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The case is selected from the case packet: Astor Park Hotel by William Poorvu & Arthur Segel, 2001, HBS Case_9-800-194 (the access link to HBP coursepack is provided under Required Readings in the syllabus on Bb).

This case study discusses the interest of Starwood Hotels in acquiring an underperforming hotel in the Pacific Northwest. Steve Goldman, Starwood Vice President for acquisitions and development, is wondering how much to pay for the property and how to reposition it. This study also provides a good overview of the earlier development strategies that made this company one of the global leading hotel organizations today.

Apply the knowledge and methods studied in this course to analyzing this case. The following is the guideline for this case study:

Your written analysis of a case should generally contain five sections

1. Executive Summary

2. Brief overview of key case facts

3. Identification of the case problem or central issue

4. Discussion of 2-3 alternative solutions to resolve the problem

5. Selection of the preferred solution and explanation of how it solves the

problem

The body of your case analysis should be no longer than 4.5 pages, double-spaced.

Allow yourself an average of one page per section (2-5 above) and a half-page for the executive summary. Part of the learning experience is the distillation of notes, ideas and opinions into succinct presentations of your thinking on a particular case. Articulately state your points. You are encouraged to use other resources.

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For the exclusive use of J. Dennany, 2018. 9-800-194 REV: AUGUST 2, 2001 WILLIAM POORVU ARTHUR SEGEL Astor Park Hotel Steve Goldman sat at the desk in his room at the Astor Park Hotel in the Astor section of Pacifico, a large Pacific Northwest city, thinking about his upcoming presentation to Barry Sternlicht, Starwood Hotels and Resorts’ (Starwood) Chairman and CEO. Goldman was the Executive Vice President of Acquisitions and Development at Starwood and responsible for growing Starwood’s worldwide portfolio of hotels. His job entailed originating, structuring, and negotiating development related investments for the nation’s largest Real Estate Investment Trust (REIT). It was March 9, 1999 and Goldman’s due diligence work on the Astor Park was about to come to a close after weeks of investigating everything from the fire preparedness to the quality of the kitchen floor at the 257-room all-suite hotel. His exhaustive efforts over the past month had convinced him that the bankrupt Astor Park was undervalued and had not maximized management efficiencies because it was an independently managed property. His analysis led him to believe that Starwood would do well with its investment if he could propose a sound strategy for purchasing and repositioning the property from its current position at the low end of the luxury hotel segment. Contemplating the numerous issues that he faced in preparing his investment recommendation, Goldman began to put pen to paper developing a list of outstanding issues regarding financing, deal structure and repositioning that he needed to address before his meeting with Sternlicht which was less than a week away: “Given the market, how should the hotel be repositioned? Is the deal structure I have proposed really attractive to both Starwood and our equity partner? Can we pull this property out of bankruptcy at a reasonable price and generate an attractive return for our shareholders?” Background The Astor Park Hotel was originally constructed as a dormitory for the University of the Northwest (UNW) in 1969. By the mid 1970’s, the property had changed hands and was converted into a retirement home. The conversion was financed by Wells Fargo, a large California based bank. The property’s stint as a retirement home lasted only a year as the property quickly fell into default. Wells Fargo took over the asset and brought in Hyatt to remodel and operate the property as a hotel. In 1979, Andrew Pimentel, a Pacifico based real estate developer purchased the hotel from Wells Fargo for $9 million (financed with $6 million of 10% interest only debt for 10 years) and changed the name of the property to the Astor Park Hotel. ________________________________________________________________________________________________________________ Entrepreneurial Studies Fellow Matthew C. Lieb prepared this case under the supervision of Professor William Poorvu and Senior Lecturer Arthur Segel. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. 800-194 Astor Park Hotel Pimentel successfully positioned the Astor Park as one of the exclusive hotels in the Pacific Northwest. The success of the Astor Park in the early 1980’s prompted Pimentel to take a 25-year, $40 million non-recourse loan with interest accruing at 10.69% from Equitable in 1987. $6 million from the loan was used to payoff Pimentel’s original acquisition financing and consolidate other loans on the property. $10 million of the Equitable debt was used for improvements to the property. The remaining $24 million from Equitable was distributed to Pimentel and his partners. In 1990, Pimentel added more debt in the form of a $5 million, 20-year second trust deed with a constant of 11.75% provided by Equitable. The proceeds from the new Equitable loan were used for hotel improvements. At the time of this loan, the Astor Park Hotel was valued at $75 million. In the early 1990’s the hotel market in the Pacific Northwest began to change dramatically for two reasons: increased competition and a precipitous decline in the health of the Pacifico economic environment. By 1992, a new Four Seasons and The Inlet, a luxury boutique hotel, had come on line. As a result of the altered competitive and economic landscape, the performance of the Astor Park began to erode dramatically (see Exhibit 1 for historical financial performance of the Astor Park). As a response to this decline, Pimentel and his lenders restructured the property’s loans allowing for a future debt service deferral of $6 million, which was to be used for renovation. Additionally, Pimentel and his partners committed an additional $6 million in equity in an effort to bring the hotel to a quality level commensurate with that of the new local competitors. From 1993 to 1996, the Astor Park underwent significant renovations at a cost of $12 million, bringing the total cost of renovations since Pimentel’s acquisition to $27 million. Pimentel had conducted detailed analysis on the market and the property and believed that a significant facelift would drastically improve the performance of the Astor Park (see Exhibit 2 for Pimentel’s forecast of the property’s performance following the scheduled $12 million renovations). Suites on floors 10 through 16 received new carpeting, wallpaper, lighting, fixtures and