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Solutions for Troubled Hotel Assets

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Solutions for Troubled Hotel Assets
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Overview
• Assess magnitude of distress in U.S. hotel market
• Analyze impact on hotel valuations
• Provide case study of a turnaround effort
• Size up prospects for loan modifications vs. foreclosure
• Suggest do’s and don’ts for borrowers
• Discuss outlook for moribund property sales market
• Identify change agents to stem tide of distress
• Outline lessons learned from ―great recession‖
• Q&A session
Today’s Panel
Steve Van Mark Elliott
President and CEO Sr. Managing Director
Prism Hotels & Resorts Hodges Ward Elliott

Michael E. Feldman Stephen Rushmore

Partner and Co-Chair, President & Founder
Lodging & Gaming Practice Group HVS International
Proskauer Rose LLP

Stephen Peca
Director, Senior Credit Consultant
Moody’s Analytics
 Question 1

Can you quantify the volume of troubled

loans or distressed properties in the U.S.
hotel market today and discuss to what
extent this problem will diminish or grow
over the next year?

Steve Van
President and CEO
Prism Hotels & Resorts
Big ADR Changes Fuel NOI Swings
Quantification
 50,000 hotel loans in US
 NOI down 39.1%
 11.4% default = more than 5,000
 Estimates 25% to 100%= 12,500 plus
 Maturity volume of loans: 2010 and 11
 No loans today
 Question 2

How widespread is the level of distress

in the hotel marketplace and how many
assets will end up as bank-owned REO
properties?

Mark Elliott
Sr. Managing Director
Hodges Ward Elliott
 U.S. Overview
Distress Dominates the Marketplace
title here

Source: Real Capital Analytics

 U.S. Overview
Distress by Niche and Market
title here

Source: Real Capital Analytics

 U.S. Overview
Hotels = 16% of all distressed assets and it’s climbing rapidly
title here

Source: Real Capital Analytics

Elasticity of Value
title here
Estimated impaired hotel debt (billions)

CMBS Bank Life Co Other Total

2006 $22.4 $10.2 $5.8 $10.2 $48.7

2007 $30.0 $16.4 $7.9 $22.9 $77.1

2008 $0.2 $3.8 $1.7 $5.0 $10.8

Total $52.6 $30.4 $15.4 $38.1 $136.6

Available Equity $11.4

Minimum Capital Gap Amount $125.2

Source: MBA; HODGES WARD ELLIOTT

 Question 3

Are there any emerging patterns to the

distress situation? Are there certain hotel
segments and/or owners that are proving
to be particularly vulnerable amid this
cyclical downturn?

Stephen Peca
Director, Senior Credit Consultant
Moody’s Analytics
 Emerging Patterns in Distress Situations

»Why the distress? – Perhaps stating the obvious

»Particularly vulnerable segments
»U.S. hotels are headed back to 2004-2005 RevPar levels

Stephen P. Peca
CPA, MRICS
Senior Credit Consultant
Moody’s Analytics Training
Moody's RevPAR Index by Chain Scale, 1998-2008 Moody's RevPAR Index
Among Top 25 US Metro Areas, Index to 1998
Budget Economy Midprice Upscale Luxury
MOODY’S ANALYTICS
Revenues per Available Room, Index to 1998

120
Lowest Revenue per Available Room Index • Strategic solutions
Detroit 98
for measuring and
110
managing risk
New Orleans 100
• Best practices
100 Dallas 101 in credit, economics
Highest Revenue per Available Room Index and financial risk
90
Oahu, Hawaii 156 management
Miami 160
• Multidisciplinary
80 approaches
Anaheim-Santa Ana 163
to compete in an
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Moody's Investors Service and Smith Travel Research, April 2009.
evolving
marketplace

SOLUTIONS FOR TROUBLED HOTEL ASSETS

AUGUST 26, 2009
 Question 4

How are appraisers and investors in

today’s marketplace valuing hotels?

