How Public Markets Helped Us Get in

This 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.
dloeb@rwbaird.com
414.765.7063

Please refer to Appendix - Important Disclosures and Analyst Certification on page 25.
How Did We Get Here?
 Lots of Money, Mostly Going Overseas
US Money Supply (M2), 1999-2009

8,500

8,000

7,500
Money Supply:
Money Supply (Billions)

7,000

6,500 grew 6.5%

6,000

5,500
annually 1999-
5,000 2009
4,500

4,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Philadelphia Fed

US Trade Deficit, 1999-2008

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-

(100)
Trade Deficit:
Trade Deficit (Billions)

(200)

(300) 1999-2008
(400) cumulative US
(500)
trade deficit: $5.4
(600)

(700)
trillion
(800)

Source: Bureau of Economic Analysis

Baird Real Estate Research | 3

 We Buy Stuff;
They Buy Real & Financial Assets

• The trade deficit (Imports less Exports) has to be invested in

$-denominated assets
Baird Real Estate Research | 4
 2000-2007: The Era of Falling Returns

Yields, 2001-2009

12.0%
11.0%
10.0%
9.0%
8.0% Full-service hotel cap rate

7.0% Aaa Corporate bonds

10-year Treasuries
6.0%
5.0%
4.0%
3.0%
2.0%
1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09

Source: PricewaterhouseCoopers, Federal Reserve

• Return opportunities declined, too many dollars

chasing return; risk taking rises

Baird Real Estate Research | 5

 Wall Street Fills the Void

• Most foreign investors prefer fixed income: treasuries,

agency debt (RMBS), corporate debt, financial
institution debt
• US investors levered equity into larger asset portfolios
• Lenders accommodated: Subprime/Alt. A, easy CMBS
• Macklowe deal to acquire EOP NYC office—CMBS debt: $50
million 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 billion
debt
• Everyone now owns some Hilton paper (via Bear, JP
Morgan to Fed)
Baird Real Estate Research | 6
Lots of Leverage Makes for Huge
Portfolios
Investment Bank Leverage: Banks Become Hedge Funds

4,500

4,000

3,500

3,000

2,500

2,000 4,000

1,500 3,000

1,000
1,200
500 600
0 100 100 100
100
6 to 1 12 to 1 30 to 1 40 to 1
Equity Debt

Source: Baird Research

Leverage Equity Debt

6 to 1 100 600
12 to 1 100 1,200
30 to 1 100 3,000
40 to 1 100 4,000
 Lots of Debt, Held by Lots of Investors

Hotel Financing—Pre-Credit Crunch (millions)

Hotel Owner Lender CMBS Buyer Lender

$100 $100 $92 $92 $83

$100 $92 $92 $83

Baird Real Estate Research | 8

Where Are We Now?
 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 isn’t convincing
• There may be other shoes yet to drop
• Even when it’s over, it won’t be over

Baird Real Estate Research | 10

 RevPAR Declines are Severe

Three-Month Moving Average National RevPAR Growth

10.0% January 2007 to Present

5.6% 6.7% 7.4%
5.1% 6.1% 6.2%
5.9% 5.4%
5.0% 3.8%
4.7%
4.7% 5.0% 5.4% 3.2% 2.2%
RevPAR (3-mo moving avg.)

1.6% 1.3%
2.0% 0.0%
0.0%
May

May
Mar

Mar

Mar
Nov

Nov
Jan

Feb

Apr

Jun

Aug

Sep

Apr
Jan

Feb

Jun

Aug
Sep

Jan

Feb
Jul

Jul
Oct

Oct
Dec

Dec
-0.6%-1.2% -3.6%
-5.0%
-7.7%
-10.0% -9.9%
-12.6%

-15.0% -14.0%
-17.5%
-20.0%

Source: Smith Travel Research and Baird Research

Baird Real Estate Research | 11

 Hotel Supply: Still Not Pretty

US YoY Hotel Supply Growth

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
4.0%
3.4% 3.4% 3.3%
3.5% 3.2% 3.2%
3.0%
3.0% 2.8% 2.9%
2.7%
2.5%
2.4% 2.4%
2.5% 2.3%

2.0%

1.5%

1.0%

0.5%

0.0%

Source: Smith Travel Research

Baird Real Estate Research | 12

 Hotel Supply: Luxury and Midscale
MUCH Worse

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

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
12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
Midscale w/o F&B Luxury

Source: Smith Travel Research

Baird Real Estate Research | 13

Where Are We Headed?
 Is There Light at the End of the Tunnel?

