Marriott Unloads Some Baggage

Stephen F. Bollenbach is fast becoming the Cardiac Kid of real estate finance. Back in 1990, he went to work for Donald Trump and within two years engineered a massive workout of Trump's free-falling hotel and casino empire. And when Bollenbach last March rejoined a struggling Marriott Corp. as chief financial officer, it wasn't for the travel perks. "Given his reputation as a financial wizard, everyone was waiting for something big to happen," says Gerald W. Petitt, president of rival Choice Hotels International Inc.

Bollenbach ended the suspense on Oct. 5, when Marriott announced plans to spin off its profitable management business from its debt-drenched real-estate holdings. The logic is simple: By carving the $9.1 billion Marriott domain into two separate companies, Marriott frees for expansion its profitable hotel and food-service management businesses, which have been constrained by crushing real estate debt. "If we'd taken more debt, we would have been under the gun even more from the rating agencies," says Chairman J. W. "Bill" Marriott Jr.

Not everyone is buying the rationale, though. Bondholders and debt-rating agencies are concerned about the real estate arm's ability to carry its weighty burden. Those worries suggest Bollenbach faces a chilly reception the next time he tries to sell bonds.

COMEUPPANCE. Marriott's woes stem from torrid expansion during the 1980s' boom. The company had enjoyed 20% average profit growth by building hotels that were quickly sold off to investors. Marriott not only booked a profit on the hotel sale but also retained lucrative contracts to manage them. But when the credit crunch hit, Marriott was stuck with 150 hotels it couldn't unload.

The split doesn't mean that Marriott's hotel portfolio is on the block. "This is not a liquidation," vows Bollenbach, 50, who will serve as chief of the real estate arm, Host Marriott Corp. He figures his new charge will generate enough cash flow to service its debt. And he even has visions of tapping the credit markets to finance more hotel purchases.

Bollenbach could be in for a surprise. Marriott's bondholders are fuming about the reorganization. The move places virtually all of Marriott's $2.9 billion in debt on the back of Host Marriott, which is seen collecting revenues of $1.7 billion a year. "It's outrageous," says Deborah Pederson, a portfolio manager at IDS Financial Services Inc. "Bondholders were lied to. We didn't know we'd be making real estate loans."

Such sentiments may haunt Bollenbach: Host Marriott will likely have to refinance $250 million in notes coming due next year. Compounding Host Marriott's woes is the lodging industry's severe slump. While Marriott's occupancy rate is more than 75%--above the 61% industry average--widespread discounting has hurt. Marriott's overall operating income, which should total $530 million this year, has run flat since the mid-'80s.

Prospects are brighter for the new management and services company, to be known as Marriott International Inc. to reflect the company's ambitions overseas. Bill Marriott also hopes to continue expanding the $7.4 billion unit beyond hotels and cafeterias into such promising areas as corporate day care and even janitorial services. Freed from $262 million a year in net interest expenses (charts), its earnings should rise sharply.

No wonder stock players are bidding up Marriott's shares, recently to near 19. The applause from the equity traders will grow louder if Bollenbach can turn around Host Marriott. But Bollenbach should just hope bondholders don't give him anything worse than a Bronx cheer.