2005 National Lodging Report

R EAL ESTATE A DVISORY SERVICES

!@# 2005 National Lodging Report

INTRODUCTION

Dear Colleague, Overall US Estimates We are pleased to present the 2005 edition of the Ernst & Young National Lodging Report.

Our National Lodging Report offers our assessment of the direction of the U.S. lodging industry, including our thoughts on key lodging industry trends and segment performance, as well as our detailed outlook for major metropolitan markets. Additional copies of this report are available through our local offices or on our Web site http://www.ey.com/us/reas.

I would like to thank the Hospitality Services professionals who contributed significant time and effort in preparing the 2005 National Lodging Report, including Georgianne Fsadni, Aaron Greenman, and Rebecca Hart.

E&Y’s Hospitality Services professionals provide developers, lenders, owners, and operators with an array of advisory services each year. Please feel free to contact me or any of the professionals mentioned at the end of this report if we may be of service.

Sincerely,

Michael Fishbin National Director Hospitality Services Ernst & Young Real Estate Advisory Services

CONTENTS

Industry Overview ...... 02 Atlanta ...... 27

Top Ten Thoughts ...... 05 Boston ...... 35

Spotlight Segment: Chicago ...... 43 Luxury ...... 14 Dallas ...... 51 Spotlight Segment: Upper Upscale ...... 16 Hawaii ...... 57

Spotlight Segment: Las Vegas ...... 65 Upscale ...... 18 Los Angeles ...... 73 Spotlight Segment: Midscale With Food and Beverage ...... 20 Miami ...... 81

Spotlight Segment: New Orleans ...... 91 Midscale Without Food and Beverage ...... 22

New York ...... 99 Spotlight Segment:

Economy ...... 24 Orlando ...... 109

San Diego ...... 115

San Francisco ...... 123

Tampa ...... 131

Washington, D.C...... 137 INDUSTRY OVERVIEW

The lodging industry continues to show significant improvement and, given the current economic environment and outlook, we anticipate its positive trends will continue at least for the next 24-30 months. Strong RevPAR performance at urban and airport hotel locations and improved midweek RevPAR performance indicate the return of corporate travel demand, while leisure demand continues to remain healthy, though could be impacted by the volatility of gasoline prices. The current supply pipeline remains relatively thin, boding well for the overall industry, which after four years of recovery, is anticipated to exceed the peak performance levels achieved in 2000.

Hotels regained pricing power in mid-2004 and we anticipate further improvement in 2005 with ADR increasing 4% to $90. Coupled with a 1.7 percentage point increase in occupancy to 63%, we anticipate total U.S. RevPAR to increase 6.9% to $57, above the $55 RevPAR level achieved in 2000.

Lodging owners and developers continue to experiment with mixed-use real estate products and creative financing structures such as condominium-hotels, while national brands focus on expanding across pricing segments and gaining market share in high-barrier- to-entry markets. Across states, the importance of properly placing tourism dollars is gaining attention as cities strategically plan to improve or expand convention facilities and meeting planning amenities.

The lodging industry is not without challenges, as rising labor, insurance, and energy costs pressure margins and increasing interest rates may modestly temper profit margins in variable rate situations. However, with overall operating structures and break-even points lower than in cycles past, the effect of interest rate increases is less worrisome.

2 Lodging Market Occupancy, ADR, RevPAR Performance

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3 top 10 thoughts TOP 10 THOUGHTS

1 Hospitality Investing: What a difference a year can make. Improved hotel operating performance over the past year — and the anticipation of continued improvement for the foreseeable future — has led to positive investor sentiment and increased capital markets activity in the sector. According to a recent report issued by Principal Real Estate Investors, Real Estate Research Corp., and Torto Wheaton Research, unleveraged average annual returns for full-service hotels are anticipated to exceed 13% over the next 10 years, with real estate investment alternatives performing at single digit growth rates (approximately 7% to 9%). As annual returns in lodging are anticipated to be greater than for other real estate asset types, real estate investors appear to be showing more interest in the lodging sector.

As a result, even private companies are raising funds in the public markets, including Sunstone Hotel Properties, Inc., Strategic Hotel Capital, and Eagle Hospitality Properties Trust, which together raised more than $770 million in public offerings in 2004. Other initial public offerings were planned, but postponed (by CNL Hotels and Resorts and Capital Lodging). Public companies have also taken advantage of increased demand for lodging investments as secondary equity issuances topped more than $1 billion in 2004. Similarly, the debt capital markets experienced a flurry of activity in 2004, with hotel CMBS issuances raising more than $7 billion for hotels (through September 2004), an increase of more than 60% relative to the same time period the last year. The Blackstone Group launched itself to the top of 2004’s lodging transaction scene, acquiring Extended Stay America, Prime Hospitality Corp., and Boca Resorts, for an aggregate value of more than $5.2 billion, taking these companies out of the public equity market arena to Blackstone’s privately held portfolio. Although interest rates are anticipated to increase in 2005, a relatively low rate environment coupled with continued improvement in operating trends should fuel strong activity in the capital markets over the next 12 months.

6 2 Lodging Fundamentals: How about that! Lodging stocks ahead of the curve. Continuing improvement in lodging fundamentals continues to provide support to large publicly traded lodging company valuations. In 2004, the majority of the publicly traded lodging companies outperformed the overall market, as the S&P 500 index (as of December 16, 2004) saw a 7.8% increase during the year. Comparatively, among the large cap c-corp lodging companies, the average price appreciation was approximately 38%, driven by improving RevPAR performance and a favorable supply and demand imbal- ance that is expected to continue for some time. Even so, the significant price appreciation in the lodging sector far above the market over the past year indicates that additional value enhancement will be somewhat more difficult to accomplish. While most Wall Street analysts continue to view the industry favorably, there is less suggestion of widespread out-performance in the sector in the year ahead.

3 Supply & Demand: Building confidence in lodging supply levels. Over the past three years, the number of available hotel rooms across the U.S. has grown minimally, helping the pace of the recovery as industry fundamentals slowly turned positive. While changes in lodging demand generally attract more headline attention, it is arguable that the cyclical nature of the industry’s supply growth plays a greater role in lodging performance. Changes in lodging supply typically manifest in three-to-five year cycles, driven by the current economic environment, availability of financial resources, and the amount of time needed for new construction to be developed. Supply growth increased 3% to 4% annually from 1997 through 2000, followed by a sequential slow- down in subsequent years to reach cyclically low levels of 1.3% growth in 2003 and an estimated 1.1% growth in 2004. Given the severe performance declines in 2001, 2002, and 2003, the financial markets have been strict in terms of funding new projects and development activity remains at historically low levels. With the recovery in lodging demand taking hold in 2004, the dynamics between demand and supply finally shifted as the number of room nights sold increased 4.8% driving occupancy and ADR gains during the year. As the pipeline of new lodging supply for 2005 and 2006 remains in check, further improvement in lodging operating performance should continue during the coming years.

7 4 New Development: Hotels find favor in mixed company. As the economics of real estate finance continue to evolve, driven by changing demographics, psychographics and investment preferences, the trend toward hybrid real estate investments is gaining popularity with both developers and owners. For developers, the mixed-use concept offers financing structures often not available to pure play lodging developments. In addition, now more than ever, investors looking for real estate opportunities may consider mixed-use lodging developments that include residential, retail and more significant recreational components such as spa facilities and golf courses. The aging baby boomer generation’s desire to spend on vacation real estate has encouraged new timeshare, fractional ownership, and condominium-hotel developments, with lodging operators perceiving high fee growth and brand expansion opportunities in these products both in resort and urban destinations.

5 Condominium-Hotel Development: Home Suite Home? During the past several years, under tight capital availability for new development, condominium-hotels have enjoyed a renaissance, with various condominium-hotel projects currently under construction in South Florida and other central business districts such as Manhattan and Chicago. Often, the appeal to developers is clearer than the appeal to buyers and management companies, with major incentives being an alternative financing structure and a desire to minimize operating risk. Compared to more traditional financing arrangements for hotels that require equity investments between 30% and 40% (or more) of project cost and long-term debt to be serviced by operations, condominium-hotel debt is largely “outsourced” to individual investor equity or mortgages from unit purchasers. Condominium-hotel units offer owners vacation homes or “pieds a terre” with the services and amenities of high-end hotels. When not using their units, owners may opt to place them in a rental program that helps to defray the cost of ownership and may produce a profit.

While condominium-hotels may alleviate some financial risks for the developer, it raises a host of other issues and risks that need to be carefully considered. The fundamentals of analyzing transient lodging demand and the relevant population of residential buyers remain critical to project planning. Further, the importance of properly structuring the way in which various stakeholders’ building governance documents, operational budgets, and property management components fit together cannot be overstated. The applica-

8 bility of securities laws to the offering of condominium-hotel units is the biggest issue affecting the structure and success of this segment and demands careful consideration of the issues and sound legal guidance.

As for the buying decision, the likely premium paid for the availability of hotel services during owner residence and the prospect of operating cash flow from the units must also be balanced by the magnitude of assessment fees and the risk of funding additional operational shortfalls borne by individual unit owners. For the manager, the desire to grow fee income and extend brand coverage must be balanced with the added complexity of developing programs for efficiently managing inventory, dealing with multiple owners, establishing control over common area maintenance and determining responsibility for operating shortfalls.

6 Tourism: Destinations deliver. In today’s competitive environment, where cities as well as other locations are fighting hard for their share of the tourism dollar, the paradigm of “if you build it, they will come” has never been riskier. Today, a location will compete successfully if it is characterized not only by contiguous convention space with nearby hotel rooms, but also by a host of other attributes that tourists, convention attendees and event planners look for. These attributes — such as air and road access, public safety, local transportation, climate, the potential of local industry to boost convention and trade show attendance, monthly patterns of hotel occupancy, average rate and demand segmentation, characteristics of the local and regional population, development projects, dollars allocated to market the location, quality of service, perceptions of cost on the part of visitors and event organizers, the accessibility of shops, restaurants, tourist attractions, cultural institutions and entertainment venues, among others — are crucial to the sustainability of a location as a tourist and convention destination. A holistic approach to strategic planning is required to support success. It is anticipated that this kind of approach will be adopted more and more by cities and other locations in the coming years as competition for out-of-region visitors — those that stay longer and spend more money — becomes more intense.

9 7 Compliance & Ethics: SOX and 404: No pain, no gain. Chief Financial Officers continue to experience the challenges of a tightening regulatory environment. With the first Sarbanes-Oxley Section 404 reporting, ostensibly due on the April 2005 filing, public SEC registrants have committed significant resources and dollars to understanding processes and ensuring compliance. As a result, the role of the internal audit continues to evolve, as efforts focus primarily on understanding and eval- uating controls for the purpose of improving the reliability of financial reporting and corporate disclosures. As companies become compliant, this, in turn, should serve to improve investor confidence. Although Sarbanes-Oxley governs only those companies registered with the SEC, the push for more process testing will soon evolve into a best practice for all companies, further enhancing financial reporting reliability. Having sufficient resources to dedicate to testing initial and ongoing compliance continues to be a challenge for many companies.

8 Operating Costs: Fundamentals improving, but costs keep rising. The economic recovery has spurred increases in occupancy and leverage to increase room rates on a national basis. However, maximizing the flow of revenue through to profitability continues to be more challenging, as in particular, rising employee-related costs, insurance, and energy costs create pressure on profit margins. While payroll and employee- related costs, which comprise the most significant component of hotel operating costs, have increased at a rate slightly higher than that of inflation over the past decade, health insurance costs, which rank second behind Social Security as the largest portion of employee benefit expenses, have skyrocketed since the late 1990s due to increases in prescription drug costs, lack of a preventative treatment culture, and an American population that at once is getting older and less healthy.

Overall, insurance rates have doubled in the past three years as hotels seek coverage against terrorist activity, weather-related events and their resulting business interrup- tions. The insurance costs of the new security paradigm are only the beginning of costs associated with dealing with such risks; virtually all hotel operators are applying more resources toward on-property security. With four major storms hitting the southeastern region of the United States during 2004’s hurricane season, natural disaster coverage, including property damage and business interruption policies, is both more critical and likely more costly in 2005 than ever, a reality that may well be exacerbated in the

10 years ahead by the continued strong focus on resort/lodging development on higher risk shorelines.

In 2004, energy prices were highly volatile, as the conflict in the Middle East pushed energy prices higher, a trend that is likely to continue in 2005. In the 12 months before November 2004, oil and natural gas prices increased 44% and 39%, respectively, according to the New York Mercantile Exchange. As energy is a major cost component for the hospitality industry– approximately 4% of total revenues and 18% of cash flows from operations for a full-service hotel, according to Smith Travel Research’s 2004 HOST report– operators with fixed price supply contracts were best protected from last year’s price increases. This year, we anticipate continued supply uncertainties and high global demand, particularly from a booming Chinese economy and a recovering U.S. economy with a thirst for gasoline and a limited federal impetus for implementing higher Corporate Average Fuel Economy (CAFE) standards.

On a more positive note, high prices improve the economics for implementing energy efficiency upgrades of lighting, heating, and air conditioning systems. One of the best matches for the lodging industry now is co-generation (CHP), with lodging’s simultaneous need for both electricity and thermal energy (hot water). In states such as California and New York, CHP can often provide returns of investment upwards of 33%. With incentives from utility companies or state agencies, property owners and operators exploring such options bear witness to tangible cost savings.

9 Labor Issues: The tug of war continues between fairness and margins. With UNITE (formerly the Union of Needle trades, Textiles and Industrial Employees) and HERE (Hotel Employees and Restaurant Employees International Union) merging on July 8, 2004, to form UNITE HERE, the combined union, which represents more than 440,000 active members throughout North America, is making a big push to unionize the balance of its industries. UNITE HERE currently represents about 100,000 hotel workers and is pressing to consolidate labor contracts and gain more influence when negotiating compensation, health care benefit contributions, and workloads. Specifically, the union is in the process of trying to align expired (or expiring) contracts in Los Angeles, San Francisco, and Washington, D.C. with contracts in New York, Chicago, Boston, Toronto and Honolulu, which expire in 2006. Without current agreements in place, worker strikes at hotels in San Francisco ensued in the second half of 2004, lasting more than five

11 weeks, and further work stoppages could occur in 2005. In addition, the Fair Minimum Wage Act of 2004 was referred to Congress’s Subcommittee on Workforce Protections in May 2004. This bill proposed an amendment to the Fair Labor Standards Act of 1938 to increase the minimum hourly wage paid to U.S. workers to $7 from $5.15 over three years. While the bill was not passed by the sitting Congress, it could be reintroduced to the 2005 Congress, and a subsequent increase in wages paid to hourly workers could have an impact on hotel’s operating margins if improved efficiency does not offset the higher wages. 10 2005 Outlook: Cautious optimism for corporate travel and hopes that a weak dollar may boost stateside tourism. With the re-election of President Bush this past November, there remains widespread perception that the Administration will continue to pursue policies highly favorable to business, and Wall Street hopes that the country’s economic recovery will continue at a more accelerated pace. However, economic issues remain to be addressed: interest rates are expected to inch higher and possibly slow growth, and a deepening trade deficit is anticipated to place downward pressure on the U.S. dollar.

Within this environment, we anticipate that corporate travel spending will increase moderately in 2005, with resulting increases in lodging demand. With consumer balance sheets and the employment outlook slowly improving, consumer confidence should begin to recover, although the trend in late 2004 has produced less optimism. With anticipated increases in the federal funds rate, the incremental cost of capital for real estate investments could affect transaction activity, although this would seem to be offset by the significant amount of capital focused on investing in real estate in general and the lodging industry in particular. In addition, a higher interest rate environment is more likely to temper the rate of new construction, which is positive for operating fundamentals in the lodging industry. Meanwhile, the benefits from foreign travel to the U.S. encouraged by the weak U.S. dollar have been partially offset by the increased hassle of visa and immigration policies to accommodate such travel to the U.S., as well as a general lower- ing of the U.S.’s stature among foreign “ally” populations as a result of political policies pursued over the past two years.

12 spotlight segments

13 LUXURY

Having experienced the greatest performance decline from the segment’s peak in 2000 through the downturn of subsequent years, the Luxury segment now appears to be poised as the primary beneficiary of the country’s economic recovery. Occupancy levels are improving as higher-rated corporate transient demand increases, and room rates also continue to improve. As the recovery continues, Luxury properties may once again begin to be more selective in managing their segmentation, declining lower-rated group, association, and sometimes leisure demand during peak periods of corporate transient travel. The continuation of this demand shift should allow Luxury segment RevPAR growth to achieve greater performance gains than the other segments in 2005.

The Business Travel Coalition estimates that corporate spending on air travel in 2004 was 4% higher than in 2003, a trend anticipated to continue according to a survey con- ducted by the organization where 45% of travel managers anticipate their spending to increase in 2005, on average, by 14%. Improving corporate travel demand continues to manifest itself by the overall trend of higher RevPAR gains on weekdays than on weekends and stronger growth among urban and airport hotel locations relative to suburban and highway locations.

Based on data provided by Smith Travel Research through November 2004, we estimate that Luxury segment lodging demand increased over 7% in 2004. Coupled with a moderate 1.9% increase in supply, occupancy in the Luxury segment in 2004 was estimated at 68.1%, a 3.5 percentage point increase over 2003’s 64.6% occupancy. The segment’s estimated $232 ADR in 2004 represented a 5% increase over 2003, the first year- over-year improvement in ADR for the segment since 2000. Overall, RevPAR increased an estimated 10.8% to $158 in 2004.

In 2005, we anticipate positive occupancy and ADR growth trends to continue, with occupancy anticipated to increase to 69.9%, ADR 6% to $246 and RevPAR 8.6% to $172.

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15 UPPER UPSCALE

Similarly but to a somewhat lesser degree than the Luxury segment, the Upper Upscale segment should also benefit from improving corporate and leisure demand levels in 2005. Experiencing considerable increases in occupancy and ADR in 2004, the Upper Upscale segment has made strides toward fully recovering to 2000 RevPAR levels. Improving corporate profits and general optimism regarding the pace and duration of the economic recovery should also spur increases in group demand, which bodes well for lodging properties in the Upper Upscale segment. As fundamentals continue to improve, we anticipate demand segmentation realignment as lodging managers are able to focus more on their core segments and optimize their yields. For the Upper Upscale segment, a focus on capturing a greater number of higher-rated corporate transient room nights is likely to further improve ADR levels and overall profitability, while moderating gains in occupancy. At the same time, this market segmentation shift in the higher-tiered segments should have a positive trickle down effect in Midscale and Economy segments by gently shifting lower-rated demand toward those segments.

Based on data provided by Smith Travel Research through November, we estimate that Upper Upscale segment lodging demand increased approximately 6% in 2004. Coupled with a minimal 1.6% increase in supply, occupancy in the Upper Upscale segment in 2004 was estimated at 69.1%, a 2.8 percentage point increase over 2003’s 66.3% occupancy. The segment’s estimated $132 ADR in 2004 represented a 3.8% increase over 2003, while RevPAR increased an estimated 8.3% to $91 in 2004.

