market study proposedh o&et l conerefnce center · whirlpool, a fitness center, a business...

MARKET STUDY

ProposedHotel&ConferenceCenter PORT ARANSAS, TEXAS

SUBMITTED TO:PR OPOSED

Mr. Jeffrey Hentz Port Aransas Chamber of Commerce and Tourist Bureau 403 West Cotter Avenue Port Aransas, Texas, 78373 +1 (407) 466-1320

PREPARED BY:

HVS Consulting & Valuation Division of TS Worldwide, LLC 603 West 13th Street, Suite 2H Austin, Texas, 78701 +1 (214) 629-0908

June-2017

February 14, 2018 Mr. Jeffrey Hentz Port Aransas Chamber of Commerce and Tourist Bureau 403 West Cotter Avenue Port Aransas, Texas, 78373

Re: Proposed Hotel & Conference Center Port Aransas, Texas HVS Reference: 2017020979

Dear Mr. Hentz: Pursuant to your request, we herewith submit our market study pertaining to the above-captioned property. We have inspected the real estate and analyzed the hotel market conditions in the Port Aransas, Texas area. We have studied the proposed project, and the results of our fieldwork and analysis are presented in this report. We have also reviewed the proposed improvements for the sites under consideration. We hereby certify that we have no undisclosed interest in the property, and our employment and compensation are not contingent upon our findings. This study is subject to the comments made throughout this report and to all assumptions and limiting conditions set forth herein.

Sincerely, TS Worldwide, LLC DRAFT DOCUMENT

David R. Bone, Vice President [email protected], +1 (214) 629-0908

HVS AUSTIN

603 West 13th Street, Suite 2H Austin, Texas, 78701 +1 (214) 629-0908 +1 (516) 742-3059 FAX www.hvs.com

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Table of Contents

SECTION TITLE PAGE

1. Executive Summary 1 Subject of the Market Study 1 Ownership, Franchise, and Management Assumptions 1 Summary of Hotel Market Trends 2 Summary of Forecast Occupancy and Average Rate 6 Summary of Forecast Income and Expense Statement 6 Scope of Work 9

2. Description of the Sites and Neighborhood 11 Access and Visibility 16 Airport Access 17 Neighborhood 17 Flood Zone 18 Zoning 18

3. Market Area Analysis 19 Workforce Characteristics 22 Unemployment Statistics 25 Major Business and Industry 26 Office Space Statistics 28 Convention Activity 29 Airport Traffic 30 Tourist Attractions 32

4. Supply and Demand Analysis 36 Definition of Subject Hotel Market 36 National Trends Overview 36 Historical Supply and Demand Data 40 Seasonality 42 Patterns of Demand 45

Primary Competitors 48 Secondary Competitors 57 Supply Changes 59 Demand Analysis Using Market Segmentation 60 Base Demand Growth Rates 63 Latent Demand 63 Unaccommodated Demand 63 Induced Demand 65 Accommodated Demand and Market-wide Occupancy 65

5. Description of the Proposed Improvements 67 Project Overview 67 Summary of the Facilities 67 Site Improvements and Hotel Structure 69 Lobby 69 Food and Beverage Facilities 69 Meeting and Banquet Space 70 Recreational Amenities 70 Additional Amenities 70 Guestrooms 70 Back-of-the-House, ADA, and Environmental 70 Capital Expenditures 71

6. Projection of Occupancy and Average Rate 72 Historical Penetration Rates by Market Segment 72 Forecast of Subject Property’s Occupancy 73 Average Rate Analysis 75 Competitive Position 76

7. Projection of Income and Expense 81 Comparable Operating Statements 81 Forecast of Income and Expense 85 Rooms Revenue 88 Food and Beverage Revenue 88

Other Operated Departments Revenue 89 Miscellaneous Income 89 Rooms Expense 90 Food and Beverage Expense 90 Other Operated Departments Expense 91 Administrative and General Expense 91 Information and Telecommunications Systems Expense 92 Marketing Expense 92 Franchise Fee 93 Property Operations and Maintenance 93 Utilities Expense 94 Management Fee 94 Property Taxes 95 Insurance Expense 97 Reserve for Replacement 97 Forecast of Revenue and Expense Conclusion 98

8. Statement of Assumptions and Limiting Conditions 99

Addenda

Qualifications

June-2017 Executive Summary Proposed Hotel & Conference Center – Port Aransas, Texas 1

1. Executive Summary

The subject of the market study is a full-service, conference center lodging facility; the hotel will be affiliated with an upper-upscale brand. The property, which is expected to open on July 1, 2020, will feature 250 rooms, a restaurant and lounge, a lobby bar, a poolside bar, 21,150 square feet of meeting space, an outdoor pool and whirlpool, a fitness center, a business center, a gift shop or retail boutique, a guest laundry room, a concierge desk, and vending areas. The hotel will also contain the appropriate parking capacity and all necessary back-of-the-house space. The Port Aransas/Mustang Island market area currently comprises hotels spanning the limited-service segment, with the notable void of a full-service hotel. While a particular brand has yet to be determined for this project, our study assumes that the proposed subject hotel will operate as an upper-upscale, full-service hotel and conference center under a brand not currently represented in the market. The subject sites under consideration are located in Port Aransas, Texas. The effective date of the report is February 14, 2018. The subject sites under consideration were inspected by David R. Bone on June 26, 2017 and June 27, 2017. As of the date of this market study, the developer of the proposed subject hotel is unknown; the user of this report intends to use it to solicit potential hotel developers that are interested in building the proposed subject property described throughout this report. Five sites are being analyzed for potential development of the proposed subject property. To the best of our knowledge, none of the sites under consideration is listed nor under contract for sale; furthermore, we have no knowledge of any recent listings of any of the sites. Details pertaining to management terms were not yet determined at the time of this report; however, we assume that the proposed hotel will be managed by a professional hotel-operating company, with fees deducted at rates consistent with current market standards. We have assumed a market-appropriate total management fee of 3.0% of total revenues in our study. We recommend that the proposed subject hotel operate as an upscale, full-service property. While we have placed heavy consideration on the Hilton, Marriott, and Sheraton brands, a specific franchise affiliation and/or brand has yet to be finalized.

Subject of the Market Study

Pertinent Dates

Ownership, Franchise, and Management Assumptions


Occupancy first peaked for this selected set of hotels in 2006 at approximately 63%, while average rate (ADR) growth continued until mid-year 2008, prior to the full impact of the Great Recession. Given strong ADR into 2008, RevPAR peaked at approximately $88 in 2008. By year-end 2009, ADR had declined to roughly $135 because of the recession. Despite a small rebound in average rates in 2010, RevPAR remained flat at around $75 because of the entrance of new supply. A rapid recovery began in 2011 that extended through 2012, at which time the prior RevPAR peak was exceeded. RevPAR continued to rise through 2015, with growth driven largely by an energy boom across South Texas from 2010 through 2014. However, oil prices began to decline in late 2014, which caused many upstream oil-sector employers to cut workforce levels beginning in 2015 and continuing through 2016. These weakening economic conditions led to a drop in consumer confidence and discretionary income available for leisure trips. Additionally, hoteliers in costal markets in South Texas were challenged by poor publicity related to the rare Vibrio vulnificus, or "flesh-eating" bacteria, in 2016. As demand softened, hoteliers sacrificed ADR growth in an attempt to maintain market share, which led to an overall drop in RevPAR in 2016. Year-to-date 2017 data illustrate a nominal increase in occupancy and a roughly $1 gain in average rate. The near-term outlook is optimistic, as oil prices have stabilized, political uncertainty has waned, and the public has been better educated about the low risk of acquiring Vibrio vulnificus. The following table provides a historical perspective on the supply and demand trends for a selected set of hotels, as provided by STR.

Summary of Hotel Market Trends


FIGURE 1-1 HISTORICAL SUPPLY AND DEMAND TRENDS (STR)

YearAverage Daily Room Count

Available Room Nights Change

Occupied Room Nights Change Occupancy

Average Rate Change RevPAR Change

2000 2,119 773,435 — 480,365 — 62.1 % $106.81 — $66.34 — 2001 2,119 773,435 0.0 % 446,513 (7.0) % 57.7 110.67 3.6 % 63.89 (3.7) %2002 2,119 773,435 0.0 465,512 4.3 60.2 111.88 1.1 67.34 5.42003 2,119 773,435 0.0 454,980 (2.3) 58.8 114.00 1.9 67.06 (0.4)2004 2,320 846,965 9.5 460,298 1.2 54.3 119.37 4.7 64.87 (3.3)2005 2,390 872,461 3.0 515,616 12.0 59.1 124.95 4.7 73.84 13.82006 2,427 885,855 1.5 554,846 7.6 62.6 133.25 6.6 83.46 13.02007 2,427 885,855 0.0 549,261 (1.0) 62.0 137.85 3.5 85.47 2.42008 2,322 847,605 (4.3) 524,416 (4.5) 61.9 142.09 3.1 87.91 2.92009 2,365 863,355 1.9 479,848 (8.5) 55.6 134.86 (5.1) 74.95 (14.7)2010 2,448 893,389 3.5 489,577 2.0 54.8 136.48 1.2 74.79 (0.2)2011 2,525 921,625 3.2 541,377 10.6 58.7 140.10 2.7 82.30 10.02012 2,578 941,062 2.1 591,612 9.3 62.9 145.92 4.2 91.73 11.52013 2,442 891,460 (5.3) 561,647 (5.1) 63.0 157.22 7.7 99.06 8.02014 2,468 900,698 1.0 575,250 2.4 63.9 162.88 3.6 104.03 5.02015 2,474 903,010 0.3 586,168 1.9 64.9 163.92 0.6 106.41 2.32016 2,549 930,244 3.0 616,076 5.1 66.2 157.59 (3.9) 104.37 (1.9)

Year-to-Date Through July2016 2,538 538,105 — 381,409 — 70.9 % $165.31 — $117.17 — 2017 2,567 544,121 1.1 % 389,995 2.3 % 71.7 166.43 0.7 % 119.29 1.8 %

Average Annual Compounded Change:2000 - 2016 1.2 % 1.6 % 2.5 % 2.9 %2000 - 2007 2.0 1.9 3.7 3.72007 - 2010 0.3 (3.8) (0.3) (4.4)2010 - 2016 0.7 3.9 2.4 5.7

Hotels Included in Sample

Wyndham Hotel Gal vez & Spa Upper Ups ca l e Class Primary 224 Jun 1998 Jun 1911Hol iday Inn Corpus Christi North Padre Is l and Upper Mi dsca le Clas s Secondary 149 Mar 2010 Dec 1974San Luis On Galveston Is land Luxury Clas s Secondary 242 Jun 1985 Jun 1985Omni Corpus Chri sti Hotel Upper Ups ca l e Class Primary 475 Sep 1996 Jun 1985Hi l ton Gal ves ton Is l and Res ort Upper Ups ca l e Class Primary 239 Jun 1996 Jun 1986The Pearl South Padre Upper Ups ca l e Class Secondary 200 Apr 2011 Aug 1986Moody Gardens Hotel Luxury Clas s Secondary 423 Nov 1998 Nov 1998Hol iday Inn Express & Stes Port Aransas Beach Area Upper Mi dsca le Clas s Secondary 74 Jul 2005 Jul 2005Hi l ton Garden Inn South Padre Is l and Upsca le Cl ass Secondary 156 Jul 2010 Jul 2010Schl i tterbahn Waterpark & Res ort Upper Ups ca l e Class Primary 216 Aug 2012 Aug 2012Hampton Inn & Sui tes Port Aransas Upper Mi dsca le Clas s Secondary 78 May 2013 May 2013Schl i tterbahn Riverpark & Resort Upper Ups ca l e Class Secondary 92 Mar 2016 Mar 2016

Total 2,568

Source: STR

ClassNumber

of RoomsYear

OpenedCompetitive Year

Status Affiliated

The following tables reflect our estimates of operating data for hotels on an individual basis. These trends are presented in detail in the Supply and Demand Analysis chapter of this report.


FIGURE 1-2 PRIMARY COMPETITORS – OPERATING PERFORMANCE

Est. Segmentation Estimated 2016 Estimated 2017

Property Occ. RevPAR RevPAROccupancy Penetration

Yield Penetration

Omni Corpus Christi Hotel 475 65 % 35 % 475 70 - 75 % $140 - $150 $105 - $110 475 75 - 80 % $140 - $150 $105 - $110 110 - 120 % 100 - 110 %

Schl i tterbahn Wa terpark & Resort

216 75 25 216 40 - 45 140 - 150 55 - 60 216 45 - 50 140 - 150 70 - 75 70 - 75 65 - 70

Wyndha m Hotel Ga lvez & Spa 224 65 35 224 70 - 75 170 - 180 130 - 140 224 70 - 75 170 - 180 130 - 140 110 - 120 120 - 130

Hi l ton Ga lves ton Is land Resort 239 75 25 239 70 - 75 150 - 160 115 - 120 239 70 - 75 150 - 160 110 - 115 100 - 110 100 - 110

Sub-Totals/Averages 1,154 68 % 32 % 1,154 68.6 % $151.14 $103.73 1,154 70.1 % $153.44 $107.60 104.5 % 101.8 %

Secondary Competi tors 1,414 78 % 22 % 811 62.4 % $163.40 $102.04 822 62.9 % $163.78 $103.04 93.7 % 97.5 %

Totals/Averages 2,568 72 % 28 % 1,965 66.1 % $155.92 $103.03 1,976 67.1 % $157.47 $105.70 100.0 % 100.0 %

* Specific occupancy and average rate data were utilized in our analysis, but are presented in ranges in the above table for the purposes of confidentiality.

Average RateTran

sient

Mee

ting

and

Grou

p

Number of Rooms Average Rate Occ.

Weighted Annual Room Count



FIGURE 1-3 SECONDARY COMPETITORS – OPERATING PERFORMANCE


Tran

sient

Mee

ting

and

Grou

p

Total Weighted

Annual Weighted

Annual

PropertyNumber of

Rooms Occ. Average Rate RevPAR Occ. Average Rate RevPAR

Hampton Inn & Suites Port Aransa s 78 95 % 5 % 75 % 59 50 - 55 % $150 - $160 $80 - $85 59 50 - 55 % $160 - $170 $80 - $85

Hol i day Inn Express & Sui tes Port Aransa s Bea ch Area

74 95 5 75 56 50 - 55 160 - 170 85 - 90 56 50 - 55 160 - 170 85 - 90

Schl i tterba hn Riverpark & Resort 92 90 10 75 58 35 - 40 95 - 100 35 - 40 69 40 - 45 100 - 105 45 - 50

Hol i day Inn Corpus Chris ti North Padre Is land

149 95 5 75 112 50 - 55 150 - 160 80 - 85 112 50 - 55 150 - 160 85 - 90

Hi l ton Garden Inn South Padre Is l and 156 80 20 75 117 70 - 75 170 - 180 125 - 130 117 70 - 75 170 - 180 125 - 130

The Pearl South Pa dre 200 85 15 60 120 55 - 60 130 - 140 80 - 85 120 55 - 60 130 - 140 80 - 85

San Luis on Ga lveston Is la nd 242 65 35 50 121 70 - 75 220 - 230 160 - 170 121 70 - 75 220 - 230 160 - 170

Moody Gardens Hotel 423 60 40 40 169 70 - 75 140 - 150 100 - 105 169 65 - 70 140 - 150 100 - 105

Totals/Averages 1,414 78 % 22 % 58 % 811 62.4 % $163.40 $102.04 822 62.9 % $163.78 $103.04

* Specific occupancy and average rate data was utilized in our analysis, but is presented in ranges in the above table for the purposes of confidentiality.

Tran

sient

Mee

ting

and

Grou

p

Total Competitive

Level

Annual Room Count

Annual Room Count


Based on our analysis presented in the Projection of Occupancy and Average Rate chapter, we have chosen to use a stabilized occupancy level of 70% and a base-year rate position of $185.00 for the proposed subject hotel. The following table reflects a summary of our market-wide and proposed subject hotel occupancy and average rate projections.

FIGURE 1-4 MARKET AND SUBJECT PROPERTY AVERAGE RATE FORECAST

Calendar Year 2017 2018 2019 2020 2021 2022 2023 2024 2025

Market ADR $157.47 $159.84 $165.43 $172.87 $179.79 $186.08 $191.66 $197.41 $203.34Projected Ma rket ADR Growth Rate — 1.5% 3.5% 4.5% 4.0% 3.5% 3.0% 3.0% 3.0%

Proposed Subject Property ADR (As-If Stabi l ized) $185.00 $187.78 $194.35 $203.09 $211.22 $218.61 $225.17 $231.92 $238.88ADR Growth Ra te — 1.5% 3.5% 4.5% 4.0% 3.5% 3.0% 3.0% 3.0%

Proposed Subject Stabi l ized ADR Penetra tion 117% 117% 117% 117% 117% 117% 117% 117% 117.5%

Fiscal Year 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26

Proposed Subject Property Average Ra te $207.12 $214.88 $221.86 $228.52 $235.37 $242.43Opening Discount 3.0% 2.0% 0.0% 0.0% 0.0% 0.0%

Average Rate After Discount $200.91 $214.88 $221.86 $228.52 $235.37 $242.43

Real Avera ge Rate Growth — 7.0% 3.2% 3.0% 3.0% 3.0%

Market ADR $176.30 $182.91 $188.85 $194.51 $200.35 $206.36Proposed Subject ADR Penetra tion (After Discount) 114% 117% 117% 117% 117% 117%

ADR Expressed in Ba se-Year Dol lars Deflated @ Inflation Rate $185.66 $192.79 $193.25 $193.25 $193.25 $193.25

Our positioning of each revenue and expense level is supported by comparable operations or trends specific to this market. Our forecast of income and expense is presented in the following table.

Summary of Forecast Occupancy and Average Rate

Summary of Forecast Income and Expense Statement


FIGURE 1-5 DETAILED FORECAST OF INCOME AND EXPENSE

2020/21 Begins July 2021/22 2022/23 Stabilized 2024/25

Number of Rooms: 250 250 250 250 250Occupancy: 56% 64% 68% 70% 70%Average Rate: $200.91 $214.88 $221.86 $228.52 $235.37RevPAR: $112.51 $137.52 $150.87 $159.96 $164.76Days Open: 365 365 365 365 365Occupied Rooms: 51,100 %Gross PAR POR 58,400 %Gross PAR POR 62,050 %Gross PAR POR 63,875 %Gross PAR POR 63,875 %Gross PAR POR OPERATING REVENUERooms $10,266 66.4 % $41,064 $200.90 $12,549 66.9 % $50,196 $214.88 $13,766 66.1 % $55,064 $221.85 $14,597 66.4 % $58,388 $228.52 $15,034 66.4 % $60,136 $235.37Food 3,126 20.2 12,503 61.17 3,741 20.0 14,964 64.06 4,242 20.4 16,967 68.36 4,465 20.3 17,859 69.90 4,599 20.3 18,394 71.99Beverage 1,394 9.0 5,577 27.28 1,687 9.0 6,748 28.89 1,963 9.4 7,852 31.64 2,055 9.3 8,220 32.17 2,117 9.3 8,467 33.14Other Operated Departments 438 2.8 1,752 8.57 494 2.6 1,974 8.45 545 2.6 2,178 8.78 566 2.6 2,263 8.86 583 2.6 2,331 9.12Miscellaneous Income 243 1.6 971 4.75 274 1.5 1,094 4.68 302 1.4 1,207 4.86 314 1.4 1,254 4.91 323 1.4 1,292 5.06 Total Operating Revenues 15,467 100.0 61,867 302.67 18,744 100.0 74,976 320.96 20,817 100.0 83,269 335.49 21,996 100.0 87,984 344.36 22,655 100.0 90,620 354.68DEPARTMENTAL EXPENSES *Rooms 2,986 29.1 11,945 58.44 3,229 25.7 12,915 55.29 3,404 24.7 13,617 54.86 3,547 24.3 14,188 55.53 3,653 24.3 14,613 57.20Food & Beverage 3,737 82.7 14,947 73.13 4,093 75.4 16,373 70.09 4,410 71.1 17,641 71.08 4,583 70.3 18,333 71.75 4,721 70.3 18,883 73.91Other Operated Departments 369 84.3 1,478 7.23 390 79.0 1,560 6.68 410 75.3 1,639 6.60 423 74.8 1,693 6.63 436 74.8 1,743 6.82 Total Expenses 7,092 45.9 28,370 138.80 7,712 41.1 30,848 132.05 8,224 39.5 32,898 132.54 8,553 38.9 34,214 133.91 8,810 38.9 35,240 137.93DEPARTMENTAL INCOME 8,374 54.1 33,497 163.88 11,032 58.9 44,128 188.90 12,593 60.5 50,371 202.95 13,442 61.1 53,770 210.45 13,845 61.1 55,379 216.75UNDISTRIBUTED OPERATING EXPENSESAdministrative & General 1,416 9.2 5,665 27.71 1,511 8.1 6,045 25.88 1,585 7.6 6,339 25.54 1,643 7.5 6,571 25.72 1,692 7.5 6,768 26.49Info & Telecom Systems 265 1.7 1,060 5.19 283 1.5 1,131 4.84 297 1.4 1,186 4.78 307 1.4 1,230 4.81 317 1.4 1,266 4.96Marketing 730 4.7 2,921 14.29 779 4.2 3,117 13.35 817 3.9 3,269 13.17 847 3.9 3,389 13.26 873 3.9 3,490 13.66Franchise Fee 821 5.3 3,285 16.07 1,004 5.4 4,016 17.19 1,101 5.3 4,405 17.75 1,168 5.3 4,671 18.28 1,203 5.3 4,811 18.83Prop. Operations & Maint. 660 4.3 2,639 12.91 704 3.8 2,816 12.05 738 3.5 2,953 11.90 765 3.5 3,061 11.98 788 3.5 3,152 12.34Utilities 812 5.3 3,249 15.90 867 4.6 3,467 14.84 909 4.4 3,636 14.65 942 4.3 3,769 14.75 970 4.3 3,882 15.19 Total Expenses 4,705 30.5 18,819 92.07 5,148 27.6 20,592 88.15 5,447 26.1 21,788 87.78 5,672 25.9 22,689 88.80 5,842 25.9 23,369 91.46GROSS HOUSE PROFIT 3,669 23.6 14,677 71.81 5,884 31.3 23,536 100.75 7,146 34.4 28,583 115.16 7,770 35.2 31,081 121.65 8,003 35.2 32,010 125.28Management Fee 464 3.0 1,856 9.08 562 3.0 2,249 9.63 625 3.0 2,498 10.06 660 3.0 2,640 10.33 680 3.0 2,719 10.64INCOME BEFORE NON-OPR. INC. & EXP. 3,205 20.6 12,821 62.73 5,322 28.3 21,287 91.13 6,521 31.4 26,085 105.10 7,110 32.2 28,441 111.32 7,323 32.2 29,292 114.64NON-OPERATING INCOME & EXPENSEProperty Taxes 420 2.7 1,682 8.23 433 2.3 1,732 7.41 446 2.1 1,784 7.19 459 2.1 1,838 7.19 473 2.1 1,893 7.41Insurance 585 3.8 2,340 11.45 603 3.2 2,411 10.32 621 3.0 2,483 10.00 639 2.9 2,558 10.01 659 2.9 2,634 10.31Reserve for Replacement 309 2.0 1,237 6.05 562 3.0 2,249 9.63 833 4.0 3,331 13.42 880 4.0 3,519 13.77 906 4.0 3,625 14.19 Total Expenses 1,315 8.5 5,259 25.73 1,598 8.5 6,392 27.36 1,899 9.1 7,598 30.61 1,979 9.0 7,914 30.98 2,038 9.0 8,152 31.90EBITDA LESS RESERVE $1,891 12.1 % $7,562 $37.00 $3,724 19.8 % $14,895 $63.76 $4,622 22.3 % $18,487 $74.48 $5,132 23.2 % $20,527 $80.34 $5,285 23.2 % $21,140 $82.74

*Departmental expenses are expressed as a percentage of departmental revenues.


