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Super Transformation: Public to Private

In just 60 days, it was a done deal. By the time the ink was dry on the contract handing New York-based The Blackstone Group ownership of MeriStar Hospitality in March 2006, MeriStar CEO and founder Paul Whetsell knew he was out of a job. For $2.6 billion, Blackstone acquired 57 upscale, full-service hotels.

That deal, and Whetsell's subsequent displacement, kicked off what's become a trend among major public companies as the topsy-turvy world of private-equity buyouts and industry consolidation continues.

In fact, in five out of the six largest private buyouts of publicly traded commercial real estate firms in the past 18 months, there has been a quiet byproduct — the exit of the incumbent chief executive.

Most executives, though, are eschewing retirement and instead going back to their entrepreneurial roots to build new, private companies. Whetsell, for example, dusted off the CapStar Hotel Co. name he launched in 1987, crowning himself CEO of the Washington, D.C-based firm in May 2006. At 51 years old, he was essentially starting all over again.

“It's very difficult from the people standpoint, when you have a good team, to break it up,” says Whetsell. “But the senior executives are all very talented, and they've all landed someplace else and they're all doing well. They all recognized that was the right thing to do for our shareholders.”

Hospitality runs hot

Investors have been especially active in the hotel sector. In the first six months of 2007 alone, six hotel real estate investment trusts (REITs) representing 71,000 hotel rooms changed hands in deals worth at least $11.1 billion.

The buyout targets read like a Who's Who of hospitality, including CNL Hotels & Resorts, Highland Hospitality Corp., Innkeepers USA Trust, Winston Hotels Co., Eagle Hospitality Properties Trust, Equity Inns, Four Seasons Hotels, Red Roof Inn, and Extended Stay Hotels.

According to Chicago-based Jones Lang LaSalle Hotels, the buyout train looks as if it will remain active through 2007. The firm estimates that $110 billion worth of global hotel transactions could be completed by the end of this year, a 52% increase over last year's record-breaking $72.5 billion volume.

But each of the recent buyouts has brought a changing of the guard in its management team. Former Innkeepers USA Trust CEO Jeffrey H. Fisher, for example, has formed two new companies — Fisher Property Group and Island Hospitality Management — to develop, acquire and manage hotels.

The REIT was acquired by Apollo Investment Corp. in June 2007. Both of Fisher's new companies are based in Palm Beach, Fla. Fisher is picking up the management pieces from the Innkeepers purchase, acting as third-party manager for the 79 hotels previously managed by Innkeepers.

Like Fisher, another top hotel executive, Bob Winston, CEO of the eponymous Winston Hotels, was displaced in July 2007. At age 45, Winston quickly formed two new companies — Crockett Capital Corp. and Winston Hospitality — in a 50-50 partnership with former Winston chief development officer Ken Crockett.

Winston never did have any intentions to sell off or leave the namesake firm that he took public in 1994. However, when New York investment firm Och-Ziff Real Estate approached him in February 2007, he listened closely.

“It was not my intention to go out and sell the company,” recalls Winston. “It was just that the others saw the value of the company and wanted to buy it.”

Ultimately, Atlanta-based Inland American Real Estate Trust swept in with its own hostile bid of $15 a share to trump Och-Ziff's $14.10 a share bid, winning approval in a vote by Winston's board.

“We're really doing what we did before, only we're doing it for ourselves as a private company,” says Winston. “I founded the company, I'm an entrepreneur and I wanted to be an entrepreneur again. It's what I like to do. I didn't feel [staying] was the best thing for me.”

Winston was ready for the change. “It is starting over again, but it's exciting too. If this is what you like to do if you enjoy being an entrepreneur and building companies, then it's fun, it's exciting.”

Bye-bye, MeriStar

Most of the recent hospitality buyout targets have involved mid-sized REITs with total market capitalizations of $1 billion to $5 billion. Many executives feel their middle-of-the-road market cap has them caught in the middle between the big players and small-fry companies, and makes them vulnerable takeover targets.

