HotelsInvestment Outlook

United States | Q2 2015

HotelsEncouraging fundamentals and rising interest from foreign capital sources drive surge in U.S. hotel investment

1

The U.S. lodging market enjoyed strengthening fundamentals and surging investor interest in the first half of 2015. Low supply growth in the context of robust demand growth allowed for strong revenue per available room (RevPAR) gains. Record-breaking inflows of off-shore capital also contributed to extraordinary growth in acquisitions volume. With performance fundamentals and foreign interest in U.S. hotel assets expected to remain strong, we are bullish on the U.S. lodging sector.

• In H1 2015, RevPAR for U.S. hotels increased 7.3 percent year-over-year, following growth of 8.3 percent in 2014. Moderate economic growth has provided the fuel for rising lodging demand, and given relatively limited supply growth, hotel occupancy in the U.S. has risen to the highest level seen in nearly two decades.

• RevPAR growth is anticipated to remain strong for the next several years barring any unforeseen demand shocks. The national pipeline implies a continuation of below-average supply growth, while moderate economic growth is expected to continue to buoy lodging demand. As long as this dynamic prevails, operating fundamentals for the U.S. lodging sector will remain strong.

• Hotel transaction volume soared to $23.0 billion in H1 2015. This level of acquisition activity amounts to a near doubling of hotel investment sales year-to-date. Investors who purchased earlier in the cycle are now looking to unlock gains and potentially redeploy capital, while private equity investors in search of yield have remained active buyers in the market.

• Offshore capital has become a major force in the U.S. hotel investment market. Weak economic growth prospects in many international markets as well as the recent liberalization of China’s regulations concerning large overseas investments have resulted in a flood of foreign capital pursuing U.S. hotel assets.

• Cap rates for the U.S. hotel sector have continued to decline with foreign investors pursuing Trophy assets at low relative return thresholds, resulting in hotel trades at exceptionally low cap rates.

• Average price per key has increased significantly given the current environment of strengthening operating fundamentals, enhanced market liquidity and falling cap rates.

• Interest rate increases present a potential threat to asset pricing. However, steady inflows of foreign capital to U.S. assets are expected to soften the impact of any increase in the fed funds rate.

JLL | United States | Hotels Investment Outlook | Q2 2015

12-month change in pricing (per key) 12-month change in cap rate (bp)

29.0% -23 bpsInvestment sales (YTD, billions of $US)

$23.0

Global Hotels investment

Investment sales (YTD, billions of $US)

$42.9Annual investment sale growth (YTD)

56.0%

Annual investment sale growth (YTD)

93.8%U.S. Hotels investment

U.S. Hotels forecast

Investment sales (FY, billions of $US)

$31.0Annual investment sale growth (FY)

16.1%

With $23.0 billion of hotel transactions, deal volume nearly doubled in the first half of 2015

Source: JLL Research

Hotel cap rates continue to decline with cap rates for full-service hotels in both primary and secondary markets hitting record lows

Source: JLL Research, Moody’s Analytics

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RevPAR rising substantially with rate increases now driving the majority of growth

RevPAR for U.S. hotels increased more than 8.0 percent in 2014, and the sector is on pace to record another year of solid growth in 2015 with RevPAR rising more than 7.0 percent in the first half of the year. At this point in the cycle, ADR is driving the majority of RevPAR gains, as hotel occupancy appears to be approaching its structural limit in many markets. In fact, U.S. hotel occupancy amounted to 64.4 percent in 2014, the highest level recorded since 1996, and year-to-date growth in 2015 has amounted to a further 2.4 percent increase. While transient demand growth has increased steadily since the market trough in 2009, group demand growth just recently turned positive in mid-2014 and rapidly surpassed transient demand growth by year-end. The recovery of group demand is allowing hotels to yield rate more effectively with ADR for the transient segment increasing more than 5.0 percent in 2014 compared to just over 3.0 percent in 2013, when group demand was still wavering.

Source: Smith Travel Research

While the current cycle may seem advanced in that 2015 is likely to mark the sixth consecutive year of RevPAR growth, the more nascent recovery in group demand suggests that considerable runway likely remains. As long as supply growth remains moderate, the recovery in group demand should allow for increased rate compression. Accordingly, we expect that transient rate growth will continue to drive strong RevPAR growth going forward.

Supply growth expected to remain below the historical average for the next few years

Supply growth for the nation’s lodging stock has been muted in recent years with 2014 marking the fifth consecutive year of below-average annual growth in the number of U.S. hotel rooms. While improving hotel operating performance, declining cap rates and easing debt markets are once again spurring new hotel development, the current pipeline suggests that annual supply growth is likely to remain below the historic average through at least 2016.

Several factors are keeping new hotel development in check. As the economy has recovered, construction costs have increased materially, challenging the feasibility of new full-service hotel projects in lower-rated markets. While the availability of construction financing has improved significantly in recent years, lender requirements for investor equity have generally remained above pre-recessionary levels. Moreover, non-recourse debt for new hotel development in resort and tertiary markets as well as for projects involving residential components has remained relatively constrained. As a result, select-service hotels in key primary and secondary markets comprise most new development with supply growth for other market segments remaining more muted.

