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Hotel Owners Should Be Wary of Complex Financial Structures, Urges Lodging Executive

ATLANTA — Memo to hotel owners from lodging executive John Murray: If you need a Ph.D. in mathematics to understand a proposed complex finance structure put forth by a mortgage broker or investment banker, it’s likely that the deal under consideration doesn’t make sense so it’s probably best to walk away.

Simplicity can be a winning strategy, insists Murray, president and COO of Hospitality Properties Trust (HPT), a publicly traded REIT whose portfolio includes 292 hotels and 185 truck stops valued at more than $6 billion located in 44 states, Puerto Rico and Canada. “If you cannot stand up in front of an audience without a script or a complex slide show and explain your joint ventures, securities, mezzanine debt, or the swap hedges and derivatives that may go with them, then you shouldn’t be doing those types of deals.”

Murray’s remarks came Monday afternoon in a keynote address during the 20th annual Hotel Investment Conference in Atlanta. The three-day conference drew more than 900 attendees to the Atlanta Marriott Marquis Hotel. The conference focused on the mounting credit crunch, its impact on the hotel industry and winning strategies amid an economic downturn.

Murray, who was profiled in NREI’s “Ten to Watch” cover story in March, tries to practice what he preaches. For example, rather than obtain mortgages on properties, his Newton, Mass-based REIT prefers to use its $750 million unsecured revolving credit facility for acquisitions and working capital purposes. By doing so, HPT puts the debt on the corporate balance sheet. That way the debt-free hotels can easily be sold to raise cash.

HPT — the only investment-grade rated lodging REIT in the country among the publicly traded giants — also spreads out the maturities of corporate debt so that no big bill comes due in any one year. That financial flexibility creates opportunities to buy and sell assets as the REIT pleases.

“It’s important to remember the motivations of the people you do business with,” Murray reminded conference attendees, many of them owners of relatively small portfolios. “The brokers and the investment bankers who come to see you with a transaction opportunity are not completely interested in your strategy, or your risk tolerance. They may understand your strategy and level of risk aversion, and most likely they will explain why whatever deal they have to sell fits your plan. It may, but it may not.”

The 47-year-old Murray urged owners to be the “keeper” of their strategy and to defend it vigorously. “If you don’t, you are at risk of owning a collection of assets with no common bond. If you don’t know why you own them, you really can’t know what value-enhancing opportunities exist, or when is the right time to sell them.”

As the economy continues to weaken, determining what brand of hotels to build or buy becomes highly important, according to Murray. Compounding matters is the fact that some 30 new brands have been added in recent years to an industry notorious for boom and bust cycles.

Some important questions need to be asked by owners to determine which brands have staying power, Murray believes. Among the questions: Which brand owners own some of their hotels? Which brand owners have long-term contracts to operate some of their new products? Which brand owners are really committed to making the brand a success, even if they have to do some of the initial heavy lifting?

“I think you should beware of the brands that are all public relations and marketing, but no hotels,” Murray warned. “They may be yesterday’s news before critical mass can be achieved.”

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