By Lorna Pappas

Now self-advised, LaSalle Hotel Properties is well positioned to move forward through a proven strategy for income and steady growth.

We all reach a point in life when striking out on our own and making our way in the world is the best choice. For some REITs, this point comes as the moment arrives when the advantages of being externally advised are outweighed by the benefits of transitioning to self-advised status. For LaSalle Hotel Properties, a lodging REIT based in Bethesda, MD, that time came this past January.

According to Jon Bortz, president, CEO and newly appointed chairman, LaSalle is less expensive to run now than it was as an advised entity, which will benefit shareholders in the long-term.

Eliminating the perceived conflict some investors believed existed under its advised structure was also a factor behind LaSalle Hotel Properties' transition to self-managed status, says Bortz. However, he contends that "because of how our advisory agreement was structured and how our management team was motivated, that conflict never really existed."

On Good Ground

The newly self-managed luxury hotel REIT took its first steps on very firm ground. In 2000, LaSalle Hotel Properties was the industry's growth leader in revenues per available room (RevPAR), at 7.7 percent over the year prior, and the RevPAR growth leader in the fourth quarter, with an increase of 9.6 percent, says Bortz. LaSalle's funds from operations for 2000 were up about 9 percent to $48 million ($2.59 per share) from $44.1 million ($2.39 per share) the year prior. Revenues were up 11 percent in 2000 to $86.3 million from $78 million the year prior. Earnings before interest, taxes, depreciation, amortized expenses and write-down of properties held for disposition (EBITDA) grew 16.4 percent over the prior year to $71.3 million.

Overall in 2000, LaSalle consistently bettered expectations as well as national averages, according to James W. Sullivan, senior REIT analyst for Prudential Securities.

"LaSalle's upscale assets are generally located in high-barrier-to-entry markets and should achieve RevPAR growth above industry averages, particularly in a weaker economy. We estimate LaSalle's 2001 FFO per share to be $2.66, with an upside potential, and project a 2002 FFO per share estimate of $2.85," says Sullivan, who gives LaSalle shares a Strong Buy rating. "We believe LaSalle's high dividend yield, low payout ratio and current valuations make the company attractive," Sullivan says.

Bryan Maher, director, lodging, gaming and leisure analyst for Credit Lyonnais Securities (USA) Inc., concurs. "We believe LaSalle is likely to continue posting industry-beating RevPAR results over the next several years. In our view, based on LaSalle's strategic positioning, high-quality assets and strong management team, investors should take an active interest in this company."

Self-managed Structure
Viewed Positively

LaSalle Hotel Properties is a multi-tenant, multi-operator company that currently owns 13 hotels with 5,000 guest rooms in 13 markets in 11 U.S. states. Most rooms (about 90 percent) are branded under luxury and international flags such as Marriott, Le Meridien, Radisson, Hyatt and others.

LaSalle Hotel Properties was formed on January 15, 1998, and went public three months later, under an advisory agreement with Jones Lang LaSalle of Chicago (formerly LaSalle Partners Incorporated). At that time, LaSalle Hotel Properties owned, through an operating partnership, three convention-, two resort- and five business-oriented, full-service hotels in eight states, with an aggregate of 3,379 guest rooms. It served, until this January, as the exclusive vehicle for LaSalle Partners Inc.'s hotel property investment activities in the U.S. Its goal then, and now, was to selectively acquire and develop additional hotel properties, particularly upscale and luxury full-service hotels located in major urban business, resort and convention markets.

Analysts anticipate LaSalle's change from an advised status to be neutral in earnings in 2001 (after adjusting for one-time costs related to the transition), followed by a positive impact in succeeding years.

States Sullivan of Prudential Securities, "We view LaSalle's change from an advised to self-managed structure to be positive, as it eliminates conflict of interest issues, provides potential scale benefits with future asset growth and should make the company more attractive in the public market.

"The elimination of the advisory and incentive fees previously paid to Jones Lang LaSalle should be replaced with a correspondingly higher level of general and administrative (G&A) expense," he explains. "However, G&A growth going forward should be less than the projected annual growth in the advisory fee as LaSalle expands in size. Essentially, with the conversion, LaSalle retains the scale benefits rather than the outside advisor," notes Sullivan.

"We feel the announcement only strengthens an already positive investment case and serves to bolster our confidence in the company," he reports.

The Hyatt Harborside in Boston, MA

REIT Status and Strategy Payoff

The firm differs from many peer companies, according to Bortz, primarily due to its structure as a REIT, rather than a real estate operating company (REOC); and because LaSalle's is highly focused on its strategy.

LaSalle believes it will continue to outperform peer companies in the lodging segment, primarily due to its differentiation strategy, an "approach that has proven to deliver the best results at the lowest risk in the long-term," says Bortz.

Elaborating on LaSalle's market differentiation, Bortz notes, "For one, we are a REIT. I say that with finality, because as a REIT our obligation is as an income-generating company delivering a steady level of income to our shareholders and partners with moderate levels of growth through opportunistic investments in the lodging industry. Other companies in the segment may not be as specific about identifying themselves as income companies first and foremost," he says.

Additionally, "LaSalle is among the most highly focused strategically in our universe," maintains Bortz. While LaSalle focuses specifically on upscale and luxury full-service hotels in urban, resort and convention markets, peer companies are often either full-service but not on the high end, have a mixture of full- and limited-service properties and/or, among other factors, own or invest in large a number of suburban properties, which LaSalle does not.