Hotel investment sales nearly doubled in H1 2015 with private equity buyers driving deal volume

In the first half of 2015, hotel transaction volume surged to $23.0 billion, representing a 93.8 percent increase relative to the first half of 2014. Private equity groups have been the dominant force in the transactions market, accounting for the largest share of both acquisitions and dispositions. Investors seeking to realize gains on hotels acquired earlier in the cycle are bringing deals to the market, and these investors are frequently redeploying their sale proceeds in the sector. Investors chasing yield in the current low cap rate environment are also looking toward hotel investments given relatively attractive returns for this asset class.

While private equity appetite for hotel real estate increased further in H1 2015, with acquisitions rising 77.0 percent year-over-year to more than $10.0 billion, their total share of hotel acquisitions declined from 52.0 percent in 2014 to 44.0 percent. The decline in private equity market share, however, appears to be due to further diversification in the buyer pool rather than waning interest. In particular, institutional investors emerged as a key player in the market with their share of investment rising from 1.0 percent in 2014 to 10.0 percent at mid-year following several blockbuster transactions.

Source: JLL Research, Smith Travel Research

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Supply annual % increaseLong-term average supply increase

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Source: JLL Research

2JLL | United States | Hotels Investment Outlook | Q2 2015

Cap rates have steadily declined with Trophy properties in primary markets trading for exceptionally low yields

Per our most recent Hotel Investor Sentiment Survey in December 2014, investors’ targeted capitalization rates declined to 6.8 percent for full-service hotels in primary markets compared to 7.0 percent approximately 6 months prior and 7.1 percent a year ago. Targeted capitalization rates for full service hotels in secondary markets averaged 7.8 percent, which amounted to no change relative to 6 months previously and a small decline from 8.0 percent a year prior. Cap rates in both primary and secondary markets are at their lowest level since we introduced the Hotel Investor Sentiment Survey in 2000.

Chinese investors’ pursuit of Trophy hotel properties in primary U.S. markets has resulted in several hotel trades at exceptionally low cap rates in 2015. The Waldorf Astoria New York, Baccarat Hotel New York and Waldorf Astoria Chicago sold to Chinese investors for reported cap rates of approximately 2.0, 3.0, and 3.0 percent, respectively. In contrast to U.S. private equity buyers, who often have a relatively short investment horizon and high return requirements, Chinese investors tend to have a longer-term, even multigenerational, outlook. Iconic hotel properties in the U.S. are viewed as secure long-term investments, and recent instability in Chinese equity markets and concerns about the integrity of the euro zone are likely to further increase the appeal of hotel real estate in the U.S. for foreign investors. Source: JLL Research

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Full service hotels, primary marketsFull service hotels, secondary marketsSelect service hotels, all markets

Offshore capital has contributed substantially to rising hotel market liquidity

Cross-border investment in U.S. hotel acquisitions amounted to $6.6 billion in the first half of 2015, representing nearly 30.0 percent of total deal volume. This level of foreign investment in U.S. hotel acquisitions amounts to more than a threefold increase compared to the first half of 2014, and with half of the year still ahead, 2015 has already seen the highest level of cross-border investment since 2007. While a handful of high-profile deals, including the sale of the Waldorf Astoria New York for nearly $2.0 billion and the Manhattan at Times Square for more than $500 million, account for much of this year’s cross-border investment, these deals are unlikely to stand out as anomalies going forward.

Source: JLL Research

In 2014, the Chinese government relaxed regulations that had previously subjected overseas investments in excess of $100 million to an arduous approvals process. As a result, Chinese investors–and Chinese insurance companies, in particular–have emerged as a significant source of offshore capital. This powerful trend is likely only just beginning. At the same time, Middle Eastern groups have remained active in the sector despite declining oil prices with the Abu Dhabi Investment Authority recently purchasing the Edition New York for $343 million. Overall, current economic woes abroad are expected to further fuel foreign investment in U.S. hotel assets, as international groups seek the relative stability and security of U.S. markets.

Target hotel cap rates in select primary and secondary U.S. markets

Source: JLL Research, Hotel Investor Sentiment Survey

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CTMA NH

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CA CO

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GA

ID

IL IN

IA

KS KY

LA

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OK

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Miami6.8%

Houston7.8%

Dallas7.9%

Atlanta8.0%

Washington, DC7.2%

New York6.1%

Philadelphia7.9%Chicago

7.3%

San Diego7.2%

Los Angeles7.0%

San Francisco6.3%

Seattle7.1%

Denver7.7%

Boston6.8%

Phoenix8.1%

Orlando8.1%

Primary Hotel MarketsSecondary Hotel Markets

Hawaii6.5%

3JLL | United States | Hotels Investment Outlook | Q2 2015

Interest rate increases present some risk for cap rates going forward, though the impact is expected to be muted