Stephen Rushmore
President & Founder
HVS International
 Valuation Challenges

• Very few transaction comparables

• Difficult to obtain acquisition financing
o Low leverage
o Higher interest rates
o Lack of debt capital
• Unknown economic recovery timetable
• Market vs. Liquidation value concept

© 2009 HVS
17
 Market vs. Liquidation Value
Market Value
Liquidation Value
• Willing Seller • Unwilling Seller – facing
foreclosure/bankruptcy
• Neither Buyer nor • Seller under extreme
Seller under pressure pressure to sell
to buy or sell
• Sufficient time to • Limited time to
expose the hotel to all adequately market and
market participants sell hotel
o Current adequate o Inadequate marketing
marketing time: 1-2 time: less than 1 year
years • Discount 20-50% below
market value
© 2009 HVS
18
 Valuation
Present
Net Income Total Cash Worth of
Available for Total Annual Plus: Refi/Sales Flow to $1 at Discounted
Year Debt Service Debt Service Proceeds Equity 19% Cash Flow
2009 $6,675 $3,225 $3,450 0.8403 $2,988
2010 $5,556 $3,225 $2,331 0.7062 $1,646
2011 $5,181 $3,225 $1,956 0.5934 $1,161
2012 $5,728 $3,225 $41,104 $43,606 0.4987 $21,745
2013 $7,210 $6,442 $768 0.4195 $322
2014 $9,433 $6,442 $2,991 0.3521 $1,053
2015 $11,593 $6,442 $5,498 0.2960 $1,524
2016 $11,940 $6,442 $5,856 0.2487 $1,367
2017 $12,298 $6,442 $6,225 0.2090 $1,224
2018 $12,667 $6,442 $60,271 $66,496 0.1756 $11,676
Value of Equity
Component $44,619
Plus: Value of Initial
Mortgage $36,369
Total Property Value $80,998

Source: HVS

© 2009 HVS
19
 Question 5

How far have hotel asset values fallen

since their peak, and how much further
are they likely to drop?

Stephen Rushmore
President & Founder
HVS International
 Value Trend for a Typical U.S. Hotel
1987 1988 1989 1990 1991 1992
Value Per Room $37,000 $37,000 $38,000 $32,000 $27,000 $30,000
Percent Change 0.0% 2.7% -15.8% -15.6% 11.1%
Per-Room Change $0 $1,000 -$6,000 -$5,000 $3,000
1993 1994 1995 1996 1997 1998
Value Per Room $33,000 $37,000 $45,000 $50,000 $59,000 $60,000
Percent Change 10.0% 12.1% 21.6% 11.1% 18.0% 1.7%
Per-Room Change $3,000 $4,000 $8,000 $5,000 $9,000 $1,000
1999 2000 2001 2002 2003 2004
Value Per Room $61,000 $69,000 $52,000 $52,000 $51,000 $65,000
Percent Change 1.7% 13.1% -24.6% 0.0% -1.9% 27.5%
Per-Room Change $1,000 $8,000 -$17,000 $0 -$1,000 $14,000
2005 2006 2007 2008 2009 2010
Value Per Room $82,000 $100,000 $95,000 $81,000 $55,000 $50,000
Percent Change 26.2% 22.0% -5.0% -14.7% -32.1% -9.2%
Per-Room Change $17,000 $18,000 -$5,000 -$14,000 -$26,000 -$5,000
2011 2012 2013 2014 2015
Value Per Room $57,000 $75,000 $93,000 $103,000 $112,000
Percent Change 14.0% 31.6% 24.0% 10.8% 8.6%
Per-Room Change $7,000 $18,000 $18,000 $10,000 $9,000

Source: HVS
© 2009 HVS
21
 Question 6

Can you discuss how inflationary

pressures on room rates will assist
hoteliers during the recovery?

Stephen Rushmore
President & Founder
HVS International
 Historical Change of Rate

Only two years where

rate declined

Source: HVS and

STR
© 2009 HVS
23
 Historical Change of Rate & CPI

Source: HVS and

STR
© 2009 HVS
24
 Question 7
REMIC Hotel Management, a division of
Prism Hotels & Resorts, has completed
175 distressed hotel assignments for
lenders and CMBS servicers. Can you
walk us through a typical assignment?
How troubled is the hotel by the time
you receive the assignment?

