International Valuation Congress Consulting and Valuation to Hotel and Resort Industry Clients

International Valuation Congress Consulting and Valuation to Hotel and Resort Industry Clients Peggy Berg, ISHC, CPA The Highland Group www.highland-group.net

Peggy Berg ISHC CPA President, The Highland Group Manager, LLC, Northlake 3400 & Rosedale Enterprises

The Highland Group, Hotel Investment Advisors, Inc. Market studies Financial projections Valuation Litigation support Franchise advisory services Extended-stay and Corporate apartments

Hotel Consulting and Appraisal Services in Changing Times Through 2008 New development Pencil @ low occupancy (low interest rates) Strong room rate increases Uncritical lenders & developer clients Predictable expenses Low cap rates Many comps 2009-2012 REO and CYA Occupancy too low to pencil Rising interest rates Deteriorating room rates Frightened lenders & clients Changing expenses Rising cap rates Few comps, poor comparability

Clients in the Current Economy Special servicers Advise Full appraisals Lenders Advise Documentation for regulators Attorneys (Defensive and Offensive) Valuations Appraisals

Status of Hotel Markets Not the best of times Occupancies bottoming out Rates may not have bottomed out Continuing supply side issue Extreme variation across markets

Impacts on Hotels & Resorts Demand down, but stabilizing Brand marketing more Internet oriented and getting more sophisticated, challenging brands and hotels with less sophisticated e-commerce and CRM Poor rate management causing long-term damage Deferred expenses causing asset deterioration Anticipated significant loss of asset value

Performance by Product Type Convention dramatically down Luxury buying up business; hurt by the ethic of moderation; vulnerable to high fixed costs Upscale buying up business; access to more markets than select service and more revenue sources; vulnerable to high fixed costs

May Year-to-Date (STR) Occupancy Average Rate 2009 2008 Change 2009 2008 Change US 53% 60% -13% $ 99 $108-9% Luxury 60% 69% -14% $154 $175-14% Upscale 54% 61% -13% $107 $116-8%

Performance by Product Type Select Service Brand loyal customers, perceived value, beneficial expense structure, hurt by new supply Mid-market full-service Accelerated decline; vulnerable to higher quality full service hotels and to select service Economy Vulnerable to discounting from above

May Year-to-Date (STR) Occupancy Average Rate 2009 2008 Change 2009 2008 Change US 53% 60% -13% $99 $108-9% Midprice 50% 57% -13% $79 $84-7% With F&B 48% 55% -14% $82 $87-5% W/O F&B 55% 62% -14% $86 $89-4% Economy 48% 54% -12% $59 $62-6%

May Year-to-Date (STR) Occupancy Average Rate 2009 2008 Change 2009 2008 Change Urban 59% 67% -12% $135 $152-13% Suburban 53% 60% -14% $87 $94-8% Airport 60% 68% -14% $96 $105-10% Interstate 48% 53% -10% $68 $68 0% Resort 57% 65% -13% $139 $158-14% Town 47% 52% -10% $76 $77-2%

Combating Recession - Marketing Franchise programs Web-based marketing Direct sales Clearing out deadwood Attracting customers who might not have been of interest in other years Maintaining morale (plan work, work plan)

Combating Recession - Operations Reduce paperwork Identify & eliminate unnecessary work Tighten controls Buy value Eliminate waste Ask for better rates (insurance, taxes, contract service providers)

Combating Recession DON TS Cut back marketing Cut back maintenance Cut back CapEx

Hotel Financial Statements Uniform System of Accounts for Hotels Revenue generating departments shown as profit centers (income and expense) Overhead departments controllable by management Fixed expenses under owner s control Significant cross over between income statement and balance sheet for CAPEX

Financial Indicators for Hotels Occupancy Above comp set (define comp set) ADR Up is good, out of comparable range is bad RevPar Balance rate & occupancy; 100%+ yield Marketing - 4-5% before franchise charges Maintenance - 3-4% before CapEx CapEx 5-8% depending investment term Revenue Trends - Up is good Profit Trends - Down is bad, unless due to

Financial Is debt coverage secure? Revenue trends (and op stats) Expenses reasonable Reporting consistent (Tax vs Financial) Financials timely and competent Debt service covered Books clean and separate

Things That Move Family and the payroll Paid and not working, can hide profit Working but not paid can hide expense Cars, travel and home expenses Off site management overhead Shared equipment and staff with co-owned hotels Expenses paid for or by co-owned hotels

Things that Lurk Property taxes (real & personal) Bed taxes (state & local) Payroll taxes Utility bills Franchise fees COD and aged payables Receivables (credit card & direct bill)

Scorecards Independent information is available STAR Reports (malleable) Host Reports (blend a range) Inspections (QA, PIP, AAA, City ) Bed Tax and Property Tax forms Appraisals

Value Both real estate and operating business Operating business drives value if successful; real estate drives value if failing

Sponsor Proposing a different class of operation Experienced in construction? In operation? Change in partners - generations Capable of managing more businesses Quality of other hotels operated Co-mingled funds Personal characteristics Reason for doing the deal

Brand Leverage Frequency programs Image American Apparel is different than JC Penney Lodging Econometrics 40%+ value swing

