Atlanta, GA, June 28, 2002 � The 2002 Hospitality Investment Survey, released today, reveals that the recession and terrorist attacks of 2001 have had a significant effect on hotel investors� perceptions of the market.  The investment survey was prepared by Atlanta-based PKF Consulting and its research affiliate, The Hospitality Research Group (HRG).  Both lenders and equity providers of investment-grade hotel properties completed the survey between April and June 2002.

Beginning in mid-2001, the majority of lenders have all but discontinued providing long-term financing for most hotel properties, particularly within the limited-service segment.  On the equity side, buyers and sellers of quality lodging properties are not in synchronization, as buyers are searching for good deals in a soft market while owners, most of whose loans are still within acceptable debt service coverage ratio limits, are not inclined to sell in a down market.

What began as a slowdown in the U.S. lodging market in the third quarter of 2000 continued through year-end 2001, as operating results nationwide declined.  According to PKF Consulting�s Trends in the Hotel Industry � USA, the major US markets experienced a 10.2 percent decline in RevPAR in 2001, as compared to the previous year�s results.  �Much uncertainty exists for investors in the lodging market because there is little evidence that RevPAR will increase past historic levels in the near future� said Scott Smith, MAI, Vice President of PKF Consulting.  �Lenders and equity providers largely have a wait-and-see attitude towards financing hotel properties.�  Forecasts from the HRG/Torto Wheaton Research  Hotel Outlook econometric model indicate that, as a group, the major metropolitan markets will not surpass their 1999-2000 RevPAR levels until 2004.  

The survey of both equity and debt investors reflects the added risk associated with estimating future cash flows in these uncertain times.  While overall capitalization rates remain stable, the decrease in net operating income, coupled with uncertainty in the market, has resulted in decreasing values. 

Survey Results

The results of the investor survey tend to bear out the preceding observations.  On the equity side, the overall capitalization rate for all properties so far for 2002 is 11.20 percent, similar to the 11.26 percent capitalization rate recorded by this survey in 2000.  The 2002 yield, or discount rate, is 16.31 percent, which is higher than any previous year since the inception of this survey in 1982.  The holding period, increased from 8.60 years in 2000 to 9.11 years in 2002, also indicates that investors are waiting for the market to rebound and not taking the discount on today�s values. Further, equity dividend rates, or cash-on-cash returns, continue to provide good returns of approximately 9 percent.  As the market appears to be at the bottom of its investment cycle, owners are selling only those assets that are distressed, over-leveraged, or not strategically desirable.  The recent sale of the Boston Marriott Copley Place by a subsidiary of the reinsurance company Overseas Partners to Host Marriott is an example of a sale of a nonstrategic asset. 

On the debt side, loan-to-value ratios decreased and debt coverage ratios (DCR) increased slightly.  The loan-to-value ratio in 2002 is 63.60 percent, which is the lowest it has been in the history of PKF Consulting�s investor survey.  The 2002 DCR is 1.52; this is higher than it has been recent years, but lower than it was in 1992, when the DCR was 1.60.  These debt parameters indicate considerable lender caution for hotel loans.

Comparative investment criteria for the full-service and limited- service segments reveal the desirability of the full-service segment as an investment vehicle in 2002 for equity investors, as the discount rate for limited-service properties has increased considerably over previous years, thereby lowering property values.

For lenders, however, neither full-service nor limited-service properties provide a considerably superior investment opportunity.  �Limited-service investment parameters are tracking full-service debt parameters closer than any other time in the history of this survey� noted Jack Corgel, Ph.D., Managing Director of Applied Research for HRG.  �The demand-side protection afforded by limited-service properties against changes in travel patterns, as well as the current low supply growth in the limited-service sector, jointly contribute to the narrowing of spreads between limited-service and full-service investment measures, specifically capitalization rates.� 

This survey did not include investment criteria for older properties approaching functional and economic obsolescence.  These properties are selling at highly discounted levels, with capitalization rates of 200-to-300 basis points higher than our reported 11.20 percent rate.  Cash-on-cash return for this type of property could range as high as 15 to 20 percent.  Lenders providing financing for this property type typically require a strong balance sheet with loan-to-value ratios less than 60 percent. 

Contact Gary Carr at PKF Consulting in San Francisco at 415-421-5378 to purchase a copy of the complete 2002 Hotel Investors Survey.

PKF Consulting is an international consulting and real estate firm specializing in the hospitality industry.  The Hospitality Research Group, based in Atlanta, is its research affiliate.  PKF Consulting and HRG, along with the PKF Consulting Capital Markets Group, are wholly owned subsidiaries of Hospitality Asset Advisors International, a U.S. Corporation.  HAA International has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, San Francisco, and Singapore.