U.S. Lodging Industry Update · Three Main Drivers of Cap Rate Change When Interest Rates Increase So do Cap Rates When Cash Flows Decelerate ... Oil/Energy Price Increases 5. Asset

CBRE HOTELS

The World’s Leading Hotel Experts.

U.S. Lodging Industry UpdateFIRST WATCH ON A LONG VOYAGE

May 8, 2018R. MARK WOODWORTH

CBRE HOTELS’ AMERICAS RESEARCH

2 Meet the Money 2018

• Cap Rates

AGENDA

First Watch on a Long Voyage

https://pip.cbrehotels.com/presentations

CAP RATES

4

Three Main Drivers of Cap Rate Change

When Interest Rates IncreaseSo do Cap Rates

When Cash Flows DecelerateCap Rates Increase

VolatilityThe more there

is, the higher the Cap Rate

THE DRIVERS OF CAP RATE CHANGE

Meet the Money 2018

5







Meet the Money 2018

66

RISING INTEREST RATES, STABLE RISK SPREADSAaa Bonds and 10-Year Treasury

0123456789

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Percent

Aaa-T-Bill Spread 10-Year Treasury Aaa

Long Run Average Spread = 1.5%, 1995-2017

Forecast

Meet the Money 2018Sources: CBRE Hotels’ Americas Research, CBRE EA Q1 2018.

Slight Uptick in

2020

7



When Cash Flows Decelerate

Cap Rates Increase




Meet the Money 2018


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

-2.7%

2.0%

-1.9%

-8.2%

-5.4%

-0.5%

1.3%

3.9%1.7%

3.9%

2.7%2.5%

-1.5%

2.9%

0.8%

4.6%

2.7%1.9%

0.5%0.1%

2.8%

0.8%

3.1%

4.0%

-0.9%

4.6%5.2%

2.0%

3.2%

2.7%1.6%

0.5%0.6%

2.2% 2.8%1.8%

1.2%

3.1%3.3%2.6%

2.1%

3.5%3.3%

2.4%2.0%1.8%

1.5%

0.8%0.0%

0.5%1.6%

2.6%

-10

-8

-6

-4

-2

0

2

4

6

8

10

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

(GOVERNMENT) Government consumption expenditures and grossinvestmentTRADE (Net exports of goods and services)

BUSINESS (Gross private domestic investment)

CONSUMERS (Personal consumption expenditures)

Lodging DemandSource: BEA, Moody’s Analytics, CBRE Hotels Americas’ Research Hotel Horizons, STR, February 2018


WHAT COULD END THE CURRENT CYCLE?

4. Oil/Energy Price Increases5. Asset Price Bubble

1. The Economy 2. Over Building 3. Unpredictable Demand Shock


194,455 193,119

90,000

110,000

130,000

150,000

170,000

190,000

210,000

2014 2015 2016 2017 2018

PIPELINE PLATEAU’S?

Source: STR, March 2018.

Number of Rooms Under Construction


NEW ROOMS

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: STR, CBRE Hotels’ Americas Research, Dec 2017.

12 MMA of New Hotel Room Added in the U.S.

Well Below Previous Peaks


0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Aus

tinS

eattl

eN

ashv

ille

Sav

anna

hC

harle

ston

Den

ver

Dal

las

Cha

rlotte

New

Yor

kLo

uisv

ille

Fort

Wor

thC

olum

bus

Por

tland

Bos

ton

Kan

sas

City

Cin

cinn

ati

Milw

auke

eH

oust

onS

an J

ose-

San

ta…

Ral

eigh

-Dur

ham

Fort

Laud

erda

leM

inne

apol

isN

ewar

kS

an F

ranc

isco

Tam

paS

alt L

ake

City

Det

roit

Indi

anap

olis

Pitt

sbur

ghH

artfo

rdO

mah

aLo

s A

ngel

esB

altim

ore

Day

ton

New

Orle

ans

Chi

cago

Mem

phis

San

Ant

onio

Phi

lade

lphi

aM

iam

iA

tlant

aW

ashi

ngto

n D

CS

acra

men

toS

an D

iego

Pho

enix

Jack

sonv

ille

Orla

ndo

Alb

uque

rque

Cle

vela

ndLo

ng Is

land

Sai

nt L

ouis

Nor

folk

-VA

Bea

chO

akla

ndA

nahe

imA

lban

yR

ichm

ond

Tucs

onO

ahu

Wes

t Pal

m B

each

Col

umbi

a

SUPPLY CHANGE 2018 - FORECAST

42 markets where the average supply growth is forecast to be greater than 2%.

