the essentials of lodging investing

April 10, 2012

Americas: Lodging

Equity Research

The essentials of lodging investing

Industry context

This is the place either to start research on this diverse $128 billion

industry or to brush up on a specific industry topic. We explain what to

look for in a lodging franchise, detail the most pressing questions facing

the industry, and discuss operating metrics and profit drivers.

Steven Kent, CFA (212) 902-6752 [email protected] Goldman, Sachs & Co. Goldman Sachs does and seeks to do business with

companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Eli Hackel, CFA (212) 902-9672 [email protected] Goldman, Sachs & Co. Robert Pokora (212) 902-2632 [email protected] Goldman, Sachs & Co.

The Goldman Sachs Group, Inc. Global Investment Research

April 10, 2012 Americas: Lodging

Goldman Sachs Global Investment Research 2

Table of Contents

Overview: What’s new in this issue 3

From the analyst’s desk: Hotel stocks’ outperformance maybe measured in years not months 4

What could go right? 7

What could go wrong 11

Industry profile 13

Size, segmentation, and history of the lodging industry 14

How hoteliers make money and generate returns 22

Lodging fundamentals 26

We expect the Marriott brand to begin to pick up vs. its peers; Courtyard should benefit from refreshes 33

How big is “big”? Potential earnings power 39

Detailed assumptions and models surrounding our analysis 43

Ways to grow lodging companies 47

Supply is still not a concern in the United States 49

*New* While supply growth is low, the US still represents a great growth opportunity for the brands 54

A closer look at timeshare operations 60

A closer look at timeshare operations 60

A look at hotels from a global perspective 69

*New* Global c-corps and REITs with gateway exposure to benefit from growing Chinese travel 73

A closer look at lodging REITs – One of our favorite ways to directly benefit from the recovery 82

Key industry risks 84

Lodging consumer characteristics 85

Analysis of industry competitors 86

Top 10 brand franchise characteristics 88

What to ask company management 89

Valuation 90

Key earnings drivers 94

Economic and demand indicators 95

Analyzing lodging performance 96

Appendix I: Industry terminology 98

Disclosure Appendix 100



Overview: What’s new in this issue

This revised lodging primer contains several new items, including an analysis and

discussion of the following topics:

From the analyst’s desk

In the analyst’s desk section of the revised lodging primer we explain why we believe that

outperformance may be measured in years, not months.

While supply growth is low the US still represents a great growth

opportunity for the brands

In this section we wanted to see what brands were still being built and which ones were

able to get the most conversion activity. While there has been and we expect there will

continue to be low supply growth in the US it is still a market that should open 75,000 net

new rooms over the next three years, and it provides a good opportunity for brands to

grow their units through both new builds and conversion.

Global c-corps and REITs with gateway exposure to benefit from

growing Chinese travel

We took another look at the Chinese hotel market on both an intra country as well as

outbound level. While it is almost cliché at this point for the large brands to talk about how

many hotels they have in the pipeline in China, the fact is that demand is growing

extremely rapidly both intra China as well as outbound. We think both the c-corps and

REITs will benefit from this trend.



From the analyst’s desk: Hotel stocks’ outperformance maybe

measured in years not months

In the next few pages we lay out our thesis for continued hotel stock outperformance. After

a difficult 2011 when the group underperformed, 2012 is off to a strong start with hotel

stocks showing outperformance. In the next few pages we note that the thesis has not

changed much, and might even be viewed as boring, but that assessment should not

dissuade investors from buying this sector. We are as confident about the group’s potential

for outperformance as when we upgraded it in May 2009. The lack of supply and steady

demand should lead to continued earnings and alpha growth.

Steady should not be viewed as uninspiring

We would continue to be broad-based buyers of the hotel sector as we expect demand to

surprise to the upside while the slow supply growth environment takes away at least half

of the historical risk of the sector for the next few years. The lack of supply as a risk should

not be minimized as we note that hotel stocks have historically trended higher when supply

was trending lower (see Exhibit 1). At the same time, demand trends also appear to be

improving with steady employment increases in the US, continued solid demand in Asia,

and Europe trends coming in slightly better than low expectations.

Exhibit 1: Lodging stocks have generally gone higher when supply growth is low Lodging Index includes Marriott, Starwood, Hyatt, Hilton, and Host

Source: FactSet, Smith Travel Research, Goldman Sachs Research estimates.

In some ways hotels, where our thesis has largely remained unchanged for the last three

years, are becoming steady performers, especially relative to the other areas of our

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Lodging Index US Supply Growth

Buy stocks when supply is low or growth is declining...

...sell stocks when supply growth is above its historical growth growth

Low supply growth almost always leads to stock outperformance.



coverage. But we think steady can be good, especially if it means solid appreciation over

the next couple of years. This is exactly what we are forecasting as we think the real

contrarian call right now is that the lodging cycle will be measured in years not quarters. At

the core of our bullish call on hotels stocks is our belief that supply growth will be lower

than employment growth. Simply put, more people with jobs versus more rooms opening

is good for hotel operations and stocks performance (see Exhibit 2). As this trend plays out

portfolio managers should view these stocks as evolving growth/cyclical names with

multiple legs rather than a trade. Our view is your should own the cycle as long as it lasts.

Exhibit 2: Employment growth is outpacing supply growth

yoy % change in US supply (TTM) vs. yoy % change in US employment

Source: Smith Travel Research, Bureau of Labor Statistics, Goldman Sachs research estimates

We are Buy rated on Marriott (CL-Buy), Starwood, InterContinental, Host, and LaSalle as

stocks that will benefit from this environment and because they are generally

geographically diverse. In addition, these stocks benefit from improving operating leverage

given a shift toward more rate-driven RevPAR growth. They should also benefit from

expense reductions that were implemented during the downturn, but we admit this is the

one part of our thesis that we have seen less evidence of. Although we are intrigued by a

number of mid-cap stocks, we have decided to stay on the sidelines on these name as they

do not provide the diversity of earnings stream due to geographic or price point

concentration.

The reasons hotel investing, at its core right now, is maybe relatively uneventful:

First, we get supply data going out for the next three years, and currently in North America

we are at a virtual standstill (see Exhibit 3-4). Investors do not have to even debate whether

a little bit of supply will negatively impact trends or certain markets. It is just not happening.

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2009 2010 2011 2012E

US yoy room supply growth Employment growth yoy

Based on our GS economic team's forecast for

employment and our forecast for US room

supply, we expect employment growth to be

greater than supply growth throughout 2012.

Employment growth outpaces supply growth.

MAR, HOT, IHG, HST, and LHO are our favorites.



Exhibit 3: We expect supply growth in the US to remain

at historically low levels US Supply growth over time

Exhibit 4: The number of rooms under construction

remains at historical lows in the United States Rooms under construction in the United States

Source: Smith Travel Research.

Source: Smith Travel Research, Goldman Sachs Research estimates.

Second, we get weekly RevPAR results, by the end of the quarter we have a general sense

as to how demand trends have impacted pricing trends (see Exhibit 5). We note that YTD

RevPAR growth is coming in toward the high end of our guidance range of 5% to 7%.

Comparisons get slightly more difficult throughout the year, but conference and

convention “deals” set two and three years ago at low prices will also be rolling off, which

should provide an additional tailwind.

Exhibit 5: YTD RevPAR is up 7.0%

Four-week moving average of % change in US RevPAR

Exhibit 6: Group business is still rolling out from the

recession Marriott Hotels & Resorts Group revenue by year booked


Source: Company Data.

Third, there is little fashion risk in the group relative to the rest of consumer. Hotels brands

take years to evolve both in a negative and positive direction. We maintain that the end

consumer still picks a hotel based on its location first, price second, and other attributes

(frequent guest program, amenities, design) as distant tertiary issues.

With supply in check, near instantaneous trend updates, and little innovation risk, what

could go right and what could go wrong over the next 12 months?

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We expect supply growth to continue to remain frozen through 2012 as growth levels have been near zero since 2011.

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Booked in 2007, 7%

Booked in 2008, 9%

Booked in 2009, 12%

Booked in 2010, 32%

Booked in 2011, 30%



What could go right?

Global demand drivers and trends come in better

The inflow of business and leisure travelers into the US has increased at an average annual

growth rate of 5% over the past five years. We expect the pace of inbound international

travel to increase, fueled by economic, tourism, and regulation drivers. International

visitors, as measured by arrivals, have increased 9% in 2010 and 6% in 2011 and are

expected to increase in 2012 and 2013 (see Exhibit 7). In addition, international consumers

have a high propensity for gateway cities and global brands, which should benefit some of

our favorite stocks.

Exhibit 7: The number of international arrivals should increase 40% by 2016

International visitor arrivals to the US

Source: OTTI.

The US economy is growing faster than Western Europe, yet the dollar remains depressed,

attracting both business and leisure travelers into the market. The US market remains a top

global tourism draw, and most importantly the US is rolling out initiatives to ease travel

into the market.

According to OTTI projections, the biggest growth countries between 2010 and 2016 should

be China, and Brazil. The number of visitors from overseas is expected to increase by 46%

from 2010 to 2016 (see Exhibit 8).

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Millions of People Arriving % change YoY

The number of international arrivals is rising and appears poised to go even higher.



Exhibit 8: Overseas visitors to the US should increase by 54% by 2016 International visitors to the US

Source: OTTI.

Federal initiatives include (1) increasing visa processing capabilities by 40% in 2012, (2)

ensuring that 80% of visas are processed within three weeks, (3) increasing the Visa Waiver

Program and expanding the Global Entry program, making it easier for frequent travelers

to gain entry into the US. These initiatives will be especially relevant for boosting inbound

traffic from China and Brazil.

We found that the percentage of room nights occupied by foreign travelers has increased

from 7.4% in 2002 to 10.3% in 2010 and is expected to increase to 14.1% in 2016 (this

estimate is based on 2010 data as 2011 data has not been released yet). This assumes that

occupancy at that time is 61%, which is a normal occupancy rate for the US.

We note that this data only looks at overseas markets and not visitors from Canada or

Mexico. If we were to include these markets the numbers would clearly be higher, but

many visitors from these countries are simply coming in for short periods of time (for

example, just for the day) and are likely not the key drivers of increased lodging demand.

Country 2010 2011E 2012E 2013E 2014E 2015E 2016E abs. change % changeGrand Total 59,745 63,154 66,522 70,063 73,668 77,595 81,466 21,721 36%

Canada 19,959 21,358 22,458 23,464 24,544 25,624 26,700 6,741 34%

Mexico 13,423 13,604 14,164 14,799 15,309 15,814 16,313 2,890 22%

Overseas 26,363 28,192 29,900 31,800 33,815 36,157 38,453 12,091 46%UK 3,851 3,889 3,969 4,103 4,292 4,528 4,765 914 24%

Japan 3,386 3,284 3,386 3,462 3,581 3,739 3,857 471 14%

Germany 1,726 1,847 1,904 1,989 2,058 2,126 2,193 467 27%

France 1,342 1,503 1,596 1,686 1,802 1,941 2,083 741 55%

Brazil 1,198 1,497 1,744 1,998 2,205 2,569 2,811 1,613 135%

Korea 1108 1,163 1,247 1,358 1,468 1,581 1,697 589 53%

Australia 904 1,067 1,199 1,360 1,501 1,633 1,753 849 94%

Italy 838 914 942 974 1,007 1,040 1,073 235 28%

China 802 1,098 1,336 1,650 2,049 2,477 2,997 2,195 274%

India 651 670 719 783 846 911 978 327 50%

Spain 640 697 739 769 799 831 865 225 35%

Netherlands 570 604 623 641 660 680 701 130 23%

Colombia 495 505 535 572 601 643 688 193 39%

Venezuela 492 536 563 563 568 574 580 88 18%

Argentina 436 506 562 612 655 701 743 307 70%

Switzerland 391 480 519 545 567 584 601 211 54%

Sweden 372 450 486 515 541 562 579 208 56%

Ireland 360 350 353 357 360 367 375 14 4%



Exhibit 9: Percentage of rooms occupied by overseas

travelers has been increasing The percentage of room nights occupied by overseas

travelers

Exhibit 10: We believe that by 2016 international visitors

could add over 300 bps of occupancy by themselves Each year’s additional occupancy is done on 2016E total

room nights available

Source: OTTI, Smith Travel Research, Goldman Sachs Research estimates.

Source: OTTI, Smith Travel, Goldman Sachs Research estimates.

Given that occupancy is already at peak levels, we think there is potential for a surge in

rates with just some incremental international travel. In order to estimate the impact on

occupancy that these international travelers will have, we looked at the rooms we believe

will come online between now and 2016, which we assumed to be all of the rooms in the

US pipeline, including under construction, final planning, and planning. There were 1.76bn

available room nights in 2011, and doing this analysis we get 1.87bn available room nights

in 2016. Overseas visitors would account for 161 million occupied room nights in 2016, up

from 105 million in 2010 (based on 2010 data, see Exhibits 9 and 10).

While we do not have data related to the amount of time spent in top markets, we feel it is

safe to assume that the majority of overseas travelers spend their time in major cities. It is

therefore more likely that the distribution is more heavily weighted to these top markets

and that occupancy increases could be more severe in these markets. So, while the impact

to the overall industry may be north of 300bps of occupancy, we think it could be

substantially more in some of the more heavily visited major markets such as New York,

Los Angeles, and Miami.

