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ALIS 2012

U.S. Lodging Market Outlook

March 19, 2012


Mark Woodworth PKF Hospitality Research Accelerating success.

Topics
Accuracy Assessment You Pick the Forecast ! Cap Rate Outlook
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Hunter Conference 2011


Accuracy Assessment
United States 2011
Hunter

2012
Hunter

2011
Occupancy ADR RevPAR

2011 Actual A t l 60.1% 3.7% 8.2% 8 2%

2011 61.0% 6.0% 8.9% 8 9%

Current Forecast F t

59.4% 3.8% 7.1% 7 1%

61.0% 4.1% 5.8% 5 8%

Full Demand Recovery

Less Optimistic on ADR Potential Why?


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Source: PKF Hospitality Research, LLC March-May 2012 Hotel Horizons, Smith Travel Research

Factors Impacting ADR

in 2012

Main drivers of the demand recovery 2010 - 2011: - Corporate profit growth - Real personal income growth - Low room rates

Rate of Corporate Profit Growth Not as Robust in 2012


50 0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0%
Source: Moodys Analytics 5

4-Quarter Moving Average Ch 4Q t M i A Change Change in U.S. Corporate Profits

Forecast

198 89 199 90 199 91 199 92 199 93 199 94 199 95 199 96 199 97 199 98 199 99 200 00 200 01 200 02 200 03 200 04 200 05 200 06 200 07 200 08 200 09 201 10 201 11 201 12 201 13

Change in Total Real Personal Income


Date of Forecast:
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0%

Hunter 2011
Jan-11 J 11 Apr-11 A 11 Oct-11 Oct O tJanJan J -12

A little more pessimistic going into 2012

Source: Moody's Analytics

Hunter 2011

Today
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Leading Economic Indicators


% change in last 6 months February 2012 g y
20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30%

Leading Economic Indicators (% change in the last 6 months)

U.S. Hotel Demand

6 to 8 Month Lag
A Contraction Coming? Source: The Conference Board, PKF-HR, STR
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Room Rates Remain Well Below Past Peak in Most Markets


2011 ADR
5% 0% -5% -10%

Percentage Point Difference From Previous Peak


U.S. is 5.4% below the previous peak.

50 U.S. Horizons Markets


-15% Room Rates Still Have a Long Way to Go! -20%
Source: PKF Hospitality Research, March May 2012 Hotel Horizons
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But Fundamentals are Improving


Number of Top U.S. Markets with

Increasing:
Average Daily Rates 47 0 9 48 50 50 50 50 Occupancy Outliers 4 0 Houston 49 New Orleans 49 44 48 49 48

Outliers

Atlanta and San Antonio

2008 2009 2010 2011 2012F 2013F 2014F 2015F

Rates and Occupancies are Going Up !


Source: STR, PKF Hospitality Research, March May 2012 Hotel Horizons
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Pick Y Pi k Your O Own Forecast F t


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Pick Your Own Forecast:


Three Scenarios 1. 1 2. 2 3. Mild Second Recession Expected Case Strong Near-term Rebound g

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Mild Second Recession


European

Sovereign and banking debt problems intensify, intensify causing the European recession to worsen worsen. U.S. business confidence weakens and total U.S. exports level off and begin to decline. Lack of progress on the U.S. fiscal situation further undermines business confidence. A mild second recession occurs during first and second quarters of 2012. U Unemployment rate rises, peaking at 11.1% i Q1 l t t i ki t 11 1% in 2013.
2012 Mild Second Recession Economic Forecast Employment E l t -0.3% CPI 0.8% GDP 0.1%
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Income I 1.5%
Source: Moodys Analytics

Mild Second Recession

Measure
Supply Demand Occupancy Average Daily Rate RevPAR

2011
0.6% 5.0% 60.1% 3.7% 3 7% 8.2%

2012
0.7% -0.1% 0.1% 59.6% 2.7% 2 7% 1.9%

Source: PKF Hospitality Research; Smith Travel Research

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Expected Case Scenario


Unemployment

is expected to remain above 8% through 2012 even with the addition of 2 million jobs jobs. Extend payroll tax holiday and emergency unemployment insurance through the rest of 2012. Housing prices continue to fall through Q2 2012 as foreclosures and short sales increase. Mild European Recession. Business Investment increases 8.9%.
2012 Expected Case Economic Forecast Income 2.5%
Source: Moodys Analytics

