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High Yield Lodging Research January 2002
High Yield Lodging Outlook 2002 Back INN Style?
Jason N. Ader (212) 272-4257 Jason M. Kroll CFA (212) 272-9621 Trip McCoy (212) 272-8821 High Yield Lodging Outlook 2002
January 18, 2002 Table of Contents Investment Thesis ...... 4 Is the Lodging Industry Poised for a Turnaround?...... 5 What is the Credit Outlook?...... 10 How Are Current Trends? ...... 13 Relative Value Analysis...... 15 Company Updates Boca Resorts, Inc...... 17 Extended Stay America, Inc...... 24 FelCor Lodging Trust ...... 34 Host Marriott, LP ...... 45 MeriStar Hospitality Corp...... 56 Prime Hospitality Corp...... 66 Starwood Hotels & Resorts Worldwide, Inc...... 74 Appendix ...... 86
High Yield Lodging Jason N. Ader Research (212) 272-4257, [email protected] Jason M. Kroll, CFA (212) 272-9621, [email protected] Trip McCoy (212) 272-8821, [email protected]
Lodging Outlook 2002 Special thanks to: John Mulkey Glen Reid Corey Benjamin Dina Treanor John F. Foy Managing Editor: Mark Albright Copy/Production: John Foy, Colleen Pickett, Miles Becker, Maya Singer, Reno Bo Cover Design: Ann Kim
Bear Stearns® is the registered trademark of The Bear Stearns Companies Inc. Lodging Outlook 2002 — January 18, 2002
Investment Thesis
We are commencing formal high yield coverage of the lodging industry with an overall market weighting. In general, we believe that companies in this sector face a challenging near-term environment as a result of the travel fall-out following September 11 and generally weak economic conditions. However, in our view, the long-term outlook remains sound because the economy appears to be slowly rebounding (January consumer confidence rose to its highest level in 12 months) and the prospect of new supply remains limited. Additionally, most lodging companies in our universe have readjusted their cost and capital structures to better withstand the current challenging operating environment. Meanwhile, scaled-back capital expenditure plans, targeted asset sales and significantly reduced dividends (where applicable) should allow lodging companies to preserve capital and liquidity. We believe that these proactive steps position the lodging industry to potentially realize significant EBITDA expansion in 2003–05 and a strengthening of credit measures that were weakened after September 11. While most lodging bonds have rebounded considerably since their post- September 11 lows, we believe that modest upside remains for investors with a 12–24 month investment horizon. Although we expect lodging bonds could be somewhat volatile over the course of the next several months as a result of unfavorable quarterly earnings comparisons, results should stabilize, in our view, during the second half of the year. Based on our projections, credit measures are expected to weaken, in some cases considerably, over the first half of 2002, but will likely stabilize from that point and improve by year-end. In addition, we believe that most of the difficult issues, such as rating downgrades and covenant amendments, have already been resolved and priced-in by the investment community, thus allowing companies to focus on the future. In terms of top picks, we favor Extended Stay America and FelCor Lodging Trust, in terms of risk adjusted total return potential. We view the ESA bonds as one of the more stable credits in the lodging space given the current challenging landscape. We believe that the extended-stay business model (when compared to the full-service model) is better insulated from both the economic downturn and travelers’ fears of flying. In addition, the company’s liquidity is ample, as it completed a new round of financing last summer. Among the three lodging REITs, we believe FelCor’s bonds offer the best relative value, particularly for those investors willing to absorb some near-term volatility. We believe FelCor entered the downturn in the best financial condition among the lodging REITs, and its strategy of being well-diversified geographically with limited exposure to top U.S. markets has become a comparative strength in the post- September 11 period. In addition, we believe that the MeriStar Hospitality senior subordinated notes are an attractive relative value play and well-suited for CBOs, given the comparatively low dollar price at which the bonds trade (87.75 as of January 18). The balance of this report is dedicated to offering investors additional information on key trends, recent developments as well as our outlook for the industry. In addition, we provide comprehensive company reports and models on seven high yield lodging companies. Lastly, the appendix provides a wide array of key industry data and metrics that we believe may be useful in forming your investment decision.
4 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Is the Lodging Industry Poised for a Turnaround?
The lodging sector was among the most impacted industries by the general reaction following the attacks of September 11. The hotel business was crippled by massive airline disruption and consumer fear of travel. Overnight, market expectations for the business went from dim to dire, as hotels ran empty and rates began to plummet. Earnings and cash flow estimates for the remainder of 2001 were slashed, and original expectations for 2002 were all but erased. In an effort to console investors, several lodging companies hosted conference calls to discuss the state of their businesses, and lay out a course for how they would manage in an unchartered environment. And a few weeks after the attack, the bottom was reached. Since that time, we have seen a significant recovery in not only the underlying business fundamentals, but also in lodging bond spreads. While America was still grieving, its leadership was taking decisive and effective military action against the perpetrators in Afghanistan, and the traveling public began to feel more assured about returning to the road. Notwithstanding several scares and a few tragic and isolated incidents, hotel operating trends began to show signs of gradual improvement and move up considerably from the post-attack troughs. Concomitant with heavy discounting implemented by nearly every major airline, hotel companies began to offer very attractive rates, put together package deals, waive restrictions, and do everything possible to stimulate new demand. Weekly Change in Total U.S. RevPAR Since September 11 (Year Over Year) 10%
0%
-0.053 -10% -0.102 -0.107 -0.129 -0.137 -0.141 -0.131 -0.16 -0.149 -20% -0.175 -0.174 -0.175 -0.169 -0.189 -0.188 -0.202 -0.243 -30%
-40% -0.373
-50% 1/5 9/15 9/22 9/29 1/12 10/06 10/13 10/20 10/27 11/03 11/10 11/17 11/24 12/01 12/08 12/15 12/22 12/29
Source: Smith Travel Research. As expressed in the graph above, more than four months after the tragic attacks of September 11, the hotel business has begun to show slow signs of stabilizing. While acknowledging that the operating outlook for the first half of 2002 remains challenging, in our opinion this is less a function of September 11 but stems more from continued reduced corporate spending levels and tighter travel budgeting controls that have constrained business travel. It is important to understanding the lodging industry’s traditionally tight correlation with the
Bear, Stearns & Co. Inc. 5 Lodging Outlook 2002 — January 18, 2002
overall economy. As illustrated below, the lodging industry tends to follow trends in the overall economy, and for the past 25 years, change in hotel demand has closely tracked changes in GDP. While economic trends are a good industry barometer, the two do not track each other precisely. Historically, contractions in the lodging industry have been longer and deeper, while expansions have been shorter. Troughs in hotel rooms demand growth lead downturns in the economy and lag recoveries. Correlation Between Changes in GDP and Hotel Demand
0.12 Change in GDP Change in Demand
0.08
0.04
0
-0.04 75 77 79 81 83 85 87 89 91 93 95 97 99 01E 03E
Source: Smith Travel Research and Bear Stearns Global High Yield Research. Comparisons Should Improve as the Year Goes On One reason we believe lodging companies should fare better as the year progresses is that comparisons become progressively easier. As the chart below reflects, January was the strongest RevPAR month of the year and the three months of the first quarter were the only months to show positive comparisons. 2001 Monthly Changes in RevPAR
10.0% 7.1%
5.0% 3.0% 1.4% 0.0%
-5.0% -2.3% -4.5% -4.2% -4.8% -6.3% -10.0%
-12.0% -15.0% -16.3% -20.0% -17.6%
-25.0% -23.6%
-30.0% Jul-01 Jun-01 Oct-01 Jan-01 Feb-01 Mar-01 Apr-01 Sep-01 Nov-01 Dec-01 Aug-01 May-01 Source: Smith Travel Research and Bear Stearns Global High Yield Research. (a) RevPAR for 12/01 was estimated based on weekly data reported by Smith Travel.
6 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Limited New Supply Is Silver Lining In our view, the silver lining for the lodging industry is the expectation of limited new supply coming on line over the next several years. The recent shock to the lodging industry has only exacerbated lender caution toward new hotel projects. We have seen several examples of projects being put on hold or cancelled outright. This trend of decelerating supply growth over the past few years is apt to make it considerably easier for demand growth to outpace supply growth. We are currently forecasting an increase in room inventory of just 2.5% in 2001, falling to just 1.5% in 2002 and 1.0% in 2003. Hotel Inventory Growth 2000 2001E 2002E 2003E STR Chain Scale Rooms Census % Change % Change % Change % Change Full-Service Upper-Upscale 499,828 3.6% 3.0% 1.9% 1.0% Upscale 359,586 4.4% 5.0% 2.0% 1.0% Midscale w/F&B 643,349 -1.2% 1.2% 0.6% 0.4% Subtotal Full-Service 1,502,763 1.7% 2.7% 1.4% 0.7% Limited-Service Midscale w/o F&B 528,003 9.5% 7.0% 5.0% 3.0% Economy 758,931 3.1% 1.9% 0.9% 0.5% Subtotal Limited-Service 1,286,934 5.6% 4.0% 2.6% 1.6% Total Chain Scale Segments 2,789,697 3.5% 3.3% 2.0% 1.1% Independents 1,275,625 2.4% 0.9% 0.5% 0.3% Total All Rooms 4,065,322 2.9% 2.9% 1.5% 1.0% E: Estimated. Sources: Lodging Econometrics and Bear Stearns Global High Yield Research. Supporting our forecast are recent 3Q01 hotel construction statistics released by Lodging Econometrics’ (“LE”), which showed a 5.5% decline in the total development pipeline during the quarter. The active pipeline—the best indicator of near-term hotel supply—also dropped 5.5%, while the inactive pipeline fell by 5.4%. With little confidence in current industry conditions, as well as a high degree of uncertainty about when and at what level future hotel demand will stabilize, developers continue to stall or cancel many projects. This is being compounded by a hotel-lending environment that is tighter now than it was before September 11. As the chart below indicates, the diminution of hotel supply has been a trend over the last several quarters. Quarter Over Quarter % Change in Total Pipeline 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 -2.6% -0.8% -5.7% -7.6% -7.0% -5.5% Source: Lodging Econometrics. According to LE’s “Quarterly Perspectives” publication issued on January 7, lending for new construction and transaction sales will continue to be sparse until late 1Q02, as no exit strategy appears to be available for their loans. Mezzanine financing for large development projects appears to be in short supply. Management and franchise companies are also cutting back on their new project commitments. Accordingly, new project announcements should be minimal, causing the total pipeline of projects to contract further, while cancellations and postponements will swell. This will be particularly pronounced in the top urban markets (only seven of top 25 markets expecting 2002 supply growth over 3%), which bodes well for companies such as Starwood Hotel & Resorts and Host Marriott. Accordingly, we believe that the expectation of limited new supply positions the lodging group well for a strong rebound in performance during 2003 and for several years thereafter.
Bear, Stearns & Co. Inc. 7 Lodging Outlook 2002 — January 18, 2002
Mixed Signals for 2002, but Long-Term Outlook Positive With reasonable assurance of minimal supply growth over the coming years (it can take as long as four to six years to build a full-service hotel), the demand side of the equation is the primary focus. In addition to a consistent improvement in weekly operating results (as tracked by Smith Travel Research), there are several other macro indicators that we monitor which could cause us to become more positive on the lodging sector if we begin to see signs of favorable change. Although unemployment figures have been trending upward for several quarters (December data were up 0.2% to 5.8%), any indications that this metric has begun to plateau would be a favorable sign for the lodging industry. Similarly, we are watchful for trends in consumer confidence (January consumer confidence rose to its highest level in 12 months) and consumer expectations, which have historically been fairly reliable leading indicators of lodging room demand growth. The following charts give some insight into business and leisure travel volume: Better Business Conditions In Next Six Months
24
22
20
18
16
14
12
10
8 Jul-00 Jul-01 Jan-00 Oct-00 Jan-01 Oct-01 Jun-00 Jun-01 Feb-00 Mar-00 Apr-00 Feb-01 Mar-01 Apr-01 Dec-99 Sep-00 Nov-00 Dec-00 Sep-01 Nov-01 Dec-01 May-00 Aug-00 May-01 Aug-01
Source: The Conference Board.
8 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Planning To Vacation In Next 6 Months
60
55
50
45
40
35
30
25
20 Oct-98 Jun-99 Oct-99 Jun-00 Oct-00 Jun-01 Oct-01 Feb-99 Apr-99 Feb-00 Apr-00 Feb-01 Apr-01 Dec-98 Dec-99 Dec-00 Dec-01 Aug-98 Aug-99 Aug-00 Aug-01
Source: The Conference Board. We would look for signs of incremental improvement in any of these metrics as positive indicators for the lodging industry. In addition, travel surveys and grass roots calling are important data points to signal that things may be on the mend. While these remain somewhat mixed regarding the near-term outlook for the industry, our longer-term visibility suggests a recovery in lodging fundamentals could begin to materialize toward the end of 2002 and more robustly in 2003. Cost Cutting Initiatives Position Industry With Significant Operating Leverage Since September 11, most lodging companies have employed several cost- cutting measures in order to realign their cost base with the new outlook for top- line growth. These efforts include suspending less essential brand standards, streamlining staffing and service delivery, reducing labor costs, consolidating operations by closing floors in low occupancy periods, reducing hours of operations at hotel restaurants, and where possible, sharing facilities between adjacent properties. As a result of being pro-active, most management teams have indicated that they have been able to reduce break-even occupancy as much as 1000 basis points from previous levels. We believe that this expense discipline should position the industry with significant operating leverage over the next several quarters and into 2003 given our belief that RevPAR will continue to increase on a sequential basis throughout 2002. Another Extraordinary Event Could Further Disrupt Travel Patterns Among the many things we learned from the events of September 11 was the degree to which the hotel industry is leveraged to the airline industry. Almost overnight, most hotels in destination cities became desolate, and more than four months later, are still operating meaningfully below pre-attacks levels. And while the American traveler has shown considerable resilience, it should be clear that another domestic terrorist event is likely to have substantial effects on travel-related businesses.
Bear, Stearns & Co. Inc. 9 Lodging Outlook 2002 — January 18, 2002
What Is the Credit Outlook?
Credit Measures to Weaken in the Short-Term and Firm Over Time Given our belief that quarterly year over year comparisons will be quite challenging for the period from 4Q01–2Q02, we are projecting all companies in our coverage universe will experience a weakening in credit measures over that time period. Based on our projections, credit measures are expected to weaken, in some cases considerably, over the first half of 2002, but will likely stabilize from that point and improve by year-end. Additional improvement is expected during 2003, as we expect most companies to register solid EBITDA gains compared to 2002. Credit Statistic Comparison Actual Projected LTM 3Q 01 12/31/2001 LTM 2Q 02 12/31/2002 12/31/2003 Leverage Int. Cov. Leverage Int. Cov. Leverage Int. Cov. Leverage Int. Cov. Leverage Int. Cov. Boca Resorts 2.8x 3.3x 3.0x 3.0x 3.1x 2.9x 2.9x 3.1x 2.4x 3.5x Extended Stay 3.9x 3.2x 4.2x 3.1x 4.5x 3.0x 4.4x 3.0x 4.1x 3.4x FelCor Lodging 4.6x 2.5x 5.3x 2.3x 5.8x 2.1x 5.4x 2.3x 4.8x 2.5x Host Marriott 5.0x 2.5x 6.2x 2.1x 7.2x 1.7x 6.5x 1.9x 5.6x 2.2x MeriStar 5.8x 2.3x 6.5x 2.1x 7.2x 1.7x 6.5x 1.8x 5.8x 2.0x Prime Hospitality 2.4x 3.5x 2.8x 3.4x 3.4x 2.9x 2.9x 3.2x 1.8x 4.8x Starwood Hotels 4.0x 3.6x 4.7x 3.3x 5.3x 3.0x 4.4x 3.5x 3.5x 4.0x Sources: Company reports and Bear Stearns Global High Yield Research estimates Banks Provide Support Through Challenging Period; Liquidity Reinforced Following September 11, several lodging companies were forced to seek amendments to their bank agreements, based on the expectation that they would not meet the existing covenant tests contained within the agreements. The bank community proved to be very supportive during this challenging period as it approved amendments for Extended Stay America, FelCor Lodging, Host Marriott, MeriStar Hospitality and Starwood Hotel & Resorts. The banks did, however, get compensated for their support through either higher one-time fees or through increased interest rates. In addition, a few companies had to accept additional restrictions, which included limitations on capital expenditures, investments, share repurchases and payment of dividends. In an effort to reduce reliance on their bank groups, each of the three REITs (FelCor, Host, MeriStar) opportunistically accessed the high yield market, using proceeds raised to pay off existing term-loans as well as reduce outstanding revolver balances. As a result, we believe each of the companies under coverage has sufficient liquidity to weather the challenging operating environment expected over the next several quarters Rating Agencies Give Mixed Reviews Following September 11, S&P and Moody’s both placed the majority of public lodging companies on CreditWatch/review for potential downgrade. At the time of their initial actions, both agencies were clearly concerned about the potential impact of future terrorist attacks as well as the status of our military activity in Afghanistan. Implicit in their reviews was the expectation that earnings for the lodging companies would be negatively affected over the near-term, resulting in a weakening of credit measures. Since that time, concerns over terrorism remain, but have generally diminished as being in the forefront of everyday thought. Consequently, many lodging management teams have indicated that the continued challenging environment is more a reflection of weak business travel as opposed to traveler’s fear of flying.
10 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
In considering the future outlook for the industry and more specifically the outlook for individual companies, Moody’s and S&P have taken subtly different views. To date, the rating actions taken by Moody’s reflect a much more conservative view in comparison to S&P. While S&P has not been bullish, its ratings reflect their belief that the industry and credit measures for certain companies are likely to recover sufficiently within a two-year period to support existing ratings. Our approach and outlook is more in line with the approach takenbyS&P. The most clear-cut divergence in opinion was with regard to Hilton and Starwood. S&P affirmed its investment grade ratings for Hilton while indicating that it planned to do the same for Starwood once it made sufficient progress on resolving its significant near-term debt maturity issue. Both companies were assigned a negative outlook. S&P basically concluded that it believed both companies would be able to bring their credit measures back in line to support the existing ratings within a two-year timeframe. Moody’s downgraded Hilton to high yield status, bringing its rating in line with its existing high yield rating for Starwood (which it affirmed). Moody’s assigned a negative outlook to both companies. The agencies’ treatment of the REITs was more in line, although there were subtle differences in opinion. Both agencies agreed that each of the REITs warranted a downgrade as a result of the uncertain environment and weakening credit measures, but Moody’s assigned all three REITs a negative outlook, while S&P only assigned a negative outlook to Host (because of its high leverage for the rating) and assigned stable outlooks to FelCor and MeriStar. The chart below highlights the actions taken by the rating agencies to date. S&P has effectively completed its review of all the lodging companies under our high yield coverage. Moody’s has not yet concluded its review of Boca Resorts, Extended Stay America and Prime Hospitality. Recent Rating Agency Actions Standard & Poor's Moody's Rating Change Rating Change Ranking Date Action To From Outlook Date Action To From Outlook Hilton Hotels Senior 1/16/202 Affirmed BBB- - Neg 12/19/01 Lowered Ba1 Baa3 Neg Hilton Hotels Sr. Sub. " Affirmed BB+ - Neg 12/19/01 Lowered Ba2 Ba1 Neg Starwood Hotels Senior " Remains on CreditWatch* Neg 12/3/01 Confirmed Ba1 Neg FelCor Lodging Senior 1/8/02 Lowered BB- BB Stable 11/16/01 Lowered Ba3 Ba2 Neg MeriStar Hospitality Senior " Lowered B+ BB- Stable 12/3/01 Lowered B1 Ba3 Neg " Sr. Sub. " Lowered B- B Stable 12/3/01 Lowered B3 B2 Neg John Q. Hammons Hotels Sr. Sec. " Lowered B B+ Stable Remains on review Host Marriott Senior " Lowered BB- BB Neg 12/3/01 Lowered Ba3 Ba2 Neg Boca Resorts Inc. Sr. Sub. " Affirmed B- - Stable 10/3/01 Remains on review Prime Hospitality Corp. 1st Mtg " Affirmed BB - Neg 10/3/01 Remains on review " Sr. Sub. " Affirmed B+ - Neg 10/3/01 Remains on review Extended Stay America Sr. Sub. " Affirmed B - Neg 10/3/01 Remains on review * S&P has indicated that it plans to affirm Starwood's investment-grade rating once the company progresses with refinancing its considerable 2002-03 debt maturities. We expect both agencies to maintain a close watch on the lodging group over the next several quarters. We believe that either agency could lower their ratings further if the expected rebound in lodging demand materializes at a slower-than- expected rate. How Have Spreads on Lodging Bonds Performed? Despite the challenging environment, lodging bonds have performed well since their post September 11 lows, which occurred during late September. After certain bonds widened by as much as 500 bps as of late September, the group commenced a strong and steady rally. As the chart below illustrates, spreads on this benchmark group of lodging bonds have in some cases surpassed their pre- September 11 levels, while for others the gap has been narrowed considerably.
Bear, Stearns & Co. Inc. 11 Lodging Outlook 2002 — January 18, 2002
Select High Yield Lodging Issues — Spread-to-Worst vs. U.S. Treasuries (Bps Spread 6 Sep 01 vs 17 Jan 02)
Current Bps Spread Bps Spread as of Sep 06 750
500
250 Bps Spread
0 Sr. Sr. FCH HOT Deb. HMT MHX RST MHX PDQ ESA Sr. '08 6.750% 7.875% 9.000% 9.500% 8.750% 9.750% 9.150% 9.875% Sr. Sub. Sr. Sub. Sr. Sub. Sr. Sub. ISSUE
Sources: Bear Stearns Global High Yield Research We are particularly impressed with this performance given the clear uncertainty that existed regarding the potential for future terrorist attacks as these bonds commenced their rally. In our view, this reflects investors’ faith in the long-term outlook for the industry, particularly in relation to the uncertainty that exists for other “fallen angel” industries, such as technology and telecommunications.
12 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
How Are Current Trends?
Smith Travel Results For The Week Ending January 12 Total US RevPAR fell by 16.9% for the week ending January 12, compared with prior-year levels. This follows the previous week, which included the New Year’s period, when total U.S. RevPAR was down by 13.1%, yielding a sequential 380-bp decline. For the week ending January 12, occupancy fell by 11.2% while ADR declined by 6.4%. We believe that RevPAR levels could move sideways for the rest of January as a result of tough comparisons with January 2001. Weekly comparisons, in our opinion, should begin to show improvement during February because RevPAR during February 2001 was only up by 3%. As the first quarter progresses, we look for March to be an important benchmark for how quickly 2002 trends will actually rebound, in particular business travel. Considering the segment results in more detail, four of the five segments declined over the previous week. The upper-upscale segment declined over the previous week, falling 22.7% compared with 18.8%. The midscale segment with F&B had the largest sequential decline, falling by 560 bps from the week ending January 5. The upscale segment was the only segment to post a sequential advance, as RevPAR fell by 16.0% this week compared with 19.1% last week. The economy segment fell rather sharply over the previous week, as RevPAR decreased by 12.6% compared with 8.5% for the week ending January 5. The mid-scale without F&B posted a minimal decline, falling by 12.4% compared with 11.7% the previous week. Total U.S. and STR Segment RevPAR (for the week ending … ) 9/15 9/22 12/15 12/22 12/29 1/5 1/12 RevPAR % Change % Chg. % Chg. % Chg. % Chg. % Chg. % Chg. % Chg. United States -20.2% -37.3% -10.7% -5.3% -12.9% -13.1% -16.9% Upper Upscale -33.5% -62.1% -20.1% -13.5% -20.9% -18.8% -22.7% Upscale -19.5% -37.2% -9.8% 2.2% -11.1% -19.1% -16.0% Midscale with F&B -19.6% -30.9% -15.0% -4.4% -13.7% -13.5% -19.1% Midscale w/o F&B -11.9% -18.4% -4.2% 5.2% -5.1% -11.7% -12.4% Economy -11.9% -15.2% -8.4% -2.6% -9.4% -8.5% -12.6% Source: Smith Travel Research and Bear Stearns Global High Yield Research. The urban segment fell by 18.8%, a 230-bp drop from the week ending January 5. The suburban segment fell by 15.8% compared with a decline of 14.3%, while the airport location improved slightly, falling by 20.7% compared with a decline of 21.9% for previous week. The highway segment fell by 1.2% from the previous week, to end up down by 12.5%. The resort segment took the hardest hit sequentially, however, as RevPAR fell by 19.4% after being up by 0.5% the week before. We believe that movement over the prior week is not a valid indicator for this segment, as the resort segment traditionally experiences solid RevPAR over the New Year’s holiday, which fell during the last reported week. RevPAR By Location (for the week ending … ) 9/15 9/22 12/15 12/22 12/29 1/5 1/12 % Chg. % Chg. % Chg. % Chg. % Chg. % Chg. % Chg. Urban -30.6% -58.1% -15.7% -1.8% -16.2% -16.5% -18.8% Suburban -19.1% -33.0% -9.2% -2.5% -9.2% -14.3% -15.8% Airport -18.9% -40.5% -17.9% -7.4% -18.2% -21.9% -20.7% Highway -12.6% -20.2% -5.2% 3.9% -5.0% -11.3% -12.5% Resort -29.4% -52.7% -15.4% -21.9% -14.5% 0.5% -19.4% Source: Smith Travel Research and Bear Stearns Global High Yield Research. Again, most of the top markets fell slightly behind last week in this most recent reporting period. San Francisco, which has struggled since the attacks, declined by 41.3% compared with -25.6% the week before. RevPAR for New York fell slightly from the previous week, posting RevPAR declines of 50 bps, marking a
Bear, Stearns & Co. Inc. 13 Lodging Outlook 2002 — January 18, 2002
decline of 26.2%. As mentioned above, the resort segment fell-off this week—a fact proved by Oahu and Orlando. Each posted sequential losses for the week ending January 12. Oahu and Orlando’s RevPAR fell by 34.6% and 31.4%, respectively, after being down 26.2% and 16.1%, respectively. RevPAR for Key Markets (for the week ending … ) 9/15 9/22 12/15 12/22 12/29 1/5 1/12 % Chg. % Chg. % Chg. % Chg. % Chg. % Chg. %Chg. Atlanta -27.2% -48.3% -20.0% -8.6% -21.4% -15.1% -21.0% Boston -42.3% -63.7% -27.9% -18.7% -25.5% -37.1% -33.5% Chicago -29.0% -61.1% -0.7% 15.9% -0.6% -14.3% -20.4% Houston 1.9% -17.4% 3.8% 18.9% 2.2% -16.4% -2.9% Los Angeles -15.8% -42.2% -12.5% -12.1% -25.8% -8.4% -13.6% New York -29.2% -56.3% -25.7% -10.0% -21.3% -25.7% -26.2% Oahu, HI -19.0% -52.4% -32.1% -41.0% -40.1% -26.2% -34.6% Orlando -39.6% -61.4% -21.2% -29.4% -28.6% -16.1% -31.4% San Francisco -42.3% -69.3% -41.3% -26.4% -23.8% -25.6% -41.3% Source: Smith Travel Research and Bear Stearns Global High Yield Research.
14 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Lodging Industry — Relative Value Analysis as of January 17, 2002 Ratings EBITDA - CapEx Debt/ Moody's/ Amount Recent Quotes Call Data LTM EBITDA/Cash Int. /Cash Interest EBITDA Coupon Description Recom. Maturity S&P Outst.(a) Bid YTW Spread Date Price EBITDA LFY LTM LFY LTM LTM Courtyard by Marriott II Ltd. Partnership: 10.750% Senior Notes NR 2/1/2008 Ba3/B $115.8 102.25 9.50% 660 Current 105.38 Boca Resorts, Inc. (formerly Florida Panthers Holdings, Inc.): 9.875% Senior Sub. Notes Attractive 4/15/2009 B2/B- $216.0 104.50 8.78% 455 4/15/2004 104.94 $79.8 2.0x 3.3x 1.0x 0.5x 2.8x Extended Stay America: 9.150% Senior Sub. Notes Buy 3/15/2008 B2/B $200.0 99.00 9.36% 500 3/15/2003 104.58 $276.3 3.7x 3.2x 0.1x 0.1x 3.9x 9.875% Senior Sub. Notes Buy 6/15/2011 B2/B $300.0 104.50 9.02% 448 6/15/2006 104.94 Felcor Lodging Trust: 7.375% Senior Notes Buy 10/1/2004 Ba3/BB- $175.0 99.00 7.79% 460 Make-whole $399.3 2.8x 2.4x 2.3x 2.0x 4.6x 7.625% Senior Notes Buy 10/1/2007 Ba3/BB- $125.0 97.50 8.18% 389 Make-whole 9.500% Senior Notes Buy 9/15/2008 Ba3/BB- $600.0 104.00 8.59% 430 9/15/2004 104.75 8.500% Senior Notes Buy 6/1/2011 Ba3/BB- $300.0 99.50 8.58% 375 Noncall. Host Marriott, L.P.: 7.875% Senior Notes Attractive 8/1/2008 Ba3/BB- $1,200.0 96.00 8.69% 428 8/1/2003 103.99 $1,081.0 2.8x 2.5x 1.8x 1.6x 5.0x 7.875% Senior Notes Attractive 8/1/2005 Ba3/BB- $500.0 98.00 8.54% 499 8/1/2002 103.94 8.450% Senior Notes Attractive 12/1/2008 Ba3/BB- $500.0 98.00 8.84% 438 12/1/2003 104.23 8.375% Senior Notes Attractive 2/15/2006 Ba3/BB- $300.0 99.00 8.67% 488 Noncall. 9.500% Senior Notes Attractive 1/15/2007 Ba3/BB- $450.0 103.50 8.61% 443 Noncall. 9.250% Senior Notes Attractive 10/1/2007 Ba3/BB- $250.0 102.00 8.79% 463 Make-whole John Q Hammons Hotels: 8.875% First Mtge. Notes NR 2/15/2004 B2/B $300.0 98.25 9.83% 691 Current 101.48 9.750% First Mtge. Notes NR 10/1/2005 B2/B $90.0 99.13 10.03% 641 Current 104.88 KSL Recreation Group, Inc.: 10.250% Sen. Sub. Notes NR 5/1/2007 B2/B- $125.0 95.00 11.53% 730 5/1/2002 105.13 MeriStar Hospitality Corporation (formerly CapStar Hotel Company): 9.000% Senior Notes Attractive 1/15/2008 B1/B+ $300.0 98.25 9.39% 505 Noncall. $298.7 2.9x 2.3x 2.0x 1.6x 5.8x 9.125% Senior Notes Attractive 1/15/2011 B1/B+ $200.0 97.50 9.55% 466 Noncall. 10.500% Senior Notes Attractive 6/15/2009 B1/B+ $250.0 104.00 9.60% 527 12/15/2005 105.25 8.750% Senior Sub. Notes Attractive 8/15/2007 B3/B- $205.0 87.75 11.81% 748 8/15/2002 104.38 Prime Hospitality Corp.: 9.250% First Mtge. Notes Attractive 1/15/2006 Ba2/BB $101.0 103.13 7.42% 539 Current 103.08 $132.5 4.1x 3.5x 3.2x 3.3x 2.4x 9.750% Senior Sub. Notes Attractive 4/1/2007 B1/B+ $190.0 102.75 8.73% 533 4/1/2002 104.88 Starwood Hotels & Resorts: 6.750% Notes Attractive 11/15/2003 Ba1/BBB- $250.0 99.91 6.80% 406 Noncall. $1,451.0 3.7x 3.6x 2.5x 2.4x 4.0x 6.750% Debentures Attractive 11/15/2005 Ba1/BBB- $450.0 97.20 7.60% 393 Noncall. 7.375% Debentures Attractive 11/15/2015 Ba1/BBB- $450.0 89.51 8.69% 368 Noncall. 7.750% Debentures Attractive 11/15/2025 Ba1/BBB- $150.0 83.96 9.45% 420 11/15/2005 103.19
15 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002 Company Updates
Boca Resorts, Inc. Extended Stay America, Inc. FelCor Lodging Trust Host Marriott, LP MeriStar Hospitality Corp. Prime Hospitality Corp. Starwood Hotels & Resorts Worldwide, Inc.
16 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Boca Resorts, Inc.
Boca Resorts, Inc. — Debt Issues Amount Recent Outstanding Ratings Next Call Bid Spread Coupon/Description Maturity (US$ in MM) Moody’s/S&P Date Price Price YTW (bps) 9.875% Sr.Sub.Nts. 4/15/09 216.0 B2/B- 4/15/04 104.938 104.50 8.78% 455 Prices as of January 17, 2002. Source: Bear Stearns Global High Yield Research.
Investment Summary We are initiating coverage of Boca Resorts, Inc. with an attractive recommendation. Although Boca Resorts is one of the smaller companies in the lodging industry, we believe that it is better positioned in the current environment than several of its competitors, given its comparatively strong credit measures and organic growth opportunities. We also believe that downside risk is limited, as the company’s assets, which are in high-barrier-to-entry markets, provide bondholders with more than adequate asset coverage. Boca Resorts has transformed itself over the past year. Originally established as a diversified owner of lodging, leisure, entertainment and sports businesses, Boca is now a pure-play resort owner/operator in South Florida. Through its sales of the Arizona Biltmore (December 2000) and the Florida Panthers hockey team (July 2001), Boca has deleveraged considerably, which enables it to focus purely on its portfolio of five Florida luxury resorts. In our view, Boca has a collection of high-quality resort assets, which provides investors with considerable asset protection. The company’s flagship property, the Boca Raton Resort & Club, is recognized as one of the premier luxury resorts in the country. Boca Resorts, along with the rest of the lodging industry, has been hard hit by the events of September 11, as well as by the general economic downturn in the U.S. During the company’s fiscal first quarter ended September 30 (which is the company’s slowest quarter on a seasonal basis), RevPAR was down by 18.5%. However, this figure compares favorably to the 20.1% RevPAR decline for the upper upscale segment of the lodging industry during the comparable period. Meanwhile, total revenue per available room (including all non-room revenue sources such as F&B, yachting and marina, golf club memberships, and retail sales) decreased by a more modest 12.3% year-over-year, reflecting the strength of the company’s non-room based amenity package. In our view, Boca has continually proven its ability to drive RevPAR, even under challenging conditions, by attracting a successful mix of business group, business transient, and leisure guests. While acknowledging that the next several quarters will be challenging for the entire lodging industry, we believe that Boca enters this period on solid financial footing. Since September 30, 2000, Boca has reduced its outstanding debt by approximately $360 million to $223.5 million as of September 30, 2001. Accordingly, the company has seen a dramatic improvement in its credit statistics. We estimate Boca’s pro forma LTM leverage and interest coverage at the end of September 30 at 2.8x and 3.4x, respectively, which compares quite favorably to 5.9x and 1.7x for the prior year. While we project that these measures will weaken over the coming quarters— to 3.1x and 2.9x, respectively, at the end of FY02 (June 30, 2002)—we believe that they will continue to rank at the upper end of the lodging group. By the end of FY03, we are projecting a rebound in both measures, to 2.6x and 3.4x, respectively. Moreover, we are optimistic that business will return to more normal levels during the company’s FY03. We believe that the company’s portfolio of properties is well positioned, following the completion of several capital improvement initiatives at its flagship Boca Raton Resort & Club property, and the continued ramp-up of its Premier Club at its Naples property. In addition, we would expect Boca Resorts to begin to benefit from tighter cost-saving measures, reductions in payroll expense, etc. Despite new supply concerns in the Ft. Lauderdale/Boca area (Diplomat) and in Naples (Ritz Carlton and Hyatt), we believe that Boca Resorts will maintain its very high market penetration. In fact, the additional supply in Naples may bring new demand to the area, bolstering the town’s image as a resort and conference destination.
Bear, Stearns & Co. Inc. 17 Lodging Outlook 2002 — January 18, 2002
Key Investment Considerations Investment Strengths Capital structure well positioned to weather the storm. Boca finds itself on solid financial footing, after completing the earlier sales of the Arizona Biltmore ($335 million) and the Florida Panthers (net proceeds of approximately $69 million), which enabled Boca to pay down approximately $360 million in debt during the previous 12 months. As a result, Boca finds itself with considerably more latitude to handle the challenging operating environment that is projected for the next 2–3 quarters. A new 40,000-square-foot spa complex and golf clubhouse opened in December 2001 at the Boca Raton Resort & Club, while a 112-room marina wing is expected to be introduced in early calendar 2002. These enhancements should well position the company as it enters FY03, although the expenditures will clearly result in a short-term weakening of the company’s credit measures. As noted earlier, we project that Boca’s leverage and interest coverage will weaken to 3.1x and 2.9x, respectively, at the end of FY02, compared to pro forma (for the sales of the Biltmore and the Panthers) LTM leverage and interest coverage of 2.8x and 3.4x, respectively, at the end of September 30. Nevertheless, we believe that Boca’s credit measures will continue to rank at the top of the lodging industry. Collection of high quality assets provides considerable asset protection. Since March 1997, Boca has amassed an impressive portfolio of virtually irreplaceable assets in resort areas with high-barriers-to-entry (e.g., a shortage of attractively located land parcels, prohibitively high construction costs, and costly amenity packages). We believe that the quality and location of these assets underscores the asset protection Boca Resorts provides to bondholders. In our view, the Boca Raton Resort alone has an asset value in excess of twice the amount of the bonds currently outstanding ($216.0 million). Recent sales of similar resort properties include the Arizona Biltmore for $335 million, or approximately 9.3x LTM EBITDA, and more recently La Costa, for $125 million, or 13.1x LTM EBITDA. We believe that the Boca Raton Resort would command a value far greater than these assets, given our belief that it generates more than $50 million in annual EBITDA (the company does not disclose individual property results), its superior amenity package, and the considerable real estate value of its waterfront location. We believe that a conservative valuation for this property would be approximately $500 million. Meanwhile, we would ascribe a similarly attractive multiple to the Registry Resort in Naples. In our view, a very conservative valuation for this property would be approximately $175 million, or approximately 9.0x LTM EBITDA. Value of the Premier Club. The company developed its unique Premier Club concept in 1991 at the Boca Raton Resort, as a means to generate additional cash flow from its resort amenities. Membership in the club allows access to the resort’s amenities, including the restaurants and recreational facilities (tennis and golf), as well as to private social gatherings that would be otherwise restricted to the resort’s guests. Membership currently requires an initiation fee of $50,000, with annual dues starting at $3,150. Additional annual dues of $5,000 are required for members to have access to the golf and tennis facilities. We believe that this “social club” program provides a reliable and recurring revenue stream to the company. In addition to the Boca Premier Club, the company opened Grande Oaks Golf Club in June 1999 and Naples Grande Golf Club in February 2000; Boca Resorts offers play at these championship golf facilities to members and guests of its Fort Lauderdale and Naples resorts, as well as reciprocal amenities to the Boca Raton Resort Premier Club member. The company currently charges $33,500 and $30,000 for membership initiation fees at Grande Oaks Golf Club and Naples Grande Golf Club, respectively, and annual golf dues of $5,356 and $4,700 at Grande Oaks Golf Club and Naples Grande Golf Club, respectively. Credit Concerns Another extraordinary event could affect travel patterns. Among the many things we learned from the events of 9/11 was the degree to which the hotel industry is dependent upon the airline industry. Almost overnight, most hotels in destination cities became desolate; more than four months later, they are still operating meaningfully below pre-attacks levels. While the American traveler has shown considerable resilience, it should be clear that another domestic terrorist event is likely to have substantial effects on travel-related businesses.
18 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Vulnerability to economic downturn. The aftermath of 9/11 further weakened an industry that was already struggling. Historically, the performance of the lodging industry has been highly correlated to the performance of the general economy. For the past 25 years, change in hotel demand has closely tracked changes in GDP. Economic trends are a good industry barometer, though the two don’t track each other precisely. Typically, contractions in the lodging industry are longer and deeper, while expansions are shorter. Troughs in rooms-demand growth lead downturns in the economy, and lag recoveries. We think that the current state of the lodging industry, though improving, remains challenging over the near term. Trends expected to be choppy over the next few quarters. We believe that the hotel industry will continue to face challenges over the near term. We acknowledge that, while several recent travel indicators portend well for improvements in volume, pricing and yields still appear to be very soft, and this weakness could significantly affect profitability. Pricing has come under pressure as companies change their customer mix towards leisure travel and away from business travel. Furthermore, we expect to see rates come under increased pressure as we move into the first quarter of 2002, because comparisons are more difficult with the industry moving back toward a more business-driven period. On balance, visibility into the sector remains poor, and the timing and magnitude of a recovery in lodging fundamentals is too difficult to pin. With a high degree of leverage to both the economy and air travel, the lodging sector should see some volatility over the near term, as the economy recovers from the recession and the traveling public weighs our military’s progress in Afghanistan and our country’s ability to allay concerns about further terrorist strikes. Competition in Lodging. The lodging industry is highly competitive, and Boca Resorts must contend with rivals—both chain-affiliated and independent—in its markets. Responding to increased competition can lower a company’s revenue-per-available room (RevPAR) and operating profits. Changes in the demand for lodging accommodations, or in the supply of lodging accommodations, can also negatively affect earnings. Other factors that can hurt the lodging industry are changes in travel patterns, increases in travel costs, and governmental actions that affect prices or wages. In particular, Boca Resorts faces new supply concerns in the Ft. Lauderdale/Boca area (Diplomat opening January 2002; Ritz Carlton Coconut Grove opening March 2002) and in Naples (Hyatt opened September 2001; Ritz Carlton opening January 2002). Nevertheless, we believe that Boca should maintain its very high market penetration. In fact, the additional supply in Naples may bring new demand to the area, bolstering the town’s image as a resort and conference destination. Possibility of rating downgrade. Following the events of September 11, both S&P and Moody’s placed Boca, along with several other lodging companies, on watch for possible downgrade. On January 8, S&P affirmed its current ratings for Boca, while assigning it a stable outlook. Moody’s has yet to conclude its review. Currently, Moody’s has the company rated B2, while S&P has the company ranked B-, one notch below Moody’s. Accordingly, we believe Moody’s could take action, bringing its rating in line with that of S&P.
Company Description and Background Boca Resorts went public in November 1996, principally as an acquisition vehicle for the NHL hockey club Florida Panthers. Since then, Boca Resorts, Inc. (formerly Florida Panthers Holdings, Inc.) has remade itself into a pure-play resort owner/operator in South Florida, completing the transformation with its recent sales of the Arizona Biltmore and Florida Panthers. The company’s resorts include the Boca Raton Resort and Club (Boca Raton), the Registry Resort at Pelican Bay (Naples), the Edgewater Beach Hotel (Naples), the Hyatt Regency Pier 66 Hotel and Marina (Fort Lauderdale), and the Radisson Bahia Mar Resort and Yachting Center (Fort Lauderdale). These properties are full-service resorts offering golf and tennis facilities, conference and convention services, spas and fitness centers, a wide array of restaurants, cafes, and retail shopping, marinas, and several other activities and services. The company also owns and operates two championship golf courses located in Florida (the Grande Oaks Golf Club in Davie and Naples Grande Golf Club in Naples), which serve both as additional amenities to the company’s resorts and as components of the company’s exclusive social club, known as the Premier Club.
Bear, Stearns & Co. Inc. 19 Lodging Outlook 2002 — January 18, 2002
Property Overview Boca Raton Resort & Club. The Boca Raton Resort & Club is a luxury resort and private club on 343 acres of land on the Atlantic Ocean and the Intracoastal Waterway in Boca Raton, Florida. The Resort consists of 963 guestrooms and offers a number of amenities to group conference customers and leisure travelers, as well as to the members of their exclusive Premier Club. It includes 147,000-square-feet of conference space, two championship golf courses, 30 tennis courts, five swimming pools, and a half a mile of private beach, among other facilities. The Resort has consistently been awarded the Readers’ Award as one of the “Top 25 Hotels in North America” by Travel & Leisure magazine. In 2001 it won the Meetings and Conventions Gold Key Award as well as the Corporate Meetings and Incentives Paragon Award. The company is expected to complete construction of a new marina wing and additional marina slips at the property in early calendar 2002. The eight-story marina wing complex will consist of 112 water-view luxury guestrooms and additional meeting space. The company recently completed the development of a state-of-the-art, 40,000-square-foot spa complex, and a new golf clubhouse and casual restaurant. Registry Hotel at Pelican Bay. The Registry Hotel at Pelican Bay is a luxury resort fronting the Gulf of Mexico in Naples, Florida. The Hotel is situated on 24 acres of land and consists of 474 guestrooms. Amenities include 43,000-square-feet of conference space, 15 tennis courts, access to four golf courses, a nature reserve boardwalk, water sports on its beach facility, eight food and beverage venues, and retail stores. The company also recently completed a new pool complex with private cabana rentals and beach improvements. Recent distinctions include winning the AAA’s Four Diamond Award, being named to Zagat’s “Top 10 Resorts in Florida” and to Travel & Leisure magazine’s “Top 100 World’s Best Resorts in the Continental U.S.” in 2000, and receiving the Meetings and Conventions Gold Key Award in 2000. Edgewater Beach Hotel. The Edgewater Beach Hotel has the distinction of being the only all- suite beach resort in Naples, Florida. The property, recently underwent a room renovation of its tower suites and sits on three acres surrounding a tropical courtyard on the Gulf of Mexico. There are 126 luxury suites, a pool, a fitness center, water sports, three conference rooms, and a penthouse gourmet restaurant. The Hotel was included on the Conde Nast Traveler’s “Best Places to Stay in the World” list, and has repeatedly received AAA’s Four Diamond Award. Hyatt Regency Pier 66 Hotel and Marina. The Hyatt Regency Pier 66 is a luxury resort and marina complex in Fort Lauderdale, Florida. The property is situated on 24 acres of land fronting the Intracoastal Waterway and consists of 380 guest rooms. Facilities include 22,000- square-feet of conference space, a spa and health club, a 136-slip marina, two swimming pools, six restaurants and food-and-beverage sites, and two retail shops. The Hotel has received such recent distinctions as Successful Meetings magazine’s Pinnacle Award in 2000 and the Meetings and Conventions Gold Key Award in 2000. Also, it has consistently been awarded AAA’s Four Diamond Award. Radisson Bahia Mar Resort and Yachting Center. The Radisson Bahia Mar is a waterfront resort and marina complex situated on 44 acres of land in Fort Lauderdale, Florida, fronting the Atlantic Ocean and the Intracoastal Waterway. The Resort consists of 296 guestrooms, 20,000 square feet of conference space, a 330-slip marina, four tennis courts, three restaurants, and retail stores. Radisson Bahia Mar has consistently received the Mobil Travel Guide’s Three Star Award, and has been awarded the Radisson Hotels Worldwide President’s Award and the Anchor Award presented by Marine Industries Association of South Florida. Each Fall, the Radisson Bahia Mar marina is host to the International Boat Show, an annual six-day boating and marine event, which is believed to be the world’s largest in-water boat show. In addition to its resort properties, Boca also owns Grande Oaks Golf Club and Naples Grande Golf Club. Grande Oaks Golf Club was formerly known as Rolling Hills Golf Club, site of the hit comedy Caddyshack. The property now features a redesigned 18-hole championship golf course designed by Raymond Floyd; a 35-acre, newly designed practice facility; and a newly constructed clubhouse. Naples Grande Golf Club, which opened in February 2000, was designed by golf architect Rees Jones.
20 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Management We believe Boca Resorts has a strong and experienced management team that is focused on maximizing its return on capital and revenue per customer. The company’s chairman is H. Wayne Huizenga, who is also the chairman of Extended Stay America and several other companies. Rick Rochon is the company’s vice chairman and president. William Pierce has been the company’s CFO since April 1997, and has served as CFO for several of Mr. Huizenga’s private businesses. In October 2001, Boca further strengthened its management team, hiring industry veteran David Feder as senior vice president for resort operations.
Financial Overview First-Quarter Recap of Fiscal Year 2002 Boca reported a fiscal 2002 first-quarter EBITDA loss of $3.8 million, compared with a pro forma loss of $0.23 million in the previous year period. On a pro-forma basis, total revenues for the quarter decreased by 12.3% to $39.5 million, from $45.1 million last year. Adjusted EBITDA for the quarter (including the impact of the deferred net membership fees) was roughly a loss of $3.2 million, compared with a pro forma gain of $2.4 million in FY1Q01. While Boca was clearly affected by the events of 9/11, the company put together a respectable quarter on balance (in fact, management suggested that it was on track to meaningfully exceed analyst expectations from before the attacks). For the quarter, occupancy declines of 12.9% drove RevPAR down by 18.5%, despite a 2.0% increase in ADR. According to management, in the remaining weeks of the quarter following 9/11, Boca lost roughly $5.4 million in top-line revenue, the majority of which would have fallen straight to the bottom line. Meanwhile, total revenue-per-available room (including all non-room revenue sources such as F&B, yachting and marina use, golf club memberships, and retail sales) decreased by 12.3% year-over-year (to $191.86). The following chart demonstrates the rapid deterioration of Boca Resorts’ FY1Q01 operating results in the period following the WTC attacks. Boca Resorts — Composition of FY02 1Q RevPAR Performance July & August September FY01 FY02 % Chg. FY01 FY02 % Chg. RevPAR 78.89 78.99 0.1% 90.44 43.29 -52.1% Total RevPAR 207.62 220.80 6.4% 241.94 132.03 -45.4% Source: Company reports. Towards the end of the quarter, the company repurchased $50 million of its 9.875% senior subordinated notes, bringing the outstanding balance to approximately $223.0 million. Boca’s credit statistics exhibited further improvement as a result. At the end of the quarter, Boca’s pro forma LTM leverage and interest coverage were 2.8x and 3.3x respectively. Following the close of the quarter, Boca repurchased an additional $7 million of its senior subordinated notes, which should help to stabilize credit measures further. Boca had ample liquidity at September 30, 2001, with $22.3 million in cash and cash equivalents, an additional $3.7 million in restricted cash, and full availability of its $144.7 million revolver. During the quarter, Boca Resorts bought just under 63,000 of its shares at an average price of slightly less than $9. Since the close of the quarter, Boca Resorts has repurchased about 172,000 additional shares. In addition, the company spent approximately $22.9 million on capital projects, as it continued construction on various projects at the Boca Raton Resort & Club, including a new Marina Wing with 112 water-view rooms, a state-of-the-art spa complex, and a new golf clubhouse with casual restaurant. We understand that the spa and golf clubhouse were completed in December 2001, while the Marina Wing is to be completed in the first calendar quarter of 2002. Given the difficult operating environment, we would not expect the company to be an aggressive buyer of shares in the near term, but rather to use any excess free cash flow to fund its development initiatives or to further pay down debt.
Bear, Stearns & Co. Inc. 21 Lodging Outlook 2002 — January 18, 2002
Fiscal Year 2002 Outlook By any measure, the calendar fourth quarter 2001(Boca’s fiscal 2Q02) is expected to be very challenging. While trends have continued to firm over the course of the quarter, most large-cap owner/operators are targeting RevPAR declines of 25%–35%, with continued pressure on operating margins as demand weakness puts pressure on rates. Boca certainly has some advantages that mitigate its operating risk in such a weak and unpredictable operating environment, but we expect very difficult conditions over the near-term for all lodging- and travel-dependent companies. In its conference call, management issued guidance for FY 2Q02, suggesting the following pro forma (ex-Biltmore) declines: occupancy down by 1500 bps, to 50%; ADR down by 5.8%, to $200; RevPAR down by 25%–30%, to $95–$105. Total RevPAR is expected to decline by 20%–25%, to $260–$270. On a positive note, Boca also indicated in its FY1Q02 conference call that it had seen a steady improvement in occupancy over the period following September 11; occupancy rates climbed from roughly 35%, directly after the attacks, to over 70% as of late October. In fact, following the progression of the upper-upscale and resort segments since the company reported its FY1Q02 results reveals that RevPAR has generally trended in a positive direction. The chart below illustrates the sequential improvement in RevPAR for these two segments over the course of the last several weeks. Using upper-upscale RevPAR as a more appropriate proxy for Boca’s portfolio, RevPAR trends have shown some volatility within a tight range, but ultimately have strengthened since September, particularly during the week ended December 22. Weekly Changes in RevPAR for the Resort and Upper Upscale Segments 9/15 9/22 12/15 12/22 12/29 1/5 1/12 Resort -29.4% -52.7% -15.4% -21.9% -14.5% 0.5% -19.4% Upper Upscale -33.5% -62.1% -20.1% -13.5% -20.9% -18.8% -22.7% Source: Smith Travel Research. It is also important to note that Boca has historically outperformed upper-upscale segment trends, typically driving RevPAR a few hundred basis points higher. We therefore believe that Boca may experience some upside to the cautious FY2Q02 guidance—which was issued at a time when demand trends were obscured by concerns over anthrax, terrorist threats, and the early stages of the military campaign in Afghanistan. Relatively strong leisure travel, augmented by airline discounting, has helped to fill the gaps left by sluggish corporate travel demand. While we would expect that this pickup in leisure travel has been accomplished at lower rates, we nonetheless believe that Boca has successfully yield-managed the change in their business mix. Likewise, we believe that management has been very diligent in reducing its cost structure to boost profitability. Furthermore, the heavy cancellation or postponement volumes following the September 11 attacks have subsided, and many groups have now rebooked. In fact, Boca expects that its leisure bookings in its FY3Q02 (calendar 1Q) will likely outpace the previous year period. Using the upper end of Boca’s RevPAR guidance, we have established a FY022Q EBITDA estimate of $9.1 million—approximately 49% lower than for the same period one year ago (estimated pro forma to exclude the sale of the Biltmore and the Florida Panthers). For the full FY02, we project that Boca will generate EBITDA of $69.2 million, a decline of approximately 17% compared with pro forma FY01 results. At the end of FY02, we expect that Boca’s leverage and interest coverage will have weakened modestly to 3.1x and 2.9x, respectively. Our capex projection for the year is $69.3 million, the majority of which we believe will be expended on the various projects underway at its Boca Raton property. For FY03, we are projecting that Boca will generate EBITDA of $82.8 million, a 19.7% increase compared with FY02. We anticipate that demand levels will recover during FY03, with Boca benefiting as well from the cost-cutting measures undertaken following 9/11. As a result of its improved EBITDA performance, we project that the company’s leverage and interest coverage will improve to 2.6x and 3.4x, respectively. While Boca has not announced any specific capital expenditure plans for FY03, we have conservatively budgeted for the company to spend $64.6 million on yet-unidentified growth initiatives.
