2016 hunter conference notes update/20… · wells fargo modeling 25bps bump each quarter. cap...

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Important Disclosures in Appendix

3/28/2015

Vince Ciepiel [email protected]

(216) 649-7253

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2016 Hunter Conference Notes

Key Quotes from the Conference:

Every analyst doesn’t want to be the last one to call the end of the cycle and they are driving the market nuts as a result o f that. –

Steve Joyce (CEO Choice)

Love what Hilton is doing with the Stop Clicking Around campaign...It’s about time this happened. Taking back what was leaking

out of the business to a place that doesn’t deserve it. – Steve Joyce (CEO Choice)

If I put a certain GM in a hotel it will be a great hotel regardless of the brand. Essence of what we do is take care of customers.

Can’t get away from that. –Dave Johnson (CEO Aimbridge)

Financing has changed in the last 6 months. Everyone saying same things. Public REIT stocks are hammered. Equity is taking a

little breather. Nobody is panicking, but if you want to sell now and pricing expectations are the same now vs. 2015, you missed the

window. The debt and equity markets are just more difficult now. –Dave Johnson (CEO Aimbridge)

Marriott/Starwood combined would negotiate much better OTA rates. And what will the OTA’s do – be ok with making less money?

No...they will raise commissions to the smaller folks. Scale matters because it becomes a self-fulfilling prophesy. – David Kong

(CEO Best Western)

I think the AirBNB fears are overblown. Let me tell you, AirBNB in not a factor in a lot of places and won’t be...Unless you want to

be sleeping on an air mattress and baby-sitting some guys cat. – Tyler Morse (MCR)

We have seen a macro repricing of future cash flows – you see that in the adjustment in REIT stock prices...the transactional

environment, etc. –Jim Merkel (CEO Rockbridge)

Demand coming into gateway cities is tough to figure out and hard to plan for. It can be fickle. Look at the condo market in Miami,

which was driven so strongly by international buyers, and then it just stopped. Or NY luxury condos, where a bunch of Chinese

buyers came in. Now it is becoming more difficult to get money out of China and it’s stalling out. –Suril Shah (Starwood)

Everything is lifestyle...every brand trying to cater to the customer. We all don’t want the same Courtyard room of 15 yrs ago that

the baby boomers wanted. –Jim Merkel (CEO Rockbridge)

Are we buyers here or sellers here?...Well it just depends on the day of week. –Brian Kim (Blackstone)

Most people are RevPAR snobs. We are not. We will buy in any market at any RevPAR level. The $70-$75 RevPAR we bought has

been fantastic. Wall Street guys push Wall Street CEO’s to buy higher RevPAR. That’s fine for them. –Tyler Morse (MCR)

Everyone got used to 6% RevPAR...then everyone misses by 100-200bps. I think its oversold and unnecessary panic. Wall Street

panicked b/c that’s what they do. Took a little piece of bad news. And made it huge. – Tyler Morse (MCR)

That used to be the 1st question I get...Hey Lee, What’s the cap rate....Now it’s the 5

th question. And if the answer is not 150-200bps

higher than back at Thanksgiving time there is no conversation. – Lee Hunter (Hunter)

We did a deal that closed in 2Q of last year at L+250. Then in 4Q of last year, L+425. Now working on a deal and its L+500.

These are all $100-200M portfolio transactions with well-established borrowers. L stayed the same but the spreads changed. – Lee

Hunter (Hunter)

Interesting place where construction debt is cheaper than repositioning debt. Haven’t seen that in a while. – Michael Everett (Sage)

Really important to understand that PIP’s can be a detriment for a deal and for the Brands to understand that if I sell 1 hotel, I am

building 2 more of theirs. So the Brands should be more understanding of the PIP process and work with us on these more. – Al

Patel (Baywood)

When should you dispose of an asset/think about selling? Still a good time now, although not as good as 6 mos ago. It’s probably

going to get worse before it gets better. – Al Patel (Baywood)

We see far less chance of a recession as we stand today compared to looking into 2008” – Anika Khan (Wells Fargo)

“Nothing new on interest rate – longer for lower.” – Anika Khan (Wells Fargo)

The Economist

Anika Khan (Wells Fargo)

Key Quotes:

“We see far less chance of a recession as we stand today compared to looking into 2008” - Anika Khan (Wells Fargo)

“Nothing new on interest rate – longer for lower.” - Anika Khan (Wells Fargo)

mailto:[email protected]

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Themes:

GDP and Corporate Profits – Consensus U.S. GDP growth modeled up 2% in 16 vs. 2.4% in 15 (Vince note – last year the

consensus GDP growth was 3.5% for 2015). Headwinds last year and this year have been stronger dollar and slower global growth

(Net Exports) and well as oil prices which have hurt industrial demand (Business Investment). Wild card is Consumer Expenditure

and how much it can support GDP in 2016.

Balance Sheets and Income Growth – Household balance sheets in the best shape in a while – debt coverage as a % of

discretionary income and total leverage levels are still favorable. Are we seeing middle income household income rise?...yes, we

are just starting to now. The last 2 recoveries showed more balance in before tax income across the quintiles (all up 15-20%), but

the recovery since 2009 has not been as favorable for the lowest, 2nd

and middle quintile, which are all sub 5% growth 09-14.

Interest rates – Lower for longer. 1Q16 fed funds at 0.5%. Wells Fargo modeling 25bps bump each quarter. Cap rates could move

up with rates, although may not move up as much as rates do as a result of the attractiveness of the U.S. economy.

