May 3, 2011

U.S. Lodging Industry Overview

Prepared for:

Meet the Money - 2011

by

R. Mark Woodworth
Accelerating success. PKF Hospitality Research
G ood and G etting B etter

1. The lodging cycle and the

economy.
2. Lodging forecast:
- Base case.
- Alternative scenarios.
3. Cap rate outlook.
For a Copy:
Claude.Vargo@pkfc.com 2
The Hotel Market Cycle
Moving Along the Road to Recovery
Rapid Rapid
Development Development Development
Equilibrium Lodging Picks Up
Decline, Leads
ADR Other Sectors
2013-2014

Long Run
U.S. is Here
Occupancy MTM 2010 2011-2012
ADR and
Occupancy Margins
Declines, Recover
ADR Follows

Development Occupancy
Slows Recovers

Development
at Minimum Lodging Recovers,
Levels Lags Other Sectors

3
Profits Surge and Jobs Should
Follow… as Will Lodging Demand Growth

% change yr ago
6 50
Job growth (L)
4
25
2

0 0

-2
-25
-4 Profit growth,
lagged 3 qtrs (R)
-6 -50
70 75 80 85 90 95 00 05 10
Sources: BLS, BEA
…Although More House Price
Declines Will be a Drag

Case Shiller® Home Price Index, 2000Q1=100

16
12
8
4
0
-4
-8
-12
-16
00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Fiserv, Moody’s Analytics
E c onomic A s s umptions Driving
Our F orec as ts :
Base Case Scenario
Payroll Real Personal
Real GDP CPI (Inflation)
Employment Income

2009 -4.3% -4.3% -1.9% -1.9% -2.6% -2.6% -0.3% -0.3%

2010 -0.5% -0.5% 1.3% 1.3% 2.9% 2.9% 1.6% 1.6%

2011 1.2% 1.7% 3.7% 4.0% 3.3% 3.9% 2.1% 1.5%

2012 2.3% 2.4% 4.7% 3.8% 4.3% 4.0% 2.0% 2.5%

2013 2.6% 2.5% 5.0% 4.6% 3.9% 3.7% 2.9% 3.2%

L.R.A. 1.2% 2.7% 2.7% 2.9%

Source: Moody’s Analytics, April 2011 L.R.A. = Long Run Average
(January 2011) 6
G ood and G etting B etter

1. The economy and the lodging

cycle.

2. Lodging forecast:
- Base case.
- Alternative scenarios.
3. Cap rate outlook.

7
Happy Thoughts

History:
- # of Consecutive Quarters of Increases
∆ Demand – 5 Quarters
∆ Occupancy – 5 Quarters
∆ ADR – 4 Quarters
∆ RevPAR – 4 Quarters

Forecast (Base Case Scenario):

- # of Consecutive Quarters above (below) Long Run Average
∆ Demand (1.5%) – 11 Quarters
∆ (Supply) (2.2%) – 14 Quarters
∆ ADR (2.9%) – 19 Quarters (as far as we can see)
∆ RevPAR (2.3%) – 19 Quarters (ditto)
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National Horizon
- Forecasts through 2012
Base Case Scenario
Long Term
Average 2006 2007 2008 2009 2010 2011F 2012F

Supply 2.2% 0.2% 1.3% 2.5% 3.0% 1.9% 0.4% 0.5%

Demand 1.5% 0.5% 0.7% -2.5% -6.1% 7.7% 5.2% 5.3%

Occupancy 62.2% 63.1% 62.8% 59.8% 54.5% 57.6% 60.3% 63.2%

ADR 2.9% 7.6% 6.4% 2.9% -8.5% -0.2% 2.6% 5.8%

RevPAR 2.3% 7.9% 5.9% -2.1% -16.6% 5.4% 6.8% 7.6%

Severe Rate
Discounting Set And a Quicker
the Stage Demand
Turnaround
For a Record
Decline Surpasses Long
Run Average
Source: PKF Hospitality Research – June-August 2011Horizons® Report (preliminary), Smith Travel Research
9
Nominal RevPAR Levels Return to
Historical Maximum in Year…

The map below displays the year in which nominal RevPAR levels
are forecast to once again achieve their historical maximum: 1
market in 2010, 0 in 2011, 10 markets in 2012, 23 markets in 2013, 8
markets in 2014, and 8 markets in 2015 or later.

Already There
2011
2012
2013
2014
2015 & Beyond
10
Source: Colliers PKF Hospitality Research – March - May 2011 Hotel Horizons® Report, Smith Travel Research
 U.S. Hotel Markets
Greatest and Least Change in RevPAR

Forecast Change 2010 to 2011

Seattle 8.9%
Oakland 8.4%

San Diego 8.3%

Portland 8.1%
Minneapolis 7.8%
Preliminary
National Average 7.1% (6.8)% Update
New York 1.9%
Raleigh-Durham 1.7%
Philadelphia 1.0%
Indianapolis -0.3%

Washington DC -1.3%

-4% 0% 4% 8% 12%

Source: Colliers PKF Hospitality Research, March - May 2011 Hotel Horizons® report.
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G ood and G etting B etter

1. The economy and the lodging

cycle.

