Mark Fair, Managing Director, Select Service Division

A hot topic repeatedly debated during the 32^nd Annual NYU International Hospitality Industry Investment Conference was the outlook for the volume of distressed transactions. I participated in the finance workshop “Have the Flood Gates Opened or is it just a Trickle?”

The consensus among panelists was that there will be more transactions this year, but the increase will likely come in form of a steady rise as opposed to a large flood. I do see the increased volume of distressed sales coming. But it is going to build slowly. There may never be a tidal wave: Panelists do not anticipate the level of distressed activity seen during the RTC days.

One of the reasons why more assets collateralized by CMBS loans have not yet come to market is due to automatic one or two year loan extensions. But lenders will be less willing to “extend and pretend” in the future. Undeniably, more assets are coming to market now and deal flow will build momentum over the next 12 months. The transactions pushed by special servicers will in many cases be comprised of assets where values have dropped significantly and assets that don’t get worked out.

Note sales are also on the rise as balance sheet lenders increasingly recognize issues. The time frame from marketing the note to closing the deal is often significantly shorter than for an asset transaction. Additionally, I’m increasingly seeing investors wanting to get to certain assets by buying their debt.

Asked if any asset is saleable, even one with negative cash flow or requiring a significant amount of capex? Absolutely, at the right price, anything will trade.

- Mark

Bruce Stemerman, Managing Director, Strategic Advisory and Asset Management

Asset managers have had a critical role during this industry downturn. In today’s conference panel “Asset Management: Checkmate or Stalemate,” I had the opportunity to speak about the state of affairs of our industry along with winning asset management strategies with my fellow panelists.

Over the years, professional hospitality asset managers have evolved from a small number of individuals to a more institutionalized group of advisors. While many owners and investors possess a solid base knowledge, what asset managers really bring to the table is relationship management. As asset managers, the mantra for our profession is to create liaisons and collaboration as opposed to threats. When we first begin an assignment, our first priority is to win the management team over—and build something that I like to call a “relationship of love and affection” with the hotel’s executive management team.

The panelists discussed the aggressive cost containment initiatives that operators and owners alike have implemented to avoid deeper net operating losses. So many of these changes have been positive and represent winning asset management strategies. Operators trimmed cost structures by reducing labor costs, closing or reducing operating hours of food and beverage outlets, renegotiating service and vendor contracts, and clustering sales and reservations offices. Many of these initiatives are here to stay, and a number of cost cutting initiatives will result in long-term savings for hotels.

What I think we must focus on as owners, operators and asset managers is achieving the highest flow through on rooms revenues, which is the income stream that has the highest profit margins. Looking for other sources of significant amounts of revenues and associated profits would be a big waste of time.

In our collaboration with owners and operators, it is our goal to provide the best service at the lowest cost to maximize profit on rooms revenues.

- Bruce

Arthur Adler, Managing Director and CEO - Americas

The market has changed dramatically since the Americas Lodging Investment Summit in January. In this morning’s session “Going for Broke: Transactions Update,” I discussed with fellow panelists which assets are moving in today’s market and which investors are most active.

The panel’s moderator asked the participants whether they are bearish or bullish on the outlook for hotel transactions. Consistent with the views expressed during the conference, all of us said that we’re bullish for 2010 and beyond. I expect the U.S. lodging industry to see a strong run of positive RevPAR growth for the next four to six years. Supply has always been what’s killed the industry, but this is of much less concern for this recovery period.

How are assets being shopped today? A common theme stated on this panel (and others during the conference) is that buyers are looking for quality, branded assets in the country’s key coastal gateway markets. Prospective buyers are looking at price per key and discount relative to replacement cost to determine the intrinsic value of assets. Full service transactions are getting done at low cap rates. Buyers are commonly looking at a five to seven year hold. You’re getting a lot of lookers. Sure there are still bottom-fishers out there, but there are also increasingly competitive bids.

Full service assets are being looked at by a number of domestic groups such as REITs and institutional buyers. In second-tier markets, we’re also seeing high net worth investors and private equity groups. Many of the domestic buyers are all-cash buyers. Panelists concurred that in terms of international buyers, we’re presently seeing more groups from Asia than from Europe and the Middle East. Asian groups usually are long term holders, have a lower cost of capital and are aggressively targeting investments in U.S. safe haven markets.