In 2005, we anticipate continuing improvement in the Upper Upscale segment performance in 2005, with occupancy anticipated to increase to 70.9%, ADR 5.5% to $139 and RevPAR 8.1% to $98.

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17 UPSCALE

The Upscale segment reported strong operating performance in 2004 as the recovery in overall lodging demand continued to gain momentum. Improving demand levels and stable supply during the year provided a favorable backdrop for positive growth performance. The supply of Upscale properties remained relatively stable in 2004; however, the segment has been one of the fastest growing segments over the past five years. Given the current pipeline of new projects under construction, growth within this segment is anticipated to continue, which could put downward pressure on performance if demand growth does not outpace new supply growth.

Based on November year-to-date data provided by Smith Travel Research, we estimate that the Upscale segment lodging demand increased more than 5% in 2004. Coupled with a slight 0.6% increase in supply, occupancy in the Upscale segment in 2004 was estimated at 69.2%, a 3.1 percentage point increase over 2003’s 66.1% occupancy. The segment’s estimated $96 ADR in 2004 represents a 3.7% increase over 2003, while RevPAR increased an estimated 8.6% to $67 in 2004.

In 2005, we anticipate further performance gains in the Upscale segment, with occupancy anticipated to increase to 70.5%, ADR 4.5% to $101, and RevPAR 6.6% to $71, similar to RevPAR levels achieved in 2000.

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19 MIDSCALE WITH FOOD AND BEVERAGE

Rising with the overall recovery in the lodging industry, the Midscale with Food and Beverage segment reported a moderate increase in performance during 2004. Increases in both occupancy and room rates pushed RevPAR levels close to those achieved in 1999. Within the two midscale chain segments, there appears to be a shift occurring as the number of midscale hotels offering food and beverage outlets have been declining while the number of limited service midscale properties has increased dramatically. In 2004, the Midscale with Food and Beverage segment experienced a decline in room supply, with total room count decreasing by an estimated 1.8%; over the past five years, this segment has declined by approximately 9%. Despite these declines in room supply, the segment still experienced declines in RevPAR in 2001 through 2003, as lodging demand declined more rapidly during the downturn. Year 2004 marked a turning point for the segment, with demand climbing by an estimated 2%.

Based on data provided by Smith Travel Research through November, we estimate that Midscale with Food and Beverage segment lodging demand increased approximately 2% in 2004. Coupled with a decline in lodging supply of 1.8%, occupancy in the Midscale with Food and Beverage segment in 2004 was estimated at 57.3%, a 2.1 percentage point increase over 2003’s 55.2% occupancy. The segment’s estimated $74 ADR in 2004 represented a 2.4% increase over 2003, while RevPAR increased an estimated 6.3% to $42 in 2004.

In 2005, we anticipate continuing improvement in the Midscale with Food and Beverage segment performance, with occupancy anticipated to increase to 58.4%, ADR 2.8% to $76 and RevPAR 4.9% to $44.

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21 MIDSCALE WITHOUT FOOD AND BEVERAGE

In 2004, a thinning development pipeline lowered Midscale without Food and Beverage segment new supply from an 8.5% increase in 2000 to an estimated 2.9% increase in 2004. This has helped to moderate performance declines as lodging demand languished during the downturn. While the 2.9% increase in the segment’s lodging supply was the greatest increase among all the chain segments, the segment was able to report strong performance gains during the year as lodging demand improved with the overall industry recovery. The shift toward limited service midscale properties and away from full service midscale properties is evident in the dramatic 30% room supply increase in the Midscale without Food and Beverage segment over the past five years. Despite the supply increases, performance metrics among limited service midscale properties outpaced full service midscale properties during the same time period. Given the relatively short development timeline required in the midscale segment and the expectation that the current demand recovery will continue for the next several years, strengthening operating performance is likely to initiate even more new development. The Midscale without Food and Beverage segment is already one of the fastest growing lodging segments in the U.S., with approximately 22,000 rooms under various phases of construction.

Based on data provided by Smith Travel Research through November, we estimate that the Midscale without Food and Beverage segment lodging demand increased approximately 6.6% in 2004. Outpacing the 2.9% increase in supply, occupancy in the Midscale without Food and Beverage segment in 2004 was estimated at 64.1%, a 2.2 percentage point increase over 2003’s 61.9% occupancy. The segment’s estimated $71 ADR in 2004 represented a 3.3% increase over 2003, while RevPAR increased an estimated 7% to $45 in 2004.

In 2005, we anticipate continuing improvement in the Midscale without Food and Beverage segment performance in 2005, with occupancy anticipated to increase to 65.4%, ADR 3% to $73 and RevPAR 5.1% to $48.

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23 ECONOMY

The Economy segment, while reporting the least improvement in performance in 2004, still showed moderately positive gains during the year. As the lodging industry continues to recover, domestic leisure travel trends favoring drive-to destinations continues to play an active role in the segment’s future. Offering hotels guests the lowest room rates among all the chain segments, the Economy segment caters to the most price sensitive travelers. While travel reports over the most recent holiday season indicate rising gas prices have not deterred travel, continued increases could have an impact during the upcoming year. In addition, the current lodging industry recovery, characterized by improving corporate transient demand, suggests the bulk of the recovery will benefit the higher rated segments.

Based on data provided by Smith Travel Research through November, we estimate that the Economy segment lodging demand increased approximately 1.8% in 2004. Coupled with a decline in lodging supply of 0.7%, occupancy in the Economy segment in 2004 was estimated at 54.5%, a 1.4 percentage point increase over 2003’s 53.1% occupancy. The segment’s estimated $49 ADR in 2004 represented a 1.8% increase over 2003, while RevPAR increased an estimated 4.4% to $26 in 2004.

In 2005, we anticipate modest improvement in the Economy segment performance, with occupancy anticipated to increase to 55.3%, ADR 2.4% to $50 and RevPAR 3.9% to $27.

24 Lodging Market Occupancy, ADR, RevPAR Performance

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25 regions and markets atlanta ATLANTA

Introduction After four consecutive years of deteriorating conditions, Atlanta’s lodging industry experienced signs of improvement in 2004 as a result of increasing visitation and a rebound in convention activity. One of the largest lodging markets in the nation with 92,000 rooms, Atlanta is seeing lodging demand growth outpace its supply growth for the first time since before 2000. Many of the city’s largest full-service hotels have improved their meeting facilities in an effort to better serve the large and corporate group segments, eager to profit from the improving economic conditions and the anticipated increase in business travel. Based on Smith Travel Research November year-to-date data the greater Atlanta lodging market experienced an estimated 7.3% RevPAR increase to $45 in 2004, benefiting from both occupancy and ADR gains. Year-end 2004 occupancy increased an estimated 2.6 percentage points to 58.8%, while ADR reached $76, a 2.6% increase relative to the previous year.

The continued recovery of Atlanta’s lodging market in 2005 remains dependent on the strengthening of the U.S. economy, the enhancement of the city’s destination appeal with the opening of new attractions, such as the Georgia Aquarium, and the expansion of low-fare air service to the city, which benefits the market’s broad leisure base. The city’s large supply base is anticipated to continue to limit the market’s ability to significantly increase rates, although demand growth is anticipated to remain strong. As such, in 2005 overall market occupancy is anticipated to increase 2.6 percentage points to 61.4%, while ADR is anticipated to increase 3% to $78, resulting in a RevPAR increase of 7.5% to $48.

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ATLANTA

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29 Market Strengths Atlanta’s centralized location places it within a two-hour flight from 80% of the U.S. population. Given its entertainment and retail offerings, as well as its significant transportation infrastructure, it serves as a regional hub, attracting many domestic and international visitors. Indicative of the strength of leisure travel to Atlanta, the city remains the number one travel destination for African-Americans and Atlanta’s Hartsfield-Jackson Airport tops the list of airports for non-stop service to domestic destinations. Further, leisure-travel demand in the coming years is anticipated to be positively affected by the opening of the Georgia Aquarium, the New World of Coca-Cola, the High Museum of Art Expansion and the continued development of Atlantic Station, among other new attractions that are anticipated to enhance the city’s appeal.

Atlanta also continues to expand its corporate base, as evidenced by recent decreasing vacancy and solid net absorption rates in its office real estate market. The city hosts offices of 753 of the Fortune 1000 Services and Industrial Companies and has been consistently ranked among the best cities for entrepreneurs and for business growth in the nation by several publications. The city will further enhance its position to attract more business if successful in its bid to attract the headquarters of the proposed Free Trade Area of the Americas.

Market Challenges As evidenced by four years of declining market occupancy rates and three years of declining market ADRs, the drive to improve Atlanta’s lodging market performance continues to be challenging. Despite preliminary reports indicating a reduction in the supply pipeline for the next two years and an anticipated improvement in market performance, lodging demand continues to be heavily dependent on the leisure segment, one that tends to be more seasonal and price-sensitive, benefiting mostly limited-service properties. As a result, ADRs are anticipated to remain under pressure, experiencing only modest increases in the coming years. In addition, Atlanta, once one of the few U.S. cities suitable for large conventions, continues to face increasing competition from other cities that are developing or expanding their own facilities. Also, Delta’s recently announced $1 billion restructuring plan, mostly through pay cut concessions, may deprive the area’s economy of roughly $625 million in consumer spending in 2005 and cause the equivalent of 9,000 job-losses from the area’s forecasted growth.

30 Demand Changes Total passenger traffic at Atlanta’s Hartsfield-Jackson International Airport year-to-date September 2004 increased 6.2% relative to 2003, with international passenger traffic increasing 13.6% and domestic traffic 5.5%. Domestic travel continues to benefit from the expansion of low-fare carriers such as AirTran and Delta’s Song.

Atlanta’s Hartsfield-Jackson is in the midst of a $5.4 billion development program which includes the expansion and upgrade of its current facilities and construction of a fifth runway by May 2005. In 2006 plans include enhancements to the airport’s road and rail systems and the construction of a consolidated rental car facility. By 2007, the expansion of Concourse E, with ten additional gates, should be complete.

The number of citywide convention groups in 2004 increased by 9.6% relative to the previous year, while the number of room-nights generated increased by a strong 23.3%. Attendance at the Georgia World Congress Center, the city’s main convention facility and the nation’s fifth largest convention center, remained stable relative to the previous year. The stable attendance is a consequence of increasing competition from area hotels, which continued to increase their meeting capacity, and also reflective of the 2003 opening of new facilities at the Georgia International Convention Center, which features the largest ballroom in Georgia.

Several new facilities are anticipated to enhance Atlanta’s appeal as a leisure destination. The Cobb Galleria Centre, a multipurpose performing arts center whose first phase includes a 2,750-seat theater and 10,000 square feet of meeting space, is anticipated to open in 2007. AmericaSmart Atlanta has acquired the former Greyhound Lines terminal on Andrew Young International Boulevard and will undertake a 2-million-square-foot expansion of its 6.2 million square-foot wholesale trade mart complex. The Atlanta Station, a 140-acre, $2 billion-dollar mixed-use development in midtown whose first phase is anticipated for spring 2005, will include 12 million square feet of retail, office, residential and hotel space and 11 acres of public parks. The Atlanta History Center has begun construction of a new 20,000 square-foot wing dedicated to memorializing the 1996 Summer Olympic Games, with opening anticipated for 2006. The $130 million expansion of the Woodruff Arts Center and the High Museum of Art, which will more than double the size of the museum’s current facilities, has broken ground and is anticipated to open in November 2005. The Center for Disease Control (CDC) is building a $62.5 million visitor’s

31 center anticipated to open in 2005, while the Atlanta Symphony Orchestra announced that it will break ground in 2005 for the construction of a new $240 million facility, which will house an office building and a 2,350-seat chamber hall, with completion anticipated for 2009.

The revitalized central business district will be the location of the most anticipated attraction to open in 2005. The 5-million-gallon Georgia Aquarium will be one of the largest and most elaborate in the nation, featuring more than 50,000 freshwater and saltwater fish and mammals. The 400,000 square-foot facility is anticipated to open in fall 2005, with visitation anticipated to top 2 million visitors during its first year of operation. Additionally, The World of Coca-Cola will relocate from its underground Atlanta site to a new area adjacent to the aquarium, with opening anticipated for late 2006/early 2007. The World of Coca-Cola is currently the most visited indoor attraction in Atlanta and the second-most-visited corporate attraction in the world, and its new 75,000 square- foot facility, together with the adjacent Georgia Aquarium, is anticipated to further enhance northwest downtown Atlanta as a prime tourist location.

Atlanta continues its effort to secure its position as the permanent location for the Secretariat of the proposed Free Trade of the Americas (FTAA). The city faces strong competition from three other cities: Miami, Florida; Panama City, Panama; and Port-of- Spain, Trinidad, all of which enjoy locations more accessible to member countries. A decision regarding the permanent location for the Secretariat is anticipated in mid-2005.

Supply Changes In 2004, Atlanta’s lodging inventory increased by 1.6%, totaling approximately 748 properties and 92,688 rooms. Atlanta remains one of the country’s largest hotel markets, a consequence of a hotel construction boom that began in the late 1980s and was further exacerbated by its hosting of the 1996 Summer Olympic Games. The large competitive base has forced many properties to continue to update their facilities, with many expanding their meeting space. Atlanta’s lodging inventory is anticipated to increase at a lower pace by approximately 1,000 rooms in 2005, mostly concentrated in the Midscale and Economy segments.

32 Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Springhill Suites Buckhead 220 May 2005 North Point Atlanta Buckhead Hospitality Twelve Atlantic Station 101 Fall 2005 Novare Group and Wood Partners The Glenn Hotel Downtown 110 Late 2005 NAV W Hotel Buckhead Buckhead 225 2006 Starwood Hotels and Resorts Worldwide, Inc.

Major Transactions in 2004 In 2004 there were several hotel transactions in Atlanta, concentrated mainly in the Upper Upscale segment. These included the sales of the 400-room Marriott Perimeter Center for $27.5 million ($68,700 per room), the 401-room Atlanta Marriott Northwest for $14 million ($35,000 per room), and the 222-room Atlanta Marriott Norcross for $14 million ($63,000 per room) by Host Marriott, the sale of the 316-room Atlanta Marriott Alpharetta for $100 million ($316,500 per room) by Blackacre Capital Management and Marriott International, the sale of the 232-room Radisson Hotel Atlanta Airport for an undisclosed amount by College Park Holdings, LLC, and the sale of the 495-room Crowne Plaza Hotel Atlanta – Ravina for $66.6 million ($134,500 per room) by Wyndham International.

Political/Economic/Legal Changes The Atlanta region has experienced tremendous growth and economic prosperity in recent decades. Having doubled its population since 1980, the region is now home to over half of the population of the state of Georgia, and has been consistently ranked as one of the nation’s best metropolitan areas for business and career development.

33 regions and markets boston BOSTON

Introduction With market fundamentals improving throughout 2004, the Boston lodging market finally began recovering from significant RevPAR declines in 2001, 2002, and 2003. This improvement was fueled by a generally stronger regional economy, an increase in corporate transient demand and international visitation, new activity at the new Boston Convention and Exhibition Center, and several high profile political and sporting events. Nevertheless, despite the recent improvement, the market is still performing at RevPAR levels lower than those achieved in years 1999 and 2000.

Based on November year-to-date data provided by Smith Travel Research, 2004 occupancy increased 4.5 percentage points to 64.9%, while ADR increased an estimated 5% to $123, resulting in a 12.9% RevPAR increase to $80. Nevertheless, this was still below the market’s RevPAR peak of $97 and $109 achieved in 1999 and 2000. In 2005, occupancy is anticipated to increase 2.6 percentage points to 67.5%, while ADR is anticipated to increase 5% to $129, resulting in a RevPAR improvement of 9.2%, to $87.

Market Strengths The completion of primary construction on the ”Big Dig,” combined with a stronger economy and several highly visible, non-recurring events, helped boost demand for the city’s lodging supply in 2004, and such positive trends in lodging demand are likely to continue. Moreover, with limited supply growth anticipated during the next 12 months, occupancy and ADR levels should also strengthen.

36 Lodging Market Occupancy, ADR, RevPAR Performance

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37 Market Challenges In 2004, the Democratic National Convention in July and the Red Sox’ historic World Series win in October, assisted in pushing RevPAR up significantly in those months, with a 27.4% and 12.5% RevPAR increase in July and October 2004, respectively. Without such events, growth in Boston’s lodging market performance metrics could be more modest in 2005.

In 2005, Cambridge is anticipated to continue to struggle with higher office vacancy rates; nevertheless, the recent stabilization in Boston’s office occupancy, and several notable commercial property transactions, signals that Cambridge’s market should continue to demonstrate moderate improvement over the next 12 months.

Demand Changes Besides the events in 2004, corporate transient demand started to improve as a result of increased economic activity across many industries, particularly high tech, biotech and pharmaceuticals, all major demand generators in the region. While there is some concern that consolidation in the financial services industry—with the Manulife purchase of John Hancock and the Bank of America purchase of Fleet—could have a negative impact on certain submarkets in 2005, overall the corporate transient demand growth trend is anticipated to continue.

In 2004, a better economy domestically and an improved geopolitical situation, combined with a weak dollar, supported increases in both domestic and international visitation. This trend was further encouraged by expanded international and domestic air lift by American Airlines, Alitalia, Lufthansa, AeroMexico, Virgin Atlantic, and low cost domestic carriers such as Jet Blue and Song. Year-to-date through September 2004 passenger volume at Logan Airport increased 15.8%, with international passenger traffic up 12.6%.

The new $800 million Boston Convention and Exhibition Center (BCEC) opened in June 2004, providing a major boost for Boston in terms of its ability to offer first class meeting and convention facilities for large groups. While the initial booking pace was slower than anticipated, the presence of both the four-day Democratic National Convention (late July) and the Macworld Expo (mid-July) have allayed some fears that the city would have a difficult time leveraging its facility without adjacent hotel inventory in its early years.

38 In 2005 the BCEC is anticipated to host several large events likely to attract significant out-of-area visitation including the 25,000-attendee International Boston Seafood Show, the 10,000-attendee SAP Sapphire event, and the 6,000-attendee InterGlassMetal/ Fenestration event.

The new Central Artery is anticipated to significantly improve traffic flow in the downtown area, while the Rose Kennedy Greenway promises to change the downtown’s character over the next three to five years, adding several new points of interest such as a large indoor botanical garden near South Station.

During 2004 the city’s office market continued to struggle, with an additional 1.2 million square feet of vacant space entering the market, to reach an overall inventory of 11 million square feet. While some estimate that as much as 18.5% of downtown office space is currently vacant, sector fundamentals are beginning to demonstrate some signs of improvement. In 2004 there were some signs of increased lease activity with several large new or continuation leases signed, including the lease of 195,000 square feet by Evergreen Investments, 156,000 square feet by Choate, Hall & Stewart and 146,000 square feet by Ernst & Young LLP.

