How Public Markets Helped Us Get in This Mess, and How They Might Get Us Out (Eventually

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May 7, 2009 David Loeb Managing Director, Senior Real Estate Research Analyst Robert W. Baird & Co. dloeb@rwbaird.com 414.765.7063

Please refer to Appendix - Important Disclosures and Analyst Certification on page 25.

How Did We Get Here?

Lots of Money, Mostly Going Overseas
US Money Supply (M2), 1999-2009 8,500 8,000

Money Supply (Billions)

7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Money Supply: grew 6.5% annually 19992009

Source: Philadelphia Fed

US Trade Deficit, 1999-2008 1999 (100) 2000 2001 2002 2003 2004 2005 2006 2007 2008

(200) (300) (400) (500) (600) (700) (800)

Trade Deficit: 1999-2008 cumulative US trade deficit: $5.4 trillion

Source: Bureau of Economic Analysis

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Trade Deficit (Billions)

We Buy Stuff; They Buy Real & Financial Assets

• The trade deficit (Imports less Exports) has to be invested in $-denominated assets
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2000-2007: The Era of Falling Returns
Yields, 2001-2009

12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09
Full-service hotel cap rate Aaa Corporate bonds 10-year Treasuries

Source: PricewaterhouseCoopers, Federal Reserve

• Return opportunities declined, too many dollars chasing return; risk taking rises
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Wall Street Fills the Void
• Most foreign investors prefer fixed income: treasuries, agency debt (RMBS), corporate debt, financial institution debt • US investors levered equity into larger asset portfolios • Lenders accommodated: Subprime/Alt. A, easy CMBS
• Macklowe deal to acquire EOP NYC office—CMBS debt: $50 million equity, $7 billion debt • Structured as 10-yrs interest only, debt-service shortfall funded by lenders for first five years • Lightstone CMBS debt: $600 million equity, $7.4 billion debt • Everyone now owns some Hilton paper (via Bear, JP Morgan to Fed)
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Lots of Leverage Makes for Huge Portfolios
Investment Bank Leverage: Banks Become Hedge Funds 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1,200 600 100 6 to 1 100 12 to 1 Equity Debt 100 30 to 1 100 40 to 1 3,000 4,000

Source: Baird Research

Leverage 6 to 1 12 to 1 30 to 1 40 to 1

Equity 100 100 100 100

Debt 600 1,200 3,000 4,000

Lots of Debt, Held by Lots of Investors
Hotel Financing—Pre-Credit Crunch (millions)

Hotel $100

Owner $100

Lender $92

CMBS Buyer $92

Lender $83

$100

$92

$92

$83

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Where Are We Now?

Beware False Bottoms
• Macro outlook still unclear • Nobel Laureate Paul Krugman (NYT, 17 April 2009)
• Things are still getting worse • Some of the good news isn’t convincing • There may be other shoes yet to drop • Even when it’s over, it won’t be over

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RevPAR Declines are Severe
Three-Month Moving Average National RevPAR Growth 10.0% 5.1% 5.0% 5.6% January 2007 to Present 6.7% 7.4% 6.2% 6.1% 5.9% 5.4% 3.8% 3.2% 2.2% 2.0%

RevPAR (3-mo moving avg.)

4.7% 0.0%

4.7%

5.0% 5.4%

1.6% 1.3% 0.0%

May

May

Mar

Mar

Nov

Aug

Sep

Aug

Sep

Nov

Feb

Feb

Dec

-0.6%-1.2%

-3.6%

-5.0% -7.7% -10.0% -9.9% -12.6% -15.0% -14.0% -17.5% -20.0%

Source: Smith Travel Research and Baird Research

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Dec

Feb

Mar

Apr

Jun

Apr

Jan

Jan

Jun

Jan

Jul

Oct

Jul

Oct

Hotel Supply: Still Not Pretty

US YoY Hotel Supply Growth Mar-08 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2.3% 2.4% 2.5% 2.4% 2.7% 2.8% 2.9% 3.0% 3.4% 3.2% 3.4% 3.3% 3.2% Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09

Source: Smith Travel Research

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Hotel Supply: Luxury and Midscale MUCH Worse
US YoY Hotel Supply Growth for Luxury & Midscale with F&B Chain Scales

Mar-08 Apr-08 May-08 Jun-08 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Jul-08

Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09

Midscale w/o F&B Source: Smith Travel Research

Luxury

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Where Are We Headed?

Is There Light at the End of the Tunnel?

