Nationally, RevPAR had a stronger than expected first quarter of 2013 despite the Easter holiday which held down the March numbers. As predicted, most of the growth is coming from ADR, as occupancies approach or exceed the peak levels for this cycle. Most sectors had a strong start to the second quarter, enjoying the easy year over year comparison, although the trend has moderated in the past couple of weeks. Boston, as would be expected, slowed down due to the impact of the April 15 bombing and subsequent business disruptions and we will watch carefully if this affects results during the traditionally strong graduation period and summer season. New York is also showing a slowdown but it is really returning towards more normal levels after a huge first quarter that was driven in part by Sandy-related activity. Washington is showing surprising resilience in the face of the sequesterization, although occupancy is starting to slip, and San Francisco has been exceptionally strong over the past few weeks. Other top performing markets in recent weeks have been smaller areas such as Atlanta and Minneapolis.

The Upper Upscale segment has been the biggest beneficiary of the Easter calendar shift in the second quarter. Group business is traditionally non-existent during the week leading up to Easter, which also usually includes Passover. It came back very strongly in the first two weeks of April, with 40 to 50% pickup compared to last year. It has since fallen back, averaging about a 5% decrease for each of the last three weeks. Group booking pace has generally been reported as steady to moderately increasing after a very slow start to the year.

Source: Smith Travel Research, Deutsche Bank, Sun Trust Robinson Humphries

As usual, the public company higher-end brands have generally followed the national trends, although there are a couple of anomalies. Hyatt, for example, reported relatively weak results, citing the impact of renovations and loss of group business, although they said that their group booking pace is starting to pick up. The Westin brand also looked a little weak, but there were no direct comments from management or the analysts. Group shifts may have impacted this brand as well.

Source: Company earnings releases

Outlook

The performance of the hotel industry keeps defying the malaise of the overall economy. Demand is still growing; supply is still over the horizon, so no worries, right? That seems to be the consensus of industry experts at most of the conferences this year, although a few contrarians are beginning to see dark clouds among the silver linings.

The chart on the following page illustrates how the current cycle compares with the previous ones. Although the percentage increases in GDP and employment have been within the normal range during this recovery phase, the drop leading in to the current cycle was much deeper, so the economy has not yet fully dug itself out of its hole. Most hotel industry experts feel that, to use the favorite baseball analogy, the recovery is clearly in the “middle innings,” but there is some question as to how long the game is going to last. The consensus is that by 2017 or 2018 things will turn, as supply will inevitably catch up at the same time demand goes south, as has happened in most previous cycles. This has disturbing implications for investors who are currently buying hotels and looking to exit in the traditional 4 to 5 year time frame. Some REIT’s have already remarked that they see an end to their acquisition strategy as soon as next year, and several private equity players have indicated that they are not raising any new funds at this time but are just filling out their existing ones and/or cashing out some of their previous hotel acquisitions.

The short term concerns continue to be the effect of government spending cuts, as they directly affect certain markets but also may constrain non-government travel. Even though the furloughs of air traffic controllers were averted, TSA workers and customs officials are still subject to sequesterization, as are potential closures or reduced hours at national parks. International visitors might also be a little more cautious, as undoubtedly there will be more visible security following the Boston attack, which would add to the perception that the US is not really welcoming to foreign visitors.

New supply also worries some analysts, as despite near record low construction levels over the past couple of years, it is definitely trending upwards (about 600 new properties are expected to open in 2013 vs. 420 last year according to Smith Travel). Lenders are definitely starting to get back into the construction loan business, especially for select service properties in gateway cities, and several cities, including Norfolk VA, Ft. Lauderdale FL and Austin TX have recently announced new convention center hotel initiatives.

Despite these concerns, many industry analysts and public companies are upping their forecasts for the year, or at least narrowing the band, driven by the strong first quarter performance and the assumption that the government cutbacks will mitigated. RevPAR is now generally seen as growing in the 6 to 8% range for the next couple of quarters, about 50 to 100 bp higher than previously thought. It is expected, however, to slow modestly in the 4^th quarter when the comparisons are tougher. It is also expected that group will continue to grow at a slower rate than transient, as the volume of business already on the books is relatively flat compared to the prior year all the way through the first quarter of 2014. This trend could be reversed if there is an increase in business confidence in the economy, but it could also go the other way if there is more uncertainty. There have been mixed signals over the past few weeks, including slower than expected GDP growth and retail sales, and some are becoming nervous as to whether the housing market recovery can be sustained. This is an important factor in driving consumer confidence, which influences vacation decisions.

Transactions

Transaction volume is continuing to be fairly strong in top markets like New York, New Orleans and Hawaii. The price per room for some of these properties is definitely getting close to, if not above, replacement cost, which bolsters the argument for new builds. So far this year, there have not been any newly announced major portfolio or M&A transactions; in fact one such deal (HPT’s proposed acquisition of the European operator NH Hotels) recently fell apart due to problems with one of NH’s participating lenders. A list of all major transactions over the past few months is included on the following page.

Some of the more significant recent transactions include:

