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.

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.

Source: Company earnings releases

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.

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

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

*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

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

US Economy General Statistics

Key Economic Indicators

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

The hotel boasts a casino in the lobby, an outdoor pool, three 24 hour restaurants and 15 meeting rooms totaling 20,000 square feet.

The Westin Casuarina Las Vegas Hotel, Casino & Spa

The Boston Marriott Burlington completed a lobby and general rooms renovation in July 2010 and is home to the Summer Winter Restaurant which features fresh, local and seasonal ingredients – many of which are grown on site.

View the Web Site:
Boston Marriott Burlington

“This quarter has been strong, with positive growth for both Pyramid’s business development efforts and existing hotel and resort performance. We expect to see similar results throughout the remainder of the year,” said Warren Fields, Pyramid’s Chief Investment Officer.

“These new contracts also reinforce the value that owners place on our core Pyramid values. At the heart of how we approach business is balancing the needs of owners, partners, employees, guests and the communities in which we live and work in ways that provide superior returns to all,” said Jim Dina, Pyramid Chief Operating Officer.

The new hotel under management by Pyramid Hotel Group is the 459-room Hyatt Regency Woodfield-Schaumburg approximately 30 miles from Chicago, featuring 30,000-square-feet of function space, inventive French-inspired contemporary cuisine and two swimming pools.

The three new resorts will be managed by Pyramid Resort Group, the new division established in June to enable the company to more aggressively target the resort business segment and deliver value to resort owners. The resorts include:

• The Wigwam, an historic independent resort in Arizona dating to 1918 is a true landmark of  the Southwest, offering 331 casitas and suites, 54 holes of championship golf, a Red Door Spa by Elizabeth Arden and 45,000-square-feet of meeting space on more than 400 acres just 10 miles from Phoenix
• The 519-room Sheraton Keauhou Bay Resort & Spa, on 22 oceanfront acres in Kona, Hawaii, features water sports, the Big Island’s longest water slide, island-inspired  Ho’ola Spa, and more than 60,000-square-feet of indoor and outdoor meeting and event space
• The 343-room Westin Casuarina Resort & Spa sits on Seven Mile Beach in the heart of Grand Cayman, the largest of the three Cayman Islands, with daily activities for ages 4-12, Hibiscus Spa, and 69,000-square-feet of indoor and outdoor function space for meetings and events

About Pyramid Hotel Group
Pyramid Hotel Group is a privately held Boston-based hotel company with 69 hotels and resorts under hotel management and asset management, comprising more than 26,000 rooms and approximately 8,000 employees.  Pyramid Hotel Group provides hotel management, asset management and project management services to a vast array of hotel assets ranging from a 90-room limited-service hotel to world-class properties with more than 1,000 rooms. Pyramid Hotel Group is a franchisee of all major hotel brand companies, an operator of independent four- and five-star hotels and resorts, and is the fifth largest U.S. hotel management company as ranked by Hotel Business magazine.  www.pyramidhotelgroup.com

About Pyramid Resort Group
Pyramid Resort Group is a new division of Pyramid Hotel Group, the Boston-based hotel management, asset management and project management firm that is the 5th largest hotel management company in the U.S. Established in June 2011, Pyramid Resort Group is a smart business evolution to enable the company to more aggressively target the resort business segment to help resort owners achieve greater profitability and value. The resort team is led by Richard A. Holtzman, Senior Vice President, who brings more than 30 years in the resort industry and accolades such as “Resort Executive of the Year” to this role. He was previously vice president of DMB, an Arizona-based real estate company, where he had both management and asset management responsibilities, including serving as president of the Kukui’ula Development Company, a new resort residential community in Hawaii on the Island of Kaua’i.  Pyramid Resort Group is actively seeking management and asset management contracts in the U.S. and Caribbean and has the potential to co-invest in situations that it deems appropriate. www.pyramidhotelgroup.com

# # #

Media Contact
Sheila Donnelly & Associates
Babs Harrison
212-851-8425
babs@sheiladonnelly.com

The Wigwam, an historic property on more than 400 acres in the quaint village of Litchfield Park, just 20 minutes from downtown Phoenix, features 331 Western-style casitas and suites, 54 holes of championship golf, signature swimming pools, authentic Arizona-inspired activities, a range of inventive dining options, Red Door Spa by Elizabeth Arden, and 43,000-square-feet of inviting indoor and outdoor event space.

