Hotel Industry Overview: Fall 2011

HOTEL INDUSTRY OVERVIEW: Fall 2011

Summary of Key Performance Indicators
The industry turned in a very solid performance in the third quarter, continuing on a pace of approximately 8% overall RevPAR growth. The contribution of ADR relative to occupancy improved- it made up almost half of the RevPAR growth, and a significantly higher proportion in key upper-end markets. Luxury continues to outpace the rest of the industry, and grew even faster in the third quarter than in the first two, while upper upscale and resort slipped slightly.

Regionally, Miami, LA and San Francisco continue to lead the pack, with consistently strong performances throughout the year. Orlando has also been steady, with very high demand growth (due primarily to the Harry Potter attraction) offsetting increased supply, while still sustaining decent ADR growth. Boston and Phoenix also had relatively good quarters, and New York has come back a little from a disappointing second quarter. Washington continues to lag, and Chicago has also weakened. Among the smaller markets, Nashville, Tampa and Minneapolis were strong in the 3^rd quarter, while St. Louis, Atlanta and Norfolk continue to be the weakest. New Orleans also showed a drop off, but this was mostly due to the spike in occupancy related to the crews cleaning up the BP oil spill last year. That market is still performing well. It should also be noted that St. Louis and Dallas will see at least a short term bump due to the baseball World Series.

?	3rd Quarter			?	YTD (thru 10/22/11)
?	ADR	Occ.	RevPAR	?	ADR	Occ.	RevPAR
Industry Total	3.8%	4.0%	7.9%	?	3.4%	4.3%	7.9%
Luxury	6.6%	5.0%	12.0%	?	6.0%	5.1%	11.4%
Upper Upscale	3.2%	2.8%	6.1%	?	3.4%	4.5%	8.1%
Resort	4.8%	3.9%	9.0%	?	4.6%	4.9%	9.8%
Key Markets	?	?	?	?	?	?	?
NY	5.7%	2.0%	7.9%	?	6.1%	0.0%	6.2%
Boston	5.4%	3.6%	9.3%	?	4.8%	3.1%	8.2%
DC	(0.7%)	(1.0%)	(1.7%)	?	1.1%	(0.5%)	0.9%
Chicago	4.1%	2.5%	6.8%	?	5.1%	4.0%	9.6%
New Orleans	3.0%	(6.6%)	(3.1%)	?	6.1%	1.2%	9.0%
Orlando	3.6%	7.1%	11.3%	?	4.4%	7.0%	12.1%
Miami	9.5%	12.2%	22.9%	?	7.0%	9.1%	17.0%
Phoenix	5.7%	7.9%	14.2%	?	3.4%	6.3%	10.1%
LA	7.1%	5.9%	13.5%	?	6.0%	5.7%	12.2%
SF	13.8%	3.8%	18.3%	?	14.1%	5.0%	20.0%

Source: Smith Travel Research, Raymond James US Research

The performance of major brands that are operated by publicly traded hotel companies continues to closely track the national trends. Generally, the higher scale and more urban-oriented brands have achieved better performance. The Marriott full service brands have been lagging the overall market for over a year, as they appear to be losing share to Starwood brands and also to their own limited service brands. Courtyard, for example, had 9.5% RevPAR growth for the quarter.

?	Q3 2011			?	Rolling 4 Quarters
?	ADR	Occ	RevPAR	?	ADR	Occ	RevPAR
Marriott (full service)	2.9%	2.2%	5.2%	?	3.8%	1.3%	5.1%
Ritz-Carlton	9.1%	4.0%	13.5%	?	4.6%	5.2%	10.1%
Sheraton	4.9%	3.3%	8.4%	?	3.5%	5.0%	8.8%
Westin	4.6%	4.3%	9.1%	?	3.9%	5.3%	9.4%
Luxury Collection	7.6%	4.4%	12.3%	?	5.7%	7.3%	13.5%
W	4.4%	2.3%	7.0%	?	6.1%	6.2%	12.8%
Le MeridienHyatt	3.7%3.5%	3.2%3.5%	10.0%7.1%	?	7.6%3.1%	4.4%2.8%	12.2%6.1%

Source: Company earnings releases

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Outlook
Over the past several months, indeed since signs of weakness began appearing in the US economy in late spring, industry pundits have been divided into two camps regarding the outlook for 2012 and beyond. This has led to unusually large spreads in the range of forecasted results, even by individual analysts such as the highly regarded Mark Woodworth of PKF, who says that RevPAR will increase by 2.5% to 7.5% “depending on whether or not we go into a recession.”

