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ISI International Strategy & Investment Group, Inc. Long Term Perspective from the Eyes of a Wall Street Analyst Ian Weissman Managing Director - Head of Lodging Research [email protected] 212.446.9461 1 ISI International Strategy & Investment Group, Inc. Lodging Recovery: While RevPAR Growth Has Been Fairly Consistent… RevPAR Growth (4 week avg) 11.0% 9.0% 7.0% 5.0% 3.0% 1.0% 3/24/2012 3/3/2012 2/11/2012 1/21/2012 12/31/2011 12/10/2011 11/19/2011 10/29/2011 10/8/2011 9/17/2011 8/27/2011 8/6/2011 7/16/2011 6/25/2011 6/4/2011 5/14/2011 4/23/2011 4/2/2011 3/12/2011 2/19/2011 1/29/2011 -1.0% 2 ISI International Strategy & Investment Group, Inc. …Its Been A Roller Coaster Ride for Investors Lodging Index - Daily Returns 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% 3/27/2012 3/13/2012 2/28/2012 2/14/2012 1/31/2012 1/17/2012 12/20/2011 1/3/2012 12/6/2011 11/22/2011 11/8/2011 10/25/2011 10/11/2011 9/27/2011 9/13/2011 8/30/2011 8/16/2011 8/2/2011 7/19/2011 6/21/2011 7/5/2011 5/24/2011 6/7/2011 5/10/2011 4/26/2011 4/12/2011 3/29/2011 3/15/2011 2/15/2011 3/1/2011 1/18/2011 2/1/2011 1/4/2011 Concerns over US ‘Double Dip’ during late fall ‘11 sent lodging stocks into a tailspin, down ~30-40% since peaking Feb ’11—Wall Street Pegged Probability at more than 50%. 3 ISI International Strategy & Investment Group, Inc. Bullish on Lodging: 1. Even in low growth environment, fundamental story works: 1) ISI forecasting 2.5% GDP in ‘12; 2) demand growth still solid as corporate profitability remains strong; and 3) supply in check (1%); 1. ISI proprietary Hotel RevPAR model forecasts growth +5.5%-7.5% in ’12 for the Gateway Cities 2. Recent economic data has been better than expected: (Manufacturing PMI, Employment, Claims, and Consumer Spending) – Last 27 weeks has been strong 3. Flurry of hotel deals in 2011 further highlight the spread between public and private valuations; 1. significant capital remains on the sidelines—expect further consolidation 4. Public valuations remain compelling relative to other asset classes: 10% discount to NAV 4 ISI International Strategy & Investment Group, Inc. Despite YTD Outperformance, Upside Left in Lodging Stocks ‘12 YTD Returns: Lodging Outperforms 20% 18% 17% 16% 14% 12% 11% 10% 8% 8% Forecasted Returns: Upside Left in Lodging 6% 20% 4% 2% 0% NASDAQ Lodging S&P 500 REITs Forecasted Total Returns ('12) YTD '12 Returns 16% 18% 16% 17% 14% 14% 12% 10% 8% 6% 7% 7% 6% 6% 5% 4% 2% 1% 0% 5 ISI International Strategy & Investment Group, Inc. My Agenda: Econ 101: ISI Economists Bullish on US Economy – Economic Data Continues to Surprise to the Upside Potential Roadblocks to the Recovery Oil Price Deficit Europe China Real Estate: How Far Off of Peak Hottest Markets Deals, deals and more deals CMBS Q&A: Softballs Please! 6 ISI International Strategy & Investment Group, Inc. GDP is Important…But You Need To Dig Deeper 10% 15% 8% 6% 5% US Real GDP 4% 0% 2% 0% -5% -2% -10% -4% -15% -6% -20% -8% -10% -25% GDP US RevPAR Growth (lagged 2 Quarters) 10% Historically there has been a strong correlation between US economic growth (GDP) and RevPAR performance, however at ISI— we try and dig a little deeper RevPAR 7 ISI International Strategy & Investment Group, Inc. Job Growth #1 Variable to a Healthy US Economy: US created 1.8mn jobs in ‘11 and ISI expects ~2mn for FY12 2012 Chg: +2351k 400 ISI is forecasting another 2mn jobs to be added to the US economy in 2012, taking the unemployment rate down to 8% 200 0 -200 Mthly Change -400 Rolling 3 Mth Avg. -600 -800 Feb-12 Oct-11 Jun-11 Feb-11 Oct-10 Jun-10 Feb-10 Oct-09 Jun-09 -1000 Feb-09 Monthly Chg Payroll E,mployment (000s) 600 8 ISI International Strategy & Investment Group, Inc. US Unemployment Claims Fall to 4 Year Low 700700 INITIAL UNEMPLOYMENT CLAIMS U.S.U.S. INITIAL UNEMPLOYMENT CLAIMS 4 Wk.Avg. 31 362 4 Wk.Avg. Mar Mar 31 362 650 650 600 600 Claims is considered among the strongest indicators for where we are in the economy. 