Recession – Roughly a 23.5% chance of a recession – highest level recovery-to-date. Heading into the last recession, Wells Fargo

had a 60% chance.

Data Geeks

Jan Freitag STR


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71 months and counting although YTD has been more modest growth as occupancy growth tailwind moderates

Shifts: Easter from April to March of this year – hurts 2 weeks of Group; Jewish holidays from Sept to Oct – also impacts Group

Total pipeline (469,000 rooms) up 13% yr/yr with construction up 7%, final planning up 25% and planning down 1%

68% still going upscale and upper midscale where the demand growth has been

Wall St expects danger. We expect 5% RevPAR growth.

Airbnb – impact appears to be minor on Manhattan hotels. Compression nights have not changed much since 2012 with 52 in 2015

compared to the 47 10 year average. Still generating a 25-30% ADR premium.

Expect 5% growth for 2016 on 4.4% rate and 0.6% occupancy build supported by 2.3% demand growth and a modest 1.7% supply.

Have not changed forecast from ALIS – Supply growth stepping up, Demand growth moderating. Still expect occupancy gains this

year. Last year only saw 4.4% ADR growth – this year we think we can do the same. Less occupancy growth gets you to roughly

5% for the year.

Katie Moro Travelclick

Slide from 2016 Hunter Presentation

Slide from 2015 Hunter Presentation

25 Markets – we get data from 22,000 hotels globally (from their data systems)

Business on the books for the next 12 months is up 3.7% vs. the same time last year. Also above, is the slide from the Travel Click

presentation at the 2015 Hunter conference which showed business on the books only up 1.1%. Group business is leading

Transient. Mar down (Easter shift). Aug (easy comp) and Sep (Jewish Holiday shift) look strong. 4Q advance bookings look strong.

Business on the books is up 4% yr/yr

o Group up 0.6% in room nights, ADR up 3.6%

o Transient Business down 0.5% in room nights, ADR up 4%

o Transient Leisure up 2.3% in room nights, and ADR up 3.6%


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Group pace for Lux and Upper Upscale hotels is flat (exact same thing they said last year)

TravelClick expects 7-10% RevPAR growth

Mark Woodworth PKF

Economy is at full employment for the first time since 2007 and income growth is strong (up 4%, similar to 20 yr avg)

What history tells us? Employment and jobs matter. Personal Income

GDP grows 2-3% unemployment is sub 5% through 2018. Real income rises 3% for next 3 years. Interest rates slowly normalize

and short term rates reach 3.5% by 2018. This trajectory should support 5.5% RevPAR in 16 and 4.7% in 17.

Of the Top 25 markets, 16 markets are seeing supply growth above their long run average, 13 markets should see occupancy

declines in 2016

Expecting leaders (San Jose, Oakland, Orlando, Portland, SD, Anaheim, Boston, Sacramento, Jacksonville)

Laggards (Minne, Seattle, Nola, Raleigh, Pitt, Austin, Omaha, NY, Albany, Houston) – average supply growth is more than 2%

above their long term average

Presidents Panel

Moderator – Jeff Higley (Hotel News Now)

Steve Joyce (CEO Choice), David Kong (CEO Best Western), Mark Laport (CEO Concord), Dave Johnson (CEO Aimbridge), Elie

Maalouf (CEO Americas IHG)

Financing has changed in the last 6 months....CMBS is going to be an issue.

Key Quotes:

o Every analyst doesn’t want to be the last one to call the end of the cycle and they are driving the market nuts as a result of that.

– Steve Joyce (CEO Choice)

o Love what Hilton is doing with the Stop Clicking Around campaign...It’s about time this happened. Taking back what was

leaking out of the business to a place that doesn’t deserve it. – Steve Joyce (CEO Choice)

o If I put a certain GM in a hotel it will be a great hotel regardless of the brand. Essence of what we do is take care of customers.

Can’t get away from that. –Dave Johnson (CEO Aimbridge)

o Financing has changed in the last 6 months. Everyone saying same things. Public REIT stocks are hammered. Equity is taking

a little breather. Nobody is panicking, but if you want to sell now and pricing expectations are the same now vs. 2015, you

missed the window. The debt and equity markets are just more difficult now. –Dave Johnson (CEO Aimbridge)

o Marriott/Starwood combined would negotiate much better OTA rates. And what will the OTA’s do – be ok with making less

money? No...they will raise commissions to the smaller folks. Scale matters because it becomes a self-fulfilling prophesy. –

David Kong (CEO Best Western)

Message/Takeaway

o Steve Joyce (CEO Choice) –Those that thrive and survive aren’t best and strongest. It’s those that will adapt to change. Rate is

critical this year. You should assume that we are operating from a position of strength for next few years.

o David Kong (CEO Best Western) – Every year we have to contend with new competitors and OTA’s. Distribution channels

and rev management is important. Let’s remind ourselves that we are in the hospitality – let’s be hospitable.

o Mark Laport (CEO Concord) – Sea of change right now. What resonates with our team is – if you don’t differentiate today, you

won’t win. We are excited about lifestyle brands and they offer differentiation. Those that get those brands and operate them

uniquely will be a big deal in the brand blur we are in.

o Dave Johnson (CEO Aimbridge) – Elie and I at a leadership summit in DC. Biggest dissatisfaction with AirBNB was lack of

service and amenities. We have great tools for the consumer. How we take care of our guests is the key. If I put a certain GM

in a hotel it will be great regardless of the brand. Essence of what we do is take care of customers. Can’t get away from it.

o Elie Maalouf (CEO Americas IHG) – Energy Dividend: Heard comments about oil markets/what that is doing to the industry.

