, first started in the business a dozen years ago, his office was in the basement of Philadelphia's Latham Hotel. He had a staff of two.

Today, Washington, D.C.-based MeriStar is the fourth-largest hotel real estate investment trust (REIT) in the United States and is the nation's largest independently branded hotel management company, with 203 properties under lease or management. Sister company MeriStar Hospitality Corp. is one of the country's largest owners of upscale, full-service hotels, with some 117 properties encompassing 29,468 rooms in 27 states, the District of Columbia and Canada.

Riding the growth curve Whetsell is the first to acknowledge the phenomenal growth of the company. "We started with one hotel, and we always had the mentality of an owner of real estate," says Whetsell. "If you recall back in the late-1980s, it was a terrible time for hotel owners, but a terrific time to start a management company."

To that end, Whetsell formed CapStar Management Co. to manage hotels for unaffiliated owners. Within four years, CapStar was managing 23 hotels and, by 1994, some 39 properties. Last year, CapStar merged with another highly respected hotel management company, American General Hospitality, run by CEO Steve Jorns. With a philosophy similar to CapStar's - that of acquiring under-performing hotels with upside potential and repositioning them for growth - American General also had grown rapidly. American General started by managing properties and went public as a REIT with 13 hotels in 1996. When it merged with CapStar, American General owned 53 hotels.

The result is MeriStar Hospitality Corp., which focuses on first-class, full-service hotels in markets with high barriers to entry, since these hotels are expensive to build and have long development lead times. Currently, MeriStar is one of the darlings of Wall Street, and rightly so."MeriStar is one of the top hotel REITs around today," says Joyce Minor, equity research analyst at New York-based Lehman Brothers. "The company has a solid portfolio of mostly upscale, full service hotels, and is the No. 1 franchisee of several brands including Hilton."

She adds that the company's management is very strong, noting that Whetsell is well regarded by Wall Street and has the hands-on knowledge of someone who grew up in the business. "The company has shown solid growth, never missed analysts' estimates, pays an attractive dividend and has good growth prospects," she says. John Arabia, senior lodging analyst with Newport Beach, Calif.-based Green Street Advisors, a boutique investment research firm specializing in REITs, is in agreement. "MeriStar has a very good position in the market, with solid assets, a large portfolio and a well-respected management team," says Arabia. "They are a non-branded independent management company, who has recently bought the Doral name and are putting [it] on some of their hotels."

Last year MeriStar Hotels & Resorts was one of the industry leaders in revenue-per-available-room (RevPAR) growth. The company's leased properties posted a 6% increase in RevPAR, one of the industry's highest growth rates. This strong internal growth generated more than $1 billion in pro-forma revenues and pro-forma earnings per share of $.13 last year, Whetsell adds. In the first quarter of this year, full-service RevPAR was up 4.4% - exceeding analysts' expectations.

MeriStar Hospitality has 117 hotels with 29,468 rooms, focusing on urban and resort markets. Some 19% of its hotels bear the Hilton brand, followed by Sheraton, with 12%. The largest concentration of hotels is in Florida, Texas, and California, with approximately 13% to 17% in each area.

Michael J. Rietbrock, an analyst at New York-based Salomon Smith Barney, reports that MeriStar's success comes from its position in the industry. "MeriStar has a high-quality portfolio of hotels situated in strong urban markets throughout the United States," he says.

The key to MeriStar's success, says Whetsell, is the three "Rs" - re-flagging, repositioning and renovating. First, MeriStar selects the right brand for a property and market and then renovates the hotel to achieve significant property improvement, spending upwards of 10% to 25% on refurbishment. Finally, it implements an intensive yield management program to increase revenues, reduce costs and boost margins.

The results can be impressive. The Sheraton Houston Brookhollow in Houston was one of 50 properties renovated last year by MeriStar. The company spent $3.5 million to upgrade it from an independent property to a Sheraton. Since then, the hotel has posted double-digit occupancy improvements.