550 550 Many skeptics out there who believe labor market is not healing…this would prove otherwise 500 500 450 400450 350400 300 350 Suggests 4% 1Q12 GDP 250 300 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 250 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 9 ISI International Strategy & Investment Group, Inc. Very Strong Correlation Between Job and ADR Growth 2% 10% 8% 1% 6% 0% 0% -2% -1% -4% -1% -6% -8% -2% -10% -2% With job growth of 2mn in ‘12 we would not be surprised if ADR growth averaged 4%-5% in ‘12 vs. the 3.5% recorded in 2011 -12% 1Q91 4Q91 3Q92 2Q93 1Q94 4Q94 3Q95 2Q96 1Q97 4Q97 3Q98 2Q99 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12E Qtrly Job Growth 2% Y/Y ADR Growth 4% 1% Qtrly Job Growth Y/Y ADR Growth 10 ISI International Strategy & Investment Group, Inc. Company Profits Are Up – Good For Lodging Corporate Profitability has surged to a record high of $2 trillion While growth is expected to slow, ISI economists expects corporate profits to remain robust. 11 ISI International Strategy & Investment Group, Inc. US Consumer Remains Healthy: Consumer Spending Well Above ‘08 Peak U.S. NOMINAL CONSUMER SPENDING U.S. NOMINAL CONSUMER SPENDING Feb $11.01 Feb $11.01 11.5 11.5 Annualized growth rate in consumer spending is nearly 4.5% since the ‘08 bottom to $11 trillion 11.0 11.0 10.5 10.5 10.0 10.0 9.5 9.5 9.0 9.0 8.5 2005 2006 2007 2008 2009 2010 2011 2012 8.5 2005 2006 2007 2008 2009 2010 2011 2012 12 ISI International Strategy & Investment Group, Inc. U.S. REAL CONSUMER SPENDING Consumer Spending in 2012 Actual 2012:1Q 1.3% Likely to Grow +2.0% 8 Forecast 2012:4Q 2.1% U.S. REAL CONSUMER SPENDING Y/Y % 2012:1Q 1.3% e 6 4 Forecast 2012:4Q 2.1% 2 0 -2 -4 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Based on lagged effects of the improvement in house prices and increases in consumer sentiment and stock prices, ISI’s forecast is for Real Consumer spending to accelerate to +2.0% Y/Y in 2012. 13 ISI International Strategy & Investment Group, Inc. First Increase in Consumer Debt: Another Sign that Consumers Are Opening their Wallets 1Q12: Consumer debt is up for the first time since 2008 – another sign that consumers are opening up their wallets and spending 14 ISI International Strategy & Investment Group, Inc. Housing: Starts Likely to Turn Up in 2012 U.S. HOUSING STARTS 3 Mo.Avg. Actual Dec 0.657 U.S. HOUSING STARTS 3 Mo.Avg. Forecast 0.771 ActualJunDec 0.657 2.2 Forecast 2.2 2.0 While US economic recovery has been in full swing for almost 2 years, Housing has lagged…until now. Jun 0.771 2.0 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 Great news for labor 1.0 1.0 .8 .8 .6 Will help to contribute to GDP .4 .6 .2 88 .4 90 92 94 96 98 00 02 04 06 08 10 12 .2 88 90 92 94 96 98 00 02 04 06 08 10 12 15 ISI International Strategy & Investment Group, Inc. ISI Cos Surveys Hit 5-Year High Hurricane Katrina Latest Click 51.4 2011 Growth Problem Iraq War 2010 Growth Problem ISI’s proprietary surveys of over 320 companies suggest that business is very good. Over 50 suggest economic expansion…no longer just a recovery 16 ISI International Strategy & Investment Group, Inc. ISI Airline Survey Continues to Surge- Another Strong Sign for ADR Growth 70 10% 8% 50 4% 2% 40 0% 30 -2% -4% 20 TTM Y/Y Change in ADR 6% -6% 10 -8% 0 -10% 2Q99 4Q99 2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 ISI Airling Survey Index 60 ISI Airlines Survey Y/Y Chg in ADR 17 ISI International Strategy & Investment Group, Inc. ISI Economists Remain Bullish on US Economy ‘12 GDP: 2.5% (bias to the upside) ‘12 Job Growth: ~2mn jobs ‘12 Unemployment Rate: 8% 18 ISI International