We are certainly watching that. Look out of for the energy dividend. Lower energy prices should be a good thing for big energy

consumers. Today there is short term pain, but going forward, it is a good thing for the American consumer.

Regardless of where we are at, what should we prepare for now?

o Dave Johnson (CEO Aimbridge) – Feels like we don’t need to talk ourselves into a recessions. Yes yr/yr growth is slowing

but no industry can grow 7-8% forever. Focus for us is that we still have a good times ahead. Fundamentals still healthy

even though there is some negativity.

o Elie Maalouf (CEO Americas IHG) – Good time focus on properties/what are the key strategic decisions so that if things do

slowdown a bit, you can be the one to take share.

o Steve Joyce (CEO Choice) – While things aren’t going to grow as fast as they were, it’s still a good level. Some markets have

supply issues. But we have never been this late in the cycle (in year terms) and have supply be as low as it is. Every analyst


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doesn’t want to be the last one to call the end of the cycle and they are driving the market nuts as a result of that.

o Mark Laport (CEO Concord) – Some markets are terrific. Some markets (oil) are tough. So it’s a little choppier out there. We

must be more cautious b/c the math points to less margin for error. Construction costs keep rising while RevPAR growth is

moderated. Have to be careful what deals we do.

o David Kong (CEO Best Western) – Take as much market share and invest in hotels to build loyalty.

What are we seeing in financing and read through to supply growth?

o Steve Joyce (CEO Choice) – CMBS market is going to be an issue. Lenders have been more disciplined this cycle and we have

less supply as a result now. Should keep supply low for longer.

o Dave Johnson (CEO Aimbridge) – Financing has changed in the last 6 months. Everyone saying same things. Public REIT

stocks are hammered. Equity is taking a little breather. Nobody is panicking, but if you want to sell now and pricing

expectations are the same now vs. 2015, you missed the window. The debt and equity markets are just more difficult now. Lot

of it is – where are we at in the cycle? Am I going to have to hold through the next cycle? Don’t think the worst has happened

in Houston yet. When NY and Houston comes up for re-financing, that could be interesting.

o Mark Laport (CEO Concord) – It’s choppy city by city. Doing a deal in NY is tough. Doing one in Columbus is a lay-up.

Thoughts on Hilton’s new Stop Clicking Around campaign?

o Steve Joyce (CEO Choice) –I think what Hilton is doing with the Stop Clicking Around campaign is great. Letting the

customers know that it’s cheaper on Brand.com, this is good for the entire industry. It’s about time this happened. Taking back

what was leaking out of the business to a place that doesn’t deserve it. Now going back into owners pockets.

o David Kong (CEO Best Western) – Hilton campaign stop clicking around was very clever. We got taken advantage of by

the OTA’s. For once, should consider being unified. If we stop giving them inventory, they go out of business tomorrow. What

cost is going up every year? It’s distribution costs.

o Dave Johnson (CEO Aimbridge) – I sit on Hilton’s owner advisory board. I applaud them here. I am happy to see the OTA’s

finally feel some pressure. The customer is going to make the decision of where they want to book. We thought it was

incremental business 20 yrs ago and allowed this to happen. 10 yrs ago, the OTA’s websites were better. Now brands have

caught up. Hilton is saying we own the customer. Expedia did own the guarantee of lowest price. Free Wi-Fi points, upgraded

and lowest price. Going to seriously move market share. Ad campaign stop clicking around is everywhere. First thing we have

done in the industry to move market share. Brands and owners and operators are coming together and saying it’s our inventory

and our brand and it’s ours to control.

o Steve Joyce (CEO Choice) – Industry did not provide leadership they should have. Finally we are. Owners – look guys we are

as much to blame as brands. Let’s see how much they want to put in OTA rooms if they get paid on net revenue. Takes both to

make this work.

o Elie Maalouf (CEO Americas IHG) – We ran a test. Put our best guarantee rates (and showed the OTA rate for compare).

Every company has to make their own decisions. Letting the guest know they are getting the best rate on our website is a

winning proposition.

Start to the year been a bit slower?

o Steve Joyce (CEO Choice) – We have very tough comps. We expect a strong summer. 2H of the year ends at a good pace.

Hotel transaction volumes?

o 22B in 2015 vs. 18.6B in 2014, 17B in 2013 (05 was 23B, 06 30B, 07 $27B)

o Steve Joyce (CEO Choice) – I won’t say which letter we are. I said we are little guys and we could run you better. Look at the

Strategic Deal – $500M on a $6B transaction. Was the risk premium established by the Blackstone/Anbang transaction. He was

willing to take the risk of a Chinese gov agency buying and closing as they said they would. That offer is not significantly

above Marriott any more. Risk premium of a deal closing.

o Steve Joyce (CEO Choice) – The Chinese bid is not good. At that price or a little higher, they don’t make any money. They

will not invest in making Starwood a better company. I think Marriott would invest. I think industry is healthier for all of us

when we have strong competitors. On scale, we may find that dramatically more scale is better. Will we see more

consolidation? Probably. However...who are the sellers – only seems there are buyers. If they prove scale makes a difference at

the level. Then it may trigger more deals

o David Kong (CEO Best Western) – Investment in technology leverage over more hotels. More products to sell developers.

