THE VERY GOOD…. …….WILL GET EVEN BETTER

October 29, 2014

Robert Mandelbaum [email protected] Director of Research Information Services

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WHO WE ARE PKF Consulting USA, a CBRE Company

PKF Hospitality Research, a CBRE Company

• Experts in Hospitality and related industries • Market Feasibility • Appraisals & Valuation • Operational Analysis • Asset Management • Specialty Expertise in Hospitality (Spa, Conv Ctrs, F&B, Public, etc.)

• Annual Trends® in the Hotel Industry • Hotel Horizons® (quarterly econometric forecast) • Trends® in the Hotel Spa Industry • Trends® in the Conference Center Industry (IACC), and more…

www.pkfc.com 2

GOOD … WILL GET BETTER U.S. Lodging Market Overview • Highlights for 2015 • The National Economy • The Supply Story • Market Forecasts – National / Location / Chain-Scale / Cities

• Operating Performance – Revenues (focus on spa) / Expenses / Profits 3

Next Topic U.S. LODGING MARKET OVERVIEW The Very Good ….. Will Get Even Better.

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THE HOTEL MARKET CYCLE Rapid Development

Accelerated Development ?

Development Picks Up

Lodging Decline, Leads Other Sectors

2017/8

U.S. is Here

Long Run Occupancy

2015

2014 Equilibrium ADR

ADR and Margins Recover

Occupancy Declines, ADR Follows

Development Slows

Occupancy Recovers Development at Minimum Lodging Recovers, Lags Levels Other Sectors (Not this Time!)

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BY 2015, THE HOTEL INDUSTRY WILL HAVE ACHIEVED: • A fourth year of accommodated demand in excess of the pre-recession peak of 2.8 million room nights. • Six consecutive years of increasing occupancy, the longest since 1988. • An occupancy level of 65.0 percent, the highest level of occupancy ever recorded by STR, Inc. • 49 of 55 markets are above their long run average occupancy level. • 14 of the 55 markets in the Hotel Horizons® universe will achieve their highest occupancy levels in the past 25 years.

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WHY PEOPLE TRAVEL

Jobs

Income

Corporate Profits

What Drives Travel?

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Income

Employment

THE ECONOMICS OF HOTEL DEMAND 10.0%

Forecast

Demand

Income

Employment

8.0%

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

-6.0%

-8.0%

Source: Moody’s Analytics, PKF Hospitality Research, Hotel Horizons: September-November 2014, STR, Inc. 8

THE OUTLOOK FOR THE DRIVERS THAT ARE MOST IMPORTANT TO HOTELS REMAINS FAVORABLE 10

8

GDP Component

3.9%

6

Forecast

4.6% 3.9%

4

1.7%

2.0%

4.2%

4.5% 3.5%

2.5% 2.7%

3.7%3.9%3.5% 3.4% 3.0%

2.7% 2.9%

2.3%

2.5% 0.1% 1.6%

1.3%

2

0.8%

2.7%

1.8%

0 I

III IV

I

II

2008

-2 -4

II

III IV

I

2009

II

III IV

I

II

2010

III IV

I

2011

II

III IV

2012

I

II

III IV

2013

-1.5%

-2.7%

I

II

III IV

I

2014

-6

2015

-2.1%

(GOVERNMENT) Government consumption expenditures and gross investment TRADE (Net exports of goods and services)

-10

III IV

-1.9% -0.5%

-8

II

-5.4% -8.2%

These matter the most.

BUSINESS (Gross private domestic investment) CONSUMERS (Personal consumption expenditures) Lodging Demand Source: BEA, Moody’s Analytics, PKF Hospitality Research, LLC Hotel Horizons: September – November 2014, STR, Inc. 9

WHY PEOPLE DON’T TRAVEL:

2 x’s 2 x’s

10 x’s Lowest level since November 2007

Source: policyuncertainty.com 10

WHY PEOPLE DON’T TRAVEL: 10%

8% 6%

FEAR!

4% 2%

?