FIGURE 1-6 TEN-YEAR FORECAST OF INCOME AND EXPENSE

2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30

Number of Rooms: 250 250 250 250 250 250 250 250 250 250Occupied Rooms: 51,100 58,400 62,050 63,875 63,875 63,875 63,875 63,875 63,875 63,875Occupancy: 56% 64% 68% 70% 70% 70% 70% 70% 70% 70%Average Rate: $200.91 % of $214.88 % of $221.86 % of $228.52 % of $235.37 % of $242.43 % of $249.71 % of $257.20 % of $264.91 % of $272.86RevPAR: $112.51 Gross $137.52 Gross $150.87 Gross $159.96 Gross $164.76 Gross $169.70 Gross $174.79 Gross $180.04 Gross $185.44 Gross $191.00OPERATING REVENUERooms $10,266 66.4 % $12,549 66.9 % $13,766 66.1 % $14,597 66.4 % $15,034 66.4 % $15,485 66.4 % $15,950 66.4 % $16,429 66.4 % $16,921 66.4 % $17,429 66.4 %Food 3,126 20.2 3,741 20.0 4,242 20.4 4,465 20.3 4,599 20.3 4,737 20.3 4,879 20.3 5,025 20.3 5,176 20.3 5,331 20.3Beverage 1,394 9.0 1,687 9.0 1,963 9.4 2,055 9.3 2,117 9.3 2,180 9.3 2,246 9.3 2,313 9.3 2,382 9.3 2,454 9.3Other Operated Departments 438 2.8 494 2.6 545 2.6 566 2.6 583 2.6 600 2.6 618 2.6 637 2.6 656 2.6 676 2.6Miscellaneous Income 243 1.6 274 1.5 302 1.4 314 1.4 323 1.4 333 1.4 343 1.4 353 1.4 363 1.4 374 1.4 Total Operating Revenues 15,467 100.0 18,744 100.0 20,817 100.0 21,996 100.0 22,655 100.0 23,335 100.0 24,035 100.0 24,757 100.0 25,498 100.0 26,264 100.0DEPARTMENTAL EXPENSES *Rooms 2,986 29.1 3,229 25.7 3,404 24.7 3,547 24.3 3,653 24.3 3,763 24.3 3,876 24.3 3,992 24.3 4,112 24.3 4,235 24.3Food & Beverage 3,737 82.7 4,093 75.4 4,410 71.1 4,583 70.3 4,721 70.3 4,862 70.3 5,008 70.3 5,159 70.3 5,313 70.3 5,473 70.3Other Operated Departments 369 84.3 390 79.0 410 75.3 423 74.8 436 74.8 449 74.8 462 74.8 476 74.8 491 74.8 505 74.8 Total Expenses 7,092 45.9 7,712 41.1 8,224 39.5 8,553 38.9 8,810 38.9 9,074 38.9 9,347 38.9 9,627 38.9 9,916 38.9 10,213 38.9DEPARTMENTAL INCOME 8,374 54.1 11,032 58.9 12,593 60.5 13,442 61.1 13,845 61.1 14,260 61.1 14,688 61.1 15,130 61.1 15,583 61.1 16,050 61.1UNDISTRIBUTED OPERATING EXPENSESAdministrative & General 1,416 9.2 1,511 8.1 1,585 7.6 1,643 7.5 1,692 7.5 1,743 7.5 1,795 7.5 1,849 7.5 1,904 7.5 1,961 7.5Info & Telecom Systems 265 1.7 283 1.5 297 1.4 307 1.4 317 1.4 326 1.4 336 1.4 346 1.4 356 1.4 367 1.4Marketing 730 4.7 779 4.2 817 3.9 847 3.9 873 3.9 899 3.9 926 3.9 953 3.9 982 3.9 1,012 3.9Franchise Fee 821 5.3 1,004 5.4 1,101 5.3 1,168 5.3 1,203 5.3 1,239 5.3 1,276 5.3 1,314 5.3 1,354 5.3 1,394 5.3Prop. Operations & Maint. 660 4.3 704 3.8 738 3.5 765 3.5 788 3.5 812 3.5 836 3.5 861 3.5 887 3.5 914 3.5Utilities 812 5.3 867 4.6 909 4.4 942 4.3 970 4.3 1,000 4.3 1,030 4.3 1,060 4.3 1,092 4.3 1,125 4.3 Total Expenses 4,705 30.5 5,148 27.6 5,447 26.1 5,672 25.9 5,842 25.9 6,018 25.9 6,198 25.9 6,384 25.9 6,576 25.9 6,773 25.9GROSS HOUSE PROFIT 3,669 23.6 5,884 31.3 7,146 34.4 7,770 35.2 8,003 35.2 8,243 35.2 8,490 35.2 8,745 35.2 9,007 35.2 9,278 35.2Management Fee 464 3.0 562 3.0 625 3.0 660 3.0 680 3.0 700 3.0 721 3.0 743 3.0 765 3.0 788 3.0INCOME BEFORE NON-OPR. INC. & EXP. 3,205 20.6 5,322 28.3 6,521 31.4 7,110 32.2 7,323 32.2 7,543 32.2 7,769 32.2 8,003 32.2 8,242 32.2 8,490 32.2NON-OPERATING INCOME & EXPENSEProperty Taxes 420 2.7 433 2.3 446 2.1 459 2.1 473 2.1 487 2.1 502 2.1 517 2.1 533 2.1 549 2.1Insurance 585 3.8 603 3.2 621 3.0 639 2.9 659 2.9 678 2.9 699 2.9 720 2.9 741 2.9 763 2.9Reserve for Replacement 309 2.0 562 3.0 833 4.0 880 4.0 906 4.0 933 4.0 961 4.0 990 4.0 1,020 4.0 1,051 4.0 Total Expenses 1,315 8.5 1,598 8.5 1,899 9.1 1,979 9.0 2,038 9.0 2,099 9.0 2,162 9.0 2,227 9.0 2,294 9.0 2,363 9.0EBITDA LESS RESERVE $1,891 12.1 % $3,724 19.8 % $4,622 22.3 % $5,132 23.2 % $5,285 23.2 % $5,443 23.2 % $5,607 23.2 % $5,776 23.2 % $5,948 23.2 % $6,127 23.2 %

1 1 1 1 1 1 1 1 1 1*Departmental expenses are expressed as a percentage of departmental revenues.

% ofGross


As illustrated, the hotel is expected to stabilize at a profitable level. Please refer to the Forecast of Income and Expense chapter of our report for a detailed explanation of the methodology used in deriving this forecast. The methodology used to develop this study is based on the market research and valuation techniques set forth in the textbooks authored by Hospitality Valuation Services for the American Institute of Real Estate Appraisers and the Appraisal Institute, entitled The Valuation of Hotels and Motels,1 Hotels, Motels and Restaurants: Valuations and Market Studies,2 The Computerized Income Approach to Hotel/Motel Market Studies and Valuations,3 Hotels and Motels: A Guide to Market Analysis, Investment Analysis, and Valuations,4 and Hotels and Motels – Valuations and Market Studies.5

1. All information was collected and analyzed by the staff of TS Worldwide, LLC. Information was supplied by the client and/or the property’s development team.

2. The subject sites under consideration have been evaluated from the viewpoint of their physical utility for the future operation of a hotel, as well as access, visibility, and other relevant factors.

3. The subject property's proposed improvements have been reviewed for their expected quality of construction, design, and layout efficiency.

4. The surrounding economic environment, on both an area and neighborhood level, has been reviewed to identify specific hostelry-related economic and demographic trends that may have an impact on future demand for hotels.

5. Dividing the market for hotel accommodations into individual segments defines specific market characteristics for the types of travelers expected to utilize the area's hotels. The factors investigated include purpose of visit, average length of stay, facilities and amenities required, seasonality, daily demand fluctuations, and price sensitivity.

1 Stephen Rushmore, The Valuation of Hotels and Motels. (Chicago: American Institute of Real Estate Appraisers, 1978). 2 Stephen Rushmore, Hotels, Motels and Restaurants: Valuations and Market Studies. (Chicago: American Institute of Real Estate Appraisers, 1983). 3 Stephen Rushmore, The Computerized Income Approach to Hotel/Motel Market Studies and Valuations. (Chicago: American Institute of Real Estate Appraisers, 1990). 4 Stephen Rushmore, Hotels and Motels: A Guide to Market Analysis, Investment Analysis, and Valuations (Chicago: Appraisal Institute, 1992). 5 Stephen Rushmore and Erich Baum, Hotels and Motels – Valuations and Market Studies. (Chicago: Appraisal Institute, 2001).

Scope of Work


6. An analysis of existing and proposed competition provides an indication of the current accommodated demand, along with market penetration and the degree of competitiveness. Unless noted otherwise, we have inspected the competitive lodging facilities summarized in this report.

7. Documentation for an occupancy and average rate projection is derived utilizing the build-up approach based on an analysis of lodging activity.

8. A detailed projection of income and expense made in accordance with the Uniform System of Accounts for the Lodging Industry sets forth the anticipated economic benefits of the subject property.

June-2017 Description of the Sites and Neighborhood Proposed Hotel & Conference Center – Port Aransas, Texas 11

2. Description of the Sites and Neighborhood

The suitability of the land for the operation of a lodging facility is an important consideration affecting the economic viability of a property and its ultimate marketability. Factors such as size, topography, access, visibility, and the availability of utilities have a direct impact on the desirability of a particular site. Several sites for the proposed subject property are being considered and analyzed. The following bullet points reflect the sites under consideration, as well as each site's various attributes. The sites are located in the city of Port Aransas, Texas.

• Site 1: Palmilla Beach – This site, which is reportedly cleared and ready for development, is considered one of the most favorable due to its high visibility from State Highway 361 and its proximity to the Palmilla Beach Golf Club and ancillary uses within this development. Furthermore, this site is located a considerable distance from Downtown Port Aransas – thereby limiting some of the traffic in the downtown area that would likely be created from the development of a full-service, conference center hotel. This site would likely provide excellent access, while limiting some of the traffic congestion in Downtown Port Aransas. Finally, this site will likely provide guests of the hotel access to areas of the beach that are exclusive to residents of Palmilla Beach. SITE 1: AERIAL – MAP VIEW


• Site 2: Cinnamon Shore – According to Cinnamon Shore ownership, multiple sites for construction of a full-service, conference center hotel are located within this development; most sites are cleared and ready for development, while some sites may contain improvements. This site would likely provide excellent access from State Highway 361; however, visibility from State Highway 361 could be limited – depending on where the hotel is ultimately built within this development. Cinnamon Shore does lack an onsite golf course as an amenity to potential guests of the hotel; however, multiple retail and restaurant options are either open or under construction. This site would also limit some of the traffic congestion in Downtown Port Aransas – given its considerable distance from downtown. Lastly, this site will likely provide guests of the hotel access to areas of the beach that are exclusive to residents of Cinnamon Shore. SITE 2: AERIAL – MAP VIEW


• Site 3: Red Roof Inn Port Aransas & Surrounding Parcels – This site reportedly includes the Red Roof Inn Port Aransas, as well as multiple parcels surrounding the Red Roof Inn. Some portions of these sites are vacant, while other portions of the sites contain improvements. While this site would provide excellent visibility closer to Downtown Port Aransas, access to/from this site would likely be challenging for the development of a full-service, conference center hotel. Further, utilizing this site for the development of a full-service, conference center hotel would likely increase traffic congestion significantly at one of the busiest intersections in Port Aransas. This site would likely provide guests of the hotel access to area restaurants and retail options – within a relatively short walking distance; however, this site lacks any onsite recreational amenities and would not provide guests of the hotel direct access to a non-public area of the beach. SITE 3: AERIAL – MAP VIEW


• Site 4: Port Aransas City Hall & Surrounding Parcels – This site reportedly includes the Port Aransas City Hall building, as well as multiple parcels surrounding City Hall. Some portions of these sites are vacant, while most portions of the sites contain improvements. Similar to Site #3, this site would provide excellent visibility closer to Downtown Port Aransas; however, access to/from this site would likely be challenging for the development of a full-service, conference center hotel. Further, utilizing this site for the development of a full-service, conference center hotel would likely increase traffic congestion significantly along a heavily traveled thoroughfare to/from the Port Aransas Ferry Landing. This site would likely provide guests of the hotel access to area restaurants and retail options – within a relatively short walking distance; however, this site lacks any onsite recreational amenities and would not provide guests of the hotel direct access to a non-public area of the beach. SITE 4: AERIAL – MAP VIEW


• Site 5: Port Aransas Marina (Northeast of Port Aransas Nature Preserve) – This site reportedly includes a portion of vacant land along Port Street – northeast of the Port Aransas Nature Preserve. This site is reportedly vacant and cleared for development. Similar to Sites #3 and #4, this site would provide excellent visibility closer to Downtown Port Aransas; however, access to/from this site would likely be challenging for the development of a full-service, conference center hotel. Further, utilizing this site for the development of a full-service, conference center hotel would likely increase traffic congestion significantly along Port Street and the surrounding roadways leading into Port Street. While this site would likely not provide guests of the hotel access to area restaurants and retail options within a relatively short walking distance, this site would likely provide views of and access to the marina. However, it is unclear what type of access to the marina would be provided to guests of the hotel. The Port Aransas Nature Preserve would be within a relatively short walking distance to the hotel. Lastly, this site lacks any onsite recreational amenities and would not provide guests of the hotel direct access to a non-public area of the beach. SITE 5: AERIAL – MAP VIEW


Each site's topography is generally flat, with a shape that should permit efficient use of the site for building and site improvements, including ingress and egress. Upon completion of construction, the selected subject site is not expected to contain any significant portion of undeveloped land that could be sold, entitled, and developed for alternate use. It is anticipated that the selected site will be developed fully with building and site improvements, thus contributing to the overall profitability of the hotel. It is important to analyze the sites under consideration with respect to regional and local transportation routes and demand generators, including ease of access. The subject sites under consideration are readily accessible to a variety of local and county roads, as well as state and interstate highways.

MAP OF REGIONAL ACCESS ROUTES

Topography and Site Utility

Access and Visibility


Primary regional access through the region is provided by U.S. Highway 77, a major north/south thoroughfare that borders Corpus Christi's western side and extends to such cities as Harlingen to the south and Victoria to the northeast. Interstate 37 is another major route, which provides access to San Antonio to the northwest. Primary access through the Port Aransas/Mustang Island area is provided by east/west State Highway 361. The subject market is served by a variety of additional local highways, which are illustrated on the map. The proposed subject hotel will be served by the Corpus Christi International Airport, which is located approximately 25 miles to the west of Port Aransas/Mustang Island. The neighborhood surrounding a lodging facility often has an impact on a hotel's status, image, class, style of operation, and sometimes its ability to attract and properly serve a particular market segment. This section of the report investigates the subject neighborhood and evaluates any pertinent location factors that could affect its future occupancy, average rate, and overall profitability. The neighborhood that surrounds the subject sites under consideration can be generally described as the State Highway 361/South Alister Street corridor between Port Royal Ocean Resort & Conference Center to the southwest and Cotter Avenue to the northeast. The neighborhood is characterized by condominiums, restaurants, retail outlets, and other locally owned businesses along State Highway 361/Alister Street, which are generally focused toward serving the needs of leisure travelers. It is important to note that Hurricane Harvey, which made landfall in nearby Rockport as a Category 4 hurricane on August 25, 2017, inflicted a significant amount of property damage. According to the National Oceanic and Atmospheric Administration, Hurricane Harvey was the costliest tropical cyclone on record, causing approximately $125 billion in damage. Many of the businesses along State Highway 361 were damaged to some extent by the hurricane. Given the damage caused by Hurricane Harvey, this neighborhood is in the growth stage of its life cycle. Many of the businesses that sustained damage from the hurricane began to rebuild in the ensuing months. Some businesses saw a partial loss of property, while others experienced a total loss. The proposed subject hotel's opening should be a positive influence on the area; the hotel is expected to be in character with and to complement surrounding land uses. Once the majority of the rebuilding efforts in Port Aransas/Mustang Island are complete, the supportive nature of the development in the immediate area should be appropriate for and conducive to the operation of a hotel.

Airport Access

Neighborhood


The selected subject site will reportedly be served by all necessary utilities. Geological and soil reports were not provided to us or made available for our review during the preparation of this report. We are not qualified to evaluate soil conditions other than by a visual inspection of the surface; no extraordinary conditions were apparent in any of the sites. We were not informed of any site-specific nuisances or hazards, and there were no visible signs of toxic ground contaminants to any of the sites at the time of our inspection. Because we are not experts in this field, we do not warrant the absence of hazardous waste and urge the reader to obtain an independent analysis of these factors. The subject sites under consideration are located in various flood zones as defined by the Federal Emergency Management Association. A further, detailed study of each site’s location with respect to flood zones is recommended. According to the Port Aransas zoning map (located on the City of Port Aransas website – dated 3-18-2010) some of the subject sites under consideration are located in different zoning districts. It is assumed that the subject site (and zoning district) selected will support the development of a full-service, conference center hotel. We are not aware of any easements attached to any of the properties that would significantly affect the utility of the site or marketability of this project.

Utilities

Soil and Subsoil Conditions

Nuisances and Hazards

Flood Zone

Zoning

Easements and Encroachments

June-2017 Market Area Analysis Proposed Hotel & Conference Center – Port Aransas, Texas 19

3. Market Area Analysis

The economic vitality of the market area and neighborhood surrounding the subject site is an important consideration in forecasting lodging demand and future income potential. Economic and demographic trends that reflect the amount of visitation provide a basis from which to project lodging demand. The purpose of the market area analysis is to review available economic and demographic data to determine whether the local market will undergo economic growth, stabilize, or decline. In addition to predicting the direction of the economy, the rate of change must be quantified. These trends are then correlated based on their propensity to reflect variations in lodging demand, with the objective of forecasting the amount of growth or decline in visitation by individual market segment (e.g., transient and meeting and group). The market area for a lodging facility is the geographical region where the sources of demand and the competitive supply are located. The subject sites under consideration are located in the city of Port Aransas, the county of Nueces, and the state of Texas. Port Aransas is a small beachside community on Mustang Island, situated to the east of Corpus Christi. Boasting pristine beaches and year-round temperate climate, the town has been a popular tourism destination for decades; furthermore, over half of the state's population lives within 200 miles of Port Aransas. The closest major city, Corpus Christi, is a seaport at the mouth of the Nueces River on the west end of Corpus Christi Bay and is the county seat of Nueces County. The city took the name of a Roman Catholic feast day following its discovery by a Spanish explorer in 1519; Corpus Christi is nicknamed "The Sparkling City by the Sea." Since its incorporation in 1852, the city has grown into a regional hub for marketing, processing, packaging, and distributing agricultural commodities for a twelve-county trade area. The greater Corpus Christi Metropolitan Statistical Area (MSA), which includes the adjacent San Patricio County, is bolstered by a variety of industries and sectors, including petrochemical, manufacturing, tourism, health care, retail, education, shipping, agriculture, and the military. The proposed subject property’s market area can be defined by its Combined Statistical Area (CSA): Corpus Christi-Kingsville-Alice, TX. The CSA represents adjacent metropolitan and micropolitan statistical areas that have a moderate degree of employment interchange. Micropolitan statistical areas represent urban areas in the United States based around a core city or town with a population of 10,000 to 49,999; the MSA requires the presence of a core city of at least 50,000 people and a total population of at least 100,000 (75,000 in New England). The following exhibit illustrates the market area.

Market Area Definition


MAP OF MARKET AREA

A primary source of economic and demographic statistics used in this analysis is the Complete Economic and Demographic Data Source published by Woods & Poole Economics, Inc.—a well-regarded forecasting service based in Washington, D.C. Using a database containing more than 900 variables for each county in the nation, Woods & Poole employs a sophisticated regional model to forecast economic and demographic trends. Historical statistics are based on census data and information published by the Bureau of Economic Analysis. Projections are formulated by Woods & Poole, and all dollar amounts have been adjusted for inflation, thus reflecting real change. These data are summarized in the following table.

Economic and Demographic Review


FIGURE 3-1 ECONOMIC AND DEMOGRAPHIC DATA SUMMARY

Average AnnualCompounded Change

2000 2010 2016 2020 2000-10 2010-16 2016-20

Resident Population (Thousands)Nueces County 313.7 340.3 361.1 371.3 0.8 % 1.0 % 0.7 %Corpus Chris ti , TX MSA 403.5 428.0 454.9 469.0 0.6 1.0 0.8Corpus Chris ti -Kingsvi l le-Al i ce, TX CSA 474.8 501.4 529.5 545.2 0.5 0.9 0.7State of Texas 20,944.5 25,245.7 27,811.3 29,649.5 1.9 1.6 1.6Uni ted States 282,162.4 309,347.1 324,506.9 336,690.4 0.9 0.8 0.9

Per-Capita Personal Income*Nueces County $29,477 $35,647 $39,931 $42,354 1.9 1.9 1.5Corpus Chris ti , TX MSA 28,500 35,233 39,496 41,945 2.1 1.9 1.5Corpus Chris ti -Kingsvi l le-Al i ce, TX CSA 27,643 34,649 39,051 41,537 2.3 2.0 1.6State of Texas 34,121 37,659 43,342 46,183 1.0 2.4 1.6Uni ted States 36,812 39,622 43,613 46,375 0.7 1.6 1.5

W&P Wealth IndexNueces County 81.5 89.4 90.6 90.4 0.9 0.2 (0.0)Corpus Chris ti , TX MSA 79.0 88.3 89.6 89.6 1.1 0.3 (0.0)Corpus Chris ti -Kingsvi l le-Al i ce, TX CSA 76.6 86.6 88.4 88.4 1.2 0.3 0.0State of Texas 94.0 96.2 100.0 100.1 0.2 0.6 0.0Uni ted States 100.0 100.0 100.0 100.0 0.0 0.0 0.0

Food and Beverage Sales (Millions)*Nueces County $495 $613 $812 $864 2.2 4.8 1.6Corpus Chris ti , TX MSA 568 711 945 1,008 2.3 4.9 1.6Corpus Chris ti -Kingsvi l le-Al i ce, TX CSA 637 808 1,071 1,141 2.4 4.8 1.6State of Texas 27,748 37,635 50,564 55,656 3.1 5.0 2.4Uni ted States 368,829 447,728 562,999 602,635 2.0 3.9 1.7

Total Retail Sales (Millions)*Nueces County $4,355 $4,926 $6,032 $6,385 1.2 3.4 1.4Corpus Chris ti , TX MSA 5,111 5,861 7,195 7,633 1.4 3.5 1.5Corpus Chris ti -Kingsvi l le-Al i ce, TX CSA 5,902 6,986 8,469 8,971 1.7 3.3 1.5State of Texas 291,221 341,775 423,158 464,763 1.6 3.6 2.4Uni ted States 3,902,830 4,130,414 4,846,834 5,181,433 0.6 2.7 1.7

* Inflation AdjustedSource: Woods & Poole Economics , Inc.


The U.S. population has grown at an average annual compounded rate of 0.8% from 2010 through 2016. The county’s population has grown more slowly than the nation’s population; the average annual growth rate of 1.0% between 2010 and 2016 reflects a gradually expanding area. Following this population trend, per-capita personal income increased slowly, at 1.9% on average annually for the county between 2010 and 2016. Local wealth indexes have remained stable in recent years, registering a relatively modest 90.6 level for the county in 2016. Food and beverage sales totaled $812 million in the county in 2016, versus $613 million in 2010. This reflects a 4.8% average annual change, which is stronger than the 2.2% pace recorded in the prior decade, the latter years of which were adversely affected by the recession. Over the long term, the pace of growth is forecast to moderate to a more sustainable level of 1.6%, which is forecast through 2020. The retail sales sector demonstrated an annual increase of 1.2% registered in the decade 2000 to 2010, followed by an increase of 3.4% in the period 2010 to 2016. An increase of 1.4% average annual change is expected in county retail sales through 2020. The characteristics of an area's workforce provide an indication of the type and amount of transient visitation likely to be generated by local businesses. Sectors such as finance, insurance, and real estate (FIRE); wholesale trade; and services produce a considerable number of visitors who are not particularly rate-sensitive. The government sector often generates transient room nights, but per-diem reimbursement allowances often limit the accommodations selection to budget and mid-priced lodging facilities. Contributions from manufacturing, construction, transportation, communications, and public utilities (TCPU) employers can also be important, depending on the company type. The following table sets forth the county workforce distribution by business sector in 2000, 2010, and 2016, as well as a forecast for 2020.

