What’s Happening to Hotel

Values & Cap Rates

JMBM Meet the Money- May 7, 2008

Suzanne R. Mellen, MAI, CRE, FRICS, ISHC

HVS International

(415) 268-0351
smellen@hvs.com

For more discussion of capitalization rate trends and discussion of data in these
slides please look for recent articles under Author: Mellen @ HVS.com
Major U.S. Hotel Transactions by Year

300 280
241 249 242
227 237
250

200 178
MajorSales

147 148
150 130 128 121
108 117 106
105
100 70
56 53
50 21

Ap '
8'
90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

7
Ja 20 0

Ja r 0

r0
19

20

20
19

19

19

19

19

19

19

19

19

20

20

20

20

20

Ap
n-

n-
Trend of Major U.S. Hotel Transactions and
Average Price Per Room by Year

300 250,000

250

Averate Price Per Room

200,000
Major Transactions

200
150,000
150
100,000
100
50,000
50

0 0

Ap '
8'
90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

n- 07

n- 07
r0
20

20
19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

Ja 20

Ja pr
A
Number of Hotels Average Price per Room
Recent Major Transactions by Month

Month 2002 2003 2004 2005 2006 2007 2008

J anuary 10 5 13 14 23 31 9
February 7 5 2 11 18 33 4
March 4 1 16 13 36 19 7
April 7 4 11 10 15 17 1
May 7 11 16 15 24 29
J une 16 9 14 36 18 39
J uly 4 18 20 22 16 8
August 6 13 28 27 18 15
September 10 9 13 17 21 7
October 6 12 19 23 25 10
November 8 6 7 16 11 12
December 20 28 19 33 24 13
Total 105 121 178 237 249 233 21
Number of
Rooms 31,626 33,292 56,822 71,531 76,137 59,470 3,823

Total Sales
(Billions) $3.5 $4.7 $8.0 $11.5 $15.5 $11.6 $0.7

Avg. Price
per Room $111,000 $138,000 $141,000 $160,000 $203,000 $194,800 $171,915
Major U.S. Transactions by Sales Price
(Confirmed Transactions Only)

Price Range (Millions) 2004 2005 2006 2007 Jan-Apr 07' Jan- Apr 08'
$200.0 and above 5 9 17 8 6 0
$150.0 to $199.9 3 4 10 4 2 0
$100.0 to $149.9 5 10 11 13 10 0
$50.0 to $99.9 24 41 49 36 15 6
$25.0 to $49.9 45 64 66 72 25 3
$10.0 to $24.9 96 109 96 100 48 12
Total 178 237 249 233 106 21
Major U.S. Transactions by Sales Price

300

250

$200.0 and above

No. of Hotels Sold

200
$150.0 to $199.9
$100.0 to $149.9
150
$50.0 to $99.9
$25.0 to $49.9
100
$10.0 to $24.9
(in millions)
50

0
178 Total 237 Total 249 Total 233 Total 106 Total 21 Total
2004 2005 2006 2007 Jan-Apr 07' Jan- Apr 08'
 Cap Rate

5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00

3rd Quarter 1994

1st Quarter 1995

3rd Quarter 1995

Regional Mall
1st Quarter 1996

3rd Quarter 1996

Full-Service Lodging
1st Quarter 1997

3rd Quarter 1997

1st Quarter 1998

3rd Quarter 1998

1st Quarter 1999

CBD Office
3rd Quarter 1999

1st Quarter 2000

3rd Quarter 2000

Limited-Service Lodging
1st Quarter 2001

Time
3rd Quarter 2001

1st Quarter 2002

3rd Quarter 2002

1st Quarter 2003

Luxury Lodging
(Source: Korpacz Investment Survey – PWC)

Suburban Office

3rd Quarter 2003

1st Quarter 2004

Real Estate Investment Cap Rate Trend

3rd Quarter 2004

1st Quarter 2005

3rd Quarter 2005

1st Quarter 2006

Apartment

3rd Quarter 2006

1st Quarter 2007

3rd Quarter 2007

1st Quarter 2008

 Discount Rate

7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00

3rd Quarter 1994

1st Quarter 1995
3rd Quarter 1995
1st Quarter 1996

Regional Mall
3rd Quarter 1996

Full-Service Lodging
1st Quarter 1997
3rd Quarter 1997
1st Quarter 1998
3rd Quarter 1998
1st Quarter 1999

