Newsletter - February 14, 2002

FEBRUARY INVESTMENT COMMENTARY

A Deutsche Bank AG Report

The month in Europe - investment commentary

The recovery that was experienced in the final quarter of 2001 has continued into 2002. While there is little doubt that trading continues to be extremely challenging, we believe there is increasing evidence that the earnings scenarios that were pencilled in by many will prove to be on the conservative side. In other words, we see consensus earnings estimates drifting upwards, not downwards, over the coming months.

That said, equity prices have rallied materially over the course of the past four months, defying the many who thought that multiple expansion would take some time to really grab hold in this sector.

In terms of specific performances during January, notable out performers included Whitbread (+13%), on which we have a Buy rating. Looking forward we continue to believe there is further upside. Although multiples still remain short of historical (and comparative) levels, if forecasts do start to trend upwards then this point will become increasingly relevant. In terms of a specific pick, we continue, in the light of the newsflow and its relative underperformance since September, to be perplexed by the stock price of M&C. Indeed, on the basis of recent events, our price target of 400p (+44%) seems increasingly credible.

Andersen survey data - Europe

No big surprises in the data with the well-established trends continuing through December. That said, and as anticipated by most, there was a modest improvement in some key cities during the month as the bias of business shifted more to the leisure segments. One would naturally expect this to be reversed in January, albeit our information is that trading has got off to a somewhat better start in 2002 than may have been anticipated.

Andersen survey data - UK

The performance of both the London and Provincial markets demonstrates what a positive outcome Whitbread managed to produce. Again, most commentators would expect these trends to deteriorate in January given the shift in business mix. As has been the case for several months, we believe some of the major brands are performing materially better than this.

The month in Asia

Another strong month for some of the major names, including CDL, parent company of Millennium & Copthorne. This stock has now more than doubled since the post-11 September lows and its performance makes the modest rally in M&C all the more perplexing. Interesting announcements during the month included the awarding of a management contract in Seoul to Hilton Group and the recently renovated Swiss Grand will now fly the Hilton flag. The branding of its existing property in Seoul (owned by M&C) has not yet been announced.

Web site: http://www.db.com/

U.S. HOTEL INDUSTRY BEGINS TO SEE SIGNS OF A REBOUND

The Dallas Morning News  -  Jim Caldwell, president of Irving-based Omni Hotels Corp., is surprised at the occupancy and revenue figures that are coming in from his company's 44 locations.

Both numbers are going up -- and much more quickly than Mr. Caldwell figured, given the hit the hotel industry took after terrorist attacks on Sept. 11.

"Times aren't as good as they were last year at this time, but they're better than we thought they'd be after Sept. 11, and they're getting better," Mr. Caldwell said. "We're optimistic."

So optimistic that Mr. Caldwell, some of his competitors and analysts are predicting the industry could see a complete rebound as early as the third quarter of this year.

"The worst is over," said Tom Corcoran, president of FelCor Lodging Trust Inc., an Irving-based real estate investment trust with 183 hotels.

The latest weekly figures show that U.S. hotel occupancy was 53.7 percent during the week ended Feb. 2. That's still a 3.8 percent drop from a year ago.

But it's a big improvement over the last part of 2001, when occupancies and room revenue fell more than 50 percent in some U.S. markets.

Those numbers are particularly important in Dallas, which is one of the nation's most important business travel markets. It's also home to some of the nation's biggest hotel companies, including Omni, Felcor, La Quinta Corp., Wyndham International, and Rosewood Hotels & Resorts, which owns The Mansion on Turtle Creek.

The months before the terrorist attacks also saw some high-profile openings in the Dallas area, including the Renaissance Hotel in Richardson and the Doubletree in Plano's Legacy business park, the area's first full-service hotel.

In Dallas, the latest report shows occupancy at 55.8 percent, a 9.3 percent decline from a year ago. Room revenue has declined 14.8 percent compared with a year ago.

Occupancy and room revenue have gradually improved since the terrorist attacks, and operators say the pace of bookings has quickened as business travel has gotten back to normal.

Leisure travel has also shown signs of rebound, largely as a result of special promotions and rates by airlines and hotel companies.

Key markets that depend heavily on air and business travel, such as Dallas, continue to feel the biggest economic pressures.

Nationwide, revenue per room -- a figure known as "revpar" -- declined almost 7 percent during 2001, the first decline in more than 10 years, according to Smith Travel Research. Occupancy across the United States finished 2001 at 60.1 percent, 5.7 percent lower than in 2000.