• Blackstone purchase of Hyatt Regency Waikiki for $450MM ($365K/key). This is a leasehold (75 years reportedly remaining), and they will also invest $80MM ($63K/key) for renovations
• GIC, the government of Singapore sovereign wealth fund, finally closed on its purchase out of bankruptcy of the CNL resort hotel portfolio, which included three Waldorf=Astoria branded properties (Grand Wailea in Maui, La Quinta Resort in the Palm Springs CA area and the Arizona Biltmore in Phoenix) and the Claremont Hotel in Berkeley CA. Total consideration was approximately $1.5 billion. Hilton will retain management on the Waldorf’s, and Pyramid Hotel Group will continue to manage the Claremont. KSL, who had owned these hotels in the past was appointed asset manager for these hotels.
• The land under the 1,300 key Milford Plaza in New York was sold for $325MM to a private buyer. Rockpoint and Highgate were the sellers, who will still own the building subject to a new 99 year lease. Highgate, who is one of the largest hotel managers in New York, will retain management
• Highgate was also part of a syndicate that purchased the Courtyard Waikiki for $127MM ($317K per key)
• Sunstone announced that they will purchase the Boston Park Plaza, a 1,053 room property, for $250MM, or $237K per key. Considerable additional investment will probably be needed. The hotel was originally built in 1927 and has seen numerous changes in brand and ownership since then. This transaction is scheduled to close in the third quarter; Highgate will also retain management here.
• Hersha closed on the newly constructed Hyatt Union Square (NY) for $101MM ($567K/key); this was a turnkey deal from developer McSam Hotel Group who has done many similar deals in lower Manhattan over the last couple of years.
• Starwood sold both of its W New Orleans hotels to Chesapeake REIT for a total of $93.5MM (average of $188K per key). Starwood will retain management on the smaller one (97 keys) but the larger one (410 keys) may be converted to Starwood’s Le Meridien brand and franchised with a different operator. This is part of an overall Starwood strategy to shed up to $3 billion of real estate while keeping the properties in their system. They executed several similar transactions last year in Chicago, New York and Los Angeles but in those cases retained management, as they do not presently franchise their “W” brand.
• The 963 key Hyatt in Jacksonville FL (formerly an Adams Mark) was foreclosed by its lender, a syndicate led by US Bank. The loan amount was $195MM.
• Although not in the US, this is still a significant deal- Intercontinental Hotel Group sold the Intercontinental London Park Lane to a group of Middle Eastern investors for the equivalent of $457MM, a price of over $1 million per key
• Blackstone closed on the sale of the 424 room Miami Beach Resort to Chetrit Group for $117 MM ($276K per key). Chetrit also bought some other properties in New York earlier this year including the Flatotel which will be converted to residential use.
• Public REIT RLJ acquired the Humble Oil Building Complex in Houston, containing a Courtyard, a Residence Inn and residential units that they intend to convert to a Spring Hill (all Marriott brands). Acquisition cost was $79.5MM or $151K per key.
• Hyatt bought the historic Driskill hotel in Austin TX for $85MM. The $450K per key price seems high, but it was confirmed by multiple sources. Seller was Lowe Enterprises, not to be confused with the Loews Hotel chain
• The James Hotel in lower Manhattan was sold by a private seller for $85MM or $746K per key; it has several popular restaurants. Denihan will remain as manager.

Public Company News

Financing, Mergers and Acquisitions, Executive Changes

• Pebblebrook recently completed a $97MM issuance of 6.5% preferred stock. The offering was led by Raymond James and Citigroup. They also closed on a $50MM loan secured by a mortgage on the Affinia Hotel Dumont in New York. The loan is non-recourse and is at a 3.14% fixed rate, interest only, for a term for five years. Lender is PNC Bank.
• HPT’s deal to acquire European hotelier NH has been indefinitely postponed because one of the member banks in NH’s financing syndicate has changed its mind about agreeing to the deal.
• HPT also raised about $400MM from a new common stock offering in March. Morgan Stanley, BofA Merrill Lynch and Wells Fargo were the lead underwriters.
• RLJ also executed a public stock offering in March, raising $328MM, with Barclays, BofA Merrill Lynch and Wells Fargo acting as joint bookrunners.
• Host Hotels issued $400MM of 3.75% unsecured 10 year notes, the proceeds of which were used to retire some 9% debt; they also called $200MM of 6.75% notes which were retired from available cash and $102MM of proceeds from a new common share issuance.
• Chesapeake refinanced its Newton MA (Boston area) Marriott with a $60MM loan from PNC Bank. The loan is for 7 years at a fixed rate of 3.63% with a 25 year amortization schedule.
• DiamondRock obtained $102MM of proceeds in two separate secured non-recourse loans- $21MM for the Lodge and Sonoma (10 years 3.96%/30 year amortization) and $71MM for the Westin San Diego (10 years/3.94%/30 year amortization). Two separate lenders were involved, but their identities were not disclosed on the company’s press release or 8-K SEC filing.
• FelCor announced that Michael C. Hughes will become CFO, replacing Andrew J. Welch, who is retiring. Hughes had been with FelCor since 2006 and was promoted from Senior VP/Treasurer. He previously served in a similar capacity at Wyndham.
• Hyatt priced $350MM of 10 year senior notes at 3.375%. Proceeds will be used to redeem all or part of $500MM of debt currently outstanding at higher coupons. Goldman Sachs, JP Morgan and Sun Trust Robinson Humphrey acted as joint book running managers.

Earnings

The table below summarizes Q1 2013 earnings reported by major public hospitality companies. A couple of themes emerge:

• Solid Q1 performance and lowered risk perception have enabled most companies to raise the lower end of their overall 2013 RevPAR guidance
• Companies with exposure to large groups and government business generally underperformed, while those with strong New York City presence generally outperformed
• As noted above, many companies are taking advantage of favorable credit market conditions to strengthen their balance sheets and raise cash for new acquisitions

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

Stock prices

Most hotel company stock prices outpaced the broader averages during the first quarter, but have underperformed so far this quarter. However, many of these stocks are still trading close to their 52 week highs. Laggards (although it should be noted that these stocks still went up since January 1, but not as much as the rest) include Hyatt, who had a relatively poor quarter, and on the REIT side, LaSalle and Diamondrock, who are saddled with properties in underperforming markets.

Publicly traded hotel company stock performance (US based companies with market capitalization in excess of $1 Billion plus selected companies over $500 Million

Source: Yahoo! Finance

Other Industry News

• Owners of the Eden Roc hotel in Miami won their lawsuit against Marriott, thereby releasing them from their management contract, although they are still required to pay an undisclosed amount of damages. Many industry legal experts feel that this is a landmark case in that it sets a precedent for breaking a supposedly “unbreakable” contract. The original claim of mismanagement arose from accusations that Marriott exceeded their contractual authority in making operating decisions that affected the Owner. This continues a string of recent court rulings that have ruled in favor of owners over managers in contract disputes, including the Fairmont Turnberry (also in Miami) and the Waikiki Edition.
• Choice Hotels has relocated their headquarters from Silver Spring MD to nearby Rockville MD
• Hong-Kong based Langham Hospitality introduced its Eaton brand into Canada, its first location outside of Asia. This was a conversion of the 1,500 key Toronto Delta, the largest hotel in Canada, which it already owned.
• In one of the less shocking announcements of the year, Kempinski Hotels is pulling out of North Korea, where it was to operate the 105-story Ryugyong Hotel. But amid bombastic threats of nuclear action by the country’s leader, Kempinski Hotels now claims, as reported by the International Business Times, that “no agreement has been signed since market entry is not currently possible.”
• Hyatt has listed its Andaz Napa hotel for sale at $75MM for 141 keys ($532K per key)- this would be one of the pricier hotel deals in California if they get close to their asking price, but the key question is whether it comes with a full wine cellar
• The troubled Morgans Hotel Group is in the news again, this time because one of its major shareholders want to liquidate most of its Miami real estate assets by selling them to an affiliate in exchange for about $200 million of preferred stock and assumption of debt, and also to issue another $100 million of common stock. Other shareholders are concerned about dilution or loss of control and are suing.
• Legendary hotelier Bob Woolley is back. The founder of the Granada Royale and Crown Sterling Suites hotel chains (both of which were eventually absorbed into Embassy Suites), who is widely credited with inventing the complimentary breakfast and cocktail hour for extended stay guests, has launched a new brand, Woolley’s Classic Suites, with the first one under construction in Denver
• Whole Foods announced that they were thinking about getting into the hotel business with a health and fitness oriented property to be located in the Austin TX area. They join a growing list of other non-hospitality companies that have attempted to get into the hotel business, with mixed results, including Lego, IKEA and The Biggest Loser.
• Owner Vornado Realty Trust has apparently decided against demolishing the Hotel Pennsylvania in New York and replacing it with an office tower. Instead, they will remodel and hire a new operator. The hotel, located across the street from Madison Square Garden and Penn Station had its phone number immortalized in the Big Band standard “Pennsylvania 6-5000″