Workforce Characteristics


FIGURE 3-2 HISTORICAL AND PROJECTED EMPLOYMENT (000S)

Average AnnualCompounded Change

Percent Percent Percent PercentIndustry 2000 of Total 2010 of Total 2016 of Total 2020 of Total

Farm 0.9 0.5 % 0.9 0.4 % 0.9 0.4 % 0.9 0.4 % (0.8) % 1.0 % 0.1 %Forestry, Fi shing, Related Activi ties And Other 0.7 0.4 0.6 0.3 0.6 0.3 0.6 0.2 (1.3) (1.9) 0.8Mining 3.4 1.9 7.0 3.4 11.2 5.0 11.6 4.9 7.3 8.2 0.9Uti l i ties 0.8 0.4 0.8 0.4 0.9 0.4 0.9 0.4 0.1 2.0 0.9Cons truction 15.2 8.4 16.7 8.3 20.2 9.0 21.7 9.2 0.9 3.2 1.8Ma nufacturing 10.5 5.8 8.2 4.1 9.1 4.0 9.2 3.9 (2.4) 1.6 0.4Tota l Trade 25.2 13.8 26.3 13.0 29.3 13.0 30.6 13.0 0.5 1.8 1.1 Wholesa le Trade 5.4 3.0 5.9 2.9 7.1 3.2 7.4 3.1 1.0 3.2 1.0 Reta i l Trade 19.8 10.9 20.4 10.1 22.2 9.9 23.2 9.8 0.3 1.4 1.1Tra nsportation And Warehous ing 5.1 2.8 5.4 2.7 7.5 3.3 7.7 3.3 0.6 5.7 0.7Informa tion 3.6 2.0 2.4 1.2 2.3 1.0 2.4 1.0 (4.2) (0.2) 1.0Finance And Insurance 6.5 3.6 8.4 4.2 9.8 4.4 10.7 4.5 2.6 2.6 2.2Real Esta te And Renta l And Leas e 6.2 3.4 7.7 3.8 9.0 4.0 9.4 4.0 2.2 2.6 1.1Tota l Services 74.0 40.6 84.9 42.0 93.0 41.3 98.0 41.5 1.4 1.5 1.3

Profes s ional And Technica l Services 8.0 4.4 9.2 4.5 9.7 4.3 10.2 4.3 1.4 1.0 1.4Ma nagement Of Compa nies And Enterpris es 0.2 0.1 0.5 0.2 0.9 0.4 1.0 0.4 6.7 12.5 3.4Administra tive And Waste Services 12.5 6.9 12.1 6.0 12.4 5.5 12.9 5.5 (0.3) 0.4 0.9Educational Services 1.6 0.9 2.1 1.0 2.1 0.9 2.3 1.0 2.8 (0.0) 2.4Heal th Care And Socia l Ass i s tance 22.8 12.5 29.6 14.6 29.9 13.3 32.0 13.6 2.6 0.2 1.7Arts , Enterta inment, And Recreation 2.5 1.4 2.8 1.4 3.3 1.5 3.4 1.5 1.2 2.6 1.0Accommodation And Food Services 14.9 8.2 17.6 8.7 21.6 9.6 22.5 9.6 1.7 3.5 1.0Other Services , Except Publ ic Admini stration 11.4 6.2 11.1 5.5 13.0 5.8 13.6 5.8 (0.2) 2.7 1.1

Tota l Government 30.0 16.5 32.6 16.2 31.2 13.9 32.2 13.6 0.8 (0.7) 0.8 Federa l Civi l ia n Government 5.4 3.0 6.7 3.3 6.1 2.7 5.9 2.5 2.1 (1.5) (0.8) Federa l Mi l i tary 3.6 2.0 3.2 1.6 2.9 1.3 2.9 1.2 (1.1) (1.5) 0.1 State And Loca l Government 21.0 11.6 22.8 11.3 22.2 9.9 23.3 9.9 0.8 (0.4) 1.3

TOTAL 182.1 100.0 % 201.9 100.0 % 225.0 100.0 % 235.9 100.0 % 1.0 % 1.8 % 1.2 %

MSA 216.5 — 239.0 — 268.0 — 282.1 — 1.0 % 1.9 % 1.3 %U.S. 165,370.9 — 173,034.7 — 191,870.8 — 203,418.4 — 0.9 1.7 1.5

Source: Woods & Poole Economics , Inc.

2000-2010

2010-2016

2016-2020


Woods & Poole Economics, Inc. reports that during the period from 2000 to 2010, total employment in the county grew at an average annual rate of 1.0%. This trend was on par with the growth rate recorded by the MSA and also outpaced the national average. More recently, the pace of total employment growth in the county accelerated to 1.8% on an annual average from 2010 to 2016, reflecting the initial years of the recovery. Of the primary employment sectors, Total Services recorded the highest increase in number of employees during the period from 2010 to 2016, increasing by 8,090 people, or 9.5%, and rising from 42.0% to 41.3% of total employment. Of the various service sub-sectors, Health Care And Social Assistance and Accommodation And Food Services were the largest employers. Strong growth was also recorded in the Mining sector, as well as the Construction sector, which expanded by 60.6% and -10.7%, respectively, in the period 2010 to 2016. Forecasts developed by Woods & Poole Economics, Inc. anticipate that total employment in the county will change by 1.2% on average annually through 2020. The trend is below the forecast rate of change for the U.S. as a whole during the same period. The following table illustrates historical employment, households, population, and average household income data, as provided by REIS for the overall Corpus Christi market.

FIGURE 3-3 HISTORICAL & PROJECTED EMPLOYMENT, HOUSEHOLDS, POPULATION, AND HOUSEHOLD INCOME STATISTICS

Year

2014 193,930 — 52,727 — 19,232 — 169,610 — 450,540 — $112,665 — 2015 191,930 (1.0) % 52,041 (1.3) % 18,484 (3.9) % 170,820 0.7 % 454,270 0.8 % 113,778 1.0 %2016 190,870 (0.6) 51,186 (1.6) 17,652 (4.5) 171,550 0.4 454,960 0.2 113,504 (0.2)

% ChgTotal

Employment % ChgOffice

Employment % ChgIndustrial

Employment % Chg Households % Chg Population % ChgHousehold

Avg. Income

Source: REIS Report, 3rd Quarter, 2017

For the Corpus Christi market, of the roughly 191,000 persons employed in 2016, 27% work in offices and are categorized as office employees, while 9% are categorized as industrial employees. Total employment decreased by -0.6% from 2015 to 2016. By comparison, office employment reflected contraction of -1.6% from 2015 to 2016. The number of households in this market in 2016 totaled 172,000, reflecting an increase of 0.4% from the level registered in 2015. Population expanded during this


same time frame, at a rate of 0.2%. Household average income diminished by -0.2% in 2016, ending the year at roughly $114,000. The following table presents historical unemployment rates for the proposed subject hotel’s market area. FIGURE 3-4 UNEMPLOYMENT STATISTICS

Year

2007 4.2 % 4.3 % 4.3 % 4.6 %2008 4.5 4.6 4.8 5.82009 6.7 7.0 7.6 9.32010 8.1 8.5 8.1 9.62011 7.9 8.2 7.8 8.92012 6.6 6.7 6.7 8.12013 6.1 6.3 6.2 7.42014 5.1 5.3 5.1 6.22015 4.9 5.2 4.5 5.32016 5.7 6.0 4.6 4.9

Recent Month - Nov2016 5.7 % 6.0 % 4.5 % 4.6 %2017 4.8 5.3 3.7 4.1

State U.S.MSACounty

* Letters s hown next to data poi nts (i f any) refl ect revis ed population control s and/or model re-estimation i mpl emented by the BLS.

Source: U.S. Bureau of Labor Statis tics

Current U.S. unemployment levels are now firmly below the annual averages of the last economic cycle peak of 2006 and 2007, when annual averages were 4.6%. National unemployment registered 4.1% in November 2017 (similar to October's level), roughly six points below the October 2009 peak of 10.0%. Total nonfarm payroll employment increased by 228,000 and 244,000 jobs in October and November 2017, respectively. The highest gains were made in the professional and business services, manufacturing, and healthcare sectors. Unemployment has remained under the 5.0% mark since May 2016, reflecting a trend of relative stability and the overall strength of the U.S. economy. Locally, the unemployment rate was 5.7% in 2016; for this same area in 2017, the most recent month’s unemployment rate was registered at 4.8%, versus 5.7% for

Unemployment Statistics


the same month in 2016. Unemployment rose in 2008 as the nation entered an economic slowdown; this trend continued through 2010. Unemployment rates began to recover in 2011 as the economy rebounded. Unemployment continued to decline through 2015, largely attributed to several new projects associated with major companies in the area. However, unemployment increased in 2016 given the depressed oil and gas industry. The most recent comparative period illustrates improvement, indicated by the lower unemployment rate in the latest available data. The area benefits from a diverse base of manufacturing, petrochemical, and logistics companies, as well as the Port of Corpus Christi, which have added thousands of jobs in recent years. Our interviews with economic development officials reflect a positive outlook driven by anticipated increases in construction employment. The following bullet points highlight major demand generators for this market: • Tourism is a major component of the greater Corpus Christi economy and is the

main economic driver for Port Aransas/Mustang Island and North Padre Island, which together feature one of the longest undeveloped beaches in the world; moreover, the mild average annual temperature of just over 70 degrees makes it a popular destination for outdoor activities throughout the year. The islands' pristine beaches draw demand from nearby Corpus Christi, as well as the larger metropolitan areas of San Antonio, Austin, and Houston. While not as popular of a Spring Break destination as South Padre Island, the area's well-maintained beaches and location closer to major metropolitan areas allows it to outperform its counterpart to the south throughout the year, despite underperforming during the spring and summer. Tourism trends in Port Aransas tend to reflect the economic health of the greater region, which is driven primarily by the energy industry, with diversity provided by the healthcare and government sectors.

• The energy industry is a major anchor of both Corpus Christi and the greater South Texas economy. The Port of Corpus Christi's exceptional highway, rail, and deep-water access, as well as its proximity to the Gulf of Mexico, combined with extensive exploration activities at the nearby Eagle Ford Shale (EFS), launched the region into an unprecedented period of economic growth in the petrochemical, manufacturing, and logistics industries. Following years of growing exploration levels, global petroleum supply hit a new peak in 2014 while demand for petroleum began to wane. As a result, the price of oil decreased significantly in late 2014. The lower oil prices have slowed growth in the oil and gas industry, specifically within the upstream sector. However, the market is still experiencing growth in the manufacturing, global shipping, and specialty chemical industries. Petroleum giant ExxonMobil Corporation plans to build the world's largest ethylene cracker plant. In April 2017, Exxon and Saudi

Major Business and Industry


Arabia Basic Industries Corporation announced plans to build a $10-billion plant spanning 1,300 acres near Gregory in the Corpus Christi area. Upon completion, the plant will be capable of producing 1.8 million tons of ethylene each year. The project is expected to create 600 permanent full time jobs, and 6,000 jobs during its five-year construction. In addition, more than $50 billion will be injected into the local economy during the first six years of operations.

• M&G Chemicals, one of the largest producers of PET resin in the country, recently opened the largest PET/PTA plant in the world in Corpus Christi, the $1-billion investment reportedly employed 3,000 construction workers at its peak, and will create more than 250 facility jobs and 700 indirect jobs. Junction Energy Capital and Castleton Commodities International broke ground on a $128-million oil storage and distribution facility in December 2017. The Corpus Christi Marine Storage Terminal is located along the Joe Fulton Corridor next to the M&G Chemicals plant. The voestalpine Group, a steel-based technology company headquartered in Linz, Austria, is another leading corporation in the global oil and gas industry. The $740-million, natural-gas-based, direct reduction plant opened on Corpus Christi Bay in early 2016 and is expected to produce over two million tons of hot briquetted iron annually. U.S. based producer of petrochemicals and specialty chemicals LyondellBasell completed the expansion of the 800 million pounds per ethylene project in January 2017. This expansion increased the ethylene production capacity of the plant from 1.7 billion pounds per annum to 2.5 billion pounds per year. Since 2012, the company has invested around $2 billion in the U.S. Gulf Coast expansion, and plans to invest an additional $3 billion in the region. Finally, Port officials are working to deepen and widen the Corpus Christi Ship Channel to ensure that the port is able to accommodate new growth.

• The government and healthcare sectors provide diversity to the regional economy. Corpus Christi Army Depot is the world’s largest helicopter-repair facility, employing a substantial workforce to repair, modify, modernize, and test helicopters, engines, and other components for military service. The Depot also serves as a training base for active-duty Army, National Guard, Reserve, and foreign military personnel, and its public-private partnership initiative has established business ties with such entities as GE Aviation and The Boeing Company. Furthermore, Naval Air Station Corpus Christi, also known as Truax Field, is a military airport located six miles southeast of Corpus Christi's CBD. The training program offered at the facility lasts approximately 18 months, primarily due to the complexity of aircraft utilized, and the general command assignment is pilot training. Moreover, area healthcare institutions and hospitals serve as major employers and represent a significant component of the local economy. Consisting of six hospital campuses, the CHRISTUS Spohn Health System is the region's largest charity care provider and not-for-profit healthcare system. The CHRISTUS Spohn Shoreline Hospital is amid a $335-


million expansion, including a new imaging room, additional operating rooms, and a new emergency department to replace the current emergency room; most improvements are scheduled to be completed in the spring of 2019. Additionally, Driscoll Children's Hospital serves as a major training facility for pediatric medicine in South Texas, while Corpus Christi Medical Center is a four-campus, 583-bed system that offers a full range of healthcare services.

The greater market area benefits from diverse economic drivers. A strong government presence, a growing petrochemical industry, one of the most active commercial ports in the nation, a well-established healthcare system, and tourism support the overall strength of the area. Strategically located on the western Gulf of Mexico, Corpus Christi provides easy access to the Gulf and the United States inland waterway system. The multi-year La Quinta Trade Gateway Terminal project, which was completed in 2014, extended and deepened the ship channel to provide access to a proposed multipurpose dock and container facility. The public investment has spurred additional private investments from major companies, such as coastline Texas LLC and Cheniere Energy. In addition, the downtown area is expected to benefit from renewed interest and activity, as Destination Bayfront, a group created to spur community and social activity along the city's waterfront, is working with community leaders and citizens. The planned developments and strong economic bases of the market should continue to bolster the economy and fuel growth. Trends in occupied office space are typically among the most reliable indicators of lodging demand, as firms that occupy office space often exhibit a strong propensity to attract commercial visitors. Thus, trends that cause changes in vacancy rates or occupied office space may have a proportional impact on commercial lodging demand and a less direct effect on meeting demand. The following table details office space statistics for the pertinent market area.

Office Space Statistics


FIGURE 3-5 OFFICE SPACE STATISTICS – MARKET OVERVIEW

Submarket Year

Metro Area 2014 14.6 % $13.842015 14.1 13.832016 14.7 13.83

CBD 2014 15.7 % $13.652015 14.9 13.672016 15.3 13.58

Non-CBD 2014 12.7 % $14.202015 12.7 14.112016 13.5 14.30

Vacancy RateAverage Asking

Lease Rate

Source: REIS Report, 3rd Quarter, 2017

A convention center serves as a gauge of visitation trends to a particular market. Convention centers also generate significant levels of demand for area hotels and serve as a focal point for community activity. Typically, hotels within the closest proximity to a convention center—up to three miles away—will benefit the most. Hotels serving as headquarters for an event benefit the most by way of premium rates and hosting related banquet events. During the largest of conventions, peripheral hotels may benefit from compression within the city as a whole. The American Bank Center, formerly the Bayfront Plaza, is Corpus Christi's premier venue for conventions, sports, concerts, and the performing arts. Located within the 500,000-square-foot complex are the state-of-the-art American Bank Center Convention Center, the 10,500-seat American Bank Center Arena, and the 2,526-seat American Bank Center Selena Auditorium. Renovated in 2004, the convention center features 76,500 square feet of easily accessible exhibit space in its main exhibit hall. Twenty-two separate breakout rooms, a 25,366-square-foot banquet hall, and the 18,530-square-foot Bayview Ballroom are all contained within the convention center complex. The American Bank Center Arena is home to the Corpus Christi IceRays minor league hockey team, Corpus Christi Fury indoor football team, and the Texas A&M University-Corpus Christi Islanders NCAA basketball teams (for both the men and women).

Convention Activity


CONVENTION CENTER

The Corpus Christi Convention & Visitors Bureau (CVB) has reportedly booked between 18 and 27 events for the American Bank Center each year since 2002. Recent statistics related to this facility were not available upon request; however, reports from the market reflect that the facility is highly utilized by groups such as local professional associations and trade shows. Furthermore, the arena and auditorium components are popular venues for sporting events and concerts in the region. Airport passenger counts are important indicators of lodging demand. Depending on the type of service provided by a particular airfield, a sizable percentage of arriving passengers may require hotel accommodations. Trends showing changes in passenger counts also reflect local business activity and the overall economic health of the area. Corpus Christi International Airport, a city-owned facility located on 2,415 acres of land, lies approximately eight miles west of Downtown Corpus Christi. Many major commercial airlines service the airport with daily flights to Dallas/Fort Worth and Houston. The airport completed a three-year, $50-million runway safety/improvement project in the third quarter of 2015. Furthermore, in 2015, the City announced a 20-year Master Plan, which includes updates at the airport, such

Airport Traffic


as the construction of a consolidated facility for the rental car companies that do business at the airport in order to provide quick turnarounds, the extension of both runways, and the taxiway reconfiguration, among other projects. The following table illustrates recent operating statistics for the Corpus Christi International Airport, which is the primary airport facility serving the proposed subject hotel’s submarket. FIGURE 3-6 AIRPORT STATISTICS - CORPUS CHRISTI INTERNATIONAL

AIRPORT

Year

2007 874,981 — — 2008 808,057 (7.6) % (7.6) %2009 733,628 (9.2) (8.4)2010 708,440 (3.4) (6.8)2011 677,664 (4.3) (6.2)2012 655,708 (3.2) (5.6)2013 667,401 1.8 (4.4)2014 716,229 7.3 (2.8)2015 701,289 (2.1) (2.7)2016 675,701 (3.6) (2.8)

Year-to-date, Nov2016 620,341 — — 2017 605,876 (2.3) % —

*Annua l average compounded percentage change from the previous year**Annual average compounded percentage change from fi rs t year of data

Source: Corpus Chri s ti International Airport

PassengerChange*TrafficPercent Percent

Change**


FIGURE 3-7 LOCAL PASSENGER TRAFFIC VS. NATIONAL TREND

-12%-10%

-8%-6%-4%-2%0%2%4%6%8%

10%

2008 2009 2010 2011 2012 2013 2014 2015 2016

Chan

ge in

Pass

enge

r Act

ivity

Source: HVS, Local Airport Authority

Local Passenger Volume National Passenger Volume

This facility recorded 675,701 passengers in 2016. The change in passenger traffic between 2015 and 2016 was -3.6%. The average annual change during the period shown was -2.8%. The market benefits from a variety of tourist and leisure attractions in the area. The peak season for tourism in this area is from March through August. During other times of the year, weekend demand comprises travelers passing through en route to other destinations, people visiting friends or relatives, and other similar weekend demand generators. Primary attractions in the area include the following: • Area beaches draw a significant amount of leisure demand to the area. Port

Aransas, the only town located on Mustang Island, inhabits five miles of the 18-mile-long barrier island. During the busy summer season, the population of Port Aransas reportedly swells from approximately 4,000 to roughly 60,000. Moreover, Schlitterbahn opened a new, $41-million water park on North Padre Island in 2016. However, the water park faces potential foreclosure, as developers have failed to meet certain incentive agreements. As of the date of this report, Schlitterbahn officials plan to operate a full water-park season in 2018.

• Port Aransas features six sites along the Great Texas Coastal Birding Trail, including the Joan and Scott Holt Paradise Pond, Port Aransas Nature Preserve, South Jetty, Leonabelle Turnbull Birding Center, University of Texas Marine

Tourist Attractions


Science Institute Wetlands Education Center, and Mustang Island State Park. The city hosts the annual Whooping Crane Festival in February of each year. According to the Port Aransas Chamber of Commerce, Port Aransas is the only spot in the United States where the last naturally occurring population of endangered Whooping Cranes can be viewed at close range. A nature-related trade show is held during the festival at the Port Aransas Civic Center.

• The USS Lexington, a World War II aircraft carrier, rests in Corpus Christi Bay, roughly 20 miles west of Port Aransas. In addition to touring the ship, visitors can experience interactive virtual battle stations, a flight simulator, and the 3D MEGA Theater.

• The Texas State Aquarium strives to provide educationally enriching, entertaining programming to a diverse audience. In addition to several indoor exhibits, this attraction includes HEB Splash Park and Owen's Paleo Park. A $60-million, 71,000-square-foot expansion that doubled the size of the aquarium and added a 400,000-gallon shark exhibit opened in May 2017.

PORT ARANSAS BEACH


Festivals and Special Events in Port Aransas (Source: Portaransas.org)

• February: Whooping Crane Festival • April: Texas SandFest, Port Aransas Wooden Boat Festival, IFA Redfish

Tournament • March: Spring Break • May: Art Fest • June: Annual Fishing Break, Great Texas Catamaran Race • July: Deep Sea Roundup, Outboard Fishing Tournament, Blue Wave Owner’s

Tournament, Rigs & Reef Classic Tournament • August: Texas Legends Billfish Tournament, Majek Boat Owner’s

Tournament, Texas Women Anglers Tournament • October: Harvest Moon Regatta, Port Aransas Old Town Festival, Shorty’s

Annual Pig Party This section discussed a wide variety of economic indicators for the pertinent market area. Port Aransas/Mustang Island and the Corpus Christi MSA are experiencing a period of economic strength and expansion, primarily led by the petrochemical, manufacturing, and trade industries. Our market interviews and research revealed that the Corpus Christi MSA is at the forefront of global trade, which has allowed it to attract a growing number of businesses from all over the world. Additionally, despite a drop in oil prices in 2015 and 2016, energy-related operations throughout South Texas, particularly related to downstream sectors, and deep-water operations in the Gulf of Mexico remain strong drivers of commercial activity in the region. The outlook for the market area is positive. Our analysis of the outlook for this specific market also considers the broader context of the national economy. The U.S. economy expanded during the last three years, with a relatively low point in growth occurring during the fourth quarter of 2015 and the first quarter of 2016, as well as the first quarter of 2017. Most recently, the economy expanded by 3.1% and 3.0% in the second and third quarters of 2017, respectively. The recent acceleration reflected strong personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports, and federal government spending.

Conclusion


FIGURE 3-8 UNITED STATES GDP GROWTH RATE

1.91.1

3.14.0

-1.2

4.05.0

2.0

3.22.7

1.6

0.5 0.6

2.22.8

1.81.2

3.1 3.0

-2.0-1.00.01.02.03.04.05.06.0

2013 2014 2015 2016 2017Source: tradingeconomics.com, Bureau of Economic Analysis

U.S. economic growth continues to support expansion of lodging demand; however, demand growth was not as robust in 2016 as in the last several years. As will be reflected in the following chapter, nationwide demand growth just slightly surpassed supply growth in 2016. Nevertheless, the stability in the U.S. economy is maintaining strong interest in hotel investments by a diverse array of market participants.

June-2017 Supply and Demand Analysis Proposed Hotel & Conference Center – Port Aransas, Texas 36

4. Supply and Demand Analysis

In the lodging industry, price varies directly, but not proportionately, with demand and inversely, but not proportionately, with supply. Supply is measured by the number of guestrooms available, and demand is measured by the number of rooms occupied; the net effect of supply and demand toward equilibrium results in a prevailing price, or average rate. The purpose of this section is to investigate current supply and demand trends, as indicated by the current competitive market, and to set forth a basis for the projection of future supply and demand growth. The subject sites under consideration are located in the greater Texas Gulf Coast lodging market. This greater lodging market spans over 200 open and operating lodging facilities totaling roughly 17,600 guestrooms in three main beach towns, South Padre Island, Corpus Christi, and Galveston Island. Within this greater market, the competitive submarket that will encompass the proposed subject hotel includes two upper-midscale, limited-service hotels (the Hampton Inn & Suites and the Holiday Inn Express Hotel & Suites) in Port Aransas; the beachfront Holiday Inn on North Padre Island; two full-service hotels (the Omni and Schlitterbahn Riverpark & Resort) in Corpus Christi; three beachfront, full-service hotels (the Schlitterbahn Waterpark & Resort, the Hilton Garden Inn, and The Pearl) on South Padre Island; and four full-service resorts (the Wyndham, Hilton, San Luis, and Moody Gardens Hotel) in Galveston. The subject property’s local lodging market is most directly affected by the supply and demand trends within the immediate area. However, individual markets are also influenced by conditions in the national lodging market. We have reviewed national lodging trends to provide a context for the forecast of the supply and demand for the proposed subject hotel’s competitive set. STR is an independent research firm that compiles and publishes data on the lodging industry, and this information is routinely used by typical hotel buyers. The following STR diagram presents annual hotel occupancy and average rate data since 1987. The next two tables contain information that is more recent; the data are categorized by geographical region, price point, type of location, and chain scale, and the statistics include occupancy, average rate, and rooms revenue per available room (RevPAR). RevPAR is calculated by multiplying occupancy by average rate and provides an indication of how well rooms revenue is being maximized.

