Meet the Money 2009 Suzanne Mellen on hotel values and cap rates 5-7-09

8/14/2019 Meet the Money 2009 Suzanne Mellen on hotel values and cap rates 5-7-09

1/29

111111111111111111111111 2009 HVS 1

Meet the Money 2009

Hotel Values and Cap Rates

Suzanne Mellen, MAI, CRE, FRICS, ISHCManaging Director

HVS San Francisco and Las [email protected]

Office: 415-268-0351


2/29

222222222222222222222222

Major Sales Transactions (> $10 Million)

Number Avg. PriceYear of Hotels Per Room % Change

1990 130 $136,0001991 56 -56.9 % 96,000 -29.4 %

1992 70 25.0 82,000 -14.61993 53 -24.3 93,000 13.41994 108 103.8 81,000 -12.91995 147 36.1 80,000 -1.2

1996 227 54.4 106,000 32.51997 280 23.3 117,000 10.41998 241 -13.9 136,000 16.21999 128 -46.9 148,000 8.82000 150 17.2 116,000 -21.6

2001 105 -30.0 146,000 25.92002 106 1.0 111,581 -23.62003 142 34.0 132,944 19.12004 189 33.1 136,056 2.3

2005 331 75.1 168,225 23.62006 270 -18.4 201,935 20.02007 252 -6.7 192,566 -4.62008 114 -54.8 176,067 -8.6

YTD 4/30/09 45 N/A 183,135 N/AYTD 4/30/10 5 88.9 % 265,900 45.2 %


3/29


4/29

444444444444444444444444

Sales Not Good Indicator of Value

Not enough recent transactions to provide guidanceon price per room or cap rates

When transactions do pick up they will require fullinvestigation regarding terms of the deal and sellerfinancing

Sales transactions will help to set new valuationparameters, but will be difficult to use for individualproperty valuations, as always.

Jump in average sales price per room through April2009 due to three high per room sales, including theHyatt in Boston and Treasure Island in Las Vegas amisleading trend.


5/29

555555555555555555555555

Capitalization Rate Comparison

PWC Korpacz Investor Survey

2009 HVS

Cap Rate Comparison

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

3rdQtr

1994

1stQ

tr199

5

3rdQtr

1995

1stQ

tr199

6

3rdQtr

1996

1stQ

tr199

7

3rdQtr

1997

1stQ

tr199

8

3rdQtr

1998

1stQ

tr199

9

3rdQtr

1999

1stQ

tr200

0

3rdQtr

2000

1stQ

tr200

1

3rdQtr

2001

1stQ

tr200

2

3rdQtr

2002

1stQ

tr200

3

3rdQtr

2003

1stQ

tr200

4

3rdQtr

2004

1stQ

tr200

5

3rdQtr

2005

1stQ

tr200

6

3rdQtr

2006

1stQ

tr200

7

3rdQtr

2007

1stQ

tr200

8

3rdQtr

2008

1stQ

tr200

9

Quarter

Regional Mall CBD Office Suburban Off ice Apartment

Full-Service Lodging Limited-Service Lodging Luxury Lodging


6/29

666666666666666666666666

Investor Survey Data

Investor survey data often lag the market anddo not provide a good basis for determiningcapitalization or discount rates for hotelvaluation when a market is in transition or at

extremes They did not reflect how low cap rates went in

the 2005 through 2007 period, or how highthey are going now

Hotel cap rates remain above those for othercommercial real estate; risk premium likely toincrease after this recession.


7/29777777777777777777777777

Cap Rates Derived from Key Operating and Balance SheetData for Publicly Traded Hotel REITS - Last 12 Mos.

Based on Value as of 3/02/09Net Debt as Net Inc./

a % of Enterprise Value Cap Rate As of Cap Rate As of Cap Rate As ofEnterprise Value (Current Cap Rate) September 9, 2008 September 7, 2007 May 9, 2007

Lodging REITsHOST HOTELS & RESORTS 79% 15.4% 8.7% 6.1% 5.2%HOSPITALITY PROPERTIES 69% 13.7% 10.4% 6.4% 6.0%SUNSTONE HOTEL INVESTORS 94% 11.9% 9.6% 5.9% 5.1%LASALLE HOTEL PROPS 78% 13.4% 8.8% 5.6% 4.8%STRATEGIC H & R 83% 9.6% 8.0% 4.6% 4.0%FELCOR LODGING TRUST 76% 13.2% 10.4% 6.5% 5.7%DIAMONDROCK HOSPITALITY 78% 12.8% 9.5% 5.0% 3.9%

