distressed hotel conference 8april09

By: Scott L. Podvin, Managing DirectorThe Crest at Waterford Lakes, [email protected]://www.linkedin.com/in/sp0dvinTel: (305) 793-5762; Fax: (305) 665-3971

Scott L. Podvin: IMN’s Distressed Hotel Symposium – April 30- May 1, 2009

AGENDA:• Evaluating Exactly Why The Project Failed • Valuation Issues • Possible Title Complexities • Contract Negotiation • Assessing Local Markets • Issues With Incomplete Projects • Brand & Management Company Considerations • Evaluating Real Cash Flow The Project Generates

Session Chair: Joel Hiser, President HORWATH HOSPITALITY & LEISURE, LLC

Panel Participants: Scott L. Podvin, Managing Director THE CREST AT WATERFORD LAKES, LLC Patrick Deming, Managing Director EASTDIL SECURED Howard Shapiro, President HOWARD SHAPIRO & CO. Marv Pearlstein, Partner MANATT David Neff, Partner PERKINS COIE

LEGAL & DUE DILIGENCE ISSUES TO WATCH OUT FOR WHEN ACQUIRING

DISTRESSED HOTELS

KINGS OF THE UNIVERSE• Blackstone’s top-of-the-market acquisition, in which it

invested $6bn of equity, made it the world’s biggest hotels group. Its Hilton brands alone comprise more than 3,000 hotels and 500,000 rooms.

• Intercontinental Hotel Group, whose brands include InterContinental, Crowne Plaza and Holiday Inn, owns more than 4,000 hotels.

• Starwood, whose brands include St. Regis, Sheraton, Westin, W Hotels and Aloft, is one of the world's largest hotel operators with 897 properties, with around 275,000 rooms.

Scott L. Podvin: IMN’s Distressed Hotel Symposium -- April 30 – May 1, [email protected]://www.linkedin.com/in/sp0dvin

KINGS OF THE UNIVERSE CONT.

• Marriott International, whose brands include:

• Marriott Hotels & Resorts, • JW Marriott Hotels & Resorts, Renaissance Hotels &

Resorts, Courtyard by Marriott, • Residence Inn by Marriott,• Fairfield Inn by Marriott,

Marriott Conference Centers, • TownePlace Suites by Marriott, SpringHill Suites by

Marriott, • Marriott Vacation Club, • The Ritz-Carlton Hotel Company, • The Ritz-Carlton Club, • Marriott ExecuStay, • Marriott Executive Apartments, • Grand Residences by Marriott,

has more than 3,100 lodging properties in the U.S. and 65 other countries and territories.

Accor, best known as the operator of cheap and mid-range hotels, such as:

• Ibis, • Mercure and • Novotel aand whose upscale hotels

include: Sofitel, have a network of 182

hotels.Scott L. Podvin: IMN’s Distressed Hotel Symposium -- April 30 – May 1, [email protected]://www.linkedin.com/in/sp0dvin

MEASURES OF HOTEL VITALITY

• OCCUPANCY

• AVERAGE DAILY

RATE (ADR)

• REVENUE PER

AVAILABLE ROOM

(REVPAR)Scott L. Podvin: IMN’s Distressed Hotel Symposium -- April 30 – May 1, [email protected]://www.linkedin.com/in/sp0dvin

HOTEL MARKET

Three sources of hotel demand: 1. Tourism (individuals, groups, and

families); 2. Corporate (individuals and groups); and 3. Government-related demand, including

contractorsRemember, 70-80% of a hotel’s performance is systematically linked to the local economy.


HOTEL OCCUPANCIES

US hotel occupancy down 12.6 % in the last week of Feb.

• 2008 RevPAR decreased 0.8% due to a 3.7% decrease in occupancy, the highest annual decrease in occupancy since 2001.

• Demand is forecast to decrease by 2.0%

• Supply is projected to increase 1.6%,

• Occupancy will reduce further to 58.6%, the lowest since 1971, according to a PWC forecast


HOLD ONTO YOUR SEAT BELTS: ITS GONNA GET ROUGH

• In 2009:• 7.8% decrease in Occupancy• 6.4% drop in ADR• 13.7% fall off in RevPAR• 30.1% decline in profits• This level of decline has not been seen

since the 1930s. March 2009 Hotel Horizons Report by PKF Hospitality Research


How About So. Florida Hotels?• Miami-Dade, south Florida’s

largest lodging market, tax revenues from hotel guests plunged 24% in Feb and 17% in Jan.