Supply Changes In the next several years Boston’s lodging supply is anticipated to grow modestly, with nearly 1,750 rooms in the construction and final planning stages and another 4,700 in earlier planning stages, with many of those not anticipated to reach fruition. The most prominent projects in development include the following: Development Management’s Regent Battery Wharf mixed-use project on the waterfront, to include luxury condominiums, retail, marina and Regent Hotel; the 790-room Westin Hotel scheduled to open adjacent to the BCEC in June 2006; the new Inter-Continental Boston at 500 Atlantic Avenue; the CWB Boylston mixed-use project in Back Bay, which will include luxury condominiums and a Mandarin Oriental hotel; and the Carpenter and Company Charles Street Jail project. The most prominent recently opened hotel to join the city’s guestroom inventory is the Jurys Doyle Hotel in Back Bay, which Saunders Hotel Group developed out of the old police headquarters building on Stuart Street and leased to the Irish lodging company.

39 Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes and renovations.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Courtyard South Dorchester 164 February 2005 Jiten Hotel Boston Management, Inc. Residence Inn Norwood 128 May 2005 K W Hotel Corp Charles Street Beacon Hill/West End 305 July 2005 Massachusetts Jail Hotel General Hospital/ Carpenter & Co. Mandarin Oriental Back Bay 168 May 2006 CWB Boylston Westin Boston Waterfront (South 790 June 2006 Massachusetts Seaport Boston) Convention Center Authority (MCCA) Inter-Continental Financial District 424 2007 Boston Edison Co – Boston NSTAR Services Renaissance Hotel South Boston 450 2007 South Boston Waterfront Development, LLC Regent Hotel Waterfront (North 150 2007 Development End/Financial Management District) Corporation Russia Wharf Hotel Financial District 300 2008 Equity Office Properties Loews Hotel Theater District 390 TBD Sawyer Enterprises

Major Renovations in 2005 PROPERTY LOCATION UNITS SCHEDULED COST DEVELOPER/ OPENING DATE (MILLIONS) OWNER The Fairmont Back Bay 383 Completed $34 FHR Real Estate Copley Plaza April 2004 Bullfinch Hotel North Station 80 Completed NA Cresset Merrimac September 2004 Hotel, LLC Tremont Boston - Theater District 322 Scheduled $6 Highland A Wyndham Completion 2005 Hospitality Historic Hotel Corporation

40 Major Renovations in 2005 (continued) PROPERTY LOCATION UNITS SCHEDULED COST DEVELOPER/ OPENING DATE (MILLIONS) OWNER Eliot Suite Hotel Back Bay 95 Scheduled NAV Dora Ullian Completion Early 2005 The Four Beacon Hill 272 Restaurants, func- $45 Hasma Seasons Hotel tion and public Holdings, LTD spaces completed in 2004; Scheduled completion of guest rooms: 2006

Major Transactions in 2004 In 2004 there was minimal hotel transaction activity in the Boston market, as the only major hotel transaction during the year involved the sale of the 322-room Tremont Boston in August by Wyndham International to Highland Hospitality Corporation for $43.3 million ($134,500 per room).

Political/Economic/Legal Changes Logan Airport, New England’s largest transportation center, continues its significant renovation and expansion plans. In order to better serve the 37.5 million passengers projected to pass through it in 2010, the airport’s $1 billion modernization plan focuses on critical landside and airside improvements, including security. Such improvements include the redevelopment of Terminal A, anticipated to open in spring 2005, and the planned construction of a new runway, anticipated by some estimates to increase the airport’s capacity by 75,000 flights per year and reduce flight delays by 20%-25% annually.

41 regions and markets chicago CHICAGO

Introduction While the lodging market nationwide continues to recover, Chicago has demonstrated signs of more gradual improvement. Though the market’s performance improvements have been lagging most other markets, there are bright spots which show growth potential for lodging demand going forward. Improved passenger volume at the world’s busiest airport, O’Hare International, coupled with the newly expanded Midway Airport, increased traffic nearly 10% in 2004. Chicago has been investing significantly in improving the cultural atmosphere of the city. The recent opening of Millennium Park, and an increased number of day visitors from Michigan, carried by Amtrak’s new Blue Water service, should both help to provide a modest jumpstart to the city’s positive lodging performance gains in 2005.

Based on November year-to-date data from Smith Travel Research, it is estimated that ADR remained stable in 2004 at $102 while occupancy increased 1.6 percentage points to 62.2%, resulting in a 2.5% increase in RevPAR. Over the next year, demand for room nights in Chicago is anticipated to outweigh additional new supply nights, which should manifest itself in RevPAR growth for the city’s lodging market. In 2005 we anticipate occupancy rising 1.8 percentage points to 64% and ADR increasing 1%, for a 4% RevPAR gain to $66.

Market Strengths The Chicago market continues to place increased emphasis on capturing year-round meetings and conventions by expanding convention space, improving accessibility for out-of-town visitors and enhancing the cultural attractions throughout the city. Strong initial meeting and convention bookings have been recorded at McCormick Place for 2005 and 2006. Significant hotel room supply growth is planned, with the addition of approximately 1,800 rooms planned for the city’s supply in 2005, compared with only

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45 596 rooms in 2004 and 305 rooms in 2003. Furthermore, Chicago’s lodging market saw five major transactions occur during 2004, and transaction activity is anticipated to continue to be strong through 2005. Given the size of the development pipeline and the amount of transaction activity, owners and operators are demonstrating confidence that Chicago’s economy and lodging market are poised for strong improvement over the next 12 months.

Market Challenges RevPAR trends in the O’Hare International Airport submarket remain soft. O’Hare may be the busiest airport in the world, but the submarket is overbuilt and newer hotels in downtown Chicago have been successful in luring travelers away from the O’Hare properties because of better facilities and attractive rates. Furthermore, Chicago’s meeting and convention business during the past several years has not generated the compression needed to generate overflow demand for suburban submarkets.

Demand Changes Chicago is home to McCormick Place, which is currently undergoing an $850 million expansion scheduled for completion in late 2007, which would make it the largest convention center in the country. McCormick Place currently contains 2.2 million square feet of exhibit halls, 112 meeting rooms, assembly seating for 10,000 people, and a 4,200-seat theater. Upon completion, the expansion will add an additional 470,000 square feet of exhibition space and 250,000 square feet of meeting space, which will increase the capacity for simultaneous events and conventions and continue to help convention-oriented hotel properties smooth the typical seasonality of their group segment demand.

While McCormick Place provides a source for lodging demand and increased visitation to the city, convention organizers report that setting up or dismantling an exhibit in Chicago can cost three times as much as in other cities due to existing union labor rules which necessitate large crews and significant overtime. Also, Chicago has been steadily losing market share to other venues including Las Vegas and Orlando. In 2004, the National Hardware Show announced it was moving to Las Vegas, and there are reports that the National Restaurant Association is considering moving its show, along with the estimated $100 million in direct spending its 70,000 attendees generate annually, to another city.

46 With the previously stated expansion underway, Chicago hopes it can more competitively compete for convention demand.

Downtown Chicago’s $475 million Millennium Park opened in July 2004. The 24.5-acre park has become a center for art, music, architecture, landscape design, and special events and has sparked a significant revitalization of the surrounding area with new restaurants and retail outlets opening nearby. Main attractions located throughout the park include the Jay Pritzker Pavilion for performing arts, an indoor year-round theater, a restaurant, an ice-skating rink, a contemporary garden, various sculptures, fountains, landscaped walkways and green space.

Amtrak unveiled its “Blue Water” service in April 2004, which links nine Michigan communities with Chicago. The new service allows passengers to make same day return trips between Michigan and Chicago. This service is anticipated to generate positive economic impact for the city through direct spending by the increased numbers of day travelers, although the effect it will have on the city’s downtown hotels, if any, remains to be seen.

Both O’Hare International Airport and Midway Airport experienced significant growth during 2004, with year-to-date passenger volume for the two airports increasing by 9.5% over the corresponding period in 2003. Continued growth in passenger volume at O’Hare should create an opportunity for the properties in the airport’s submarket to recapture the demand currently absorbed by the downtown market; however, these airport hotels will likely need to upgrade guestrooms and adjust pricing to effectively compete. Midway Airport, located 10 miles southwest of Chicago, recently completed its eight-year redevelopment program, resulting in a new 941,000 square-foot terminal building with concourses and 43 gates, shops and restaurants, a six-story parking garage and airport roadways.

Planning continues for the development of two waterparks in the suburban Chicago city of Gurnee, Ilinois. Six Flags Inc. is planning a $35 million outdoor waterpark on 13 acres, which will feature 25 water slides, a 500,000-gallon wave pool, and the world’s largest waterplay structure. Also, Great Northern Resorts LLC is planning a $130 million attraction which will include a hotel, 66,000 square-foot indoor water park and a conference center.

47 Supply Changes Over the past five years, Chicago has experienced an increase in lodging supply of more than 11%, with higher than 30% supply increases in the Luxury and Midscale without Food and Beverage chain scale segments. The number of rooms available in Chicago increased slightly in 2003 and 2004, and new projects anticipated to open in 2005 suggest an increase of 2.1%. As lodging demand gains are anticipated to exceed supply increases, Chicago should experience moderately positive RevPAR gains this year.

Developers are increasing their focus on condominium hotels in the city. Four projects are currently in the planning phases: Falor Companies is currently redeveloping the Hyatt on Printers Row and converting the Century Building offices into hotel condominium units. The Trump Organization has sold over half of the 227 units in its planned Trump Tower, to be built on the former Chicago Sun-Times site. Elysian Development Group LLC is breaking ground on the Elysian Hotel at Rush and Walton Streets, containing 90 hotel condos, 81 regular hotel rooms, and 50 private condominiums.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions

PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Renaissance O’Hare International 362 February 2005 O’Hare Chicago Chicago O’Hare Airport Hotel, LLC Hotel Staybridge Suites West Huron 209 Construction starting Dellisart Lodging 1st quarter 2005 Hilton Garden Inn Midway Airport 174 Spring 2005 The Weglarz Company at Midway Airport Hilton Garden Inn Des Plaines 253 Summer 2005 Raymond Management Company LaQuinta Inn Des Plaines 205 Late 2005 LaQuinta Inns, Inc. & Suites

48 Planned Additions (continued)

PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Baymont Inn NW corner of Rush 226 2005 Marcus Corp. and Suites and Ontario Elysian Hotel 912-920 North Rush 90 condo-hotel units; Spring 2006 Elysian Development Street 81 hotel rooms Group Trump Tower 401 N. Wabash 461 condo units; 2008 Trump Organization Avenue 227 condo-hotel units

Major Transactions in 2004 Hotel transaction volume and prices should continue to increase in 2005 as compared to previous years. As a result of the June 2004 merger between Harrah’s Entertainment and Caesar’s Entertainment, the companies agreed in September 2004 to the sale of four casino hotels to Colony Capital for a total of $1.24 billion, which included the 293- room Harrah’s Chicago East. In April, Host Marriott Corporation purchased the 455-room Embassy Suites Lakefront for $89 million ($195,604 per room). Other transactions finalized in 2004 include the sale of the 751-room Westin Michigan Avenue by Westin Hotels LP to JER Partners Acquisitions III LLC for $137 million ($182,423 per room) in October, and the sale of the 161-room Hyatt Printers Row by MHJV LLC to Falor Companies for $18 million ($111,800 per room), which occurred in July. Lastly, a partnership comprised of affiliates of Tishman Realty Corporation and JPMorgan Fleming Asset Management Corporation purchased the 362-suite Renaissance Chicago O’Hare Hotel in November. The property was completed in 2003 but never opened under its original ownership. It will officially open its doors in February 2005.

Political/Economic/Legal Changes After peaking at 7% in January, Chicago’s unemployment rate decreased to 6.2% in May and remained flat until September, when it decreased further to 5.8%; however, the unemployment trend may stabilize or rise as technology service companies continue to move to less expensive facilities overseas and corporate headquarters such as those for Amoco, Bank One, and Quaker Oats Company relocate.

In November 2004, the city of Chicago approved a 99-year lease of the Chicago Skyway (a 7.8-mile toll bridge which links Chicago to Indiana) to the Cintra-Macquerie Consortium

49 for $1.8 billion. The lease serves as an additional revenue source for the city, which will be used to reduce the city’s general debt and create a long-term reserve fund.

BP PLC, one of the world’s largest fuel companies, announced in October that it has selected Chicago as the global headquarters for its olefins and derivatives subsidiary, which primarily manufactures petrochemicals to make plastic goods. Once this subsidiary establishes itself as a stand-alone company, it will be one of the five largest petro- chemical companies in the world, with assets over $8 billion. At the moment, the company’s final plans for locating its operations in the city are undecided.

50 regions and markets dallas DALLAS

Introduction Dallas lodging market fundamentals continue to improve at a moderate pace. With the recent $130 million expansion of the convention center unveiled in late 2003, ongoing airport renovations, and an increase in business travel, Dallas increased its occupancy levels in 2004. In 2000, Dallas hotels achieved occupancy of 64.6%, a level that sub- sequently dropped each year to a low of 52.9% in 2003. While still below the market’s peak occupancy level of 2000, hotel occupancy in Dallas improved in 2004 to an estimated 56.1% based on November year-to-date data provided by Smith Travel Research, an increase of 3.2 percentage points over 2003. Pricing remains challenged, as room rates were essentially unchanged in 2004. This increase in occupancy, coupled with stable room rates, resulted in an estimated RevPAR increase of 5.9% to $41 in 2004, still approximately $12 below the market’s peak RevPAR performance in 2000.

In 2005, occupancy levels are anticipated to increase 1.1 percentage points to 57.2% and ADR is anticipated to increase 3% to $76, with RevPAR increasing 5.1% to $43.

Market Strengths The Dallas market is in a position to gain from the improving economy and corporate environment as business travelers hit the road again. Increased corporate travel is anticipated to significantly affect the Dallas market due to the concentration of nearly 200 businesses that have either a corporate or regional headquarters located in the downtown Dallas area. In addition, the local lodging pipeline continues to shift towards the Luxury and Upscale segments, with the focus on large mixed-use residential, hotel and retail projects. These projects include the W, as part of the Victory Project, and the Ritz-Carlton.

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53 Market Challenges While Dallas has a reputation for big businesses, it also is known for its big expanses of land. Relative to comparable cities of the same size, Dallas generally lacks a cohesive downtown district, making it difficult for visitors to navigate the city with ease. The availability of undeveloped land results in a relatively low barrier to entry and increased potential for new lodging supply to enter the market. The development pipeline indicates a moderate increase in lodging supply in the near term; however, as performance of the current supply improves, it is likely that development activity will accelerate.

Demand Changes The Dallas Cowboys are currently planning their new stadium in Arlington, Texas, 20 miles west of downtown Dallas. After much deliberation and a lengthy approval process, the stadium was approved by voters in November 2004. The city of Arlington is anticipated to provide financial support of half of the cost of the stadium up to $325 million. The Cowboys are anticipated to provide the additional funds necessary to complete the stadium. The city will fund its investment in the stadium by increasing city sales tax by 0.5%, hotel occupancy tax by 2% and car rental tax by 5%. A study by Economics Research Associates projects that the 75,000 seat retractable-roof stadium could generate up to $238 million for the local economy each year, as well as $5 million in rent and sales tax revenue. Groundbreaking is scheduled for early 2006, with the Cowboys playing their first game at the facility during summer 2009. Stadium supporters are hopeful that the venue will be ready for Super Bowl host contention beginning with 2011’s game.

The Victory project, a 72-acre $3 billion mixed-use project developed by Hillwood Southwest Sports Realty near downtown Dallas, continues to evolve. The latest development is the construction of the W Hotel and Towers, as well as the Lift Boutique, a 20,000 square- foot two-level department store. In November 2004, the Dallas Area Rapid Transit (DART) opened a new rail station at the Victory development. The addition of the DART station should encourage visitation to the development as well as to the nearby American Airlines Arena. The three-phase Victory development is scheduled for overall completion by 2015.

The Dallas/Fort Worth International Airport Capital Development Program continues to progress with the opening of Terminal D and the Skylink. International Terminal D is a 2 million square-foot facility built to handle 12.8 million passengers annually. Scheduled

54 to open in early 2005, the expanded Terminal should allow increased traffic at the airport. In addition, the Skylink will also open in early 2005 as the world’s largest high-speed airport train, uniting Terminals A,B,C,D and E.

Following a reorganization of convention center management, former Dallas director of convention and event services Frank Poe has returned to Dallas after seven years away, with many believing he is a key to re-invigorating Dallas’ convention sales, which have decreased more than 30% from the highs in the late 1990s. Convention attendees are anticipated to increase from 680,000 attendees in 2004 to 717,000 attendees in 2005.

Supply Changes New supply in Dallas is coming online at a moderate pace, and is anticipated to increase 3.2% in 2005. As Dallas currently has few luxury properties, new development in the market is focused on this segment. More than 55% of the new development pipeline in Dallas falls in either the Luxury or the Upscale chain segments, usually under the guise of large mixed-use projects such as the Victory and West Village developments. Some recent transactions of full-service hotels indicate that buyers are looking at opportunities to reposition such assets toward a more upscale orientation.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes. Planned Additions

PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Springhill Suites Airport (Terminal D) 298 January 2005 Hyatt Hotels Atlanta Buckhead W Hotel (part of Downtown 251 2006 Hillwood Capital Victory project) Hotel Santa Fe Mockingbird Lane 185 2006 Realty America Group and Behringer Harvard Funds Ritz Carlton Uptown 215 2007 Crescent Real Estate Equities Convention Convention Center 1,200 2008 City of Dallas Center Hotel

55 Major Transactions in 2004 There were three major hotel transactions in Dallas in 2004 that involved the sale of full-service, upscale hotels by prominent Lodging REITs. The Sheraton Brookhollow, a 348-room property, was sold in February 2004 by MeriStar Hospitality to a Dallas investment group for an undisclosed amount. The Dallas/Fort Worth Marriott, located at the Dallas/Fort Worth International Airport, was sold by Host Marriott in May 2004. The 491- room property sold for $59 million, or approximately $120,000 per room, to Highland Hospitality, which has focused its efforts on acquiring hotels in urban and airport markets.

The 506-room Harvey Hotel sold in October 2004 at an undisclosed price. FelCor Lodging Trust, based in Dallas, sold the property to the Procaccianti Group, who is anticipated to try to enhance the value of the property through a repositioning and upscale re-branding.

Political/Economic/Legal Changes After years of negotiating over public financing for a Dallas Convention Center headquarters hotel, local authorities have come to a compromise. While other proposed deals have relied solely on increased occupancy taxes, the new plan includes a lease rebate and no property taxes for 10 years. Hilton, Marriott and Westin have all submitted proposals for the project.

56 regions and markets hawaii HAWAII

Introduction Hawaii continued to lead the nation in 2004 with the strongest statewide occupancy and ADR levels, according to November year-to-date data provided by Smith Travel Research. Approximately 6.3 million passengers traveled to Hawaii by air based on year- to-date November 2004 data, representing an increase of approximately 8.5% versus the corresponding period the previous year, due to increasing domestic travel from the U.S. mainland and the return of the Japanese market.

