Mark Woodworth

R. Mark Woodworth

PKF Hospitality Research, LLC

May 6, 2014mark.woodworth@pkfc.com

Meet the Money 2014

The Path to the Peak

•Some Happy Facts

•Our Forecasts

•The Supply Story

•Cap Rate Expectations

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Hotel Horizons®Forecasting Model

•STR, Inc.

Historical rooms occupied, room available,

rooms revenue

Pipeline of future hotel construction

•Moody’s Analytics

Economic forecasts

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1. Demand has fully recovered.

• Nationally and in 45 of 50 Top Markets.

2. 2013 Occupancy level was above the long run average.

• Occupancy has increased four years in a row – 2014 will be a record 5th.

3. Limited supply growth persists.

• Below long run average Nationally and in 47 of 50 top markets.

4. Urban locations at record occupancy levels.

• To be followed by Airport locations in 2014.

5. Profits have increased > 10% per year since 2011.

• A run that should last through 2015.

Some Happy Facts:

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6. Real average daily rates have a way to go.

A Not So Happy Fact:

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Our Forecasts

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Leading Economic Indicators

% change in last 6 months – March 2014

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Leading Economic Indicators (% change in the last 6 months) U.S. Hotel Demand

Source: The Conference Board, PKF-HR, STR, Inc. 7

6 to 8 month lagIncreasing Leading

Economic Indicators,

Demand to Follow?

What’s Different Now?

Source: policyuncertanity.com 8

Lowest

level since

November

2007

2 x’s

2 x’s10 x’s

What is Different Today?

•Remember the:

Fiscal Cliff

S+P Downgrade

Government Shutdown

Greece, Cyprus, Spain, etc.

•Today:

Russia

I hope Jim has ark at the Reception

tonight9

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-2.7%

2.0%

-2.0%

-8.3%

-5.4%

-0.4%

1.3%

3.9%

1.6%

3.9%

2.8%2.8%

-1.3%

3.2%

1.4%

4.9%

3.7%

1.2%

2.8%

0.1%1.1%

2.5%

4.1%2.6%

0.1%

3.8%3.8%4.0%4.1%

4.5%

3.9%

2.9%

-10

-8

-6

-4

-2

0

2

4

6

8

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I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

2008 2009 2010 2011 2012 2013 2014 2015

(GOVERNMENT) Government consumption expenditures and gross investment

TRADE (Net exports of goods and services)

BUSINESS (Gross private domestic investment)

CONSUMERS (Personal consumption expenditures)

Lodging DemandThese matter

the most.

GDP Component Forecast

Source: BEA, Moody’s Analytics, PKF Hospitality Research, LLC Hotel

Horizons: December - February 2014, Smith Travel Research

The Outlook for the Drivers that are Most

Important to Hotels Remains Favorable

Long Term

Average 2009 2010 2011 2012 2013 2014F 2015F

Supply 1.9% 2.8% 1.7% 0.5% 0.5% 0.7% 1.0% 1.3%

Demand 2.1% -6.2% 7.2% 4.7% 3.0% 2.2% 3.0% 3.0%

Occupancy 61.9% 54.5% 57.5% 59.9% 61.4% 62.2% 63.4% 64.5%

ADR 2.9% -8.7% 0.0% 3.8% 4.2% 3.9% 4.3% 5.4%

RevPAR 2.9% -16.7% 5.4% 8.2% 6.8% 5.4% 6.3% 7.1%

National Forecast – 2014/2015

Passing Through Long

Run Average Level

Very Limited New

Supply

Source: PKF Hospitality Research, LLC – Hotel Horizons® Preliminary Update May 6, 2014, STR, Inc. 11

Forecast Occupancy LevelsBy Chain-Scale

74.6% 71.9% 71.7%

63.8%55.8% 55.0%

75.0% 72.0% 72.1%

64.5%57.0% 56.2%

75.6% 72.3%72.1%

65.2%

58.0% 57.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2013 2014F 2015F

Source: STR, Inc., PKF Hospitality Research, LLC, March-May 2014 Hotel Horizons®

This is where meetings go.

