Hotel IntelligenceWashington, D.C.April 2013

Market Insight • Lodging fundamentals have marked double-digit improvements

in year-to-date 2013, driven by the demand surges during the presidential inauguration.

• Despite relatively flat RevPAR performance in 2012, hotel acquisition volume in 2012 reached a five-year high.

• The sale of the 888-room Grand Hyatt for $400 million in 2012 represented the largest hotel transaction on record in Washington, D.C.

• Anchored by a stable and diversified economy, Washington, D.C. will remain a core hotel investment market.

“ Home to the U.S. federal government and centrally

located on the country’s eastern seaboard,

Washington, D.C. is a key international gateway

market. An extremely stable economy, anchored

by the political activity surrounding the nation’s

capital, creates a strong base of demand for local

hotels. Hotel transaction volume reached a five-year

high in 2012.

Following what is temporarily expected to be a quiet

transactions market as investors gain more clarity

on the effects on lodging fundaments of government

sequestration budget cuts, deal flow should pick

up in the second half of 2013. Washington, D.C.

will remain a highly sought after hotel investment

market, and signs point to increasing interest from

off-shore buyers in the future.”

Arthur Adler Managing Director and CEO-Americas Hotels & Hospitality Group

Jones Lang LaSalle’s Hotels & Hospitality Group serves as the hospitality industry’s global leader in real estate services for luxury, upscale, select service and budget hotels; timeshare and fractional ownership properties; convention centers; mixed-use developments and other hospitality properties. The firm’s more than 265 dedicated hotel and hospitality experts partner with investors and owner/operators around the globe to support and shape investment strategies that deliver maximum value throughout the entire lifecycle of an asset. In the last five years, the team completed more transactions than any other hotels and hospitality real estate advisor in the world totaling nearly US$25 billion, while also completing approximately 4,000 advisory and valuation assignments. The group’s hotels and hospitality specialists provide independent and expert advice to clients, backed by industry-leading research.

For more news, videos and research from Jones Lang LaSalle’s Hotels & Hospitality Group, please visit: www.jll.com/hospitality

Arthur Adler Managing Director and CEO-Americas arthur.adler@am.jll.com

Robert J. Webster Managing Director robert.webster@am.jll.com

Amelia Lim Executive Vice President amelia.lim@am.jll.com

Gilda Perez-Alvarado Senior Vice President gilda.perez-alvarado@am.jll.com

Lauro Ferroni Vice President lauro.ferroni@am.jll.com

Michael Reiss Analyst michael.reiss@am.jll.com

Emily Lustig Analyst emily.lustig@am.jll.com

Contributors

April 2013 | Hotel Intelligence: Washington, D.C. 3

Washington, D.C. remains a highly sought after hotel investment market Fourth most active urban transactions market in U.S.

Hotel acquisition volume in 2012 reached a five-year high in Washington, D.C., fueled by the sale of the 888-room Grand Hyatt1, which represented the largest ever hotel transaction in Washington, D.C. Total transaction volume increased 85% over 2011 levels, while average price per key rose 15%, representing a multi-year high.

To put the market in national perspective, Washington, D.C. ranked as the fourth most active investment market in the U.S. in 2012, only behind New York, San Francisco and Chicago. Factors driving this strong investor interest include market stability and diverse demand sources.

With a large number of REITs headquartered in the greater Washington area, REITs have consistently had a vested interest in the local lodging market, and accounted for 80% of buyer volume in the city in 2012. Additionally, as lodging REIT stock prices continue to rise, we anticipate that this buyer group will continue to be a significant player in the transactions market.

Following a blockbuster year, we anticipate that transaction activity will be relatively subdued during the first half of 2013 as investors observe how new legislation and budget cut concerns affect lodging demand. The second half of 2013, however, is expected to see a pickup in trades concurrent with the expected improved performance of local hotels, representing investor interest and momentum that will continue into 2014.

Interest from off-shore investors is also expected to increase in 2013 and beyond. While foreign investors have focused primarily on New York and West Coast gateways over the past several years, we anticipate that Washington, D.C. will increasingly be on off-shore investors’ radar, as international groups seek trophy and/or unencumbered/independent hotel acquisitions as a way to enter this market.

Active sellers will include institutional funds seeking liquidity, brands in cases where they can retain management contracts, and owners seeking to take advantage of the increased availability of debt capital for purchases.