Steve Van
President and CEO
Prism Hotels & Resorts
Distressed Hotel Life Cycle
 Transferred into Special Servicing
 Special Servicer decides to take back
 Receiver
◦ Agreed
◦ Contested
 Takeover management
◦ First day: control cash, life safety, employees,
franchisor
◦ Begin turn around
 Operate hotel
 Sell hotel
 Question 8

If a mortgage on a hotel was originated

as a CMBS loan as opposed to a whole
loan, does that pose any special
problems when trying to resolve a
distress situation?

Steve Van
President and CEO
Prism Hotels & Resorts
CMBS v Whole Loan
 REMIC Rules  Loan Agreement
◦ No reposition  Strength of lender
 Pooling and Servicing
Agreement  FDIC?
 B piece
 Question 9
As a seasoned attorney who has
counseled owners, developers,
operators and banks on loan workouts
and restructurings, do you believe the
lion’s share of troubled mortgages today
will be successfully modified or will
these properties end up in foreclosure?

Michael E. Feldman
Partner and Co-Chair,
Lodging & Gaming Practice Group
Proskauer Rose LLP
Solutions for Troubled Hotel Assets
 Loan modification or foreclosure
— Are 1990-91 and the RTC guidelines applicable to 2009, 2010
and 2011?
— Date of financing – 2005 and beyond
— Availability of refinancing
— New capital
 Question 10
Can you provide a case study of a
loan workout, highlighting the
problem and solution, which
illustrates the challenges facing
hotel borrowers and lenders today?

Michael E. Feldman
Partner and Co-Chair,
Lodging & Gaming Practice Group
Proskauer Rose LLP
Solutions for Troubled Hotel Assets
 Workouts
— Very few at present
— Banks are generally holding off
 Banks reluctant to take further write-downs
— Timing
— Additional equity or recourse loans
 Question 11

If you were to compile a list of do’s and

don’ts for borrowers seeking a loan
modification from their hotel lender,
what points would be at the top of your
list?

Michael E. Feldman
Partner and Co-Chair,
Lodging & Gaming Practice Group
Proskauer Rose LLP
Solutions for Troubled Hotel Assets
 Do’s and Dont’s
— Do’s
 Be upfront with your lender
 Provide all requested information
 Diligently try to refinance maturing loans
 Be flexible
— Dont’s
 Bankruptcy is likely not the ultimate weapon
— Consider all aspects, including personal guarantees
— Mixed-use hotel projects
 Don’t forget the do’s
 Question 12

Are we likely to see M&A activity heat

up among REITs and other large
publicly traded hotel companies in the
near term, and if so what will be the
driving factors?

Michael E. Feldman
Partner and Co-Chair,
Lodging & Gaming Practice Group
Proskauer Rose LLP
Solutions for Troubled Hotel Assets
 M&A Activity
— Buyer-seller-bid-ask must narrow
— Portfolio purchases
 Restrictions on competitively flagged properties
 Players back in the market
— Sovereign wealth funds
— Private equity funds
— Available debt
 Question 13

In the face of declining real estate

fundamentals that may
get worse before they get better, should
hotel owners under financial pressure
sell now, or wait a year?

Mark Elliott
Sr. Managing Director
Hodges Ward Elliott
 U.S. Overview
title ishere
Pricing pressured by pending operating improvements and revenue increases

Source: Real Capital Analytics

 U.S. Overview
title sales
Hotel hereare dwarfed by the value of properties listed
To put recent volume in context, the $1.2b of sales in the first six months of
2009 compares to $4.7b averaged each month in 2006

Source: Real Capital Analytics

 Current Value Trends
titleready,
The here unwilling, and able seller premium

Market Value Forced Value Discount

.700

.600

.500

.400

.300

.200

.100

.000
2007 2008 2009 2010 2011 2012 2013 2014

Source: HODGES WARD ELLIOTT

 Question 14

The property sales market for the past

year could be best described as
―moribund‖. What sequence of events
needs to occur before hotel sales
activity begins to accelerate?

Mark Elliott
Sr. Managing Director
Hodges Ward Elliott
 Where are we in the cycle?
titleone
When here
door shuts, another opens...