Definition of Subject Hotel Market

National Trends Overview


FIGURE 4-1 NATIONAL OCCUPANCY AND AVERAGE RATE TRENDS

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

$0

$20

$40

$60

$80

$100

$120

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: STR

RevPAR Average Rate Occupancy


FIGURE 4-2 NATIONAL OCCUPANCY AND AVERAGE RATE TRENDS – YEAR-TO-DATE DATA

United States 66.5 % 67.1 % 0.8 % $124.49 $127.07 2.1 % $82.85 $85.22 2.9 % 1.8 % 2.6 %

RegionNew England 65.6 % 66.2 % 0.9 % $152.85 $155.59 1.8 % $100.30 $103.02 2.7 % 1.5 % 2.5 %Mi ddle Atl antic 68.1 68.7 0.7 162.14 161.49 (0.4) 110.49 110.87 0.3 2.9 3.6South Atlantic 68.1 69.0 1.3 120.34 123.58 2.7 81.91 85.21 4.0 1.5 2.8East North Central 62.5 62.8 0.4 109.22 110.48 1.2 68.29 69.38 1.6 1.9 2.3East South Central 62.6 62.7 0.2 95.46 98.76 3.5 59.72 61.90 3.6 1.9 2.0West North Central 60.4 59.4 (1.8) 96.65 98.01 1.4 58.40 58.18 (0.4) 1.4 (0.4)West South Central 62.4 63.4 1.5 99.43 100.83 1.4 62.07 63.91 3.0 3.0 4.6Mounta in 66.6 67.7 1.7 114.44 119.01 4.0 76.17 80.55 5.8 1.1 2.8Paci fi c 74.8 75.0 0.3 159.33 163.38 2.5 119.25 122.59 2.8 1.6 1.8

Clas sLuxury 71.8 % 72.0 % 0.3 % $280.61 $284.35 1.3 % $201.40 $204.60 1.6 % 2.2 % 2.4 %Upper-Ups cal e 73.8 74.0 0.2 178.90 181.83 1.6 132.04 134.49 1.9 1.7 1.9Upsca le 73.2 73.6 0.5 139.62 141.78 1.5 102.17 104.31 2.1 4.3 4.8Upper-Midsca le 68.5 68.9 0.6 114.74 116.53 1.6 78.57 80.29 2.2 4.0 4.7Mi ds cal e 60.9 61.6 1.2 92.65 94.81 2.3 56.44 58.45 3.6 0.3 1.4Economy 59.3 59.8 0.8 70.15 72.29 3.1 41.63 43.24 3.9 (0.4) 0.4

LocationUrban 74.3 % 74.7 % 0.5 % $177.94 $179.60 0.9 % $132.13 $134.09 1.5 % 3.1 % 3.6 %Suburban 68.0 68.2 0.3 106.48 108.82 2.2 72.37 74.22 2.6 1.9 2.3Ai rport 74.4 74.8 0.5 114.48 116.97 2.2 85.18 87.50 2.7 1.4 2.0Inters tate 57.6 58.4 1.3 83.53 85.39 2.2 48.15 49.85 3.5 1.5 2.8Resort 69.3 70.5 1.7 168.08 172.54 2.7 116.41 121.59 4.4 0.9 2.7Smal l Metro/Town 58.0 58.5 0.9 100.44 102.81 2.4 58.28 60.19 3.3 1.5 2.4

Cha in Sca leLuxury 74.7 % 74.7 % 0.1 % $314.64 $320.99 2.0 % $234.88 $239.93 2.2 % 1.6 % 1.7 %Upper-Ups cal e 75.5 75.5 (0.1) 180.50 183.00 1.4 136.32 138.13 1.3 2.1 2.0Upsca le 75.0 74.9 (0.1) 138.99 140.87 1.4 104.31 105.58 1.2 6.0 5.9Upper-Midsca le 68.8 69.2 0.6 112.15 113.81 1.5 77.21 78.80 2.1 3.2 3.8Mi ds cal e 60.5 61.1 1.1 85.73 87.45 2.0 51.84 53.47 3.2 1.3 2.4Economy 58.7 59.0 0.5 61.20 62.77 2.6 35.92 37.04 3.1 0.1 0.7Independents 63.1 64.0 1.4 123.06 126.63 2.9 77.64 81.00 4.3 0.0 1.4

Rms. Avail. Rms. Sold20162016 2017

Source: STR - November 2017 Lodging Review

2016 20172017%

Change%

Change%

Change

Occupancy - YTD November Average Rate - YTD November RevPAR - YTD November Percent Change


FIGURE 4-3 NATIONAL OCCUPANCY AND AVERAGE RATE TRENDS – CALENDAR YEAR DATA

United States 65.4 % 65.5 % 0.1 % $120.30 $123.97 3.1 % $78.68 $81.19 3.2 % 1.6 % 1.7 %

RegionNew England 64.5 % 64.3 % (0.4) % $146.41 $150.70 2.9 % $94.49 $96.89 2.5 % 1.3 % 1.0 %Middle Atlantic 67.3 67.3 0.0 162.29 163.41 0.7 109.22 109.99 0.7 2.8 2.8South Atlantic 66.5 67.2 1.1 116.65 119.77 2.7 77.53 80.44 3.8 1.3 1.3East North Centra l 61.3 61.2 (0.2) 105.20 108.09 2.7 64.45 66.10 2.6 1.6 1.4East South Centra l 61.0 61.4 0.7 90.91 94.87 4.4 55.43 58.26 5.1 1.7 2.5West North Centra l 59.6 59.1 (0.8) 93.28 95.91 2.8 55.58 56.68 2.0 1.5 0.7West South Centra l 62.9 61.5 (2.3) 98.43 98.66 0.2 61.93 60.63 (2.1) 2.7 0.3Mounta in 65.0 65.5 0.7 108.77 114.24 5.0 70.68 74.79 5.8 0.8 1.5Paci fic 73.2 73.9 0.9 151.10 158.44 4.9 110.57 117.04 5.8 0.9 1.9

ClassLuxury 70.8 % 71.0 % 0.3 % $278.39 $283.05 1.7 % $196.98 $200.95 2.0 % 2.8 % 3.1 %Upper-Upsca le 72.7 72.6 (0.1) 173.53 177.77 2.4 126.08 129.07 2.4 1.2 1.2Upsca le 72.0 72.0 0.1 135.70 139.47 2.8 97.72 100.49 2.8 3.9 3.9Upper-Midsca le 67.1 67.1 0.0 110.95 113.84 2.6 74.48 76.38 2.6 3.3 3.2Midsca le 59.9 59.9 0.1 90.13 92.61 2.7 53.96 55.50 2.9 0.4 0.6Economy 58.6 58.6 0.0 67.60 70.17 3.8 39.63 41.13 3.8 (0.4) (0.4)

LocationUrban 73.0 % 73.1 % 0.1 % $173.99 $177.37 1.9 % $127.04 $129.69 2.1 % 2.9 % 3.0 %Suburba n 66.7 66.8 0.2 101.91 105.70 3.7 67.97 70.63 3.9 1.4 1.6Airport 73.6 73.4 (0.2) 109.78 113.56 3.4 80.78 83.40 3.3 1.0 0.8Inters tate 57.2 56.6 (1.1) 81.35 83.04 2.1 46.53 46.97 0.9 1.5 0.4Resort 67.9 68.6 0.9 164.10 168.76 2.8 111.51 115.76 3.8 0.9 1.8Smal l Metro/Town 56.9 56.9 0.1 96.63 99.45 2.9 54.95 56.64 3.1 1.4 1.5

Chain Sca leLuxury 75.2 % 74.9 % (0.3) % $317.58 $322.84 1.7 % $238.70 $241.82 1.3 % 2.8 % 2.4 %Upper-Upsca le 74.3 74.2 (0.2) 174.98 178.82 2.2 130.08 132.63 2.0 1.6 1.4Upsca le 74.3 73.8 (0.6) 134.82 138.50 2.7 100.13 102.27 2.1 5.6 5.0Upper-Midsca le 67.5 67.4 (0.2) 108.75 111.43 2.5 73.46 75.14 2.3 2.1 1.9Midsca le 59.4 59.4 (0.1) 83.32 85.43 2.5 49.52 50.74 2.5 1.2 1.1Economy 58.1 57.9 (0.4) 58.82 60.84 3.4 34.16 35.20 3.1 0.3 (0.1)Independents 61.8 62.3 0.8 118.73 123.22 3.8 73.36 76.75 4.6 0.2 1.0

2016

RevPAR%

ChangeRms. Avail. Rms. Sold

Percent Change%

Change

Occupancy Average Rate

2016%

Change2015 20152015 2016

Source: STR - December 2016 Lodging Review


Following the significant RevPAR decline experienced during the last recession, demand growth resumed in 2010, led by select markets that had recorded growth trends in the fourth quarter of 2009. A return of business travel and some group activity contributed to these positive trends. The resurgence in demand was partly fueled by the significant price discounts that were widely available in the first half of 2010. These discounting policies were largely phased out in the latter half of the year, balancing much of the early rate loss. Demand growth remained strong, but decelerated from 2011 through 2013, increasing at rates of 4.7%, 2.8%, and 2.0%, respectively. Demand growth then surged to 4.0% in 2014, driven by a strong economy, a robust oil and gas sector, and limited new supply, among other factors. By 2014, occupancy had surpassed the 64% mark. Average rate rebounded similarly during this time, bracketing 4.0% annual gains from 2011 through 2014. In 2015, demand growth continued to outpace supply growth, a relationship that has been in place since 2010. With a 2.9% increase in room nights, the nation's occupancy level reached a record high of 65.4% in 2015. Supply growth intensified modestly in 2015 (at 1.1%), following annual supply growth levels of 0.7% and 0.9% in 2013 and 2014, respectively. Average rate posted another strong year of growth, at 4.4% in 2015, in pace with the annual growth of the last four years. Robust job growth, heightened group and leisure travel, and waning price-sensitivity all contributed to the gains. In 2016, occupancy increased minimally (by 0.1%) to 65.5%, as demand growth modestly exceeded supply growth. Average rate increased 3.1% for the year, and the net change in RevPAR was 3.2%, reflecting a healthy lodging market overall. Year-to-date October 2017 data show this trend continuing, with a 0.5-point occupancy increase to 67.6%, while average rate increased by just over $2.50 to roughly $127.50, resulting in a 2.8% upward change in RevPAR. As previously noted, STR is an independent research firm that compiles and publishes data on the lodging industry, routinely used by typical hotel buyers. HVS has ordered and analyzed an STR Trend Report of historical supply and demand data for a group of hotels considered applicable to this analysis for the proposed subject hotel. This information is presented in the following table, along with the market-wide occupancy, average rate, and rooms revenue per available room (RevPAR). RevPAR is calculated by multiplying occupancy by average rate and provides an indication of how well rooms revenue is being maximized.

Historical Supply and Demand Data


FIGURE 4-4 HISTORICAL SUPPLY AND DEMAND TRENDS

YearAverage Daily Room Count

Available Room Nights Change

Occupied Room Nights Change Occupancy

Average Rate Change RevPAR Change

2000 2,119 773,435 — 480,365 — 62.1 % $106.81 — $66.34 — 2001 2,119 773,435 0.0 % 446,513 (7.0) % 57.7 110.67 3.6 % 63.89 (3.7) %2002 2,119 773,435 0.0 465,512 4.3 60.2 111.88 1.1 67.34 5.42003 2,119 773,435 0.0 454,980 (2.3) 58.8 114.00 1.9 67.06 (0.4)2004 2,320 846,965 9.5 460,298 1.2 54.3 119.37 4.7 64.87 (3.3)2005 2,390 872,461 3.0 515,616 12.0 59.1 124.95 4.7 73.84 13.82006 2,427 885,855 1.5 554,846 7.6 62.6 133.25 6.6 83.46 13.02007 2,427 885,855 0.0 549,261 (1.0) 62.0 137.85 3.5 85.47 2.42008 2,322 847,605 (4.3) 524,416 (4.5) 61.9 142.09 3.1 87.91 2.92009 2,365 863,355 1.9 479,848 (8.5) 55.6 134.86 (5.1) 74.95 (14.7)2010 2,448 893,389 3.5 489,577 2.0 54.8 136.48 1.2 74.79 (0.2)2011 2,525 921,625 3.2 541,377 10.6 58.7 140.10 2.7 82.30 10.02012 2,578 941,062 2.1 591,612 9.3 62.9 145.92 4.2 91.73 11.52013 2,442 891,460 (5.3) 561,647 (5.1) 63.0 157.22 7.7 99.06 8.02014 2,468 900,698 1.0 575,250 2.4 63.9 162.88 3.6 104.03 5.02015 2,474 903,010 0.3 586,168 1.9 64.9 163.92 0.6 106.41 2.32016 2,549 930,244 3.0 616,076 5.1 66.2 157.59 (3.9) 104.37 (1.9)

Year-to-Date Through July2016 2,538 538,105 — 381,409 — 70.9 % $165.31 — $117.17 — 2017 2,567 544,121 1.1 % 389,995 2.3 % 71.7 166.43 0.7 % 119.29 1.8 %

Average Annual Compounded Change:2000 - 2016 1.2 % 1.6 % 2.5 % 2.9 %2000 - 2007 2.0 1.9 3.7 3.72007 - 2010 0.3 (3.8) (0.3) (4.4)2010 - 2016 0.7 3.9 2.4 5.7

Hotels Included in Sample

Wyndham Hotel Galvez & Spa Upper Upsca le Class Primary 224 Jun 1998 Jun 1911Hol i day Inn Corpus Christi North Padre Is land Upper Mids ca l e Clas s Secondary 149 Mar 2010 Dec 1974San Luis On Gal ves ton Is land Luxury Clas s Secondary 242 Jun 1985 Jun 1985Omni Corpus Chris ti Hotel Upper Upsca le Class Primary 475 Sep 1996 Jun 1985Hi l ton Galveston Is land Res ort Upper Upsca le Class Primary 239 Jun 1996 Jun 1986The Pearl South Padre Upper Upsca le Class Secondary 200 Apr 2011 Aug 1986Moody Gardens Hotel Luxury Clas s Secondary 423 Nov 1998 Nov 1998Hol i day Inn Expres s & Stes Port Aransas Beach Area Upper Mids ca l e Clas s Secondary 74 Jul 2005 Jul 2005Hi l ton Garden Inn South Padre Is land Ups ca le Clas s Secondary 156 Jul 2010 Jul 2010Schl i tterbahn Waterpa rk & Resort Upper Upsca le Class Primary 216 Aug 2012 Aug 2012Hampton Inn & Suites Port Arans as Upper Mids ca l e Clas s Secondary 78 May 2013 May 2013Schl i tterbahn Riverpark & Res ort Upper Upsca le Class Secondary 92 Mar 2016 Mar 2016

Total 2,568

Source: STR

ClassNumber

of RoomsYear

OpenedCompetitive Year

Status Affiliated


It is important to note some limitations of the STR data. Hotels are occasionally added to or removed from the sample; furthermore, not every property reports data in a consistent and timely manner. These factors can influence the overall quality of the information by skewing the results, and these inconsistencies may also cause the STR data to differ from the results of our competitive survey. Nonetheless, STR data provide the best indication of aggregate growth or decline in existing supply and demand; thus, these trends have been considered in our analysis. Opening dates, as available, are presented for each reporting hotel in the previous table. The STR data for the competitive set reflect a market-wide occupancy level of 2016 in 66.2%, which compares to 64.9% for 2015. The STR data for the competitive set reflect a market-wide average rate level of $157.59 in 2016, which compares to $163.92 For 2015. These occupancy and average rate trends resulted in a RevPAR level of $104.37 in 2016. Occupancy first peaked for this selected set of hotels in 2006 at approximately 63%, while average rate (ADR) growth continued until mid-year 2008, prior to the full impact of the Great Recession. Given strong ADR into 2008, RevPAR peaked at approximately $88 in 2008. By year-end 2009, ADR had declined to roughly $135 because of the recession. Despite a small rebound in average rates in 2010, RevPAR remained flat at around $75 because of the entrance of new supply. A rapid recovery began in 2011 that extended through 2012, at which time the prior RevPAR peak was exceeded. RevPAR continued to rise through 2015, with growth driven largely by an energy boom across South Texas from 2010 through 2014. However, oil prices began to decline in late 2014, which caused many upstream oil-sector employers to cut workforce levels beginning in 2015 and continuing through 2016. These weakening economic conditions led to a drop in consumer confidence and discretionary income available for leisure trips. Additionally, hoteliers in costal markets in South Texas were challenged by poor publicity related to the rare Vibrio vulnificus, or "flesh-eating" bacteria, in 2016. As demand softened, hoteliers sacrificed ADR growth in an attempt to maintain market share, which led to an overall drop in RevPAR in 2016. Year-to-date 2017 data illustrate a nominal increase in occupancy and a roughly $1 gain in average rate. The near-term outlook is optimistic, as oil prices have stabilized, political uncertainty has waned, and the public has been better educated about the low risk of acquiring Vibrio vulnificus. Monthly occupancy and average rate trends are presented in the following tables. Seasonality


FIGURE 4-5 MONTHLY OCCUPANCY TRENDS

Month 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ja nua ry 39.5 % 44.5 % 39.9 % 39.5 % 45.5 % 30.0 % 40.2 % 41.1 % 42.1 % 44.4 % 48.1 % 50.3 % 53.3 %Februa ry 49.4 58.3 58.7 63.4 62.1 52.2 55.2 56.2 62.7 59.4 64.0 67.2 64.8Ma rch 68.3 71.5 69.0 64.2 60.0 61.8 61.0 72.5 68.9 62.0 64.4 74.6 73.5Apri l 63.7 69.7 59.6 65.1 57.4 59.5 60.7 64.6 65.0 66.1 67.8 65.2 69.4Ma y 63.8 70.6 69.3 62.7 53.2 55.4 58.5 65.2 63.7 70.7 68.1 66.8 67.7June 81.2 85.2 83.3 81.0 72.6 76.3 77.2 85.0 80.9 82.7 81.4 84.3 82.5July 77.1 80.0 79.6 76.9 77.4 73.8 83.3 87.4 87.4 87.0 89.5 86.8 90.0August 61.2 65.8 71.4 68.9 66.7 63.6 70.4 72.5 80.8 80.0 79.8 75.4 — September 48.9 56.9 62.0 54.9 44.3 48.7 53.8 55.4 58.4 55.4 60.7 61.6 — October 66.6 58.7 61.5 65.3 48.5 55.6 56.5 56.7 58.4 61.6 58.7 62.0 — November 51.3 47.9 52.8 49.8 44.9 43.9 47.4 50.7 48.0 48.8 51.6 51.2 — December 37.9 42.4 37.1 48.9 34.8 37.1 40.6 47.1 39.0 47.6 44.9 48.9 —

Annual Occupancy 59.1 % 62.6 % 62.0 % 61.9 % 55.6 % 54.8 % 58.7 % 62.9 % 63.0 % 63.9 % 64.9 % 66.2 % —

Year-to-Date 63.5 % 68.6 % 65.7 % 64.6 % 61.4 % 58.6 % 62.3 % 67.5 % 67.4 % 67.5 % 69.0 % 70.9 % 71.7 %

Source: STR

FIGURE 4-6 MONTHLY AVERAGE RATE TRENDS

Month 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ja nua ry $104.47 $106.10 $115.00 $120.72 $125.99 $113.04 $109.53 $112.32 $117.65 $117.73 $123.44 $124.32 $120.89Februa ry 108.84 113.42 120.29 122.35 125.79 122.91 118.04 119.26 125.96 128.79 128.95 130.95 134.19Ma rch 126.41 137.30 141.69 151.33 133.03 142.72 143.59 148.81 167.46 166.16 166.45 165.01 163.91Apri l 120.88 127.93 128.70 136.88 127.07 136.31 139.08 143.87 149.59 151.73 158.06 157.69 158.41Ma y 124.86 135.90 135.30 150.84 138.98 142.80 142.06 150.95 158.63 168.54 171.76 163.80 162.92June 141.29 152.61 158.02 164.35 147.31 152.56 159.28 171.63 181.23 191.21 190.62 181.34 185.80July 151.81 167.69 166.00 175.70 160.85 159.48 173.38 182.52 201.64 214.54 216.84 203.32 207.80August 133.94 138.57 154.65 153.79 144.45 145.51 153.08 160.74 181.23 195.17 185.46 166.45 — September 123.74 130.02 130.95 127.17 130.34 133.02 136.45 137.26 143.16 144.62 158.20 153.09 — October 116.25 119.51 124.01 120.35 127.57 125.09 125.77 124.49 136.65 140.62 139.52 138.89 — November 107.78 116.08 120.07 116.62 114.60 115.35 119.80 126.79 130.64 134.96 133.94 131.83 — December 105.26 114.63 121.44 123.65 106.97 106.49 112.34 116.73 120.18 126.52 127.56 123.43 —

Annual Average Rate $124.95 $133.25 $137.85 $142.09 $134.86 $136.48 $140.10 $145.92 $157.22 $162.88 $163.92 $157.59 —

Year-to-Date $128.93 $137.98 $141.38 $149.26 $139.24 $142.36 $145.13 $152.39 $163.27 $168.98 $170.66 $165.31 $166.43

Source: STR


FIGURE 4-7 SEASONALITY

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

High Season - June, July, August Occupancy 73.0 % 76.9 % 78.0 % 75.8 % 72.2 % 71.1 % 76.9 % 81.3 % 83.1 % 83.2 % 83.6 % 82.1 % 86.3 %Average Rate $142.98 $153.85 $159.73 $165.36 $151.31 $152.86 $162.51 $172.01 $188.47 $200.71 $198.41 $184.56 $197.45RevPAR 104.40 118.32 124.66 125.34 109.32 108.64 125.03 139.86 156.56 167.08 165.84 151.60 170.41

Shoulder Season - February, March, April, May, September, October Occupancy 60.3 % 64.4 % 63.4 % 62.7 % 53.9 % 55.5 % 57.7 % 61.7 % 62.9 % 62.6 % 63.9 % 66.2 % 69.0 %Average Rate $120.64 $128.17 $130.73 $135.58 $130.54 $134.18 $134.66 $138.45 $147.80 $151.15 $154.61 $152.36 $155.77RevPAR 72.75 82.53 82.94 84.99 70.40 74.53 77.63 85.47 92.90 94.65 98.86 100.91 107.42

Low Season - January, November, December Occupancy 42.8 % 44.9 % 43.1 % 45.8 % 41.6 % 37.1 % 42.7 % 46.4 % 43.0 % 46.9 % 48.1 % 50.1 % 53.3 %Average Rate $106.01 $112.29 $118.89 $120.34 $116.27 $111.69 $114.15 $119.28 $123.21 $126.58 $128.40 $126.55 $120.89RevPAR 45.41 50.41 51.28 55.08 48.32 41.42 48.74 55.31 53.00 59.40 61.82 63.42 64.50

Source: Smith Travel Res earch


The illustrated monthly occupancy and average rates patterns reflect important seasonal characteristics. We have reviewed these trends in developing our forthcoming forecast of market-wide demand and average rate. The competitive market is characterized by a moderate degree of seasonality, which is evident in the monthly occupancy statistics. The strongest occupancy levels are recorded in the summer months, when demand from leisure travelers is at its highest. ADR levels reflect a similar pattern. A review of the trends in occupancy and average rate by day of the week provides some insight into the impact that the current economic conditions have had on the competitive lodging market. The data, as provided by STR, are illustrated in the following table(s).