AVERAGES 80% 12.8% 9.3% 5.7% 5.0%

2009 HVS


8/29888888888888888888888888

Historical Cap Rates Select Set of FullService Hotels

YearCap Rate based on

Historical NOICap Rate based on

1st Yr. Projected NOIFree and ClearDiscount Rate

EquityYield

1988 9.1 9.7 14.7 21.41989 9.5 9.4 17.6 28.8

1990 8.0 10.0 15.1 22.4

1991 6.4 8.9 19.4 24.0

1992 4.8 7.7 15.1 21.9

1993 8.5 12.0 20.8 34.3

1994 5.7 8.3 14.8 21.8

1995 7.0 11.1 14.1 20.5

1996 7.0 9.8 13.5 21.41997 9.3 10.5 15.4 23.9

1998 8.8 9.7 14.5 22.2

1999 10.3 11.4 15.5 24.9

2000 9.2 10.4 14.0 21.0

2001 8.2 9.8 14.6 22.2

2002 8.9 9.8 13.6 21.0

2003 7.9 8.2 14.0 21.4

2004 5.8 7.4 12.2 19.7

2005 5.2 6.9 11.4 19.7

2006 5.5 5.7 10.8 18.9

2007 6.0 6.8 11.6 21.3

2008 6.6 5.3 11.9 20.0

Source: HVS San Francisco

2009 HVS


9/29


10/29


11/29111111111111111111111111111111111111111111111111

Hotel Mortgage and T-Bill Rates

10-Year T-Bill Yields and Hotel Mortgage Interest Rates

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

3rdQtr

1994

1stQ

tr19

95

3rdQtr

1995

1stQ

tr19

96

3rdQtr

1996

1stQ

tr19

97

3rdQtr

1997

1stQ

tr19

98

3rdQtr

1998

1stQ

tr19

99

3rdQtr

1999

1stQ

tr20

00

3rdQtr

2000

1stQ

tr20

01

3rdQtr

2001

1stQ

tr20

02

3rdQtr

2002

1stQ

tr20

03

3rdQtr

2003

1stQ

tr20

04

3rdQtr

2004

1stQ

tr20

05

3rdQtr

2005

1stQ

tr20

06

3rdQtr

2006

1stQ

tr20

07

3rdQtr

2007

1stQ

tr20

08

3rdQtr

2008

Rates

Hotel Mortgage Int. Rate 10-year T-BillSource: ACLI and HVS

2009 HVS


12/29121212121212121212121212121212121212121212121212

Debt Component More Expensive and LessAvailable

Hotel mortgage interest rates for transactions over $10million have risen dramatically

8% to double digit interest rates are being quoted atextraordinarily low loan-to-value ratios of 30% to 50%

Weighted cost of capital has risen due to higher

interest rates and the need for more equity toconsummate a deal

Underwriting standards are so stringent that manydeals may need to be on an all cash basis until the

credit markets and hotel cash flow normalizes


13/29

131313131313131313131313131313131313131313131313

U.S. CMBS Volume by Year

Year

Total U.S. Issuance $

(+000)

Percent

Change1997 $36,979,700 --

1998 $74,331,700 102.0%

1999 $56,571,100 -23.9%

2000 $46,894,400 -17.1%

2001 $67,149,900 43.2%

2002 $52,073,600 -22.5%

2003 $77,848,100 49.5%

2004 $93,216,400 19.7%

2005 $168,734,500 81.0%

2006 $202,654,100 20.1%

2007 $230,193,300 13.6%

2008 $12,146,000 -94.7%

13 2009 HVS

Source: Commercial Mortgage Alert

What will

replace theCMBS debt thatprovided somuch liquidity tothe market?

Can hotel valuesfully recoverwithout a

comparablereplacement ofdebt capital?


14/29

141414141414141414141414141414141414141414141414

Sample Valuation - Forecast of Income and Expense

2009 HVS

Hstorical Operating Results2008/09 2009/10 2010/11 2011/12 Stabilized

Number of Rooms: 421 421 421 421 421Occupancy: 63% 58% 62% 66% 68%Average Rate: $172.00 $154.68 $159.01 $166.64 $176.64RevPAR: $107.84 $89.71 $98.59 $109.98 $120.12Days Open: 366 365 365 365 365Occupied Rooms: 128,075 PAR POR 89,126 %Gross PAR POR 95,272 %Gross PAR POR 101,419 %Gross PAR POR 104,492 %GrossREVENUE

