ALIS 2012

U.S. Lodging Market Outlook

Prepared for:

Meet the Money 2012

May 2012

Some Headwinds More Tailwinds

Bruce Baltin
bruce.baltin@pkfc.com

Topics

Our Current Forecasts

A Look at Productivity Profit Outlook

Our Current Forecasts

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Fewer Jobs Today...and the Return to Past Peaks will be Slow.

This is True in 20% of Our 50 Hotel Horizons Markets

Employment Levels

>2000 2011 2012 2013 28 34 41

Source: Moodys Analytics

>Peak 3 6 12

A Fundamentally Good Sign:

Lodging Demand Has Recovered in Over Half of Our 50 Hotel Horizons Markets

Market All Hotels Upper-Priced Lower-Priced

Number of Markets at or Above Past Peak Demand as of Q4 2011* 30 47

* Four Quarter Moving Average

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Source: Smith Travel Research

There is a Disconnect:

Employment is Weak Lodging Demand is Strong Why?

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The Answer: Part 1

Consumers, Businesses have the $s to Travel
Total Real Personal Income Levels

>2000 2011 2012 2013 49 49 49

Source: Moodys Analytics

>Peak 13 37 43

The Answer: Part 2

2011 ADR
Percentage Point Difference From Previous Peak
U.S. is 5.4% below the previous peak. LA is 4.5% below the previous peak.
Pittsburgh + New Orleans

50 U.S. Horizons Markets

Room Rates Still Have a Long Way to Go!

Source: PKF Hospitality Research, March May 2012 Hotel Horizons

Meet the Money 2011

Accuracy Assessment
United States 2011
MTM

2012
MTM

2011
Occupancy
ADR RevPAR

2011 Actual

2011

Current Forecast

60.3%
2.6% 6.8%

60.1%
3.7% 8.2%

63.2%
5.8% 7.6%

61.0%
4.1% 5.8%

Full Demand Recovery

Less Optimistic Why?

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

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Rate of Corporate Profit Growth Not as Robust in 2012

4-Quarter Moving Average Change Change in U.S. Corporate Profits

Forecast

Source: Moodys Analytics 11

Change in Total Real Personal Income

Date of Forecast:
8.0% 6.0%

April 2011
Jan-11 Apr-11 Oct-11 Jan-12

4.0%
2.0% 0.0% -2.0%

-4.0%
-6.0%

A little more pessimistic going into 2012

Source: Moody's Analytics

April 2011

Today
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Leading Economic Indicators

20%

% change in last 6 months February 2012

Leading Economic Indicators (% change in the last 6 months)
15% 10% 5% 0% -5% -10% -15% -20% -25% -30%

U.S. Hotel Demand

6 to 8 Month Lag
A Contraction Coming?
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Source: The Conference Board, PKF-HR, STR

Leading Economic Indicators

% change in last 6 months April 2012

April 2012 Reading: An Encouraging Sign

Source: The Conference Board, PKF-HR, STR

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Many Important Unknowns for 2013:

Some Headwinds

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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 4 0 49 49 44 48 49 48

Outliers

Atlanta and San Antonio

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

Outliers
Houston Houston
New Orleans New Orleans

Rates and Occupancies are Going Up !

Source: STR, PKF Hospitality Research, March May 2012 Hotel Horizons
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Expected Case Scenario

Unemployment is expected to remain above 8% through 2012 even with the addition of 2 million jobs. Extend payroll tax holiday and emergency unemployment insurance through the rest of 2012 (done). 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% 8.2%

2012
0.6% 2.2% 61.0% 4.1% 5.8%

Source: PKF Hospitality Research; Smith Travel Research

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2012 RevPAR Forecast By Chain-Scale

Chain-Scale Luxury (Ritz-Carlton, Four Seasons, InterContinental,..)
Upper-Upscale (Marriott, Hilton, Hyatt, ..) Upscale (Courtyard, Crowne Plaza, Hyatt Place,) Upper-Midscale (Hampton, Holiday Inn, Comfort..) 2012 RevPAR Change

6.0%
6.5% 7.4% 4.8%

Midscale (Best Western, LaQuinta, Quality )

Economy (Days Inn, Red Roof, Motel 6 )
Source: PKF Hospitality Research, March-May 2012 Hotel Horizons report.