“We are delighted to add The Wigwam to our resort management portfolio,” said Richard A. Holtzman, Pyramid Resort Group Senior Vice President, Resort Operations and a long-time Scottsdale resident. “The Wigwam offers an unmatched collection of resort amenities, particularly its dedicated staff, dramatic Southwestern setting and outstanding collection of championship golf courses. We look forward to helping the resort continue to stand apart as a welcoming icon for a wide array of audiences and future generations.”

“The Wigwam has such a rich history. I’m honored to lead the team of hospitality professionals that will continue to restore this special resort as an inviting and sustainable beacon in the Litchfield Park and West Phoenix communities,” said George K. McGann, newly appointed Vice President, Managing Director and General Manager of The Wigwam.  “We look forward to every associate being vital members of the community and strengthening the role that The Wigwam plays in daily life for guests and residents alike.”

About The Wigwam
A designated “Historic Hotel of America,” The Wigwam is one of Arizona’s iconic landmarks. With over 80 years of history, a new era began in early 2011 as The Wigwam unveiled a $7 million renovation to include a new pool complex with both adult and family areas, new restaurants and bars featuring al fresco dining and entertaining areas, and a variety of new social areas and event lawns. Situated on an estate-like setting, The Wigwam spans over 440 acres and features 331 casita-style guest rooms, including 72 suites, crafted from distinctive adobe architecture.  The Wigwam also offers 54 holes of championship golf, a 25,000 square-foot Red Door Spa, four pools, and seven restaurants and bars. The Wigwam invites guests to create new traditions and lasting memories of their own by participating in a variety of daily activities from morning nature walks and Native American campfires to cooking classes, weekly farmer’s markets and more. The Wigwam is located in the affluent community of Litchfield Park, Ariz. in the West Valley of greater Phoenix. For more information, visit www.wigwamarizona.com or call (623) 935-3811 or (800) 327-0396.

About Pyramid Resort Group
Pyramid Resort Group is a new division of Pyramid Hotel Group, the Boston-based hotel management, asset management and project management firm that is the 5th largest hotel management company in the U.S. Established in June 2011, Pyramid Resort Group is a smart business evolution to enable the company to more aggressively target the resort business segment to help resort owners achieve greater profitability and value. The resort team is led by Richard A. Holtzman, Senior Vice President, who brings more than 30 years in the resort industry and accolades such as “Resort Executive of the Year” to this role. He was previously vice president of DMB, an Arizona-based real estate company, where he had both management and asset management responsibilities, including serving as president of the Kukui’ula Development Company, a new resort residential community in Hawaii on the Island of Kaua’i.  Pyramid Resort Group is actively seeking management and asset management contracts in the U.S. and Caribbean and has the potential to co-invest in situations that it deems appropriate. www.pyramidhotelgroup.com

# # #

Media Contacts
For The Wigwam:
Jenna Ernster
623-856-1097
jernster@wigwamarizona.com

For Pyramid Resort Group:
Sheila Donnelly & Associates
Babs Harrison
212-851-8425
babs@sheiladonnelly.com

The Westin Casuarina sits on Seven Mile Beach in the heart of Grand Cayman, the largest of the three Cayman Islands. Spacious accommodations offer marble baths and the signature Heavenly Bed® with ideal access to a wealth of activities for couples, families and corporate groups. The resort offers daily activities for ages 4-12, the tropical-inspired Hibiscus Spa, dining at Casa Havana, the island’s only AAA Four Diamond restaurant, and more than 18,000-square-feet of indoor and outdoor event space for meetings and events. A $6 million renovations program, anticipated soon, will add to the resort’s many charms.

“We are delighted to add Westin Casuarina Resort & Spa to our resort management portfolio,” said Richard A. Holtzman, Pyramid Resort Group Senior Vice President, Resort Operations. “We look forward to enhancing its exciting array of beachfront amenities to ensure that Westin Casuarina remains a top choice for all travelers to the Cayman Islands and the Caribbean.”

“I’m thrilled to join the team at this spectacular island resort,” said John Wagner, newly appointed Area Managing Director and General Manager, Westin Casuarina Resort & Spa. “The many planned additions promise to assist our team of outstanding hospitality professionals deliver an even greater level of experience for guests, residents and associates. The entire team at Westin Casuarina remains fully committed to and deeply involved in the daily life of the Grand Cayman community.”