0% -2% -4% -6% -8% -10%

12-quarter moving average change in demand per STR, Inc. 11

Next Topic THE SUPPLY STORY

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2014: NEAR TERM SUPPLY OUTLOOK BEGINS TO STABILIZE

3.0%

Supply Forecast As of: Current 2013 2012

2.5%

2011

2.0%

1.5%

1.0%

0.5%

0.0% 2009

2010

2011

2012

2013

2014

Source: PKF Hospitality Research, STR, Inc. 13

2015

2016

WHY SO LITTLE NEW CONSTRUCTION? 1.

Financing remains a challenge.

2.

Elevated uncertainty that characterized this past cycle has not yet been forgotten.

3.

Construction costs are rising faster than property values in many markets, undermining the feasibility of new development.

4.

Scarcity of brands that lenders are willing to finance.

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TROUBLING SIGNS IN THE PIPELINE?

Phase

2014

2013

% Change

In Construction

108,853

78,665

38.4%

Final Planning

123,291

124,591



Planning

159,258

141,687

12.4%

Active Pipeline

391,402

344,943

13.4%

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

Source: STR, Inc. 15

TODAY VS. THE PREVIOUS PEAK OF CONSTRUCTION ACTIVITY Q1 2008

A CBRE Company

2014

Q1/2008

% Difference Change

In Construction

108,853

207,468

-47.5%

Final Planning

123,291

113,419

8.7%

Planning

159,258

344,363

-53.7%

Active Pipeline

391,402

665,250

-41.1%

Phase

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

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4.0%

New York Austin Pittsburgh Miami Seattle West Palm Beach Raleigh-Durham Houston Cincinnati Nashville Charleston San Jose-Santa Cruz Cleveland Denver Salt Lake City Louisville Columbus San Diego Chicago Washington DC Dallas Baltimore Savannah Anaheim New Orleans San Antonio Detroit Boston Richmond Newark Phoenix Philadelphia Atlanta Saint Louis Portland Jacksonville Orlando Memphis Norfolk-VA Beach Fort Lauderdale Minneapolis Charlotte Tampa Hartford Albuquerque Kansas City Los Angeles San Francisco Sacramento Indianapolis Fort Worth Oahu Long Island Oakland Tucson

NET SUPPLY CHANGE 2015

8.0%

United States – Major Cities

6.0%

40,000 New Rooms in 2015

63,800 New Rooms in 2009

2.0%

0.0%

Source: PKF-HR Hotel Horizons® September-November 2014 Edition, STR, Inc. 17

Next Topic OUR FORECASTS

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NATIONAL FORECAST 2014-2016 Long Term Average 2009 2010

2011

2012

2013

2014F

2015F

2016F

Supply

1.9%

2.8% 1.7% 0.5%

0.5%

0.7%

0.9%

1.3%

1.7%

Demand

2.1%

-6.2% 7.2% 4.7%

3.0%

2.2%

4.5%

2.2%

1.6%

Occupancy

61.9% 54.5% 57.5% 59.9% 61.4% 62.2% 64.4%

64.9%

ADR

2.9%

-8.7% 0.0% 3.8%

4.2%

3.9%

4.5%

5.7%

5.9%

RevPAR

2.9%

-16.7% 5.4%

6.8%

5.4%

8.2%

6.7%

5.8%

8.2%

Source: PKF Hospitality Research – Hotel Horizons® September –November 2014, STR, Inc. 19

REVPAR FORECAST BY CHAIN-SCALE Lower-Priced Categories Moving Up The Recovery Curve

Chain-Scale

2013

2014F

2015F

Luxury

7.6%

5.9%

6.4%

Upper-Upscale

5.8%

7.2%

6.5%

Upscale

5.4%

8.1%

6.2%

Upper-Midscale

4.2%

8.1%

5.1%

Midscale

4.1%

7.9%

5.9%

Economy

4.8%

9.1%

6.5%

All Hotels

5.4%

8.2%

6.7%

Source: PKF Hospitality Research, September-November 2014 Hotel Horizons®, STR, Inc. 20

REVPAR FORECAST BY LOCATION Only Interstate and Small Town Behind Pre-Recession Occupancy

Location

A CBRE Company

2013

2014F

2015F

Urban

6.1%

6.7%

6.5%

Suburban

5.3%

9.3%

7.8%

Airport

5.6%

8.8%

6.3%

Interstate

3.1%

7.2%

4.8%

Resort

7.1%

9.3%

6.8%

Small Town / Metro

3.7%

7.0%

4.8%

All Hotels

5.4%

8.2%

6.7%

Source: PKF Hospitality Research, September – November 2014 Hotel Horizons®, STR, Inc. 21