Marwood is its own portal/don’t need OTA’s. If they don’t need OTA’s, they are going to negotiate more attractive rates. How

will OTA’s make it up? If they give Marwood attractive commissions, they will have to make it up on others that don’t have

scale. If Marwood is 12% and we are 15%, we are at a competitive disadvantage.

As a developer and owner, would you rather be a part of 500k or 1m rooms system?

o Mark Laport (CEO Concord) – Reality is that size does matter. However, the combination can be daunting, when you think

that 40% of certain markets can be controlled by 1 brand. Change is out there for sure. We worry about it in distinct and

separate markets.


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o Dave Johnson (CEO Aimbridge) – I think it comes down to size and quality. We are of the belief that there are too many

brands in the industry. Know they need to grow, but quality is equally important. Scale gives leverage to drive business but

sometimes makes company harder to work with. I am a big Starwood franchisee – I am a bit scared. Where is Westin vs.

Marriot vs. Sheraton vs. Delta? We just acquired Hilton Pasadena and changed it to Marriott....if the deal goes through our

competitive set is 100% Marwood product. In certain markets, it is an issue. Marriott is smart and will figure it out though.

o Elie Maalouf (CEO Americas IHG) – When we talk about scale, at some point you have enough to be competitive globally.

For some that already have sufficient scale geography and brands and loyalty channels, then it’s a choice. It’s just more

size/not really scale.

When you look at the pipeline – any thoughts?

o Under contract is up 13% yr/yr = in construction up 17%, Final planning up 25%, and planning down 1% yr/yr.

o Mark Laport (CEO Concord) – We must overbuild – it’s in our DNA. Hopefully it will take a long time. Some markets are real

scary. Houston and NY.

o Elie Maalouf (CEO Americas IHG) – Financial markets were not working efficiently in 07/08 to throttle back financing. Now

they are working correctly and financing is becoming more difficult. Not worried about it at this moment.

o Dave Johnson (CEO Aimbridge) – Look at Nashville or Austin and supply is up big but it’s all getting absorbed. When you

talk new supply, you also have to consider obsolete product. Some that needs to leave the systems. At this point in the cycle,

supply looks much lower than you would have expected.

State of the Industry Panel

Moderator – Teague Hunter

Nelson Knight (EVP Apple REIT), Jim Merkel (CEO Rockbridge), Suril Shah (Starwood), Brian Kim (Blackstone), Tyler Morse

(CEO MCR)

Key Quotes

o I think the AirBNB fears are overblown. Let me tell you, AirBNB in not a factor in a lot of places and won’t be...Unless you

want to be sleeping on an air mattress and baby-sitting some guys cat. – Tyler Morse (MCR)

o We have seen a macro repricing of future cash flows – you see that in the adjustment in REIT stock prices...the transactional

environment, etc. –Jim Merkel (CEO Rockbridge)

o Demand coming into gateway cities is tough to figure out and hard to plan for. It can be fickle. Look at the condo market in

Miami, which was driven so strongly by international buyers, and then it just stopped. Or NY luxury condos, where a bunch of

Chinese buyers came in. Now it is becoming more difficult to get money out of China and it’s stalling out. –Suril Shah

(Starwood)

o Everything is lifestyle...every brand trying to cater to the customer. We all don’t want the same Courtyard room of 15 yrs ago

that the baby boomers wanted. –Jim Merkel (CEO Rockbridge)

o Are we buyers here or sellers here?...Well it just depends on the day of week. –Brian Kim (Blackstone)

o Most people are RevPAR snobs. We are not. We will buy in any market at any RevPAR level. The $70-$75 RevPAR we bought

has been fantastic. Wall Street guys push Wall Street CEO’s to buy higher RevPAR. That’s fine for them. –Tyler Morse (MCR)

o Everyone got used to 6% RevPAR...then everyone misses by 100-200bps. I think its oversold and unnecessary panic. Wall

Street panicked b/c that’s what they do. Took a little piece of bad news. And made it huge. – Tyler Morse (MCR)

Opening Thoughts

o Jim Merkel (CEO Rockbridge) – We have 80 properties across 25 states. Diversification key for us. Some ups and downs. But

on the whole we are up 6-7% on the RevPAR side in the last 12 months. The market was very strong, perhaps too lofty, and

had seen significant growth. We have seen a macro repricing of future cash flows – you see that in the adjustment in

REIT stock prices...the transactional environment, etc. The focus is in-place cash flow, given the level of uncertainty in the

near term. From our perspective, there was a necessary cause in the market. Overall, underlying fundamentals still strong. We

are quite comfortable with where market is now. These times of changes create opportunities.

o Tyler (MCR) – Overall still feels goods. Supply growth of 1.7 or 2.2% not that relevant this year. Not impacting things and

demand growth is still good.

o Nelson (Apple) – Stable. We are structured with broad diversification – 32 states, 83 MSA’s. Broad appeal with strong brands.

Share price based on lot of different investors – whey we are trading at a premium to our peers? – Our goals resonate with our

shareholders. Strong and nimble balance sheet which can weather storms if the market turns bearish. Do not have 1 market that

contributes too much. LA is biggest and it’s only 8%.

Why are stock prices down?

o Tyler (MCR) – Simple as Manhattan. RevPAR there was down 5% last year. Will be down 5% again this year. NY has a


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huge supply issue. Outside of that, everything else is pretty good.

o Brian (Blackstone) – Big reason is that a lot of these REIT’s have too much exposure to certain markets which are suffering.

