Meet the Money 2009

Hotel Values and Cap Rates

Suzanne Mellen, MAI, CRE, FRICS, ISHC

Managing Director
HVS San Francisco and Las Vegas
smellen@hvs.com
Office: 415-268-0351

© 2009 HVS
1
Major Sales Transactions (> $10 Million)

Number Avg. Price

Year of Hotels Per Room % Change
1990 130 $136,000
1991 56 -56.9 % 96,000 -29.4 %
1992 70 25.0 82,000 -14.6
1993 53 -24.3 93,000 13.4
1994 108 103.8 81,000 -12.9
1995 147 36.1 80,000 -1.2
1996 227 54.4 106,000 32.5
1997 280 23.3 117,000 10.4
1998 241 -13.9 136,000 16.2
1999 128 -46.9 148,000 8.8
2000 150 17.2 116,000 -21.6
2001 105 -30.0 146,000 25.9
2002 106 1.0 111,581 -23.6
2003 142 34.0 132,944 19.1
2004 189 33.1 136,056 2.3
2005 331 75.1 168,225 23.6
2006 270 -18.4 201,935 20.0
2007 252 -6.7 192,566 -4.6
2008 114 -54.8 176,067 -8.6

YTD 4/30/09 45 N/A 183,135 N/A

YTD 4/30/10 5 88.9 % 265,900 45.2 %

2
 Major Hotel Sales Transactions

350 $300,000

300 $250,000
250
$200,000
200
$150,000
150
$100,000
100

50 $50,000

0 $0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07

YT 4 /3 08
ar

4/ 9

0
D 0 /0

/1
Ye
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20
20

D 20

30
YT
Number Avg. Price

© 2009 HVS
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Sales Not Good Indicator of Value

• Not enough recent transactions to provide guidance

on price per room or cap rates
• When transactions do pick up they will require full
investigation regarding terms of the deal and seller
financing
• Sales transactions will help to set new valuation
parameters, but will be difficult to use for individual
property valuations, as always.
• Jump in average sales price per room through April
2009 due to three high per room sales, including the
Hyatt in Boston and Treasure Island in Las Vegas – a
misleading trend.

4
 3r
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Q

5.0
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© 2009 HVS
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Regional Mall
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Full-Service Lodging
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PWC – Korpacz Investor Survey

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Cap Rate Com parison

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Suburban Office

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Apartment

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Investor Survey Data

• Investor survey data often lag the market and

do not provide a good basis for determining
capitalization or discount rates for hotel
valuation 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 high
they are going now
• Hotel cap rates remain above those for other
commercial real estate; risk premium likely to
increase after this recession.

6
 Cap Rates Derived from Key Operating and Balance Sheet
Data for Publicly Traded Hotel REITS - Last 12 Mos.

Based on Value as of 3/02/09

Net Debt as Net Inc./
a % of Enterprise Value Cap Rate As of Cap Rate As of Cap Rate As of
Enterprise Value (Current Cap Rate) September 9, 2008 September 7, 2007 May 9, 2007
Lodging REITs
HOST 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
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 Historical Cap Rates – Select Set of Full
Service Hotels
Cap Rate based on Cap Rate based on Free and Clear Equity
Year Historical NOI 1st Yr. Projected NOI Discount Rate Yield
1988 9.1 9.7 14.7 21.4
1989 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 21.4
1997 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
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Cap Rates Derived From Sales

• Cap rates were derived from hotels that sold at the

time that they were being appraised by HVS
• Cap rates reached an historic low in the 2004 through
2007 period
• Cap rates for full service hotels averaged 5% to 6% on
trailing twelve NOI, and 6% to 7% on projected 1st year
NOI
• Income being cap’d was at peak, resulting in
overinflated values
• Cap rate on forward looking NOI is now below rate on
historical NOI due to near term depressed income.

9
Capitalization and Discount Rates –
Select Set of Full Service Hotels
40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Free and Clear Discount Rate Equity Yield Cap Rate based on Historical NOI Cap Rate based on 1st Yr. Projected NOI

HVS San Francisco

© 2009 HVS
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© 2009 HVS
Rates
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Source: ACLI and HVS

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Hotel Mortgage Int. Rate

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

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Hotel Mortgage and T-Bill Rates

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Debt Component More Expensive and Less
Available

• Hotel mortgage interest rates for transactions over $10

million have risen dramatically
• 8% to double digit interest rates are being quoted at
extraordinarily 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 to
consummate a deal
• Underwriting standards are so stringent that many
deals may need to be on an all cash basis until the
credit markets and hotel cash flow normalizes