22 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Boca Resorts, Inc. — Financial Model ($ in 000s) 2001PF LTMPF 1Q02 2Q 02E 2Q01PFA %Chg 3Q 02E 4Q 02E 2002E 2003E Revenue Leisure and Recreation Revenues $289,320 $283,749 $57,677 $70,188 -17.8% $96,273 $73,810 $267,280 $291,042 Expenses L&R Costs 126,898 $125,194 28,000 32,197 -13.0% 35,000 30,500 117,546 127,000 Selling, General, And Administrative 79,064 $78,798 20,500 20,013 2.4% 20,500 20,225 80,525 81,225 Depreciation & Amortization 30,967 $31,433 8,250 7,490 10.1% 8,550 8,850 33,360 36,100 Total Operating Expenses 236,929 $235,425 56,750 59,700 -4.9% 64,050 59,575 231,431 244,325 Operating Income 52,391 $48,324 927 10,488 -91.2% 32,223 14,235 35,849 46,717 EBITDA 83,358 $79,757 9,177 17,978 -49.0% 40,773 23,085 69,209 82,817 Margin 28.8% 88.5% 15.9% 25.6% -970 bp 42.4% 31.3% 25.9% 28.5% Interest and Other Income 1,045 $6,227 758 1,396 -45.7% 113 162 1,750 288 Interest Expense & Fees (25,454) ($24,831) (6,276) (6,200) 1.2% (6,183) (6,183) (25,596) (24,732) Capital Expenditures (60,778) ($68,544) (17,884) (21,474) -16.7% (17,814) (10,690) (69,317) (64,552) Cash Flow Items EBITDA 83,358 $79,757 9,177 17,978 -49.0% 40,773 23,085 69,209 82,817 Less: Capex (60,778) ($68,544) (17,884) (21,474) -16.7% (17,814) (10,690) (69,317) (64,552) Less: Cash Interest (24,409) ($24,114) (5,518) (6,200) -11.0% (6,070) (6,021) (23,845) (24,444) Free Cash Flow (1,829) ($12,901) (14,225) (9,696) 46.7% 16,890 6,374 (23,954) (6,179) Interest Coverage Ratios LTM EBITDA/Cash Interest 3.4x 3.3x 3.0x 2.8x 2.9x 2.9x 3.4x (LTM EBITDA-Capex)/Cash Interest 0.9x 0.5x NM NM 0.0x 0.0x 0.7x Capitalization Cash and Cash Equivalents 9,909 22,303 18,501 21,589 21,589 6,501 9.875% Senior Sub Notes 272,960 223,500 216,000 216,000 216,000 216,000 Revolver and Other 551 0 0 0 0 0 Total Long-Term Debt 273,511 223,500 216,000 216,000 216,000 216,000 Leverage Ratios Net debt/LTM EBITDA 3.2x 2.5x 3.0x 2.8x 2.8x 2.5x Total debt/LTM EBITDA 3.3x 2.8x 3.3x 3.1x 3.1x 2.6x Enterprise Value/EBITDA 9.5x 10.1x 8.7x E: Estimated. PF: Pro forma. Source: Company reports and Bear Stearns Global High Yield Research.
Bear, Stearns & Co. Inc. 23 Lodging Outlook 2002 — January 18, 2002
Extended Stay America, Inc.
Extended Stay America, Inc. — Debt Issues Amount Recent Outstanding Ratings Next Call Bid Spread Coupon/Description Maturity (US$ in MM) Moody’s/S&P Date Price Price YTW (bps) 9.150% Sr.Sub.Nts. 3/15/08 200.0 B2/B 3/15/03 104.58 99.00 9.36% 500 9.875% Sr.Sub.Nts. 6/15/11 300.0 B2/B 6/15/06 104.94 104.50 9.02% 448 Prices as of January 17, 2002. Source: Bear Stearns Global High Yield Research.
Investment Summary We are initiating coverage of the Extended Stay America, Inc. (ESA) 9.150% and 9.875% senior subordinated notes with a buy recommendation. ESA develops, owns and manages extended-stay hotels under the Extended Stay America, StudioPLUS and Crossland Economy Studio brand names. Each brand competes at a different price point in the lower-tier segment of the extended-stay sector. As a result of its rapid development plan, ESA has become the largest extended-stay hotel chain in the mid-priced and economy sectors and is firmly entrenched in second in the budget segment. At the end of the third quarter of 2001, the company had 413 open properties located in 40 states, including 280 Extended Stay America properties, 94 StudioPLUS hotels and 39 Crossland economy properties. At the end of the third quarter, ESA also had 38 properties under construction. We view the ESA bonds as one of the more stable plays in the lodging space given the current challenging landscape. We believe the extended-stay business model (when compared to the full-service model) is better insulated from both the economic downturn and travelers’ fears of flying. In addition, the company is well positioned in terms of liquidity, having completed a new round of financing last summer. Importantly, on December 17, ESA reached an agreement with its banks to amend its leverage covenant in return for modestly higher interest rates on its outstanding loans. While the company had prudently announced on its 3Q conference call that it was temporarily suspending the commencement of new development in light of the challenging post-September 11 fundamental lodging environment, the amendment to its credit facility should enable ESA to remain opportunistic in terms of new development. While we project that this amendment will result in ESA’s leverage remaining above 4.0x for at least the next two to three years, we also believe it will permit ESA to further distance itself from its capital-starved competitors. In our view, ESA continues to do a good job in balancing shareholder and bondholder objectives. While ESA has admitted that it is more susceptible to the downturn than previously thought, we believe a few important distinctions make ESA a good defensive play in this environment: 1) broad geographic dispersion; 2) virtually zero dependence on large group business and conventions; 3) no operations in large, urban markets; 4) no one customer makes up more than 1% of ESA’s business; and 5) no reliance on fly-to business—nearly 75% of its guests drive less than 500 miles. While its occupancy expectations have come down, the company’s low operating overhead (limited facilities, services, and amenities) allows an ESA hotel to break even at about 30% occupancy (about 45% if 50% leverage is factored in), substantially lower than other lodging products. Even under our revised expectations, we are still projecting annual portfolio occupancy in the mid 70% range, the highest in the lodging group. Despite a fairly significant downturn, annual property margins are still expected to be 56%–57% and EBITDA margins are expected to be just under 50%. On top of these estimates, ESA keeps adding units so overall EBITDA can keep growing, even when same-store results are flat to down.
Relative Value Currently, the ESA bonds trade wide of both the Host Marriott and FelCor Lodging senior notes, with yields of approximately 9.25%. In light of the current challenging market conditions, we would rather own the ESA bonds, despite their subordinated position, given our expectation that ESA’s business model is better positioned to withstand a continued weakness in lodging
24 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
demand, as we note above. In addition, while ESA’s credit measures are projected to weaken over the next several quarters, we believe the company’s leverage at its peak will remain at a reasonable level (4.5x – 4.8x in 2Q02), particularly in relation to REITs such as Host and MeriStar. We project each of these companies will see leverage peak at approximately 7.0x. In addition, if ESA chose to scale back its capital spending, it could use its free cash flow to deleverage quickly, while the REITs, on the other hand, must use a significant amount of their free cash flow to satisfy dividend pay-out requirements. Furthermore, ESA should continue to benefit from the positive effect of lower interest rates on its floating-rate debt, while each of the REITs has locked in the majority of its debt at fixed rates.
Key Investment Considerations Investment Strengths Proven business model. Since its 1995 launch, ESA’s business model has not changed. At that time, management laid out a basic business model—purpose-build apartment-like lodging facilities that offer long-term guests compelling value and produce above-industry property- level profitability and returns. So far, the model has worked and the company is the market leader. As a result of its rapid development plan, ESA has become the largest owner of lower-tier extended-stay properties as measured both by number of properties and rooms. With more than 45,700 rooms at December 31, 2001, ESA has at least 30,000 more rooms that its next closest competitor (Homestead). By further increasing the scope and geographic distribution of its roll- out, ESA has been able to achieve greater brand recognition and has further leveraged its corporate expense base, thus increasing margins. Defensively positioned in a slower environment. We believe ESA can weather the downturn better than most other lodging companies. Its hotels are competitively priced and offer good relative value. The company’s low and relatively fixed operating overhead (limited facilities, services and amenities) allows an ESA hotel to break even at 28% occupancy, substantially lower than other lodging products (43% if 50% leverage is factored in). In a typical ramp-up scenario, a hotel breaks even after its first 45 days of operations. ESA passes the lower operating costs on to the consumers with lower prices relative to comparable non-extended-stay product. On a per-night basis, hotels in ESA’s three brands (Studio Plus, Extended Stay America, and Crossland) are generally $10–15 per night cheaper than comparable facilities in traditional transient limited-service hotels. They are also well positioned to receive “trade- down” business if more cost-conscious companies look to economize by putting their people in lower-priced accommodations. Likewise, they are attractively priced to begin with, so we could expect less “trading down” out of ESA products. Additionally, ESA has good customer and geographic diversification. No single corporate client provides more than 1% of their business. Finally, ESA’s properties are geographically dispersed throughout the country so no single market provides a disproportionate amount of the company’s cash flow, insulating the company from significant impacts from region-specific economic softness. Competitive landscape continues to improve. Extended Stay America is the only company undertaking significant corporate development in the lower-tier extended-stay sector. Virtually all other extended-stay brands are relying on franchisees to grow their brands. ESA’s strong capital base and significant cash flow generating ability (coupled with conservative leverage) has allowed the company to keep building even after capital availability was dramatically curtailed in late 1998. New room additions in the lower-tier extended-stay segment fell to 13,000 in 2000 from 36,000 in 1998. Demand has grown faster than supply since April 1999. Despite the fall-off in overall development, Extended Stay America keeps developing new properties and is now the leading corporate developer of extended-stay hotels. Operating margins are very strong. Extended stay properties generally have higher operating margins, lower occupancy break-even thresholds, and higher returns on capital than traditional hotels, primarily as a result of the typically longer length of stay, lower guest turnover and lower operating expenses. ESA’s operating margin improved to 50.0% in 2000, from 46.7% in 1999, due to continued strengthening of property level operating margins (58.6% in 2000, up from 56.8% in 1999) and the leveraging of the corporate expense base over more properties. Year to
Bear, Stearns & Co. Inc. 25 Lodging Outlook 2002 — January 18, 2002
date through 3Q01, ESA’s property level and EBITDA margin have improved to 59.0% and 50.7%, which we believe is a further testament to the company’s ability to manage costs in a challenging operating environment. For 2000, corporate operating and site selection expenses totaled $44.4 million, which decreased as a percentage of revenue to 8.6% from 10.1% year over year. Even with the more challenging operating environment of 2001, for the year-to-date period, this measure has improved to 8.4%. We expect these trends to continue as more properties stabilize (ESA properties in operation for over one year have produced operating margins approaching 60%) and as the company further leverages its corporate expense base with the opening of new properties. Credit statistics expected to remain solid. At the end of 3Q01, ESA’s leverage and cash interest coverage stood at a respectable 3.9x and 3.2x, respectively. Given the more challenging operating environment combined with an acceleration of the company’s previously budgeted development program, we are projecting ESA’s credit measures will weaken over the next several quarters. We are projecting ESA’s leverage will peak during 2Q02 to approximately 4.5x, while cash interest coverage will trough at the end of the same quarter at 3.0x. From that point forward, we would expect both measures to exhibit improvement. At the end of 2003, we are projecting leverage and cash interest coverage to be 4.1x and 3.4x, respectively. While ESA’s credit measures are projected to weaken over the next several quarters, we believe the company’s leverage at its peak will remain at a reasonable level, particularly in relation to the three lodging REITs (Host Marriott, FelCor Lodging and MeriStar Hospitality). We project each of these companies will see leverage peak in the 6x–7x range. In addition, if ESA chose to scale back its capital spending, it could use its free cash flow to deleverage quickly, while the REITs, on the other hand, must use a significant amount of their free cash flow to satisfy dividend pay-out requirements. Furthermore, ESA should continue to benefit from the positive effect of lower interest rates on its floating-rate debt, while each of the REITs has locked in the majority of its debt at fixed rates. Credit Concerns Another extraordinary event could further disrupt travel patterns. Among the many things we learned from the events of September 11 was the degree to which the hotel industry is dependent upon the airline industry. Almost overnight, most hotels in destination cities became desolate, and more than three months later, are still operating meaningfully below pre-attacks levels. And while the American traveler has shown considerable resilience, it should be clear that another domestic terrorist event is likely to have substantial effects on all travel-related businesses. Vulnerability to economic downturn. The aftermath of September 11 further weakened an industry that was already struggling. Historically, the performance of the lodging industry has been highly correlated to the performance of the general economy. For the past 25 years, change in hotel demand has closely tracked change in GDP. While economic trends are a good industry barometer, they do not track each other precisely. Historically, contractions in the lodging industry have been longer and deeper, while expansions have been shorter. Troughs in room demand growth lead downturns in the economy and lag recoveries. We believe the current state of the lodging industry, though improving, remains challenging over the near term. Trends expected to be choppy over the next few quarters. We believe that the hotel industry will continue to face challenges over the near term. We acknowledge that, while several recent travel indicators portend well for improvements in volume, pricing and yields still appear to be very soft, and the profitability implications will be meaningful. Pricing has come under pressure as companies change their customer mix to drive more leisure travel and less business travel. Furthermore, as we move into the first quarter of 2002, we expect to see rates come under increased pressure, as comparisons are more difficult with the industry moving back toward a more business-driven period. On balance, visibility for the sector remains poor, and the timing and magnitude of a recovery in lodging fundamentals is too difficult to pin down at the present time. With a high degree of leverage to both the economy and air travel, the lodging sector should see some volatility over the near term, as the economy recovers from the recession and the traveling public weighs our military’s progress in Afghanistan and our country’s ability to allay concerns about further terrorist strikes.
26 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
High level of senior debt ahead of the senior sub notes. Since its inception in 1995, ESA has relied to a fair degree on bank debt to fund its new unit-development program. In August, the company completed a new bank financing, providing it with total bank capacity of $900 million, all of which would be senior to the senior subordinated notes. At the end of 3Q01, ESA had $579 million in bank debt outstanding, with an additional $321 million of availability. The company’s LTM senior leverage ratio at the end of 3Q01 stood at 2.1x. Risk of potential rating agency downgrades. ESA, like the majority of lodging companies, was placed on review by both S&P and Moody’s for potential downgrade following September 11. On January 8, S&P affirmed ESA’s rating, while assigning it a negative outlook. Moody’s has yet to conclude its review of the company. While we believe the initial actions by the rating agencies were warranted given the very uncertain outlook, at this time, we were in agreement with S&P’s conclusion and are optimistic that Moody’s will also reach a similar conclusion. In our view, ESA is much more insulated from the demand slowdown. We expect ESA to keep its credit statistics under control so that they will remain acceptable for its current rating, albeit at the upper end of that rating. Other Considerations Credit agreement amended. On December 18, ESA announced that it had amended its credit facility, whereby it increased its leverage covenant to 5.25x from 4.75x for the period from January 1, 2002, to March 31, 2003. After this period, the leverage covenant returns to its previous level of 4.5x. In return, ESA accepted an increased interest rate based on a pricing grid tied to leverage. For the period from January 1, 2002, to March 31, 2002, the interest rate on all outstanding loans increases by 25 bps. After this period, the interest rate is increased by 25 bps if total leverage is greater than or equal to 4.25x or by 75 bps if total leverage is greater than or equal to 4.75x. Given this increased flexibility, ESA expects to opportunistically recommence its new development construction. On its 3Q01 conference call, ESA had indicated that it was temporarily suspending the commencement of any new development in 2002 until business fundamentals and/or the economy evidenced signs of stabilizing. Given its amended credit facility, ESA now expects to commence construction of 15 new properties during 2002, with total costs of approximately $150 million. ESA expects the majority of these properties to open during 2003.
Company Overview Extended Stay America, Inc. develops, owns and manages extended-stay hotels under the Extended Stay America, StudioPLUS and Crossland Economy Studio brand names. Each brand competes at a different price point in the lower-tier segment of the extended-stay sector. At the end of the third quarter of 2001, the company had 413 open properties located in 40 states, including 280 Extended Stay America properties, 94 StudioPLUS hotels and 39 Crossland economy properties. At the end of the third quarter, ESA also had 38 properties under construction. As a result of its rapid development plan, ESA has become the largest extended-stay hotel chain in the mid-priced and economy sectors and is firmly entrenched in second in the budget segment. The company was founded in 1995 by current president and CEO, George D. Johnson Jr. and H. Wayne Huizenga. Mr. Johnson was formerly president of the consumer products division of Blockbuster Entertainment Corp. Mr. Huizenga, who is chairman of the board, also is chairman of Republic Services Inc., AutoNation, Inc and Boca Resorts, Inc. and formerly was vice chairman of Viacom, Inc., and chairman and CEO of Blockbuster Entertainment Corp. The Concept Extended-stay properties cater primarily, if not exclusively, to customers who require accommodations for five nights or longer. The key distinction between extended-stay hotels and traditional hotels is that extended-stay hotels offer rooms with separate living and sleeping areas, kitchens, limited guest services and few, if any, public spaces.
Bear, Stearns & Co. Inc. 27 Lodging Outlook 2002 — January 18, 2002
Extended-stay hotels are the highest growth sector in the lodging industry. Their investment characteristics are superior to all other sectors of the lodging industry. Extended-stay properties have low per-room development costs, quickly achieve stabilization, maintain high occupancy rates, generate high operating margins and produce very attractive unleveraged property-level ROIs. Fundamental changes in the economic and social landscape have driven consumer demand for this product in the past five years. Downsizing and outsourcing have increased corporate reliance on outside consultants and temporary workers. Rather than take the risk of increasing permanent payrolls, companies are increasingly hiring individuals or firms to complete specific tasks or projects on a contractual basis. Extended-stay hotels provide the flexible and cost- efficient longer-term accommodations required by these contractors while they are on assignment. Societal trends also feed extended-stay demand. Extended-stay hotels have emerged as a temporary housing alternative for a variety of consumers, from those relocating to a new city to those awaiting completion of a new home. An extended-stay room is a hybrid of a traditional hotel room and an apartment residence that is designed to accommodate the needs of long-term guests. Thus, extended-stay hotels do not offer facilities like restaurants, meeting rooms, and extensive public spaces that are typically found in traditional hotels. Customers who stay in hotels for longer periods of time do not require these facilities, and excluding them keeps construction and operating costs low, which, in turn, allows extended-stay hotels to charge lower per-night rates than traditional hotels for comparable lengths of stay. Moreover, the elimination of facilities that generate high levels of wear and tear, like restaurants, bars, and lounges, help keep the annual maintenance capital requirements of these types of properties low. As is the case with the rest of the lodging industry, the extended-stay sector has embraced market segmentation. Extended-stay facilities at the upper price points are more similar to traditional hotels than properties in the extended-stay market’s lower price points. However, key distinctions, such as extended-stay market’s exclusion of on-premise restaurants, inclusion of kitchens in rooms, and limit of public spaces, remain. The figure below compares the facilities, services and amenities offered by upper- and lower-end extended-stay properties, traditional full-service hotels and traditional limited-service hotels.
28 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Facilities and Services — Extended-Stay Hotels vs. Traditional Hotels Extended-Stay Hotel Service/Amenity Upper Price Points Lower Price Points Full-Service Hotel Limited-Service Hotel Rooms Sleeping Area Sleeping Area Sleeping Area Sleeping Area Living Area Living Area Bath Bath Dining/Cooking Area Dining/Cooking Area Bath Bath
Housekeeping Daily Maid Service Weekly Maid Service Daily Maid Service Daily Maid Service Daily Linen Service Twice-Weekly Linen Service Daily Linen Service Daily Linen Service
Front Desk 24 Hours 12-16 Hours per Day 24 Hours 24 Hours
Food & Beverage Continental Breakfast Vending Banquets Continental Breakfast Evening Cocktails Restaurant Vending Vending Lounge Room Service Mini-Bar Vending
Recreational Pool Some with Pool Pool Some with Pool Amenities Exercise Room Exercise Room Health Club/Spa Sauna Jacuzzi
Other Facilities/ Lobby Coin-Op Laundry Lobby Lobby Services Business Center Meeting Rooms Sundry Shop Business Center Coin-Op Laundry Sundry Shop Shopping Service Concierge Laundry/Valet Valet Parking Bell Staff Source: Bear, Stearns & Co. Inc.
Extended-stay hotel rooms have separate living, sleeping and eating areas. Depending on price point, these areas may be in separate rooms or spatially divided with partitions or other design features. Furnishings are typical of those found in traditional hotel rooms. Kitchens typically feature a microwave oven, range or stovetop, coffee maker, sink, refrigerator and dining table (or counter with chairs). The units of higher-priced brands will also have dishwashers. Pots, pans, dishes, silverware and utensils are provided. In-room amenities typically include cable or satellite TVs, direct-dial telephones, voice mail and personal computer data ports. The pricing of extended-stay hotels is designed to place them between traditional hotels and rental apartments. On a monthly basis, extended-stay hotels are typically more expensive than a comparable apartment lease. However, for that additional cost, an extended-stay hotel guest receives fully-furnished housing with paid utilities, housekeeping/linen services and, most importantly, an open-ended “rental” agreement. Another key characteristic of Extended Stay America is low operating expenses and development costs. Each property employs a manager, an assistant manager, a desk clerk, a maintenance person and a laundry/housekeeping staff of approximately 8–10 part-time employees. Front-office hours are limited, however one employee is always on duty 24 hours a day to respond to emergencies. Standardized plans and specifications lower construction and purchasing costs and establish uniform quality and operational standards. Prototype properties feature either interior or exterior corridors, depending on geographic location or climatic conditions. Properties are either two or three stories and average 106 rooms plus back-of-the- house areas and usually take seven to nine months to construct. The Customer Extended-stay hotels appeal to a broad range of consumers for a wide variety of reasons. The customer mix varies among the price points, with the more expensive brands catering to corporate training-oriented business, while the less expensive brands have higher amounts of long-term temporary assignments and life-situation customers. For example, corporate training
Bear, Stearns & Co. Inc. 29 Lodging Outlook 2002 — January 18, 2002
can account for 40%–50% of the market mix for upper-tier brands. At the other end of the price spectrum, relocations, temporary assignments and personal situations like divorce account for more than half of a low-end extended-stay property. Properties in the middle price ranges cater to a full range of customers, but are especially appealing to contractors or consultants who are self-employed or who work for smaller firms with limited or no expense reimbursements.
A Much Better Sector Today Fundamentals continue to dramatically improve in the lower-tier extended-stay segment. Beginning in 1995, supply growth started to ramp up dramatically, peaking in 1997 at over 100%. Since that peak, supply growth has diminished. Initially, this was a gradual process, but the capital market crunch that began in late 1998 accelerated this trend toward equilibrium. During the development boom of the mid-1990’s, pure-play publicly traded extended-stay companies were fueling their development with cheap equity capital. With the onset of the capital crunch that occurred in late 1998, these development companies were suddenly frozen out of the market. A few pressed on using debt, but most quickly tapped out their balance sheets. As a result, the size of the construction pipeline shrank rapidly. The lone exception was Extended Stay America. ESA had grown much more rapidly than the other companies, so by the time the equity dried up, they had a sizeable portfolio of cash-flow-producing properties that could support further development. Moreover, it had remained debt-free for most of the peak building years so that when equity became scarce, it had ample borrowing capacity to leverage the cash flow produced by its properties. As a result, ESA was able to deploy more than $290 million per year on new development from 1999–2001, substantially more than any of its competitors. In fact, most competitors disbanded their development departments and turned to low-cost franchising as an alternative to growth. The following chart illustrates the historical relationship between supply and demand in the lower-tier extended-stay sector and the recent strength exhibited by this segment. Lower-Tier Extended-Stay Sector Performance Period Supply Growth Demand Growth Equil. Index Occ. Occ. Change 1994 14.4% 15.5% +110 bps 73.3% + 70 bps 1995 72.2% 73.8% +160 bps 74.0% + 70 bps 1996 43.0% 39.7% -330 bps 72.2% -180 bps 1997 110.5% 101.3% -920 bps 69.1% -310 bps 1998 95.5% 91.1% -440 bps 67.5% -160 bps 1999 44.5% 46.7% +220 bps 68.5% +100 bps 2000 14.7% 22.2% +750 bps 74.3% +460 bps Source: Smith Travel Research The end result of the supply growth deceleration is that demand growth (which, while falling short, had nonetheless done a good job of keeping up with the onslaught of new supply) has finally had a chance to catch up with supply growth. Management ESA’s management team has been together since the company was formed in 1995. In our view, the company has executed its business plan exactly as it intended, which is a testament to management’s capabilities. We provide below short summary biographies of the company’s chairman, CEO, president & COO and CFO. Mr. Huizenga, who is Extended Stay’s chairman of the board, also is chairman of Republic Services Inc., AutoNation, Inc and Boca Resorts, Inc. and formerly was vice chairman of Viacom, Inc., and chairman and CEO of Blockbuster Entertainment Corp. He was a co-founder of Waste Management, Inc. (now WMX Technologies, Inc.). He is also the sole shareholder in Huizenga Holdings, Inc., a diversified holding and management company. Mr. Huizenga also owns the Miami Dolphins football team. Prior to founding Extended Stay America, CEO George Johnson was president of Viacom’s Blockbuster Entertainment Group’s consumer products division. He was formerly managing general partner of WJB Video, the largest Blockbuster franchisee (more than 200 stores), and
30 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
managing general partner in American Storage, a chain of 23 self-storage facilities. Mr. Johnson sits on several corporate boards and is a former member of the South Carolina House of Representatives. Robert A. Brannon is president and chief operating officer and until April 2000 was the company’s chief financial officer. Prior to joining the company, he was the vice president of finance for the Domestic Home Video division of the Blockbuster Entertainment Group. Prior to joining Blockbuster, he was CFO of WJB Video and American Storage. Greg R. Moxley was appointed as ESA’s chief financial officer in April 2000. Prior to that Mr. Moxley served as vice president of finance since the company’s founding. Prior to joining ESA, Mr. Moxley was director of financial reporting and assistant treasurer for One Price Clothing Stores, Inc. and also held various positions as a CPA including senior manager for Ernst and Young.
Recent Financial Performance Third-Quarter Results In our view, given the challenging environment being experienced by the majority of lodging companies, post–September 11, ESA’s 3Q01 results were quite encouraging, as EBITDA declined by only 1.4% to $73.8 million. Margin control was a key driver in the quarter as successful expense control kept property-level margin erosion to 170 bps despite a 6.9% reduction in same-store RevPAR. We consider this to be particularly impressive given the fact that energy costs and the weak economy were eroding margins even before the events of September 11. In our view, conscientious control of expenses, particularly labor, was the key for the solid margin performance. Portfolio RevPAR was down by 4.5%, reflecting the influence of the new properties in high- AWR markets on the portfolio. Same-store (305 of 405 hotels) RevPAR was down by 6.9%, more accurately reflecting softer demand associated with the weak economy. RevPAR declines were occupancy driven (down 850 bps) as AWR actually inched up by 1.8%. Same-store brand statistics were as follows: Crossland—occupancy down 680 bps, AWR up 3.0%, and RevPAR down 4.0%; Extended Stay America—occupancy down 900 bps, AWR up 2.4%, and RevPAR down 6.9%; StudioPLUS—occupancy down 770 bps, AWR down 1.8%, and RevPAR down 6.9%. ESA opened eight hotels ($83 million in capex) in the quarter and ended the quarter with 413 hotels (39 Crossland, 280 Extended Stay America and 94 StudioPLUS). At the end of 3Q01, ESA had 38 hotels under construction (37 Extended Stay America and one StudioPLUS), which were expected to open over the next four quarters (eighteen in 4Q01, 12 in 1Q02, 6 in 2Q02, and two in 3Q02). The company also repurchased roughly 2.2 million shares for just over $30 million at the beginning of the third quarter. At the end of the quarter, ESA had long-term debt of $1.078 billion, comprised of 53.6% in floating-rate bank debt and 46.4% in fixed public debt. LTM leverage and cash interest coverage remained solid at 3.9x and 3.2x, respectively.
Outlook 4Q01 ESA indicated on its 3Q01 conference call that it expected its RevPAR decline for 4Q01 to be in the range of 13%–14%, if demand continued at the rates experienced in October. Based on this anticipated decline in RevPAR, we project ESA will generate EBITDA of $53.4 million during 4Q01, a 13.7% decline from 4Q00. However, we recognize that the company’s performance could be modestly softer if AWR levels continued to come under pressure from discounting by full service properties. While the company had previously anticipated that it would only open eight properties during 4Q01, based on announcements released by the company we believe the total will be closer to 18. In large part, we believe this is purely a timing difference, with fewer properties now expected to open during 1Q02. Capital
Bear, Stearns & Co. Inc. 31 Lodging Outlook 2002 — January 18, 2002
expenditures for the quarter are projected to be $79.9 million. At year-end, we project ESA’s total debt increased to $1.137 billion. We project leverage and cash interest coverage to end the year at 4.2x and 3.1x, respectively, modestly weaker compared to the end of 3Q01. 2002–03 Regarding 2002, when ESA last issued guidance, it projected a 4%–6% decline in same-store RevPAR, with performance during the first half of the year considerably lagging performance during the second half of the year. Based on this anticipated decline in RevPAR, we project ESA will generate EBITDA of $277.0 million during 2002, a 3.4% increase over 2001, largely as a result of new units added. With the increased flexibility gained as a result of its recent bank amendment, we believe ESA may ramp-up its capex spending plans during the second half of 2002; accordingly, we are projecting a full-year capex budget of $237.7 million. While we expect ESA will use its free cash flow to fund the majority of its expansion, we expect total debt to increase by $69.4 million during 2002, ending the year at $1.2 billion. We are projecting ESA’s leverage will peak during 2Q01 to approximately 4.5x, while cash interest coverage is expected to trough at the end of the same quarter at 3.0x. Assuming 2003 will be a recovery year, we are projecting RevPAR growth of 4.0%. Our 2003 EBITDA estimate for ESA is $312.2 million, a 12.7% increase over 2002. For 2003, we are projecting that capital spending will total $275.1 million, as we anticipate that ESA may aggressively ratchet up its development plans. At year-end we project total debt to be $1.285 billion. Leverage and cash interest coverage at the end of 2003 are projected to improve to 4.1x and 3.4x, respectively.
32 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Extended Stay America, Inc. — Financial Model ($ in 000s) LTM 3Q01 4Q01E 4Q00A %Chg 2001E 1Q02E 2Q02E 3Q02E 4Q02E 2002E 2003E Total Revenues 551,937 121,442 128,694 -5.6% 544,685 131,691 145,374 155,828 135,695 568,587 627,591 Costs and Expenses Property Operating Expenses 228,922 56,472 55,515 1.7% 229,879 59,921 58,874 63,498 60,385 242,677 262,021 Property-Level Op. Income 323,015 64,970 73,179 -11.2% 314,806 71,770 86,500 92,330 75,310 325,910 365,570 % Property Margin 58.5% 53.5% 56.9% -336 bps 57.8% 54.5% 59.5% 59.3% 55.5% 57.3% 58.3% Corporate Overhead 46,682 11,540 11,280 2.3% 46,942 11,590 12,500 13,250 11,530 48,870 53,350 Total Costs and Expenses 275,604 68,012 66,795 1.8% 276,821 71,511 71,374 76,748 71,915 291,547 315,371 EBITDA 276,333 53,430 61,899 -13.7% 267,864 60,180 74,000 79,080 63,780 277,040 312,220 % Margin 50.1% 44.0% 48.1% -410 bps 49.2% 45.7% 50.9% 50.7% 47.0% 48.7% 49.7% Depreciation and Amortization 70,649 18,670 17,119 9.1% 72,200 19,134 19,372 19,677 20,031 78,214 83,541 EBIT 205,684 34,760 44,780 -22.4% 195,664 41,046 54,628 59,403 43,749 198,826 228,679 Cash Flow Items Interest Expense 78,163 18,472 20,187 -8.5% 76,448 18,897 20,159 21,233 22,319 82,608 84,438 Interest (Income) (361) (71) 0 -- (432) (68) (98) (149) (137) (452) (466) Capital Expenditures (298,762) (79,858) (65,442) 22.0% (313,178) (70,268) (53,815) (55,733) (57,928) (237,743) (275,104) Cash Flow Coverage Ratios LTM EBITDA/Interest Expense 3.2x 3.1x 3.2x 3.1x 3.0x 3.0x 3.0x 3.0x 3.0x 3.4x LTM EBITDA - Capex/Interest Expense NM NM NM NM NM NM 0.1x 0.4x 0.4x 0.4x Free Cash Flow EBITDA 276,333 53,430 61,899 267,864 60,180 74,000 79,080 63,780 277,040 312,220 Cash Interest (87,002) (21,401) (21,587) (86,816) (21,828) (22,561) (23,085) (23,682) (91,156) (92,972) Capital Expenditures (298,762) (79,858) (65,442) (313,178) (70,268) (53,815) (55,733) (57,928) (237,743) (275,104) Scheduled Debt Amortization -- (2,500) -- (2,500) (3,750) (3,750) (4,063) (4,063) (15,625) (16,250) Cash Taxes (11,877) (3,270) 9,838 (24,985) (3,334) (5,186) (5,749) (3,236) (17,505) (21,705) Free Cash Flow (140,984) (53,599) (34,968) (159,615) (39,000) (11,312) (9,549) (25,129) (84,990) (93,810) Capitalization Cash and Equivalents 4,417 11,818 7,819 14,506 19,457 11,829 11,829 13,018 Revolver 29,000 40,000 25,000 43,000 57,500 75,000 75,000 170,000 Term Loans 549,375 596,875 643,125 639,375 635,313 631,250 631,250 615,000 9.875% Sr Sub. Notes due 2011 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 9.150% Sr Sub. Notes due 2008 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 Total Debt 1,078,375 1,136,875 1,168,125 1,182,375 1,192,813 1,206,250 1,206,250 1,285,000 Enterprise Value 2,459,218 2,508,982 2,586,542 Leverage Ratios Total Debt/LTM EBITDA 3.9x 4.2x 4.5x 4.5x 4.5x 4.4x 4.4x 4.1x Enterprise Value/EBITDA 9.2x 9.1x 8.3x Sources: Company reports and Bear Stearns Global High Yield Research.
Bear, Stearns & Co. Inc. 33 Lodging Outlook 2002 — January 18, 2002
FelCor Lodging Trust
FelCor Lodging Trust — Debt Issues Amount Recent Outstanding Ratings Next Call Bid Spread Coupon/Description Maturity (US$ in MM) Moody’s/S&P Date Price Price YTW (bps) 7.375% Senior Notes 10/1/04 175.0 Ba3/BB- Make whole 99.00 7.79% 460 7.625% Senior Notes 10/1/07 125.0 Ba3/BB- Make whole 97.50 8.18% 389 9.500% Senior Notes 9/15/08 600.0 Ba3/BB- 9/15/04 104.75 104.00 8.59% 430 8.500% Senior Notes 6/1/01 300.0 Ba3/BB- Non call 99.50 8.58% 375 Prices as of January 17, 2002. Source: Bear Stearns Global High Yield Research.
Investment Summary and Recommendation We are initiating coverage of the senior notes of FelCor Lodging Trust with a buy rating. FelCor, a Dallas-based real estate investment trust (REIT), is an owner of full-service hotels throughout the country. FelCor is the second largest public hotel REIT in the nation, owning 183 hotels (including 14 properties considered “held for sale”) across 35 states and in Canada. FelCor has well-based relationships with the top hotel management and franchise companies in the U.S., including Hilton, Starwood Hotels & Resorts, and Six Continents. FelCor owns hotels with several different brand affiliations, among them Embassy Suites, DoubleTree, Crowne Plaza, Holiday Inn, Sheraton, Westin, and Marriott. Six Continents Hotels is a 16% owner of FelCor. FelCor’s business strategy is to own strong, well-positioned, full-service brands that significantly outperform their competitive segment. The company has a fairly well-diversified portfolio geographically, and is not heavily exposed to center-city locations in the top U.S. markets. Prior to September 11, FelCor had agreed to a merger with MeriStar Hospitality that would have made the combined company the largest lodging REIT in the U.S. On September 21, however, the companies agreed to terminate the merger, as a result of the repercussions of the September 11 attacks in the lodging industry. As a result of the termination of the merger, during October FelCor redeemed $300 million of its 8.50% senior notes in accordance with the indenture. Among the three lodging REITs, we believe that FelCor’s bonds offer the most attractive returns on a risk-adjusted basis, particularly for those investors willing to absorb some near-term volatility. We acknowledge that the company is subject to short-term macroeconomic and event risk, but FelCor has positioned itself well, in our opinion, to ride out the uncertainty of the next several quarters. While FelCor, along with the rest of the lodging industry, has been hit hard after September 11, we believe that the company entered the downturn in the best financial condition among the lodging REIT’s, and post–September 11, its strategy of being well- diversified geographically with limited exposure to top U.S. markets has become a comparative strength. Although we believe Host has superior “long-term” assets, FelCor is in far better shape from a credit measure and balance sheet perspective, providing it with significantly more financial flexibility for handling the challenges of the next several quarters. We expect FelCor, Host and MeriStar to all experience peak leverage at the end of 2Q02. We are currently projecting that leverage for MeriStar, and Host will peak at just over 7.0x; our peak leverage estimate for FelCor is only 5.8x. In addition, while all of the REITs have obtained bank covenant waivers, we believe that FelCor’s waiver was obtained at more favorable terms than Host’s and MeriStar’s.
Recent Events On January 8, S&P lowered its ratings on FelCor’s senior unsecured debt and preferred stock to BB- and B- from BB and B, respectively. S&P assigned FelCor a stable outlook. On December 20, FelCor announced that it would pay a fourth-quarter dividend of $0.05 per common share, and also provided an update on recent business trends. The company anticipates that its 4Q RevPAR decline will fall in the middle of its previous guidance of a decline of 20%–25%, and operating margins will be better than the previously forecast margin decrease of 500–700 basis points, compared with the prior year period.
34 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
On November 16, 2001, FelCor Lodging LP was the first lodging REIT to access the high yield market after September 11, and issued $100 million 9.50% senior notes, priced at a discount to yield 9.80%, due September 15, 2008. Proceeds were used to repay amounts outstanding under the company’s revolver. On November 16, 2001, Moody’s lowered its ratings on FelCor’s senior unsecured debt and preferred stock to Ba3 and B2, respectively, from Ba2 and B1, respectively. Moody’s also assigned FelCor a negative outlook. On November 8, FelCor amended its bank facility. Given the challenging operating environment, FelCor needed to amend its bank facility in order to, among other things, remain in compliance with several of the financial covenants contained within the indenture. In return, additional tiers were added to the loan pricing grid, in order to reflect the potential for higher leverage. During November the company entered into $100 million of fixed-to-floating rate swaps, increasing its floating rate debt exposure to 10% of its total debt. The company believes that floating rate debt serves as a natural hedge to softening in lodging demand. During November, FelCor sold the 182-room Doubletree Guest Suites hotel in Tampa, Florida for net proceeds of $3.4 million. On September 21, FelCor and MeriStar Hospitality called off their merger as a result of the weakened lodging climate following September 11. Because of the termination of the merger with MeriStar, FelCor redeemed $300 million of its 8.50% senior notes during October in accordance with the indenture. The redemption price was 101% of the principal amount redeemed, plus accrued interest. The redemption price was paid out of the $315 million held in escrow.
Investment Considerations Investment Strengths FelCor has less exposure to more challenged urban markets. In the aftermath of the events of September 11th, it has become clear that hotels in those locations most reliant upon fly-in guests have suffered the most. Reduced airline capacity, safety concerns, and security delays have combined to meaningfully curtail airline passenger traffic in and out of America’s major cities. These factors, along with a weak economy and very restrictive corporate travel policies, have severely affected room demand at full-service hotels in most urban markets. While we have seen trends in these markets pick up in the weeks subsequent to the attacks, we expect cities like New York, Boston, and San Francisco to continue to trail secondary markets such as Dallas, St. Louis, and Denver over the recovery period. FelCor is less dependent on these challenged urban markets, relative to its peers, and that should help to mitigate the risk to its portfolio. While the bulk of FelCor’s assets fall in the full-service category, they are reasonably well-diversified in location. If we examine FelCor’s holdings by location type, we find that the company has 32% of its assets in urban locations and 18% in airport locations, but also that a sizable proportion of its assets (42%) are in suburban locations. FelCor’s remaining hotels are split between highway and resort locations (4% in each). We believe that this dispersion across locations is particularly important in the current operating environment, which remains rife with uncertainty. Non-urban locations have proven to be more resilient to industry-wide downturns than other locations. In fact, it is FelCor’s presence in suburban, drive-to markets that has driven its results, as both residual concerns about travel and low gasoline prices continue to encourage business and leisure travelers alike to drive, instead of fly. As the table below shows, suburban hotels have fared considerably better in holding occupancy than their urban and airport counterparts, and have thus managed to stem RevPAR decline more successfully. It is clear that the combination of the fear of terrorism, lack of confidence in airline security, airport hassles, and cutbacks in business travel expenses have resulted in a sharp decline of fly-in guests to the top MSAs. On the other hand, suburban and highway hotels have been a beneficiary of these trends, as road warriors turn to driving as a safer and cheaper alternative to flying.
Bear, Stearns & Co. Inc. 35 Lodging Outlook 2002 — January 18, 2002
RevPAR By Location (Week Ending January 12, 2002) 9/15 9/22 12/15 12/22 12/29 1/5 1/12 % Chg. % Chg. % Chg. % Chg. % Chg. % Chg. %Chg. Urban -30.6% -58.1% -15.7% -1.8% -16.2% -16.5% -18.8% Suburban -19.1% -33.0% -9.2% -2.5% -9.2% -14.3% -15.8% Airport -18.9% -40.5% -17.9% -7.4% -18.2% -21.9% -20.7% Highway -12.6% -20.2% -5.2% 3.9% -5.0% -11.3% -12.5% Resort -29.4% -52.7% -15.4% -21.9% -14.5% 0.5% -19.4% Source: Smith Travel Research and Bear Stearns Global High Yield Research. FelCor’s relatively strong balance sheet allows for increased flexibility. We believe that one of FelCor’s competitive strengths, in this environment, is its relatively solid balance sheet. While we expect that the company’s credit measures will deteriorate in the short run, we believe FelCor entered the downturn in better shape than its peers, Host and MeriStar, and thus should have significantly more financial flexibility for handling the challenges of the next several quarters. We expect FelCor, Host and MeriStar all to experience peak leverage at the end of 2Q02. We are currently projecting that MeriStar’s, and Host’s, leverage will peak at just over 7.0x; our peak leverage estimate for FelCor is only 5.8x. Credit Statistic Comparison Actual Projected LTM 3Q 01 12/31/2001 LTM 2Q 02 12/31/2002 12/31/2003 Leverage Int. Cov. Leverage Int. Cov. Leverage Int. Cov. Leverage Int. Cov. Leverage Int. Cov. FelCor 4.6x 2.4x 5.3x 2.3x 5.8x 2.1x 5.4x 2.3x 4.8x 2.5x Host 5.0x 2.5x 6.2x 2.1x 7.2x 1.7x 6.5x 1.9x 5.6x 2.2x MeriStar 5.8x 2.3x 6.5x 2.1x 7.2x 1.7x 6.5x 1.8x 5.8x 2.0x Sources: Company reports and Bear Stearns Global High Yield Research. In addition, while all of the REITs needed to obtain bank covenant waivers, we believe that FelCor obtained its bank amendment on the most favorable terms, agreeing to only a modest rate increase. Host had several onerous restrictions placed on it, while MeriStar’s spread over LIBOR was increased from 188 to 400 basis points. Importantly, FelCor is not subject to any material near-term debt maturity risk, as no major bullet payments are due until 2004 (at which point $240 mm comes due). In fact, the company has only $50 mm in debt maturing by the end of 2003. Clearly this schedule bodes well for FelCor’s efforts to preserve capital in a difficult operating environment, and eliminates near- term refinancing risk. As a real estate owner, FelCor is well positioned for a turnaround. As a REIT, FelCor is purely an owner of hotels, and cannot participate in the management of its properties. Instead, FelCor has third-party contracts with managers and franchisers to run and flag its hotels. This business model allows FelCor to retain most of the operating income of its hotels while simply paying out fees to its management/franchise companies. With this structure, the company can realize strong profits in periods of robust hotel room demand, but is subject to reduced profits, or losses, when demand is weak. The leverage inherent in ownership gives rise to additional vulnerability and a greater degree of earnings uncertainty. As an owner, FelCor is best positioned when hotel fundamentals are strong or improving and the outlook for business trends is positive. With most analysts expecting 2002 to be a recovery year for the lodging industry (operating trends having been set back to 1997–98 levels), the stage is set for a robust 2003. We expect a sharp pickup in demand for hotel rooms concurrent with the relatively strong GDP growth expected for 2003 (our economists anticipate 3.5% growth). A meaningful increase in corporate spending should help precipitate the return of the high-margin business traveler, which, combined with what has been a fairly resilient leisure traveler during the recent downturn, should prompt industry-wide hotel room demand (rooms sold) to grow in excess of 3.0% in 2003. While this is down by approximately 70 basis points from the superheated demand growth of 2000, it is also up by about 250 basis points over expected 2002 demand, and up by 50 basis points from the average annual demand growth for the past dozen years. Limited new supply is silver lining. In our view, the silver lining for hotel owners is the expectation that limited new supply will be coming on line over the next several years. Indeed, the recent shock to the lodging industry has only exacerbated lender caution toward new hotel
36 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
projects. We have seen several cases of projects being put on hold, or cancelled outright. This decelerating supply growth, a trend over the past few years, makes it considerably easier for demand growth to outpace supply growth. We are currently forecasting an increase in room inventory of just 2.5% in 2001, falling to just 1.5% in 2002 and to roughly 1.0% in 2003. Inventory Growth 2000 2001E 2002E 2003E STR Chain Scale Rooms Census % Change % Change % Change % Change Full-Service Upper-Upscale 499,828 3.6% 3.0% 1.9% 1.0% Upscale 359,586 4.4% 5.0% 2.0% 1.0% Midscale w/F&B 643,349 -1.2% 1.2% 0.6% 0.4% Subtotal Full-Service 1,502,763 1.7% 2.7% 1.4% 0.7% Limited-Service Midscale w/o F&B 528,003 9.5% 7.0% 5.0% 3.0% Economy 758,931 3.1% 1.9% 0.9% 0.5% Subtotal Limited-Service 1,286,934 5.6% 4.0% 2.6% 1.6% Total Chain Scale Segments 2,789,697 3.5% 3.3% 2.0% 1.1% Independents 1,275,625 2.4% 0.9% 0.5% 0.3% Total All Rooms 4,065,322 2.9% 2.9% 1.5% 1.0% E: Estimated. Sources: Lodging Econometrics and Bear Stearns Global High Yield Research. Capex requirements are limited given recent renovations. FelCor recently undertook an overhaul of its portfolio, spending in excess of $500 million to improve certain under- performing hotels and boost revenues. The renovation program took place primarily in 1998 and 1999, during which years FelCor invested $220 million and $222 million, respectively. FelCor invested an additional $95 million into its portfolio in 2000. The company continues to keep its assets in good shape in 2001, having spent approximately $50 million on capital expenditures through the third quarter. By ramping up its capital expenditure schedule in 1998 and 1999, the company has substantially mitigated the necessity for large-scale expenditures over the near term. While FelCor could not have predicted the events of September 11 and their negative impact on cash flows across the hotel industry, the company is well positioned from a “condition of assets” standpoint. Asset valuation is compelling. Given the company’s portfolio of high quality assets, we believe that FelCor bondholders have a considerable degree of asset protection, even in light of the current market environment. FelCor’s management estimates that the replacement cost of its hotels is $110,000 per key, which equates to an asset value of approximately $5.0 billion, which would cover the company’s outstanding debt by approximately 2.6x. Even after a 25% haircut to management’s replacement cost estimates, the bonds are more than adequately covered at 2.0x. Credit Concerns Another extraordinary event could further affect travel patterns. Among the many things we learned from the events of September 11 was the degree to which the hotel industry is levered to the airline industry. Almost overnight, most hotels in destination cities became desolate, and more than three months later, they are still operating meaningfully below pre-attacks levels. And while the American traveler has shown considerable resilience, it should be clear that another domestic terrorist event is likely to have substantial effects on travel related businesses. Vulnerability to economic downturn. The aftermath of September 11 further weakened an industry that was already struggling. Historically, the performance of the lodging industry has been highly correlated to the performance of the general economy. For the past 25 years, change in hotel demand has closely tracked change in GDP. While economic trends are a good industry barometer, they don’t pace with each other precisely. Historically, contractions in the lodging industry have been longer and deeper, while expansions have been shorter. Troughs in rooms demand growth lead downturns in the economy and lag recoveries. We believe that the current state of the lodging industry, though improving, remains challenging over the near term. Trends expected to be choppy over the next few quarters. We believe that the hotel industry will continue to face challenges over the near term. We acknowledge that, while several recent travel indicators bode well for improvements in volume, pricing and yields still appear to be
Bear, Stearns & Co. Inc. 37 Lodging Outlook 2002 — January 18, 2002
very soft, and the profitability implications will be meaningful. Pricing has come under pressure as companies change their customer mix to drive more leisure travel and less business travel. Furthermore, as we move into the first quarter 2002, we expect to see rates come under increased pressure, as comparisons are more difficult with the industry moving back toward a more business-driven period. On balance, visibility into the sector remains poor, and the timing and magnitude of a recovery in lodging fundamentals is too difficult to pinpoint. With a high degree of leverage to both the economy and air travel, the lodging sector should see some volatility over the near term, as the economy recovers from the recession and the traveling public weighs our military’s progress in Afghanistan and our country’s ability to allay concerns about further terrorist strikes. Geographic concentration in four states. FelCor has a significant number of its properties concentrated within four states: Texas, California, Florida, and Georgia. Based on 2000 EBITDA levels, these four states accounted for 58% of total EBITDA contribution. Such dependence on four states could prove problematic for the company, particularly with two of those states being in the same region and therefore more or less subject to the same economic forces; moreover, the company’s reliance on Florida and California is risky, given that their tourism industries continue to suffer. Credit measures expected to weaken in coming quarters. Of the three primary lodging REITs, FelCor has traditionally maintained the lowest leverage, typically falling in the low- to mid-4x range. The tragic events of September 11 and subsequent travel and economic fallout unfortunately caught FelCor and others in the lodging industry off guard. While it was anticipated that the company’s credit measures would weaken in the short run solely as a result of the declining economy, this process was significantly expedited following the falloff in performance after September 11. On an LTM basis, FelCor’s leverage and cash interest coverage are estimated at 4.6x and 2.4x, respectively. By year-end we expect these measures to weaken to 5.3x and 2.3x, respectively. Assuming that 2Q02 will represent the last quarter of lower year-over-year comparisons, we expect FelCor’s leverage to peak at 5.8x and its cash interest coverage to trough at 2.1x. From that point forward, we expect FelCor’s credit statistics to stabilize and slowly begin to rebound. We are projecting FelCor leverage and cash interest coverage to improve by the end of 2003, to 4.8x and 2.5x, respectively. Further rating downgrades by rating agencies are possible. On November 16, Moody’s downgraded FelCor one notch, lowering its senior unsecured rating to Ba3 from Ba2, citing the uncertain outlook as well as FelCor’s weakening credit measures. Given the continued uncertainty, Moody’s decided to maintain a negative outlook on the company. On January 8, S&P also lowered its ratings on FelCor to BB- from BB. However, in contrast to Moody’s, S&P assigned FelCor a stable outlook. We expect both agencies to maintain a close watch on FelCor and the rest of the lodging group, and both could lower their ratings further if the expected rebound in lodging demand materializes at a slower-than-expected rate. Standard REIT risks and inability to fulfill dividend obligations. Separately, FelCor is exposed to standard REIT risks. These include the failure to qualify as a REIT because of the inability to meet current IRC requirements or a change in the requirements. This failure could result in the loss of the company’s tax-exempt status. In order to maintain its REIT status, FelCor must pay out 90% of its taxable income as dividends to its shareholders, thereby limiting its ability to use free cash flow to deleverage. In addition, pursuant to the REIT Modernization Act and the acquisition of its leases, FelCor is now subject to the risks associated with hotel operations. Prior to the RMA (which came into effect on January 1, 2001), substantially all of FelCor’s hotels were leased to unaffiliated third parties under leases that generated rental income based on revenues from hotels operations. Accordingly, FelCor’s operating risks were basically limited to the lessees’ ability to pay its rent. As a result of the repurchase of its leases from these third parties, FelCor has effectively become subject to risks associated with fluctuating hotel operating revenues and expenses, including labor costs, repair and maintenance expenses, energy costs, and liability insurance costs. Other Considerations Merger with MeriStar terminated. On May 10, 2001, FelCor announced that it had agreed to acquire MeriStar Hospitality, another hotel REIT, for $2.7 billion in cash, stock and the assumption of debt. However, following the tragic events of September 11 and in light of their
38 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
repercussions on the lodging industry, the two companies elected to terminate the planned merger. The primary thrust behind the merger was to put together two hotel REITs that were similar, in terms of size and assets, in an effort to capture the benefits of scale, diversity and investor awareness. FelCor’s management has stated that they would be amenable to pursuing discussions with MeriStar at a later date. We would not be surprised if this merger were revisited sooner rather than later; however, this will likely be dependent upon market conditions and a stabilization in the financial performance of both companies. As a result of the October termination of the merger with MeriStar, FelCor redeemed $300 million of its 8.500% senior notes, in accordance with the indenture. The redemption price was 101% of the principal amount redeemed plus accrued interest. The redemption price was paid out of the $315 million held in escrow. REITs and the RMA: Overview of the new financial structure. Real estate investment trusts (REITs) are created by sections 856-860 of the Internal Revenue Code (IRC). Through the status granted by the IRC, REITs avoid the double taxation that is inherent in the traditional corporations. Normally, profits are taxed at the corporate level through corporate income tax and again at the shareholder level through taxation of distributed profits (dividends). So long as REITs meet certain requirements, earnings are not taxed at the corporate level. Under the REIT structure, substantially all of the income from the corporation is passed along to shareholders in the form of dividends, avoiding corporate tax. The basic tenets of the REIT structure are outlined below. Basic Tenets of the REIT Structure A publicly traded company that raised equity through an initial public offering or private formation transaction. Structured to lease its owned hotels' assets to a tenant and receives rent based on a percentage lease agreement. Income increases are derived from increases in lease income resulting from higher hotel revenues and via acquisition of hotel assets. Because of the requirement to distribute 90% of taxable net income, an equity REIT must grow through external capital sources. To access external capital sources, REITs must establish a line of credit with a lending institution and typically borrow 40%–50% of the value of a hotel asset. An entity can qualify as a REIT if it has the following: a) management by board of directors or trustees; b) distribution of 90% of income as dividends; c) no fewer than five "individuals" can own more than 50% of the REIT; d) minimum of 100 investors; e) at least 75% of gross income must come from rents from real property or from mortgages on real property; f) 30% or more of gross income cannot come from the sale of real estate assets that are held for sale for less than four years; and g) at least 75% of assets must be real estate. Source: Bear Stearns Global High Yield Research. Pursuant to the REIT Modernization Act (“RMA”), FelCor has restructured its hotel leases and similarly, its reporting structure. Prior to the legislation, which became effective on January 1, 2001, REITs leased their hotels to a third party. The hotels were either managed by the lessee or a separate management company. Typically, the REITs income would consist of rental income (usually based on hotel revenues) received from the lessee. However, under this arrangement, REITs would not capture all of the operating income of their assets, as the lessee or management company would retain any profits that remained after rent and management fees were paid. Often, this created a conflict of interest between the owner and the management company. However, under the terms of the RMA, a solution was established to help create a better economic alignment between a hotel owner and its manager. REITs were then allowed to set up taxable REIT subsidiaries (“TRS”) and lease their assets to a TRS rather than to a third party. TRS’s are not allowed to manage hotels, so the properties still need to be managed by an
Bear, Stearns & Co. Inc. 39 Lodging Outlook 2002 — January 18, 2002
independent entity that is paid a management fee for its services. To this end, FelCor’s reporting structure reflects the revenues and expenses (including management fees) associated with its assets, and the company now seeks to drive operating income, rather than rent. Adopting the RMA earlier this year, FelCor bought back 85 leases from DJONT (a privately– held lessee). It also acquired 11 leases from Bass Hotels & Resorts for hotels that are either held for sale or were contributed to a joint venture with Interstate Hotels. Effective July 1, 2001, the company acquired the remaining 88 hotel leases held by Six Continents. At the end of the third quarter, Six Continents managed 89 of the hotels, Hilton 71, Starwood 11, Interstate eight, and three independent management companies managed the remaining four. After adopting the RMA, FelCor established FelCor Lodging Limited Partnership (“FelCor LP”) as its TRS. The company has more than 85% of the equity interest in the TRS. As of September 30, 2001, FelCor owned 183 hotels (including those held for sale), encompassing nearly 50,000 rooms supported by 24 different brands. The hotels are located in 35 states throughout the United States and Canada. Furthermore, as of September 30, the company owned 100% of the interest in 151 of the hotels, 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels, and 50% interests in entities owning 24 hotels.