entire bathrooms. Additionally, the lobby received new wallpaper, marble floors and furniture. Despite an excellent location, recent renovations and first-class amenities, the Astor Park continued to perform poorly. By 1998, the hotel’s poor performance caused deferred interest to grow from $6 million in 1993 to over $18 million leaving the property encumbered with a total of $63 million in debt. The debt burden proved to be too much for the property and Pimentel was forced to file for Chapter 11 bankruptcy proceedings for the Astor Park (see Exhibit 3 for a description of Chapter 11 as it relates to real estate). Astor Park Hotel The Location The Astor Park was situated in a central location bordered by three of Pacifico’s most exclusive neighborhoods: Emeraldville, De Pere and Bayview Hills. The hotel was within walking distance of Astor Village’s numerous shops, restaurants and theaters as well as the UNW campus. In addition, the Astor location afforded hotel guests convenient access to the large supply of well-occupied class “A” office space situated along the West Water Corridor of Pacifico. While the Astor locale had many advantages, it was considered a very good, but not premier location relative to the hotels in the trendy section of Bayview Hills or the scenic beachfront of Inlet Sound. 2 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. Astor Park Hotel 800-194 The Property The mix of rooms at the 257 all-suite Astor Park included 177 one-bedroom suites, 39 twobedroom suites, 2 three-bedroom suites and 39 penthouse suites. Standard amenities included multiline speaker phones, voice mail systems, fax and modem lines, 27-inch remote controlled televisions and deluxe bathroom accessories. The Astor Park offered a variety of food and beverage options consisting of the fine-dining Denmark Room, the three-meal Bayview Terrace, the poolside dining Café Solaris and the Astor Lounge. The hotel currently maintained minimal meeting space consisting of five separate rooms totaling nearly 4,000 square feet. The Astor Park Room, the largest of the meeting rooms, was capable of accommodating 150 guests. In addition to the suites, restaurants and meeting spaces, the Astor Park maintained a 170-space underground parking facility, a wellequipped exercise room and two outdoor swimming pools situated within an attractively landscaped garden area. Consistent with its location and amenities, the Astor Park offered premium services such as valet parking, 24-hour room service, a concierge, same day laundry and complementary chauffeured transportation to area shopping destinations. The Competition The Astor Park Hotel faced competition on two fronts. The primary competitive set was comprised of the lower end of Pacifico’s luxury market. The Northwest Hyatt, Pacific Inn, Nakota, Emerald Hilton, Sheraton Mirvue, Matilda and Porcouver Bismarck all competed with the Astor Park for business and leisure guests. These seven hotels plus the Astor Park represented a total of 2,594 rooms. The Astor Park also competed against Pacifico’s premier luxury hotels. This secondary competitive set consisted of the Inlet, Four Seasons, Regent Emeraldville, Lane Forest Hotel and Windows on the Sound. Along with the Astor Park, this secondary competitive set operated a total of 1,672 rooms (see Exhibit 4 for description of competition). Current Operations In Goldman’s opinion, the Astor Park was suffering as a result of its market positioning and management inefficiencies. In evaluating hotel properties, Goldman and his Starwood peers considered average daily rates (ADR) and occupancy levels to be the key measures of the hotel’s general strength. While occupancy levels often reflected industry wide patterns, they were also a significant measure of a hotel’s position within its local competitive market. As of September 1998, the Astor Park was garnering an ADR of only $175 (not including “ownership related” rooms). Worse yet was the property’s low occupancy rate. The Astor Park was running at only 65% of capacity in relation to competing hotels that achieved occupancy levels of over 70% on average. Goldman speculated that the poor performance of the Astor Park in recent years was due to the fact that undisciplined management had allowed the property to slip from the top tier of the Pacific Northwest luxury market. He cited an inconsistent and deteriorating guestroom mix on the lower floors, management turnover, and overstaffing with poorly trained employees as significant contributors to the poor performance of the Astor Park. As a result of slipping from the top of the luxury segment, the Astor Park management team had been forced to rely heavily on discounted government and corporate business which brought down the property’s ADR (see Table A for the Astor Park’ current market position). 3 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. 800-194 Table A Astor Park Hotel Astor Park Competitive Position Astor Park ADR vs. Two Competitive Sets Trailing 12-Month ADR as of 7/96 $245 $225 $205 $185 $165 $145 $125 Lower Tier* Astor Park Hotel Upper Tier** Goldman believed there were a number of areas where Starwood management could generate dramatic improvements in the performance of the Astor Park. Obvious cost overruns included food and beverage operations which lost over $320,000 in 1998 due to generous staffing and an extravagant, money-losing weekend brunch. Goldman also sited the excessive use of complimentary or discounted rooms in his analysis. According to his calculations, 6% of total room nights in 1998 were devoted to “ownership related” guests at a $65 ADR (“ownership related” guests are not included in the $175 ADR from September 1998). While Goldman believed that Starwood’s management practices could result in significant improvements at the hotel, he also knew that the turnaround would not be easy. After all, hotels, as compared to residential, retail and office projects, were perhaps the riskiest and most complex form of real estate management, development and ownership. Hotels were generally characterized by large capital building costs, complicated design and construction, high fixed costs of operation, management intensity, and high levels of uncertainty relating to occupancy levels. Hotels, in effect, had to ”rent” their entire facilities every night, a constraint which significantly increased operating risks, and which imposed a need for specialized management expertise and an ongoing refinement of market positioning. Occupancy was heavily affected by changes in the economy. Room rates were often used as a benchmark to determine the feasibility of new hotel construction or acquisition. One industry rule of thumb for full service hotels was that for every $1,000 of project costs on a per room basis, a hotel must achieve $1 of average daily room rate. If, for example, total development costs of the hotel amounted to $250,000 per room, an average daily rate of approximately $250 per room must be achieved. Goldman wondered if this rule of thumb was applicable to the Astor Park in this case. Starwood Starwood Hotels and Resorts was the world’s largest hotel operator generating over $4 billion of revenue in 1998. The company had grown from relative obscurity in the early 1990’s to international 4 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. Astor Park Hotel 800-194 prominence through a series of bold acquisitions led by Chairman and CEO Barry Sternlicht (Harvard Business School class of 1986). In 1995, Sternlicht purchased Hotel Investors Trust (a hotel REIT) and Hotel Investors Corporation (a hotel management company). Hotel Investors Trust and Hotel Investors Corporation allowed Starwood to benefit from a rare paired-share REIT structure. This structure permitted income from the management company as well as income from real estate gains to be exempt from corporate income tax, as long as the company paid out 95% of its earnings as dividends. Any tax due was paid by the individual investors in the Trust. Although the pairedshared status was outlawed in the early 1980’s, Hotel Investors Trust and Hotel Investors Corporation were “grandfathered” under the 1984 law. As a result of its paired share structure and unique ability to avoid "leakage" between the management company and ownership entity, Starwood was able to raise large amounts of equity and debt. At the end of 1997, Starwood further increased its market presence through the acquisition of Westin Hotels. By the end of 1997, acquisitions had given Starwood an ownership stake in over 110 hotels. Despite rapid growth from 1995 through 1997, 1998 proved to be the breakout year for Starwood. Early in the year, Sternlicht approached ITT's Chairman, Rand Araskog, as a "White Knight," and subsequently beat out Hilton for the acquisition of ITT in a well-publicized battle for control. Starwood paid $14.6 billion for ITT which was comprised of Sheraton Hotels, Ciga Hotels, Caesars Casinos, World Directories, and a 50% interest in Madison Square Garden. The acquisition of ITT propelled Starwood to the top of the hotel industry and made Sternlicht, at age 38, a household name in the hotel industry. Later the same year, Congress eliminated the paired-share status of Starwood causing Sternlicht to combine Starwood’s operations into a single C-corporation, but not before the company had amassed a portfolio of over 700 hotels in 75 countries including such marquis properties as the St. Regis in New York City, the Phoenician in Scottsdale, the Gritti Palace in Venice, and the Princeville Resort in Kauai. The repeal of Starwood’s paired-share status eliminated Starwood’s advantageous tax position versus other hotel companies, but it also gave the company access to internally generated cash flow that could be used for further expansion. Acquiring the Astor Park Hotel Acquiring the Astor Park would require Starwood to work closely with Andrew Pimentel, the property’s owner since 1979. Goldman had been introduced to Pimentel by Michael Schedler, a prominent real estate attorney who was advising Pimentel on the bankruptcy issues the Astor Park was facing. Seeking a mutually beneficial partnership, Pimentel and Goldman entered negotiations in an effort to buy the Astor Park out of bankruptcy. Goldman had only recently received word that Equitable, the largest current creditor of the Astor Park, would be willing to sell its interest in the property for $33 million. Goldman viewed this as a positive sign as Equitable had over $63 million in debt against the property. Whether $33 million was the bottom line, he did not know. After weeks of negotiations, Goldman and Pimentel had come to an agreement on structuring a partnership deal that broke out cash disbursements according to both ownership interests and management responsibilities. Under the agreement, Starwood would commit the equity capital and manage the property. Starwood would receive an 11% preferred return and a management fee equal to 3% of gross revenue. Following Starwood’s preferred return, distributions would be split 90% to Starwood and 10% to Pimentel in the form of his carried interest in the property. In addition to his carried interest, Pimentel also had the option to commit up to 20% of the equity capital. 5 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. 800-194 Astor Park Hotel On the surface, the deal appeared to be equally attractive to both parties. Starwood would gain an underperforming hotel at a potentially attractive price and Pimentel would preserve a carried interest in the property (which allowed him to avoid the $4.65 million tax liability he would be burdened with if he sold the property outright).1 However, Pimentel would still have to pay the taxes on the debt forgiveness of $2.4 million in the event of a continuing interest in the partnership. Pimentel’s role was critical to Goldman in that Starwood could not bypass the bankruptcy process without Pimentel’s consent and involvement. Repositioning As Goldman began to craft his proposal for Sternlicht, it became obvious that he could not separate the acquisition decision from the repositioning strategy for the Astor Park. After all, the success or failure of the investment would be a function of the capital committed and the returns generated from the investment. The positioning of the hotel would be a critical driver in both the capital requirements for the hotel as well as the average daily rate, occupancy levels and overall returns. To position the hotel effectively, Goldman carefully considered the type of customer that would be most desirable and profitable, given the Astor's favorable location and size. Typically, hotel guests are divided into four discreet categories (see Exhibit 5 for customer profiles). By segmenting the market by customer type, Goldman could more effectively position the hotel by catering to specific customers in the Pacifico area. In positioning the hotel, Goldman would be relying on one of Starwood’s most powerful assets: the company’s portfolio of well-recognized brands. Starwood utilized five distinct brands around the world, with each brand serving a specific segment of the hotel market. These brands included Westin, Sheraton, Four Points, St. Regis and the new W brand (see Exhibit 6a for a description of Starwood’s brands). In thinking through his branding options, Goldman quickly eliminated Four Points as a possibility: The location of this hotel is not consistent with Four Points. That is not to say that a moderate priced, full service hotel would not do well here, but from Starwood’s perspective, it does not make sense to move the property downscale. Having said that, Sheraton, W, St. Regis and Westin are all real possibilities. We have a proven track record of success with St. Regis Hotel and Westin brand, which helps to mitigate some of the risk of the deal. Sheraton gives us the option to operate a less expensive hotel in a 1 Sale Price Book Value (1) Gain on Sale Tax @ 25% (2) $ 33 million 24 million $ 9 million $2.25 million Mortgage (3) Sales Price Debt Foregiveness Tax @ 20% $ 45 million 33 million $ 12 million $2.4 million ______________________ (1) Costs $36 million less $12 million depreciation. (2) Rate based on recapture of depreciation. (3) The original mortgage of $45 million had unpaid accrued interest of $18 million for a total of $63 million; but the deferred interest had not been expensed for tax purposes. 