U.S. HOTEL T RANSACTIONS A UGUST 24 Hyatt Regency Capitol Hill, Washington D.C. U.S. Transaction Activity Doubles to $7.3 Billion The REIT boom of 1997/98 whipped the market into a buying frenzy. Due to the weight of capital that has been attracted to the lodging sector, Jones Lang LaSalle Hotels expects a similar level of activity by the end of 24. This is based on the $7.3 billion in transactions recorded in the first six months of the year, as well as the amount of product currently on the market. What would have been a dream in 22 is now a reality: free-flowing capital and an increasing line of sellers. Jones Lang LaSalle Hotels is in a unique position to comment on lodging transaction activity, having arranged one third of all single asset transactions that traded at prices greater than $1 million during the first half of 24. Larger assets like the Hyatt Regency Capitol Hill, the Embassy Suites Chicago, the InterContinental Central Park South and the Renaissance Hollywood (all arranged by Jones Lang LaSalle Hotels), as well as multi-billion dollar portfolio transactions are more prevalent in this market where major urban and resort hotels, and those being sold subject to brand and management, are trading. However, there are still not enough assets on the market to satisfy the enormous weight of capital in the system.
Transaction activity has doubled in the first half of 24 compared to the same period last year. For YTD June 24, Jones Lang LaSalle Hotels reports 58 transactions over $1 million representing 72,886 rooms, with an average price per key of $1,698. Given this pace, along with the volume of assets on the market and the typical pattern of a disproportionate share of transaction activity during the second half of the year, Jones Lang LaSalle Hotels forecasts full year transaction volume to reach close to $1 billion. This is a 48% lift over the 23 level of $6.7 billion and almost three times the 22 volume. U.S. Transactions 1-Year History Value ($MM) Price per Key ($) 12, 2, 18, 1, 16, 8, 14, 12, 6, 1, 8, 4, 6, 2, 4, 2, 1994 1995 1996 1997 1998 1999 2 21 22 23 24E Av. Price P/Rm Volume Portfolio Transactions Dominate In 23, portfolio deals comprised less than 4% of total transaction value. Jones Lang LaSalle Hotels anticipates a reverse ratio for 24, given the Blackstone/ESA deal and CNL/KSL transaction. In the first half of 24, this was indeed the case as portfolio transactions comprised 76% of transaction volume in dollars. Single-asset transactions had a price per key premium of 3.2% at $123,855 versus $95,154 for portfolio deals. Typically, single-asset deals command a much stronger price per key premium (in 23 it was nearly double that of portfolio sales), however the strong price per key of the CNL/KSL transaction (at almost $6, per key) was responsible for the strength of the average portfolio price. 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 2
Single-Asset vs. Portfolio Transactions (over $1MM) Value ($MM) 4,5 Price per Key ($) 18, 3,75 15, 3, 12, 2,25 9, 1,5 6, 75 3, Single-Asset Portfolio Av. Price P/Rm Volume Two Single-Asset Hotel Transactions Breach $1 Million In the midst of an active year, Blackstone has conducted the largest single asset transaction and largest portfolio acquisition for 24.Blackstone acquired the encumbered Hyatt Regency Capitol Hill for $16 million and Extended Stay America (ESA) for $3.1 billion, following a quiet 23 in which they did not acquire a single hotel. Not included in the table of top single-asset transactions is the Four Seasons Maui, which was acquired by Michael Dell (under his capital management firm MSD Capital) for a rumored $282 million or in excess of $74, per key in early July 24. This will be trumped in August with the closing of Host Marriott s acquisition of the Fairmont Kea Lani Maui in Wailea for $355 million, or $789, per key. The ten largest single-asset hotel transactions averaged a price per key of $19,5, almost double the total average. The strongest price per key for a single asset to date in 24 is $31, paid for the leasehold interest in the InterContinental Central Park South in New York City, a residential co-op conversion. In comparison, the highest price per key paid for an asset in 23 was CNL s purchase of the Del Coronado at almost $56, per key. The Four Seasons Maui and Fairmont Kea Lani price tags far outstrip the record price per key of 23. 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 3