Sustained US GDP growth in 2-3% range plus the potential for upside

Currently the GS Economics team is forecasting GDP growth of 2.2% in 2012 and 2.2% in

2013. We believe this level of growth is supportive to our current RevPAR forecast of 6%

annually for the next few years. At this level of economic activity we expect businesses to

continue to slowly add workers. Most importantly, without an economic downdraft we do

not expect significant layoffs.

The lack of a negative, in this case layoffs, is viewed as a very big positive for us. First, as

we noted, more employees means more business travel. Second, when CFOs make the

decision to lay employees off it is usually accompanied by a dramatic cutback in travel

expenditures. It seems unseemly to hold major conventions or meetings while at the same

time laying employees off. So we generally get concerned when we see layoff

announcements.

The good news is that most companies are financially sound with high cash levels, low

debt, and generally high profit margins. In addition, companies see incremental growth

opportunities, so they are inclined to send their salespeople and leaders out on the road to

ensure that they get their share of this growth.

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% of rooms occupied by international travelors

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Cummulative occupancy benefit from international travelors

GDP growth of 2% to 3% is enough to meet our RevPAR forecasts.



At this point, with expectations for macro growth solid but not a far reach, any upside to

economic growth would also suggest upside to our RevPAR and earnings forecasts. Most

portfolio managers are assuming steady growth, but hotels, given their current high

occupancy, would be one of the first beneficiaries of a surge in economic conditions.

Capital allocation could become a bigger theme

We think hotel stocks have a huge opportunity to embrace their inner capital allocation

stories. The need for capital should diminish over the next few years as US building is at a

standstill, timeshare operations have been exited or are winding down, and international

growth tends to be more low capital franchise/management driven rather then building

owned hotels.

In addition, Starwood, Intercontinental, and Marriott should start to see more cash come

over the transom. Starwood has said it is interested in selling hotels and is expecting the

condo sales at Bar Harbour to contribute at least $80mn in EBITDA in 2012. InterContinental

is also selling properties (Barclay in New York), and 62% of its earnings come from free

cash flow generating franchising. Marriott is 55% fee based and has said it plans on selling

Edition hotels that it has recently acquired.

So with fundamentally strong cash flow and increasingly lower capital expenditures, why

are we not seeing a more aggressive and consistent capital allocation story? We think it is

primarily managements’ mindset that if they start to pay a dividend they will no longer be

a growth stock. Also we expect it is more interesting to start a new brand, enter new

businesses, and buy hotels then to simply pay out a dividend.

Hotel stocks could become bigger dividend and buyback stories.



Exhibit 11: Consumer discretionary capital allocation in 2000, 75% of capital was allocated to growth, but by 2011 the number dropped to 39%. Capital returned to investors has

tripled from 19% to 57%

Source: Goldman Sachs Research estimates.

However, to us it seems there are enough brands out there and there are few “holes” in

the brand portfolio for the major companies, and entering new businesses (timeshare,

assisted living, cafeterias, condos) has been value destroying. Furthermore, focusing on

building same-store profits at existing hotels is the highest return on capital (management

and dollars). In addition, no investor is saying that hotel companies have to stop growing

or being innovative. They want both.

Companies like AutoZone, Bed Bath and Beyond, Coach, and Ralph Lauren have all shown

that they can “do both” and have seen their multiple expand as investor have recognized

these attributes. We expect hotels to start to follow these examples. Also, paying out a

healthy dividend would create a sense of discipline on building more hotels, which may

reduce the surges and cylical boosts on development.

What could go wrong

Financing for new builds could come back

Financing for new builds in the US could come back, creating an unexpected surge in

supply. We have seen few signs of life on financing for small or large hotels in the US.

Use of Cash:

Debt paydown 6% 10% 10% 8% 8% 5% 5% 2% 7% 16% 9% 4% 4% 4%

Invest for Growth 75% 74% 65% 63% 52% 54% 53% 42% 55% 44% 34% 39% 40% 42%

(capex)

Return to Investors 19% 16% 25% 29% 39% 40% 43% 56% 38% 40% 57% 57% 55% 55%

(buybacks + dividends)

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Buybacks

Dividends



Exhibit 12: Commercial real estate loans in the United States are declining US commercial real estate loans

Source: SNL.

We are not naïve to think that hotel companies and developers would stop building based

on their assessment of market saturation. The appeal of building a new facility to take

market share or enhance a real estate investment has too big of an allure. Instead they

have tended to stop building only when capital is in short supply. Any signs that capital is

available would be a possible precursor to building surge, so we are especially focused on

it.

Lower economic growth is the obvious other risk

As much as we noted earlier that any increase in economic activity would be beneficial to

hotel trends, the obvious counterpoint is that a slowdown would be a true negative. In fact,

the hotel stocks traded off dramatically in 2011 when investors’ concerns about a double-

dip recession increased. As of now we are not particularly concerned about this issue.

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Commercial Real Estate Loans in the US



Industry profile

Lodging is an influential economic force

With almost 4.9 million hotel rooms and an estimated $108 billion in total revenues (2011)

generated in the United States alone, the lodging industry has become an influential

economic force. According to the Travel Industry Association, lodging is a critical

component of the overall US travel and tourism industry, which is a $1.8 trillion industry

that pays about $118 billion in federal, state, and local taxes and supports more than 14

million jobs both directly and indirectly.

Highly segmented lodging product controlled by a handful of

lodging participants

The lodging industry is highly segmented with regard to product, with a variety of brands

targeting a wide array of price points and consumer needs. Nearly 71% of the hotels in the

United States are affiliated with a brand, but no one hotel brand accounts for more than 4%

of all hotel rooms in the United States. The end result is an industry comprised of a

multitude of brands that are controlled by a handful of lodging operators. The top nine

hotel companies, ranked by number of rooms in the United States, account for about 2.8

million hotel rooms. These top nine lodging companies continue to increase their share

and now account for around 57% of the total US room supply (see Exhibit 13).

Exhibit 13: Top nine hotel companies ranked by total US hotel rooms based on March 2012 figures

Source: Smith Travel Research, company data, Goldman Sachs Research.

Hotels derive revenues through a variety of means

Hotels aim to “put heads in beds” or “feets in sheets” that is, fill up their rooms with

paying customers. This produces the majority of hotel revenues (more than 60% of

both full service and limited service hotels), but additional revenues are earned from

food and beverage sales, rentals, internet use, spa amenities, and other income.

Depending on the type of hotel (full service or limited service), these additional revenues

can contribute significantly to overall hotel revenues (as much as 38% for full service) or

account for a small percentage of overall revenues (as little as 9% for limited service).

Company

Hilton Hotel Corp. 492,897 10.1% 11Marriott International* 491,808 10.1% 13Wyndham Worldwide 450,788 9.3% 15Choice Hotels International 392,826 8.1% 11InterContinental Hotels Group 373,190 7.7% 9Best Western International 182,160 3.7% 1Starwood Hotels & Resorts 179,600 3.7% 9Accor 112,644 2.3% 14Hyatt Hotels Corp. 109,935 2.3% 8

Total Rooms from Top Nine Companies 2,785,848 57% 91Total Rooms in the US 4,867,183 100%*Excludes timeshare

Total Number of Rooms in the US

Percentage of Total US Rooms

Total Number of Brands Operating in the US

Nearly 71% of hotel rooms in the United States are affiliated with a brand.

In 2011 the lodging industry generated about $108 billion in room revenues.



Size, segmentation, and history of the lodging industry

Size of the industry

In 2011 the US lodging industry took in almost $108 billion in room revenues, according to

Smith Travel Research. Over the past 45 years, the sector has shown compound annual

revenue growth of approximately 6.6% (see Exhibit 14).

Exhibit 14: Lodging revenues moved up 8.8% yoy in 2011 vs. 14.3% decline in 2009

total US lodging industry revenues


The US lodging industry has 4.9 million hotel rooms. The dominant forces in the

lodging sector by number of rooms in the United States are Choice Hotels, Wyndham

Worldwide, Marriott International, and Hilton Hotels, each with about 400,000 or more

franchised/managed rooms. Together these companies control close to 40% of all the

rooms in the United States.

Of the available 4.9 million hotel rooms at the end of 2011, approximately 60.0% were

occupied on average throughout the year, according to Smith Travel Research. This

was 250 bp better than the 2010 occupancy rate of 57.5% but lower than 63.1%

occupancy achieved in the most recent peak year of 2006.

In terms of equity exposure, the hotel industry accounts for 0.23% of the S&P 500

index.

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2008

2009

2010

2011

Total Revenues ($mn)



Exhibit 15: Total revenues for hotel companies and lodging REITS under our coverage,

2011 $ million; IHG does not account for pass-through revenues similar to the US based companies

Source: Company data and Goldman Sachs Research.

RevPAR is driven by economic forces—most important is

employment

Over the years we have looked at many different economic indicators to find that they

generally have a positive correlation with RevPAR growth. The indicator we found to have

the highest r2 is change in employment. The r2 between RevPAR growth in the United

States and the percentage change in employment over the last 20 years is 0.68. This makes

sense as most of the room nights in hotels are from business travelers. On a more basic

level, hotels do well when the economies they are in do well (see Exhibit 16).

Company Revenue

Lodging C- CorpsMarriott International $12,317Starwood Hotels & Resorts $5,624Wyndham Worldwide $4,254Hyatt Hotels $3,698InterContinental $1,768Gaylord Entertainment $952Choice Hotels International $639Orient Express Hotels Ltd. $606Interval Leisure $429

Lodging REITsHost Hotels and Resorts $4,998Felcor Lodging Trust $946Sunstone Hotel Investors $835RLJ Lodging Trust $759

LaSalle Hotel Properties $719

DiamondRock Hospitality $638

Marriott continues to have the highest revenues among hotel companies in the United States due to its large managed hotel portfolio.



Exhibit 16: RevPAR growth is highly correlated to changes in employment yoy change in RevPAR and change in absolute level of employment

Source: BLS, Smith Travel Research, Goldman Sachs Research estimates.

Individual hotels are segmented into brands

The lodging sector is segmented into brands. The lodging industry is highly segmented

as a result of the slow evolution into a multitude of brands. Hotel companies have

developed a variety of brands, which convey to the customer not only consistency and

quality of the property for the best brands but also amenity levels, price ranges,

accommodation types, and service levels. Consumers have been educated to the relative

merits of these variables and know the difference between a full-service Marriott and a

limited-service Hampton Inn based solely on their names.

The end result of the evolution of these many brands is a highly segmented industry with a

multitude of products catering to different types of travelers (business versus leisure),

different price points (high-end versus economy), and different consumer needs (short one-

night stays versus three-to-four week stays).

Hotels are segmented primarily into two types. Hotels are typically divided into two

types: either full-service hotels or limited-service hotels. Full-service hotels are generally

mid-price to upscale hotels featuring restaurants and meeting and convention space and

include more labor-intensive services such as room and concierge service. In contrast,

limited-service hotels typically do not include food and beverage service and have few

additional amenities.

Hotel operators are segmented into owner/operators, managers,

and franchisors

Hotel companies can earn revenues from individual hotels in three ways: they can own,

manage, or franchise hotels. Some hotel companies have portfolios consisting of a mixture

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012E

2013E

Change in Employment Yoy Change in RevPAR



of the three with hotels that they own and operate, hotels that they manage for third-party

hotel owners, and hotels that they franchise. While C-corps can earn their revenues in any

way, hotel REITs are only allowed to own hotels and are not allowed by law to participate

in the management of the properties, although they can make suggestions to their

managers.

Hotel ownership—higher capital risk with greater reward. Hotel ownership is highly

capital intensive, requiring significant investment up-front. Hotel owners bear the direct

costs and typically assume losses for the first 12-24 months of operation until the property

ramps up to profitability. Because initial hotel earnings are often unknown, sometimes

management companies guarantee earnings for the first couple of years to induce owners

to use one of their brands. Full hotel ownership companies are heavily tied to the operating

leverage of the hotel business. In good times, hotel owners reap the benefits as revenues

increase against a highly fixed expense structure. However, the opposite is true in slowing

times as hotel owners feel the full brunt of declining revenues within the same fixed

expense structure. We noticed these negatives to an extreme during the recent downturn

as many REITs (which have no revenues other than ownership revenues) were forced into

very undesirable positions due to a lack of liquidity and higher than desired leverage levels.

On the positive side, ownership allows for greater control of the property and allows for

the benefits of asset appreciation that generally occur over time. Most hotels that are

owned by REITs are fee simple, which means they own the land. However, in some case

they are a lease interest, where they lease the land from another party. In addition, the

hotel owners have the ability to choose who manages the properties, and if they are not

happy with one manager, they can hire another (depending on their contract).

In Exhibit 17 we lay out the typical income statement for an owned full-service hotel.

Rooms normally provide only about 64% of hotel revenues with the next biggest item

being food, which makes up about 19% of revenues. Gross operated profits are typically

close to 30% with income before fixed charges being 26% of sales.



Exhibit 17: Typical income statement of an owned full-service hotel $, 2010


If we look just at the payroll and related expense we can see that labor is approximately

35% of sales (see Exhibit 18).