6 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. Astor Park Hotel 800-194 good location, which I think could be successful here. W, though relatively unproven, is a new and exciting brand and the Pacific Northwest seems to be an attractive market to continue the rollout of the W name. At the end of the day, the projected economics for all four options are relatively similar at this location (see Exhibit 6b for Goldman’s pro forma financials of each brand at the Astor Park location). Despite the financial similarities, I need to make the right recommendation based on the current state of the market, where I think the market is headed and Starwood’s overall corporate objectives (see Exhibit 7 for a description of the current state of the hotel industry). Conclusion Goldman checked the clock and realized it was almost 2 a.m. and he had not come to any firm conclusions on either the acquisition or the repositioning of the Astor Park. Weary eyed, he summarized his thoughts: I’m convinced that this property is undervalued because I know that we could significantly improve cash flow through a variety of different strategies. If we can purchase the property for approximately $33 million and reposition it effectively, we will do very well, but the repositioning decision is anything but straightforward. On one hand, positioning the property more downscale has the advantage of limiting our capital commitment for renovations and seems to address a need for less expensive rooms in the area. On the other hand, this market seems like it could easily support another upscale property catering to business customers if it is done properly. While occupancy rates in this market are typically well above 70%, I know that the industry average is only 68%. No matter how we reposition this property, we will be extremely vulnerable to any dip in occupancy rates and I need to be very cognizant of how sensitive our returns are to capacity utilization. Of course this isn’t all about positioning. I have to make sure Pimentel goes along with my plan and that we don’t either overpay for the property or overspend for the repositioning. This would make a great addition to the Starwood portfolio because it would improve our presence in the Pacific Northwest. One last option is to find an independent investor to take out a mortgage and put up the equity. The investor could own the property and receive the 11% preferred return and the 90% share of the remaining profits. We would receive a long-term management contract with a management fee equal to 3% of revenue and possibly 10% to 15% of the investor’s 90% interest as an incentive fee. 7 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. 800-194 Exhibit 1 Historical Financials of the Astor Park Hotel 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 12,400,957 4,969,718 862,747 493,310 18,726,732 277,305 19,004,037 12,675,426 4,956,965 850,781 545,639 19,028,811 252,624 19,281,435 12,440,669 5,129,323 819,054 582,308 18,971,354 241,248 19,212,602 11,314,812 5,018,440 807,703 523,823 17,664,778 234,068 17,898,846 10,471,075 4,618,122 830,288 521,161 16,440,646 149,585 16,590,231 8,930,232 4,198,076 676,116 506,930 14,311,354 140,074 14,451,428 8,162,805 3,807,507 604,160 506,228 13,080,700 231,918 13,312,618 8,717,598 3,735,146 647,489 573,114 13,613,347 113,481 13,726,828 8,628,228 3,602,662 613,577 431,207 13,275,674 105,987 13,381,661 10,240,039 3,841,829 697,438 504,174 15,283,480 96,669 15,380,149 Operating Costs Rooms Food and Beverages Telephone Garage, Gift Shop, Spa Total Operating Costs 2,788,823 4,554,227 600,226 308,250 8,251,526 2,945,670 4,835,599 656,897 392,539 8,830,725 3,069,783 4,996,384 659,536 357,432 9,083,135 3,291,780 5,153,636 562,592 495,695 9,503,703 3,391,327 5,045,616 552,387 539,011 9,528,341 2,963,615 4,642,319 479,613 462,367 8,547,914 2,961,758 4,335,504 466,078 464,873 8,228,213 2,794,550 4,071,494 389,578 363,179 7,618,801 2,858,151 3,836,174 366,275 285,834 7,346,434 3,173,654 3,937,228 395,948 313,985 7,820,815 Earnings before Other 10,752,511 10,450,710 10,129,467 8,395,143 7,061,890 5,903,514 5,084,405 6,108,027 6,035,227 7,559,334 Other Operating Costs Administrative and General Heat, Light , and Power Advertising and Sales Repairs and Maintenance Total Other Operating Costs 2,467,801 614,655 501,952 907,739 4,492,147 2,294,961 640,387 983,394 900,349 4,819,091 2,210,391 680,823 1,005,029 941,996 4,838,239 2,022,500 718,097 952,145 1,008,488 4,701,230 818,541 1,155,292 673,414 1,079,336 3,726,583 721,530 919,740 664,950 934,511 3,240,731 792,245 1,036,067 690,522 1,067,338 3,586,172 673,911 1,088,844 725,274 1,093,376 3,581,405 722,557 1,393,484 670,862 1,052,275 3,839,178 961,056 1,517,163 692,863 1,200,371 4,371,453 Operating Income/Loss 6,260,364 5,631,619 5,291,228 3,693,913 3,335,307 2,662,783 1,498,233 2,526,622 2,196,049 3,187,881 Other Expenses Management Fee to Owner Real Estate Taxes Insurance Depreciation Total Other Expenses 855,182 190,738 49,156 1,276,274 2,371,350 867,665 189,135 48,018 1,124,621 2,229,439 864,567 191,168 72,506 1,060,365 2,188,606 804,046 197,092 99,201 968,215 2,068,554 746,560 208,192 324,998 932,830 2,212,580 650,314 206,621 256,999 933,864 2,047,798 595,391 220,342 221,855 849,617 1,887,205 617,707 222,876 285,545 933,864 2,059,992 605,976 224,037 284,610 933,864 2,048,487 692,107 216,793 299,312 990,744 2,198,956 Net Income 3,889,014 3,402,180 3,102,622 1,625,359 1,122,727 614,985 -388,972 466,630 147,562 988,925 Add: Depreciation Management Fee to Owner 1,276,274 855,182 1,124,621 867,665 1,060,365 864,567 968,215 804,046 932,830 746,560 933,864 650,314 849,617 595,391 933,864 617,707 933,864 605,976 990,744 692,107 6,020,470 5,394,466 5,027,554 3,397,620 2,802,117 2,199,163 1,056,036 2,018,201 1,687,402 2,671,776 4,276,000 0 0 4,276,000 1,744,470 4,276,000 587,500 0 4,863,500 530,966 4,276,000 587,500 0 4,863,500 164,054 4,276,000 587,500 (1,465,880) 3,397,620 0 4,276,000 587,500 (2,061,383) 2,802,117 0 4,276,000 587,500 (2,472,737) 2,390,763 (191,600) 4,276,000 587,500 0 4,863,500 (3,807,464) 4,276,000 587,500 0 4,863,500 (2,845,299) 4,276,000 587,500 0 4,863,500 (3,176,098) 4,276,000 587,500 0 4,863,500 (2,191,724) 70.33% $188.00 257 69.50% $195.15 257 66.08% $202.84 257 62.14% $199.99 257 63.83% $183.08 257 60.90% $183.11 257 Renovation Year 257 58.96% $157.02 257 56.84% $161.83 257 63.63% $171.09 257 Revenue Rooms Food and Beverages Telephone Garage, Shop, Spa, Rentals Net Revenue Other Income Total Revenue Cash Flow from Operations Debt Service $40 million Loan $5 million Loan $6 million Debt Deferral Total Debt Service Cash Flow Less Debt Service Occupancy A.D.R. Rooms This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. -8- For the exclusive use of J. Dennany, 2018. 