“I have been a pretty big proponent of either being large or basically getting out,” says Whetsell. To that end, he tried an ill-fated merger with Dallas-based Felcor Lodging Trust in 2001, a deal that at the time would have made MeriStar the second-largest REIT behind Host Marriott. Then along came 9-11 and everyone in the hotel industry went into full survival mode.

Whetsell recounts the woes of many middle-market companies. “It was becoming increasingly difficult to absorb public company costs and to compete with the private sector for capital. You either had to get larger by buying something or by merging with somebody, or by selling to somebody who had the ability to tap into the capital more effectively than you could.”

That's when Blackstone senior managing director Jonathan Gray rode onto the scene, first contacting Whetsell in January 2006. But Whetsell had initial misgivings. “We were one of the first privatizations, but at the time I didn't really think it was exactly the time to do it,” he says. “I didn't want to put the company through a disruptive period. But Jon's a pretty persistent guy and said he liked the company and could do it.”

Whetsell quickly found that in today's buyout binge, there are essentially two types of acquisition targets — asset-based firms and operating companies — and management plays a different role in each buyout.

In the case of Blackstone's purchase of MeriStar, Wyndham International, Equity Office and CarrAmerica, the strategy was to sell off the assets for more than the whole. As of August, Blackstone had sold off 62 million sq. ft. of EOP's 102 million sq. ft. of office properties. That strategy has short-term, and all-too-often negative, implications for incumbent managers.

“Since we fell into this group, they really didn't need the management,” says Whetsell. “I left the day the deal closed. They kept some of the top management for 60 to 90 days, but management was not a factor one way or the other.”

But Blackstone's history with operating companies, including the newly minted buyout of Hilton Hotels Corp. and its recent running of both LaQuinta Inns and Extended Stay, has been to keep management in place whenever possible. The idea is that incumbent managers are valued for their expertise in continuing to grow the business over time while Blackstone and other private-equity players plot longer-term exit strategies.

No beach, just freedom

Though apparently wealthy enough to do so, most displaced executives in their 40s and 50s have not even considered retiring to a beach-bum life of clipping coupons (see sidebar p. 43). “I've taken a cautious and conservative approach, but I can't just sit back and do nothing, it's not in my nature,” says Whetsell.

Winston echoes that sentiment. “I want to come to work, building companies and be involved with people,” he says. “Oddly enough, I really approached it with great excitement. I look forward every day to starting to build it back again. It is a very exciting process.”

Former REIT executives welcome the newfound freedom of running a private concern after years working under close public scrutiny. “Sarbanes-Oxley was a big burden, and there is an excitement about being in the private world again because I don't have to answer to those kinds of things,” says Winston. “I did it back then because it was my job and that's OK, but part of the excitement is being private.”

What goes around…

As more private firms are established, they represent a whole new crop of potential buyout targets down the road. In fact, Whetsell grew MeriStar into a public entity out of private money he secured back in the days before private equity was fashionable.

One of his first partners was the Bass family in Fort Worth, which has invested billions of dollars in commercial real estate over the past 30 years. “We built up a company and when the Basses wanted to exit, we felt the best exit was to take the company public,” says Whetsell. “Ten years later we felt the best way to exit was to go with a private equity group.”

Whetsell predicts that in another four or five years, some of today's private companies will again go public. Ironically, Whetsell is eying that same strategy for his own company again. “I don't know that I want to go back and run another public real estate company, but I could see an exit of what I'm doing through a public execution or selling to a public vehicle. Things will come around again.”

Ben Johnson is a Dallas-based writer.


Through the first seven months of 2007, investors snapped up hotels at a record pace. With the price of debt financing climbing, it remains to be seen whether the pace will continue.

