Hospitality Industry Prospects For 2009 Look Grim

R M R. Mark kW Woodworth d th President PKF Hospitality Research

J b B Jobs Becoming i M More Scarce S Total Payroll Employment in a Long Contraction

Source: Moody's Economy.com

Current Contraction Looks Like the Last One Remember the Jobless Recovery? Long Run Employment Levels

Forecast

15 Qtrs 16 Qtrs

10 Qt Qtrs

9 Qt Qtrs

Beginning / End of Contraction Period Turning Point

Source: Moody's Economy.com

Turning Points: Distance from Beginning of Official NBER Recession (Quarters)

Source: Moody's Economy.com

Loan Delinquencies Increase Pain Will Escalate into Late 2010

Source: PKF Hospitality Research, Moody’s Economy.com

H t l CMBS D Hotel Delinquency li R Rate t 1998 - 2008 2008

Source: Trepp, LLC

Protracted Disconnect B t Between P Property t C Cycle l and d Business Cycle Forecast

Cycle Disconnect Source: PKF Hospitality Research, Smith Travel Research

Protracted Declines Lead to Record Low Occupancy in 2009 Forecast

Source: PKF Hospitality Research, Smith Travel Research

Weak Occupancy Postpones ADR Growth Until 2Q 2010 Forecast

Source: PKF Hospitality Research, Smith Travel Research

High ADR Changes Fuel NOI Growth Forecast

THIS IS A “MODERN RECORD”

Source: PKF Hospitality Research, Smith Travel Research

Forecast Spreads Above LRA But Below 2Q 2003 Peak

Source: PKF Hospitality Research, Moody’s Economy.com, Real Estate Research Corporation

Forecasts of Return Components Cap Rates Exploding – Up 210 bps by 2010 10 Year Treasury

Treasury Spread

% Δ NOI

Cap Rate

2005

4.3%

4.0%

15.5%

8.3%

2006

4.3%

3.8%

13.3%

8.1%

2007

4 6% 4.6%

3 0% 3.0%

7 2% 7.2%

7 6% 7.6%

2008E

3.7%

4.1%

-1.7%

7.8%

2009F

3.6%

5.2%

-18.8%

8.8%

2010F

4 8% 4.8%

4 9% 4.9%

0 0% 0.0%

9 7% 9.7%

Source: PKF Hospitality Research, RERC, Moody’s Economy.com

Cumulative Value Decline Falls Sh t off 2001 – 2003 E Short Experience i Factors Influencing Value of Upper Priced Hotels Note: Cap Rate Influence = Change In Value – Change In NOI (after reserve)

Source: PKF Hospitality Research, Real Estate Research Corporation

A Longer Journey This Time Around Number of Quarters from Beginning of Official NBER Recession Until Turning Point

*Until supply falls below its LRA Source: PKF Hospitality Research

Nothing g Looks Normal Supply Up – Demand Down: Big RevPAR Declines in ‘09 2009 = the Low Point Going Forward = Below/Above Long Run Average

Long Term Average

2004

2005

2006

2007

2008E

2009F

2010F

Supply

1.9%

0.4%

-0.1%

0.2%

1.3%

2.7%

2.9

1.0%

Demand

1.9%

4.0%

2.8%

0.5%

1.0%

-1.4%

-2.8%

1.3%

62.8%

61.3%

63.1%

63.3%

63.1%

60.5%

57.2%

57.4%

ADR

3.5%

4.2%

5.5%

7.5%

6.1%

2.4%

-4.6%

1.0%

RevPAR

3.5%

7.9%

8.5%

7.8%

5.7%

-1.7%

-9.8%

1.3%

Occupancy p y

Source: PKF Hospitality Research – Preliminary Fourth Quarter 2008 Hotel HorizonsSM Report, Smith Travel Research

Impact of Revenue Declines on NOI Depends on Where You Start Low and High Occupancy Hotels Hotels with Occupancy Greater than 70%

Hotels with Occupancy Less than 70%

Note: * After capital reserve expense and before rent , interest, income taxes, and amortization. Source: PKF Hospitality Research

Negative Impact on Debt Service Coverage Capability is Significant Resulting Debt Coverage Ratio

Source: PKF Hospitality Research

E it is Equity i Evaporating E ti 1 of 3 CMBS Loans Since 2005 LTV > 70%

Are these hotels under water?

Source: Trepp, LLC

Final Thoughts ƒ Nothing really new ahead, although all that is bad about this phase h off the th cycle l iis protracted t t d in nature. ƒ NOI and asset value declines are big but not unprecedented – owners and lenders will still experience significant stress. ƒ The Turning Point: consensus view is mid-2010.

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