GLOBAL HOTEL TRANSACTIONS OUTLOOK Year End 2011

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1 GLOBAL HOTEL TRANSACTIONS OUTLOOK Year End 2011 Arthur de Haast Chairman, Hotels Jones Lang LaSalle Hotels Larissa Esser Global Hotel Analyst Jones Lang LaSalle Hotels Hotel transaction volumes are expected to hold steady in 2012 Global hotel investment volumes reached $31.2 billion in 2011, marking a 17% year-on-year increase. Although momentum somewhat faltered in the second half of 2011, activity was sustained, particularly in the global gateway markets. Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 1

2 Volumes in Q totalled $861.9 million in New York and $1.1 billion in London driven by the trades of the Park Central Hotel New York, The W London, the Sanderson & St. Martins Lane and the Holiday Inn Mayfair. Additionally in the United States, Cerberus Capital Management and Chatham Lodging Trust reached an agreement with Innkeepers USA Trust to acquire a portfolio of 64 budget hotels for $1 billion, a deal which initially fell apart in August due to uncertain market conditions. Looking ahead to 2012, hotel deal volume around the world is anticipated to remain broadly flat totalling $31 billion. Activity will be held back by illiquid markets and the shrinking balance sheet capacity of international banks to lend significant new money. Still, the market will be flush with equity capital that will come into play and two driving forces behind the market for hotel acquisitions healthy and growing operating fundamentals and an abundance of equity capital will support a reasonably active market for hotel transactions. 2

3 Global Hotel Investment Volumes, F * Figures include hotel property transactions $5 million and above and excludes note sales, land sales, foreclosures and recapitalizations. Source: Jones Lang LaSalle Hotels Uncertainty to shape investor sentiment in 2012, although fundamentals reassure outlook Global economic uncertainty will continue to result in delicate investor sentiment in 2012 although the dislocation in the financial markets has not impacted underlying trading fundamentals, reassuring investors to a certain degree and underlining the attractiveness of high quality, income producing hotel real estate as an asset class. STR Global reported late December that The Americas, Europe and Asia Pacific recorded positive results in the three key performance metrics for hotels namely occupancy, ADR and RevPAR, suggesting that despite a weakening economic environment, demand is still evident. 3

4 A number of gateway markets including Hong Kong, Jakarta, Singapore, Sydney, London, Los Angeles, Miami and San Francisco posted significant gains in revenue per available room (RevPAR) in 2011, and assets in several of these markets have attracted substantial interest. However, several markets in The Middle East and Africa region continue to struggle as a result of the Arab Spring early in Source: Jones Lang LaSalle Hotels Buyers and sellers Private equity players increased their acquisition activity in the second half of 2011 and are expected to remain ambitious in Various large private equity firms have received significant capital commitments, notably from pension funds, and with significant buying power and risk tolerance in a volatile environment they are in position to achieve opportunistic returns. Notwithstanding, deficient debt markets and limited availability of attractive acquisition opportunities will impede an upsurge in 4

5 acquisitions as was experienced in the pre-global crisis era. Joining the buyer mix are sovereign wealth funds and private high net worth individuals who will take a longterm view and make strategic acquisitions globally. While uncertainty persists in the public markets, public companies, notably REITs, are expected to focus on their existing portfolio rather than new acquisitions. In terms of sellers, Private equity firms and institutional investors are also expected to liquidate some previous acquisitions, either to divest select non-core assets or to fund life maturities. In mature markets, particularly in the United States, sellers will be motivated by different factors in 2012 than they were in the first half of 2011, where they were motivated by record pricing in some cases. The great de-leveraging and financing challenges going forward The hotel real estate market was heavily overleveraged during the latest market-peak, and although some of the overleveraged debt has already been restructured, most has yet to mature. And with many lenders currently reluctant to return to the sector, or showing a high level of conservativeness, the industry faces a major debt funding gap. Traditionally, lenders have been conservative towards the hospitality industry due to higher volatility, although during the latest market peak, a significant amount was (re)financed with highly leveraged CMBS debt. These loans are impossible to refinance at current underwriting standards, which is even exacerbated by a significant decline in asset values since As a result, a large portion of hotel sales are likely to be bank induced as a result of debt maturities and consequent refinancing challenges. Notably, NH Hoteles 5

6 recently announced they asked creditor banks to back a near-term debt refinancing ahead of a 195 million payment on a syndicated loan due in a month's time, and mentioned they would sell hotels worth close to 300 million. Banks continue to be reluctant to foreclose and take hotels on their balance sheet, and instead seek alternative solutions with the property owners, and potential investors injecting necessary capital. However, particularly in Europe, the banking sector seems to be pressing ahead with plans to reduce exposure to real estate debt in the wake of Basel III regulations and the on-going sovereign debt crisis in the form of large loan book sales, despite the significant discounts they may face. Focus on flexibility Increased merger and acquisition activity is expected as several hotel management companies actively look for acquisition targets in the form of brands, operating companies and real estate to grow their business. A great number of these groups are increasingly flexible in deploying capital to secure brand presence in certain markets. Notably, Marriott recently completed the acquisition of the MetLife Clock Tower building in New York for $165 million with the purpose of expanding their Edition brand. Companies with strong balance sheets and healthy cash flows are expected to acquire smaller companies struggling in the present environment. Flexibility is a key theme for 2012, and the ability to react to change quickly will feature as a success indicator. Unexpected events, such as political unrest and natural disasters seem to have become the "new normal and success will be predicated by investors and operators who can calculate risk and adapt the quickest. 6

7 London - December 2011 Chicago November 2011 On behalf of McAleer & Rushe, Jones Lang LaSalle Hotels sold the freehold interest in the W London overlooking London's Leicester Square to a Qataribased investor for close to 200 million. The sale of the W London marks one of the cities most highprofile deals of 2011 and is part of a mixed-use scheme including luxury apartments and Europe s first M&M store. Jones Lang LaSalle Hotels advised Arcapita Inc. in de sale of the Elysian Chicago. The luxury hotel featuring 188 rooms was acquired by a joint venture consisting of an affiliate of Equity Group Investments, principals of Elysian Worldwide Chicago L.L.C. and Hilton Worldwide. The hotel will be converted into the Waldorf Astoria Chicago. The price is confidential. Arthur de Haast is a member of the Investment Committee of GlobalHotelNetwork.com. 7