Caesars owner loses battle in Congress

Key Congressional leaders may have dealt Starwood Hotels & Resorts' growth prospects a knockout blow Tuesday.

House Ways and Means Committee Chairman Bill Archer and Senate Finance Committee Chairman William Roth have agreed to restrict the ability of Starwood and three other paired-share real estate investment trusts to shield new acquisitions from taxes.

Starwood has used its paired-share status to become the nation's largest and fastest-growing hotel REIT over the past three years, spending nearly $20 billion to acquire the lucrative assets of Westin Hotels and ITT Corp.

Its portfolio of owned or managed properties includes more than 650 hotels and resorts in more than 70 countries. It boasts such high-end brands as Sheraton, Four Points, CIGA and The Luxury Collection among its hotel assets.

In outbidding Hilton Hotels Corp. for control of ITT last year, Starwood also won control of Caesars Palace and the Desert Inn on the Las Vegas Strip.

It was that battle, though -- and the intense lobbying efforts of Hilton and other traditional hotel operators such as Marriott International -- that prompted Congress to take a closer look at paired-share REITs.

The opponents argued that such REITs enjoy unfair advantages over regular corporate entities and, because of their structure, could afford to pay more for attractive acquisitions than competitors.

"Part of the problem with buying hotel assets these days is that paired-share REITs have been able to pay very high multiples," said a hotel executive who requested anonymity.

On Tuesday, though, the sweet times for hotel sellers eager to profit from the recent acquisition spree may have soured. Archer and Roth rejected pleas by paired-share REIT executives to allow them to retain their ability to couple a property-owning entity with a property-management company into a paired share that trades under a single stock listing.

For the past few days, said one industry source, Starwood Chairman Barry Sternlicht "has been running around Capitol Hill like a flea in a bottle trying to convince Archer and Roth to maintain the status quo."

But the congressional leaders decided to include restrictions on paired-share REITs in a bill that would overhaul the Internal Revenue Service. The bill is expected to be on President Clinton's desk next month.

The four REITs affected by the action are Starwood, Patriot American Hospitality Inc., Meditrust Cos., and First Union Real Estate Equity & Mortgage Investments.

Like other REITs, paired-share REITs can shield income from taxes as long as they pay 95 percent of earnings as dividends to investors. Unlike other REITs, which are restricted to passive investments in real estate, paired-share companies can also operate businesses. Each share of the separate operating company is paired with a share of the REIT, and they trade as a single unit.

Starwood's stock closed at $47.125 Tuesday before the lawmakers' action and dropped 81.25 cents in mid-morning trading today. It has fallen from about $61 a share since November, when it won its bid to acquire ITT for $14.6 billion.

Some analysts have attributed the drop in Starwood's stock price to the perception it may have overpaid for ITT. Starwood officials have said the decline was due to uncertainty over what Congress would do about its REIT status.

At the time of the ITT takeover, several REIT analysts predicted Starwood stock would rise to between $72 and $85 a share within 12 months. Its recent weakness has prompted some of those analysts to proclaim that Starwood itself could become a takeover target.

Starwood spokesman Jim Gallagher said today that, "While we'd be foolish to not be concerned about the possibility, at today's prices this would be a $20 billion acquisition, which is not something that's an everyday occurrence."

"We've seen speculation from two individual analysts who said if our stock languishes for several quarters we might become a takeover target," he said. "But our feeling is that once we're able to meet or exceed Wall Street's expectations for a couple of quarters, that will be reflected in the price of our stock.

"Clearly the new legislation is going to mean some changes for paired-share REITs if they want to continue to grow," he said. "In anticipation of the law being passed, we've examined numerous options and are prepared to implement the appropriate ones once the specific language of the bill is set, which should be several weeks from now."

Gallagher said he wasn't able to discuss the specific options under consideration, but indicated they could include some alterations in the REIT's structure.

"Our concern is our ability to grow externally," he said. "We've had the good fortune of growing tremendously by acquisitions prior to this legislation.

"We've publicly stated that the bulk of our growth going forward is going to come from operating the acquisitions we've made efficiently, so we're looking for significant internal growth in the years to come.

"We've said numerous times in the past that important measures of performance such as revenue per available room, cash flow, profitability and the like were not based on our structure but on the quality of our assets, the strength of our worldwide brands and an innovative management team, and those things remain unaffected," Gallagher said. "Our focus is with the operating company, which is unaffected by the new legislation."

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