Patterns of Demand


FIGURE 4-8 OCCUPANCY BY DAY OF WEEK (TRAILING 12 MONTHS)

Month Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total Month

Aug - 16 61.2 % 70.8 % 73.0 % 69.1 % 75.9 % 87.4 % 93.7 % 75.4 %Sep - 16 50.8 41.1 54.3 61.1 56.3 76.2 89.2 61.6Oct - 16 41.0 44.7 57.3 63.1 63.4 78.3 88.7 62.0Nov - 16 30.1 32.8 39.3 51.9 55.1 73.4 78.3 51.2Dec - 16 38.2 41.9 42.9 40.2 47.7 59.4 65.2 48.9Ja n - 17 43.6 42.8 50.6 52.1 56.5 64.1 69.5 53.3Feb - 17 49.0 57.0 63.6 58.2 58.5 79.2 87.8 64.8Ma r - 17 59.6 67.3 73.2 72.2 69.6 81.8 90.3 73.5Apr - 17 49.7 54.9 60.5 62.3 69.9 90.8 96.1 69.4Ma y - 17 63.5 52.1 60.3 61.3 62.4 85.9 96.1 67.7Jun - 17 67.6 76.9 84.0 84.7 79.5 89.5 94.6 82.5Jul - 17 80.7 85.7 92.1 88.5 90.9 95.1 98.1 90.0

Average 53.0 % 56.0 % 62.1 % 63.7 % 65.3 % 79.9 % 87.3 % 66.7 %

Source: STR

FIGURE 4-9 AVERAGE RATE BY DAY OF WEEK (TRAILING 12 MONTHS)


Aug - 16 $148.23 $150.72 $145.79 $144.44 $151.96 $194.85 $218.85 $166.45Sep - 16 169.21 126.06 126.36 129.06 130.79 165.12 193.78 153.09Oct - 16 122.56 121.22 124.64 126.32 125.03 154.51 166.77 138.89Nov - 16 111.78 116.12 119.65 119.68 125.14 147.41 153.96 131.83Dec - 16 116.07 111.73 109.30 112.34 114.76 130.85 145.35 123.43Jan - 17 112.13 112.93 116.80 115.68 118.77 129.98 134.88 120.89Feb - 17 116.35 117.87 121.08 119.15 118.56 156.16 164.74 134.19Mar - 17 153.26 149.72 148.40 143.89 153.65 186.05 198.94 163.91Apr - 17 136.29 128.53 131.15 135.09 143.31 183.63 199.00 158.41May - 17 174.41 128.77 130.10 129.55 136.09 188.33 225.58 162.92Jun - 17 162.86 165.80 167.96 168.62 168.43 215.78 232.45 185.80Jul - 17 190.33 189.14 190.14 180.95 183.41 240.32 263.93 207.80

Average $148.75 $141.62 $140.29 $139.09 $142.94 $178.24 $195.61 $158.40

Source: STR


FIGURE 4-10 OCCUPANCY, AVERAGE RATE, AND REVPAR BY DAY OF WEEK (MULTIPLE YEARS)

Occupancy (%)

Aug 14 - Jul 15 50.6 % 55.3 % 60.8 % 62.9 % 61.7 % 77.0 % 84.6 % 64.8 %Aug 15 - Jul 16 53.3 55.8 61.6 62.4 63.7 79.5 86.0 66.0Aug 16 - Jul 17 53.0 56.0 62.1 63.7 65.3 79.9 87.3 66.7

Change (Occupancy Points)FY 15 - FY 16 2.6 0.5 0.8 (0.6) 2.0 2.4 1.4 1.3FY 16 - FY 17 (0.3) 0.2 0.5 1.4 1.7 0.4 1.3 0.7

ADR ($)

Aug 14 - Jul 15 $151.10 $143.53 $143.52 $145.79 $151.71 $189.09 $199.10 $164.02Aug 15 - Jul 16 153.21 142.52 139.56 141.88 146.37 179.82 198.57 160.77Aug 16 - Jul 17 148.75 141.62 140.29 139.09 142.94 178.24 195.61 158.40

Change (Dollars)FY 15 - FY 16 $2.11 ($1.01) ($3.96) ($3.91) ($5.34) ($9.27) ($0.53) ($3.25)FY 16 - FY 17 (4.45) (0.90) 0.72 (2.80) (3.43) (1.59) (2.96) (2.37)

Change (Percent)FY 15 - FY 16 1.4 % (0.7) % (2.8) % (2.7) % (3.5) % (4.9) % (0.3) % (2.0) %FY 16 - FY 17 (2.9) (0.6) 0.5 (2.0) (2.3) (0.9) (1.5) (1.5)

RevPAR ($)

Aug 14 - Jul 15 $76.47 $79.36 $87.31 $91.75 $93.59 $145.68 $168.53 $106.21Aug 15 - Jul 16 81.59 79.53 86.01 88.48 93.17 142.93 170.81 106.19Aug 16 - Jul 17 78.80 79.33 87.11 88.61 93.35 142.32 170.74 105.68

Change (Dollars)FY 15 - FY 16 $5.12 $0.17 ($1.30) ($3.28) ($0.42) ($2.76) $2.28 ($0.02)FY 16 - FY 17 (2.79) (0.19) 1.10 0.14 0.18 (0.60) (0.07) (0.51)

Change (Percent)FY 15 - FY 16 6.7 % 0.2 % (1.5) % (3.6) % (0.4) % (1.9) % 1.4 % (0.0) %FY 16 - FY 17 (3.4) (0.2) 1.3 0.2 0.2 (0.4) (0.0) (0.5)

Sunday Monday Tuesday Wednesday

Sunday Monday Tuesday Thursday

Total YearSaturday

Friday

Thursday Friday

Source: STR

Total Year

Sunday Monday Tuesday Total Year

Wednesday Saturday

Wednesday Thursday Friday Saturday

In most markets, business travel, including individual commercial travelers and corporate groups, is the predominant source of demand on Monday through Thursday nights. Leisure travelers and non-business-related groups generate a majority of demand on Friday and Saturday nights. The influence of the leisure segment, particularly demand generated by beach tourism, is evident in the


occupancy and ADR levels recorded in the summer months, as well as during Spring Break in March. Based on an evaluation of the occupancy, rate structure, market orientation, chain affiliation, location, facilities, amenities, reputation, and quality of each area hotel, as well as the comments of management representatives, we have identified several properties that are expected to be primarily competitive with the proposed subject hotel. If applicable, additional lodging facilities may be judged only secondarily competitive; although the facilities, rate structures, or market orientations of these hotels prevent their inclusion among the primary competitive supply, they are expected to compete with the proposed subject hotel to some extent. The following table summarizes the important operating characteristics of the future primary competitors and the aggregate secondary competitors (if applicable). This information was compiled from personal interviews, online resources, and our in-house database of operating and hotel facility data.

SUPPLY

Primary Competitors


FIGURE 4-11 PRIMARY COMPETITORS – OPERATING PERFORMANCE


Property Occ. RevPAR RevPAROccupancy Penetration

Yield Penetration

Omni Corpus Chris ti Hotel 475 65 % 35 % 475 70 - 75 % $140 - $150 $105 - $110 475 75 - 80 % $140 - $150 $105 - $110 110 - 120 % 100 - 110 %

Schl i tterbahn Waterpark & Resort

216 75 25 216 40 - 45 140 - 150 55 - 60 216 45 - 50 140 - 150 70 - 75 70 - 75 65 - 70

Wyndham Hotel Ga lvez & Spa 224 65 35 224 70 - 75 170 - 180 130 - 140 224 70 - 75 170 - 180 130 - 140 110 - 120 120 - 130

Hi l ton Galveston Is land Resort 239 75 25 239 70 - 75 150 - 160 115 - 120 239 70 - 75 150 - 160 110 - 115 100 - 110 100 - 110

Sub-Totals/Averages 1,154 68 % 32 % 1,154 68.6 % $151.14 $103.73 1,154 70.1 % $153.44 $107.60 104.5 % 101.8 %

Secondary Competi tors 1,414 78 % 22 % 811 62.4 % $163.40 $102.04 822 62.9 % $163.78 $103.04 93.7 % 97.5 %

Totals/Averages 2,568 72 % 28 % 1,965 66.1 % $155.92 $103.03 1,976 67.1 % $157.47 $105.70 100.0 % 100.0 %

* Specific occupancy and average rate data were utilized in our analysis, but are presented in ranges in the above table for the purposes of confidentiality.

Average RateTran

sient

Mee

ting

and

Grou

p

Number of Rooms Average Rate Occ.




FIGURE 4-12 PRIMARY COMPETITORS – FACILITY PROFILES

PropertyNumber of

RoomsYear

OpenedLast Major

Renovation(s) Food and Beverage Outlets

Indoor Meeting

Space (SF)Meeting Space

per Room Facilities & Amenities

Omni Corpus Chris ti Hotel 475 1985 2015 19,430 40.9 900 North Shorel i ne Boulevard

Schl i tterba hn Waterpark & Resort 216 2012 — 19,800 91.7 100 Padre Boulevard (A)

Wyndham Hotel Galvez & Spa 224 1911 2013 11,253 50.2 2024 Seawal l Boulevard

Hi l ton Gal veston Is land Resort 239 1986 2015 6,313 26.4 5400 Seawal l Boulevard

Republ ic of Texas Bar & Gri l l ; Glas s Pavi l ion Res taurant ; Smoke & Sip; Mors el 's

Palm Court & Lounge Bus iness Center; Guest La undry Area; Concierge; Room Service; Gi ft Shop; Ful l -Service Spa ; Outdoor Swimming Pool ; Fi tness Center; Indoor Whirlpool

Bus iness Center; Ai rport/Local Shuttle; Guest La undry Area; Concierge; Room Service; Gi ft Shop; Indoor Swimming Pool ; Outdoor Swimming Pool ; Fi tness Center; Indoor Whirlpool ; Sauna; Spa-Treatment Room(s)

Shrimp Haus , Seas i de Gri l l , Sea4Ever Rooftop Ba r & Gri l l

Concierge; Reta i l Outlet/Boutique; Room Service; Beach Services ; Gi ft Shop; Indoor Swimming Pool ; Outdoor Swimmi ng Pool ; Indoor Whirlpool ; Ga me Room; Water Park

Galvez Bar & Gri l l , Swim-Up Bar Bus iness Center; Fishing; Guest Laundry Area; Concierge; Room Service; Ful l -Service Spa ; Outdoor Swimming Pool ; Fi tness Center; Indoor Whirlpool ; Sauna


The following map illustrates the locations of the subject property and its future competitors.

MAP OF COMPETITION


Our survey of the primarily competitive hotels in the local market shows a range of lodging types and facilities. Descriptions of our findings are presented below.


PRIMARY COMPETITOR #1 - OMNI CORPUS CHRISTI HOTEL

FIGURE 4-13 ESTIMATED HISTORICAL OPERATING STATISTICS

YearWtd. Annual Room Count Occupancy RevPAR

Occupancy Penetration

Yield Penetration

Est. 2016 475 70 - 75 140 - 150 105 - 110 110 - 120 100 - 110Est. 2017 475 75 - 80 140 - 150 105 - 110 110 - 120 100 - 110

Average Rate

The Omni Corpus Christi has the advantage of being the largest hotel in the market and the primary hotel for citywide conventions held at the nearby American Bank Center. Overall, the property appeared to be in very good condition. Its accessibility is similar to that of the subject sites under consideration, and its visibility is similar to the expected visibility of the Proposed Hotel & Conference Center.

Omni Corpus Christi Hotel 900 North Shoreline Boulevard Corpus Christi, TX


PRIMARY COMPETITOR #2 - SCHLITTERBAHN WATERPARK & RESORT




Yield Penetration

Est. 2016 216 40 - 45 140 - 150 55 - 60 60 - 65 55 - 60Est. 2017 216 45 - 50 140 - 150 70 - 75 70 - 75 65 - 70

Average Rate

This hotel has the advantage of being located next to the outdoor and indoor Schlitterbahn Waterpark. Overall, the property appeared to be in very good condition. Its accessibility is similar to that of the subject sites under consideration, and its visibility is similar to the expected visibility of the Proposed Hotel & Conference Center.

Schlitterbahn Waterpark & Resort 100 Padre Boulevard (A) South Padre Island, TX


PRIMARY COMPETITOR #3 - WYNDHAM HOTEL GALVEZ & SPA




Yield Penetration

Est. 2016 224 70 - 75 170 - 180 130 - 140 110 - 120 120 - 130Est. 2017 224 70 - 75 170 - 180 130 - 140 110 - 120 120 - 130

Average Rate

This property benefits from its status as the only historic beachfront hotel along the Gulf Coast of Texas, along the seawall in Galveston. Overall, the property appeared to be in very good condition. Its accessibility is similar to that of the subject sites under consideration, and its visibility is similar to the expected visibility of the Proposed Hotel & Conference Center.

Wyndham Hotel Galvez & Spa 2024 Seawall Boulevard Galveston, TX


PRIMARY COMPETITOR #4 - HILTON GALVESTON ISLAND RESORT




Yield Penetration

Est. 2016 239 70 - 75 150 - 160 115 - 120 110 - 120 110 - 120Est. 2017 239 70 - 75 150 - 160 110 - 115 100 - 110 100 - 110

Average Rate

This hotel benefits from its location adjacent to the Galveston Island Convention Center and along the seawall. Overall, the property appeared to be in very good condition. Its accessibility is similar to that of the subject sites under consideration, and its visibility is similar to the expected visibility of the Proposed Hotel & Conference Center.

Hilton Galveston Island Resort 5400 Seawall Boulevard Galveston, TX


We have also reviewed other area lodging facilities to determine whether any may compete with the proposed subject hotel on a secondary basis. The room count of each secondary competitor has been weighted based on its assumed degree of competitiveness in the future with the proposed subject hotel. By assigning degrees of competitiveness, we can assess how the proposed subject hotel and its future competitors may react to various changes in the market, including new supply, changes to demand generators, and renovations or franchise changes of existing supply. The following table sets forth the pertinent operating characteristics of the secondary competitors.

Secondary Competitors


FIGURE 4-17 SECONDARY COMPETITOR(S) – OPERATING PERFORMANCE


PropertyNumber of

Rooms Occ. Average Rate RevPAR Occ. Average Rate RevPAR

Hampton Inn & Suites Port Aransas 78 95 % 5 % 75 % 59 50 - 55 % $150 - $160 $80 - $85 59 50 - 55 % $160 - $170 $80 - $85

Hol iday Inn Express & Suites Port Aransas Beach Area 74 95 5 75 56 50 - 55 160 - 170 85 - 90 56 50 - 55 160 - 170 85 - 90

Schl i tterbahn Riverpark & Resort 92 90 10 75 58 35 - 40 95 - 100 35 - 40 69 40 - 45 100 - 105 45 - 50

Hol iday Inn Corpus Chris ti North Padre Is land

149 95 5 75 112 50 - 55 150 - 160 80 - 85 112 50 - 55 150 - 160 85 - 90

Hi l ton Garden Inn South Padre Is land

156 80 20 75 117 70 - 75 170 - 180 125 - 130 117 70 - 75 170 - 180 125 - 130

The Pearl South Padre 200 85 15 60 120 55 - 60 130 - 140 80 - 85 120 55 - 60 130 - 140 80 - 85

San Luis on Galveston Is land 242 65 35 50 121 70 - 75 220 - 230 160 - 170 121 70 - 75 220 - 230 160 - 170

Moody Gardens Hotel 423 60 40 40 169 70 - 75 140 - 150 100 - 105 169 65 - 70 140 - 150 100 - 105

Totals/Averages 1,414 78 % 22 % 58 % 811 62.4 % $163.40 $102.04 822 62.9 % $163.78 $103.04

* Specific occupancy and average rate data was utilized in our analysis, but is presented in ranges in the above table for the purposes of confidentiality.

Tran

sient

Mee

ting

and

Grou

p

Total Competitive

Level




It is important to consider any new hotels that may have an impact on the proposed subject hotel’s operating performance. The following chart sets forth the hotels that have recently opened, are under construction, or are in the stages of early development in the Port Aransas area. The list is categorized by the principal submarkets within the city.

FIGURE 4-18 AREA DEVELOPMENT ACTIVITY

Proposed Hotel Name Hotel Product Tier Development Stage AddressProposed Hotel 0

Proposed Hotel 60 Ups cal e Ea rl y Devel opment Q3 '19 Sunset Avenue, Access Roa d 1, Port Ara nsa sCourtyard by Marriott Beachfront South Padre Is l and 200 Ups cal e Under Construction Q3 '18 6700 Padre Boulevard, South Padre Is l andAloft Corpus Chris ti 105 Ups cal e Recently Opened Q3 '17 5117 Embass y Dri ve, Corpus Chri s tiHa mpton Inn & Sui tes Portl a nd 91 Upper-Midsca le Recently Opened Q2 '17 1801 U.S. Hi ghway 181, Portl andHome2 Suites Portla nd 88 Upper-Midsca le Recently Opened Q1 '17 139 Buddy Ganem Drive, PortlandBes t Western Pl us /Executi ve Res i dency Corpus Chri s ti 88 Upper-Midsca le Under Construction Q1 '18 3533 Mckinzie Road, Corpus Chris tiSl eep Inn & Sui tes Ingles i de 72 Midsca le Recently Opened Q1 '17 2810 State Hi ghway 361, Ingles i deFa i rfie ld Inn & Sui tes Ara nsa s Pa ss 88 Upper-Midsca le Recently Opened Q2 '17 2679 Texas 35 Bus iness , Aransas Pas sHomewood Suites Gal veston 88 Ups cal e Recently Opened Q1 '17 110 Seawal l Boul evard, Ga l veston

Estimated Number of

Rooms

Expected Qtr. & Year of Opening

Of the hotels listed in the preceding chart, we have identified the following new supply that is expected to have some degree of competitive interaction with the proposed subject hotel, based on location, anticipated market orientation and price point, and/or operating profile.

FIGURE 4-19 NEW SUPPLY

Total

Proposed PropertyNumber

of Rooms Competitive

LevelEstimated Opening

Date Development Stage

Proposed Subject Property 250 100 % 250 July 1, 2020 Early DevelopmentProposed Hotel 60 75 45 July 1, 2019 Early DevelopmentCourtyard by Marriott Beachfront South Padre Is land 200 75 150 September 1, 2018 Under Cons truction

Totals/Averages 510 445

Weighted Room Count

A hotel has been proposed for development on a site located within the Palmilla Beach Club development; however, given its anticipated boutique product type and expected smaller room count, it has been weighted secondarily competitive in our analysis. Furthermore, we note that a Courtyard by Marriott is proposed for development on South Padre Island, approximately 117 miles from Port Aransas;

Supply Changes


however, given its anticipated location and its select-service product type, it has been weighted secondarily competitive in our analysis. While we have taken reasonable steps to investigate proposed hotel projects and their status, due to the nature of real estate development, it is impossible to determine with certainty every hotel that will be opened in the future, or what their marketing strategies and effect in the market will be. Depending on the outcome of current and future projects, the future operating potential of the proposed subject hotel may be affected. Future improvement in market conditions will raise the risk of increased competition. Our forthcoming forecast of stabilized occupancy and average rate is intended to reflect such risk. We have identified various properties that are expected to be competitive to some degree with the proposed subject hotel. We have also investigated potential increases in competitive supply in this Port Aransas submarket. The Proposed Hotel & Conference Center should enter a dynamic market of varying product types and price points. Next, we will present our forecast for demand change, using the historical supply data presented as a starting point. The following table presents the most recent trends for the subject hotel market as tracked by HVS. These data pertain to the competitors discussed previously in this section; performance results are estimated, rounded for the competition, and in some cases weighted if there are secondary competitors present. In this respect, the information in the table differs from the previously presented STR data and is consistent with the supply and demand analysis developed for this report.

FIGURE 4-20 HISTORICAL MARKET TRENDS

Year

Est. 2016 473,836 5.4 % 717,082 3.0 % 66.1 155.92 (3.6) % 103.03 (1.4) %Est. 2017 484,119 2.2 721,222 0.6 67.1 157.47 1.0 105.70 2.6

Avg. Annual Compounded Chg., Est. 2015-Es t. 2017: 3.8 % 1.8 % (1.3) % 0.6 %

Accommodated Room Nights % Change

Market Occupancy Market ADR% Change

Room Nights Available % Change % Change

Market RevPAR

For the purpose of demand analysis, the overall market is divided into individual segments based on the nature of travel. Based on our fieldwork, area analysis, and knowledge of the local lodging market, we estimate the 2017 distribution of accommodated-room-night demand as follows.

Supply Conclusion

DEMAND

Demand Analysis Using Market Segmentation


FIGURE 4-21 ACCOMMODATED ROOM-NIGHT DEMAND

Marketwide

Market Segment

Trans ient 348,870 72 %Meeting and Group 135,249 28

Total 484,119 100 %

Accommodated Demand

Percentage of Total

The market’s demand mix comprises transient demand, with this segment representing roughly 72% of the accommodated room nights in this Port Aransas submarket. The meeting and group segment comprises 28% of the total. Using the distribution of accommodated hotel demand as a starting point, we will analyze the characteristics of each market segment in an effort to determine future trends in room-night demand. Transient demand consists of individuals and families spending time in an area or passing through en route to other destinations; this segment represents travelers that are not associated with a group or room-night contract. Travel purposes include business, sightseeing, recreation, or visiting friends and relatives. Transient demand also includes room nights booked through Internet sites such as Expedia, Hotels.com, and Priceline; however, this demand may include group and convention attendees who use these channels to take advantage of any discounts that may be available on these sites. In resort destinations, transient demand is strongest Friday and Saturday nights, and all week during holiday periods and the summer months. In urban and suburban destinations, transient demand is typically strongest on Tuesday, Wednesday, and Thursday nights. The typical length of stay ranges from one to four days, depending on the destination and travel purpose. The rate of double occupancy typically ranges from 1.0 to 3.0 people per room, with higher double occupancy occurring in resort destinations. Price sensitivity tends to vary with product type. All-suite properties with inclusive food and beverage or luxury destination properties tend to drive strong transient room rates, with discounted rates offered at older or value-oriented hotels with limited amenities. For destination locations, future transient demand is related to the overall economic health of the primary source cities for visitation; the overall economic health of the surrounding neighborhood is considered for urban and suburban locations. Transient leisure demand for this market is primarily generated by the various beaches and a variety of leisure attractions in the area. Major projects in the area,

Transient Segment


such as ExxonMobil's planned $10-billion ethylene cracker plant and the Harbour Bridge Project, should increase discretionary income for families in the region, leading to an increase in transient leisure demand. Demand within this segment is also generated by the Schlitterbahn Riverpark & Resort, the USS Lexington, the Texas State Aquarium, and fishing tournaments, as well as various festivals throughout the year. Lastly, many hotels in the area also benefit from "staycations" during the shoulder months and from friends and family visiting the area. These factors should allow for moderate growth within this demand segment. The meeting and group market includes meetings, seminars, conventions, trade association shows, and similar gatherings of ten or more people. Peak convention demand typically occurs in the spring and fall. Although there are numerous classifications within the meeting and group segment, the primary categories considered in this analysis are corporate groups, associations, and SMERFE (social, military, ethnic, religious, fraternal, and educational) groups. Corporate groups typically meet during the business week, most commonly in the spring and fall months. These groups tend to be the most profitable for hotels, as they typically pay higher rates and usually generate ancillary revenues including food and beverage and/or banquet revenue. SMERFE groups are typically price-sensitive and tend to meet on weekends and during the summer months or holiday season, when greater discounts are usually available; these groups generate limited ancillary revenues. Association demand is generally divided on a geographical basis, with national, regional, and state associations representing the most common sources. Professional associations and/or those supported by members' employers often meet on weekdays, while other associations prefer to hold events on weekends. The profile and revenue potential of associations varies depending on the group and the purpose of the meeting or event. Meeting and group demand in Port Aransas/Mustang Island and the Corpus Christi MSA is primarily generated by corporate groups from nearby companies, such as Valero, ExxonMobil, Flint Hills Resources, Baker Hughes, and Repcon, as well as major corporate offices, such as Koch Industries, AT&T, and M&G Polymers. The same companies that create commercial demand also generate group demand through training activities and social corporate events. Demand generated by the American Bank Center also provides room nights for area hotels. The Omni hotel is the largest recipient of lodging demand associated with the convention center, as this is the largest hotel nearest the convention center. High school and collegiate sports teams, SMERFE groups, and social events, such as weddings and family reunions, also contribute to this demand segment. We anticipate continued moderate growth within the meeting and group segment.

Meeting and Group Segment


The purpose of segmenting the lodging market is to define each major type of demand, identify customer characteristics, and estimate future growth trends. Starting with an analysis of the local area, two segments were defined as representing the subject property’s lodging market. Various types of economic and demographic data were then evaluated to determine their propensity to reflect changes in hotel demand. Based on this procedure, we forecast the following average annual compounded market-segment growth rates.

FIGURE 4-22 AVERAGE ANNUAL COMPOUNDED MARKET SEGMENT GROWTH RATES

Annual Growth RateMarket Segment

Trans ient 2.5 % 2.5 % 3.0 % 2.0 % 1.0 % 0.5 %Meeting and Group 1.0 1.5 2.5 4.0 2.5 1.0

Base Demand Growth 2.1 % 2.2 % 2.9 % 2.5 % 1.4 % 0.6 %

2018 2019 2020 2021 2022 2023

A table presented earlier in this section illustrated the accommodated-room-night demand in the subject property’s competitive market. Because this estimate is based on historical occupancy levels, it includes only those hotel rooms that were used by guests. Latent demand reflects potential room-night demand that has not been realized by the existing competitive supply, further classified as either unaccommodated demand or induced demand. Unaccommodated demand refers to individuals who are unable to secure accommodations in the market because all the local hotels are filled. These travelers must defer their trips, settle for less desirable accommodations, or stay in properties located outside the market area. Because this demand did not yield occupied room nights, it is not included in the estimate of historical accommodated-room-night demand. If additional lodging facilities are expected to enter the market, it is reasonable to assume that these guests will be able to secure hotel rooms in the future, and it is therefore necessary to quantify this demand. Unaccommodated demand is further indicated if the market is at all seasonal, with distinct high and low seasons; such seasonality indicates that although year-end occupancy may not average in excess of 70%, the market may sell out certain nights during the year. To evaluate the incidence of unaccommodated demand in the market, we have reviewed the average occupancy by the night of the week for the past twelve months for the competitive set, as reflected in the STR data. This is set forth in the following table.