Or is it an oncoming train?
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RevPAR, Profits Still Shrinking
Early 1990s Hotel REIT Returns v. RevPAR - 3 mo. Moving Avg 45 6.0%

• RevPAR falling more slowly (we hope); still falling • Profits shrinking until enough RevPAR growth to cover cost increases • Lessons from prior cycles: 1991-1993, 2001-2003

40 4.0% 35 2.0%
SNL Hotel REIT Index RevPAR Growth (%)

30 25 20 15 RevPAR turns positive Feb 1992 10
Stocks bottom July 1992

0.0%

-2.0% Stocks lagged the recovery of RevPAR coming out of the 1991 downturn. Not only did RevPAR contraction need to slow, but RevPAR needed to have positive growth for a number of months before the stocks performed.

-4.0%

-6.0%

5 0 1991 1992 Hotel REIT Index Source: Baird Research, Smith Travel Research, and SNL Financial

-8.0% 1993 3mo MA RevPAR Chg

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Stocks Typically Bottom Closer to RevPAR Turning Positive
Post 9/11 Hotel REIT Returns v. RevPAR - 3 mo. Moving Avg 50 45 10.0% 40 35
SNL Hotel REIT Index

15.0%

5.0%
RevPAR Growth (%)

30 25 20 15
RevPAR bottoms July 2003 Stocks bottom - March 2003

In the post 9/11 recovery, hotel stocks were more anticipatory than in the early 1990s case, however, bulk of the stocks' recovery was realized once RevPAR growth became positive. By waiting for positive RevPAR, investors missed four months of a four-year rally We conclude that a sustained trend in positive RevPAR growth is needed for a lasting rally coming out of a downturn. Thus, while hotels are considered early-cycle, we see little reason to risk being too early.

0.0%

-5.0%

-10.0%

10 5 0 2002 2003 Hotel REIT Index Source: Baird Research, Smith Travel Research, and SNL Financial
RevPAR turns positive Aug 2003

-15.0%

-20.0% 2004 3mo MA RevPAR Chg

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Current Bounce Could be Premature; Investor Focus Shifting from Survival to Recovery
2007-2009 Hotel REIT Return v. RevPAR 3 mo. Moving Avg 80 70 60 50 40 30 20 10 0 Jan-2007 -15.0% 0.0% 10.0% 5.0%

SNL Hotel REIT Index

-5.0%

-10.0%

-20.0% Jul-2007 Jan-2008 SNL Hotel REIT Index Jul-2008 3mo MA RevPAR Trend Jan-2009

Source: Smith Travel Research and Baird Research

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RevPAR Growth (%)

When the Cycle Turns . . .
• Supply holiday—five or more years with little supply • Luxury lags, rate gap with upper-upscale shrinks
• “Bling is dead;” “Value is the new black,” not thrift • Luxury that distinguishes itself with great product, service, and attention to detail likely to outperform luxury that sought “aspirational” travelers

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Will Public Markets Provide the Solution?

Who Else But Public Markets CAN be Part of the Solution?
• PE is on the sidelines • Debt markets closed, long time before CMBS market reopens • Government role – just the public sector taking over private sector debt
Real Estate Private Equity Fundraising, 2000-2008 120 107 100 80 60 40 20 2000 2001 2002 2003 2004 2005 2006 2007 2008* 16

Aggregate Raised (Billions)

88 80 71

28 14

29 23

Source: Preqin Private Equity Real Estate Review *2008 data reflect fundraising through Q3

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Lots of Equity Raised for Real Estate in 1990s
• 1993/1994 Real Estate Offerings:
• 79 IPOs, $16.0 billion raised • 56 Secondaries, $4.9 billion raised
1993/1994 Hotel Equity Offerings Company RFS Hotel Investors RFS Hotel Investors Jameson Inns Equity Inns RFS Hotel Investors Winston Hotels Equity Inns FelCor Suite Hotels Innkeepers USA RFS Hotel Investors Source: Smith Barney Date IPO/Secondary 8/6/1993 IPO 11/19/1993 Secondary 1/26/1994 IPO 2/23/1994 IPO 5/5/1994 Secondary 5/24/1994 IPO 7/6/1994 Secondary 7/21/1994 IPO 9/23/1994 IPO 9/23/1994 Secondary Amount (000) $39,800 $39,000 $26,900 $51,200 $142,300 $63,700 $50,000 $87,200 $46,900 $121,900

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Public Markets Bailed Out Private Real Estate Owners Last Time Around
• Early 1990s, IPO wave as RE firms were unable to roll debt—hotel deals included:
•RFS •Jameson Inns •Equity Inns •Winston •FelCor •Sunstone •Innkeepers •Doubletree •Red Lion •Boykin

• Mid-2000s public exits/new companies:
•Ashford •Highland •Strategic
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•Sunstone •Eagle •DiamondRock

Re-equitizing REITs—2009
Recent REIT Common Equity Raised by Property Type (millions) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 Industrial Shopping Center Office Hotel Health Care Mall 711 692 543