• Hard Rock announced plans to build a 250 key hotel plus 100 condominium units in Daytona Beach FL. Opening would be in 2016 if the project is approved and can get financing. The city and county have been trying to attract additional hotels there to support their convention center and be more competitive with other Florida venues, but the market there has been soft in recent years due to aggressive development in Orlando, which is only about 70 miles away.
• Speaking of soft markets, the 349 key former Ritz Carlton at Lake Las Vegas NV is once again rebranding, this time to a Hilton. It was purchased, along with a small adjacent casino, by Kam Sang company for $46.9MM last November.
• Lane Hospitality, a long established mid-sized hotel management company, is rebranding itself as “Spire Hospitality” and together with new owner AWH Partners is attempting to reposition itself into larger markets.

Special Feature- Golf Industry

The golf industry in the US is closely intertwined with the hospitality business, especially in the contexts of resorts where golf is the main attraction and in private clubs which compete with hotels for social catering business such as weddings. Pyramid has had extensive experience with golf, and is currently or was recently associated with such major golf venues as TPC Sawgrass, Doral, Pebble Beach, PGA West and others.

Unlike the hotel industry, golf has been on a downward trend for some time, because the number of players has remained stagnant or even been diminishing, at the same time when there is excess capacity on the nation’s golf courses. The statistics seem to bear this out:

Source: National Golf Foundation

Most of the uptick in rounds in 2012 was attributable to much warmer than normal weather last spring in the Northeast and Midwest. For the first two months of 2013, rounds are down almost 8% year over year. Since 1990, there has been a 22% increase in the number of courses, while the number of players has only gone up by 5%. The number of courses has dropped by 3% since peaking in 2005, but the player count has dropped by 14%. Historically, there has been a lot of turnover in the player count, with a steady (but shrinking) core group and a trend of more players leaving than taking up the game each year. There are several factors that cause this, most notably:

• Time commitment- it takes around 4 to 5 hours to play a full 18 hole round, plus the time needed to get to the course and warm up, not to mention practice time
• Cost of equipment and greens fees or club membership
• Frustration: Golf is very difficult for the average person to master, and simply stops being fun if you keep practicing and playing and do not get better

There are also demographic factors at work. The core group of golfers, for lack of a better term, can generally be characterized as “old white guys,” which is to say retired folks who have been playing for years. The baby boom generation, many of whom are approaching that age, did not take up the sport as enthusiastically as their parents, mostly for the three reasons listed above. Younger people seem to have even shorter attention spans and other diversions for leisure, which is perhaps best illustrated by this:

The supply side of golf has changed dramatically over the years. When golf was introduced to the US in the last quarter of the 19^th century, it was mostly played at private clubs near the wealthier cities; most of these clubs still exist. There were also a handful of city-owned courses in parks in New York, Boston, Philadelphia and other major cities. Golf courses have also been part of resorts dating back to the early 20^th century, mostly in Florida and California. Competitive play during this era was dominated by amateurs from the US and the British Isles; Bobby Jones is perhaps the best-known golfer from this period.

Despite a few attempts with such fads as miniature golf in the 1920′s and again in the 1950′s, golf really did not get into the consciousness the average American until television broadcasts of tournaments made golf professionals into celebrities. In the 1960′s, Arnold Palmer and Jack Nicklaus became the faces of American golf. Demand began to pick up, and course construction began to accelerate during the 1960-1980 period, with many in planned retirement communities such as Sun City Arizona.

After stalling during the 1980′s, golf began to pick up again in the late 90′s. A key factor to this boom was improvement to equipment. Mass-produced clubs using lightweight materials and with bigger hitting surfaces made the game somewhat more forgiving, although these clubs are pricey and there is still controversy about allowing even more such improvements because the organizations that set the rules and control the tournaments do not want to have two sets of standards for amateurs and professionals.

New suppliers of capital to the industry such as Textron (who not so coincidentally also manufactures golf course maintenance equipment) helped boost construction of additional golf courses, mostly in conjunction with upscale housing development, but also for some stand-alone courses mostly in suburban Sun Belt locations such as Houston, Phoenix and Atlanta. Golf marketing also became more sophisticated as we entered the 21^st century. Tiger Woods became the poster child for this movement, and even today, tournaments that he plays in still command TV ratings that are three times higher than when he does not play. The industry also began to recognize its demographic limitations and focused on inner cities with programs such as First Tee.

One of the effects of the last construction boom was shrinkage in the number of private clubs, as the potential pool of members was siphoned off by residential golf communities. Older clubs gradually began to close or become semi-private, as the stream of membership dues dwindled while operating costs remained high. Spikes in oil prices resulted in large increase in the costs in fertilizers and other chemicals used on golf courses such as pesticides and weed-killers, and water conservation also became issues.

There was also some consolidation on the management side of the business, not only for economies of scale in purchasing, but also for applying more scientific practices of agronomy and the ability to offer reciprocal memberships. Many of these ran into trouble with too much real estate exposure during the ensuing down cycle, but a few of the larger ones are still going strong, most notably Club Corp and Troon Golf.