Base Demand Growth Rates

Latent Demand

Unaccommodated Demand


FIGURE 4-23 OCCUPANCY BY NIGHT OF THE WEEK


Aug - 16 61.2 % 70.8 % 73.0 % 69.1 % 75.9 % 87.4 % 93.7 % 75.4 %Sep - 16 50.8 41.1 54.3 61.1 56.3 76.2 89.2 61.6Oct - 16 41.0 44.7 57.3 63.1 63.4 78.3 88.7 62.0Nov - 16 30.1 32.8 39.3 51.9 55.1 73.4 78.3 51.2Dec - 16 38.2 41.9 42.9 40.2 47.7 59.4 65.2 48.9Ja n - 17 43.6 42.8 50.6 52.1 56.5 64.1 69.5 53.3Feb - 17 49.0 57.0 63.6 58.2 58.5 79.2 87.8 64.8Ma r - 17 59.6 67.3 73.2 72.2 69.6 81.8 90.3 73.5Apr - 17 49.7 54.9 60.5 62.3 69.9 90.8 96.1 69.4Ma y - 17 63.5 52.1 60.3 61.3 62.4 85.9 96.1 67.7Jun - 17 67.6 76.9 84.0 84.7 79.5 89.5 94.6 82.5Jul - 17 80.7 85.7 92.1 88.5 90.9 95.1 98.1 90.0

Average 53.0 % 56.0 % 62.1 % 63.7 % 65.3 % 79.9 % 87.3 % 66.7 %

Source: STR

Our interviews with market participants found that the market generally sells out during the summer travel season and during Spring Break week, as well as sporadically within other periods throughout the year. Special events, in particular citywide conventions, regularly sell out hotels in Corpus Christi. A portion of this demand, which is currently turned away, should return to the market concurrent with the supply increase. The following table presents our estimate of unaccommodated demand in the subject market. FIGURE 4-24 UNACCOMMODATED DEMAND ESTIMATE

Market Segment

Tra ns i ent 348,870 10.0 % 34,888Meeting and Group 135,249 2.8 3,827

Total 484,119 8.0 % 38,715

Unaccommodated Demand Percentage

Unaccommodated Room Night Demand

Accommodated Room Night Demand

Accordingly, we have forecast unaccommodated demand equivalent to 8.0% of the base-year demand, resulting from our analysis of monthly and weekly peak demand and sell-out trends.


Induced demand represents the additional room nights that are expected to be attracted to the market following the introduction of a new demand generator. Situations that can result in induced demand include the opening of a new manufacturing plant, the expansion of a convention center, or the addition of a new hotel with a distinct chain affiliation or unique facilities. Although increases in demand are expected in the local market, we have accounted for this growth in the determination of market-segment growth rates rather than induced demand. Based upon a review of the market dynamics in the subject property’s competitive environment, we have forecast growth rates for each market segment. Using the calculated potential demand for the market, we have determined market-wide accommodated demand based on the inherent limitations of demand fluctuations and other factors in the market area. The following table details our projection of lodging demand growth for the subject market, including the total number of occupied room nights and any residual unaccommodated demand in the market.

Induced Demand

Accommodated Demand and Market-wide Occupancy


FIGURE 4-25 FORECAST OF MARKET OCCUPANCY

357,592 366,532 377,528 385,078 388,929 390,874 390,874Una ccommodated Demand 35,760 36,654 37,754 38,509 38,894 39,088 39,088

393,352 403,186 415,281 423,587 427,823 429,962 429,962Growth Ra te 12.8 % 2.5 % 3.0 % 2.0 % 1.0 % 0.5 % 0.0 %

136,601 138,650 142,116 147,801 151,496 153,011 153,0113,865 3,923 4,021 4,182 4,287 4,330 4,330

140,466 142,573 146,138 151,983 155,783 157,341 157,3413.9 % 1.5 % 2.5 % 4.0 % 2.5 % 1.0 % 0.0 %

Base Demand 494,193 505,182 519,644 532,879 540,425 543,885 543,885Una ccommodated Demand 39,625 40,577 41,775 42,691 43,181 43,418 43,418Tota l Demand 533,818 545,759 561,419 575,570 583,606 587,303 587,303less : Res idua l Demand 35,161 24,831 0 0 0 0 0Tota l Accommodated Demand 498,657 520,928 561,419 575,570 583,606 587,303 587,303Overall Demand Growth 3.0 % 4.5 % 7.8 % 2.5 % 1.4 % 0.6 % 0.0 %Market Mix

73.7 % 73.9 % 74.0 % 73.6 % 73.3 % 73.2 % 73.2 %26.3 26.1 26.0 26.4 26.7 26.8 26.8

1,976 1,976 1,976 1,976 1,976 1,976 1,976

Propos ed Subject Property ¹ 126 250 250 250 250Propos ed Hotel ² 23 45 45 45 45 45Courtya rd by Ma rriott Bea chfront South Padre Is la nd ³ 50 150 150 150 150 150 150

Avai lable Room Nights per Yea r 739,522 784,252 838,397 883,647 883,647 883,647 883,647Nights per Year 365 365 365 365 365 365 365Total Supply 2,026 2,149 2,297 2,421 2,421 2,421 2,421Rooms Suppl y Growth 2.5 % 6.0 % 6.9 % 5.4 % 0.0 % 0.0 % 0.0 %

Marketwide Occupancy 67.4 % 66.4 % 67.0 % 65.1 % 66.0 % 66.5 % 66.5 %

¹ Opening in Jul y 2020 of the 100% competitive, 250-room Propos ed Subject Property² Opening in Jul y 2019 of the 75% competiti ve, 60-room Propos ed Hotel³ Opening in September 2018 of the 75% competitive, 200-room Courtya rd by Ma rriott Bea chfront South Padre Is la nd

Transient

2018 2019 2020 2021 2022

Una ccommodated Demand

2023 2024

Base Demand

Tota l Demand

Meeting and GroupBase Demand

Tota l DemandGrowth Ra te

Existing Hotel SupplyProposed Hotels

Totals

Trans ientMeeting a nd Group

The defined competitive market of hotels should experience modest occupancy growth in the first projection year before slight occupancy fluctuations during the remainder of the projection period because of the increase in new supply. Based on historical occupancy levels in this market, and taking into consideration typical supply and demand cyclicality, market occupancy is forecast to stabilize in the mid-60s.

June-2017 Description of the Proposed Improvements Proposed Hotel & Conference Center – Port Aransas, Texas 67

5. Description of the Proposed Improvements

The quality of a lodging facility's physical improvements has a direct influence on marketability, attainable occupancy, and average room rate. The design and functionality of the structure can also affect operating efficiency and overall profitability. This section investigates the subject property's proposed physical improvements and personal property in an effort to determine how they are expected to contribute to attainable cash flows. The Proposed Hotel & Conference Center will be a full-service, conference center lodging facility containing 250 rentable units. The property will open on July 1, 2020. The Port Aransas/Mustang Island market area currently comprises hotels spanning the limited-service segment, with the notable void of a full-service hotel. While a particular brand has yet to be determined for this project, our study assumes that the proposed subject hotel will operate as an upper-upscale, full-service hotel and conference center under a brand not currently represented in the market. We recommend that the proposed subject hotel operate as an upscale, full-service property. While we have placed heavy consideration on the Hilton, Marriott, and Sheraton brands, a specific franchise affiliation and/or brand has yet to be finalized. The following table summarizes the facilities that are recommended at the proposed subject hotel.

Project Overview

Summary of the Facilities


FIGURE 5-1 PROPOSED FACILITIES SUMMARY

Recommended Guestroom Configuration

King 120 Queen/Queen 100 Sui te 30

Tota l 250

Recommended Food & Beverage Facilities

Restaurant & Lounge 200 Lobby Bar 100 Pools ide Bar 75

Recommended Meeting & Banquet Facilities

Bal l room 9,000 Junior Ba l l room 4,500 Meeting Room A 1,250 Meeting Room B 1,250 Meeting Room C 1,250 Meeting Room D 1,000 Meeting Room E 1,000 Meeting Room F 1,000 Boardroom A 450 Boardroom B 450 Pre-Function Space 6,345

Tota l , Less Pre-Function Space 21,150

Recommended Amenities & Services

Outdoor Swimming Pool Reta i l Outlet/BoutiqueOutdoor Whirlpool Guest Laundry AreaFi tness Center ConciergeBus iness Center Vending Area(s )

Infrastructure

Parking Spaces 250 Spaces Required for 250 RoomsElevatorsLi fe-Safety SystemsConstruction Deta i l s

Recommended Square Footage

Recommended Number of Units

Recommended Seating Capacity

Sprinklers , Smoke DetectorsSteel and Concrete

4 (Estimated)


Once guests enter the selected site, ample parking is planned to be available on a surface lot around the perimeter of the hotel. Site improvements are expected to include freestanding signage at the entrance to the site (additional signage is also anticipated to be placed on the exterior of the building). We assume that all signage will adequately identify the property and meet brand standards. Landscaping should allow for a positive guest impression and competitive exterior appearance. Sidewalks should be present along the front entrance and around the perimeter of the hotel. Other site improvements should include an outdoor pool with sundeck and a trash area toward the rear of the property. The expected site improvements for the property should be adequate to provide for an upscale lodging experience. Construction details were not provided for our review. It is expected that the hotel structure will be constructed of reinforced concrete. Elevators and stairways are anticipated to provide internal vertical transportation within the main structure as needed. We assume that the building components will be normal for a full-service hotel of its type, meeting the standards for the chosen brand and this market. Furthermore, we assume that all structural components will meet local building codes and that no significant defaults will occur during construction that would affect the future operating potential of the hotel or delay its assumed opening date. Guests should enter the hotel through a single set of automatic doors, which open to a vestibule, and then through a second set of automatic doors. The lobby should be large and appropriate for a Hilton, Marriott, Sheraton, or similar upper-upscale, full-service brand. The lobby walls should be attractively finished with an upscale material that is in line with the selected brand and the Port Aransas/Mustang Island market. The front desk should feature a stone or glass countertop. We assume that all property management and telephone systems, as well as other technology, will be appropriately installed for the effective management of hotel operations. The furnishings and finishes in this space should offer an appropriate first impression, and the design of the space should lend itself to adequate efficiency. The specific design concept will be finalized with input from the pursued future brand for the proposed subject hotel. The hotel is anticipated to offer a full-service restaurant and lounge, a lobby bar, a poolside bar, room service, and banquet operations. We would expect onsite outlets to be relatively upscale due to the ideal hotel service level and first-class nature. The hotel's primary focus in the food and beverage department should be centered on banquet operations. The furnishings of the restaurant and lounge, as well as the lobby bar, are expected to be of a similar style and finish as lobby and guestroom furnishings. We have assumed that the hotel would provide a competitive offering of food and beverage facilities for an upper-upscale, full-service property.

Site Improvements and Hotel Structure

Lobby

Food and Beverage Facilities


Under a full-service, upper-upscale scope, the proposed hotel should be developed with approximately 21,000 square feet of modern and technologically advanced space. We would expect the integration of a fully divisible grand ballroom, a junior ballroom, smaller breakout rooms, secondary meeting rooms, and boardroom-type spaces. We anticipate that public restrooms and pre-function space will be conveniently located near the meeting rooms. The hotel is expected to offer an outdoor pool, an outdoor whirlpool, and a fitness center as recreational facilities. Restrooms should be present off of the pool area. Other amenities are anticipated to include a full-service business center with various workstations, wireless Internet in the public areas, a guest laundry room, vending areas, a concierge desk, and a gift shop or retail boutique. Overall, the supporting facilities should be appropriate for a hotel of this type and should meet brand standards. The hotel is expected to feature standard and suite-style guestroom configurations, with guestrooms present on all floors above the lobby level within the single building. The guestrooms are anticipated to be of a standard size, offering typical amenities for this upper-upscale product type. Guestrooms should feature high-quality finishes and amenities, thus supporting a strong room-rate level. In addition to the standard furnishings, rooms should also feature an iron and ironing board, a coffeemaker, and high-speed Internet access, among other amenities. Suites are expected to feature a larger living area and other upgraded amenities. Overall, the guestrooms should offer a competitive product for this Port Aransas/Mustang Island neighborhood. Guestroom bathrooms are expected to be of a standard size, with a shower-in-tub, commode, and single sink with vanity area, featuring a granite countertop. The floors are anticipated to be finished with tile, and the walls will likely be finished with a wallcovering. Bathrooms should feature a hairdryer, a robe, and high-quality toiletries. Overall, the bathroom design should appeal to the upscale traveler and conform to brand standards. The interior guestroom corridors are anticipated to be wide and functional, permitting the easy passage of housekeeping carts. Corridor carpet, wallcovering, signage, and lighting should be in keeping with the overall look and design of the rest of the property. The hotel will be served by the necessary back-of-the-house space, including an in-house laundry facility, administrative offices, and two full-service kitchens to serve the needs of the restaurant and banquet operations. These spaces should be

Meeting and Banquet Space

Recreational Amenities

Additional Amenities

Guestrooms

Back-of-the-House, ADA, and Environmental


adequate for a hotel of this type and should allow for the efficient operation of the property under competent management. We assume that the property will be built according to all pertinent codes and brand standards. Moreover, we assume its construction will not create any environmental hazards (such as mold) and that the property will fully comply with the Americans with Disabilities Act. Our analysis assumes that, after its opening, the hotel will require ongoing upgrades and periodic renovations in order to maintain its competitive level in this market and to remain compliant with the chosen brand's standards. These costs should be adequately funded by the forecasted reserve for replacement, as long as a successful, ongoing preventive-maintenance program is employed by hotel staff. Overall, the proposed subject hotel should offer a well-designed, functional layout of support areas and guestrooms. All typical and market-appropriate features and amenities are expected to be included in the hotel's design. We assume that the building will be fully open and operational on the stipulated opening date and will meet all local building codes and applicable brand standards. Furthermore, we assume that the hotel staff will be adequately trained to allow for a successful opening and that pre-marketing efforts will have introduced the product to major local accounts at least six months in advance of the opening date.

Capital Expenditures

Conclusion

June-2017 Projection of Occupancy and Average Rate Proposed Hotel & Conference Center – Port Aransas, Texas 72

6. Projection of Occupancy and Average Rate

Along with average rate results, the occupancy levels achieved by a hotel are the foundation of the property's financial performance and market value. Most of a lodging facility's other revenue sources (such as food, beverages, other operated departments, and rentals and other income) are driven by the number of guests, and many expense levels vary with occupancy. To a certain degree, occupancy attainment can be manipulated by management. For example, hotel operators may choose to lower rates in an effort to maximize occupancy. Our forecasts reflect an operating strategy that we believe would be implemented by a typical, professional hotel management team to achieve an optimal mix of occupancy and average rate. The subject property's forecasted market share and occupancy levels are based upon its anticipated competitive position within the market, as quantified by its penetration rate. The penetration rate is the ratio of a property's market share to its fair share. In the following table, the penetration rates attained by the primary competitors and the aggregate secondary competitors are set forth for each segment for the base year.

FIGURE 6-1 HISTORICAL PENETRATION RATES

Over

all

Tran

sient

Mee

ting a

nd

Grou

p

Property

Omni Corpus Chris ti Hotel 102 % 142 % 113 %Schl i tterba hn Waterpark & Resort 78 67 74Wyndha m Hotel Galvez & Spa 99 138 110Hi l ton Galveston Is land Resort 113 97 109Secondary Competition 101 75 94

Over

all

Tran

sient

Mee

ting a

nd

Grou

p

The Hilton Galveston Island Resort achieved the highest penetration rate within the transient segment. The highest penetration rate in the meeting and group segment was achieved by the Omni Corpus Christi Hotel.

Penetration Rate Analysis

Historical Penetration Rates by Market Segment


Because the supply and demand balance for the competitive market is dynamic, there is a circular relationship between the penetration factors of each hotel in the market. The performance of individual new hotels has a direct effect upon the aggregate performance of the market, and consequently upon the calculated penetration factor for each hotel in each market segment. The same is true when the performance of existing hotels changes, either positively (following a refurbishment, for example) or negatively (when a poorly maintained or marketed hotel loses market share). A hotel’s penetration factor is calculated as its achieved market share of demand divided by its fair share of demand. Thus, if one hotel’s penetration performance increases, thereby increasing its achieved market share, this leaves less demand available in the market for the other hotels to capture and the penetration performance of one or more of those other hotels consequently declines (other things remaining equal). This type of market share adjustment takes place every time there is a change in supply, or a change in the relative penetration performance of one or more hotels in the competitive market. Our projections of penetration, demand capture, and occupancy performance for the subject property account for these types of adjustments to market share within the defined competitive market. The proposed subject hotel's occupancy forecast is set forth as follows, with the adjusted projected penetration rates used as a basis for calculating the amount of captured market demand.

Forecast of Subject Property’s Occupancy


FIGURE 6-2 FORECAST OF SUBJECT PROPERTY'S OCCUPANCY

Market Segment

TransientDemand 415,281 423,587 427,823 429,962 429,962Market Share 3.9 % 8.9 % 9.4 % 9.8 % 9.8 %Capture 16,270 37,730 40,101 42,320 42,320Penetration 71 % 86 % 91 % 95 % 95 %

Meeting and GroupDemand 146,138 151,983 155,783 157,341 157,341Market Share 5.0 % 12.2 % 13.1 % 13.9 % 13.9 %Capture 7,314 18,514 20,334 21,897 21,897Penetration 91 % 118 % 126 % 135 % 135 %

Total Room Nights Captured 23,584 56,244 60,434 64,217 64,217Ava i lable Room Nights 46,000 91,250 91,250 91,250 91,250

Subject Occupancy 51 % 62 % 66 % 70 % 70 %Market-wi de Avai lable Room Nights 838,397 883,647 883,647 883,647 883,647

Fair Share 5 % 10 % 10 % 10 % 10 %Market-wi de Occupied Room Ni ghts 561,419 575,570 583,606 587,303 587,303

Market Share 4 % 10 % 10 % 11 % 11 %Market-wide Occupancy 67 % 65 % 66 % 66 % 66 %Total Penetration 77 % 95 % 100 % 106 % 106 %

2020 2021 2022 2023 2024

The proposed subject hotel is expected to stabilize with an overall strong penetration rate due to its new facility and anticipated strong upper-upscale brand, as well as its proximity to the beach. Additional insights by segment are presented as follows:

• The proposed subject hotel's transient leisure penetration level is positioned appropriately within the range of existing competitors, supported by its expected upper-upscale amenities and services, as well as the hotel’s proximity to the beach and other popular leisure attractions in the area. With the proposed subject property's location being so favorable to weekend uses, we would anticipate the hotel to experience high levels of peak weekends, with weekend-transient leisure supplemented by strong weekend group. The proposed subject hotel is expected to realize a leisure penetration level just below fair share by the stabilized year.


• The proposed subject hotel is anticipated to become the foremost choice for meeting and group demand in this Port Aransas/Mustang Island market. While the nearby Omni Corpus Christi Hotel encompasses a significant amount of meeting space, the space exhibits some signs of functional obsolescence. The proposed subject hotel is expected to offer a considerable amount of meeting space, which should increase its ability to capture large meetings and events. Furthermore, its proximity to the beach and a golf course should also allow it to become a popular destination for groups, executive-level meetings, and social events, such as weddings. The proposed subject hotel's ability to capture this demand will be supported by the anticipated experience and sophistication of the selected brand's sales and marketing operation.

These positioned segment penetration rates result in the following market segmentation forecast. FIGURE 6-3 MARKET SEGMENTATION FORECAST – SUBJECT PROPERTY

Trans ient 69 % 67 % 66 % 66 % 66 %Meeti ng and Group 31 33 34 34 34

Total 100 % 100 % 100 % 100 % 100 %

2020 2021 2022 2023 2024

Based on our analysis of the proposed subject hotel and market area, we have selected a stabilized occupancy level of 70%. The stabilized occupancy is intended to reflect the anticipated results of the property over its remaining economic life, given all changes in the life cycle of the hotel. Thus, the stabilized occupancy excludes from consideration any abnormal relationship between supply and demand, as well as any nonrecurring conditions that may result in unusually high or low occupancies. Although the subject property may operate at occupancies above this stabilized level, we believe it equally possible for new competition and temporary economic downturns to force the occupancy below this selected point of stability. One of the most important considerations in estimating the value of a lodging facility is a supportable forecast of its attainable average rate, which is more formally defined as the average rate per occupied room. Average rate can be calculated by dividing the total rooms revenue achieved during a specified period by the number of rooms sold during the same period. The projected average rate and the

Average Rate Analysis


anticipated occupancy percentage are used to forecast rooms revenue, which in turn provides the basis for estimating most other income and expense categories. Although the average rate analysis presented here follows the occupancy projection, these two statistics are highly correlated; in reality, one cannot project occupancy without making specific assumptions regarding average rate. This relationship is best illustrated by revenue per available room (RevPAR), which reflects a property's ability to maximize rooms revenue. The following table summarizes the historical average rate and the RevPAR of the subject property’s future primary competitors.

FIGURE 6-4 BASE-YEAR AVERAGE RATE AND REVPAR OF THE COMPETITORS

Property

Omni Corpus Chris ti Hotel $140 - $150 85 - 90 % $105 - $110 100 - 110 %

Schl i tterbahn Waterpark & Resort 140 - 150 90 - 95 70 - 75 65 - 70

Wyndham Hotel Ga lvez & Spa 170 - 180 110 - 120 130 - 140 120 - 130

Hi lton Ga lveston Is land Resort 150 - 160 95 - 100 110 - 115 100 - 110

Average - Primary Competitors $153.44 97.4 % $107.60 101.8 %

Average - Secondary Competi tors 163.78 104.0 103.04 97.5

Overall Average $157.47 $105.70

Estimated 2017 Average Room

RateAverage Room

Rate Penetration

Rooms Revenue Per Available

Room (RevPAR)RevPAR

Penetration

The defined primarily competitive market realized an overall average rate of $153.44 in the 2017 base year, improving from the 2016 level of $151.14. The San Luis (a secondary competitor) achieved the highest estimated average rate in the competitive market, by a significant margin, because of its location along the seawall, luxury product offering, extensive amenity set, and high service level. Of the primary competitive set, the Wyndham Hotel Galvez & Spa achieved the highest estimated average rate because of its high-quality product offering and its location near the seawall. Proximity to the beach and views of the water are important rate considerations for hotels in this market. Furthermore, the strong demand during

Competitive Position


the summer months and on holiday weekends allows area hotels to charge premium rates during these times. The selected rate position for the proposed subject hotel, in base-year dollars, takes into consideration factors such as its proximity the beach, new construction, and assumed strong brand affiliation. We have selected the rate position of $185.00, in base-year dollars, for the proposed subject. Market-wide rates trended upward from 2010 through 2015; however, rates registered a modest decline in 2016. We expect average rates to improve because of Port Aransas/Mustang Island's appeal as a preferred lodging choice for travelers to the Texas Gulf Coast, while also considering the high demand levels. Moreover, the Hampton Inn & Suites Port Aransas, the Holiday Inn Express Hotel & Suites Port Aransas Beach Area, and the Holiday Inn Corpus Christi North Padre Island are undergoing renovation and will reopen in the near future, which should support a higher market-wide ADR. Additionally, the expectation of strong levels of higher-rated transient leisure demand support this forecast. Based on these considerations, the following table illustrates the projected average rate and the growth rates assumed. As a context for the average rate growth factors, note that we have applied underlying inflation rates of 2.5%, 2.5%, and 3.0% thereafter for each respective year following the base year of 2016.


FIGURE 6-5 COMPARISON OF HISTORICAL AND PROJECTED OCCUPANCY, AVERAGE RATE, AND REVPAR – PROPOSED SUBJECT PROPERTY AND MARKET

2015 2016 2017 2018 2019 2020 2021 2022 2023

Proposed Hotel & Conference Center

Occupancy — — 51.3 % 61.6 % 66.2 % 70.4 %Change in Points — — — 10.4 4.6 4.1Occupancy Penetration — — 76.6 % 94.6 % 100.3 % 105.9 %

Average Rate $185.00 $187.78 $194.35 $203.09 $211.22 $218.61 $225.17Change 1.5 3.5 % 4.5 % 4.0 % 3.5 % 3.0 %Average Rate Penetra tion — — 117.5 % 117.5 % 117.5 % 117.5 %

RevPAR — — $104.13 $130.19 $144.78 $158.46Change — — — 25.0 % 11.2 % 9.4 %RevPAR Penetration — — 89.9 % 111.2 % 117.8 % 124.4 %

2015 2016 2017 2018 2019 2020 2021 2022 2023

Port Aransas SubmarketOccupancy 64.6 % 66.1 % 67.1 % 67.4 % 66.4 % 67.0 % 65.1 % 66.0 % 66.5 %Change in Points — 1.5 1.0 0.3 (1.0) 0.5 (1.8) 0.9 0.4

Average Rate $161.79 $155.92 $157.47 $159.84 $165.43 $172.87 $179.79 $186.08 $191.66Change — (3.6) % 1.0 % 1.5 % 3.5 % 4.5 % 4.0 % 3.5 % 3.0 %

RevPAR $104.51 $103.03 $105.70 $107.78 $109.88 $115.76 $117.11 $122.90 $127.39Change — (1.4) % 2.6 % 2.0 % 2.0 % 5.3 % 1.2 % 4.9 % 3.7 %

* The forecast for the proposed subject property does not include rate discounts that are expected to occur during the initial year(s) of operation.