Company History and Description FelCor Lodging Trust was founded in 1991 by Hervey Feldman and Tom Corcoran. Mr. Feldman and Mr. Corcoran purchased their first hotel together— the Holiday Inn at Dallas/Fort Worth International Airport in 1991. One year later, they acquired the Embassy Suites hotel in Tulsa, and later, in 1993, they acquired five Park Suites hotels that were in the process of already being converted to the Embassy Suites brand. In 1994, FelCor went public with six hotels (1,479 suites) as a REIT on Nasdaq under the name of FelCor Suite Hotels, Inc. In 1996, the company was listed on the New York Stock Exchange. Over the next few years, FelCor continued its aggressive growth strategy, adding the Sheraton and Doubletree brands to its portfolio. In 1997, FelCor purchased seven Sheraton hotels, which marked its initial entry into the upper-upscale, non-suite market. In July 1998, FelCor merged with Bristol Hotel Company and changed its name to FelCor Lodging Trust Incorporated. Through the merger, FelCor added to its portfolio 107 full-service hotels containing more than 28,000 rooms and suites. The Bristol merger more than doubled the company’s size and provided important geographic and asset class diversification. Since that point, FelCor has primarily focused on an internal growth strategy, including the renovation, redevelopment and rebranding of its hotels to help improve revenue performance. Today, FelCor is the owner of the largest number of Embassy Suites, Crowne Plaza, Holiday Inn and independently owned Doubletree branded hotels in the world. Portfolio Composition With a broad variety of hotel brands in its portfolio, FelCor is well-diversified across the full- service spectrum. As a company, FelCor has limited exposure to the upper-upscale urban market. This has allowed FelCor to mitigate some of the risks associated with sustainable demand at high-end hotels—a fact that has proven to be a relative strength in the current environment. As the pie graph indicates, just over 50% of FelCor’s hotels are classified as upper-upscale product. For comparison purposes, roughly 97% of Host Marriott’s portfolio and about 55% of MeriStar Hospitality’s hotels compete in the upper-upscale segment. In other words, FelCor has greater diversity by service level with more exposure to the full-service sector than its two comparables, with a combined 37% between its mid-scale properties with and without F&B. MeriStar, on the other hand, has just over 20% exposure, while Host has only a fraction.
40 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
FelCor — Portfolio by Location
Airport 18% Urban 32% Highway 4% Resort 4% .
Suburban 42%
Sources: Company reports and Bear Stearns Global High Yield Research. As the chart below indicates, FelCor’s portfolio consists of the some of the strongest brands in the industry. As the largest owner of Embassy Suites (59 hotels), FelCor has developed a very strong relationship with Hilton. Similarly, as the largest independent owner of Holiday Inn branded hotels (59 hotels), FelCor has established a solid relationship with Six Continents (which owns 16% of the company). These well-based affiliations help give FelCor more leverage than smaller owners in a variety of areas, including negotiations, purchasing, brand standards, etc. The company also is a large owner of Starwood’s Sheraton brand (10 hotels) and owns seven Marriott-branded hotels in a joint-venture with Interstate. FelCor — Portfolio by Major Brand (Excluding Hotels for Sale) Hilton Brands Six Continents Brands Embassy Suites 59 Holiday Inn 44 Doubletree 14 Crowne Plaza 17 Hampton Inn 7 Holiday Inn Select/Express 15 Hilton and Hilton Suites 1 76 Homewood Suites 1 Starwood Brands 82 Sheraton 10 Independents Westin 1 Beaver Creek Lodge 1 11 Bristol House 1 Marriott Brands Harvey 4 Courtyard Marriott 2 Whispering Woods 1 Fairfield Inn 5 77 Sources: Company reports and Bear Stearns Global High Yield Research. Management We believe that FelCor is led by one of the lodging industry’s stronger management teams. FelCor’s senior management has an average of nearly 20 years of experience in the hotel industry and is considered to be savvy and transaction-oriented. Below we give a brief professional bio of the key executives of the company. Thomas J. Corcoran, Jr., president and chief executive officer. Thomas Corcoran serves the dual role of president and chief executive officer for the REIT and has served in that capacity since FelCor’s formation in 1994. His long history of management in the lodging and food- service industry began with Brock Hotel Corporation in Topeka, Kansas. During his 11 years with Brock, Mr. Corcoran held positions in mergers and acquisitions, financial planning and project development and franchise sales for Chuck E. Cheese Entertainment, Inc. (formerly known as ShowBiz Pizza Place, Inc.).
Bear, Stearns & Co. Inc. 41 Lodging Outlook 2002 — January 18, 2002
Richard J. O’Brien, executive vice president and chief financial officer. Mr. O’Brien recently joined FelCor as the company’s chief financial officer, which had been vacant for several months. Prior to joining FelCor, Mr. O’Brien was most recently with GE Capital Real Estate, where he held a number of leadership positions. As a Managing Director, he was responsible for e-commerce investments, the development of strategic alliances and new programs, and debt program management. Mr. O’Brien also served as the chief financial officer of the Americas business unit of GE Capital Real Estate, with $8.0 billion in assets. Prior to his work with GE Capital Corporation, he held management positions with J. P. Morgan and KPMG Peat Marwick. Michael A. DeNicola, executive vice president and chief investment officer. The most recent member of FelCor’s management team, Mr. DeNicola joined the company in early December. Prior to joining the company, Mr. DeNicola was with Lend Lease Real Estate Investments, where he was Principal and Head of the Lodging and Leisure Group. In his role, he was responsible for managing a $1.1-billion hotel portfolio of 21 properties, including investment management, acquisitions and dispositions. Prior to Lend Lease, he held a number of leadership positions with Carlson Hospitality Worldwide, including Executive Vice President of Carlson Vacation Ownership, Senior Vice President of Planning, Mergers and Acquisitions, and Vice President of Operations. Prior to his work with Carlson Hospitality, he held management positions with Kenneth Leventhal & Company and VMS Realty Partners.
Financial Summary Third-Quarter Results For its third quarter, FelCor reported EBITDA of $80.1 million, down by 34.9% from 3Q00, as the slowing economy and the September 11 aftershock helped to drive RevPAR down by 17.4% during the quarter. The RevPAR decline came mostly from occupancy and ADR declines, of 9.7% and 4.8%, respectively. FelCor’s RevPAR fell by 31% in September, following declines of 10.1% during July and 11.6% during August. FelCor’s operating margins during 3Q01 narrowed by 390 bps from 3Q00, to 31.7%. The operating margin for September 2001 decreased by 870 bps from prior-year, to 26.4%. Management indicated that, in the fourth quarter, it expects to realize savings from many of its post-September 11 cost-reduction initiatives. FelCor ended the quarter with total debt of $1.84 billion and unrestricted cash of $69.6 million. FelCor’s LTM leverage and interest coverage at the end of the third quarter were 4.6x and 2.4x, respectively. During the quarter, capital expenditures totaled $18.7 million. As noted above, because of its increased leverage, FelCor needed to obtain a covenant waiver from its bank group. Outlook 4Q01 On December 20, FelCor provided an update on 4Q01 trends, indicating that it expects its 4Q01 RevPAR decline to be in the middle of its previous decline estimate of 20%–25%, and it expects operating margins to be better than the previously forecasted margin decrease of 500–700 bps from the prior-year period. As a result of the improved margin performance, the company expects to be in the middle-to-high end of its previous FFO guidance of $0.10 to $0.25 per share, which corresponds with EBITDA of approximately $55–65 million. Our current 4Q01 EBITDA estimate is $62.6 million, a decline of 35.6% from 4Q00. FelCor completed a $100-million add-on senior note offering during the quarter, using approximately $85 million in proceeds to reduce its revolver balance, which we believe was $25 million at the end of the quarter. At year-end, we expect total debt to be up by approximately $65 million from the end of 3Q01, reaching approximately $1.92 billion. Leverage and cash interest coverage are projected to weaken to 5.2x and 2.3x, respectively, as a result of the year- over-year decline in EBITDA. The company has more than ample liquidity, with projected revolver availability of $590 million and cash estimated to be more than $100 million at year- end.
42 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
2002–2003 On its 3Q01 conference call, FelCor cautiously stated that it expected 2002 RevPAR to fall in a range of negative 5% to flat with 2001. The company indicated that it anticipates a gradual sequential quarterly recovery in 2002, with easier comparisons in the second half of the year. Further, the company indicated that it expects a first-half RevPAR decline of approximately 10%, with the first quarter being more challenging than the second quarter of 2002. We are currently projecting RevPAR to decline by 3.8% for 2002. Given the company’s guidance that its fourth-quarter results were trending ahead of its original expectations, particularly on the margin side, we are only projecting a 4.9% decrease in EBITDA, to $346.4 million. Assuming 2003 is a recovery year, we project that FelCor could generate EBITDA of $387.2 million, an 11.8% increase compared with 2002. Our 2003 RevPAR estimate for FelCor calls for an increase of 5.8%. During 2002, we expect FelCor to balance its free cash flow usage between debt reduction, dividend payments and capital expenditures. We are currently projecting a total reduction in long-term debt of $35 million, ending 2002 at $1.88 billion. Capital expenditures during 2002 are expected to be primarily maintenance-related and projected to total $49 million, or approximately 3.5% of total hotel revenues. Based on our discussions with the company, we expect FelCor to pay a modest dividend for the first two quarters of 2002; however, the dividend could ramp-up meaningfully during the second half of the year, with improved operating performance. For 2003, we expect the company to reduce debt by another $36 million, ending the year at $1.85 billion. Based on our projections of increased EBITDA during 2003, we believe that the increased free cash flow generated may likely be allocated to a 22.5% increase in capital expenditures and a 66.5% increase in dividends. Assuming that 2Q02 will represent the last quarter of lower year-over-year comparisons, we expect FelCor’s leverage to peak at 5.8x and its cash interest coverage to trough at 2.1x. From that point forward, we expect FelCor’s credit statistics to stabilize and slowly begin to rebound. We project FelCor’s leverage and cash interest coverage to improve by the end of 2003, to 4.8x and 2.5x, respectively.
Bear, Stearns & Co. Inc. 43 Lodging Outlook 2002 — January 18, 2002
FelCor Lodging Trust— Financial Model ($ in 000s) 3Q01 LTM 4Q01E 4Q00A %Chg. 2001E 1Q02E 2Q02E 3Q02E 4Q02E 2002E 2003E Revenues Room $1,212,609 $251,452 $305,333 -17.6% $1,158,728 $282,399 $293,907 $283,260 $266,155 $1,125,720 $1,192,089 Food & Beverage 242,957 40,232 71,519 -43.7% 211,670 49,420 52,903 50,987 49,239 202,548 226,497 Other Operating Depts 83,435 15,087 24,541 -38.5% 73,981 16,944 19,104 18,412 18,631 73,091 83,446 Total Hotel Revenue 1,539,001 306,772 401,393 -23.6% 1,444,380 348,762 365,915 352,658 334,024 1,401,360 1,502,032 Income From Unconsolidated Subs 5,211 1,000 (1,839) -154.4% 8,050 1,000 1,500 2,000 2,000 6,500 8,000 Retail and Other Revenues 3,021 491 565 -13.1% 2,947 558 585 564 534 2,242 2,403 Total Revenue 1,547,233 308,262 400,119 -23.0% 1,455,376 350,320 368,000 355,223 336,558 1,410,102 1,512,436 EXPENSES Room 292,951 65,378 74,904 -12.7% 283,425 72,012 73,477 70,815 63,877 280,181 286,101 Food & Beverage 190,152 33,393 54,018 -38.2% 169,527 39,536 41,265 39,770 37,421 157,991 172,138 Other Operating Depts 34,782 6,035 9,005 -33.0% 31,812 6,778 7,642 7,365 7,452 29,236 33,378 Total Hotel Operating Exp 517,889 104,806 137,928 -24.0% 484,767 118,326 122,384 117,950 108,752 467,412 491,619 Mangmnt & Incentive Fees 67,422 12,330 18,630 -33.8% 61,122 14,013 15,456 15,985 16,828 62,282 75,622 Other Property Operating Costs 427,243 97,500 109,075 -10.6% 415,668 97,500 100,000 100,000 100,000 397,500 415,388 Property Taxes, Insurance And Other 147,354 33,000 38,504 -14.3% 141,850 35,000 35,000 37,000 37,000 144,000 150,000 Corporate G&A 13,078 3,000 3,769 -20.4% 12,309 3,000 3,000 3,100 3,100 12,200 12,500 Depreciation 158,636 39,500 39,850 -0.9% 158,286 39,500 39,500 40,000 40,000 159,000 162,000 EBIT 195,314 18,126 52,363 -65.4% 161,076 42,981 52,660 41,187 30,879 167,708 205,308 FFO 211,268 16,300 50,456 -67.7% 177,112 43,534 53,784 42,750 32,380 172,447 210,673 EBITDA 399,255 62,026 97,185 -36.2% 364,095 87,402 97,081 86,108 75,800 346,392 387,172 Operating Margins EBITDA Margin 25.8% 20.1% 24.3% -417 bps 25.0% 24.9% 26.4% 24.2% 22.5% 24.6% 25.6% Hotel Margin 66.3% 65.8% 65.6% 20 bps 66.4% 66.1% 66.6% 66.6% 67.4% 66.6% 67.3% Cash Flow Coverage Ratios LTM EBITDA/Interest Expense 2.5x 2.3x 2.1x 2.1x 2.2x 2.3x 2.3x 2.5x LTM EBITDA - Capex/Interest Expense 2.0x 1.9x 1.8x 1.8x 1.9x 2.0x 2.0x 2.1x Free Cash Flow EBITDA 399,255 364,095 87,402 97,081 86,108 75,800 346,392 387,172 Cash Interest (160,020) (159,471) (37,834) (37,263) (37,323) (37,385) (149,805) (152,199) Capital Expenditures (77,477) (58,840) (12,207) (12,807) (12,343) (11,691) (49,048) (60,081) Scheduled Debt Amortization (95,705) (23,662) (3,290) (3,290) (3,290) (3,290) (13,160) (34,900) Free Cash Flow 66,053 122,122 34,072 43,722 33,152 23,434 134,379 139,992 Dividend Payments (141,582) (140,892) (8,799) (16,535) (23,256) (23,146) (71,736) (103,266) Capitalization Cash and equivalents 69,608 109,927 99,906 116,299 114,901 103,894 103,894 92,764 Revolver $49,900 25,0000000 0 0 7.375% Sr Notes due 2004 $174,601 174,633 174,665 174,697 174,729 174,761 174,761 174,889 7.625% Sr Notes due 2007 $124,394 124,418 124,442 124,466 124,490 124,514 124,514 124,610 9.500% Sr Notes due 2008 $496,884 596,995 597,166 597,337 597,508 597,679 597,679 598,363 8.500% Sr Notes due 2011 $297,593 297,593 297,593 297,593 297,593 297,593 297,593 297,593 Mortg/Capital Lease Debt $633,193 630,918 627,628 624,338 621,048 617,758 617,758 582,858 Other Secured Debt $67,076 66,196 66,196 66,196 66,196 66,196 66,196 66,196 Total Debt $1,843,641 1,915,753 1,887,690 1,884,627 1,881,564 1,878,501 1,878,501 1,844,509 Enterprise Value 2,935,238 2,905,969 2,881,158 Leverage Ratios Net Debt/LTM EBITDA 4.4x 5.0x 5.3x 5.4x 5.3x 5.1x 5.1x 4.5x Total Debt/LTM EBITDA 4.6x 5.3x 5.6x 5.8x 5.7x 5.4x 5.4x 4.8x Enterprise Value/EBITDA 8.1x 8.4x 7.4x E: Estimated. Sources: Company reports and Bear Stearns Global High Yield Research.
44 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Host Marriott, LP
Host Marriott, LP — Debt Issues Amount Recent Outstanding Ratings Next Call Bid Spread Coupon/Description Maturity (US$ in MM) Moody’s/S&P Date Price Price YTW (bps) 7.875% Senior Notes 8/1/08 1,200.0 Ba3/BB- 8/1/03 103.99 96.00 8.69% 428 7.875% Senior Notes 8/1/05 500.0 Ba3/BB- 8/1/02 103.94 98.00 8.54% 499 8.450% Senior Notes 12/1/08 500.0 Ba3/BB- 12/1/03 104.23 98.00 8.84% 438 8.375% Senior Notes 2/15/06 300.0 Ba3/BB- Non Call 99.00 8.67% 488 9.500% Senior Notes 1/15/07 450.0 Ba3/BB- Non Call 103.50 8.61% 443 9.250% Senior Notes 10/1/07 250.0 Ba3/BB- Make Whole 102.00 8.79% 463 Prices as of January 17, 2002. Source: Bear Stearns Global High Yield Research.
Investment Summary We are initiating coverage of the Host Marriott, LP senior notes with an attractive recommendation. Host is the largest lodging REIT in the U.S. and is generally recognized as having one of the premier hotel portfolios in the industry. Host’s core strategy is to own large, high-end hotels in urban, airport, or resort markets with high barriers to entry for new competitive supply. Current brand affiliations in Host’s portfolio include Marriott, Hilton, Swissôtel, Four Seasons, Hyatt, and Ritz-Carlton. The events of September 11 and the general economic downturn have unfortunately turned out to be a considerable setback for Host and the rest of the lodging industry. RevPAR, which was trending lower before the attacks as a result of the economic slowdown, dropped precipitously directly afterwards. Host’s RevPAR for the four weeks ended October 5 and November 2 was down by 42.7% and 25.8%, respectively. Since September 11, however, demand has rebounded, resulting in a fairly steady increase in RevPAR levels. For the week ended January 12, RevPAR for upper upscale properties as reported by Smith Travel Research showed that RevPAR was down by 22.7%, a considerable improvement from the period directly proceeding September 11, when RevPAR levels for the upper upscale segment were down by as much as 62%. Also to be considered is that January and February of 2001 were the last periods in which the upper upscale segment had positive RevPAR, making comparisons more challenging. Nevertheless, the significant drop-off in RevPAR is expected to result in a corresponding—if not greater—drop-off in EBITDA for the next several quarters. Directly after September 11, Host acted decisively to reduce costs in an effort to preserve margins and lower its breakeven occupancy level to 40%–50%, compared with a more normal 50%–60%. In addition, the company has focused on preserving liquidity. Since September 11, the company has temporarily suspended its common dividend and reduced its capex plans for 2002. In December, Host amended its bank agreement, receiving covenant relief in return for accepting several new restrictions. In order to reduce its reliance on its banks, on December 6, Host completed a $450- million senior note offering (upsized from $350 million), the proceeds of which were used to repay the majority of the company’s remaining outstanding bank debt. The remaining balance was repaid with proceeds from two recently closed asset sales. Not surprisingly, on December 5, Host’s senior notes were downgraded by Moody’s from Ba2 to Ba3. Moody’s cited the challenging operating conditions following September 11, which would result in weaker debt coverage measures as the primary reason for its downgrade. Following the downgrade, Moody’s is maintaining a negative outlook on Host. On January 8, S&P also lowered its rating on Host’s senior notes to BB- from BB while also maintaining a negative outlook. After widening by approximately 500 basis points immediately following the events of September 11, Host’s senior notes have tightened to within 125 basis points of their pre- September 11 levels. While this tightening has been dramatic, we believe that additional upside is possible, particularly for investors with at least a 12–24 month investment horizon. We believe that the bonds may exhibit modest volatility over the next several quarters, but, given the challenging operating environment, the company’s long-term outlook in our view remains sound, with more than adequate asset protection and a very strong management team. Although
Bear, Stearns & Co. Inc. 45 Lodging Outlook 2002 — January 18, 2002
credit measures are expected to weaken through the first half of 2002 (leverage reaching 7.0x), we believe that improvement should be evidenced from that point through the end of 2003. Through cost-cutting efforts, Host’s business model now has significant operating leverage, in our view, to benefit from the sequential improvements in quarterly RevPAR that we expect to see during 2002–03.
Recent Events On January 8, 2002, S&P lowered the senior unsecured ratings of Host Marriott Corporation and Host Marriott LP to BB- from BB and the preferred stock ratings of Host Marriott Corporation to B- from B. S&P also assigned the company a negative outlook. On December 6, 2001, Host Marriott LP issued $450 million (up from an original offer of $350 million) in 9.500% senior notes due July 15, 2007. Proceeds were used to repay bank debt. On December 5, Host officially announced that it was suspending its common stock dividend, pending further visibility on the stabilization of lodging demand and thus the company’s performance. On December 5, Host provided an update on 4Q01 trends, noting that RevPAR for the four weeks ended October 5 and November 2 was down by 42.7% and 25.8%, respectively. The company also noted that operating margins were ahead of initial expectations as a result of aggressive cost containment strategies implemented after September 11. On December 4, 2001, Moody's lowered the senior unsecured ratings of Host Marriott Corporation, Host Marriott LP, and HMH Properties, Inc. to Ba3 from Ba2; the Quarterly Income Preferred Securities (QUIPS) rating of Host Marriott Financial Trust to B2 from Ba3; and the preferred stock ratings of Host Marriott Corporation to B3 from Ba3. During December, Host completed the sales of its Vail Marriott Mountain Resort for $49 million and its Pittsburgh Marriott City Center for $15 million. Proceeds from the sales were used to repay remaining bank debt and provide a source of additional liquidity. On November 19, Host amended its bank facility. Given the challenging operating environment, Host needed to amend its bank facility in order to, among other things, remain in compliance with several of the financial covenants contained within the indenture. As part of the amendment, Host was required to accept several additional restrictions, including limitations on its ability to: access its revolver, pay dividends, make capital expenditures, repurchase shares and make investments/acquisitions (specific details are provided later in the report).
Investment Considerations Investment Strengths High-quality portfolio of assets. Host is recognized in the industry as having one of the premier portfolios of lodging properties. In building its portfolio of 123 hotels (includes World Trade Center Marriott), Host’s strategy has been to acquire larger properties with signature brands that are located in urban, resort or airport markets, where barriers to entry tend to be high. Approximately 78% of Host’s properties are located in such markets, with the remainder located in suburban markets. Host has also grown its portfolio with a view towards maintaining geographic diversity. It is currently located in 30 states and 70 distinct markets, with no single market representing more than 11% of EBITDA. In terms of brands, Host is the leading owner of Marriott and Ritz Carlton properties and also owns premier assets with the Four Seasons, Hyatt, Swissôtel and Hilton brand affiliations. In our view, a critical strength during this period of uncertainty is Host’s ownership of exclusive properties with strong brand affiliations. The combination of these traits has historically allowed Host’s portfolio to outperform those of its peers in terms of occupancy and RevPAR. As real estate owner, Host is well-positioned for a turnaround. As a REIT, Host is purely an owner of hotels and cannot participate in the management of its properties. Instead, Host has
46 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
third-party contracts with managers to run and flag its hotels. The structure of this business model allows Host to retain most of the operating income of its hotels and simply pay out fees to its management company. This structure allows the company to realize strong profits in periods of robust hotel room demand, but it also subjects the company to reduced profits or losses when demand is weak. Accordingly, the leverage inherent in ownership gives rise to additional vulnerability and a greater degree of earnings uncertainty. As an owner, Host is best positioned when hotel fundamentals are strong or improving, and the outlook for business trends is positive. With most considering 2002 to be more of a recovery year for the lodging industry (with operating trends having been set back to 1997-98 levels), the stage is set for 2003 to be robust. Concurrent to relatively strong GDP growth expected in 2003 (our economists are anticipating growth of 3.5%), we would expect a sharp pick up in the demand for hotel rooms. A meaningful increase in corporate spending could help precipitate the return of the high-margin business traveler. Combined with what has been a fairly resilient leisure traveler during the recent downturn, industry-wide hotel room demand (rooms sold) could grow in excess of 3% in 2003. While this is down roughly 70 basis points from the super- heated demand growth of 2000, it is to also up by about 250 basis points over expected 2002, and 50 basis points from the average annual demand growth for the past dozen years. Limited new supply is silver lining. In our view, the silver lining for hotel owners is the expectation of limited new supply coming on line over the next several years. The recent shock to the lodging industry has only exacerbated lender caution toward new hotel projects. We have seen several examples of projects being put on hold or cancelled outright. This trend of decelerating supply growth over the past few years will make it easier for demand growth to outpace supply growth. We are currently forecasting an increase in room inventory of just 2.5% in 2001, falling to just 1.5% in 2002 and 1.0% in 2003. Inventory Growth 2000 2001E 2002E 2003E STR Chain Scale Rooms Census % Change % Change % Change % Change Full-Service Upper-Upscale 499,828 3.6% 3.0% 1.9% 1.0% Upscale 359,586 4.4% 5.0% 2.0% 1.0% Midscale w/F&B 643,349 -1.2% 1.2% 0.6% 0.4% Subtotal Full-Service 1,502,763 1.7% 2.7% 1.4% 0.7% Limited-Service Midscale w/o F&B 528,003 9.5% 7.0% 5.0% 3.0% Economy 758,931 3.1% 1.9% 0.9% 0.5% Subtotal Limited-Service 1,286,934 5.6% 4.0% 2.6% 1.6% Total Chain Scale Segments 2,789,697 3.5% 3.3% 2.0% 1.1% Independents 1,275,625 2.4% 0.9% 0.5% 0.3% Total All Rooms 4,065,322 2.9% 2.9% 1.5% 1.0% E: Estimated. Sources: Lodging Econometrics and Bear Stearns Global High Yield Research. Cost cutting positions company with significant operating leverage. Since September 11, Host has employed several cost-cutting measures in order to realign its cost base with the new outlook for top-line growth. These efforts include suspending less essential brand standards, streamlining staffing and service delivery, reducing labor costs, consolidating operations by closing floors in low occupancy periods, reducing hours of operations at hotel restaurants and, where possible, sharing facilities between adjacent properties. As a result of being pro-active, Host indicated that it has been able to reduce its break-even occupancy levels to 40%–50% compared to 50%–60%, previously. We believe that this expense discipline should position Host with significant operating leverage over the next several quarters and into 2003 as we project that RevPAR will continue to increase on a sequential basis throughout 2002. Asset valuation is compelling. Given its portfolio of superior assets, we believe that bondholders have a considerable degree of asset protection even in light of the current market environment. Host’s management estimates that the replacement cost of its hotels is $200,000– $225,000 per room, which equates to an asset value range of approximately $12.0–$13.5 billion, which would cover the company’s outstanding debt by approximately 2.1x–2.4x. While we believe if Host sold some of the assets in the current environment they could be sold at a discount to replacement cost, even taking a 25% haircut on these estimates implies that the bonds are more than adequately covered at 1.6x–1.8x.
Bear, Stearns & Co. Inc. 47 Lodging Outlook 2002 — January 18, 2002
Recent bond deal reduces near-term reliance on banks and reduces exposure to near-term maturities. At the beginning of December, Host completed a $450-million senior note offering, the proceeds of which were used to repay almost all of the company’s outstanding bank debt (pari passu with senior notes), which stood at $460 million as of October 19. Given the expectation of challenging market conditions for the next several quarters and limitations under the company’s recent bank amendment to take draws under its revolver, we believe that this is an important financing for the company, which accomplished several strategic objectives. Most importantly it reduced the company’s near-term reliance on its banks and extended its maturities, thus reducing near-term cash requirements. Still a generator of free cash flow during 2002. Despite our projection that Host will only generate EBITDA of $852 million during 2002, we still anticipate the company could generate approximately $100 million in free cash flow during 2002. Typically, Host’s largest uses of cash are to pay interest expense, capital expenditures and dividends. While we expect the company’s cash interest expense to increase to $ 458 million (up by 6.0%) during 2002 as a result of an increase in debt as well as a higher percentage of fixed rate debt, we believe that the company’s project capital expenditure budget will likely decline sharply and the company may not pay dividends to its common stockholders at all. The company has indicated that its capex budget for 2002 is likely to be between $150– 200 million and primarily relegated to maintenance. While lower than normal, due to the drop-off in project spending, it is fairly consistent with Host’s normal spending on maintenance capex, which averaged $197 million from 1998–2000. With regard to dividends, Host has both preferred and common shareholders. At this time, we expect Host to make its approximately $68 million in preferred dividend payments with cash available. On the other hand, paying its common dividend is a completely different matter. As a REIT, Host is required to pay out 90% of its net taxable income to shareholders in the form of cash dividends. Following the events of September 11 and the subsequent drop-off in the company’s cash flows, Host suspended its common dividend, pending an improvement in business fundamentals. Importantly, with the company’s expectation of negative taxable income during 4Q01, Host was not obligated to pay a dividend as it had already fulfilled its requirement through the third quarter to pay out more than 90% of its taxable income as dividends. Based on our current projections, Host would not be obligated to pay a dividend during 2002, as we are currently projecting the company will generate negative taxable income for the year. Credit Concerns Another extraordinary event could further impact travel patterns. Among the many things we learned from the events of September 11 was the degree to which the hotel industry is leveraged to the airline industry. Almost overnight, most hotels in destination cities became desolate, and more than three months later, they are still operating meaningfully below pre-attack levels. While the American traveler has shown considerable resilience, it should be clear that another domestic terrorist is likely to have substantial effects on travel-related businesses. Vulnerability to economic downturn. The aftermath of September 11 further weakened an industry that was already struggling. Historically, the performance of the lodging industry has been highly correlated to the performance of the general economy. For the past 25 years, change in hotel demand has closely tracked change in GDP. While economic trends are a good industry barometer, they do not track each other precisely. Historically, contractions in the lodging industry have been longer and deeper, while expansions have been shorter. Troughs in room- demand growth lead downturns in the economy and lag recoveries. We believe that the current state of the lodging industry, though improving, should remain challenging over the near term. Credit measures expected to weaken significantly in coming quarters. For the past several years, Host has maintained its leverage in the 4.5x –5.5x range as it sought to strike the balance between maximizing performance and maintaining its credit rating. The tragic events of September 11 and subsequent travel and economic fallout, unfortunately caught Host and others in the lodging industry off guard. While many anticipated that the company’s credit measures would weaken in the short run solely as a result of the declining economy, this process was significantly expedited following the falloff in performance after September 11. On an LTM basis, Host’s leverage and cash interest coverage are estimated at 5.0x and 2.5x respectively. By year-end, we expect these measures to weaken to 6.2x and 2.1x, respectively. Assuming that 2Q02 will represent the last quarter of lower year-over-year comparisons, we expect Host’s leverage to peak at 7.2x, while its cash interest coverage we expect to trough at 1.7x. From that
48 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
point forward, we expect Host’s credit statistics to stabilize and slowly begin to rebound. We are projecting Host’s leverage and cash interest coverage to improve by the end of 2003 to 5.6x and 2.2x, respectively. Limited bank availability over the next several quarters. Given the challenging operating environment, Host needed to amend its bank facility in order to, among other things, remain in compliance with several of the financial covenants contained within the indenture. As part of the amendment, Host was required to accept several additional restrictions, including limitations on its ability to access its revolver. According to the amendment, Host is permitted to draw no more than $50 million under its revolver during 1Q02 and no more than $25 million during 2Q02; however, the 2Q02 permitted drawdown is only available if nothing else is currently drawn down on the revolver. On the positive side, pro forma for its recent bond offering and certain asset sales, we estimate Host had approximately $310 million in cash available as of year-end, providing it with sufficient near-term liquidity. Importantly, the company has no significant maturities until August 2005. Further rating downgrades by rating agencies are possible. On December 3, Moody’s downgraded Host Marriott one notch, lowering its senior unsecured rating to Ba3 from Ba2, citing the uncertain outlook as well as Host’s weakening credit measures. Given the continued uncertainty, Moody’s decided to maintain a negative outlook on the company. On January 8, S&P also lowered its rating on Host’s senior notes to BB- from BB while also maintaining a negative outlook. We expect both agencies to maintain a close watch on Host as well as the rest of the lodging group. In our opinion, the agencies could lower their ratings further if the expected rebound in lodging demand materializes more slowly than expected. Trends expected to be choppy over the next few quarters. We believe that the hotel industry will continue to face challenges over the near term. We acknowledge that, while several recent travel indicators augur well for improvements in volume, pricing and yields still appear to be very soft, and the profitability implications will be meaningful. Pricing has come under pressure as companies change their customer mix to drive more leisure travel and less business travel. Furthermore, as we move into the first quarter of 2002, we expect to see rates come under increased pressure, as comparisons are more difficult with the industry moving back toward a more business-driven period. On balance, visibility into the sector remains poor, and the timing and magnitude of a recovery in lodging fundamentals is too difficult to pin. With a high degree of leverage to both the economy and air travel, the lodging sector should see some volatility over the near term, as the economy recovers from the recession and the traveling public weighs our military’s progress in Afghanistan and our country’s ability to allay concerns about further terrorist strikes. Standard REIT risks and inability to fulfill dividend obligations. Separately, Host is exposed to standard REIT risks. These include the failure to qualify as a REIT due to the inability to meet current Internal Revenue Code requirements or a change in the requirements. This failure could result in the loss of the company’s tax-exempt status. In order to maintain its REIT status, Host must pay out 90% of its taxable income as dividends to its shareholders, thereby limiting its ability to use free cash flow to deleverage. In addition, pursuant to the REIT Modernization Act (“RMA”) and the acquisition of its leases, Host is now subject to the risks associated with hotel operations. Prior to the RMA (which came into effect on January 1, 2001 ), substantially all of Host’s hotels were leased to unaffiliated third parties under leases that generated rental income based on revenues from hotels operations. Consequently, Host’s operating risks were basically limited to the lessees’ ability to pay its rent. As a result of the repurchase of its leases from these third parties, Host has effectively become subject to risks associated with fluctuating hotel operating revenues and expenses, including labor costs, repair and maintenance expenses, energy costs and liability insurance costs. Other Considerations New covenant package. As noted previously, on November 19, Host amended its bank facility. Host anticipates it will need to further amend the credit agreement during 2002, as it expects to encounter difficulty in maintaining compliance with several covenant tests, which return to more stringent levels for the periods following August 15, 2002. We note, however that as we
Bear, Stearns & Co. Inc. 49 Lodging Outlook 2002 — January 18, 2002
do not expect Host to draw on its revolver in the near-term, many of these restrictions are currently not applicable. Specific highlights of the amended bank agreement are provided below. The amendment provides Host with covenant relief through the period ended August 15, 2002. The new tests are outlined in the following table: Host Marriott — Amended Bank Covenant Tests LTM Period Min. Cons. Min. Unsecured Min. Fixed Ended/Test (a) Max Leverage Interest Coverage Interest Coverage Charge Coverage Dec 31, 2001 6.50x 1.75x 1.55x Waived Mar 31, 2002 7.40x 1.60x 1.40x Waived Jun 30, 2002 7.25x 1.50x 1.30x Waived Aug 15, 2002 7.25x 2.15x 1.80x Waived Thereafter 5.50x 2.15x 1.80x 1.4x Sources: Company reports and Bear Stearns Global High Yield Research. (a) Calculation of these ratios is based on the latest twelve month audited financial statements. The amendment limits draws under the revolver to not more than $50 million in the first quarter of 2002 and up to $25 million in the second quarter of 2002 (but only to the extent that less than $25 million is outstanding from any first quarter draws). The interest rate is increased to between 25 and 75 bps on outstanding amounts, based on a grid tied to leverage. All asset sale proceeds, except from proceeds received in the recent sale of the Marriott Hotel located in Vail, Colorado, are to be used to repay any amounts outstanding under the bank agreement. Common stock dividend payments are restricted to those necessary to maintain the company’s compliance with REIT requirements. Acquisitions with cash are not permitted; however, acquisitions accomplished via the use of equity or assumption of debt is permitted. However, if debt is assumed, the leverage of the property acquired must be less than 3.5x. Investments are generally restricted to: no more than $45 million in intercompany loans or equity contributions to the company’s subsidiaries; and up to $7.5 million in ventures in which Host already had an equity interest as of November 19, 2001. Capital expenditures are limited to: $85 million for the quarter ended December 31, 2001; not more than 5.25% of gross revenues for the quarter ended March 31, 2002; not more than 5.00% of gross revenues for the period commencing April 1, 2002 and ending August 15, 2002; and $5.0 million for emergency capital expenditures. All insurance proceeds received for claims related to the World Financial Center and World Trade Center Marriotts are to be deposited and maintained in segregated bank accounts. Marriotts at the World Trade Center and World Financial Center. As a result of the terrorist attacks of September 11, Host’s World Trade Center Marriott hotel was destroyed, while its New York Marriott Financial Center hotel suffered considerable damage. The Marriott Financial Center, which has been closed since September 11, re-opened during the first week of January, after repairs on the facility were completed. The company is required to redevelop the World Trade Center Hotel per its ground lease with the Port Authority of New York and New Jersey. According to the company, it has both casualty and business interruption insurance for both hotels, through its manager Marriott International, and thus it eventually expects to be made whole or substantially whole. There could, however, be timing differences associated with receipt of insurance disbursements versus repair and redevelopment work. Any insurance proceeds received by Host are to be placed in escrow and can only be used initially for the restoration of the Marriott Financial Center and construction of the new hotel to replace the Marriott World Trade Center. Importantly, for purposes of calculating its compliance with its bank covenants, Host is permitted to include business interruption proceeds received in its calculation of consolidated EBITDA. During 2000, the combined EBITDA on the two hotels was approximately $37 million, or about 3% of the company’s total 2000 EBITDA.
50 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
REITs and the RMA: overview of the new financial structure. Real estate investment trusts (REITs) are created by sections 856-860 of the Internal Revenue Code (IRC). Through the status granted by the IRC, REITs avoid the double taxation that is inherent in the traditional corporations. Normally, profits are taxed at the corporate level through corporate income tax and again at the shareholder level through taxation of distributed profits (dividends). So long as REITs meet certain requirements, earnings are not taxed at the corporate level. Under the REIT structure, substantially all of the income from the corporation is passed along to shareholders in the form of dividends, avoiding corporate tax. The basic tenets of the REIT structure are outlined below. Basic Tenets of the REIT Structure A publicly traded company that raised equity through an initial public offering or private formation transaction. Structured to lease its owned hotels' assets to a tenant and receives rent based on a percentage lease agreement. Income increases are derived from increases in lease income resulting from higher hotel revenues and via acquisition of hotel assets. Because of the requirement to distribute 90% of taxable net income, an equity REIT must grow through external capital sources. To access external capital sources, REITs must establish a line of credit with a lending institution and typically borrow 40%–50% of the value of a hotel asset. An entity can qualify as a REIT if it has the following: a) management by board of directors or trustees; b) distribution of 90% of income as dividends; c) no fewer than five "individuals" can own more than 50% of the REIT; d) minimum of 100 investors; e) at least 75% of gross income must come from rents from real property or from mortgages on real property; f) 30% or more of gross income cannot come from the sale of real estate assets that are held for sale for less than four years; and g) at least 75% of assets must be real estate. Source: Bear Stearns Global High Yield Research. Crestline lease purchase. Following passage of the REIT Modernization Act, which took effect January 1, 2001, Host purchased 116 of its operating leases from Crestline Capital for $207 million. In two separate transactions completed in June 2001, Host acquired the remaining four leases held by third parties. Under the provisions of the RMA, hotel REITs are no longer required to lease their hotels to third parties. Instead, they are now permitted to establish taxable REIT subsidiaries, effectively leasing the properties to themselves. This was clearly a positive for Host in our view because it helped to simplify the company’s corporate structure and gave the company greater control over its assets. However, as noted above, as a result of the repurchase of its leases from these third parties, Host has effectively become subject to risks associated with fluctuating hotel operating revenues and expenses, including labor costs; repair and maintenance expenses; energy costs; and liability insurance costs. Courtyard Marriott settlement. As part of a litigation settlement related to several limited partnership transactions from the 1980s, Host Marriott and Marriott International formed a joint venture to buy 120 Courtyard properties (17,554 rooms). The total transaction, which closed during October 2000, was valued at $1.165 billion, consisting of a $199 million equity commitment from the joint-venture partners, $199 million in mezzanine debt provided by Marriott International (at 13%) and $767 million in existing debt on the properties. Host’s cash equity commitment to the transaction was $90 million. The joint venture partners now receive the cash flow from the properties, which on Host’s books is reported as “equity in unconsolidated subs” on the income statement. Since the debt of these unconsolidated subsidiaries is non-recourse to Host Marriott, we do not consider it within our leverage calculations.
Bear, Stearns & Co. Inc. 51 Lodging Outlook 2002 — January 18, 2002
Company Description Host Marriott is a lodging REIT that owns 123 (including the World Trade Center Marriott) upscale and luxury, full-service hotel properties operated under the Marriott, Ritz-Carlton, Four Seasons, Hyatt, Hilton, and Swissôtel brand names. The company’s assets are primarily located in urban, resort, and airport markets with high barriers to entry, which prevent substantial additions to competitive supply. Host Marriott — Portfolio at a Glance
Property Size <250 Market Type rooms 10% Suburban Dow ntow n > 500 53% rooms 22% 29%
Convention/ Res ort 251-500 14% rooms 61% Airport 11%
Brand Segment
The Host Marriott Portfolio is focused on large hotels in the deluxe and luxury-brand Upper- Upscale segments. It is concentrated in urban, resort, upscale 2% and airport markets with high barriers to entry, 98% which will limit the effect of new supply.
Source: company reports. Management In our view, Host’s management team ranks among the top in the lodging industry. Below, we provide summary biographies of the company’s chairman, chief executive officer and chief financial officer. Richard E. Marriott. Mr. Richard Marriott, 59, currently serves as chairman of the board, a position he has held since 1993. Prior to that, Mr. Marriott served as vice chairman of the board. Mr. Marriott joined Host in 1965 and has held various executive positions. He has been a Director of Host since 1979, and is also a Director of Marriott International. In addition, Mr. Marriott is a past president of the National Restaurant Association and is currently the President of the Marriott Foundation for People with Disabilities. Christopher J. Nassetta. Mr. Nassetta, 39, currently serves as president and chief executive officer, a position he has held since May 2000. From 1995 until May 2000, he served as executive vice president and was elected chief operating officer of Host Marriott Corporation in 1997. Before joining Host in 1995, he served as President of Bailey Realty Corporation for four years. Mr. Nassetta was also with the Oliver Carr Company from 1984 to 1991. Mr. Nassetta also serves on the Board of Trustees of Prime Group Realty Trust and as a member of the McIntire School of Commerce Advisory Board for the University of Virginia.
52 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Robert E. Parson, Jr. Mr. Parsons, 46, currently serves as executive vice president and chief financial officer, a position he has held since 1995. Prior to that, Mr. Parsons served as senior vice president and treasurer. In addition, he served as assistant treasurer from 1988 to 1993. Mr. Parsons began his career with Host in 1981 in the Corporate Financial Planning department.
Financial Summary Third-Quarter Review For its third quarter (12 weeks), Host reported EBITDA of $190 million, down by 19.5% compared with 3Q00, as the slowing economy helped to drive RevPAR down by 11.9% during the quarter. Because of its reporting calendar, Host’s third quarter ended the Friday before the September 11 attacks, and thus the results were unaffected by the attacks. All major markets experienced declines in both occupancies and room rates to levels below what Host experienced in the first half of the year, reflecting the continued decline in the overall economy. RevPAR for comparable properties was down by 11.9% for the quarter, based on a 4.9% decline in ADR and an almost 600-bp drop in occupancy. Regional/market RevPAR growth for the quarter was as follows: New England down by 21%; Mountain down by 13%; Pacific down by 18.9%; Mid-Atlantic down by 10.2%; DC Metro down by 11.8%; North Central down by 13.8%; International down by 9.6%; Atlanta down by 8.8%; South Central down by 3.3%; and Florida up by 1.9%. Hotel sales for the third quarter were $829 million (with $19 million of rental income recognized for hotels still leased to third parties). RevPAR at Host Marriott’s nine owned Ritz-Carlton properties was down by 11.8% as occupancy fell by 12.6 %. Interestingly, Host’s strategy to hold rates worked, and ADR was up by almost 5%. Host ended the quarter with total debt of $5.4 billion and unrestricted cash of $182 million. However, soon after the attacks, Host drew down its revolver by $250 million in order to preserve liquidity. Host’s LTM leverage and interest coverage at the end of the third quarter were 5.0x and 2.5x, respectively. During the quarter, capital expenditures totaled $46 million. Host also declared a third-quarter dividend of $0.26 per share, or approximately $68.3 million, which is to be paid during the fourth quarter.
Outlook What We Do Know In an 8-K filed by the company on December 6, Host indicated that operating results for its comparable properties for the four weeks ended October 5 and November 2, 2001, reflect decreases in RevPAR of 42.7% and 25.8%, respectively, over the prior-year periods. The company also noted that operating margins were ahead of initial expectations as a result of aggressive cost containment strategies implemented after September 11. During the four -week period ended October 5, Host’s hotels recorded an occupancy rate of 54.6%, with weekly occupancy rates ranging from 38% to 62%. During that period, the company had approximately $70 million of cancellations and lost business. Some of the hardest hit properties were Host’s large convention hotels, which accounted for over 70% of the lost revenue through October 12. For the four-week period ended November 2, Host’s occupancy levels improved to 69.3%. On the cost-cutting front, following September 11, Host intensified cost control initiatives, which it had begun earlier in the year. These efforts include suspending less essential brand standards, streamlining staffing and service delivery, reducing labor costs, consolidating operations by closing floors in low-occupancy periods, reducing hours of operations at hotel restaurants and, where possible, sharing facilities between adjacent properties. As a result, Host has been able to drive down the breakeven occupancies of its hotels. Generally, 50%–60% occupancy has been considered breakeven. Host’s cost cutting efforts have now allowed the company to achieve breakeven levels at 40%–50% occupancy.
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What Are Management’s Expectations? During its third-quarter conference call, the company attempted to provide guidance for its fourth quarter and, to a limited extent, on 2002. For 4Q01, the company expects RevPAR to be down by 30%–35%, with margins expected to be narrowed by 9%–11%. Accordingly, the company indicated that it expects full-year 2001 EBITDA to be approximately $900 million, implying 4Q01 EBITDA of $170–175 million. Based on the quarter-to-date RevPAR numbers reported by the company in its December 5 8-k filing, we believe that the fourth quarter may be running slightly ahead of management’s original expectations and guidance. Our projection for Host’s 4Q01 EBITDA is $173 million. Since the end of the third quarter, Host has been actively repositioning its balance sheet to conform to the new reality it is currently facing. As noted above, Host drew down its revolver on September 18 by $250 million, in order to strengthen its near-term liquidity. In early December, the company completed a $450-million senior note offering, the proceeds of which were used to pay off the majority of the company’s remaining outstanding bank debt. In addition, Host raised $65 million through the sale of two properties, which it used to repay the last of the company’s revolver as well as strengthen liquidity. At the end of 2001, we project Host will likely have total debt of $5.6 billion and cash of $310 million. We estimate year-end leverage and interest coverage to be 6.2x and 2.1x respectively. Outlook for 2002 Remains a Question Mark—2003 Should Be a Year of Recovery Next year remains a question mark. The company’s internal forecasts are based upon the assumption of overall RevPAR declines of 3%–5% for the full year, with weaker expectations in the front end of the year and an improvement in the back half. While RevPAR declines of 3%–5% do not seem overly dramatic given the disruption to the travel industry, it should be pointed out that those are additional declines over 2001 results, which will include an almost 12% RevPAR drop in 3Q01 and a 30%–35% drop in 4Q01. For 2002, given the uncertainty, we believe that a reasonable EBITDA estimate is $852 million. At this level of EBITDA, we would expect the company to generate approximately $100 million in free cash, based on a reduction in capex and a short-term suspension of the company’s common dividend. If Host does pay a 2002 dividend, we believe that it would not be until the second half of the year, when operating performance should, in our view, show evidence of stabilizing if not improving on a year-over- year basis. Assuming 2003 is a recovery year, we are projecting that Host will likely generate EBITDA of $983 million, a 15.4% increase over 2002. Our 2003 RevPAR estimate for Host is an increase of 7.0%. Assuming that 2Q02 will represent the last quarter of lower year-over-year comparisons, we expect Host’s leverage to peak at 7.2x and its cash interest coverage to trough at 1.7x. From that point forward, we expect Host’s credit statistics should stabilize and slowly begin to rebound. We are projecting that, by the end of 2003, Host’s leverage and cash interest coverage will likely improve to 5.6x and 2.2x, respectively.
54 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Host Marriott, LP — Financial Model ($ in MM, Except Property Statistics) LTM 3Q01 4Q01E 4Q00PF %Chg 2001E 1Q02 2Q02 3Q02 4Q02 2002E 2003E Revenues Rooms 2,408 591 770 -23.2% 2,229 492 571 537 654 2,254 2,412 F&B 1,202 266 420 -36.6% 1,048 231 277 231 314 1,053 1,158 Other 294 70 90 -22.7% 274 60 70 6784280 310 Total Hotel Sales 3,904 927 1,280 -27.6% 3,551 783 918 835 1,052 3,588 3,880 Rental Income 146 25 69 -63.8% 102 16 16 18247485 Other Income 35 0 26-9224 41230 Total Revenue 4,085 952 1,375 -30.8% 3,662 801 936 857 1,080 3,674 3,995 Total Operating Costs & Exp 3,299 890 1,051 -15.3% 3,138 718 789 754 926 3,186 3,388 Margins Rooms Margin 305.0% 69.0% 76.4% -736 bps 74.3% 72.0% 75.0% 74.0% 72.0% 73.2% 73.5% F&B Margin 102.2% 22.5% 28.6% -607 bps 24.3% 22.5% 28.0% 19.5% 25.5% 24.2% 24.5% Other Dep. Exp. (% of Hotel Revs) 96.3% 27.0% 22.0% 504 bps 25.1% 26.0% 25.5% 27.5% 24.0% 25.0% 24.5% Mgmt. Fees & Other (% Hotel Revs) 22.2% 5.0% 5.9% -94 bps 5.3% 5.2% 4.8% 5.0% 5.5% 5.1% 5.5% Other Property Level Expense 28.8% 9.0% 6.6% 244 bps 7.8% 8.5% 8.5% 8.0% 8.0% 8.2% 8.0% EBITDA Calculations Net Income 391 (87) 316 -127.6% (12) (43) 13 (29) (26) (84) 4 Effect on Revenue of SAB 101 (384) 0 (366) - (18) 0 0 0 000 Interest Expense (171) (139) 140 -199.0% (450) (111) (111) (111) (146) (478) (475) Dividends on Convertible Pref. (12) (10) 10 -202.2% (32) (8) (8) (8) (10) (33) (33) D&A (159) (120) 107 -212.1% (386) (90) (90) (90) (115) (385) (400) Minority Interest 72 0 98 - (26) (8) (11) (12) (17) (48) (71) Income Taxes (38) 8 (23) -135.3% (7) 4 (1) 3 28(0) Other Non-Cash Items (19) 0 (25) - 6 0 0 0 000 Lease Repurchase Expense (5) 0 0 -(5)0 0 0 000 EBITDA of Host LP 1,081 173 349 -50.3% 905 170 234 189 259 852 983 Free Cash Flow EBITDA 1,081 173 349 905 170 234 189 259 852 983 Cash Interest Expense (440) (134) (141) (433) (106) (106) (106) (141) (458) (455) Interest Income 38 10 13 35 8 8 8 12 36 40 Capital Expenditures (312) (43) (108) (247) (36) (42) (48) (58) (185) (228) Scheduled Debt Amortization 0 0 0 (66) (13) (13) (13) (13) (50) (50) Convertible preferred dividend (32) (10) (10) (32) (8) (8) (8) (9) (32) (32) Dividends (207) (77) 0 (284) (9) (9) (9) (9) (35) (167) Free Cash Flow 128 (80) 103 (205) 7 64 14 42 123 101 Cash Flow Coverage Ratios: EBITDA/Interest Expense 2.5x 2.1x 1.9x 1.7x 1.7x 1.9x 1.9x 2.2x EBITDA - Capex/Interest Expense 1.7x 1.6x 1.4x 1.3x 1.3x 1.5x 1.3x 1.5x Capitalization Cash and Equivalents 182 310 300 338 330 340 340 296 Credit Facility 210 0 0 0 0 000 Series A Notes (7 7/8% due 08/05) 500 500 500 500 500 500 500 500 Series B Notes (7 7/8% due 08/08) 1,194 1,194 1,194 1,194 1,194 1,194 1,194 1,194 Series C Notes (8.45% due 12/08) 499 499 499 499 499 499 499 499 Series E Notes (8 3/8% due 2/06) 300 300 300 300 300 300 300 300 Series G Notes (9 1/4% due 10/07) 250 250 250 250 250 250 250 250 Series H Notes (9 1/2% due 1/07) 0 450 450 450 450 450 450 450 Sr. Secured Notes (9 1/2% due 05/05) 13 13 13 13 13131313 Other Sr. Nts (9.75% Due Thru '12) 26 26 26 26 26262626 Mortgages 2,292 2,267 2,255 2,242 2,230 2,217 2,217 2,167 Other Notes 90 90 90 90 90909090 Capital Lease Obligation 17 17 17 17 17171717 Total Debt 5,391 5,606 5,594 5,581 5,569 5,556 5,556 5,506 Convertible Preferred 492 492 492 492 492 492 492 492 Enterprise Value 7,473 7,393 7,446 Leverage Ratios Net Debt/LTM EBITDA 4.8x 5.8x 6.3x 6.8x 6.8x 6.1x 6.1x 5.4x Total Debt/LTM EBITDA 5.0x 6.2x 6.7x 7.2x 7.2x 6.5x 6.5x 5.6x Enterprise Value/EBITDA 8.3x 8.7x 7.6x E: Estimated. Sources: Company reports and Bear Stearns Global High Yield Research.