U.S. LODGING MARKETS SURPASS THEIR PREVIOUS PEAKS Counts Based On 2014 Forecast 60 52

50

50 40

39

30 20

16

10

3

5

0 Occupancy

ADR

RevPAR

Number of Markets Above Previous Peak Number of Markets Below Previous Peak Source: PKF Hospitality Research – Hotel Horizons® September –November 2014, STR, Inc. 22

U.S. HOTEL MARKETS GREATEST AND LEAST CHANGE IN REVPAR Forecast Change 2014 to 2015 San Jose-Santa Cruz

12.3%

Nashville

10.9%

Oakland

10.5%

San Francisco

9.0%

Denver

8.8%

National Average

6.7%

Phoenix

3.5%

Houston

3.3%

Pittsburgh

2.6%

Oahu

2.2%

Norfolk-VA Beach

1.5% 0%

3%

6%

9%

12%

Source: PKF Hospitality Research, September 2014 Hotel Horizons® reports. 23

15%

Next Topic OPERATING PERFORMANCE

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2013 U.S. HOTEL REVENUES Change From 2012 5.4%

Total Hotel Revenue

3.7% 5.9%

Rooms

4.2% 4.3%

Food and Beverage

2.6%

Other Operated Departments

4.3% 2.5%

Rentals and Other Income

7.3% 5.5%

0%

2%

4%

$ Per Available Room

6%

$ Per Occupied Room

Source: PKF Hospitality Research, 2014 Trends® in the Hotel Industry report. 25

8%

2013 HOTEL F&B DEPARTMENT REVENUES Full-Service Hotels Restaurant

1.0%

Bar/Lounge

15.3%

Room Service Mini Bar

2.2% -5.6%

Banquet

4.1%

Public Room Rental

4.3%

A/V Rental

7.9%

Service Charges

5.8%

Other F&B Income

1.9%

Total F&B Department Revenue

4.3%

-10%

-5%

0%

5%

10%

15%

Change: 2012 to 2013 Source: PKF Hospitality Research, LLC, Trends® in the Hotel Industry Report 26

20%

SELECT “OTHER” HOTEL REVENUES Change From 2012 to 2013 Golf

3.1%

Spa

4.6%

Parking

7.0%

Movie Rental Retail

1.3% -8.2%

Guest Laundry Telecommunications -12%

-1.4% -4.5%

-6%

0%

6%

Sample: Only properties that reported respective revenue source. Source: PKF Hospitality Research, 2014 Trends® in the Hotel Industry Report 27

12%

TRAVEL AND HEALTH

Our Deteriorating Profile • • • • •

More Travel, More Stress • Record level of hotel rooms sold in the last 4 years • Stress is interwoven in today’s travel experience

Aging population Less healthy More overweight More stressed Traveling more than ever before

Source: Center for Disease Control (CDC); AgeWave; STR 28

HOW DOES WHAT WE DO MATTER?

To Whom?

In What Way?

• Guests

• • • • • • •

• Management

• Owners

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Experience Perception/Rating Competitive Differentiated Revenue Profitability Drives Asset Value

GREATER REVENUE GROWTH IN URBAN HOTEL SPAS

All Hotel Spas

4.6%

Urban Hotel Spas

7.7%

Resort Hotel Spas

0.0%

3.6%

2.0%

4.0%

6.0%

8.0%

10.0%

*Data from 2013 and 2012* sourced for PKF’s 2014 Trends® in the Hotel Spa Industry 30

COMPONENTS OF HOTEL SPA REVENUE INCREASES Total Departmental Revenue

4.6%

Massage

4.9%

Skin Care/Body Work

2.6% 3.1%

Salon Services Daily Facility Use

11.1%

Fitness and Personal Training Health and Wellness

16.8% N/C

Membership Fees

5.5%

Retail

4.8%

0.0%

5.0%

10.0%

15.0%

*Data from 2013 and 2012* sourced for PKF’s 2014 Trends® in the Hotel Spa Industry 31