Most industry experts feel that there are at least a few more years left in the current down cycle, with continuing shutdowns of courses and little, if any, new development, while player participation rates remain stagnant or declining. Golf course construction costs have increased rapidly due to scarcity of land (about 200 acres is necessary for a “championship” level 18 hole layout) and environmental sensitivity to removal of trees and grading to minimize erosion and chemical run-off. As a result, an 18-hole golf course could probably not be built today for less than $5 million, and costs of two to four times higher than that would not be unusual in certain parts of the country. A big component, especially on the higher end, is the cost of a “name” designer. Fees charged by the likes of Jack Nicklaus, Tom Fazio or Pete Dye run into the millions.

As mentioned previously, operating costs are also a factor. Even a run-of-the mill course can easily cost $500K per year to maintain, and higher end courses, or courses in areas with high water costs run $1.5 to $2 million per year or more. As a typical private club would have around 300 active members per 18 hole course, this means that there is a minimum investment of about $20 to $40K per member required, plus costs of $250 to $500 per member per month, just for the golf facilities, let alone the cost of building a clubhouse and other amenities such as swimming pools or tennis courts.

The economics of operating a daily-fee or resort course are also challenging. Under perfect conditions, a golf course has a capacity of about 60,000 rounds per year, which is an average of about 160 tee-times (40 foursomes) per day. However, very few locations in the US have 12 month availability. Those in the North generally only play from April through October, and while the Southern and desert locations do not have the cold, the heat and humidity make play difficult during the summer, which is when the availability is greatest due to the length of the day. If a course can do 35,000 rounds they are doing well, and 40,000 rounds is exceptional. Again, we do the math. Maintenance alone would cost $20-$30 per round, and amortizing the capital (say over a 15 year period) would cost another $20 to $40 per round, so you need to charge $40 to $60 per round just to break even. To put this into perspective, over half the daily-fee courses in the US have peak weekend greens fees of $40 (with cart!) or less.

US Economy General Statistics

No major changes have been noted in the trends of the key economic indicators in recent months, which paint a picture of cautious consumers- not overly pessimistic, but still somewhat restrained in their spending.

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

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Memphis Marriott

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The Lodge & Spa at Cordillera

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The Chase Park Plaza

After a surprisingly strong Q4 of 2012 (7.3% overall increase), RevPAR has continued to accelerate during the first quarter of 2013. Week to week results are choppy due to holiday timing, but US average RevPAR increased 8.2% through February 16. Luxury, Resort and Urban properties have led the way so far in 2013, with RevPAR increases of 14.5%, 13.6% and 11.1% respectively. Economy and midscale have generally lagged the overall averages, posting numbers in the 5% range YTD, consistent with the notion that lower-income travelers continue to be most affected by the sluggish economy, while the other scales (Upper Upscale, Upscale and Upper Midscale), which accommodate the vast majority of business travel, have performed near the overall average. Suburban properties, however, have lagged the averages, for reasons discussed below.

Although not shown on the chart below due to space limitations, a very important factor beginning to show up in the numbers is group vs. transient. Group has been significantly off for several months as continuing economic uncertainty make advance booking decisions difficult. Year to date transient RevPAR is up 13.5%, while group is up only 2.1%. This is the primary reason that suburban upper upscale hotels have been underperforming, as midweek mid-size corporate group has been a tough sell; the independent upper-tier hotels have also been lagging in this area.

The strongest markets YTD have been New York (which is actually being helped by Hurricane Sandy), New Orleans (helped by the Super Bowl), Miami and Oahu, which are running in the 20% range. Washington DC was also solid due to the inaugural, as were Nashville and Houston. Laggards included Norfolk, Philadelphia and Chicago, as well as San Francisco, which was one of the top performers last year.

Source: Smith Travel Research, Deutsche Bank, Sun Trust Robinson Humphries

As usual, the public company higher-end brands follow the overall trends. In Q4, the luxury brands were weaker than the upscale ones. Starwood’s mid-priced brands such as Four Points and aloft/element actually did much better, gaining 8-10% for the quarter, and the best performing Marriott brand was Spring Hill Suites (a mid price extended stay brand) at 7.7% for the quarter and 7.8% for the year. It is noteworthy that Le Meridien is the first high end brand to show a quarterly decline in RevPAR since Q1 of 2010. However, all major brands are continuing to show guidance of 4-7% for 2013 RevPAR, which is consistent with PKF, STR and PWC forecasts; as will be discussed, the wide range is primarily due to uncertainty about the direction of US economic policy.

Source: Company earnings releases

Outlook

The general sentiment of the industry continues positive although clouds are still gathering on the horizon. At the recent annual ALIS conference held in LA which was attended by thousands of hospitality executives, seldom was heard a discouraging word. The unexpected drop in GDP during Q4 was shrugged off, as it was attributed to Hurricane Sandy, which was probably a net positive for the industry due to displacement of homeowners and mobilization of FEMA workers, and cutbacks in government spending, which currently only affect a handful of markets. However, at least on the surface, the fundamentals are still strong, as supply growth is still well below historical levels (although as noted below it is starting to pick up), and the demand from corporations and higher end individual travelers is persistent. Occupancy is generally fully recovered, which means that compression during peak periods can support higher room rates, and hotel revenue and yield management is becoming more sophisticated in order to take advantage of these opportunities.

As is normal in this part of the cycle, new supply is starting to catch up, especially for urban select service, generally 200 keys or less. These hotels have high operating margins compared to full service properties, and ADR’s have recovered enough to justify new development especially in the current low interest rate environment. Markets such as New York City, Washington DC, Denver and Nashville are seeing above-average construction activity, and new hotels will be opening soon in Boston, Philadelphia, Orlando, Miami and Chicago as well as many smaller markets. On the other hand, Hawaii, Atlanta, Seattle, San Francisco and Dallas are seeing minimal present activity, in some cases due to the scarcity of available sites but in other cases (Dallas and Atlanta) it is because the markets are not fully recovered and numbers still do not pencil for new construction.

Even though the “fiscal cliff” was averted by a last-minute deal, fights over the debt ceiling and spending will continue to create uncertainty for the financial community, which is bound to have some effect on hotel demand, particularly from the government sector and for large group meetings. On the operations side, rising healthcare and energy costs are a matter of concern, although the industry may have dodged a bullet with the recent favorable court decision on the NLRB recess appointees, which means that new rules designed to encourage unionization may not be implemented.

