HVS International

HVS International is a global consulting and services organization focused on the hotel, restaurant, timeshare, gaming, and leisure industries. Its clients rely on the firm’s specialized industry knowledge and expertise for advice and services geared to enhance economic returns and asset value. Through a network of 22 offices staffed by more than 200 seasoned industry professionals, HVS offers a wide scope of services that track the development/ownership process.

Starting with the market feasibility and appraisal study, a project is conceived and justified. Financing through the HVS investment banking team is then arranged, interiors designed, and management hired. The latest technology solutions are implemented, marketing strategies developed, and organizational assessments made. When a client requires actual, on-site hotel or restaurant management, HVS offers these services as well. Lastly, HVS asset management provides constant operational oversight that ensures the maximization of economic returns and asset value. No other organization offers such a broad range of complementary services. HVS also has specialists in parking operations, golf courses, and convention centers.

Since 1980, HVS International has performed more than 15,000 assignments throughout the world for virtually every major industry participant. Its principals literally “wrote the book” on hospitality consulting, authoring numerous authoritative texts and hundreds of articles. HVS is client driven, entrepreneurial, and dedicated to providing the best advice and services in a timely and cost efficient manner.

The Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management at New York University is a dynamic and growing educational and research center located in the heart of Manhattan. The Tisch Center offers an extensive complement of hospitality and tourism academic programs of study, including two bachelor’s degree programs and five master’s degree programs (three on-site and two online). In concert with its location in the financial and hotel capital of the world, coursework is focused on the areas of hospitality investments, hotel operations, revenue management, and customer relationship management relative to the international hospitality and tourism industry. As entrepreneurial educators, administrators and faculty are experienced in the profession and bring the reality of the industry into the classroom. The Tisch Center’s motto encapsulates its uniqueness — The City is our laboratory, the industry is our faculty, and our students are the future of the profession.

New York University Annual International Hospitality Investment Conference

For 21 years, HVS International has played an integral role in New York University’s Annual International Hospitality Industry Investment Conference. Once again, our team of professionals looks forward to welcoming you to this prestigious event, which is scheduled for Sunday – Tuesday, June 6 - 8, 2004, at New York City’s Waldorf Astoria Hotel.

Acknowledgements

Randy Smith of Smith Travel Research has provided the Survey’s comprehensive hotel statistics of Manhattan. Smith Travel Research continues to be the leading source of hospitality industry operating statistics. We would also like to thank Joseph E. Spinnato and Rick Amatto of the Hotel Association of New York City for their assistance. Additionally, in cooperation with New York University, the data-gathering process was largely a contribution of two graduate students, Michael Parys and Nimeet Patel, through the coordination of Dr. Mark M. Warner, Director of Graduate Programs. HVS International is pleased to have been a part of this enriching educational process.

Manhattan Operating History

The following table illustrates aggregate occupancies and average rates for contributing Manhattan hotels since 1987, as compiled by Smith Travel Research (STR). The table also summarizes marketwide rooms revenue per available room (RevPAR); this figure, which is calculated by multiplying occupancy by average rate, provides an indication of how well rooms revenue is being maximized.

The Manhattan hotel market has experienced dramatic cycles since the late 1980s. A significant downturn occurred in the early 1990s, reflecting the combined impact of supply additions, the nationwide recession, several disappointing years in the financial markets, and the Persian Gulf War; the result was a substantial decline in both occupancy and RevPAR. Signs of true recovery began to appear in 1993, and by the end of 1994, it was clear that a dramatic improvement in the market was underway. With the exception of 1999, which saw a substantial increase in supply, overall RevPAR registered double-digit growth each year from 1994 through 2000. A second significant downturn started in 2001, as a result of the slowdown in the national and regional economies, as well as the September 11 terrorist attacks; the result was even more dramatic than that of the previous recession, with a RevPAR decline of 21.7%. In 2002, marketwide occupancy rose slightly, as many hotels in the market employed a strategy of aggressive rate discounts to stimulate demand and maintain occupancy levels; marketwide average rate decreased further, resulting in a RevPAR decline of 4.5% compared to 2001. Despite a RevPAR decline of 1.4%, composed of a 1.0% growth in occupancy and a 2.3% decline in average rate, 2003 ended on a very positive note for the Manhattan lodging market. While the first half of the year was severely impacted by the adverse effects on travel due to the war in Iraq and the outbreaks of the SARS epidemic, demand levels in Manhattan started rising in June, with overall occupancy increasing from four to six percent in each month through the end of the year. With demand compression increasing, average rate showed positive growth in October through December. Overall, RevPAR registered strong increases in the last four months of the year, rising at rates ranging from seven to nine percent in each month.

The following chart illustrates the Manhattan lodging market performance from 1987 through 2003.

New Supply

Proposed Hotels

Manhattan Operating Statistics (Class)

HVS International compiled data provided by Smith Travel Research to illustrate the effects of the current state of the economy on different classes of hotels in Manhattan. The following tables compare the performance of all reporting hotels in Manhattan for year-end figures from 1998 through 2003; results are broken down by market segment: luxury, boutique, first-class, and other.

