Real Estate Research

May 4, 2010

Trends In Hotel Capital

Markets

David Loeb
Managing Director, Senior Real Estate
and Hotel Research Analyst
Robert W. Baird & Co.
dloeb@rwbaird.com
414.765.7063

Please refer to Appendix - Important

Disclosures and Analyst Certification
on page 33.
 Today’s Topics

•Hotel debt capital markets far from healed

•Hotel transaction market slowly improving

•Public equity market happily chasing hotels

•Conclusions

•Questions

Baird Real Estate Research | 2

Real Estate Debt Capital
Markets
 Lots of Debt Outstanding
Commercial and Multifamily Debt Outstanding - Year-End 2009

$3.38 Trillion of Outstanding Commercial/Multuifamily Mortgages

Agency- and GSE-backed

mortgage pools
5%
Savings institutions
6%
Government-sponsored
enterprises
7%

Life insurance companies

10% Commercial banking
49%

CMBS, CDO and other

ABS issues
23%

Source: Federal Reserve

Baird Real Estate Research | 4

 Refinancing Will Be Hot Topic for Years

CMBS Issuance 1991-2009 (billions)

350

300

250

200
Non-US CMBS Issuance
150 US CMBS Issuance

100

50

0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Bloomberg

Baird Real Estate Research | 5

 Significant Maturities Across
Property Types
CMBS Maturities 2010-2017 (m illions)
140,000

120,000

100,000 Retail
Residential
80,000
Other

60,000 Office
N/A
40,000 Industrial
Hotel
20,000

0
2010 2011 2012 2013 2014 2015 2016 2017

Source: Bloomberg

Baird Real Estate Research | 6

 Another Maturity Wave Lies Ahead for
HotelsHote l CMBS Loan Maturitie s By Ye ar

$20

$18

$16

$14
n
ilo
s b
($

$12
)

$10
Current
$8 Delinquent

$6

$4

$2
b
id
lctp
anC
u
re

$0
1
0
2

1
0
2

1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

d
n
yo
e
b
2
d
n
a
9
1
0
Source: Realpoint

Baird Real Estate Research | 7

 Delinquency rates getting worse
Hotel loan delinquency rate by month (as % of total CMBS hotel loans)

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

Source: Realpoint

Baird Real Estate Research | 8

 Spreads on Existing Debt are Narrowing
CMBS Spreads

2,000

1,800

1,600

1,400

1,200

1,000
Super Senior AAA
800 AAA mezz
600
Y
u
T
to
y
s
0
1d
aS
p
re

400

200

Source: Bloomberg

Baird Real Estate Research | 9

 The Problem: Extend and Pretend
Worked
•Many lenders opted to work with borrowers, ignore
delinquencies, or offer more time

•Bet has been that cycle will turn up, increasing debt service
coverage and collateral value

•Smaller banks under increasing regulatory pressure to deal

with bad loans

•Still WAY too much debt coming due relative to available new
debt

•Additional equity is the ultimate answer—property and entity

level

Baird Real Estate Research | 10

Transaction Markets
 Hotel Transactions Are Recovering
United States Hotel Transactions

50.0 35
46.0
30
45.0 31
30 30 31 30
40.0 28
24 29
35.0 25 25
24 24 31.0
23 23
30.0 21 21
19 20
19
25.0
16 21.5
16 15 15
20.0
15.0
15.0 9.8 10
10.1
10.0 8.0 8.0
5.1 5.1 5.0 5.1 6.0
4.0 5
3.5
m

5.0 2.0 2.5 2.3 3.0 3.0

b V
lu
tio
nT

2.0
($
)e c
s
ra

0
)d
($p
g
ic
y
kA
ra
e
v
0.0 0
1
0
9
9
1
2
9
1
3
9
1
4
9
1
5
9
1
6
9
1
7
9
1
8
9
1
9
1
0
2
1
0
2
0
2
3
0
2
4
0
2
5
0
2
6
0
2
7
0
2
8
0
2
9
0
2
F
1
0
2
Transaction volume Per key

Source: Jones Lang LaSalle Hotels

Baird Real Estate Research | 12

 Recent Hotel Sales Utilized Public Capital
Recent Hotel Transactions

Price
Date Hotel Room s Per key Com m ents
($000s)
McSam to Hersha Hospitality. Reported 8.2% cap on
Feb 2010 Holiday Inn Express - Times Square 210 $56,500 $269
2010
McSam to Hersha Hospitality. Reported 8.2% cap on
Feb 2010 Candlew ood Suites-Times Square 188 $51,000 $271
2010
McSam to Hersha Hospitality. Reported 8.2% cap on
Feb 2010 Hampton Inn-Times Square 184 $56,000 $304
2010
Whitehall/GEM sold to LHO for 15.7x '09 EBITDA (ex-
Feb 2010 Sofitel Washington DC 237 $95,000 $401
inauguration)
Starw ood sold - w ill lose W flag- convert to St. Giles
March 2010 W New York - The Court/Tuscany 328 $78,000 $238
Hotels