Hawaii’s lodging fundamentals in 2004 outperformed 2003 with higher levels of growth for both occupancy and ADR. Occupancy is anticipated to increase by 5.2 percentage points to 77.8% in 2004, while ADR is anticipated to increase approximately 4.3% from $145 to $151, resulting in a RevPAR increase of approximately 11.8% from $105 to $118.

Greater renovation activity in the market and limited hotel supply increases due to governmental development restrictions are promising signals for hotel market performance in 2005. Occupancy is anticipated to increase 1.2 percentage points to 79% in 2005, while ADR is anticipated to increase 4% from $151 to $158, resulting in a RevPAR increase of 5.6%, from $118 to $124.

Market Strengths Since the 1950s the Hawaiian Islands have enjoyed strong brand awareness among travelers due to the area’s ideal climate, culture, history, and overall high visitor sat- isfaction. Visitation to Hawaii should continue to improve in 2005, due mainly to healthy travel from the U.S. mainland and the return of Japanese visitors. Lodging revenues surpassed $2 billion in September 2004, with the luxury lodging market garnering approximately half of those revenues and increasing 12% over 2003. Hawaii’s lodging

58 Lodging Market Occupancy, ADR, RevPAR Performance

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59 fundamentals are anticipated to steadily improve in 2005 due to increased leisure travel, the growing military presence and bookend stays associated with an expanding cruise industry.

Market Challenges Due to its geographic isolation, Hawaii’s main challenge continues to be high travel costs to and within the islands and airline industry volatility, as inter-island travel prices have risen since the bankruptcy of Hawaiian and Aloha Airlines. Both Hawaiian and Aloha Airlines, the island’s two major carriers, have shifted to a demand-based fare structure, forcing airfare prices for inter-island travel to increase to as much as $200 roundtrip, discouraging island hopping by leisure travelers.

Demand Changes The number of visitors to Hawaii from Japan reached approximately 1.3 million year-to- date November 2004, up 12.5% from 2003, influenced by the 4.2% Japanese gross domestic product (GDP) growth in 2004. The Hawaiian lodging market should benefit from the 2.2% anticipated Japanese GDP growth in 2005, in addition to the effects of the weak dollar, which was the equivalent of 103¥ as of December 2004, as compared to 130¥ for the first half of 2002.

In addition to the return of the Japanese visitor, U.S. east coast visitation to Hawaii continues to rise, increasing 9.4% year-to-date November 2004. As daily expenditures and length of stay typically exceeds that of the U.S. traveler originating in the Western states, such increases in visitation have a particularly beneficial effect on lodging revenues.

Approximately $4 billion of military expenditures circulate through Hawaii’s economy each year, making the state second only to Virginia in per capita military spending. Some $10 billion will be spent on building, renovating, and managing a portion of Hawaii’s 15,000 military homes for the next 50 years, and the Hawaii lodging industry is anticipated to benefit from such an increase in construction development.

Cruise lines are the fastest growing segment of Hawaii’s tourism industry. Approximately 245,000 cruise line passengers are anticipated to visit the islands in 2004, representing an increase of approximately 86% over 2000 levels. Norwegian Cruise Line (NCL) is

60 expanding its presence in Hawaii and anticipates increasing its passenger count to the islands to approximately 520,000 by 2007 with its exclusive right to operate year-round in Hawaii. However, infrastructure limitations, particularly harbor size and staffing issues, have burdened the cruise industry in 2004. NCL is anticipated to add two additional U.S. flagged ships to their current fleet in Hawaii within the next two years.

Inter-island travel will benefit from Hawaii Superferry, which is anticipated to deliver its first ship in late 2006, with a second ship following in 2007. This 900-seat ferry, which has the capacity for 282 cars, will be able to shuttle passengers to and from each of the four major island ports in three hours twice per day. The ferry-service is anticipated to increase inter-island travel, as pricing will be lower when compared to the current high costs of flying.

Supply Changes The development and conversion of many hotels — in part or in whole — to condominiums and vacation ownership is reducing the supply of available hotel rooms. Examples include Westin Kaanapali Ocean Resort Villas, Maui Marriott Beach Club, and Fairfield Hawaii at Waikiki Beach Walk, with Fairfield converting 480 guestrooms into 195 condos. Since conversions typically reduce the number of rooms available at a resort, the trend of conversion is anticipated to benefit occupancy, and possibly rate, throughout the Islands.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions Due to the unavailability of key locations and the restrictive governmental viewpoint of hotel development, few hotel additions are currently in the planning stages. To accom- pany the JW Marriott Ihilani that is already present at Ko Olina, West Oahu, a 250-room luxury hotel and condominium managed by Ritz Carlton is currently in planning. Kukui’ula Development Co., a joint venture between A&B and DMB Associates, has received approval for their 1,000-acre residential resort development on Kauai. Along with housing a golf course and parks, a 62-room hotel is in early planning. Additionally, the Keaau Hospitality Group is in the planning stages of developing and operating a plantation-era themed 60-room hotel in Keaau, Big Island.

61 Major Renovations in 2005

PROPERTY LOCATION UNITS SCHEDULED COST COMMENTS OPENING DATE (MILLIONS) Hilton Waikoloa Waikoloa, 1,240 Late 2005 $18 Renovation of Village Big Island Palace and Ocean Towers Sheraton Waikiki Waikiki, Oahu 1,800 Late 2007 $43 Room renovation Coco Palms Kapaa, Kauai 175 NAV $200 Proposed Resort comprehensive renovation

Major Rebranding

PROPERTY FORMERLY LOCATION UNITS Manele Bay Hotel – Manele Bay Resort – Lanai City, Lanai 249 A Four Seasons Resort Luxury Collection

Lodge at Koele - Lodge at Koele – Lanai City, Lanai 102 A Four Seasons Resort Luxury Collection

Kapalua Bay – Kapalua Bay – Kapalua, Maui 191 A Renaissance Resort Luxury Collection

W Wailea Renaissance Wailea Wailea, Maui 345 Beach Resort Courtyard by Marriott Kauai Coconut Kapaa, Kauai 312 Kauai at Waipouli Beach Beach Resort

Major Transactions in 2004 Maui was the most active transaction market beginning with the 450-room Fairmont Kea Lani sold by Fairmont Hotels & Resorts to Host Marriott in June for $355 million, or approximately $790,000 per room. The 377-room Four Seasons Wailea was sold in July to MSD Capital LP, a private investment fund company, by SCP (Maui 5) Inc. for $280 million, or approximately $743,000 per room. Additionally, as part of a major portfolio sale, CNL Hospitality purchased the 780-room Grand Wailea Resort & Spa from KSL Recreation Corporation in February for $312 million, or $400,000 per room. The 191-room Kapalua Bay Hotel was purchased by a joint venture of Maui Land & Pine, Marriott International, and Exclusive Resorts, LCC; the hotel will be managed by Marriott International and branded as a Renaissance. The 360-room Ohana Maui Islander Hotel in Lahaina was sold to Bay West Investments by SVP Islander for $19 million or $53,000 per room in March.

62 The two-part outer-island disposition strategy for Outrigger Enterprises, Inc. to fund their large-scale Waikiki Beach Walk project was successfully completed in July 2004 with the sale of the 780-room Wailea Marriott Resort on Maui and the 545-room Waikoloa Beach Marriott Resort on the Big Island to Blackstone Real Estate Advisors for an undisclosed price.

Japan-based Kyo-ya Company, Ltd., sold its portfolio of Hawaii, California, and Florida hotels to New York investment fund Cerberus Partners, LP in December for an undisclosed price. The transaction included 4,700-rooms in Hawaii, comprised of The Royal Hawaiian Hotel, Sheraton Moana Surfrider Hotel, Sheraton Waikiki Hotel, Sheraton Princess Kaiulani Hotel, and Sheraton Maui Resort.

The 125-room Kona Village Resort on the Big Island was sold in July to Ty Warner Hotels & Resorts for an estimated $50 million, or $400,000 per room, by Kona Village Associates. The 413-room Sheraton Kauai Resort on Poipu Beach was acquired by Starwood Hotels & Resorts in March from Obayashi Corporation for $40 million, or approximately $97,000 per room. Additionally, the 47-room Hotel Molokai sold in March to Blue Island Properties by the Keawe Group for $3.4 million, or approximately $72,000 per room.

Political/Economic/Legal Changes Mobil, for the first time in its nearly 50-year history of rating hotels, has gone beyond the contiguous United States to include Hawaii in 2005. Recently, the Four Seasons Wailea on Maui achieved a five-star rating, representing Mobil’s highest-rated hotel in the state. Four-star recipients include the Ritz Carlton Kapalua, Kahala Mandarin Oriental, Halekulani, and Four Seasons Hualalai.

63 regions and markets las vegas LAS VEGAS

Introduction Significant merger activity in 2004 is certain to continue to reshape the Las Vegas lodging industry in 2005. Harrah’s Entertainment Inc. is currently acquiring Caesars Entertainment Inc. for an estimated $9.4 billion, a merger that will create the largest gaming company in the world. Also, Mandalay Resort Group is anticipated to acquire MGM Mirage for approximately $7.9 billion, with cash payments of approximately $75.5 million, a transaction anticipated to close by the end of the first quarter of 2005.

In the midst of this transaction activity, the Las Vegas lodging market continues to be one of the top performing markets in the United States. In 2004, the market benefited from an increase in domestic travel coupled with increases in local area investment. Approximately 35 million people visited Las Vegas in 2004 with September year-to-date passenger traffic at McCarran International Airport up 14.7% as compared to the previous year. Lodging performance is anticipated to stabilize in 2005, with additional demand associated with the year-long celebration of Las Vegas’s centennial matching the supply increases associated with the opening of several new properties including the 2,629- room $2.6-billion Wynn Las Vegas.

In 2004, Las Vegas lodging and gaming fundamentals improved significantly. According to the Las Vegas Convention and Visitors Authority (LVCVA), occupancy levels year-to- date through September reached 89.6%, a 3.7 percentage point increase over the corresponding period the previous year, while ADR increased to $89, an 8.5% improvement. Total gaming revenue for Clark County (including Las Vegas, Mesquite, Primm, and Laughlin) year-to-date through September 2004 reached approximately $6.5 billion, a 10.4% increase over the corresponding period the previous year, with many gaming companies reporting significant year-over-year income gains as of year-end 2004.

66 Market Strengths The Las Vegas market should continue to benefit from strong convention and group demand in 2005. Additionally, the market should benefit from the marketing exposure generated by new and highly-anticipated hotel and casino openings, particularly the Wynn Las Vegas Resort in April 2005.

Market Challenges With over 6,000 rooms under construction and approximately 12,000 rooms in various stages of planning, the main challenge for such a large lodging and gaming market, where the supply itself often generates the demand, will be the threat of over-supply should the economy, or market, cool, and the potential effects on RevPAR and profitability at older, less competitive properties.

Demand Changes The Las Vegas convention market continues to perform strongly, with 17 tradeshows held in the last quarter of 2004, and an estimated 387,000 convention attendees, the largest of which was the Specialty Equipment Market Association and Automotive Aftermarket Products Expo in early November, drawing approximately 100,000 attendees. The attendance rate for the last quarter of 2004 represented an increase of 10.7% relative to the corresponding period the previous year, with an estimated economic impact of approximately $539.9 million to the Las Vegas metropolitan area.

LVCVA recently added approximately $52 million to their 2005 budget, with $9.4 million allocated for advertising Las Vegas to convention and leisure travelers, bringing the largest bureau advertising budget nationwide to approximately $76.1 million for the upcoming year. The budget increase incorporates 2004’s unused funds and the Authority’s challenge of filling 8,000 new hotel rooms in 2005.

Several large projects in development are worth mentioning as demand changes, given the fact that their gaming and entertainment components are likely to induce significant demand to the market once open. Mirage recently announced plans for a $4 billion project to be completed over the next several years. “Project CityCenter” is anticipated to consist of a 4,000-room hotel with a casino, three boutique hotels, 550,000 square feet of retail space, numerous restaurants and clubs, 1,650 luxury condominiums, a

67 private residence club, and a condominium-hotel. Construction on the first phase is anticipated to begin in 2006 on 66 acres of land adjacent to the Monte Carlo and Bellagio resorts. The development is anticipated to further establish Las Vegas as a place to live and work and is anticipated to create approximately 12,000 jobs upon completion in 2010. Additionally, a 1,500-room resort complex on Harmon Avenue is in the early planning stages, with completion anticipated in 2007. The $400-million complex is anticipated to contain a 28-story hotel tower with 60,000 square-foot casino, restaurants, a health spa, and meeting space.

The Related Companies are currently developing the World Market Center in downtown Las Vegas. The 1.3-million square-foot first edition of the center will bring the furniture industry to the area and has the potential to make Las Vegas the center of furniture design and home accessories. The new center, which will eventually contain at least 7.5 million square feet, is anticipated to revitalize the downtown market. The first furniture show will be held in July 2005 and will include approximately 2.3 million square feet of exhibits, drawing an estimated 40,000 to 60,000 attendees. Upon completion, the center is anticipated to generate approximately $60 million in additional tax revenue for Las Vegas and Nevada and create an additional 1.7 million travelers to the area each year. The center is also anticipated to create approximately 35,000 jobs in downtown Las Vegas and have an approximately $1.5 billion impact on annual personal income.

Supply Changes Las Vegas experienced an increase of approximately 1.3% in lodging room supply through September 2004, versus the corresponding period the previous year. This trend is anticipated to continue in 2005, with 6,156 new hotel rooms currently in construction and over 12,000 new hotel rooms in various stages of planning, according to Smith Travel Research. The most anticipated new supply is the Wynn Las Vegas Resort, set to open in April 2005 with approximately 110,000 square feet of gaming facilities, 70,000 square feet of retail, a 130,000 square-foot convention center, 18 restaurants, an 18-hole golf course, a 2,000-seat theater, a full-service Ferrari and Maserati dealership and an art gallery. Wynn recently announced a $900-million addition to this development, which will include a 1,500-suite tower and is anticipated to open in 2007.

68 Several other projects in the pipeline contain residential condominium or vacation ownership components and include the following:

◗ An estimated $1.5-billion high-rise project, the Cosmopolitan Resort and Casino, is being developed by 3700 Associates of Las Vegas on an 8.5-acre site adjacent to the current Bellagio Hotel and Casino. The project, anticipated to open in late 2007 or early 2008, is slated to include 2,400 hotel and condominium/vacation ownership units, approximately 150,000 square feet of convention space, a 70,000 square-foot casino, 300,000 square feet of retail and restaurant space and an 1,800-seat theater.

◗ The first phase of an estimated $1 billion project adjacent and adjoined to the current Las Vegas Hard Rock Hotel and Casino is anticipated to open in 2006. The project would be comprised of four buildings containing 1,500 hotel and residential condominium units, restaurants, nightclubs, retail and fitness facilities.

◗ The first phase of the $300 million Marriott Grand Chateau vacation ownership complex is anticipated to open in August 2005, consisting of a 37-story, 210-unit tower, and to be followed by three additional towers containing the same number of units in each tower.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes, renovations, and closings.

Planned Additions

PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Wynn Las Vegas Las Vegas 2,629 April 2005 Wynn Design & Hotel Casino Development South Coast Las Vegas 670 June 2005 Coast Resorts Hotel Casino Incorporated Red Rock Station Las Vegas 400 June 2006 Station Casinos, Inc. Hotel Casino Conrad Las Vegas Las Vegas 378 January 2007 Hilton Hotel Corporation The Palazzo Hotel Las Vegas 3,000 Early 2007 Venetian Hotel and Tower/Casino Casino

69 Major Renovations in 2005 PROPERTY LOCATION UNITS SCHEDULED COST DEVELOPER/ OPENING DATE (MILLIONS) OWNER Green Valley Henderson 296 April 2005 $40 American Nevada Ranch Resort & Corp/Commercial Spa Addition Caesars Palace Las Vegas 949 Fall 2005 $37 Caesars All-Suite Addition Entertainment

Hotel Closings in 2004

PROPERTY LOCATION UNITS CLOSING DATE COMMENTS Vagabond Inn Las Vegas 126 February 2004 Asbestos and demolition for new construction project Town Hall Casino Las Vegas 357 June 2004 Financial difficulties Days Inn

Major Transactions in 2004 In addition to the corporate-level merger and acquisition activity, two major property transactions occurred in Las Vegas in 2004. The most significant was the sale of the 2,955- room Hilton Las Vegas by Caesars Entertainment in June for approximately $280 million to Colony Capital. The hotel is anticipated to undergo approximately $70 million in renovations over the next two years, focused on remodeling the guestrooms, redesigning the casino, and updating the hotel’s restaurants.

Additionally, the 360-room Binion’s Horseshoe was sold by the Interests of Becky Binion Behnan in March for approximately $20 million to Speakeasy Gaming of Fremont.

Political/Economic/Legal Changes Las Vegas’s October 2004 unemployment rate decreased by 0.5 percentage points from September 2004 to 3.5%, while the unemployment rate in Nevada decreased by 0.3 percentage points to 3.6% during the same period. This marks the lowest unemployment rate during the past 25 years for the state and represents a rate 1.9 percentage points lower than the national rate. Additionally, Las Vegas recently ranked near the top in the Milken Institute’s 2004 Best Performing Cities Index, with the second highest job growth

70 rate over the past five years. Las Vegas ranked first in job growth between April 2003 and April 2004 with a rate of 4.8%.

Job growth in the casino hotels and gaming industry increased 1.5% to 168,400 jobs in October 2004 versus the same period the previous year. This trend should continue as Las Vegas, whose population increased approximately 110% between 1990 and 2003, is anticipated to maintain its status as the nation’s fastest growing city, with a population growth rate of approximately 4% anticipated for 2005.

71 regions and markets los angeles LOS ANGELES

Introduction The Los Angeles lodging market experienced significant growth in average daily room rate and occupancy levels in 2004 versus the previous year. The Los Angeles lodging market benefited from an increase in visitor spending throughout 2004 coupled with an increase in domestic leisure travel, which represents the area’s largest travel segment with opportunity for growth. The market’s recovery is anticipated to continue in 2005, with limited supply additions and improving macroeconomic conditions. For the first time since 2000, international passenger counts at Los Angeles International Airport (LAX) increased by 14.2% year-to-date through September 2004 versus the corresponding period the previous year. Domestic passenger counts increased 10% during the same period. International travel is anticipated to continue to increase throughout 2005 due to additional security measures at LAX and the market’s gradual return to pre-9/11 travel characteristics.

Based on November year-to-date data provided by Smith Travel Research, in 2004, occupancy reached an estimated 71.8% representing an increase of 4.4 percentage points over the corresponding period the previous year, establishing Los Angeles as the fifth-best market in the U.S. in terms of occupancy level. The lodging market will continue to benefit from new development in the office, residential, and entertainment sectors into 2005 in the Downtown, Santa Monica, Pasadena, and Valencia sub-markets.