The last cycle ended in 2008 by

demand disruption, not
Transaction Velocity
overbuilding. The next cycle Hotel Sale Transactions 1990-2008
should experience stronger $20,000,000,000
RevPAR growth. Sell
$18,000,000,000

Absolute prices could increase by $16,000,000,000

as much as 50% before the end of $14,000,000,000

the new cycle.
Transaction Volume ($)

$12,000,000,000
Sell
The market is in a similar position $10,000,000,000

to 1993 and 2002, which were the $8,000,000,000

best buying years.
$6,000,000,000
Buy
Buy
The new cycle should last 5 to 7 $4,000,000,000

years until 2015 with perhaps the $2,000,000,000

greatest RevPAR growth in 30
years due to restricted new supply $-
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

growth and
tight credit.

Source: HODGES WARD ELLIOTT

A Timely
title here Case Study...
Analyst predicts opportunities for Host Hotels
Associated Press, 06.30.09

Host Hotels & Resorts Inc. is building a war chest for potential distressed acquisitions despite the
likelihood of steep second-quarter revenue declines.

• Deutsche Bank expects Host to report a 22.7 percent drop in Q2’09 RevPAR.
• Cost cuts are likely to beat expectations while cost savings will become more difficult in the
second half of the year.
• Despite the gloomy forecast, Host is likely to look to buy properties at distressed prices.

“In our view, (Host) will be increasingly well positioned to take advantage of
distressed one-off situations… so we expect (Host) to continue to build dry
powder (for buying opportunities”). - Deutsche Bank
 Question 15

When do you anticipate this wave of

distress in the hotel sector to peak and
what will be the critical factors that will
help stem the tide?

Stephen Peca
Director, Senior Credit Consultant
Moody’s Analytics
Indicators of Change

»Improvement of the economy

»Increased debt capital flow
»Restoration of securities markets

Stephen P. Peca
CPA, MRICS
Average Occupancy by Chain Scale, 2007-2013 Forecast
Senior Credit Consultant
Budget Economy Midprice Upscale Luxury Moody’s Analytics Training

80%
MOODY’S ANALYTICS
• Strategic solutions
70% for measuring and
managing risk
60%
• Best practices
in credit, economics
and financial risk
50% management
• Multidisciplinary
40% approaches
2007 2008 2009 2010 2011 2012 2013 to compete in an
evolving
Source: Moody's Analytics and Smith Travel Research, April 2009.
marketplace

SOLUTIONS FOR TROUBLED HOTEL ASSETS

AUGUST 26, 2009
 Question 16

What lessons, if any, have the recession

and credit crunch taught lenders and
borrowers alike when it comes to
underwriting standards for hotel loans?

Stephen Peca
Director, Senior Credit Consultant
Moody’s Analytics
Lessons Learned from the Current
Environment
»Do not overlook the basics
- Use conservative assumptions
- Apply more break-even scenarios
»Do not get caught up in the ―irrational exuberance‖
- Focus more on major markets Stephen P. Peca
CPA, MRICS
- Concentrate on operational flexibility Senior Credit Consultant
Moody’s Analytics Training

Global Net Margin: Hotels & Gaming, 1997- 2013 Forecast

MOODY’S ANALYTICS
20% • Strategic solutions
Forecast for measuring and
10%
managing risk
0% • Best practices
in credit, economics
-10% and financial risk
management
• Multidisciplinary
-20%

-30% approaches
to compete in an
1997Q1

1998Q1

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1
evolving
marketplace
Source: Moody's Analytics Economy.com, Industry Forecasts Aug 2009.

SOLUTIONS FOR TROUBLED HOTEL ASSETS

AUGUST 26, 2009
 Question & Answer Session
Please take this time to pose questions to any of our panel.

Steve Van Mark Elliott

President and CEO Sr. Managing Director
Prism Hotels & Resorts Hodges Ward Elliott

Michael E. Feldman Stephen Rushmore

Partner and Co-Chair, President & Founder
Lodging & Gaming Practice Group HVS International
Proskauer Rose LLP

Stephen Peca
Director, Senior Credit Consultant
Moody’s Analytics
 Thank you for attending!
Solutions for Troubled Hotel Assets