The Ten Largest Single-Asset Transactions in 24 (YTD June) Property Name Rooms Date Sale Price Price Per Key Buyer Hyatt Regency Capitol Hill, 834 Feb-4 $16,, $191,847 Blackstone Group Washington D.C. Indianapolis Marriott 615 Feb-4 $16,, $172,358 LaSalle Hotel Properties Downtown Ritz Carlton Pentagon 366 May-4 $93,, $254,98 Meristar City, Arlington Marriott Irvine 484 Jun-4 $92,5, $191,116 MeriStar Hospitality Embassy Suites River East, 455 Apr-4 $88,5, $194,55 Host Marriott Chicago Renaissance Hollywood 637 Feb-4 $86,, $135,8 CIM Group/CalPERS Hotel, Los Angeles Laguna Cliffs Marriott, 346 Jun-4 $84,, $242,775 Prudential Insurance Dana Point InterContinental Central 211 May-4 $63,5, $3,948 Anbau Enterprises Park South, New York Dallas Fort Worth Airport 491 May-4 $59,, $12,163 Highland Hospitality Corp Marriott South Hilton Alexandria 241 Jun-4 $59,, $244,813 LaSalle Hotel Properties Old Town Hotel Debt Drives Pricing and Volume Debt drives pricing for leveraged buyers and has been a major growth engine for hotel transactions. The renewed lift in Hotel CMBS issuance last year, evident in the graph below, has lifted the volume up to $6 billion in 23. Year-todate June 24 volume has reached $3.6 billion, and while this is an 8.1% decline over the same period last year, if sustained in the second half of the year it will outstrip 23 level by 2%. 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 4
Hotel CMBS Issuance Reflects Strong Demand for Debt Value ($B) 7 % of Total 1 6 9 8 5 7 4 6 5 3 4 2 3 2 1 1 2 21 22 23 23 YTD - June 24 YTD - June % of Total Competition among lenders to place capital has led to sharply contracting spreads to some of the lowest levels on record. Lenders are offering typical rates of 2 to 3 basis points over LIBOR and loan to value (LTV) ratios are also inching up. High-quality urban and resort hotels are fetching proceeds of up to 1x NOI, at pricing of between 175 and 225 basis points above LIBOR. This level of proceeds is driven by strong debt service coverage ratios (caused by the current favorable interest rate environment), valuations which place property values below replacement cost, loan-tovalue of 7 to 75% and the fact that operating fundamental have hit a floor and are showing clear signs of improving (NOIs will rise), thereby making such loans less risky than some other property types. In Jones Lang LaSalle Hotels latest Hotel Investor Sentiment Survey (HISS), there has been a notable shift to higher leverage levels.the 71%+ gearing ratio experienced its largest response in the history of the HISS, with 14% of investors indicating this was their current loan to value ratio. This is almost double the rate recorded in the last survey. An increase in the 51-7% band also occurred to its highest share in the life of the HISS, now at 56%. Volume Cap Rates at Record Lows Cap rates have continued to tumble in 24. The average cap rate on 3 transactions in the first half of 24, representing $1.8 billion in deals, was 7.%. This comprised a mixture of encumbered and unencumbered assets. In comparison, for the 11 transactions executed by Jones Lang LaSalle Hotels with income support (over half a billion dollars value), the average cap rate was 6.2%. In Jones Lang LaSalle Hotels HISS, investors indicated that they targeted an average 9.2% cap rate for 18 top U.S. hotel markets. However, the actual cap rate has been much lower, indicating that investors are paying more in relation to current NOIs (and are also targeting lower IRRs). Furthermore, the trend in target cap rates reflects the weight of 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 5
capital in the market and the lower interest rates: cap rates have fallen by almost 1 basis points in less than 18 months. Pricing has become much more aggressive as investors weigh the benefit of favorable and plentiful debt and an improving operating environment. In addition, the public capital markets have attracted increasing amounts of capital. Established REITs are trading at our near 52 week highs (such as Host Marriott, LaSalle Hotel Properties and MeriStar), and new public REITs are actively in the market, including Strategic Hotel Capital, Ashford Hospitality and Highland Hospitality. Furthermore, several new public REITs are in the pipeline, such as CNL s recently delayed IPO, Eagle Hospitality (Corporex) and Capital Lodging (Apollo). REITs are acquiring hotels at EBITDA multiples of 9 to 11x (and sometimes higher) reflecting the appetite that public capital has for the lodging sector and the cost of that capital. The greatest shift has occurred, not surprisingly, in hotly competed areas, such as Washington DC, San Francisco, Miami and New York. A similar compression is occurring with IRRs. Over the last two years, required IRRs have shifted over 3 basis points lower. U.S. Transactions 1-Year History Cap Rate 9.8% 9.6% 9.4% 9.2% 9.% 8.8% 8.6% 8.4% 8.2% 8.% 7.8% New York Hawaii Washington D.C. Los Angeles Miami Boston San Diego Phoenix Chicago Orlando Denver Dallas San Francisco Atlanta Philadelphia Key Buyer Groups of U.S. Hotels In 23, we saw the dominance of CNL, the only company within the private REIT category, alone acquiring almost one third of the total transaction volume. While CNL will remain dominant in 24 given its KSL acquisition, the emergence of public companies and private equity and opportunity funds (primarily in the form of Blackstone) will shift the buyer landscape, as evidenced by the first half of the year. 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 6