• Room rates dropped twice as quickly in Feb. as in January –down 14% to $180/nt

• Occupancy dropped 11% to 73%

• Broward tax revenues fell dropped 20% in Feb and 16% in Jan

• Room rates dropped 12% to $144/nt

• Occupancy dropped to 83%


TRANSACTION VOLUME FALLS OFF A CLIFF

• Market for luxury hotels has evaporated

• “Luxury is just getting killed,” said Bobby Bowers, SVP at STR Global.

• Not a single top-tier hotel traded during the last quarter of 2008, said Patrick Ford, president of Lodging Econometrics


REASONS FOR DECREASING TRANSACTION VOLUME

1.Decreasing

liquidity

2.Deteriorating

demand

fundamentals Scott L. Podvin: IMN’s Distressed Hotel Symposium -- April 30 – May 1, [email protected]://www.linkedin.com/in/sp0dvin

SOME CITIES WILL ENJOY 2010

• Atlanta• Austin• Detroit• Oahu• Fort Worth• Raleigh• Chicago

• Dallas• Nashville• Columbus• Albuquerque• Houston*• Anaheim• Minneapolis

Lenders, investors, and operators should continue to be cautious because all but the hotels in Houston are forecast to continue to report occupancy their long-term average. March 2009 Hotel Horizons Report


HOSPITALITY IS SYMBIOTIC WITH COMMERCIAL REAL ESTATE

• Employment and Office Demand – Hotels proximate to office buildings tend to capture

corporate travelers– Density of office space in a market helps determine

highest and best use of land for hotels– Last decade, ave. 318 sf of office space absorbed for

every new job created, but in last 5 yrs, ave. decreased to 235 sf for every new job.

– BUT…..


STATISTICAL CORRELATION

• Ratio of office sf to total number of hotel rooms– Ratio of hotel rooms per

1,000 sf of net rentable office space ranged from only 0.21 to 0.23, w/ a mean of 0.22

• BUT…..


THE SECRET SAUCE

• Each job creates demand for 235 sf of office space

• 16.6 sf of office space creates demand for 1 occupied room night

• Thus, each new job generates demand for 14 room nights per annum


Relationship Between Office and Hotel Demand

• Ratio of occupied hotel room to occupied office space ranges from only 0.058 to 0.064, with an average of 0.060.

• Inverse of this ratio shows that for every 16.6sf of occupied office space, there was one hotel room occupied.

• The range of the occupied RBA to occupied room nights was from 15.5 square feet to 17.2 square feet.


UNEMPLOYMENT RATE


COMMERCIAL PROPERTY MARKET IS UNDER SIEGE

• Vacancies are expected to reach 14.7% this quarter

• Vacancies will approach 18% by year end

according to the National Association of Realtors.


OFFICE VACANCY PRIMARY MARKETSMarket 1992 Vacancy 2002 Vacancy 3Q 2008 Vacancy

New York -Mid-Town 15.0% 8.8% 6.2%

New York -Downtown 22.6% 12.1% 6.9%

San Francisco 12.4% 20.9% 10.0%

Seattle-Tacoma 16.4% 15.4% 10.1%

Los Angeles 20.5% 15.3% 10.3%

Miami 17.2% 14.3% 10.7%

Washington, D.C. 15.0% 11.2% 11.0%

Philadelphia 17.9% 12.5% 11.7%

Boston 17.8% 18.4% 11.8%

Chicago -Downtown 21.4% 15.0% 12.2%

Houston 22.0% 15.6% 12.5%

Atlanta 18.8% 18.7% 16.2%

Phoenix 20.9% 20.3% 17.3%

Chicago -Suburbs 20.8% 21.8% 19.8%

Dallas-Ft. Worth 25.1% 23.2% 21.0%

US Average 19.8% 16.0% 13.7%

FORECAST FOR DEFAULTS AND BANKRUPTCIES

• Debt defaults increase at double-digit rate next 24 months

• 160 to 190 defaults in 2009• B/n 120 and 140 in 2010• Typically, 2 out of 3 to 3 out of 4 defaults end in

bankruptcies within 3 months. • Thus, we are looking at:

– 150 bankruptcies in 2009 and – 100 in 2010.

according to a bi-annual study in November 2008 by Bain Corporate Renewal Group.