12
 U.S. CMBS Volume by Year

What will Total U.S. Issuance $ Percent

Year (+000) Change
replace the
1997 $36,979,700 --
CMBS debt that
provided so 1998 $74,331,700 102.0%

much liquidity to 1999 $56,571,100 -23.9%

the market? 2000 $46,894,400 -17.1%

2001 $67,149,900 43.2%

2002 $52,073,600 -22.5%

Can hotel values 2003 $77,848,100 49.5%

fully recover 2004 $93,216,400 19.7%
without a
2005 $168,734,500 81.0%
comparable
2006 $202,654,100 20.1%
replacement of
2007 $230,193,300 13.6%
debt capital?
2008 $12,146,000 -94.7%

Source: Commercial Mortgage Alert

© 2009 HVS
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 Sample Valuation - Forecast of Income and Expense

Historical Operating Results

2008/09 2009/10 2010/11 2011/12 Stabilized
Number of Rooms: 421 421 421 421 421
Occupancy: 63% 58% 62% 66% 68%
Average Rate: $172.00 $154.68 $159.01 $166.64 $176.64
RevPAR: $107.84 $89.71 $98.59 $109.98 $120.12
Days Open: 366 365 365 365 365
Occupied Rooms: 128,075 %Gross PAR POR 89,126 %Gross PAR POR 95,272 %Gross PAR POR 101,419 %Gross PAR POR 104,492 %Gross
REVENUE
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 26.7
Beverage 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 8.5
Telephone 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 0.1
Other 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 2.8
Total 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 25.7
Food & 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 69.0
Telephone 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 83.6
Other 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 41.9
DEPARTMENTAL 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 58.1
UNDISTRIBUTED OPERATING EXPENSES
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 6.4
Marketing 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 5.5
Franchise 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 3.7
Prop. 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 4.1
Utilities 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 3.3
Total 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
HOUSE PROFIT 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 35.1
Management 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 3.0
INCOME BEFORE FIXED 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 32.1
FIXED 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 3.0
Insurance 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 0.6
Reserve 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 4.0
Total 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.

© 2009 HVS
14
 Valuation of Sample Hotel at Market Peak (2007)

Valuation Input Value $96,830,000

Stabilized Year 3 (Say) 96,800,000
Inflation 3.0% Value per Room $230,000
Loan/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%

© 2009 HVS
15
 Value Based on Current More
Onerous Investment Parameters

Valuation Input Valuation Output

Stabilized Year 4 Value $56,600,000
Inflation 3% Value per Room $134,442
Loan/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% $25,471,574
Terminal Cap Rate 9.5% Mortgage Per Room $60,503
Transaction Costs 2.0% Annual Debt Service $2,565,000
Equity Yield 19.0% Debt Coverage Ratio -Yr.1 1.58

© 2009 HVS
16
 Change in Value at Current Rates

Investment Parameters and Resultant Values

% Change
Recent Peak Current Recent Peak
Value Available to Current
Valuation 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%

© 2009 HVS
17
Assumed Refinancing in Future Moderates
Value Loss

• Most hotel buyers that pay all cash or obtain

financing at a low LTV will anticipate
refinancing when cash flow recovers and debt
market 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 to
13.5% with an assumed refinancing
• It is anticipated that many hotels will require
four to six years to recover lost revenue and
NOI

18
 Stabilized Value – Normalized Lending

Value at end of stabilized year (year 4) based

on forward looking cash flow from year 5

Valuation Input Valuation Output

Stabilized Year 4 Value $81,700,000
Inflation 3% Value per Room $194,062
Loan/Value 70% Overall Discount Rate 11.9%
Amortization 25 Years Cap Rate - Historical NOI 9.0%
Term 10 Years Cap Rate - 1st Yr. NOI 9.3%
Interest Rate 7.5% Mortgage @ 70% $57,187,243
Terminal Cap Rate 9.5% Mortgage Per Room $135,837
Transaction Costs 2.0% Annual Debt Service $5,071,000
Equity Yield 19.0% Debt Coverage Ratio Yr.1 1.49

© 2009 HVS
19
 Refinancing Proceeds

Refinancing Based on Stabilized Value at End of Year 4

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

Stabilized Year Value $81,700,000

New Loan to Value Ratio 70.0%
New Mortgage $57,187,000
Less:
Outstanding Balance of Initial Mortgage 24,165,000
Refinancing Costs @ 1.5% 858,000
Refinancing Proceeds $32,164,000