Transactions

2012 finished the year at about the same level as 2011, with about $17.5 billion of transactions in the Americas (per Jones Lang LaSalle). However, single asset transactions were down, as the mix leaned more towards portfolio sales including Blackstone’s purchases of Motel 6 ($1.9 billion), Apple REIT Six ($1.2 billion) and Eagle Hospitality Properties ($600MM). Another major transaction was Starwood Capital’s acquisition of In-Town Suites for $735MM. Some of the more noteworthy single property acquisitions in the 4^th quarter included:

• Plaza Hotel (New York): $575MM (Elad Group to Sahara India Pariwar)
• Dream Downtown (New York): $220MM (Hampshire Hotels & Resorts to Sahara India Pariwar)
• The Madison (Washington DC): $145MM (Jamestown Properties to Loews Hotels)
• Sofitel Chicago Water Tower: $125MM (GEM Realty Capital to Blackstone Group)
• Beekman Tower (New York): $85MM (Lone Star Funds to Silverstein Properties et al); possible residential conversion.

As has previously been noted, most of the buying is being done by private entities, although a couple of the REIT’s, most notably LaSalle, Pebblebrook and Summit (in the limited service sector), have been very active lately. Chesapeake is also back in the game, having completed its equity issuance, and Sunstone has disposed of some properties and completed a new equity offering which will give it more dry powder.

The outlook for 2013 is expected to be more of the same. Most experts think that transaction volume will be up a little, but will still be concentrated in the gateway markets (New York, Chicago, Washington and Miami accounted for over 1/3 of the volume in 2012). Everyone is still waiting for the “great deleveraging” when the lenders and servicers finally pull the plug on the vintage 2006-07 CMBS deals that are still cluttering up the pipeline, but there is still a very large gap between seller’s expectations and what buyers are willing to pay. Much of this is because of product type and location. The suburban upper-upscale product is not in great demand right now because of changes in corporate meeting patterns leading to significant reduction in group occupancy, and these hotels are also becoming tired and in need of extensive PIP renovations to maintain their brand affiliation. They are also being targeted by some of the new select-service products that have entered some of these markets, especially the “hipper” boutique brands such as aloft that appeal more to younger business travelers (who are notoriously less brand loyal than their older counterparts).

In any event, 2013 is off to a busy start, with several deals announced in the first seven weeks of the year, including:

• $293MM Marriott Marquis Atlanta (1,663 keys) sold by Host Hotels to an Abu Dhabi investor
• $210MM portfolio of hotels in Rochester MN (home of the Mayo Clinic) sold by Sunstone to a private investor
• $180MM sale of the Flatotel (New York) out of bankruptcy to a group that will probably convert it to residential use; this buyer (Chetrit Group) also bought a Miami Beach hotel for $117MM from Blackstone last month
• $170MM sale of the Liberty Hotel in Boston from the local developer to LaSalle REIT
• $120MM sale of the Clift San Francisco to HPT, who continues to grow through their Sonesta acquisition into the upscale segments
• $112.5MM sale of the Embassy Suites San Diego to Pebblebrook
• $104MM sale of five limited service Hiltons in the South (avg. price a surprisingly high $165K/key), acquired by Carey Watermark Investors from a private fund

A schedule of transactions from the past few months is shown below:

Public Company News

IPO, Financing, Mergers and Acquisitions

• Chesapeake Lodging Trust issued 8.3MM common shares, raising $166MM of net proceeds to be used for acquisitions; this is significant because the offering size was increased (in addition to the shoe being executed) and the price was above its IPO price. This stock is now trading close to its all time high of $22. Lead underwriters were JP Morgan, Deutsche Bank, Wells Fargo and RBC Capital Markets. They also closed on a $32MM mortgage loan on the Hilton Checkers Los Angeles, which is a 30 year amortizing loan at a 10 year fixed rate of 4.11%. This represented a 70% loan to cost ratio.
• Choice hotels announced a marketing alliance with Bluegreen Vacation Club, marking their first entry into the world of timeshare, as they too seek to move up the chain scale away from pure economy brands.
• Diamondrock Hotels announced that their COO, John L. Williams will be retiring and has engaged a national search for a successor. They also expanded their Board of Directors and appointed Bruce Wardinski to fill the new slot. Wardinski is CEO of Playa Hotels and Resorts. He was formerly CEO of Barcelo Crestline and has an extensive hospitality industry background.
• FelCor extended its $225MM secured line of credit at substantially improved terms; interest is at L+337.5 (no floor), with an unused line fee of only 10 bp. The facility is secured by 8 hotels and runs through 2017; JP Morgan and Merrill Lynch were the lead bookrunners.
• Starwood has authorized the repurchase of about $680MM worth of common stock, comprised of $500MM new plus $180MM left over from last year, when they bought back $320MM worth. Although such repurchases are generally good news for shareholders, it indicates a very conservative strategy by management, as they apparently do not have a better use for the capital, most of which was generated from asset sales.
• Marriott has also increased its buyback authorization to a total of 34 million shares, worth about $1.3 billion at current prices, which is approximately 12% of its float. It repurchased 31.2 million shares for $1.2 billion in 2012.
• Hersha also authorized a $75MM share buyback, which is interesting because they have been in acquisition mode. However, their balance sheet is relatively weak.
• A major shareholder of Strategic Hotels & Resorts sent a letter to the company pushing for its sale, citing the departure of its founder and long-time CEO Laurence Geller. The company views the letter as a means to incite a short-term lift in the stock price, which it has- it is up 13% in the last 3 weeks.
• Pebblebrook refinanced its New York portfolio (a JV with Denihan) with a $410MM non recourse 5 year fixed rate 3.67% loan.
• Red Lion appointed Jim Evans (former Brand USA director and Best Western CEO) to their board, along with Dave Johnson (who was their CEO when they were owned by KKR back in the 90′s), Mike Vernon (who was their CFO at that time) and Robert Wolfe, an investment banker.
• Sunstone had a follow on offering of 22 million shares (plus a green shoe of 3.3 million), priced at $11.80, which it used to redeem $179MM of  8% coupon convertible preferred stock and also provide some dry powder for acquisitions. Citigroup was the sole manager of the offering.
• Wyndham announced tender offers and mandatory redemption on some of its debt securities, looking to reduce their cost of capital in light of the currently favorable interest rate climate

Earnings

This is a summary of Q4 2012 earnings reported by major public hospitality companies:

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

Stock prices

Hotel stock prices have generally increased in line with the overall stock market so far in 2013, but they strongly outperformed in Q4 of 2012. Strong performers YTD include Strategic (rumored buyout), HPT (upscale acquisitions) and Ashford (improving balance sheet), while La Salle (overweighted in DC) and Diamondrock (renovation issues) have lagged. These same stocks have led and lagged for the period since bottoming out last November; in addition,