Operating like sister companies MeriStar Hotels & Resorts was created last August as a spin-off from CapStar Hotel Co. To optimize shareholder value, the new company entered into a "paper-clip" structure with MeriStar Hospitality Corp. Under this arrangement, analysts say, the two share several board members and have the right of first refusal to lease and manage hotels acquired by MeriStar Hospitality. MeriStar's paper-clip structure creates two companies that trade separately yet operate like sister companies through an inter-company agreement and some shared senior management and board members.

Minor of Lehman Brothers notes that MeriStar's corporate structure provides the tax advantages of a REIT without sacrificing the benefits of affiliated property management. One disadvantage of a REIT is that its owned real estate must be managed by a separate entity organized as a C-corp, which is sometimes unaffiliated with the REIT and sometimes has the incentive to maximize revenues, not profits. The paired-share REITs made popular by Starwood and Patriot allowed these companies to have a REIT and an affiliated operating company that traded "paired" as one stock.

However, recent legislation has curtailed the use of this paired structure. The paper-clip organization is a looser connection of the REIT and operating company than a paired-share structure, though the goal is similar. Whetsell says he is happy with the current structure. "We were a C-corp before, and I came to the conclusion that the REIT format was the best way to go," he says.

Four of nine board members are the same on both boards, but there is also some independence, he adds. "If there is any issue that has even the hint of conflict between the two companies, only our independent directors meet and vote on it. We're happy with the paper-clip structure - until the government comes up with something else that works better."

Currently, says Whetsell, the company is concentrating on managing the assets. "We believe our operating performance has been terrific, but when you grow as fast as we did, at some point you have to slow down. We feel like we have a good handle on operations right now."

Methodical acquisitions Whetsell stresses that acquisitions have given MeriStar economies of scale in such areas as purchasing and insurance. Also, doubling in size allows the company to take advantage of properties through job consolidation, shared marketing costs and management expertise.

Still, the company is eyeing other acquisitions. It recently partnered with Oak Hill Capital Partners, a Robert Bass-sponsored investment fund based in New York, to form MeriStar Investment Partners, a $400 million fund that was set up to acquire full service, premier brands. The partnership has purchased four hotels for $100 million and has another under contract.

"We've slowed down a little bit, but we're doing some acquisitions," he adds. "We could fund probably 12 to 15 hotels through MeriStar Investment Partners and they could easily be absorbed by our operating company. But we're being selective of what we'll buy."

Also, MeriStar is refining its strategy of operating first-class, full-service, multi-branded hotels. "We will dispose of some mid-market properties that we believe have slower growth rates," he adds. "Our intent is to sell those, but right now it's more of a buyer's market, so it may be better for us to hold assets."

Last fall saw some dynamic change in the acquisitions environment, he adds, when the capital markets tightened. "It became more of a buyer's market, compared with the last couple of years, when it was a seller's market and the REITs and hotel companies had money to make acquisitions. Credit market tightening last fall eliminated all options for people who wanted to move some properties out of their portfolio. Many didn't have the option to refinance and many REITs were capital constrained."

For the future, Whetsell expects supply and demand to temporarily level out. "The experts are saying that by 2000 there will be an equilibrium, but after that, demand will grow at a faster rate than supply," says Whetsell. "Those positive fundamentals mean we will operate even more profitably in the years ahead."

Whetsell adds that investors have been shunning REIT stocks for other sectors, even in a lively economy. "The outflow of funds [from REIT stocks] is pretty significant," he says. "But it's hard to blame investors when the Dow is over 10,000. I don't see anything on the horizon that is going to bring investors back into lodging. Our profits are at record levels, our dividend is safe. I'm just frustrated that we aren't able to attract more people into our stock right now. The market will come back. We just don't know when."

Analysts agree that MeriStar's size, its track record of producing superior results and its ability to invest side-by-side with its owners gives the company a competitive edge to attract new management contracts.