About Westin Casuarina Resort & Spa

Stretching across eight acres along Seven Mile Beach on Grand Cayman Island, the award-winning 343-room Westin Casuarina Resort & Spa is the ideal spot to unwind. With the surf’s gentle rhythm and whispering palm trees to set the mood, this inspiring resort features every vacation and corporate meeting amenity. Most guest rooms offer breathtaking ocean-views. The grounds are home to the island’s largest fresh water swimming pool, the full-service Hibiscus Spa, an engaging kids’ camp, exhilarating water sports, and more than 9,000-square-feet of indoor and 60,000 square feet of outdoor event space for memorable weddings and corporate incentive programs.  Shopping and local attractions are steps away. For dining, select the intimate Casa Havana, a AAA Four Diamond restaurant, celebrated for its contemporary island cuisine with Cuban, South American and Caribbean influences; Ferdinand’s Caribbean Café for traditional and inventive Caribbean dishes; Tortugas for lighter fare poolside; Cafe Soleil with tempting coffees, ice cream and snacks; and 24-hour in-room dining. The hotel is expected to shortly unveil its $6 million renovations program, to include refreshed guest rooms, new teak furniture poolside and in restaurants, and new restaurant menus.  www.westingrandcayman.com

About Pyramid Resort Group
Pyramid Resort Group is a new division of Pyramid Hotel Group, the Boston-based hotel management, asset management and project management firm that is the 5th largest hotel management company in the U.S. Established in June 2011, Pyramid Resort Group is a smart business evolution to enable the company to more aggressively target the resort business segment to help resort owners achieve greater profitability and value. The resort team is led by Richard A. Holtzman, Senior Vice President, who brings more than 30 years in the resort industry and accolades such as “Resort Executive of the Year” to this role. He was previously vice president of DMB, an Arizona-based real estate company, where he had both management and asset management responsibilities, including serving as president of the Kukui’ula Development Company, a new resort residential community in Hawaii on the Island of Kaua’i.  Pyramid Resort Group is actively seeking management and asset management contracts in the U.S. and Caribbean and has the potential to co-invest in situations that it deems appropriate. www.pyramidhotelgroup.com

# # #

Media Contacts
For Westin Casuarina Resort & Spa:
David H. Krech
954-452-3233
david.krech@westin-cayman.com

For Pyramid Resort Group:
Sheila Donnelly & Associates
Babs Harrison
212-851-8425
babs@sheiladonnelly.com

Set on 22 acres on scenic Keauhou Bay, every room at the Sheraton Keauhou Bay Resort and Spa  features spectacular ocean or mountain views, private lanais and the signature Sheraton’s Sweet Sleeper® beds. The property is celebrated as the home of the Big Island’s longest waterslide that spills into a freshwater pool complete with sandy-bottom children’s play area. Additional recreation options include ocean sports, tennis, basketball, volleyball and nearby golf. Its inviting tropical ambience includes the new Haleo Luau, the island-inspired Ho’ola Spa, inventive local dining, and more than 60,000-square-feet of indoor and outdoor meeting and event space, including the dedicated Bayside Chapel and Bayside Wedding Lawn.

“We are delighted to add Sheraton Keauhou Resort and Spa to our management portfolio,” said Jim Dina, Pyramid’s Chief Operating Officer. “We look forward to ensuring that the resort is a top choice for local resident kamaaina and visitors alike, whether they are on vacation, planning a memorable wedding or family reunion, or organizing a productive business meeting in this spectacular setting.”

“This is the perfect opportunity to refine an oceanfront gem in ways that match its spectacular setting and better engage the heartfelt spirits of our associates,” said Steven Lindburg, newly appointed Area Managing Director and General Manager of Sheraton Keauhou Bay Resort & Spa. “An important priority is that the entire team of dedicated hospitality professionals at Sheraton Keauhou Bay play active and rewarding roles in the Kona community in ways that resonate with our guests and area residents.”

A multi-million dollar guest room and public areas reinvigoration will soon be underway at this place of “new beginnings,” the Hawaiian meaning for Keauhou. Meanwhile, Sheraton Keauhou Bay Resort & Spa has added new cultural activities for guests and the public to enjoy, including complimentary twice-weekly guided tours of the cultural preserve area adjacent to the resort. The tours enhance guests’ appreciation and understanding of the area’s importance in Hawaiian history.

Other guest activities now include lei making, hula and story-telling around a shoreline fire pit while enjoying s’mores. Daily pastimes vary and might also include rubber duckie races down the slide, water volleyball, and arts and crafts. Sheraton Keauhou Bay Resort & Spa also debuted a new teens-only hangout called Club Le‘ale‘a (“fun”) with Xbox and Wii games. The resort has also revamped its locally-focused menus to better showcase the island’s bounty.