Bear, Stearns & Co. Inc. 55 Lodging Outlook 2002 — January 18, 2002
MeriStar Hospitality Corp.
MeriStar Hospitality, LP — Debt Issues Amount Recent Outstanding Ratings Next Call Bid Spread Coupon/Description Maturity (US$ in MM) Moody’s/S&P Date Price Price YTW (bps) 9.000% Senior Notes 1/15/08 300.0 B1/B+ Non call 98.25 9.39% 505 9.125% Senior Notes 1/15/11 200.0 B1/B+ Non call 97.50 9.55% 466 10.500% Senior Notes 6/15/09 250.0 B1/B+ 12/15/05 105.25 104.00 9.60% 527 8.750% Sr.Sub.Nts. 8/15/07 205.0 B3/B- 8/15/02 104.38 87.75 11.81% 748 Prices as of January 17, 2002. Source: Bear Stearns Global High Yield Research.
Investment Summary We are initiating coverage of the MeriStar Hospitality, LP senior and senior subordinated notes with an attractive recommendation. We believe that the MeriStar bonds are best suited to investors with a more speculative risk profile and at least an 18–24 month investment horizon. In particular, we believe that the senior subordinated notes are an attractive investment for CBOs, given the low dollar price (87.75). MeriStar is the third largest lodging REIT in the U.S., with a portfolio of 112 hotels located in 27 states, the District of Columbia and Canada. The hotels are primarily upscale, full-service properties located in major metropolitan markets and other high-demand locations with high barriers to entry for new competitive supply. MeriStar Hospitality, along with its sister- company, MeriStar Hotel and Resorts, Inc., combine to form a “paper-clipped” REIT, whereby the two companies share certain management and board members and have closely aligned objectives. In our view, this strong relationship with its operating company offers MeriStar certain competitive advantages, particularly in the current challenging environment, where cost- efficient run properties are a necessity. MeriStar has typically acquired under-performing properties below replacement cost with a strategy to remodel, reposition and, when appropriate, rebrand the property. Current brand affiliations in MeriStar’s portfolio include Hilton, Sheraton, Marriott, Westin, Radisson and Doubletree. Prior to September 11, MeriStar had agreed to a merger with FelCor Lodging LP, which would have made the combined company the largest lodging REIT in the U.S. However, on September 21, both companies agreed to terminate the merger as a result of the repercussions on the lodging industry following the tragic events of September 11. With the merger terminated, MeriStar found itself in a tenuous position, as it was the most leveraged of the top three lodging REITs (Host Marriott and FelCor being the other two) prior to the events of September 11, and its strategy of focusing on major metropolitan urban and airport locations became a considerable challenge because both of these lodging sub-sectors were among the hardest hit following September 11. As a result of the challenging operating environment and an expected weakening of the company’s credit measures, Moody’s on December 3 and S&P on January 8 each lowered the company’s credit ratings one notch. While we believe that the bonds may exhibit modest volatility over the next several quarters, given the challenging operating environment, the company’s long-term outlook in our view remains sound, with more than adequate asset protection. Although credit measures are expected to weaken through the first half of 2002, we believe that improvement should be evidenced from that point through the end of 2003. Through cost-cutting efforts, we believe MeriStar’s business model now has significant operating leverage to benefit from our expectation of sequential improvements in quarterly RevPAR during 2002–03. Supporting our thesis is management’s mid-December announcement that it expects to meet or exceed the upper end of its previous guidance, largely as a result of better-than-expected gross operating margins. Relative Value We view the MeriStar bonds as attractive relative to the Host Marriott bonds, particularly the senior subordinated notes, given the higher yield offered. While Host is clearly larger, with superior assets, and deserves a premium valuation because of its frequent and sizable issuance,
56 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
we believe that MeriStar’s portfolio in this environment could prove to be less volatile, while absolute credit measures for each company are expected to weaken to similar levels. Furthermore, MeriStar’s senior leverage is expected to peak at 5.6x, while Host’s senior leverage is expected to peak at 7.2x.
Recent Events On January 8, S&P lowered its ratings on the senior unsecured and senior subordinated debt of MeriStar Hospitality and MeriStar Operating Partnership, L. P., to B+ and B-, respectively, from BB- and B. S&P also assigned MeriStar a stable outlook. On December 18, MeriStar announced that it had successfully amended its bank facility. In return for receiving greater covenant flexibility, the interest rate on the revolver was increased, to LIBOR plus 400 bps from LIBOR plus 188 bps. MeriStar also has the option of extending the maturity of the revolver from August 2002 until August 2003. The amount of the facility was reduced to $375 million from $500 million. On December 18, MeriStar provided an update on 4Q01 trends, noting that RevPAR for October and November was down by 25.6% and 24.1%, respectively. The company also expects December RevPAR to be down 20%–25% from December 2000. The company also noted that operating margins were ahead of initial expectations because of aggressive cost containment strategies implemented after September 11. As a result of the improved margin performance, the company expects to meet or exceed the upper end of its previous FFO (Funds From Operations) guidance of $0.15 to $0.25, which corresponds with EBITDA of approximately $36–41 million. On December 17, MeriStar announced that it would pay a nominal 4Q01 common stock dividend of $0.01 per share. The company further indicated that it plans to continue to pay dividends on a quarterly basis. The ability to do so, however, will depend on current market and operating conditions. On December 12, MeriStar Hospitality Operating Partnership, L.P. issued $250 million (upsized from original offer of $200 million) in 10.500% senior notes due June 15, 2009, to yield 10.68%. Proceeds were used to repay the company’s term loans in their entirety as well as a portion of the company’s revolver. On December 3, Moody’s lowered its ratings on the senior unsecured and senior subordinated debt of MeriStar Hospitality, MeriStar Operating Partnership, L. P. and CapStar Hotel company to B1 and B3, respectively, from Ba3 and B2, respectively. The downgrade was made in light of the uncertain outlook for the lodging industry and MeriStar’s weakening credit measures. Given the continued uncertainty, Moody’s decided to maintain a negative outlook on the company. On December 3, MeriStar announced that it acquired from Prime Hospitality the leases on the final four of eight hotels previously leased and managed by Prime. With this transaction complete, MeriStar Hotels & Resorts will now manage all of MeriStar’s 112 hotels. On September 21, Felcor and MeriStar Hospitality called off their agreement to merge as a result of the weakened lodging climate following the tragic events of September 11.
Investment Considerations Investment Strengths “Paper-clip” structure a positive, particularly given challenging market conditions. As noted previously, MeriStar, along with its sister company, MeriStar Hotel & Resorts, combine to form a “paper-clipped” REIT. In our opinion, the structure provides certain benefits not available to either independent lessee structures or captive lessee structures without management oversight. We believe that the unique, paper-clipped structure of the REIT with its operating company creates a relationship that more closely aligns the interests of the two companies and increases the likelihood that their operators will continue to stress the importance of maximizing all revenue sources. This structure should ensure that the REIT and the operating company
Bear, Stearns & Co. Inc. 57 Lodging Outlook 2002 — January 18, 2002
maintain a strong working relationship, as the entities share key members of the management team. This oversight, in our opinion, provides an opportunity to monitor the portfolio’s performance more closely and keep management of the REIT in touch with the day-to-day operations of the hotels. Given the current challenging operating conditions, we believe that this relationship takes on even greater importance, particularly as it pertains to implementing cost- cutting measures. Cost cutting positions company with significant operating leverage. Since September 11, MeriStar has employed several cost-cutting measures in order to realign its cost base with the new outlook for top-line growth. Such measures include: reducing overall staffing levels and hours, revising operating procedures to gain greater efficiencies and closing underutilized or duplicative facilities. In its press release of December 18, the company noted that as a result of its success in cutting costs, and in conjunction with its operating company, it expected its gross operating margins to be better than originally anticipated, thus contributing to a better-than- expected FFO performance during 4Q01. This expense discipline, in our view, should position MeriStar with significant operating leverage over the next several quarters and into 2003, as we project that RevPAR will likely continue to increase on a sequential basis throughout 2002. As a real estate owner, MeriStar is well-positioned for a turnaround. As a REIT, MeriStar is purely an owner of hotels and cannot participate in the management of its properties. Instead, MeriStar has third-party contracts with managers and franchisors to run and flag (brand) its hotels. The structure of this business model allows MeriStar to retain most of the operating income of its hotels and simply pay out fees to its management/franchise company. This structure allows the company to realize strong profits in periods of robust hotel room demand, but it also subjects the company to reduced profits or losses when demand is weak. Accordingly, the leverage inherent in ownership gives rise to additional vulnerability and a greater degree of earnings uncertainty. As an owner, MeriStar is best positioned when hotel fundamentals are strong or improving and the outlook for business trends is positive. Assuming 2002 will be more of a recovery year for the lodging industry (and with operating trends having been set back to 1997–98 levels), the stage is set for 2003 to be robust. Concurrent to relatively strong GDP growth expected in 2003 (our economists are anticipating around 3.5%), we are expecting a sharp pick up in the demand for hotel rooms. A meaningful increase in corporate spending should help precipitate the return of the high-margin business traveler. Combined with what has been a fairly resilient leisure traveler during the recent downturn, industrywide hotel room demand (rooms sold) should grow in excess of 3.0% in 2003. While this is down by roughly 70 bps from the super-heated demand growth of 2000, it is to also up by about 250 bps over expected growth in demand for 2002, and 50 bps from the average annual demand growth for the past dozen years. Portfolio is in solid shape following recent renovations. During 1998–99, MeriStar undertook a major capital spending program to renovate its properties, spending approximately $375 million to improve certain underperforming hotels and boost revenues. In addition, MeriStar plowed $91 million into its portfolio in 2000. The company continues to keep its assets in good shape in 2001, having spent approximately $31 million on capital expenditures through the third quarter. By ramping up its capital expenditure schedule in 1998 and 1999, the company has substantially mitigated the necessity for large-scale expenditures over the near term, as it seeks to preserve its cash flow. Limited new supply is silver lining. In our view, the silver lining for hotel owners is the expectation of limited new supply coming on line over the next several years. The recent shock to the lodging industry has only exacerbated lender caution toward new hotel projects. We have seen several examples of projects being put on hold or cancelled. This trend of decelerating supply growth over the past few years will make it considerably easier for demand growth to outpace supply growth. We are currently forecasting an increase in room inventory of just 2.5% in 2001, falling to just 1.5% in 2002 and 1.0% in 2003.
58 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Inventory Growth 2000 2001E 2002E 2003E STR Chain Scale Rooms Census % Change % Change % Change % Change Full-Service Upper-Upscale 499,828 3.6% 3.0% 1.9% 1.0% Upscale 359,586 4.4% 5.0% 2.0% 1.0% Midscale w/F&B 643,349 -1.2% 1.2% 0.6% 0.4% Subtotal Full-Service 1,502,763 1.7% 2.7% 1.4% 0.7% Limited-Service Midscale w/o F&B 528,003 9.5% 7.0% 5.0% 3.0% Economy 758,931 3.1% 1.9% 0.9% 0.5% Subtotal Limited-Service 1,286,934 5.6% 4.0% 2.6% 1.6% Total Chain Scale Segments 2,789,697 3.5% 3.3% 2.0% 1.1% Independents 1,275,625 2.4% 0.9% 0.5% 0.3% Total All Rooms 4,065,322 2.9% 2.9% 1.5% 1.0% E: Estimated. Sources: Lodging Econometrics and Bear Stearns Global High Yield Research. Asset protection offers support. Given its portfolio of higher-quality assets, we believe that bondholders have a considerable degree of asset protection even in light of the current market environment. MeriStar’s management estimates that the replacement cost of its hotels is $130,000 per room, which equates to an asset value of approximately $3.7 billion, which would cover the company’s outstanding debt by approximately 2.2x. Even taking a 25% haircut on management’s asset valuation estimates implies the bonds are more than adequately covered, at 1.6x. Still a generator of free cash flow during 2002. Despite our projection that MeriStar may only generate EBITDA of $255.0 million during 2002 (a decrease of 25.2% from 2000), we still anticipate that the company could generate approximately $60 million in free cash flow during 2002, which may be used to reduce its revolver balance. Typically, MeriStar’s largest uses of cash are interest expense, capital expenditures and dividends. While we expect the company’s cash interest expense will increase to $140.6 million (up 12.1%) during 2002 as a result of an increase in debt as well as a higher percentage of fixed rate debt, we expect the company’s capital expenditure budget to be limited to maintenance expenditures of less than $40 million, while dividend payments to its common stockholders are currently projected to be less than $15 million. Furthermore, Meristar has no public debt due until November 2004. Credit Concerns Another extraordinary event could further affect travel patterns. Among the many things we learned from the events of September 11 was the degree to which the hotel industry is dependent on the airline industry. Almost overnight, most hotels in destination cities became desolate, and more than three months later, they are still operating meaningfully below pre- attacks levels. And while the American traveler has shown considerable resilience, it should be clear that another domestic terrorist event is likely to have substantial effects on travel related businesses. Vulnerability to economic downturn. The aftermath of September 11 further weakened an industry that was already struggling. Historically, the performance of the lodging industry has been highly correlated to the performance of the general economy. For the past 25 years, change in hotel demand has closely tracked change in GDP. While economic trends are a good industry barometer, they don’t track each other precisely. Historically, contractions in the lodging industry have been longer and deeper, while expansions have been shorter. Troughs in rooms demand growth lead downturns in the economy and lag recoveries. We believe that the current state of the lodging industry, though improving, could remain challenging over the near term. Credit measures expected to weaken in coming quarters. For the past several years MeriStar has maintained its leverage in the 4.5x–5.5x range, as it sought to strike the balance between maximizing performance and maintaining its credit rating. The tragic events of September 11 and subsequent travel and economic fallout unfortunately caught MeriStar and others in the lodging industry off guard. While it was anticipated that the company’s credit measures would weaken in the short run solely as a result of the declining economy, this process was significantly expedited following the falloff in performance after September 11. On an LTM basis, MeriStar’s leverage and cash interest coverage are estimated at 5.8x and 2.3x,
Bear, Stearns & Co. Inc. 59 Lodging Outlook 2002 — January 18, 2002
respectively. By year-end we expect these measures to weaken to 6.5x and 2.1x, respectively. Assuming that 2Q02 could represent the last quarter of lower year-over-year comparisons, we expect MeriStar’s LTM leverage to peak at 7.2x and its cash interest coverage to trough at 1.7x. From that point forward, we expect MeriStar’s credit statistics to stabilize and slowly begin to rebound. We are projecting MeriStar’s leverage and cash interest coverage to improve by the end of 2003, to 5.8x and 2.0x, respectively. Potential for further rating downgrades. On December 3, Moody’s lowered its ratings on the senior unsecured and senior subordinate debt of MeriStar Hospitality, MeriStar Operating Partnership, L. P. and CapStar Hotel Company to B1 and B3, respectively, from Ba3 and B2, respectively, in light of the uncertain outlook for the lodging industry as well as MeriStar’s weakening credit measures. Given the continued uncertainty, Moody’s decided to maintain a negative outlook on the company. On January 8, S&P also downgraded MeriStar, lowering its senior and senior subordinated ratings to B+ and B-, respectively, from BB- and B. However, as opposed to Moody’s, S&P assigned MeriStar a stable outlook. We expect both agencies to maintain a close watch on MeriStar as well as the rest of the lodging group. The agencies could lower their ratings further if the expected rebound in lodging demand materialize at a slower than expected rate. Geographically concentrated in California and Florida. MeriStar has a significant number of its properties concentrated within California and Florida, two states that have been particularly hard hit by the recent curtailment in both business and leisure travel. Based on 2000 EBITDA levels, these two states accounted for 40% of MeriStar’s total EBITDA contribution. Trends expected to be choppy over the next few quarters. We believe the hotel industry will continue to face challenges over the near term. We acknowledge that, while several recent travel indicators augur well for improvements in volume, pricing and yields still appear to be very soft, and the profitability implications will be meaningful. Pricing has come under pressure as companies change their customer mix to drive more leisure travel and less business travel. Furthermore, as we move into first quarter of 2002, we expect to see rates come under increased pressure, as comparisons are more difficult with the industry moving back toward a more business-driven period. On balance, visibility into the sector remains poor, and the timing and magnitude of a recovery in lodging fundamentals is too difficult to pin. With a high degree of leverage to both the economy and air travel, the lodging sector should see some volatility over the near term, as the economy recovers from the recession and the traveling public weighs our military’s progress in Afghanistan as well as our country’s ability to allay concerns about further terrorist strikes. Standard REIT risks and inability to fulfill dividend obligations. These include the failure to qualify as a REIT due to the inability to meet current Internal Revenue Code (“IRC”) requirements or a change in the requirements. This failure could result in the loss of the company’s tax-exempt status. In order to maintain its REIT status Host must pay out 90% of its taxable income as dividends to its shareholders, thereby limiting its ability to use free cash flow to deleverage. In addition, pursuant to the REIT Modernization Act (“RMA”) and the acquisition of its leases, MeriStar is now subject to the risks associated with hotel operations. Prior to the RMA (which came into effect on January 1, 2001), substantially all of MeriStar’s hotels were leased to unaffiliated third parties under leases that generated rental income based on revenues from hotels operations. Consequently, MeriStar’s operating risks were basically limited to the lessees’ ability to pay its rent. As a result of the repurchase of its leases from these third parties, MeriStar has effectively become subject to risks associated with fluctuating hotel operating revenues and expenses, including labor costs, repair and maintenance expenses, energy costs and liability insurance costs. Other Considerations Merger with Felcor terminated. On May 10, 2001, FelCor announced that it had agreed to acquire MeriStar Hospitality for $2.7 billion in cash, stock, and the assumption of debt. However, following the events of September 11, and in light of their repercussions on the lodging industry, the two companies elected to terminate the planned merger. The primary thrust behind the merger was to put together two similar hotel REITs in both size and assets in an effort to capture the benefits of scale, diversity, and investor awareness. FelCor’s management has stated that they would be amenable to pursuing discussions with MeriStar at a
60 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
later date. We would not be surprised if this merger were revisited sooner rather than later; however, this is likely to be dependent upon market conditions as well as a stabilization in the financial performance of both companies. Recent bond deal reduces near-term exposure to banks. In order to reduce its reliance on its banks, MeriStar on December 12 issued $250 million of 10.500% senior notes (increased from $200 million), the proceeds of which were used to completely repay the company’s term loans and a portion of the company’s revolver. We project that MeriStar’s revolver balance at the end of 2001 was likely $233.9 million, with $141.1 million undrawn. As a result of receiving covenant waivers from its bank group, the interest rate spread on the revolver increased, to LIBOR + 400 from LIBOR + 188. REITs and the RMA: overview of the new financial structure. Real estate investment trusts (REITs) are created by sections 856-860 of the Internal Revenue Code (IRC). Through the status granted by the IRC, REITs avoid the double taxation that is inherent in the traditional corporations. Normally, profits are taxed at the corporate level through corporate income tax and again at the shareholder level through taxation of distributed profits (dividends). So long as REITs meet certain requirements, earnings are not taxed at the corporate level. Under the REIT structure, substantially all of the income from the corporation is passed along to shareholders in the form of dividends, avoiding corporate tax. The basic tenets of the REIT structure are outlined below. Basic Tenets of the REIT Structure A publicly traded company that raised equity through an initial public offering or private formation transaction. Structured to lease its owned hotels' assets to a tenant and receives rent based on a percentage lease agreement. Income increases are derived from increases in lease income resulting from higher hotel revenues and via acquisition of hotel assets. Because of the requirement to distribute 90% of taxable net income, an equity REIT must grow through external capital sources. To access external capital sources, REITs must establish a line of credit with a lending institution and typically borrow 40%–50% of the value of a hotel asset. An entity can qualify as a REIT if it has the following: a) management by board of directors or trustees; b) distribution of 90% of income as dividends; c) no fewer than five "individuals" can own more than 50% of the REIT; d) minimum of 100 investors; e) at least 75% of gross income must come from rents from real property or from mortgages on real property; f) 30% or more of gross income cannot come from the sale of real estate assets that are held for sale for less than four years; and g) at least 75% of assets must be real estate. Source: Bear Stearns Global High Yield Research. Pursuant to the REIT Modernization Act (“RMA”), MeriStar converted all 106 of its existing leases with MeriStar Hotel & Resorts into management contracts. Prior to the legislation, which became effective on January 1, 2001, REITs leased their hotels to a third party. The hotels were either managed by the lessee or a separate management company. Typically, the REIT’s income would consist of rental income (usually based on hotel revenues) received from the lessee. However, under this arrangement, REITs would not capture all of the operating income of their assets, as the lessee or management company would retain any profits that remained after rent and management fees were paid. Often, this created a conflict of interest between the owner and the management company. However, under the terms of the RMA, a solution was established to help create a better economic alignment between a hotel owner and its manager. REITs were permitted to establish taxable REIT subsidiaries (“TRS”), and lease their assets to a TRS rather than to a third party. TRS’s are not allowed to manage hotels, so the properties still need to be managed by an independent entity that is paid a management fee for its services. To this end, MeriStar’s reporting structure reflects the revenues and expenses (including management fees)
Bear, Stearns & Co. Inc. 61 Lodging Outlook 2002 — January 18, 2002
associated with its assets, and the company now seeks to drive operating income rather than rent. During the course of 2001, MeriStar acquired the remainder of its six leases that were held by Prime Hospitality so that MeriStar Hotel & Resorts now manages all 112 of the company’s properties.
Company Description MeriStar Hospitality is the third largest lodging REIT in the U.S., with a portfolio of 112 hotels located in 27 states, the District of Columbia and Canada. The hotels are primarily upscale, full- service properties located in major metropolitan markets and other high-demand locations. MeriStar, along with its sister-company, Meristar Hotel and Resorts, Inc., combine to form a “paper-clipped” REIT, whereby the two companies share certain management and board members and have closely aligned objectives. MeriStar has typically acquired underperforming properties below replacement cost with a strategy to remodel, reposition and, when appropriate, rebrand the property. Current brand affiliations in MeriStar’s portfolio include Hilton, Sheraton, Marriott, Westin, Radisson and Doubletree. MeriStar — Portfolio Composition MeriStar — Portfolio by Chain Scale Hilton Brands Hilton 23 Mids c ale w ith Doubletree 6 F&B Embassy Suites 3 16% 32 Marriott Brands Courtyard 5 Marriott 3 Renaissance 1 9 Starwood Brands Sheraton 11 Westin 4 Four Points 1 Ups cale Upper-Upscale 16 25% Six Continents Brands 59% Holiday Inn 14 Crowne Plaza 5 19 Cendant Brands Ramada 5 Howard Johnson 1 6 Other Source: Company reports. Radisson 12 Wyndham 3 Doral 2 Best Western 1 Independent 12 30 Total Hotels 112 Source: Company reports Management We believe that MeriStar is led by one of the lodging industry’s stronger management teams. In particular, we view the paper-clipped structure between the REIT and the operating company, which permits the sharing of key members of the respective management teams, as a positive because the two companies share common objectives. Below we provide summary biographies of the company’s chairman and chief executive officer, and its president and chief operating officer. Paul W. Whetsell, chairman and chief executive officer. Mr. Whetsell serves the dual role of chairman and chief executive officer for MeriStar Hospitality as well as for MeriStar Hotels & Resorts. He founded CapStar Hotel Company in 1987 and served as its chairman, president and
62 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
CEO until its August 1998 merger with American General Hospitality. Prior to founding CapStar, he served as vice president of development for Lincoln Hotels in Dallas, Texas. John Emery, president and chief operating officer. Mr. Emery was appointed president and chief operating officer of both MeriStar Hospitality and MeriStar Hotels & Resorts during September 2001. Since April 2000, Mr. Emery was chief investment officer of MeriStar Hospitality and chief operating officer of the operating company. Prior to that, Mr. Emery was chief financial officer of the REIT. He previously served as chief financial officer for CapStar Hotel Company and has more than a decade of finance and accounting experience in the hotel industry. He joined CapStar in 1995 as director of finance and was named CFO in 1997. Prior to 1995, he worked in various capacities for the accounting firm Deloitte & Touche, rising to senior management of the hotel and real estate industries group.
Financial Summary Third-Quarter Results As with all lodging companies during the third quarter, MeriStar’s results were severely affected by the events of September 11 and by the general decline in economic conditions prior to September 11. For the quarter, EBITDA fell by 42.2% to $45.8 million as RevPAR plunged by 16.1%, the drop stemming from occupancy and ADR declines of 10.7% and 5.9%, respectively. MeriStar’s RevPAR fell by 31% in September after declining by 8% in July and 9% in August. MeriStar’s hotels in Northern California, Chicago and New Jersey suffered the largest quarterly RevPAR declines, at 35%, 33% and 21%, respectively. MeriStar Hospitality — 3Q01 Operating Performance in Significant Markets RevPAR Change EBITDA Contribution %ofTotalEBITDA Mid-Atlantic -14.6% 5,019 11.0% Southern California -15.3% 4,796 10.5% Northern California -34.2% 3,822 8.3% Houston -1.9% 2,333 5.1% New Jersey -20.6% 2,171 4.7% Chicago -32.9% 2,056 4.5% Colorado -18.4% 1,957 4.3% Orlando -16.9% 1,901 4.2% Tampa/Clearwater -4.8% 1,802 3.9% Atlanta -19.1% 1,366 3.0% Connecticut -13.8% 1,106 2.4% Southwest Florida -10.7% 101 0.2% Dallas -12.8% 70 0.2% Sources: Company reports. While MeriStar’s RevPAR decline was slightly less severe than most of its competitive set during 3Q01, its EBITDA drop was more pronounced, as operating profit margins fell by 510 bps. Management indicated that it expects to realize savings from many of its post-September 11 cost reduction initiatives in the fourth quarter. At the end of the quarter, MeriStar had approximately $1.72 billion in total debt, and $47.7 million in cash. LTM leverage and cash interest coverage were 5.8x and 2.3x, respectively— both considerably weaker compared with second-quarter levels of 5.1x and 2.7x, respectively. As a result of its increased leverage, Meristar needed to obtain a covenant waiver from its bank group. Outlook 4Q01 On December 18, MeriStar provided an update on 4Q01 trends, noting that RevPAR for October and November was down by 25.6% and 24.1%, respectively. The company also expects December RevPAR to be down by 20%–25% from December 2000. The company also noted that operating margins were ahead of initial expectations because of aggressive cost containment strategies implemented after September 11. As a result of the improved margin performance, the company expects to meet or exceed the upper end of its previous FFO
Bear, Stearns & Co. Inc. 63 Lodging Outlook 2002 — January 18, 2002
guidance of $0.15 to $0.25, which corresponds with EBITDA of approximately $36–41 million. Our current 4Q01 EBITDA estimate is $40.4 million. As noted earlier, MeriStar completed a $250-million senior note offering during the quarter, using the net proceeds to reduce its bank debt. Accordingly, at year-end we expect total debt to remain basically unchanged from the end of 3Q01, at $1.7 billion. Year-end leverage and cash interest coverage are projected to weaken to 6.5x and 2.1x, respectively, as a result of the year-over-year decline in EBITDA. Liquidity remains adequate—we expect the company had approximately $16 million in cash and $141 million in bank availability at year-end. 2002–2003 On its 3Q01 conference call, MeriStar cautiously provided guidance calling for expected 2002 RevPAR to range from negative 5% to positive 2%, as measured against 2001. We are currently projecting RevPAR to decline by 3.0%. Given the company’s guidance that its fourth-quarter results were trending ahead of its original expectations, particularly on the margin side, we are only projecting a 3.6% decrease in EBITDA, to $255.0 million. Assuming 2003 is a recovery year, we are projecting MeriStar to generate EBITDA of $286.6 million, marking a 12.4% increase over projected 2002 EBITDA. Our 2003 RevPAR estimate for MeriStar is an increase of 6.5%. For 2002, we expect MeriStar to use the majority of its cash flow to pay down its revolver balance. We are currently projecting a total reduction in long-term debt of $62.9 million, ending 2002 at $1.652 billion. Capital expenditures during 2002 are expected to be primarily maintenance-related and projected to total $38 million, or approximately 3.7% of total hotel revenues. Based on our discussions with the company, we expect MeriStar to pay a token dividend for the first two quarters of 2002; however, the dividend could ramp-up meaningfully during the second half of the year, depending on improved operating performance. We are currently projecting that the company will likely pay a $0.25 dividend per common share for both its third and fourth quarters. For 2003, we expect the company’s total debt to remain virtually unchanged as it ramps-up capital spending as well as dividend payments. We are currently projecting capital spending to total $91.6 million. Our current dividend expectation calls for the company to pay-out $0.25 per quarter, for a total of $53.1 million, although we recognize that it could be significantly higher if the company’s performance exceeds current expectations. Assuming that 2Q02 will represent the last quarter of down year-over-year comparisons, we expect MeriStar’s leverage to peak at 7.2x and its cash interest coverage to trough at 1.7x. From that point forward, we expect MeriStar’s credit statistics to stabilize and slowly begin to rebound. We are projecting MeriStar’s leverage and cash interest coverage to improve by the end of 2003, to 5.8x and 2.0x, respectively.
64 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Meristar Hospitality — Financial Model ($ in 000’s) LTM 3Q01 4Q01E 4Q00A %Chg. 2001E 1Q02E 2Q02E 3Q02E 4Q02E 2002E 2003E Revenues Participating Lease Rev 22,710 2,667 8,533-68.7%16,84400000 0 Rooms 745,128 143,905 176,113 -18.3% 712,920 175,528 190,588 178,416 163,223 707,755 754,452 F&B 280,355 54,684 78,465 -30.3% 256,574 64,946 70,518 64,230 58,760 258,453 286,692 Other Operating 84,862 15,398 19,938 -22.8% 80,322 18,255 19,821 18,377 16,975 73,428 79,217 Office Rental, Parking, And Other 11,599 2,500 4,216 -40.7% 9,883 2,500 2,500 2,500 2,500 10,000 12,000 Total Revenues 1,144,654 219,153 287,265 -23.7% 1,076,542 261,229 283,427 263,523 241,458 1,049,636 1,132,361 Hotel Operating Expenses Rooms 180,091 36,408 44,524 -18.2% 171,975 41,249 45,741 43,712 40,969 171,671 178,051 F&B 203,893 41,013 55,442 -26.0% 189,464 48,709 50,067 47,530 42,895 189,202 206,418 Other Operating 45,639 8,777 11,569 -24.1% 42,847 10,588 10,902 10,015 9,676 41,181 44,362 Office Rental, Parking, and Other 3,378 875 934 -6.3% 3,319 742 800 800 875 3,217 3,600 G&A 173,561 39,086 45,277 -13.7% 167,370 39,184 39,396 40,213 41,048 159,841 169,854 Property Operating Costs 165,281 33,092 38,900 -14.9% 159,473 35,266 38,263 43,481 36,702 153,711 164,192 Property Tx, Insurance, Other 74,091 19,505 16,063 21.4% 77,533 19,592 18,423 18,447 19,317 75,778 79,265 Total Operating Costs 845,934 178,755 212,709 -16.0% 811,980 195,330 203,592 204,198 191,481 794,601 845,742 EBITDA 298,720 40,398 74,556 -45.8% 264,562 65,899 79,835 59,325 49,977 255,035 286,619 Depreciation & Amortization 116,383 29,161 28,817 1.2% 116,727 29,245 29,245 29,245 29,245 116,979 120,000 Operating Income 182,337 11,237 45,739 -75.4% 147,835 36,654 50,590 30,080 20,732 138,056 166,619 Cash Flow Items Interest Expense 121,601 30,175 29,999 0.6% 121,777 34,908 34,486 34,200 34,214 137,808 137,941 Capital Expenditures (46,481) (7,944) (15,414) -48.5% (39,011) (9,619) (10,444) (9,706) (8,879) (38,648) (91,646) Cash Flow Coverage Ratios EBITDA/Interest Expense 2.3x 2.1x 2.5x 2.1x 1.9x 1.7x 1.8x 1.8x 1.8x 2.0x EBITDA - Capex/Int. Exp 2.0x 1.8x 2.0x 1.8x 1.6x 1.5x 1.5x 1.5x 1.5x 1.4x Free Cash Flow EBITDA 298,720 40,398 74,556 264,562 65,899 79,835 59,325 49,977 255,035 286,619 Cash Interest (128,001) (30,475) (30,999) (127,477) (35,208) (34,986) (35,200) (35,214) (140,608) (142,941) Capital Expenditures (46,481) (7,944) (15,414) (39,011) (9,619) (10,444) (9,706) (8,879) (38,648) (91,646) Sched.DebtAmortization (9,617) (1,911) 0 (11,528) (3,975) (3,975) (3,975) (3,975) (15,900) (8,600) Cash Taxes (1,100) 607 (286) (207) (56) (516) 132 432 (8) (919) Free Cash Flow 113,521 675 27,857 86,339 17,040 29,913 10,576 2,341 59,870 42,514 Capitalization Cash and Equivalents 107,829 15,904 17,566 16,096 15,487 16,685 16,685 18,690 Revolver 1,780,500 233,900 218,900 188,900 176,900 186,900 186,900 196,900 CMBS Facility 1,289,137 319,804 318,554 317,304 316,054 314,804 314,804 309,704 10.500% Senior Nts due 09 0 250,000 250,000 250,000 250,000 250,000 250,000 250,000 9.000% Sr Nts due 08 1,200,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 9.125% Sr Nts due 11 800,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 8.750% Sr. Sub. Nts due 07 820,000 205,000 205,000 205,000 205,000 205,000 205,000 205,000 4.750% Conv. Nts due 04 617,200 154,300 154,300 154,300 154,300 154,300 154,300 154,300 Mortgage Debt And Other 219,977 52,258 49,533 46,808 44,083 41,358 41,358 37,858 Total Debt 6,726,814 1,715,262 1,696,287 1,662,312 1,646,337 1,652,362 1,652,362 1,653,762 Enterprise Value 2,466,416 2,402,735 2,402,130 Leverage Ratios Total Debt/LTM EBITDA 5.8x 6.5x 7.0x 7.2x 6.7x 6.5x 6.5x 5.8x Enterprise Value/EBITDA 9.3x 9.4x 8.4x E: Estimated. Sources: Company reports and Bear Stearns Global High Yield Research.
Bear, Stearns & Co. Inc. 65 Lodging Outlook 2002 — January 18, 2002
Prime Hospitality Corp.
Prime Hospitality Corp. — Debt Issues Amount Recent Outstanding Ratings Next Call Bid Spread Coupon/Description Maturity (US$ in MM) Moody’s/S&P Date Price Price YTW (bps) 9.250% First Mtg. 1/15/06 101.0 Ba2/BB Current 103.08 103.13 7.42% 539 9.750% Sr.Sub.Nts 4/1/07 190.0 B1/B+ 4/1/02 104.88 102.75 8.73% 533 Prices as of January 17, 2002. Source: Bear Stearns Global High Yield Research. Investment Summary We are initiating coverage of the first mortgage and senior subordinated notes of Prime Hospitality Corp. with an attractive recommendation. Prime is an owner, operator and franchisor of hotels, with 235 hotels in operation containing 30,170 rooms located in 33 states as of November 1, 2001. Prime controls two hotel brands—AmeriSuites and Wellesley Inn & Suites—as well as a portfolio of non-proprietary brand hotels, which are primarily upscale, full- service hotels operated under franchise agreements with national hotel chains. Through the development of its proprietary brands, Prime has been transforming itself since 1998 from purely an owner/operator into a franchisor and manager, and it has positioned itself to generate additional revenues with minimal capital investment. We believe that the Prime bonds are a solid defensive play in this challenging environment for lodging companies. Prime’s credit statistics are among the best in the high yield lodging universe with LTM leverage and interest coverage of 2.4x and 3.9x, respectively. While we expect that these measures will weaken modestly over the next several quarters, we expect the weakening to be much less dramatic in comparison with most other high yield lodging companies. In addition to being less exposed to upscale and urban markets, which have been among the hardest hit sectors of the lodging universe, Prime continues to improve its balance sheet through the selective sale of assets. We believe that, during the fourth quarter, Prime sold two properties for net proceeds of approximately $20 million, while we understand the company has already sold two properties to date during 2002 for approximately $15 million in net proceeds. The cash raised from these sales provides Prime with increased flexibility to weather the expected near-term challenges. We believe that over the next two years, Prime will likely continue to be opportunistic in growing its brands; however, we would expect the company to continue deleveraging, using proceeds from asset sales and free cash flow to reduce debt levels. The company has been actively repurchasing its bonds over the past several quarters, a process that we believe could continue. Alternatively, we believe Prime may consider calling its first mortgage notes at their current call price of 103.08, using proceeds from the company’s currently undrawn revolver. In any event, we expect Prime will gradually shrink its total debt outstanding. By the end of 2003, we are projecting Prime’s leverage and interest coverage to strengthen to 1.8x and 4.8x, respectively. Having such a strong balance sheet, in our view, should position the company well as it evaluates additional growth opportunities. Prime’s first mortgage notes currently trade around the current call price, offering a yield to worst of 7.54%, assuming the January 15, 2003, is the worst call. Given the collateral value supporting these notes, the company’s solid fundamentals, its orientation to repurchase bonds and the potential for the bonds to be called, we believe that, at current levels, the bonds provide a low-risk, short-term investment vehicle that offers superior returns to other short-term instruments. For many of the reasons noted above, we believe that the senior subordinated notes are also attractive, particularly on a relative value basis. These notes currently offer a yield to worst of 8.73%, which compares favorably to the 8.875% senior subordinated notes of Aztar Corporation (current YTW of 7.83%), a gaming operator with similar credit measures (LTM leverage and interest coverage of 4.6x and 2.7x, respectively) and a fairly similar outlook over the next 12–18 months.
66 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Recent Events On January 7 and 9, after closing on the sale of six hotel properties during all of 2001, Prime closed the sale of its Trevose Radisson and Miami Airport Wellesley hotels, respectively. The individual terms of the sale were not disclosed. However, the company did indicate that year-to-date sales have generated total proceeds of approximately $15 million. This is in keeping with the company’s stated long-term strategy to gradually sell off its owned assets while retaining franchise and management contracts. On January 8, S&P affirmed its BB and B+ ratings on Prime's first mortgage notes and senior subordinated notes, respectively. S&P assigned Prime a negative outlook, in light of the current challenging lodging environment. On January 7, though not publicly announced by Prime Hospitality, Equity Inns acquired from Prime all 19 hotel property leases that were in place between the two entities. The hotels were all AmeriSuites hotels and were previously leased and managed by Prime and will continue to be managed by Prime. Neither party paid remuneration to convert the leases to management contracts. On December 3, Prime sold to MeriStar Hospitality the remaining four leases of eight hotels previously leased and managed by Prime. On October 25, Prime reported results for its third quarter, indicating that EBITDA declined 41.8%, to $25.4 million. RevPAR for the quarter was down 13%, driven primarily by a 620 bp decline in occupancy and a 4.7% decline in ADR. Higher energy costs resulted in EBITDA margin erosion of over 600 bps. The company provided only limited guidance for the fourth quarter and offered no outlook for 2002 at that time. Nonetheless, the company’s non-specific outlook was for continued caution. On October 3, Moody’s placed Prime, as well as several other lodging companies, on review for potential downgrade, given the drop in lodging demand following the events of September 11. Moody’s has yet to conclude its review.
Investment Considerations Investment Strengths Capital structure well positioned to weather the storm. Prime finds itself on solid financial footing to handle the expected challenging operating environment over the next several quarters. Prime’s credit statistics are among the best in the high yield lodging universe, with LTM leverage and interest coverage of 2.4x and 3.9x, respectively. While we expect that these measures will weaken modestly over the next several quarters, we expect the weakening to be much less dramatic in comparison with most other high yield lodging companies. In addition to being less exposed to upscale and urban markets, which have been among the hardest hit sectors of the lodging universe, Prime continues to improve its balance sheet through the selective sale of assets. We believe that, during the fourth quarter, Prime sold two properties for net proceeds of approximately $20 million, while we understand the company has already sold two properties to date during 2002 for approximately $15 million in net proceeds. The cash raised from these sales provides Prime with increased flexibility to weather the expected near-term challenges. We believe that over the next two years, Prime will continue to deleverage, using proceeds from asset sales and free cash flow to reduce debt levels. The company has been actively repurchasing its bonds over the past several quarters, a process we that believe could continue. Alternatively, we believe Prime may consider calling its first mortgage notes at their current call price of 103.08, using proceeds from the company’s currently undrawn revolver. In any event, we expect that Prime will gradually shrink its total debt outstanding. By the end of 2003, we are projecting Prime’s leverage and interest coverage to strengthen to 1.8x and 4.8x, respectively. Prime continues to transform itself through selective asset sales. As noted above, during 1998 Prime adopted a strategy to focus on building its business through franchising and management agreements, while reducing its direct exposure to ownership through asset sales. Since the end of 1998, Prime has sold assets for total proceeds of more than $325 million. Prime has used the
Bear, Stearns & Co. Inc. 67 Lodging Outlook 2002 — January 18, 2002
majority of these proceeds to reduce its outstanding debt, which has decreased by approximately $265 million since the end of 1998. No dividend requirements. As a c-corp, Prime has no obligation to pay dividends, in contrast to the lodging REITs, which are required to pay out 90% of their taxable income as dividends to their shareholders. Prime thus maintains greater flexibility in determining how to allocate its free cash flow, particularly as it pertains to debt reduction. Focus on growth through franchising reduces capital requirements. We think the franchise business is among the most defensively positioned in the current environment. Prime’s main strategy for growth is to develop its proprietary AmeriSuites and Wellesley Inn & Suites brands, primarily through franchising. Through the development of its proprietary brands, Prime has been transforming itself from an owner/operator into a franchisor and manager, and it has positioned itself to generate additional revenues with minimal capital investment. Franchise fees are based on the top-line revenues of the franchised hotel and are not connected to property profitability. To the extent that RevPAR falls in this environment, franchise fees can be expected to fall in direct proportion. However, the negative operating leverage that is inherent in the hotel business does not affect the franchise fees. In other words, a hotel that is running at or below break-even occupancy and generates no profits for the owner still pays franchise fees. Moreover, default on the payment of franchise fees is rare because, upon default, hotels are quickly removed from the brand system (reservations, directories, signage, etc.), which would further exacerbate a property’s poor performance. At the end of the third quarter, there were nine AmeriSuites hotels under construction, including seven by franchisees. In addition, Prime has a pipeline of another 56 executed franchise agreements for new AmeriSuites to be built. The company also has a pipeline of nine executed Wellesley Inn & Suites franchise agreements for new hotels. Limited new supply is silver lining. In our view, the silver lining for hotel owners is the expectation of limited new supply coming on line over the next several years. In fact, the recent shock to the lodging industry has only exacerbated lender caution toward new hotel projects. We have seen several examples of projects being put on hold or cancelled outright. This trend of decelerating supply growth over the past few years could make it considerably easier for demand growth to outpace supply growth. We are currently forecasting an increase in room inventory of just 2.5% in 2001, falling to just 1.5% in 2002 and around 1.0% in 2003. Inventory Growth 2000 2001E 2002E 2003E STR Chain Scale Rooms Census % Change % Change % Change % Change Full-Service Upper-Upscale 499,828 3.6% 3.0% 1.9% 1.0% Upscale 359,586 4.4% 5.0% 2.0% 1.0% Midscale w/F&B 643,349 -1.2% 1.2% 0.6% 0.4% Subtotal Full-Service 1,502,763 1.7% 2.7% 1.4% 0.7% Limited-Service Midscale w/o F&B 528,003 9.5% 7.0% 5.0% 3.0% Economy 758,931 3.1% 1.9% 0.9% 0.5% Subtotal Limited-Service 1,286,934 5.6% 4.0% 2.6% 1.6% Total Chain Scale Segments 2,789,697 3.5% 3.3% 2.0% 1.1% Independents 1,275,625 2.4% 0.9% 0.5% 0.3% Total All Rooms 4,065,322 2.9% 2.9% 1.5% 1.0% E: Estimated. Sources: Lodging Econometrics and Bear Stearns Global High Yield Research. Building brand awareness should help drive loyalty in the longer term. As part of its brand development strategy, Prime has implemented several new initiatives in 2001. In May 2001, Prime began new national advertising campaigns for both its brands. For AmeriSuites, the company ran television ads on national cable channels, including TNT and CNN. In addition, the company began advertising its Wellesley chain on national radio. In September 2001, the company implemented a new expanded rewards program (“Prime Rewards”), which offers frequent customers points toward a free hotel room and airline miles for each stay. Currently, frequent guests account for nearly 10% of revenue at Prime’s brands and the company believes that the new program will enhance its competitive position. Prime has already added approximately 40,000 new members since September 1, bringing its total to approximately
68 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
150,000, as it is increasing its membership by almost 10,000 per month. Prime believes that this program will enable them to become more competitive with brands like Courtyard and Hampton Inn. Credit Concerns Very competitive franchise environment. While Prime has chosen to focus on growing its business through the expansion of its franchise and management business, which is less capital intensive than proprietary development, this strategy is not without risk, particularly in the current challenging environment. Over the intermediate term (2-4 years) we believe the franchise business could face challenges as a result of the tight financing environment, which is resulting in a dramatic reduction in new hotel starts. At the same time, we believe several large companies are moving more aggressively into the franchise space, including Cendant, Marriott, Choice Hotels and La Quinta, which could place Prime at a competitive disadvantage. Geographic concentration could present issues. Prime’s full service hotel collection is heavily concentrated in the New York metropolitan region, an area that has been particularly hard hit following the events of September 11. In addition, Prime has a number of properties across its portfolio located in Florida, Atlanta, Texas and Chicago. Geographic Breakdown of Portfolio Based on Total Rooms
Northeast 16%
Other 43% Florida 14%
Chic ago 5%
Texas Atlanta 14% 8%
Source: Company reports. Another extraordinary event could further impact travel patterns. Among the many things we learned from the events of 9/11 was the degree to which the hotel industry is levered to the airline industry. Almost overnight, most hotels in destination cities became desolate, and more than three months later, are still operating meaningfully below pre-attacks levels. And while the American traveler has shown considerable resilience, it should be clear that another domestic terrorist event is likely to have substantial effects on travel-related business. Vulnerability to economic downturn. The aftermath of 9/11 further weakened an industry that was already on the ropes. Historically, the performance of the lodging industry has generally mirrored the performance of the overall economy: for the past 25 years, change in hotel demand has closely tracked change in GDP. While economic trends are a good industry barometer, they don’t track each other precisely. Contractions in the lodging industry have been longer and deeper, while expansions have been shorter. Troughs in rooms demand growth lead downturns in the economy and lag recoveries. We think the current state of the lodging industry, though improving, remains challenging over the near-term. Rating downgrades by rating agencies are possible. On October 3, Moody’s placed Prime, as well as several other lodging companies, on review for potential downgrade given the drop in lodging demand following the events of September 11. Moody’s has yet to conclude its review. On January 8, S&P affirmed its BB and B+ ratings on Prime's first mortgage notes and senior subordinated notes, respectively. S&P assigned Prime a negative outlook in light of the current challenging lodging environment. We expect both agencies will maintain a close watch on Prime as well as the rest of the lodging group and could lower their ratings further should the expected rebound in lodging demand materialize at a slower rate than expected.
Bear, Stearns & Co. Inc. 69 Lodging Outlook 2002 — January 18, 2002
Trends expected to be choppy over the next few quarters. To be clear, we do not think that the hotel industry is out of the woods yet. Although several recent travel indicators augur well for improvements in volume, we acknowledge that pricing and yields still appear very soft, and the profitability implications will be meaningful. Pricing has come under pressure as companies change their customer mix to drive more leisure travel and less business travel. Furthermore, as we move into first-quarter 2002, we expect to see room rates come under increased pressure, comparisons becoming more difficult as the industry moves back toward a more business-driven period. On balance, visibility into the sector remains poor, and the timing and magnitude of a recovery in lodging fundamentals is too difficult to pin down. With its high degree of leverage to both the economy-at-large and air travel, the lodging sector should see some volatility over the near term, as the economy climbs its way out of a recession and the traveling public weighs our military’s progress in Afghanistan. Our government’s effectiveness in allaying the public’s concerns about further terrorist strikes will also have a bearing on the lodging sector’s performance. Company Description Prime Hospitality Corp. is an owner, operator and franchisor of hotels, with 235 hotels in operation containing 30,170 rooms located in 33 states as of November 1, 2001. Prime controls two hotel brands — AmeriSuites (R) and Wellesley Inn & Suites (R) — as well as a portfolio of non-proprietary brand hotels, which are primarily upscale, full-service hotels operated under franchise agreements with national hotel chains. Prime’s Portfolio consists primarily of new, well-maintained hotels, with an average age of approximately 7 years. The following table shows Prime’s portfolio as of November 1, 2001: Prime — Portfolio as of November 1, 2001 Owned Leased Managed Franchised Total Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms AmeriSuites 65 8,408 46 5,710 5 670 21 2,655 137 17,443 Wellesley Inn & Suites 56 6,588 5 558 12 1,126 73 8,272 Non-Proprietary Brands 11 2,195 5 821 9 1,439 25 4,455 Total 132 17,191 51 6,531 19 2,667 33 3,781 235 30,170 Sources: Company reports. Prime’s strategy is to develop its proprietary AmeriSuites and Wellesley Inn & Suites brands, mainly through franchising. Through the development of its proprietary brands, Prime has been transforming itself from an owner/operator into a franchisor and manager and has positioned itself to generate additional revenues with minimal capital investment. Prime’s hotels operate primarily in three major lodging industry segments: the all-suites segment, under its AmeriSuites brand; the limited-service segment, under its Wellesley Inn & Suites brand; and the full-service segment, under major national franchises. The company’s 137 AmeriSuites are upscale hotels located in 31 states throughout the United States. The 73 Wellesley Inn & Suites hotels compete in the mid-price segment, and are [primarily] located in the Northeast, Texas and Florida. The company also operates 25 non-proprietary brand hotels, which compete in the upscale full-service segment with food service and banquet facilities, under franchise agreements with national hotel brands. The company’s non-proprietary hotels are located in the northeastern region of the United States. In 2001, four AmeriSuites have opened, including a 245-room franchised AmeriSuites located near Chicago O’Hare Airport, the largest AmeriSuites hotel in the system. There are currently nine AmeriSuites hotels under construction, seven by franchisees. In addition, Prime has a pipeline of another 56 executed franchise agreements for new AmeriSuites to be built. The company also has a pipeline of nine executed Wellesley Inn & Suites franchise agreements for new hotels. Building on the successful conversion of 38 hotels to the Wellesley Inn & Suites brand in 1999, Prime intends to further expand the brand through conversions from other hotel brands. The company completed the conversions of five Howard Johnson hotels to Wellesley Inns during 2001.
70 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Management Prime’s management team has successfully shepherded it through a significant transformation over the past 2-3 years. Management’s focus on conservatively positioning the balance sheet has proven a prudent strategy. A.F. Petrocelli, president, chief executive officer and chairman of the board. Prime Hospitality’s management team is headed by the company’s president, chief executive officer and chairman of the board of directors, A.F. Petrocelli. Prior to attaining his current position in 1998, Mr. Petrocelli worked as a director of the company, beginning in 1992, and from 1993 to 1998 he served on the company's Compensation and Audit Committee. Mr. Petrocelli is also involved with several outside businesses: He has been chairman and CEO of United Capital Corp. for approximately five years, and is currently a director of Nathan’s Famous , Boyar Value Fund and Philips International Realty Corp. Douglas W. Vicari, senior vice president and chief financial officer. Mr. Vicari has been a director of the company since 1999 and senior vice president and chief financial officer since 1998. Prior to that, Mr. Vicari served as vice president and treasurer of the company, beginning in 1993. Financial Summary Third-Quarter Results As expected, the terrorist attacks of September 11th had a significant impact on Prime’s third quarter results, as EBITDA declined by 41.8% to $25.4 million. RevPAR for the quarter was down by 13%, driven primarily by a 620-bp decline in occupancy and a 4.7% decline in ADR. Total revenues for the 3Q declined by 18.6% to $119.1 million, driven by a decline in revenues at comparable owned hotels and asset divestitures. Management, franchise and other fees declined by 14%. Hotel operating expenses were down by 9.1%, year-over-year, despite a 15% increase in energy costs. Rent and other occupancy expenses were down by 46%, due to the termination of four leases with MeriStar that were terminated earlier this year. Offsetting this increase however, was a 21% increase in G&A from last year’s levels. Management attributed this increase to the timing of its newly-launched advertising campaign. Total expenses dropped 7.6%, year-over- year. Nevertheless, operating margins were off by more than 600 basis points. System-wide, comparable hotel RevPAR at its AmeriSuites brand declined by 11.8%, driven by a drop in occupancy of 530 bps. Primarily targeting business travelers, the AmeriSuites brand was greatly affected by the drop-off in business travel following September 11th. The hardest-hit markets were Chicago, Cincinnati, and Orlando. Wellesley Inn & Suites, which caters more to leisure travelers, fared slightly better. System-wide, comparable hotel RevPAR declined by 9.2% as occupancy fell off 440 bps. The hardest hit markets for the Wellesley Inn & Suites brand were South Florida, Austin, and Detroit. Houston, however, saw a significant increase in demand. Not surprisingly, Prime’s non-proprietary hotels, which are mostly upscale hotels located in the Northeast, were the hardest hit with RevPAR down by 17.6% during the quarter. The main drivers for the RevPAR decline were weakness in group and convention business, as well as soft demand in the New York City metro area. Comparable Performance — Third Quarter 2001 ADR % Change Occupancy Bp Change RevPAR % Change AmeriSuites $77.54 -4.9% 67.9% -530 $52.65 -11.8% Wellesley Inns & Suites $56.88 -2.7% 62.9% -440 $35.75 -9.2% Non-Proprietary Brands $114.34 -3.4% 68.2% -1170 $77.94 -17.6% Source: Company reports. During the quarter, Prime opened three new franchised AmeriSuites (in Austin, Texas, Weston, Florida, and Mt. Laurel, New Jersey). Prime sold one Wellesley Inn during the quarter for $4.6 million, while retaining the franchise rights under a 20-year agreement. Proceeds from the sale were used to reduce debt. Prime reduced debt during the quarter by $11.8 million to $324 million. At the end of the quarter, Prime’s LTM leverage and interest coverage were 2.5x and 3.5x, respectively.