% of Sales Per available room

Per occupied room night

RevenueRooms 63.6% $35,935 $150Food 18.9 10,677 45Beverage 5.4 3,051 13Other Food & Beverage 4.8 2,717 11Telecommunications 0.5 308 1Other Operated Departments 4.5 2,537 11Rentals & Other Income 2.0 1,109 5Cancellation Fee 0.2 138 1

Total Revenue 100% $56,472 $236

Departmental ExpensesRooms 28.2% $10,135 $42Food & Beverage 76.3 12,546 52Telecommunications 136.8 421 2Other Operated Depts & Rentals 3.5 2,019 8

Total Departmental Expenses 44.5% $25,121 $105

Total Departmental Profit 55.5% $31,351 $131

Undistributed operating expensesAdministrating & General 9.0% $5,077 $21Marketing 7.2 4,084 17Utility Costs 4.4 2,468 10Property Operations & Maintenance 5 2,826 12

Total Undistributed Operating Expenses 25.6% $14,455 $60

Gross Operating Profit 29.9% $16,896 $71

Franchise Fees (Royalty) 0.9% $481 $2Management Fees 3.0% $1,711 $7

Income Before Fixed Charges 26.0% $14,704 $61

Selected Fixed ChargesProperty Taxes 3.6% $2,007 $8Insurance 1.2 659 3Reserve For Capital Replacement 2.1 1,196 5

Amount available for debt service & other fixed charges 19.1% $10,842 $45



Exhibit 18: Payroll & Related Expenses $, 2010


Hotel management—less capital intensive, more brand distribution. Companies that

specialize in management contracts derive fees for managing the day-to-day operations for

third-party hotel owners (sometimes they can also own the hotel). These tasks include

every aspect of running the hotel, from the sales and marketing programs to the hotel

reservations and training of employees.

Management companies derive fees for their services in three ways: (1) base fees

calculated as a percentage of overall gross revenues at the hotel (typically 3%-5% of

revenues); (2) additional fees for services rendered for pre-opening development,

purchasing, marketing, reservations, and advertising for the hotel owner; and (3) incentive

fees, which serve as an additional bonus for outperformance at the hotel profit level.

Incentive fees are typically based on a percentage of adjusted gross operating profits and

are usually only paid if a certain threshold level of profits is achieved. This threshold level

is typically known as the “owner’s priority.” On average, incentive fees can be 10%-30% of

a hotel’s profits after an owner’s priority. However, it is important to note that most

international markets typically do not have owner’s priority agreements. Because there is

no owner’s priority, the incentive fee rates are generally lower, and management

companies typically begin to receive their incentive fees shortly after the hotel opens.

Incentive fees can be very volatile and are one of the ways that managing a hotel is

similar to ownership. For example, in 2007 Marriott earned almost $363 million in

incentive fees but in 2011 earned only $195 million. The positive element is that as

RevPAR and hotel profitably increase, incentive fees should increase quickly (once the

owner’s priority is reached), given the fixed operating structure of hotels.

Hotel management contracts are less capital intensive than outright hotel ownership, but

hotel management companies have been known to contribute through mezzanine loans

and sliver equity to acquire new management contracts, a process that lowers the returns

of what should be a high-return business. In addition, we believe that the market for

getting new management contracts is getting even more fierce, which could reduce returns.

There are also companies that will buy the land for a hotel site and manage the

construction process in order to secure a more favorable management contract. This adds

to their risk profile.

Hotel franchises—more brand distribution, less control of operations. The third way to

make money in hotels is through franchising. Hotel companies that franchise do not own

or manage the hotels but essentially license hotel owners the right to their brand name and

the advantages that come with it. The franchisee benefits from being affiliated with a brand

as it is included in national marketing and advertising programs, central reservation

systems, ongoing training programs for employees, and sales and technology support. In

return for these services, the franchisor receives the following fees: (1) a one-time

Payroll & Related Expenses % of SalesPer available room

Per occupied room night

Rooms 17.7% $5,788 $25Food & Beverage 45.2 6,318 28Telecommunications 298.8 415 2Other Operated Departments 2.8 2,493 12Administrative & General 5.1 2,506 11Marketing 3.1 1,533 7Property Operating & Maintenance 2.7 1,322 6Total Payroll & Related Expenses 34.6% $18,307 $80

Hotel managers typically contribute their brands to the properties and manage everything from reservations to sales and marketing functions.



application fee; (2) recurring royalty fees, which are typically 4%-6% of room revenues and

2%-3% of food and beverage revenues for full-service hotels; and (3) fees for the use of the

franchiser’s central reservation system. The franchisee is also expected to contribute

toward the national marketing and advertising programs.

Franchisors also earn additional fees when hotel transactions occur (a hotel is bought or

sold). Most contracts give the company the ability to charge a re-franchising fee when a

hotel is bought or sold. During the recent downturn these fees have fallen dramatically as

the number of hotel deals has slowed. Generally, while we have seen a pickup in deals, the

number of transactions remains low. We expect a pickup in transaction levels to continue

to increase as the year goes on.

Exhibit 19 details the major differences among the three structures. Exhibit 20 breaks down

the major lodging operators and their brands.

Exhibit 19: Comparison between hotel ownership, management and franchise contracts

Source: Goldman Sachs Research.

Hotel revenues 100% Base fee- 3% to 5% Royalty fee- 4% to 6%Hotel profit 100% Variable - 10%-30% Zero

Incentive fees dependent upon contract: (1) % of profit above set threshold (2) % of total operating profit

Capital Contribution High Variable Minimal

Benefits to hotel corporation

Drawbacks to hotel corporation

* assumes hotel is owned and operated by same hotel company

Greater downside to operations in a slowing economy given the high operating leverage of the business. Ownership companies feel the full brunt as top line revenues slow against a high fixed expense structure.

Tied somewhat to the operating leverage of the business through incentive fees. Less control over maintenance and upkeep at the property level.

No control over property management or upkeep. Brand consistency can be difficult to maintain across a franchise system.

Allows for aggressive unit growth with minimal capital risk. Less susceptible to operating leverage as base fees are taken as a percentage of overall hotel revenues. Total control over day-to-day operations at the property level.

Greater reward during a growing economy given the high operating leverage of the business. 100% control of overall operations.

Vehicle for brand distribution without capital risk. No ties to the operating leverage of the hotel business as royalty fees are taken as a percentage of overall hotel revenues.

Franchise companies contribute modestly to national and international advertising campaigns to promote their brands.

Ownership companies are responsible for 100% of the development costs. Owners can have partners and can receive mezzanine financing, sliver equity, and loans from additional sources.

Management companies have been known to aid hotel owners through mezzanine financing, sliver equity, and loans. On average management companies will take a maximum 20% interest in hotels.

Ownership * Management Franchise

Am

ericas: LodgingA

pril 10, 2012

21G

oldman Sachs G

lobal Investment R

esearch

Exhibit 20: Brand affiliations broken down by company

Source: Company Data; Goldman Sachs Research.

Company Accor Best Western International Wyndham Worldwide Choice Hotels Four Seasons Hotels Hilton Hotels Corp.Owner/manager/franchiser Franchiser Franchiser/Manager Franchiser Owner/Manager Owner/Manager/Franchiser

Brands Sofitel Best Western Wyndham Cambria Suites Four Seasons Conrad HotelsPullman Days Inn Comfort Inn DoubletreeMGallery Ramada Comfort Suites Embassy SuitesNovotel Super 8 Quality Hampton Suite Novotel Hawthorn Suites by Wyndham Ascend Home2SuitesMercure Howard Johnson EconoLodge Hilton HotelsAdagio Travelodge Clarion Hilton Garden InnAll Seasons Knights Inn Sleep Inns Homewood Suites by HiltonEtap hotel Wingate Inns Rodeway Inns The Waldorf-Astoria CollectionIbis Baymont Inn and Suites MainStay SuitesMotel 6 RCI Suburban Extended Stay HotelStudio 6 Microtel Inn & SuitesFormulae 1 TRYP by WyndhamhotelF1 The Resort CompanyOrbis ResortQuest Thalassa sea & spa James Villa HolidaysHotels Barriere cottages4you

HoseasonsNovasolLandal GreenParks

Company Host Hotels and Resorts InterContinental Hotels Marriott International Orient Express Hotels Starwood Hotels & Resorts HyattOwner-REIT Owner/manager/franchiser Owner/Manager/Franchiser Owner Owner/Manager/Franchiser Owner/Manager/Franchiser

Brands Marriott Inter-Continental Marriott Hotels & Resorts No affiliated brand Westin Park HyattRitz-Carlton Crowne Plaza Renaissance Hotels & Resorts Sheraton Hotel AndazHyatt Hotel Indigo Courtyard by Marriott Four Points Grand HyattHilton/Embassy Suites Holiday Inn Residence Inn by Marriott St. Regis Hyatt RegencyFour Seasons Holiday Inn Express Fairfield Inn by Marriott W Hotels HyattFairmont Staybridge Suites TownePlace Suites by Marriott Aloft Hyatt PlaceWestin Candlewood Suites SpringHill Suites by Marriott Le Meridien Hyatt HouseSheraton Holiday Inn Select The Ritz-Carlton Hotel Company L.L.C ElementSwissotel Holiday Inn SunSpree Resorts Marriott conference & centers The Luxury CollectionW EVEN Marriott Executive Apartments

Hualuxe EDITION HotelsAutograph CollectionJ W Marriott Hotels & ResortsMarriott Vacation clubThe Ritz-Carlton Destination ClubGrand ResidencesAC Hotels by Marriott



How hoteliers make money and generate returns

Below we lay out the three ways that hotel companies can make money (hotel

ownership, hotel management, and hotel franchising) and the returns each method

generates. In addition, we give examples of how each of these methods is accounted

for on the income statement and the balance sheet, and we discuss the returns

generated through each method. From these examples, it is clear that revenues

earned on franchise fees provide the highest returns followed respectively by

management and then owned.

In each case illustrated below, we have assumed that the company owns a hotel outright,

manages the hotel for a fee, or franchises the hotel.

We point out that all hotel companies in our coverage universe, with the exception of

hotel REITS, can participate in hotel ownership, hotel management, and hotel

franchising.

We looked at data from the HOST report to get an idea what an “average” full service

hotel income statement may look like. The analysis is done on a per room basis.

Hotel ownership: Returns are modest but capital appreciation is key

For hotels that are owned outright, revenues mainly consist of sales of hotel rooms, food

and beverage, and other revenues such as parking fees, internet usage, and telephone

charges. On the income statement, total revenues generated at the hotel level are recorded

as owned-hotel revenues with associated operating costs. On the balance sheet, the

company records the hotels’ buildings, land, and other assets under property and

equipment.

Exhibit 21 illustrates the revenue stream from a typical owned hotel and the way in which

events are accounted for on the company’s financial statements. We looked at hotel data

for the years 2010 and 2009 to get an idea of how a hotel may look during two different

time periods. We do not yet have data for 2011. The data clearly shows how much the

returns and the margins can drop off during a downturn for a hotel owner.

If we take the NOI and divide it by the assets we get a range of ROA from 6%-7%, and if we

divide by the Equity we get a ROE range of 16%-18%. These returns are lower than the

returns for a management or franchised business model. Hotel owners have higher risk

during economic downturns as sales tend to decline more than costs.

We also point out that not only may these returns and margins be lower; the actual dollar

contribution for an individual hotel is higher when a company owns it outright versus a

hotel where the same company is receiving just the franchise or management fees.

However, what we are not calculating here is the potential to generate returns through

capital appreciation, which has the potential to be significant.



Exhibit 21: Owned hotels—impact on hotel owner’s income statement and balance sheet revenue and expense structure for an owned hotel; $ millions

Source: Company data, Smith Travel Research, Goldman Sachs Research estimates.

Managing hotels: Provides a higher return and margins

The second way that hotels can make money is through hotel management. Hotel

management companies are responsible for the day-to-day running of the hotel and

overseeing the administrative functions, such as hiring and supervising employees. The

hotel manager also provides hotels with services such as a centralized reservation system,

national advertising, and accounting assistance.

In contrast to an owned hotel, a hotel manager does not own the hotel’s land or buildings;

therefore, it does not have property and equipment associated with the managed hotel on

its balance sheet (most of the time). However, in order to “get the contract” the manager

may provide sliver equity, mezzanine financing, or even help with capital costs, which

would then go on the manger’s balance sheet. In this example we do not assume any of

these occur, but in a more practical setting (especially in the United States) they are not

infrequent events.

The manager’s income statement captures management fee revenues, which consist of

base and incentive fees. These fees are paid by the hotel owner (typically a real estate fund,

private equity fund, or REIT) for the services that the manager provides on a day-to-day

basis. Base fees are calculated as about 3%-5% of a hotel’s revenues, and incentives fees

vary considerably but average 10%-30% of a hotel’s profits after an owner’s priority. An

owner’s priority is the amount of operating profits that must go to the owner before any

profits are shared with others, such as a manager—in other words, it is the owner’s

minimum return.