Targeted Company Buyer Price Date Announced
Hilton Hotels Corp. The Blackstone Group $26 billion July 2007
Extended Stay Hotels Lightstone Group $8 billion April 2007
CNL Hotels & Resorts Morgan Stanley Real Estate $6.6 billion January 2007
Four Seasons Hotels Inc. Cascade Investment LLC $3.8 billion February 2007
Legacy Hotels REIT (Canada) LGY Associates $2.4 billion July 2007
Equity Inns Inc. Whitehall Street Global Real Estate $2.2 billion June 2007
Highland Hospitality Corp. JER Partners $2 billion April 2007
Innkeepers USA Trust Apollo Investment Corp. $1.5 billion April 2007
Red Roof Inn Citigroup Inc. $1.3 billion April 2007
Apple Hospitality Five Inc. Inland American Real Estate Trust $709 million July 2007
Eagle Hospitality Properties Trust Apollo Real Estate Advisors $701 million April 2007
Winston Hotels Inc. Inland American Real Estate Trust $690 million April 2007
* Sale prices of announced deals, not including debt
Source: Deloitte & Touche

Now departing with platinum parachutes

Huge pay days are often the norm for many top real estate executives cut loose from their former corporate homes. Paul Whetsell, for example, was making more than $2 million a year in total compensation when he left MeriStar, and he owns some $29 million worth of shares in Marriott International.

Tim Callahan, who served as the CEO of Chicago-based Equity Office Properties from 1996 to 2002, resigned in April 2002 and was handed a generous payout of $1.65 million, or about a year's salary, plus accelerated vesting of options and restricted EOP shares.

Only four months later, Callahan landed as CEO of Trizec Properties, where he served until October 2006, when Blackstone partnered with New York-based Brookfield Properties to purchase Trizec. Callahan left to form his own firm, Callahan Capital Partners, with four fellow ex-Trizec colleagues in Chicago.

As Bob Winston was walking away from Winston Hotels, he was collecting nearly a million shares of vested Winston stock worth around $15 a share.

In the case of Hilton's acquisition by Blackstone Group, however, co-chairman and CEO Stephen Bollenbach, 64, is retiring, but he is also taking with him a tidy sum in deferred salary and stock options worth an estimated $125 million.

One of the grandest recent payouts mirrored the largest buyout ever. Richard Kincaid, 45, formally left his post as CEO of Equity Office Properties on March 9. EOP chairman Sam Zell had installed Kincaid as one of the REIT industry's youngest CFOs in 1997 and then CEO in 2003. Kincaid was unavailable for comment, but sources in Chicago confirm he is hatching plans to start a private investment firm with former EOP colleagues.

Kincaid has joined the boards of directors of Vail Resorts Inc. and Rayonier Inc., the latter a leading forest products company based in Jacksonville, Fla. By all accounts he made a small mint in leaving EOP, some $102 million.

Plus, Blackstone is set to pay Kincaid his regular salary and bonus totaling around $1.4 million for each of the next three years.
Ben Johnson

Recruiter taps fresh talent pool

The recent bevy of public-to-private buyouts has proved to be a goldmine for Matt Slepin's business. A 20-year veteran in commercial real estate and recent co-founder of executive recruiter Terra Search in San Francisco, Slepin specializes in following the movements of industry leaders.

“When we start a search we ask where are there corporate rubs in the industry, what companies are doing really badly and what companies just merged out of existence. We will directly target those folks,” says Slepin.

Most high-placed executives are landing quickly on their feet, according to Slepin. “Even with these mergers there are not a zillion people out there desperately seeking jobs.” As far as any stigma on displaced execs, there is none, says Slepin.

Many mid-level executives also are ripe for placement amid the M&A rush. “The site managers will generally be picked up by the acquiring company and the top executives are totally rich. The people in the middle are the ones who are scrambling because the acquiring companies are probably going to have their own people in the middle,” explains Slepin.

Recently, he has been helping New York-based Tishman Speyer recruit someone to open an office on the West Coast. “Three of the very serious candidates were from companies that had gone by the wayside. They were being dislocated due to changes in the marketplace.”

How long can displaced execs expect to wait for that next full-time opening, if they opt not to go it alone? With the Tishman Speyer position, it took over a year. While the industry standard is 90 to 100 days, Slepin admits it takes a lot longer for some searches.

“Usually the winners of the world only do better with change. It may take a little time, but usually they do better both career-wise and they get happier, too.”
Ben Johnson

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