Despite the declines, analysts and operators say the industry is in better shape to handle the current recession than it was a decade ago. And analysts have projected that revenue per room will stop declining by the end of this year.

A decade ago, when the Persian Gulf War and economic recession took their toll on the lodging industry, many hotels were highly leveraged, paying about 14 percent of their revenue on interest, said Duane Vinson, a research analyst at Smith Travel Research.

"Now hotels are paying more like 3 percent or 3.5 percent; that's a big difference," Mr. Vinson said.

The downturn in 1991 also forced hotel companies to become more efficient, lowering the break-even point, Mr. Corcoran said.

"You used to have to reach 60 percent occupancy to break even in the early '90s," he said. "Now, it's more like 50 percent."

Hotels with strong financial standings are using the current economic environment to evaluate expansion plans and acquisitions.

Omni Hotels saw its revenue fall 12.5 percent in 2001. But the company expects revenue to climb about 4 percent or 5 percent this year and is looking to expand, Mr. Caldwell said.

"We're well capitalized and have very little debt," Mr. Caldwell said. "Development has slowed so much, it really creates some new opportunities for us."

The latest recession, which began about a year ago, is expected to be relatively short, and hoteliers are already looking ahead to what 2003 and 2004 may bring.

Dave Johnson, Wyndham's executive vice president of sales, said revenue per room could return to double-digit growth by 2003. "There are fewer new hotels in the pipeline and demand is rebounding with the economy," Mr. Johnson said.

At Wyndham, where losses have forced the struggling company to cut 1,600 jobs in the last year, business is expected to be down during the first quarter, though January business has been strong.

"We're excited about the third and fourth quarter," Mr. Johnson said. "Everything we're seeing in the news and hear from our customers says there is going to be a rebound."

The company, which relies on business travelers and meetings for 80 percent of its business, has launched a program aimed at leisure travelers. "There's still healthy demand in leisure, so we're marketing to it," Mr. Johnson said.

Business is coming back, but at a slightly different pace than before the economic downturn, Mr. Johnson said. Booking windows have narrowed, making long-term projections more difficult.

"We just closed on a piece of a 6,000-room meeting in August," Mr. Johnson said. "That kind of business normally happens a year in advance, and people are booking six months out."

ORBIS TO TAKE OVER ACCOR OWNED HOTELS IN POLAND FOR CASH

Polish News Company  -    At the beginning of March Orbis is to begin preparations for its fusion with Accor. Orbis chairman Maciej Grelowski is to suggest to the shareholders of the hotel and travel giant that Orbis should take over Accor owned hotels in Poland for cash.

"In late February, early March preparations for the fusion of the (Accor and Orbis) structures will get under way. As Orbis chairman I will suggest to shareholders that the take-over of the Accor hotels should take the form of a transaction and not an emission of shares for the French investor. There are numerous reasons why such a form is better," claims Grelowski. The Orbis chairman thinks he knows what the purchase price is likely to be, but refused to be drawn on exact figures. He added, however, "We can afford it. I think some of the money will come from our own funds and some from credits. Orbis's debt is small and I am sure banks will be happy to lend us the money," the chairman added.

TravelCLICK ISSUES FOURTH QUARTER ELECTRONIC BOOKINGS RESULTS FOR HOTELS IN EUROPEAN CITIES

Exclusive Database Details Trends in Hotel E-Commerce

 TravelCLICK released results today for hotel room nights booked electronically through the Global Distribution Systems (GDS) during the fourth quarter of 2001 versus the same period last year. Several of the top ten European cities experienced growth in GDS hotel bookings in fourth quarter. On a worldwide basis, GDS hotel bookings were  down 11.7% compared to the fourth quarter of 2000, due primarily to the events of September 11th.

The results were compiled from TravelCLICK's comprehensive database, which
is the exclusive source of hotel industry electronic distribution data from
the Amadeus, Galileo, Sabre, and Worldspan GDSs. TravelCLICK's data also
includes consumer online GDS hotel bookings made through many of the major
Internet travel sites, such as Travelocity and Expedia.