Private equity and opportunity funds have found themselves the benefactors of a significant volume of capital due to a lack of competitive returns in other asset classes and the obvious counter-cyclical opportunity that exists today in hotel investment. At the same time, the capital drought has broken in the public markets, with the previously mentioned new and pipeline REITs actively seeking to acquire hotels. Hotel Buyer Groups 23 24 (ytd June) Owner / Operator 7% Institution 1% Public Company 24% Private Equity / Opportunity Fund 41% Owner / Operator 3% Institution 7% Private Equity / Opportunity Fund 36% Private REIT 32% Public Company 49% Key Seller Groups of U.S. Hotels The Blackstone/ESA and CNL/KSL transactions dominate the 24 landscape: with those two deals alone accounted for over 72.1% of the total YTD value. In this analysis, KSL (the seller) was categorized as private equity given the transaction was motivated by their capital partner, KKR Capital. Interestingly, the ratio of sales by public companies has dropped notably (when excluding the ESA deal). In 23 public companies were net sellers disposing of $512 million more than they acquired. This was the result of pressure from shareholders over the last two years to jettison non-strategic assets and reduce debt burdens. The 24 environment is different. Public hotel companies have, in general, de-levered sufficiently and pressure has shifted now to growth. When excluding the ESA deal, public companies have to date been net buyers, acquiring $423.2 million more than they have sold. Hotel Seller Groups 23 24 (ytd June) Owner / Operator 17% Institution 5% Private Equity / Opportunity Fund 43% Owner / Operator 1% Institution 3% Private Equity / Opportunity Fund 32% Public Company 46% 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, Public Company 53% 7
Hotels Have a Compelling Story Hotels provide good risk diversification by asset type, strong comparative returns (plus a good annuity income stream), and an exceptional counter-cyclical position. It is therefore not surprising that institutional and pension fund money is increasingly attracted to the sector. 1. The Best Cyclical Position Hotels also offer one of the best positions on the real estate cycle, having experienced the worst downturn and now firmly positioned in the early recovery stage. This is clearly the best time to buy. Comparative Real Estate Cycles Stagnant Market Rising Market Supply Response Falling Market New Construction Top Tier Malls Neighborhood & Community Centers Apartments Over Supply Office Downtown Warehouse Office Suburban 2nd Tier Regional Mall Hotels Full Service Opportunistic pricing Uncertain recovery timing Rents rising Discounted pricing Rising occupancy New development Tight occupancy Rental growth slowing Supply ahead of demand Rent growth flat - declining 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 8
2. The Sector is Competitively Priced Spreads are at an all-time high against office and ten year treasuries, indicating the sector is competitively priced. In addition, values remain reasonable relative to earnings and outlook. This provides additional protection from the downside risks associated with economic slowdowns, as well as possible room for growth as investors compare this sector s prospects relative to other investments going forward. Hotels premium to Treasury is currently 65 basis points. Hotel Yields at a Ten-Year High Basis point differnece in cap rates 8 7 6 5 4 3 2 1 Jan 1994 Jan 1995 Jan 1996 Jan 1997 Jan 1998 Jan 1999 Jan 2 Jan 21 Jan 22 Jan 23 Jan 24 Hotels vs. Office Hotels vs. 1-Year Treasuries Source: REIC; Economy.com 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 9
3. Hotels Provide Good Risk Diversification What some investors are only just realizing is the appeal of hotels on a contrarian basis. Private hotel investment has a low correlation with bonds, public real estate, and to a lesser extent, private real estate. It therefore makes the asset class appealing to institutional investors seeking portfolio diversification, while still retaining real estate allocations. Hotel Correlations are Low Against Many Other Asset Types Correlation 1993-23 1.8.6.4.2 -.2 Stocks Bonds Private Hotel Public Hotel Private Real Estate Public Real Estate Private Hotel Public Hotel Source: Source: Ibbotson, based 1 years data ending 4q2, annual holding period. Stocks: S&P 5, Bonds: Lehman Bros Corp Universe *Public Hotels data series commences 1/94 Conclusions The doubling of hotel transactions