Hospitality Lawyer on State of the Hotel Industry - Dan Lesser at JMBM's Meet the Money 2008

8/14/2019 Hospitality Lawyer on State of the Hotel Industry - Dan Lesser at JMBM's Meet the Money 2008

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Daniel H. Lesser

Senior Managing Director Industry Leader

Hospitality & Gaming Group

CB Richard Ellis, Inc.

One Penn Plaza, Suite 1835

New York, NY 10119

Phone: 212.207.6064

Fax: 212.207.6069

Email: [email protected]

The U.S. Hotel InvestmentMarket: The Glass Is Half Full

Presented to:

JMBMs 18th Annual

Meet the Money Conference
http://upload.wikimedia.org/wikipedia/commons/1/11/Glass-of-water.jpg


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CB Richard Ellis | Page 2

Investment Overview of the U.S. Lodging IndustryEconomic Overview

Much talk about the Big R

Consumer Confidence

GDP Growth

Home Sales

Conflicting opinions on Main Street & WallStreet Bear Stearns debacle near failure to $2 per share, then

back to $10 per share (400% weekly change)

Volatile stock markets

Profits still being generated at household name firms

General Electric, Lehman, JP Morgan, Goldman Sachs,Viacom

Some industry experts predict business will pick up after2008; others predict 2010


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Statistics Are What They Are . Or Are They?

Economy Commodities (gold, wheat, oil) at all time highs

Hotel Operations RevPAR still showing year over year growth2008 increases are over 2007 records

Supply & Demand As of Q2 2008, Lodging Econometricsreported a record 760,000 rooms in the pipeline2.5% net supply growth in 2007

3.0% net supply growth forecasted for 2008

FinanceWidening spreads, higher DCRs, lower LTV & LTCs

Non-existent CMBS market,

Lower volume of transactions

Decline in overall value of transactions;

Virtual halt to M&A and portfolio deals for now

So, What does this really mean?


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Buy or Sell? Just Ask the Smart Money

Savvy and sophisticated long term investors believe NOWis a buying opportunity

Value Decline or Perception Decline?

Crisis localized in the Debt Capital Markets

Plenty of Available Equity evidenced by available funds: KSL - $1.6 billion equity fund

Kimpton - closed $246 million fund w/buying power of $800 million

RLJ - the RLJ Real Estate Fund III, L.P. - $1.2 Billion

Rockbridge Rockbridge Hospitality Fund IV with $160 million possible total to exceed $200 million

Blackstone closes with $10.9B in Q2 2008

Jon Gray, We believe there should be attractive investmentopportunities for this capital given the market dislocation thatexists today.


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Historic Perspective ADR/RevPAR Change

Supply Demand Occupancy ADR RevPAR CPI Differential: Differential:

% % % % % % ADR vs RevPAR vs

Change Change Change Change Change Change CPI CPI1978 1.4% 4.1% 2.9% 14.0% 17.0% 7.6% 6.40% 10.60%1979 1.4 5.3 3.8 17.0 21.5 11.3 5.7 15.91980 0.8 -1.0 -1.8 15.2 13.2 13.5 1.7 11.51981 1.5 -2.4 -3.9 10 5.8 10.3 -0.3 6.11982 0.7 -1.2 -1.9 6.1 4.1 6.2 -0.1 4.21983 1.2 -2.1 -0.9 5.2 1.7 3.2 1.9 -0.21984 1.5 0.9 -0.6 6.9 6.3 4.3 2.6 3.7