Washington, D.C. hotel transaction volume 2000 – 2012

Note: Hotel transactions $5MM+; excludes hotels that are sold as part of multi-state portfolios above $500MM Source: Jones Lang LaSalle

Transaction volume Average price per room

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tran

sacti

on V

olume

($Mi

llions

)

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

Average price per room

1Jones Lang LaSalle acted as advisor to seller

Notable Washington, D.C. single-asset hotel transactions

*Seller advised by Jones Lang LaSalle Source: Jones Lang LaSalle

Contract Date

Property Name Price Room Count

Price per Room Buyer Name Seller Name

Jul-12 Grand Hyatt Washington DC* $400,000,000 888 $450,500 Host Hotels & Resorts, Inc. Quadrangle Development Corporation

Mar-12 Hotel Palomar Washington DC $143,800,000 335 $429,300 LaSalle Hotel Properties Kimpton Hotel & Restaurant Group

Feb-13 Madison Hotel Washington DC $140,000,000 356 $393,300 Loews Hotels & Resorts Jamestown Properties

May-11 St. Regis Washington DC $100,000,000 182 $549,500 Westbrook Partners Barclays Capital

Feb-11 Madison Hotel Washington DC Undisclosed 353 Undisclosed Jamestown Properties Bentall Kennedy

Jun-11 Courtyard Capitol Hill/Navy Yard Washington DC $68,000,000 204 $333,300 Chesapeake Lodging Trust NJA Hotel LLC

Apr-11 Capitol Hill Suites Washington DC $47,500,000 152 $312,500 Hersha Hospitality Trust AEW Capital Partners

4 Hotel Intelligence: Washington, D.C. | April 2013

Election year constrains RevPAR growth in 2012

The presence of the federal government in Washington, D.C. has historically acted as a stabilizing factor for the lodging industry, keeping the market somewhat insulated from major economic fluctuations. In 2009, for example, while national RevPAR decreased by approximately 17%, Washington, D.C.’s RevPAR decreased by a far lesser 9%, indicative of the city’s lower volatility.

Washington, D.C.’s RevPAR growth in 2010 and 2011 was driven primarily by rate increases; whereas the rebound in the U.S. as a whole was propelled by occupancy increases. The fact that the majority of the post-downturn RevPAR growth in Washington, D.C. has been powered by rate gains has enabled hotel owners to capitalize on additional revenues while keeping costs in line, allowing them to flow more revenue to the bottom line.

In line with what is often experienced during election years, the metro area experienced flat performance in 2012. With government officials and lobbyists campaigning in other cities during the presidential election, Washington, D.C.’s upper-tier hotels registered a moderate decrease in RevPAR in 2012. That said, the Washington, D.C. metro area garnered the sixth highest urban RevPAR level in the country as a whole, after New York, San Francisco, Miami, Boston and Los Angeles—one of the reasons why the city is highly sought after by domestic and international investors.

Thus far in 2013, lodging fundamentals have marked double-digit improvements on a year-to-date comparison, driven by the demand surges during the presidential inauguration. The 2013 presidential inauguration RevPAR bump was on par with what was witnessed during the inauguration in January 2009.

We expect better performance in 2013 compared to 2012, partly because the strong performance during the inauguration will have an impact on the year as a whole. Overall, we expect the city’s upper-tier hotels, and hotels that rely less on government room nights, to post 4 to 5 percent RevPAR growth during the year. That said, there are further pressures looming for 2013 due to the impact of sequestration—a series of across-the-board, forced governmental budget cuts which could amount to $1.2 trillion nationally over the next ten years. These forced cuts will keep a lid on higher growth rates above and beyond our forecast, and hotels that rely on a greater share of government-related business will lag the overall growth curve.

Top-ranking urban RevPAR markets in the U.S. (2012)

Source: Smith Travel Research

RevPAR ($) 2012 Growth

$-

$50.00

$100.00

$150.00

$200.00

$250.00

New

York

San F

ranc

isco

Miam

i

Bosto

n

Los A

ngele

s

Was

hingto

n, D.

C.

San D

iego

New

Orlea

ns

Anah

eim

Seatt

le

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Washington, D.C. (CBD) lodging performance 1990 – YTD 2013

Note: Data is based on Tract: Washington DC (CBD) | Chain Scales: Upper Upscale, Luxury, Independents in Luxury Class Source: Smith Travel Research

ADR RevPAR Occ

$0

$50

$100

$150

$200

$250

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

YTD

Feb 2

012

YTD

Feb 2

013

30%

40%

50%

60%

70%

80%

90%

April 2013 | Hotel Intelligence: Washington, D.C. 5

Significant new supply in store but demand growth expected to match supply increases

During the past several years, the pace of new openings has been below the long-term average. The most recent notable opening was the 144-room Courtyard Foggy Bottom, which opened in February 2013, and the opening of the 50-room Capella Hotel in Georgetown in March 2013.