BAD SITUATION GETS WORSE FOR HOTELS

• A rapidly growing number of hotels — including many high-end and luxury properties — are forced into bankruptcy or foreclosure in coming months, Martha C. White reported in The New York Times.

• Jim Butler, a hotel industry lawyer, said those who manage distressed hotel loans have told him that their workloads have jumped tenfold in recent months.

• “Things seem to be accelerating,” Mr. Butler said, and predicted that before the recession is over, the number of hotels in bankruptcy or foreclosure could rise above the 2,000 or so reached in the industry’s last big downturn in the 1990s.


GAMBLING ON CASINO OPERATORS Hit by the twin blows of a recession and tight credit markets, many gaming

companies have been squeezed hard.

1. Tropicana Entertainment filed for bankruptcy2. STATION CASINOS -- Colony owns a 75% stake in Station Casinos

Inc. while Crown owns a 19.6% interest in Fontainebleau Equity Holdings LLC. Both have Las Vegas properties

3. Trump Entertainment Resorts, of which Mr. Trump owns 28 per cent, filed for Chapter 11 protection at a court in New Jersey after bondholders who control the debt-laden casino operator rejected Mr Trump’s attempt to take the company private. Mr Trump has resigned from the board.

4. CITY CENTER--needs a combined $800 million contribution from both partners before it can access a $1.8 billion credit facility from lenders needed to finish construction. Australian billionaire and gambling magnate James Packer is weighing a stake in City Center, the troubled $8.6 billion Las Vegas development owned by MGM Mirage and Dubai World


LUXURY HOTELS TAKE A DIP INTO THE RED

• Ritz-Carlton, Lake Las Vegas spent much of 2008 in Chapter 11 – recently sold to 3rd owner a year.

• In Scottsdale, Ariz., 2 upscale properties entered foreclosure in Jan. after being open for ≤ 6 months

• Greenbrier Resort in W.V. filed for Chapter 11 last month after losing $35 million in 2008.

• In Chicago, plans for a 200-room Shangri-La hotel were scrapped.


VALUING HOTELS & RESORTSThree valuation techniques: 1. Income approach, 2. Cost approach, and 3. Sales-comparison approach.


HOTEL VALUATIONSFor the income approach, we create at least

three models: (a) A band of investment with 3-year net income build-up

and an equity dividend; (b) Mortgage equity with a 10-year income projection and

an equity yield; and (c) Overall rate derived from sales of comparable hotels.

*10-year discounted cash-flow is the preferred technique, although in this environment cash flow forecasts are not that reliable.

*Relying on sales of comparable hotels should be avoided since the true motivations of buyers and sellers are difficult to ascertain.


DUE DILIGENCE1. Research the Property

A. Title EncumbrancesB. Land use restrictionsC. Zoning

2. Understand the Physical Characteristics of the Land

D. No substitute for site visits

E. TopographyF. Surface water runoff


Due diligence cont-3. Environmental Impact Study

A. Phase IB. Phase II

4. Examine Infrastructure NeedsA. Sewage DisposalB. Water SupplyC. Transportation – traffic studiesD. Other utilities


DUE DILIGENCE CONT.-5. Investigate and Identify Community Stakeholders6. Meet with Government Officials7. Review Land Use Regulations

a. State and Local Comprehensive Plansb. Zoning Ordinancesc. Development Ordinances

d. Subdivision/Binding Site Plan Ordinancese. Impact Fee Ordinancesf. Other governmental regulations

8. Entitlements and Permits9. Additional land for expansion…


CONTRACT ISSUES

• Option Agreement or Sale and Purchase Agreement for the Site

• Contribution of the Site by the Land Owner

• PRICE• REPRESENTATIONS• INDEMNITEES• CLOSING AGENT• TITLE AGENTScott L. Podvin: IMN’s Distressed Hotel Symposium -- April 30 – May 1, [email protected]://www.linkedin.com/in/sp0dvin


Hotel Management & Sub-Management Agreements

Choosing the Brand– What is the market for the condominiums, fractional interests,

condo-hotel units, yacht club membership interests, and dockominiums to be sold?