© 2009 HVS
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 Reversion at End of Ten Year Holding Period

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% 1,901,000
Net Sales Proceeds (Say) $41,866,000

© 2009 HVS
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 Forecast of Total Cash Flow to Equity

Net Income Plus: Total

Available for Total Annual Refi / Sales Cash Flow
Year Debt Service Debt Service Proceeds to Equity

2009/10 $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 + = 3,192,000
2017/18 8,511,000 - 5,071,000 + = 3,440,000
2018/19 8,767,000 - 5,071,000 + 41,866,000 = 45,562,000

© 2009 HVS
22
 Cash Flow to Equity Plus Initial
Mortgage = Value
Net Income Present Worth of $1 Discounted
Year to Equity Factor at 19.0% Cash Flow

2009/10 $1,480,000 x 0.840325 = $1,244,000

2010/11 2,463,000 x 0.706146 = 1,739,000
2011/12 3,688,000 x 0.593392 = 2,188,000
2012/13 36,941,000 x 0.498642 = 18,420,000
2013/14 2,491,000 x 0.419021 = 1,044,000
2014/15 2,718,000 x 0.352114 = 957,000
2015/16 2,952,000 x 0.295890 = 873,000
2016/17 3,192,000 x 0.248644 = 794,000
2017/18 3,440,000 x 0.208942 = 719,000
2018/19 45,562,000 * x 0.175579 = 8,000,000
Value of Equity Component 35,978,000
Plus: Value of Initial Mortgage 25,472,000
Total Property Value 61,450,000
Rounded to: $61,500,000

10th year net income to equity of $3,696,000 plus sales proceeds of $41,866,000

© 2009 HVS
23
 Discount Rate Equating Cash Flow to Value

Discount Factor @ Discounted

Year Net Income 13.5% Cash Flow

2009/10 $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 = 2,715,729
2018/19 101,916,000 * * 0.28105 = 28,643,542

Estimated Market Value $61,454,054

(SAY) $61,500,000

© 2009 HVS
24
 DCR and Cash on Cash Return

Debt Cash on
Coverage Cash
Year Ratio Return

2009 1.58 4.8 %

2010 1.96 7.9
2011 2.44 11.8
2012 2.86 Infinite
2013 1.49 Infinite < DCR Reduced Upon
2014 1.54 Infinite Refinancing
2015 1.58 Infinite
2016 1.63 Infinite
2017 1.68 Infinite
2018 1.73 Infinite

© 2009 HVS
25
 Conclusion: Cap Rates Down in 2009 Due to Depressed
NOI, Overall Rates of Return Up, Values Down

Investment Parameters and Resultant Values

% Change Assumed % Change

Recent Peak Current Recent Peak Refinancing Peak to
Value 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 bps
Implied Cap Rate 7.6% 12.5% 490 bps 10.5% 290 bps
Derived Cap Rate:
Historical NOI 6.6% 10.7% 300 bps 9.9% 270 bps
1st Year Proj. NOI 6.8% 7.1% -40 bps 6.6% -110 bps

© 2009 HVS
26
 Suzanne R. Mellen, MAI, CRE, FRICS is the founding principal and Managing
Director of HVS - San Francisco. She also heads up the firm’s Gaming Services
Division, which specializes in the valuation and evaluation of gaming
properties, and HVS’ newest office in Las Vegas. Prior to establishing the San
Francisco office in 1985, Ms. Mellen was Director of Consulting and Valuation
Services for the firm in New York. Her professional experience includes
positions with Morgan Guaranty Trust, Laventhol & Horwath and Helmsley-
Spear and with Harley-Little Associates. She gained her operational experience
with Westin Hotels.
Suzanne R. Mellen, Biography
Ms. Mellen has a BS degree in Hotel Administration from Cornell University and
holds the following designations: MAI (Appraisal Institute), CRE (Counselors of
Real Estate), FRICS (Royal Institute of Chartered Surveyors) and ISHC
(International Society of Hospitality Consultants). She has been appraising
hotels 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.

© 2009 HVS
27
 HVS

HVS is a global services and consulting organization focused on

hotel, restaurant, shared ownership, gaming and leisure
industries. Since the launching of the firm in 1980, our clients
have relied on our specialized industry knowledge and expertise
for advice and services geared to enhancing economic returns
and asset value. Through a network of more than 20 offices
staffed by over 350 seasoned industry professionals, HVS offers a
wide scope of services that track the development and ownership
process.

© 2009 HVS
28
 Please call with any questions!

Thank You

© 2009 HVS
29