Employment 1.1%

CPI 2.1%

GDP 2.6%
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Expected Case Scenario

Measure
Supply Demand Occupancy Average Daily Rate RevPAR

2011
0.6% 5.0% 60.1% 3.7% 3 7% 8.2%

2012
0.6% 2.2% 61.0% 4.1% 4 1% 5.8%

Source: PKF Hospitality Research; Smith Travel Research

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Strong Near-term Rebound Near Better

than expected progress on the European sovereign debt crisis and the U S federal fiscal debate U.S. raises business confidence, speeding up fixed investment & hiring. g Consumer sentiment rebounds strongly. No further declines in house prices. Unemployment rate declines to less than 8%. Federal Reserve begins to raise the federal funds rate slowly over th course of 2012. l l the f 2012
2012 Strong Near-term Rebound Economic Forecast Income 3.4%
Source: Moodys Analytics

Employment 1.7%

CPI 2.3%

GDP 3.7%
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Strong Near-term Rebound Near-

Measure
Supply Demand Occupancy Average Daily Rate RevPAR

2011
0.6% 5.0% 60.5% 4.7% 4 7% 5.4%

2012
0.6% 2.9% 61.6% 4.6% 4 6% 7.3%

Source: PKF Hospitality Research; Smith Travel Research

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You Pick the Forecast


2012
Mild Strong Second Expected Near-term NearRecession Case Rebound 0.6% 60.1% 2.1% 2.3% 1.
Source: PKF Hospitality Research

Measure
Demand Occupancy Average Daily Rate RevPAR

2.2% 61.0% 4.1% 5.8% 2.

2.9% 61.6% 4.6% 7.3% 3.


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Cap Rate Forecast C R t F t

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The Credit Spigot Is Opening


Net % of senior loan officers
50 40 30 20 10 0 -10 -20 -30 -40 -50 90 92 94 96 98 00 02 04 06 08 10 12 80

Willing to Willi t make a k consumer loan (L)

60 40 20 0 -20

Tightening standards for C&I loans to small businesses (R)

-40 -60 -80

Source: Federal Reserve Senior Loan Officer Survey January, 2012

Hotel Cap Rate Forecasting Model

Accounting for Growth and Risk (Gordon Growth Model)


Data
RERC Survey/ RCA Trans. PKF Hotel Horizons/ STR

Moody s Moodys Analytics

Variables

Hotel Cap Rate

Changes in Income

10-Year Treasuries

Moodys Baa Corp Bond


Market Risk Baa - T10 Proxy for all other rated debt

R Hotel The equity risk applied to hotels

RevPAR

Risk Free Alternative T10 Risk free alternative to any investment

Change in income

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Forecasts of Return Components Lodging Risk Premium Stays Below L.R.A.


Base Case Scenario
10YearTreasury 2005 2006 2007 2008 2009 2010 2011 2012F 2013F L.R.A. MarketRiskPremium LodgingRiskPremium HotelCapRate

4.3% 4 3% 4.8% 4.6% 3.7% 3.3% 3.2% 2.8% 2.5% 2 5% 4.0% 5.3%
3.5% 5.0% 5 0% 5.2%

1.8% 1 8% 1.7% 1.9% 3.8% 4.0% 2.8% 2.8% 2.9% 2 9% 2.4% 2.3%
2.4% 2.0% 2 0% 1.7%

2.8% 2 8% 2.0% 1.5% 0.9% 2.0% 1.9% 2.5% 2.3% 2 3% 2.2% 2.7%
Hunter 2011 = RED 2.3% 1.8% 1 8% 1.7%

8.9% 8 9% 8.5% 7.9% 8.4% 9.3% 7.9% 8.1% 8.2% 7.7% 8.8% 7 7% 8 8% 8.6% 8.6% 10.0%

Long Run Average (L.R.A.) = 1992-2011

Source: PKF Hospitality Research, RERC, RCA, Moodys Analytics

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Some Thi S Things to t Think About


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In Asian Astrology..

January J 2012 b began y the year of the

rd, 23

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In Asian Astrology..

This should be a year of aggressive p positioning for the future. g Conventional wisdom should not be allowed to stand in the way of progress. Those who are confident i their Th h fid t in th i ideas and ventures should proceed.
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A Final Thought

Each New Day Brings a Rising Tide

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