Exhibit 22 illustrates how a manager would account for its management contracts and the

typical returns it would achieve. Here we use the same example hotel as we did for the

owned example, except we are now looking from a manager’s perspective. Again, we

looked at 2010 and 2009 and can see that for both of these years the manager did not earn

any incentive fee as the profit level did not surpass the owner’s priority threshold. We

estimated what the margins would be in each year from looking at various C-corps we

cover. The returns of the business are somewhat difficult to figure out. What should be a

very high return business can see its returns eaten away by competition for the contract

and the brands’ desire for more units and locations.

Hotel OwnershipIncome Statement 2010 2009 Balance SheetRoom Revenue $35,935 $33,054 Assets

F&B and Other $20,537 $19,596 Hotel Investment, Net $150,000

Total Revenue $56,472 $52,650

Debt $90,000

Operating Expense $39,576 $37,164

Equity $60,000

Gross Operating Profit $16,896 $15,486

2010 2009

Management and Franchise Fee $2,192 $2,025 Return on Assets 7% 6%

Return on Equity 18% 16%

Fixed Charges including FF&E $3,862 $3,954

NOI $10,842 $9,507

Profit Margin 19% 18%

Base fees are typically 3%-5% of revenues. Incentive fees are typically 10%-30% of operating profits.

In this example, we are assuming no equity interests or loans to the individual hotels by the hotel manager.



Exhibit 22: Managed hotels—effect on hotel manager’s income statement & balance sheet revenue and expense structure for a managed hotel; $ millions


In terms of risk exposure, the incentive fees tend to be more affected during economic

downturns because they are calculated as a percentage of a managed hotel’s profits.

Nonetheless, management fees are highly profitable because the hotel owners bear all the

direct operating costs. We also point out that the hotel manager does not profit from

providing services, such as national advertising and reservations. The company “pools” all

the fees received from its managed properties for such services and uses them to acquire

the services on behalf of all its managed properties.

As we mentioned above, what we do not look at in this example is the cost of acquiring the

management contract, which can be significant in some cases and can add up over time.

For example, Marriott currently has $846 million of contract acquisition costs on its balance

sheet, and it has $210 million of guarantees to hotel owners.

Franchised hotels: Great source of profit, limited capital exposure

Hotel companies with brands can also franchise their brand names to hotel owners in

exchange for a franchise fee. In this case, the hotel owner is responsible for running the

hotel (they may also hire a third-party management company), and they are entitled to use

one of the brand’s names in exchange for a franchise fee. Accordingly, the brand as the

franchisor would record no assets on its balance sheet associated with the hotel.

Franchise fees are calculated as an initial application fee plus an ongoing royalty fee, which

typically ranges from 4% to 6% of room revenues, plus 3% of food and beverage revenues.

In addition, franchisees must contribute to the brand’s advertising and marketing programs

and pay fees to use its reservation system. The brand collects advertising and other fees on

Hotel ManagementIncome Statement 2010 2009 Manager CapitalRoom Revenue $35,935 $33,054 Sliver Equity??

F&B and Other $20,537 $19,596 Mezzanine Financing??

Total Revenue $56,472 $52,650 Corporate??


GOP $16,896 $15,486


Profit $13,034 $11,532

Owners Priority $15,000 $15,000

4% of Revenue $2,259 $2,106

20% of profits after Owners Priority $0 $0

Total Management Fees $2,259 $2,106

Overhead $1,005 $1,053

Margin 56% 50%

Manager Profit $1,254 $1,053

Franchise fees are highly profitable because the hotelier (Marriott, Hyatt, Starwood) does not incur any of a hotel’s operating costs.



behalf of all its franchised hotels and uses them to pay for these services. The company

does not profit from these activities.

Exhibit 23 depicts how a franchisor would account for its franchised revenues and

expenses on its financial statements. In this example, the franchisor has the highest

margins out of any of the types of hotel revenue generation as it has the lowest level of

costs associated with it. While in our examples we used the same hotel for ownership,

management and franchise, typically lower-segmented hotels tend to be franchised while

higher-end hotels tend to be managed. Given that the hotel franchisor does not have an

investment in its franchised hotel, returns on capital are high.

Exhibit 23: Franchised hotels – impact on franchisor’s income statement and balance sheet revenue and expense structure for the hypothetical franchised hotel; $ millions


Hotel ManagementIncome Statement 2010 2009 Franchisor CapitalRoom Revenue $35,935 $33,054 Corporate??

F&B and Other $20,537 $19,596

Total Revenue $56,472 $52,650


GOP $16,896 $15,486


5% of Room Revenue $1,797 $1,653

3% of F&B $460 $460

Total Franchise Fees $2,257 $2,113

Overhead $880 $845

Margin 61% 60%

Franchisor Profit $1,377 $1,268



Lodging fundamentals

The lodging industry is a highly consolidated (in terms of brands, not owners) and

regulated industry, exhibiting high barriers to entry for new lodging companies. This

creates significant opportunities for existing participants with significant expansion

potential abroad. The building of brands takes time, and new participants are rare.

Growth over the past several years has been shifting away from the United States

and more toward international markets, and we expect this trend could continue as

developing new hotels in the United States remains challenging.

Key economic characteristics

Lodging is part of the hospitality sector, making hotel revenues highly cyclical and

dependent on domestic and international consumer travel. Revenues for hotel

companies (conference/convention/group business) are greatly affected by corporate

travel budgets.

The industry is concentrated into a handful of major lodging competitors, but the sector is

highly segmented with respect to products as no one hotel brand accounts for more than

4% of US hotel rooms. These brands are diversified geographically and by price point, with

the exception of a few niche competitors.

Overall, lodging operators have moved beyond the inflection point after the low end of the

business life cycle in the United States. Margins and operating performance improved

throughout 2011 and have continued into 2012 as RevPAR remains strong. Given that the

sector is highly dependent on business travel and general economic conditions, we expect

that conditions will continue to improve as business travel picks up in line with the rest of

the economy.

High barriers to entry characterize the lodging industry. Particularly in city and resort

locations, regulatory hurdles for new builds are substantial, upfront construction costs and

time are significant, and growth is capital intensive. Barriers for management companies

come in the form of brand recognition and consumer preference, which all take time to

build. Launching a new brand also takes significant capital as most owners are reluctant to

install an “unproven flag.” In this case the brand developers in the early years will look to

put equity into these new hotels or build the hotels on their own in order to get the image

of the new brand out in the open. The need for state-of-the-art reservation systems,

national and international advertising programs, and frequent-guest programs also serves

as a barrier to entry for new participants.

Industry economics

In our view, three key factors influence the lodging sector: (1) supply and demand

dynamics, (2) the state of the overall economy, and (3) the availability of capital.

Low supply growth is key for solid lodging performance. Favorable industry

fundamentals—low supply growth accompanied by solid demand for hotel

accommodation—tend to be positive signals for industry revenue growth rates. Room

supply is a function of the rate of change in inflation-adjusted room rate, availability of

capital, and cost of construction, which are dependent on factors such as the level of

interest rates, regulatory requirements (i.e., zoning approval), and investors’ willingness to

lend.

We believe that supply growth is one of the most important factors for hotel

companies in the long term. On the supply side, we monitor construction starts and new

Lodging revenues are cyclical.

Supply growth is now decelerating, which we expect to continue for several years.



room additions. When supply outpaces demand, occupancy falls, which eventually puts

downward pressure on room rates, thereby pressuring lodging revenues. Investors can

deal with slowing demand because they know that eventually the economy will recover.

However, continued supply growth is difficult to overlook as it creates a permanent

obstacle to overcome in each market.

As shown in Exhibit 24, supply surged in the mid to late 1980s owing to looser lending

practices by savings and loans (S&Ls) and tax advantages for building. Supply

reaccelerated in the early 1990s as a result of the improving capital markets and higher

demand. Supply growth peaked in 2000 and had dipped significantly below the 2.5%

average annual growth rate from 2004-2007 until 2008. The downturn in 2001 helped keep

supply growth low, and it has remained low despite the lodging recovery through 2007,

with RevPAR up 8.5% in 2005, 7.5% in 2006, and 5.7% in 2007. In the late part of the last

decade all of the inputs for strong room growth were turned fully on, which resulted in

room supply growth at over the historical average, which had not been seen since the late

1990s.

However, since the middle of 2008 we have seen a declining room pipeline, which has led

to slowing supply growth. We expect that supply will grow less than 0.5% in 2012 and

possibly under 1% for several years after.

Exhibit 24: Total US lodging industry supply growth has averaged about 2.6 % from 1968

Source: PricewaterhouseCoopers (1967-1986), Smith Travel Research (1987-2009).

New room supply is to come mostly from the Upper Midscale and

Unaffiliated segments

Looking at the different segments of the lodging industry, it appears that supply growth

will be most prominent in the Upper Midscale, with about 29% of existing rooms in the

pipeline, and Unaffiliated, with about 28% of existing rooms in the pipeline (see Exhibits

25-26).

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012TD

We expect supply growth will be below its historical average growth rate of 2.6% for the next couple of years.



Exhibit 25: Most of the supply is coming from the Upper

Midscale and Unaffiliated segment pipeline per segment as a % of total supply, February 2012

Exhibit 26: The segments most advanced in the pipeline

are the Upper Midscale and Upscale % of room in construction/final planning per segments

Source: Smith Travel Research and Goldman Sachs Research.

Source: Smith Travel Research and Goldman Sachs Research.

Hotel companies face the “prisoner’s dilemma” (see Exhibit 27) when determining

unit growth, additional franchise and management contracts, amenity levels, and

other variables. If one hotel develops more aggressively than its competition, it gains

market share and increases profits at the expense of the other hotels in the market. When

all the hotels decide that accelerating unit growth and adding grander amenities will

maximize profits, the resulting overcapacity minimizes revenue gains and reduces profits

for all. The same dilemma occurs when hotels use reduced fees to attract property owners

and use amenities and services to attract the consumer.

The prisoner’s dilemma is further complicated by the conflicting strategies of

management/franchise companies and real estate owners. Management and franchise

companies benefit from unit growth because they gain additional fees and are not as

affected by the deceleration in RevPAR growth rates from increased supply. They do not

have as much operating leverage as the owners of properties do. In contrast, real estate

owners would like to see limited development so that they can continue to raise prices

without facing supply-induced competition. Thus, management companies often accelerate

their unit growth in a downturn to maintain earnings growth, and hotel owners suffer the

consequences. However, we expect that it could be challenging for managers and

franchisors to continue to grow their rooms going forward at least in the US and in Europe,

even if they would like to, as the level of equity required for new construction is higher

than historical levels and financing for deals over $10 million is still hard to obtain even

though there has been economic growth. Even though managers are willing to provide

incentives for development, it is not enough to bridge the gap of the capital structure,

especially for full-service hotels.

2%

7%

25%

2%

29%

8%

28%

0%

5%

10%

15%

20%

25%

30%

Luxury Upper Upscale

Upscale Economy Upper Midscale

Midscale Unaffiliated

Luxury2%

Upper Upscale9%

Upscale31%

Economy2%

Upper Midscale34%

Midscale10%

Unaffiliated12%

In the end, few benefit

from the development

game because

oversupply depresses

returns for all.



Exhibit 27: Prisoner’s dilemma


Availability of capital is an important criterion for growth. The final critical factors are

the availability of capital for development and capital maintenance opportunities. Hotels

can increase revenues by adding to their unit count or making acquisitions. Both of these

options depend on the availability of capital. Equally reliant are projects to refurbish

properties or change hotel brands. The lender’s receptivity to providing capital for these

sizable investments is influenced by interest rates and the operator’s existing debt levels. In

addition, lenders have increased their requirements on borrowers, such as personal

guarantees and requiring greater levels of equity than in the past.

There have been few large deals as of late

In the late 1990s, we saw extensive consolidation in the lodging industry as the larger

competitors acquired more brands and disposed of their hotel assets. The larger, more

mature ownership companies (e.g., Hilton) acquired management and franchise vehicles

(e.g., Promus) to diversify revenues and broaden their business mix. Other companies such

as Marriott, which already had a diverse portfolio of products, selectively acquired

additional brands (Renaissance, Ritz Carlton) to fill market niches and price points in their

hotel portfolios.

The larger, more mature hotel companies had a distinct advantage in this consolidation

trend, using their larger balance sheets and less expensive sources of capital to acquire

competitors and niche operators. These mergers have helped the larger corporations to

build out their systems, taking advantage of economies of scale to increase profits. Cross-

selling opportunities have also been a dominant driver of increased market share for the

larger operators that are now operating with a variety of brands in a variety of locations

and price points.

Toward the end of 2005 and into 2006, we saw the second leg in this public consolidation

trend following the lodging downturn at the turn of the century. The focus shifted more

toward increasing international exposure, and Hilton Corporation, based in the United

States, completed its purchase of Hilton International, while Starwood acquired the Le

Meridien brand. Late 2006 and the early part of 2007 saw a significant rise in activity from

private equity funds that have purchased lodging companies such as Hilton Hotels

(acquired by Blackstone for $26 billion), and Equity Inns (acquisition by Whitehall was

completed in October 2007). Another key acquisition was the management buyout of Four

Seasons, which included Kingdom Hotels and Cascade Investments. However, for the most

part, these were the last major deals to be done. As the credit markets started to

Company ADON'T BUILD BUILD

WIN/WIN LOSE/WIN

D

ON

'T B

UIL

D

B

UIL

D

Com

pany

B

WIN/LOSE LOSE/LOSE



deteriorate and the CMBS market in particular broke down, the major driver of hotel

financing began to evaporate.