What I think is a key shift in recent months is that following two years of hunkering down and maintaining an internal focus, corporations are increasingly growing their external focus and traveling more. Overall, the panelists agreed that the improvement in hotel fundamentals and the uptick in transaction volume will represent an evolution, not a revolution.

- Art

Arthur Adler, Managing Director and CEO - Americas

We’re hearing over and over again today that the wave of dramatic RevPAR declines has waned and U.S. hotel operating performance fundamentals have largely hit their trough. I also believe that there is a growing consensus that asset values—ranging from select service properties all the way to luxury hotels—have firmed during the past three to six months. This is laying the foundation for a more congruous understanding of value. It’s no secret that today’s market represents a very opportune time to acquire hotels. Here are three of the primary reasons that we’re hearing investors say they are decisively looking to buy assets.

First of all, prices are well below historic norms. Given that values have declined by as much as 50%, investors are unlikely to find such exceptionally discounted acquisition opportunities for another business cycle. Additionally, buyers can improve yield by acquiring at favorable prices and subsequently refinancing when the capital markets normalize. The bottom line here is that if you buy at a low basis, you have more room for error when you time your exit.

Secondly, the supply pipeline is abating considerably, and this will lead to a more robust recovery overall. In 2010, we expect the number of annual available rooms available to increase by 1.9% (net). In 2011, annual available rooms are forecast to grow by 0.8%, followed by a reduced increase of 0.3% in 2012. These growth rates are considerably below the long term average recorded over the past 20 years.

Lastly, buyers will be able to benefit from hotels’ trimmed cost structures. We’ve heard from some owners that these cost cutting initiatives have resulted in cost per occupied room savings of as much as 5-8% for large urban hotels. A number of cost cutting initiatives will result in long-term savings for hotels. These market dynamics are leading to a very favorable time for hotel buyers.

- Art

Mike Francis, Senior Vice President, Select Service Division

In the workshop “Select Service: Surviving and Thriving”, panelists highlighted the positive aspects of the select service hotel market and the ability of the sector to outperform the rest of the industry during the downturn. The panel was insightful and much discussion was devoted to historical underwriting standards and the applicability of history to the future.

Additionally, a key theme that the speakers agreed upon was that the select service sector has fat profit margins, which displayed an unexpected degree of resilience as most investors’ worst case scenario unfolded during 2009.

Some important theories were advanced on the competitive position of the select service hotel market relative to full service hotels and the market as a whole. In the downturn following 9/11, select service hotels generally benefited from consumers trading down from full service hotels to less expensive properties. Though there was some trading down in this downturn, a distinct—and surprising—new trend emerged. Panelists universally cited that full service hotels actually engaged in predatory pricing tactics by lowering their rates significantly, using this as their leverage factor in an attempt to take some market share from select service hotels.

Industry participants to a certain extent first feared that the ADR declines in select service hotels would be particularly detrimental as the hotels already operated a lean operation to begin with. But select service owners and operators have been proven wrong. Through creative cost containment initiatives and restructuring of operations, select service hotels have been able to achieve significant additional cost savings. The speakers agreed that while some operators knew the additional efficiencies adjustments to operating leverage were possible or available, they had simply never been forced to test some of these cuts. The destructive effects of ADR deterioration were thereby moderated.

Looking forward, one panelist commented that occupancy was starting to give him more “pep in my step” and, while rates have not improved as of yet, the groundwork is in place. Not surprisingly, there was universal agreement that feasibility of new development would be slow in coming back.

That all sounds like good news to me.

- Mike

Arthur de Haast, Global Chief Executive Officer

With fundamentals in many of the world’s mature lodging markets still bouncing along the bottom, brands and investors continue to look abroad for growth to their portfolios.

Much has been said about the development opportunities that the BRIC economies offer and this is still very much true today. Globally, the most significant hot spots for hotel development are China and India, and also Brazil. The Middle East has seen an explosion in new hotel openings in a number of cities but Saudi Arabia still offers considerable potential for growth. Investors are also looking to North Africa. Hotel markets in Egypt and Morocco are doing well. Furthermore, several natural resource-rich countries in Africa are starting to selectively pop up on investors’ radar. Indochina also presents development opportunities, though not on the same scale as in China, India and Brazil.

