Newsletter - January 17, 2002

VETERAN HOTELIERS FORM OWNERSHIP AND MANAGEMENT COMPANIES

Companies Seek to Acquire between $ 200 Million and $ 300 Million in Hotel Assets

Business Wire...Four veteran hoteliers have joined forces to create an ownership and management organization to acquire, co-invest in and/or operate first-class hotels.

The principals include Gary Mendell, former CEO of HEI Hotels; David E. McCaslin, former chief operating officer of MeriStar Hotels & Resorts; Stephen Rushmore, president, HVS International; and Stephen Mendell, former executive vice president/acquisitions HEI Hotels.

The ownership group, HEI Hospitality, initially will acquire or joint venture with other investors to acquire first-class, full-service hotels throughout the U.S. In addition, the company may acquire second mortgages or other forms of hotel debt.

"All of the principals have been through several real estate cycles and combined have more than 100 years in hotel-related experience," said Gary Mendell, Chairman and CEO of HEI Hospitality, which is headquartered in Norwalk, Conn. "We believe we are entering the trough portion of the hotel real estate cycle where 'cash is king,' and seek to acquire assets with strong turn-around potential. In addition to the funds each of us has invested, we expect to partner with other investment groups or to co-invest with existing owners who may need additional capital but don't wish to sell. We have a proven investment model and successful track record that will work well in the current economic environment. And, we have the creativity, flexibility and hands-on expertise to structure transactions that meet today's needs."

Smilezzzz (pronounced "smiles") Hospitality LLC, the management company, is a wholly owned subsidiary of HEI Hospitality and will be headquartered in Washington, D.C. Smilezzzz will manage assets acquired by HEI Hospitality, as well as be an independent, third-party operator. "We are creating an entrepreneurial, long-term, value-driven culture," said McCaslin, partner of HEI Hotels and president of Smilezzzz. "We are assembling a team of high-energy, seasoned professionals who are both bottom-line and people-driven. And with our parent company, we will have the ability to invest side-by-side from sliver to majority investor. Because all of the principals have been and will continue to be hotel owners, we will bring an owner-operator mentality to every hotel we manage. Our goal is to be a mid-sized company that has the size to deliver economies of scale but the scope for senior management to be able to personally focus on each property."

Typical properties sought by the two companies include: 150 to 500 rooms, first-class, full-service hotels located throughout the U.S., according to Stephen Mendell, executive vice president-acquisitions and development, HEI Hospitality. The company expects to invest between $ 200 million and $ 300 million over the next 18 months. "While we are not limiting our scope, we are targeting $ 10 million as the low end for our property transactions. We have the capability to buy outright and the flexibility to structure deals and certainly are willing to take more risk for more upside potential," Mendell said.

HEI Hospitality, headquartered in Norwalk, Connecticut is an ownership/investment and hotel management group that seeks to acquire and manage first-class and full-service hotels throughout the United States. For additional information, contact the company at 101 Merritt 7, Norwalk, Conn., 06851 Telephone is 203 849-5846 and e-mail address is steve.mendell@heiinvestments.com

BUDGET CHAINS EMERGE AS THE REAL WINNERS OF THE WORLDWIDE DOWNTURN

A growing sense of optimism across the hotel sector was the theme that emerged from this month's hotel industry Crisis Seminar organised in London by Hotel Report.

While the major chains such as 6C and Hilton believed they had the resilience to ride out the current downturn, smaller boutique groups, such as London-based Firmdale collection, believed too that their continued investment in quality and service would be repaid by long-term customer loyalty.

But it was the budget chains, in particular Accor and the UK-based Premier Lodge brand, that presented the most upbeat picture of both current and future business.

The budget sector, along with provincial hotel business in both the UK and European regions, had held up best in the aftermath of the September 11 attacks. It was the major gateway cities, in particular Paris and London, that had carried the brunt of the fall-off from international business, delegates heard.

Accor's UK managing director Michael Flaxman said that the economy hotel end of Accor's business had remained buoyant post September 11. Revpar figures for October were up 3% for Europe as a whole, including 5% up in France and 2.5% up in UK.

Premier Lodge's operations director Richard Edwards said that revpar for the year was up 10% and like for like occupancy was ahead 5%. There had been no impact on revpar from September 11.

Other sectors were not so healthy, but still optimistic. Martyn Levitt, finance director of Firmdale, operator of six luxury boutique hotels in London, said the company had not cut staff or rates, but was taking a long-term view. In October the townhouse hotel sector was down 38%, he said. In contrast, Firmdale was down only 20%, and 17% in November.

Tom Oliver, CEO of Six Continents Hotels, said business had been hit badly in key gateway cities, especially in the US, but the company was acting to maintain profit and reduce costs. But it was maintaining its modernisation programme. "It's a good time to have room stock out, and it will strengthen us for the future," he said.

The focus was now on domestic and regional markets over long haul and 6C had expanded its sales force and had increased short-haul short-break marketing. "Long-term we are fundamentally strong. Our focus is on driving revenues and changing guest mixes," he said. The fact that the UK hotel industry was profitable gave it a cushion against the short-term effects of September 11, Trevor Ward of TRI Hospitality Consulting said.

Visit the Hotel Report web site or contact:

Andrew Sangster,
Martin Information Ltd,
9 Rathbone Square,
Croydon UK
CR0 1BT
Tel: 44 20 8240 4479
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E-mail: hotelreport@martin-info.com

TRADE IDEA – NOMURA RECOMMENDS LIMITED SERVICE HOTELS

Analysts at Nomura Securities International Inc. recommended limited service hotels in a recent report because this type of commercial property has the ability to weather the nation's economic downturn.