Publicly traded hotel company stock performance (US based companies with market capitalization in excess of $1 Billion plus selected companies over $500 Million)

 Source: Yahoo! Finance

 Other Industry News

• Penny Pritzker, a billionaire whose family founded Hyatt Hotels, is being considered for the post of US Secretary of Commerce. She is a long time Chicago associate of President Obama and was a key part of fundraising for his 2008 campaign.
• A controversy has erupted over the ground lease between the City of New York and the Marriott Marquis Times Square (owned by Host Hotels). The City contends that the Marriott got a sweetheart deal when they renegotiated the lease in 1998, which allows them to buy the ground for $20MM when the lease expires in 2017 (probably less than 5% of what it is worth). The City’s controller (who is possibly running for Mayor in the next election) says that Marriott has breached their contract by not providing certain financial records and owes interest on back rent, so he wants to use this as a lever to force renegotiation. Marriott officials, in turn, responded that the hotel anchored Times Square when the area was considered unsavory, created 1,500 jobs, paid a billion dollars in property taxes over the years and have paid every penny of rent that was owed.
• Red Lion Hotels announced that it was creating a new “soft brand,” called Leo Hotels. No one took them seriously until a few days later when it was announced that the first hotel to join Leo was the Las Vegas Hotel & Casino, the 3,000 room former Hilton property. However, ownership of this asset is in play and it is not clear whether Leo is a long term fit.
• Four Seasons Hotels announced the retirement of CEO Kathleen Taylor, a 25 year company veteran and one of the most prominent female executives in the lodging industry.
• Marriott is moving ahead with the development of a 1,500 room Gaylord resort near Denver, which had been on hold for several years due to economic conditions.
•  Drury Hotels, a relatively small (130 unit) upper midscale chain, has posted the world’s highest customer satisfaction rating in a survey from Market Metrix, edging out the likes of Ritz-Carlton and JW Marriott. Drury has won the J. D. Power and Associates midscale award for each of the last seven years.
• America’s Best Franchising has acquired the Jameson brand. Jameson, once an independent public company, has over 100 economy properties, primarily in the Southeast, and together with its affiliated management companies and other economy brands, has been fighting through a foreclosure attempt for the last two years.
• Former Molinaro Koger COO Jonathan Propp pled guilty in federal court to conspiracy charges stemming from a $20MM hotel “flipping” scheme that defrauded Host Hotels.
• The ADA mandated pool lift requirements went into effect January 31, after a mad scramble by hotels to comply. While most chain-affiliated properties were able to meet the deadline, there are anecdotal reports of smaller independent hotels being forced to close their pools. No reports have yet been received about enforcement or claims of discrimination being filed, but this is being watched closely, especially in California where there is a history of “drive-by” ADA filings that lead hotel owners to settle rather than face a lengthy, expensive court process.

Special Feature- Who is behind the brands?

Not to be confused with ownership of the real estate or day-to-day management of the properties, the franchising/branding of hotels is extremely concentrated. The top companies in terms of world-wide property count (not rooms count) are shown on the chart below. Figures are based on company websites and press releases and are approximate as of December 31, 2012.

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

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Hyatt Place Lake Mary Orlando-North

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Hilton Garden Inn Phoenix Airport North

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Hampton Inn & Suites Tilton

HOTEL INDUSTRY OVERVIEW: Fall 2012

Summary of Key Performance Indicators

RevPAR trends have been decelerating. September’s 3.8% growth marked the lowest year over year change since the recovery began, although it was partly due to the timing of Labor Day and the Jewish holidays. October has been better (up 5.6%), but it is still lagging the performance of the first half of the year. There was also an impact due to Hurricane Sandy, with major Eastern markets taking a hit during the last week in October and first week of November. The consensus for full year 2012 has now edged down towards 6.0%, but still with more than half of the growth coming from average daily rate (ADR). No significant movement has been seen recently across the various chain scales or locations, as luxury and upper midscale (e.g. Hampton Inn) have continued to outperform, as have resort and urban locations, while small town markets and the lower end chains have not kept up. Regionally, Chicago and Los Angeles have accelerated in recent weeks, while the major Eastern markets (NY, Boston, Washington) have declined. New Orleans also continues its strong performance despite Hurricane Isaac. Florida, particularly Orlando, has slipped a bit as demand is lagging, while the Western markets have been steady.

Source: Smith Travel Research, JP Morgan North American Equity Research

The performance of major brands that are operated by publicly traded hotel companies lagged a bit during the 3^rd quarter (overall RevPAR for this group up 5.1% vs. 7.8% for comparable chain scales nationally). Bucking recent trends, Marriott brands including Ritz-Carlton, outperformed Hyatt and the Starwood brands, particularly the Luxury Collection, which went from 12.2% RevPAR growth in Q2 down to 5.1% in Q3. One of the reasons for this is the concentration of these brands in the major Eastern markets, which as mentioned previously are currently not doing as well. Note that there are several major upscale and upper upscale brands that are not part of public companies, most notably the Hilton family (including Doubletree, Embassy Suites and Homewood), and those are reportedly performing well.

Source: Company earnings releases

Outlook

Although the lodging industry has recovered significantly better than the overall US economy, the cycle has now matured to the point where a more normal growth rate would be expected. During the summer, the absolute level of hotel room demand (i.e. the total number of occupied hotel rooms) reached all time high levels, and due to stagnant supply growth (especially in the full service segments), occupancy is pretty much back to where it was pre-recession. ADR growth has been slower to rebound, and although it will be close to 2007-2008 peak levels in many markets by next year, it will still be lagging significantly if expressed in real (adjusting for inflation) dollars. As shown in the graphic on the next page, real ADR in 2011 is actually lower than it was in 1987, and is considerably below its 2008 peak. This graph also illustrates a couple of other trends in terms of recovery. Note that from its peak in 1987, it took 10 years for ADR to recover in real dollar terms, and this was during a period of steady economic growth, although there were large supply increases during this period. The recovery time from the 2000 peak only took 6 years, as this was more of a “V-shaped” recovery for both the economy and the industry. Now, however, the 2008 peak was much higher and we are nearly 4 years past it and there has been virtually no growth. Most industry experts feel that we will not see real ADR fully recovered for at least another 4 to 5 years, which is problematic on several levels. First of all, it is likely that at some point during this time the overall economy will contract, which will impact demand, and most importantly, at a time that rates are lagging, growth in expenses keeps chugging along. Going back to the earlier example, outside of consumer electronics, can you think of anything else that is even remotely close in price to what it was 25 years ago? To refresh your memory, in 1987:

• Price of a gallon of gasoline: 95 cents
• Price of a gallon of milk: $1.98
• Price of first class postage stamp: 22 cents
• Price of a new car: $13,000
• Minimum wage was $3.35 per hour
• Cost of one year at an Ivy league college: $17,000

What this means is that unless ADR growth continues at a rate that outpaces inflation, profit margins will necessarily fall.