CBD Office
3rd Quarter 1999
1st Quarter 2000
3rd Quarter 2000
1st Quarter 2001

Limited-Service Lodging
Time
3rd Quarter 2001
1st Quarter 2002
3rd Quarter 2002
1st Quarter 2003
3rd Quarter 2003
Luxury Lodging
Suburban Office

1st Quarter 2004

Real Estate Investment Discount Rate
Trend (Source: Korpacz Investment Survey – PWC)

3rd Quarter 2004

1st Quarter 2005
3rd Quarter 2005
1st Quarter 2006
3rd Quarter 2006
Apartment

1st Quarter 2007

3rd Quarter 2007
1st Quarter 2008
Projected Operating Performance of
Sample Hotel – Favorable Economy

Historical Projected >>>>

2007 2008 2009 2010 2011
Occ. 72% 72% 72% 72% 72%
ADR 128 136 142 148 153
% change 6% 5% 4% 3%
RevPAR $92 $98 $103 $107 $110
% change 6% 5% 4% 3%
NOI/Room 8,265 9,600 10,457 11,070 11,404
% Change 16% 9% 6% 3%
 Impact of Credit Crunch

Investment Parameters

Pre- Capital Current @ Current @

Valuation Inputs Crunch 6 5% LTV 60% LTV

Interest Rate: 6.00% 6.00% 6.00%

Loan -to-Value Ratio: 75% 65% 60%
Equity Yield Rate: 19% 19% 19%
Terminal Cap Rate 8.0% 8.5% 9.0%
Valuation Outputs
Value Per Room: $132,000 $119,000 $112,000
DCR Trailing Twelve 1.2 1.5 1.7
DCR Year 1 1.3 1.7 2.0
Discount Rate: 10.4% 11.7% 12.3%
Implied Cap Rate: 7.4% 8.7% 9.3%
Derived Cap Rate TT 6.2% 7.0% 7.4%
Derived Cap Rate (1st Yr. NOI) 7.2% 8.1% 8.6%
Change in Value to Current -11% -18%
 Impact of Credit Crunch

Investment Parameters

Pre- Capital Current @ Current @

Valuation Inputs Crunch 6 5% LTV 60% LTV

Interest Rate: 6.00% 6.00% 6.00%

Loan -to-Value Ratio: 75% 65% 60%
Equity Yield Rate: 19% 19% 19%
Terminal Cap Rate 8.0% 8.5% 9.0%
Valuation Outputs
Value Per Room: $132,000 $119,000 $112,000
DCR Trailing Twelve 1.2 1.5 1.7
DCR Year 1 1.3 1.7 2.0
Discount Rate: 10.4% 11.7% 12.3%
Implied Cap Rate: 7.4% 8.7% 9.3%
Derived Cap Rate TT 6.2% 7.0% 7.4%
Derived Cap Rate (1st Yr. NOI) 7.2% 8.1% 8.6%
Change in Value to Current -11% -18%
 Impact of Credit Crunch

Investment Parameters

Pre- Capital Current @ Current @

Valuation Inputs Crunch 6 5% LTV 60% LTV

Interest Rate: 6.00% 6.00% 6.00%

Loan -to-Value Ratio: 75% 65% 60%
Equity Yield Rate: 19% 19% 19%
Terminal Cap Rate 8.0% 8.5% 9.0%
Valuation Outputs
Value Per Room: $132,000 $119,000 $112,000
DCR Trailing Twelve 1.2 1.5 1.7
DCR Year 1 1.3 1.7 2.0
Discount Rate: 10.4% 11.7% 12.3%
Implied Cap Rate: 7.4% 8.7% 9.3%
Derived Cap Rate TT 6.2% 7.0% 7.4%
Derived Cap Rate (1st Yr. NOI) 7.2% 8.1% 8.6%
Change in Value to Current -11% -18%
 Impact of Credit Crunch