Rooms $16,564 62.5 % $39,344 $129.33 $13,786 59.4 % $32,746 $154.68 $15,149 60.1 % $35,983 $159.01 $16,901 60.9 % $40,145 $166.65 $18,458 61.8 %Food 6,922 26.1 16,442 54.05 6,544 28.2 15,543 73.42 7,013 27.8 16,658 73.61 7,572 27.3 17,985 74.66 7,978 26.7Beverage 2,209 8.3 5,247 17.25 2,088 9.0 4,960 23.43 2,238 8.9 5,316 23.49 2,416 8.7 5,740 23.83 2,546 8.5Telephone 31 0.1 73 0.24 29 0.1 68 0.32 31 0.1 74 0.33 34 0.1 81 0.33 36 0.1Oher Income 763 2.9 1,812 5.96 747 3.2 1,775 8.38 777 3.1 1,845 8.15 816 2.9 1,937 8.04 848 2.8Total Revenues 26,489 100.0 62,919 206.82 23,194 100.0 55,092 260.24 25,208 100.0 59,876 264.59 27,739 100.0 65,888 273.51 29,866 100.0

DEPARTMENTAL EXPENSES *Rooms 4,425 26.7 10,511 34.55 3,890 28.2 9,241 43.65 4,169 27.5 9,903 43.76 4,502 26.6 10,693 44.39 4,743 25.7Food & Beverage 6,513 71.3 15,470 50.85 6,359 73.7 15,104 71.35 6,629 71.7 15,746 69.58 6,976 69.8 16,569 68.78 7,261 69.0Telephone 27 87.3 64 0.21 26 91.1 62 0.29 27 87.8 65 0.29 29 84.9 68 0.28 30 83.6Oher Expenses 426 55.8 1,012 3.33 424 56.7 1,007 4.76 435 56.0 1,033 4.56 450 55.2 1,070 4.44 465 54.9

Total 11,391 43.0 27,057 88.94 10,699 46.1 25,413 120.04 11,261 44.7 26,747 118.19 11,956 43.1 28,400 117.89 12,499 41.9DEPARTMENTAL INCOME 15,098 57.0 35,862 117.88 12,495 53.9 29,679 140.19 13,947 55.3 33,129 146.39 15,782 56.9 37,488 155.62 17,367 58.1UNDISTRIBUTED OPERATINGEXPENSES

Administrative & General 1,851 7.0 4,397 14.45 1,643 7.1 3,902 18.43 1,730 6.9 4,110 18.16 1,842 6.6 4,376 18.16 1,916 6.4Marketing 1,584 6.0 3,762 12.37 1,406 6.1 3,339 15.77 1,481 5.9 3,517 15.54 1,576 5.7 3,745 15.54 1,640 5.5Franchise Fee 994 3.8 2,361 7.76 827 3.6 1,965 9.28 909 3.6 2,159 9.54 1,014 3.7 2,409 10.00 1,107 3.7Prop. Operations & Maint. 1,221 4.6 2,900 9.53 1,082 4.7 2,570 12.14 1,118 4.4 2,655 11.73 1,167 4.2 2,773 11.51 1,214 4.1Utilities 949 3.6 2,254 7.41 885 3.8 2,102 9.93 914 3.6 2,172 9.60 955 3.4 2,268 9.42 993 3.3Total 6,599 24.9 15,674 51.52 5,843 25.3 13,878 65.56 6,152 24.4 14,612 64.57 6,555 23.6 15,570 64.63 6,870 23.0

HOUSEPROFIT 8,499 32.1 20,188 66.36 6,652 28.6 15,800 74.64 7,796 30.9 18,517 81.82 9,227 33.3 21,918 90.98 10,497 35.1Management Fee 795 3.0 1,888 6.20 696 3.0 1,653 7.81 756 3.0 1,796 7.94 832 3.0 1,977 8.21 896 3.0INCOMEBEFOREFIXED CHARGES 7,704 29.1 18,300 60.16 5,956 25.6 14,148 66.83 7,039 27.9 16,720 73.89 8,395 30.3 19,941 82.78 9,601 32.1FIXED EXPENSES

Property Taxes 756 2.9 1,796 5.90 819 3.5 1,944 9.18 835 3.3 1,983 8.76 860 3.1 2,043 8.48 886 3.0Insurance 363 1.4 862 2.83 164 0.7 391 1.84 168 0.7 398 1.76 173 0.6 410 1.70 178 0.6Reserve for Replacement 1,060 4.0 2,517 8.27 928 4.0 2,204 10.41 1,008 4.0 2,395 10.58 1,110 4.0 2,636 10.94 1,195 4.0Total 2,179 8.2 5,175 17.01 1,911 8.2 4,539 21.44 2,011 8.0 4,777 21.11 2,142 7.7 5,089 21.12 2,258 7.6

NET INCOME $5,526 20.9 % $13,126 $43.15 $4,045 17.4 % $9,609 $45.39 $5,028 19.9 % $11,944 $52.78 $6,253 22.6 % $14,853 $61.65 $7,342 24.5 %*Departmental expenses are expressed as a percentage of departmental revenues.