March 2010 Ambassador East Hotel, Chicago 285 $25,000 $88 Ian Shrager bought from Peter Dumon and David Bossy

March 2010 Marriott - Houston Energy Corridor 206 $50,750 $246 Apple 9, bought from MWE Houston Property LP

March 2010 Raffles L'Ermitage - Berverly Hills 119 $44,800 $376 Viceroy bought from Colony

March 2010 Four Seasons San Francisco 277 $107,500 $388 Westbrook bought 67% interest from Millennium Partners

March 2010 Four Seasons Miami 221 $60,000 $271 Westbrook bought 67% interest from Millennium Partners

March 2010 Ritz-Carlton Boston 193 $37,500 $194 Westbrook bought 67% interest from Millennium Partners

Source: Baird Research. Highlighted transactions involved public company purchasing the hotels

Baird Real Estate Research | 13

 Recent Hotel Sales Utilized Public Capital
Recent Hotel Transactions

Price
Date Hotel Room s Per key Com m ents
($000s)

March 2010 Hyatt Boston 498 $112,000 $225 Hyatt sold to Chesapeake, reported to be 7% cap TTM

March 2010 Sheraton, Pleasanton, CA 170 $12,300 $72 Mesa West Capital sold

Purchased by Shenzhen New World in f oreclosure

March 2010 Marriott Dow ntow n Los Angeles 469 $60,000 $128
previously Manco Capital. $13 mm renovation scheduled
Hampton Inn and Suites, Beale Street
March 2010 144 $20,000 $139 Fairw ood Hospitality acquired
Memphis

March 2010 Tow nePlace Suites, Panama City, FL 103 $10,600 $103 Apple 9 acquired

Citi took over w ith mezz in late '09-sold to Washington

April 2010 St. Regis Monarch Beach 400 $230,000 $575 Holdings. Cancelled $230 mm first, now reported to have
$165 mm first and $40 mm mezz

Marriott and Independent in Rochester, 9.6x 2009 EBITDA. Sunstone bought these hotels from
April 2010 653 $83,000 $127
MN, Courtyard LAX their lender after tried to w alk aw ay

RLJ Development sold to Chatham Lodging Trust. Will get

April 2010 Portfolio of 6 Homew ood Suites 813 $73,500 $90
$11 million capex.
Embassy Suites, Tampa Convention
April 2010 360 $77,000 $214 RLJ Development purchased from Whiteco Industries
Center
Hilton Checkers, Los Angeles, Courtyard Chesapeake purchased from Tarsadia. Baird estimates
May 2010 341 $71,000 $208
Anaheim 7.25% blended cap

Source: Baird Research. Highlighted transactions involved public company purchasing the hotels

Baird Real Estate Research | 14

 Public Companies Play Lead Role
• 28 institutional deals and 6,500 rooms uncovered by Baird
Research so far in 2010
• $1.34 billion of assets
• Public companies have emerged as key capital providers,
with ability to recapitalize larger properties
Summary of YTD Hotel Deal Flow

Ownership of Existing Hotel Number of Hotels Dollar Amount

Rooms

Public
4%

Private
Public
40% Private 47%
Public 53%
60%

Private
96%
Approximately 4.8 million U.S. hotel rooms

Source: Baird Research

Baird Real Estate Research | 15

 Transaction Case Study: Hersha
Deal Specifics:
• Acquired three limited service hotels in Times Square area on 39th between
8th and 9th .
• Paid $163.5 million for 582 rooms ($281k/key)
• Company estimates 2010E cap rate of 8.3%

Deal Financing:
• Funded primarily with newly issued equity
• Completed TWO equity offerings totaling $272 million
• Deals announced, but not closed, prior to first equity raise
• Both equity offerings were well over-subscribed
• Hotels owned with no property debt today

Baird Real Estate Research | 16

 Transaction Case Study: LaSalle
Deal Specifics:
• Acquired Sofitel Washington D.C
• Paid $95 million for 237 rooms ($401k/key)
• Baird estimated cap rate of 5.7% on 2009 EBITDA (ex-inauguration)

Deal Financing:
• Funded with newly sold equity AFTER the deal was announced and closed
• Today hotel is owned without property debt

Baird Real Estate Research | 17

 Transaction Case Study: Sunstone
Deal Specifics:
• Acquired 3 hotels: Marriott & Independent in Rochester, MN, Courtyard LAX
• Paid $83 million for 635 rooms ($127k/key)
• Baird estimated cap rate of 8.75% on 2009 EBITDA