2. Lodging forecast:
- Base case.
- Alternative scenarios.
3. Cap rate outlook.

12
Consumers Are Making Tough Decisions
The Oil Spike of 2005

Basis-point change in share of overall retail sales between February, 2002 and July, 2005

Gas stations

Nonstore

Building materials

Autos

Electronics

Health & personal Then

Restaurants

Sport, book & music

Clothing

Home furnishings

Grocery

-200 -150 -100 -50 0 50 100 150 200 250

Source: U.S. Census Bureau

A Different Reaction this Time Around

Basis-point change in share of overal retail sales between January, 2007 and March, 2011

Gas Stations

Nonstore (internet)

Grocery

Health & personal

Resturants & Bars

Sport, book & music

And Now
Clothing

Electronics

Home Furnishings

Dept Stores

Building materials

Autos

-400 -300 -200 -100 0 100 200 300

Source: U.S. Census Bureau
Pent-Up Demand Is Mounting…

Light vehicle sales, millions

20 12
10
18 Trend sales
8
16
6
14 4
2
12
0
10 Units (L)
-2
Spent-up/pent-up demand (R)
8 -4
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Sources: BEA, Moody’s Analytics Implications for Some Markets
No Margin for Error in Global Oil Markets…

OPEC spare capacity as a % of global oil demand

25

20

15

10

0
70 75 80 85 90 95 00 05 10
Sources: OPEC, EIA, IEA, Moody’s Analytics
Moody’s Oil Price Scenarios

Moody’s approximates the fundamental price of oil at $93.53 in 2011.

$160

$150

$140 Baseline Scenario

$125 Scenario
$130
$150 Scenario

$120

$110

$100

$90

$80

$70

$60
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4
Source: Moody’s Analytics

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Potential Effect of an
Oil Price Spike on U.S GDP

“Every $1 increase in the price of crude oil raises gasoline prices by 2.2 cents
per gallon and costs consumers about $3 billion over the course of a year.”
- Moody’s Analytics
8.0%

7.0%
Baseline Scenario
6.0% $125 Scenario

5.0% $150 Scenario

4.0%

3.0%

2.0%

1.0%
Recession
0.0%
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4
-1.0%

-2.0%

18
Potential effect of Oil Price Increases
on RevPAR

14.0%

Baseline Scenario (Current

12.0% Forecast)
$125 Scenario
10.0%
$150 Scenario
8.0%

6.0%

4.0%

2.0%
Long Run Average per STR = 2.3%
0.0%
2010 2011 2012 2013

Source: PKF Hospitality Research

19
Different Regions = Different Effects

Drive to effect from Boston

20
 Cumulative Change in RevPAR
2010 – 2012 – By Location

Forecast
Town

Current

Forecast
Resort

Current
Interstate

Forecast
Location

Current

Forecast
Airport

Current Resort and Suburban

Locations take the Big Hit
Suburban

Forecast

Current

Forecast
Urban

Current

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Percent Change in RevPAR Source: PKF Hospitality Research

Base Case Scenario Oil at $150 Scenario 21

Summary Estimates

Base
Case Oil at $125 Oil at $150
Year 2011 2012 2011 2012 2011 2012

Occupancy 60.3% 63.2% 59.7% 61.6% 59.2% 60.2%

ADR 2.6% 5.8% 2.1% 1.3% 2.4% 0.1%

RevPAR 6.8% 7.6% 5.7% 4.6% 5.2% 1.8%

NOI 10.4% 13.5% 6.5% 1.9% 6.2% -2.2%

Source: PKF Hospitality Research – June-August 2011Horizons® Report (preliminary), Smith Travel Research 22
G ood and G etting B etter

1. The economy and the

lodging cycle.
2. Lodging forecast:
- Base case.
- Alternative scenarios.
3. Cap rate outlook.

23
The Credit Spigot Is Opening

Net % of senior loan officers…

50 80
Willing to make a
40 60
consumer loan (L)
30
40
20
10 20
0 0
-10 -20
-20
Tightening standards for C&I -40
-30
loans to small businesses (R) -60
-40
-50 -80
90 92 94 96 98 00 02 04 06 08 10
Source: Federal Reserve Senior Loan Officer Survey – May 2, 2011
Perceptions and Reality Coming Together

12
10 8.4
8
6
4 RERC Investor Survey Cap Rates
7.9 Converging
Rates

2 RCA Observed Transaction Cap Rates

0

Source: RERC, RCA 25

Forecasts of Return Components
Lodging Risk Premium Stays Below L.R.A.
Base Case Scenario
10 Year Treasury Market Risk Premium Lodging Risk Premium Hotel Cap Rate
2005 4.3% 1.8% 2.8% 8.9%
2006 4.8% 1.7% 2.0% 8.5%
2007 4.6% 1.9% 1.5% 7.9%
2008 3.7% 3.8% 0.9% 8.4%
2009 3.3% 4.0% 2.0% 9.3%
2010 3.2% 2.8% 2.0% 7.9%
2011F 3.8% 2.6% 2.0% 8.4%
2012F 5.4% 2.2% 2.2% 9.8%
2013F 5.8% 1.8% 2.3% 9.9%
L.R.A. 5.3% 2.3% 2.7% 10.0%

Long Run Average (L.R.A.) = 1992-2010

26
Source: Colliers PKF Hospitality Research, RERC, RCA, Moody’s Analytics
Summary

No Tailwinds Yet:
* P ers is tent high levels of unemployment

* C ontinued weaknes s in hous ing

* Higher inflation lifts appeal of hotels

* Oil prices – a B ump on the P ath.

F orecas t bias = very s light pos itive.

27
 Thank you for your time.
Claude Vargo: Claude.Vargo@pkfc.com

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