Bear, Stearns & Co. Inc. 71 Lodging Outlook 2002 — January 18, 2002
Outlook 4Q01 To date, management has offered limited guidance for the fourth quarter or 2002. Based on Prime’s limited guidance, we are estimating that the company’s RevPAR will be down by 13.4% during the fourth quarter. This is significantly lower than the 20-35% RevPAR declines guided by several of the larger lodging companies. We attribute this to our belief that Prime’s hotels compete at price points, which will outperform the industry in the near- and intermediate- term. In our opinion, Prime’s diverse portfolio, which includes both limited service and suburban hotels, should fare better in this environment than urban and resort properties catering to discretionary group and convention business. We also expect that cost control measures adopted by Prime after September 11 will help stem further margin deterioration. Such cost controls include: reducing local advertising, conserving energy, and reducing staffing levels. We are currently projecting that Prime will generate EBITDA of $17.4 million during the quarter, a 53.4% decline compared to 4Q 00, although the quarters are not quite comparable given the lower number of properties this year compared to last. At year-end we expect total debt to remain basically unchanged from the end of 3Q01 at $315.7 million. However, as a result of $15 million in asset sale proceeds we project the company’s cash balance will increase to $30 million from $9 million at the end of 3Q01. Leverage and cash interest coverage are projected to weaken modestly to 2.8x and 3.4x, respectively, as a result of the year-over-year decline in EBITDA. 2002–2003 For 2002, we are currently projecting RevPAR to decline by 3.1%. Given our assumptions that Prime will cut costs, we are only projecting a 14.2% decrease in EBITDA, to $96.3 million. Assuming 2003 is a recovery year, we are projecting Prime will generate EBITDA of $114.2 million, an 18.6% increase compared to 2002. Our 2003 RevPAR estimate for Prime is an increase of 6.4%. For 2002, we expect Prime to remain conservative in terms of its use of cash, focusing on debt reduction as opposed to share repurchases or project capital expenditures. As noted in our summary, we believe Prime may continue to repurchase its first mortgage notes in the secondary market, or call them as they are currently callable at a price of 103.08 (or wait until January 15, 2003, when the call price drops to 101.54). Regardless of which approach the company uses, we believe the mortgage notes will be fully retired by the end of 2003. We are currently projecting a total reduction in long-term debt of $40.0 million, ending 2002 at $275.7 million. Capital expenditures during 2002 are expected to be primarily maintenance related and projected to total $22.4 million. For 2003, we expect the company’s total debt will be down to $203.7 million, a reduction of $72 million, as we expect the rest of the company’s first mortgage notes to be retired. We are currently projecting capital spending to total $23.1 million. Assuming that 2Q02 will represent the last quarter of down year-over-year comparisons, we expect Prime’s leverage will peak at 3.4x, while its cash interest coverage will trough at 2.9x. From that point forward, we expect Prime’s credit statistics will stabilize and slowly begin to rebound. By the end of 2003 we are projecting Prime’s leverage and cash interest coverage will improve to 1.8x and 4.8x, respectively.
72 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Prime Hospitality Corp. — Financial Model ($ in 000s) 3Q01 LTM 4Q01E 4Q00A %Chg. 2001E 1Q02E 2Q02E 3Q02E 4Q02E 2002E 2003E Revenues Hotels Revenue 531,447 98,197 129,173 -24.0% 469,584 101,957 110,889 117,543 103,861 434,250 462,985 Franchise, Mgmt & Other Fees 17,447 3,793 2,064 83.8% 15,181 3,987 4,269 4,600 4,484 17,340 22,056 Rental and Other Income 4,901 700 3,404 -79.4% 2,983 700 700 1,000 1,000 3,400 3,500 Total Revenues 553,795 102,691 134,641 -23.7% 487,749 106,644 115,857 123,144 109,345 454,990 488,541 Costs and Expenses Hotel Operating Expenses 268,439 57,936 69,150 -16.2% 257,225 58,116 60,989 65,824 59,201 244,130 254,179 Occupancy and Other Operating 88,976 20,500 21,868 -6.3% 87,608 20,000 20,500 21,000 21,500 83,000 85,000 General and Administrative 29,827 6,860 6,312 8.7% 30,375 7,465 7,531 8,374 8,201 31,570 35,175 Depreciation & Amortization 38,427 9,650 9,830 -1.8% 38,247 9,701 9,747 9,800 9,800 39,047 41,000 Total Expenses 425,669 94,946 107,160 -11.4% 413,455 95,281 98,766 104,998 98,702 397,747 415,354 Operating Income 94,030 7,744 27,481 -71.8% 74,293 11,363 17,091 18,146 10,644 57,243 73,187 EBITDA 132,457 17,394 37,311 -53.4% 112,540 21,063 26,838 27,946 20,444 96,290 114,187 Margins EBITDA Margin 23.9% 16.9% 27.7% -1,077 bps 23.1% 19.8% 23.2% 22.7% 18.7% 21.2% 23.4% Hotel Operating Margin 49.5% 41.0% 46.5% -547 bps 45.2% 43.0% 45.0% 44.0% 43.0% 43.8% 45.1% G&A as a % of Revs 5.4% 6.7% 4.7% 199 bps 6.2% 7.0% 6.5% 6.8% 7.5% 6.9% 7.2% Cash Flow Coverage Ratios EBITDA/Interest Expense 3.5x 3.4x 3.1x 2.9x 3.0x 3.2x 3.2x 4.8x EBITDA - Capex/Interest Expense 2.6x 2.2x 1.9x 2.7x 3.1x 2.3x 2.5x 3.8x Free Cash Flow EBITDA 132,457 112,540 21,063 26,838 27,946 20,444 96,290 114,187 Cash Interest (34,090) (33,470) (7,702) (7,648) (7,420) (7,019) (29,789) (23,947) Capital Expenditures (41,197) (38,140) (7,078) (6,436) (4,702) (4,154) (22,370) (23,149) Scheduled Debt Amortization (13,800) (16,900) (2,500) (2,500) (2,500) (2,500) (10,000) (1,000) Cash Taxes (29,881) (22,338) (1,582) (3,828) (4,283) (1,588) (11,282) (19,727) Free Cash Flow 13,489 1,693 2,200 6,426 9,041 5,182 22,849 46,363 Capitalization Cash and Equivalents 8,959 29,808 46,473 52,414 45,869 36,067 36,067 9,520 Revolver 0 0 0 0 0000 9.250% First Mort. Nts due 2006 100,970 100,970 100,970 100,970 85,970 70,970 70,970 0 9.750% Sr. Sub. Notes due 2007 190,000 190,000 190,000 190,000 190,000 190,000 190,000 190,000 Mortgage Debt and Other 27,819 24,719 22,219 19,719 17,219 14,719 14,719 13,719 Total Debt 318,789 315,689 313,189 310,689 293,189 275,689 275,689 203,719 Enterprise Value 805,348 759,089 719,416 Leverage Ratios Total Debt/LTM EBITDA 2.4x 2.8x 3.1x 3.4x 3.1x 2.9x 2.9x 1.8x Enterprise Value/EBITDA 7.2x 7.9x 6.3x Sources: Company reports and Bear Stearns Global High Yield Research.
Bear, Stearns & Co. Inc. 73 Lodging Outlook 2002 — January 18, 2002
Starwood Hotels & Resorts Worldwide, Inc.
Starwood Hotels & Resorts Worldwide, Inc. — Debt Issues Amount Recent Outstanding Ratings Next Call Bid Spread Coupon/Description Maturity (US$ in MM) Moody’s/S&P Date Price Price YTW (bps) 6.750% Notes 11/15/03 $250.0 Ba1/BBB- Non call 99.91 6.80% 406 6.750% Debentures 11/15/05 $450.0 Ba1/BBB- Non call 97.20 7.60% 393 7.375% Debentures 11/15/15 $450.0 Ba1/BBB- Non call 97.20 8.69% 368 7.750% Debentures 11/15/25 $150.0 Ba1/BBB- Non call 83.96 9.45% 420 Prices as of January 17, 2002. Source: Bear Stearns Global High Yield Research.
Investment Summary We are initiating coverage of the senior notes of Starwood Hotel & Resorts Worldwide, Inc. (a.k.a. the ITT notes) with an attractive rating. We believe that, at current levels, the bonds offer an attractive return over a 12–24 month time horizon, particularly as we believe that the company should be in position during that time period to re-attain its full investment grade status, benefiting from what we expect should be a steady recovery in lodging demand. In addition, should the company be successful in selling its Ciga portfolio, we believe that it could provide some near-term support to the bonds as we expect the company may use the sale proceeds towards debt reduction. Starwood is one of the world’s largest hotel and leisure companies, with a portfolio of 750 hotels and resorts, located in 80 countries, that operate under the Sheraton, Westin, St. Regis, Luxury Collection, Four Points, and “W” brands. Through these brands, Starwood is well represented in most major markets around the world. We expect 2000 should be a recovery year for the lodging industry; weak business demand, difficult year-over-year hotel operating comparisons, and a sluggish economic environment in the first half of the year should yield to improved conditions by the end of the third quarter. Even though the performance of the lodging sector has historically lagged a rebound in the broader economy, we believe that the leverage inherent in real estate ownership should position Starwood for significant EBITDA expansion once corporate earnings growth begins to accelerate. In addition to the intrinsic strengths of being an owner of hotel properties in a strong economy, Starwood has several attributes, and initiatives already underway, that should strengthen its core long-term franchise. These attributes/initiatives include its potential sale of the Ciga portfolio; its recent major property renovation program (for the Sheraton brand in particular); its development of the successful “W” brand; the expansion of its timeshare business; and the implementation of several efficiency programs, including its new yield management system. While Starwood’s heavy ownership exposure in the top 25 MSAs and resort locations is likely to be a drag on cash flow over the next several quarters, the company should comfortably weather the storm, and be well positioned when trends begin to turn around. Although we project that Starwood’s 2002 EBITDA should be down more than 23% compared to 2000 levels, and down 2.5% compared to 2001, we still anticipate that the company will generate approximately $650 million in free cash flow during 2002. We believe that the majority of the company’s free cash flow could go towards debt reduction. Starwood currently bridges the high yield and high grade sectors as a result of its split ratings. However, we believe that Starwood should return to being solely an investment grade credit within 12–24 months. We think that S&P’s January 16 comment—that it planned to affirm its investment grade rating for Starwood once the company made material progress on resolving near-term refinancing issues (there is more than $3.0 billion in debt maturing by the end of 2003)—was a clear vote of confidence. Although we anticipate that the company’s results will be negatively affected over the next several quarters by the slowdown in lodging demand, we believe that Starwood remains one of the world’s pre-eminent lodging companies. Starwood’s bonds might exhibit modest volatility over the next several quarters, given the challenging operating environment, yet in our view the company’s long-term outlook remains sound, with more than adequate asset protection and a very strong management team. Although credit measures are expected to weaken through the first half of 2002 (with leverage and interest
74 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
coverage reaching 5.3x and 3.0x, respectively at the end of 2Q02), we believe that improvement should be in evidence from that point through the end of 2003. After cost-cutting, Starwood’s business model now has significant operating leverage, in our opinion, to benefit from the sequential improvements in quarterly RevPAR that we expect during 2002–03.
Recent Events On January 16, S&P indicated that, for the time being, it was keeping Starwood on CreditWatch with negative implications. However, S&P also indicated that it expected to affirm Starwood’s investment grade ratings, pending better visibility on management’s plans to alleviate its refinancing risk. On January 14, Starwood issued a release indicating that in mid-February it will begin to review preliminary offers for the sale of its Ciga portfolio. Starwood has intimated that it will entertain offers for the portfolio as a whole, for groups of hotels, or for individual assets. On January 3, Starwood closed on an 18-month, €450 million (Euro) loan at a rate of Euribor + 195 bps. Starwood will draw the loan in two tranches: the first €270 million will be used to pay down its existing €270 million facility, and the second draw will be used to repay a portion of the company‘s revolver. On December 20, Moody’s affirmed its existing ratings for Starwood, although it shifted its outlook to negative from stable in light of the continued uncertainty in the lodging industry. On December 20, Starwood announced its fourth-quarter dividend of $0.20 per share. The dividend will be payable on January 21, 2002 to shareholders of record by December 31, 2001. The amount of the dividend constitutes a 16% increase over the amount paid in 4Q00. On November 28, Starwood announced amendments to its senior credit facility and to its dividend policy. The amended provisions include adjustments to the company‘s combined leverage ratio and interest coverage ratio, as well as modifications to near-term amortization payments. Regarding the company‘s dividend, Starwood announced that it plans to pay its regular dividend in the fourth quarter, but subsequently will shift to an annual dividend. On October 25, Starwood announced third-quarter results, which were severely affected by the events of September 11. Same-store owned hotel RevPAR fell by 19.4% for North American properties, and by 8.2% for international properties. Total revenues were down 12%, to $965 million, as a result of the terrorist attacks and the already soft economy. Total company EBITDA was $288 million, versus $406 million in 3Q00.
Investment Considerations Investment Strengths The right assets in the right places. Starwood‘s business philosophy is to own and operate big- box, center-city hotels in the top business-demand markets, and large luxury resorts in the top destination markets. Through the years, the company has assembled one of the most attractive portfolios of assets (many of which are irreplaceable) in the industry, with strategic concentrations in strong, high-barrier-to-entry markets. While Starwood‘s full-service center- city and resort properties might experience reduced cash flow in years when the economy, and hotel demand, are softer than normal, the leverage inherent in real estate ownership can make these properties very profitable when demand is moderate to robust. In an effort to mitigate this top–U.S. market risk, roughly 30% of Starwood‘s portfolio is composed of assets outside North America, primarily in Europe and Latin America. Despite an EBITDA shortfall, free cash flow remains robust and earmarked for debt reduction. Despite our projection that Starwood’s 2002 EBITDA will be down more than 23% compared to 2000 levels, and down 2.5% compared to 2001, we still anticipate that the company will generate approximately $650 million in free cash flow during 2002. Our model assumes the company should reduce its maintenance capex to $100 million during 2002, as guided by the company. We believe that the majority of the company’s free cash flow should go towards debt reduction. Importantly, the company announced that it had switched to paying its
Bear, Stearns & Co. Inc. 75 Lodging Outlook 2002 — January 18, 2002
dividend on an annual basis, as opposed to quarterly; thus, dividends declared for 2002 will not be paid until 2003. We therefore project that the company will pay only its 4Q01 dividend in 2002—a total of $41 million. Accordingly, we project that Starwood will end 2002 with total debt of $5.1 billion, down more than $400 million from the end of 2001. Limited new supply is the silver lining for the industry. In our view, the silver lining for hotel owners is the limited new supply expected to come on line over the next several years. The recent shock to the lodging industry has only exacerbated lender caution toward new hotel projects. We have seen several cases of projects being put on hold, or cancelled outright. This decelerating supply growth, a trend over the past few years, makes it considerably easier for demand growth to outpace supply growth. We are currently forecasting an increase in room inventory of just 2.5% in 2001, falling to just 1.5% in 2002 and to roughly 1.0% in 2003. Hotel Inventory Growth 2000 2001E 2002E 2003E STR Chain Scale Rooms Census % Change % Change % Change % Change Full-Service Upper-Upscale 499,828 3.6% 3.0% 1.9% 1.0% Upscale 359,586 4.4% 5.0% 2.0% 1.0% Midscale w/F&B 643,349 -1.2% 1.2% 0.6% 0.4% Subtotal Full-Service 1,502,763 1.7% 2.7% 1.4% 0.7% Limited-Service Midscale w/o F&B 528,003 9.5% 7.0% 5.0% 3.0% Economy 758,931 3.1% 1.9% 0.9% 0.5% Subtotal Limited-Service 1,286,934 5.6% 4.0% 2.6% 1.6% Total Chain Scale Segments 2,789,697 3.5% 3.3% 2.0% 1.1% Independents 1,275,625 2.4% 0.9% 0.5% 0.3% Total All Rooms 4,065,322 2.9% 2.9% 1.5% 1.0% E: Estimated. Sources: Lodging Econometrics and Bear Stearns Global High Yield Research. Six Sigma and cost-containment efforts expected to boost margins. Even before September 11, and the effect of those events on the hotel operating outlook, Starwood has been committed to controlling costs and stemming margin erosion. Starwood expects to accomplish these goals through efforts at both the property and corporate levels, including initiatives from its Six Sigma program, which it began to implement during the first quarter of 2001. We expect that many of these cost-reduction measures, along with some of its post-attack, “crisis” mode cost-saving measures, will start to yield results in 2002. In the long term, we believe that the efforts that Starwood is making now should make it a margin leader, and position it for significant EBITDA expansion. Preferred Guest Program continues to build a loyal customer base. In the current environment, a strong, frequent guest rewards program has proven to be an invaluable marketing tool. With both business and leisure consumers alike becoming more cost-conscious, Starwood’s ability to keep its guests within its system, and to repay loyalty with attractive packages at its strong brands throughout the world, has helped to soften weak demand and drive incremental business. The Starwood Preferred Guest (SPG) program has won a loyal following with its customers. Over 2.5 million new members enrolled in 2000; over 2.0 million enrolled in 2001. The program recently enrolled its 10-millionth customer. This group of frequent customers contributed 28% of total system occupancy in 2000, and 34% of total system revenue. Starwood’s Preferred Guest Program is quickly gaining ground on Marriott and Hilton—which have the number-one and number-two customer loyalty programs, respectively—as Starwood’s vested member production grew at a rate of 62% over the previous year. SPG has three main advantages over Marriott and Hilton’s programs: no blackout dates, no property exclusions, and no expiration issues. SPG provides Starwood with excellent marketing inroads to its most loyal customers. Through establishing a customer base, Starwood can leverage that information to market its products more efficiently. Timeshare a growing component of the business. In 1999, Starwood acquired timeshare operator Vistana, gaining an immediate presence in the large and rapidly growing timeshare industry. Starwood also gained Vistana’s top-notch management team, led by co-CEOs and chairmen Raymond (“Rip”) Gellein and Jeffrey Adler, both industry veterans and timeshare pioneers. Along with strong management experience, Starwood acquired a business line with compelling economics, as the typical profit margin per membership unit sold (or “interval”) is
76 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
roughly 20%. This added source of earnings should help to diversify Starwood’s lodging revenues, in the same way that Marriott Vacation Club International (MVCI) has over time become a more meaningful contributor to Marriott’s top line. In addition, we would expect Starwood to build out existing Vistana resort properties, and to utilize the leverage of its brands to develop new resorts and/or convert existing Vistana resorts. Starwood’s high-end brands, the St. Regis and Luxury Collection, present attractive opportunities for expanding the previous Vistana offers through the development of a luxury timeshare product. The repositioning of Sheraton presents upside opportunity. Over the last few years, we have seen Starwood spend a significant amount of capital toward repositioning the Sheraton brand. Sheraton has become meaningfully more competitive from an operating standpoint relative to its primary peers, Marriott and Hilton. While Sheraton has made strides toward closing the market penetration gap, we believe that the brand has still more operating upside opportunity and could continue to post above-average occupancy gains when trends begin to stabilize. Credit Concerns Refinancing risk. Over the next four years, Starwood has more than $4.0 billion in debt maturing, with $2.7 billion coming due during 2003. Starwood recently commenced the first stage of its refinancing process, announcing that it entered into a new 18-month, €450 million (Euro) loan. Proceeds from the loan are to expected to be used to repay an existing €270 million facility, with the remaining €180 million expected to be used to repay a portion of the company’s corporate revolver. The company has previously indicated that it plans to tap the bond market during 2002 as part of its refinancing plans. We believe that before concluding any additional refinancing initiatives, Starwood may wait for clarity on its potential sale of its CIGA portfolio of properties; we believe that the portfolio could be sold for in excess of $1 billion. We would expect that the majority of the proceeds from a sale of the CIGA portfolio would go towards debt reduction, which in turn would clearly reduce the company’s refinancing requirements. Another extraordinary event could further affect travel patterns. Among the many things we learned from the events of September 11 was the degree to which the hotel industry is levered to the airline industry. Almost overnight, most hotels in destination cities became desolate, and more than three months later most are still operating meaningfully below pre-attack levels. While the American traveler has shown considerable resilience, it should be clear that another domestic terrorist event may have a substantial effect on travel-related businesses. Vulnerability to economic downturn. The aftermath of 9/11 further weakened an industry that was already struggling. Historically, the performance of the lodging industry has been highly correlated to the performance of the general economy. For the past 25 years, change in hotel demand has closely tracked change in GDP. Economic trends are a good industry barometer, though the two do not track each other precisely. Typically, contractions in the lodging industry are longer and deeper, while expansions are shorter. Troughs in rooms-demand growth lead downturns in the economy, and lag recoveries. We believe that the current state of the lodging industry, though improving, could remain challenging over the near term. Credit measures to weaken in coming quarters. At the end of the second quarter, Starwood’s LTM leverage and interest coverage were a very solid 3.7x and 3.8x, respectively. The events of September 11, and the subsequent travel and economic fallout, unfortunately caught Starwood and others in the lodging industry off-guard. While it was anticipated that the company’s credit measures would weaken in the short run, solely as a result of the declining economy, this weakening was accelerated following the drop-off in performance after 9/11. On an LTM basis at the end of 3Q, Starwood’s leverage and cash interest coverage weakened to 4.0x and 3.6x, respectively. We expect these measures to have weakened to 4.7x and 3.3x, respectively, by year-end. Assuming that 2Q02 will represent the last quarter of down year-over-year comparisons, we expect that Starwood’s leverage could peak at 5.3x, and its cash interest coverage will trough at 3.0x. We expect Starwood’s credit statistics to stabilize from that point forward, and to slowly rebound to pre–September 11 levels. We are projecting that Starwood’s leverage and cash interest coverage should improve to 3.5x and 4.0x, respectively, by the end of 2003.
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Rating downgrades by rating agencies are possible. On December 20, Moody’s affirmed its existing ratings for Starwood, although it shifted its outlook to negative from stable in light of the continued uncertainty in the lodging industry. On January 16, S&P indicated that it was keeping Starwood on CreditWatch with negative implications. However, S&P also indicated that it expected to affirm the rating, pending better visibility on management’s plans to alleviate its refinancing risk. We would expect S&P, when it does complete its review, to maintain its investment grade rating for Starwood while assigning it a negative outlook, as it did in concluding its review of Hilton. Nevertheless, we expect that both agencies will maintain a close watch on Starwood, as well as on the rest of the lodging group, and that they could lower their ratings further should the expected rebound in lodging demand materialize at a slower- than-expected rate. Trends expected to be choppy over the next few quarters. The hotel industry, in our view, will likely continue to face challenges over the near term. We acknowledge that, while several recent travel indicators augur well for improvements in volume, pricing and yields still appear to be very soft, and this weakness could significantly affect profitability. Pricing has come under pressure as companies change their customer mix towards leisure travel and away from business travel. Furthermore, we expect to see rates come under increased pressure as we move into the first quarter of 2002, because comparisons are more difficult with the industry moving back toward a more business-driven period. On balance, visibility into the sector remains poor, and the timing and magnitude of a recovery in lodging fundamentals is too difficult to assess. With a high degree of leverage to both the economy and air travel, the lodging sector should see some volatility over the near term, as the economy recovers from the recession and the traveling public weighs our military’s progress in Afghanistan as well as our country’s ability to allay concerns about further terrorist strikes. Foreign exchange risk. Starwood currently receives approximately 30% of its revenues from its international properties. The company currently does not have a program to hedge its foreign exchange risk. During 2000, volatility in the Euro contributed to an approximate $30 million loss to the company’s EBITDA. Other Considerations New covenant package. As with many of the lodging companies, Starwood needed to amend its credit facility, in order to get relief from certain covenants. In return for gaining more flexibility under its leverage and interest coverage tests, Starwood agreed to a slightly higher interest rate and accepted certain restrictions on share repurchases, capital expenditures and equity investments. On November 28, Starwood filed an 8-K, which included its amended bank agreement. Highlights of the amended agreement are outlined below. Highlights of the amended agreement. The amendment provides Starwood with covenant relief over the next several quarters. The new tests are provided in the table below: Starwood — Amended Bank Covenant Tests LTM Period Min. Combined Min. Combined Adj. Ended/Test Max Leverage Interest Coverage Int. Cov. December 31, 2001 5.50x 2.50x 1.25x March 31, 2002 5.75x 2.50x 1.25x June 30, 2002 6.25x 2.50x 1.25x September 30, 2002 5.75x 2.75x 1.30x Thereafter 4.75x 2.75x 1.30x Sources: Company reports. A new repayment schedule for the remainder of Starwood’s $800-million term loan, which matures in February 2003. Instead of making four equal quarterly payments of $50 million during 2002, Starwood now plans to make two $25-million payments for the first two quarters of 2002 and two $75-million payments for the third and fourth quarters. The $600- million balance remains due in February 2003. Total capital expenditures (both maintenance and development) may not exceed $250 million for the period 10/1/01 to 2/3/03. For the same time period, equity investments may not exceed $100 million, amended from $400 million.
78 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Starwood is not permitted to repurchase any common stock until 2Q02. The spread over LIBOR on the company’s revolver was raised to 72.5 bps from 62.5 bps. The 8-K also includes changes in language regarding the Ciga assets. We believe that the amendments were undertaken with a view towards making it easier to complete an eventual sale of these assets. Potential sale of Ciga assets could allow for considerable deleveraging. On January 14, Starwood indicated that it will begin in mid-February to review preliminary offers for the sale of its Ciga portfolio. More than a year after Starwood first earmarked the Ciga portfolio could be sold, it now appears that the disposition process is underway and that Starwood may be able to accomplish at least a partial sale in 2002. Starwood has intimated that it will entertain offers for the portfolio as a whole, for groups of hotels, or for individual assets. The company also hopes to retain the management contracts upon the sale, but we would expect that if sold in groups or individually, Starwood will likely not be able to successfully negotiate management contracts for all the properties and will sell some of the Ciga hotels unencumbered. In the past, Starwood has suggested that it would be willing to forgo management contracts in cities where Starwood already operates some properties. The timing of the sale is still very difficult to predict at this point, particularly in light of cumbersome restrictions pursuant to Italian law and tax complications. This has been one of the primary challenges facing Starwood, as efforts to unwind the tax issues and sell the assets in a tax efficient manner are painstakingly difficult. In our view, this announcement signals that material progress has been made in this regard. Understanding that Starwood’s overarching objective for the sale of Ciga is to maximize value, we would look for individual and group sales to trophy asset buyers and international hotel companies looking to complement their existing portfolios. While difficult to gauge, we estimate that these hotels should fetch in excess of $1.0 billion. Encompassing 25 hotels across Italy (17 hotels), Spain (5 hotels), and Austria (3 hotels), the Ciga portfolio consists of some of Europe’s oldest, most luxurious, and most irreplaceable assets. We expect Ciga to generate roughly $115 million to $125 million in EBITDA in 2001 (after earning about $150 million in 2000). Expected EV/EBITDA sale multiples for most of the portfolio range from roughly 10.0x- 15.0x. These projections will certainly be affected by the extent to which Starwood is able to retain management contracts. Selling these assets on an encumbered basis could lower these sale multiples by roughly 100–200 basis points. In light of the different unknowns related to the timing and proceeds of a Ciga sale, we have taken a conservative approach toward the financial implications and not modeled in any dispositions at this juncture. However, with nearly $500 million in debt coming due in 2002 and over $2.3 billion maturing in 2003, we would certainly anticipate that the vast majority of funds received from any asset sales over the next two years should be applied to deleveraging the balance sheet. We expect to hear more regarding Ciga during the companies upcoming 4Q01 earnings call and would revisit our estimates if more definitive visibility is provided at that point. Company Description Starwood Hotels & Resorts is one of the world‘s largest hotel and leisure companies, with a portfolio of 750 hotels and resorts located in 80 countries worldwide that operate under the Sheraton, Westin, St. Regis, Luxury Collection, Four Points, and “W” brands. Through these brands, Starwood is well represented in most major markets around the world. Starwood’s revenue and earnings are derived primarily from hotel and leisure operations, which include the operation of the company‘s owned hotels; management fees earned from hotels the company manages pursuant to long-term management contracts; the receipt of franchise fees; and the development, ownership and operation of vacation ownership resorts (“VOI’s), marketing and selling VOIs in the resorts and providing financing to customers who purchase such interests. The early 1998 mergers of the predecessor Starwood organization with Westin Hotels & Resorts and ITT Corp. created Starwood in its current form. Since then, Starwood has embarked on a systematic divestiture of non-strategic assets, the bulk of which was completed in late 1999 when Park Place Entertainment purchased the assets of Caesars, although Starwood recently reiterated its intentions to divest itself of its Ciga assets as well.
Bear, Stearns & Co. Inc. 79 Lodging Outlook 2002 — January 18, 2002
To better understand how Starwood is positioned in the current marketplace, it is instructive to examine how Starwood generates its profits. 2000 EBITDA Distribution by Business Segment Franchised 5% Managed 13%
Ow ned 82%
Source: Company data. Owned hotels are clearly Starwood’s most important business line. Based on 2000 EBITDA figures, owned hotels generated about 82% of total EBITDA, while franchise and management activities combined accounted for roughly 18% of EBITDA. This is significant because same store sales increases and margin improvement are the most important drivers of earnings growth for owned hotels. On the other hand, new unit growth is a significant driver of earnings growth for the management and franchise business. In an environment where capital is tight and fewer new hotels are being built, unit growth becomes more difficult. And while we have seen a handful of new management contracts secured by Starwood in the past few months, we do not expect this fee-based component of Starwood’s business to materially move the needle in 2002. A Closer Look at Its Well-Regarded Brands Starwood owns a collection of very well regarded hotel brands, including the St. Regis/Luxury Collection, Westin, Sheraton, Four Points, and the newly developed “W” hotels. The following charts breaks out Starwood’s portfolio by brand and room census. Brand Summary (as of 3Q01) Brand Properties Rooms St. Regis/Luxury Collection 58 11,846 Westin 114 46,931 Sheraton 386 129,492 Four Points 147 27,822 "W" 14 3,921 Other 30 8,039 Total Portfolio 749 228,051 Source: Company data. St. Regis/Luxury Collection. This international collection of hotels, headed by the flagship St. Regis in New York, represents the top of the line of Starwood’s portfolio. The hotels offer the highest level of accommodations, amenities and guest services. In their markets, most of these assets are unique, historical, or both. Many are irreplaceable. A subset of this group is Ciga Hotels, based in Italy. Across Europe, the Ciga name is synonymous with the Continent’s most renowned hotels, such as the Excelsior hotels in Rome, Florence, and Venice; the Hotel Gritti Palace and Hotel Danieli in Venice, and the Hotel Cala di Volpe in Costa Smeralda, Sardinia. Westin. Westin is among the top luxury brands both domestically and internationally. The brand has a well-established portfolio of both traditional commercial hotels and resort properties, and is known for high-quality accommodations and distinctive levels of service. Notable properties
80 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
in the Westin chain include the St. Francis in San Francisco and the Century Plaza Hotel and Tower in Los Angeles. Sheraton. Sheraton is the workhorse brand of Starwood’s collection. With its strategic presence in the gateway cities of North America, Asia, Europe, and Latin America, it is among the most recognized hotel brands in the world. The Sheraton brand spans the spectrum of airport hotels, major convention center properties, downtown business hotels, and resorts. Notable Sheraton properties include the Sheraton Chicago Hotel & Towers, the Sheraton Manhattan/New York Hotel & Towers complex, and the Park Lane Hotel in London. Four Points. Four Points is Starwood’s mid-priced, full-service brand. It is primarily a franchised brand. The brand is designed to offer business travelers full-service amenities in prime locations but at a moderate price. Most facilities offer a full-sized room, business services, laundry, restaurants, room service, banquet/meeting facilities, and fitness centers. This brand is suitable for secondary and tertiary markets that could not support a full-blown, full- service Sheraton or Westin property. At its inception, the Four Points brand was primarily a conversion product, but it now enjoys an active new construction program. Starwood plans to develop the brand aggressively overseas as well, where the market for branded mid-priced products is virtually untapped. “W.” Starwood newest brand, “W,” encompasses a collection of highly stylized boutique hotels designed to appeal to a younger, hipper class of business and leisure travelers. The goal is to combine the service levels of a business class hotel with the stylistic design and décor of a boutique hotel, incorporating a feeling of residential comfort and warmth. A Large and Diverse Group of Assets … Starwood’s portfolio contains a mixture of nearly 750 owned, leased, consolidated, and nonconsolidated joint venture, managed, and franchised properties encompassing more than 228,000 rooms. Details of the portfolio are shown below. Summary of Starwood’s Portfolio by Properties and Rooms Luxury/ Four Sheraton Westin CIGA Points W Other Total Hotels Owned, leased & consolidated JV's 683718 7 10 25 165 Unconsolidated JVs 2993201 44 Equity Interest Properties 974621 9 10 26 209
Managed (third-party owned) 134 41 23 2043 225 Franchised, represented, referral 155 27 14 118 0 1 315 Total 386 114 58 147 14 30 749 -% of total 51.5% 15.2% 7.7% 19.6% 1.9% 4.0% 100.0% Rooms Owned, leased & consolidated JV's 27,297 14,085 3,729 1,894 3,325 6,445 56,775 Unconsolidated JVs 11,723 3,763 671 328 0 132 16,617 Equity Interest Properties 39,020 17,848 4,400 2,222 3,325 6,577 73,392
Managed (third-party owned) 44,890 20,406 5,258 3,734 596 971 75,855 Franchised, represented, referral 45,582 8,677 2,188 21,866 0 491 78,804 Total 129,492 46,931 11,846 27,822 3,921 8,039 228,051 -% of total 56.8% 20.6% 5.2% 12.2% 1.7% 3.5% 100.0% Source: Company data. … Spread Throughout the World Starwood’s lodging portfolio is also well diversified throughout the world. The geographic distribution of the portfolio, by property, is outlined below.
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Distribution of Rooms by World Region Asia Pacific 2% Latin America 9%
Europe 19%
North America 70%
Source: Company data. Starwood’s Exposure to the Top Markets The heart of Starwood’s business strategy is to own high-end, full-service hotels in center-city and top-resort locations across the U.S. and internationally. Consequently, Starwood has a considerable concentration of its assets in a handful of markets. While we consider this an excellent long-term strategy, it also subjects the company to operating volatility in fly-to, business-driven markets. Distribution of Rooms by World Region % of 2000 EBITDA MSA N. America Worldwide New York 20% 15% Boston 12% 9% San Diego 6% 5% Phoenix 6% 4% Atlanta 5% 4% San Francisco 5% 4% Seattle 4% 3% Los Angeles 4% 3% Total 62% 47% Source: Company data.
Management In our view, Starwood’s management team ranks among the top in the lodging industry. We believe that the management team has considerable depth. Below we provide summary biographies of the company’s chairman and chief executive officer, the chief operating officer and the chief financial officer. Barry S. Sternlicht, chairman and chief executive officer. Mr. Sternlicht serves as the chairman and chief executive officer of Starwood Hotels and Resorts. Born in 1960, Mr. Sternlicht is one of the youngest leaders in the hotel and leisure industry today. Mr. Sternlicht received his BA, magna cum laude, with honors from Brown University, where he was elected to Phi Beta Kappa. He later earned an MBA with distinction from Harvard Business School, with first- and second-year honors. In May 1999, he was awarded an Honorary Doctor of Business Administration in Hospitality Management from Johnson & Wales University. Mr. Sternlicht currently serves on the board of U.S. Franchise Systems and the Juvenile Diabetes International Foundation. He is a member of the Young Presidents Organization, Urban Land Institute, Fairfield County Junior Achievement, the Board of Governors of NAREIT, and the Board of Directors of the Center for Christian-Jewish Understanding. Robert F. Cotter, chief operating officer. As COO, Mr. Cotter reports directly to Mr. Sternlicht. He oversees all domestic and international operations, including Starwood‘s Marketing, Information Technology, Sales, Human Resources, and Six Sigma initiatives. Mr. Cotter most
82 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
recently served as president of international operations, a post he was named to in December 1999, after serving as president and chief operating officer for Europe, a position he held since 1994. Prior to that role, he served as senior vice president and president of the company‘s Asia- Pacific Division, based in Hong Kong. Mr. Cotter joined Sheraton in 1973 and held numerous sales and marketing positions, including area director of marketing for the company‘s hotels in Hawaii (1980–1982); vice president/director of advertising for the then Hawaii, Japan & Far East Division (1983-1985) and senior vice president/director of marketing for the Hawaii-Japan Division based in Honolulu (1985–1988). While based in Honolulu, Mr. Cotter also served as president of the Waikiki Beach Operators Association. Ronald C. Brown, executive vice president and chief financial officer. Mr. Brown‘s duties include managing Starwood‘s activities in the financial markets, negotiating and structuring mergers and acquisitions, and overseeing financing efforts. Mr. Brown joined Starwood Lodging Trust, the predecessor entity of Starwood Hotels & Resort, in August 1995 as senior vice president and chief financial officer. In March 1998, Mr. Brown was named to the newly created position of executive vice president and chief financial officer for Starwood Hotels & Resorts Worldwide, Inc., and will continue to oversee all accounting, tax and SEC compliance, equity and debt financing activities, cash management and insurance for the Corporation. Prior to joining the Trust, Mr. Brown was president of Sonoran Hotel Advisors, a hotel REIT advisory firm.
Financial Summary Third-Quarter Review As expected, the terrorist attacks of September 11 had a significant impact on Starwood’s third- quarter results, as same-store North American RevPAR fell by 19.4% on a 1100-bp decline in occupancy and a 6.1% increase in ADR. EBITDA for the quarter totaled $273 million, a 29.8% decline from 3Q00. Considerable exposure to very weak major markets crippled results. Such markets, reliant on fly-to, business-transient demand, included New York, San Francisco and Boston. International RevPAR fell by 8.2%, partially affected by currency weakness. It also appears that Starwood was less successful than Hilton and Marriott at containing costs and preserving margins, as EBITDA margins at comparable owned hotels worldwide declined by 520 bps (750 bps in North America). In an effort to bring costs more in line with its new top- line prospects, Starwood eliminated 10,000 full-time equivalent employees following the attacks of September 11. The benefit of these staff reductions as well as other cost control initiatives are expected to have a positive effect on results starting in 4Q01. Demand dropped off precipitously after the attacks. Between the period of September 15 and September 30, occupancy at same-store hotels in North America decreased by approximately 3200 bps to 48%, and RevPAR declined by approximately 49% from the same period last year. Because of the events of September 11, Starwood Vacation Ownership experienced a decline in sales activity at its resorts located in fly-to markets. Sales at drive-to markets, such as Myrtle Beach and Palm Springs, were less affected. Timeshare operations include nine resorts in sales and three in pre-sales. Three new projects are in the works: Sheraton Mountain View Vista in Avon, Colorado; Westin Mission Hills Resort in Rancho Mirage; Westin Ka’anapali Ocean Resort in Maui. During the quarter, Starwood invested approximately $136 million in owned hotel assets and timeshare construction. Prior to September 11, the company was actively buying back shares. During the third quarter, Starwood repurchased approximately two million shares at a total cost of $54 million. The company had more than adequate liquidity at the end of the quarter, with more than $200 million in cash and approximately $600 million available under its credit facility. At the end of the quarter, Starwood had approximately $5.5 billion in total debt. LTM leverage and cash interest coverage were 4.0x and 3.6x, respectively—both weaker compared with end of second quarter levels, of 3.7x and 3.8x, respectively. Given its expectation that leverage would increase during the next several quarters, Starwood needed to obtain a covenant waiver from its bank group.
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Outlook 4Q01 In its third-quarter earnings press release, Starwood provided fourth-quarter guidance, noting that it expected RevPAR at worldwide same-store hotels to be down by 25%–30%, resulting in EBITDA of approximately $200–225 million. We are currently projecting a RevPAR decline of 26% and EBITDA to be $211 million, a decline of 49.8% from 4Q00. In addition, as a result of Starwood’s staff reductions and an evaluation of the carrying value of certain assets for potential impairment, Starwood plans to take $75–150 million in restructuring charges in the fourth quarter. Less than 50% of this total write-down is expected to be in cash. Accordingly, at year- end we expect total debt to be up by $33 million, to $5.54 billion. Leverage and cash interest coverage are projected to weaken to 4.7x and 3.3x, respectively, as a result of the year-over-year decline in EBITDA. Outlook for 2002 Remains Uncertain—2003 Should Be a Year of Recovery The year 2002 remains a year of uncertainty with regard to lodging demand. The company’s guidance is for RevPAR to be flat to down slightly from 2001 levels (or declining 15% from 2000 levels). The company’s RevPAR guidance assumes an economic recovery takes hold during the second half of 2002. Based on this RevPAR guidance, the company expects EBITDA to be approximately $1.25–1.3 billion. Given the uncertainty, we are currently projecting 2002 EBITDA to be $1.16 billion, based on a RevPAR decline of 3%. At this level of EBITDA, we would expect the company to generate approximately $650 million in free cash flow, based on a reduction in maintenance capex to $100 million. We believe that the majority of the company’s free cash flow will go towards debt reduction. Importantly, the company announced that it had switched to paying its dividend on an annual as opposed to quarterly basis, thus dividends declared for 2002 will not be paid until 2003. As a result, we are projecting the company will only pay its 4Q01 dividend in 2002—a total of $41 million. Accordingly, we project Starwood will likely end 2002 with total debt of $5.1 billion, down by more than $400 million from the end of 2001. Assuming 2003 is a recovery year, we are projecting Starwood to generate EBITDA of $1.33 billion, a 14.6% increase from 2002. Our 2003 RevPAR estimate for Starwood assumes an increase of 7.0%. We also project the company’s EBITDA margin to improve by approximately 250 bps, as the company should benefit from cost-cutting initiatives as well as efficiencies realized through its Six Sigma program. For 2003, we project Starwood could generate more than $700 million in free cash flow, while using just under half to pay down debt. At the end of 2003, we project total debt to be $4.68 billion. Assuming that 2Q02 will represent the last quarter of down year-over-year comparisons, we expect Starwood’s leverage to peak at 5.3x and its cash interest coverage to trough at 3.0x. From that point forward, we expect Starwood’s credit statistics to stabilize and slowly begin to rebound. We are projecting Starwood’s leverage and cash interest coverage to improve by the end of 2003, to 3.5x and 4.0x, respectively. As one last note, we remind investors that we have not modeled in any dispositions of the company’s Ciga assets. Should the company sell any or all of these assets, we would need to readjust our projections accordingly. In addition, we have assumed for modeling purposes that the company would be able to successfully refinance its debt that matures during 2002–2003.
84 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Starwood Hotels & Resorts — Financial Model ($ in MM) 3Q 01 LTM 4Q01E 4Q00A % Chg. 2001E 1Q02E 2Q02E 3Q02E 4Q02E 2002E 2003E Revenues Owned, Leased, and Consolidated JV 3,516 688 919 -25.1% 3,285 737 854 824 753 3,169 3,357 Other Hotel and Leisure 678 130 186 -30.1% 622 125 150 170 175 620 660 Total Revenues 4,194 818 1,105 -25.9% 3,907 862 1,004 994 928 3,789 4,017 Cost and Expenses Owned, Leased, and Consolidated JV 2,389 512 599 -14.4% 2,302 542 602 577 519 2,241 2,274 Owned Hotel EBITDA 1,127 176 320 -45.0% 983 195 252 247 234 928 1,083 Owned Hotels EBITDA Margin (%) 32% 26% 35% -930 bps 30% 27% 30% 30% 31% 29% 32% SG&A Expense 413 95 91 4.4% 417 95 98 9898389 415 EBITDA 1,392 211 415 -49.2% 1,188 225 304 319 311 1,159 1,328 % Margin 33% 26% 38% -1,180 bps 30% 26% 30% 32% 33% 31% 33% Depreciation and Amortization 516 135 125 7.7% 526 136 137 138 140 551 580 EBIT 876 76 290 -73.7% 662 89 167 181 171 608 748 Cash Flow Coverage Ratios LTM EBITDA/Cash Interest Expense 3.6x 3.3x 4.0x 3.3x 3.2x 3.0x 3.2x 3.5x 3.5x 4.0x LTM EBITDA - Capex/Cash Interest Expense 2.2x 2.3x 2.0x 2.3x 2.3x 2.3x 2.7x 2.9x 2.9x 3.3x Free Cash Flow EBITDA 1,392 211 415 -49.2% 1,188 225 304 319 311 1,159 1,328 Cash Interest (382) (83) (103) -19.2% (363) (83) (84) (84) (83) (334) (329) Capital Expenditures (540) (25) (214) -88.3% (351) (50) (50) (50) (50) (200) (250) Cash taxes (149) 2 (56) -103.7% (91) (2) (25) (29) (26) (82) (130) Free Cash Flow 321 105 42 149.5% 383 90 145 156 151 543 619 Capitalization Cash and Equivalents 204 198 196 184 232 206 206 198 Revolver Due 2/03 622 672 511 611 611 541 541 581 Term Loan Due 2/03 800 800 775 750 675 600 600 200 Term Loan Add-On 3/03 423 423 423 423 423 423 423 423 Euro-Loan 0 0 402 402 402 402 402 402 Senior Secured Notes (IRN's) 500 500 500 500 500 500 500 500 6.750% ITT Notes due 11/03 249 249 249 249 249 249 249 249 6.750% ITT Notes due 11/05 449 449 449 449 449 449 449 449 7.375% ITT Notes due 11/15 449 449 449 449 449 449 449 449 7.750% ITT Notes due 11/25 149 149 149 149 149 149 149 149 Floating Mortgages & Other 524 514 264 254 244 234 234 214 Fixed Mortgages & Other 838 828 818 808 798 788 788 748 Sr. "A" Convertible Notes, Put 5/02 201 202 203 0 0 0 0 0 Sr. "B" Convertible Notes. Put 5/04 303 305 307 308 310 312 312 319 Total Debt 1 5,507 5,540 5,499 5,352 5,259 5,096 5,096 4,683 Leverage Ratio Total Debt/LTM EBITDA 4.0x 4.7x 5.0x 5.3x 5.0x 4.4x 4.4x 3.5x (1) During 2003, several tranches of debt are scheduled to mature. For modeling purposes we assume the company will refinance this debt. E: Estimated. Sources: Company reports and Bear Stearns Global High Yield Research.
Bear, Stearns & Co. Inc. 85 Lodging Outlook 2002 — January 18, 2002
Appendix
Macroeconomic Overview
86 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Lodging and the Broader Economy
GDP Growth — Actual and Forecasted Unemployment Rate
10.0% 6.8% Actual Forecast 6.4% 8.0% 6.0% 6.0% 5.6%
4.0% 5.2% 4.8% 2.0% 4.4% 0.0% 4.0%
-2.0% 3.6% 1999 2000 1Q 00 2Q 00 3Q 00 4Q 00 1Q 01 2Q 01 3Q 01 1Q 00 2Q 00 3Q 00 4Q 00 1Q 01 2Q 01 3Q 01 2001E 2002E 4Q 01E 1Q 02E 2Q 02E 3Q 02E 4Q 02E 4Q 01E 1Q 02E 2Q 02E 3Q 02E 4Q 02E
Source: Bear, Stearns & Co. Inc. Source: Bear, Stearns & Co. Inc.
The decline in real GDP in the third quarter was revised Our economists forecast that the unemployment rate will downward to 1.3% from an already-revised –1.1%. Behind continue to rise through this year, plateauing close to 6.5%. the revision was lower government and consumer expenditures than initially expected.
10-Year Treasury Yield Consumer Price Index: Four-Quarter % Change 6.0% 7.0% Actual Forecast 6.5%
6.0% 4.0%
5.5%
5.0% 2.0%
4.5%
4.0% 0.0% 1Q 00 2Q 00 3Q 00 4Q 00 1Q 01 2Q 01 3Q 01 1999 2000 4Q 01E 1Q 02E 2Q 02E 3Q 02E 4Q 02E 1Q 00 2Q 00 3Q 00 4Q 00 1Q 01 2Q 01 3Q 01 2001E 2002E Source: Bear, Stearns & Co. Inc. 4Q 01E 1Q 02E 2Q 02E 3Q 02E 4Q 02E Source: The Conference Board.
Developers and borrowers still continue to face a difficult Core inflation remains contained and overall inflation rates financing environment. Current scarcity of capital comes are declining on lower energy prices (this is likely to continue from tight underwriting, not prohibitive interest rates. for the next few months given recent developments in the oil markets). There is no inflation barrier to further Fed easing.
Plan to Vacation in the Next Six Months? Airline Revenue Passenger Miles: Last 12 Months 52.0 8.0% 50.0 6.0%
48.0 4.0%
46.0 2.0%
44.0 0.0% -2.0% 42.0 -4.0% 40.0 -6.0% 38.0 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01 08/98 10/98 12/98 02/99 04/99 06/99 08/99 10/99 12/99 02/00 04/00 06/00 08/00 10/00 12/00 02/01 04/01 06/01 08/01 10/01 12/01 Source: Air Transport Association. Source: The Conference Board.
Plans to vacation over the next six months fell off sharply in The decline in Revenue Passenger Miles continued in December as consumer reluctance to travel was fully November. We continue to monitor security warnings and assimilated into the data. developments in South Asia and the Middle East for insight into future trends.
Bear, Stearns & Co. Inc. 87 Lodging Outlook 2002 — January 18, 2002
Lodging and the Broader Economy (cont’d)
Consumer Confidence — Overall Will There Be More Jobs Available in Six Months?
150.0 20.0
140.0 18.0 130.0 16.0 120.0 14.0 110.0 12.0 100.0
90.0 10.0
80.0 8.0 12/99 01/00 02/00 03/00 04/00 05/00 06/00 07/00 08/00 09/00 10/00 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01 12/01 12/99 01/00 02/00 03/00 04/00 05/00 06/00 07/00 08/00 09/00 10/00 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01 12/01
Source: The Conference Board. Source: The Conference Board.
Consumer confidence marched upward in December to Expectations for future jobs continue to trend upward, 93.7. The results were aided by the expectations coincident with the expectations component of the consumer component, which rose to 91.5 from 77.3 in November. confidence index.
Expect Income to Rise in the Next Six Months? Will Business Conditions Be Better in Six Months?
32.0 24.0 30.0 22.0 28.0 20.0 26.0 18.0 24.0 16.0 22.0 14.0 20.0 12.0 18.0 10.0 16.0 8.0 12/99 01/00 02/00 03/00 04/00 05/00 06/00 07/00 08/00 09/00 10/00 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01 12/01 12/99 01/00 02/00 03/00 04/00 05/00 06/00 07/00 08/00 09/00 10/00 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01 12/01
Source: The Conference Board. Source: The Conference Board.
Contradicting consumer sentiment about more jobs Expectations for business conditions rose greatly in becoming available in the next six months, expectations December as America and its allies continue to gain ground about raises in income over the same time frame trended in their operations in Afghanistan. downward.
Foreign Currencies Versus the U.S. Dollar National Average for Gallon of Regular Gas 1.70 $1.80 BRITISH POUND 1.50 $1.60 1.30
1.10 $1.40 EURO 0.90 CANADIAN DOLLAR $1.20 0.70 $1.00 0.50 1/3/01 2/2/01 3/4/01 4/3/01 5/3/01 6/2/01 7/2/01 8/1/01 3/1/01 12/4/00 8/31/01 9/30/01 12/1/00 1/30/01 3/31/01 4/30/01 5/30/01 6/29/01 7/29/01 8/28/01 9/27/01 10/30/01 11/29/01 12/29/01 12/31/00 10/27/01 11/26/01 12/26/01 Source:U.S.DepartmentofEnergy. Source: OANDA.com.
As the Euro becomes fully assimilated as the new currency The price of gas increased modestly through December, but and local currencies are phased out, we expect that the prices remained relatively low. As such, holiday travelers Euro could gain against the dollar. could still have been encouraged to drive rather than fly.
88 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Hotel Operating Trends: November 2001
Bear, Stearns & Co. Inc. 89 Lodging Outlook 2002 — January 18, 2002
All U.S. Hotels Operating Trends: November 2001
Monthly Change in Supply and Demand
8.0%
4.0% U.S. hotel demand was down 7.4% for the month of November, a 160-basis- 0.0% point improvement over October’s -4.0% results. Supply continues to flatten out Year-over-Year Demand Change Year-over-Year Supply Change as projects are placed on hold or -8.0% cancelled.