As I discussed with my fellow panelists during today’s workshop “International Hotel Development: Translating Domestic to Global”, the development of hotels outside of mature lodging markets is accompanied by a host of challenges. There are virtually no experienced third-party hotel operators in these emerging markets, which is a challenge for franchisees. Many developers do not have previous experience with hotel assets and have a limited understanding of management agreement terms and how they work. In agreements for hotels outside of the U.S., it is often more difficult to negotiate how risk is shared in the event of operating shortfalls. In many emerging markets, mixed-use hotel developments are the norm, which brings further complexities.

Being flexible in terms of certain brand standards and offering more flexibility in management agreements is crucial for increasing brands’ development pipelines. Offering termination without cause, subject to fair compensation to the operator, may represent one of the ways to get more deals done.

- Arthur

Arthur Adler, Managing Director and CEO - Americas

At the 32^nd Annual NYU International Hospitality Industry Investment Conference, the mood is brighter than at previous conferences in recent memory. In the U.S., demand growth is back, though ADR growth remains elusive. The themes communicated at the “CEOs Check In” panel this morning, along with what I’m hearing from industry participants in our meetings, are very much resonated in the data revealed in our most recent bi-annual Hotel Investor Sentiment Survey.

Market optimism took a positive stride in our latest survey and investors’ hotel performance expectations for the next six months marked the biggest positive shift recorded in a single survey period. Investors’ sentiment for the next two years jumped to a three-year high. The survey findings parlay into today’s opening session where panelists expressed their expectation for a V-shaped recovery (as opposed to a U-shaped one). In terms of growth in fundamentals, panelists unequivocally stated the most optimistic outlook for New York, Washington, D.C., Boston and San Francisco.

Consistent with the viewpoints from this morning, investors’ ‘buy’ intentions dominate again for the first time since the onset of the downturn. Hotel markets are starting to heat up across the country. More than half of investors surveyed indicated that their main activity over the next six months will be buying. This marks an unmistakable trend.

Buyers are becoming more aggressive and are increasingly pricing in optimism on future cash flows, knowing they are still establishing a foothold at cyclically low purchase prices. The abundance of equity capital in the marketplace will further drive transactions. Panelists agreed that transactions are on the upswing and will continue to tick up throughout 2010 and beyond.

-Art

Arthur Adler, Managing Director and CEO - Americas

Things are starting to get better out there, and I look forward to convening with fellow leaders in the hospitality industry during the upcoming NYU International Hospitality Industry Investment Conference. The mood shrouding industry conferences in recent memory has been bleak, and I expect this conference to reflect a turning point for our industry.

As recently as three months ago, many of us were expecting RevPAR to mark a further marginal decline in 2010, but RevPAR has now posted positive growth for two consecutive months which is leading to a consensus that RevPAR will mark a slight rise this year—finally!

I believe that this improvement in recent operating data will have a huge impact on the sentiment at the conference. While we’re nowhere near a recovery from the drastic declines, positive growth has made a very welcome return and is already beginning to shape the actions of investors and operators. The volume of hotel transactions that we tracked in the U.S. has more than doubled so far this year compared to the same period last year.

We’re at a very interesting juncture and I eagerly await participating in discussions on today’s driving topics and industry trends during the conference. A number of my colleagues at Jones Lang LaSalle Hotels are participating on conference panels and will share their views on expanding brands internationally, the latest on which assets are moving and at what price, what is happening in the debt markets, a look at distressed asset trends, what is motivating buyers and sellers and what are some winning asset management strategies. Let’s face it; there are some huge opportunities out there.

I hope you’ll check back for more updates on this blog during the conference, and I invite you to comment on our posts. I look forward to seeing many of you over the coming days.

- Art

Arthur Adler, Managing Director and CEO - Americas

Welcome to the Jones Lang LaSalle Hotels blog, where our executive team will bring you the insider’s scoop from the panels and happenings at the 32nd Annual NYU International Hospitality Industry Investment Conference in New York. Our goal is to give you, our readers, on-site perspectives about the key issues and upsides facing the lodging industry. We will be blogging from many of the educational and keynote sessions and will report on the dynamic discussions we are participating in to provide you with our outlook for transactions, debt availability and trends in asset management.

We invite your comments and ideas so please give us your feedback on all the opinions to be posted here. Look for upcoming posts from Jones Lang LaSalle Hotels’ team.

-Art