Projected

Historical (Estimated) Projected


The final forecast reflects years beginning on July 1, 2020 and corresponds with our financial projections, as shown below.

FIGURE 6-6 MARKET AND SUBJECT PROPERTY AVERAGE RATE FORECAST

Calendar Year 2017 2018 2019 2020 2021 2022 2023 2024

Market ADR $157.47 $159.84 $165.43 $172.87 $179.79 $186.08 $191.66 $197.41Projected Ma rket ADR Growth Rate — 1.5% 3.5% 4.5% 4.0% 3.5% 3.0% 3.0%

Proposed Subject Property ADR (As-If Stabi l ized) $185.00 $187.78 $194.35 $203.09 $211.22 $218.61 $225.17 $231.92ADR Growth Ra te — 1.5% 3.5% 4.5% 4.0% 3.5% 3.0% 3.0%

Proposed Subject Stabi l ized ADR Penetration 117% 117% 117% 117% 117% 117% 117% 117%

Fiscal Year 2020/21 2021/22 2022/23 2023/24 2024/25

Proposed Subject Property Avera ge Rate $207.12 $214.88 $221.86 $228.52 $235.37Opening Discount 3.0% 2.0% 0.0% 0.0% 0.0%

Average Rate After Discount $200.91 $214.88 $221.86 $228.52 $235.37

Real Avera ge Rate Growth — 7.0% 3.2% 3.0% 3.0%

Market ADR $176.30 $182.91 $188.85 $194.51 $200.35Proposed Subject ADR Penetration (After Discount) 114% 117% 117% 117% 117%

ADR Expressed in Base-Year Dol la rs Deflated @ Infla tion Rate $185.66 $192.79 $193.25 $193.25 $193.25

As illustrated above, a 1.5%% rate of change is expected for the proposed subject hotel's positioned 2017 room rate in 2018. This is followed by growth rates of 3.5%% and 4.5%% in 2019 and 2020, respectively. The Port Aransas/Mustang Island market should experience rate growth through the near term. The proposed subject hotel's rate position should reflect growth similar to market trends because of the proposed hotel's new facility, assumed upper-upscale service level under a strong brand, and proximity to the beach. The proposed subject hotel’s penetration rate is forecast to reach 117.5% by the stabilized period. A new property must establish its reputation and a client base in the market during its ramp-up period; as such, the proposed subject hotel’s average rates in the initial operating period have been discounted to reflect this likelihood. We forecast 3.0% and 2.0% discounts to the proposed subject hotel’s forecast room rates in the first two operating years, which would be typical for a new operation of this type. The following occupancies and average rates will be used to project the subject property's rooms revenue; this forecast reflects years beginning on July 1, 2020, which correspond with our financial projections.


FIGURE 6-7 FORECASTS OF OCCUPANCY, AVERAGE RATE, AND REVPAR

Year

2020/21 56 % $207.12 3.0 % $200.912021/22 64 214.88 2.0 210.582022/23 68 221.86 0.0 221.862023/24 70 228.52 0.0 228.52

OccupancyAverage Rate

Before Discount DiscountAverage Rate After Discount

June-2017 Projection of Income and Expense Proposed Hotel & Conference Center – Port Aransas, Texas 81

7. Projection of Income and Expense

In this chapter of our report, we have compiled a forecast of income and expense for the proposed subject hotel. This forecast is based on the facilities program set forth previously, as well as the occupancy and average rate forecast discussed previously. The forecast of income and expense is expressed in current dollars for each year. The stabilized year is intended to reflect the anticipated operating results of the property over its remaining economic life, given any or all applicable stages of build-up, plateau, and decline in the life cycle of the hotel. Thus, income and expense estimates from the stabilized year forward exclude from consideration any abnormal relationship between supply and demand, as well as any nonrecurring conditions that may result in unusual revenues or expenses. The ten-year period reflects the typical holding period of large real estate assets such as hotels. In addition, the ten-year period provides for the stabilization of income streams and comparison of yields with alternate types of real estate. The forecasted income streams reflect the future benefits of owning specific rights in income-producing real estate. In order to project future income and expense for the proposed subject hotel, we have included a sample of individual comparable operating statements from our database of hotel statistics. All financial data are presented according to the three most common measures of industry performance: ratio to sales (RTS), amounts per available room (PAR), and amounts per occupied room night (POR). The following data reflect the performance of five hotel properties, which were chosen based on similarities in product, market orientation, brand affiliation, size, and price positioning. These historical income and expense statements will be used as benchmarks in our forthcoming forecast of income and expense.

Comparable Operating Statements


FIGURE 7-1 COMPARABLE OPERATING STATEMENTS: RATIO TO SALES

Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Subject

Number of Rooms: 260 to 320 440 to 540 310 to 390 430 to 540 300 to 380 250Days Open: 366 365 365 365 365 365Occupancy: 69% 76% 74% 73% 76% 70%

Average Rate: $181 $199 $176 $175 $193 $188RevPAR: $124 $151 $131 $128 $146 $132

REVENUE Rooms 65.0 % 69.8 % 63.0 % 58.9 % 67.1 % 66.4 % Food & Beverage 28.2 28.5 29.8 35.7 26.3 29.6 Other Operated Departments 5.5 1.7 5.6 3.9 4.8 2.6

Miscel laneous Income 1.4 0.0 1.6 1.5 1.8 1.4 Tota l 100.0 100.0 100.0 100.0 100.0 100.0 DEPARTMENTAL EXPENSES* Rooms 24.7 23.2 26.1 25.1 23.9 24.3 Food & Beverage 69.2 72.0 70.1 68.1 70.1 70.3 Other Operated Departments 74.2 68.0 91.0 73.1 92.2 74.8 Tota l 39.6 37.8 42.4 41.9 38.9 38.9DEPARTMENTAL INCOME 60.4 62.2 57.6 58.1 61.1 61.1OPERATING EXPENSES Adminis trative & Genera l 7.6 7.0 7.1 6.8 6.8 7.5 Info. and Telecom. Systems 0.0 1.3 1.5 0.0 1.4 1.4 Ma rketing 3.9 3.7 3.7 3.2 3.6 3.9 Fra nchise Fee 4.6 7.8 3.8 3.5 7.4 5.3 Property Operations & Ma intenance 3.5 3.2 3.3 2.9 3.3 3.5 Uti l i ties 3.9 4.5 4.0 3.6 3.9 4.3 Tota l 23.5 27.6 23.5 20.0 26.6 25.8HOUSE PROFIT 36.9 34.6 34.1 38.1 34.5 35.3Management Fee 3.5 3.0 2.5 3.0 3.0 3.0INCOME BEFORE FIXED CHARGES 33.4 31.6 31.6 35.1 31.6 32.3

* Departmenta l expense ra tios are expressed as a percentage of departmenta l revenues

Stabilized $


FIGURE 7-2 COMPARABLE OPERATING STATEMENTS: AMOUNTS PER AVAILABLE ROOM




REVENUE Rooms $45,435 $54,975 $47,869 $46,641 $53,419 $48,056 Food & Beverage 19,728 22,429 22,668 28,298 20,889 21,465 Other Operated Departments 3,813 1,353 4,231 3,086 3,817 1,863

Miscel laneous Income 974 39 1,186 1,203 1,438 1,032 Tota l 69,951 78,796 75,954 79,227 79,564 72,415 DEPARTMENTAL EXPENSES Rooms 11,226 12,736 12,478 11,684 12,768 11,678 Food & Beverage 13,644 16,159 15,889 19,257 14,637 15,090 Other Operated Departments 2,830 921 3,852 2,255 3,521 1,393 Tota l 27,699 29,815 32,220 33,196 30,927 28,160DEPARTMENTAL INCOME 42,251 48,981 43,734 46,031 48,637 44,255OPERATING EXPENSES Adminis trative & Genera l 5,317 5,537 5,410 5,414 5,434 5,408 Info. and Telecom. Systems 0 1,054 1,176 0 1,114 1,012 Marketing 2,752 2,877 2,800 2,503 2,903 2,789 Franchise Fee 3,220 6,119 2,895 2,752 5,924 3,845 Property Operations & Maintenance 2,420 2,551 2,530 2,318 2,660 2,519 Uti l i ties 2,743 3,584 3,054 2,884 3,101 3,102 Tota l 16,450 21,723 17,865 15,871 21,136 18,675HOUSE PROFIT 25,801 27,258 25,869 30,160 27,501 25,580Management Fee 2,448 2,364 1,899 2,377 2,387 2,173INCOME BEFORE FIXED CHARGES 23,353 24,895 23,970 27,783 25,114 23,408

Stabilized $


FIGURE 7-3 COMPARABLE OPERATING STATEMENTS: AMOUNTS PER OCCUPIED ROOM




REVENUE Rooms $181.16 $199.33 $176.09 $175.03 $193.43 $188.09 Food & Bevera ge 78.66 81.32 83.39 106.19 75.64 84.01 Other Operated Departments 15.20 4.91 15.57 11.58 13.82 7.29

Miscel la neous Income 3.89 0.14 4.36 4.51 5.21 4.04 Tota l 278.91 285.70 279.41 297.32 288.09 283.43 DEPARTMENTAL EXPENSES Rooms 44.76 46.18 45.90 43.85 46.23 45.70 Food & Bevera ge 54.40 58.59 58.45 72.26 53.00 59.06 Other Operated Departments 11.28 3.34 14.17 8.46 12.75 5.45 Tota l 110.45 108.10 118.52 124.57 111.98 110.22DEPARTMENTAL INCOME 168.47 177.59 160.88 172.74 176.11 173.21OPERATING EXPENSES Adminis trative & Genera l 21.20 20.08 19.90 20.32 19.68 21.17 Info. and Telecom. Systems 0.00 3.82 4.32 0.00 4.04 3.96 Marketing 10.97 10.43 10.30 9.39 10.51 10.92 Franchise Fee 12.84 22.18 10.65 10.33 21.45 15.05 Property Operations & Maintenance 9.65 9.25 9.31 8.70 9.63 9.86 Uti l i ties 10.94 13.00 11.24 10.82 11.23 12.14 Tota l 65.59 78.76 65.72 59.56 76.53 73.09HOUSE PROFIT 102.88 98.83 95.16 113.18 99.58 100.12Mana gement Fee 9.76 8.57 6.99 8.92 8.64 8.50INCOME BEFORE FIXED CHARGES 93.12 90.26 88.18 104.26 90.94 91.61

Stabilized $

The departmental income of the comparable properties ranged from 57.6% to 62.2% of total revenue. The comparable properties achieved a house profit ranging from 34.1% to 38.1% of total revenue. We will refer to the comparable operating data in our discussion of each line item, which follows later in this section of the report. HVS uses a fixed and variable component model to project a lodging facility's revenue and expense levels. This model is based on the premise that hotel revenues and expenses have one component that is fixed and another that varies directly with

Fixed and Variable Component Analysis


occupancy and facility usage. A projection can be made by taking a known level of revenue or expense and calculating its fixed and variable components. The fixed component is then increased in tandem with the underlying rate of inflation, while the variable component is adjusted for a specific measure of volume such as total revenue. The actual forecast is derived by adjusting each year’s revenue and expense by the amount fixed (the fixed expense multiplied by the inflated base-year amount) plus the variable amount (the variable expense multiplied by the inflated base-year amount) multiplied by the ratio of the projection year’s occupancy to the base-year occupancy (in the case of departmental revenue and expense) or the ratio of the projection year’s revenue to the base year’s revenue (in the case of undistributed operating expenses). Fixed expenses remain fixed, increasing only with inflation. Our discussion of the revenue and expense forecast in this report is based upon the output derived from the fixed and variable model. This forecast of revenue and expense is accomplished through a systematic approach, following the format of the Uniform System of Accounts for the Lodging Industry. Each category of revenue and expense is estimated separately and combined at the end in the final statement of income and expense. In consideration of the most recent trends, the projections set forth previously, and our assessment of probable property appreciation levels, we have applied underlying inflation rates of 2.5%, 2.5%, and 3.0% thereafter for each respective year following the base year of 2016. This stabilized inflation rate takes into account normal, recurring inflation cycles. Inflation is likely to fluctuate above and below this level during the projection period. Any exceptions to the application of the assumed underlying inflation rate are discussed in our write-up of individual income and expense items. Based on an analysis that will be detailed throughout this section, we have formulated a forecast of income and expense. The following table presents a detailed forecast through the fifth projection year, including amounts per available room and per occupied room. The second table illustrates our ten-year forecast of income and expense, presented with a lesser degree of detail. The forecasts pertain to years that begin on July 1, 2020, expressed in inflated dollars for each year.

Inflation Assumption

Forecast of Income and Expense


FIGURE 7-4 DETAILED FORECAST OF INCOME AND EXPENSE

2020/21 Begins July 2021/22 2022/23 Stabilized 2024/25

Number of Rooms: 250 250 250 250 250Occupancy: 56% 64% 68% 70% 70%Average Rate: $200.91 $214.88 $221.86 $228.52 $235.37RevPAR: $112.51 $137.52 $150.87 $159.96 $164.76Days Open: 365 365 365 365 365Occupied Rooms: 51,100 %Gross PAR POR 58,400 %Gross PAR POR 62,050 %Gross PAR POR 63,875 %Gross PAR POR 63,875 %Gross PAR POR OPERATING REVENUERooms $10,266 66.4 % $41,064 $200.90 $12,549 66.9 % $50,196 $214.88 $13,766 66.1 % $55,064 $221.85 $14,597 66.4 % $58,388 $228.52 $15,034 66.4 % $60,136 $235.37Food 3,126 20.2 12,503 61.17 3,741 20.0 14,964 64.06 4,242 20.4 16,967 68.36 4,465 20.3 17,859 69.90 4,599 20.3 18,394 71.99Beverage 1,394 9.0 5,577 27.28 1,687 9.0 6,748 28.89 1,963 9.4 7,852 31.64 2,055 9.3 8,220 32.17 2,117 9.3 8,467 33.14Other Operated Departments 438 2.8 1,752 8.57 494 2.6 1,974 8.45 545 2.6 2,178 8.78 566 2.6 2,263 8.86 583 2.6 2,331 9.12Miscellaneous Income 243 1.6 971 4.75 274 1.5 1,094 4.68 302 1.4 1,207 4.86 314 1.4 1,254 4.91 323 1.4 1,292 5.06 Total Operating Revenues 15,467 100.0 61,867 302.67 18,744 100.0 74,976 320.96 20,817 100.0 83,269 335.49 21,996 100.0 87,984 344.36 22,655 100.0 90,620 354.68DEPARTMENTAL EXPENSES *Rooms 2,986 29.1 11,945 58.44 3,229 25.7 12,915 55.29 3,404 24.7 13,617 54.86 3,547 24.3 14,188 55.53 3,653 24.3 14,613 57.20Food & Beverage 3,737 82.7 14,947 73.13 4,093 75.4 16,373 70.09 4,410 71.1 17,641 71.08 4,583 70.3 18,333 71.75 4,721 70.3 18,883 73.91Other Operated Departments 369 84.3 1,478 7.23 390 79.0 1,560 6.68 410 75.3 1,639 6.60 423 74.8 1,693 6.63 436 74.8 1,743 6.82 Total Expenses 7,092 45.9 28,370 138.80 7,712 41.1 30,848 132.05 8,224 39.5 32,898 132.54 8,553 38.9 34,214 133.91 8,810 38.9 35,240 137.93DEPARTMENTAL INCOME 8,374 54.1 33,497 163.88 11,032 58.9 44,128 188.90 12,593 60.5 50,371 202.95 13,442 61.1 53,770 210.45 13,845 61.1 55,379 216.75UNDISTRIBUTED OPERATING EXPENSESAdministrative & General 1,416 9.2 5,665 27.71 1,511 8.1 6,045 25.88 1,585 7.6 6,339 25.54 1,643 7.5 6,571 25.72 1,692 7.5 6,768 26.49Info & Telecom Systems 265 1.7 1,060 5.19 283 1.5 1,131 4.84 297 1.4 1,186 4.78 307 1.4 1,230 4.81 317 1.4 1,266 4.96Marketing 730 4.7 2,921 14.29 779 4.2 3,117 13.35 817 3.9 3,269 13.17 847 3.9 3,389 13.26 873 3.9 3,490 13.66Franchise Fee 821 5.3 3,285 16.07 1,004 5.4 4,016 17.19 1,101 5.3 4,405 17.75 1,168 5.3 4,671 18.28 1,203 5.3 4,811 18.83Prop. Operations & Maint. 660 4.3 2,639 12.91 704 3.8 2,816 12.05 738 3.5 2,953 11.90 765 3.5 3,061 11.98 788 3.5 3,152 12.34Utilities 812 5.3 3,249 15.90 867 4.6 3,467 14.84 909 4.4 3,636 14.65 942 4.3 3,769 14.75 970 4.3 3,882 15.19 Total Expenses 4,705 30.5 18,819 92.07 5,148 27.6 20,592 88.15 5,447 26.1 21,788 87.78 5,672 25.9 22,689 88.80 5,842 25.9 23,369 91.46GROSS HOUSE PROFIT 3,669 23.6 14,677 71.81 5,884 31.3 23,536 100.75 7,146 34.4 28,583 115.16 7,770 35.2 31,081 121.65 8,003 35.2 32,010 125.28Management Fee 464 3.0 1,856 9.08 562 3.0 2,249 9.63 625 3.0 2,498 10.06 660 3.0 2,640 10.33 680 3.0 2,719 10.64INCOME BEFORE NON-OPR. INC. & EXP. 3,205 20.6 12,821 62.73 5,322 28.3 21,287 91.13 6,521 31.4 26,085 105.10 7,110 32.2 28,441 111.32 7,323 32.2 29,292 114.64NON-OPERATING INCOME & EXPENSEProperty Taxes 420 2.7 1,682 8.23 433 2.3 1,732 7.41 446 2.1 1,784 7.19 459 2.1 1,838 7.19 473 2.1 1,893 7.41Insurance 585 3.8 2,340 11.45 603 3.2 2,411 10.32 621 3.0 2,483 10.00 639 2.9 2,558 10.01 659 2.9 2,634 10.31Reserve for Replacement 309 2.0 1,237 6.05 562 3.0 2,249 9.63 833 4.0 3,331 13.42 880 4.0 3,519 13.77 906 4.0 3,625 14.19 Total Expenses 1,315 8.5 5,259 25.73 1,598 8.5 6,392 27.36 1,899 9.1 7,598 30.61 1,979 9.0 7,914 30.98 2,038 9.0 8,152 31.90EBITDA LESS RESERVE $1,891 12.1 % $7,562 $37.00 $3,724 19.8 % $14,895 $63.76 $4,622 22.3 % $18,487 $74.48 $5,132 23.2 % $20,527 $80.34 $5,285 23.2 % $21,140 $82.74

*Departmental expenses are expressed as a percentage of departmental revenues.


FIGURE 7-5 TEN-YEAR FORECAST OF INCOME AND EXPENSE

2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30

Number of Rooms: 250 250 250 250 250 250 250 250 250 250Occupied Rooms: 51,100 58,400 62,050 63,875 63,875 63,875 63,875 63,875 63,875 63,875Occupancy: 56% 64% 68% 70% 70% 70% 70% 70% 70% 70%Average Rate: $200.91 % of $214.88 % of $221.86 % of $228.52 % of $235.37 % of $242.43 % of $249.71 % of $257.20 % of $264.91 % of $272.86RevPAR: $112.51 Gross $137.52 Gross $150.87 Gross $159.96 Gross $164.76 Gross $169.70 Gross $174.79 Gross $180.04 Gross $185.44 Gross $191.00OPERATING REVENUERooms $10,266 66.4 % $12,549 66.9 % $13,766 66.1 % $14,597 66.4 % $15,034 66.4 % $15,485 66.4 % $15,950 66.4 % $16,429 66.4 % $16,921 66.4 % $17,429 66.4 %Food 3,126 20.2 3,741 20.0 4,242 20.4 4,465 20.3 4,599 20.3 4,737 20.3 4,879 20.3 5,025 20.3 5,176 20.3 5,331 20.3Beverage 1,394 9.0 1,687 9.0 1,963 9.4 2,055 9.3 2,117 9.3 2,180 9.3 2,246 9.3 2,313 9.3 2,382 9.3 2,454 9.3Other Operated Departments 438 2.8 494 2.6 545 2.6 566 2.6 583 2.6 600 2.6 618 2.6 637 2.6 656 2.6 676 2.6Miscellaneous Income 243 1.6 274 1.5 302 1.4 314 1.4 323 1.4 333 1.4 343 1.4 353 1.4 363 1.4 374 1.4 Total Operating Revenues 15,467 100.0 18,744 100.0 20,817 100.0 21,996 100.0 22,655 100.0 23,335 100.0 24,035 100.0 24,757 100.0 25,498 100.0 26,264 100.0DEPARTMENTAL EXPENSES *Rooms 2,986 29.1 3,229 25.7 3,404 24.7 3,547 24.3 3,653 24.3 3,763 24.3 3,876 24.3 3,992 24.3 4,112 24.3 4,235 24.3Food & Beverage 3,737 82.7 4,093 75.4 4,410 71.1 4,583 70.3 4,721 70.3 4,862 70.3 5,008 70.3 5,159 70.3 5,313 70.3 5,473 70.3Other Operated Departments 369 84.3 390 79.0 410 75.3 423 74.8 436 74.8 449 74.8 462 74.8 476 74.8 491 74.8 505 74.8 Total Expenses 7,092 45.9 7,712 41.1 8,224 39.5 8,553 38.9 8,810 38.9 9,074 38.9 9,347 38.9 9,627 38.9 9,916 38.9 10,213 38.9DEPARTMENTAL INCOME 8,374 54.1 11,032 58.9 12,593 60.5 13,442 61.1 13,845 61.1 14,260 61.1 14,688 61.1 15,130 61.1 15,583 61.1 16,050 61.1UNDISTRIBUTED OPERATING EXPENSESAdministrative & General 1,416 9.2 1,511 8.1 1,585 7.6 1,643 7.5 1,692 7.5 1,743 7.5 1,795 7.5 1,849 7.5 1,904 7.5 1,961 7.5Info & Telecom Systems 265 1.7 283 1.5 297 1.4 307 1.4 317 1.4 326 1.4 336 1.4 346 1.4 356 1.4 367 1.4Marketing 730 4.7 779 4.2 817 3.9 847 3.9 873 3.9 899 3.9 926 3.9 953 3.9 982 3.9 1,012 3.9Franchise Fee 821 5.3 1,004 5.4 1,101 5.3 1,168 5.3 1,203 5.3 1,239 5.3 1,276 5.3 1,314 5.3 1,354 5.3 1,394 5.3Prop. Operations & Maint. 660 4.3 704 3.8 738 3.5 765 3.5 788 3.5 812 3.5 836 3.5 861 3.5 887 3.5 914 3.5Utilities 812 5.3 867 4.6 909 4.4 942 4.3 970 4.3 1,000 4.3 1,030 4.3 1,060 4.3 1,092 4.3 1,125 4.3 Total Expenses 4,705 30.5 5,148 27.6 5,447 26.1 5,672 25.9 5,842 25.9 6,018 25.9 6,198 25.9 6,384 25.9 6,576 25.9 6,773 25.9GROSS HOUSE PROFIT 3,669 23.6 5,884 31.3 7,146 34.4 7,770 35.2 8,003 35.2 8,243 35.2 8,490 35.2 8,745 35.2 9,007 35.2 9,278 35.2Management Fee 464 3.0 562 3.0 625 3.0 660 3.0 680 3.0 700 3.0 721 3.0 743 3.0 765 3.0 788 3.0INCOME BEFORE NON-OPR. INC. & EXP. 3,205 20.6 5,322 28.3 6,521 31.4 7,110 32.2 7,323 32.2 7,543 32.2 7,769 32.2 8,003 32.2 8,242 32.2 8,490 32.2NON-OPERATING INCOME & EXPENSEProperty Taxes 420 2.7 433 2.3 446 2.1 459 2.1 473 2.1 487 2.1 502 2.1 517 2.1 533 2.1 549 2.1Insurance 585 3.8 603 3.2 621 3.0 639 2.9 659 2.9 678 2.9 699 2.9 720 2.9 741 2.9 763 2.9Reserve for Replacement 309 2.0 562 3.0 833 4.0 880 4.0 906 4.0 933 4.0 961 4.0 990 4.0 1,020 4.0 1,051 4.0 Total Expenses 1,315 8.5 1,598 8.5 1,899 9.1 1,979 9.0 2,038 9.0 2,099 9.0 2,162 9.0 2,227 9.0 2,294 9.0 2,363 9.0EBITDA LESS RESERVE $1,891 12.1 % $3,724 19.8 % $4,622 22.3 % $5,132 23.2 % $5,285 23.2 % $5,443 23.2 % $5,607 23.2 % $5,776 23.2 % $5,948 23.2 % $6,127 23.2 %

1 1 1 1 1 1 1 1 1 1*Departmental expenses are expressed as a percentage of departmental revenues.