The outlook for RevPAR growth in 2013 is still showing a wide spread, as the impact of the election results is still not entirely clear. The good news is that almost everyone believes that the “fiscal cliff” will be averted, as some sort of compromise will be reached to remove or delay the most serious consequences, namely sequesterization of spending and massive middle-class tax hikes (although the FICA tax holiday and extension of unemployment benefits will almost certainly come to an end). On the other hand, there are still lingering issues weighing down the economy, including (in no particular order), Eurozone uncertainty, slowing of growth in China, the impact of Hurricane Sandy (both short term and long term, including its effects on insurance premiums) and, as a result of the recent election, the impact of more regulations and a strengthened organized labor presence. The consensus seems to be settling in the 4% to 6% range, with virtually all growth on the ADR side, but there is optimism for the later part of the year and into 2014 as long as supply growth continues to be constrained.

Transactions

Once again, several high-profile sales (especially in New York) dominate the transaction news. It is also rumored that the Four Seasons hotel, currently owned by Beanie Babies magnate Ty Warner, is for sale at $900MM ($2.4MM per key). However, the overall pace continues to be sluggish. Total sales volume in 2012 ran at less than half of the 2011 pace during the first half of the year ($6 billion vs. $13 billion), but the second half of 2011 was very slow due to the collapse of REIT stock prices, which as shown later on, are still below last years’ levels. Whereas REIT’s accounted for about 35% of the volume in 2011, through August of this year they are only at about half that level (18%). Distressed asset sales as a percentage of total volume has also shrunk dramatically (from 31% last year to 12%), as improving fundamentals have helped sellers. What is also interesting is the continuing trend of the REIT’s (especially FelCor and Sunstone) to re-juggle their portfolios, typically moving from smaller markets to larger ones, as well as the continuing shedding of real estate assets by Starwood, Hyatt and Red Lion.

The good news is that pricing has improved (at least if you are a seller). Average price per key has increased by about 5% (although this may be influenced more by weighting towards urban locations), and cap rates have declined by almost 100 bp (national average is now in the range of 8.5% to 9%). Financing is much more readily available than it was last year, at least for well-located assets in major markets that are not over levered. Typical terms are 65% LTV, with interest in the 5% range (either fixed or variable). Amortization (typically on a 30 year schedule) is still common, but guarantees are becoming more negotiable.

Some of the highlights of deals made over the past few months are listed below. Additional details on these and other transactions in the past three months can be found on the chart on the following page.

• The 518 room Essex House on Central Park in New York was purchased by a joint venture between Strategic Hotels & Resorts and KSL for $362MM ($700K per key). It will be converted to a JW Marriott.
• Manhattan at Times Square (formerly Sheraton Manhattan): $275MM ($413K/key)- sold by Starwood, bought by Rockpoint
• Setai New York 5^th Avenue: $229MM (1.1MM/key)- private sale
• Ritz-Carlton Reynolds Plantation (Georgia): $160MM ($637K/key)- bought by Met Life at auction; price includes real estate, golf and other assets besides the hotel.
• W Chicago Lakeshore at $126MM/$242K per key and W Los Angeles at $125MM/$485K/key, both sold by Starwood and acquired by Chesapeake and Pebblebrook respectively
• Hotel Palomar San Francisco $58MM/$296K per key acquired by Pebblebrook
• In select service land, Summit Properties acquired a portfolio of 10 hotels, including 8 Hyatt Place hotels from Hyatt, for a total price of $115MM ($84K per key).

Public Company News

IPO, Financing, Mergers and Acquisitions

Recent activity included the following:

• Ashford replaced a $154MM non recourse mortgage loan which was at 12.72% interest with a $211MM facility at LIBOR + 615, representing a substantial cash savings.
• FelCor also improved its cash flow by refinancing about $160MM of 9% debt with sub 5% fixed rate debt.
• Strategic closed on a $90MM mortgage for the Hyatt La Jolla from Met Life. The $72MM A note is at L+400 interest only, and the B note is fixed at 10% with principal paid down from swept cash flow. They also had a major management change (see below).
• Chesapeake completed a follow on offering of 7.5MM common shares, which raised $132MM. Deutsche Bank, JP Morgan and Wells Fargo were the joint book runners.
• DiamondRock announced that they had reached a settlement in the bankruptcy of the Allerton Hotel in Chicago. They had purchased the debt of this distressed asset in the hope of a “loan to own” plan, but the hotel will now be marketed at auction in January 2013. However, they look to make a profit of over $10MM on their loan investment.
• Hersha expanded its credit line from $250MM to $400MM with further options to increase to $550M. The first tranche of the term loan portion of this facility will have a 3.195% interest fixed for four years. The facility was arranged by Citigroup and Wells Fargo.
• Intercontinental plans a $500MM special dividend during Q4 2012 and will also start a $500MM share buyback proceeds, which would be partially funded by the anticipated proceeds of the sale of their Barclay hotel in New York which is back on the market; this property is expected to sell for north of $300MM ($437K per key).
• Summit Hotel Properties, which as noted above has been in acquisition mode, closed a 12MM share offering which will net nearly $100MM. Deutsche Bank, Citigroup, RW Baird and RBC acted as joint book runners.
• LaSalle announced that Denise Coll, former President North America for Starwood, will be joining their board effective in March 2013.
• Red Lion called off its unsuccessful attempt to sell itself, and will continue to concentrate on selling its real estate assets while retaining franchises, as well as continuing to market franchises in the Northwestern US. Two key board members, brothers Donald and Richard Barbieri will retire as of December 31.
• Wyndham announced that it issued $275MM of asset-backed notes related to its timeshare receivables. Weighted average coupon was 2.06%. Note that the availability of financing for timeshare unit purchasers has fueled a resurgence in this market, especially in the moderate price segment (under $20K for a week-equivalent).
• Kayak, who only went public about 4 months ago, agreed to be acquired by Priceline in a $1.8 billion consolidation in the OTA space. The price ($40/share) represented a 57% premium above its IPO price.