800-194 Exhibit 2 Previously Projected Financials Assuming $12 Million in Renovations from 1992 to 1994 1992 1993 1994 1995 1996 1997 11,017,890 4,405,108 774,275 425,426 171,371 16,794,069 222,956 17,017,025 12,618,780 4,625,363 828,474 455,205 183,367 18,711,190 238,563 18,949,752 13,842,990 5,087,899 994,169 546,247 220,041 20,691,345 286,275 20,977,620 15,712,265 5,596,689 1,093,585 600,871 242,045 23,245,455 309,177 23,554,633 16,715,175 5,932,490 1,170,136 642,932 258,988 24,719,722 330,820 25,050,542 17,718,086 6,110,465 1,216,942 668,649 269,348 25,983,490 344,053 26,327,542 18,386,693 6,293,779 1,265,620 695,395 280,122 26,921,608 357,815 27,279,423 Operating Costs Rooms Food and beverages Telephone Garage Health spa Total operating costs 3,800,182 4,427,574 597,826 267,885 188,509 9,281,974 4,168,946 4,737,438 625,342 303,196 217,397 10,052,318 4,199,569 4,872,409 637,648 318,860 221,524 10,250,009 4,211,997 4,958,679 641,800 321,724 230,737 10,364,937 4,284,896 5,298,998 665,734 343,744 239,534 10,832,906 4,354,933 5,589,516 703,240 362,541 253,019 11,263,249 4,541,311 5,806,069 731,197 376,553 263,071 11,718,200 Earnings before Other 7,735,051 8,897,434 10,727,611 13,189,696 14,217,635 15,064,293 15,561,223 Other Operating Costs Administrative and general Heat, light and power Advertising and sales Repairs and maintenance Total other operating costs 2,225,984 850,851 986,307 1,054,022 5,117,163 2,299,340 890,638 1,039,095 1,118,035 5,347,109 2,315,212 946,651 1,095,009 1,136,288 5,493,160 2,352,094 957,432 1,125,276 1,164,648 5,599,449 2,447,155 971,412 1,247,903 1,166,964 5,833,434 2,536,220 1,006,029 1,311,518 1,213,526 6,067,292 2,602,609 1,066,741 1,358,936 1,264,632 6,292,918 Other Income/Loss 2,617,888 3,550,325 5,234,451 7,590,247 8,384,201 8,997,001 9,268,304 Other Expenses Management fee to owner Real estate taxes Insurance Depreciation Total other expenses 768,046 195,696 85,085 1,424,000 2,472,827 855,278 208,447 92,854 2,085,732 3,242,311 951,537 212,294 97,651 2,155,426 3,416,908 956,803 220,236 98,105 2,166,203 3,441,347 1,017,568 234,223 104,336 2,177,034 3,533,161 1,069,440 246,163 109,654 2,187,920 3,613,177 1,108,106 255,063 113,619 2,198,859 3,675,647 145,061 308,014 1,817,543 4,148,900 4,851,040 5,383,824 5,592,657 1,424,000 768,046 2,337,107 2,085,732 855,278 3,249,024 2,155,426 951,537 4,924,506 2,166,203 1,068,430 7,383,533 2,177,034 1,136,284 8,164,358 2,187,920 1,194,208 8,765,952 2,198,859 1,237,385 9,028,901 Revenue Rooms Food and beverages Telephone Garage Health spa Net revenue Other income Total revenue Net Income Plus: Depreciation Management fee to owner Cash Flow from Operations Occupancy ADR -9- 65% $180 67% $200 70% $210 71% $235 71% $250 71% $265 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. 1998 71% $275 For the exclusive use of J. Dennany, 2018. 800-194 Exhibit 3 Astor Park Hotel Chapter 11 Bankruptcy Description What is Chapter 11? An out-of-court restructuring between a debtor and its creditors is not binding on creditors that do not consent. If the out-of-court workout fails for this reason or if time does not permit structuring of an out-of-court solution for a troubled debtor, bankruptcy may be the only viable solution. For the business debtor, liquidation can be sought under Chapter 7 of the Bankruptcy Code or the debtor can seek to reorganize under Chapter 11. The Bankruptcy Code is a federal law, which is administered by United States Bankruptcy Courts located in each federal judicial district. All conflicting state laws are pre-empted by the Bankruptcy Code. A primary goal of Chapter 7 is to sell assets of the business as quickly as possible, usually by auction. Although this procedure has the advantage of speed, assets are usually sold at liquidation rather than going concern value. Conversely, the primary goal of Chapter 11 is to reorganize and restructure a company so that it can again become a viable entity. Chapter 11 essentially embraces two main policies: (i) the policy of equality, i.e., there should be an equal distribution of gains and losses among creditors of equal rank, and (ii) the rehabilitation policy, which promotes the restructuring of a business to preserve jobs and businesses and to enhance going concern value for creditors. Although the equality policy may produce painful results, it is subject to objective application. The rules underlying the rehabilitation policy are not nearly as clear. As the debtor stabilizes and seeks to reorganize, secured creditors and landlords must stand still so long as their interests are “adequately protected” and there is a reasonable prospect for reorganization. This result favors unsecured creditors and sometimes the equity holders of the company. However, the rehabilitation policy may also benefit secured creditors since lenders are likely to realize more on their claims if assets maintain their “going concern” value, rather than being sold by liquidation. A plan of reorganization may be either consensual, in which all classes of creditors vote to have the plan confirmed, or non-consensual, in which a process referred to as “cram-down” is used to confirm a plan despite the lack of sufficient creditor support. For a plan to be confirmed by cram-down, however, the Court must find that certain statutory safeguards designed to ensure fairness are met. The necessary findings include the determination that creditors under a cram-down plan would receive at least as much as they would receive if the debtor’s assets were liquidated. If it appears that a plan of reorganization cannot be confirmed within a reasonable time or if the debtor’s assets are diminishing, the Court may order a reorganization converted to a Chapter 7 proceeding where the debtor’s assets will be liquidated and the proceeds distributed to creditors. Source: Prepared by Bruce Levin, Esq. 10 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. 