Only one deal was done in 2008 when Wyndham Worldwide acquired the US franchise

systems. Soon after that the economy went into a recession and consolidation activities

came to a halt due to the absence of liquidity.

More recently there have been a few large-scale deals out of former LBO portfolios. For

example late in 2010 a group acquired Extended Stay out of bankruptcy; in 2011 CNL,

Highland, and Innkeepers were all acquired in some form of restructuring process; and in

2012 Interval Leisure Group purchased Vacation Resorts International (see Exhibits 28-29).

Exhibit 28: Lodging deals – 1998-present does not include individual hotel sales

Source: Company data, Goldman Sachs Research estimates.

Date Acquiror Acquiree

Total consideration

($mn)Forward

EV/EBITDAFebruary-12 Interval Leisure Group Vacation Resorts International NA NAMay-11 Chatham Lodging Trust, Cerberus Innkeepers USA 1130 NAMarch-11 Ashford Hospitality Highland Hospitality 1300 NAJanuary-11 Paulson & Co. CNL Hotels NA NAOctober-10 Paulson & Co., Blackstone, Centerbridge Extended Stay 3900 NAJune-08 Wyndham Worldwide U.S. Franchise Systems (from Hyatt) 131 13.0xJuly-07 Blackstone Hilton Hotels 26000 13.4xJune-07 Whitehall Equity Inns Inc 2190 13.1xApril-07 JER Partners Highland Hospitality 2000 14.3xApril-07 Citigroup and Westbridge Hospitality Fund LP Red Roof Inn (Accor) 1320 11.2xApril-07 Apollo Investment Corp Innkeepers USA Trust 1500 12.0xApril-07 Lightstone ESA (Blackstone) 8000 13.3xMarch-07 Inland American Winston Hotels 797 11.6xJanuary-07 Morgan Stanley Resort Holdings CNL Hotels (8 luxury assets) 4200 15.4xJanuary-07 Ashford Hospitality CNL Hotels (51 assets) 2400 11.1xNovember-06 Kingdom Hotels/Cascade/Triples Holdings Four Seasons 3696.2 37.3xFeb-06 Blackstone Group Meristar Hospitality 2600 13.0xJan-06 Colony Capital / Kingdom Hotels Fairmont Hotels and Resorts6 3900 16.4xDec-05 Hilton Hotels Corp Hilton Group PLC 5710 11.3xNov-05 Host Marriott Starwood 4096 11.4xNov-05 Blackstone Group La Quinta Corp. 3400 14.4xJul-05 Colony Capital Raffles Hotels & Resorts 1720 12.3xJun-05 Blackstone Group Wyndham International 3240 14.3xFeb-05 JQH Acquisition LLC John Q. Hammons 1294 10.8xDec-04 Hyatt Corp. AmeriSuites 650 NAOct-04 Blackstone Group Boca Resorts, Inc. 1250 12.9xAug-04 Blackstone Group Prime Hospitality 790 11.3xJul-04 La Quinta Baymont 395 10.5xMar-04 Blackstone Group ESA 3100 13.5xFeb-04 CNL Hospitality KSL Recreation 2200 11.5xMay-03 CNL Hospitality RFS Hotel Investors 688 10.4xSep-02 Westbrook Hotel Partners 13 hotels from Wyndham International 447 8.5xAug-02 Accor Dorint 50 6.0xMay-02 MeriStar Hotels & Resorts Interstate Hotels Corp 260 7.6xFeb-02 NH Hoteles Astron 152 9.0xMay-01 Nomura Le Meridien 2640 9.5xMay-01 Felcor Lodging Trust Meristar Hospitality 2650 7.8xApr-01 Hilton Group Scandic 962 10.0xApr-01 Raffles Holdings Swissotel 241 10.4xApr-01 Six Continents Posthouse 1156 7.9xApr-01 MacDo -ld/Bk of Scotland Heritage Hotels 335 5.9xJul-00 Sol Melia Tryp Hoteles 356 9.2xApr-00 NH Hoteles Krasnopolsky 738 9.6xApr-00 Scandic Hotels Provobis 70 10.2xFeb-00 Six Continents (formerly Bass Plc) Bristol Hotels & Resorts 156.1 10.1xNov-99 Whitbread Swallow 1122 12.2xSep-99 Millennium & Copthorne Regal Hotels 640 8.7xSep-99 Hilton Hotels Corp Promus 4270 9.4xJul-99 Accor SA Red Roof Inns 1175 7.8xMay-99 Accor/Blackstone/Colony CGIS (Vivendi) 494 13.5xApr-99 Jurys Hotel Doyle Hotel Group 335 7.7xApr-99 Management & Westbrook Funds Sunstone Hotel Investors 886 9.4xFeb-99 Hilton Group Stakis 2194 11.5xJan-99 Marriott International ExecuStay 134 -Jun-98 Krasnopolsky Golden Tulip 266 10.6xApr-98 Host Marriott 13 Luxury Hotels from the Blackstone Group 1766 9.7xApr-98 Blackstone & Colony Savoy 908 18.5xMar-98 Felcor Lodging Trust Bristol Hotel Company 1718 8.3xMar-98 CapStar American General Hospitality 1085 8.7xFeb-98 Six Continents Inter-Continental 2889 14.7xJan-98 Meditrust La Quinta Inns 3061 10.4xAverage 2093 11.7x



Exhibit 29: Hotel deals and their multiples


Individual hotel sales have picked up

REITs have been the primary buyer of individual hotels, with transaction activity picking up

in 2011 and in 2012 ytd. For the most part the deals have come in the major urban centers

of the country such as New York, Boston, Chicago, Washington DC, San Diego, and San

Francisco. While deals in these markets should continue, we expect that deals will start to

spread outside these areas as pricing has increased significantly.

6.5

7

7.5

8

8.5

9

9.5

10

10.5

11

11.5

12

12.5

13

13.5

14

14.5

15

15.5

16

16.5

17

17.5

18

Jun-03 Jan-04 Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08

Hilton Group PLC(11.3x)

= $1bn consideration

Red Roof Inn (11.2x)

Innkeepers USA Trust

(12x)

Blackstone exited ESA (13.3x)

Equity Inns(13.1x)

Hilton Hotels(13.4x)

Highland Hospitality(14.3x)

Fairmont(16.4x)

Wyndham International(14.3x)

Boca Resorts(12.9x)

Starwood (11.4x) Wyndham portfiolio of

25 hotels (10X)

John Q Hammons (10.8X) Baymont

(10.5x)

Prime Hospitality(11.3x)

KSL Recreation(11.5x)

ESA (13.5)

La Quinta(14.4x)

Meristar(13.0x)

Winston Hotels(11.6x)

Boca Resorts(12.9x)

Raffles Holdings (12.3X)

8 luxury CNL assets (13.3x)

USFS(13.0x)



Exhibit 30: Recent lodging deals 2006-2012 YTD

Source: Company data, Goldman Sachs estimates.

Date Name of the property Total # of rooms Total amount paid ($mn) Price per key REIT/Hotel Company involvedMar-12 San Fransisco Airport Marriott 685 $112.70 $164,526 Host Hotels

Mar-12 Hotel Palomar 335 $143.80 $429,254 LaSalle

Feb-12 Knickerbocker Hotel 330 $115.00 $348,485 FelCor

Jan-12 The Park Central Hotel 934 $396.20 $424,197 LaSalle

Oct-11 Villa Florence 182 $67.20 $369,231 LaSalle

May-11 JW Marriott Denver 196 $72.60 $370,408 DiamondRock Hospitality

May-11 Radisson Lexington Hotel 712 $335.00 $470,506 DiamondRock Hospitality

May-11 New York Palace Hotel 899 $400.00 $444,939 Northwood Investors LLC

May-11 W Chicago 368 $128.80 $350,000 Chesapeake(Buy)/Starwood(Sell)

Apr-11 Mondrian Los Angeles 237 $137.00 $578,059 Pebblebrook Hotel Trust

Apr-11 The Royaltons and Morgans 282 $140.00 $496,454 Felcor

Apr-11 Hotel Monaco, Seattle, Washington 189 $51.20 $270,899 Pebblebrook

Apr-11 Westin Gaslamp Quarter hotel 450 $110.00 $244,444 Pebblebrook

Mar-11 JW Marriott New Orleans 494 $93.80 $189,879 Sunstone

Mar-11 Viceroy Santa Monica 162 $80.10 $494,444 LaSalle

Feb-11 Courtyard Washington Capitol Hill 204 $68.00 $333,000 Chesapeake

Feb-11 Manchester Grand Hyatt, San Diego 1625 $570.00 $350,769 Host Hotels

Jan-11 New York Helmsley Hotel 775 $313.50 $404,516 Host Hotels

Jan-11 Sheraton Bloomington Hotel 564 $20.00 $35,461 LaSalle

Jan-11 Hilton Washington D.C 496 $121.00 $243,952 Crow Holdings Realty Partners V, L.P

Jan-11 Argonaut Hotel , San Francisco 252 $84.00 $333,333 Pebblebrook

Dec-10 Le Meridien, San Francisco 360 $143.00 $397,000 Chesapeake

Dec-10 Sheraton Tyson Corner Hotel 443 $84.50 $190,745 Felcor

Dec-10 Sheraton Premiere Hotel, Virginia 443 $84.50 $191,000 Felcor

Dec-10 Chamberlain, West Hollywood, California 113 $38.50 $340,708 LaSalle

Nov-10 Sheraton Delfina, Santa Monica 310 $102.80 $331,613 Pebblebrook

Nov-10 Grand Hyatt, Tampa Bay 445 $58.50 $131,461 Hyatt

Nov-10 Skamania Lodge, Bethesda 254 $55.80 $219,685 Pebblebrook

Nov-10 Milford Plaza Hotel 1300 $200.00 $153,846 Milstein Family

Oct-10 Hotel Roger Williams, New York 193 $94.50 $489,637 LaSalle

Sep-10 St. Regis Aspen 179 $70.00 $391,061 Starwood

Sep-10 Westin City Center Dallas 407 $50.00 $122,850 LaSalle

Sep-10 Grand Hotel Minneapolis 140 $33.00 $235,714 Pebblebrook

Sep-10 Hilton Garden Inn, New York City 169 $68.40 $404,734 DiamondRock

Sep-10 Monaco Washington D.C 183 $74.00 $404,372 Pebblebrook

Sep-10 Hotel Monaco, San Francisco 201 $68.50 $340,796 LaSalle

Sep-10 Westin Philadelphia 294 $145.00 $493,197 LaSalle

Sep-10 Embassy Suites Philadelphia 288 $79.00 $274,306 LaSalle

Sep-10 Seaview Resort, Atlantic City 297 $20.00 $67,340 LaSalle

Aug-10 Royal Palm Hotel, Miami Beach 409 $117.00 $286,000 Sunstone

Aug-10 The Fairmont Copley Plaza, Boston 383 $98.50 $257,000 Felcor

Aug-10 Boston Marriott Newton , Massachusetts 430 $77.25 $180,000 Chesapeake

Aug-10 Courtyard Anaheim 153 $25.00 $163,000 Chesapeake

Jul-10 Le Meridien, Picadally London 266 $148.00 $556,391 Host Hotels

Jul-10 Westin Chicago North River 424 $165.00 $389,151 Host Hotels

Jul-10 W New York 270 $185.20 $685,926 Host Hotels

Jul-10 Renaisssance Charleston, South Carolina 166 $39.00 $234,940 DiamondRock

Jul-10 InterContinental Buckhead Hotel , Atlanta 422 $105.00 $248,815 Pebblebrook

Jun-10 Sir Francis Drake Hotel, San Francisco 416 $90.00 $216,346 Pebblebrook

Jun-10 Hilton Minneapolis 821 $155.50 $189,403 DiamondRock

Jun-10 DoubleTree Bethesda hotel 269 $67.10 $249,442 Pebblebrook

Jun-10 Buckingham Hotel 100 $60.00 $600,000 UBS Realty

Mar-10 Helmsley Carlton House 157 $169.40 $1,078,981 Helmsley Spear / Angelo Gordon

Feb-10 Holiday Inn Express Times Square 210 $56.50 $269,048 McSam Hotel Group/ Hersha