%Gross


15/29

151515151515151515151515151515151515151515151515

Valuation of Sample Hotel at Market Peak (2007)

2009 HVS

Valuation Input Value $96,830,000Stabilized Year 3 (Say) 96,800,000

Inflation 3.0% Value per Room $230,000Loan/Value 75% Overall Discount Rate 10.57%

Amortization 30 Years Cap Rate - Historical NOI 6.6%Term 10 Years Cap Rate - 1st Year NOI 6.3%Interest Rate 6.5%

Terminal Cap Rate 8.5%Transaction Costs 2.0%

Equity Yield 18.0%


16/29

161616161616161616161616161616161616161616161616

Value Based on Current MoreOnerous Investment Parameters

2009 HVS

Valuation Input Valuation OutputStabilized Year 4 Value $56,600,000Inflation 3% Value per Room $134,442Loan/Value 45% Overall Discount Rate 15.5%Amortization 25 Years Cap Rate - Historical NOI 10.7%Term 10 Years Cap Rate - 1st Yr. NOI 7.1%Interest Rate 9.0% Mortgage @ 45% $25,471,574Terminal Cap Rate 9.5% Mortgage Per Room $60,503Transaction Costs 2.0% Annual Debt Service $2,565,000

Equity Yield 19.0% Debt Coverage Ratio -Yr.1 1.58


17/29

171717171717171717171717171717171717171717171717

Change in Value at Current Rates

2009 HVS

Investment Parameters and Resultant Values % ChangeRecent Peak Current Recent PeakValue Available to CurrentValuation Inputs: Mid-2007 Rates Available

Interest Rate 6.5% 9.0%Loan-to-Value 75% 45%Eq. IRR 18.0% 19.0%Terminal Cap Rate 8.5% 9.5%Valuation Outputs:Value Per Room $230,000 $134,000 -41.7%Discount Rate 10.5% 15.5%Implied Cap Rate 7.5% 12.5%Derived Cap Rate:

Historical NOI 6.6% 10.7%1st Year Proj. NOI 6.3% 7.1%


18/29

181818181818181818181818181818181818181818181818

Assumed Refinancing in Future ModeratesValue Loss

Most hotel buyers that pay all cash or obtain

financing at a low LTV will anticipaterefinancing when cash flow recovers and debtmarket normalizes

10 year DCR model assumes a refinancing at

the end of a stabilized year of operation Overall discount rate for the current value

declines from 15.5% with no refinancing to13.5% with an assumed refinancing

It is anticipated that many hotels will requirefour to six years to recover lost revenue andNOI


19/29


20/29

202020202020202020202020202020202020202020202020

Refinancing Proceeds

2009 HVS

Stabilized Year Value $81,700,000

New Loan to Value Ratio 70.0%New Mortgage $57,187,000

Less:

Outstanding Balance of Initial Mortgage 24,165,000Refinancing Costs @ 1.5% 858,000

Refinancing Proceeds $32,164,000

Refinancing Based on Stabilized Value at End of Year 4

Based on Year 5 Cash Flow Going Forward in Ten Year DCF


21/29

212121212121212121212121212121212121212121212121

Reversion at End of Ten Year Holding Period

2009 HVS

11th Year's Net Income $9,029,734

Capitalization Rate 9.5%

Total Sales Proceeds $95,050,000

Less: Outstanding Mortgage Balance 51,283,000

Less: Transaction Costs @ 2.0% 1,901,000Net Sales Proceeds (Say) $41,866,000


22/29

222222222222222222222222222222222222222222222222

Forecast of Total Cash Flow to Equity

2009 HVS

Net Income Plus: TotalAvailable for Total Annual Refi / Sales Cash Flow

Year Debt Service Debt Service Proceeds to Equity2009/10 $4,045,000 - $2,565,000 + = $1,480,000

2010/11 5,028,000 - 2,565,000 + = 2,463,000

2011/12 6,253,000 - 2,565,000 + = 3,688,000

2012/13 7,342,000 - 2,565,000 + 32,164,000 = 36,941,000

2013/14 7,562,000 - 5,071,000 + = 2,491,000

2014/15 7,789,000 - 5,071,000 + = 2,718,000

2015/16 8,023,000 - 5,071,000 + = 2,952,000

2016/17 8,263,000 - 5,071,000 + = 3,192,0002017/18 8,511,000 - 5,071,000 + = 3,440,000