-12.0%
-16.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
5.0% Demand Supply 4.0% 3.0%
2.0% The U.S. hotel industry remains in a 1.0% state of imbalance on an LTM basis, 0.0% as demand continues to decline while supply still handily outstrips it. -1.0% -2.0% -3.0% 01/91 06/91 11/91 04/92 09/92 02/93 07/93 12/93 05/94 10/94 03/95 08/95 01/96 06/96 11/96 04/97 09/97 02/98 07/98 12/98 05/99 10/99 03/00 08/00 01/01 06/01 11/01
Monthly Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Full-Service -10.2% 1.9% -1210 bps 55.0% 62.5% -750 bps $101.47 $111.06 -8.6% $55.85 $69.36 -19.5% Limited-Service -1.4% 4.5% -590 bps 52.6% 55.8% -320 bps $53.58 $54.41 -1.5% $28.19 $30.34 -7.1% Independent Hotels -9.5% -1.2% -830 bps 52.6% 57.4% -480 bps $77.45 $84.48 -8.3% $40.77 $48.51 -16.0% All US Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3%
LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index LTM-01 LTM-00 Change LTM-01 LTM-00 % Chg. LTM-01 LTM-00 % Chg. Full-Service -5.1% 2.0% -710 bps 61.9% 66.5% -460 bps $108.22 $109.02 -0.7% $67.01 $72.54 -7.6% Limited-Service 1.5% 4.6% -310 bps 59.0% 60.8% -180 bps $56.83 $55.60 2.2% $33.52 $33.78 -0.8% Independent Hotels -4.1% 0.8% -490 bps 60.1% 63.2% -310 bps $85.68 $86.15 -0.5% $51.51 $54.42 -5.3% All US Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
90 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
All Hotels Operating Trends: November 2001 (cont’d)
Monthly Change in Supply and Demand (November 2000-November 2001)
Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Full-Service Supply 2.1% 2.1% 1.9% 2.0% 1.9% 1.9% 1.9% 1.9% 2.2% 2.5% 2.1% 2.0% 1.9% Demand 2.3% 4.3% 4.0% -0.2% -1.7% -4.0% -4.9% -3.3% -4.2% -2.6% -21.2% -12.1% -10.2% Eq. Index 0.2 2.2 2.1 (2.2) (3.6) (5.9) (6.8) (5.2) (6.4) (5.1) (23.3) (14.1) (12.1) Limited-Service Supply 4.9% 5.0% 4.9% 4.6% 4.7% 4.6% 4.6% 4.5% 4.6% 4.4% 4.5% 4.4% 4.5% Demand 5.7% 6.7% 7.9% 5.0% 4.2% 2.6% 0.8% 1.4% 0.9% 2.2% -5.5% -2.6% -1.4% Eq. Index 0.8 1.7 3.0 0.4 (0.5) (2.0) (3.8) (3.1) (3.7) (2.2) (10.0) (7.0) (5.9)
Independents Supply 1.0% 1.2% 1.7% 2.1% 1.8% 1.9% 1.7% 1.0% 0.3% -0.3% -0.6% -0.5% -1.2% Demand 1.4% 4.1% 4.1% 0.8% 1.4% -1.7% -4.2% -3.8% -5.5% -3.6% -15.6% -11.1% -9.5% Eq. Index 0.4 2.9 2.4 (1.3) (0.4) (3.6) (5.9) (4.8) (5.8) (3.3) (15.0) (10.6) (8.3) AllU.S.Hotels Supply 2.6% 2.7% 2.8% 2.8% 2.8% 2.7% 2.7% 2.4% 2.4% 2.2% 2.0% 2.0% 1.7% Demand 3.0% 5.0% 5.1% 1.6% 0.9% -1.3% -3.0% -2.0% -3.0% -1.5% -14.7% -9.0% -7.4% Eq. Index 0.4 2.3 2.3 (1.2) (1.9) (4.0) (5.7) (4.4) (5.4) (3.7) (16.7) (11.0) (9.1)
Change in Occupancy, ADR and RevPAR (November 2000-November 2001)
Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Full-Service Occ. Chg. 10 bps 110 bps 110 bps -140 bps -250 bps -400 bps -470 bps -380 bps -450 bps -360 bps -1580 bps -980 bps -750 bps ADR Chg. 6.4% 3.3% 5.6% 5.6% 3.6% 2.3% 1.8% 0.2% -1.4% -2.3% -9.2% -8.5% -8.6% RevPAR Chg 6.7% 5.6% 7.7% 3.3% -0.1% -3.6% -5.0% -4.9% -7.5% -7.1% -29.9% -21.2% -19.5% Limited-Service Occ. Chg. 40 bps 80 bps 140 bps 20bps -30bps -120 bps -230 bps -200 bps -250 bps -140 bps -600 bps -430 bps -320 bps ADR Chg. 5.2% 4.1% 5.6% 4.9% 4.5% 3.7% 3.3% 2.8% 1.3% 1.8% -0.9% -0.5% -1.5% RevPAR Chg 5.9% 5.9% 8.6% 5.3% 3.9% 1.7% -0.4% -0.2% -2.3% -0.3% -10.3% -7.2% -7.1%
Independents Occ. Chg. 20 bps 130 bps 120 bps -70 bps -30 bps -230 bps -380 bps -340 bps -420 bps -230 bps -1000 bps -700 bps -480 bps ADR Chg. 5.6% 3.3% 4.2% 3.8% 3.8% 2.2% 0.5% -0.2% -0.8% -0.3% -7.5% -7.7% -8.3% RevPAR Chg 5.9% 6.2% 6.6% 2.5% 3.3% -1.5% -5.3% -4.9% -6.6% -3.6% -21.5% -17.6% -16.0% All U.S. Hotels Occ. Chg. 20 bps 100 bps 120 bps -70 bps -120 bps -260 bps -370 bps -310 bps -380 bps -250 bps -1090 bps -720 bps -530 bps ADR Chg. 5.6% 3.2% 4.7% 4.3% 3.2% 1.8% 1.1% 0.2% -1.1% -1.2% -8.6% -7.7% -8.1% RevPAR Chg 6.0% 5.5% 7.1% 3.0% 1.4% -2.3% -4.5% -4.2% -6.3% -4.8% -23.6% -17.6% -16.3%
LTM RevPAR Change vs. LTM Occupancy Change
8.0%
4.0%
0.0%
-4.0% LTM RevPAR Change LTM Occupancy Change
-8.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 91 Lodging Outlook 2002 — January 18, 2002
Full-Service Operating Trends: November 2001
Monthly Change in Supply and Demand
8.0%
4.0%
0.0% The full-service segment improved -4.0% somewhat during the month of
-8.0% November, as demand fell by 10.2%, Year-over-Year Demand Change Year-over-Year Supply Change a 190-basis-point improvement over 2.0% October. 6.0%
0.0%
4.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
5.0% On an LTM basis, the full-service 4.0% 3.0% sector remains in a state of 2.0% imbalance, as demand continues to 1.0% fall off the map and supply remains 0.0% -1.0% relatively flat. We believe that -2.0% Demand Supply declines in demand have mitigated to -3.0% an extent, but that the imbalance -4.0% -5.0% should continue over the near term. -6.0% 01/91 06/91 11/91 04/92 09/92 02/93 07/93 12/93 05/94 10/94 03/95 08/95 01/96 06/96 11/96 04/97 09/97 02/98 07/98 12/98 05/99 10/99 03/00 08/00 01/01 06/01 11/01
Monthly Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Upper-Upscale -11.1% 3.5% -1460 bps 59.8% 69.7% -990 bps $142.27 $159.15 -10.6% $85.12 $110.86 -23.2% Upscale -7.6% 4.1% -1170 bps 59.6% 67.1% -750 bps $91.44 $99.14 -7.8% $54.50 $66.56 -18.1% Midscale w/F&B -11.1% -0.6% -1050 bps 48.5% 54.3% -580 bps $68.17 $71.54 -4.7% $33.08 $38.84 -14.8% Full-Service -10.2% 1.9% -1210 bps 55.0% 62.5% -750 bps $101.47 $111.06 -8.6% $55.85 $69.36 -19.5% All US Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3%
LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index LTM-01 LTM-00 Change LTM-01 LTM-00 % Chg. LTM-01 LTM-00 % Chg. Upper-Upscale -5.2% 4.3% -950 bps 65.9% 72.5% -660 bps $152.29 $155.51 -2.1% $100.36 $112.77 -11.0% Upscale -2.8% 4.0% -680 bps 65.6% 70.2% -460 bps $98.96 $98.61 0.3% $64.95 $69.22 -6.2% Midscale w/F&B -6.4% -0.7% -560 bps 56.7% 60.1% -340 bps $73.65 $73.26 0.5% $41.73 $43.99 -5.1% Full-Service -5.1% 2.0% -710 bps 61.9% 66.5% -460 bps $108.22 $109.02 -0.7% $67.01 $72.54 -7.6% All US Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
92 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Full-Service Operating Trends: November 2001 (cont’d)
Monthly Change in Supply and Demand (November 2000 – November 2001)
Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Upper-Upscale Supply 4.1% 4.2% 4.2% 4.2% 4.2% 4.5% 4.7% 4.3% 4.7% 5.0% 4.0% 4.1% 3.5% Demand 4.0% 6.4% 5.1% 0.0% -1.3% -4.0% -3.9% -2.3% -3.2% -1.3% -28.2% -13.7% -11.1% Eq. Index (0.1) 2.2 0.9 (4.2) (5.5) (8.5) (8.6) (6.6) (7.9) (6.3) (32.2) (17.8) (14.6) Upscale Supply 4.2% 4.2% 4.4% 4.4% 4.2% 3.7% 3.2% 3.2% 4.5% 4.2% 4.5% 3.6% 4.1% Demand 4.8% 5.8% 7.0% 2.7% 0.2% -1.3% -3.7% -2.0% -1.3% -1.3% -17.4% -9.5% -7.6% Eq. Index 0.6 1.6 2.6 (1.7) (4.0) (5.0) (6.9) (5.2) (5.8) (5.5) (21.9) (13.1) (11.7) Midscale w/F&B Supply -0.5% -0.6% -1.1% -1.0% -0.9% -1.1% -0.9% -0.6% -1.0% -0.4% -0.6% -0.4% -0.6% Demand -1.0% 1.4% 0.9% -2.4% -3.4% -5.7% -6.6% -5.0% -6.8% -4.5% -17.1% -12.3% -11.1% Eq. Index (0.5) 2.0 2.0 (1.4) (2.5) (4.6) (5.7) (4.4) (5.8) (4.1) (16.5) (11.9) (10.5)
Full-Service Supply 2.1% 2.1% 1.9% 2.0% 1.9% 1.9% 1.9% 1.9% 2.2% 2.5% 2.1% 2.0% 1.9% Demand 2.3% 4.3% 4.0% -0.2% -1.7% -4.0% -4.9% -3.3% -4.2% -2.6% -21.2% -12.1% -10.2% Eq. Index 0.2 2.2 2.1 (2.2) (3.6) (5.9) (6.8) (5.2) (6.4) (5.1) (23.3) (14.1) (12.1)
Change in Occupancy, ADR and RevPAR (November 2000 – November 2001)
Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Upper-Upscale Occ. Chg. 0 bps 110 bps 60 bps -300 bps -410 bps -610 bps -620 bps -500 bps -570 bps -460 bps -2330 bps -1320 bps -990 bps ADR Chg. 5.9% 2.2% 4.4% 5.3% 3.0% 1.6% 0.9% -1.1% -3.7% -4.9% -10.4% -10.7% -10.6% RevPAR Chg 5.9% 4.3% 5.4% 1.1% -2.5% -6.7% -7.3% -7.4% -11.0% -10.7% -38.1% -26.0% -23.2% Upscale Occ. Chg. 40 bps 80 bps 150 bps -110 bps -280 bps -340 bps -500 bps -390 bps -410 bps -390 bps -1520 bps -950 bps -750 bps ADR Chg. 6.3% 3.9% 7.4% 6.4% 4.6% 3.2% 1.9% 0.8% -0.3% -1.7% -5.3% -6.7% -7.8% RevPAR Chg 6.9% 5.4% 10.0% 4.7% 0.7% -1.7% -4.9% -4.3% -5.8% -6.9% -25.2% -18.5% -18.1% Midscale w/F&B Occ. Chg. -30 bps 90 bps 90bps -80bps -160 bps -290 bps -370 bps -310 bps -410 bps -280 bps -1050 bps -760 bps -580 bps ADR Chg. 4.9% 2.6% 4.1% 4.2% 3.2% 2.2% 2.2% 0.9% 0.4% 0.6% -3.6% -4.2% -4.7% RevPAR Chg 4.4% 4.6% 6.1% 2.7% 0.6% -2.6% -3.8% -3.5% -5.5% -3.6% -19.6% -15.7% -14.8%
Full-Service Occ. Chg. 10 bps 110 bps 110 bps -140 bps -250 bps -400 bps -470 bps -380 bps -450 bps -360 bps -1580 bps -980 bps -750 bps ADR Chg. 6.4% 3.3% 5.6% 5.6% 3.6% 2.3% 1.8% 0.2% -1.4% -2.3% -9.2% -8.5% -8.6% RevPAR Chg 6.7% 5.6% 7.7% 3.3% -0.1% -3.6% -5.0% -4.9% -7.5% -7.1% -29.9% -21.2% -19.5%
LTM RevPAR Change vs. LTM Occupancy Change
10.0%
5.0%
0.0%
-5.0% LTM RevPAR Change LTM Occupancy Change -10.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 93 Lodging Outlook 2002 — January 18, 2002
Limited-Service Operating Trends: November 2001
Monthly Change in Supply and Demand
10.0%
8.0% Year-over-Year Demand Change Limited-Service sector demand Year-over-Year Supply Change 6.0% improved month over month during November and the sector 4.0% outperformed the full-service sector.
2.0% The limited-service sector has proven to be more resilient to the 0.0% industry-wide downturn than the full- -2.0% service sector.
-4.0%
-6.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
12.0% Demand Supply 10.0% The limited-service sector remains in
8.0% astateofimbalanceonanLTM basis, as supply growth continues to 6.0% outpace demand growth; however, 4.0% this imbalance is less pronounced than that within the full-service 2.0% sector. 0.0% 01/91 06/91 11/91 04/92 09/92 02/93 07/93 12/93 05/94 10/94 03/95 08/95 01/96 06/96 11/96 04/97 09/97 02/98 07/98 12/98 05/99 10/99 03/00 08/00 01/01 06/01 11/01
Monthly Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Midscale w/o F&B 2.2% 8.3% -610 bps 56.3% 59.6% -330 bps $64.82 $65.82 -1.5% $36.48 $39.23 -7.0% Economy -4.2% 1.8% -600 bps 49.9% 53.1% -320 bps $44.20 $45.50 -2.9% $22.07 $24.16 -8.7% Limited-Service -1.4% 4.5% -590 bps 52.6% 55.8% -320 bps $53.58 $54.41 -1.5% $28.19 $30.34 -7.1% All US Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3%
LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index LTM-01 LTM-00 Change LTM-01 LTM-00 % Chg. LTM-01 LTM-00 % Chg. Midscale w/o F&B 4.9% 8.7% -380 bps 62.5% 64.7% -220 bps $68.75 $66.85 2.8% $42.95 $43.27 -0.7% Economy -1.0% 1.8% -280 bps 56.5% 58.1% -160 bps $47.34 $47.15 0.4% $26.73 $27.38 -2.4% Limited-Service 1.5% 4.6% -310 bps 59.0% 60.8% -180 bps $56.83 $55.60 2.2% $33.52 $33.78 -0.8% All US Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
94 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Limited-Service Operating Trends: November 2001 (cont’d)
Monthly Change in Supply and Demand (November 2000-November 2001)
Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Midscale w/o F&B Supply 9.3% 9.3% 9.1% 8.8% 8.9% 8.6% 8.8% 8.6% 8.8% 8.5% 8.4% 8.4% 8.3% Demand 9.5% 10.5% 13.0% 8.7% 7.3% 6.1% 4.1% 5.3% 4.6% 5.2% -4.4% 0.9% 2.2% Eq. Index 0.2 1.2 3.9 (0.1) (1.6) (2.5) (4.7) (3.3) (4.2) (3.3) (12.8) (7.5) (6.1) Economy Supply 2.1% 2.2% 2.1% 1.8% 2.0% 2.0% 1.7% 1.6% 1.8% 1.7% 1.8% 1.6% 1.8% Demand 2.9% 4.1% 4.1% 2.1% 1.8% 0.0% -1.7% -1.6% -1.8% 0.0% -6.3% -5.4% -4.2% Eq. Index 0.8 1.9 2.0 0.3 (0.2) (2.0) (3.4) (3.2) (3.6) (1.7) (8.1) (7.0) (6.0)
Limited-Service Supply 4.9% 5.0% 4.9% 4.6% 4.7% 4.6% 4.6% 4.5% 4.6% 4.4% 4.5% 4.4% 4.5% Demand 5.7% 6.7% 7.9% 5.0% 4.2% 2.6% 0.8% 1.4% 0.9% 2.2% -5.5% -2.6% -1.4% Eq. Index 0.8 1.7 3.0 0.4 (0.5) (2.0) (3.8) (3.1) (3.7) (2.2) (10.0) (7.0) (5.9)
Change in Occupancy, ADR and RevPAR (November 2000-November 2001)
Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Midscale w/o F&B Occ. Chg. 10 bps 50 bps 180 bps 0 bps -100 bps -150 bps -300 bps -220 bps -290 bps -220 bps -790 bps -470 bps -330 bps ADR Chg. 5.5% 4.1% 5.9% 5.3% 5.0% 4.6% 4.2% 3.5% 2.2% 2.4% 0.5% -0.1% -1.5% RevPAR Chg 5.7% 5.3% 9.8% 5.2% 3.5% 2.2% -0.3% 0.4% -1.7% -0.7% -11.4% -6.9% -7.0% Economy Occ. Chg. 40 bps 90 bps 90bps 10bps -10bps -110 bps -210 bps -210 bps -240 bps -110 bps -480 bps -420 bps -320 bps ADR Chg. 3.6% 3.0% 3.4% 3.1% 2.8% 1.4% 1.2% 0.9% -0.6% 0.3% -2.6% -2.3% -2.9% RevPAR Chg 4.4% 5.0% 5.5% 3.4% 2.6% -0.5% -2.2% -2.3% -4.2% -1.4% -10.3% -9.1% -8.7%
Limited-Service Occ. Chg. 40 bps 80 bps 140 bps 20bps -30bps -120 bps -230 bps -200 bps -250 bps -140 bps -600 bps -430 bps -320 bps ADR Chg. 5.2% 4.1% 5.6% 4.9% 4.5% 3.7% 3.3% 2.8% 1.3% 1.8% -0.9% -0.5% -1.5% RevPAR Chg 5.9% 5.9% 8.6% 5.3% 3.9% 1.7% -0.4% -0.2% -2.3% -0.3% -10.3% -7.2% -7.1%
LTM RevPAR Change vs. LTM Occupancy Change
6.0% LTM RevPAR Change LTM Occupancy Change 4.0%
2.0%
0.0%
-2.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 95 Lodging Outlook 2002 — January 18, 2002
Extended-Stay Operating Trends: November 2001
Monthly Change in Supply and Demand
25.0% Year-over-Year Demand Change Year-over-Year Supply Change 20.0% Supply growth has remained high while demand growth has plateaued 15.0% for the last two months, creating a significant disconnect. We would 10.0% expect these components to converge over the coming quarters 5.0% as demand rebounds and ESA curbs
0.0% its development starts.
-5.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
70.0% Demand Supply 60.0% 50.0% The gap between supply growth and 40.0% demand growth continued to widen in 30.0% the month of November as demand 20.0% fell off. 10.0%
0.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Monthly Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Upper-Tier -0.5% 8.6% -910 bps 66.7% 72.8% -610 bps $92.41 $99.94 -7.5% $61.66 $72.79 -15.3% Lower-Tier -4.3% 9.3% -1360 bps 63.7% 72.7% -900 bps $45.10 $47.04 -4.1% $28.73 $34.22 -16.1% Extended-Stay -2.8% 9.1% -1190 bps 64.9% 72.8% -790 bps $63.77 $67.44 -5.4% $41.36 $49.07 -15.7% All US Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3%
LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index LTM-01 LTM-00 Change LTM-01 LTM-00 % Chg. LTM-01 LTM-00 % Chg. Upper-Tier 6.3% 12.5% -620 bps 71.6% 75.8% -420 bps $99.98 $100.75 -0.8% $71.62 $76.41 -6.3% Lower-Tier 4.4% 9.7% -530 bps 70.7% 74.3% -360 bps $47.66 $45.96 3.7% $33.67 $34.13 -1.3% Extended-Stay 5.1% 10.8% -570 bps 71.0% 74.9% -390 bps $68.04 $67.07 1.4% $48.33 $50.21 -3.7% All US Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
96 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Extended Stay Operating Trends: November 2001 (cont’d)
Monthly Change in Supply and Demand (November 2000-November 2001)
Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Upper-Tier Supply 15.2% 14.1% 13.2% 13.3% 12.7% 13.3% 13.5% 12.3% 13.6% 13.3% 12.5% 10.1% 8.6% Demand 14.9% 14.6% 16.2% 11.7% 8.3% 7.9% 6.6% 7.5% 7.7% 6.6% -5.0% -1.1% -0.5% Eq. Index (0.3) 0.5 3.0 (1.6) (4.4) (5.4) (6.9) (4.8) (5.9) (6.7) (17.5) (11.2) (9.1) Lower-Tier Supply 12.3% 12.0% 10.9% 10.1% 9.6% 10.5% 9.6% 8.5% 8.7% 9.1% 9.1% 9.2% 9.3% Demand 16.6% 16.3% 18.7% 10.4% 7.8% 5.2% 3.1% 2.9% 3.9% 3.1% -2.7% -4.0% -4.3% Eq. Index 4.3 4.3 7.8 0.3 (1.8) (5.3) (6.5) (5.6) (4.8) (6.0) (11.8) (13.2) (13.6)
Extended-Stay Supply 13.4% 12.8% 11.8% 11.3% 10.7% 11.5% 11.1% 10.0% 10.5% 10.7% 10.4% 9.6% 9.1% Demand 16.0% 15.6% 17.7% 10.9% 8.0% 6.2% 4.4% 4.7% 5.4% 4.5% -3.5% -2.9% -2.8% Variance 2.6 2.8 5.9 (0.4) (2.7) (5.3) (6.7) (5.3) (5.1) (6.2) (13.9) (12.5) (11.9)
Change in Occupancy, ADR and RevPAR (November 2000-November 2001)
Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Upper-Tier Occ. Chg. -20 bps 20 bps 170 bps -100 bps -310 bps -370 bps -480 bps -350 bps -410 bps -480 bps -1190 bps -810 bps -610 bps ADR Chg. 3.8% 2.6% 3.9% 3.5% 2.6% 1.4% 0.6% 0.5% -1.2% -2.3% -5.1% -6.4% -7.5% RevPAR Chg 3.5% 3.0% 6.6% 2.1% -1.4% -3.4% -5.6% -3.8% -6.3% -8.1% -19.9% -15.9% -15.3% Lower-Tier Occ. Chg. 270 bps 230 bps 440 bps 20bps -120 bps -360 bps -460 bps -420 bps -340 bps -440 bps -830 bps -950 bps -900 bps ADR Chg. 6.5% 6.4% 9.0% 8.3% 7.8% 6.7% 5.0% 4.8% 3.3% 2.6% -0.6% -1.9% -4.1% RevPAR Chg 10.6% 10.5% 16.7% 8.6% 6.0% 1.6% -1.3% -0.6% -1.2% -3.0% -11.3% -13.7% -16.1%
Extended-Stay Occ. Chg. 160 bps 150 bps 340 bps -30 bps -190 bps -360 bps -470 bps -390 bps -370 bps -450 bps -970 bps -890 bps -790 bps ADR Chg. 4.6% 4.0% 5.6% 5.7% 4.8% 4.1% 3.1% 3.1% 1.4% 0.4% -3.6% -4.0% -5.4% RevPAR Chg 7.0% 6.5% 11.2% 5.4% 2.2% -0.8% -3.1% -1.8% -3.3% -5.3% -15.8% -14.9% -15.7%
LTM RevPAR Change vs. LTM Occupancy Change
8.0% LTM RevPAR Change 4.0% LTM Occupancy Change
0.0%
-4.0%
-8.0%
-12.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 97 Lodging Outlook 2002 — January 18, 2002
November Chain Scale Trends
98 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Chain Scale Trends: Upper-Upscale
Monthly and LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Upper-Upscale -11.1% 3.5% -1460 bps 59.8% 69.7% -990 bps $142.27 $159.15 -10.6% $85.12 $110.86 -23.2% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Upper-Upscale -5.2% 4.3% -950 bps 65.9% 72.5% -660 bps $152.29 $155.51 -2.1% $100.36 $112.77 -11.0% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Upper-Upscale Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 4.0% 6.4% 5.1% 0.0% -1.3% -4.0% -3.9% -2.3% -3.2% -1.3% -28.2% -13.7% -11.1% Y-O-Y Supply Growth 4.1% 4.2% 4.2% 4.2% 4.2% 4.5% 4.7% 4.3% 4.7% 5.0% 4.0% 4.1% 3.5% Equilibrium Index (0.1) 2.2 0.9 (4.2) (5.5) (8.5) (8.6) (6.6) (7.9) (6.3) (32.2) (17.8) (14.6) YOY Occupancy Change 0 bps 110 bps 60 bps (300) bps (410) bps (610) bps (620) bps (500) bps (570) bps (460) bps (2,330) bps (1,320) bps (990) bps YOY ADR Change 5.9% 2.2% 4.4% 5.3% 3.0% 1.6% 0.9% -1.1% -3.7% -4.9% -10.4% -10.7% -10.6% YOY RevPAR Change 5.9% 4.3% 5.4% 1.1% -2.5% -6.7% -7.3% -7.4% -11.0% -10.7% -38.1% -26.0% -23.2%
Monthly Change in Supply and Demand (November 2000-November 2001)
10.0%
0.0%
-10.0% Year-over-Year Demand Change
-20.0% Year-over-Year Supply Change
-30.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average 8.0%
4.0%
0.0%
-4.0% Demand Supply -8.0% 01/97 04/97 07/97 10/97 01/98 04/98 07/98 10/98 01/99 04/99 07/99 10/99 01/00 04/00 07/00 10/00 01/01 04/01 07/01 10/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 99 Lodging Outlook 2002 — January 18, 2002
November Chain Scale Trends: Upscale
Monthly and LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Upscale -7.6% 4.1% -1170 bps 59.6% 67.1% -750 bps $91.44 $99.14 -7.8% $54.50 $66.56 -18.1% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Upscale -2.8% 4.0% -680 bps 65.6% 70.2% -460 bps $98.96 $98.61 0.3% $64.95 $69.22 -6.2% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Upscale Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 4.8% 5.8% 7.0% 2.7% 0.2% -1.3% -3.7% -2.0% -1.3% -1.3% -17.4% -9.5% -7.6% Y-O-Y Supply Growth 4.2% 4.2% 4.4% 4.4% 4.2% 3.7% 3.2% 3.2% 4.5% 4.2% 4.5% 3.6% 4.1% Equilibrium Index 0.6 1.6 2.6 (1.7) (4.0) (5.0) (6.9) (5.2) (5.8) (5.5) (21.9) (13.1) (11.7) YOY Occupancy Change 40 bps 80 bps 150 bps (110) bps (280) bps (340) bps (500) bps (390) bps (410) bps (390) bps (1,520) bps (950) bps (750) bps YOY ADR Change 6.3% 3.9% 7.4% 6.4% 4.6% 3.2% 1.9% 0.8% -0.3% -1.7% -5.3% -6.7% -7.8% YOY RevPAR Change 6.9% 5.4% 10.0% 4.7% 0.7% -1.7% -4.9% -4.3% -5.8% -6.9% -25.2% -18.5% -18.1%
Monthly Change in Supply and Demand (November 2000-November 2001)
15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Year-over-Year Demand Change -15.0% Year-over-Year Supply Change -20.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
8.0%
4.0%
0.0%
-4.0% Demand Supply -8.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
100 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Chain Scale Trends: Midscale with F&B
Monthly and LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Midscale with F&B Segment -11.1% -0.6% -1050 bps 48.5% 54.3% -580 bps $68.17 $71.54 -4.7% $33.08 $38.84 -14.8% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Midscale with F&B Segment -6.4% -0.7% -560 bps 56.7% 60.1% -340 bps $73.65 $73.26 0.5% $41.73 $43.99 -5.1% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Midscale with F&B Segment Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth -1.0% 1.4% 0.9% -2.4% -3.4% -5.7% -6.6% -5.0% -6.8% -4.5% -17.1% -12.3% -11.1% Y-O-Y Supply Growth -0.5% -0.6% -1.1% -1.0% -0.9% -1.1% -0.9% -0.6% -1.0% -0.4% -0.6% -0.4% -0.6% Equilibrium Index (0.5) 2.0 2.0 (1.4) (2.5) (4.6) (5.7) (4.4) (5.8) (4.1) (16.5) (11.9) (10.5) YOY Occupancy Change (30) bps 90 bps 90 bps (80) bps (160) bps (290) bps (370) bps (310) bps (410) bps (280) bps (1,050) bps (760) bps (580) bps YOY ADR Change 4.9% 2.6% 4.1% 4.2% 3.2% 2.2% 2.2% 0.9% 0.4% 0.6% -3.6% -4.2% -4.7% YOY RevPAR Change 4.4% 4.6% 6.1% 2.7% 0.6% -2.6% -3.8% -3.5% -5.5% -3.6% -19.6% -15.7% -14.8%
Monthly Change in Supply and Demand (November 2000-November 2001)
4.0%
0.0%
-4.0%
-8.0% Year-over-Year Demand Change -12.0% Year-over-Year Supply Change -16.0%
-20.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% Demand Supply -8.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 101 Lodging Outlook 2002 — January 18, 2002
November Chain Scale Trends: Midscale without F&B
Monthly and LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Midscale w/o F&B Segment 2.2% 8.3% -610 bps 56.3% 59.6% -330 bps $64.82 $65.82 -1.5% $36.48 $39.23 -7.0% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Midscale w/o F&B Segment 4.9% 8.7% -380 bps 62.5% 64.7% -220 bps $68.75 $66.85 2.8% $42.95 $43.27 -0.7% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Midscale w/o F&B Segment Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 9.5% 10.5% 13.0% 8.7% 7.3% 6.1% 4.1% 5.3% 4.6% 5.2% -4.4% 0.9% 2.2% Y-O-Y Supply Growth 9.3% 9.3% 9.1% 8.8% 8.9% 8.6% 8.8% 8.6% 8.8% 8.5% 8.4% 8.4% 8.3% Equilibrium Index 0.2 1.2 3.9 (0.1) (1.6) (2.5) (4.7) (3.3) (4.2) (3.3) (12.8) (7.5) (6.1) YOY Occupancy Change 10 bps 50 bps 180 bps 0 bps (100) bps (150) bps (300) bps (220) bps (290) bps (220) bps (790) bps (470) bps (330) bps YOY ADR Change 5.5% 4.1% 5.9% 5.3% 5.0% 4.6% 4.2% 3.5% 2.2% 2.4% 0.5% -0.1% -1.5% YOY RevPAR Change 5.7% 5.3% 9.8% 5.2% 3.5% 2.2% -0.3% 0.4% -1.7% -0.7% -11.4% -6.9% -7.0%
Monthly Change in Supply and Demand (November 2000-November 2001)
15.0% Year-over-Year Demand Change
10.0% Year-over-Year Supply Change
5.0%
0.0%
-5.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
20%
Demand Supply 16%
12%
8%
4%
0% 01/97 04/97 07/97 10/97 01/98 04/98 07/98 10/98 01/99 04/99 07/99 10/99 01/00 04/00 07/00 10/00 01/01 04/01 07/01 10/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
102 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Chain Scale Trends: Economy
Monthly and LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Economy -4.2% 1.8% -600 bps 49.9% 53.1% -320 bps $44.20 $45.50 -2.9% $22.07 $24.16 -8.7% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Economy -1.0% 1.8% -280 bps 56.5% 58.1% -160 bps $47.34 $47.15 0.4% $26.73 $27.38 -2.4% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Economy Segment Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 2.9% 4.1% 4.1% 2.1% 1.8% 0.0% -1.7% -1.6% -1.8% 0.0% -6.3% -5.4% -4.2% Y-O-Y Supply Growth 2.1% 2.2% 2.1% 1.8% 2.0% 2.0% 1.7% 1.6% 1.8% 1.7% 1.8% 1.6% 1.8% Equilibrium Index 0.8 1.9 2.0 0.3 (0.2) (2.0) (3.4) (3.2) (3.6) (1.7) (8.1) (7.0) (6.0) YOY Occupancy Change 40 bps 90 bps 90 bps 10 bps (10) bps (110) bps (210) bps (210) bps (240) bps (110) bps (480) bps (420) bps (320) bps YOY ADR Change 3.6% 3.0% 3.4% 3.1% 2.8% 1.4% 1.2% 0.9% -0.6% 0.3% -2.6% -2.3% -2.9% YOY RevPAR Change 4.4% 5.0% 5.5% 3.4% 2.6% -0.5% -2.2% -2.3% -4.2% -1.4% -10.3% -9.1% -8.7%
Monthly Change in Supply and Demand (November 2000-November 2001)
8.0%
4.0%
0.0%
Year-over-Year Demand Change -4.0% Year-over-Year Supply Change
-8.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
10.0%
8.0% Demand Supply
6.0%
4.0%
2.0%
0.0%
-2.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 103 Lodging Outlook 2002 — January 18, 2002
November Chain Scale Trends: Upper-Tier Extended Stay
Monthly and LTM Operating Statistics
% Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Upper-Tier Ex-Stay -0.5% 8.6% -910 bps 66.7% 72.8% -610 bps $92.41 $99.94 -7.5% $61.66 $72.79 -15.3% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Upper-Tier Ex-Stay 6.3% 12.5% -620 bps 71.6% 75.8% -420 bps $99.98 $100.75 -0.8% $71.62 $76.41 -6.3% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Upper-Tier Extended-Stay Segment Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 14.9% 14.6% 16.2% 11.7% 8.3% 7.9% 6.6% 7.5% 7.7% 6.6% -5.0% -1.1% -0.5% Y-O-Y Supply Growth 15.2% 14.1% 13.2% 13.3% 12.7% 13.3% 13.5% 12.3% 13.6% 13.3% 12.5% 10.1% 8.6% Equilibrium Index (0.3) 0.5 3.0 (1.6) (4.4) (5.4) (6.9) (4.8) (5.9) (6.7) (17.5) (11.2) (9.1) YOY Occupancy Change (20) bps 20 bps 170 bps (100) bps (310) bps (370) bps (480) bps (350) bps (410) bps (480) bps (1,190) bps (810) bps (610) bps YOY ADR Change 3.8% 2.6% 3.9% 3.5% 2.6% 1.4% 0.6% 0.5% -1.2% -2.3% -5.1% -6.4% -7.5% YOY RevPAR Change 3.5% 3.0% 6.6% 2.1% -1.4% -3.4% -5.6% -3.8% -6.3% -8.1% -19.9% -15.9% -15.3%
Monthly Change in Supply and Demand (November 2000-November 2001)
24.0% Year-over-Year Demand Change 18.0% Year-over-Year Supply Change
12.0%
6.0%
0.0%
-6.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
25.0% Demand Supply 20.0%
15.0%
10.0%
5.0%
0.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
104 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Chain Scale Trends: Lower-Tier Extended Stay
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Boston -19.5% 4.7% -2420 bps 56.0% 72.7% -1680 bps $123.38 $146.51 -15.8% $69.06 $106.58 -35.2% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Boston -9.0% 4.9% -1390 bps 65.5% 75.5% -1000 bps $137.05 $144.03 -4.9% $89.71 $108.71 -17.5% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Lower-Tier Extended-Stay Segment Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 16.6% 16.3% 18.7% 10.4% 7.8% 5.2% 3.1% 2.9% 3.9% 3.1% -2.7% -4.0% -4.3% Y-O-Y Supply Growth 12.3% 12.0% 10.9% 10.1% 9.6% 10.5% 9.6% 8.5% 8.7% 9.1% 9.1% 9.2% 9.3% Equilibrium Index 4.3 4.3 7.8 0.3 (1.8) (5.3) (6.5) (5.6) (4.8) (6.0) (11.8) (13.2) (13.6) YOY Occupancy Change 270 bps 230 bps 440 bps 20 bps (120) bps (360) bps (460) bps (420) bps (340) bps (440) bps (830) bps (950) bps (900) bps YOY ADR Change 6.5% 6.4% 9.0% 8.3% 7.8% 6.7% 5.0% 4.8% 3.3% 2.6% -0.6% -1.9% -4.1% YOY RevPAR Change 10.6% 10.5% 16.7% 8.6% 6.0% 1.6% -1.3% -0.6% -1.2% -3.0% -11.3% -13.7% -16.1%
Monthly Change in Supply and Demand (November 2000-November 2001)
24.0% Year-over-Year Demand Change 18.0% Year-over-Year Supply Change
12.0%
6.0%
0.0%
-6.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
140.0% 120.0% Demand Supply 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 105 Lodging Outlook 2002 — January 18, 2002
November Market Trends
106 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Operating Trends in the Top 15 Markets: November 2001
Equilibrium Index by Market
Houston 160 bps San Diego -680 bps
New York -1130 bps
Tampa -1170 bps
Atlanta -1410 bps Phoenix -1430 bps November was another difficult Chicago -1560 bps month for the top 15 markets, with Washington DC -1650 bps all but Houston posting negative Dallas -1740 bps
Miami -1780 bps equilibrium.
Los Angeles -1830 bps
Boston -2410 bps
Orlando -2430 bps
Oahu -2880 bps
San Francisco -2980 bps
-3600 -3200 -2800 -2400 -2000 -1600 -1200 -800 -400 0 400 800
Monthly RevPAR Growth by Market
Houston 0.9% San Diego -7.0% Allofthetop15majormarkets Tampa -17.8% except Houston posted declines in Atlanta -19.3% RevPAR for the month of Phoenix -19.3% November. Oahu was the hardest Chicago -22.2%
Washington DC -23.3% hit, as RevPAR for that market fell Los Angeles -23.8% 40.0%. As this market generally is Dallas -24.9% more dependent on fly-in traffic and Miami -26.4% tourism — both domestic and Asian Orlando -32.2%
New York -32.3% — we are not surprised by the Boston -35.2% RevPAR decline, given the relative San Francisco -38.2% states of those two economies. Oahu -40.0%
-50.0% -45.0% -40.0% -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0%
Monthly Operating Statistics % Change EQ Occupancy Average Daily Rate RevPAR Market Supply Demand Index Nov-01 Nov-00 Chg. Nov-01 Nov-00 Chg. Nov-01 Nov-00 % Chg. Atlanta 1.5% -12.6% -1410 bps 54.7% 63.5% -880 bps $74.41 $79.42 -6.3% $40.71 $50.46 -19.3% Boston 4.7% -19.5% -2410 bps 56.0% 72.7% -1680 bps $123.38 $146.51 -15.8% $69.06 $106.58 -35.2% Chicago 3.1% -12.5% -1560 bps 60.1% 70.8% -1070 bps $116.00 $126.65 -8.4% $69.73 $89.67 -22.2% Dallas 2.1% -15.3% -1740 bps 50.0% 60.3% -1030 bps $73.84 $81.57 -9.5% $36.96 $49.20 -24.9% Houston 2.3% 3.9% 160 bps 61.7% 60.8% 100 bps $75.26 $75.74 -0.6% $46.45 $46.02 0.9% Los Angeles 1.4% -16.9% -1830 bps 57.9% 70.6% -1280 bps $88.87 $95.54 -7.0% $51.45 $67.49 -23.8% Miami -0.5% -18.3% -1780 bps 56.9% 69.3% -1240 bps $95.34 $106.38 -10.4% $54.26 $73.71 -26.4% New York -0.4% -11.7% -1130 bps 74.9% 84.5% -960 bps $181.06 $237.11 -23.6% $135.64 $200.35 -32.3% Oahu 0.3% -28.5% -2880 bps 54.1% 75.9% -2180 bps $98.52 $117.19 -15.9% $53.32 $88.92 -40.0% Orlando 3.3% -21.0% -2430 bps 52.0% 68.0% -1600 bps $79.31 $89.44 -11.3% $41.25 $60.82 -32.2% Phoenix 0.0% -14.3% -1430 bps 56.4% 65.8% -940 bps $98.27 $104.43 -5.9% $55.42 $68.71 -19.3% San Diego -0.2% -7.1% -680 bps 63.6% 68.3% -470 bps $106.12 $106.23 -0.1% $67.46 $72.51 -7.0% San Francisco 3.0% -26.8% -2980 bps 51.8% 72.8% -2110 bps $129.31 $148.63 -13.0% $66.95 $108.27 -38.2% Tampa -0.5% -12.3% -1170 bps 53.4% 60.5% -710 bps $73.52 $78.92 -6.8% $39.26 $47.77 -17.8% Washington DC 2.7% -13.7% -1650 bps 56.9% 67.8% -1090 bps $108.13 $118.36 -8.6% $61.57 $80.25 -23.3% Source: Smith Travel Research.
Bear, Stearns & Co. Inc. 107 Lodging Outlook 2002 — January 18, 2002
Operating Trends in the Top 15 Markets: LTM November 2001
Equilibrium Index by Market
Houston 490 bps Tampa -180 bps
San Diego -350 bps
Phoenix -490 bps
Miami -550 bps Atlanta -630 bps Equilibrium is negative for all but Los Angeles -690 bps one of the top 15 markets over the Oahu -740 bps last 12 months, as supply has Washington DC -840 bps
Orlando -1020 bps continued to outstrip demand.
Dallas -1130 bps
New York -1130 bps
Chicago -1140 bps
Boston -1390 bps
San Francisco -1800 bps
-2500 -2250 -2000 -1750 -1500 -1250 -1000 -750 -500 -250 0 250 500 750 1000
LTM RevPAR Growth by Market
Houston 4.5% Tampa 1.9% Many of the top markets faced San Diego -1.1% large declines in RevPAR over the Miami -3.5%
Phoenix -3.6% last 12 months. On an LTM basis, Oahu -3.6% 13 of the top 15 posted RevPAR Los Angeles -5.4% declines, with New York, San Washington DC -5.4% Francisco, and Boston remaining Atlanta -5.9% at the bottom of the heap. We Orlando -10.1%
Dallas -12.0% expect this trend to continue as Chicago -12.6% the outlook for leisure and Boston -15.0% business travel remains uncertain. New York -15.2%
San Francisco -16.4%
-20.0% -16.0% -12.0% -8.0% -4.0% 0.0% 4.0% 8.0%
LTM Operating Statistics % Change EQ Occupancy Average Daily Rate RevPAR Market Supply Demand Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Atlanta 1.4% -4.8% -630 bps 61.7% 65.7% -410 bps $79.07 $80.03 -1.2% $48.78 $52.62 -7.3% Boston 4.9% -9.0% -1390 bps 65.5% 75.5% -1000 bps $137.05 $144.03 -4.9% $89.71 $108.71 -17.5% Chicago 2.4% -9.0% -1140 bps 62.7% 70.6% -790 bps $112.47 $116.84 -3.7% $70.55 $82.48 -14.5% Dallas 3.1% -8.1% -1130 bps 57.6% 64.7% -710 bps $79.57 $82.11 -3.1% $45.81 $53.09 -13.7% Houston 4.0% 8.9% 490 bps 64.8% 61.9% 290 bps $75.30 $75.22 0.1% $48.79 $46.54 4.8% Los Angeles 0.8% -6.0% -690 bps 67.8% 72.8% -500 bps $97.18 $97.38 -0.2% $65.89 $70.86 -7.0% Miami 2.0% -3.5% -550 bps 66.0% 69.8% -200 bps $108.80 $108.79 0.0% $71.82 $75.92 -5.4% New York 3.4% -7.9% -1130 bps 73.7% 82.7% -1670 bps $187.75 $204.47 -8.2% $138.28 $169.10 -18.2% Oahu -0.2% -7.5% -740 bps 70.0% 75.5% -190 bps $115.25 $114.54 0.6% $80.62 $86.52 -6.8% Orlando 3.7% -6.5% -1020 bps 64.8% 71.9% -190 bps $86.63 $88.92 -2.6% $56.14 $63.91 -12.2% Phoenix 0.9% -4.0% -490 bps 59.2% 62.2% 260 bps $99.86 $100.17 -0.3% $59.11 $62.34 -5.2% San Diego 0.8% -2.8% -350 bps 70.5% 73.0% -1380 bps $111.02 $108.90 1.9% $78.22 $79.51 -1.6% San Francisco 2.6% -15.4% -1800 bps 66.2% 80.3% -980 bps $144.65 $147.53 -2.0% $95.79 $118.43 -19.1% Tampa 0.6% -1.2% -180 bps 63.1% 64.3% 190 bps $85.54 $83.62 2.3% $54.01 $53.75 0.5% Washington, D.C. 3.6% -4.8% -840 bps 67.2% 73.1% -1000 bps $117.15 $115.66 1.3% $78.68 $84.56 -7.0% Source: Smith Travel Research.
108 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Market Trends — Atlanta
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Atlanta -12.6% 1.5% -1410 bps 54.7% 63.5% -880 bps $74.41 $79.42 -6.3% $40.71 $50.46 -19.3% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -520 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Atlanta -4.8% 1.4% -630 bps 61.7% 65.7% -410 bps $79.07 $80.03 -1.2% $48.78 $52.62 -7.3% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -320 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Atlanta Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 2.0% 3.6% 0.2% 0.7% 3.2% -3.3% 0.9% -3.2% -9.5% -3.8% -21.7% -9.6% -12.6% Y-O-Y Supply Growth 2.0% 2.8% 1.5% 1.2% 1.2% 1.5% 1.8% 0.7% 1.2% 1.1% 1.3% 1.5% 1.5% Equilibrium Index 0.0 0.8 (1.3) (0.5) 2.0 (4.8) (0.9) (3.9) (10.7) (4.9) (23.0) (11.1) (14.1) YOY Occupancy Change 0 bps 40 bps (80) bps (30) bps 130 bps (310) bps (60) bps (280) bps (770) bps (330) bps (1,520) bps (740) bps (880) bps YOY ADR Change -2.2% -0.2% -6.8% 3.7% 4.7% -0.9% 4.5% 2.4% -4.9% 1.1% -11.6% -1.9% -6.3% YOY RevPAR Change -2.2% 0.5% -8.0% 3.3% 6.7% -5.6% 3.6% -1.6% -15.0% -3.8% -31.6% -12.7% -19.3%
Monthly Change in Supply and Demand (November 2000-November 2001)
8.0%
0.0%
-8.0%
-16.0% Year-over-Year Demand Change Year-over-Year Supply Change -24.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
16.0% Demand Supply 12.0%
8.0%
4.0%
0.0%
-4.0%
-8.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 109 Lodging Outlook 2002 — January 18, 2002
November Market Trends — Boston
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Boston -19.5% 4.7% -2410 bps 56.0% 72.7% -1680 bps $123.38 $146.51 -15.8% $69.06 $106.58 -35.2% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -520 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Boston -9.0% 4.9% -1390 bps 65.5% 75.5% -1000 bps $137.05 $144.03 -4.9% $89.71 $108.71 -17.5% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -320 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Boston Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 4.0% 6.9% 5.8% 0.1% -3.1% -2.3% -7.8% -5.5% -8.6% -7.9% -30.1% -20.5% -19.5% Y-O-Y Supply Growth 3.8% 3.1% 4.5% 4.3% 5.0% 5.2% 5.9% 6.1% 5.9% 4.5% 5.5% 4.4% 4.7% Equilibrium Index 0.2 3.8 1.3 (4.2) (8.1) (7.5) (13.7) (11.6) (14.5) (12.4) (35.6) (24.9) (24.2) YOY Occupancy Change 10 bps 190 bps 70 bps (260) bps (550) bps (540) bps (1,070) bps (950) bps (1,160) bps (1,030) bps (2,890) bps (2,100) bps (1,680) bps YOY ADR Change 8.4% 8.0% 6.7% 6.1% 5.8% 4.7% -0.7% -1.8% -7.0% -8.6% -15.3% -17.7% -15.8% YOY RevPAR Change 8.6% 12.0% 8.0% 1.8% -2.4% -2.7% -13.6% -12.5% -19.8% -19.4% -43.9% -37.4% -35.2%
Monthly Change in Supply and Demand (November 2000-November 2001)
16.0%
8.0%
0.0%
-8.0%
-16.0% Year-over-Year Demand Change Year-over-Year Supply Change -24.0%
-32.0% 1/00 2/00 1/01 2/01 3/01 4/01 5/01 6/01 7/01 8/01 9/01 0/01 1/01
Supply and Demand: Rolling 12-Month Average
12.0% Demand Supply 8.0%
4.0%
0.0%
-4.0%
-8.0%
-12.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
110 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Market Trends – Chicago
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Chicago -12.5% 3.1% -1560 bps 60.1% 70.8% -1070 bps $116.00 $126.65 -8.4% $69.73 $89.67 -22.2% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Chicago -9.0% 2.4% -1140 bps 62.7% 70.6% -790 bps $112.47 $116.84 -3.7% $70.55 $82.48 -14.5% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Chicago Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 3.4% -4.0% 0.4% 1.9% -5.3% -7.8% -9.7% -6.9% -10.3% -5.3% -26.0% -14.3% -12.5% Y-O-Y Supply Growth 0.7% 1.4% 1.6% 1.8% 2.4% 2.6% 2.4% 2.2% 2.2% 2.3% 3.0% 3.4% 3.1% Equilibrium Index 2.7 (5.4) (1.2) 0.1 (7.7) (10.4) (12.1) (9.1) (12.5) (7.6) (29.0) (17.7) (15.6) YOY Occupancy Change 190 bps (270) bps (60) bps 10 bps (510) bps (710) bps (920) bps (740) bps (980) bps (580) bps (2,290) bps (1,310) bps (1,070) bps YOY ADR Change 6.5% -1.5% 2.1% 4.5% 3.8% -1.4% -2.6% -2.2% -4.2% -3.8% -12.7% -7.2% -8.4% YOY RevPAR Change 9.4% -6.7% 0.8% 4.6% -4.0% -11.3% -14.1% -11.0% -16.0% -10.9% -37.3% -23.1% -22.2%
Monthly Change in Supply and Demand (November 2000-November 2001)
18.0%
9.0%
0.0%
-9.0% Year-over-Year Demand Change -18.0% Year-over-Year Supply Change -27.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
8.0%
4.0%
0.0%
-4.0%
-8.0% Demand Supply -12.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 111 Lodging Outlook 2002 — January 18, 2002
November Market Trends — Dallas
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Dallas -15.3% 2.1% -1740 bps 50.0% 60.3% -1030 bps $73.84 $81.57 -9.5% $36.96 $49.20 -24.9% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Dallas -8.1% 3.1% -1130 bps 57.6% 64.7% -710 bps $79.57 $82.11 -3.1% $45.81 $53.09 -13.7% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Dallas Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 5.3% 8.4% 3.7% 2.8% -1.5% -7.6% -9.7% -9.9% -4.1% -8.7% -24.8% -23.0% -15.3% Y-O-Y Supply Growth 5.2% 4.5% 4.7% 5.5% 4.9% 3.2% 3.2% 2.9% 2.2% 1.8% 1.7% 1.6% 2.1% Equilibrium Index 0.1 3.9 (1.0) (2.7) (6.4) (10.8) (12.9) (12.8) (6.3) (10.5) (26.5) (24.6) (17.4) YOY Occupancy Change 10 bps 180 bps (60) bps (170) bps (420) bps (700) bps (840) bps (890) bps (390) bps (660) bps (1,690) bps (1,750) bps (1,030) bps YOY ADR Change 2.4% 0.5% 0.2% 2.1% 6.4% -1.6% -3.1% -5.2% -0.6% -4.0% -11.1% -12.1% -9.5% YOY RevPAR Change 2.6% 4.3% -0.7% -0.5% 0.0% -11.9% -15.3% -17.0% -6.7% -13.9% -34.2% -33.3% -24.9%
Monthly Change in Supply and Demand (November 2000-November 2001)
20.0%
10.0%
0.0%
-10.0%
-20.0% Year-over-Year Demand Change Year-over-Year Supply Change -30.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
16.0% 12.0% 8.0% 4.0% 0.0% -4.0% -8.0% Demand Supply -12.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
112 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Market Trends — Houston
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Houston 3.9% 2.3% 160 bps 61.7% 60.8% 100 bps $75.26 $75.74 -0.6% $46.45 $46.02 0.9% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Houston 8.9% 4.0% 490 bps 64.8% 61.9% 290 bps $75.30 $75.22 0.1% $48.79 $46.54 4.8% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Houston Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 8.1% 8.4% 8.3% 5.7% 12.0% 10.3% 4.8% 16.0% 15.9% 17.0% -0.8% 3.8% 3.9% Y-O-Y Supply Growth 2.7% 3.6% 3.9% 4.4% 4.6% 4.2% 4.7% 4.8% 4.7% 3.5% 3.3% 3.7% 2.3% Equilibrium Index 5.4 4.8 4.4 1.3 7.4 6.1 0.1 11.2 11.2 13.5 (4.1) 0.1 1.6 YOY Occupancy Change 300 bps 220 bps 230 bps 90 bps 460 bps 370 bps 0 bps 720 bps 700 bps 790 bps (240) bps 0 bps 100 bps YOY ADR Change 3.8% 2.8% 4.2% 2.9% 1.7% 4.2% 0.8% -2.2% -0.5% -0.8% -6.8% -2.2% -0.6% YOY RevPAR Change 9.2% 7.6% 8.5% 4.2% 9.0% 10.3% 0.8% 8.2% 10.2% 12.2% -10.4% -2.1% 0.9%
Monthly Change in Supply and Demand (November 2000-November 2001)
18.0% Year-over-Year Demand Change 15.0% Year-over-Year Supply Change 12.0% 9.0% 6.0% 3.0% 0.0% -3.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
12.0% Demand Supply 9.0%
6.0%
3.0%
0.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 113 Lodging Outlook 2002 — January 18, 2002
November Market Trends — Los Angeles
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Los Angeles -16.9% 1.4% -1830 bps 57.9% 70.6% -1280 bps $88.87 $95.54 -7.0% $51.45 $67.49 -23.8% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Los Angeles -6.0% 0.8% -690 bps 67.8% 72.8% -500 bps $97.18 $97.38 -0.2% $65.89 $70.86 -7.0% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Los Angeles Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth 10.7% 3.3% 7.7% -0.2% -0.3% -4.6% -6.0% -5.2% -2.4% -2.1% -20.6% -20.3% -16.9% Y-O-Y Supply Growth 4.5% 0.5% 0.7% 0.6% 0.4% 0.5% 0.3% 1.3% 0.8% 1.0% 0.7% 1.6% 1.4% Equilibrium Index 6.2 2.8 7.0 (0.8) (0.7) (5.1) (6.3) (6.5) (3.2) (3.1) (21.3) (21.9) (18.3) YOY Occupancy Change 390 bps 170 bps 440 bps (60) bps (60) bps (370) bps (470) bps (510) bps (240) bps (240) bps (1,580) bps (1,640) bps (1,280) bps YOY ADR Change 4.1% 0.3% 3.5% 3.4% 3.9% 0.6% 2.8% 2.3% 2.4% -5.1% -5.8% -6.4% -7.0% YOY RevPAR Change 10.3% 3.2% 10.7% 2.5% 3.1% -4.6% -3.6% -4.3% -0.9% -8.0% -25.7% -26.6% -23.8%
Monthly Change in Supply and Demand (November 2000-November 2001)
16.0%
8.0%
0.0%
-8.0%
-16.0% Year-over-Year Demand Change Year-over-Year Supply Change -24.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0%
-6.0% Demand Supply -8.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
114 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Market Trends — Miami
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Miami -18.3% -0.5% -1780 bps 56.9% 69.3% -1240 bps $95.34 $106.38 -10.4% $54.26 $73.71 -26.4% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Miami -3.5% 2.0% -550 bps 66.0% 69.8% -380 bps $108.80 $108.79 0.0% $71.82 $75.92 -5.4% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Miami Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Y-O-Y Demand Growth -0.7% 3.1% 6.1% 1.3% 1.1% -1.0% 0.9% 2.9% 6.3% 3.0% -24.7% -24.9% -18.3% Y-O-Y Supply Growth 3.6% 2.0% 2.4% 2.6% 1.7% 1.8% 4.1% 3.1% 3.6% 3.6% -0.6% -0.1% -0.5% Equilibrium Index (4.3) 1.1 3.7 (1.3) (0.6) (2.8) (3.2) (0.2) 2.7 (0.6) (24.1) (24.8) (17.8) YOY Occupancy Change (300) bps 70 bps 270 bps (100) bps (50) bps (200) bps (210) bps (20) bps 170 bps (40) bps (1,500) bps (1,720) bps (1,240) bps YOY ADR Change 1.8% -2.1% 3.4% 2.8% -0.6% 1.7% 3.5% 3.1% 3.3% 5.9% -11.8% -12.4% -10.4% YOY RevPAR Change -2.5% -1.1% 7.2% 1.6% -1.2% -1.1% 0.3% 2.8% 6.0% 5.3% -33.2% -34.2% -26.4%
Monthly Change in Supply and Demand (November 2000-November 2001)
16.0%
8.0%
0.0%
-8.0%
-16.0% Year-over-Year Demand Change -24.0% Year-over-Year Supply Change -32.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
8.0%
6.0% Demand Supply
4.0%
2.0%
0.0%
-2.0%
-4.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 115 Lodging Outlook 2002 — January 18, 2002
November Market Trends — New York
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics New York -11.7% -0.4% -1130 bps 74.9% 84.5% -960 bps $181.06 $237.11 -23.6% $135.64 $200.35 -32.3% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics New York -7.9% 3.4% -1130 bps 73.7% 82.7% -900 bps $187.75 $204.47 -8.2% $138.28 $169.10 -18.2% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
New York Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Y-O-Y Demand Growth 1.9% 4.3% 1.0% -1.5% -3.4% -7.6% -6.0% -5.2% -7.9% -6.6% -26.2% -18.7% -11.7% Y-O-Y Supply Growth 4.7% 5.0% 4.6% 4.8% 5.3% 4.7% 4.7% 4.2% 3.8% 3.9% 0.7% -0.4% -0.4% Equilibrium Index (2.8) (0.7) (3.6) (6.3) (8.7) (12.3) (10.7) (9.4) (11.7) (10.5) (26.9) (18.3) (11.3)
YOY Occupancy Change (240) bps (50) bps (240) bps (460) bps (690) bps (1,030) bps (880) bps (790) bps (930) bps (860) bps (2,360) bps (1,580) bps (960) bps YOY ADR Change 9.4% 1.9% 2.4% 3.3% -0.1% -1.4% -3.6% -5.4% -4.5% -7.3% -20.6% -27.4% -23.6% YOY RevPAR Change 6.4% 1.2% -1.2% -2.9% -8.3% -13.0% -13.4% -13.9% -15.3% -16.7% -41.8% -40.7% -32.3%
Monthly Change in Supply and Demand (November 2000-November 2001)
8.0% 4.0% 0.0% -4.0% -8.0% -12.0% -16.0% -20.0% Year-over-Year Demand Change -24.0% Year-over-Year Supply Change -28.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Demand Supply -10.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
116 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Market Trends — Oahu
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Oahu -28.5% 0.3% -2880 bps 54.1% 75.9% -2180 bps $98.52 $117.19 -15.9% $53.32 $88.92 -40.0% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Oahu -7.5% -0.2% -740 bps 70.0% 75.5% -560 bps $115.25 $114.54 0.6% $80.62 $86.52 -6.8% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Oahu Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Y-O-Y Demand Growth 0.3% 10.4% 11.9% 2.1% -4.2% -5.0% -3.5% -9.2% -6.4% -1.2% -25.3% -30.0% -28.5% Y-O-Y Supply Growth -3.5% -0.4% -0.3% -0.8% -1.5% -0.5% 0.2% 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% Equilibrium Index 3.8 10.8 12.2 2.9 (2.7) (4.5) (3.7) (9.4) (6.6) (1.4) (25.6) (30.3) (28.8)
YOY Occupancy Change 280 bps 710 bps 860 bps 250 bps (210) bps (320) bps (250) bps (760) bps (520) bps (110) bps (1,950) bps (2,290) bps (2,180) bps YOY ADR Change 13.1% -2.6% 3.3% 3.9% 5.4% 2.3% 2.7% 3.9% 3.1% 4.8% -6.6% -6.4% -15.9% YOY RevPAR Change 17.5% 8.0% 16.0% 6.9% 2.5% -2.3% -1.0% -5.8% -3.7% 3.4% -30.4% -34.7% -40.0%
Monthly Change in Supply and Demand (November 2000-November 2001)
16.0%
8.0%
0.0%
-8.0%
-16.0% Year-over-Year Demand Change -24.0% Year-over-Year Supply Change -32.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
8.0% Demand Supply 4.0%
0.0%
-4.0%
-8.0%
-12.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research
Bear, Stearns & Co. Inc. 117 Lodging Outlook 2002 — January 18, 2002
November Market Trends — Orlando
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Orlando -21.0% 3.3% -2430 bps 52.0% 68.0% -1600 bps $79.31 $89.44 -11.3% $41.25 $60.82 -32.2% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Orlando -6.5% 3.7% -1020 bps 64.8% 71.9% -710 bps $86.63 $88.92 -2.6% $56.14 $63.91 -12.2% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Orlando Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Y-O-Y Demand Growth 5.5% 13.5% 8.1% 0.1% -3.4% -3.6% -9.6% -7.5% -3.6% 0.0% -25.5% -21.9% -21.0% Y-O-Y Supply Growth 4.6% 3.5% 3.9% 4.0% 4.0% 4.1% 4.3% 3.5% 4.0% 3.9% 3.2% 3.3% 3.3% Equilibrium Index 0.9 10.0 4.2 (3.9) (7.4) (7.7) (13.9) (11.0) (7.6) (3.9) (28.7) (25.2) (24.3)
YOY Occupancy Change 60 bps 520 bps 250 bps (290) bps (590) bps (610) bps (1,010) bps (850) bps (590) bps (250) bps (1,710) bps (1,730) bps (1,600) bps YOY ADR Change 6.0% -4.6% 1.1% 2.2% 0.5% -3.0% -0.7% -0.5% -4.7% -2.6% -11.7% -6.3% -11.3% YOY RevPAR Change 6.9% 4.6% 5.2% -1.6% -6.6% -10.1% -13.9% -11.1% -11.7% -6.2% -36.2% -29.2% -32.2%
Monthly Change in Supply and Demand (November 2000-November 2001)
16.0%
8.0%
0.0%
-8.0%
-16.0%
-24.0% Year-over-Year Demand Change Year-over-Year Supply Change -32.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
10.0%
5.0%
0.0%
-5.0% Demand Supply
-10.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
118 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Market Trends — Phoenix
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Phoenix -14.3% 0.0% -1430 bps 56.4% 65.8% -940 bps $98.27 $104.43 -5.9% $55.42 $68.71 -19.3% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Phoenix -4.0% 0.9% -490 bps 59.2% 62.2% -300 bps $99.86 $100.17 -0.3% $59.11 $62.34 -5.2% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Phoenix Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Y-O-Y Demand Growth 8.3% 9.3% 3.2% 1.2% 4.7% 0.6% -2.5% -4.7% -2.5% -5.9% -25.7% -12.4% -14.3% Y-O-Y Supply Growth 4.3% 3.2% 2.1% 1.3% 2.0% 1.2% 0.6% 0.4% -0.1% 0.2% 0.2% 0.2% 0.0% Equilibrium Index 4.0 6.1 1.1 (0.1) 2.7 (0.6) (3.1) (5.1) (2.4) (6.1) (25.9) (12.6) (14.3)
YOY Occupancy Change 250 bps 290 bps 70 bps (10) bps 220 bps (40) bps (200) bps (290) bps (110) bps (320) bps (1,500) bps (840) bps (940) bps YOY ADR Change 4.7% 3.0% 3.9% 1.4% 3.1% -3.3% 1.7% -1.6% 1.1% -0.4% -14.0% -8.5% -5.9% YOY RevPAR Change 8.8% 9.1% 5.1% 1.2% 5.9% -3.9% -1.5% -6.5% -1.4% -6.5% -36.3% -20.1% -19.3%
Monthly Change in Supply and Demand (November 2000-November 2001)
16.0%
8.0%
0.0%
-8.0%
-16.0%
-24.0% Year-over-Year Demand Change Year-over-Year Supply Change -32.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
15.0% 12.0% Demand Supply 9.0% 6.0% 3.0% 0.0% -3.0% -6.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 119 Lodging Outlook 2002 — January 18, 2002
November Market Trends — San Diego
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics San Diego -7.1% -0.2% -690 bps 63.6% 68.3% -470 bps $106.12 $106.23 -0.1% $67.46 $72.51 -7.0% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics San Diego -2.8% 0.8% -350 bps 70.5% 73.0% -260 bps $111.02 $108.90 1.9% $78.22 $79.51 -1.6% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
San Diego Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Y-O-Y Demand Growth 8.5% 14.2% 14.3% 6.4% 0.4% 0.4% -6.7% -1.5% -4.1% -3.8% -20.8% -15.3% -7.1% Y-O-Y Supply Growth 1.4% 1.2% 1.7% 1.7% 2.1% 1.4% 1.0% 0.3% 0.2% 0.3% -0.2% -0.1% -0.2% Equilibrium Index 7.1 13.0 12.6 4.7 (1.7) (1.0) (7.7) (1.8) (4.3) (4.1) (20.6) (15.2) (6.9)
YOY Occupancy Change 450 bps 650 bps 740 bps 330 bps (130) bps (70) bps (560) bps (150) bps (370) bps (340) bps (1,530) bps (1,120) bps (470) bps YOY ADR Change 4.0% 6.3% 8.1% 6.5% 5.3% 6.7% 1.5% 3.1% 2.9% 0.4% -6.8% -7.0% -0.1% YOY RevPAR Change 11.3% 20.0% 21.6% 11.4% 3.5% 5.7% -6.2% 1.2% -1.6% -3.7% -26.1% -21.2% -7.0%
Monthly Change in Supply and Demand (November 2000-November 2001)
16.0%
8.0%
0.0%
-8.0%
Year-over-Year Demand Change -16.0% Year-over-Year Supply Change -24.0% 1/00 2/00 1/01 2/01 3/01 4/01 5/01 6/01 7/01 8/01 9/01 0/01 1/01
Supply and Demand: Rolling 12-Month Average
8.0% Demand Supply 6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
120 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Market Trends — San Francisco
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics San Francisco -26.8% 3.0% -2980 bps 51.8% 72.8% -2110 bps $129.31 $148.63 -13.0% $66.95 $108.27 -38.2% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics San Francisco -15.4% 2.6% -1800 bps 66.2% 80.3% -1410 bps $144.65 $147.53 -2.0% $95.79 $118.43 -19.1% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
San Francisco Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Y-O-Y Demand Growth 2.4% 11.5% -1.6% -9.6% -14.4% -15.0% -11.2% -14.7% -15.5% -11.7% -33.9% -30.7% -26.8% Y-O-Y Supply Growth 1.1% 2.1% 2.4% 2.4% 2.9% 3.0% 3.0% 2.8% 1.9% 1.9% 2.2% 3.4% 3.0% Equilibrium Index 1.3 9.4 (4.0) (12.0) (17.3) (18.0) (14.2) (17.5) (17.4) (13.6) (36.1) (34.1) (29.8)
YOY Occupancy Change 90 bps 540 bps (250) bps (900) bps (1,420) bps (1,430) bps (1,160) bps (1,560) bps (1,500) bps (1,170) bps (3,070) bps (2,830) bps (2,110) bps YOY ADR Change 12.9% 12.9% 12.5% 9.7% 4.7% 2.6% 8.2% -4.0% -6.1% -7.4% -16.8% -15.8% -13.0% YOY RevPAR Change 14.3% 23.4% 8.2% -3.0% -12.8% -15.3% -6.7% -20.4% -22.2% -19.8% -46.3% -43.6% -38.2%
Monthly Change in Supply and Demand (November 2000-November 2001)
24.0% 16.0% 8.0% 0.0% -8.0% -16.0% -24.0% Year-over-Year Demand Change -32.0% Year-over-Year Supply Change -40.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
15.0% 10.0% 5.0% 0.0% -5.0% -10.0%
-15.0% Demand Supply -20.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 121 Lodging Outlook 2002 — January 18, 2002
November Market Trends — Tampa
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Tampa -12.3% -0.5% -1180 bps 53.4% 60.5% -710 bps $73.52 $78.92 -6.8% $39.26 $47.77 -17.8% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Tampa -1.2% 0.6% -180 bps 63.1% 64.3% -110 bps $85.54 $83.62 2.3% $54.01 $53.75 0.5% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Tampa Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Y-O-Y Demand Growth 6.0% 11.1% 11.8% 2.9% 2.0% 0.3% -5.9% -0.6% 2.0% 1.1% -18.2% -9.8% -12.3% Y-O-Y Supply Growth 1.6% 3.4% 3.7% 3.0% 1.0% 0.3% -0.3% -0.1% -0.2% -0.2% -1.9% -0.8% -0.5% Equilibrium Index 4.4 7.7 8.1 (0.1) 1.0 0.0 (5.6) (0.5) 2.2 1.3 (16.3) (9.0) (11.8)
YOY Occupancy Change 250 bps 370 bps 480 bps 0 bps 80 bps 0 bps (380) bps (30) bps 140 bps 70 bps (920) bps (550) bps (710) bps YOY ADR Change 3.9% 0.9% 21.4% 3.8% 2.8% 0.9% 1.1% -0.3% 0.4% -0.9% -6.6% -2.8% -6.8% YOY RevPAR Change 8.3% 8.5% 30.8% 3.7% 3.8% 0.9% -4.6% -0.8% 2.6% 0.3% -22.2% -11.7% -17.8%
Monthly Change in Supply and Demand (November 2000-November 2001)
16.0% 12.0% 8.0% 4.0% 0.0% -4.0% -8.0% -12.0% Year-over-Year Demand Change -16.0% Year-over-Year Supply Change -20.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
10.0% Demand Supply 8.0%
6.0%
4.0%
2.0%
0.0%
-2.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
122 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
November Market Trends — Washington, D.C.