Investment Parameters

Pre- Capital Current @ Current @

Valuation Inputs Crunch 6 5% LTV 60% LTV

Interest Rate: 6.00% 6.00% 6.00%

Loan -to-Value Ratio: 75% 65% 60%
Equity Yield Rate: 19% 19% 19%
Terminal Cap Rate 8.0% 8.5% 9.0%
Valuation Outputs
Value Per Room: $132,000 $119,000 $112,000
DCR Trailing Twelve 1.2 1.5 1.7
DCR Year 1 1.3 1.7 2.0
Discount Rate: 10.4% 11.7% 12.3%
Implied Cap Rate: 7.4% 8.7% 9.3%
Derived Cap Rate TT 6.2% 7.0% 7.4%
Derived Cap Rate (1st Yr. NOI) 7.2% 8.1% 8.6%
Change in Value to Current -11% -18%
 Impact of Credit Crunch

Investment Parameters

Pre- Capital Current @ Current @

Valuation Inputs Crunch 6 5% LTV 60% LTV

Interest Rate: 6.00% 6.00% 6.00%

Loan -to-Value Ratio: 75% 65% 60%
Equity Yield Rate: 19% 19% 19%
Terminal Cap Rate 8.0% 8.5% 9.0%
Valuation Outputs
Value Per Room: $132,000 $119,000 $112,000
DCR Trailing Twelve 1.2 1.5 1.7
DCR Year 1 1.3 1.7 2.0
Discount Rate: 10.4% 11.7% 12.3%
Implied Cap Rate: 7.4% 8.7% 9.3%
Derived Cap Rate TT 6.2% 7.0% 7.4%
Derived Cap Rate (1st Yr. NOI) 7.2% 8.1% 8.6%
Change in Value to Current -11% -18%
 Impact of Credit Crunch

Investment Parameters

Pre- Capital Current @ Current @

Valuation Inputs Crunch 6 5% LTV 60% LTV

Interest Rate: 6.00% 6.00% 6.00%

Loan -to-Value Ratio: 75% 65% 60%
Equity Yield Rate: 19% 19% 19%
Terminal Cap Rate 8.0% 8.5% 9.0%
Valuation Outputs
Value Per Room: $132,000 $119,000 $112,000
DCR Trailing Twelve 1.2 1.5 1.7
DCR Year 1 1.3 1.7 2.0
Discount Rate: 10.4% 11.7% 12.3%
Implied Cap Rate: 7.4% 8.7% 9.3%
Derived Cap Rate TT 6.2% 7.0% 7.4%
Derived Cap Rate (1st Yr. NOI) 7.2% 8.1% 8.6%
Change in Value to Current -11% -18%
Projected Operating Performance of
Sample Hotel – Recession