Source: CBRE Hotels’ Americas Research Q4 2017


(30.0)%

(20.0)%

(10.0)%

0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

San

Jos

e-S

anta

Cru

zN

ashv

ille

San

Fra

ncis

coO

akla

ndP

ortla

ndLo

s A

ngel

esO

ahu

Den

ver

Cha

rlotte

Cin

cinn

ati

Sea

ttle

Bos

ton

Aus

tinA

nahe

imC

harle

ston

Tam

paIn

dian

apol

isLo

uisv

ille

Day

ton

Kan

sas

City

Col

umbu

sD

etro

itS

acra

men

toD

alla

sS

aint

Lou

isC

olum

bia

Orla

ndo

Atla

nta

Jack

sonv

illeFo

rt La

uder

dale

Sal

t Lak

e C

ityR

alei

gh-D

urha

mS

an D

iego

Fort

Wor

thM

iam

iM

emph

isM

ilwau

kee

Long

Isla

ndR

ichm

ond

Har

tford

New

ark

New

Orle

ans

Was

hing

ton

DC

Nor

folk

-VA

Bea

chW

est P

alm

Bea

chA

lbuq

uerq

ueP

hila

delp

hia

Pitt

sbur

ghO

mah

aS

an A

nton

ioP

hoen

ixH

oust

onTu

cson

New

Yor

kS

avan

nah

Cle

vela

ndM

inne

apol

isA

lban

yC

hica

goB

altim

ore

Not all markets have fully recovered from the last recession. REAL REVPAR CHANGE FROM PRE-RECESSION PEAK

Markets in Expansion

Source: CBRE Hotels’ Americas Research; STR, Q4 2017.

Markets in Recovery Markets in Recession

14

Total Labor Costs and

Related Expenses

42.4%

Cost of Sales7.0%

Management Fees5.0%

Non-Operating Income and Expenses

10.6%

Operating Expenses

35.0%

LABOR – LARGEST EXPENSE2017 Mix of Expenses

Source: 2018 Trends® in the Hotel IndustryMeet the Money 2018


LEISURE & HOSPITALITY JOB OPENINGS

5.8%

4.9%

1.5%

5.3%

0%

1%

2%

3%

4%

5%

6%

7%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: BLS, Dec 2017.

Leisure & Hospitality Job Openings as a Percent of Total Leisure & Hospitality Jobs

16

3%

4%

5%

6%

7%

8%

9%

10%

0%

2%

4%

6%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

Source: Bureau of Labor Statistics

TIGHT LABOR MARKET – UPWARD PRESSURE ON COMPENSATION

Annual Change in Hospitality Industry Employee Hourly Compensation versus Unemployment Rate

Meet the Money 2018

17

70.2%

47.9%

4.5%

67.4%

80.8%77.1% 79.3%

86.2%80.6%

66.4%

59.1%61.6%

44.4%

8.6%

58.9%

72.3% 70.4% 70.4%

78.2%

70.0%

59.3%

52.3%

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total Operating Revenue (Total Revenue)* Profit* (GOP 2015 - 2017, NOI before 2015)

FEWER HOTELS ARE ABLE TO ACHIEVE INCREASESON THE TOP AND BOTTOM LINES Percent of Hotels in Trends® Sample Posting an Increase from Prior Year

Note: * 11th edition of USALI in 2015, (10th edition of USALI from 2007 to 2014) Source: 2018 Trends® in the Hotel Industry

Lowest Since 2009

Meet the Money 2018

OUR FORECASTS


U.S. NATIONAL FORECAST – ALL HOTELS

Long Run

Average 2015 2016 2017 2018F 2019FSupply 1.9% 1.0% 1.5% 1.8% 2.0% 1.9%

Demand 2.0% 2.5% 1.5% 2.7% 1.8% 1.9%

Occupancy 62.2% 65.4% 65.4% 65.9% 65.8% 65.8%

ADR 3.1% 4.5% 3.1% 2.1% 2.6% 2.0%

RevPAR 3.3% 6.1% 3.2% 3.0% 2.5% 2.0%

Source: STR, CBRE Hotels’ Americas Research, Q4 2017.

20







Meet the Money 2018


1. The fundamentals remain attractive across the vast majority of markets.2. Growing levels of disposable income and wealth will continue to drive

increases in travel away from home. 3. Moderating supply growth will support high occupancy levels and may finally

help to leverage ADR increases over the next two-three years. 4. Above long run average occupancy leads to revenue growth. Increasing labor

costs will pressure performance. Profit growth will be durable, but not great.5. Sharing economy will become more of a factor for traditional hotels.6. Outlook for lodging in most domestic markets remains favorable.