One school of thought, which is largely composed of Wall Street analysts, speculators and other “momentum” players argues that since GDP, employment growth and consumer confidence have not grown as expected, this will ripple through to the hotel sector and cause a dramatic slowdown of growth, if not contraction of RevPAR. This has resulted in a large correction in hotel stock prices, especially in the REIT sector, as will be shown later.

On the other hand, there are many people (including Woodworth, who is just hedging his bet) who feel that lack of supply growth and strength on the corporate side will be enough to maintain decent, if not robust growth in hotel income and profits. Most of the folks on this side seem to be more directly connected with hotel operations, so it would seem that they have more credibility, and at least over the past few months the results seem to have borne this out, as indicated by the charts above. This camp cites some other evidence, some factual and some anecdotal, to support their contentions, such as the following points:

• No large-scale group cancellations have been noted, as was the case leading into the last recession. Convention calendars are strong in many major markets.
• Overall labor costs will hold steady due to high unemployment rates. While increased union penetration remains a threat, Washington gridlock has largely prevented policies such as card-check that would make it easier to organize.
• Continuing decline in home values does not materially affect the upper-end leisure travelers, as home equity is a less significant portion of their overall net worth
• Middle class workers (at least those who are still employed) still feel it is their right to take a vacation in a destination such as Orlando
• The current administration will do everything it can to prop up the economy in the months leading up to the election

Conversely, there are other arguments to support the pessimistic view:

• Airline capacity has continued to decline, and fares will rise, thus discouraging travel
• Historical knee-jerk reactions by operators to cut rates at the slightest whiff of trouble- for example, Hawaiian performance was doing great until the Japanese tsunami, but then they started madly discounting.
• The overall fragility of the economic situation, in that an unexpected shock (natural disaster, disease, war, etc.) could send it over the edge very quickly
• Increased “class warfare” tensions could lead to more AIG-effect fallout at high end hotels and resorts. Even the lower end is not immune as Gaylord Hotels (a major SMERF market player) got hammered after announcing disappointing Q3 earnings and reduced expectations for 2012 as their market segment is very price sensitive.
• On line travel agencies (OTA’s) are increasing their market presence and are forcing prices down as consumers shop for the best deals

There is obviously validity to many of the arguments on both sides, and everyone in the industry is anxiously holding their breath to see what develops. Right now, there does seem to be a bit more positive momentum in the economy as preliminary 3^rd quarter GDP was not as bad as expected, the stock market had a strong October and jobless claims seem to be holding steady, so right now we are somewhat bullish about 2012 prospects, but stay tuned.

Transactions
This is one area that has definitely felt the impact since the credit downgrade, as many deals have been pulled due to lack of financing. Except for the re-trade of the Cerebrus/Innkeepers portfolio (see below), and some recent smaller select service transactions, only one major public REIT deal was closed in the last three months; most of these were private sales.