Feb-10 Candlewood Suites Times Square 188 $51.00 $271,277 Hersha

Feb-10 Hampton Inn Times Square 184 $56.00 $304,348 Hersha

Feb-10 W New York Court 198 $90.50 $457,071 Starwood Hotels

Feb-10 W New York Tuscany 130 $59.50 $457,692 Starwood Hotels

Mar-10 Sofitel Washington D.C 237 $96.00 $405,063 LaSalle

Oct-09 Windsor Court Hotel, New Orleans 264 $44.25 $167,614 Orient Express

Jul-09 W San Francisco 404 $90.00 $222,772 Starwood

Jun-09 Marriott Riverside, California 292 $19.30 $66,096 Sunstone

May-09 Marriott Napa, California 274 $36.00 $150,000 Sunstone

Jun-08 Hyatt Regency, Century Plaza, LA 726 $366.50 $505,000 Sunstone

Dec-07 Spring Hill Suites, Buckhead, Atlanta 220 $36.00 $163,636 DiamondRock

Dec-07 Sheraton Salt Lake City, Utah 326 $33.30 $102,147 Sunstone

May-07 Marriott Boston Quincy Hotel 464 $116.60 $251,000 Sunstone

Mar-07 Boston Marriott Long Wharf hotel 402 $228.20 $568,000 Sunstone

Jan-07 Westin Boston Waterfront hotel, Boston 793 $330.30 $416,520 DiamondRock

Jan-07 La Guardia Marriott Hotel 438 $69.00 $157,534 LaSalle

Jan-07 LAX Rennaissance Hotel, Los Angeles 499 $65.00 $130,000 Sunstone

Dec-06 Doubletree Guest Suites , Times Square 460 $68.50 $148,913 Sunstone

Dec-06 Holiday Inn Express 170 $5.25 $30,882 Sunstone

Dec-06 The Graciela burbank, California 99 $36.50 $368,687 LaSalle

Dec-06 Renaissance Waverly, Atlanta 521 $130.00 $249,520 DiamondRock

Dec-06 Renaissance Austin, Texas 492 $107.50 $218,496 DiamondRock

Nov-06 Allerton Crowne Plaza, Chicago 443 $70.00 $158,014 Felcor

Nov-06 Conrad Chicago Hotel 311 $117.50 $377,814 DiamondRock

Sep-06 Holiday inn , Wall Street, NY 138 $51.50 $373,188 LaSalle

Aug-06 Hotel Solamar, San Diego 235 $87.00 $370,213 LaSalle

Jun-06 W San Diego 259 $96.00 $370,000 Sunstone

Jun-06 Alexis hotel, Seattle 109 $38.00 $348,624 LaSalle

May-06 Westin Kierland Resort & Spa 732 $393.00 $536,885 Host Hotels

May-06 Embassy Suites, La Jolla 335 $100.00 $298,507 Sunstone

May-06 Westin Atlanta North, Atlanta 369 $61.50 $166,667 DiamondRock

Mar-06 Chicago Marriott Downtown 1192 $295.00 $247,483 LaSalle

Mar-06 Hilton Times Square 444 $242.50 $546,171 Sunstone

Mar-06 Holiday inn, Hollywood 160 $25.90 $161,875 Sunstone

Mar-06 Chicago Marriott Downtown, Chicago 1192 $295.00 $257,000 DiamondRock

Feb-06 Blued hotel Chicago 367 $114.50 $311,989 LaSalle

Jan-06 Parc Suite Hotel , West Hollywood , California 154 $47.00 $305,195 LaSalle

Jan-06 Westin Michigan Avenue, Chicago 751 $215.00 $286,285 LaSalle

Jan-06 San Diego Marriott Del Mar 284 $69.00 $243,000 Sunstone



We expect the Marriott brand to begin to pick up vs. its peers;

Courtyard should benefit from refreshes

We have taken a look at how several brands from Starwood and Marriott performed vs.

each other and their chain scales. For Marriott, RevPAR in real terms and property-level

margins are materially below their peak, and we believe Marriott is poised to return to

those historical levels. Marriott is making renovations to Great Rooms and starting to see

increased guest satisfaction, intent to return, F&B per room, and profit. It is also seeing

RevPAR index up 500bps above non renovated hotels. Marriott has one-quarter of hotels

with the new lobby now and expects half done by 2013. Last year investors started to

question whether there was a specific issue at Marriott that was causing its RevPAR growth

to be less robust than that of the industry and of Starwood. Our analysis suggests that the

Marriott brand (not to be confused with the corporation) has experienced some

underperformance relative to the Sheraton brand in North America over the last year but is

beginning to regain traction, and we think that will continue as group business returns.

However, some of this underperformance is simply because the Sheraton brand fell more

in the recession, creating easier comparisons. In addition, the Marriott brand grew faster

toward the end of the last cycle, creating tougher comparisons. One of the reasons for this

latent strength is Marriott’s focus on group business, which strengthened prior to the

economic downturn. We also analyzed the Marriott brand vs. the upper upscale chain and

found that it tends to outperform during the mid to late part of cycles. This supports our

contention that because of Marriott’s group focus, it tends to show strength, thereby

creating tougher comparisons.

We also looked at Marriott Corporation’s other price points. In this case it does appear that

Starwood’s luxury brand St. Regis is showing greater growth recently than Marriott’s high-

end Ritz Carlton. These two brands grew at similar rates during the last boom, so they have

similar, easier/weaker comparisons. However, in the past year the St. Regis brand has been

growing more rapidly.

Finally, we looked at Courtyard by Marriott, and found that this brand routinely

outperformed the upscale chain in the 1990s but has only outperformed half of the time

since then, suggesting that this brand may be struggling. However, we believe Marriott is

beginning to reverse this trend through its extensive Courtyard lobby renovation program.

So far, in the Courtyards with the new lobby, F&B sales are up 45% and the profit is nearly

double.

We focused on brands from Marriott and Starwood because they are the most widespread

branded companies in our coverage for the higher-end segments. We do not believe that

Hyatt has a large enough footprint to be as comparable, and Intercontinental is more

concentrated in the midscale segment. Hilton would have been appropriate, but the

company is private and does not disclose data. While there are clearly differences in the

geographies between Marriott’s and Starwood’s hotels, we believe they are broad enough

to permit us to derive general trends.

Sheraton is outperforming on growth but partially due to

underperformance in the downturn

We looked back at quarterly trends since 2005 for RevPAR growth of the Marriott Hotels

and Resorts brand vs. the RevPAR growth of the Sheraton brand in North America (see

Exhibit 31). While we would have preferred to review a longer period of time (Starwood

has Sheraton data only back to 2005), we believe we can extract trends from this data

series.

Sheraton fell more, creating an easier relative setup.

Ritz Carlton and Courtyard seem to be underperforming recently.



First, the Sheraton brand outperformed in the beginning of the last cycle and has been

outperforming again in the beginning of this cycle. However, in 2005 and 2006 Sheraton

RevPAR growth was 10% on average while Marriott was 9% on average (we used the

simple average). But if we look at 2007 and 2008 the Marriott brand grew faster at 3% vs.

Sheraton at only 2%. From 1Q2010 to 1Q2011 the differences are a little more dramatic:

Sheraton RevPAR had grown 8% on average vs. 4% on average for the Marriott brand.

However, we have begun to see a convergence between the two brands over the last year

as we extend further into the recovery.

Second, the Marriott brand experienced slight outperformance during the downturn. If we

look at 2009 the Marriott brand went down 18% while the Sheraton brand went down 19%.

Our conclusion from this analysis is that fears that the Marriott brand has somehow lost its

way seem misplaced. The trends maybe simply be following an historical cycle, creating

easier/tougher comparisons. Our view is that Marriott RevPAR growth will likely move

closer to that of Sheraton and may even outperform as the cycle moves forward.

Exhibit 31: Marriott Hotels and Resorts brand tends to outperform during the late part of

the cycle Quarterly RevPAR growth


If we look from an absolute RevPAR perspective we can see that Sheraton RevPAR during

the last up cycle came close to but never overtook Marriott RevPAR. In the later part of the

cycle Marriott RevPAR widened its lead on Sheraton, and now that the cycle has turned,

the RevPARs are again close together.

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

1Q

2005

2Q

2005

3Q

2005

4Q

2005

1Q

2006

2Q

2006

3Q

2006

4Q

2006

1Q

2007

2Q

2007

3Q

2007

4Q

2007

1Q

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2Q

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3Q

2008

4Q

2008

1Q

2009

2Q

2009

3Q

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4Q

2009

1Q

2010

2Q

2010

3Q

2010

4Q

2010

1Q

2011

2Q

2011

3Q

2011

4Q

2011

Marriott RevPAR Growth Sheraton RevPAR Growth

Sheraton RevPAR grew faster in 2005-2006 but Marriott grew faster in 2007-2008

So far this upcycle Sheraton is growing faster.

Sheraton RevPAR fell more during the downturn



Exhibit 32: Marriott Hotels and Resorts RevPAR and Sheraton RevPAR move close during

the beginning of cycles and apart during the end and downturns


A final way we compare the Marriott Hotels and Resorts brand vs. Sheraton is by looking at

the relative ratio of the two on an annual basis (see Exhibit 33). The exhibit shows that

Marriott had the greatest relative RevPAR to Starwood during the worst part of the

downturn in 2009 and then again last year in 2011.

$-

$20

$40

$60

$80

$100

$120

$140

$160

1Q

2005

2Q

2005

3Q

2005

4Q

2005

1Q

2006

2Q

2006

3Q

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4Q

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1Q

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2Q

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2011

2Q

2011

3Q

2011

4Q

2011

Marriott Absolute RevPAR Sheraton Absolute RevPAR

Sheraton absolute RevPAR moved close to Marriott during the earlier

part of the last upcycle.

Marriott pulled away from Sheraton in 2007-2009.

Sheraton is again catching up with Marriott during the early

part of this cycle.



Exhibit 33: Marriott rates peak relative to Starwood in downturns


We are not completely sure why this anomaly seems to be appearing, but we can suggest

two possible reasons. First, we believe that Marriott in general may have slightly better

positioned hotels on average. During downturns it tends to hold up better than the

Sheraton hotels as a group. Second, Marriott may tend to have larger hotels and to do

larger group business, which is more late cycle and, because it is booked far in advance,

generally holds up during downturns. While Starwood does do significant group business,

our sense is that Marriott groups are likely larger than Starwood groups on average.

Earlier last year, Marriott had been having some issues with the rollout of its Sales Force

One initiative, which had affected the booking of group meetings. This may have come into

play with the Marriott Hotels and Resorts brand’s underperformance in 2011, but through

our discussions with hotel owners and the managers of lodging REITs, we believe this

issue is in the process of being corrected, if not corrected already.

Marriott Hotels and Resorts going through a normal cycle, while

Courtyard may begin to come around due to recent renovations

We also took a deeper look at how Marriott’s brands perform relative to the broader

industry. To do this we looked at the Marriott Hotels and Resorts brand as well as the

Courtyard brand versus their chain brand segment, as defined by Smith Travel Research.

Our conclusion is that Marriott Hotels and Resorts tends to outperform the chain scale

during the middle to end part of cycles and perform in line with the chain scales during the

down part of cycles. Marriott has also been rolling out its Great Room, which we believe

will begin to increase guest satisfaction, intent to return, and profitability. For the Courtyard

brand we had begun to see a slow degradation vs. the upscale chain over time. However,

104%

106%

108%

110%

112%

114%

116%

$0

$20

$40

$60

$80

$100

$120

2005 2006 2007 2008 2009 2010 2011

Marriott Systemwide NA RevPAR Sheraton Systemwide NA RevPAR Marriott RevPAR relative to Sheraton RevPAR

Marriott’s larger hotels and group focus may result in a slightly slower recovery pace.



due to Marriott’s focus on the Courtyard renovations, we are optimistic on its ability to turn

the brand around.

Exhibit 34: Marriott Hotels and Resorts tends to outperform during the mid to later part of

the cycle Annual RevPAR growth

Source: Smith Travel Research, company data.

From 1990 to 2000 Courtyard outperformed the upscale chains for eight out of the 11 years.

However, from 2001 to 2011 Courtyard only outperformed half of the time. It is difficult to

know exactly why this is the case, but we would note that Starwood has been launching a

limited service strategy and Hyatt is also going after this segment. We note that we expect

the Courtyard brand to see relative strength on a go-forward basis. Marriott has been

updating the Courtyard lobbies and has already begun to see improved F&B spend and

profitability. In the Courtyards with the new lobby F&B sales are up 45% and the profit is

nearly double. They currently have the new lobby in half of the domestic hotels.

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Marriott Hotels and Resorts RevPAR Growth Upper Upscale RevPAR Growth

Marriott underperformed the chain scale in the early part of the 1990s cycle and the 2000s

Marriott performed inline with the chain scale during the last two downturns.



Exhibit 35: It seems that Courtyard has lost some of its outperformance Annual RevPAR growth

Source: Smith Travel Research, company data.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Courtyard RevPAR Growth Upscale RevPAR Growth

The Countyard brand outperformed the upscale chain scale throughout the 1990s.The Countyard brand outperformed the upscale chain scale throughout the 1990s.

The Countyard brand has seen less outperformance in the 2000 and had been

underfoerfmring the chain Scale since 2008.



How big is “big”? Potential earnings power

We have updated our forward-looking analysis and ask, what will the next earnings

peak be? In other words, how big is “big”? Valuations looking at near-term earnings

may not be fully capturing this rapidly growing and rebounding business.

Our conclusion is that it is likely that the next earnings peak may be higher than the

previous peak. We base this fundamental view on RevPAR’s historical ability to trend

at or above the rate of inflation, unit growth, and cost-cutting initiatives. When we

put current stock prices relative to peak forward earnings, the valuation clearly looks

more compelling. If we discount the earnings back to 2013 (the year on which we

base our price targets), valuations are still below their historical averages. Therefore,

while valuations are above historical averages, if we look at them with respect to the

next projected earnings peak they still appear reasonable.

Because it is difficult to know exactly how the next peak may look, we ran three scenarios.