This is about to change, and the city will see greater supply increases over the next year. According to Smith Travel Research, Washington, D.C. ranks second in the nation for the most rooms under construction. The most talked about supply addition is the upcoming opening of the 1,175-room Washington Marriott Marquis slated for May 2014, which has some investors taking a wait-and-see approach prior to jumping back into the market.

Approximately 35 hotels totaling 9,500 rooms are within a one-mile radius of the Walter E. Washington Convention Center. This proximate hotel stock represents a density measure of 13.5 rooms per 1,000 square feet of convention center exhibit space, right on par with the average density in 15 of the nation’s largest convention markets.

However, in Washington, D.C., the average hotel size directly supporting the convention center is 20% smaller than what we tracked on average in the other markets, which means that there are fewer proximate hotels with 300+ rooms that can accommodate large groups. Even with the opening of the Marriott Marquis, the room density measure will increase to about 15 rooms per 1,000 square feet of convention center exhibit space and thereby be largely in line with the national average.

Hotel stock surrounding convention center

Source: Convention center websites, Jones Lang LaSalle, Smith Travel Research 1Refers to hotels with 50+ rooms

Market (Alphabetical order) Convention center name Approx. hotel rooms within 1-mile radius1

Approx. number of hotels within 1-mile radius1

Density measure: Hotel rooms per 1,000 s.f. of exhibit space

within 1-mile radius1

Anaheim Anaheim Convention Center 15,600 61 19.1Atlanta Georgia World Congress Center 12,300 31 9.0Chicago McCormick Place 1,100 3 0.4Dallas Dallas Convention Center 8,483 24 8.3Houston George R. Brown Convention Center 5,100 16 5.9Las Vegas Las Vegas Convention Center 29,600 28 15.2Los Angeles Los Angeles Convention Center 7,000 23 9.7New Orleans Ernest N. Morial Convention Center 19,100 70 17.4New York Jacob K. Javits Convention Center 3,700 19 4.9Orlando Orange County Convention Center 14,400 33 7.0Philadelphia Pennsylvania Convention Center 10,300 35 15.2Phoenix Phoenix Convention Center 3,100 11 4.8San Diego San Diego Convention Center 11,300 35 18.3San Francisco Moscone Convention Center 25,300 104 46.9Washington, D.C. Walter E Washington Convention Center 9,500 35 13.5Average 11,500 35 12.9

Government per diem rates – what hotel investors need to know

The U.S. General Services Administration establishes lodging per diem rates, which are the maximum allowances that federal employees are reimbursed for from expenses incurred while on official travel. Per diem rates are determined based on ADRs—for Monday through Thursday nights—of specific hotel properties chosen to best represent mid-range hotels in the market.

Per diem rates often vary by season: for example, if ADRs for any period (defined as two or more months) differ from the preceding or following period by more than 15%, a seasonal rate period is usually defined. Given the notable hotel rate fluctuations in Washington, D.C. by time of year, there are different per diem rates set by month for the market.

Lodging per diem rates are set by October 1 of each year, based on ADR data for the 12 months up until April of that year. As such, per diems have a lagging impact and can impact market performance on a forward basis. Because ADRs contracted slightly in Washington, D.C. during 2012, this will likely have a moderate effect on the FY 2014 per diems, since these will be determined based on April 2012 to March 2013 performance.

This lag effect was recently witnessed in Washington, D.C. whereby the city’s per diem rates decreased by 6% in 2011, when the market as a whole had posted its declines in 2009. A market with a higher proportion of travelers who stay on per diem rates tends to have stickier prices, which has both benefits and drawbacks for investors.

6 Hotel Intelligence: Washington, D.C. | April 2013

Jones Lang LaSalle evaluated supply and demand growth rates in 20 convention center markets across the country, which, over the past 20 years, have seen the opening of a major convention center headquarters hotel.

On average, these markets experienced demand growth to match the supply growth during the three years following the opening of the convention center hotel, providing evidence that the supply was fully absorbed over a three-year period. Even supply increases of this size have shown to have a neutral or positive impact on the market.

It is therefore our view that the opening of the Marriott Marquis will induce demand while enhancing convention center utilization. Upon opening of the Marriott Marquis, the convention center is expected to be better able to compete on a national level for high-profile citywide conventions.