1985 2.8 1.3 -1.5 4.6 3.1 3.6 1.1 2.0

1986 3.3 2.3 -1.0 3.2 2.2 1.9 1.4 0.8

1987 3.8 4.1 0.7 4.1 4.8 3.6 0.4 4.4

1988 4.2 4.2 0.3 3.5 3.8 4.1 -0.6 4.51989 3.6 4.9 1.4 3.4 4.9 4.8 -1.4 6.31990 3.2 1.9 -1.5 3.2 1.7 5.4 -2.2 3.91991 1.5 -1.2 -2.8 0.0 -2.7 4.2 -4.2 1.51992 0.8 2.1 1.3 0.6 2.8 3.0 -2.4 5.31993 0.4 1.9 1.6 2.7 4.3 3.0 -0.3 4.51994 1.2 3.1 1.7 3.9 5.9 2.6 1.4 4.51995 1.5 2.1 0.6 4.8 5.4 2.8 2.0 3.41996 2.4 2.3 -0.3 6.5 6.3 3.0 3.6 2.71997 3.6 2.8 -0.8 5.9 5.1 2.3 3.6 1.41998 4.2 3.1 -0.9 4.6 3.6 1.6 3.1 0.51999 4.1 3.0 -1.1 4.0 2.9 2.2 1.8 1.22000 3.1 3.7 0.6 4.9 5.5 3.4 1.5 4.02001 2.4 -3.4 -5.7 -1.3 -6.9 2.8 -4.1 -2.82002 1.6 0.3 -1.2 -1.4 -2.6 1.6 -3.0 0.42003 1.2 1.7 0.5 0.1 0.6 2.3 -2.1 2.72004 0.9 4.5 3.5 4.0 7.8 2.7 1.3 6.52005 0.3 3.3 2.9 5.4 8.5 3.4 2.0 6.52006 0.3 0.7 0.5 7.2 7.7 3.2 4.0 3.72007 1.4 1.2 -0.2 5.9 5.7 2.8 3.1 2.6

Year

Source: Smith Travel Research; Bureau of Labor Statistics


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Beware of Self-Fulfilling Prophecy!

Maintain rate integrity

International travelers see the U.S. on sale

Still growth, not declines over record year performances

Dont fret just because the system is back to basics,does not indicate a negative situation: Spreads are 250+ BPS over 10-year Treasury

1.3 or better DSCR

75% or better LTV or LTC

25-year or less AM

A correction is good


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8/31CB Richard Ellis | Page 8

Why This Downturn Will Not Last Long

DB GDP Forecast- 0.5% - 0.3% 2.6% 0.9%

DB Demand Forecast0.0% - 0.4% - 1.2% - 0.7%

DB Supply Forecast 2.0% 2.1% 2.2% 2.0%

DB Occupancy Forecast- 2.0% - 2.5% - 3.4% - 2.7%

DB ADR Forecast 4.7% 4.9% 3.8% 4.0%

DB RevPAR Forecast2.7% 2.4% 0.4% 1.3%

4 08E1 08E 2 08E 3 08E

Source: Deutsche Bank



Supply & Demand Growth

-3

-2

-1

0

1

2

3

4

5

1988

Sup

ply

1989

Sup

ply

1990

Sup

ply

1991

Dem

and

1998

Sup

ply

1999

Sup

ply

2000

Sup

ply

2001

Dem

and

2005

Sup

ply

2006

Sup

ply

2007

Sup

ply

2008

Dem

and

Supply growth three years prior to negative demand growth years

Source: Smith Travel Research; Deutsche Bank



U.S. Hotel Transaction Market v. Rest of the World

Average Sale Price Per Room: 2007 Single

Asset Sale Transactions

United Kingdom *350,856 EURO (Roughly $554,353)

France *228,064 EURO (Roughly $360,342)

USA **$220,718

*Euro = 1.58 USD

*Source: HVS London Office

**Source: CBRE Hotels
http://rds.yahoo.com/_ylt=A0oGkiaWJBpILAYBlBJXNyoA;_ylu=X3oDMTBzdXR0NmJjBHNlYwNzYwRjb2xvA3NrMQR2dGlkA0Y4MjRfNzM-/SIG=1e7r8e0bc/EXP=1209759254/**http%3a//images.search.yahoo.com/images/view%3fback=http%253A%252F%252Fsearch.yahoo.com%252Fsearch%253Fei%253DUTF-8%2526p%253DDollar%252Bsighn%26w=125%26h=113%26imgurl=www.comnetsupport.com%252Fimages2%252FDollar_Sign.jpg%26size=3.6%26name=Dollar_Sign.jpg%26rcurl=http%253A%252F%252Fwww.comnetsupport.com%252Fc_home.html%26rurl=http%253A%252F%252Fwww.comnetsupport.com%252Fc_home.html%26p=dollar%2bsign%26type=jpeg%26no=1%26tt=20%252C395