Scenario one: RevPAR reaches the last nominal peak level (no inflation adjustments).

We further trim this outlook by assuming flat unit count to current levels.

Scenario two: RevPAR reaches the last peak (assuming there is inflation). For this

scenario we assume that next peak’s RevPAR gets back to the prior peak assuming

annual inflation of 2% since the last peak. It also assumes no additional unit growth

from current levels (for Hyatt we assume slightly higher RevPAR given large

disruptions currently due to renovations).

Scenario three: RevPAR reaches the last peak (assuming there is inflation), and all the

rooms in the company’s pipeline come online by the time the next peak occurs. We

use the same inflation assumption as in scenario two.

While scenario three may sound the most aggressive, it is also maybe the most probable

for several reasons. First, historically RevPAR has been able to grow faster than inflation,

indicating it is likely to move higher than the previous peak in real terms. Second,

considering that most of the hotels in the pipeline have financing and real estate clearance,

these hotels are likely to be opened in the next three to four years. In addition, an increased

percentage of the pipeline is outside of the United States in regions where capital is less of

an issue and the need for hotels is very strong.

Exhibit 36 suggests that the next peak would be higher for Marriott, Starwood, and Hyatt

under scenario three. Hyatt’s peak scenario is the highest as the company has made large

acquisitions.

Exhibit 36: We see several ways for the next peak to be higher than the previous peak


If we then take these three scenarios (see Exhibit 37) and look how the companies’

multiples look relative to them, they paint a valuation picture that is less daunting than

looking at more near-term earnings. We looked at all three scenarios with three different



capital structures: the current year, 2012, and 2013. While we assume for computational

purposes that the peak is in 2015, we believe that after 2013 each of these companies’

capital structures may not change dramatically, and therefore for ease of calculation we

only look at these three structures.

The range of multiples we arrive at is 8.7X-11.9X for Marriott, 7.7X-10.4X for Starwood, and

7.8X-12.3X for Hyatt. Currently, Marriott is trading at 12.6X 2013E, Starwood is at 9.9X

2013E, and Hyatt is trading at 10.7X 2013E, so there is still some way to go in terms of

being valued at peak earnings. While we are not suggesting that this will happen during

the next few months, it appears to justify our contention that these stocks should move

higher for an extended period of time as earnings move closer to peak levels.

Exhibit 37: The valuations look much more reasonable under our three scenarios


If we look at this in the context of Marriott, Starwood, and Hyatt, they are all in line to

below their historical averages. Marriott has traded in a range of 7X-17X (average of 12X)

forward EV/EBTIDA; Starwood has traded in a range of 6X-16X (average of 11X) forward

EV/EBITDA; and Hyatt has traded in a range of 9X-17X (average of 12X) forward EV/EBITDA

(see Exhibit 38). We would note that over the past 10 years Starwood has moved to more

of a franchise and management model, and Hyatt does not have much history.



Exhibit 38: Marriott, Starwood, and Hyatt’s historical forward multiples are on average

12X-13X

Source: FactSet.

The next peak looks set to be higher than the last

Our analysis suggests that the next peak in earnings will likely be greater than the previous

peak for Marriott, Starwood, and Hyatt. We base this on three key points:

Unit growth since the last peak is significant. While supply growth in general tends

to weigh on hotel operators’ ability to raise rates, as the demand grows into the supply

having additional rooms does benefit a hotel manager and franchisor. If we assume

that Marriott’s, Starwood’s, and Hyatt’s pipelines come online by 2015, then each

company would show 49%, 51%, and 53% room growth since 2007 (see Exhibit 39). We

believe this is a reasonable assumption considering that the average time it takes to

develop a hotel is two to four years, and some of these hotels are conversions, which

require much less time.

Exhibit 39: Marriott, Starwood, and Hyatt should have over 49% more rooms by the next

peak than at the last peak


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Marriott forward EV/EBITDA Starwood forward EV/EBITDA Hyatt forward EV/EBITDA

Last Peak (2007)

Current Rooms Pipeline

Rooms by 2015

Growth from last peak

Marriott 504,157 643,196 + 110,000 = 753,196 49%

Starwood 272,227 322,300 + 90,000 = 412,300 51%

Hyatt 111,294 132,727 + 38,000 = 170,727 53%



While it is likely that some rooms will be taken out of Marriott, Starwood, and Hyatt

systems over the next several years, it is also likely that additional rooms will be added

to the pipeline. For our analysis we assume that these two effects offset each other.

Low supply growth and history suggest pricing power in the United States. We

are currently in a favorable supply period in the United States given that we believe

that supply will increase by less than 1% in 2012 and 2013. We do not expect supply

growth to accelerate dramatically beyond that as we would need to see a pickup now

given the long lead time required to build a hotel, which we are not seeing. This should

return pricing power to hotels and allow rates to rise back to the previous peak (in

nominal terms) and likely beyond. In addition, many companies are now focusing on

their growth internationally given the stronger relative economic growth rates, which

should further keep a lid on US room supply growth.

If we look back at history (see Exhibit 40) it is clear that US RevPAR has risen faster

than inflation, and the last three RevPAR peaks were all higher than the one before on

a real basis. This gives us confidence that hotels have true pricing power over the long

term.

In our scenario we assume that it takes seven years for real RevPAR to get back to its

previous peak. During the last three cycles it took between five and eight years.

Exhibit 40: Real RevPAR has grown consistently over time Real RevPAR growth


Permanent cost cutting should lead to higher peak margins. While the downturn

severely affected short-term results, it did force hotel operators to re-examine how

they operated. Since the last recession a significant amount of costs had come into

hotel operating structures. One of the most consistent remarks we hear from our

companies is that before the downturn, many hotels simply had too many managers.

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Af ter the last three recessions it look between f ive and eight years for real RevPAR to equal its previous peak.



For example, many hotels may not need an assistant general manager and a general

manager, and the general manager can help out at the front desk when he is not doing

anything else.

Although some occupancy-related costs (such as increased housekeeping costs) will

come back, we believe that many of the expense reductions are permanent. This

should lead to strong profit flow-through once rates begin to increase, which we

expect to occur in the second half of this year. We have already started to see margin

growth, although it has been slow as some unavoidable cost increases such as

employee bonuses and utilities are increasing. However, our view is that these

increases in costs are fast now but will moderate at the same time rate growth is

accelerating.

Detailed assumptions and models surrounding our analysis

Exhibit 41 shows the assumptions we used for the three different scenarios for Marriott,

Starwood, and Hyatt. We chose these three companies because they are broad-based

lodging companies that we believe generally represent the industry. There are clearly

differences between the three companies, and there are also other companies for which

this analysis is not as applicable (most notably the REITs given lack of room growth), but it

does give an idea in terms of what is possible.

Exhibit 41: Assumptions we used in our analysis


Exhibits 42-44 show the models we used to come up with our analysis for Marriott,

Starwood, and Hyatt.

Assumptions for all companies Scenario 1 Scenario 2 Scenario 3RevPAR Equal to 2007 Grow 2007 at inflation until 2015 Grow 2007 at inflation until 2015Inflation 2% 2% 2%Management fees Grow 2012E by increase of RevPAR from 2007Grow 2012E by increase of RevPAR from 2012Grow 2012E by increase of RevPAR from 2012

and half of current room pipeline growth Franchise fees Grow 2012E by increase of RevPAR from 2007Grow 2012E by increase of RevPAR from 2012Grow 2012E by increase of RevPAR from 2012

and half of current room pipeline growth Incentive fees Equal to 2007 Grow 2007 by inflation until 2015 Grow 2007 by inflation until 2015 and half of

current room pipeline growth Owned Revenue Grow 2012E by increase of RevPAR from 2007Grow 2012E by increase of RevPAR from 2012Grow 2012E by increase of RevPAR from 2012Owned Profit Margin Equal to 2007 Company specific increase Company specific increaseTimeshare Profit Equal to 2012E Equal to 2012E Equal to 2012ESG&A Grow at 2% from 2012 to 2015 Grow at 2.5% from 2012 to 2015 Grow at 3% from 2012 to 2015D&A Grow at 2% from 2012 to 2015 Grow at 2% from 2012 to 2015 Grow at 2% from 2012 to 2015UJV EBITDA Company specific increase Company specific increase Company specific increase



Exhibit 42: Marriott analysis


2007 2012E Scenario 1 Scenario 2 Scenario 3Worldwide Systemwide RevPAR $103.19 $96.82 $103.19 $120.90 $120.90

-6% 7% 25% 25%

FeesBase management fees 620 599 638 747 805Franchise fees 439 623 664 778 851Incentive management fees 369 224 396 464 500Total Fee Revenue 1,428 1,445 1,698 1,989 2,156

Owned and OtherOwned and other revenue 1,240 1,099 1,157 1,318 1,318

Owned and other expense 1,062 960 993 1,124 1,124Owned and Other Profit 178 140 164 194 194

margin 14% 13% 14% 15% 15%

TimeshareTimeshare sales and services 1,747 0 0 0 0Timeshare expenses 1,397 0 0 0 0Timeshare profit 350 0 0 0 0

margin 20% 0% 0% 0% 0%

Total Revenues 4,415 2,544 2,855 3,307 3,474

SG&A 768 665 706 717 727Percentage of revenue 17.4% 26.2% 24.7% 21.7% 20.9%

Operating Income 1,188 919 1,156 1,467 1,623D&A 197 144 153 153 153UJV EBITDA 85 17 65 65 65Other adjustments 13 38 16 16 16Adjusted EBITDA $1,483 $1,118 $1,390 $1,701 $1,857

Last peak and 2012 estimate Peak Scenarios



Exhibit 43: Starwood analysis


2007 2012E Scenario 1 Scenario 2 Scenario 3Worldwide Systemwide RevPAR $123.13 $121.21 $123.13 $144.27 $144.27

-2% 2% 19% 19%Owned and OtherOwned and other Revenue 2429 1781 1809 2119 2119Owned and other expense 1805 1435 1344 1543 1543Owned and Other Profit 624 345 465 576 576Margin 26% 19% 26% 27% 27%

TimeshareTimeshare Revenue 1025 884 576 576 576Timeshare expense 758 668 435 435 435Timeshare profit 267 217 141 141 141Margin 26% 25% 25% 25% 25%

Management fees, franchisee and otherFranchise Fees 151 206 209 245 262Base Management fees 280 338 344 403 487

Incentive Fees 155 164 169 223 270Other 253 179 179 179 179Total fee and other revenue 839 887 900 1049 1197

SG&A 513 367 389 395 401Percentage of revenue 12% 10% 12% 11% 10%

D&A 306 260 276 276 276

Consolidated EBITDA 1217 1082 1117 1372 1514UJV EBITDA 119 34 88 88 88Other adjustments 20 -20 -18 -18 -18Company EBITDA $1,356 $1,096 $1,187 $1,442 $1,584




Exhibit 44: Hyatt analysis


2007 2012E Scenario 1 Scenario 2 Scenario 3Worldwide Systemwide RevPAR $123.10 124.84 $123.10 $149.99 $149.99

1% -1% 20% 20%Owned and leasedOwned and leased Revenue 2039 2,036 2007 2446 2446Owned and leased expense 1524 1,568 1,500 1,791 1,791Owned and leased Profit 515 468 507 654 654Margin 25% 23% 25% 27% 27%

Management and franchiseFranchise Fees 14 52 51 62 67Base Management fees 155 182 180 219 266

Incentive Fees 134 118 140 164 199Other 12Total Fee and other revenue 315 352 371 445 532

Timeshare and otherTimeshare Revenue 103 70 70 70 70Timeshare Expenses 42 24 24 24 24Timeshare Profit 61 46 46 46 46Margin 59% 66% 66% 66% 66%

SG&A 292 297 316 320 325% of Revenue 11.9% 12.1% 13% 11% 11%

Operating Income 599 568 608 825 907

EBITDA CalculationNet income 270 124 191 408 490D&A 270 350 371 371 371Income taxes 208 59 0 0 0Interest expense, net 0 45 45 45 45JV EBITDA 94 90 94 126 126JV Equity earnings -15 -10 -10 -10 -10Minority interest 1 0 0 0 0Other -120 0 0 0 0Adjusted EBITDA $708 $658 $692 $941 $1,023




Ways to grow lodging companies

We see five ways for lodging companies to grow in a relatively mature lodging

market:

Unit growth through new builds or conversions (converting from one brand to

another).

Improving profits through operating efficiencies.

Accelerating top-line growth by stealing existing market share from competitors.

Brand extension opportunities such as timeshare and residential communities.

Growth by acquisition.

Unit growth through new builds and conversions

We believe that new builds and conversion opportunities are the best vehicles for

growth in the lodging industry. Furthermore, international expansion will likely play a

major role over the next decade given the highly fragmented nature of the lodging

business outside the United States. Europe is the largest lodging market outside the

United States, yet it is highly fragmented with regard to its product, with roughly only 30%

of its hotel rooms affiliated with a brand vs. approximately 70% in the United States.

Realizing the advantages of international expansion (e.g., increased brand awareness,

brand distribution), US-based Marriott, Starwood, and Hyatt and UK-based Intercontinental

have established solid footholds. Hilton jump-started its presence with its acquisition of

Hilton International in early 2006, which added 400 international properties to its total

portfolio. We expect international development to begin to account for a larger and larger

portion of overall hotel development for the major US-based lodging operators going

forward.