Strategy & Investment Group, Inc. ISI Forecast: Expecting RevPAR to Top 7% in ‘12 Across Gateway Cities ISI Hotel Rev. Forecasting Model: Luxury/Upper Upscale 30.0 20.0 0.0 -10.0 -20.0 -30.0 1Q88 4Q88 3Q89 2Q90 1Q91 4Q91 3Q92 2Q93 1Q94 4Q94 3Q95 2Q96 1Q97 4Q97 3Q98 2Q99 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 US Luxury RevPAR 10.0 Y/Y % Actual Y/Y % Estimate 19 ISI International Strategy & Investment Group, Inc. Feeling Pretty Good!!!!!! 20 ISI International Strategy & Investment Group, Inc. Potential Roadblocks to US Lodging Recovery 21 ISI International Strategy & Investment Group, Inc. Catalysts for Double-Dip Concerns Our best guess is continued growth of +2.5% in 2012. However, here’s the list of catalysts for double-dip concerns in 2011. The list for 2012 is not inconsequential. 2011 • US budget impasse • US debt downgrade . 2012 • Oil . prices (Israel/Iran) • Oil prices (Arab Spring) • Deficit and fiscal drag • Inflation accelerating • Eurozone financial crisis/recession • Central bank tightenings (ECB, etc) • China slowdown • Eurozone financial crisis • Japan disasters/supply-chain disruptions • US elections (and foreign) • US storms, etc • End of QE2 22 ISI International Strategy & Investment Group, Inc. 1) Rising Gasoline Prices Has ISI Economists Concerned… $123 Brent Suggests a Record U.S. RETAIL GASOLINE PRICE (AAA) Mar 25 $3.90 4.5 Expect $4.25 Gasoline this Summer 4.0 3.5 3.0 2.5 2.0 1.5 2007 2008 2009 2010 2011 2012 23 ISI International Strategy & Investment Group, Inc. 1) Comparing RevPAR Performance and Oil Prices (Brent) 20% $160 15% $140 10% $120 -5% $80 -10% $60 -15% $40 -20% Brent Oil Prices $100 0% $20 -25% -30% $0 Jun-89 Dec-89 Jun-90 Dec-90 Jun-91 Dec-91 Jun-92 Dec-92 Jun-93 Dec-93 Jun-94 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 RevPAR Growth 5% No clear thesis on rising oil prices and impact on fundamentals... However,, spikes in oil pressure RevPAR performance and operating margins RevPAR What can we expect in ‘12? Oil 24 ISI International Strategy & Investment Group, Inc. 2) Debt, debt and more debt: Fiscal Drag Will Remain an Issue U.S. FEDERAL BUDGET (FISCAL YEAR) U.S. 2012 1H FEDERAL -$1.4t BUDGET 2012 .4 -1.4 It’s bad enough that we’ve already had 3 years with the federal deficit averaging a huge -$1.3t. Now on top of that, the deficit for 1H of FY2012 is running at a -$1.4t annual rate. This is particularly troubling for the 3rd year of a recovery. .2 0.0 -.2 -.4 -.6 -.8 -1.0 -1.2 -1.4 -1.6 1970 1975 1980 1985 1990 1995 2000 2005 2010 25 ISI International Strategy & Investment Group, Inc. 2) Global Growth is Slowing: Emerging Markets: EMERGING ECONMIES REAL GDP 2011:3Q 5.7% e Y/Y % 10 8 Emerging Market GDP Likely to Slow to 4% in 2012 from a high of 8% in ‘10 6 4 2 0 -2 92 94 96 98 00 02 04 06 08 10 12 26 ISI International Strategy & Investment Group, Inc. 2) Global Growth: China is Slowing; Concerns Over ‘Hard Landing’ Soft Landing Level US economy will NOT be spared from a potential ‘Hard Landing’ in China Hard Landing Level 27 ISI International Strategy & Investment Group, Inc. 2) Global Growth: Developed Countries--If Europe Sneezes Will the US Could Catch a Cold? Global Growth is Slowing; Spain and Italy Facing Recession DEVELOPED ECONMIES REAL GDP 2011:3Q 1.1% e 6 Y/Y % ISI Expects Global GDP growth to slow to +0.4%, while Italy is likely to fall into a recession at -2% in ’12 4 2 0 European recession will weigh on US economy—question remains, by how much? -2 -4 -6 92 94 96 98 00 02 04 06 08 10 12 28 ISI International Strategy & Investment Group, Inc. European GDP Forecasts for ‘12: Germany: France: UK: Italy: Spain: 0.0% -1.0% -1.5% -2.0% -2.0% ISI economists are calling for a recession across most of Europe, however, developed countries up North will fare better than their Southern EU neighbors 29 