WEAKNESSESWEAKNESSES STRENGTHSSTRENGTHS

Todays Market: Weaknesses v. Strengths

k b i l i



Weakness: Subprime Malaise



Weakness: Foreclosures

Nearly six times more foreclosures in 2007than 2006


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Weakness: Economists Dire Predictions

S h D b S ill I i



Strengths: Debt Still Inexpensive

10 Year

Treasury3.749%

Prime Rate 5.0%

30 Year Fixed

Rate Residential

Mortgage

5.72%

As of May 1, 2008

St th F i C



Strengths: Foreign Currency

0.00

0.50

1.00

1.50

2.00

2.50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

EUR GBP CAD

$US

R C t W k St th



STRENGTHSSTRENGTHSWEAKNESSESWEAKNESSES

4. Dire Predictions4. Dire Predictions

3. Supply Increases3. Supply Increases

2. Home Foreclosures2. Home Foreclosures

1. Subprime Malaise1. Subprime Malaise

4. Foreign Currency4. Foreign Currency

3. Intl Tourism3. Intl Tourism

2. RevPAR Growth2. RevPAR Growth

1. Inexpensive Debt1. Inexpensive Debt

Recap: Current Weaknesses v. Strengths

h i ll k il



or

A Choice We All Make Daily:

Wh H W B



Now lets look at someeconomic history

Where Have We Been

1981 I t t R t



1981 - Interest Rates

Prime Rate

July, 1981 20.5%

SOURCE: Wall Street Journal

1986 T R f A t



1986 Tax Reform Act

1991 G lf W D t St


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1991 Gulf War Desert Storm

Dow Jones Industrial Average

April 17, 1991 3,004

May 1, 2008 13,010

1989 Resolution Trust Corporation (RTC)


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1989 Resolution Trust Corporation (RTC)

ForecastForecast


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ForecastForecast

In recent past small increments ofwealth were transferred to a largenumber of people.

In the near term large increments ofwealth will be created by a smallnumber of people who have faith.

ForecastForecast


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ForecastForecast

Change is Inevitable

Struggle is Optional

Stop struggling

2008 Is A Terrific TimeTo Buy U.S. Lodging

Assets!

What Should One Do If


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I want to buy a property?

Look over the menu.

Hire professionals with the best information.

Dont be shy. Intercept the bottom.

Be creative. Every part of a cycle offers valueenhancement opportunities.



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I need to refinance my property?

With interest rates as low as they are, itswrong not to borrow, if you can.

Be creative.

Seller financing

1031 Exchange

Club Deals

Quote Worth Considering


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You cannot change the

direction of the wind, butyou can adjust yoursails. - Jonathan Swift

Quote Worth Considering

Closing Thoughts


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Closing Thoughts

During the past several years, the U.S. hotel industryhas experienced record revenues and profits. Worstcase scenario, if either or both decline in the near

future, it will be experienced off of all time highs; theindustry has been and will continue to be profitable. Incontrast, during the early 1990's the US hotel industrywas losing millions of dollars a year

Foreign capital, led by sovereign wealth funds is eagerlyscouring the U.S. landscape for deal opportunities. TheU.S. has and will continue to represent the safest andmost stable place on the planet to invest in. On a perpound basis, U.S. hotel real estate prices are relativelyinexpensive and well positioned to provide superior riskadjusted returns when compared with other worldwideinvestment opportunities

Healthy growth in emerging market economies has beenand will continue to be fueled by overseas demand forAmerican goods, products, services, and technology,which in part will be a main engine of a growing U.S.economy. Long term U.S. GDP growth bodes well forthe hotel industry

Th U S H t l I t t


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Daniel H. Lesser

Senior Managing Director Industry Leader

Hospitality & Gaming Group

CB Richard Ellis, Inc.

One Penn Plaza, Suite 1835

New York, NY 10119

Phone: 212.207.6064

Fax: 212.207.6069

Email: [email protected]

The U.S. Hotel InvestmentMarket: The Glass Is Half Full

Presented to:

JMBMs 18th Annual

Meet the Money

Conference
http://upload.wikimedia.org/wikipedia/commons/1/11/Glass-of-water.jpg

Hospitality Lawyer on State of the Hotel Industry - Dan Lesser at JMBM's Meet the Money 2008

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