About Sheraton Keauhou Bay Resort and Spa
Situated on an ancient lava flow at Keauhou Bay, Sheraton Keauhou Bay Resort & Spa, a member of the Pyramid Hotel Group, offers 519 spacious guestrooms and suites featuring ultra-comfortable Sheraton Sweet Sleeper beds. The resort’s multi-level Manta Ray Super Slide & Pool and its 200-foot-long lava tube waterslide make water a central feature of the resort. From a viewing area at water’s edge, seeing Manta Ray dance their nightly ocean ballet adds a cherished memory to the visits of many guests. Ho’ola Spa offers indoor or ocean side patio treatments that are Hawaiian-inspired. Resort-wide wireless Internet access makes staying in touch a breeze as does The Link@Microsoft center. An adjacent convention center, weekly lu’au dinner and show, shopping and dining options on property and nearby along with a lovely Bayside Wedding Center and Chapel make Sheraton Keauhou Bay Resort & Spa a comforting and obvious choice for any traveler. Twitter: @KeauhouSheraton, or become a Sheraton Keauhou Facebook fan. Visit www.SheratonKeauhou.com

About Pyramid Hotel Group
Pyramid Hotel Group is a privately held Boston-based hotel company with 69 hotels and resorts under hotel management and asset management, comprising more than 26,000 rooms and approximately 8,000 employees.  Pyramid Hotel Group provides hotel management, asset management and project management services to a vast array of hotel assets ranging from a 90-room limited-service hotel to world-class properties with more than 1,000 rooms. Pyramid Hotel Group is a franchisee of all major hotel brand companies, an operator of independent four- and five-star hotels and resorts, and is the fifth largest U.S. hotel management company as ranked by Hotel Business magazine.  www.pyramidhotelgroup.com

Media Contacts
For Sheraton Keauhou Bay Resort and Spa:
Current Events Public Relations
Vicky Kometani
808-326-7820
Vicky@current-events.com

For Pyramid Hotel Group:
Sheila Donnelly & Associates
Babs Harrison
212-851-8425
babs@sheiladonnelly.com

Summary of Key Performance Indicators
The industry recovery has continued over the past several months despite signs of weakness in the overall US economy. RevPAR gains have been maintained despite increasingly more difficult year-over-year comps. This is illustrated by the fact that for June and July, weekly year over year growth has generally been in only the 5 to 6% range, compared to the 8-10% numbers we saw through May. However, more of the growth is coming in rate as opposed to occupancy. Upper-upscale chains such as Marriott and Hilton, as well as suburban and urban hotels continue to lag some of the other market segments, as do the big Eastern cities, mostly because they were ahead of the curve on the upswing last year and have tougher comps. Other segments and markets, including luxury, resort and West Coast locations are still playing catch-up, and have racked up some pretty impressive growth numbers so far this year.

Real strength is observed in Florida, where Orlando in particular has absorbed significant supply growth and still managed to register big gains in both rates and occupancy. Universal Studio’s new Harry Potter attraction deserves a lot of the credit for this. Hawaii, at least Oahu, also seems to be doing very well on the STR numbers despite anxieties caused by the Japanese earthquake and high airfares, but anecdotally there has been significant softening on the outer islands in recent weeks.

There is fundamental weakness, however, in Washington DC and other government-dependent markets (e.g. Norfolk VA and smaller state capitals), for the short term, as government-related business is down due to uncertainties as to the outcome of the deficit-cutting and debt ceiling measures.

Source: Smith Travel Research, Raymond James US Research

The performance of major brands that are operated by publicly traded hotel companies reinforce these trends. Generally, higher scale and more urban-oriented brands have achieved better performance. It has not gone unnoticed that Marriott brands have been lagging the overall market for the past year or so. Part of this is due to the fact that they started to recover earlier and thus have tougher comparisons, but it is also true that their stable of brands is considered very conservative (less of that urban “edge”) than their competitors, particularly Starwood and Hyatt.

Source: Company earnings releases Outlook

There are some mixed signals on the overall outlook. On one hand, new supply growth continues at a very low pace of 0.8% YTD, as compared to a 5.8% annual rate on demand growth, however as will be discussed below, the pipeline is building, especially in certain markets. Gasoline and jet fuel prices are still relatively high, which has both direct and indirect impacts on travel patterns, but they appear to be stable for now. On the other hand, persistent weakness in the job and housing markets have dampened consumer confidence, and GDP growth coming out of the recession seems to have stalled; preliminary estimates of 2^nd quarter growth are in the 1 – 2 % range, which is far below typical recovery levels.