Deal Financing:
• “Acquired” by paying release fee as part of returning large portfolio from
lender; Sunstone just kept ownership, while handing keys on remaining asset
to lender
• Funded with excess cash on hand as Sunstone has no credit facility
• Today hotels owned without property debt

Baird Real Estate Research | 18

 The Solution: Become a Seller

•Not that much on the market and lots of buyers

looking
•Cap rates are down, prices are up
•Public companies have a lower cost of capital

Lesson from 2007: It pays to swim

against the tide, so take your profits
when others see more value than you do

Baird Real Estate Research | 19

Public Equity Markets
 Don’t Look to Private Equity

Real Estate Private Equity Fund Raising: Capital Raising

45
39.5 39.5
40 37.3

35
31.6 31.8
29.8
30

25 23
19.8
20
16.7
15
10.3
n
o
bitlR
d
($
e
s C
p
a

10
)

5 2.5

0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09

Source: Preqin

Baird Real Estate Research | 21

 PE Raising Less than Targeting

Real Estate Private Equity Fund Raising: Final Closing as a Percentage of Target

40%

35% 34% 82% of 2009 funds on the road fell short of

31% fund raising goals compared to only 20% in
30%
2007
27%
25%
25% 24%

20% 20% 2007

20% 19%
18% 2008
15% 2009
15% 13%
12%
10%
10% 8% 8%
n
o
bitlR
d
($
)e
s C
p
a

5% 4% 4% 4%
3%
2%
0%
0%
Below 49% 50% - 70% 80% - 90% 100% 101% - 120% 121%- 150% Above 150%

Source: Preqin

Baird Real Estate Research | 22

 Hotel Stocks Up Sharply As
Investors Seek Recovery Investment
Vehicles
Baird Hospitality and Major Stock Indices

Since 2000 Since 2009

4,500
2,500

4,000

3,500 2,000

3,000

1,500
2,500

2,000

1,000

1,500

1,000
500

500

0
0
J -0 0
n -0 1
n -0 2
n -0 3
n -0 4
n -0 5
n -0 6
n -0 7
n -0 8
n -0 9
n -1 0
l -0 0
l -0 1
l -0 2
l -0 3
l -0 4
l -0 5
l -0 6
l -0 7
l -08
l -0
9

n -0
9

n -1
0
l -0
9
r -0
9

ct -0
9
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju

O
n
a
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja

Ju
A
p
Ja

Ja
Hospitality Index S&P 500 RMZ Hospitality Index S&P 500 RMZ

Source: Baird Research, SNL Financial

Baird Real Estate Research | 23

 Public Markets Discounting the Recovery
• Public market EBITDA multiples are at cyclical peaks
• Private market cap rates are at cyclical lows

All hotel stock buyers appear to be discounting a strong recovery

Historical Hotel REIT EBITDA Multiples for Select Com panies

20.0

18.0
16.9
LHO
16.0
HST

14.0 DRH
AHT
12.0 11.6 11.3 HT
10.4
AVERAGE
M
D
A
ltip
urw
B
Y
d
E
IT
e
ao
F

10.0

8.0
2007 2008 2009 2010

Source: Baird Research

Baird Real Estate Research | 24

 Public Companies Actively Raising Equity
...
Public Hote l Equity Raised Since 2008

Com pletion Equity Com pletion Equity

Issuer Date Proceeds ($000s) Issuer Date Proceeds ($000s)
Hersha Hospitality Trust 05/13/08 65,340 Sunstone Hotel Investors, Inc. 10/16/09 165,600
Apple REIT Eight, Inc. 06/30/08 950,000 Pebblebrook Hotel Trust 12/08/09 402,500
Orient-Express Hotels Ltd. 11/14/08 55,185 Pebblebrook Hotel Trust 12/08/09 2,700
DiamondRock Hospitality Company 04/14/09 86,451 DiamondRock Hospitality Company 12/31/09 49,383
LaSalle Hotel Properties 04/23/09 124,861 Host Hotels & Resorts, Inc. 12/31/09 157,350
Host Hotels & Resorts, Inc. 04/24/09 499,950 Orient-Express Hotels Ltd. 01/12/10 138,000
Orient-Express Hotels Ltd. 04/28/09 148,781 Hersha Hospitality Trust 01/14/10 155,250
Sunstone Hotel Investors, Inc. 05/21/09 103,500 MHI Hospitality Corporation 01/15/10 3,412
LaSalle Hotel Properties 06/10/09 147,500 Chesapeake Lodging Trust 01/21/10 151,717
Hospitality Properties Trust 06/18/09 231,438 Chesapeake Lodging Trust 01/21/10 3,000
Hersha Hospitality Trust 08/04/09 14,250 Chesapeake Lodging Trust 01/21/10 25,517
Hospitality Properties Trust 08/11/09 158,700 LaSalle Hotel Properties 03/02/10 113,821
DiamondRock Hospitality Company 09/11/09 53,504 Hersha Hospitality Trust 03/19/10 117,300
Host Hotels & Resorts, Inc. 09/11/09 130,000 Chatham Lodging Trust 04/15/10 172,500
DiamondRock Hospitality Company 10/08/09 21,495 Chatham Lodging Trust 04/15/10 10,000