Or is it an oncoming train?
Baird Real Estate Research | 15
 RevPAR, Profits Still Shrinking
Early 1990s Hotel REIT Returns v. RevPAR - 3 mo. Moving Avg

45 6.0%

• RevPAR falling 40
4.0%

more slowly 35

(we hope); still 2.0%

falling
30

SNL Hotel REIT Index

RevPAR Growth (%)

0.0%
• Profits shrinking
25

until enough 20 -2.0%

RevPAR growth 15
Stocks lagged the recovery of
RevPAR coming out of the

to cover cost RevPAR turns positive

Feb 1992
1991 downturn. Not only did
RevPAR contraction need to
-4.0%

increases 10
Stocks bottom July 1992
slow, but RevPAR needed to
have positive growth for a number
of months before the stocks -6.0%

• Lessons from
5
performed.

prior cycles: 0 -8.0%

1991-1993,
1991 1992 1993
Hotel REIT Index 3mo MA RevPAR Chg
2001-2003
Source: Baird Research, Smith Travel Research, and SNL Financial

Baird Real Estate Research | 16

 Stocks Typically Bottom Closer to
RevPAR Turning Positive
Post 9/11 Hotel REIT Returns v. RevPAR - 3 mo. Moving Avg

50 15.0%

45
10.0%
40

35 5.0%
SNL Hotel REIT Index

RevPAR Growth (%)

30
In the post 9/11 recovery, hotel stocks were 0.0%
more anticipatory than in the early 1990s
25
case, however, bulk of the stocks' recovery was
realized once RevPAR growth became positive. -5.0%
20 Stocks bottom - March 2003 By waiting for positive RevPAR, investors
missed four months of a four-year rally
15 -10.0%
RevPAR bottoms July 2003 We conclude that a sustained trend in
positive RevPAR growth is needed for a
10
lasting rally coming out of a downturn. Thus,
RevPAR turns positive Aug 2003 while hotels are considered early-cycle, we see -15.0%
5 little reason to risk being too early.

0 -20.0%
2002 2003 2004
Hotel REIT Index 3mo MA RevPAR Chg

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

Baird Real Estate Research | 17

 Current Bounce Could be Premature;
Investor Focus Shifting from Survival to Recovery
2007-2009 Hotel REIT Return v. RevPAR 3 mo. Moving Avg

80 10.0%

70
5.0%
60
SNL Hotel REIT Index

RevPAR Growth (%)

0.0%
50

40 -5.0%

30
-10.0%
20
-15.0%
10

0 -20.0%
Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009
SNL Hotel REIT Index 3mo MA RevPAR Trend

Source: Smith Travel Research and Baird Research

Baird Real Estate Research | 18

 When the Cycle Turns . . .

• Supply holiday—five or more years with little

supply
• 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

Baird Real Estate Research | 19

Will Public Markets Provide the Solution?
 Who Else But Public Markets CAN be
Part 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 private
sector debt
Real Estate Private Equity Fundraising, 2000-2008

120
107

100
Aggregate Raised (Billions)

88
80
80 71

60

40
28 29
23
20 16 14

-
2000 2001 2002 2003 2004 2005 2006 2007 2008*

Source: Preqin Private Equity Real Estate Review

*2008 data reflect fundraising through Q3

Baird Real Estate Research | 21

 Lots of Equity Raised for Real Estate
in 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
RFS Hotel Investors 5/5/1994 Secondary $142,300
Winston Hotels 5/24/1994 IPO $63,700
Equity Inns 7/6/1994 Secondary $50,000
FelCor Suite Hotels 7/21/1994 IPO $87,200
Innkeepers USA 9/23/1994 IPO $46,900
RFS Hotel Investors 9/23/1994 Secondary $121,900

Source: Smith Barney

Baird Real Estate Research | 22

 Public Markets Bailed Out Private
Real Estate Owners Last Time Around
• Early 1990s, IPO wave as RE firms were unable to
roll debt—hotel deals included:
•RFS •Sunstone
•Jameson Inns •Innkeepers
•Equity Inns •Doubletree
•Winston •Red Lion
•FelCor •Boykin

• Mid-2000s public exits/new companies:

•Ashford •Sunstone
•Highland •Eagle
•Strategic •DiamondRock
Baird Real Estate Research | 23
 Re-equitizing REITs—2009

Recent REIT Common Equity Raised by Property Type (millions)

2,000
1,815
1,728 1,755
1,800
1,600
1,400
1,200
1,000
800 711 692
543
600
400
200
-
Industrial Shopping Center Office Hotel Health Care Mall

Source: SNL Financial, Baird Research

Baird Real Estate Research | 24

 Public markets Likely Key to Broader
Real Estate De-levering
Re-Equitizing REITs: Common Equity Offerings

Gross Offering
Company Ticker Offering Date Offer Price Shares (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 32,200,000 458,850
Regency 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

Baird Real Estate Research | 25

 De-levering Hotel Portfolios—Public
Execution
• New companies
• Perhaps led by proven public-company management
teams
• Public market investors bet on proven cycle timers
• PE/private portfolios coming public
• Morgan Stanley, Whitehall, Apollo, JER, etc.—all those
2005-2007 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

Baird Real Estate Research | 26

 To Get Our Research, Send Full Contact
Information to:

David Loeb
dloeb@rwbaird.com
414-765-7063

• Hospitality Monthly
• Industry and company research
• This presentation

Baird Real Estate Research | 27

 Baird Hospitality Real Estate Contacts

Research Investment Banking Trading

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414.765.7063 703.821.5760 414.298.5275

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awittmann@rwbaird.com mdeckerjr@rwbaird.com jgoddard@rwbaird.com
414.298.1898 703.821.5761 414.298.7792

Eric M. Palm Brian Jones Equity Capital Markets

epalm@rwbaird.com bjones@rwbaird.com
415.364.3341 650.424.9314 Rick Conklin
rconklin@rwbaird.com
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312.609.5480
jglasgow@rwbaird.com
703.821.5763

Baird Real Estate Research | 28

Appendix – Important Disclosures and Analyst
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