By Allison Landa
Winston Hotels Inc. (NYSE: WXH) specializes in developing, acquiring, repositioning, and financing hotels in the premium limited-service, extended-stay, and full-service categories. The company uses a mix of business strategies to provide its own brand of Southern comfort. Roughly 65 percent of the Raleigh, N.C.-based hospitality REIT's portfolio is concentrated in the Mid-Atlantic and Southeast regions.
Hotel and restaurant veteran Charles M. Winston founded
the company in the early 1980s. Charles Winston remains chairman of the company's board. His son, Robert Winston, III, is the company's chief executive officer. The company went public in
June 1994 and Winston Hotel's 51-property portfolio now totals 7,185 rooms in 16 states; of those, 44 are wholly owned and the
rest jointly held.
President and Chief Financial Officer Joe Green came on board just over a year before the company went public in order to help see Winston through the IPO process.
"We've been public for over 10 years, and we believe that building shareholder value is something that we need to strive for every day," Green says. "We believe in long-term value."
In February 2005, the firm announced that funds from operations increased 32.5 percent during 2004, rising to $26.2 million as compared to $19.7 million the previous year.
Different Angles
The company relies on a multi-pronged growth strategy, an approach that Green says helps it stand out from its hotel peers. One focal point is the use of mezzanine debt to finance property acquisitions, buyouts and refinancing. Since this type of loan is closer to equity rather than debt, Green considers it
a strategy to replace debt.
"We're one of very few
hospitality REITs that actually offers mezzanine debt to (third-party) hoteliers," he says.
Another of Winston's growth strategies is having an active
development pipeline, another factor that Green says distinguishes it from its competitors. "I don't know another hospitality REIT today that really (employs) the kind of strategies that we do," he says. "Most buy existing product, but very, very few are actually building."
In September 2004, Winston finished construction on a new 147-room Courtyard by Marriott hotel in Chapel Hill, N.C. The hotel, which is now open for business, is a joint venture between Winston (which owns 49 percent of the property) and company
directors Charles and James
Winston, who along with three unrelated minority investors own a collective 51 percent of the hotel.
"One of the advantages in our strategy is that we're builders too," Green says. "If we see (the pricetag of a) product as too ridiculous, we can find opportunities to build."
Acquisitions constitute
Winston's third main avenue
of growth. The 18-employee company splits its buying goals into two categories: one-off purchases of existing properties that need no redevelopment, and turnaround assets that
require work before being put back on the market.
Green calls the first category "plain-vanilla"—stable properties that have already established a good track record in solid markets. The December 2004 purchase of a 135-room Courtyard by Marriott hotel in Roanoke, Va., for which Winston paid an estimated $12.1 million, was the first acquisition of its type in several years, according to Green. However, he adds that the lack of plain-vanilla purchases in recent years was less a deliberate act than a matter of circumstance.
The second acquisitions pipeline consists of properties that Green refers to as "garbage" —hotels that are often independently owned before purchase and require significant renovations before Winston considers them marketable. The company conducts these transactions jointly with Charlesbank
Capital of Boston.
"These are properties where we convert, improve, and add value," Green says.
The company has been active in this type of acquisition over the past year. In December 2004, Winston bought a historic six-story residential building in Kansas City, Mo., paying an estimated $3.1 million. The company plans major renovations for the building, which will eventually be converted to a 123-room Courtyard by Marriott hotel. Winston plans to spend a total of $16.7 million on the project, which is slated for completion in Spring 2006.
In August 2004, Winston and Charlesbank, in a joint venture with Concord Hospitality Enterprises Company, bought the 95-room Quality Suites hotel in West Des Moines, Iowa, for $4.4 million. After undergoing
a $2.7 million renovation, the property is expected to reopen
as a Springhill Suites hotel in Spring 2005. And in Winter 2004, Winston formed a new joint-venture entity, WNC Project Company LLC, along with Charlesbank and New Castle Hotels, to purchase the 160-room Ramada Plaza Hotel in Shelton, Conn. The joint venture spent $14 million total to purchase and revamp the property, which opened as a Courtyard by Marriott hotel in early 2005.
A Firm Identity
Under the REIT Modernization Act, which took effect Jan. 1, 2001, REITs are generally
allowed to own taxable REIT
subsidiaries. This means that, among other things, REITs can now provide third-party services (other than managing lodging or health care facilities) or manage properties for other parties. Over the years many REITs have opted for this strategy in one form or another. However, Winston Hotels has chosen to concentrate its efforts solely on the ownership of hotel properties, rather than choosing to operate accessory businesses.
"We think about it in terms of, are we in the hotel business, or are we in some other kind of business?" Green asks rhetorically. "If we owned a 500-room convention-center hotel, maybe we'd set up a Kinko's (to serve that population), but we don't own that kind of property. For us, (other businesses) are not something that's profitable."
Instead, Winston is grounding itself in expansion. Some of its most promising locations are its home base in Raleigh, N.C., as well as a slate of Southeast tourist destinations such as Hilton Head, Charleston, and Myrtle Beach in South Carolina.
"Raleigh is a good corporate environment," Green says. "In Raleigh, you have the Research Triangle, quite a few Fortune 500 companies, and three universities within 20 minutes of each other. It's a strong location for business; it's got all aspects. It's got education, tourism, and strong corporate growth."
Toward the Future
When pressed to name looming difficulties for Winston Hotels, Green says he can't see many. "I think our challenge is a general challenge, and that is being able to execute each of the company's strategies in a prudent manner," he says.
However, he maintains that the firm's layered strategy is what will help it keep a unique toehold in the REIT hospitality world.
"What distinguishes us from the rest of the pack is our ability to be nimble at different times in the cycle," he says. "It's been one of our goals to have a consistent earnings strategy that permits us to grow in different environments. All of our various strategies contribute to that right now."
Allison Landa is a regular contributor to Portfolio.