That is hurting their RevPAR results relative to the rest of the industry. Diversified RevPAR is much stronger.

Is Supply a problem?

o Suril (Starwood) – We don’t’ feel the supply that some markets are seeing. We are so broad, that national supply is what really

impacts us. 75% of new development is in mid/upper mid/upscale space. We are cautious about that, but supply is not

impacting us in a big way yet. Demand coming into gateway cities is tough to figure out and hard to plan for. It can be

fickle. Look at the condo market in Miami, which was driven so strongly by international buyers, and then it just stopped. Or

NY luxury condos, where a bunch of Chinese buyers came in. Now it is becoming more difficult to get money out of China

and it’s stalling out. Hard to figure out how deep the international incoming demand is in gateway market. Impact of new

supply is not as predictable b/c demand is less predictable. So we are cautious there.

o Nelson (Apple) – Urban Select serve being impacted by supply and international arrivals. We are closely watching that.

o Tyler (MCR) – I think the AirBNB fears are overblown. Let me tell you, AirBNB in not a factor in a lot of places and won’t

be...Unless you want to be sleeping on an air mattress and baby-sitting some guys cat.

AirBNB just like what happened in OTA’s?

o Tyler – AirBNB will just be another OTA. A distribution channel. Then they will be like Expedia and raise the commission

level eventually to all their listings. NY is cracking down on AirBNB housing. In the long term, AirBNB will have to pay

the right taxes and will have to charge a higher commission. It won’t be the Wild West like it is now. Talk to Uber

drivers – they are making less money today. Same thing will happen 12-18 months from now with AirBNB listers. B/c

there are 16,000 uber drivers in Manhattan, more than cabs. You have seen run up in Uber. The other thing people forget is that

a listing is not the same as a room. Our courtyards we sell the same room 365 days per year. Airbnb is on the market 10 days

per year.

o Jim (CEO Rockbridge) – As it relates to AirBNB, gets a lot of attention but not seeing any impact at our hotels. One thing that

does not get written about...it grew during the strongest period of growth during the hotel business. It’s a reflection of the

consumer, who wants to experience a city in a certain way at a price point that fits them. Also the tech changes that occur that

put a company like AirBNB with direct access to the customer. We pay attention to it...not as a threat...but as how we think

about our hotels and brand’s resonating with the consumer. The hotel can go direct to the customer like we have never seen

before. We are seeing a change in the landscape of the brands...lifestyle brands. Everything is lifestyle...every brand trying

to cater to the customer. We all don’t want the same Courtyard room of 15 yrs ago that the baby boomers wanted.

o Nelson (Apple) – We have not seen any major impact from AirBNB on our results.

o Brian Kim (Blackstone) – Not a big issue for us either. In 10 yrs bigger issue for OTA’s than us. AirBNB charges a fraction of

what the OTA’s charge. I wonder how sustainable it is.

How concerned on OTA’s

o Tyler (MCR) – Look at how Expedia consolidated all OTA. Same consolidation in brands – now you have Hilton, Marriott,

and Wyndham as the big ones. Each owns their customers through point’s program/loyalty. The OTA’s get marginally

crowded out at some point as the brands get bigger and bigger. The other things is look at Hotel Tonight...it charges 15%.

Expedia charges 20%. In just 3 years, look at how Hotel Tonight has distribution and reach. That’s a bigger issue for Expedia

and Priceline. There really is not a strong barrier to entry as shown by Hotel Tonight.

o Suril (CEO Best Western) – OTA’s grew because of technology. It sticks b/c of loyalty/habit. Nothing compelling about

Expedia. Does not add a ton of value.

Thoughts on Marriott and Starwood?

o Jim (CEO Rockbridge) – Talk to anyone at the companies. Hard to say what’s going to happen. 30 brands if they

combine. 2-3 brands deep in each segment. Will be a lot of change. Don’t know where or how. Starwood franchisees are

bigger beneficiary than MAR franchisees. Select serve side – Starwood is not deep there.

o Suril (Starwood) – Seems like a very good deal for Marriott. Anbang did a 9% premium to MAR’s offer. I think both bids have

juice/room to move up.

o Tyler (MCR) – As an owner of 50 Marriott hotels – I like picking up the SPG members. Get to wipe out 250M of corporate

overhead. That’s worth 2.5B – 15% of the purchase price of the company. Anbang has to leave all of HOT’s team in place. If

MAR wants to get this thing, they prob can.

o Brian (Blackstone) – Free option for board of Marriott – do I just take $400M and go home. And HOT is not with another

competitor. Really interesting. Not every day your 6.5B hotel deal gets overshadowed. Bought for 6B sold for 6.5B. When we

bought BEE, thought there was always demand for luxury hotels. We were approached and we did what we thought was best

for our investors. Pace of growth has slowed. Values are flat or down. Best part of select serve is these assets generate so much

cash flow, 15/20% cash yields that’s fantastic. If you sold those assets today, I don’t know what you would do with that money.

Deals and debt market?


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o Tyler (MCR) – Buy select serves at an 8 cap. Put 60% leverage on them. Not sure you can replicate that cash return anywhere.