800-194 Exhibit 4 -11- Primary and Secondary Competitors of the Astor Park Hotel Profile of Competitive Facilities— Pacifico Regent Emeraldville Mobil Stars AAA Diamonds Stories Number of rooms Opening year Single Double Estimated Market Mix Commercial Group Leisure 60% 15% 25% Facilities/Amenities Restaurants Lounges Total meeting space (sq. ft.) Largest room/ballroom (sq. ft.) Square feet/guest room Swimming pool Exercise room Gift shop Parking Tennis courts Other amenities/services Occupancy ! Full year 1996 ! Full year 1997 Four Seasons Porcouver Bismarck Inlet Windows on the Sound 4 4 4 4 4 4 5 5 4 4 12 16 17 4 7 395 285 367 196 198 1928 1987 1988 1991 1993 $285-$425 $385-$440 $305-$430 $325-$575 $269-$399 $294-$424 $325-$450 $355-$480 $395-$495 $350-$550 Penetration 117% 69% 92% 45% 20% 35% Penetration 85% 89% 125% The Dining Room Garden Café Lobby Lounge Bar 50% 40% 10% Penetration 93% 175% 35% 60% 15% 25% Penetration 125% 74% 98% 40% 10% 50% Penetration 85% 50% 199% Inlet Garden Water Cafe Window Lounge Northwest Grill Dining Room Bar The Club Inlet Bar Lobby Lounge 25,529 14,300 64.63 9,650 4,200 33.86 11,000 4,032 29.97 4,532 1,380 23.12 6,745 3,645 34.07 outdoor yes yes valet/covered no beauty shop Outdoor Yes Yes Covered No business center heated indoor pool yes yes valet no concierge rooftop pool yes yes valet yes golf course outdoor yes yes indoor/valet no business center 75.0% 75.0% 73.4% 73.0% 63.2% 71.5% 76.8% 80.2% 83.1% 81.5% Total Competitive Market 1,341 51% 22% 27% 73.1% 75.3% ADR ! Full year 1996 ! Full year 1997 $305.00 $317.00 $279.05 $293.00 $177.33 $182.79 $347.00 $367.61 $258.79 $289.50 $268.03 $280.68 RevPar ! Full year 1996 ! Full year 1997 $228.75 $237.75 $204.82 $213.89 $112.07 $130.69 $270.66 $294.82 $215.05 $235.94 $195.84 $211.46 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. 800-194 Primary and Secondary Competitors of the Astor Park Hotel Exhibit 4 (continued) Profile of Competitive Properties— Pacifico Lane Forest Opening year Matilda Pacific Inn Northwest Hyatt Sheraton Mirvue Emerald Hilton Total Competitive Market Nakota 1989 1961 1984 1988 1978 1955 1999 Mobil Stars AAA Diamonds 3 4 3 NR 3 3 4 4 3 3 3 4 4 4 Stories 8 12 9 17 10 8 7 341 224 200 367 301 581 297 $300-$535 $240-$290 $300-$450 $205-$510 Same $294-$424 same $295-$345 $295-$345 $195-$335 $500-$1,000 $290-$330 $315-$415 Ocean Grill Matilda’s Table Pacific Bistro Ocean Bar Club Oceanic 2 Restaurants 2 Lounges Lobby Lounge Trader Jeff’s Lobby Bar Northwest Grill Dining Room Bar Panoramic Restaurant and Bar Halo Lounge 10,886 3,960 54.4 11,000 4,032 30.0 20,000 7,400 66.4 53,332 20,000 90.1 10,000 4,375 33.7 Outdoor Yes Yes Valet business center, private kitchens, and balconies, dataports, florist, salon, art gallery indoor yes yes garage concierge, business center outdoor yes yes yes beauty salon, beachfront location, disabled facilities outdoor yes yes garage business center, comp. transportation services yes yes Number of rooms Single Double/suites Facilities/Amenities Restaurants Lounges Total meeting space (sq. ft.) Largest room/ballroom (sq. ft.) Square feet/guest room Swimming pool Exercise room Gift shop Parking Other amenities/services Occupancy 1996 1997 1998 -12- 17,000 6,188 49.9 indoor/outdoor yes yes valet massage, business center, and concierge 77.2% 80.0% 77.6% 2,500 2,500 11.2 Outdoor Yes Yes Garage CD players, minibars Voicemail/data ports Modern Art, Concierge 39.7% 77.4% 77.6% 79.3% 78.9% 74.5% 63.2% 71.5% 72.0% 79.9% 80.3% 80.3% Sarto’s Pool Bar, Coco Café, Kiwi Club 2,569 valet business center, videoconference facility, remote control panels for lighting, TV, AC 74.3% 70.0% 71.6% 70.2% 70.0% 68.0% 69.3% 73.0% 72.7% ADR 1996 1997 1998 $181.38 $197.26 $229.75 $127.02 $223.08 $254.82 $136.18 $142.83 $159.40 $177.33 $182.79 $239.20 $172.71 $187.65 $201.64 $141.89 $168.00 $171.21 $163.98 $171.00 $174.00 $159.43 $181.32 $200.97 RevPar 1996 1997 1998 $140.03 $157.81 $178.29 $ 50.43 $172.66 $197.74 $107.99 $112.69 $118.75 $112.07 $130.69 $172.22 $138.00 $150.68 $161.92 $105.42 $120.40 $122.59 $115.11 $119.70 $118.32 $110.51 4132.35 $146.19 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. Astor Park Hotel Exhibit 5 800-194 Customer Profiles of the Hotel Industry Corporate/Commercial Individuals: This demand segment consists of individuals whose purpose for traveling is related solely or predominantly to their jobs or businesses. Its peak days of demand are Monday through Thursday. Corporate Groups: The purpose of travel for this demand segment is also business. This segment is distinguished from the corporate individual segment by virtue of its booking of rooms on a block basis. The specific purpose of travel is likely to be a company-sponsored meeting in the hotel or at a nearby location. Convention and Association Groups: Conventions and association meetings can have thousands of attendees, many of whom travel as corporate groups or book rooms on a block basis through the sponsoring organization. Tourists and Leisure Travelers: This demand segment encompasses most pleasure travelers and includes many family groups. Double (or higher) occupancy of rooms is common. Travel tends to occur at peak periods of demand. Room rates are infrequently discounted for tourists. Lengths of stay vary widely from one-night stopovers a day’s drive from home to vacations lasting a week or longer at a resort thousands of miles from home. Typical Profiles for Four Hotel Demand Segments Corporate Individual Traveler Corporate Group Traveler Leisure Individual Traveler Leisure Group Traveler Seasonality None Fall and spring are peak Summer and winter are popular Varies with destination Day of Week Weekday (Wednesday and Thursday are peak) Weekday (Monday arrival and Thursday departure are popular) Friday arrival and Sunday departure are peak Stays are usually for a week or encompass both weekdays and weekends Double Occupancy Limited Rare Frequent Always Price Sensitivity Varies, but not extremely sensitive Varies, but not extremely sensitive Often sensitive, but varies Very price sensitive, commissions paid Average Length of Stay 2 nights 2.5 to 3 nights 2 to 6 nights 3 to 6 nights Facilities/Amenities Needs and Preferences Business center, modems, room service, video checkout Recreational facilities, breakout rooms, audiovisual equipment Recreational facilities, variety of restaurants and nearby amenities Double/double rooms, on-premises restaurant, large lobby Repeat Patronage Often Often Occasionally Repeat tour operators Source Travel agents, corporate travel departments, individual secretaries Corporate meeting planners Travel agents, selfbooking Travel agents, tour operators Source: Hotel Development, ULI-the Urban Land Institute, 1996. 13 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. 