ISI International Strategy & Investment Group, Inc. Europe RevPAR Data: Slipped into Negative Territory in ‘12 London 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Feb-09 Europe Avg. 40% 30% 20% 10% 0% -10% Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 -20% -30% Milan -40% 60% Feb-12 Dec-11 Oct-11 Aug-11 Jun-11 Apr-11 Feb-11 Dec-10 Oct-10 Jun-10 Aug-10 Apr-10 Feb-10 Dec-09 Oct-09 Aug-09 Jun-09 Apr-09 Feb-09 -50% 40% 20% 0% -20% -40% -60% Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 30 ISI International Strategy & Investment Group, Inc. Real Estate Overview: Asset Values – Where are We Now 31 ISI International Strategy & Investment Group, Inc. Off to a slow start in ‘12, but most experts expect an active 2nd half ‘12 $60,000 $285,000 $53,727 $265,000 $259,088 $50,000 $40,000 $225,000 $203,676 $30,000 $205,000 $25,129 $21,436 $195,411 $185,000 $20,000 $15,017 $10,000 $165,000 $7,298 $5,737 $2,219 $2,054 $0 $145,000 $/Key Transaction Volume (m) $245,000 Of the $15bn+ of full-service hotels which sold last year, REITs accounted for nearly 40% of the capital $125,000 2005 2006 2007 2008 Ttl Volume 2009 2010 2011 2012 $/Key 32 ISI International Strategy & Investment Group, Inc. Capital Continues to Concentrate in Tier I Cities; Investors Still Worried About Moving Further Out on the Risk Curve for Higher Yield—That Will Change 100% % of Hotel Sales by Tier 90% 80% 39% 42% 70% 60% 50% 46% 34% 42% 31% 17% 19% 20% 14% 8% 10% 15% 12% 1% 13% 40% 30% 16% 51% 46% 40% 2005 2006 2007 51% 57% 61% 64% 2008 2009 2010 2011 70% 10% 0% Tier I Tier II Tier III 2012 Top 10 Most Active Markets in ‘11 City New York, NY Volume (m) $4,487 $/Key $483,871 San Diego, CA San Francisco, CA Miami, FL Los Angeles, CA Chicago, IL Washington, DC Denver, CO $1,468 $1,179 $806 $767 $668 $461 $370 $312,004 $260,731 $222,782 $246,916 $304,792 $373,252 $221,896 Dallas, TX Boston, MA Total/Wtd Avg.: $333 $298 $10,837 $567,008 $274,674 $372,231 33 ISI International Strategy & Investment Group, Inc. Trouble in NYC and DC? Not in the Minds of “Smart Capital” $583,203 $600,000 Transaction Volume (m) $4,000 $550,000 $3,500 $498,113 $3,000 $457,347 $500,000 $2,500 $450,000 $2,000 $400,000 $1,500 $1,000 $355,721 $351,494 $/Key $4,500 $350,000 $300,000 $500 $0 In NYC – Pricing remains 20% off of ‘06 Peak, however, we would not be surprised if we exceed ‘11 peak this year (Plaza Hotel trading for $1.4mn/key to India conglomerate) $250,000 $1,600 $429,254 $475,000 $1,400 $425,000 $1,200 $352,384 $341,725 $1,000 $800 $600 $325,000 $275,000 $235,787 Despite talk of weak fundamentals in DC, institutional capital continues to pay up for high quality assets $225,000 $400 $200 $375,000 $/key Transaction Volume (m) 2005 2006 2007 2008 2009 2010 2011 2012 $175,000 $133,929 $0 $125,000 $75,000 2005 2006 2007 2008 2009 2010 2011 2012 34 ISI International Strategy & Investment Group, Inc. Sunny Cal is Where the $ Migrates—Supported by Strong Fundamentals $1,000 $350,000 $318,938 $300,000 $239,012 $800 $250,000 $700 $600 $500 $200,000 $146,459 $400 $150,000 $300 $100,000 $200 $/Key Transaction Volume (m) $900 West LA West Coast Remains in High Demand for Investors – West LA and San Francisco in particular $50,000 $100 $0 $0 2005 2006 2007 2008 2009 2010 2011 2012 $1,600 $1,400 $277,990 $250,000 $1,000 $200,000 $800 $600 $400 $300,000 $241,138 $1,200 $150,000 $128,530 $100,000 $/Key Transaction Volume (m) $350,000 $327,709 San Francisco $50,000 $200 $0 $0 2005 2006 2007 2008 2009 2010 2011 2012 35 ISI International Strategy & Investment Group, Inc. CMBS Issuance: Has Placed a Lid on Deal Volumes… $35,000 Hotel (CMBS) Debt Issued (in Millions) $30,833 $30,000 $26,343 $25,000 $20,000 $15,848 $15,000 $10,000 $5,000 $0 $27 $71 $299 $933 '00 '01 '02 '03 $3,277 $2,034 '04 $803 '05 '06 '07 '08 $4,468 Hotel CMBS