Date	Property	Location	# keys	Price $MM	Price/Key	Buyer/Seller
Aug-11	Ritz Carlton Highlands	Truckee CA	170	85.5	503	Private/Private
Aug-11	Fairmont	Dallas	551	69.0	125	Inland America/Private
Aug-11	Hotel Chelsea	New York	226	82.5	365	Private/Private
Aug-11	Mandarin Oriental	San Francisco	158	63.5	402	Private/Cornerstone
Aug-11	Marriott LaGuardia	New York	438	61.0	139	Capmark/RLJ
Aug-11	Holiday Inn	San Diego	218	17.5	80	Pinnace/Rockpoint
Aug-11	Mark Hotel	New York	180	145.0	806	Private/Private
Aug-11	6 hotel portfolio	TX CA VA GA WI	875	238.4	272	Hyatt/LodgeWorks
Aug-11	93 Red Roof Inns	Various	11,233	335.0	30	Five Mile/Citigroup Westmont JV
Sep-11	La Valencia Hotel	La Jolla CA	115	41.0	357	Private/Private
Sep-11	Chateau Bourbon	New Orleans	251	45.7	182	Private/Private
Sep-11	Doubletree	Wilmington DE	219	12.0	55	Driftwood Apollo/Private
Sep-11	Beverly Hilton	Beverly Hills CA	569	NA	NA	Oaktree/Private
Sep-11	Lost Pines Resort	Cedar Creek TX	500	NA	NA	Anschutz/Oklahoma Publishing
Sep-11	The Broadmoor	Colo. Springs CO	744	NA	NA	Anschutz/Oklahoma Publishing
Sep-11	Marriott City Center	Denver	613	119.0	194	Chesapeake REIT/Walton St
Sep-11	Embassy Suites	Deerfield IL	237	18.0	76	Oaktree/C III Capital
Sep-11	Paramount Hotel	New York	597	275.0	461	Private/Walton St JV Westbrook
Sep-Oct	5 HGI/Homewoods	NE TX AZ OH IN	649	91.5	141	Apple REIT/various private
Oct-11	Hawks Cay Resort	Marathon FL	177	76.8	434	Related JV Deutsche Bank/Behringer Harvard
Oct-11	Kyoto Grand Hotel	Los Angeles	436	NA	NA	Rim Hospitality/Private
Oct-11	Hilton Downtown	Miami	527	24.4	46	Genting from Related JV
Oct-11	64 hotel select serv.	Various	8,101	1,020.0	126	Cerebrus Chatham JV/Apollo
Nov-11	Courtyard	Miami FL	263	95.0	361	Hersha/Private
Nov-11	Courtyard	Atlanta	150	28.7	191	Summit/Private
Nov-11	Residence Inn	Kansas City	96	9.9	103	Summit/Private

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Public Company News
IPO, Financing, Mergers and Acquisitions

• Ashford REIT issued $30MM of 9% preferred stock in October, with proceeds to be used for general corporate purposes. They also closed on a $105MM revolving line of credit in September
• Chesapeake Lodging added $50MM to their revolver, and lowered their overall interest cost.
• Chatham Lodging, in a joint venture with Cerebrus, recently closed on the bankrupt Innkeepers portfolio of 64 select service hotels. The deal was originally scheduled to close in August, but was pulled because the buyers cited a “Material Adverse Change” clause. After a contentious court battle, the price was reduced by about $100MM
• Strategic Hotels announced a buyback program for its 8.25% and 8.50% Preferred Stock issues at a slight premium to their original issuance prices. They will also pay accrued but unpaid dividends. Total value of this transaction will be over $400MM
• Diamond Rock entered into an agreement to sell three “non core” hotels to Inland America for $262.5MM ($185K per key). The hotels are Marriott or Renaissance branded and are located in Austin TX, Lexington KY and Atlanta. The transaction is expected to close by year end
• Felcor modified a CMBS agreement on $178MM of its outstanding debt to pay down $20MM of the balance and extend the facility for up to two more years
• Starwood is prepaying over $600MM of 7.875% notes due next year, including all interest and defeasance charges
• Hospitality Properties Trust announced that it would acquire two Sonesta hotels (Cambridge MA and New Orleans) for $150.5MM ($170K per key). In addition, its affiliated management company would be acquiring Sonesta’s management and franchise operations for a cash price of $31 per share (representing a premium of about 72% above its recent market price, but this stock is very thinly traded). HPT also renewed and extended a $750MM revolving credit agreement; at a base interest rate of LIBOR + 130 bp. Wells Fargo is the administrative agent
• Hersha announced that they will sell 18 “non core” limited service hotels to an affiliate of Starwood Capital Group for $155MM. ($81K per key). This price is an 8.4% cap on trailing 12 months NOI and a 10.3 multiple on TTM EBITDA
• Summit Hotels consolidated and refinanced about $120MM of mortgage debt, including $28MM of loans from ING that were called, and also issued $50MM of 9.25% preferred stock to pay down its revolving line of credit
• LaSalle Hotel approved a $100MM share buyback program
• Marriott’s board approved the previously announced spin-off of its timeshare business. Pricing and record date have not yet been set, but the new company has already begun trading on a “When Issued” basis
• Pebblebrook netted $82MM from the issuance of 8.00% preferred stock, about half of which will be used to pay down their revolving credit line.
• Red Lion acquired 10 previously leased hotels for a total of $37MM. These include many of the older Red Lions located in Oregon, Washington, Idaho and Montana. They also refinanced and expanded their credit facilities with Wells Fargo
• Sunstone refinanced its loan on the Doubletree Times Square. They paid down $90MM of the original $270MM principal; the new loan will bear interest at 3 month LIBOR + 325. They also sold the $90MM loan that they held on the Royal Palm hotel in Miami for a 12% discount, but still retains some earn-out rights on the sale of that property
• Wyndham hotels announced that Moodys upgraded their debt to investment grade (BAA3); it was previously at BA1. They already have an investment grade rating from S&P