Total $4,459,005
Note: Hyatt IPO raised an additional $1.1 billion from public hotel investors, but was not new equity

Source: SNL Financial and Baird Research

Baird Real Estate Research | 25

 . . . and Using Proceeds for De-
leveraging
• The new normal is expected to be much lower financial leverage
• Today’s debt to EBITDA of 5.3x looks like 3.8x on a 2007 EBITDA basis, when EBITDA was roughly 40%
higher than today
• Hotel companies are deleveraging by unencumbering specific assets or through purchasing with 100% cash

Historical Hotel REIT Leverage: Debt /EBITDA for Select Com panies

8.0

7.0 6.6

6.0 LHO
5.3
HST
5.0 4.5
4.3 DRH

4.0 HT
M
A
lip
uB D
b

AVERAGE
t/E
IT e

3.0

2.0
2007 2008 2009 2010

Source: Baird Research

Baird Real Estate Research | 26

 Public Markets Offer Solution to Private
Market Leverage

• Rescue financing, 2010 (and beyond) edition

• Valuations quite attractive
• Large and small portfolios may seek public exit
• Opportunistic buyers looking for public capital
(blind pool IPOs)
• Now-private companies may seek public exit –
Hilton is best example of possible IPO, but there
could be a number of others
• Looming debt maturities can be catalyst, but
public valuation can create great outcomes

Baird Real Estate Research | 27

 “Blind Pool” IPOs
Public market investors becoming increasingly skeptical
•
Bar is being raised for each successive deal
•
Pristine corporate governance is a must
•
Differentiated business plan or credible “twist” required
•
Management reputation / track record is important
•
$767 million raised so far, another $525 million is trying
•

Public Hote l Equity Blind Pools, Near Blind Pools , Atte m pted Blind Pools, and Blind Pool Wanna Be

Com pletion Equity

Issue r Ticker Date Proceeds ($m il)

Com pleted
Pebblebrook Hotel Trust PEB 12/08/09 $405
Chesapeake Lodging Trust CHSP 01/21/10 $180
Chatham Lodging Trust CLDT 04/15/10 $182
$767
In registration
Pyramid Hotels and Resorts PYR 12/08/09 $275
Reunion Hotel Trust RBSC 01/21/10 $250

Source: Baird Research

Baird Real Estate Research | 28

 Conclusions
•Extend and pretend—So crazy, it just might work!
And has, so far

•Now could be a great time to sell assets

•Public equity investors are hungry for real

companies; too little stock to go around today, as
investors keep looking for more ways to invest in hotels

•By this time next year, expect 3-6 more public hotel
companies

Baird Real Estate Research | 29

Questions?
 To Get Our Research, Send Full Contact
Information to:

David Loeb
dloeb@rwbaird.com
414-765-7063

•Hospitality Monthly
•Industry and company research
•This presentation

Baird Real Estate Research | 31

 Baird Hospitality Real Estate Contacts

Research Investment Banking Trading

David Loeb Mark Decker, Sr. Mike Lanigan

dloeb@rwbaird.com mdeckersr@rwbaird.com mlanigan@rwbaird.com
414.765.7063 703.821.5760 414.298.5275

Andrew J. Wittmann Mark Decker, Jr. Jeff Goddard

awittmann@rwbaird.com mdeckerjr@rwbaird.com jgoddard@rwbaird.com
414.298.1898 703.821.5761 414.298.7792

Brian Jones Equity Capital Markets

bjones@rwbaird.com
650.424.9314
Rick Conklin
Justin Glasgow rconklin@rwbaird.com
jglasgow@rwbaird.com 312.609.5480
703.821.5763

Baird Real Estate Research | 32

 Appendix – Important
Disclosures and Analyst
Certification
Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related compensation from the
company or companies mentioned in this report within the next three months.

Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity
market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12
months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market
over the next 12 months.

Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis
on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of
revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety.
Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and
earnings. H - Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of
risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of
earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high
degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth
strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges.

Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of
12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined
by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of
methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples,
peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all
securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research
report.
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Outperform/Buy, 48% rated Neutral/Hold and 3% rated Underperform/Sell. Within these rating categories, 11% of
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