Looking farther to the future, the city is said to be contemplating a change in the height restriction laws within the District of Columbia due to growing demographics. If the current height restriction is eased, it could open the door to development opportunities that otherwise would not have been permitted, which would potentially lead to new sources of corporate demand which would ultimately increase demand for lodging facilities as well.

Ownership profile in the nation’s capital

Washington, D.C.’s ownership profile is dominated by REITs and private equity investors, who, together own nearly 75% of the District’s room stock. This high percentage of REITs as hotel owners in the nation’s capital indicates that assets are at times held onto longer than private equity groups do, and that Washington, D.C. is viewed as a strong market for stable, long-term growth. When compared to New York, REIT ownership equates to a lower 25% of total rooms.

Of the lodging REITs in the United States, five are based in the greater Washington, D.C. metro area, creating the largest concentration of lodging REITs in one metro area, which supports the high ownership levels of REITs in the nation’s capital. Key transactions in the District of Columbia by REITs located in the metro area include the purchase of the 888-room Grand Hyatt by Host Hotels & Resorts in July 2012 and the 335-room Hotel Palomar by LaSalle Hotel Properties in March 2012.

District of Columbia: Proposed supply additions

Source: Jones Lang LaSalle (based on publicly available information). Note: Projects and dates are subject to change

Planning phase

Project Location Rooms Opening year Positioning

Courtyard by Marriott and Residence Inn Convention Center 500 2015 Upscale

Trump Hotel Washington D.C. 1100 Pennsylvania Avenue 215 2016 Luxury

Unnamed Hotel National's Stadium 170 TBD Upscale

Under construction

Project Location Rooms Opening year Positioning

Hilton Garden Inn West End 2201 M St. NW 237 2014 Upscale

Marriott Marquis Hotel Convention Center 901 Massachusetts Avenue NW 1,175 2014 Upper Upscale

Cambria Suites CityMarket at O 182 2015 Upscale

April 2013 | Hotel Intelligence: Washington, D.C. 7

Government dependence: Implications of government budget

The health of the lodging industry in the District of Columbia is dependent on the federal government. During 2012 there was less business activity in Washington due to the election and other factors; but we anticipate that local hoteliers will experience a pickup in demand in 2013, despite the looming budget cuts. Corporate transient and leisure demand remain strong and visitor arrivals to the city are increasing notably, especially from markets such as Brazil and China.

Now that the presidential election has passed, increased lobbyist activity is expected to help bolster occupancy rates. The overall economic and demographic health in the District of Columbia has boasted strong growth in recent years which is expected to continue into the future.

Washington, D.C. will remain a core hotel investment market

Several recapitalizations of large lodging assets are expected to take place in 2013. Even in markets which have experienced a short-lived lull in performance growth, recapitalization opportunities abound, as owners’ financing structures increasingly call for a capital event. Furthermore, many assets financed at the peak of the market where debt maturities have already been extended will see more receptive debt markets due to rising liquidity.

The availability of hotel debt in 2013 is expected to be at the highest level since 2007. Throughout the U.S., the re-emergence of the CMBS market is propelling the availability of debt for hotels and will continue to drive pricing, terms and accessibility for a wide range of assets and borrowers. Balance sheet lenders will continue to favor core markets such as Washington, D.C. The increasing array of financing options and the availability of debt financing for hotels will underpin transactions activity.

Coming off of flat performance in 2012 as is typical during an election year, hotel performance in the nation’s capital is expected to build in 2013 and we project the city’s upper-tier hotels to post 4-5% RevPAR growth. Sequestration and other governmental budget cuts will hamper what could otherwise be growth above and beyond this forecast.

After what is temporarily expected to be a quiet transactions market for several months, as investors gain more clarity regarding future growth in fundamentals, asset bidding and deal flow is slated to heat up in the second half of 2013, with continued momentum growing into 2014.

Source: Jones Lang LaSalle

DeveloperHotel owner/operatorOff-shore

REITPrivate equity

40%

33%

13%

13%

1%

Lodging ownership profile in Washington, D.C.

District of Columbia economic and demographic indicators

Source: Source: IHS Global Insight

Indicator 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Economic output ($Millions) 87,089 89,893 91,643 93,703 95,466 97,258 99,782 102,011

Percent change 3.2% 1.9% 2.2% 1.9% 1.9% 2.6% 2.2%

Unemployment rate 9.7% 10.2% 10.2% 9.1% 8.5% 8.3% 8.0% 7.5%

Population (000's) 593.8 606.8 620.6 633.8 644.9 652.6 658.1 662.7

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