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Familiar Themes

Familiar Themes. U.S. Lodging Industry Update. a presentation to:. Hotel Asset Managers Association. R. Mark Woodworth PKF Hospitality Research, LLC May 9, 2013 mark.woodworth@pkfc.com. Hotel Horizons® Forecasting Model. Smith Travel Research

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Familiar Themes

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  1. Familiar Themes U.S. Lodging Industry Update a presentation to: Hotel Asset Managers Association R. Mark Woodworth PKF Hospitality Research, LLC May 9, 2013 mark.woodworth@pkfc.com

  2. Hotel Horizons® Forecasting Model • Smith Travel Research • Historical rooms occupied, room available, rooms revenue • Pipeline of future hotel construction • Moody’s Analytics • Economic forecasts 2

  3. Familiar Themes The economic outlook, while rife with uncertainty, remains essentially unchanged.

  4. The Outlook for the Drivers that are Most Important to Hotels Remains Favorable GDP Component Forecast These matter the most. Source: BEA, Moody’s Analytics

  5. Historic and Projected International Visitors to the U.S. This Includes In-Bound International Visitation Forecast Source: International Trade Administration

  6. Familiar Themes The economic outlook, while rife with uncertainty, remains essentially unchanged Supply growth remains in check in most markets.

  7. New Supply Outlook Varies Across Markets

  8. Mixed Signals on New Hotel Construction Source: Engineering News Record Q1 2013 Report

  9. Nominal Dollar Operating Profits* Surpass Previous Peak in 2014 2009 – 2014F Source: PKF Hospitality Research LLC’s Annual Trends Database Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.

  10. Real Changes In NOI* Still Below All-Time High and Previous Peak Source: PKF Hospitality Research LLC’s Annual Trends Database Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization 2012 Constant value dollars

  11. Familiar Themes The economic outlook, while rife with uncertainty, remains essentially unchanged Supply growth remains in check in most markets. The fundamentals have become more predictable and the outlook remains very attractive.

  12. Hotel Horizons®May 2012 United States ADR Recovery Slower than Expected Stronger than Expected Demand Growth Source: PKF Hospitality Research, LLC – Hotel Horizons® March--May 2012, 2013, Smith Travel Research

  13. United States Q1 2013 Forecast Stronger than Expected Demand Growth (again) ADR Lift Very Good; Not Great Source: PKF Hospitality Research, LLC – Hotel Horizons® March--May 2012, 2013, Smith Travel Research

  14. Good News Summary 1. Supply Growth: Below Average through 2016. 2. Demand Growth: Above Average through 2015. • Occupancy: Above Average Level through 2016. • 4. ADR Growth: 2 x’s Average through 2015. • 5. RevPAR Growth: 2.5 x’s Average through 2015.

  15. These Strong Market Conditions will Persist through 2017 Historic and Forecast Occupancy and ADR4 Quarter Moving Average LRA = Long Run Average

  16. Profit Growth Will be Above Average as Well Forecast Source: PKF Hospitality Research, LLC

  17. Longer Term Outlook Remains Strong Across Markets Average Annual RevPAR Change (2013 - 2017)

  18. Familiar Themes The economic outlook, while rife with uncertainty, remains essentially unchanged Supply growth remains in check in most markets. The fundamentals have become more predictable and the outlook remains very attractive. Group meeting demand needs to recover.

  19. Forecast Occupancy Levels By Chain-Scale This is where meetings go. Source: STR, PKF Hospitality Research, LLC, March-May 2013 Hotel Horizons® 19

  20. An Unfamiliar Theme What about the downside? 20

  21. Question What do you care more about? The magnitude of the upside? The depth of the downside? 21

  22. A Different Way to Look at Markets Variance Semi-Variance Semi-variance only considers values (below) above the target value. 22

  23. A Close Look at Two Markets Focus is Here 23

  24. The Bigger the Market,the Larger the Downside Risk

  25. Some Findings from 2012 Trends® Survey 25

  26. Where Did The Dollars Go in 2012? Percent of Total Operating Expenses* (8.8%) (45.7%) (3.8%) (2011 Results) (6.4%) (35.4%) Average Hotel in PKF-HR 2013 Trends® Database215 Rooms, 70.5% Occupancy, $149.10 ADR Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, LLC, 2013Trends® in the Hotel Industry sample (2012 Data) 26

  27. U.S. Hotel Labor Costs - $PORAnnual Change: 2011 – 2012 Annual Increase Occupied Rooms = 1.8% Rooms Sold And Total Labor Costs POR Both Increased By 1.8%. Is This a Good Thing? Source: PKF Hospitality Research, LLC, 2013 Trends® in the Hotel Industry

  28. A Look at Productivity 28

  29. Drivers of Labor Costs Business Volume – rooms sold; covers served. • Compensation Levels – wages; benefits. • Productivity – Output achieved per hour worked.

  30. Data Analyzed Year-Over-Year Change in Labor Costs (PKF Hospitality Research) • Year-Over-Year Change in Average Hourly Compensation Levels (BLS) • Year-Over-Year Change in Total Hours Worked (1 - 2)

  31. 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 compensation* = • Total hours worked Note: * Includes salaries, wages, and benefits.

  32. Change in Average Hourly Compensation Can these low increases be sustained? Source: PKF Hospitality Research, LLC, Bureau of Labor Statistics

  33. Change in Average Hourly Compensation vs. Unemployment Source: PKF Hospitality Research, LLC, Bureau of Labor Statistics

  34. Annual Change inTotal Hours Worked Since 2011, the Rate of Increase in the Percentage Change of Hours Worked Declined. Is This A Good Thing? Source: PKF Hospitality Research, LLC, Bureau of Labor Statistics

  35. Change In Hours Worked vs.Change In Rooms Occupied Total Hours Worked Now Growing Faster Than Rooms Sold Source: PKF Hospitality Research, LLC, Bureau of Labor Statistics

  36. Change in Hourly Wages and Hours Worked vs Change in Occupied Rooms Productivity Has Been Declining Since 2011 at an Increasing Rate Source: PKF Hospitality Research, LLC, Bureau of Labor Statistics

  37. Change in Hourly Wages and Hours Worked = Change in Labor Costs Although Productivity has been Declining, the Rate of Increase in Labor Costs is Less than what We Saw During the Last Expansion Phase Source: PKF Hospitality Research, LLC, Bureau of Labor Statistics

  38. Components of Labor CostAnnual Change Note: 9th Edition of USALI prior to 2007 Source: PKF Hospitality Research, LLC, Trends® in the Hotel Industry 38

  39. Summary 1.Uncertainty continues to be a drag – an important impediment to the recovery of the group segment and pricing overall. 2.Industry growth, while still positive, will slow relative to what we have become used to. Q2 and Q3 2013 will be weaker ; 2014 should be next really good year.

  40. Summary Positive momentum will persist as industry fundamentals solidifyand greater levels of debt and equity find their way into the market. The hotel risk premium contracts as a result. It is a great time to be in the hotel business!

  41. Thanks for Your Time “Fundamental Alignment”

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