70.0% 69.0% 68.7%

63.5% 57.3% 57.8%

Long Run Average

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The Supply Story

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Troubling Signs in the Pipeline?

Phase 2014 2013 % Change

In Construction 102,855 72,509 41.9%

Final Planning 133,090 96,365 38.1%

Planning 145,558 151,876 -4.2%

Active Pipeline 381,503 320,750 18.9%

Total U.S. Pipeline, Number of Rooms by Phase, March 2014 and 2013

Source: STR, Inc.

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Question:

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When Was Overbuilding Last an Issue?

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U.S. Supply Change

4.0%

3.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1988

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

1997

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

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Source: PKF Hospitality Research LLC, STR, Inc.

Long Run

Average =

1.9%

Q2 1999

Q1 2009

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Today vs. the Previous Peak of Construction Activity – Q1 2008

Phase 2014 Q1/2008

%

Difference

Change

In Construction 102,855 207,468 -50.4%

Final Planning 133,090 113,419 17.3%

Planning 145,558 344,363 -57.7%

Active Pipeline 381,503 665,250 -42.7%

Total U.S. Pipeline, Number of Rooms by Phase, March 2014 and March 2008Source: STR, Inc. 17

New Construction:Not a Near-Term Threat

$90

$95

$100

$105

$110

$115

$120

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Re

al A

DR

Le

ve

l (2

01

4 D

oll

ars

)

Ye

ar

ove

r Y

ea

r S

up

ply

Ch

an

ge

Supply Change Real ADRForecast

Source: Moody’s Analytics, STR, Inc., PKF Hospitality Research, LLC Hotel Horizons® March-May 2014 1818

Real ADR Has Recovered in Six Markets

1919

2013-2015

Supply Growth

Market Top 50 Rank

Austin # 2

Nashville # 3

Pittsburgh # 4

New Orleans # 13

San Francisco # 45

Oahu # 47

New York = #1Source: STR, Inc., PKF Hospitality Research, LLC, March-May 2014 Hotel Horizons®

Cap Rate Expectations

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Three Main Drivers of Cap Rate Change

When

Interest Rates

Increase

So do Cap Rates

When Cash Flows

Accelerate

Cap Rates

Decline Volatility

The more there is, the higher the Cap Rate

Where are Cap Rates Going?

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Hotel Profits:A Strong, Favorable Run

-40%

-30%

-20%

-10%

0%

10%

20% Change in NOI Forecast

Source: PKF Hospitality Research, LLC22

Forecasts of Return Components

Cap Rate Baa

Hotel Risk

Premium % Supply

% Net

Operating

Income

2011 8.2% 5.6% 2.6% 0.5% 12.7%

2012 8.1% 4.9% 3.2% 0.4% 10.2%

2013 8.0% 5.0% 3.0% 0.7% 10.1%

2014F 8.3% 6.0% 2.3% 1.0% 12.4%

2015F 8.8% 6.9% 1.9% 1.3% 14.2%

2016F 8.8% 7.6% 1.2% 1.7% 6.3%

Source: PKF Hospitality Research, LLC, STR, Inc., RERC, RCA, Moody’s Analytics

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Hotel Risk Premium Contracts

Unit Level Hotel Profits* andHotel Transaction Volume

0

500

1,000

1,500

2,000

2,500

3,000

3,500

$10,000

$15,000

$20,000

$25,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

Unit Level NOI* $PAR (Left Axis) Number Properties Sold (Right Axis)

Note: * Before deduction for capital reserve, rent, interest, income taxes, depreciation, and amortization.

Sources: Real Capital Analytics March 2014, PKF Hospitality Research, LLC, March 2014 Hotel Horizons® Report25

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Summary Thoughts:

1. The Economic Outlook for 2014 Has Remained Relatively

Consistent Over the Past Three Years; Uncertainty is Disapating.

2. Industry Fundamentals Remain Solid.

3. Supply Growth will Remain in Check for at Least Another Two

Years as Real ADR’s Recover.

4. Attractive Hotel Profit Growth Continues and will Serve to Mitigate

the Impact of Rising Interest Rates.

5. Owners and Investors will be Rewarded as a Result.

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