20.0%

GREATER PROFIT GROWTH IN URBAN HOTEL SPAS

*Data from 2013 and 2012* sourced for PKF’s 2014 Trends® in the Hotel Spa Industry 32

EXPAND BEYOND THE SPA WALLS

Positioning – More than Luxury, Focus on Wellbeing

Broaden Revenue Drivers

Create Unique Experiences

Create a Connecting Thread of Wellness

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REVENUE VS EXPENSE* GROWTH Annual Change 12% 8%

8.8% 7.6% 6.5% 8.2% 6.4%

6.2% 5.5% 4.8%

6.2%

4.8% 3.4%

4%

4.3% 5.0% 3.3%

5.4% 3.7%

0% -1.3%-0.3%

-4%

-8% -12% -12.1%

-16% -20%

-18.5%

-24% 2004

2005

2006

2007

Revenues

2008

2009

Expenses

2010

2011

2012

2013

C.P.I.

Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, Trends® in the Hotel Industry, Moody’s Analytics 34

WHERE DO THE DOLLARS GO? Percent of Total Expenses Salaries, Wages, and Benefits 44.8%

Cost of Goods Sold 8.5%

Management Fees 4.6%

Property Taxes and Insurance 6.5%

Operating Expenses 35.7%

Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, 2014Trends® in the Hotel Industry 35

TOTAL U.S. HOTEL LABOR COSTS Percent of Total Expenses 46%

45%

44%

43%

42%

41% 1980

1985

1990

1995

2000

2005

Source: PKF Hospitality Research, Trends® in the Hotel Industry 36

2010

2015F

COMPENSATION VS. UNEMPLOYMENT Change in Average Hourly Wage 6%

10.0%

5%

9.0%

4%

8.0%

3%

7.0%

2%

6.0%

1%

5.0%

0%

4.0% 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

BLS - Change in Average Hourly Compensation for Hospitality Employees (Left Axis) U.S. Unemployment Level (Right Axis)

Source: PKF Hospitality Research, LLC, Bureau of Labor Statistics 37

2013

HOURS WORKED VS. ROOMS OCCUPIED Annual Percentage Change

10%

5%

0%

-5%

-10%

-15% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Change in Total Hours Worked PKF-HR Change in Occupied Rooms Source: PKF Hospitality Research, LLC, Bureau of Labor Statistics 38

HOTEL OPERATING EXPENSES Change from 2012 to 2013 Rooms Department

5.0%

F&B Department

3.0%

Other Operated Departments

3.3%

A&G

3.3%

Sales and Marketing

3.5%

P.O.M.

3.3% 2.0%

Utilities Management Fees

6.3%

Property Taxes

4.1%

Insurance

3.2% 0%

3%

6%

Source: PKF Hospitality Research, LLC, 2014Trends® in the Hotel Industry report. 39

9%

REVENUE VS EXPENSE* GROWTH Annual Change 12% 8%

7.6% 8.8% 6.5% 8.2% 6.4% 5.5%4.8% 6.2%

3.4%

4%

7.7%

6.2%

4.8%

5.4% 4.3% 5.0% 3.3% 3.7%

6.3% 5.5% 3.7% 4.5% 3.3%

0% -4%

-0.3% -1.3%

-8% -12% -12.1%

-16% -20%

-18.5%

-24% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F Revenues

Expenses

C.P.I.

Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, Trends® in the Hotel Industry, September 2014 Hotel Horizons® forecast, 40 Moody’s Analytics

REVPAR COMPONENTS AND NOI* CHANGE 20%

10% 0% -10% -20% -30%

-40%

Occupancy

A.D.R.

Change in NOI*

Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, Trends® in the Hotel Industry, September 2014 Hotel Horizons® forecast, Moody’s Analytics 41

NOMINAL DOLLAR OPERATING PROFITS* Six Years of Double Digit Growth 2010 – 2016F CAGR: 11.9% $20,000

2010

2011

2012

$23,182

$14,662

2009

$21,029

$13,305

2008

$18,715

$11,806

2007

$16,136

$10,752

$0

$16,644

$10,000

$17,301

Dollars Per Available Room

$30,000

2013 2014F 2015F 2016F

Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, Trends® in the Hotel Industry, September 2014 Hotel Horizons ® forecast report 42

THANK YOU

www.pkfc.com [email protected]

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