meet the money 2009 david loeb of rw baird 5-7-09

8/14/2019 Meet the Money 2009 David Loeb of RW Baird 5-7-09

1/31

How Public Markets Helped Us Get inThis Mess, and How They Might Get Us

Out (Eventually)May 7, 2009

David Loeb

Managing Director, Senior Real Estate Research Analyst

Robert W. Baird & Co.

[email protected]

414.765.7063

Please refer to Appendix - Important Disclosures and Analyst Certification on page 25.


2/31

How Did We Get Here?


3/31

Baird Real Estate Research | 3

US Money Supply (M2), 1999-2009

Source: Philadelphia Fed

4,0004,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

MoneySupply(Billions)

US Trade Deficit, 1999-2008

Source: Bureau of Economic Analysis

(800)

(700)

(600)

(500)

(400)

(300)

(200)

(100)

-

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

TradeDeficit(Billions)

Lots of Money, Mostly Going Overseas

Money Supply:grew 6.5%annually 1999-2009

Trade Deficit:

1999-2008cumulative UStrade deficit: $5.4trillion


4/31


The trade deficit (Imports less Exports) has to be invested in$-denominated assets

We Buy Stuff;They Buy Real & Financial Assets


5/31

2000-2007: The Era of Falling Returns

Return opportunities declined, too many dollarschasing return; risk taking rises


Yields, 2001-2009

Source: PricewaterhouseCoopers, Federal Reserve

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09

Full-service hotel cap rate

Aaa Corporate bonds

10-year Treasuries


6/31

Wall Street Fills the Void


Most foreign investors prefer fixed income: treasuries,agency debt (RMBS), corporate debt, financialinstitution debt

US investors levered equity into larger asset portfolios

Lenders accommodated: Subprime/Alt. A, easy CMBS

Macklowe deal to acquire EOP NYC officeCMBS debt: $50million equity, $7 billion debt

Structured as 10-yrs interest only, debt-service shortfall

funded by lenders for first five years Lightstone CMBS debt: $600 million equity, $7.4 billiondebt

Everyone now owns some Hilton paper (via Bear, JPMorgan to Fed)


7/31

Lots of Leverage Makes for HugePortfolios

Leverage Equity Debt6 to 1 100 60012 to 1 100 1,20030 to 1 100 3,00040 to 1 100 4,000

Investment Bank Leverage: Banks Become Hedge Funds

Source: Baird Research

100 100

6001,200

3,000

4,000

100 1000

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

6 to 1 12 to 1 30 to 1 40 to 1Equity Debt


8/31

Lots of Debt, Held by Lots of Investors

Hotel

$100

Hotel FinancingPre-Credit Crunch (millions)


$92

Lender

$92

$83

Lender

$83

$100

Owner

$100

$92

CMBS Buyer

$92


9/31

Where Are We Now?


10/31

Beware False Bottoms


Macro outlook still unclear

Nobel Laureate Paul Krugman (NYT, 17 April 2009)

Things are still getting worse

Some of the good news isnt convincing

There may be other shoes yet to drop

Even when its over, it wont be over


11/31

RevPAR Declines are Severe


Three-Month Moving Average National RevPAR Growth

Source: Smith Travel Research and Baird Research

January 2007 to Present

4.7%5.9% 6.1%

7.4%6.2%

5.4%

-7.7%

-17.5%

4.7%

5.1%

5.0%5.4%

5.6% 6.7%

3.8%3.2%

2.0%

2.2%1.6%1.3%

0.0%

-0.6%-1.2% -3.6%

-9.9%

-12.6%

-14.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

RevPAR(3-momovinga

vg.)


12/31

Hotel Supply: Still Not Pretty


US YoY Hotel Supply Growth

Source: Smith Travel Research

2.3%2.4%

2.5%2.7%

2.8% 3.0%

3.2%3.4% 3.4% 3.3%

3.2%

2.9%

2.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09


13/31

Hotel Supply: Luxury and MidscaleMUCH Worse


US YoY Hotel Supply Growth for Luxury & Midscale with F&B Chain Scales

Source: Smith Travel Research

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09

Midscale w/o F&B Luxury


14/31

Where Are We Headed?


15/31

Or is it an oncoming train?


Is There Light at the End of the Tunnel?


16/31

RevPAR, Profits Still Shrinking


RevPAR fallingmore slowly(we hope); stillfalling

Profits shrinkinguntil enoughRevPAR growthto cover costincreases

Lessons fromprior cycles:1991-1993,2001-2003

Early 1990s Hotel REIT Returns v. RevPAR - 3 mo. Moving Avg

Source: Baird Research, Smith Travel Research, and SNL Financial

0

5

10

15

20

25

30

35

40

45

1991 1992 1993

SNLHotelREIT

Index

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

RevPARGrowth(%)

Hotel REIT Index 3mo MA RevPAR Chg

Stocks lagged the recovery of

RevPAR coming out of the

1991 downturn. Not only did

RevPAR contraction need to

slow, but RevPAR needed to

have positive growth for a number

of months before the stocks

performed.