Occupancy is anticipated to increase 1.1 percentage point to 72.9% in 2005, while ADR is anticipated to increase 4% from $96 to $100, resulting in a RevPAR increase of 5.6%, from $69 to $73.

74 Lodging Market Occupancy, ADR, RevPAR Performance

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75 Market Strengths The Los Angeles lodging market is anticipated to continue to benefit from the combination of a large increase in lodging demand coupled with minimal change in lodging supply throughout 2005. The Downtown and Hollywood sub-markets, particularly, are anticipated to experience healthy performance gains due to continued commercial development and efforts to increase the physical appearance of these areas. Additionally, the planned expansion of LAX is anticipated to increase traffic to and from the area, while the construction of a convention center hotel is anticipated to further strength the downtown and convention markets.

Market Challenges Achieving significant growth in convention-oriented demand and increasing cost for labor benefits will continue to be the market’s major challenges in 2005. In addition, two main travel demand generating industries of the Los Angeles area, international trade and entertainment, have weakening outlooks for 2005, as the international trade industry continues to exist as a fractured industry and suffers from high energy prices while the entertainment industry continues to struggle with labor issues (particularly insurance) and the ever-present threat of outsourcing.

Demand Changes At the end of the second quarter in 2004, Anschutz Entertainment Group (AEG) announced its purchase of Fox Entertainment Group’s 40% share in the Staples Center complex. After being financially hindered for some time, AEG announced plans to begin the $1-billion construction project on 28 acres surrounding Staples Center. The 55-story, 4 million square-foot center is anticipated to house 1,200 hotel rooms, operated by Hilton Hotels Corporation, 100,000 square feet of meeting space, and 100 condominiums on the top floors of the building. Construction of the hotel structure, developed by Wolff Urban Development and Apollo Real Estate, is anticipated to begin in 2005 with an opening date of 2007. The remainder of the complex will include a 7,000-seat theater; a 40,000 square-foot plaza; a 4,000-seat movie theater; numerous shops, restaurants, and nightclubs; a television and radio broadcast center; 5,300 parking spaces; and 4,000 condominium and apartment units. The proposed convention hotel complex,

76 located six blocks from Staples Center, will be the third largest hotel in the county and is anticipated to generate business at the Los Angeles Convention Center.

In April 2004, the Beverly Hills Planning Commission approved plans for the city’s first luxury hotel project since 1991. This $200-million project, Montage Hotel Beverly Hills and Public Gardens, was proposed by the Athens Group and will be managed by Montage Hotels and Resorts. The project will include a 228-room hotel, a 25,000 square-foot retail floor, a 20,000 square-foot health spa, 25 condominiums, and three gardens, which will be open to the general public. A group of residents and merchants recently formed the Campaign to Save Beverly Hills, an initiative to place the approval of the hotel project on the city’s March 8, 2005 ballot.

On October 21, 2004, the $11 billion expansion plans for LAX was approved by the Los Angeles City Council. The initial phase, a $3 billion expansion, is anticipated to increase the current capacity of LAX by 30% to approximately 78 million passengers annually. This is anticipated to have a positive impact on the local economy and generate approximately 12,000 jobs through improvements made to the Tom Bradley International Terminal and the south runway, and the construction of a new rental-car facility. The remaining $8 billion expansion will undergo separate environmental testing before final approval is granted.

The 97-year-old Port of Los Angeles (Port of LA) is currently undergoing an expansion and facelift called the Bridge to Breakwater Waterfront Development. The development, which broke ground in February 2004 with a 10-year timeline, is anticipated to allow the Port of LA to be one of the most user-friendly ports for cruise-ship passengers, and will cover approximately 400 acres along eight miles of the coast. The first phase of the expansion, the $6 million Los Angeles Cruise Ship Promenade, opened in December 2004. Additionally, officials approved a deal with Princess Cruises at the end of August for a one-year trial at the Port of LA, with an option to extend the contract for five years when the initial term expires. The expansion is particularly in response to the recent $40 million expansion of the Long Beach cruise terminal.

Downtown’s Grand Avenue development continues to move forward as new construction begins and designers are chosen. In August 2004, the developer Related Companies

77 was chosen to develop and design the $1.2 billion Grand Avenue project near the Walt Disney Concert Hall. Preliminary plans for the development include a 16-acre park near the Civic Center, along with 2,500 housing units and 350,000 square feet of commercial and retail development. Additionally, in late September 2004, ground was broken on the first new condominium project in Downtown Los Angeles in the past 20 years. The new project, called “E11even,” is located at 1111 S. Grand Ave. and will consist of three buildings comprising 700-750 new homes and is anticipated to bring approximately $250 million in new investment to the Downtown area.

The National Football League (NFL) is considering Los Angeles as a potential market for a professional football team. The project, which has been in planning stages for approximately 16 months, is anticipated to begin with the selection of the site in May 2005 and returning a team to the area by 2008. The NFL is currently considering four stadium location choices: the Coliseum in downtown LA, the Rose Bowl in Pasadena, and unnamed locations in Carson and Anaheim.

Supply Changes Increases in occupancy and ADR were fueled by a marginal decrease of rooms supply by approximately 0.2% in 2004. This year is anticipated to be a more active year for lodging supply, with 841 new rooms currently in construction, and an additional 2,562 in planning stages, according to Smith Travel Research. In 2005, the largest impact to the Los Angeles area is anticipated to be the opening of the Sunset Millennium Hotel Project in West Hollywood. The complex will contain 190 condominiums, 104,000 square feet of retail and restaurant space, two subterranean parking garages, and two hotels (a W Hotel and a J.W. Marriott hotel) totaling 296 rooms. Additionally, hotels are increasingly being converted into condominiums, given the improved real estate market. Falor Construction recently agreed to purchase the Hilton Checkers hotel in downtown Los Angeles for approximately $28 million for conversion into a condominium hotel, and Related Companies purchased the 197-room St. Regis hotel in Century City for approximately $125 million for conversion into condominiums, making the sale one of the most expensive hospitality transactions in California in 2004.

78 Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Best Western Long Beach 75 January 2005 Asara, Inc. Hampton Inn Burbank 100 June 2005 JTHC, Inc. & Suites Shade Manhattan Beach 38 June 2005 NAV Sunset Millennium West Hollywood 296 June 2005 Apollo Realty Advisors Hotel Project Embassy Suites Long Beach 230 December 2005 Hilton Hotel Corp.

Major Renovations in 2005 PROPERTY LOCATION UNITS SCHEDULED COST DEVELOPER/ OPENING DATE (MILLIONS) OWNER Barnabey’s Hotel Manhattan Beach 122 January 2005 NAV Laeroc Barnabey’s, LLC

Hotel Closings in 2004

PROPERTY LOCATION UNITS CLOSING DATE COMMENTS Holiday Inn – Los Angeles 204 September 2004 NAV Downtown

Major Transactions in 2004 Six significant transactions occurred in 2004 in the Los Angeles area. The most notable transaction occurred in November, when the 297-room St. Regis hotel in Century City was sold for approximately $125 million by a consortium led by Pivotal Group Inc. to Related Companies, a group also involved with the Grand Avenue development in Downtown Los Angeles. Additionally, the Hollywood hotel market was active with the sale of the 637-room Renaissance hotel in March for approximately $86 million by Trizec Properties Inc. to CIM Group and the sale of the historic 74-room Argyle Hotel for approximately $18.5 million in March by the Kingston Klein Hotel Group, LLC, from the Argyle Hotel Corporation.

79 Other transactions include the purchase of the 296-room Hilton Pasadena in May for approximately $43 million by The Carlyle Group/Davidson Hotel Co. President Wilton Hill, the 132-room Holiday Inn in Santa Monica in April for approximately $27 million by NAHOP Partners II LLC to FelCor Lodging Trust, Inc., and the 244-room Hyatt Valencia in January for approximately $22.7 million.

Political/Economic/Legal Changes According to Los Angeles County Economic Development Corporation (LAEDC), Southern California’s economy is anticipated to continue to gain momentum through 2005, with real personal income anticipated to increase at 1.8% per annum for the next five years. Despite increasing gas prices, tourism in Southern California is also anticipated to improve through 2005. Consequently, the number of hospitality jobs increased by 4.4% over last year to approximately 378,300, and is anticipated to continue to grow at 2.5% over the next five years.

September and October became active months for the hotel labor sector in Los Angeles as protests and the threat of strikes forced numerous conferences to cancel or move their meetings to alternative locations.

Recently, a motion was presented to the city council for a 180-day moratorium on all city departmental approvals for the conversion of any or all hotel rooms into for-sale condominiums. Additionally, the City of Los Angeles may be undertaking a study analyzing the trend of such conversions. The motion stems from the recent announcements by several hotels that approximately 2,000 rooms will be converted into condominiums, possibly jeopardizing the employment of approximately 1,000 individuals.

80 regions and markets miami MIAMI

Introduction Miami continues to reposition itself from a tropical leisure destination to one of the country’s major metropolitan areas, as well as a center of nightlife, fashion, arts, and Latin American banking. Few places in the United States have witnessed more visible changes to its skylines as a result of the real estate boom of the last decade, and, with major downtown Miami developments still under construction, the city’s transformation continues in 2005.

Tourism in Miami experienced a strong recovery in 2004, with most tourism indicators (airport traffic, visitation, lodging performance and convention activity) observing positive gains. Based on November year-to-date Smith Travel Research data, the overall greater Miami lodging market is anticipated to experience a 13.1% RevPAR increase to $79 in 2004, with 2004 occupancy increasing 3.7 percentage points to 68.3%, and ADR reaching $115, representing a 6.9% increase over the previous year. The recovery in international visitation is particularly worth noting, assuaging previous concerns that new visa and immigration policies could have a negative impact on overseas travel.

With the U.S. economy showing improvement, along with economic conditions in Argentina, Brazil and Mexico, and the Euro continuing to strengthen, Miami should continue to experience growth in overall visitation. Lodging supply is also anticipated to increase, which should moderate occupancy gains, while overall market ADR is anticipated to continue to increase more significantly. In 2005, market occupancy is anticipated to increase 2 percentage points to 70.3%, while ADR is anticipated to increase 6.5% to $123, resulting in a 9.7% RevPAR increase.

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83 Market Strengths Miami’s proximity to Latin America and the Caribbean, its tropical weather, cultural diversity, beaches, and nightlife continue to enhance its position as the “Gateway to the Americas” and as a preferred leisure destination for international travelers visiting the United States. A wave of new luxury lodging and residential developments, together with new upscale retail and restaurant venues and the hosting of high-profile events, such as MTV’s Video Music Awards, continue to promote the city as a trendy and sophisticated destination, and Miami’s trade, banking and real estate industries also benefit from the city’s strong internationalism. Furthermore, as a result of the real estate boom, and specifically the condominium-hotel segment, the majority of the luxury hotel and spa operators will soon be represented in this market.

Market Challenges The overheated activity in the city’s condominium-hotel sector, partially fueled by inflows of foreign capital and speculative investors, has created a significant pipeline of upscale and luxury condominium-hotel projects that will likely influence lodging market supply/ demand fundamentals despite many operators’ current optimism. Miami also continues to suffer from service issues, demonstrated by the absence of Mobil five-star properties despite an increasing presence of top-tier lodging brands. The Atlantic’s unusually active hurricane season in 2004 may also have an impact on third quarter 2005 as leisure travelers may avoid the region during the months of August and September. Lastly, Miami’s strong dependence on international visitation makes it more susceptible to geo-political events such as terrorist events, changes in immigration policies, exchange rate fluctuations and Latin America’s economic conditions. Deteriorating traffic conditions and lack of appropriate tourism signage also remain a concern to Miami’s tourism officials.

Demand Changes Visitation to the Miami metropolitan area increased 8.1% during fiscal-year 2004 (October 2003 to September 2004) to reach 11 million visitors, with growth driven primarily by a 12.6% increase in international visitation, benefiting from a weaker U.S. dollar relative to the Euro and from improving economic conditions in large Latin American source markets such as Brazil, Argentina and Mexico. Domestic visitation increased by 4.6% to reach 6 million visitors.

84 Total passenger traffic (arrivals and departures) at Miami International Airport (MIA) year-to-date November 2004 increased 2.3% relative to 2003. MIA continues to experience competition from Fort Lauderdale International Airport (FLL), South Florida’s hub for low-fare carriers located 21 miles north. MIA’s largest operator, American Airlines, recently announced simplifications of its fare structure for flights into and out of MIA, with reductions of up to 85% on its walk-up fares, in an effort to counterbalance market- share erosion. MIA’s $4.8 billion expansion, which began 10 years ago and includes two new terminals, a fourth runway (already in operation) and a multi-modal transportation hub, has encountered several delays and is now anticipated to be fully complete by the end of the decade.

Total cruise passenger traffic (arrivals and departures) at the Port of Miami decreased 11.6% to 3.5 million passengers during the fiscal-year 2004 (October 2003 to September 2004), compared to 3.9 million passengers during the corresponding period in the previous year. A fire aboard Norwegian Cruise Line’s Norway, no longer in operation, coupled with the relocation of Royal Caribbean’s Voyager of the Sea to New Jersey during the summer season, were the main contributors to the decline in cruise passenger traffic at the Port of Miami in 2004. The Port of Miami will welcome five new vessels in 2005, including the 2,974-passenger Carnival Valor, which is anticipated to reverse the previous year’s anomaly.

Although not directly affected by any of the four hurricanes that made landfall in Florida in 2004, Miami was frequently included in the high probability areas, resulting in occupancy declines in the days preceding the storms, and not counter-balanced by the generally observed trend of post-storm increases in lodging demand from displaced residents, relief workers and insurance adjusters. Further, given the constant hurricane threats, Miami was not perceived as a safe refuge for other Florida residents fleeing the storms’ paths. As a consequence, the market’s increasing occupancy trend, observed since January 2004, was significantly reduced in August, followed by a 3.5-percentage- point year-over-year decline in market occupancy in September to 49.1%. Fortunately, market occupancy rebounded in October and November, albeit at a slower pace.

Convention bookings through the Greater Miami Convention and Visitors Bureau during fiscal year 2004 (October 2003 to September 2004) indicated a 22.1% increase in total room nights generated and a 9.1% increase in the number of booked events over

85 the previous year, indicating the strength of Miami as an attractive convention destination. The Miami Beach Convention Center (MBCC), the city’s main convention facility and Florida’s second largest convention center, experienced a 7 percentage point increase in its occupancy rate to reach 52% during fiscal year 2003/2004, and anticipates an even stronger performance in fiscal year 2004/2005, with occupancy anticipated to increase another five percentage points. The MBCC, currently offering a total of 1.1 million square feet of space, is planning a $55 million expansion, including the addition of a 60,000 square-foot ballroom. Funds for the expansion were recently approved, and the project is currently in early planning.

The opening of the new Performing Arts Center is now scheduled for October 2006. New city events such as the introduction of Miami as host to MTV’s Video Music Awards in 2004 and the possible relocation of the Air and Sea Show from Fort Lauderdale to Miami Beach in 2006 bode well for the city’s leisure visitation. Further, the Florida Marlins organization is negotiating with the City of Miami and Miami-Dade County for a $420- million, 38,000-seat, retractable-roof stadium to be built next to the Orange Bowl Stadium, with anticipated completion in 2008.

The redevelopment of the central business district is anticipated to continue to enhance Miami’s metropolitan appeal. Downtown Miami is well on its way to transform itself into a round-the-clock city with as many as 16,000 condominium units planned or under construction in the area, anticipated to generate, along with other planned construction, as many as 80,000 additional residents to the downtown area in the next 20 years. Miami Beach continues to experience a wave of new luxury lodging and residential developments, along with new upscale retail and restaurant venues. As the state of Florida remains one of the most desirable destinations for affluent Americans currently planning vacation travel, Miami is well positioned to profit from this market.

Miami continues its effort to secure its position as the permanent location for the headquarters of the Free Trade Area of the Americas (FTAA). The signing of the FTAA agreement and the official announcement of its Secretariat (headquarters) location, originally scheduled for 2004, has been delayed until late 2005, as Miami contends with the following three destinations: Atlanta, Georgia; Panama City, Panama; and Port-of- Spain, Trinidad.

86 Supply Changes In 2004, Miami’s lodging inventory decreased slightly by 0.6%, due to the temporary closing of some hotel properties to be converted into condominium-hotels. Additionally, several anticipated luxury properties scheduled for opening in 2004 were delayed and are now scheduled to enter the market in 2005. While the anticipated increase in the market’s luxury lodging supply enhances Miami’s image as a luxury destination and helps attract affluent travelers, the anticipated surge in supply is likely to pressure occupancy and limit ADR growth in the higher segment of the market. Miami still has a need for mid-tier hotels, as the existing inventory is dated and in need of refurbishment.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Victor Hotel South Beach 91 January 2005 ZOM Development Group Le Meridien Sunny Isles Beach 210 February 2005 Fortune International Beach Resort The Fontainebleau Miami Beach 462 March 2005 Stephen Muss Tower at the Fontainebleau Hilton Resort Bentley Beach Hotel South Beach 110 Early 2005 The Bentley Group The Regent South South Beach 80 June 2005 South Beach Resort Beach Development Acqualina Resort Sunny Isles Beach 97 October 2005 Williams Island & Residences – Associates A Rosewood Hotel Canyon Ranch Miami Beach 151 Early 2006 WSG Development Resort Company Hilton North Sunny Isles Beach 190 2006 DSP Construction, LLC Miami Beach Unnamed Four-Star Watson Island 400 Fall 2006 Flagstone Island Hotel Gardens, LLC Unnamed Five-Star Watson Island 100 Fall 2006 Flagstone Island Hotel Gardens, LLC

87 Planned Additions (continued) PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE The Regent Bal Harbour 124 Late 2006 WCI Communities Bal Harbour The Ritz Plaza Hotel South Beach NAV Late 2006 Kimpton Hotels The Fontainebleau III Miami Beach 286 Early 2007 Stephen Muss Condominium-Hotel and Turnberry and Associates

Hotel Closings in 2004

PROPERTY LOCATION UNITS CLOSING DATE COMMENTS The Ritz Plaza Hotel South Beach 132 Mid-2004 To be renovated and reopened under the Kimpton Hotels brand The Seville Hotel Miami Beach 318 October To be converted into luxury residential condominiums

Major Transactions in 2004 In 2004 Miami saw substantial hotel transaction activity. Many of the city’s lodging transactions, such as the ones involving the Mayfair House, The Tides and The Radisson Deauville hotels, were motivated by a desire to convert these lodging properties into condominium- hotels through the subsequent sale of individual units.

Major lodging transactions in 2004 include the sale of the 585-room Roney Palace Hotel for $150 million ($256,000 per room) by Propinvest, the sale of the 417-room Royal Palm Hotel for $127.5 million ($306,000 per room) by Peebles Atlantic Development Corporation, the sale of the 598-room Sheraton Biscayne Bay for $94 million ($157,000 per room) by Archstone-Smith, the sale of the 203-room Conrad Miami for $65 million ($320,000 per room) by Espirito Santo, the sale of the 500-room Radisson Deauville Hotel for $28 million ($56,000 per room) by Prudential Life Insurance, and the sales of the 45-room Tides Hotel, the 408-room Wyndham Miami Airport and the 692-room Doral Golf Resort & Spa for undisclosed amounts.