Luxury

Boutique

First-Class

Other

A review of the previous tables reveals the following.

Operating Statistics by Neighborhood

The following tables compare the performance of all reporting hotels in Manhattan from 1998 through 2003; results are broken down by neighborhood, including Midtown West, Midtown East, and Downtown.

Midtown West

Midtown East

Downtown

Overall, all three neighborhoods exhibited somewhat similar trends from 1998 through 2002. However, data for 2003 indicate that the Midtown West area has shown stronger and earlier signs of recovery; its RevPAR remained fairly stable from 2002 to 2003, while that of the other neighborhoods declined by roundly 3.0%. This superior performance can be attributed to the existence of a strong commercial base coupled with numerous leisure attractions.

Survey of Members of the Hotel Association of New York City

Manhattan Operating History and Forecast

As mentioned previously, the uncertainties of the war in Iraq and the negative impact of the SARS epidemic on international travel greatly hampered the Manhattan lodging market’s performance in the first four months of 2003. However, market fundamentals started improving in the second half of the year, and strong RevPAR increases were attained in October through December of 2003. In view of these historical trends, the expected year-over-year increases in the first four months of 2004, the continued recovery of the regional and national economies, a favorable exchange rate of the Euro against the U.S. dollar, and only moderate supply growth, we project the marketwide RevPAR to increase by 7.8% in 2004, composed of a 3.6% growth in occupancy and a 4.0% rise in average rate. As the national economy continues to recover, we project that by 2006, Manhattan’s occupancy will reach close to 1999 levels and average rate will return to 2000 levels.

Based on an analysis of the historical data and a review of proposed hotels, we have prepared the following forecast for the Manhattan lodging market.

Overview of Sales Transactions in Manhattan

The table on the following pages sets forth an overview of Manhattan hotel sales from 1992 through April of 2004.

As a result of the previous recession in the early 1990s, limited transactions occurred in 1992 and 1993, following by moderate increases in sales activity in 1994 and 1995. The hotel industry in Manhattan experienced significant sales transaction activity from 1996 through the first half of 2000, due to the upswing in hotel operating profits as well as the increased availability of debt financing. Hotel REITs and operating companies were in a strong acquisition mode during this period, which, coupled with the relatively low cost of debt and equity, helped to enhance hotel values. The downturn in lodging REIT and C-Corp. stock prices, as well as the uncertainty of the capital markets, contributed to a slowdown in sales activity as of the second half of 2000.

Following the events of September 11, 2001, hotel transaction activity further declined due to the uncertainty regarding hotel operating performance and stricter underwriting by lenders. Well-capitalized owners were generally holding onto their assets until market conditions normalized. Those owners facing debt-service shortfalls modified loan payment terms with their lenders or brought in new equity to the investment. Few owners have been forced to sell their assets.

Since the end of 2001, numerous buyers have raised capital to purchase hotels at levels below replacement cost. Declining hotel performance in 2002, followed by the war in Iraq and the SARS epidemic in the first half of 2003, caused many transactions to stall due to a gap between seller and buyer expectations.

As of the last quarter of 2003, hotel investors now perceive that the hotel industry in Manhattan has turned around, and occupancy and rates are expected to rebound significantly over the next few years; buyers are starting to meet seller expectations. We note that all five sales that occurred in 2003 took place during the second half of the year, as the Manhattan lodging market was starting to turn around.

Two hotels sold in the first four months of 2004 and several hotels are anticipated to change ownership in 2004 and beyond. We expect significant sales transaction activity in the next few years, similar to the activity that followed the previous recession of the early 1990s.

We note that from 1992 through April 2004, the highest per-room price was achieved by the Four Seasons, at roundly $743,000, in February of 1999.

Five transactions were identified in 2003; the following is a synopsis of each of these sales.

• The 244-room Helmsley Hotel Windsor was sold in September 2003, to be converted to luxury condominiums, for $55,000,000 or roundly $225,000 per room.
• The 117-room Gorham Hotel was sold in September 2003 for $23,100,000 or roundly $197,000 per room. The hotel closed and is undergoing an extensive renovation; upon completion of the project, the hotel will be repositioned as a four-star property. The hotel is anticipated to have a soft reopening in May 2004 and a grand opening in September 2004.
• In September 2003, the 187-room Roger Williams sold for $26,500,000 or roundly $142,000 per room. The hotel is subject to a ground lease with the Madison Avenue Baptist Church with less than 40 years remaining.
• The 722-room Loews Metropolitan Hotel sold in July 2003 for $110,250,000 or roundly $153,000 per room. The hotel underwent a $26-million renovation after the sale, which encompassed all guestrooms and public spaces.
• Currently named the Kimpton Hotel, the former 188-room Doral Park Avenue sold in July 2003 for $38,240,000 or roundly $203,000 per room. The hotel closed in November 2003 to undergo a $19-million renovation, which includes a new restaurant and 17 additional guestrooms.