issuance is way off of ‘06-’07 peaks – with few expecting a near term resurgence $3 '09 '10 '11 36 ISI International Strategy & Investment Group, Inc. CMBS Hotel Maturities (M) $16,000 $14,000 $12,000 $14,069 $11,910 $11,348 $11,670 $10,000 $8,000 $6,000 $4,000 $3,240 $2,863 $2,000 $972 $444 $319 $1,059 $0 Hotel CMBS Maturies $69 7.0% 6.8% 6.6% 6.4% 6.2% 6.0% 5.8% 5.6% 5.4% 5.2% 5.0% Wtd. Avg. Interest Rate on CMBS …While CMBS Debt Maturities in ‘12, Expected to Place a Lid on Valuations Wtd. Avg. Rate 37 ISI International Strategy & Investment Group, Inc. Good News is that nearly 80% of the CMBS Loans Due this Year are Performing…that Figure Continues to Expand as Banks Extend Loans 100% % of Outstanding CMBS Loans 90% 13% 23% 39% 80% 17% 35% 27% 32% 4% 2% 96% 98% 2020 2021 37% 70% 60% 50% 40% 87% 77% 30% 61% 65% 2013 2014 83% 73% 68% 63% 2017 2018 2019 20% 10% 0% 2012 2015 2016 Performing Distressed 38 ISI International Strategy & Investment Group, Inc. A Perspective on the Future: “If you come to a fork in the road….take it” -Yogi Berra 39 ISI International Strategy & Investment Group, Inc. Analyst Certification and Disclosures ANALYST CERTIFICATION: The views expressed in this Report accurately reflect the personal views of those preparing the Report about any and all of the subjects or issuers referenced in this Report. No part of the compensation of any person involved in the preparation of this Report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by research analysts in this Report. DISCLOSURE: Neither ISI nor its affiliates beneficially own 1% or more of any class of common equity securities of the subject companies referenced in the Report. No person(s) responsible for preparing this Report or a member of his/her household serve as an officer, director or advisory board member of any of the subject companies. No person(s) preparing this report or a member of his/her household have a financial interest in the subject companies of this Report. At various times, the employees and owners of ISI, other than those preparing this Report, may transact in the securities discussed in this Report. Neither ISI nor its affiliates have any investment banking or market making operations. No person(s) preparing this research Report has received non-investment banking compensation form the subject company in the past 12 months. ISI does and seeks to do business with companies covered in this research Report and has received non-investment banking compensation in the past 12 months. DISCLAIMER: This material is based upon information that we consider to be reliable, but neither ISI nor its affiliates guarantee its completeness or accuracy. Assumptions, opinions and recommendations contained herein are subject to change without notice, and ISI is not obligated to update the information contained herein. Past performance is not necessarily indicative of future performance. This material is not intended as an offer or solicitation for the purchase or sale of any security. ISI RATING SYSTEM: Based on stock's 12-month risk adjusted total return; ETR = total expected return (stock price appreciation/depreciation + dividend yield) Buy Low Risk ETR >+10% Hold Low Risk ETR 0% to +10% Sell Low Risk ETR <0% Buy Medium Risk ETR >+15% Hold Medium Risk ETR -5% to +15% Sell Medium Risk ETR <-5% Buy High Risk ETR >+20% Hold High Risk ETR -10% to +20% Sell High Risk ETR <-10% RISK RATING: 30% based on stock price volatility, 30% on EPS volatility, 30% on debt rating & 10% on mkt cap ISI has assigned a rating of BUY to 45% of the securities rated as of 12/31/11. ISI has assigned a rating of HOLD to 51% of the securities rated as of 12/31/11. ISI has assigned a rating of SELL to 4% of the securities rated as of 12/31/11. Due to rounding the above numbers may add up to more/less than 100%. 40