3.2%
4.6%

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A Look at Productivity
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A Look at Productivity

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Drivers of Labor Costs

1. Business Volume rooms sold; covers served.

2. Compensation Levels wages; benefits. 3. Productivity Output achieved per hour worked.

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Data Analyzed
1. Year-Over-Year Change in Labor Costs (PKF-Hospitality Research)

2. Year-Over-Year Change in Average Hourly Compensation Levels (BLS) 3. Year-Over-Year Change in Total Hours Worked (1 - 2)

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Estimating the Number of Hours Worked

According to the BLS, the average weekly hours worked per employee has remained generally stable. Therefor: total labor costs average hourly $ levels = Total hours worked
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Change in Average Hourly Compensation

10% 5% 0% -5% -10% -15% 2002 2003 2004 2005 2006 2007 2008 2009 2010

BLS - Change in Average Hourly Compensation for Hospitality Employees

Source: PKF Hospitality Research, Bureau of Labor Statistics

Compensation and Hours Worked

10% 5% 0% -5% -10% -15% 2002 2003 2004 2005 2006 2007 2008 2009 2010

Change in Total Hours Worked BLS - Change in Average Hourly Compensation for Hospitality Employees

Source: PKF Hospitality Research, Bureau of Labor Statistics

Annual Change in Labor Costs

10%

5%

0%

-5%

-10%

-15% 2002 2003 2004 2005 2006 2007 2008 2009 2010

Change in Total Hours Worked BLS - Change in Average Hourly Compensation for Hospitality Employees PKF-HR - Annual Change in Labor Costs

Source: PKF Hospitality Research, Bureau of Labor Statistics

What Happened in 2011?

10% 5% 0% -5% -10% -15% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

+3.1% +1.0% +4.1%

Change in Total Hours Worked BLS - Change in Average Hourly Compensation for Hospitality Employees PKF-HR - Annual Change in Labor Costs

Source: PKF Hospitality Research, Bureau of Labor Statistics

Change in Total Hours Worked v. Change in Occupied Rooms Productivity Was Flat in 2011
10%

4.3%
5%

6.2% 3.1% 3.1% 3.1% -0.1% -7.7% 1.5%

-0.1%
0%

-5%

-3.9%
-10%

-12.5%
-15% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Change in Total Hours Worked

PKF-HR Change in Occupied Rooms

Source: PKF Hospitality Research, Bureau of Labor Statistics

Profit Outlook

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RevPAR Components and NOI* Change

20% 10% 0% -10% -20% -30% -40% Occupancy A.D.R. Change in NOI*

What is better:

Occupancy or

ADR?

Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.

19 95 19 96 19 97 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 F 13 F
Source: PKF Hospitality Researchs Annual Trends Database

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Annual Change All U.S. Hotels Unit-Level NOI*

+64.6% - 1943

60%

+12.7% - 2011 +9.3% - 2012F +11.7% - 2013F

40%

20%

0%

-20%
-22.4% - 1938

-19.4% - 2001 -35.4% - 2009

-40%
1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2013F

Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, Trends in the Hotel Industry sample. 32

Nominal Dollar Operating Profits* Surpass 2005 Dollars in 2012

Dollars Per Available Room

$18,000 $14,000 $10,000 $6,000

$15,357

$16,908

$13,628

$12,320

$10,792

$12,022

$13,886

$15,735

$16,868

$16,227

$10,483

$11,510

$12,972

$14,184

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 F 20 13 F
Source: PKF Hospitality Researchs Annual Trends Database

$15,837
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Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.

Peak to Trough Decline in Operating Profits* 50% Decline in Real Terms

Dollars Per Available Room

$30,000

-41.3%
$20,000
$20,708 $22,103 $17,186 $15,265 $13,024 $14,162 $15,877 $17,480 $18,232 $16,844 $10,949 $11,847 $12,972 $13,906 $15,227

$10,000 $0

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 F 20 13 F
Source: PKF Hospitality Researchs Annual Trends Database

Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.

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Some Things to Think About

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Summary
1. Personal incomes and corporate profit growth will continue, but at less robust levels. Lodging demand growth in 2012, while still positive, will pale relative to the past two years. - Higher rooms rates will help to slow demand growth as well.

2.

Unemployment will remain high helps to keep labor costs in check and profit growth up.

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Summary
3. Oil is a wild card for 2012 too big an increase will undermine the economy lodging demand will suffer as a result.
Overall, the 2nd and 3rd quarters of 2012 will be the weakest given the economic slow down currently underway.

4.

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A Final Thought

Each New Day Brings a Rising Tide

For a Copy:
PKFC.COM/Presentations
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