800-194 Exhibit 6a Astor Park Hotel Starwood Hotel Brands St. Regis Luxury Collection comprise a unique family of over 55 hotels and resorts in 20 countries, with more than 15,000 rooms. These properties offer exceptional service to an elite clientele. Many of the hotels, some of them centuries old, are internationally recognized as being among the world’s finest. Competitors of the St. Regis Collection include Four Seasons and Ritz-Carlton. Westin Hotels & Resorts is a global network of more than 105 upscale hotels and resorts in 23 countries, with over 45,000 rooms. This leading hotel brand was rated the best U.S. Upscale Hotel Chain for an unprecedented four years in a row by “Business Travel News” in 1997. Westin competes primarily with Hyatt Hotels. Sheraton Hotels & Resorts caters to upscale business and leisure travelers. Recognized the world over, the Sheraton brand is represented in more business and resort locations than any other brand in its category, with over 340 properties in 60 countries and more than 115,000 rooms. Sheraton typically faces competition from brands such as Marriott and Hilton. Four Points Hotels by Sheraton serves the needs of price conscious business and leisure customers, delivering the amenities of a full-service hotel at more competitive rates. Four Points Hotels is the fastest growing full-service, mid-priced brand in the U.S., with more than 100 hotels in 5 countries and over 20,000 rooms. The Four Points Hotels compete in many markets with Courtyard by Marriott and Hampton Inn. W Hotels offers a new product of business hotels quite unlike anything else available to the corporate business traveler. W Hotels provide the personality and chic style of a boutique hotel, while providing the reliability and comprehensive business services that these travelers expect. Initially, W Hotels will be comprised of 12 sophisticated properties, all opening in gateway U.S. cities by the year 2000. Starwood’s newest brand would compete with boutique hotels such as Ian Schrager Hotels. Exhibit 6b Financial Assumptions for Repositioning of the Astor Park Hotel As Is Occupancy Average rate RevPAR Total revenue Cash flowsa Capital Expenditure for Repositioningb Sheraton Westin W St. Regis 65% $ 175.00 $ 113.75 $16,112,000 $ 2,810,000 70% $ 180.00 $ 126.00 $16,901,000 $ 5,070,000 70% $ 220.00 $ 154.00 $22,247,000 $ 7,899,000 75% $ 250.00 $ 187.50 $29,550,000 $ 8,273,000 68% $ 325.00 $ 221.00 $33,132,000 $ 8,955,000 $ 6,000,000 $10,000,000 $19,000,000 $20,000,000 $25,000,000 aCash flows available for distribution to partners reflect Starwood base management fee of 3.0% and 4% capital reserve. bIf the property is repositioned, the acquisition of the hotel will be financed with 100% debt at 9% interest over 20 years. The capital expenditures associated with the repositioning will be done with equity financing. If the property continues to operate as is, the acquisition and capital expenditures for repositioning will be done with 50% leverage financed over 20 years at 9% interest. 14 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. Astor Park Hotel Exhibit 7 800-194 1999 Landauer Real Estate Market Forecast based on 1998 Hotel Data HOTEL The emotions evoked by the ups and downs of the hotel industry are worthy of a melodrama. Every feeling is heightened. The collapse of a decade ago was fraught with despair. The comeback of the ‘90s moved from elation to euphoria. In the past year, anxiety has started to swell. By the time the curtain rings down on 1999, the audience can anticipate being psychologically exhausted and mentally perplexed. Perhaps the actors and spectators might need a vacation to sort things out. If so, there may be some cheap rooms at the inn. Nowhere has the drama been more publicly played out than in the stocks of hotel operating companies and REITs. Hilton’s stock fluctuated between 12 1/2 and 35 1/2 in the course of the past year. Starwood’s 52-week trading range was 18 3/4 to 58. For Host Marriott the figures were 9 7/8 and 22 1/8. In November, Patriot America’s inability to meet forward equity guarantees sent its stock to new lows. Total returns for hotel REITs were -40.1% for the first three-quarters of 1998, compared with positive returns of 35.6% for the same period in 1997. By some estimates, hotel companies were trading at a 25% premium to net asset value in 1997, and at a 35% discount to NAV in 1998. No wonder investors suffered from a severe case of vertigo. What was going on? No one seriously suggests that the value of the hotels themselves swung so violently in such a short period of time. Indeed, the speculative buying frenzy for limited service hotels, which saw average cap rates dip below 10% for these inherently risky low-end facilities, had run its course by mid-1996. More recent transaction evidence pointed to higher-quality facilities, with solid pricing above $110,000 per room at fairly conservative cap rates in the 11% to 12.5% range. There was a 50-100 basis point rise in cap rates for full-service hotels between late 1997 and the fall of 1998, but nothing like the roller coaster in hospitality share prices. On one level, investors were making a judgment about the hoteliers’ business prospects. While on the way to their stock valuation peaks, investors concentrated on the operating efficiencies gained as the chains and trusts added facilities and consolidated operations. Companies with the foresight to scoop up facilities when prices were low had a compelling story to tell, and investors provided the capital to encourage them to do more of the same. And, supporting it all, supply/demand fundamentals for hotels were improving. Occupancies rose steadily through the ‘90s, average daily rates and RevPAR (revenue per available room) increased, and the industry, after years of losses, began to show handsome profits. Wall Street rewarded the results. The sudden downward spiral in the investment valuation of the hotel companies has to be seen against the background of their skyrocketing ascent. It is an oversimplification to say these companies were overvalued. The bidding frenzy for ITT Sheraton raised the storm flags, as Hilton and Starwood played high-stakes poker for what were sound, but not spectacular assets. There were two consequences. First, the possibility that the hoteliers were vastly overpaying for properties was bruited about in the business press. Second, Starwood’s victory caused a backlash against a perceived advantage held by REITs over other hotel operating companies. The latter raised the specter of possible changes in REIT regulations, striking fear of the unknown in investors’ hearts. For real estate professionals, this is comforting for it suggests that the whipsawing of the industry is all about misjudgment and overreaction on Wall Street. Unfortunately, the picture is more complicated and drives deeper into the property side of the business as well. The view of hoteliers as growth stocks led to an expansionary imperative in which buyers paid full price and more to keep income levels accreting. The cost of funds argument held that traditional real estate economics were of limited relevance. If a company could get low cost capital in the public markets, and buy at a higher cap rate in the real estate market, why not? If the cap rate looked exceptionally aggressive in purely real estate terms, well, the old order passeth, giving way to the new. The flaw in this reasoning is duration matching. Public market capital is the shortest of short-term sources of funds; real estate, on the other hand, is a long-lived asset. Borrowing short to invest long is a classic path to market bubbles and when investors took advantage of their call provision, by selling their stock, the operating company was left to make the acquisition prices work on supply/demand funda- 15 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. 