88 Political/Economic/Legal Changes Miami-Dade County welcomed a new Mayor, Carlos Alvarez, in November 2004, after eight years under the leadership of former Mayor Alex Panelas. Elected on premises of reform and accountability, Mayor Alvarez, a former director of the Miami-Dade police department, vows to increase government efficiency and help promote economic development. As for Miami’s economy, it showed significant signs of improvement in 2004, driven by a strong performance from its two major industries: tourism and international trade. The city’s economy has also benefited from the recent boom in real estate activity, mostly driven by foreign capital inflows from Latin America and Europe, the latter as a result of the weakening U.S. dollar. In addition, Government spending and an influx of pharmaceutical-related businesses is likely to further stimulate Miami-Dade County’s economy in 2005.

Lastly, given its dependency on international tourism, Miami continues to be vulnerable to changes in immigration policies. Fortunately, fears that the implementation of the new US-VISIT program, which requires fingerprinting and photographing of all foreign visitors holding non-immigrant visas and computer-readable passports for non-visa holders, would result in significant airport delays and in a reduction in international visitation have proven unfounded, as growth in international visitation continued in 2004 and is anticipated to continue in 2005.

89 regions and markets new orleans NEW ORLEANS

Introduction Following three years of significant RevPAR declines, New Orleans turned the corner toward recovery in 2004. Home to one of the largest convention centers and host to some of the most popular cultural events in the U.S., the New Orleans economy is highly dependent on conventions and leisure tourism. Corporate and group demand for lodging declined with the national economic downturn and even though leisure demand to the city has remained relatively healthy due to its location and regional appeal, the price sensitive nature of this demand segment has hurt overall rates through 2003. The improved economic environment in 2004 propelled performance gains that should continue as advance group bookings for the New Orleans region and the convention center accelerate.

Based on Smith Travel Research November year-to-date data, in 2004, the lodging supply in New Orleans increased an estimated 3.4%. These room additions were absorbed relatively quickly, however, as occupancy increased slightly to 64.1% during the year. ADR increased an estimated 3.1% to $112, boosting RevPAR by an estimated 4.4% to $72 in 2004. Still, this is nearly $12 below the peak RevPAR of $84 achieved in New Orleans in 2000.

Continued improvement in operating performance for 2005 is anticipated with RevPAR increasing 5.3%, driven by a 2 percentage point increase in occupancy to 66.1% and a 2% increase in room rates to $114.

Market Strengths New Orleans offers visitors a full array of cultural, historical, and educational opportunities with an abundance of museums, art galleries, and eclectic music festivals for people of all demographics. The city’s unique appeal provides New Orleans with a competitive advantage in capturing leisure and convention group demand.

92 Lodging Market Occupancy, ADR, RevPAR Performance

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93 Market Challenges Given the characteristics of the local economy, New Orleans lacks significant traditional corporate transient demand and relies heavily on attracting group and leisure demand to the area. As other cities across the country build new or expand existing convention facilities and improve tourism attractions to vie for large group and tourism demand, it is becoming increasingly challenging to maintain competitiveness.

Demand Changes The Ernest Morial Convention Center (EMCC) currently offers 1.1 million square feet of exhibit space, a 4,000-seat auditorium, and two ballrooms. The EMCC is considering a “Phase IV” expansion of its facility to include up to 500,000 square feet of meeting space, planned to make the convention center the fourth largest in the country. While an alternative to Phase IV has been considered, which would include less meeting space and a new sports complex for the New Orleans Saints football team, support for the latter scenario appears to be losing steam. The expansion is anticipated to break ground early this year, with construction lasting three to four years and new meeting and exhibit space opening by early 2008. While not anticipated to impact lodging performance in 2005, the improved, larger convention center facility in the longer term is anticipated to significantly increase the number of groups coming into the city and positively impact lodging demand.

According to the EMCC, confirmed and tentative city-wide groups indicate occupancy at the EMCC of more than 50% this year, up from 46% in 2004. Occupancy for 2006 is anticipated to reach close to 60%, which would translate to improved performance for area hotels.

In 2004, the New Orleans Metropolitan Convention and Visitor’s Bureau (NOMCVB) was named Convention and Visitor’s Bureau of the year by ConferenceDirect, a Los Angeles based meeting resources company. The strength of the NOMCVB is a key factor in keep- ing New Orleans at the forefront of meeting planners’ minds when choosing a destination for upcoming events. The NOMCVB brings more than $4.5 billion to the area annually and the pace of new events booking in New Orleans appears to be accelerating. According to the NOMCVB, the number of confirmed room nights on the books as of September

94 2004, for 2004 through 2010, increased by more than 980,000 room nights as compared to the same number of confirmed room nights 12 months before for 2003 through 2009.

For leisure travelers, the biggest draw to New Orleans has long been the Mardi Gras season, which typically begins in January with the start of Carnival and ends with Mardi Gras (Fat Tuesday), the day prior to Ash Wednesday. The NOMCVB estimates that Mardi Gras contributes more than $220 million of economic impact to the local area. Including Mardi Gras, there are approximately 45 days in each calendar year that are dedicated to inducing leisure demand to New Orleans, including the Nokia Sugar Bowl, the French Quarter Festival, the New Orleans Jazz Festival, and the Heritage Festival, among others. During these peak leisure demand periods, the local lodging supply is typically sold out even though group and convention activity is generally lower.

The Port of New Orleans has spent more than $9 million over the past two years renovating sections of the cruise terminals located at the Julia Street Wharf, which is located across the street from the EMCC. This past October, the Port began construction on a new 100,000 square-foot cruise ship terminal, which is to be located at the adjacent Erato Street Wharf. Construction of the new terminal is anticipated to be completed in late 2005. The number of cruise passengers in New Orleans increased at a CAGR of nearly 23% between 1993 and 2003. In 2004, the number of cruise passengers was estimated at over 806,000 and is anticipated to reach more than 1.9 million by 2010.

The Louis Armstrong International Airport experienced an increase in passenger volume in 2004. Through September 2004, traffic among passengers was 5.1% higher than for the corresponding period one year earlier. The airport experienced a rebound in the number of international travelers, a positive indication that the lodging sector will continue its recovery in this demand segment.

The new Canal Streetcar line began operations in April 2004, running more than 5.5 miles from the Mississippi River to City Park Avenue in New Orleans, providing improved accessibility to the city’s many downtown tourist attractions.

95 Supply Changes New Orleans experienced a larger increase in its available lodging supply than most markets in 2004; however, its estimated 3.4% supply increase was more modest than what the city experienced in 2000, 2001, and 2002. During that time period, the growth in lodging supply in New Orleans was largely due to new development in the Midscale without Food and Beverage and the Upscale segments. With few new hotels scheduled to open in 2005 and 2006, the supply/demand environment should be more balanced, boding well for improved RevPAR performance.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Marriott Convention Center 331 June 2005 Carl E. Woodward, Inc. Hilton New Orleans French Quarter 204 March 2006 Carbone Properties Harrah’s Hotel Downtown/French 450 June 2006 Harrah’s Quarter Entertainment

Major Renovations in 2004

PROPERTY LOCATION UNITS SCHEDULED COST DEVELOPER/ OPENING DATE (MILLIONS) OWNER Bourbon Orleans French Quarter 220 June 2004 $14.5 Wyndham

Political/Economic/Legal Changes During her first year as governor of Louisiana, Kathleen Blanco gave weight to a contro- versial alternative to the planned Phase IV expansion of the Ernest Morial Convention Center. Indeed, the governor commissioned a feasibility study to examine the possibility of scaling back the previously planned 500,000 square-foot expansion to make room for a new athletic stadium for the New Orleans Saints. While this alternative scenario seemed to take hold for a short time, it increasingly appears that Phase IV will be built in its entirety.

96 The litigation case surrounding the redevelopment of the World Trade Center building at 2 Canal Street into a 653-room Westin hotel has made its way up to the Louisiana Supreme Court. The legality of the proposed hotels’ financing to use a TIF (tax-increment financing) is currently being challenged by the Greater New Orleans Hotel and Lodging Association.

97 regions and markets new york NEW YORK

Introduction New York hotels displayed exceptionally strong performance gains in 2004, significantly narrowing the gap between post-9/11 performance and the peak occupancy and ADR levels achieved in 1999 and 2000. Indeed, the pace of recovery in New York surpassed all other major U.S. markets in 2004, with RevPAR increasing more than 20%. While there is limited new Luxury and Upper Upscale construction underway, a number of Upscale, Midscale, and Economy supply additions are anticipated to open in 2005 and better accommodate the current need for more moderately priced, nationally branded hotel rooms in the city. Given the planned development activity on the west side of Manhattan, including the expansion of the Jacob C. Javits Convention Center and the New York Cruise Terminal, and the recreation of Lower Manhattan as a 24-hour neighborhood, New York is anticipated to remain a top corporate, group, and leisure destination.

In 2004, New York experienced an increase in lodging demand as the overall economic recovery gained momentum, business travel activity increased, and high levels of leisure demand continued, assisted also by the reluctance of domestic travelers to journey abroad as a result of the weak U.S. dollar. Based on Smith Travel Research November year-to-date data, it is estimated that occupancy increased 6.3 percentage points to 81% in 2004. Gains in ADR were particularly strong, increasing an estimated 11% to $188.

In 2005, hotel performance in New York is anticipated to continue its positive trend, with occupancy levels increasing 3.5 percentage points to 84.5% and ADR increasing 9% to $205, with an anticipated RevPAR of $173 above the market’s performance in 2000.

100 Lodging Market Occupancy, ADR, RevPAR Performance

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101 Market Strengths New York’s economy came roaring back to life in 2004, and demand for hotel rooms in New York soared as corporate travel improved and the city maintained its status as one of the top U.S. destinations for leisure travelers. According to NYC & Company, a record 39.4 million visitors are estimated to have visited the Big Apple in 2004. As a result, while occupancy levels had been improving, 2004 was the first year since 2000 that the city experienced significant pricing power and a positive year-over-year changes in ADR, positive momentum that should continue in 2005.

Market Challenges New York lodging continues to be a possible target for terrorist activity, and leisure and group segments could easily be affected by increases in the terror threat level. Additionally, New York faces tough competition in its bid for the 2012 Olympic Games, upon which some upgrades and additions to the city’s hotel supply are depending.

Demand Changes Significant development proposals are moving through the approval process for Manhattan’s West Side. There are plans to double the size of the Jacob C. Javits Convention Center through northward expansion (from 814,000 square feet to 1.6 million square feet) and extend the No. 7 subway line to the Convention Center. A proposal has been put forward to partially finance the Javits expansion with an additional $1.50 per night hotel room tax. West Side plans also call for a 1,500-room hotel, rezoning for office space, retail, and residential high-rises, parks, and a retractable domed stadium for the New York Jets, a venue for convention related exhibitions and activities, and the 2012 Olympics, for which New York is bidding. The West Side expansion is anticipated to provide significant economic impact for the city, including employment during and after construction, increased delegate attendance at trade shows, increased direct spending, and substantial state and city tax revenue. In October 2004, the Empire State Development Corporation unanimously approved the West Side expansion plan, which must now pass in the City Council, New York State Legislature, and survive likely lawsuits from those opposing the developments.

New York agreed to invest $200 million in the renamed New York Cruise Terminal on Manhattan’s West Side, which will provide for immediate repairs to the existing facility

102 (last renovated in the 1970s), as well as add four new berths over the next four years. In return, Carnival Corporation and Norwegian Cruise Line agreed to pay at least $200 million in port charges and bring at least 13 million passengers to the city through 2017. The Cruise Terminal expansion is anticipated to provide additional economic impact from hotel nights, direct spending, and airport activity from the increased number of passengers.

New York is competing against Paris, London, Moscow, and Madrid for the 2012 Olympic Summer Games. Paris is viewed as the current favorite, given that it has many facilities already in place, and France has not hosted the Summer Games since 1924. Also, Vancouver was selected as the host of the 2010 Winter Olympics and the Olympic Committee prefers to switch continents between winter and spring. A win for New York would add significant economic impact to the area and the city is anxiously waiting the Olympic Committee’s decision, which is anticipated to be announced in early July 2005.

Air traffic at all three New York area airports (Newark, LaGuardia, JFK) has increased over the past year as the three airports accommodated 90.9 million passengers during the twelve months ending August 2004, representing a 10.3% increase over the corresponding period in 2003. Construction is anticipated to begin in 2005 on an $875 million, 26-gate terminal for JetBlue Airways at JFK. In addition, the new JFK AirTrain (service between JFK, Jamaica Station, and Howard Beach), along with proposals to create a rail link between Lower Manhattan and Jamaica, have sparked a redevelopment initiative in the 40-block radial area around the new Jamaica station, including a potential hotel atop the station.

There were several significant additions to Manhattan’s commercial real estate market during 2004. The highly publicized completion of the Time Warner Center, located near Columbus Circle at the southwest tip of Central Park, stands 750 feet tall, and is a twin- towered multi-use complex housing the headquarters for AOL Time Warner, CNN Studios, retail space, restaurants, offices, luxury apartments, and the Mandarin Oriental Hotel. In addition, 3.6 million square feet of office space was added to the Midtown market with the completion of 300 Madison Avenue, 7 Times Square, and 731 Lexington Avenue. While new construction is ongoing in the area, new office space is not anticipated to be completed in Midtown Manhattan until 2007. In Downtown Manhattan, 1.7 million

103 square feet of new Class A supply is anticipated to be completed in 2005 at 7 World Trade Center.

Real estate developer Bruce Ratner began the initial phases of a $2.6 billion redevelopment of the Atlantic Yards in Brooklyn, the centerpiece of which is an 800,000 square- foot, 19,000 seat arena to be home to the New Jersey Nets franchise he purchased in 2004. Other plans for the development include construction of 4,500 residential units, 2.1 million square feet of office space, and 3.1 million square feet of retail space. Ratner estimates that it will take 10 years to fully complete the project, with the arena opening in 2007 at the earliest.

Supply Changes The development pipeline in New York has been shifting towards a greater number of branded upscale, midscale, limited service, and extended-stay properties (78% of hotels under development, according to Smith Travel Research) with guestroom inventories smaller than historically seen. The arrival of moderately priced hotels in the market is targeting non-group mid-tier corporate and leisure demand.

New York is also losing a number of luxury and upscale rooms as the conversion of hotel properties, either partially or entirely, to condominiums, continues to be a popular trend. In 2004, over 2,000 hotel rooms were removed from the lodging supply and are in the process of being converted to residential units.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Hampton Inn 320 Pearl Street 65 May 2005 Metro Five LLC Seaport Luxury Hotel 377-383 Greenwich 83 Mid 2005 Robert DeNiro Street & BD Hotels Hilton Garden Inn York St. & 6th Avenue 150 Mid 2005 Meisel & Cohen

104 Planned Additions (continued)

PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE 6 Columbus 6 Columbus Circle 100 Spring 2005 Jason Pomeranc Courtyard by 92nd St. & 1st 226 September 2005 Madison Equities Marriott Avenue Wingate Inn 35th St. & 8th Avenue 97 Late 2005 NAV Allen Street Lower East Side 70 2005 Jason Pomeranc Unnamed Hotel 45th Street & NAV 2005 Andre Balazs Broadway Residence Inn 39th Street & 6th 357 2005 G. Holding Corp. Avenue Courtyard by 125th Street & 204 December 2005 1800 Park Ave., LLC Marriott Park Avenue Holiday Inn Express 39th Street & 70 July 2006 Metro One Hotels, 8th Avenue LLC W Hotel Hoboken, NJ: 225 September 2006 Applied Development Waterfront on 2nd Company Street Holiday Inn Express 29th Street & 195 Late 2006 Metro One Hotels, 7th Avenue LLC Unnamed 42nd St. & 11th Ave. 1500 NAV Jacob Javits Convention Center Convention Center Hotel

Hotels Scheduled for Conversion to Condominiums in 2005 PROPERTY LOCATION HOTEL UNITSCLOSING ACQUISITION BUYER SELLER DATE COST (MILLIONS) Empire Hotel 63rd St. & 375 January $14.5 Kennedy and Ian Schrager Broadway Associates Hotels & Northstar Financial Mayflower on Central Park 365 July $401 William Goulandris the Park (and West & 81st St. Zeckendorf, Family adjacent lot) Whitehall Fund, Carlyle MG Limited Regent Wall 55 Wall Street 144 January NAV Steve Witkoff Sidney Street Kimmell

105 Hotels Scheduled for Conversion to Condominiums in 2005 (continued)

PROPERTY LOCATION HOTEL UNITSCLOSING ACQUISITION BUYER SELLER DATE COST (MILLIONS) Inter- Park South 211 April $63.5 Anbau Inter- continental Enterprises Continental Central Park Hotels South Paramount 253 West 46th 608 April $126.5 Becker Century Hotel Street Ventures Paramount Sheraton 37th St. & 146 August $42 SJP Properties Starwood Russell Park Ave. Hotels & Resorts Stanhope 81st St. & 5th 185 August NAV Estate of Sol Hyatt Hotels Park Hyatt Ave. Goldman The Plaza 5th Ave. at 805 April $675 Affiliate of Plaza Hotel (and the Central Park Elad Properties Operating adjoining South NY LLC Partners Ltd property)

Major Transactions in 2004 During 2004, of the 11 major hotel transactions that occurred in the New York market, seven are scheduled for redevelopment as residential units, as detailed in the chart above. Perhaps the most significant sale in 2004, making headlines across the nation, was the 805-room Plaza Hotel, sold in August by Plaza Operating Partners Ltd., a partnership between British hotel group Millennium & Copthorne and Saudi Prince Alwaleed bin Talal, to Elad Properties for $675 million, or approximately $838,000 per room. Reports indicate that several floors of the Plaza are anticipated to be converted into condominium units, fetching prices of approximately $3,000 per square-foot. Additionally, the 65-room Shoreham Hotel was sold in January by Credit Suisse First Boston to Ark Investment Partners LP for $14.5 million, or approximately $82,000 per room and the 189-room Hotel 5A was acquired in December by DiamondRock Hospitality Company for $34.4 million, or approximately $182,000 per room. Lastly, in November, Dallas- based Highgate Holdings signed a letter of intent to purchase the 935-room Park Central Hotel from Lehman Brothers, with details of the transaction not yet available.

106 Political/Economic/Legal Changes New York’s $7 billion redevelopment of Lower Manhattan is well underway. Plans call for Phase I of the project, including the Freedom Tower, a $2 billion PATH rail terminal linking the area to New Jersey, significant infrastructure, new streets, parks, and a 9/11 memorial, to be completed by 2009. Additional phases will add a substantial number of residential units and bring the total new office space in the development to 10 million square feet. The redevelopment will transform Lower Manhattan from primarily a commercial area into a 24-hour neighborhood, with residential, commercial, and leisure spaces inter- acting with each other.

