What do you get when combine the nation's largest hotel REIT with an up-and-coming operating concern? Barry Sternlicht and Eric Danziger are betting this one-two punch will be a winner.

How often does one have the opportunity to create a corporate culture from the ground up? That's what Eric Danziger, president and CEO of Starwood Lodging Corp., is doing. Making his job a little easier, though, is the fact that he has the muscle of the nation's largest hotel real estate investment trust behind him.

"This is probably the most exciting opportunity within this industry," enthuses Danziger, who joined Starwood Lodging Corp. in July after leaving Wyndham, a company from which he says he thought he'd retire. However, he was won over by the prospect of moving to Phoenix - where he has family and Starwood's headquarters is located - plus the chance to create a corporate culture and pull together a team that is "the best of the best."

Starwood Lodging Corp. is the operating entity whose shares are paired and traded together on the New York Stock Exchange with Starwood Lodging Trust (NYSE: HOT), a full integrated equity umbrella partnership real estate investment trust (UPREIT) that focuses on the acquisition and management of first-class hotels.

Starwood Lodging Trust invests in hotels, which are leased to, managed and operated by Starwood Lodging Corp. The Trust and the Corporation each have their own board of directors, and all the two have in common is Barry Sternlicht, chairman and CEO of the Trust, who sits on both boards.

In 1995, Sternlicht's Starwood Capital Group LLC, a Greenwich, Conn.-based privately held entrepreneurial organization that specializes in making real estate investments on behalf of high net worth and institutional partners, gained a 71.7% ownership interest in Hotel Investors Trust Corp. - a REIT that was facing severe financial problems - in exchange for a contribution of four hotels, five mortgages and $14 million of capital. At that time, Hotel Investors was renamed Starwood Lodging.

After an 11.8 million share secondary offering at $23 per share this June, followed by another secondary offering in August, issuing 10 million shares at $35 7/8 each, Starwood Capital holds an 18% ownership interest in HOT.

Only someone living under a rock this year could have missed Starwood's considerable buying spree. During the company's third quarter alone, it acquired equity and debt interests in 21 hotels containing 6,485 rooms at a combined cost of approximately $520 million. This was funded primarily through the proceeds of the equity offering and a new $300 million line of credit with an affiliate of Goldman Sachs.

Grabbing the most headlines was the $309 million acquisition of eight upscale and luxury full-service hotels from Teachers Insurance and Annuity Association. The deal, which closed in August and added 3,141 hotel rooms to the Trust's portfolio, included The Ritz-Carlton, Philadelphia; The Ritz-Carlton, Kansas City; The Westin Hotel Waltham, suburban Boston; the Doubletree Hotel at Concourse, Atlanta; the Doubletree Hotel LAX, Los Angeles; the Doubletree Hotel at Horton Plaza, San Diego; the Doubletree Grand Hotel at Mall of America, Bloomington, Minn.; and the Sheraton Ft. Lauderdale Airport Hotel, Dania, Fla. These properties were purchased at an average price per room of $98,000.

Following quickly on the heels of that transaction, Starwood acquired a portfolio of nine upscale, full-service hotels from Hotels of Distinction Ventures Inc. The purchase price of $134 million, or $55,000 per key, was approximately 63% of estimated replacement cost.

These transactions exemplify the Trust's strategy of acquiring scale properties with significant upside potential at discounts to replacement cost.

"The last six months have been an incredibly exciting period for Starwood Lodging," Sternlicht says. "We have built an enviable portfolio at extraordinary cost bases in major urban markets totally altering the nature and long-term competitive position of our portfolio."

"Starwood is probably the greatest real estate company that operates today," Danziger says. "These guys in Connecticut are the most brilliant, entrepreneurial, deal guys that I've ever seen in my life. So Starwood was and still is a deal shop, a great real estate company."

But acquiring hotels is only half the battle. Once a property is added to the portfolio, someone has to manage it, which is where the Corporation steps up to bat.

"They go out and buy with some validation from the Corporation side because we have to run them," Danziger says. "They make the deal, then it's passed on to us to run them. The relationship is superior."

"In addition to being a great real estate company, we're also going to be a great operating company," Danziger says. "That's what differentiates us from most other companies. Most other companies are only one or the other. We have this unique niche to be both."

Now that the REIT's holdings have reached critical mass, attention has been turned to growing an operating group to manage the substantial portfolio and maximize its potential.

"To date," Sternlicht says, "the rapid growth in FFO of Starwood Lodging has been driven by the acquisitions of the Trust. With the addition of Eric Danziger and his team of executives, Starwood Lodging will now also be driven by the Corporation and its management expertise."

"Here's a company that's huge," Danziger says. "It has scope and size, but it did not have a corporate structure." It only takes a brief conversation to discover his enthusiasm for the task at hand.

"We are able to attract and recruit talent in this company that is the best of Wyndham, the best of Doubletree, the best of Marriott, the best of Hyatt, because people want to be with a go-go, exciting company," Danziger says. "We get to put in place human values, the kind of hotels we want to be."

"I want us to be known as a company of excellence. I want us to be known as the employer of choice for people in this industry," he adds. "There are all sorts of things you can start from the beginning to create."

Danziger says that the biggest challenge currently facing Starwood is that the company's hotel portfolio is divided among 16 different brands. "So an employee doesn't necessarily - at least until we generate this new culture - really feel so much a part of Starwood as they do whatever the flag they operate under," he says. "It gives us an opportunity to go in and start at ground zero and let people feel great about this new hotel company they're working for."

"It seems to me to be one of the most exciting opportunities that could ever confront any leader of people to get to build a company," he says. "However, the base that we're starting to build with is 70 hotels. I think we have an opportunity to really shake up the business."

"As we unfold a long-term branding strategy, we can create a new atmosphere," he adds. "We have the opportunity to create a physical difference. And then, on the employee side, somehow develop this culture that our employees have fun with their jobs and have fun with the customer."

"Within our paired share structure, because we get to manage our own hotels, we're not like another REIT that has to pay a management company," Danziger notes, "but we do have to pay outside people a royalty for a franchise fee. That's a lot of money."

"How do you develop an employee culture of Starwood people if those people are working under 16 different flags?" Danziger asks. "How does the customer say he had a great Starwood experience if he went to 16 different flags?"

As a result of this, look for Starwood to come up with its own brand. According to Danziger, the company is in the process of evaluating opportunities in that regard, and a new brand could be as near as 18 months.

"The easiest way is to buy an existing flag," Danziger says. "Failing that, we'll develop one of our own."

New development is in the plans, too. Both Danziger and Sternlicht agree there are still some cities and sites that could withstand another hotel.

In fact, by the year 2000, Danziger says he thinks Starwood will be a national brand with as many as 150 hotels. "We will be a really big company because we'll be a really great company, and that will drive the size we become."

"The company's long-term growth strategy is to maximize the value in our investment," Sternlicht says. "For the Trust, it is to acquire upscale properties that offer significant upside potential at a discount to replacement cost and, for the Corporation, to then implement ways to improve operational efficiencies."

"There is enormous fire in the belly on both sides," Danziger says. "People are working awfully hard to create this next greatest hotel company."

"At the end of the day, the value of real estate has to do with how it's run," Danziger adds. "The best operating company wins the day by having the highest returns because they have performed at the highest level. And that's what we're setting out to do."