Industry pundits PKF, Smith Travel Research and others have tempered their 2011 forecasts. PKF is currently predicting 6.9% RevPAR growth for the year (down from 7.1% three months ago), about 1/3 from rate and the balance in occupancy. For 2012, PKF is looking for 8.7%, also down a couple of tenths, however more of the growth (over half) is expected to come from ADR improvement.

STR’s current RevPAR forecast for 2011 is 6.1%, and 8.6% for 2012, again with growth coming largely from occupancy this year and rate next year, but those have not been updated since February. A new set of forecasts is expected to be released in early August at Smith Travel’s Data Conference.

Our view is that hotel operators are anxious to drive rate, but they are still a little nervous because no one wants to be the first in their market to raise prices; they would rather follow than lead. Although demand in general is up, it is still spotty on the group side in the short term (although 2012 is looking very strong in some markets), which makes compression more difficult. The other factor is price sensitivity, as on the business side, corporations are still putting pressure on hotels to keep rates steady, and leisure customers are increasingly turning to OTA’s (online travel agencies) to seek out the best deals. It is now more important than ever for hotels to employ sophisticated revenue management strategies to maximize yields, and increasing penetration of social networks beyond the basic Facebook/Twitter paradigms will be a key to this.

Transactions
The transaction pace continues at dizzying levels. The overall economic uncertainty and supposed lack of debt capital does not seem to be affecting asset pricing, which appears to be defying gravity especially for public company acquisitions in major markets. Here is a sample of key transactions over the past several months:

Note- these are only the highlights of transactions for full service hotels and resorts in major US markets. There were many more deals reported for international properties, gaming assets, small market and limited service properties. According to hotel broker Jones Lang LaSalle, total transactions in the Americas are expected to top $16 Billion this year, up from their previous forecast of $13 Billion. Transaction volume is up 187% year to date, but much of it was driven by some of the pricier New York deals.

Public Company News
IPO, Financing, Mergers and Acquisitions

• In early June, RLJ executed an IPO that raised $568MM including the green shoe. Share price has declined slightly (from $18 to about $17.50) since the offering. They also completed a $300MM non-secured revolver. RLJ owns approximately 140 hotels, mostly in the select service category, in many major urban markets.
• Ashford Hotel Trust, a major REIT, had a follow-on equity offering of 7 million shares, which raised about $100MM, which will be used to pay down debt and for future acquisitions
• Another large REIT, Strategic Hotels and Resorts, completed a $300MM senior credit facility, underwritten by Deutsche Bank. The facility is secured by a portfolio of Ritz-Carlton hotels, and is priced on a grid with rates 275-375 over LIBOR. It matures in three years.
• Chesapeake Lodging (REIT), which has been very active on the acquisition front (see above), has completed a number of financing transactions, including a $130MM three year term loan secured by hotels in San Francisco and Chicago (rate was fixed via swaps at 4.65%) and a $95MM five year fixed rate loan on the Hyatt Boston at 5% w/30 year amortization.
• Chatham Lodging Trust acquired an interest in 67 limited service properties formerly owned by Innkeepers USA Trust (which was affiliated with Chatham’s principals) in a bankruptcy auction.
• Felcor, another REIT actively acquiring properties, sold $575MM of 6.75% senior notes in June. In addition to financing acquisitions, the proceeds were also used to retire more expensive (9-10%) corporate debt obligations. They also had a $159MM equity offering in April.
• Hyatt repurchased approximately $400MM of Class B stock from the Pritzker family in May, continuing the process of liquidating the founding family’s holdings.
• Hospitality Properties Trust renegotiated lease/management agreements on 71 hotels with Marriott, which extends them through 2025 (with future options) and also provides for certain guarantees and commitments for capital spending. They also renegotiated their IHG leases; this provided for the release and possible sale of 42 hotels.
• Host Hotels raised about $500MM through a privately placed sale of senior debt, at a 5.875% coupon due in 2019; the proceeds were used to retire more expensive debt as well as financing some of their recent acquisitions and providing capital for future expansion
• Hersha Hotels, yet another active acquirer, issued $100MM of 8%-yielding preferred stock.
• La Salle REIT raised about $200MM in late April from a common stock offering pursuant to its shelf registration. Most of this was used in connection with their $405MM purchase of the Park Central hotel in Manhattan in June
• The Pebblebrook REIT amended and restated its unsecured credit facility which will now provide $200MM with a three year term and an option for a fourth year as well as an accordion feature to expand it to $400MM. Interest is the greater of 7% or 10 year Treasuries plus 300 bp. There were also other provisions relating to which properties it may include in its borrowing base for this facility.