– Which brand will fit best into the marketing plan?– Which brand would find the asset and its location most desirable?– How easy is the brand to deal with?– Which brand can be expected to deliver the highest RevPAR, given

the character of the asset and its location?– Which brand can be expected to deliver the most for the money?


Branded Management Contracts vs. Franchise/Management

Branded Management Contracts

1. FEES2. CONTRIBUTIONS3. BUDGET CONTROLS4. PERFORMANCE CLAUSE5. TERMINATION ON SALE6. CORPORATE MARKETING7. TERRITORY PROTECTION8. DISPUTE RESOLUTION9. OWNER APPROVAL OF KEY

EMPLOYEES

FRANCHISE AGREEMENTS1. FEES2. TERM3. TERMINATION ON SALE4. PERFORMANCE CLAUSE5. TERMINATION W/O CAUSE6. CORP MARKETING7. TERRITORY PROTECTION8. VENUE9. PROPERTY IMPROVEMENT

PLAN

TURNAROUND POTENTIAL

1. If poorly managed or maintained, we can timely implement capital improvement plan to push the ADRs.

2. If none, value may be land value or less.

3. The availability of financing is key to evaluating a distressed hotel.


RISK vs. REWARD Big hotel operators:1. IHG, 2. Hilton, 3. Marriott, and,4. Accor,

Reduce risk by selling hotels in exchange for long-term management agreements and/or franchise agreements, plus a small equity kicker (i.e. share of revenues).Scott L. Podvin:

IMN’s Distressed Hotel Symposium -- April 30 – May 1, [email protected]://www.linkedin.com/in/sp0dvin

ASSET LIGHT VS. ASSET RIGHT

• Starwood pursues a slightly nuanced asset disposal strategy to its peers.

• While others have sold hotels and retained management contracts and franchising of its brands - a strategy known as asset light - Starwood has adopted an “asset right” approach, holding onto a slightly higher percentage of hotel assets.


GREEN SHOOTS GROWING FOR HOTEL DEALS

• The hotel sector should benefit from its position as a favored investment for less-leveraged buyers, such as sovereign wealth funds, high net worth private investors and real estate investment trusts, says Arthur de Haast, global chief executive of Jones Lang LaSalle Hotels.


NOW IS THE TIME TO RAISE A FUND


FOUR POCKETS OF DEMAND1.Opportunity Funds that have been established to

buy real estate equity2.Newer Opp. Funds that have been created as

dedicated debt investors3.Private Equity looking at real estate debt4.Real Estate Companies buy back their own debt

or debt of others


THIS FUND SHALL FOCUS ON PURCHASING THE FOLLOWING TYPES OF ASSETS/DEBT:

City-CoreDevelopment

Projects

Strategically located developments, located in the centre of a city, being large-scale and multi-phase developments typically consisting of residential, hospitality, office, retail, entertainment and cultural properties with a blend of historic restoration and modern architecture.

Integrated Residential

Development Projects

Large-scale multi-family residential communities in secondary and tertiary markets located on main and main where we can implement a capital improvement program to push the rents. We will be prepared to purchase asset/debt on an all cash basis, but once the community has been stabilized, we shall lever it or dispose of the asset, triggering a repayment event.

PODVIN DEVELOPMENT GROUPRAISING $$100MM FUND TO

PURCHASE REAL ESTATE, DISTRESSED/OPPORTUNISTIC ASSETS

Broken Condos & Conversions or

Partially Constructed

Communities

There will be tremendous opportunities in busted condos and conversions while value add plays will also be easy to find. Likewise, there will be many projects with incomplete construction that we will be able to pick up on the cheap, complete construction and reposition the asset to create a vibrant working, walkable (with bike paths and all), sustainable and living community for working class people.