Earnings

A summary of major hospitality companies that have reported Q3 earnings so far this season is shown on the chart below. Most companies had solid beats; note that the two exceptions in the chart below (Hersha and LaSalle) both have above average exposure to the East Coast. Guidance for 2013 RevPAR growth generally shows a broad range as would be expected at this juncture, but many companies have reduced guidance below analysts’ prior expectations. Also note that Q4 2012 RevPAR guidance was dramatically affected by Hurricane Sandy for several of these companies, including Hersha, Host, LaSalle and Sunstone.

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

Stock prices

Prices for large cap full service hotel companies have generally been crushed over the past few weeks, due to a combination of Hurricane Sandy, tepid earnings guidance and overall economic uncertainty. The REIT’s have given up all of their gains for the year, although Marriott (and to a lesser extent, Starwood) are still ahead. By way of comparison, the Dow is down 4.6% so far this quarter and is up 4.9% this year.

Publicly traded hotel company stock performance (US based companies with market capitalization in excess of $1 Billion plus selected companies over $500 Million)

Source: Yahoo! Finance

Other Industry News

• Marriott once again is facing a management contract performance lawsuit, this time at the Eden Roc resort in Miami, which they are managing under the Renaissance flag. The owners claimed mismanagement after they did a major renovation to the property, and attempted to physically remove Marriott from the premises. Marriott successfully obtained a restraining order, and another hearing will be held later this month, with arbitration expected.
• Lawrence Geller, the often controversial head of Strategic Hotels and Resorts, abruptly announced his resignation on November 2^nd, which immediately puts Strategic into play as a takeover candidate, with Host Hotels mentioned as a possible buyer as well as unnamed private equity firms. Geller is precluded from making his own bid for 18 months.
•  In a sign of the times, Choice Hotels closed a call center in Colorado, citing volume declines as their clientele is shifting towards the internet.
• Intercontinental Hotels is introducing a new brand, “EVEN Hotels,” which will have its first US location opening in New York in late 2014. This brand was “created with the frequent traveler in mind who wants to stay healthy while away from home.” They expect to have 100 managed and franchised properties signed up in the next five years.
• Niki Leondakis, former president and COO of Kimpton Hotels has been named CEO of Commune Hotels & Resorts, the company formed as a result of the merger of Joie de Vivre Hospitalilty and Thompson Hotels.
• A series of court rulings have affirmed that on line travel agencies (OTA’s) are not liable for hotel occupancy taxes on the fees that they charge; in other words, the guest must only pay tax on the net (wholesale) rate, not the gross (retail) rate. OTA’s hail this as a victory for their business model, while states and municipalities are concerned about declining revenues.

Special Feature- International Hotel Markets

Normally, we are focused only on the US, as there are still plenty of opportunities in the domestic markets, but global trends are becoming increasingly important as it becomes easier to move capital around. However, there are still many impediments to doing business overseas, including currency fluctuations, regulatory environment and other local customs. To illustrate, several years ago Doubletree was doing due diligence to acquire the Renaissance hotel chain (we were eventually outbid by Marriott), which had interests in several hotels in China. As part of this exercise, we had to review the management contracts, which of course were bulky documents all written in Chinese. When we asked for an English language version, it came out on one page. You think something might have got lost in the translation?

International market conditions vary widely by region. According to Smith Travel, the regions are defined as follows (key countries in parentheses)

• Americas
• North America (US, Canada and Mexico)
• Caribbean (Bahamas, Puerto Rico, Jamaica)
• Central America (Panama)
• South America (Brazil, Argentina)
• Europe
• Eastern Europe (Czech Republic, Russia)
• Northern Europe (UK, Scandinavia)
• Southern Europe (Italy, Greece, Spain)
• Western Europe (France, Germany)
• Middle East and Africa
• Middle East (UAE, Saudi Arabia)
• Northern Africa (Egypt, Libya)
• Southern Africa (Kenya, Nigeria, South Africa)
• Asia Pacific
• Central & South Asia (India, Pakistan)
• Northeastern Asia (China, Japan, Korea)
• Southeastern Asia (Indonesia, Thailand, Singapore)
• Australia/Oceania (New Zealand, Pacific islands)

As would be expected, hotel markets generally follow overall economic growth trends. Right now (as of November 2012), Europe is probably has the weakest economy, with China still experiencing the highest growth rates (although they are not as strong as they were a few years ago). Comparison of RevPAR growth is interesting, and it really shows the effect of currency exchange rates:

Source: Smith Travel Research

Within the regions, the areas showing the strongest growth (using US dollar comparison) include the Caribbean, up 11.3%, Northern Africa (up 10.1%) and the Middle East (up 8.0%), while the weakest areas are Northeastern Asia (down 13.4%), Southern Europe (down 8.9%) and Western Europe (down 6.9%).

The figures for publicly traded hotel companies with large international presences (note that regions may be divided somewhat differently) show some similarities in that Europe is consistently the weakest (especially Starwood for the quarter), but they are showing more strength in Asia than the STR data, which may indicate that upper scale properties are doing better over there.

Starwood (Q3 2012 vs. 2011)

• North America            + 4.8%
• Europe                        – 9.1%
• Asia Pacific                 + 0.7%
• Africa/Middle East     + 3.2%
• Latin America             +3.0%

Intercontinental (Q3 2012 vs. 2011)

• Americas                     + 4.6%
• Europe                         + 3.0%
• Africa/Middle East     +5.0%
• “Greater China”          +9.8%

Marriott (8 mo. ended Aug. 31 2012 vs. 2011)

• Caribbean & Latin America    +5.9%
• Europe                                     +3.3%
• Middle East & Africa             +8.8%
• Asia Pacific                             +10.1%
• North America                        +6.6%

In general, we would have to say that international markets are subject to the same pressures as US markets, but are much more volatile, as the impact of a Eurozone meltdown or slowing Chinese growth would obviously be more immediate. New supply may not be as constrained, as if a government wants to improve its tourism profile or promote new business, for example, it can order new construction. Most of the development activity is in China, where over 300,000 new hotel rooms are under construction and another 100,000 are in active planning. These numbers are by far the largest in the world, according to Lodging Econometrics. Other areas experiencing strong development include Indonesia, Panama and Brazil, while India (which is experiencing an economic downturn), Mexico, the rest of Central America and Europe are lagging.

US Economy General Statistics

There have been positive movements in almost all of the major economic indicators over the past few months:

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

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Sheraton Gateway Los Angeles Hotel & Spa