1,815

1,728

1,755

Source: SNL Financial, Baird Research

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Public markets Likely Key to Broader Real Estate De-levering
Re-Equitizing REITs: Common Equity Offerings Gross Offering (000) 72,040 214,352 101,271 85,000 267,750 543,375 576,366 72,807 747,098 304,725 1,153,680 92,950 35,035 68,713 86,451 575,357 458,850 325,000 740,675 98,541 124,861 499,950 7,244,844 Company Medical Properties Trust, Inc. Health Care REIT, Inc. Senior Housing Properties Trust Digital Realty Trust, Inc. Alexandria Real Estate Equities, Inc. Simon Property Group, Inc. AMB Property Corporation Corporate Office Properties Trust Kimco Realty Corporation Ventas, Inc. ProLogis Equity One, Inc. Equity One, Inc. Acadia Realty Trust DiamondRock Hospitality Company Duke Realty Corporation Weingarten Realty Investors Regency Centers Corp. Vornado Realty Trust Parkway Properties LaSalle Hotel Properties Host Hotels & Resorts Ticker MPW HCN SNH DLR ARE SPG AMB OFC KIM VTR PLD EQY EQY AKR DRH DRE WRI REG VNO PKY LHO HST Offering Date 01/08/2009 01/29/2009 02/04/2009 02/10/2009 03/19/2009 03/20/2009 03/25/2009 04/01/2009 04/03/2009 04/07/2009 04/08/2009 04/09/2009 04/09/2009 04/14/2009 04/14/2009 04/16/2009 04/17/2009 04/21/2009 04/22/2009 04/23/2009 04/23/2009 04/24/2009 Offer Price 5.40 36.85 17.30 34.00 38.25 31.50 12.15 24.35 7.10 23.90 6.60 14.30 14.30 11.95 4.85 7.65 14.25 32.50 43.00 13.71 10.10 6.60 Shares 13,340,700 5,816,870 5,853,800 2,500,000 7,000,000 17,250,000 47,437,500 2,990,000 105,225,000 12,750,000 174,800,000 6,500,000 2,450,000 5,750,000 17,825,000 75,210,000 32,200,000 10,000,000 17,225,000 7,187,500 12,362,500 75,750,000 Total

Source: SNL Financial, Baird Research

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De-levering Hotel Portfolios—Public Execution
• New companies
• Perhaps led by proven public-company management teams • Public market investors bet on proven cycle timers

• PE/private portfolios coming public
• Morgan Stanley, Whitehall, Apollo, JER, etc.—all those 2005-2007 takeovers could come public again • PE Asset owners: Walton Street, Broadreach, RLJ, etc. • Operator funds: Noble, Crescent, HEI, etc. • Hilton brand, Hilton assets • Hyatt brand, Hyatt assets
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To Get Our Research, Send Full Contact Information to: David Loeb dloeb@rwbaird.com 414-765-7063
• Hospitality Monthly • Industry and company research • This presentation
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Baird Hospitality Real Estate Contacts
Research Investment Banking Trading

David Loeb dloeb@rwbaird.com 414.765.7063 Andrew J. Wittmann awittmann@rwbaird.com 414.298.1898 Eric M. Palm epalm@rwbaird.com 415.364.3341

Mark Decker, Sr. mdeckersr@rwbaird.com 703.821.5760 Mark Decker, Jr. mdeckerjr@rwbaird.com 703.821.5761 Brian Jones bjones@rwbaird.com 650.424.9314 Justin Glasgow jglasgow@rwbaird.com 703.821.5763

Mike Lanigan mlanigan@rwbaird.com 414.298.5275 Jeff Goddard jgoddard@rwbaird.com 414.298.7792

Equity Capital Markets
Rick Conklin rconklin@rwbaird.com 312.609.5480

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Appendix – Important Disclosures and Analyst Certification
Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months. Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H - Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report.

Distribution of Investment Ratings. As of March 31, 2009, Baird U.S. Equity Research covered 526 companies, with 42% rated Outperform/Buy, 56% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories, 10% of Outperform/Buy-rated, 5% of Neutral/Hold-rated, and 8% of Underperform/Sell-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst’s recommendations and stock price performance; 2) Ratings and direct feedback from our investing clients, our sales force and from independent rating services; and 3) The analyst’s productivity, including the quality of the analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird’s Research Oversight Committee. Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking transactions. A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspxYou can also call 1800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202.

Analyst Certification
The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.

Disclaimers Baird prohibits analysts from owning stock in companies they cover.
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws. Copyright 2009 Robert W. Baird & Co. Incorporated

Other Disclosures
UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W Baird Limited holds an ISD passport. This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W Baird Limited, which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services Authority requirements, this investment research report is classified as objective. Robert W Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws.

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