Top European Destination Markets

The top 10 destination markets for total GDS room nights in Europe during
the fourth quarter were in order:

Room Nights % Chg
1. London 503,891 -21.0%
2. Paris 407,129 18.6%
3. Stockholm 125,728 45.4%
4. Frankfurt 122,524 -0.2%
5. Amsterdam 113,548 -15.3%
6. Munich 111,187 12.4%
7. Madrid 105,323 12.1%
8. Oslo 84,867 1.5%
9. Brussels 79,882 -4.0%
10. Barcelona 62,791 -2.5%

"Many European markets that had showed sluggish third quarter performance
made a comeback in the fourth quarter. Paris demonstrated a significant
recovery, with an 18.6% increase year-over-year. Stockholm continued its
strong growth pattern at 45.4%, fueled primarily by domestic demand and EU
meetings, while Madrid and Munich, each with 12% increases, also maintained
their growth pace," said Jan Tissera, division vice president for
TravelCLICK. "On the down side, even though intra-European travel is on the
rise, electronic hotel bookings in major hubs, including Amsterdam, London
and Rome, appear to be affected by the overall slowing demand this quarter,
similar to the decline in US markets such as New York, Los Angeles and
Chicago."

HILTON GROUP BAA1 RATING ON REVIEW FOR POSSIBLE DOWNGRADE – MOODY’S

AFX News -  Moody's Investors Service said it has placed on review for possible downgrade the Baa1 long-term senior unsecured debt ratings of Hilton Group PLC.

The ratings agency said the review focus on assessing the extent in recovery on occupancy rates and revenue per available room since September 11, the progress in the integration of Scandic, and the progress on the strategy being executed by Hilton Group's management to continue to improve lease adjusted debt protection measurements which are currently weak for the Baa1 rating category.

Although it has already seen an increase in occupancy rates since last September, Moody's said it is concerned that recovery in business may take longer than originally expected.

Moody's said that while Hilton has recorded strong results for the first half of 2001, the challenging outlook for the hotel sector in the UK and Continental Europe, this year, make it expect Hilton Group to need to ensure that debt protection measures improve strongly over hte medium-term in order to maintain its current rating level.

Ratings placed under review for possible downgrade at Baa1 are Hilton Group PLC and Hilton Group Finance PLC's MTN program and all drawdowns under it, the ratings agency said.

CORNELL UNIVERSITY SHA  ANNOUNCES 2002 COURSES, HIGHLIGHTING PROFESSIONAL DEVELOPMENT PGROGRAM (PDP)

In a Challenging Year for the Hotel Industry and the Economy,
Cornell’s PDP Provides Essential Tools for Success

February 12, 2001, ITHACA – The Cornell University School of Hotel Administration’s Office of Executive Education is proud to announce an impressive array of hospitality management courses for 2002, highlighting seventeen Cornell Certifications being offered during the Professional Development Program (PDP) for summer, 2002. The courses are designed to give hospitality managers advanced education in a myriad of industry related topics, to promote success, career advancement for improved performance, benefiting hospitality managers and their employers.

With a multitude classes tailored for all the hospitality professional needs, the PDP is a series of in-depth, one-week courses designed for all levels of management from managerial trainees through the seasoned executive. There are eight major categories of courses offered:

• Food, Beverage and Restaurant Management
• General and strategic management
• Human resources management
• Managerial accounting and finance
• Marketing
• Operations management and information technology
• Property-asset management and real estate
• Rooms management

This year, management development takes on a new meaning and importance in light of the current economic climate. Both companies and individual employees are experiencing, first-hand, the need for education and professional development to in order to succeed in today’s challenging economy. The tight job market demands the best people with the best training – and indeed, recruiting, retaining and training the best people are continuing challenge for the hotel industry.  The Professional Development Program (PDP) is the industry’s acclaimed leader in meeting these challenges.

PDP classes are held as one-week session from June 10 through July 19, 2002.  The PDP program is a great option for professionals that have schedule constraints and cannot be away for long periods. PDP offers one-week immersion courses where hospitality professionals will benefit from an intensive productive time with the most distinguished hospitality faculty in the world.

In addition to the PDP, The Cornell University School of Hotel Administration offers two other courses designed specifically for senior managers and executives: Advanced Management (AMP), May 13-23, 2002 and the Generals Managers Program (GMP), June 17-28, 2002. 

Founded in 1922, the Cornell University’s School of Hotel Administration has delivered the most advanced educational opportunities available to the hospitality industry for nearly 80 years.

Contact:
School of Hotel Administration at
Cornell University 
PDP 2002
149 Statler Hall
Ithaca, NY 14853-6902 
E-mail: exec_ed_hotel@cornell.edu