Handling a Hostile Hotel Environment: Strategies for Owners, Operators and Lenders

Thank you for joining us at our conference: Handling a Hostile Environment. More than 170 senior executives from our industry convened to share their views on issues ranging from financing and operations to workouts of distressed properties. Below are some of the highlights from each session.

Melinda McKay, Senior Vice President, Jones Lang LaSalle Hotels

• The main consensus among economists is for a V-shaped recovery,which assumes a short deep recession with recovery in late 2002. Normal GDP growth to resume in 2003.
• Leading indicators of a recovery include a peak in the new unemployment claims, the strong tilt on the bond yield curve and the bottoming of the stock market. Other positives include a stimulative fiscal and monetary policy, 40-year low in interest rates, growth in construction and consumer spending.
• However,uncertainty pervades which is limiting business investment. Lending is tighter, unemployment has risen, excess capacity remains, personal savings are at record low and there has been no growth in incomes. Consumer confidence is likely to lift although it remains fragile.

Alan Tantleff, Executive Vice President, Jones Lang LaSalle Hotels

• With the consensus opinion among sellers of a "V" shaped recovery, sellers appear unwilling to sell today, preferring to ride out the cycle.
• Parallels to the early 1990's are not applicable, since the recession coincided with an absence of capital, driving real estate prices down. Today, there is an excess of capital in the system earmarked for opportunistic investments. Therefore, it is unlikely that prices will decline significantly.
• Hotels have outperformed other asset classes these past years. Investors with exposure to the sector generally benefited.
• Value investors, not vultures,will dominate the market in 2002.

Carl Kane, President and CEO of

• As of the end of November 2001, 69 hotel loans were in default.Most were smaller, limited-service assets; there are relatively few larger hotel assets in delinquency. This number has increased dramatically since August but still represents a relatively insignificant percentage of the universe of 2700 hotel loans.
• By state,Florida has the greatest percentage of loan defaults. The greatest percentage of loans in default had balances of less than $5 million.

Moderator: Arthur Adler,Managing Director and CEO, Americas, Jones Lang LaSalle Hotels
Jonathan Bortz, Chairman and CEO of LaSalle Hotel Properties
Robert E. Parsons, CFO, Host Marriott Corporation
Paul W.Whetsell, Chairman and CEO,MeriStar Hotels & Resorts
Paul Underhill, President,Millennium Hotels and Resorts, USA

• Valuations are difficult to assess in this environment and it is best to consider discounted cash flow over five to 10 years, rather than cap rates. Occupancy of about 65% is expected for 2002.
• We are at the beginning of a cycle and will see demand growth from where we are today as well as considerable shrinking in supply growth. There will be good opportunities for value plays.
• Few acquisitions are expected over the next six months as a considerable gap remains between buyers and sellers. The focus for Host Marriott is on company liquidity, while MeriStar is gearing up for buy opportunities, aiming to sell 10-12 hotels so as to react quickly when assets become available.
• Strategies should be amended based on market conditions. In an up market,Millennium Hotels recommends placing value in bricks and mortar and putting aside capital. Conversely in a down market, it is necessary to spend money on marketing to capture available market share.

Moderator: Mary Daly, Senior Vice President, Jones Lang LaSalle Hotels
Daniel Abrams, Executive Vice President, iStar Financial
Jerry Earnest, Senior Vice President/Managing Director, GMAC Commercial Mortgage
Jonathan D. Gray, Senior Managing Director, Blackstone Real Estate Advisors
Ronald J. Kravit,Managing Director, Blackacre Capital Management LLC
Andrew B. Stein,Managing Director,WestLB

• Despite recent concerns, in general, banks are able and willing to lend, although some have temporarily suspended new financing commitments until they are more certain of the operating environment in 2002.
• Political risk is proving extremely difficult to underwrite.
• Overall, the lenders noted that banks have been reacting rationally to the lessons learned from the early 1990s.All are grappling with how to underwrite hotels today, but question how much demand truly exists in the current climate. The majority are underwriting based on 1998 operating levels.

Moderator: Michael E. Feldman, Corporate Partner, Proskauer Rose
Robert W. Boykin, Chairman and CEO, Boykin Lodging Company
Brian D. Egger, Director, Equity Research Department, Credit Suisse First Boston
Eileen M. Kirsch,Vice President, General Counsel (North America), Club Med
Edward A. Ryan, Senior Vice President and Associate General Counsel,Marriott International
Joseph M. Wilson, Executive Vice President/Leisure Global Practice Leader,Willis Group Holding

• Capital spending and reserve funds have been maintained. Projects are being completed, but no bold new initiatives are being pursued.
• Advertising and marketing have returned on an accelerated schedule following cancellations immediately following September 11.Many have opted for marketing alliances as well.
• Brand standards have eroded somewhat as discretionary services have been cut to maintain margins. The effect on customer expectations and satisfaction is being monitored.
• The Force Majeure clause has proven nebulous following the terrorist attacks, as no precedent exists.
• The industry needs to create "buy in" block for insurance and be committed long term to the concept to ensure its effectiveness.

Moderator: Jeffrey A. Horwitz, Corporate Partner, Proskauer Rose
Sheldon I. Hirshon, Corporate Partner, Proskauer Rose
Michael G.Medzigian, President and CEO, Lazard Frères Real Estate
Rick Rohrbach, Senior Vice President, Credit Lyonnais
Simon Turner, Principal, Hotel Capital Advisers

• Financing today is quite different than the high yield, private bond placement of 1988 and 1989. Today there are different fundamentals and different participants.Nearly 10 years ago, a borrower didn't always have an exit strategy, but could depend on the basic supply and demand curve as reality. The event risk and volatility affecting the markets today is changing perceptions on lending. Today's lenders need to look for earlier signs of distress than in previous years.
• Post September 11, it is nearly impossible to forecast over 90 days into the future. Thus far, lenders have not intervened however if covenants remained breached by mid 2002, lenders will find it tougher to grant relief, especially in the face of creditors and regulators.

Jones Lang LaSalle Hotels, the world's leading hotel investment services group, provides clients with value-added investment opportunities and advice. Its recent two-year success story includes the sale of 13,994 hotel rooms to the value of US$1.4 billion in 48 cities and advisory expertise for 173,021 rooms to the value of US$32.6 billion across 343 cities. Jones Lang LaSalle Hotels' services include transactions,mergers and acquisitions, financial advice and capital raising, valuation and appraisal, asset management, strategic planning, operator assessment and selection and industry research.

Founded in 1875 in New York City, Proskauer Rose LLP is one of the nation's largest law firms, providing a wide variety of legal services to clients throughout the United States and around the world. The firm has offices in New York, Los Angeles,Washington, D.C., Boca Raton, Newark and Paris.