VOLATILITY FIRST WATCH ON A LONG VOYAGE

VolatilityOutlook = Low

CAP RATE OUTLOOK

23

31%

Market Return, Risk, and Income Growth (from Gordon Growth Model)HOTEL CAP RATE FORECASTING MODEL

Real Risk Free Rate(10-Year Treasury-Inflation)

Real Risk Free Rate(10-Year Treasury-Inflation)

Risk Premium (EA’s Aaa –

10-Year Treasury)

Risk Premium (EA’s Aaa –

10-Year Treasury)

Income Growth (∆NOI)

Income Growth (∆NOI)

CBRE EACBRE EA

Hotel Cap Rate

(Rhotel)

Hotel Cap Rate

(Rhotel)

Hotel Horizons/

STR

Hotel Horizons/

STR

RERC Survey/

Transactions

RERC Survey/

TransactionsData

VariablesVariables

*2005-2015*other variables such as debt/GDP ratio are used which contribute <5% in predictive power

Contribution*:Contribution*: 27% 36%

Meet the Money 2018

2424

HOTEL RISK REVERTS TO MEAN, SPIKES PRIOR TO SLOWDOWNHotel Cap Rates and Aaa Bonds

.

0

2

4

6

8

10

12

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Percent

Hotel Risk Premium Aaa Cap RateSources: CBRE Hotels’ Americas Research, CBRE EA Q1 2018.

Long Run Average Hotel Risk = 3.68%, 1995-2017

Forecast

Meet the Money 2018

Favorable Expectations for Growth Post 2020

25

WHERE ARE CAP RATES GOING?

10‐Year Treasury Risk Premium(Aaa ‐ 10‐Yr Treasury)

Real Estate Risk Premium (Hotel Cap Rate – Aaa)

Hotel Cap Rate

2012 1.81 1.87 4.41 8.092013 2.35 1.89 3.80 8.04

2014 2.54 1.62 3.46 7.62

2015 2.14 1.75 3.47 7.362016 1.84 1.83 4.12 7.78

2017 2.33 1.49 4.29 8.11

2018F 2.88 1.47 3.88 8.23

2019F 3.06 1.74 3.59 8.392020F 3.13 1.78 3.55 8.46

2021F 3.17 1.50 3.58 8.25L.R.A. (1995‐2017)

4.10 1.51 3.68 9.30

Market expects

that treasuries

will rise moderately

Cap rates will

remain below

the LRA

Slightly above LRA by

2019

Meet the Money 2018


FOR A COPY OF THIS PRESENTATION:

https://pip.cbrehotels.com/presentationsMARK WOODWORTHSenior Managing Director+ 1 404 812 [email protected]

CBRE Hotels | Americas Research3280 Peachtree Road, Suite 1400 Atlanta, GA 30305

CBRE © 2018 All Rights Reserved. All information included in this proposal pertaining to CBRE—including but not limited to itsoperations, employees, technology and clients—are proprietary and confidential, and are supplied with the understanding that theywill be held in confidence and not disclosed to third parties without the prior written consent of CBRE. This proposal is intendedsolely as a preliminary expression of general intentions and is to be used for discussion purposes only. The parties intend thatneither shall have any contractual obligations to the other with respect to the matters referred herein unless and until a definitiveagreement has been fully executed and delivered by the parties. The parties agree that this proposal is not intended to create anyagreement or obligation by either party to negotiate a definitive lease/purchase and sale agreement and imposes no dutywhatsoever on either party to continue negotiations, including without limitation any obligation to negotiate in good faith or in anyway other than at arm’s length. Prior to delivery of a definitive executed agreement, and without any liability to the other party,either party may (1) propose different terms from those summarized herein, (2) enter into negotiations with other parties and/or (3)unilaterally terminate all negotiations with the other party hereto.

The information contained in this document has been obtained from sources believed reliable. While CBRE, Inc. does not doubt itsaccuracy, CBRE, Inc. has not verified it and makes no guarantee, warranty or representation about it. It is your responsibility toindependently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for exampleonly and do not represent the current or future performance of the property. The value of this transaction to you depends on taxand other factors which should be evaluated by your tax, financial and legal advisors. You and your advisors should conduct acareful, independent investigation of the property to determine to your satisfaction the suitability of the property for your needs.

Documents

U.S. Lodging Industry Update · Three Main Drivers of Cap Rate Change When Interest Rates Increase So do Cap Rates When Cash Flows Decelerate ... Oil/Energy Price Increases 5. Asset