Add Value and Reduce Risk

LaSalle looks to buy assets to which it can add significant value, often taking the hotel property up one or more levels. The company improves property performance by, for example, repositioning the asset from a lower to higher quality, changing its flag and operator, expanding it, dramatically changing the marketing focus, and/or changing its strategy, perhaps by focusing on rate growth rather than occupancy. LaSalle invested roughly $75 million in capital over the past three years to upgrade and/or improve several of its properties, representing expenditures totaling roughly $15,000 per room.

In addition, LaSalle attempts to separate itself from the field by concentrating on reducing risk for investors through diversification, which the company approaches in three ways: by brand and operator (using eight different operators reduces LaSalle's reliance on any single brand or company); by market orientation (if the business market drops, for example, another customer base, such as the leisure-transient segment, can balance the impact); and geographically (LaSalle owns 13 different properties in 13 different markets).

High Barriers to Entry

LaSalle focuses in areas with the highest barriers to entry, such as centralized downtown districts where restrictive zoning, height limitations, lack of land, lengthy approval processes, difficult parking conditions and other factors limit market penetration. Other examples of LaSalle's high-barrier-to-entry ownerships include the Holiday Inn Beachside Resort in Key West, FL, where a building moratorium exists; The Paradise Point Resort in San Diego's Mission Bay area, directly on the California coastline; The LaGuardia Marriott at New York's LaGuardia International Airport; and The Harborside Hyatt on the Boston Harbor, adjacent to Logan Airport.

LaSalle's strategy for the resort market also specifically embraces drive-to destinations, such as San Diego or Newport, R.I., not destination resorts like Hawaii or the Caribbean. Explains Bortz, "In soft economic cycles, people still want a vacation, but usually a less expensive one, without the cost of airfare. Therefore, all our resorts are within two or three hours driving distance from major U.S. metropolitan areas, such as Boston, Los Angeles, Miami, New York and Philadelphia."

Staying on Target Despite Market Cycles

Bortz notes that the lodging industry traditionally has lagged behind the economy's performance, so that as the economy slowed in the third and fourth quarters of 2000, companies like LaSalle were still reaping the benefits of the first and second quarter growth. "We fully expect the industry to slow down in 2001 from its robust level of growth last year, in a delayed response to the slowed economy in late 2000," he says.

"However, the industry has never been better positioned to deal with such a slowdown: We've had a minimal amount of new supply and new supply growth, and expect to see decreases in any new supply growth into 2002. We are extremely optimistic as we look ahead, especially with interest rate reductions and possible income tax cuts which could spike the economy. As the industry experiences significant increases in lodging demand, our company is well-positioned to benefit significantly from that growth." A report released on January 16, 2001, by PricewaterhouseCoopers (PWC) concurred with Bortz, lowering hotel industry assumptions for this year, prompted by greater economic weakness in the fourth quarter of 2000 than previously expected, but raised its assumptions for 2002. PWC's revisions outlined greater economic weakness and reduced room demand in the first three quarters of this year, after which the economy and lodging fundamentals should stabilize and rebound. PWC cited the delayed impact of interest rate reductions in combination with low inflation, declining energy prices and increased personal disposable income, among other factors, as the catalysts for the economic turnaround.

Prudential's Sullivan notes, "For the lodging industry, the improved economy translates into greater room demand than previously estimated, which drives a slight increase in occupancy and a significant increase in room rate over previous levels. While the severity of the industry's near-term weakness is still debatable, we contend that PWC's revised forecast of a more positive 2002 reinforces our thesis of a soft landing for the hotel industry."

At First Union Securities Inc., Jeffrey Donnelly, CFA and vice president of real estate equity research, says repeated rate reductions by the Federal Reserve will continue to benefit the hotel REITs who carry relatively higher levels of leverage than their REIT peers, and that income tax cuts, if delivered, could reinvigorate consumer spending on travel and lodging. "We remain steadfastly optimistic about the intermediate and long-term performance of the lodging industry and LaSalle Hotel Properties," states Donnelly.

Maher of Credit Lyonnais Securities maintains that LaSalle could weather an economic downturn better than many of its competitors in the lodging sector, given its nearly completed and extensive capital improvement program. "Unfortunately, due to its relatively small size, many large institutional investors are unable to take large enough positions in the company and therefore choose to pass," notes Maher. "If LaSalle can find a way to grow at a reasonable acquisition price, we believe it could find a much larger audience for its shares and begin to trade at a higher multiple more commensurate with its managerial expertise and high-quality assets."

Repositioning, Renovating and Improving

During 2001, LaSalle has earmarked an additional $16 million to increase values at two specific properties. At the same time, in addition to the Radisson Tampa Hotel, the company is considering the sale of other assets that make minor contributions to its profits, such as the Omaha Marriott.

While the company also looks to make new investments by acquiring assets in its existing markets (urban business, resort and convention), no plans for new development are underway. "We don't believe new development is a favorable risk today. We think we can get better returns with lower risk by buying existing assets and repositioning, renovating and improving them," reports Bortz.

As the company moves forward into succeeding years, new institutional investment potential and the scale benefits retained as a self-managed firm should indeed prove positive for this luxury hotel REIT.