Historical Projected >>>>

2008 2009 2010 2011 2013
Occ. 72% 67% 68% 70% 72% 72%
ADR 128 132 133 137 144 153
% change 3% 1% 3% 5% 6%
RevPAR $92 $88 $91 $96 $104 $110
% change -4% 3% 6% 8% 6%
NOI/Room 8,265 6,716 7,010 8,278 9,995 11,203
% Change -19% 4% 18% 21% 12%
Impact of Recession and Credit Crunch
Decline in Equity Returns
Valuation Inputs Same Equity IRR 17% Equity IRR 15% Equity IRR
Interest Rate: 6.00% 6.00% 6.00%
Loan -to-Value Ratio: 65% 65% 65%
Equity Yield Rate: 19% 17% 15%
Terminal Cap Rate 8.5% 8.5% 8.5%
Valuation Outputs
Value Per Room: $104,000 $112,000 $119,000
DCR Trailing Twelve 1.7 1.6 1.5
DCR Year 1 1.4 1.3 1.2
Discount Rate: 12.0% 11.0% 10%
Implied Cap Rate: 9.0% 8.0% 7.0%
Derived Cap Rate TT 7.9% 7.4% 6.9%
Derived Cap Rate (1st Yr. NOI) 6.4% 6.0% 5.6%
Change in Value from Peak 22% 15% 11%
Impact of Recession and Credit Crunch
Decline in Equity Returns
Valuation Inputs Same Equity IRR 17% Equity IRR 15% Equity IRR
Interest Rate: 6.00% 6.00% 6.00%
Loan -to-Value Ratio: 65% 65% 65%
Equity Yield Rate: 19% 17% 15%
Terminal Cap Rate 8.5% 8.5% 8.5%
Valuation Outputs
Value Per Room: $104,000 $112,000 $119,000
DCR Trailing Twelve 1.7 1.6 1.5
DCR Year 1 1.4 1.3 1.2
Discount Rate: 12.0% 11.0% 10%
Implied Cap Rate: 9.0% 8.0% 7.0%
Derived Cap Rate TT 7.9% 7.4% 6.9%
Derived Cap Rate (1st Yr. NOI) 6.4% 6.0% 5.6%
Change in Value from Peak 22% 15% 11%
Impact of Recession and Credit Crunch
Decline in Equity Returns
Valuation Inputs Same Equity IRR 17% Equity IRR 15% Equity IRR
Interest Rate: 6.00% 6.00% 6.00%
Loan -to-Value Ratio: 65% 65% 65%
Equity Yield Rate: 19% 17% 15%
Terminal Cap Rate 8.5% 8.5% 8.5%
Valuation Outputs
Value Per Room: $104,000 $112,000 $119,000
DCR Trailing Twelve 1.7 1.6 1.5
DCR Year 1 1.4 1.3 1.2
Discount Rate: 12.0% 11.0% 10%
Implied Cap Rate: 9.0% 8.0% 7.0%
Derived Cap Rate TT 7.9% 7.4% 6.9%
Derived Cap Rate (1st Yr. NOI) 6.4% 6.0% 5.6%
Change in Value from Peak 22% 15% 11%
Impact of Recession and Credit Crunch
Decline in Equity Returns
Valuation Inputs Same Equity IRR 17% Equity IRR 15% Equity IRR
Interest Rate: 6.00% 6.00% 6.00%
Loan -to-Value Ratio: 65% 65% 65%
Equity Yield Rate: 19% 17% 15%
Terminal Cap Rate 8.5% 8.5% 8.5%
Valuation Outputs
Value Per Room: $104,000 $112,000 $119,000
DCR Trailing Twelve 1.7 1.6 1.5
DCR Year 1 1.4 1.3 1.2
Discount Rate: 12.0% 11.0% 10%
Implied Cap Rate: 9.0% 8.0% 7.0%
Derived Cap Rate TT 7.9% 7.4% 6.9%
Derived Cap Rate (1st Yr. NOI) 6.4% 6.0% 5.6%
Change in Value from Peak 22% 15% 11%
Impact of Recession and Credit Crunch
Decline in Equity Returns
Valuation Inputs Same Equity IRR 17% Equity IRR 15% Equity IRR
Interest Rate: 6.00% 6.00% 6.00%
Loan -to-Value Ratio: 65% 65% 65%
Equity Yield Rate: 19% 17% 15%
Terminal Cap Rate 8.5% 8.5% 8.5%
Valuation Outputs
Value Per Room: $104,000 $112,000 $119,000
DCR Trailing Twelve 1.7 1.6 1.5
DCR Year 1 1.4 1.3 1.2
Discount Rate: 12.0% 11.0% 10%
Implied Cap Rate: 9.0% 8.0% 7.0%
Derived Cap Rate TT 7.9% 7.4% 6.9%
Derived Cap Rate (1st Yr. NOI) 6.4% 6.0% 5.6%
Change in Value from Peak 22% 15% 11%
Impact of Recession and Credit Crunch
Decline in Equity Returns
Valuation Inputs Same Equity IRR 17% Equity IRR 15% Equity IRR
Interest Rate: 6.00% 6.00% 6.00%
Loan -to-Value Ratio: 65% 65% 65%
Equity Yield Rate: 19% 17% 15%
Terminal Cap Rate 8.5% 8.5% 8.5%
Valuation Outputs
Value Per Room: $104,000 $112,000 $119,000
DCR Trailing Twelve 1.7 1.6 1.5
DCR Year 1 1.4 1.3 1.2
Discount Rate: 12.0% 11.0% 10%
Implied Cap Rate: 9.0% 8.0% 7.0%
Derived Cap Rate TT 7.9% 7.4% 6.9%
Derived Cap Rate (1st Yr. NOI) 6.4% 6.0% 5.6%
Change in Value from Peak 22% 15% 11%