Given a relatively constrained supply outlook and expectations for stable demand growth, the impact of future increases in the federal funds rate on hotel capitalization rates likely represents the most notable wildcard for hotel asset pricing. In the current cycle, declining interest rates–and Treasury yields–have generally corresponded with downward pressure on hotel cap rates, suggesting that expectations for increases in the federal funds rate by year-end could ultimately put upward pressure on cap rates. Still, there are several reasons to anticipate a muted impact, if any at all. To the extent economic woes abroad continue to funnel foreign investment into U.S. assets, the ultimate impact of federal funds rate increases on Treasury yields and real estate cap rates may be rather limited. Furthermore, in the last growth cycle, cap rates continued to decline in spite of movement in Treasury yields due to strong operating fundamentals and abundant market liquidity. Given these trends are expected to remain in place, hotel cap rates are anticipated to stay low as long as increases in the federal funds rate are moderate.Source: JLL Research, Federal Reserve Board

Average price per key has risen significantly given strong fundamentals and Trophy asset sales

The average price per key rose to $241,000 for the 12-month period through June 2015, representing an increase of 29.0 percent year-over-year. Declining cap rates, strengthening operating fundamentals and robust market liquidity have all contributed to the substantial appreciation of hotel real estate assets. The recent preponderance of Trophy property sales has also certainly contributed to the large increase in average price per key with the Baccarat Hotel New York, the Montage Laguna Beach and the Waldorf Astoria New York trading this year for approximately $2.0, $1.5, and $1.4 million per key, respectively. Still, the median price per key for the latest 12-month period posted a nearly identical year-over-year increase of 28.0 percent, illustrating that asset price appreciation has, in fact, been rather widespread.

Source: JLL Research

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Avg. Target HotelCap Rate*

10-Year TreasuryYield

Federal FundsTarget Rate

*Investors' average target capitalization rates for full service hotels, per the JLL Hotel Investor Sentiment Survey.

Cap Rate: -174 bpsTreasury Yield: +61 bpsFed Funds Rate: +425 bps

4JLL | United States | Hotels Investment Outlook | Q2 2015

Portfolio transactions, Q2 2015

Property Buyer Seller Market Price Size (rooms) Price per key

Equity Inns 116-Hotel Portfolio Arc Hospitality Trust Whitehall Real Estate Multiple $1,808,000,000 13,744 $132,000

Great Wolf Resorts Portfolio Centerbridge Partners Apollo Global Management Multiple $1,350,000,000 3,579 $377,000

Paulson 3-Hotel Portfolio The Blackstone Group Paulson & Co. Inc. Orlando, Phoenix $1,300,000,000 2,530 $514,000

GEM 2-Hotel Portfolio Orlando Hilton Worldwide GEM Realty Capital Orlando $760,000,000 1,499 $507,000

Highland Portfolio (28% Stake)Ashford Hospitality Trust, Inc.

Prudential Real Estate Investors Multiple $490,311,000 8,379 $59,000

OTO Development Portfolio II The Blackstone Group OTO Development Multiple $330,000,000 2,385 $138,000

Crestwood Suites & Sun Suites & HTS Portfolio

Starwood Capital GroupMount Kellett Capital Management

Multiple $300,000,000 6,042 $50,000

TMI 183-Hotel Portfolio Starwood Capital Group TMI Hospitality Multiple $299,379,106 3,983 $75,000

RLJ 24-Hotel Portfolio Unknown RLJ Lodging Trust Multiple $240,000,000 2,924 $82,000

Notable single asset transactions, Q2 2015

Property Buyer Seller Market Price Size (rooms) Price per key

Waldorf Astoria New York Anbang Insurance Group Hilton Worldwide New York $1,950,000,000 1,413 $1,380,000

The Manhattan at Times Square Hotel

Al Faisal Holdings Rockpoint Group New York $535,000,000 689 $776,000

Luxury Collection The Phoenician

Host Hotels & ResortsStarwood Hotels & Resorts Worldwide, Inc.

Phoenix $400,000,000 643 $622,000

Montage Laguna Beach Strategic Hotels & Resorts Ohana Real Estate Investors Orange County $360,000,000 248 $1,452,000

Park Central Hotel San Francisco

LaSalle Hotel Properties Westbrook Partners San Francisco $350,000,000 681 $514,000

Waldorf Astoria Casa Marina Resort

Hilton Worldwide The Blackstone Group Florida Keys $348,000,000 311 $1,119,000

Edition New YorkAbu Dhabi Investment Authority (ADIA)

Marriott International, Inc. New York $343,000,000 273 $1,256,000

Ritz-Carlton Key Biscayne Miami WP Carey & Co., Inc. Gencom Group Miami $328,600,000 302 $1,088,000

The Royal Palm MiamiChesapeake Lodging Trust

KSL Resorts Miami $278,000,000 393 $707,000

5JLL | United States | Hotels Investment Outlook | Q2 2015

For more information, please contact:

InvestorSean CoghlanDirector, Investor Research+1 215 988 5556sean.coghlan@am.jll.com

HotelsKent Michels Director, Hotels Research+1 312 228 2927kent.michels@am.jll.com

About JLL

JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $55.3 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

About JLL Research

JLL’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.

© 2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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