in the first half of the year, and the forecasted growth for the rest of the year represents the beginning of a sustained level in overall transaction volume activity, as long as interest rates don t rise dramatically. The strong recovery environment this year bodes well for a continued growth position in 25. Unsatisfied investors who haven t made all their buys will extend additional allocation requirements in 24, and initiate buys in 25 with their remaining allocations. Hotels will continue to enjoy more attention and continued recovery, which will yield a positive effect on NOI. Investors with a three to five year hold period acquiring hotels in 24 and 25 will be seeking to divest in 27 to 21,at a time when NOIs will be significantly improved from current levels. Even at historical cap rates, which are higher than current cap rates, investors will be able to achieve both strong current returns and IRRs that are favorable relative to other property types. 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 1
Biographies of Authors Arthur Adler Managing Director & CEO Americas With more than 2 years of experience in the hotel industry, Art Adler heads the Americas division of Jones Lang LaSalle Hotels. He specializes in arranging hotel market transactions, financings, investment advisory services and consulting for domestic and offshore owners and investors. Prior to joining the firm, Art was managing director of Sonnenblick Goldman and before this was the partner responsible for Coopers and Lybrand's lodging and gaming industry group. He started his career with Hilton Hotels Corporation and subsequently managed the NY office of Lavethol & Horwath. Art holds a Bachelor of Science degree from Cornell University School of Hotel Administration. Tel (direct): +1 212 812 583 Email: arthur.adler@am.joneslanglasalle.com Melinda McKay Senior Vice President Portfolio analysis and investment strategy are specialties of Ms. McKay, in addition to directing the firm s research activities in the Americas. Recent examples of Ms. McKay s extensive buy-side and underwriting advisory include advice to Rockwood Capital on the fair market prices for the Starwood portfolio of 12 hotels, strategic investment underwriting on a 1-hotel portfolio for a major private equity firm and value considerations for a hotel owner/operator on a $25+ million portfolio. She has also assisted major private organizations and institutions with hotel investment strategy and infrastructure development. Ms McKay has an Economics degree and over 1 years experience in the hotel industry. Tel (direct): +1 312 228 2662 Email: melinda.mckay@am.joneslanglasalle.com 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 11
Office Addresses New York 153 E. 53rd Street New York, NY122 tel: +1 212 812 57 fax: +1 212 421 564 Los Angeles 355 South Grand Avenue Suite 428 Los Angeles, CA 971 tel: +1 213 68 79 fax: +1 213 68 7933 Chicago 2 East Randolph Drive Chicago, IL 661 tel: +1 312 782 58 fax: +1 312 782 4339 Miami 2655 Le Jeune Road Suite 14 Coral Gables, FL 33134 tel: +1 35 779 36 fax: +1 35 779 363 London 22 Hanover Square London W1A 2BN tel: +44 27 493 64 fax: +44 27 399 5694 Frankfurt Platz der Einheit 2 D-6327 Frankfurt Am Main tel: +49 69 7543 141 fax: +49 69 7543 14 Madrid Paseo de la Castellana, 33 Edificio Fenix Planta 14 2846 Madrid tel: +34 91 789 11 fax: +34 91 789 12 Munich Maximilianstrasse 52 8538 Munich tel: +49 89 212 68 fax: +49 89 212 681 Paris 58/6, Avenue de la Grand Armee 7517 Paris tel: +331 455 153 fax: +331 455 1511 Barcelona Passeig de Gracia 11 4a Planta, Esc. A 87 Barcelona tel: +34 93 445 5369 fax: +34 93 31 2999 Singapore 9 Raffles Place #38-1 Republic Plaza Singapore 48619 tel: +65 6536 66 fax: +65 6533 217 Sydney Level 18 4 George Street Sydney NSW 2 tel: +61 2 922 8777 fax: +61 2 922 8765 Jakarta Jakarta Stock Exchange Bldg. Tower 1, 28th Floor Sudirman Central BusinessDistrict Jl Jend Sudirman, Kav 52-53 Jakarta 1219 Indonesia tel: +62 21 515 5665 fax: +62 21 515 5666 Tokyo 3F ATT New Tower 2-11-7 Akasaka Minato-ku, Tokyo 17-52 tel: +81 3 3568 166 fax: +81 3 3568 3356 Brisbane Level 33, Central Plaza One 345 Queen Street Brisbane QLD 4 tel: +61 7 3231 14 fax: +61 7 3231 1411 Jones Lang LaSalle is the largest and most qualified specialist hotel investment services group in the world. Through our 15 dedicated offices and the global Jones Lang LaSalle network of 7, professionals across more than 1 key markets on five continents, we are able to provide clients with value added investment opportunities and advice. Our recent track record for the last year alone included the sale of 13,263 hotel rooms to the value of US$2.6 billion in 6 cities and advisory expertise for 119,814 rooms to the value of US$18.8 billion across 281 cities. 24 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable, 12