Hidden Partner - The Franchisor Charges (10+%) Royalty, Marketing, Reservation, Training, Technology, Frequency QA - Quality Assurance PIP - Product Improvement Plan Term - Expiration Dates Risk of lost value, re-branding

Common Valuation Methods Cost per key Room revenue multiplier Value of comparable existing hotels per key Lodging Econometrics or local comparables Capitalization of Rolling 12 income DCF for appraisals or sophisticated developers

Per Key Strong more up-market brands cost more to develop carry higher values Values of hotels more than 5 years old Impacted by length of franchise term available ( available is sometimes difficult to predict) Impacted by performance Impacted by physical condition

Room Revenue Multiplier Room revenue only 4+ times for Hampton or Courtyard level 3+/- times for standard limited service 1-3 times for economy properties

Value per Key $85,000-$100,000++ for high quality strong brand $40,000-$75,000 good performing second tier brands, depending on brand, building and revenue <$40,000 poor performing, poor building, declining revenue

Capitalization Historically 10-12% Now 8-9% >8% in unusual circumstances Strong turn-around potential Strong revenue upside (new hotel ramping up) High barrier to entry location Extremely desirable brand and building

A Healthy Industry Good business looking for debt Economic development tool - (when rooms are unavailable) Softening in some markets (more supply growth than demand growth in 2007 and projected 2008-2010)

Fundamentals All hotels are not created equal All brands are not created equal All markets are not created equal There are winners and losers in every hotel market

Hotel Financial Statements Total US Occupancy 70.0% 69.1% 69.2% ADR $ 166.69 $ 198.50 $ 94.94 Rooms 306 406 117 Revenue PAR $67,301 $ 90,261 $24,349 NOI PAR $ 17,003 $ 21,687 $ 9,743

Hotel Financial Statements Revenue Full Svce Resort Ltd Svce Rooms 62.5% 54.9% 96.2% Food 20.1% 22.2% Beverage 5.0% 6.2% Other F&B 4.5% 3.8% Telecom 0.8% 0.7% 0.4% Other 4.8% 9.2% 1.6% Rentals 2.0% 2.8% 1.8% Cancellation 0.3% 0.4%

Hotel Financial Statements Departmental Full Svce Resort Ltd Svce Rooms 24.8% 25.0% 22.2% F&B 72.9% 71.4% Telecom 103.8% 103.7% 2.1% Other 3.4% 6.5% 0.2% Total 41.3% 43.9% 23.9%

Hotel Financial Statements Undistributed Full Svce Resort Ltd Svce A&G 8.2% 7.7% 8.9% Marketing 6.5% 6.2% 5.2% Utilities 3.8% 3.7% 4.7% POM 4.5% 4.8% 5.3% Total 23.0% 22.4% 24.1% GOP 35.7% 33.7% 5.2%

Hotel Financial Statements Franchise Royalty 0.7% 0.3% 2.3% Management 3.4% 3.2% 2.9% Property Tax 2.9% 2.4% 3.8% Insurance 1.3% 1.9% 1.4% Sub-Total 2.1% 7.8% 10.4% NOI 25.3% 24.0% 40.0%

Hotel Financial Statements US Full Svce Resort Ltd Svce Payroll 31.5% 34.7% 22.9% Payroll PAR $ 19,388 $ 31,278 $ 5,177

Scorecards Independent information is available The frame of reference is moving Yesterday s normal my not be relevant STAR Reports (malleable) Host Reports (blend a range) Inspections (QA, PIP, AAA, City ) Bed Tax and Property Tax forms Appraisals

Relying on Data STR STAR and HOST PKF Trends PWC HVS Lodging Econometrics Shifflett Brand reports TripAdvisor Economic and demographic data

Hotel Value Both real estate and operating business Operating business drives value if successful Real estate underlies value if failing

Common Valuation Methods Cost per key Room revenue multiplier Value of comparable existing hotels per key Lodging Econometrics or local comparables Capitalization of Rolling 12 income DCF for appraisals or sophisticated developers

Value Trends Cap Rates are UP because the market is tight and interest rates are expected to go up (9-13%) Room Revenue Multipliers are down because margins are pinched by lower rates and rising expenses (2 to 3.5%) Cost Per Key is down but not yet where cautious investors perceive a deal Construction cost is down Purchase prices are below new build costs Sales Comps are hard to find (relevant and current)

Valuation Trends HVS Reported Cap Rates 2006 2007 2008 Luxury 5.0%-6.5% 6.5%-8.5% 7.0%-9.0% Mid-Rate 7.0%-9.0% 8.5%-10.5% 8.5%-11.0% Budget 8.0%-11.0% 9.5%-12.0% 10.0%-12.5% Projected Change in Value 2007-2012 44%

Cap Rates Using Lodging REITS as an Indicator March 2009 @ 12.9% September 2008 @ 9.3% May 2007 @ 5%

Impact of Spas Spas do not add occupancy, after a short term boost of 1 point on average Spas do add rate, up to an average of $50 Other improvements may coincide with the spa contribute Spas may help hold occupancy, at the sacrifice of rate, in a down market Not all spas are created equal