"We expect that for the duration, limited service hotels that were stable prior to the summer of 2001 will continue to outperform their full service brethren, especially at the lower- and mid-level price points," Nomura Securities analysts said in their report.

Loans for hotel properties - including full service and limited service - are pooled with other commercial property loans into commercial mortgage-backed securities.

Nomura estimates that hotel properties comprise 7 percent to 12-1/2 percent of loans pooled in commercial mortgage bonds over the last seven years.

Investors who buy these securities include banks, insurance companies and hedge funds and mutual funds.

Nomura warned that investors holding securities backed by hotel properties should be on watch during the economic downturn. "The hotel market is in for a rough time over the next six to twelve months. We are already starting to see this filter through into the CMBS market as seen by the increase in hotel delinquencies," the Nomura January report warned.

Investors should expect loans that seemed to be foundering prior to the mid-summer of 2001 to be potentially facing severe credit issues and may need to be worked out by a special servicer, Joshua Phillips, commercial mortgage backed securities analyst at Nomura, told Reuters.

Special servicers are companies hired to work out troubled loans within a loan pool that has been sold as a commercial mortgage bond.

According to the Nomura report, full service hotels have faced the brunt of the economic downturn hit by the economic downturn because they have higher fixed costs, which remain, even as room revenues plummet. On the other hand, "limited service hotels appear to be benefiting from a much lower fixed cost base than their full service counterparts," Nomura analysts said in the report.

"With their fixed costs, the full service hotels have no choice but to lower room rates in response to lower occupancy levels in an attempt to spur demand," the Nomura report said, adding that "this initially further exacerbates the negative impact of the decrease in rooms sold on revenues."

TOURIST PROJECT WITH 17 NEW HOTELS WORTH US$3 BN APPROVED IN MOSCOW

At yesterday’s meeting the Moscow government approved the concept of integral development of the tourist and recreational zone of The Golden Ring of Moscow. The project is to be implemented before 2010.

According to Deputy Mayor Iosif Ordzhonikidze, the implementation of the project will require about $ 3 billion in investments. The Golden Ring will be located in the center of Moscow. It is planned to build 17 new hotels and to reconstruct 2 of the 8 existing hotels in that area within the framework of the project. New buildings with a total area of 2 million square meters, including 19 tourist centers and 14 observation points, are to be constructed inside the tourist zone.

Parking lots for about 20,000 cars will also be built. According to information from the deputy mayor, the implementation of the project will allow for increasing the number of foreign tourists in Moscow from 1.5 million to 5 million people a year. Owing to the development of The Golden Ring, the city's revenues from tourism may reach about $ 2.5 billion a year.

-          RBC Network Corp

THAILAND HOTELS RECORD SLIGHT OCCUPANCY INCREASE IN 2001 OVER 2000

Bangkok Post - The impact of the Sept. 11 terrorist attacks in the US on Thailand's hotel industry has not been as bad as expected and growth in the industry has managed to at least maintain the status quo, according to local hoteliers.

The overall occupancy rate of the Thai hotel industry last year was 70.07 percent, a slight increase from the 69.85 percent rate in 2000, according to the latest summary released by the Thailand Hotel Association (THA).

Before the attacks in the US, the industry had targeted an 8 percent increase in the occupancy rate year-on-year.

But the projection was revised to -10 percent after the Sept. 11 events.

"Fortunately, the figure turned out to be better than expected, thanks to a 5 percent increase in the rate during the first eight months of last year," said Prakit Chinamornphong, the THA's secretary-general.

He said that the aftermath of the attacks was not very significant on the Thai hotel industry because, unlike some neighbouring countries, particularly Indonesia, Thailand does not have any involvement in the international war against terrorism.

"Many tourists from Australia, the UK and US have switched their destinations from Indonesia and Malaysia to Thailand," Mr Prakit said.

Moreover, the number of tourists from the Middle East increased by 23 percent last year, with those travellers switching their destinations to a conflict-free country like Thailand based on their fear of discrimination in the US and Europe.

THA president Chanin Dhonavanick said that the Thai hotel industry this year was expected to grow marginally.

"But we are very concerned about several obstacles which may impede tourism growth," he said.

Mr Chanin said that the government's tourism policy was not supporting the industry.

For example, the 20 percent lift in domestic airfares by Thai Airways International Plc would undermine the government's campaign to promote domestic travel, which is the centrepiece of its tourism strategy this year.

He stressed that it was not an appropriate time for higher airfares when the country increasingly needed to rely on domestic travel.

"The government should also be aware that many countries in Europe and the US are also promoting domestic travel by offering very attractive packages during the post-Sept 11 period.

"But we increased airfares. So far, there has no tangible achievements by the government after a series of workshops held last year, " Mr Chanin said.

THISTLE HOTELS ‘CAUTIOUS’ AFTER DOWNBEAT TRADING

Thistle Hotels has been hit by a fall-off in the number of overseas tourists visiting London.

The drop in visitor numbers since the US terror attacks means turnover at its London hotels has fallen by 26.3%.

Outside London, turnover was down 6.8%.

In total, turnover was down 19% against the previous year.

Thistle says a swathe of costcutting measures has reduced this year's debt to the same level as last year.

Chief executive Ian Burke says: "Trading conditions have been very difficult in recent months, particularly in London.

"It remains difficult to forecast prospects for the hotel industry for 2002, and we remain cautious on market conditions for at least the next six months."

-          Ananova