Monthly and LTM Operating Statistics
%Change EQ Occupancy Average Daily Rate RevPAR Demand Supply Index Nov-01 Nov-00 Change Nov-01 Nov-00 % Chg. Nov-01 Nov-00 % Chg. Monthly Operating Statistics Washington, D.C. -13.7% 2.7% -1640 bps 56.9% 67.8% -1090 bps $108.13 $118.36 -8.6% $61.57 $80.25 -23.3% All U.S. Hotels -7.4% 1.7% -910 bps 53.5% 58.8% -530 bps $79.05 $85.99 -8.1% $42.31 $50.53 -16.3% LTM Operating Statistics Washington, D.C. -4.8% 3.6% -840 bps 67.2% 73.1% -590 bps $117.15 $115.66 1.3% $78.68 $84.56 -7.0% All U.S. Hotels -2.8% 2.4% -520 bps 60.4% 63.7% -330 bps $85.28 $85.96 -0.8% $51.53 $54.74 -5.9%
Operating Statistics Change (November 2000-November 2001)
Washington, D.C. Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01
Y-O-Y Demand Growth 7.2% 9.9% 14.5% 5.0% 1.8% -2.3% -2.8% -1.5% -2.6% -4.8% -28.2% -19.5% -13.7% Y-O-Y Supply Growth 4.6% 4.7% 4.3% 4.1% 3.8% 3.9% 4.0% 3.5% 3.4% 3.3% 3.3% 2.8% 2.7% Equilibrium Index 2.6 5.2 10.2 0.0 0.0 (2.3) (6.8) (5.0) (6.0) (8.1) (31.5) (22.3) (16.4)
YOY Occupancy Change 160 bps 240 bps 520 bps 60 bps (150) bps (510) bps (550) bps (400) bps (450) bps (590) bps (2,360) bps (1,760) bps (1,090) bps YOY ADR Change 9.0% 6.1% 19.9% 8.2% 7.8% 5.1% 3.3% 2.2% 0.3% -2.1% -9.5% -9.9% -8.6% YOY RevPAR Change 11.6% 11.3% 31.6% 9.2% 5.7% -1.2% -3.4% -2.7% -5.5% -9.8% -37.1% -29.5% -23.3%
Monthly Change in Supply and Demand (November 2000-November 2001)
20.0%
10.0%
0.0%
-10.0%
-20.0% Year-over-Year Demand Change Year-over-Year Supply Change -30.0% 11/00 12/00 01/01 02/01 03/01 04/01 05/01 06/01 07/01 08/01 09/01 10/01 11/01
Supply and Demand: Rolling 12-Month Average
8.0% 6.0% 4.0% 2.0% 0.0% -2.0%
-4.0% Demand Supply -6.0% 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01
Source: Bear, Stearns & Co. Inc.; Smith Travel Research.
Bear, Stearns & Co. Inc. 123 Lodging Outlook 2002 — January 18, 2002
Supply Data
124 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Construction Pipeline Data as of End of Third-Quarter 2001
Quarter-to-Quarter Change in Active Pipeline 20.0% The number of rooms in the active 15.0% 13.6% pipeline — projects under
10.0% construction or in permitting — fell by 5.5% in the third quarter. This 5.0% 2.1% 1.3% was primarily driven by a 12.6% 0.0% -0.2% decline in the number of midscale -1.8% -1.6% -5.0% -3.0% with food & beverage rooms in the -5.5% -6.8% -6.2% -10.0% active pipeline, as the full-service sector active pipeline fell by 6.4%. -15.0% -13.9% Given recent events, we believe that -20.0% -20.3% most hotel companies will curtail -25.0% their pre-September 11 4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 development pace.
Third-Quarter 2001 Hotel Construction Pipeline Detail Number of Rooms Number of Rooms Number of Rooms Number of Rooms Number of Rooms Under Construction In Permitting In Active Pipeline In Inactive Pipeline In Total Pipeline 3Q01 2Q01 %Chg. 3Q01 2Q01 %Chg. 3Q01 2Q01 %Chg. 3Q01 2Q01 %Chg. 3Q01 2Q01 %Chg.
Full-Service Upper Upscale 29,811 29,611 0.7% 16,066 20,255 -20.7% 45,877 49,866 -8.0% 8,574 10,138 -15.4% 54,451 60,004 -9.3% Upscale 22,390 23,039 -2.8% 28,262 29,429 -4.0% 50,652 52,468 -3.5% 16,464 19,027 -13.5% 67,116 71,495 -6.1% Midscale w/ F&B 4,538 4,794 -5.3% 5,794 7,021 -17.5% 10,332 11,815 -12.6% 5,051 6,186 -18.3% 15,383 18,001 -14.5% Subtotal Full-Service 56,739 57,444 -1.2% 50,122 56,705 -11.6% 106,861 114,149 -6.4% 30,089 35,351 -14.9% 136,950 149,500 -8.4% Limited-Service Midscale w/o F&B 27,152 29,733 -8.7% 39,318 40,350 -2.6% 66,470 70,083 -5.2% 20,491 18,489 10.8% 86,961 88,572 -1.8% Economy 8,524 9,025 -5.6% 15,556 15,589 -0.2% 24,080 24,614 -2.2% 18,650 19,992 -6.7% 42,730 44,606 -4.2% Subtotal Limited-Service 35,676 38,758 -8.0% 54,874 55,939 -1.9% 90,550 94,697 -4.4% 39,141 38,481 1.7% 129,691 133,178 -2.6%
Independent 14,927 16,615 -10.2% 19,782 20,126 -1.7% 34,709 36,741 -5.5% 32,618 33,833 -3.6% 67,327 70,574 -4.6%
AllU.S.Hotels 107,342 112,817 -4.9% 124,778 132,770 -6.0% 232,120 245,587 -5.5% 101,848 107,665 -5.4% 333,968 353,252 -5.5%
Source: Lodging Econometrics.
Projected Inventory Change 2000 2001E 2002E 2003E With all of 2001’s projected STR Chain Scale Rooms Census % change % change % change % change new supply currently under Full-Service construction — and most of Upper-Upscale 499,828 3.6% 3.0% 1.9% 1.0% Upscale 359,586 4.4% 5.0% 2.0% 1.0% 2002’s — recent events Midscale w/F&B 643,349 -1.2% 1.2% 0.6% 0.4% should have less of an Subtotal Full-Service 1,502,763 1.7% 2.7% 1.4% 0.7% impact on the near-term Limited-Service supply outlook. We may Midscale w/o F&B 528,003 9.5% 7.0% 5.0% 3.0% Economy 758,931 3.1% 1.9% 0.9% 0.5% expect to see some Subtotal Limited-Service 1,286,934 5.6% 4.0% 2.6% 1.6% smaller, limited-service Total Chain Scale Segments 2,789,697 3.5% 3.3% 2.0% 1.1% projects tabled or Independents 1,275,625 2.4% 0.9% 0.5% 0.3% cancelled, limiting 2003 Total All Rooms 4,065,322 2.9% 2.9% 1.5% 1.0% supply growth to near 1%.
Source: Bear, Stearns & Co. Inc.; Smith Travel Research; Lodging Econometrics.
Bear, Stearns & Co. Inc. 125 Lodging Outlook 2002 — January 18, 2002
Market Construction Pipeline Data as of End of Third-Quarter 2001
Year-over-Year Inventory Growth: Total U.S. and 15-Market Average
2000 2001E 2002E 10-Year Averages Market Rooms Rooms % Chg. Rooms Chg. Supply Demand Atlanta 82,560 84,160 1.9% 86,294 2.5% 3.6% 4.4% Boston 40,474 42,888 6.0% 44,116 2.9% 1.6% 3.3% Chicago 78,515 80,601 2.7% 82,657 2.6% 1.6% 2.8% Dallas 63,073 64,912 2.9% 66,311 2.2% 4.2% 4.8% Houston 52,101 52,439 0.6% 54,573 4.1% 3.8% 3.3% Los Angeles 83,838 86,081 2.7% 87,038 1.1% 0.5% 1.6% Miami 43,612 44,755 2.6% 46,798 4.6% 1.3% 1.1% New York 73,386 73,324 -0.1% 75,102 2.4% 1.4% 2.7% Oahu 36,506 36,075 -1.2% 36,075 0.0% 0.2% -1.0% Orlando 107,495 110,460 2.8% 116,314 5.3% 3.6% 3.2% Phoenix 51,152 51,397 0.5% 51,497 0.2% 3.6% 3.4% San Diego 49,828 50,073 0.5% 51,677 3.2% 1.1% 2.8% San Francisco 46,852 48,863 4.3% 50,146 2.6% 0.7% 2.2% Tampa 39,033 39,170 0.4% 40,242 2.7% 2.1% 2.4% Washington DC 77,086 79,446 3.1% 81,379 2.4% 1.3% 2.6% Total 925,511 944,644 2.1% 970,219 2.7% 2.1% 2.7%
10-Year Historical Average Rate of Annual Inventory Increase
Dallas 4.2% Houston 3.8% Phoenix 3.7% Orlando 3.6% Atlanta 3.6% Total US Average 2.4% Tampa 2.1% 15-Market Average 2.1% Chicago 1.6% Boston 1.6% New York 1.4% Washington DC 1.3% Miami 1.3% San Diego 1.1% San Francisco 0.7%
Los Angeles 0.5%
Oahu 0.2%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%
Source: Bear, Stearns & Co. Inc.; Smith Travel Research; Lodging Econometrics.
126 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Market Supply Projections
2001 Projected Average Rate of Annual Inventory Increase
Boston 6.0% San Francisco 4.3% Washington DC 3.1% Dallas 2.9% Orlando 2.8% Los Angeles 2.7% Chicago 2.7% Miami 2.6% Atlanta 1.9% Houston 0.6% San Diego 0.5% Phoenix 0.5% Tampa 0.4% New York -0.1% Oahu -1.2%
-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%
2002 Projected Average Rate of Annual Inventory Increase
Orlando 5.3% Miami 4.6% Houston 4.1% San Diego 3.2% Boston 2.9% Tampa 2.7% San Francisco 2.6% Chicago 2.6% Atlanta 2.5% Washington DC 2.4% New York 2.4% Dallas 2.2% Los Angeles 1.1% Phoenix 0.2% Oahu 0.0%
-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Bear, Stearns & Co. Inc. 127 Lodging Outlook 2002 — January 18, 2002
Year-over-Year Inventory Growth by Market
Year-over-Year Inventory Growth: Total U.S. and 15-Market Average
2000 2001E 2002E Market Chain Scale Rooms Rooms % Chg. Rooms Chg.
Atlanta Upper Upscale 20,202 20,289 0.4% 20,289 0.0% Upscale 10,637 10,192 -4.2% 11,255 10.4% Midscale w/F&B 8,895 8,595 -3.4% 8,655 0.7% Midscale w/o F&B 15,072 16,141 7.1% 16,923 4.8% Economy 18,492 19,814 7.1% 20,043 1.2% Independents 9,262 9,129 -1.4% 9,129 0.0% Total 82,560 84,160 1.9% 86,294 2.5%
Boston Upper Upscale 15,314 16,150 5.5% 16,150 0.0% Upscale 4,632 5,504 18.8% 5,939 7.9% Midscale w/F&B 6,972 7,056 1.2% 7,113 0.8% Midscale w/o F&B 3,755 4,384 16.8% 4,662 6.3% Economy 2,957 2,903 -1.8% 3,020 4.0% Independents 6,844 6,891 0.7% 7,232 4.9% Total 40,474 42,888 6.0% 44,116 2.9%
Chicago Upper Upscale 27,820 29,319 5.4% 30,093 2.6% Upscale 9,700 10,248 5.6% 10,502 2.5% Midscale w/F&B 10,869 11,157 2.6% 11,357 1.8% Midscale w/o F&B 7,976 9,030 13.2% 9,532 5.6% Economy 9,060 9,069 0.1% 9,328 2.9% Independents 13,090 11,778 -10.0% 11,845 0.6% Total 78,515 80,601 2.7% 82,657 2.6%
Dallas Upper Upscale 13,269 13,821 4.2% 14,079 1.9% Upscale 11,268 11,891 5.5% 12,319 3.6% Midscale w/F&B 7,593 7,925 4.4% 8,035 1.4% Midscale w/o F&B 9,617 10,245 6.5% 10,788 5.3% Economy 10,609 11,185 5.4% 11,245 0.5% Independents 10,717 9,845 -8.1% 9,845 0.0% Total 63,073 64,912 2.9% 66,311 2.2%
Houston Upper Upscale 10,101 9,365 -7.3% 9,365 0.0% Upscale 7,876 8,398 6.6% 9,416 12.1% Midscale w/F&B 6,643 7,309 10.0% 7,369 0.8% Midscale w/o F&B 9,387 9,777 4.2% 10,225 4.6% Economy 11,353 12,469 9.8% 12,750 2.3% Independents 6,741 5,121 -24.0% 5,448 6.4% Total 52,101 52,439 0.6% 54,573 4.1%
Source: Bear, Stearns & Co. Inc.; Smith Travel Research; Lodging Econometrics.
128 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Year-over-Year Inventory Growth by Market (cont’d)
Year-over-Year Inventory Growth: Total U.S. and 15-Market Average
2000 2001E 2002E Market Chain Scale Rooms Rooms % Chg. Rooms Chg.
Los Angeles Upper Upscale 23,527 23,495 -0.1% 23,495 0.0% Upscale 9,589 10,070 5.0% 10,333 2.6% Midscale w/F&B 12,902 13,003 0.8% 13,003 0.0% Midscale w/o F&B 3,112 3,546 13.9% 3,711 4.7% Economy 10,414 10,391 -0.2% 10,581 1.8% Independents 24,294 25,576 5.3% 25,915 1.3% Total 83,838 86,081 2.7% 87,038 1.1%
Miami Upper Upscale 11,398 12,424 9.0% 13,136 5.7% Upscale 2,833 3,501 23.6% 3,794 8.4% Midscale w/F&B 5,963 5,969 0.1% 5,969 0.0% Midscale w/o F&B 3,376 3,507 3.9% 3,607 2.9% Economy 2,978 3,069 3.1% 3,383 10.2% Independents 17,064 16,285 -4.6% 16,909 3.8% Total 43,612 44,755 2.6% 46,798 4.6%
New York Upper Upscale 28,901 27,067 -6.3% 28,228 4.3% Upscale 5,166 5,333 3.2% 5,333 0.0% Midscale w/F&B 7,207 7,517 4.3% 7,686 2.2% Midscale w/o F&B 1,032 1,523 47.6% 1,613 5.9% Economy 829 946 14.1% 1,146 21.1% Independents 30,251 30,938 2.3% 31,096 0.5% Total 73,386 73,324 -0.1% 75,102 2.4%
Oahu Upper Upscale 12,210 11,779 -3.5% 11,779 0.0% Upscale 4,428 5,141 16.1% 5,141 0.0% Midscale w/F&B 8,118 7,709 -5.0% 7,709 0.0% Midscale w/o F&B 0 0 0.0% 0 0.0% Economy 48 48 0.0% 48 0.0% Independents 11,702 11,398 -2.6% 11,398 0.0% Total 36,506 36,075 -1.2% 36,075 0.0%
Orlando Upper Upscale 18,127 19,026 5.0% 19,026 0.0% Upscale 9,694 10,259 5.8% 11,228 9.4% Midscale w/F&B 20,100 20,269 0.8% 20,269 0.0% Midscale w/o F&B 8,825 9,902 12.2% 10,501 6.0% Economy 15,781 15,496 -1.8% 15,496 0.0% Independents 34,968 35,508 1.5% 39,794 12.1% Total 107,495 110,460 2.8% 116,314 5.3%
Source: Bear, Stearns & Co. Inc.; Smith Travel Research; Lodging Econometrics.
Bear, Stearns & Co. Inc. 129 Lodging Outlook 2002 — January 18, 2002
Year-over-Year Inventory Growth by Market (cont’d)
Year-over-Year Inventory Growth: Total U.S. and 15-Market Average
2000 2001E 2002E Market Chain Scale Rooms Rooms % Chg. Rooms Chg.
Phoenix Upper Upscale 10,662 10,662 0.0% 10,662 0.0% Upscale 7,075 7,073 0.0% 7,073 0.0% Midscale w/F&B 5,015 5,170 3.1% 5,170 0.0% Midscale w/o F&B 9,073 9,129 0.6% 9,229 1.1% Economy 8,552 8,727 2.0% 8,727 0.0% Independents 10,775 10,636 -1.3% 10,636 0.0% Total 51,152 51,397 0.5% 51,497 0.2%
San Diego Upper Upscale 9,291 9,576 3.1% 9,860 3.0% Upscale 5,330 5,360 0.6% 5,780 7.8% Midscale w/F&B 7,865 7,940 1.0% 7,940 0.0% Midscale w/o F&B 2,833 3,313 16.9% 3,432 3.6% Economy 7,894 7,881 -0.2% 8,096 2.7% Independents 16,615 16,003 -3.7% 16,569 3.5% Total 49,828 50,073 0.5% 51,677 3.2%
San Francisco Upper Upscale 16,579 17,129 3.3% 17,491 2.1% Upscale 3,717 4,536 22.0% 4,713 3.9% Midscale w/F&B 6,277 6,545 4.3% 6,651 1.6% Midscale w/o F&B 1,200 1,788 49.0% 2,028 13.4% Economy 3,271 3,436 5.0% 3,531 2.8% Independents 15,808 15,429 -2.4% 15,732 2.0% Total 46,852 48,863 4.3% 50,146 2.6%
Tampa Upper Upscale 5,379 5,379 0.0% 5,379 0.0% Upscale 4,770 4,973 4.3% 5,382 8.2% Midscale w/F&B 6,932 6,931 0.0% 6,931 0.0% Midscale w/o F&B 5,008 5,529 10.4% 5,840 5.6% Economy 6,498 6,682 2.8% 6,682 0.0% Independents 10,446 9,676 -7.4% 10,028 3.6% Total 39,033 39,170 0.4% 40,242 2.7%
Washington Upper Upscale 25,217 25,453 0.9% 25,543 0.4% Upscale 10,304 11,229 9.0% 11,958 6.5% Midscale w/F&B 13,322 13,187 -1.0% 13,420 1.8% Midscale w/o F&B 8,016 8,851 10.4% 9,492 7.2% Economy 9,035 9,202 1.8% 9,262 0.7% Independents 11,192 11,524 3.0% 11,704 1.6% Total 77,086 79,446 3.1% 81,379 2.4%
Source: Bear, Stearns & Co. Inc.; Smith Travel Research; Lodging Econometrics.
130 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter Pipeline Summary by Market
Bear, Stearns & Co. Inc. 131 Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Atlanta
Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Atlanta Downtown 6 1,365 56 15,018 17.9% 2 368 2 693 4 1,061 7.1% 5 1,450 1 416 2 368 0 0 110062,043 19.1% Atlanta Northeast 23 2,337 81 9,968 11.9% 1 654300 5 365 3.7% 1 108 2 168 0 0 4 265 2 208 0 0 11.4% Atlanta Airport 12 1,439 56 9,386 11.2% 3 311 4 533 7 844 9.0% 1 100 2 190 2 158 2 191 2 220 2 375 11.2% Atlanta South 24 1,680 106 8,515 10.2% 3 183 2 425 5 608 7.1% 3 249 7 404 1 62 2 121 5 674 0 0 10.2% Atlanta Northwest 28 2,382 89 8,354 10.0% 0 0 1 60 1 60 0.7% 1 150 2 83001 60001150 9.3% Atlanta-Other 87 9,024 252 32,647 38.9% 10 775 8 991 18 1,766 5.4% 101,3256 584 5 404 10 777 8 765 5 1,145 38.9% MARKET TRACT TOTAL 180 18,227 640 83,888 100.0% 19 1,702 21 3,002 40 4,704 5.6% 21 3,382 20 1,845 10 992 19 1,414 18 1,967 14 3,713 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 3 789 49 20,203 24.1% 1 861593 2 679 3.4% 1 425 1 150 1 86 0 0 0021,018 23.2% Upscale 24 2,969 69 10,744 12.8% 2 321 3 569 5 890 8.3% 2 190 2 247 1 168 3 343 1 149 2 420 12.9% Midscale w/F&B 10 1,044 59 8,437 10.1% 2 158 2 260 4 418 5.0% 1 52 2 129 2 158 1 602252009.7% Midscale w/o F&B 77 6,621 162 15,823 18.9% 10 744 11 1,157 21 1,901 12.0% 4 494 7 513 4 318 11 782 6 620 4 675 19.8% Economy 54 4,911 207 19,752 23.5% 3 193 3 198 6 391 2.0% 6 521 7 390 1 62 4 229 7 621 0 0 22.5% Independents 12 1,893 94 8,929 10.6% 1 200 1 225 2 425 4.8% 7 1,700 1 416 1 200 0 0 232561,600 12.0% CHAIN SCALE TOTAL 180 18,227 640 83,888 100.0% 19 1,702 21 3,002 40 4,704 5.6% 213,382 20 1,845 10 992 19 1,414 18 1,967 14 3,713 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Hotel 1 318 12 5,202 6.2% 1 8600 1861.7%0 0 0 0 186 0 0 00005.7% Days Inn 3 130 35 3,284 3.9% 0 0 0 0 000.0%00 0 0 000 0 00003.6% Courtyard by Marriott 3 310 20 2,914 3.5% 0 0 0 0 000.0%00 0 0 000 0 00003.2% Suburban Lodge 7 932 22 2,864 3.4% 0 0 0 0 000.0%00 0 0 000 0 00003.1% Hampton Inn 6 517 25 2,667 3.2% 1 6900 1692.6%0 0 1 721690 0 00003.0% Holiday Inn 0 0 12 2,357 2.8% 0 0 0 0 000.0%00 0 0 000 0 00002.6% Sheraton Hotel 0 0 5 2,237 2.7% 0 0 0 0 000.0%00 0 0 000 0 00002.4% Hilton Hotel 0 0 4 2,221 2.6% 0 0 0 0 000.0%00 0 0 000 0 00002.4%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Int'l 20 2,279 74 15,067 18.0% 3 351 1 220 4 571 3.8% 4 535 0 0 3351 1 9011653500 17.6% Cendant 18 1,235 104 9,636 11.5% 2 131 2 260 4 391 4.1% 5 438 2 142 0 0 3 191 6 638 0 0 11.4% Hilton Hotel Corp. 19 2,503 53 8,958 10.7% 1 693569 4 638 7.1% 0 0 5 574 1 69 0 0 11492420 10.4% Six Continents Hotels 12 1,081 46 6,851 8.2% 3 234 3 266 6 500 7.3% 2 474 2 122 1 80 3 234 3 235 1 425 8.5% Choice Hotels 21 1,437 60 5,110 6.1% 4 275 2 98 6 373 7.3% 0 0 2 145 2 150 4 223 0 0 0 0 6.0% Starwood Hotels 0 0 10 4,850 5.8% 0 0 0 0 000.0%00 0 0 000 0 00005.3% Suburban Lodges 9 1,143 27 3,674 4.4% 0 0 0 0 000.0%00 1 39000 0 00004.0% ACCOR 4 394 25 2,873 3.4% 0 0 0 0 000.0%00 1 65000 0 00003.1%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801.
(1) Room supply sources: Smith Travel Research and Lodging Econometrics.
(2) The Current Supply consists of all opened and operating hotels as of September 30, 2001.
(3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
132 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Boston Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Boston CBD 15 3,338 56 15,007 35.2% 4 647 10 2,667 14 3,314 22.1% 7 1,541 5 860 1 33 2 341 8 1,434 10 3,047 39.1% Boston North 16 2,147 51 7,635 17.9% 5 614 4 502 9 1,116 14.6% 3 280 2 200 1 65 3 435 5 601 3 295 17.8% Essex County 10 1,162 64 5,479 12.8% 2 281 1 20 3 301 5.5% 1 65 2 256 0 0 2 281 2 85 0 0 11.5% Cambridge-Lexington 4 679 31 5,452 12.8% 2 335 1 80 3 415 7.6% 0 0 0 0 001 114 2 301 0 0 11.5% Boston Southshore 11 1,340 46 4,786 11.2% 2 160 3 575 5 735 15.4% 1 100 5 813 1 103 1 5712503425 11.1% Boston South/Southwest 3 387 27 4,328 10.1% 0 0 0 0 0 0 0.0% 2 253 1 181 0 0 0 0 0 0 2 253 9.0% MARKET TRACT TOTAL 59 9,053 275 42,687 100.0% 15 2,037 19 3,844 34 5,881 13.8% 14 2,239 15 2,310 3 201 9 1,228 18 2,671 18 4,020 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 6 1,950 44 16,150 37.8% 1 273 3 1,290 4 1,563 9.7% 0 0 3 837 0 0 0 0 252321,040 34.9% Upscale 17 2,171 34 5,504 12.9% 4 549 6 942 10 1,491 27.1% 2 213 5 605 0 0 3 435 5 648 4 621 14.2% Midscale w/F&B 5 775 47 7,056 16.5% 1 571802137 1.9% 2 154 3 310 0 0 1 571802154 14.5% Midscale w/o F&B 15 2,072 33 4,319 10.1% 3 343 2 290 5 633 14.7% 1 129 3 466 1 65 2 278 1 190 2 229 10.0% Economy 9 1,008 29 2,800 6.6% 2 220 0 0 2 220 7.9% 0 0 1 9211031 117 0 0 0 0 5.9% Independents 7 1,077 88 6,858 16.1% 4 595 7 1,242 11 1,837 26.8% 9 1,743 0 0 133 2 341 9 1,230 8 1,976 20.5% CHAIN SCALE TOTAL 59 9,053 275 42,687 100.0% 15 2,037 19 3,844 34 5,881 13.8% 142,239 15 2,310 3 201 9 1,228 18 2,671 18 4,020 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Sheraton Hotel 0 0 9 3,548 8.3% 0 0 0 0 000.0%00 0 0 000 0 00007.0% Marriott Hotel 1 464 7 3,539 8.3% 0 0 1 250 1 250 7.1% 0 0 1 464 0 0 0 0 1 250 0 0 7.5% Holiday Inn 0 0 11 2,245 5.3% 0 0 0 0 000.0%00 0 0 000 0 00004.4% Best Western 1 92 13 1,711 4.0% 0 0 0 0 000.0%2154 1 92000 0 002154 3.7% Courtyard by Marriott 2 335 9 1,292 3.0% 2 300 2 362 4 662 51.2% 0 0 1 181 0 0 1 186 2 301 1 175 3.8% Hilton Hotel 1 600 3 1,234 2.9% 0 0 0 0 000.0%00 0 0 000 0 00002.4% Residence Inn 8 947 10 1,185 2.8% 1 149 3 430 4 579 48.9% 1 128 4 424 0 0 1 149 1 112 3 446 3.7% Westin Hotel 0 0 2 1,147 2.7% 0 0 0 0 000.0%00 0 0 000 0 00002.3%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Int'l 15 2,297 37 7,705 18.0% 4 613 7 1,142 11 1,755 22.8% 1 128 8 1,398 0 0 3 499 4 663 5 721 18.9% Starwood Hotels 1 168 17 5,611 13.1% 0 0 1 80 1 80 1.4% 0 0 1 168 0 0 0 0 1 80 0 0 11.2% Hilton Hotel Corp. 10 1,996 19 4,103 9.6% 2 387 2 340 4 727 17.7% 0 0 2 330 0 0 1 114 3 613 0 0 9.5% Six Continents Hotels 2 274 22 4,086 9.6% 0 0 0 0 000.0%00 0 0 000 0 00008.0% Cendant 2 169 25 3,086 7.2% 0 0 0 0 000.0%00 0 0 000 0 00006.1% Carlson Hospitality 0 0 5 1,887 4.4% 0 0 0 0 000.0%00 0 0 000 0 00003.7% Best Western Int'l 1 92 13 1,711 4.0% 0 0 0 0 000.0%2154 1 92000 0 002154 3.7% Wyndham Int'l 4 903 7 1,663 3.9% 0 0 0 0 000.0%00 1 180 0 0 0 0 00003.3%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801.
(1) Room supply sources: Smith Travel Research and Lodging Econometrics.
(2) The Current Supply consists of all opened and operating hotels as of September 30, 2001. (3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
133 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Chicago Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Chicago CBD 16 4,493 105 31,339 39.1% 1 412 4 2,329 5 2,741 8.7% 4 1,021 4 1,291 0 0 1 412 0 0 8 3,350 39.1% Chicago Dupage Co. 25 2,897 93 13,843 17.3% 4 429 3 320 7 749 5.4% 2 218 0 0 1 127 4 369 1 98 3 373 16.5% Chicago Airport 11 1,947 47 10,568 13.2% 1 362 4 617 5 979 9.3% 2 336 3 455 0 0 1 362 4 426 2 527 13.3% Chicago Northwest 23 2,328 75 9,993 12.5% 5 688 5 710 10 1,398 14.0% 0 0 4 318 2 213 3 261 3 527 2 397 12.7% Chicago South 13 1,131 63 5,690 7.1% 1 85 5 363 6 448 7.9% 5 764 3 226 1 85 5 363 1 82 4 682 7.7% Chicago-Other 8 1,164 74 8,633 10.8% 2 310 4 484 6 794 9.2% 1 150 1 178 1 110 2 289 2 250 2 295 10.7% MARKET TRACT TOTAL 96 13,960 457 80,066 100.0% 14 2,286 25 4,823 39 7,109 8.9% 14 2,489 15 2,468 5 535 16 2,056 11 1,383 21 5,624 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 9 3,238 62 29,319 36.6% 3 1,069 0 0 3 1,069 3.6% 0 0 2 767 0 0 2 774 1 295 0 0 33.9% Upscale 22 3,613 52 10,248 12.8% 2 190 7 2,682 9 2,872 28.0% 6 934 3 548 0 0 3 254 3 394 9 3,158 15.7% Midscale w/F&B 6 673 54 11,072 13.8% 2 285 0 0 2 285 2.6% 1 300 1 50185 1 200 0 0 1 300 13.0% Midscale w/o F&B 32 3,346 77 8,580 10.7% 6 642 11 1,275 17 1,917 22.3% 4 625 6 654 4 450 6 502 5 504 6 1,086 12.4% Economy 24 2,529 81 9,069 11.3% 1 100 3 409 4 509 5.6% 2 380 2 110 0 0 3 259 0 0 3 630 11.1% Independents 3 561 131 11,778 14.7% 0 0 4 457 4 457 3.9% 1 250 1 339 0 0 1 67 2 190 2 450 13.9% CHAIN SCALE TOTAL 96 13,960 457 80,066 100.0% 14 2,286 25 4,823 39 7,109 8.9% 14 2,489 15 2,468 5 535 16 2,056 11 1,383 21 5,624 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Hyatt Hotel 3 1,209 10 5,806 7.3% 0 0 000 0 0.0% 0 0 0 0 0000000 0 6.5% Hilton Hotel 0 0 7 4,987 6.2% 0 0 000 0 0.0% 0 0 0 0 0000000 0 5.6% Holiday Inn 1 121 20 4,834 6.0% 0 0 000 0 0.0% 0 0 0 0 0000000 0 5.4% Marriott Hotel 0 0 7 3,492 4.4% 1 295 0 0 1 295 8.4% 0 0 0 0 000012950 0 4.2% Sheraton Hotel 0 0 5 2,551 3.2% 0 0 000 0 0.0% 0 0 0 0 0000000 0 2.8% Radisson Hotel 0 0 8 2,179 2.7% 0 0 000 0 0.0% 0 0 0 0 0000000 0 2.4% Best Western 2 136 16 1,939 2.4% 1 85 0 0 1 85 4.4% 0 0 1 5018500000 0 2.3% Extended Stay America 10 1,137 15 1,772 2.2% 1 100 0 0 1 100 5.6% 0 0 0 0 0 0 1 100 0 0 0 0 2.1%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr InPermitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Hilton Hotel Corp. 13 2,851 43 12,083 15.1% 0 0 3 502 3 502 4.2% 1 90 2 634 0 0 0 0 2 250 2 342 14.1% Six Continents Hotels 8 842 37 8,570 10.7% 2 312 3 315 5 627 7.3% 0 0 1 86 0 0 4 452 1 175 0 0 10.3% Marriott Int'l 6 895 34 8,561 10.7% 6 1,106 5 982 11 2,088 24.4% 2 425 2 310 2 259 3 552 1 295 7 1,407 12.4% Hyatt Hotel Corp. 3 1,209 10 5,806 7.3% 0 0 000 0 0.0% 0 0 0 0 0000000 0 6.5% Starwood Hotels 1 130 12 5,481 6.8% 0 0 000 0 0.0% 0 0 0 0 0000000 0 6.1% Carlson Hospitality 5 401 15 3,214 4.0% 0 0 198 1 98 3.0% 0 0 1 8400001980 0 3.7% Extended Stay America 12 1,380 17 2,015 2.5% 1 100 0 0 1 100 5.0% 0 0 0 0 0 0 1 100 0 0 0 0 2.4% Best Western Int'l 2 136 16 1,939 2.4% 1 85 0 0 1 85 4.4% 0 0 1 5018500000 0 2.3%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001.
(3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
134 Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Dallas
Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Dallas/Market Center 16 4,450 54 15,650 24.1% 0 0 5 1,008 5 1,008 6.4% 2 291 1 81 0 0 2 210 2 228 3 861 23.9% Dallas North 23 3,154 64 11,582 17.9% 1 127 2 298 3 425 3.7% 1 40 1 244 1 127 1 159 1 40 1 139 17.0% Irving North 31 3,704 46 7,660 11.8% 2 321 1 150 3 471 6.1% 0 0 3 235 0 0 1 153 2 318 0 0 11.5% Plano/Richardson 24 3,033 56 7,030 10.8% 0 0 2 227 2 227 3.2% 0 0 2 741 0 0 1 125 1 102 0 0 10.2% Dallas South-East 22 1,375 77 6,261 9.7% 1 65 4 557 5 622 9.9% 5 400 2 125 1 65 3 210 5 400 1 347 10.3% Dallas-Other 42 4,847 144 16,665 25.7% 6 948 2 473 8 1,421 8.5% 5 1,077 5 446 2 166 3 482 1 86 7 1,764 27.1% MARKET TRACT TOTAL 158 20,563 441 64,848 100.0% 10 1,461 16 2,713 26 4,174 6.4% 13 1,808 14 1,872 4 358 11 1,339 12 1,174 12 3,111 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 7 1,845 33 13,821 21.3% 2 558 3 997 5 1,555 11.3% 2 511 2 581 0 0 1 258 0 0 6 1,808 22.4% Upscale 25 5,152 61 11,891 18.3% 2 303 3 414 5 717 6.0% 1 128 3 625 0 0 3 428 1 150 2 267 18.0% Midscale w/F&B 17 1,212 54 7,925 12.2% 0 0 1 110 1 110 1.4% 0 0 1 65 0 0 1 110 0 0 0 0 11.3% Midscale w/o F&B 52 5,007 97 9,952 15.3% 5 535 7 657 12 1,192 12.0% 1 100 3 220 3 293 6 543 4 456 0 0 15.9% Economy 41 3,212 115 11,414 17.6% 1 65001 65 0.6% 6 420 5 381 1 65 0 0 6 420 0 0 16.8% Independents 16 4,135 81 9,845 15.2% 0 0 2 535 2 535 5.4% 3 649 0 0 0 0 0 0 1 148 4 1,036 15.6% CHAIN SCALE TOTAL 158 20,563 441 64,848 100.0% 10 1,461 16 2,713 26 4,174 6.4% 13 1,808 14 1,872 4 358 11 1,339 12 1,174 12 3,111 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Budget Suites of America 8 2,782 8 2,782 4.3% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00003.9% Courtyard by Marriott 6 828 14 2,055 3.2% 1 153 0 0 1 153 7.4% 0 0 1 121 0 0 1 153 0 0 0 0 3.1% La Quinta Inn 1 129 15 1,903 2.9% 2 295 0 0 2 295 15.5% 0 0 0 0 1 127 0 0 1 168 0 0 3.1% Marriott Hotel 2 630 5 1,867 2.9% 0 0 000 0 0.0% 1 300 0 0 0 0 0 0 0 0 1 300 3.1% Adam's Mark 1 1,844 1 1,844 2.8% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00002.6% Holiday Inn Select 0 0 6 1,649 2.5% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00002.3% Sheraton Hotel 0 0 5 1,639 2.5% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00002.3% Wyndham Hotel 0 0 1 1,620 2.5% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00002.3%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Int'l 20 2,961 42 7,332 11.3% 1 153 4 747 5 900 12.3% 2 511 3 558 0 0 2 312 1 102 4 997 12.3% Hilton Hotel Corp. 11 1,855 31 5,826 9.0% 2 408 4 675 6 1,083 18.6% 0 0 2 648 0 0 4 633 1 150 1 300 9.8% Six Continents Hotels 7 551 27 5,433 8.4% 1 741752 149 2.7% 0 0 0 0 0 0 2 149 0 0 0 0 7.9% Starwood Hotels 1 301 8 2,908 4.5% 0 0 1 350 1 350 12.0% 0 0 0 0 0 0 0 0 0 0 1 350 4.6% Bigelow Cos. 8 2,782 8 2,782 4.3% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00003.9% Wyndham Int'l 1 197 7 2,619 4.0% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00003.7% La Quinta Inns 1 129 15 1,903 2.9% 2 295 0 0 2 295 15.5% 0 0 0 0 1 127 0 0 1 168 0 0 3.1% Adam's Mark 1 1,844 1 1,844 2.8% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00002.6%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001.
(3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
135 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Houston Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Houston North 48 4,083 104 12,734 24.4% 6 822 6 392 12 1,214 9.5% 0 0 10 775 1 59 10 810 1 345 0 0 24.0% Houston West 22 2,925 52 10,291 19.7% 1 69001 69 0.7% 1 100 1 76 1 69 0 0 0 0 1 100 18.0% Houston Northwest 30 2,785 69 8,413 16.1% 2 253 1 60 3 313 3.7% 1 49 6 444 1 82 1 171 2 109 0 0 15.1% Houston East/NASA/Baytown 24 1,686 81 8,244 15.8% 4 213 3 262 7 475 5.8% 2 405 1 56 0 0 6 353 2 222 1 305 15.7% Houston/South 14 1,121 47 8,096 15.5% 4 1,612 6 537 10 2,149 26.5% 4 779 4 455 0 0 7 800 3 274 4 1,854 19.0% Houston Southwest 15 1,269 41 4,451 8.5% 0 0 1 300 1 300 6.7% 1 80 0 0 0 0 0 0 0 0 2 380 8.3% MARKET TRACT TOTAL 153 13,869 394 52,229 100.0% 17 2,969 17 1,551 34 4,520 8.7% 9 1,413 22 1,806 3 210 24 2,134 8 950 8 2,639 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 2 436 23 9,365 17.9% 2 1,545 1 300 3 1,845 19.7% 0 0 0 0 0 0 0 0 1 345 2 1,500 19.3% Upscale 18 1,945 43 8,398 16.1% 5 765 4 375 9 1,140 13.6% 0 0 4 545 0 0 8 1,018 1 122 0 0 16.4% Midscale w/F&B 11 934 50 7,158 13.7% 3 211 0 0 3 211 2.9% 0 0 2 134 2 151 1 60 0 0 0 0 12.7% Midscale w/o F&B 58 4,917 102 9,718 18.6% 2 131 8 525 10 656 6.8% 2 225 8 566 1 59 7 448 4 374 0 0 18.2% Economy 57 4,768 129 12,469 23.9% 4 191 3 150 7 341 2.7% 2 129 8 561 0 0 6 281 2 109 1 80 22.2% Independents 7 869 47 5,121 9.8% 1 126 1 201 2 327 6.4% 5 1,059 0 0 0 0 2 327 0 0 5 1,059 11.2% CHAIN SCALE TOTAL 153 13,869 394 52,229 100.0% 17 2,969 17 1,551 34 4,520 8.7% 9 1,413 22 1,806 3 210 24 2,134 8 950 8 2,639 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Holiday Inn 0 0 13 3,055 5.8% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00005.3% La Quinta Inn 3 422 19 2,390 4.6% 0 0 2 110 2 110 4.6% 0 0 0 0 0 0 2 110 0 0 0 0 4.3% Marriott Hotel 0 0 5 2,148 4.1% 1 345 1 300 2 645 30.0% 0 0 0 0 0 0 0 0 1 345 1 300 4.8% Days Inn 1 38 17 1,717 3.3% 1 60001 603.5%0 0 0 0 0 0 1 6000003.1% Hilton Hotel 0 0 7 1,576 3.0% 1 1,200 0 0 1 1,200 76.1% 0 0 0 0 0 0 0 0 0 0 1 1,200 4.8% Motel 6 2 175 12 1,464 2.8% 0 0 000 0 0.0% 0 0 1 54 0 0 0 0 00002.5% Best Western 10 634 20 1,408 2.7% 2 151 0 0 2 151 10.7% 0 0 2 134 2 151 0 0 00002.7% Crowne Plaza 1 259 4 1,320 2.5% 0 0 000 0 0.0% 0 0 1 259 0 0 0 0 00002.3%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Six Continents Hotels 17 1,686 34 5,864 11.2% 1 59 2 145 3 204 3.5% 0 0 5 583 1 59 1 75 1 70 0 0 10.4% Marriott Int'l 16 1,573 31 5,507 10.5% 3 707 3 492 6 1,199 21.8% 0 0 2 195 0 0 4 554 1 345 1 300 11.5% Hilton Hotel Corp. 12 1,096 32 5,027 9.6% 3 1,553 4 327 7 1,880 37.4% 0 0 1 91 0 0 4 479 2 201 1 1,200 11.9% Cendant 18 980 56 4,740 9.1% 3 155 1 52 4 207 4.4% 3 305 4 180 0 0 4 207 2 225 1 80 9.0% Choice Hotels 15 833 36 2,626 5.0% 1 60 2 126 3 186 7.1% 0 0 2 125 0 0 3 186 0 0 0 0 4.8% ACCOR 2 175 18 2,417 4.6% 0 0 000 0 0.0% 0 0 1 54 0 0 0 0 00004.2% La Quinta Inns 3 422 19 2,390 4.6% 0 0 2 110 2 110 4.6% 0 0 0 0 0 0 2 110 0 0 0 0 4.3% Best Western Int'l 10 634 20 1,408 2.7% 2 151 0 0 2 151 10.7% 0 0 2 134 2 151 0 0 00002.7%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801.
(1) Room supply sources: Smith Travel Research and Lodging Econometrics.
(2) The Current Supply consists of all opened and operating hotels as of September 30, 2001.
