COMPANY: Homegate Hospitality


TYPE OF BUSINESS: Extended-stay hotels

FOUNDERS: Bob Faith, 33; John Kratzer, 34

CAPITAL: $10 million from Greystar Capital Partners, $10 million from Crow Investment Trust, $50 million from public offering, $134 million from merger

KEY COMPETITION: Extended Stay America, Candlewood Hotel Co.

COMPETITIVE STRATEGIES: Form strategic alliances, establish national brand

Bob Faith saw an opportunity. In the early 1990s corporate apartments--fully furnished units that companies rented month-to-month--evaporated throughout the Houston area as the real estate market sizzled. Landlords, eager to fill properties with long-term tenants, phased out their corporate units, forcing scores of businesspeople into higher-priced hotels. "That's when the lightbulb went on," says Faith. "I said, Aha! I'm gonna build a product that specifically meets the needs of these customers."

With dollar signs in his eyes, Faith called John Kratzer, an old friend from Faith's early days as a real estate developer at industry giant Trammell Crow. Faith and Kratzer, ostensibly competitors, compared notes. The pair concluded they should build midpriced extended-stay hotels--lodging facilities that resemble apartments but are designed for short stays of a week or more--as quickly as possible. The demand clearly existed. They also decided a partnership between Greystar Capital Partners (where Faith was founder and CEO) and Crow Investment Trust (one of the many entities of Trammell Crow, where Kratzer worked) would move things along considerably.

Crow was enthusiastic, but hammering out the agreement details took from July 1995 until February 1996. Trammell Crow Residential, the apartment-development arm of the Trammell Crow empire, was brought in, as was Wyndham Hotel Corp., which would manage the hotels. (Crow owns 47% of Wyndham's stock.) In February 1996, Greystar and Crow kicked in $10 million apiece to found a company called Homegate Hospitality.

The plan was for Crow and Greystar to find the locations and build the hotels, typically 136-room units. In exchange, they would earn $250,000 per project; they would also receive stock, aligning their interests with Homegate's. Wyndham would get a management fee of 3% of gross hotel revenues plus incentives.

Early on, Homegate CEO Faith and chief operating officer Kratzer realized the company's strategic alliances would make it easier to raise money in this capital-intensive industry. But the pair never imagined just how hot Homegate would become.

The market for extended-stay hotels is booming, especially in Homegate's midpriced segment ($250 to $500 a week). The demand could support 68 rooms for each one now available. "I've heard that if every hotel slated for development gets built between now and 2000, only a small fraction of the demand will be met," says competitor Mike Wilson, vice-president of marketing at Extended Stay America, a 180-hotel chain.

What's more, with margins of up to 60% and occupancy rates of 80%, extended-stay hotels are among the most profitable segment of the hospitality industry.

Initially, Faith envisioned Homegate as a regional player with 20 hotels. But his aspirations changed dramatically after he saw how successfully Extended Stay America raised $289 million from a stock offering in June 1996. So in October 1996, Homegate went public, raising $50 million for expansion capital. Last year the company posted revenues of nearly $2.7 million and lost $866,000. By July, Homegate had 8 hotels operating and 34 under development. It hoped to have 65 completed or under construction by 1998.

Even after going public, Homegate had only enough capital to complete the first 20 or so hotels, so it began exploring different financing alternatives. Then in February, Prime Hospitality Corp., in Fairfield, N.J., began wooing Homegate. In early July, Prime approached Faith and Kratzer about a merger. Three weeks later Homegate was merged into Prime for stock worth $134 million. Under the deal, Prime--owner and operator of 112 hotels nationwide--will assume Homegate's development alliances with Crow and Greystar, buy out Wyndham for $12 million, and give Homegate a $65-million bridge loan so that work on new hotels can continue until the deal's closing.

After the merger Faith plans to leave Homegate and focus his energies on running Greystar. Kratzer will stay on to run Homegate as a division of Prime. Meanwhile competition has heated up. Marriott entered the midpriced segment of the market this year with its TownePlace Suites. The hotel giant plans to open 5 by year's end and 130 by 2000. Other recent entrants include Candlewood Hotel Co. and MainStay Suites. Still, says Faith, "the time when we're going to have to worry about competition isn't here yet. There just aren't enough rooms yet. It's a race to market share, and we want to be there first."

Published on: Nov 1, 1997