According to the Bureau of Labor Statistics, New York’s unemployment rate decreased to 6.9% in September 2004, from 8.4% in September 2003. The city’s economy was estimated to have added approximately 50,000 jobs in 2004, marking the first increase in jobs since 2000. Though retail and tourism sectors are at near-record employment levels, Wall Street employment has been stable at about 170,000 jobs since 2003. Wall Street hiring is anticipated to rebound in 2005, boosting New York’s economy even further.

107 regions and markets orlando ORLANDO

Introduction Orlando’s increasing visitation levels and positive lodging performance in 2004, despite an extraordinary hurricane season, coupled with the increase in convention demand following the most recent Orange County Convention center expansion, suggest continued support for lodging demand growth in 2005.

Based on data provided by Smith Travel Research year-to-date November 2004, the Orlando lodging market experienced a 15.7% demand increase in 2004, with occupancy increasing to 70.7%, ADR increasing 3% to $87 and RevPAR increasing 16.2% to $62.

Occupancy is anticipated to increase approximately 4.3 percentage points to 75% in 2005 and ADR is anticipated to increase 4% to $91, resulting in a 10.2% RevPAR increase to $68. Rate growth is anticipated to be influenced primarily by increases in demand and the introduction of higher positioned properties in the market.

Market Strengths Overall, the Orlando economy continues to rebound, with low unemployment rates and improving economic growth. The Orange County Convention Center’s expansion and moderate growth in new lodging supply should support improved lodging market performance in 2005. According to Global Insight, domestic visitation to Orlando is anticipated to total approximately 48 million visitors, while international visitation is estimated to reach approximately 2.5 million visitors, better than recent years but still below the 2000 peak of approximately 3.7 million visitors.

110 Lodging Market Occupancy, ADR, RevPAR Performance

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111 Market Challenges A repeat of the 2004 hurricane season, and a more direct hit on Orlando, could affect the city’s lodging performance during the summer months. With the improving lodging sector and availability of financing, additional lodging projects may be added to the development pipeline applying pressure to occupancies and rates.

Demand Changes The estimated growth in both domestic and international visitation is anticipated to result in double-digit increases in room night demand in 2004 and, with limited supply additions entering the market in 2005, occupancy levels and average daily rate should increase.

Year-to-date September 2004, total passenger traffic at Orlando International Airport increased 14.4% compared to the corresponding period in 2003 to approximately 23 million passengers. International passenger traffic grew 14.3%, reaching 1.5 million passengers, and domestic passenger traffic increased 14.4% to 22 million passengers. The Orlando International Airport’s $1.2 billion expansion program continues to move forward, designed to meet demand for the rapidly growing Central Florida Region.

Convention activity year-to-date September 2004 increased 24.6%, to approximately 1 million attendees, and was particularly strong during the months of January, March and August, with the total number of events increasing approximately 32% during the same period.

Orlando continues to be the theme park capital of the world with Walt Disney World and Universal Studios leading the way. Walt Disney World’s four parks attracted 37.8 million visitors in 2003, representing a 0.5% increase over 2002. 2004 estimates are not available at this time, however, representatives at Universal Studios anticipate that their overall theme park attendance in Orlando should increase approximately 5% in 2004, due in part to strong first and second quarter preliminary attendance estimates. Additionally, new attractions now in the planning phase for 2005 and 2006 bode well for the lodging industry.

112 Supply Changes According to the Orange County CVB, approximately 3,100 rooms, a 3% increase in supply, are anticipated to enter the market through 2007, representing a 60% decrease in the pipeline from estimates 12 months previous.

In 2004, several properties opened including the 730-room Omni Orlando at Champions Gate, and Phase I of the 810-room Travelodge World Resort. The 150-room Regent Winter Park Resort & Spa is anticipated to open in fall 2005. In 2006, the 1,500-room Rosen Shingle Creek Resort is anticipated to open, featuring 250,000 square feet of meeting space, an 18-hole golf course, and full-service spa.

Four Seasons Hotel & Resorts has been in discussions with developers since early 1999 to develop a hotel in the Celebration area. The hotel, still anticipated to open in 2007 despite reported delays, is currently planned to feature approximately 425 rooms and 30,000 square feet of meeting space.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions

PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Disney’s Saratoga Lake Buena Vista 185 Opened May 2004 Disney Vacation Springs (Timeshare) Development, Inc. Travelodge World Lake Buena Vista 270 Opened June 2004 Travelodge Hotels (a Resort (Phase I) unit of Cedant Corp.) and Lake Buena Vista Suites Omni at Kissimmee East 730 Opened RIDA Development Champions Gate October 2004 Corp. Travelodge World Lake Buena Vista 270 Early 2005 Travelodge Hotels (a Resort (Phase II) unit of Cedant Corp.) and Lake Buena Vista Suites Travelodge World Lake Buena Vista 270 Early 2006 Travelodge Hotels (a Resort (Phase III) unit of Cedant Corp.) and Lake Buena Vista Suites

113 Planned Additions (continued) PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Regent Winter Park Orlando North 150 Late 2006 Langford Resort & Spa Development, LLC Rosen’s Shingle International Drive 1,500 Late 2006 Rosen Hotels Creek Resort & Resorts Four Seasons Celebration 425 2007 Four Seasons Hotels and Resorts

Major Transactions in 2004 There was one notable hotel transaction that took place in Orlando in 2004. In January, the 210-unit Residence Inn by Marriott located in Lake Buena Vista was sold to Ashford Hospitality Trust for $25.3 million, or $120,000 per key.

Political/Economic/Legal Changes Orlando is the nation’s second largest hotel market. With over 116,000 rooms, the service industry dominates employment, a lack of diversification that some city representatives are concerned leaves the area’s economy more vulnerable. Area government continues to seek ways to diversify the local area economy and create programs to provide incentives to non-tourism related industries.

114 regions and markets san diego SAN DIEGO

Introduction San Diego continues to rank as the top performing lodging market in California and one of the top markets in the United States. The San Diego lodging market benefited from an increase in visitor spending with spending year-to-date September 2004 up 3.8% to approximately $4.3 billion. In addition, domestic travel to San Diego increased by approximately 8.5% year-to-date September versus the corresponding period the previous year. The number of international flights to and from the San Diego International Airport, however, has decreased through September 2004 by approximately 52.2% versus the corresponding period the previous year, due primarily to the discontinuation of direct flights to San Diego by British Airways in October 2003. Based on November year-to-date data provided by Smith Travel Research, occupancy levels increased an estimated 2.1 percentage points to 71.6%, while ADR increased an estimated 1.5% to $113 resulting in a RevPAR increase of 4.5% to $81.

San Diego market trends are anticipated to continue in 2005 as the area remains a top leisure and convention destination. Occupancy is anticipated to increase 1.1 percentage points to 72.7% in 2005, while ADR is anticipated to increase 3% from $113 to $116, resulting in a RevPAR increase of 4.5%, from $81 to $85.

Market Strengths In 2005, the San Diego lodging market will benefit from the continued strength of the San Diego convention sector as well as the continued demand generated by the biotechnology and defense industries. Lodging demand growth is anticipated to slightly outpace lodging supply growth in 2005.

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117 Market Challenges The main challenges for the San Diego lodging market in 2005 are anticipated to be California’s budget crisis and its effect on regional travel, coupled with a decrease in international travel to the area due to volatile international flight schedules and high pricing into and out of the San Diego International Airport.

Demand Changes San Diego Convention and Visitors Bureau (ConVis) and its surrounding hotels have experienced a significant increase in the number of leisure and convention travelers throughout 2004. Hotels experienced both drive-in travel from locations such as Los Angeles, San Francisco, and the major markets in Arizona as well as travel from the midwest and the east coast. While domestic travel has increased, ConVis estimates that international visitors accounted for only 4% of San Diego’s total visitation in 2004. After British Airways discontinued its direct flights to San Diego in October 2003, Mexico is the only international market that serves the San Diego International Airport. International travel in San Diego County is hindered due to the county’s lack of an international hub.

In 2004, ConVis lost a significant amount of funding for advertising and its overall budget for the 2004-2005 fiscal year. The bureau’s overall operating budget decreased by $2.7 million, (or approximately 21.5%) to $12.5-million, while its advertising budget of $3.7 million has decreased from $4.5 million, for the current fiscal year. This decrease in funding is likely to hinder the promotion of San Diego to the rest of the U.S., and may negatively affect the number of convention bookings in the upcoming years.

Recent development in downtown San Diego has established the area as a desirable location to live, work, and play. Construction, most of which has been spurred by the opening of the Petco ballpark, is anticipated to create increased lodging demand for the downtown submarket as new projects open to the public. According to the Centre City Development Corporation, approximately $1.4 billion in construction is occurring around the ballpark. Anticipated projects include the following:

◗ Broadway 655 - a 23-story, 356,000 square-foot office tower anticipated to open in June 2006. The tower will contain 17 apartments and 16,314 square feet of retail space.

118 ◗ DiamondView Tower at the Ballpark – a 14-story, 300,000-square-foot office building. The development is anticipated to contain 36,000 square feet of retail and restaurant space. The project is anticipated to open in the fall of 2006.

◗ Gaslamp City Square – the $20.6 million second phase of this project, anticipated to open in April 2006, is anticipated to contain 88 condominiums, 25,000 square feet of retail, and 250 parking spaces. The first phase of this project, which opened in October 2004, included 120 condominiums, 40,000 square feet of retail, and 318 underground parking spaces

San Diego is now playing a bigger role in the defense industry than it has in the past, following a surge in federal spending on defense and homeland security. In particular, Los Angeles-based Northrop Grumman has acquired three defense-related businesses in the San Diego area over the past couple of years, starting with their acquisition of Ryan Aeronautical in 1999. Since then, Northrop has also taken over TRW and Newport News Shipbuilding, acquiring some 4,300 employees in the San Diego area. The company plans to add upwards of 700 more employees throughout 2005.

San Diego continues to show its prominence in biotechnology research and development. In a recent study performed by the Milken Institute, San Diego ranks first out of the major metropolitan areas of the United States as a biotechnology centered market, with approximately 55,600 jobs in the industry and approximately $5.8 billion in yearly income. Signs of the market growing exist, particularly with the July 2004 announcement that Gen-Probe, a large biotechnology company in San Diego, will expand its current campus, allowing the company to nearly double its workforce over the next several years, from 900 to approximately 1,700 positions. The 292,000 square-foot facility will house research and development laboratories and manufacturing facilities and will be located behind the company’s current headquarters. California’s biotechnology industry is the largest in the world, with approximately 230,000 jobs. Additionally, Biogen Idec Inc.’s pharmaceutical factory is slated to open in Oceanside in 2005, and it is anticipated that a new supply of manufacturing jobs in San Diego County will emerge. Once open, the $380-million factory will be the sixth largest in the world and will house approximately 800 employees.

119 With the current airport anticipated to exceed its capacity by 2012, airport expansion plans at the San Diego International Airport are currently under scrutiny, with the latest plan to add a second runway. Such a runway would require demolition of approximately 3,220 homes and buildings, displacing an estimated 10,850 people, while requiring the airport to acquire an additional 1,841 acres surrounding the current site. Other sites under consideration for the airport include the March Air Reserve Base in Riverside County, the Miramar Marine Corps Air Station in San Diego, Camp Pendleton north of Oceanside, and North Island Naval Air Station in Coronado, among others.

Supply Changes In 2004, San Diego was one of the most active markets in California in terms of new hotel supply; however, this trend is not anticipated to continue into 2005 with few supply additions and renovations planned. According to Smith Travel Research, 1,373 new hotel rooms are currently under construction, with 4,465 in the planning stages throughout the San Diego area, a majority of which are in the Upscale, Upper Upscale, and Independent segments.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Tower 23 Hotel San Diego 44 January 2005 Miller Pacific Beach Enterprises Hotel Solamar San Diego 235 May 2005 JMI/Burnham Development Hard Rock Hotel San Diego 393 September 2006 Tarsadia Hotel, Inc. Renaissance Hotel San Diego 344 December 2006 5th & J LLC San Diego Downtown Hilton Campbell’s San Diego 1,200 January 2007 The Port of San Landing Diego/Hilton Hotels Corporation Hotel San Diego 450 June 2007 Isis Hotels InterContinental Spinnaker Hotel San Diego 250 Late 2007 5th Avenue LLC

120 Major Renovations in 2005

PROPERTY LOCATION UNITS SCHEDULED COST DEVELOPER/ OPENING DATE (MILLIONS) OWNER Marriott San Diego 312 June 2004 $41 Stanford Hotel Gaslamp Quarter Corporation

Political/Economic/Legal Changes In 2002, the Board of Supervisors for San Diego County voted to increase benefits for county employees by $1.1 billion, a decision that has since created a reported $1.4 billion deficit for the San Diego County Employees’ Retirement Association. Additionally, the $3.2-billion San Diego City Employees Retirement system has a reported $1.2 billion deficit. Such deficits could create a financial situation for the County that could lead to either additional cost cutting or taxes levied.

San Diego is anticipated to outpace the rest of the U.S. in terms of job growth over the next five years. In particular, jobs in the hospitality and leisure industry, which experienced an increase of approximately 2.9% in the 12 months ending September 2004, are anticipated to increase at approximately 4% per year for the next five years.

121 regions and markets san francisco SAN FRANCISCO

Introduction In 2004, the San Francisco Bay Area showed signs of recovery, as travel to and from the area increased for the first time since 2000. Air travel has been above 2003 levels with overall airport passengers year-to-date through September up 16% over the same period last year to approximately 25.3 million passengers. This increase in traffic was fueled both by domestic travel (up approximately 15.9% over the same period last year) and international travel (up approximately 16.5% over the same period last year). Due to the weakened U.S. dollar, international travel plays a pivotal role in the recovery of the Bay Area. The greatest gains in international travel are from Asia (up approximately 27.6% year-to-date through September over the same period last year) and Australia/Oceania (up approximately 25.3% year-to-date through September over the same period last year). The trend in increased international travel is anticipated to continue, as evidenced by a recent decision by United Airlines, the largest airline carrier at the San Francisco International Airport (SFO), to increase the number of international flights into and out of SFO.

In 2004, the San Francisco lodging market fundamentals improved relative to 2003. Based on November year-to-date data provided by Smith Travel Research, occupancy levels reached an estimated 67.6%, an increase of 5 percentage points over the same period last year, while RevPAR increased to $80, representing an increase of 9.1% over the same period last year.

Occupancy is anticipated to increase 3.1 percentage points to 70.7% in 2005, while ADR is anticipated to increase 3% from $118 to $122, resulting in a RevPAR increase of 7.7%, from $80 to $86.

124 Lodging Market Occupancy, ADR, RevPAR Performance

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125 Market Strengths The San Francisco market will continue to benefit from a growing number of convention travelers, as business travel is anticipated to continue to increase into and throughout 2005. Additionally, the existing growth in international travel is anticipated to continue throughout the coming year as visitors, particularly from Asia and Australia, take advantage of the weakening U.S. dollar.

Market Challenges The biggest challenges for the San Francisco lodging market will be the effects of the labor union strikes at the end of 2004, with the possibility of a tarnished lodging industry image for the Bay Area. In addition, the unsteady technology industry continues to weigh on the city’s local economy. These challenges are forcing hoteliers to continue attempts to increase their occupancy while hindering the growth of ADR into 2005.

Demand Changes Enthusiastic entrepreneurs are optimistic that Silicon Valley is in the process of a major comeback while more tempered views believe the region remains in a delicate state. Many anticipate the area may experience a technological rebound within the next 18 months, which they are referring to as “Web 2.0.” The success of Google and its IPO, the modest increase in computer sales, and the investments in technology start-ups provide a modest basis for optimism. However, at the same time, the area’s high commercial vacancy rate of approximately 21% still provides reason for caution.

Though San Francisco’s commercial real estate market weakened alongside the national recession and the dot-com bust of the past few years, investors are showing signs that the market may be in a recovery stage. As of early November, 11 Class A buildings have transferred ownership throughout San Francisco in 2004, compared to a total of two transactions in the past four years. In total, investors purchased approximately $2.1 billion of San Francisco office property in the first three quarters of 2004. However, office rental rates are down approximately 60% to $25.91 per square foot from fourth quarter 2000 levels. Transactions in the Bay Area are anticipated to continue as the low prices make the market attractive to financial services companies and technology firms looking to expand.

126 At the end of the second quarter in 2004, the San Francisco Convention and Visitors Bureau launched its new marketing and branding campaign titled, “Only in San Francisco” in an effort to enhance the city’s tourism industry. Businesses such as local magazines, television and radio stations, outdoor media companies, and the San Francisco International Airport have committed more than $1.2 million in local advertising space and time to the new campaign. “Only in San Francisco” extends beyond traditional advertising to include unique tour packages, “Only in San Francisco, Only with Visa” offers, exclusive deals with See’s Candies, and “Wish You Were Here” sweepstakes.

The Port of San Francisco announced that construction has begun on the International Cruise and Bryant Street Pier Project. This $400 million mixed-use project will feature a state of the art international cruise terminal facility, luxury residential condominiums, office and retail commercial developments, and a waterfront park known as Brannan Street Wharf Park. Construction is slated for completion in late 2006.

The biotech industry will continue to be a major travel demand generator for the Bay area throughout 2005, particularly due to the recent passage of the stem cell research program on November 2. This legislation will allow the state to borrow up to $300 million per year for the next 10 years for stem cell research in universities and private institutions, 12 times more than the total amount spent last year. Due to the lack of support of stem cell research in other areas of the country, California and, particularly, the Bay Area are poised to continue to be the forerunner in biogenetic research in the near future. Additionally, a recent study found that the number of jobs in the biotechnology and pharmaceuticals industries is anticipated to grow by 11% during the next 10 years, increasing from 406,700 to approximately 536,300 employees by 2014.

San Francisco was chosen in October to be one of the major markets (along with Washington, D.C. and Los Angeles) in which labor unions supporting employees led strikes against hotels. Some 4,000 employees struck against 4 hotels and were locked out of an additional 10. Though strikes ended on November 21, issues of concern for San Francisco’s hospitality industry include Mayor Gavin Newsom’s support of the employees over the industry and the tarnished image the Bay Area hotels may have received from the ordeal.