Earnings
A summary of Q2 earnings for the major companies that have reported as of July 28 is as follows:

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

Again, a mixed bag. Starwood Host and Wyndham had solid beats. Marriott was viewed as a disappointment, and LaSalle and Diamondrock also missed their numbers, but those were primarily due to ramp-up on new acquisitions. Our view is that the REIT’s who are actively acquiring properties, especially Pebblebrook and Chesapeake, will see pressure on their EBITDA/earnings as they based their (high) purchase prices more on future performance than how those hotels are actually doing.

Stock Performance
As shown in the table (below), most hotel stocks have been trending sharply downwards; most of the damage was done in the May-June period, which is when it generally became clear that economic growth in 2011 was going to be below expectations. Hotel stocks tend to be a leading indicator, and they had run up quite a bit in the last quarter of 2010 and the first couple of months in 2011. Choice was particularly hard hit because it plays in the low-end segment which is most sensitive to gas prices, and Marriott was slammed because of a combination of its lagging growth compared to its peers and the spin off of its timeshare units, which was not favorably viewed by the Street. The only large cap hotel stock to buck the trend was HPT, which was driven in large part by its recent renegotiation of its lease terms with major operators (see above). By comparison, the Dow is up 6% for the year and is flat since April 1.

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

Development Projects
The pace of development activity, from both public and private companies, seems to be accelerating in recent months. While there is the usual assortment of lower-end limited service highway hotels and convention center-oriented properties in tertiary markets, there are also a couple of notable full service projects which appear to be gaining momentum, including:

• 1,000 key Marriott Marquis property in Austin Texas (by White Lodging, who recently opened a similarly sized property in Indianapolis). They are also planning a 130 key Residence Inn in a Chicago suburb.
• 1,500 key conference hotel proposed for Denver by Gaylord. They also said they were not abandoning their proposal to build a similarly sized project outside of Phoenix.
• A $2 Billion expansion of the Boston convention center is proposed which would create a demand for up to 1,200 additional rooms. Several other smaller projects in Boston are expected to break ground this year.
• A 532 room Hilton Hotel is under construction in Columbus OH, scheduled for a September 2012 opening.
• 460 room Hyatt expansion in downtown Chicago (design/build contracts let). Also in Chicago, a 150 room boutique hotel is planned for the Navy Pier.
• Several new projects have been announced for New York City, including 200+/- rooms at Brooklyn Bridge Park, 56 rooms on Mott Street in Chinatown and a 139 key hotel just south of the World Trade Center site.

The logic for new builds is compelling in that demand is still expected to be very strong by the time these are completed in 2013/2014, and developers are afraid of missing the window. Due to overall softness in the economy, construction materials and labor costs are depressed (anecdotally running as much as 20-25% less than at the peak), and interest rates continue low, which makes the break-even point that much more attainable. Similar themes are also popping up in downtown commercial office building development in many major markets, which are fueling record high prices for existing well-located assets.

While many lenders are still reluctant to do construction financing, a combination of guarantees, high initial equity (in many cases the owners will contribute the land that they already own), availability of public money (think “JOBS!”) and a building sense of bandwagon momentum will (as they historically have done) magically result in the money pipe being opened up.

Other Industry News

• Host Hotels has sued brokerage firm Molinaro Koger, alleging that they used unethical business practices to flip properties for their own account rather than getting the best price for Host. Koger has countersued, claiming that Host obtained information illegally.
• In late June, Marriott provided pro forma data relating to its upcoming spin-off of its time-share group.
• It was recently reported by the Wall St. Journal that the primary broker-dealer for the Apple REIT family, a major non-traded player (which has raised over $6Bn over the past decade) is being investigated by financial regulators for possible misrepresentation.
• International expansion by major US brands is accelerating, with Starwood and Hyatt announcing major Chinese projects, Marriott Autograph collection expanding with six European properties, and increased activity by Hilton and others in Mexico and Colombia.

US Economy General Statistics
Key Economic Indicators

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

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