There is a lot of CMBS coming due in next 2 yrs. Mountain of other commercial obligations. Overhang from 06/07, all 10 yr

paper. Some staggering about of debt needs refinanced in the next 24-36 months. Unclear if that can happen.

o Suril (Starwood) – 10 yr paper harder to get today. Have to think about refinancing risk.

o Jim (Rockbridge) – Think about Capex. Owners like to take the cash and not put back into properties. Ultimately has to be put

back in. Our view is that if you don’t have to sell today and have a well-positioned asset...wait. We are a seller with certain

mature assets with cash flow in place. Props that don’t have capex needs and can continue to grow, we hold.

o Brian Kim (Blackstone) – Are we buyers here or sellers here?....Well it just depends on the day of week

o Nelson (Apple) – refine our strategy. Probably sell if we get appropriate prices for those assets. Sold 19 hotels in 2 transactions.

Had $70 RevPAR mostly in tertiary. Replaces with 7 hotels at significantly higher RevPAR. Play more in that sector. Our

focus is much broader than the top 10 markets. We are looking at assets around $100 RevPAR. We have just found that if we

are producing RevPAR under $100, we struggle to find capital to finance the capex. So then we are asking...can it cover its

own renovation cycle?

o Tyler (MCR) – We happily bought Apple’s hotels. Yes we are buying sub $100 assets – love that space. Most people are

RevPAR snobs. We are not. We will buy in any market at any RevPAR level. The $70-$75 RevPAR we bought has been

fantastic. Wall Street guys push Wall Street CEO’s to buy higher RevPAR. That’s fine for them. You can make great

yields at any RevPAR level.

o Jim (CEO Rockbridge) – RevPAR not the metric we are focused on. Fascinated by so many people’s focus on it. Really is the

publicly traded group that is beholden to analysts.

o Suril (Starwood) – Analysts say higher RevPAR is higher multiple. Historically that’s the case. Right now not really so much.

All been net sellers over the last 6 months...what’s the deal with that? Stocks are down 30%...is our real estate worth 30% less?

o Suril (Starwood) – So much is opportunity set. If the public REIT’s go down 20% and we would buy some.

o Nelson (Apple) – We sold 19 hotels, bought 7. Matching EBITDA. Just swapping assets.

o Suril (Starwood) – We would be interested in the REIT’s at these levels. But the boards are not ready to sell where their

stock prices are at. We look at publicly traded cos. Those are much harder to get done than buying the Hilton garden inn.

o Brian Kim (Blackstone) – All these public REITs. I would go out and buy the common stock of any of these REITs. But I can’t

buy them.

o Tyler (MCR) – I think it’s all oversold. How much did RevPAR grow and how much did NOI grow. Everyone got used to

6% RevPAR...then everyone misses by 100-200bps. I think its oversold and unnecessary panic. Wall Street panicked b/c

that’s what they do. Took a little piece of bad news. And made it huge. I wish people would stop using the baseball

analogy. 1991-2001, the market was up 10yrs. In 2001, tech business crashed –would not have triggered recession. 911 caused

it. Hotel business would have been fine. If Donald trump becomes president our tax rates on real estate are not going up.

o Jim (CEO Rockbridge) – People were looking for a reason to sell. Reality is that demand is really strong, it’s been strong.

What I tell our investors…you will be paying more for your hotel rooms over the next 5 years barring an unforeseen and

unpredictable demand shock. Today is fundamentally as a good as I have seen it.

Less confidence in the future?

o Jim (CEO Rockbridge) – Value is off on a stabilized Garden Inn. Not as many buyers and NOI not growing as fast as it was.

o Nelson (Apple) – Always benefit when new entrants come in and drive asset sales. This cycle, hasn’t seen that. REITs trading

too low to issue stock. There are fewer buyers and they are being discerning about what they want to buy. Not enough trades

in the 1Q to see where it shakes out. There is still a lot of interest in Urban select serve. It’s probably the other stuff sliding

more in value.

o Suril (Starwood) – Debt we can get today is easily more expensive. Means cap rate going down. You would expect cap rates.

Macro saying cap rates widening. Private market cap rates widen a bit. Debt cost going up.

o If you believe interest rates are going to stay low, you would not sign up for cap rate. There is more going on there.

o Tyler (MCR) – In 05/06, the 10 yr trading at 5%. You could buy hotels at 7%. Risk free Treasury bond at 5%. No pip needed.

Could make 5% and not get out of slippers. Could make 5% and do nothing but watch Opera. Right now spread of cap rates

over treasury is like 600bps. Richest spread environment. Also remember that in 05/06 everyone thought RevPAR would grow

8-9%. Today we think 3-5%. Deals are being underwritten at much more reasonable levels.

What we talk about this time next year?

o Tyler (MCR) – When all the debt comes up in 4Q16. Debt could tighten massively. Lot of the demand will get sucked up by

refi’s. 3 or 4 counties with negative interest rates. There is a lot of capital in the world. Needs to go somewhere. The bank is

going to charge you to hold your money here soon. 10 yr treasury.

o Jim (Rockbridge) – We ask ourselves how does the capital get here and where does it go. Tyler - To guys like us.


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Buying & Selling Hotels

Moderator: Lee Hunter

Ben Brunt (Noble), Jatin Desai (Peachtree), Al Patel (Baywood), Michael Everett (Sage)

Key Quotes o That used to be the 1

st question I get...Hey Lee, What’s the cap rate....Now it’s the 5

th question. And if the answer is not 150-

200bps higher than back at Thanksgiving time there is no conversation. – Lee Hunter (Hunter)

o We did a deal that closed in 2Q of last year at L+250. Then in 4Q of last year, L+425. Now working on a deal and its L+500.