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Earnings
A summary of reported Q3 earnings for the some of the larger-cap companies is as follows:

Company	Date Reported	Reported EPS*	Consensus EPS*	RevPAR Guidance for 2012
Starwood	Oct 27	0.42	0.39	4-8%
Marriott	Oct 5	0.29	0.27	3-7%
Host Hotels	Oct 12	0.16	0.17	3-7%
La Salle	Oct 19	0.50	0.49	NA, but group up 8%
Sunstone	Nov 8	0.20	0.20	“in line” w/industry
Diamondrock	July 25	0.16	0.15	NA; group pace +10%

*Generally excludes unusual items; figures are for FFO on REITS

In general, most companies met or exceeded Street earnings estimates. Guidance for Q4 remained largely unchanged, but as shown above, there is considerable uncertainty as to next year. Note that most of the larger publicly traded companies are typically more heavily weighted to big-box hotels in top 25 markets, and are more dependent on business transient and groups as opposed to leisure travelers, so given the current state of the market, these companies would be expected to outperform the industry as a whole.

Stock prices
Prices for large cap full service hotel companies are generally down about 10% since June 30 and 20% for the year to date, while limited service companies such as Choice have done relatively better. Some, such as Wyndham (not shown on chart) are actually up over 10% for the year. REIT stocks have rallied strongly over the past month; they are now, on average “only” down 18% for the year, whereas at the beginning of October they were down 35%.

Publicly traded hotel company stock performance (US based companies with market capitalization in excess of $1Bn)

Note- all prices adjusted for dividends paid
Source: Yahoo! Finance

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Other Industry News

• Intercontinental Hotels announced plans to revamp its Crowne Plaza brand in a three phase program (“Freshen Up,” “Move Up” and “Shine”) over the next 3 to 4 years.
• Interstate Hotels, which is now privately owned, purchased Noble Management Group, which adds over 50 hotels and 9.000 keys to its operations.
• Overseas expansion by US-based companies continues, with Starwood, Carlson and others announcing deals in China, India, Turkey and other emerging markets
• Hard Rock is the first major chain to announce that it has entered into a partnership to develop a casino resort in Massachusetts under new legislation which is expected to be enacted this year. This property would be in Holyoke, an industrial city about 90 miles west of Boston. Up to three such casinos are expected to be built.
• A Miami Federal court denied Fairmont Hotel’s request for an injunction to reinstate it as manager of the Turnberry hotel. This continues a recent trend of courts supporting terminations of management agreements.
• Industry veteran Mark Lomanno left Smith Travel to join newBrandAnalytics, which provides business intelligence from social media customer feedback. This venture is backed by some of the biggest names in the industry, including Barry Sternlicht and Neil Shah from Hersha

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US Economy General Statistics

Key Economic Indicators

Measure	Period	Value/Trends
GDP Q3 2011 Preliminary figure of 2.5%, an improvement from the 1.3% advance in Q2, but still well short of normal post-recession recovery levels. ConsumerConfidence Oct-11 The University of Michigan Consumer Sentiment Index was 60.9, up slightly from August and September levels, but still well below the 71.5 in June and the 74.3 in May ? Unemployment Oct-11 9.0%, down slightly from last month. It has ranged from 9.0% to 9.2% since April CPI Sept-11 Up 0.3% for the month, at an annual rate of 3.9%, which is the highest level in some time. Food costs were up 0.6% (close to 5% for the year) and energy prices were up almost 20%. So-called “core inflation” without food & energy was up only 0.1%, but for the average consumer, this is a meaningless statistic. Retail Sales Sept-11 Up 1.1% for month; up 7.9% vs. year ago. Along with the consumer confidence trends, this will be a good indication of where the economy is headed in the short term ? ? ? New Home Sales Sept-11 313K units, up from 296K in August, but slightly below September 2010 levels. Inventories of existing houses remain high and prices are still declining in most markets.

Sources: National Bureau of Economic Research; various government agencies including US Department of Commerce