WE ARE NOW RAISING A $100,000,000 FUND TO PURCHASE DISTRESSED SELLER’S ASSETS

Scott L. Podvin: IMN’s Distressed Hotel Symposium -- April 30 – May 1, [email protected]://www.linkedin.com/in/sp0dvinhttp://www.linkedin.com/in/sp0dvin

Investors1. Institutional Investors 2. Pension funds 3. Insurance companies 4. Endowments 5. Investment Banks 6. Commercial Banks 7. Fund of funds 8. Hedge Funds9. High net worth individuals 10. Family offices

11. Sovereign wealth funds


Our Preferred Shares pay cumulative preferential cash distributions at an annual rate of 9%.

INVESTORS

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WHAT WE DO

• We identify real estate opportunities that generate superior risk-adjusted returns while ensuring capital preservation.


CORE BUSINESS FOCUS

1. Identification;2. Acquisition; 3. Ownership; and 4. Operation of multi-family residential and

hospitality real estate properties.


TYPES OF INVESTMENTWE MAKE THE FOLLOWING TYPES OF INVESTMENTS:

• single assets and portfolios;

• Distressed mutli-family and hotel operating companies

• development or redevelopment projects;

• real estate operating platforms; and

• structured loans and partnerships.

DEAL SIZE• The ideal deal size will

start at US$2-25MM, with a minimum equity investment of US$5 million.

• We have capacity for large transactions as a result of co-investment and partnerships with our broad institutional client base.


Investment Objectives(1)acquire neglected multi-family

residential &/or hospitality properties; and

(2) increase profitability thru: (a) providing superior property management, (b) improving appearance & environment;(c) implementing renovation strategies; and,(d) cross-selling ancillary services


INVESTMENT APPROACH

• Conduct thorough and comprehensive research • Perform ongoing review• Commit to strong on-the-ground presence• Add value by applying focused leasing & expense

reduction strategy • Undertake development or redevelopment plans• Create a tailored plan for each investment• Identify key milestones and profit drivers to achieve the

targeted result• Capital and financial structuring


OUR PHILOSOPHY• DO THE RIGHT THING: Our core ethos is to "do the

right thing” -- responsible investment. • ALIGNING INTERESTS: To deliver results, we

strategically structure the organization and employment compensation plans.

• PARTNERING: Working together (within our business and with clients & service providers), we achieve far more than on our own.

• DELIVERING INVESTMENT EXCELLENCE: delivering investment excellence lies at the heart of building client confidence.


OUR STRATEGY

• Attract and retain investors;

• Continuous research and innovation;

• Deliver stable platform for growth;


REAL ESTATE FUNDS – THE ANATOMY OF THE DEAL


What to Look for in a REAL ESTATE FUND

• Experience• Skills• Contacts• Practical problem solving• Reputation• Team • Capacity• $$ Balance Sheet $$


Alignment of Interests: FUND & REAL ESTATE COMPANY

• Fund Objectives• Fund Life• Leverage and Financing • Guarantees• Management Style and Control• Tax Considerations• Dealing with Unexpected Issues


THE CHEMISTRY COUNTS

ABOUT US• PDG is an independently managed private equity real estate

investment advisory company focused on real estate investment in the U.S., Europe and Asia.

• Our managed investments include development and redevelopment projects, joint-ventures and real estate operating companies in the multifamily apartments, retail, industrial, and hotel sectors.

• We combine local knowledge of our real estate professionals with broad global perspectives to develop our strategies and identify investment opportunities.

• Our team of real estate professionals come from diverse backgrounds, with the full range of skills required to invest in and manage real estate and advise real estate funds. Our specialists apply their skills to ensure that we drive every one of our investments to perform at its optimum.

• PDG is independent of any broader financial services group. We can invest funds on behalf of a number of different organizations, including pension funds, insurance companies, government entities and financial institutions, as well as charities and endowments.

Take Care of Your Family

• Scott L. Podvin, Managing Director of The Crest at Waterford Lakes, LLC

• www.TheCrestLife.com• [email protected]• Cell: (305) 793-5762• Fax: (305) 665-3971

distressed hotel conference 8april09

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