800-194 mentals. In that light, some of the assets did indeed look like overpriced real estate. Also, the supply and demand sides of the operating equation were weakening simultaneously. Hotel construction volumes were starting to run ahead of gains in visitation. How could demand keep pace with development trends that saw hotel completions grow 300% between 1994 and 1998? New competition was inevitably going to put the brakes on revenue and occupancy growth, and thus the hoteliers' income potential. 1998 also introduced deeper concerns that the fundamental drivers of hotel occupancy were themselves weakening. Corporate profits from current production rose $8.4 billion the first quarter of 1998, then dropped $9.5 billion in the second. With business travel a key hotel demand factor, any corporate belt-tightening will bite into hotel profits quickly. The rapidly worsening world economic crisis also cast a pall over hotels, especially those tied to international travel. The national income accounts show a $300 million drop in foreign travel receipts since the second quarter of 1997 when the Asian crisis began. This year with the exception of the luxury segment, hotel occupancies are down across the board in the third quarter of 1998, compared with the year prior. The prospect of slower growth in 1999 puts even more pressure on hoteliers. Value of Hotel/Motel Construction Put in Place Billions of 1992 Dollars (SAAR) Source: U.S. Census Bureau Astor Park Hotel Nevertheless, the volatility in the market capitalization of hotel companies has been entirely disproportionate to the performance of their assets. It is time for the investors to re-focus on the properties themselves. We find the markets to be at a tipping point, though there are robust conditions in a few high-profile cities, as we enter 1999. Operational efficiencies introduced in the ‘90s have dropped hotel breakeven points under the 60% occupancy level, and this has created a comfort zone for the industry. There does not appear to be immediate danger of red ink unless operators fall into the “amenities creep” trap of the ‘80s. Domestic travel should increase modestly, in an environment of rising real incomes, low interest rates and low unemployment. Once the public and the business community gain confidence that a recession is not imminent, concerns about a sharp reduction in room nights should ease. But there is an urgent need for stern discipline on the development front—and right away. The majority of hotel markets in Landauer’s Equilibrium Index and Market Quality Ratings are weakening. Thirty-four out of 61 had new supply exceeding fresh demand in 1998. More significantly, 34 of the 61 markets now have as many rooms as they will require to be in balance, based upon our demand forecasts through 2003. That means that the majority of U.S. hotel markets should have zero construction for the next five years. Probably, that won’t happen, and so we are projecting a real decline in market quality. Unless inventory is retired, profitability will suffer. Defenders of the hotel faith will argue that there hardly seems cause for such draconian suggestions. After all, any reductions in occupancy levels have been modest and, at a utilization rate of 68%, hotels are still very full and running in the black. They will point to markets like New York, Boston, San Francisco and Washington, D.C. to make the case that there are just not enough rooms to meet demand, citing soaring room rates to prove their point. Similarly, they will look to the tourism markets of Las Vegas and Orlando, saying that occupancies well above 70% are not bad at all, given the volume of recent hotel openings and that these markets are the epitome of solid long-term demand growth. And all those claims are quite plausible. In start contrast to all the other property types, hotel development has displayed no discipline—none whatsoever—in response to improved occupancy rates and room revenues in this cycle. It is already on its way to a crash landing. Construction is up 300% since 1995. Only the luxury facilities in a minority of top business cities will be spared the pain of a harsh downtown in the next five years. 16 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. For the exclusive use of J. Dennany, 2018. Astor Park Hotel Exhibit 7 (continued) 800-194 Landauer Hotel Market Equilibrium Forecast Relative Market Strength Source: 1999 Landauer Real Estate Market Forecast. While a half-dozen markets show excellent market strength through 2003, many cities already have more hotel inventory than required to meet demand through our forecast period. The lesson is a simple one: most markets should pull the plug on development immediately. Capital sources, take note. 17 This document is authorized for use only by James Dennany in Hotel and Resort Market Analysis-1 taught by Larry Yu, HE OTHER from January 2018 to May 2018. Hotel/Resort Market Analysis Spring 2018 Case Analysis The case is selected from the case packet: Astor Park Hotel by William Poorvu & Arthur Segel, 2001, HBS Case_9-800-194 (the access link to HBP coursepack is provided under Required Readings in the syllabus on Bb). This case study discusses the interest of Starwood Hotels in acquiring an underperforming hotel in the Pacific Northwest. Steve Goldman, Starwood Vice President for acquisitions and development, is wondering how much to pay for the property and how to reposition it. This study also provides a good overview of the earlier development strategies that made this company one of the global leading hotel organizations today. Apply the knowledge and methods studied in this course to analyzing this case. The following is the guideline for this case study: Your written analysis of a case should generally contain five sections 1. 2. 3. 4. 5. Executive Summary Brief overview of key case facts Identification of the case problem or central issue Discussion of 2-3 alternative solutions to resolve the problem Selection of the preferred solution and explanation of how it solves the problem The body of your case analysis should be no longer than 4.5 pages, double-spaced. Allow yourself an average of one page per section (2-5 above) and a half-page for the executive summary. Part of the learning experience is the distillation of notes, ideas and opinions into succinct presentations of your thinking on a particular case. Articulately state your points. You are encouraged to use other resources.
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