127 Supply Changes In 2004, San Francisco benefited greatly from a large increase in demand coupled with approximately a 0.3% decrease in supply. This trend is anticipated to continue in 2005, with limited supply in the pipeline. According to Smith Travel Research, 604 new hotel rooms are in construction with 1,850 rooms in the planning phase. The most anticipated change in supply is the completion of the St. Regis Museum Tower, which is scheduled to open in June 2005. This mixed-use project will include the St. Regis Hotel with 269 guestrooms, 102 luxury condominiums, the three-story Museum of African Diaspora, and four levels of garage parking.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Hotel Vitale San Francisco 200 March 2005 City & County of San Francisco St. Regis San Francisco 269 June 2005 San Francisco Museum Tower Redevelopement Agency

Major Renovations in 2005 PROPERTY LOCATION UNITS SCHEDULED COST DEVELOPER/ OPENING DATE (MILLIONS) OWNER North Bay Inn San Rafael 50 May 2005 NAV Private Investor Renovation

Hotel Closings in 2004 PROPERTY LOCATION UNITS CLOSING DATE COMMENTS San Francisco San Francisco 103 February 2004 NAV Bayside Travelodge Hill Point San Francisco 30 June 2004 NAV Guest Houses Juliana Hotel San Francisco 107 August 2004 Hotel was sold

128 Major Transactions in 2004 Four notable hotel transactions occurred in the Bay Area in 2004, the largest of which was the sale of the 261-room Ritz-Carlton Half Moon Bay in February. Strategic Hotel Capital Inc. purchased the property from Vestar Development/Athens Group for approximately $124.4 million, or $476,628 per room, making it one of the most expensive transactions in California for the year. Additionally, the 374-room Clift Hotel underwent a sale and leaseback deal in October for approximately $71 million. Morgans Hotel Group sold the property, thereby emerging it from Chapter 11 bankruptcy protection, to Divco West Properties. Morgans will retain a 99-year leasehold on the property.

Other notable transactions include the sale of the 107-room Tiburon Lodge in May by a private investor to Larkspur Hospitality for approximately $15.4 million, and the sale of the 188-room Pickwick Hotel in January by Wyndham International Inc. to Koreana Hotels for approximately $14 million.

Political/Economic/Legal Changes After years of experiencing economic downturn, the economic conditions in San Francisco may be showing signs of recovery. During the four quarters ending September 2004, overall employment levels declined at a rate of 0.7%, while hospitality and leisure employment levels grew at a rate of 1%. This trend is anticipated to continue as hospitality employment levels are forecast to grow at 2.4% annually for the next five years. In addition, Economy.com anticipates personal income in the Bay Area to grow at approximately 2.3% yearly for the next five years, which is comparable to the national average.

129 regions and markets tampa TAMPA

Introduction The Tampa lodging market experienced positive performance in 2004 despite an unusually active hurricane season during the last quarter of the year. Fortunately, Tampa’s tourism and hospitality industry infrastructure remained unaffected by the hurricanes experiencing only limited disruptions in power supply. Tampa continues to strengthen its performance and is poised for further improvement in 2005, as a result of the planned revitalization of downtown, increase in cruise industry activity, new hotel developments, record level air passenger traffic volume, corporate relocations to the Westshore area and the increase in retail development.

In 2004, Tampa’s lodging market performance increased relative to 2003. Based on November year-to-date data provided by Smith Travel Research, occupancy increased an estimated 4.3 percentage points to 65.1% in 2004, while ADR increased an estimated 2.5% from $81 to $83, resulting in a RevPAR increase of 9.7% from $49 to $54.

Occupancy is anticipated to increase by approximately 1.3 percentage points to 66.4% in 2005 while ADR is anticipated to increase 3% from $83 to $85, resulting in a RevPAR increase of 5.1% to $57.

Market Strengths Tampa is dedicating significant resources to improving the downtown area, which is attracting additional lodging, office and residential projects. The Westshore area, Tampa’s commercial center proximate to Tampa International Airport (TPA) and home to the largest inventory of office space in Florida, is also expanding, as observed by the recent opening of the 239-room Renaissance Tampa Hotel located at International Plaza, Tampa’s most upscale shopping center. The diversity of Tampa’s visitor mix, both from an origin and demographic profile, minimizes demand fluctuations and seasonality in the local

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133 lodging market. In turn, due to the market’s mixed demand, entertainment and recreational attractions are being developed to meet the wide-ranging needs of visitors.

Market Challenges Tampa was not directly affected by the four hurricanes that hit Florida’s shores in 2004: Frances, Jeanne, Charley, and Ivan. Meteorologists, however, predict that Florida’s hurricane seasons will continue to intensify, producing higher frequency and intensity of hurricanes. This may present future challenges to the Convention & Visitors Bureau (CVB), lodging properties and the cruise industry, as they strive to increase bookings during the summer and fall months and counter balance the impacts of negative publicity from the natural events. The increasing popularity of other Gulf Coast destinations such as Clearwater Beach, St. Petersburg, and Sarasota is also anticipated to place additional pressures on Tampa’s lodging industry.

Demand Changes In 2004, Tampa International Airport (TPA) experienced record breaking passenger traffic that is anticipated to continue through the final quarter of the year. Year-to-date September 2004 airport passenger volume at TPA increased approximately 12% compared to the same period in 2003, with both domestic and international passenger volume increasing at similar levels. TPA anticipates opening the new Airside C terminal in April 2005. The $134 million terminal will serve Southwest Airlines, Spirit Airlines, and new carrier Independence Air. Additionally, AirTran Airways and Southwest Airlines are looking to increase flight operations from Tampa to Northeast and Midwest destinations. The increase in flights is anticipated to contribute to positive lodging performance in 2005.

Tampa’s Convention Center experienced relatively flat convention activity during the first three quarters of 2004 compared to the same period in 2003, although there are expec- tations of stronger activity in the last quarter. At present, the CVB is considering a large- scale expansion of the Tampa Bay Convention Center but financing for the project has not yet been finalized and the project remains in the planning phase.

The Port of Tampa continues to confirm its position as one of the nation’s fastest growing homeports. In 2003, approximately 810,000 passengers where recorded, while 2004 performance was even stronger with estimates peaking at 832,000 passengers, repre-

134 senting a 3% increase. In 2005, however, cruise ship reassignments are anticipated to have a temporary damper on cruise demand, resulting in a decrease of approximately 3% in passenger volume for the year.

In November, Carnival Cruise Line’s 2,124-passenger vessel “Miracle” began sailing from Tampa. This will be the largest cruise ship to ever be home-ported in Tampa year-round. Additionally, Royal Caribbean International cruise lines will bring its 1,800-passenger vessel “Splendour of the Seas” to Tampa from November 2004 to May 2005 to replace the smaller “Empress of the Seas”. According to the Tampa Port Authority, increasing passenger demand over the years has required that larger ships be stationed in Tampa.

Busch Gardens Tampa Bay, which represents the single largest tourist demand generator in the Tampa area, attracted approximately 4.3 million visitors in 2003, down slightly from 4.5 million in 2002. Estimated visitation for 2004 and projections for 2005 are not available at this time. The unveiling of new attractions, however, is anticipated to increase demand to the theme park attendance in 2005 and beyond.

The Florida Aquarium completed its expansion in March 2004, opening the new 2.2- acre water play area for children called Explore-A-Shore, featuring sea life models, a pirate ship, waterslide, water cannons and live animals. In addition, Clear Channel Entertainment opened the $23-million Ford Amphitheatre at the Florida State Fairgrounds in July 2004. The facility offers 20,000 outdoor seats and has already hosted major performers including Kiss and Sting. The new amphitheatre is conveniently located near major transportation arteries, offering convenient access to concert-goers from out of town. Lodging properties are anticipated to benefit from the increase in visitation from events held at the new amphitheatre.

Supply Changes The supply pipeline is increasing, with some referring to the current development environment in Tampa as a mini hotel construction boom, adding attractive new facilities to the existing inventory. The anticipated additions to supply include both limited and full service properties, accommodating the diversified demand in the area. Most notable projects in 2004 included the 250-room Seminole Hard Rock Hotel & Casino which opened in March 2004 on Indian reservation land at the edge of Tampa. The hotel features a 90,000 square-foot casino, which opened in June 2003. The property includes

135 ten food and beverage outlets and 10,000 square feet of meeting space. A 293-room, $45-million Renaissance Tampa Hotel developed by CNL, opened in August 2004 in the Westshore area. The hotel features 12,500 square feet of meeting space, including a 7,800 square-foot grand ballroom, five breakout rooms and one boardroom. The hotel is located in the upscale International Plaza shopping center, approximately one mile from Tampa International Airport.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Hampton Inn Ybor City 138 January 2005 CNL Financial Group Embassy Suites Downtown 374 January 2006 Whiteco Inc./WPM Construction Westin Hotel Rocky Point 200 February 2006 NAV

Major Transactions in 2004 There were two notable hotel transactions that took place in Tampa in 2004. In January, the Tampa Hilton located in the Westshore area was sold to Highland Hospitality for $29.5 million, or $124,000 per key. Highland Hospitality also purchased the Residence Inn located in downtown Tampa for $10.5 million, or $96,000 per key.

Political/Economic/Legal Changes Downtown Tampa is experiencing significant improvements in its residential, lodging, commercial, and cultural infrastructure. The Tampa Downtown Partnership is focusing on the revitalization of Tampa’s downtown area. Formed in 1986, the agency has a broad constituency and strong relationship with local government and community organizations. The Partnership will facilitate and oversee the creation of a strategic development plan for Downtown Tampa and the surrounding areas, taking into consideration residential, retail, office, lodging, transportation, and public spaces to harmonize the downtown “neighborhood.” The objective is to recommend specific projects that will serve as catalysts for further development.

136 regions and markets washington, d.c. WASHINGTON, D.C.

Introduction Washington, D.C. continues to be one of the strongest markets in the country in terms of RevPAR gains as performance in 2004 is close to the market’s peak level achieved in 2000. Additionally, several promising signs point to continued strong performance in 2005, primarily due to the opening of new office developments, increased group demand related to the 2003 commencement of the Washington Convention Center, and Major League Baseball’s return to the District of Columbia. As the Washington economy continues its rebound, 2005 should be another banner year for the area.

Based on November year-to-date data provided by Smith Travel Research, it is estimated that occupancy and ADR increased at healthy levels in 2004, aided by low office vacancy rates, increased corporate spending, and demand generated by the convention center. RevPAR exceeded 2003 levels by an estimated 13.4% in 2004, indicative of the strength of the market. Occupancy increased to an estimated 71.2% in 2004, while ADR increased an estimated 6% to $118, resulting in a 13.4% RevPAR increase to $84.

In 2005, performance trends are anticipated to continue to be positive, with occupancy increasing by 2.1 percentage points to approximately 73.3%, ADR growth of approximately 4% to $122, and a RevPAR increase of 7.1% to $90.

Market Strengths Washington, D.C. continues to be one of the most attractive destinations for corporate, leisure and international travelers, with a variety of historical and cultural points of interest, including the World War II Memorial completed in April 2004. Headquarters for many associations, political parties, and labor unions, coupled with quality attractions, airport access, and facilities, makes D.C. a favorite among meeting planners.

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139 Market Challenges The Washington lodging market, particularly the leisure and group demand segments, has continued to be affected by security concerns, particularly following increases to the terror treat level.

Demand Changes After one full year of operation, the 2.3 million square-foot Washington Convention Center hosted nearly 1 million visitors and generated 438,000 room nights, netting $426.5 million in delegate spending. The convention center is projected to generate over 17,000 jobs and $1.4 billion in total regional economic impact by 2007.

Baseball returns to Washington, D.C. after more than 30 years as the Nationals will play their first home game in April 2005 at their temporary home at RFK Stadium. Plans are underway to construct a 43,000-seat stadium just south of the nation’s capital. When in full swing, the stadium anticipates generating $20 million annually in additional hotel spending for the D.C. area.

The government lodging per diem rate for the District of Columbia has increased by 2% for fiscal year 2005 to $153. Prior to this increase, Washington, D.C. lodging per diem hung steadily at $150 since the February 2002 increase from $119, or a 26% increase. With many room nights attributed to government employees, this increase should be a welcome sign.

Washington, D.C. plays host to one of the world’s largest collections of museums and galleries, which continues to draw domestic and international leisure travelers to the area. New or planned developments in the city include the Capitol Visitor Center, the National Portrait Gallery, the Newseum, and the Arena Stage.

Sectors in Washington, D.C. that have shown the highest employment growth over 2004 have been Construction, Professional and Business Services, and Leisure and Hospitality. The most notable construction projects include Waterview, Arlington Gateway, One Liberty Center, IMF Headquarters, and 1875 Pennsylvania Avenue. These projects, and many others, have increased the number of jobs and demand for hotel room nights in the Washington, D.C. area. It is estimated that 3 million square feet of office space was added in 2004 with an additional 1.3 million square feet estimated for 2005.

140 Downtown Washington, D.C. has maintained its status of having the lowest office vacancy rate in the country at 8.3% as of third quarter 2004, with suburban Washington, D.C. experiencing a slightly higher vacancy rate of 11.6% at the same point in time.

In 2004, total airport passenger volume at the city’s two major airports, Washington Dulles International Airport and Ronald Reagan Washington National Airport, increased approximately 19.1% through October 2004, fueled by an increase in government and leisure travel.

Supply Changes The hotel market in Washington, D.C. is in a development cycle, with the current new supply pipeline showing an additional 3,600 rooms either under construction or in the final stages of planning, representing a 4% increase to the current hotel supply. In addition, another 3,000 room increase to the Washington, D.C. area lodging supply is anticipated in 2008, with two convention center-oriented hotels anticipated to open 10 miles apart from each other.

Following the trends of other cities, Washington, D.C. is also seeing some of its notable hotels converted back to residential uses. Particularly, JBG Companies has purchased the 1,300-room Marriott Wardman Park and is planning to convert some rooms into residential units, while Monument Realty, LLC will turn the 251-room Watergate Hotel into 133 luxury cooperative apartments.

Anticipated Openings, Closings, and/or Renovations The following summarize selected major supply changes.

Planned Additions PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Residence Inn 333 E. Street, SW, 233 January 2005 Four Fires LLC/ Capitol Washington, D.C. Donohoe Development Co. Hampton Inn 599 Massachusetts 228 March 2005 JBG Construction/CG Washington D.C. Avenue, Washington, D.C. Investments Embassy Suites 44610 Waxpool 150 March 2005 Buccini/Pollin Group Dulles North Road, Dulles, VA Loudoun

141 Planned Additions (continued) PROPERTY LOCATION UNITS SCHEDULED DEVELOPER/OWNER OPENING DATE Homewood Suites 44612 Waxpool 90 March 2005 Buccini/Pollin Group Dulles North Road, Dulles, VA Loudoun Embassy Suites 1150 K Street NW, 383 August 2005 Kite Companies Washington Washington, D.C. Convention Center Washington-Dulles 13869 Park Center 155 expansion September 2005 Stanford Hotels Airport Hilton Road, Herndon, VA Corporation Residence Inn Dulles 45250 Monterey 151 October 2005 Lerner Enterprises Airport Place, Dulles, VA and The Tower Companies Hilton Garden Inn 8301 Boone Blvd., 149 Spring 2006 Donohoe Tysons Corner Vienna, VA Development Company Courtyard by 140 L. Street SE, 204 February 2006 NJA Development Marriott Capitol Hill Washington, D.C. Partners, LP Towers Westin Gateway 801 N. Glebe Road, 336 March 2006 The JBG Companies Hotel Arlington,VA Waterview Hotel Two Waterview Place, 155 2007 The JBG Companies Arlington, VA Marriott Convention Mt Vernon Place - 1,500 June 2008 Tishman Urban Center Hotel 9th and 10th Streets Development Massachusetts Avenue Corporation NW, Washington, D.C. Gaylord National Woodrow Wilson 1,500 March 2008 The Peterson Resort & Convention Bridge, Oxon Hill, MD Companies Center

Major Renovations in 2005

PROPERTY LOCATION UNITS SCHEDULED COST OPENING DATE (MILLIONS) Key Bridge 1401 Lee 586 June 2004 $15 Marriott Highway Arlington, VA Renaissance 1127 Connecticut 657 July 2004 $10 Mayflower Hotel Avenue NW, Washington, D.C.

142 Major Renovations in 2005 (continued) PROPERTY LOCATION UNITS SCHEDULED COST OPENING DATE (MILLIONS) Hyatt Regency 400 New Jersey 834 October 2004 $13 Washington, D.C. Avenue, NW, on Capitol Hill Washington, D.C. Four Seasons 2800 212 April 2005 $20 Hotel Pennsylvania Washington, D.C. Avenue N.W. Washington, D.C.

Major Transactions in 2004 Eight notable transactions occurred in 2004 in the Washington, D.C. area. In May, Strategic Hotel Capital sold the 834-room Hyatt Regency Capitol Hill for $157 million to BRE/ Capital LLC (an affiliate of the Blackstone Group), or approximately $188,000 per room. Also in May, LaSalle Hotel Properties acquired the 241-room Hilton Old Town from LNR Alexandria for $59 million, or approximately $245,000 per key. The 390-room Hyatt Regency Bethesda was sold to Rockwood Capital by the Blackstone Group for an undisclosed price.

JBG Companies purchased the 1,334-room Marriott Wardman Park for an estimated $300 million, or $225,000 per room, from Thayer Hotel Investors at the end of the year. Furthermore, as referred to above, the Watergate Hotel was purchased in August for an undisclosed price by Monument Realty LLC from Blackstone Real Estate Advisors.

In May, the 366-room Ritz-Carlton Pentagon City was acquired by MeriStar Hospitality from Washington Tower for $93 million, or $254,000 per room. In addition to the Marriott Wardman Park, JBG Companies was active again with the purchase of the 265-room Sheraton Hotel in June from Stephen A. Goldberg Co. for an undisclosed price. Lastly, the 343-room Crystal City Marriott Hotel was sold in July to Vornado Realty Trust from Crystal City Hotel Associates, LP for $21.5 million, or approximately $63,000 per key.

Political/Economic/Legal Changes Washington won the Expos franchise over other cities bidding reportedly because of its wealthy population base and a financial package that would build a new stadium. The

143 $440 million financing package will be used to build the new ballpark on the Anacostia waterfront less than a mile south of the U.S. Capitol.

The recent merger between the textile worker’s union and the hotel and restaurant industry union to form UNITE HERE has become a power broker for unionized employees for Washington, D.C. area hotels. Representing about 37% of the total rooms in the area, UNITE HERE is seeking a two-year contract term through 2006 to put Washington, D.C. in line with contract expirations in New York, Chicago, Boston, and Toronto, in hopes of leveraging its negotiating position with the large hotel chains.

144 CONTACTS

MICHAEL FISHBIN DAN LASIK NATIONAL DIRECTOR AMERICAS DIRECTOR (212) 773-4906 (703) 747-1287 Hospitality Services Hospitality & Leisure e-mail: [email protected] e-mail: [email protected]

ROGERIO BASSO MARK LUNT (305) 415-1321 (305) 415-1673 Miami Miami e-mail: [email protected] e-mail: [email protected]

GEORGIANNE FSADNI MICHAEL STRANEVA (212) 773-4924 (602) 322-3610 New York Phoenix e-mail: [email protected] e-mail: [email protected]

AARON GREENMAN BRIAN TRESS (617) 570-8422 (212) 773-8359 Boston New York e-mail: [email protected] e-mail: [email protected]

TROY JONES (213) 977-3338 Los Angeles e-mail: [email protected] E RNST & YOUNG www.ey.com/us/reas

SCORE Retrieval File No. W00296