These are all $100-200M portfolio transactions with well-established borrowers. L stayed the same but the spreads changed. –

Lee Hunter (Hunter)

o An interesting place where construction debt is cheaper than repositioning debt. Haven’t seen that for a while. – Michael

Everett (Sage)

o Really important to understand that PIP’s can be a detriment for a deal and for the Brands to understand that if I sell 1 hotel, I

am building 2 more of theirs. So the Brands should be more understanding of the PIP process and work with us on these more.

– Al Patel (Baywood)

o When should you dispose of an asset/think about selling? Still a good time now, although not as good as 6 mos ago. It’s

probably going to get worse before it gets better. – Al Patel (Baywood)

Value add out there any more on acquisition front?

o Michael Everett (Sage) – We are seeing a decent number of value added but not as many as we used to. Our view is that we are

clearly going into a slower period. Don’t see things getting bad, but just slower. Good time to renovate/get work done thought.

We did 4 deals last year in 2015 vs. 12 deals in 2014. Biggest hurdle is finding appropriate debt for value add deals. Finding

debt for zero cash flow acquisitions that involves changing brands is difficult.

o Jatin (Peachtree) – We are doing some debt deals on major renovations/value added deals. We help step in as preferred equity

and take it to a higher leverage point. CMBS debt is irrational right now and moving around so much in the last 90 days.

Prices got a lot wider than where they were in the 1H15. Having to hold some back is making CMBS lenders less interested in

loans.

o Al (Baywood) – We are very interest rate sensitive. We range 12-18M deals. We go to local/regional banks get that done. We

sign some recourse which is the con of that. However we can sell without prepayment penalties.

How analyze acquisition opportunities? Year 1 or 2 projections, Cap rates, replacement costs? What is the focus?

o Ben Brunt (Noble) – Depends on the deal. What condition it is in? What are the cash flows? Is there a brand conversion play?

We have done a number of those brand conversions that we are pleased with. So many factors that go into it. Look at a lot of

different metrics. Opening next month – bought a quality inn and suites and converted to Moxy in New Orleans and feel good

about that.

o Al (Baywood) – We look at what’s wrong with the asset. What can we do to make it better? Is it under-capitalized, under-

branded, and under-managed. Look to improve on those things. Most of the time it’s all of the above. We are typically holding

for a minimum of 5 years. Could change based on cycles.

o Michael Everett (Sage) – Only thing I would add to what those guys have said - 80% of the focus is basis. We have become

more sensitive to replacement costs as we get later in the cycle. We are part of the new supply/adding in markets. Some

markets have it worse than others. If we buy Courtyard at 160K per key in suburban market, we get concerned an AC could

pop up at 140K right by us. We try to stay closer to 100k per key to be protected on basis. Everything we have done in the last

4 years post PIP is close to that and we feel like we have some wiggle room and could deal with a downturn.

o Jatin (Peachtree) – Also look at historical trades. Make sure we are not setting the high water mark in that market. We focus on

brands too. Also be premium branded to better weather downturn. We don’t pay that much attention to cap rates, because we

are doing something to change the value/improve it and impact the cash flows. There is something we are changing in the box

to change the asset and improve the value.

o Lee Hunter (Hunter) – that used to be the 1st question I get...Hey Lee, What’s the cap rate....Now it’s the 5

th question.

And if the answer is not 150-200bps higher than back at Thanksgiving time there is no conversation.

How is pricing debt now?

o Jatin (Peachtree) – Select sever with 150 rooms usually between L6 and L8. We go up to 85% of the cost of the borrower.

o Ben (Noble) – On non-valued added acquisitions, we are looking at 68% loan. Balance sheet lender priced at L +2.75. Today

that would price up close to100bps higher. Now prepared for L + low 3s. We are not leveraging beyond 70% and looking for

non-recourse.

o Lee Hunter (Hunter) – We did a deal that closed in 2Q of last year at L+250. Then in 4Q of last year, L+425. Now

working on a deal and its L+500. These are all $100-200M portfolio transactions with well-established borrowers. L

stayed the same but the spreads changed. A month ago on the phone with CMBS lender who said, we are underwriting on


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year end 13 and some cases year end 12. I am selling off year end 15, they are underwriting off year end 13. Think about how

much RevPAR has grown since then that the underwriters are not giving any credit for. What does that do to loan to value...that

opens up opportunity for creative debt. Bring in preferred equity partner. Either need more equity or need the price of the asset

to come down to get deal done.

o Michael Everett (Sage) – On value add, we are talking 7s. We are borrowing from a debt fund lender. 70% of cost. Definitely

has a 7 in front of it. It’s the nature of what we are doing. We want to move that lender out as soon as we can get stabilized

cash flow in place. Interesting to watch that value add segment of the market. We are also financing a luxury hotel in Georgia

where the debt is L+500. Also doing deal in Atlanta, a reposition that’s L+750. An interesting place where construction debt

is cheaper than repositioning debt. Haven’t seen that for a while.

On the development front, how do you determine what market and what brand?

o Ben (Noble) – At this point in the cycle, we engage some advisor groups to help us synthesize a variety of markets. We realize

the cycle is maturing so we wanted to put more analytics around where we want to be. College or medical markets. Variety of

things we consider. Allows us to have a roadmap to market selection. We are big into central FL – markets like Orlando and

Atlanta. They recovered late and still have run room. We have gotten more micro focused. Lot of new brands to choose from

today. We look for where the gaps are in the market.

o Al (Baywood) – Our first strategy is to cluster in areas to build some scale. For branding, we do HLT, MAR, IHG. We just go

through the roster – extended stay vs. transient. What’s demand like there? How many rooms HLT vs. MAR vs. IHG. Then we

come up with a few dif options and see what kind of deal we can get.