RevPAR turns positive

Feb 1992

Stocks bottom July 1992


17/31

Stocks Typically Bottom Closer toRevPAR Turning Positive


Post 9/11 Hotel REIT Returns v. RevPAR - 3 mo. Moving Avg

Source: Baird Research, Smith Travel Research, and SNL Financial

0

5

10

15

20

25

30

35

40

45

50

2002 2003 2004

SNLHotelREITInd

ex

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

RevPARGrowth(%)

Hotel REIT Index 3mo MA RevPAR Chg

RevPAR turns positive Aug 2003

In the post 9/11 recovery, hotel stocks were

more anticipatory than in the early 1990s

case, however, bulk of the stocks' recovery was

realized once RevPAR growth became positive.

By waiting for positive RevPAR, investors

missed four months of a four-year rally

We conclude that a sustained trend in

positive RevPAR growth is needed for a

lasting rally coming out of a downturn. Thus,

while hotels are considered early-cycle, we seelittle reason to risk being too early.

Stocks bottom - March 2003

RevPAR bottoms July 2003


18/31

Current Bounce Could be Premature;Investor Focus Shifting from Survival to Recovery


2007-2009 Hotel REIT Return v. RevPAR 3 mo. Moving Avg

Source: Smith Travel Research and Baird Research

0

10

20

30

40

50

60

70

80

Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009

SNLHotelREITIndex

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

RevPARGrowth

(%)

SNL Hotel REIT Index 3mo MA RevPAR Trend


19/31

When the Cycle Turns . . .

Supply holidayfive or more years with littlesupply

Luxury lags, rate gap with upper-upscale

shrinks Bling is dead; Value is the new black, not thrift

Luxury that distinguishes itself with great product,service, and attention to detail likely to outperform

luxury that sought aspirational travelers



20/31

Will Public Markets Provide the Solution?


21/31

Who Else But Public Markets CAN bePart of the Solution?

PE is on the sidelines

Debt markets closed, long time before CMBS market reopens

Government role just the public sector taking over privatesector debt


Real Estate Private Equity Fundraising, 2000-2008

Source: Preqin Private Equity Real Estate Review

*2008 data reflect fundraising through Q3

16

28

14

2329

71

88

107

80

-

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008*

AggregateR

aised(Billions)


22/31


Lots of Equity Raised for Real Estatein 1990s

1993/1994 Real Estate Offerings:

79 IPOs, $16.0 billion raised

56 Secondaries, $4.9 billion raised

1993/1994 Hotel Equity Offerings

Company Date IPO/Secondary Amount (000)

RFS Hotel Investors 8/6/1993 IPO $39,800

RFS Hotel Investors 11/19/1993 Secondary $39,000

Jameson Inns 1/26/1994 IPO $26,900

Equity Inns 2/23/1994 IPO $51,200


Winston Hotels 5/24/1994 IPO $63,700

Equity Inns 7/6/1994 Secondary $50,000FelCor Suite Hotels 7/21/1994 IPO $87,200

Innkeepers USA 9/23/1994 IPO $46,900


Source: Smith Barney


23/31

Public Markets Bailed Out PrivateReal Estate Owners Last Time Around

Early 1990s, IPO wave as RE firms were unable toroll debthotel deals included:

Mid-2000s public exits/new companies:

RFS Sunstone

Jameson Inns Innkeepers

Equity Inns Doubletree

Winston Red Lion

FelCor Boykin


Ashford Sunstone

Highland Eagle

Strategic DiamondRock


24/31


Re-equitizing REITs2009

Recent REIT Common Equity Raised by Property Type (millions)

Source: SNL Financial, Baird Research

1,8151,728 1,755

711 692

543

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Industrial Shopping Center Office Hotel Health Care Mall


25/31

Public markets Likely Key to BroaderReal Estate De-levering


Re-Equitizing REITs: Common Equity Offerings

Company Ticker Offering Date Offer Price Shares

Gross Offering

(000)

Medical Properties Trust, Inc. MPW 01/08/2009 5.40 13,340,700 72,040

Health Care REIT, Inc. HCN 01/29/2009 36.85 5,816,870 214,352

Senior Housing Properties Trust SNH 02/04/2009 17.30 5,853,800 101,271

Digital Realty Trust, Inc. DLR 02/10/2009 34.00 2,500,000 85,000

Alexandria Real Estate Equities, Inc. ARE 03/19/2009 38.25 7,000,000 267,750

Simon Property Group, Inc. SPG 03/20/2009 31.50 17,250,000 543,375

AMB Property Corporation AMB 03/25/2009 12.15 47,437,500 576,366

Corporate Office Properties Trust OFC 04/01/2009 24.35 2,990,000 72,807

Kimco Realty Corporation KIM 04/03/2009 7.10 105,225,000 747,098

Ventas, Inc. VTR 04/07/2009 23.90 12,750,000 304,725

ProLogis PLD 04/08/2009 6.60 174,800,000 1,153,680

Equity One, Inc. EQY 04/09/2009 14.30 6,500,000 92,950

Equity One, Inc. EQY 04/09/2009 14.30 2,450,000 35,035

Acadia Realty Trust AKR 04/14/2009 11.95 5,750,000 68,713

DiamondRock Hospitality Company DRH 04/14/2009 4.85 17,825,000 86,451

Duke Realty Corporation DRE 04/16/2009 7.65 75,210,000 575,357

Weingarten Realty Investors WRI 04/17/2009 14.25 32,200,000 458,850Regency Centers Corp. REG 04/21/2009 32.50 10,000,000 325,000