2018/19 8,767,000 - 5,071,000 + 41,866,000 = 45,562,000


23/29


24/29

242424242424242424242424242424242424242424242424

Discount Rate Equating Cash Flow to Value

2009 HVS

Discount Factor @ DiscountedYear Net Income 13.5% Cash Flow2009/10 $4,045,000 * 0.88080 = $3,562,845

2010/11 5,028,000 * 0.77581 = 3,900,786

2011/12 6,253,000 * 0.68334 = 4,272,910

2012/13 7,342,000 * 0.60189 = 4,419,042

2013/14 7,562,000 * 0.53014 = 4,008,933

2014/15 7,789,000 * 0.46695 = 3,637,075

2015/16 8,023,000 * 0.41129 = 3,299,786

2016/17 8,263,000 * 0.36227 = 2,993,403

2017/18 8,511,000 * 0.31908 = 2,715,7292018/19 101,916,000 * * 0.28105 = 28,643,542

Estimated Market Value $61,454,054(SAY) $61,500,000


25/29

252525252525252525252525252525252525252525252525

DCR and Cash on Cash Return

2009 HVS

Debt Cash onCoverage Cash

Year Ratio Return2009 1.58 4.8

2010 1.96 7.9

2011 2.44 11.82012 2.86 Infinite

2013 1.49 Infinite

2014 1.54 Infinite

2015 1.58 Infinite

2016 1.63 Infinite

2017 1.68 Infinite

2018 1.73 Infinite

< DCR Reduced UponRefinancing


26/29

262626262626262626262626262626262626262626262626

Conclusion: Cap Rates Down in 2009 Due to DepressedNOI, Overall Rates of Return Up, Values Down

2009 HVS

Investment Parameters and Resultant Values% Change Assumed % Change

Recent Peak Current Recent Peak Refinancing Peak toValue Available to Current @ 70% LTV Refinancing

Valuation Inputs: Mid-2007 Rates Available 7.5% @ 70%Interest Rate 6.5% 9.0% 9.0%/7.5%Loan-to-Value 75% 45% 45% / 70%Eq. IRR 18.0% 19.0% 19.0%Terminal Cap Rate 8.5% 9.5% 10.0%Valuation Outputs:Value Per Room $230,000 $134,000 -41.7% $146,000 -36.5%Discount Rate 10.6% 15.5% 490 bps 13.5% 290 bpsImplied Cap Rate 7.6% 12.5% 490 bps 10.5% 290 bpsDerived Cap Rate:

Historical NOI 6.6% 10.7% 300 bps 9.9% 270 bps1st Year Proj. NOI 6.8% 7.1% -40 bps 6.6% -110 bps


27/29

272727272727272727272727272727272727272727272727

Suzanne R. Mellen, Biography

2009 HVS 27

Suzanne R. Mellen, MAI, CRE, FRICS is the founding principal and ManagingDirector of HVS - San Francisco. She also heads up the firms Gaming Services

Division, which specializes in the valuation and evaluation of gamingproperties, and HVS newest office in Las Vegas. Prior to establishing the SanFrancisco office in 1985, Ms. Mellen was Director of Consulting and ValuationServices for the firm in New York. Her professional experience includespositions with Morgan Guaranty Trust, Laventhol & Horwath and Helmsley-Spear and with Harley-Little Associates. She gained her operational experience

with Westin Hotels.

Ms. Mellen has a BS degree in Hotel Administration from Cornell University andholds the following designations: MAI (Appraisal Institute), CRE (Counselors ofReal Estate), FRICS (Royal Institute of Chartered Surveyors) and ISHC(International Society of Hospitality Consultants). She has been appraisinghotels and related real estate for over 30 years, has authored numerous

articles and is a frequent lecturer and expert witness on the valuation of hotels,casinos and related issues. She developed the Simultaneous Valuation Formula,a mortgage-equity income capitalization formula for variable income properties,as well as the refinancing model currently utilized by the firm.


28/29

282828282828282828282828282828282828282828282828

HVS is a global services and consulting organization focused onhotel, restaurant, shared ownership, gaming and leisureindustries. Since the launching of the firm in 1980, our clients

have relied on our specialized industry knowledge and expertisefor advice and services geared to enhancing economic returnsand asset value. Through a network of more than 20 officesstaffed by over 350 seasoned industry professionals, HVS offers awide scope of services that track the development and ownership

process.

28 2009 HVS

HVS


29/29

292929292929292929292929292929292929292929292929

Please call with any questions!

Thank You

29 2009 HVS

Documents

Meet the Money 2009 Suzanne Mellen on hotel values and cap rates 5-7-09