Marriott International Inc. plans to spin off a publicly traded real estate investment trust, a distinct but closely aligned entity designed to enhance its rapid growth, according to sources familiar with the matter.
Bethesda-based Marriott, one of the largest hotel management and development companies in the world, created DiamondRock Hospitality Inc. last month and plans to complete the first phase of a two-step capital-raising effort by mid-July, according to a source familiar with the matter who spoke on the condition he not be named.
DiamondRock will be the latest in a cadre of companies that owe their creation to Marriott in the past 20 years as part of Marriott's long-term strategy of moving the hotels it develops off its books -- along with the hotels' debt -- to separate but closely affiliated companies.
Marriott had a close hand in creating, and until two years ago governing, Host Marriott Corp., the largest of the hotel REITs. Host Marriott was spun off in 1993 and held virtually all of Marriott's hotel properties and long-term debt. Marriott managed Host Marriott's properties and was paid under an elaborate system of fees and incentive payments that some Host officials came to see as overly favorable to Marriott International. The two companies' chairmen were brothers: Host Marriott had Richard E. Marriott and Marriott International had J.W. "Bill" Marriott. They also sat on each other's boards.
But as the hotel industry foundered after Sept. 11, 2001, the two companies' interlocking corporate governance became an issue with some Host Marriott shareholders. Host Marriott effectively severed its close relationship with its former parent in the summer of 2002 when it renegotiated its long-term management agreements with Marriott. Host Marriott Chairman Richard E. Marriott left the board of Marriott International, and his brother left the board of Host Marriott. Though it retains the Marriott name, Host Marriott buys hotels operated by a variety of different lodging companies.
DiamondRock, according to the source, is designed to provide a "flexible" source of long-term capital for Marriott's hotel development program. Marriott is expected to open more than 175 hotels and time-share resorts -- as many as 30,000 rooms -- in 2004, according to financial reports. The company spent $210 million last year to build or buy properties compared with $560 million in 2001. That number is expected to increase as lodging demand continues its climb back from 2001. DiamondRock would provide one way for Marriott to move these properties off its books, then operate them under long-term management contracts, according to several sources familiar with the matter who spoke on the condition of anonymity.
Marriott spokesman Tom Marder declined to comment. Should it eventually become a public company, DiamondRock will face the same potential conflict of interest issues as Host Marriott.
The new venture will be headed by a group of current Marriott managers, led by William W. McCarten, a longtime Marriott executive. He joined the company in 1979 and spent much of the 1980s in accounting positions, according to Marriott's most recent annual report with the Securities and Exchange Commission. In 1991, he was named president of the company's food-services business -- the group that runs concessions at travel plazas and airports. Until recently, he was president of Marriott's services group, the company division that ran its senior living centers and its lodging supply distribution business -- both of which Marriott sold last year.
McCarten could not be reached for comment.
Incorporation papers in Maryland for DiamondRock list McCarten as president, and a source familiar with the matter confirmed he would be chief executive.
DiamondRock will initially be capitalized in a private placement of stock managed by Arlington investment bank Friedman, Billings, Ramsey Group Inc. The plan, according to a source familiar with the matter, is to raise seed capital initially, then register DiamondRock's shares on a public stock exchange, effectively making it a public company and enabling it to raise money in subsequent public stock sales, though, as with most real estate investment trusts, most of DiamondRock's acquisitions will be financed with debt.
Friedman, Billings, Ramsey spokesman Bill Dixon declined to comment.