Vornado Realty Trust VNO 04/22/2009 43.00 17,225,000 740,675

Parkway Properties PKY 04/23/2009 13.71 7,187,500 98,541

LaSalle Hotel Properties LHO 04/23/2009 10.10 12,362,500 124,861

Host Hotels & Resorts HST 04/24/2009 6.60 75,750,000 499,950

Total 7,244,844

Source: SNL Financial, Baird Research


26/31

De-levering Hotel PortfoliosPublicExecution

New companies

Perhaps led by proven public-company managementteams

Public market investors bet on proven cycle timers

PE/private portfolios coming public

Morgan Stanley, Whitehall, Apollo, JER, etc.all those2005-2007 takeovers could come public again

PE Asset owners: Walton Street, Broadreach, RLJ, etc.

Operator funds: Noble, Crescent, HEI, etc.

Hilton brand, Hilton assets

Hyatt brand, Hyatt assets



27/31

To Get Our Research, Send Full ContactInformation to:

David Loeb

[email protected]

414-765-7063

Hospitality Monthly

Industry and company research

This presentation



28/31

Baird Hospitality Real Estate Contacts


Research Investment Bank ing Trading

David [email protected]

Andrew J. [email protected]

Eric M. [email protected]

Mark Decker, [email protected]

Mark Decker, [email protected]

Brian [email protected]

Justin [email protected]

Mike [email protected]

Jeff [email protected]

Equity Capital Markets

Rick [email protected]

312.609.5480


29/31

Appendix Important Disclosures and AnalystCertification

Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related compensation fromthe company or companies mentioned in this report within the next three months.

Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S.equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity marketover the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broaderU.S. equity market over the next 12 months.

Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with anemphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an establishedhistory of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an

emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stablepatterns of revenue and earnings. H - Higher Risk - Higher-growth situations appropriate for investors seeking capitalappreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamicbusiness environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situationsappropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include:unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage,extreme price volatility and unknown competitive challenges.

Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a timehorizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Pricetargets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and thesecurity type. A variety of methods may be used to determine the value of a security including, but not limited to,

discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest raterisk, and general economic risks impact all securities. Specific information regarding the price target and recommendation isprovided in the text of our most recent research report.


30/31

Distribution of Investment Ratings. As of March 31, 2009, Baird U.S. Equity Research covered 526 companies, with42% rated Outperform/Buy, 56% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories,10% of Outperform/Buy-rated, 5% of Neutral/Hold-rated, and 8% of Underperform/Sell-rated companies havecompensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a publicoffering of securities for these companies in the past 12 months.

Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analysts recommendationsand stock price performance; 2) Ratings and direct feedback from our investing clients, our sales force and fromindependent rating services; and 3) The analysts productivity, including the quality of the analysts research and theanalysts contribution to the growth and development of our overall research effort. This compensation criteria and actualcompensation is reviewed and approved on an annual basis by Bairds Research Oversight Committee.

Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Bairddoes not compensate research analysts based on specific investment banking transactions.

A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can beaccessed at http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspxYou can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI53202.

Analyst Certification

The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accuratelyreflect such senior analyst's personal views about the subject securities or issuers and that no part of his or hercompensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in theresearch report.

Disclaimers

Baird prohibits analysts from own ing stock in companies they cover.

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressedhere reflect our judgment at this date and are subject to change. The information has been obtained from sources weconsider to be reliable, but we cannot guarantee the accuracy.


31/31

ADDITIONAL INFORMATION ON COMPANI ES MENTIONED HEREIN IS AVAILABLE UP ON REQUEST

The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used tomeasure and report performance of various sectors of the stock market; direct investment in indices is not available.

Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the UnitedStates Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws andregulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulationsgoverning United States broker-dealers and not Australian laws.

Copyright 2009 Robert W . Baird & Co. Incorporated

Other Disclosures

UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert WBaird Limited holds an ISD passport.

This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of theFinancial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionalsand may not be distributed to private clients. Issued in the United Kingdom by Robert W Baird Limited, which has offices atMint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial ServicesAuthority. For the purposes of the Financial Services Authority requirements, this investment research report is classified asobjective.

Robert W Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL isregulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. Thisdocument has been prepared in accordance with FSA requirements and not Australian laws.

meet the money 2009 david loeb of rw baird 5-7-09

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