(3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
136 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Los Angeles Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Los Angeles Airport 6 731 79 15,797 18.5% 1 532250 3 303 1.9% 1 190 3 324 1 53 1 5023900017.9% Los Angeles CBD 0 0 99 14,497 17.0% 1 207 1 132 2 339 2.3% 0 0 0 0 002 339 0 0 0 0 16.3% Los Angeles Southwest 12 1,364 117 11,140 13.0% 1 711228 2 299 2.7% 3 798 3 349 0 0 1 711603966 13.4% Hollywood-Beverly Hills 6 463 97 10,797 12.6% 2 287 1 370 3 657 6.1% 1 192 0 0 2287 0 0 002562 12.8% Los Angeles East 6 656 106 9,008 10.5% 0 0 1 180 1 180 2.0% 0 0 0 0 000 0 1 180 0 0 10.1% Los Angeles-Other 15 1,946 230 24,278 28.4% 3 476 9 1,447 12 1,923 7.9% 3 628 1 9011944 497 7 1,024 3 836 29.5% MARKET TRACT TOTAL 45 5,160 728 85,517 100.0% 8 1,094 15 2,607 23 3,701 4.3% 8 1,808 7 763 4 534 8 957 11 1,654 8 2,364 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 1 250 61 23,225 27.2% 1 240 2 457 3 697 3.0% 1 430 0 0 1240 0 0 11802707 26.8% Upscale 7 1,016 44 9,823 11.5% 3 389 4 714 7 1,103 11.2% 4 799 2 240 2 247 2 263 4 783 3 609 12.9% Midscale w/F&B 4 323 97 13,003 15.2% 0 0 0 0 000.0%2129 1 105 0 0 0 0 2 129 0 0 14.4% Midscale w/o F&B 7 739 40 3,499 4.1% 2 118 2 189 4 307 8.8% 0 0 3 388 1 47 2 165 1 95 0 0 4.2% Economy 19 1,976 140 10,391 12.2% 1 140 2 250 3 390 3.8% 0 0 1 30002 190 1 200 0 0 11.8% Independents 7 856 346 25,576 29.9% 1 207 5 997 6 1,204 4.7% 1 450 0 0 002 339 2 267 3 1,048 29.9% CHAIN SCALE TOTAL 45 5,160 728 85,517 100.0% 8 1,094 15 2,607 23 3,701 4.3% 8 1,808 7 763 4 534 8 957 11 1,654 8 2,364 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Hilton Hotel 0 0 12 5,163 6.0% 0 0 1 180 1 180 3.5% 0 0 0 0 000 0 1 180 0 0 5.9% Best Western 2 151 45 4,258 5.0% 0 0 0 0 000.0%2129 0 0 000 0 2 129 0 0 4.8% Marriott Hotel 0 0 10 4,001 4.7% 0 0 0 0 000.0%1430 0 0 000 0 001430 4.9% Westin Hotel 0 0 4 3,613 4.2% 0 0 0 0 000.0%00 0 0 000 0 00004.0% Holiday Inn 0 0 15 3,238 3.8% 0 0 0 0 000.0%00 0 0 000 0 00003.6% Sheraton Hotel 0 0 8 2,849 3.3% 0 0 0 0 000.0%00 0 0 000 0 00003.1% Radisson Hotel 0 0 8 2,341 2.7% 0 0 0 0 000.0%00 0 0 000 0 00002.6% Motel 6 1 126 20 2,191 2.6% 0 0 0 0 000.0%00 0 0 000 0 00002.4%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Int'l 9 1,190 40 9,872 11.5% 1 240 2 443 3 683 6.9% 2 622 4 548 1 240 0 0 24432622 12.3% Hilton Hotel Corp. 2 286 31 8,874 10.4% 2 213 5 822 7 1,035 11.7% 0 0 0 0 004 428 2 330 1 277 10.9% Starwood Hotels 0 0 18 8,231 9.6% 0 0 0 0 000.0%00 0 0 000 0 00009.0% Cendant 3 220 91 6,840 8.0% 0 0 1 200 1 200 2.9% 0 0 1 105 0 0 0 0 1 200 0 0 7.7% Six Continents Hotels 1 80 31 5,726 6.7% 2 241 1 95 3 336 5.9% 0 0 1 8022410 0 1950 06.7% Best Western Int'l 2 151 45 4,258 5.0% 0 0 0 0 000.0%2129 0 0 000 0 2 129 0 0 4.8% ACCOR 1 126 24 3,043 3.6% 0 0 0 0 000.0%00 0 0 000 0 00003.3% Carlson Hospitality 1 98 11 2,611 3.1% 0 0 0 0 000.0%00 0 0 000 0 00002.9%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801.
(1) Room supply sources: Smith Travel Research and Lodging Econometrics.
(2) The Current Supply consists of all opened and operating hotels as of September 30, 2001.
(3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
137 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Miami Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Miami Beach 8 1,922 126 18,061 41.1% 6 1,369 6 632 12 2,001 11.1% 0 0 2 529 3 602 4 896 5 503 0 0 41.1% Miami Airport-Civic Center 17 2,113 62 11,851 26.9% 0 0 3 437 3 437 3.7% 1 243 1 109 0 0 0 0 1 100 3 580 25.6% Miami Downtown-North 5 1,033 39 8,219 18.7% 6 880 2 274 8 1,154 14.0% 1 104 2 238 1 15 4 613 3 526 1 104 19.4% Miami South 5 1,152 44 5,851 13.3% 4 590 3 356 7 946 16.2% 0 0 1 490 1 156 4 534 2 256 0 0 13.9% MARKET TRACT TOTAL 35 6,220 271 43,982 100.0% 16 2,839 14 1,699 30 4,538 10.3% 2 347 6 1,366 5 773 12 2,043 11 1,385 4 684 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 6 2,136 30 12,424 28.2% 3 712 0 0 3 712 5.7% 0 0 1 490 0 0 3 712 0 0 0 0 26.9% Upscale 3 465 15 2,833 6.4% 5 1,010 5 689 10 1,699 60.0% 2 347 0 0 3 668 2 293 5 738 2 347 10.0% Midscale w/F&B 2 202 33 5,969 13.6% 0 0 1 100 1 100 1.7% 0 0 0 0 0 0 0 0 1 100 0 0 12.4% Midscale w/o F&B 11 1,281 27 3,507 8.0% 0 0 3 371 3 371 10.6% 0 0 1 131 0 0 1 100 1 96 1 175 7.9% Economy 6 704 28 3,069 7.0% 2 194 2 282 4 476 15.5% 0 0 2 216 0 0 3 314 0 0 1 162 7.3% Independents 7 1,432 138 16,180 36.8% 6 923 3 257 9 1,180 7.3% 0 0 2 529 2 105 3 624 4 451 0 0 35.5% CHAIN SCALE TOTAL 35 6,220 271 43,982 100.0% 16 2,839 14 1,699 30 4,538 10.3% 2 347 6 1,366 5 773 12 2,043 11 1,385 4 684 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Holiday Inn 2 202 11 1,979 4.5% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00004.0% Marriott Hotel 2 539 5 1,811 4.1% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00003.7% Hilton Hotel 0 0 3 1,721 3.9% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00003.5% Wyndham Hotel 0 0 4 1,640 3.7% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00003.4% Days Inn 0 0 11 1,365 3.1% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00002.8% Sheraton Hotel 0 0 2 1,243 2.8% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00002.5% Best Western 0 0 7 1,080 2.5% 0 0 1 100 1 100 9.3% 0 0 0 0 0 0 0 0 1 100 0 0 2.4% Radisson Hotel 0 0 3 1,058 2.4% 1 156 0 0 1 156 14.7% 1 243 0 0 1 156 0 0 0 0 1 243 3.0%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Cendant 1 88 35 4,417 10.0% 0 0 1 120 1 120 2.7% 0 0 0 0 0 0 1 120 0 0 0 0 9.3% Hilton Hotel Corp. 4 548 16 3,846 8.7% 0 0 2 255 2 255 6.6% 0 0 1 131 0 0 0 0 2 255 0 0 8.4% Marriott Int'l 7 1,525 16 3,750 8.5% 4 771 5 705 9 1,476 39.4% 0 0 1 490 1 90 3 632 4 579 1 175 10.7% Six Continents Hotels 4 448 17 3,633 8.3% 1 422 1 100 2 522 14.4% 0 0 0 0 1 422 1 100 0 0 0 0 8.5% Wyndham Int'l 1 157 5 1,797 4.1% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00003.7% Carlson Hospitality 0 0 4 1,320 3.0% 1 156 0 0 1 156 11.8% 1 243 0 0 1 156 0 0 0 0 1 243 3.5% Starwood Hotels 0 0 2 1,243 2.8% 0 0 000 0 0.0% 0 0 0 0 0 0 0 0 00002.5% Best Western Int'l 0 0 7 1,080 2.5% 0 0 1 100 1 100 9.3% 0 0 0 0 0 0 0 0 1 100 0 0 2.4%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001. (3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
138 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: New York Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Manhattan-West 14 3,566 98 35,948 49.6% 5 1,774 2 278 7 2,052 5.7% 2 540 3 265 3 661 2 1,021 3 490 1 420 49.6% Manhattan-East 16 2,120 87 22,728 31.4% 2 348 1 182 3 530 2.3% 1 175 1 143 0 0 2 348 1 182 1 175 30.2% New York NY Area 11 1,502 57 7,109 9.8% 4 535 1 220 5 755 10.6% 2 342 6 799 1 216 3 319 1 92 2 470 10.6% Westchester-Rockland 5 630 44 6,662 9.2% 0 0 4 416 4 416 6.2% 2 440 1 124 0 0 1 9033262440 9.7% MARKET TRACT TOTAL 46 7,818 286 72,447 100.0% 11 2,657 8 1,096 19 3,753 5.2% 7 1,497 11 1,331 4 877 8 1,778 8 1,090 6 1,505 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 7 2,286 50 26,556 36.7% 3 1,672 0 0 3 1,672 6.3% 0 0 0 0 1511 2 1,161 0 0 0 0 36.3% Upscale 5 989 17 5,333 7.4% 0 0 2 244 2 244 4.6% 2 720 2 314 0 0 0 0 22442720 8.1% Midscale w/F&B 4 966 34 7,432 10.3% 3 254 0 0 3 254 3.4% 0 0 1 217 1 85 2 169 0 0 0 0 9.9% Midscale w/o F&B 6 478 14 1,307 1.8% 1 216 4 512 5 728 55.7% 1 140 4 333 1 216 1 9022022360 2.8% Economy 4 466 7 946 1.3% 2 200 0 0 2 200 21.1% 1 250 1 117 0 0 2 200 0 0 1 250 1.8% Independents 20 2,633 164 30,873 42.6% 2 315 2 340 4 655 2.1% 3 387 3 350 1 65 1 158 4 644 1 175 41.1% CHAIN SCALE TOTAL 46 7,818 286 72,447 100.0% 11 2,657 8 1,096 19 3,753 5.2% 7 1,497 11 1,331 4 877 8 1,778 8 1,090 6 1,505 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Hilton Hotel 1 444 7 4,928 6.8% 0 0 0 0 000.0%00 0 0 000 0 00006.3% Marriott Hotel 1 376 7 4,796 6.6% 0 0 0 0 000.0%00 0 0 000 0 00006.2% Sheraton Hotel 1 185 5 2,918 4.0% 0 0 0 0 000.0%00 0 0 000 0 00003.8% Holiday Inn 2 670 9 2,498 3.4% 0 0 0 0 000.0%00 0 0 000 0 00003.2% Helmsley Hotel 0 0 5 2,032 2.8% 0 0 0 0 000.0%00 0 0 000 0 00002.6% Ramada Plaza 1 217 3 2,003 2.8% 0 0 0 0 000.0%00 1 217 0 0 0 0 00002.6% Omni Hotel 0 0 2 1,865 2.6% 0 0 0 0 000.0%00 0 0 000 0 00002.4% Crowne Plaza 0 0 4 1,828 2.5% 0 0 0 0 000.0%00 0 0 000 0 00002.4%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Int'l 5 1,217 19 7,398 10.2% 1 298 1 82 2 380 5.1% 2 560 1 166 0 0 1 298 1 82 2 560 10.7% Hilton Hotel Corp. 3 1,055 11 6,155 8.5% 2 326 3 464 5 790 12.8% 0 0 1 148 1 216 1 110 2 244 1 220 8.9% Six Continents Hotels 3 749 16 5,299 7.3% 0 0 1 90 1 90 1.7% 0 0 1 79001 9000006.9% Starwood Hotels 2 455 11 5,089 7.0% 2 1,374 0 0 2 1,374 27.0% 0 0 0 0 1511 1 863 0 0 0 0 8.3% Cendant 1 217 12 4,262 5.9% 2 200 0 0 2 200 4.7% 1 250 1 217 0 0 2 200 0 0 1 250 6.1% Helmsley Hotels 0 0 5 2,032 2.8% 0 0 0 0 000.0%00 0 0 000 0 00002.6% Choice Hotels 5 322 16 1,919 2.6% 0 0 1 120 1 120 6.3% 0 0 1 58000 0 1 120 0 0 2.6% Omni Hotels 0 0 2 1,865 2.6% 0 0 0 0 000.0%00 0 0 000 0 00002.4%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001.
(3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
139 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Oahu Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Waikiki 1 453 99 31,767 88.1% 0 0 0 0 000.0%00 1 453 0 0 0 0 0 0 0 0 87.3% Oahu Area 1 48 17 4,308 11.9% 0 0 0 0 000.0%1299 0 0 000 0 001299 12.7% MARKET TRACT TOTAL 2 501 116 36,075 100.0% 0 0 0 0 0 0 0.0% 1 299 1 453 0 0 0 0 0 0 1 299 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 1 453 13 11,779 32.7% 0 0 0 0 000.0%00 1 453 0 0 0 0 0 0 0 0 32.4% Upscale 0 0 23 5,141 14.3% 0 0 0 0 000.0%1299 0 0 000 0 001299 15.0% Midscale w/F&B 0 0 22 7,709 21.4% 0 0 0 0 000.0%00 0 0 000 0 0 0 0 0 21.2% Midscale w/o F&B 0 0 0 0 0.0% 0 0 0 0 000.0%00 0 0 000 0 00000.0% Economy 1 48 1 48 0.1% 0 0 0 0 000.0%00 0 0 000 0 00000.1% Independents 0 0 57 11,398 31.6% 0 0 0 0 000.0%00 0 0 000 0 0 0 0 0 31.3% CHAIN SCALE TOTAL 2 501 116 36,075 100.0% 0 0 0 0 000.0% 1 299 1 453 0 0 0 0 001299 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Outrigger 0 0 20 8,007 22.2% 0 0 0 0 000.0%00 0 0 000 0 0 0 0 0 22.0% Sheraton Hotel 0 0 5 4,366 12.1% 0 0 0 0 000.0%00 0 0 000 0 0 0 0 0 12.0% Hilton Hotel 1 453 3 3,483 9.7% 0 0 0 0 000.0%00 1 453 0 0 0 0 00009.6% Marriott Hotel 0 0 2 1,691 4.7% 0 0 0 0 000.0%00 0 0 000 0 00004.6% Best Western 0 0 3 1,690 4.7% 0 0 0 0 000.0%00 0 0 000 0 00004.6% Aston 0 0 10 1,635 4.5% 0 0 0 0 000.0%00 0 0 000 0 00004.5% Hyatt Hotel 0 0 1 1,230 3.4% 0 0 0 0 000.0%00 0 0 000 0 00003.4% Renaissance Hotel 0 0 1 783 2.2% 0 0 0 0 000.0%00 0 0 000 0 00002.2%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Outrigger Hotels 0 0 20 8,007 22.2% 0 0 0 0 000.0%00 0 0 000 0 0 0 0 0 22.0% Starwood Hotels 0 0 7 4,935 13.7% 0 0 0 0 000.0%00 0 0 000 0 0 0 0 0 13.6% Hilton Hotel Corp. 1 453 4 3,796 10.5% 0 0 0 0 000.0%00 1 453 0 0 0 0 0 0 0 0 10.4% Marriott Int'l 0 0 3 2,474 6.9% 0 0 0 0 000.0%1299 0 0 000 0 001299 7.6% Best Western Int'l 0 0 3 1,690 4.7% 0 0 0 0 000.0%00 0 0 000 0 00004.6% Aston Hotels 0 0 10 1,635 4.5% 0 0 0 0 000.0%00 0 0 000 0 00004.5% Hyatt Hotel Corp. 0 0 1 1,230 3.4% 0 0 0 0 000.0%00 0 0 000 0 00003.4% Carlson Hospitality 0 0 1 620 1.7% 0 0 0 0 000.0%00 0 0 000 0 00001.7%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801.
(1) Room supply sources: Smith Travel Research and Lodging Econometrics.
(2) The Current Supply consists of all opened and operating hotels as of September 30, 2001.
(3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
140 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Orlando Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Orlando-International Drive 34 6,876 101 32,759 29.7% 7 3,528 9 3,281 16 6,809 20.8% 3 2,720 5 1,349 1 100 5 1,077 8 3,332 5 5,020 31.9% Lake Buena Vista 12 7,138 46 30,720 27.8% 0 0 3 900 3 900 2.9% 5 1,470 2 1,503 0 0 0 0 250061,870 25.0% Kissimmee East 5 677 103 13,501 12.2% 1 1,406 3 1,589 4 2,995 22.2% 0 0 1 162 0 0 2 1,531 0 0 2 1,464 12.4% Orlando South 14 1,796 51 9,444 8.6% 1 136 2 220 3 356 3.8% 5 775 1 74001 136 2 220 5 775 8.0% Orlando CBD 13 1,864 41 6,573 6.0% 1 2,880 2 455 3 3,335 50.7% 1 1,500 2 372 0 0 1 2,880 1 105 2 1,850 8.6% Orlando-Other 20 2,243 82 17,363 15.7% 2 413 2 247 4 660 3.8% 4 687 1 83002 230 3 530 3 587 14.1% MARKET TRACT TOTAL 98 20,594 424 110,360 100.0% 12 8,363 21 6,692 33 15,055 13.6% 18 7,152 12 3,543 1 100 11 5,854 16 4,687 23 11,566 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 7 2,447 34 19,026 17.2% 4 2,889 3 1,962 7 4,851 25.5% 1 1,500 2 900 0 0 0 0 53,05133,300 19.1% Upscale 24 3,674 45 10,259 9.3% 3 844 6 2,005 9 2,849 27.8% 0 0 3 565 0 0 4 969 4 680 1 1,200 9.9% Midscale w/F&B 5 1,361 71 20,269 18.4% 0 0 0 0 000.0%3950 1 150 0 0 0 0 003950 16.0% Midscale w/o F&B 35 5,032 61 9,802 8.9% 3 344 8 1,011 11 1,355 13.8% 4 565 4 552 1 100 5 599 6 756 3 465 8.8% Economy 20 2,276 93 15,496 14.0% 0 0 1 200 1 200 1.3% 6 1,150 1 83000 0 120061,150 12.7% Independents 7 5,804 120 35,508 32.2% 2 4,286 3 1,514 5 5,800 16.3% 4 2,987 1 1,293 0 0 2 4,286 0 0 7 4,501 33.4% CHAIN SCALE TOTAL 98 20,594 424 110,360 100.0% 12 8,363 21 6,692 33 15,055 13.6% 187,152 12 3,543 1 100 11 5,854 16 4,687 23 11,566 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Days Inn 0 0 23 5,520 5.0% 0 0 1 200 1 200 3.6% 1 300 0 0 000 0 12001300 4.5% Sheraton Hotel 0 0 7 5,125 4.6% 0 0 0 0 000.0%00 0 0 000 0 00003.9% Holiday Inn 2 950 13 4,699 4.3% 0 0 0 0 000.0%00 1 150 0 0 0 0 00003.5% Best Western 2 165 14 2,906 2.6% 0 0 0 0 000.0%00 0 0 000 0 00002.2% Quality Inn 0 0 9 2,889 2.6% 0 0 0 0 000.0%00 0 0 000 0 00002.2% Radisson Hotel 0 0 7 2,802 2.5% 0 0 0 0 000.0%00 0 0 000 0 00002.1% Marriott Hotel 1 500 3 2,777 2.5% 2 1,305 0 0 2 1,305 47.0% 0 0 0 0 000 0 2 1,305 0 0 3.1% Travelodge 0 0 10 2,245 2.0% 0 0 0 0 000.0%1250 0 0 000 0 001250 1.9%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Cendant 1 100 79 16,834 15.3% 0 0 1 200 1 200 1.2% 8 2,070 0 0 000 0 230071,970 14.4% Marriott Int'l 16 3,285 31 9,317 8.4% 4 2,239 2 225 6 2,464 26.4% 1 125 3 526 0 0 1 350 5 2,114 1 125 9.0% Choice Hotels 10 1,175 39 9,133 8.3% 2 208 0 0 2 208 2.3% 0 0 1 7411001 108 0 0 0 0 7.0% Hilton Hotel Corp. 17 2,529 34 7,209 6.5% 0 0 10 4,080 10 4,080 56.6% 1 150 2 355 0 0 2 233 5 847 4 3,150 8.6% Starwood Hotels 1 250 12 6,847 6.2% 0 0 0 0 000.0%00 1 250 0 0 0 0 00005.2% Six Continents Hotels 4 1,162 22 6,464 5.9% 2 494 0 0 2 494 7.6% 0 0 1 150 0 0 2 494 0 0 0 0 5.2% Carlson Hospitality 3 488 13 3,590 3.3% 1 136 0 0 1 136 3.8% 0 0 1 162 0 0 1 136 0 0 0 0 2.8% Best Western Int'l 2 165 14 2,906 2.6% 0 0 0 0 000.0%00 0 0 000 0 00002.2%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001. (3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
141 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Phoenix Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Scottsdale 18 2,719 75 14,028 27.3% 1 750 2 240 3 990 7.1% 3 1,100 0 0 000 0 41,09021,000 28.2% Phoenix West 36 4,004 102 12,580 24.5% 2 1,026 0 0 2 1,026 8.2% 2 139 2 219 1 76 0 0 2 1,025 1 64 24.1% Phoenix East 8 910 39 8,441 16.4% 1 100 2 280 3 380 4.5% 1 300 1 121 0 0 1 100 2 280 1 300 16.0% Mesa/Chandler 15 1,675 54 6,295 12.3% 1 500 2 468 3 968 15.4% 3 448 0 0 000 0 37413675 13.5% Tempe 17 1,878 44 5,530 10.8% 0 0 0 0 000.0%2225 0 0 000 0 11251100 10.1% Phoenix Airport 8 1,400 30 4,447 8.7% 0 0 1 192 1 192 4.3% 0 0 0 0 000 0 001192 8.1% MARKET TRACT TOTAL 102 12,586 344 51,321 100.0% 5 2,376 7 1,180 12 3,556 6.9% 11 2,212 3 340 1 76 1 100 12 3,261 9 2,331 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 5 1,266 33 10,662 20.8% 3 2,200 0 0 3 2,200 20.6% 1 250 0 0 000 0 32,2001 250 23.0% Upscale 19 2,488 42 7,073 13.8% 0 0 3 432 3 432 6.1% 1 120 0 0 000 0 33601192 13.4% Midscale w/F&B 4 389 37 5,170 10.1% 0 0 0 0 000.0%16400 000 0 001649.2% Midscale w/o F&B 41 4,415 81 9,053 17.6% 2 176 1 80 3 256 2.8% 4 428 1 981761 100 3 305 2 203 17.1% Economy 26 2,683 80 8,727 17.0% 0 0 1 121 1 121 1.4% 1 75 2 242 0 0 0 0 2 196 0 0 15.6% Independents 7 1,345 71 10,636 20.7% 0 0 2 547 2 547 5.1% 3 1,275 0 0 000 0 120041,622 21.8% CHAIN SCALE TOTAL 102 12,586 344 51,321 100.0% 5 2,376 7 1,180 12 3,556 6.9% 112,2123 340 1 76 1 100 12 3,261 9 2,331 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Motel 6 0 0 16 2,244 4.4% 0 0 0 0 000.0%00 0 0 000 0 00003.9% Hilton Hotel 0 0 6 2,047 4.0% 0 0 0 0 000.0%1250 0 0 000 0 001250 4.0% Best Western 2 151 17 1,690 3.3% 0 0 0 0 000.0%16400 000 0 001643.1% Marriott Hotel 2 615 5 1,656 3.2% 1 950 0 0 1 950 57.4% 0 0 0 0 000 0 1 950 0 0 4.6% Embassy Suites 1 277 6 1,453 2.8% 0 0 0 0 000.0%00 0 0 000 0 00002.5% Courtyard by Marriott 4 649 8 1,230 2.4% 0 0 0 0 000.0%00 0 0 000 0 00002.2% Hyatt Hotel 0 0 2 1,205 2.3% 0 0 0 0 000.0%00 0 0 000 0 00002.1% Hampton Inn 6 728 10 1,203 2.3% 0 0 0 0 000.0%00 0 0 000 0 00002.1%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Hilton Hotel Corp. 11 1,522 34 6,815 13.3% 0 0 2 200 2 200 2.9% 2 370 0 0 000 0 33201250 12.9% Marriott Int'l 20 3,081 39 6,303 12.3% 1 950 2 312 3 1,262 20.0% 0 0 0 0 000 0 21,0701 192 13.3% Cendant 7 413 39 3,947 7.7% 1 100 0 0 1 100 2.5% 3 325 0 0 001 100 2 225 1 100 7.7% Choice Hotels 10 880 31 3,086 6.0% 1 7600 1762.5%1103 0 0 176 0 0 001103 5.7% ACCOR 4 502 21 2,867 5.6% 0 0 0 0 000.0%00 0 0 000 0 00005.0% Six Continents Hotels 3 329 15 2,777 5.4% 0 0 0 0 000.0%00 0 0 000 0 00004.9% Best Western Int'l 2 151 17 1,690 3.3% 0 0 0 0 000.0%16400 000 0 001643.1% Hyatt Hotel Corp. 0 0 2 1,205 2.3% 0 0 0 0 000.0%00 0 0 000 0 00002.1%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001. (3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequently come to fruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
142 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: San Diego Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share San Diego CBD 6 889 61 12,518 25.2% 2 1,013 2 383 4 1,396 11.2% 6 1,946 2 207 0 0 0 0 581252,530 28.1% San Diego North 10 1,016 129 10,041 20.2% 6 1,272 2 202 8 1,474 14.7% 1 138 1 7022325 1,134 1 108 1 138 20.6% Mission Valley 3 365 58 9,963 20.0% 1 107 2 203 3 310 3.1% 1 192 0 0 001 107 1 66 2 329 18.5% La Jolla-Point Loma 0 0 68 8,277 16.6% 1 175 3 410 4 585 7.1% 1 125 0 0 002 255 1 120 2 335 15.9% San Diego South 0 0 65 4,952 10.0% 0 0 0 0 000.0%1100 0 0 000 0 11000 08.9% Carlsbad-Oceanside 7 1,257 37 3,992 8.0% 2 206 1 250 3 456 11.4% 1 70 0 0 198 1 108 1 70 1 250 8.0% MARKET TRACT TOTAL 26 3,527 418 49,743 100.0% 12 2,773 10 1,448 22 4,221 8.5% 11 2,571 3 277 3 330 9 1,604 10 1,276 11 3,582 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 3 853 22 9,576 19.3% 3 1,297 1 250 4 1,547 16.2% 0 0 1 30001 284 1 263 2 1,000 19.7% Upscale 8 1,151 26 5,360 10.8% 1 246 4 497 5 743 13.9% 3 400 0 0 003 420 3 393 2 330 11.5% Midscale w/F&B 4 280 60 7,940 16.0% 0 0 0 0 000.0%1100 0 0 000 0 11000 014.2% Midscale w/o F&B 6 594 28 3,081 6.2% 3 351 3 311 6 662 21.5% 4 471 2 247 2 232 1 119 4 340 3 442 7.5% Economy 4 559 91 7,881 15.8% 2 215 0 0 2 215 2.7% 0 0 0 0 002 215 0 0 0 0 14.3% Independents 1 90 191 15,905 32.0% 3 664 2 390 5 1,054 6.6% 3 1,600 0 0 198 2 566 1 180 4 1,810 32.8% CHAIN SCALE TOTAL 26 3,527 418 49,743 100.0% 12 2,773 10 1,448 22 4,221 8.5% 112,5713 277 3 330 9 1,604 10 1,276 11 3,582 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Best Western 4 280 28 2,705 5.4% 0 0 0 0 000.0%00 0 0 000 0 00004.8% Marriott Hotel 0 0 5 2,629 5.3% 1 284 0 0 1 284 10.8% 0 0 0 0 001 284 0 0 0 0 5.2% Holiday Inn 0 0 10 2,506 5.0% 0 0 0 0 000.0%00 0 0 000 0 00004.4% Motel 6 0 0 13 1,722 3.5% 0 0 0 0 000.0%00 0 0 000 0 00003.0% Hilton Hotel 2 282 7 1,613 3.2% 0 0 0 0 000.0%00 1 30000 0 00002.9% Days Inn 0 0 15 1,505 3.0% 0 0 0 0 000.0%00 0 0 000 0 00002.7% Sheraton Hotel 0 0 1 1,044 2.1% 0 0 0 0 000.0%00 0 0 000 0 00001.8% Radisson Hotel 0 0 4 1,018 2.0% 0 0 0 0 000.0%00 0 0 000 0 00001.8%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Cendant 0 0 64 5,089 10.2% 0 0 0 0 000.0%4391 0 0 000 0 32661125 9.7% Hilton Hotel Corp. 6 819 20 4,448 8.9% 0 0 5 624 5 624 14.0% 1 138 3 277 0 0 1 8032942388 9.2% Marriott Int'l 5 783 15 4,231 8.5% 2 530 2 231 4 761 18.0% 1 192 0 0 003 624 0 0 2 329 9.2% Six Continents Hotels 1 80 20 3,380 6.8% 3 351 0 0 3 351 10.4% 1 180 0 0 2232 1 119 0 0 1 180 6.9% Best Western Int'l 4 280 28 2,705 5.4% 0 0 0 0 000.0%00 0 0 000 0 00004.8% Starwood Hotels 0 0 5 2,274 4.6% 1 263 0 0 1 263 11.6% 0 0 0 0 000 0 12630 04.5% ACCOR 0 0 13 1,722 3.5% 0 0 0 0 000.0%00 0 0 000 0 00003.0% Carlson Hospitality 0 0 4 1,018 2.0% 0 0 0 0 000.0%00 0 0 000 0 00001.8%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001. (3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequentlycometofruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
143 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: San Francisco Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share San Francisco-Market St. 2 621 77 15,952 33.4% 4 1,295 3 1,100 7 2,395 15.0% 1 203 0 0 2682 2 613 1 200 3 1,103 34.7% S.F.-Nob Hill/Wharf 2 357 131 15,565 32.6% 0 0 0 0 000.0%1500 1 252 0 0 0 0 001500 30.0% San Francisco Area 19 1,754 103 8,327 17.4% 6 394 6 842 12 1,236 14.8% 3 230 2 322 4 247 3 242 5 577 3 400 18.3% San Francisco Airport 9 1,217 41 7,917 16.6% 4 495 2 183 6 678 8.6% 2 532 2 252 2 173 3 428 1 77 2 532 17.0% MARKET TRACT TOTAL 32 3,949 352 47,761 100.0% 14 2,184 11 2,125 25 4,309 9.0% 7 1,465 5 826 8 1,102 8 1,283 7 854 9 2,535 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 3 847 32 16,852 35.3% 2 639 1 400 3 1,039 6.2% 0 0 1 261 1 277 1 362 0 0 1 400 33.4% Upscale 7 1,152 19 4,131 8.6% 2 582 2 386 4 968 23.4% 2 200 1 152 1 405 1 177 1 186 3 400 9.9% Midscale w/F&B 2 145 34 6,460 13.5% 1 851106 2 191 3.0% 0 0 1 100 1 85 1 106 0 0 0 0 12.4% Midscale w/o F&B 5 545 15 1,513 3.2% 5 515 2 180 7 695 45.9% 0 0 2 313 3 275 2 240 2 180 0 0 4.1% Economy 6 516 52 3,407 7.1% 1 292203 3 232 6.8% 0 0 0 0 129 1 951108006.8% Independents 9 744 200 15,398 32.2% 3 334 3 850 6 1,184 7.7% 5 1,265 0 0 131 2 303 3 380 5 1,735 33.3% CHAIN SCALE TOTAL 32 3,949 352 47,761 100.0% 14 2,184 11 2,125 25 4,309 9.0% 7 1,465 5 826 8 1,102 8 1,283 7 854 9 2,535 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Hyatt Hotel 0 0 5 2,956 6.2% 0 0 0 0 000.0%00 0 0 000 0 00005.5% Marriott Hotel 1 163 4 2,797 5.9% 0 0 0 0 000.0%00 0 0 000 0 00005.2% Holiday Inn 0 0 6 2,369 5.0% 0 0 0 0 000.0%00 0 0 000 0 00004.4% Hilton Hotel 0 0 3 2,364 4.9% 0 0 0 0 000.0%00 0 0 000 0 00004.4% Best Western 0 0 16 1,894 4.0% 0 0 0 0 000.0%00 0 0 000 0 00003.5% Westin Hotel 0 0 2 1,577 3.3% 0 0 0 0 000.0%00 0 0 000 0 00002.9% Sheraton Hotel 0 0 3 1,480 3.1% 0 0 0 0 000.0%00 0 0 000 0 00002.8% Renaissance Hotel 0 0 2 1,401 2.9% 0 0 0 0 000.0%00 0 0 000 0 00002.6%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Int'l 5 910 17 6,157 12.9% 2 500 0 0 2 500 8.1% 1 160 2 413 1 405 1 95001160 12.7% Hilton Hotel Corp. 5 617 12 4,257 8.9% 2 264 2 183 4 447 10.5% 0 0 1 611872 283 1 77 0 0 8.8% Six Continents Hotels 2 334 16 4,195 8.8% 1 145 1 200 2 345 8.2% 0 0 1 252 0 0 1 145 0 0 1 200 8.5% Starwood Hotels 2 523 8 3,815 8.0% 0 0 0 0 000.0%00 1 100 0 0 0 0 00007.1% Cendant 3 131 43 3,326 7.0% 2 188 1 95 3 283 8.5% 0 0 0 0 2188 1 9500006.7% Hyatt Hotel Corp. 0 0 5 2,956 6.2% 0 0 0 0 000.0%00 0 0 000 0 00005.5% Best Western Int'l 0 0 16 1,894 4.0% 0 0 0 0 000.0%00 0 0 000 0 00003.5% Choice Hotels 2 95 15 1,514 3.2% 1 851103 2 188 12.4% 0 0 0 0 185 0 0 11030 03.2%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001. (3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequentlycometofruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Tampa
Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Tampa Downtown-Airport 12 2,081 44 9,387 24.3% 3 394 2 273 5 667 7.1% 2 325 2 149 1 149 3 397 1 121 2 325 24.7% Saint Petersburg 2 262 93 8,930 23.1% 0 0 2192 2 192 2.2% 0 0 0 000 192 1 100 0 0 21.7% Clearwater 8 784 83 7,288 18.9% 3 253 0 0 3 253 3.5% 4 449 1 121 2 203 1 50 3 199 1 250 19.0% Tampa North-Busch Gardens 15 1,604 43 5,604 14.5% 1 205 1 100 2 305 5.4% 2 365 0 01205 0 0 2 165 1 300 15.0% Tampa East 12 1,185 38 4,084 10.6% 1 150 2 280 3 430 10.5% 2 166 0 000 2 350 1 80 2 166 11.2% Tarpon Springs/New Port Richey 3 253 27 3,320 8.6% 2 183 0 0 2 183 5.5% 0 0 1 82 0 0 2 183 0 000 8.4% MARKET TRACT TOTAL 52 6,169 328 38,613 100.0% 10 1,185 7 845 17 2,030 5.3% 10 1,305 4 352 4 557 9 1,072 8 665 6 1,041 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 2 971 15 5,379 13.9% 0 0 000 0 0.0% 0 0 0 000 000 000 12.8% Upscale 9 1,005 26 4,768 12.3% 4 614 0 0 4 614 12.9% 0 0 0 01205 3 409 0 000 12.8% Midscale w/F&B 1 99 50 6,931 17.9% 0 0 1100 1 100 1.4% 0 0 0 000 001 100 0 0 16.8% Midscale w/o F&B 29 2,607 52 5,177 13.4% 6 571 3 272 9 843 16.3% 2 139 2 168 3 352 4 311 4 319 0 0 14.7% Economy 10 1,127 60 6,682 17.3% 0 0 1121 1 121 1.8% 4 331 2 184 0 0 002 186 3 266 17.0% Independents 1 360 125 9,676 25.1% 0 0 2352 2 352 3.6% 4 835 0 000 2 352 1 60 3 775 25.9% CHAIN SCALE TOTAL 52 6,169 328 38,613 100.0% 10 1,185 7 845 17 2,030 5.3% 10 1,305 4 352 4 557 9 1,072 8 665 6 1,041 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Days Inn 0 0 16 2,361 6.1% 0 0 000 0 0.0% 0 0 0 000 000 000 5.6% Best Western 0 0 17 1,742 4.5% 0 0 000 0 0.0% 0 0 0 000 000 000 4.2% Ramada Inn 0 0 9 1,605 4.2% 0 0 000 0 0.0% 0 0 0 000 000 000 3.8% Holiday Inn 0 0 8 1,524 3.9% 0 0 1100 1 100 6.6% 0 0 0 000 001 100 0 0 3.9% Marriott Hotel 1 717 3 1,312 3.4% 0 0 000 0 0.0% 0 0 0 000 000 000 3.1% Hilton Hotel 0 0 4 1,121 2.9% 0 0 000 0 0.0% 0 0 0 000 000 000 2.7% Hampton Inn 4 358 10 1,019 2.6% 0 0 000 0 0.0% 0 0 1 86 0 0 000 000 2.4% Sheraton Hotel 0 0 3 974 2.5% 0 0 000 0 0.0% 0 0 0 000 000 000 2.3%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Cendant 3 255 52 6,605 17.1% 0 0 000 0 0.0% 0 0 0 000 000 000 15.7% Hilton Hotel Corp. 9 1,096 23 3,920 10.2% 2 234 1 92 3 326 8.3% 0 0 1 86 0 0 3 326 0 000 10.1% Six Continents Hotels 6 496 23 3,808 9.9% 2 161 3 280 5 441 11.6% 0 0 1 82 1 761853 280 0 0 10.1% Marriott Int'l 11 1,700 20 3,375 8.7% 4 535 0 0 4 535 15.9% 1 79 0 02276 2 259 1 79 0 0 9.5% Choice Hotels 6 439 22 2,093 5.4% 1 50001 50 2.4% 1 60 0 000 150 1 60 0 0 5.3% Starwood Hotels 1 99 5 1,923 5.0% 0 0 000 0 0.0% 0 0 0 000 000 000 4.6% Best Western Int'l 0 0 17 1,742 4.5% 0 0 000 0 0.0% 0 0 0 000 000 000 4.2% Hyatt Hotel Corp. 0 0 2 966 2.5% 0 0 000 0 0.0% 0 0 0 000 000 000 2.3%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001. (3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequentlycometofruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too. Lodging Outlook 2002 — January 18, 2002
Third-Quarter 2001 Pipeline Summary: Washington, D.C. Current Supply Development Pipeline Scheduled Completions Tract Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Washington, DC-CBD 9 1,849 107 25,680 32.7% 3 507 3 1,003 6 1,510 5.9% 0 0 1 175 1 237 2 270 1 220 2 783 31.1% Fairfax 23 2,873 74 13,183 16.8% 6 920 5 866 11 1,786 13.5% 2 615 2 207 4 608 2 312 5 807 2 674 17.8% Arlington 1 176 37 9,480 12.1% 3 686 1 220 4 906 9.6% 1 227 0 0 002 350 1 336 2 447 12.1% Suburban Virginia Area 23 2,129 56 6,954 8.8% 0 0 7 660 7 660 9.5% 7 1,161 5 530 0 0 5 391 2 325 7 1,105 10.0% Frederick-Rockville 15 1,658 48 6,774 8.6% 1 90 1 70 2 160 2.4% 2 310 1 80 0 0 2 160 0 0 2 310 8.3% Washington, DC-Other 12 1,292 122 16,530 21.0% 2 360 4 586 6 946 5.7% 4 552 1 80 0 0 3 450 4 501 3 547 20.6% MARKET TRACT TOTAL 83 9,977 444 78,601 100.0% 15 2,563 21 3,405 36 5,968 7.6% 16 2,865 10 1,072 5 845 16 1,933 13 2,189 18 3,866 100.0%
Current Supply Development Pipeline Scheduled Completions Chain Scale Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Upper Upscale 4 842 66 25,216 32.1% 3 663 3 783 6 1,446 5.7% 1 525 0 0 1237 1 90248631,158 31.1% Upscale 18 2,763 53 10,764 13.7% 7 1,104 4 600 11 1,704 15.8% 8 1,416 3 453 3 465 5 729 6 940 5 986 15.9% Midscale w/F&B 1 265 70 13,187 16.8% 1 233 0 0 1 233 1.8% 0 0 0 0 001 233 0 0 0 0 15.3% Midscale w/o F&B 37 3,587 77 8,708 11.1% 3 383 9 922 12 1,305 15.0% 3 352 6 520 1 143 7 641 3 343 4 530 11.9% Economy 22 2,366 84 9,202 11.7% 0 0 2 260 2 260 2.8% 1 122 1 99001 6012001122 11.0% Independents 1 154 94 11,524 14.7% 1 180 3 840 4 1,020 8.9% 3 450 0 0 001 180 1 220 5 1,070 14.9% CHAIN SCALE TOTAL 83 9,977 444 78,601 100.0% 15 2,563 21 3,405 36 5,968 7.6% 162,865 10 1,072 5 845 16 1,933 13 2,189 18 3,866 100.0%
Current Supply Development Pipeline Scheduled Completions Top Brands Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Hotel 0 0 18 8,007 10.2% 1 336 1 250 2 586 7.3% 1 525 0 0 000 0 13362775 10.4% Holiday Inn 0 0 22 5,347 6.8% 0 0 0 0 000.0%00 0 0 000 0 00006.1% Hyatt Hotel 0 0 9 4,465 5.7% 0 0 0 0 000.0%00 0 0 000 0 00005.1% Hilton Hotel 1 241 10 4,247 5.4% 0 0 0 0 000.0%00 0 0 000 0 00004.9% Best Western 0 0 24 3,460 4.4% 0 0 0 0 000.0%00 0 0 000 0 00004.0% Courtyard by Marriott 5 822 18 2,973 3.8% 1 191 2 356 3 547 18.4% 4 726 1 157 1 191 0 0 35313551 4.9% Days Inn 0 0 19 2,707 3.4% 0 0 1601602.2%0 0 0 0 001 6000003.2% Comfort Inn 1 82 18 2,353 3.0% 0 0 1701703.0%0 0 0 0 001 7000002.8%
Current Supply Development Pipeline Scheduled Completions Top Companies Opens 97-3Q01 (1) Supply 3Q 01 (2) MarketUnder Constr In Permitting Active Pipeline (3) Change Early Planning 1Q-3Q 2001 4Q 2001 2002 2003 Beyond 2003 Market Hotels Rooms Hotels Rooms Share Hotels Rooms Hotels Rooms Hotels Rooms in Supply Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Share Marriott Int'l 25 3,427 67 16,919 21.5% 6 1,067 4 755 10 1,822 10.8% 9 2,023 3 364 1 191 4 540 5 1,042 9 2,072 23.7% Hilton Hotel Corp. 15 2,004 45 10,478 13.3% 3 499 5 878 8 1,377 13.1% 0 0 2 255 1 149 4 541 2 304 1 383 13.6% Six Continents Hotels 2 130 34 7,746 9.9% 2 376 5 512 7 888 11.5% 1 90 0 0 1143 3 373 3 343 1 119 10.0% Choice Hotels 10 829 50 5,730 7.3% 1 792160 3 239 4.2% 0 0 4 354 0 0 3 239 0 0 0 0 6.8% Cendant 2 84 48 5,584 7.1% 0 0 2 260 2 260 4.7% 2 222 0 0 001 6012002222 6.9% Hyatt Hotel Corp. 0 0 9 4,465 5.7% 0 0 0 0 000.0%00 0 0 000 0 00005.1% Best Western Int'l 0 0 24 3,460 4.4% 0 0 0 0 000.0%00 0 0 000 0 00004.0% Starwood Hotels 1 265 12 3,164 4.0% 0 0 0 0 000.0%00 0 0 000 0 00003.6%
Source: Bear, Stearns & Co. Inc.; Lodging Econometrics, The Research Division of National Hotel Realty, Portsmouth, NH 03801. (1) Room supply sources: Smith Travel Research and Lodging Econometrics. (2) The Current Supply consists of all opened and operating hotels as of September 30, 2001. (3) Active Pipeline refers to projects Under Construction and those projects in the Permitting stage. This chart uses Market Tracts and Chain Scales as defined by Smith Travel Research. Casinos are included as Independents. Scheduled Completions is not a forecast of all new openings in the years ahead. It is only an estimate of the likely flow of completed projects from the existing known Development Pipeline based on Developers' present estimates of their project timelines. The table does not account for project delays that frequently occur or projects that may be announced in the future, enter the pipeline and subsequentlycometofruition. Statistics in this chart represent the projects in the Development Pipeline as of September 30, 2001. Caution should be used when forecasting the number of projects that will actually come to fruition. The attrition rate for the projects In Permitting can be up to 25% and the attrition rate for projects in Early Planning can be up to 60%. As successful projects move forward, the number of planned rooms frequently decreases. During difficult financing periods, time lines can lengthen, too.
146 Bear, Stearns & Co. Inc. Lodging Outlook 2002 — January 18, 2002
Smith Travel Chain Scale Breakdown by Brand
Upper-Upscale Upscale Midscale With F&B Midscale Without F&B Economy
Amfac Adam's Mark Best Western Amerihost Admiral Benbow Lexington Hotel Suites Caesars Amerisuites Clarion Baymont Inns & Suites Americinn Mainstay Suites Doral Aston Doubletree Club Bradford Homesuites Best Hotels Masters Inn Doubletree Guest Suites Camino Real Four Points Cabot Lodge Best Inns Mcintosh Motor Inn Embassy Suites Club Med Garden Plaza Candlewood Hotel Budget Host Inn Microtel Inn Fairmont Hotel Colony Golden Tulip Clubhouse Inns Of America Country Hearth Inn Motel 6 Four Seasons Courtyard Harley Hotel Comfort Inn Cricket Inn Motel Orleans Helmsley Hotel Crowne Plaza Harvey Hotel Comfort Suites Cross Country Inn National 9 Hilton Delta Hotels Hawthorn Inn & Suites Conley Inn Crossland Suites Nendels Hotel Sofitel Doubletree Hotels Holiday Inn Country Inn & Suites Days Inn Passport Inn Hyatt Embassy Vacation Resorts Holiday Inn Select Drury Inn Downtowner Motor Inn Ramada Limited Inter-Continental Garden Inn Howard Johnson Fairfield Inn Econo Lodge Red Carpet Inn Le Meridien Harrah's Jolly Hotels Hampton Inn Envoy Inn Red Roof Inn Loews Hawthorn Suites Little America Hampton Inn Suites Exel Inn Relax Inn Luxury Collection Hilton Garden Inn Ohana Hotels Heartland Extended Stay America Roadstar Inn Marriott Homewood Suites Outrigger Holiday Inn Express E-Z 8 Rodeway Inn Marriott International Hotel Novotel Park Inn Innsuites Hotels Family Inns Of America Scottish Inn Millennium Hotels Marc Quality Key West Inns & Suites Friendship Inn Select Inn New Otani Hotels Park Plaza Quality Suites La Quinta Good Nite Inn Select Suites Nikko Radisson Ramada Lee's Inn Of America Great Western Shoney's Inn Omni Red Lion Romantik Hotel Master Hosts Inn Guesthouse Inns Studio 6 Pan Pacific Hotels Regal Sheraton Inn Park Inn Suite Hotel Ha' Penny Studio Plus Preferred Residence Inn Sunspree Resorts Pear Tree Inn Homegate Suburban Lodge Raphael Hotel Westmark Wandlyn Inn Shilo Inn Homestead Super 8 Renaissance Woodfield Suites Westcoast Sierra Suites Hometown Inn Susse Chalet Ritz-Carlton Woodfin Suites Signature Inn Howard Johnson Express Thriftlodge Sheraton Wyndham Garden Hotel Sleep Inn Imperial Inns Thrifty Inn Sonesta Hotel Springhill Suites Inn Town Suites Travel Inn Starhotels Staybridge Suites Inncal Travelers Inn Summerfield Suites Towneplace Suites Innkeeper Travelodge Swissotel Wellesley Inn Inns Of America Usa Inn W Hotel Wellesley Suites Interstate Inn Vagabond Inn Westin Wingate Inn Jameson Inn Villager Lodge Wyndham Key West Inn Wilson Wyndham Grand Bay Kings Inn Wynfield Inn Wyndham Grand Heritage Knights Inn
Bear, Stearns & Co. Inc. 147 Lodging Outlook 2002 — January 18, 2002
Useful Travel Industry World Wide Web Pages
Newspapers/News Sources Hotel and Motel Management www.hmmonline.com Hotel Interactive www.hotelinteractive.com Hotel Business www.hotelbusiness.com Real Estate Forum www.reforum.com Lodging Magazine www.lodgingmagazine.com Tourism and Hospitality Journal www.amcity.com/journals/tourism_hospitality HOTELS Magazine www.hotelsmag.com Associations National Business Travel Association www.nbta.org American Resort Development Association www.arda.com Travel Industry Association of America www.tia.com American Hotel and Motel Association www.ahma.com Air Transport Association www.air-transport.org Hotel Links and Booking Sites www.priceline.com www.fodors.com www.HotelsOnline.com www.4hotel.com www.ase.com www.concierge.com www.guests.com www.leisureplanet.com www.all-hotels.com www.thebestintheworld.com www.hoteldiscount.com www.expedia.com www.travelocity.com www.hotelbook.com www.world-tourism.org www.vacationspot.com www.lodgenet.com www.travelbybus.com Lodging Industry/Market Research Tourism Industries www.tinet.ita.doc.gov Smith Travel Research www.wwstar.com Lodging Econometrics www.lodgingresearch.com Nareit www.nareit.com Companies Starwood Hotels & Resorts www.starwoodhotels.com Sunburst Hospitality www.sunbursthospitality.com Extended Stay America www.extendedstay.com MeriStar Hotels & Resorts www.meristar.com Promus Hotel www.promus.com Homestead Village www.homesteadvillage.com Hilton Hotels www.hilton.com Sholodge www.sholodge.com Marriott International www.marriott.com Candlewood Hotel Company www.candlewoodhotel.com Four Seasons www.fourseasons.com J.Q. Hammons www.jqhhotels.com Choice Hotels International www.choicehotels.com Host Marriott www.hostmarriott.com Prime Hospitality www.primehospitality.com Innkeepers USA Trust www.innkeepersusa.com Lodgian www.lodgian.com Winston Hotels www.winstonhotels.com Suburban Lodges www.suburbanlodge.com Equity Inns www.equityinns.com US Franchise Systems www.usfsi.com Hospitality Properties Trust www.hptreit.com Wyndham International www.wyndham.com FelCor Lodging Trust www.felcor.com Crestline Capital Corp. www.crestlinecapital.com RFS Hotel Investors www.rfshotel.com Bristol Hotels & Resorts www.bristolhotels.com LaSalle Hotel Properties www.lasallehotels.com WestCoast Hospitality Corp. www.westcoasthotels.com
148 Bear, Stearns & Co. Inc.
Global High Yield Research Department
HIGH YIELD RESEARCH LATIN AMERICAN CORPORATE RESEARCH
DIRECTOR OF HIGH YIELD RESEARCH DIRECTOR OF LATIN AMERICAN CORPORATE RESEARCH Michael S. Hyland, CFA, (212) 272-6854 Carl Ross, (212) 272-9040
Chemicals/Paper and Forest Products Energy and Power Francine L. Brodowicz, (212) 272-2790 Robijn Hornstra, (212) 272-8611 Geoffrey R. Smith, (212) 272-6925 Alexander Monroy, (212) 272-3545
Consumer Products/Retail/ Retail/Food/Steel/Diversified/ Food, Beverages and Restaurants Cable and Media/Telecommunications Shelley R. Ben Nathan, (212) 272-7437 A. Daniel Lerner, (212) 272-4297 Karen Miller, (212) 272-3392 Stephen Balinskas, (212) 272-4216
Energy Gary Stromberg, (212) 272-6777 EMERGING MARKETS SOVEREIGN RESEARCH Andrea Wagner (212) 272-2877 DIRECTOR OF EMERGING MARKETS SOVEREIGN RESEARCH Gaming/Lodging and Leisure Carl Ross, (212) 272-9040 Jason N. Ader, (212) 272-4257 Jason M. Kroll, CFA, (212) 272-9621 Asia/Pacific Mark J. Falcone, (212) 272-7335 John Stuermer, +44 (20) 7516-6284 John Mulkey, (212) 272-9880 Latin America Health Care Carl Ross, (212) 272-9040 Amy S. Brown, (212) 272-3228 Jose Cerritelli, (212) 272-9097 Ted Bronstein, (212) 272-9010 Franco Uccelli, (212) 272-9325
Industrials/Technology/ Eastern Europe, Middle East, Africa Wireline Telecommunications Timothy Ash, +44 (20) 7516-5231 Alexi Coscoros, (212) 272-2687 Natasha Selver, (212) 272-5936
Media/Cable PUBLISHING Stephen W. Weiss, (212) 272-2966 Ruchir N. Parekh, (212) 272-9655 Mark Albright, (212) 272-6069, Managing Editor Valerie L. Whalen, (212) 272-9311 John Foy, (212) 272-8101 Brenda Lee, (212) 272-4475 Wireless Telecommunications/Towers Colleen Pickett, (212) 272-8850 Sandy Liang, CFA, (212) 272-8387 Ariel Rothman, (212) 272-8816
STRATEGY AND INDEX ANALYTICS
Michael Taylor, (212) 272-7791
The securities mentioned herein may not be eligible for sale in all states. Verify the Blue Sky status prior to client solicitation. Any recommendation contained in this report may not be suitable for all investors. Moreover, although the information contained herein has been obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. Bear Stearns may make markets and effect transactions, including transactions contrary to any recommendations herein, or have positions in the securities mentioned herein (or options with respect thereto) and also may have performed investment banking services for the issuers of such securities. Although Bear, Stearns may at times elect to make markets in particular high yield securities, there can be no assurance that its market making will be continuous. In addition, employees of Bear Stearns may have positions and effect transactions in the securities or options of the issuers mentioned herein and may serve as directors of such issuers. ©2002. All rights reserved by Bear, Stearns & Co. Inc. Bear Stearns® is a registered trademark of The Bear Stearns Companies Inc. HYLodging2002.qxd 1/16/02 11:57 AM Page 1 BEAR STEARNS
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