What do when someone else trying to do similar?

o Jatin (Peachtree) – also an impact issue. Another developer trying to do a similar deal. Depends on your relationship with the

brand. There is a reason there are new brands. Might just go to plan B.

o Michael (Sage) – We just spread rumors about their deal, and it works (joking).

Rather do an adaptive use vs. ground up development?

o Ben (Noble) – Lot easier to do ground up.

o Al (Baywood) – You need at least 30% cushion on adaptive reuse for us to consider it vs. ground up. When go to underwriting,

the PIP is going to whittle away some of that 30% away. Brands make some compromises when approving it.

Where are construction costs and where headed?

o Michael (Sage) – So high right now. In Denver, multifamily market is booming. Lot of big office building going up.

Competition with those folks is challenging. Portland challenging also. Building material costs going up. Labor is more of the

issue. Whenever we pay more for concrete, we hope ADR on the property is going up! Our RevPAR projections have

proven to be conservative. Our lenders never let us project 6-7% rate growth in 16 and 17. While things have slowed and as we

get 12-18 months in, they are still in line with what we projected/little above in a lot of markets. Our markets have

outperformed.

o Jatin (Peachtree) – In some markets, challenge is similar. Construction costs up 15% vs. when we originally signed.

PIP’s...when go to dispose of an asset, how do you work to minimize those PIP’s for a potential buyer?

o Al (Baywood) – We actually walk with them and explain to them and be proactive. Once we get the PIP, we try to negotiate

what we can on our behalf. Typical we have the better relationship with the brand/franchisor than the buyer, so we take the

opportunity to assist them. When PIP is higher than expected, the buyer expects the seller to help bridge the gap. Really

important to understand that PIP’s can be a detriment for a deal and for the Brands to understand that if I sell 1 hotel,

I am building 2 more of theirs. So the Brands should be more understanding of the PIP process and work with us on

these more.

o Ben Brunt (Noble) – If we are considering a sale, we order PIP, we negotiate the brand. We understand it before we go to

market. Price it with a contractor. This helps us be educated for when a buyer goes through the process, so we have info.

o Michael (Sage) – We typically invest 25-30k so they are big PIPs. If we are renovating a Courtyard 25-30k PIP, but they

approve a Fairfield, Residence, and AC right around the corner a mile away. Hey look guys, you want us to do all these things

but in a market that is going to be more competitive over time. We can maybe work with them on the renovation. Lots of new

supply coming into a market, it impacts what we might want to do on the PIP.

In your mind, is now a good time to dispose of an asset?

o Jatin (Peachtree) – 6 months ago was the time. Were a lot more players in the market. World also changing in CMBS in the last

2 months.

o Al (Baywood) – Agree 6 months ago was the ideal time. Now coming back and there is 10-15% less on the price today. New

reality if you will, takes longer than 6 months to deal with those adjusted expectations. Still a good time now, although not as

good as 6 mos ago. It’s probably going to get worse before it gets better.

o Lee (Hunter) – Still expecting positive RevPAR for a few years. Yes rate has slowed, but it’s still positive. You are buying into

an up market. The big guys are still acquiring assets. The super regionals who own 5 to 25 hotels were all bidding on deals


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at 8 to 9s. They just lost to the Blackstone’s and Starwood’s who were at 7. They aren’t paying the 7 anymore. The

1H16 will be slower b/c the bid ask spread is wider and expectations are still adjusting.

Do we need all these new brands?

o Michael Everett (Sage) – Creates development opportunities. Our experience with Curio...We own Courtyards in suburban

Atlanta. AC and Tru right next door. Does the customer – is the courtyard customer really begging for something different. We

don’t see the customer screaming for more brands.

o Jatin (Peachtree) – Home2 doing well and Hampton as well. Did not cannibalize. Not sure where the demand came from. Tru

could be a similar situation. In Urban it should do well. In Suburban not sure. When I look at Moxy, if it goes into Suburban

Columbus Mississippi, we have problems. Some ability to have more brands out there. Will work in certain markets. Others

not so much.


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Appendix

Disclosures

Buy: The stock’s return is expected to exceed the market due to superior fundamentals and positive catalysts.

Underperform: The stock’s total return is expected to underperform the market due to weak fundamentals and a lack of catalysts.

Neutral: The stock is expected to be in line with the market due to full valuation and/or a lack of catalysts.

Valuation and Risk: Price targets are established under various valuation methods including P/E, P/S, EV/EBITDA on financial

estimates based on forward earnings. Price targets are not established for every stock. The price target’s effectiveness may be affected

by various outside factors. Risk assessments can be found in the most recent research on these stocks.

Other Disclosures: I, Vince Ciepiel, certify that the views expressed in the research report(s) accurately reflect my personal views

about the subject security(s). Further I certify that no part of my compensation was, is, or will be directly or indirectly related to the

specific recommendations or views contained in the research report(s). The analysts responsible for the preparation of this report have

no ownership stake in this company. Cleveland Research Company provides no investment banking services of any type on this or any

company.

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Research Company may be used by Cleveland Research for other purposes in the course of compensated consulting and other services

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