% ofGross


The following description sets forth the basis for the forecast of income and expense. We anticipate that it will take four years for the subject property to reach a stabilized level of operation. Each revenue and expense item has been forecast based upon our review of the proposed subject hotel’s operating budget and comparable income and expense statements. The forecast is based upon fiscal years beginning July 1, 2020, expressed in inflated dollars for each year. Rooms revenue is determined by two variables: occupancy and average rate. We projected occupancy and average rate in a previous section of this report. The proposed subject hotel is expected to stabilize at an occupancy level of 70% with an average rate of $228.52 in 2023/24. Following the stabilized year, the subject property’s average rate is projected to increase along with the underlying rate of inflation. Food and beverage revenue is generated by a hotel's restaurants, lounges, coffee shops, snack bars, banquet rooms, and room service. In addition to providing a source of revenue, these outlets serve as an amenity that assists in the sale of guestrooms. With the exception of properties with active lounges or banquet facilities that draw local residents, in-house guests generally represent a substantial percentage of a hotel's food and beverage patrons. In the case of the Proposed Hotel & Conference Center, food and beverage department will include a restaurant and lounge, a lobby bar, a poolside bar; moreover, banquet space is expected to span 21,150 square feet. Although food and beverage revenue varies directly with changes in occupancy, the small portion generated by banquet sales and outside capture is relatively fixed. The proposed subject hotel's food and beverage operation is expected to be an important component of the hotel. Therefore, based upon our review of comparable operating statements, we have positioned an appropriate revenue level given the hotel's planned upper-upscale facility and price point. We would anticipate future moderate growth to occur within this category after the hotel's opening.

Rooms Revenue

Food and Beverage Revenue


FIGURE 7-6 FOOD AND BEVERAGE REVENUE

#1 #2 #3 #4 #5 2020/21

Food RevenuePercentage of Revenue 20.6 % 25.6 % 22.8 % 31.0 % 23.2 % 20.2 % 20.3 %Per Ava i lable Room $14,442 $20,196 $17,306 $24,588 $18,491 $12,503 $14,699Per Occupied Room $57.59 $73.23 $63.66 $92.27 $66.95 $61.17 $57.53

Beverage RevenuePercentage of Revenue 7.6 % 2.8 % 7.1 % 4.7 % 3.0 % 9.0 % 9.3 %Per Ava i lable Room $5,286 $2,233 $5,362 $3,710 $2,398 $5,577 $6,766Per Occupied Room $21.08 $8.10 $19.72 $13.92 $8.68 $27.28 $26.48

Food & Beverage RevenuePercentage of Revenue 28.2 % 28.5 % 29.8 % 35.7 % 26.3 % 29.2 % 29.6 %Per Ava i lable Room $19,728 $22,429 $22,668 $28,298 $20,889 $18,080 $21,465Per Occupied Room $78.66 $81.32 $83.39 $106.19 $75.64 $88.45 $84.01

Comparable Operating Statements Proposed Subject Property ForecastDeflated Stabilized

According to the Uniform System of Accounts, other operated departments include any major or minor operated department other than rooms and food and beverage. The proposed subject hotel's other operated departments revenue sources are expected to include the hotel's telephone charges, retail outlet/boutique sales, guest laundry fees, and in-room movie and game charges. Based on our review of operations with a similar extent of offerings, we have positioned an appropriate revenue level for the proposed subject hotel.

FIGURE 7-7 OTHER OPERATED DEPARTMENTS REVENUE

#1 #2 #3 #4 #5 2020/21

Percentage of Revenue 5.5 % 1.7 % 5.6 % 3.9 % 4.8 % 2.8 % 2.6 %Per Ava i lable Room $3,813 $1,353 $4,231 $3,086 $3,817 $1,752 $1,863Per Occupi ed Room $15.20 $4.91 $15.57 $11.58 $13.82 $8.57 $7.29


The miscellaneous income sources comprise those other than guestrooms, food and beverage, and the other operated departments. The proposed subject hotel's miscellaneous income revenues are expected to be generated primarily by the commissions earned on the vending sales and other minor collections, such as cancelation fees. Based on our review of operations with a similar extent of

Other Operated Departments Revenue

Miscellaneous Income


offerings, we have positioned an appropriate revenue level for the proposed subject hotel. Changes in this revenue item through the projection period result from the application of the underlying inflation rate and projected changes in occupancy.

FIGURE 7-8 MISCELLANEOUS INCOME

#1 #2 #3 #4 #5 2020/21

Percentage of Revenue 1.4 % 0.0 % 1.6 % 1.5 % 1.8 % 1.6 % 1.4 %Per Ava i lable Room $974 $39 $1,186 $1,203 $1,438 $971 $1,032Per Occupi ed Room $3.89 $0.14 $4.36 $4.51 $5.21 $4.75 $4.04


Rooms expense consists of items related to the sale and upkeep of guestrooms and public space. Salaries, wages, and employee benefits account for a substantial portion of this category. Although payroll varies somewhat with occupancy and managers can generally scale the level of service staff on hand to meet an expected occupancy level, much of a hotel's payroll is fixed. A base level of front desk personnel, housekeepers, and supervisors must be maintained at all times. As a result, salaries, wages, and employee benefits are only moderately sensitive to changes in occupancy. Commissions and reservations are usually based on room sales, and thus are highly sensitive to changes in occupancy and average rate. While guest supplies vary 100% with occupancy, linens and other operating expenses are only slightly affected by volume. The proposed subject hotel's rooms department expense has been positioned based upon our review of the comparable operating data and our understanding of the hotel's future service level and price point.

FIGURE 7-9 ROOMS EXPENSE

#1 #2 #3 #4 #5 2020/21


Deflated StabilizedComparable Operating Statements Proposed Subject Property Forecast

Food expenses consist of items necessary for the primary operation of a hotel's food and banquet facilities. The costs associated with food sales and payroll are moderately to highly correlated to food revenues. Items such as china, linen and uniforms are less dependent on volume. Although the other expense items are

Rooms Expense

Food and Beverage Expense


basically fixed, they represent a relatively insignificant factor. Beverage expenses consist of items necessary for the operation of a hotel’s lounge and bar areas. The costs associated with beverage sales and payroll are moderately to highly correlated to beverage revenues. The proposed subject hotel's food and beverage operation is expected to be efficiently managed and operated at an expense level that is in line with other comparable operations.

FIGURE 7-10 FOOD AND BEVERAGE EXPENSE

#1 #2 #3 #4 #5 2020/21



Other operated departments expense includes all expenses reflected in the summary statements for the divisions associated in these categories. This was previously discussed in this chapter. The proposed subject hotel's other operated departments revenue sources are expected to include the hotel's telephone charges, retail outlet/boutique sales, guest laundry fees, and in-room movie and game charges. Based on our review of operations with a similar extent of offerings, we have positioned an appropriate revenue level for the proposed subject hotel.

FIGURE 7-11 OTHER OPERATED DEPARTMENTS EXPENSE

#1 #2 #3 #4 #5 2020/21

Percentage of Revenue 74.2 % 68.0 % 91.0 % 73.1 % 92.2 % 84.3 % 74.8 %Per Ava i lable Room $2,830 $921 $3,852 $2,255 $3,521 $1,478 $1,393Per Occupi ed Room $11.28 $3.34 $14.17 $8.46 $12.75 $7.23 $5.45


Administrative and general expense includes the salaries and wages of all administrative personnel who are not directly associated with a particular department. Expense items related to the management and operation of the property are also allocated to this category. Most administrative and general expenses are relatively fixed. The exceptions are cash overages and shortages; commissions on credit card charges; provision for doubtful accounts, which are moderately affected by the number of transactions or total revenue; and salaries, wages, and benefits, which are very slightly influenced

Other Operated Departments Expense

Administrative and General Expense


by volume. Based upon our review of the comparable operating data and the expected scope of facility for the proposed subject hotel, we have positioned the administrative and general expense level at a market- and property-supported level.

FIGURE 7-12 ADMINISTRATIVE AND GENERAL EXPENSE

#1 #2 #3 #4 #5 2020/21



Information and telecommunications systems expense consists of all costs associated with a hotel’s technology infrastructure. This includes the costs of cell phones, administrative call and Internet services, and complimentary call and Internet services. Expenses in this category are typically organized by type of technology, or the area benefitting from the technology solution. We expect the proposed subject hotel's information and telecommunications systems to be well managed. Expense levels should stabilize at a typical level for a property of this type. Marketing expense consists of all costs associated with advertising, sales, and promotion; these activities are intended to attract and retain customers. Marketing can be used to create an image, develop customer awareness, and stimulate patronage of a property's various facilities. The marketing category is unique in that all expense items, with the exception of fees and commissions, are totally controlled by management. Most hotel operators establish an annual marketing budget that sets forth all planned expenditures. If the budget is followed, total marketing expenses can be projected accurately. Marketing expenditures are unusual because although there is a lag period before results are realized, the benefits are often extended over a long period. Depending on the type and scope of the advertising and promotion program implemented, the lag time can be as short as a few weeks or as long as several years. However, the favorable results of an effective marketing campaign tend to linger, and a property often enjoys the benefits of concentrated sales efforts for many months. Based upon our review of the comparable operating data and the expected scope of facility for the proposed subject hotel, we have positioned the marketing expense level at a market- and property-supported level.

Information and Telecommunications Systems Expense

Marketing Expense


FIGURE 7-13 MARKETING EXPENSE

#1 #2 #3 #4 #5 2020/21



We recommend that the proposed subject hotel operate as an upscale, full-service property. While we have placed heavy consideration on the Hilton, Marriott, and Sheraton brands, a specific franchise affiliation and/or brand has yet to be finalized. Our forecasted franchise fee reflects a blended average of the three brands considered – resulting in an average franchise fee of 8.0% of rooms revenue. Property operations and maintenance expense is another expense category that is largely controlled by management. Except for repairs that are necessary to keep the facility open and prevent damage (e.g., plumbing, heating, and electrical items), most maintenance can be deferred for varying lengths of time. Maintenance is an accumulating expense. If management elects to postpone performing a required repair, they have not eliminated or saved the expenditure; they have only deferred payment until a later date. A lodging facility that operates with a lower-than-normal maintenance budget is likely to accumulate a considerable amount of deferred maintenance. The age of a lodging facility has a strong influence on the required level of maintenance. A new or thoroughly renovated property is protected for several years by modern equipment and manufacturers' warranties. However, as a hostelry grows older, maintenance expenses escalate. A well-organized preventive maintenance system often helps delay deterioration, but most facilities face higher property operations and maintenance costs each year, regardless of the occupancy trend. The quality of initial construction can also have a direct impact on future maintenance requirements. The use of high-quality building materials and construction methods generally reduces the need for maintenance expenditures over the long term. We expect the proposed subject hotel's maintenance operation to be well managed, and expense levels should stabilize at a typical level for a property of this type. This expense has been ramped up during the first few years of operation, as repairs and maintenance needs for the property should be minimal during the period immediately after the hotel's opening. Changes in this expense item through the

Franchise Fee

Property Operations and Maintenance


projection period result from the application of the underlying inflation rate and projected changes in occupancy.

FIGURE 7-14 PROPERTY OPERATIONS AND MAINTENANCE EXPENSE

#1 #2 #3 #4 #5 2020/21



The utilities consumption of a lodging facility takes several forms, including water and space heating, air conditioning, lighting, cooking fuel, and other miscellaneous power requirements. The most common sources of hotel utilities are electricity, natural gas, fuel oil, and steam. This category also includes the cost of water service. Total energy cost depends on the source and quantity of fuel used. Electricity tends to be the most expensive source, followed by oil and gas. Although all hotels consume a sizable amount of electricity, many properties supplement their utility requirements with less expensive sources, such as gas and oil, for heating and cooking. The changes in this utilities line item through the projection period are a result of the application of the underlying inflation rate and projected changes in occupancy.

FIGURE 7-15 UTILITIES EXPENSE

#1 #2 #3 #4 #5 2020/21



Management expense consists of the fees paid to the managing agent contracted to operate the property. Some companies provide management services and a brand-name affiliation (first-tier management company), while others provide management services alone (second-tier management company). Some management contracts specify only a base fee (usually a percentage of total revenue), while others call for both a base fee and an incentive fee (usually a percentage of defined profit). Basic hotel management fees are often based on a percentage of total revenue, which means they have no fixed component. While base

Utilities Expense

Management Fee


fees typically range from 2% to 4% of total revenue, incentive fees are deal specific and often are calculated as a percentage of income available after debt service and, in some cases, after a preferred return on equity. Total management fees for the proposed subject hotel have been forecast at 3.0% of total revenue. Property (or ad valorem) tax is one of the primary revenue sources of municipalities. Based on the concept that the tax burden should be distributed in proportion to the value of all properties within a taxing jurisdiction, a system of assessments is established. Theoretically, the assessed value placed on each parcel bears a definite relationship to market value, so properties with equal market values will have similar assessments and properties with higher and lower values will have proportionately larger and smaller assessments. Depending on the taxing policy of the municipality, property taxes can be based on the value of the real property or the value of the personal property and the real property. We have based our estimate of the proposed subject property's market value (for tax purposes) on an analysis of assessments of comparable hotel properties in the local municipality.

FIGURE 7-16 COUNTY-ASSESSED VALUE OF COMPARABLE HOTELS

YearHotel Open

Subject Property 2020

Omni Corpus Chri s ti Hotel 1985 $1,824,000 $22,234,030 $24,058,030Ha mpton Inn & Sui tes Port Aransa s 2013 377,992 4,372,469 4,750,461Holiday Inn Expres s & Sui tes Port Ara ns as 2005 747,684 2,600,677 3,348,361Schl i tterbahn Riverpark & Resort 2016 11,234,100 15,152,099 26,386,199Holiday Inn Corpus Chri sti North Padre Is land 1974 1,516,248 3,349,728 4,865,976

Assessments per Room

Omni Corpus Chri s ti Hotel 475 $3,840 $46,808 $50,648Ha mpton Inn & Sui tes Port Aransa s 78 4,846 56,057 60,903Holiday Inn Expres s & Sui tes Port Ara ns as 74 10,104 35,144 45,248Schl i tterbahn Riverpark & Resort 92 122,110 164,697 286,807Holiday Inn Corpus Chri sti North Padre Is land 149 10,176 22,481 32,658

Positioned Subject - Per Room 250 $10,000 $75,000 $85,000Positioned Subject - Total $2,500,000 $18,750,000 $21,250,000

Land Improvements Total

# of Rms

Source: Neuces County Apprais al District

We have positioned the future assessment levels of the subject site and proposed improvements based upon the illustrated comparable data. Overall, the positioned assessments are well supported by the market data.

Property Taxes


Tax rates are based on the city and county budgets, which change annually. The most recent tax rate in this jurisdiction was reported at 1.82819%. The following table shows changes in the tax rate during the last several years. FIGURE 7-17 COUNTY TAX RATES

Real PropertyYear

2014 1.897252015 1.840362016 1.825022017 1.82819

Source: Neuces County Appra isa l Di s trict

Tax Rate

Based on comparable assessments and the tax rate information, the proposed subject property's projected property tax expense levels are calculated as follows. FIGURE 7-18 PROJECTED PROPERTY TAX BURDEN (BASE YEAR)

Land Real Property TotalPosi tioned (Assess ed Value) $2,500,000 $18,750,000 $21,250,000Equa l ization Rate 1.00000Tax Rate 1.82819Tax Burden as of Bas e Year $388,491

Real Property

FIGURE 7-19 PROJECTED PROPERTY TAX EXPENSE - REAL PROPERTY

TaxesYear Payable

Posi tioned $388,491 — $388,4912020/21 $388,491 8.2 % 100 % $420,4032021/22 420,403 3.0 100 433,0152022/23 433,015 3.0 100 446,0062023/24 446,006 3.0 100 459,386

Real Property Total Tax Burden

(Positioned Prior to Increase)Base Rate of Tax % Positioned

Tax BurdenBurden Increase


The insurance expense category consists of the cost of insuring the hotel and its contents against damage or destruction by fire, weather, sprinkler leakage, boiler explosion, plate glass breakage, and so forth. General insurance costs also include premiums relating to liability, fidelity, and theft coverage. Insurance rates are based on many factors, including building design and construction, fire detection and extinguishing equipment, fire district, distance from the firehouse, and the area's fire experience. Insurance expenses do not vary with occupancy. The positioned insurance expense is above the range of the comparable data given the proposed subject hotel’s location in Port Aransas and the anticipated need for increased coverage for hurricane and flood insurance.

FIGURE 7-20 INSURANCE EXPENSE

#1 #2 #3 #4 #5 2020/21

Percentage of Revenue 0.6 % 1.2 % 0.9 % 1.1 % 1.4 % 3.8 % 2.9 %Per Ava i lable Room $449 $914 $670 $876 $1,095 $2,340 $2,105Per Occupied Room $1.79 $3.31 $2.46 $3.29 $3.96 $11.45 $8.24

Deflated StabilizedComparable Operating Statements Proposed Subject Property Forecast

Furniture, fixtures, and equipment are essential to the operation of a lodging facility, and their quality often influences a property's class. This category includes all non-real estate items that are capitalized, rather than expensed. The furniture, fixtures, and equipment of a hotel are exposed to heavy use and must be replaced at regular intervals. The useful life of these items is determined by their quality, durability, and the amount of guest traffic and use. Periodic replacement of furniture, fixtures, and equipment is essential to maintain the quality, image, and income-producing potential of a lodging facility. Because capitalized expenditures are not included in the operating statement but affect an owner's cash flow, a forecast of income and expense should reflect these expenses in the form of an appropriate reserve for replacement. The International Society of Hospitality Consultants (ISHC) oversees a major industry-sponsored study of the capital expenditure requirements for full-service/luxury, select-service, and extended-stay hotels. The most recent study was

Insurance Expense

Reserve for Replacement


published in 2014.6 Historical capital expenditures of well-maintained hotels were investigated through the compilation of data provided by most of the major hotel companies in the United States. A prospective analysis of future capital expenditure requirements was also performed based upon the cost to replace short- and long-lived building components over a hotel's economic life. The study showed that the capital expenditure requirements for hotels vary significantly from year to year and depend upon both the actual and effective ages of a property. The results of this study showed that hotel lenders and investors are requiring reserves for replacement ranging from 4% to 5% of total revenue. Based on the results of our analysis and on our review of the proposed subject asset and comparable lodging facilities, as well as on our industry expertise, we estimate that a reserve for replacement of 4% of total revenues is sufficient to provide for the timely and periodic replacement of the subject property's furniture, fixtures, and equipment. This amount has been ramped up during the initial projection period. Projected total revenue. House profit, and EBITDA less replacement reserves are set forth in the following table.

FIGURE 7-21 FORECAST OF REVENUE AND EXPENSE CONCLUSION

Year Total%

Change Total % Change Total % Change

Projected 2020/21 $15,467,000 — $3,669,000 — 23.6 % $1,891,000 — 12.1 %2021/22 18,744,000 21.2 % 5,884,000 60.4 % 31.3 3,724,000 96.9 % 19.82022/23 20,817,000 11.1 7,146,000 21.4 34.4 4,622,000 24.1 22.32023/24 21,996,000 5.7 7,770,000 8.7 35.2 5,132,000 11.0 23.22024/25 22,655,000 3.0 8,003,000 3.0 35.2 5,285,000 3.0 23.2

Total Revenue House Profit House Profit Ratio

EBITDA Less Replacement ReserveAs a % of

Ttl Rev

6 The International Society of Hotel Consultants, CapEx 2014, A Study of Capital Expenditure in the U.S. Hotel Industry.

Forecast of Revenue and Expense Conclusion

June-2017 Statement of Assumptions and Limiting Conditions Proposed Hotel & Conference Center – Port Aransas, Texas 99

8. Statement of Assumptions and Limiting Conditions

1. This report is set forth as a market study of the proposed subject hotel; this is not an appraisal report.

2. This report is to be used in whole and not in part. 3. No responsibility is assumed for matters of a legal nature, nor do we render

any opinion as to title, which is assumed marketable and free of any deed restrictions and easements. The property is evaluated as though free and clear unless otherwise stated.

4. We assume that there are no hidden or unapparent conditions of the sub-soil or structures, such as underground storage tanks, that would affect the property’s development potential. No responsibility is assumed for these conditions or for any engineering that may be required to discover them.

5. We have not considered the presence of potentially hazardous materials or any form of toxic waste on the project site. We are not qualified to detect hazardous substances and urge the client to retain an expert in this field if desired.

6. The Americans with Disabilities Act (ADA) became effective on January 26, 1992. We have assumed the proposed hotel would be designed and constructed to be in full compliance with the ADA.

7. We have made no survey of the site, and we assume no responsibility in connection with such matters. Sketches, photographs, maps, and other exhibits are included to assist the reader in visualizing the property. It is assumed that the use of the described real estate will be within the boundaries of the property described, and that no encroachment will exist.

8. All information, financial operating statements, estimates, and opinions obtained from parties not employed by TS Worldwide, LLC are assumed true and correct. We can assume no liability resulting from misinformation.

9. Unless noted, we assume that there are no encroachments, zoning violations, or building violations encumbering the subject property.

10. The property is assumed to be in full compliance with all applicable federal, state, local, and private codes, laws, consents, licenses, and regulations (including the appropriate liquor license if applicable), and that all licenses, permits, certificates, franchises, and so forth can be freely renewed or transferred to a purchaser.


11. All mortgages, liens, encumbrances, leases, and servitudes have been disregarded unless specified otherwise.

12. None of this material may be reproduced in any form without our written permission, and the report cannot be disseminated to the public through advertising, public relations, news, sales, or other media.

13. We are not required to give testimony or attendance in court because of this analysis without previous arrangements, and shall do so only when our standard per-diem fees and travel costs have been paid prior to the appearance.

14. If the reader is making a fiduciary or individual investment decision and has any questions concerning the material presented in this report, it is recommended that the reader contact us.

15. We take no responsibility for any events or circumstances that take place subsequent to the date of our field inspection.

16. The quality of a lodging facility's onsite management has a direct effect on a property's economic viability. The financial forecasts presented in this analysis assume responsible ownership and competent management. Any departure from this assumption may have a significant impact on the projected operating results.

17. The financial analysis presented in this report is based upon assumptions, estimates, and evaluations of the market conditions in the local and national economy, which may be subject to sharp rises and declines. Over the projection period considered in our analysis, wages and other operating expenses may increase or decrease because of market volatility and economic forces outside the control of the hotel’s management. We assume that the price of hotel rooms, food, beverages, and other sources of revenue to the hotel will be adjusted to offset any increases or decreases in related costs. We do not warrant that our estimates will be attained, but they have been developed based upon information obtained during the course of our market research and are intended to reflect the expectations of a typical hotel investor as of the stated date of the report.

18. This analysis assumes continuation of all Internal Revenue Service tax code provisions as stated or interpreted on either the date of value or the date of our field inspection, whichever occurs first.

19. Many of the figures presented in this report were generated using sophisticated computer models that make calculations based on numbers carried out to three or more decimal places. In the interest of simplicity, most numbers have been rounded to the nearest tenth of a percent. Thus, these figures may be subject to small rounding errors.


20. It is agreed that our liability to the client is limited to the amount of the fee paid as liquidated damages. Our responsibility is limited to the client, and use of this report by third parties shall be solely at the risk of the client and/or third parties. The use of this report is also subject to the terms and conditions set forth in our engagement letter with the client.

21. Evaluating and comprising financial forecasts for hotels is both a science and an art. Although this analysis employs various mathematical calculations to provide value indications, the final forecasts are subjective and may be influenced by our experience and other factors not specifically set forth in this report.

22. This study was prepared by TS Worldwide, LLC. All opinions, recommendations, and conclusions expressed during the course of this assignment are rendered by the staff of TS Worldwide, LLC as employees, rather than as individuals.

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