BOOM AT THE INN

By Bill Saporito

"You'd have a difficult time finding a room here this week," says Hilton Hotels CEO Stephen Bollenbach, sitting in the company's flagship Waldorf-Astoria in New York City. Of course, he's managed to snag a rather nice one.

In fact, getting his hands on hotel rooms, say an additional 10,000 this year, is Bollenbach's mission at Hilton, a company he hopes to turn into a hot property again. His timing is nearly perfect. The lodging industry in the U.S., which bled money over seven horrendous years from 1987 to 1993, had a breakout performance in 1995, and is now running out of room to hold the profits. This year the industry will earn more than $10 billion, a record, as occupancy and rates go up and costs go down. Stocks of such companies as Hospitality Franchise Systems, Marriott International and ITT are soaring. ITT, which owns Sheraton, has made lodging a focal point of its future growth. Lodging companies that also own casinos, as do Hilton and ITT, are racking up big wins.

This is not great news for business travelers, who have seen 20% rate increases in some cities, or for vacation travelers, who may be spending as much as 30% more this summer in the hot spots. Some chains are charging a fee if you leave a day early, while others, such as Hyatt and Westin, have tested a demand for as much as 72 hours' notice on cancellations.

Hilton has been a middling performer, even though its earnings increased last year about 40%, to $121.7 million on sales of $1.65 billion. But the company carries little debt and can borrow money more cheaply than most competitors, a considerable advantage because in Bollenbach, 54, Hilton has one of dealmaking's master players. Indeed, there's barely a major hotel company that doesn't bear his imprint. "He is the best in the hotel business," says Bjorn Hanson, head of hotel-industry practice at Coopers & Lybrand, an accounting and consulting firm. "He has demonstrated that in what he has done with Disney, Marriott and Trump. He's done something different from what anyone expected. It's just sort of a Midas touch."

Last year, as chief financial officer of Walt Disney Co., Bollenbach helped CEO Michael Eisner engineer the Mouse's $19 billion buyout of Capital Cities/ABC. In so doing, he tackled Disney's urgent problem: where to spend Mickey's megamillions. Disney was making movies, expanding its theme parks and adding to its cruise business. But it needed something bigger than boats to make best use of the company's money. Says he: "Honestly, it doesn't make sense to spend $1 billion to build two cruise ships that can be capitalized [paid for] in 120 days." Making shrewd use of capital is Bollenbach's forte. In 1993 he fashioned an elegant solution to quite a different problem: saving Marriott Corp. from collapsing in debt by splitting it into two companies. In 1989, as CFO of Holiday Corp., he helped launch a subsidiary that is now the Promus Hotel Corp. (Hampton Inn, Embassy Suites), in the process selling off Holiday Inns to Bass PLC for an outrageous amount of money. He also rescued casino-hotel mogul Donald Trump from ruin. Trump was personally on the hook for $650 million before Bollenbach sprang him, an act that some of the Donald's rivals found unforgivable.

After barely six months at Hilton, Bollenbach has added a layer to the empire bequeathed by former CEO Barron Hilton, the son of founder Conrad. Last month the company agreed to buy Bally Entertainment's hotels and casinos, adding 4,826 rooms to Hilton's collection of 99,105 and, more important, giving Hilton two gambling tents in Atlantic City, New Jersey, a place now fairly bursting at the seams with wage burners. "He's brilliant and a terrific guy," says Trump, the once and future king of Atlantic City, whose own company can't build rooms fast enough to meet demand.

In a world full of overpaid CEOs, Bollenbach is demonstrably worth the money. The day that Hilton announced his appointment as CEO, the company's stock shot up 21%, or more than $750 million. For the Bally Entertainment deal, Hilton anted up $2 billion and assumed $1 billion in debt but paid with Hilton stock, then trading at $113.75--or worth about $1.9 billion more under Bollenbach.

The lodging business is one of those industries that can't stand prosperity. It wasn't long ago that lodging was an absolute dog, the ugly consequence of silly tax laws and even sillier real estate investors. Prior to 1986, anyone could invest in a hotel and recover up to $3 of write-offs for every $1 invested. From 1983 to 1985, the industry added more than 140,000 new rooms annually--but far fewer customers.

That's how Marriott got into trouble. The company built hotels, sold them to investors and took back lucrative management contracts. Even if the hotel lost money--and many did--Marriott still made out. But by the late '80s the real estate industry came crashing down. Marriott and other companies, as well as real estate investment trusts, or REITs, were stuck with dozens of properties that couldn't be unloaded. The industry racked up losses of some $5.7 billion in 1990, or about $1,800 a room. By 1991 new construction virtually stopped.

Nowadays, Marriott and the rest of the industry are luxuriating in an occupancy rate that averages about 66% nationally, up from about 60% in 1991. At the same time, the occupancy level at which a hotel typically breaks even has fallen, from 67% to 62.5%. That's because hard times forced the industry to figure out how to do more with less. For instance, last year the industry employed 81 workers for every 100 rooms, according to Hanson of Coopers & Lybrand, down from 87.5 in 1987. You may not have noticed, because hotels did it by cutting back on costly amenities like 24-hour room service.

Hilton, which got into the habit of building big, if not oversize, full-service hotels in major cities, is now in the penthouse. Says Bollenbach: "What is absolutely certain is that no one is going to build a $500 million hotel across the street from you. Today you are very, very lucky if you are an owner."

Moreover, because of the luxe prices investors paid in the '80s for upscale hotels, it costs about half as much to buy one today as it does to build one. Case in point: the Four Seasons in New York City, opened in 1993 for about $500 million, was recently sold for $190 million. Hilton is shopping for big properties, "because the competition isn't as fierce when you start talking about spending $50 million or $100 million."

One step in Bollenbach's campaign is bound to be international. Nine years ago, Hilton's international properties were sold and are now owned by Ladbroke's, a British gambling concern. Bitter disputes followed, especially after Hilton began opening overseas hotels called Conrad. Both companies could benefit from a joint marketing agreement, if not a merger.

Barring a major recession, the industry will break records next year, but some executives are getting nervous. There is still an overhang of loans coming due from the past building cycle, even as new money keeps pouring in. Warns Holiday Inn Worldwide chairman Bryan Langton: "Right now everybody's having a good time. We are a very seductive industry. People lose money in it, and they still come back. As sure as day follows night, the next five years will experience a down cycle."

Bollenbach agrees. But he points out that much of the new construction is in the small, limited-service-hotel segment of the business. He likes Hilton's location just fine--and he can always get a room.

--With reporting by William Dowell/New York and Greg Fulton/Atlanta

With reporting by WILLIAM DOWELL/NEW YORK AND GREG FULTON/ATLANTA