Improve operating efficiencies

Given the rapid advances in technology, improving operating efficiencies at the hotel and

corporate level are ongoing. Profitability has already been enhanced by more automated

services such as customer checkout, billing, and online reservations. The internet has

alleviated a lot of the stress on hotel operators as it has provided an additional means for

customers to book reservations and to obtain information. Over the course of the most

recent downturn we are, for the first time in a while, able to see all of the costs that can

come out of hotels as companies look to streamline their operations to offset declining

revenues. While some of the costs that have come out will ultimately return as the

economy picks up, we expect that a large proportion of these cost removals could be

permanent, and we expect the next peak in margins to be higher than the last.

Increase sales through taking market share

Given the high barriers to entry in some of the major lodging markets, increased revenues

at the hotel level (absent new unit growth in the market) can only be derived from taking

market share. We believe that solid brands (backed by excellent service and high product

quality) and a strong frequent-guest program are the necessary tools for taking market

We believe that many of the cost cuts made in the recent downturn will be permanent.



share. Room rates are just one of many criteria that hotel consumers weigh when deciding

whether or not to stay at a particular hotel.

Frequent-guest programs, which allow consumers to build points for future rewards, give

customers an extra incentive as they know that building points will result in a “freebie” at

some future point. When deciding between two competing brands in comparable locations

and at comparable price points, the ability to build points will likely sway the undecided.

We believe that those hotels that are not affiliated with a frequent-guest program and have

less well-regarded brand affiliations will likely lose market share to the more dominant

competitors over time. Starwood has generally been known to have the most advanced

rewards program, but other companies such as Choice are rapidly growing their

membership base as well.

Brand leverage opportunities

Over different points in history, many traditional lodging companies have extended their

operations into timeshare, corporate, and residential apartments. Branching into these

markets allows lodging companies some diversification from lodging and travel cycles;

however, these “add-on” products did not provided any insulation from the recent general

lodging downturn. For example, timeshare grew heavily dependent on the securitization

market as its growth became too fast to be supported by current operations’ cash flow. We

still believe there are opportunities for lodging companies to grow through such

businesses, although the opportunity, when compared to several years ago, has

diminished. In fact, just last year, Marriott spun off its timeshare division.



Supply is still not a concern in the United States

Over the pasts several years supply went from a concern, to less of a concern, and

now is not much of a concern at all. Growth over the past year dipped to 0.3% in

February 2012 from the peak of 3.2% in September 2009. We expect that over the

next couple of years supply growth will decline below its historical average of 2.5%

and should be less than 1% through 2012 and 2013.

A lack of new supply could support significant future rate growth

In 2008 we were concerned about new supply hitting the market as well as the continued

growth in the development pipeline. We changed that view in late 2009 as the US pipeline

started to contract. Currently we are not concerned with the supply picture in the United

States. We expect that the decreasing pipeline will help to drive rates for years as long as

the economy continues to grow. We expect supply growth to be below 1% for 2012 and

2013 (see Exhibit 45).

While this lack of new developments hurts franchisors and managers, which need large

pipelines to grow revenues, it helps owners, which should outperform as new competition

is limited and asset values increase due to scarcity. We expect net new room additions in

2012 to be relatively flat, in contrast to 2008 when it was just over 150,000.

Exhibit 45: Supply growth should continue to be frozen at near zero levels through 2012

and 2013 number of rooms added each year, in thousands. Growth is measured at the end of one year

from end of previous year and not average growth for the year. (Does not adjust for

restatements)


As shown in Exhibit 46, the amount of room supply coming on in 2011 should be

significantly lower than the historical average and remain at these historically low levels

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The supply surge this time around was much shorter than the past few cycles



through 2013. We expect that this below-trend growth could last for a couple more years

before the debt market opens up to support new hotel construction.

Exhibit 46: Supply growth has remained below historical average of 2.6% at 0.5% in 2011

room supply growth in % yoy


When we looked at previous cycles we found that periods of below-trend room supply

growth were concurrent with periods of above-trend average daily rate (ADR) growth.

While such a conclusion easily follows from simple supply-demand theory, we highlight it

as we believe the next few years will be a period of sustained below-trend room supply

growth, which could provide a support for above-trend ADR growth (see Exhibit 47).

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1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012TD

We expect supply growth will be below its historical average growth rate of 2.6% for the next couple of years.



Exhibit 47: Strong ADR growth has only taken place during periods of below trend supply

growth ADR growth Yoy, and supply growth YoY


Continuously shrinking pipeline indicates less supply in out years

After increasing for several years the US room pipeline now represents only about 6.0% of

total existing room supply (see Exhibit 48), which is down from 6.7% last year and its 14.6%

peak. There are 158,770 fewer rooms currently under construction as of February 2012

since the number of rooms under construction peaked in December 2007. Given the

difficulty of obtaining financing for new construction, despite the incrementally improving

debt markets, we expect the number of rooms under construction to stay at historically low

levels (see Exhibit 49). In addition, given that the pipeline in absolute terms increased far

above historical levels during the supply peak in 2007, we think it could be likely that the

pipeline several years out could end up dramatically lower than historical levels as the

country continues to recover from a glut of new rooms.

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Exhibit 48: The pipeline as a percentage of existing supply continues to decline pipeline (number of rooms)


Exhibit 49: All segments of the pipeline continue to shrink

pipeline (number of rooms)


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The pipeline declined at an accelarated pace since March 2008. Though the rate of decline has mellowed down as we expect very little supply to convert through pipeline in 2012-2013

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The number of rooms in the final planning andplanning stage of the pipeline have been decliningas projects get cancelled and no new projects havereplaced it

The number of hotels under continue to diminish as nonew projects are coming through despite the slightimprovement in CMBS market



A large amount of rooms continue to be deferred or canceled. As seen in Exhibit 50, the

number of rooms that have been abandoned or deferred over the last 12-months is

approximately 165,138. While this absolute number has started to moderate, the number of

rooms deferred or cancelled remains significant, despite a reduction in rooms under

planning and preplanning.

Exhibit 50: The amount of canceled rooms continues to be above historical average

despite significant reduction in the pipeline of rooms under planning and preplanning

Number of rooms abandoned or deferred (rolling 12-month cumulative)


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*New* While supply growth is low, the US still represents a great

growth opportunity for the brands

While there has been and we expect there will to continue to be low supply growth in the

US, it is still a market that should open 75,000 net new rooms over the next three years and

provides a good opportunity for brands to grow their units through both new builds and

conversion. We think that brands overall will continue to gain share in the US vs.

independents hotels. More specifically, however, we believe that Marriott, Hyatt, Hilton,

and InterContinental will gain share and grow their units whereas Starwood, Wyndham,

and Choice may have a more difficult time as evidenced by what is under construction

currently relative to their existing base of rooms in the US.

Given there has been limited financing availability in the US, we wanted to see what

brands were still being built and which ones were able to get the most conversion activity.

Hyatt and Starwood seem to be doing the most conversions, and InterContinental and

Marriott seem to be able to grow by new builds relative to their existing US hotel base.

While much of the focus on company pipelines has been on international growth, the US is

still generally the biggest or one of the biggest markets for each the companies relative to

their pipelines. Marriott has the greatest percentage of its pipeline in the US with over 50%,

and Starwood has the lowest percentage at under 15%.

Exhibit 51: While the US is shrinking as a % of company pipeline, it is still a big component

Percentage of company pipelines in the US


In addition to the brands still relying on their US pipeline for a large percentage of their

growth, more broadly brands continue to increase in importance in the US hotel industry.

Brands have become a more important part of the pipeline and now make up over 70% of

the pipeline vs. below 60% for much of 2010. We think part of the reason is that it is harder

to finance independent hotels. This provides as opportunity for the brands to grow their

share as they convert out independents that are having a difficult time making it in the

environment or can give the final push on getting financing for a new build.

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Marriott InterConteintal Hyatt Starwood

US as % of Pipeline



Exhibit 52: Brands have been gaining share as a % of the pipeline Brands as a percentage of the US rooms pipeline

Source: STR, Goldman Sachs Research estimates.

We dug deeper to see which brands are growing fastest in the US and by what method. We

have looked at brand growth in three primary ways: first, by way of new build; second, by

way of conversion; and third, by looking at total growth, which combines the first two as

well as includes hotel room additions and room closures.

InterContinental, Hilton, and Marriott are showing the most growth from new builds

If we look at which brands have seen the most benefit of their growth from new build

hotels, IHG and Marriot are the top for our covered companies, and Hilton is also up there

but is still private. We would note that when we are looking at new builds we are looking at

net new builds, which takes into account hotels that have closed. Marriott and IHG are

strong operators in the limited service space and have dominant brands in that space, such

as Courtyard and Fairfield for Marriott and Holiday Inn Express for IHG. Limited service

brands tend to be smaller hotels that are less expensive to build, which is a large reason

we think they are getting done. Also, along with several Hilton brands including Hilton

Garden Inn and Hampton Inn, these are all proven brands that tend to give banks more

comfort because of their long track record and proven operating structure.

Starwood and Hyatt both have less experience in the limited service space, which is the key

reason we think they are not seeing as much growth by new build. Starwood is working

hard to get into the space with Element and Aloft and Hyatt with Hyatt Place and Hyatt

House. As these brands gain traction with developers and lenders they may be able to take

a bigger piece of the pie, but that is a long process.

63%

64%

65%

66%

67%

68%

69%

70%

71%

72%

73%

Brands as % of US Room Pipeline



Exhibit 53: IHG, Hilton, and Marriott have seen the greatest new build growth Brands with greatest % of net new builds last 12 months


Starwood and Choice have seen the most growth from conversions

We did a similar analysis by looking at the brands that are seeing the most strength from

net new conversions. The results of this analysis show that Starwood and Choice are at the

top of this list in terms of growth by conversion. We were surprised that Starwood was at

the top since it does not have as many conversion brands, so we took a deeper look and

saw that majority of its conversion came from the Sheraton brand (almost 3,000 rooms). It

is not clear to us if this was one or two hotels on a one-off basis that really moved the

needle, but nonetheless it put Starwood at the top of the list. We think that this could be

difficult to keep up as there are not as many higher end conversion opportunities that

become available.

We were not surprised that Choice was the second on this list in terms of net conversion

growth as the company has a wide array of conversion brands. Hyatt, which is third from

the top, is not getting credit for buying a large part of its growth, including the LodgeWorks

portfolio, in this analysis, but the company has been able to supplement its growth by

buying independents or small chains and converting them.

IHG is at the bottom of the list, not surprisingly as it continues to convert out Holiday Inn’s

and Crowne Plazas and opens Holiday Inn Expresses mostly as new builds. IHG is in the

middle of reworking its Crowne Plaza brand, and we would expect the trend in that brand

may continue for some time. However, we do think the reworking of the Holiday Inn brand

is closer to being finished.

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

IHG HLT MAR H HOT WYN CHH

Net new builds over the last 12 months as a % of existing base



Exhibit 54: Brands with the highest absolute net room conversions Selected brands conversion activity over last 12 months as a % of existing room base in the US


Hyatt has seen the greatest percentage of room growth overall

When we look at the brands in terms of net unit growth over the last year (which includes

not only net new builds and net conversions but also room adds and room removals),

Hyatt has seen the most growth followed by Starwood and Marriott. Part of this is at least

due to the smaller size of Hyatt’s room base, and therefore it is easier to grow off it, but the

company is also very active, including committing its own capital to growing its brands.

Also, according to Smith Travel, Hyatt gained over 1,200 rooms with Hyatt (the brand)

room additions at existing properties, which added materially to its growth. Without these

rooms Hyatt’s growth would have been only 1.1% and it would have been more in the

middle of the pack.

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

Starwood Choice Hyatt Marriott Wyndham Hilton IHG

Conversion over last 12 months as a % of existing base



Exhibit 55: Hyatt has seen the most net room growth in the last 12 months Net room growth over the last 12 months


In order to take a stab at looking forward we also analyzed the relative proportion within

each brand family of what they have under construction versus their current existing

properties. We think that the brands that are the strongest with long periods of success

have the best chance of getting financing and therefore getting built. From this analysis we

see that several brand families seem especially well positioned to grow in absolute terms

as well as in relative terms. Hilton, Marriott, InterContinental, and Hyatt rooms all make up

a larger percentage of the US construction pipeline then they do of the existing base. We

looked at this in two ways: first, as the spread between these two percentages, and, second,

the ratio of these two percentages. Hilton has the largest spread with the company having

10.1% of its existing rooms base under construction but 20.7% of the rooms or a spread of

10.6% (20.7%-10.1%). Doing the same math we find Marriott has a spread of 8.6%,

InterContinental 6.8%, and Hyatt 4.4%.

Looking at the ratio of these percentages gives us an idea of the relative growth of the

brands. Hyatt has this biggest ratio as although it only has 6.3% of the pipeline they only

make up 1.9% of the existing rooms, so they are really “punching above their weight” with

a ratio of 3.4. Hilton, Marriott, and InterContinental all have a ratio close to 2.

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

H HOT MAR HLT CHH WYN IHG

Net growth



Exhibit 56: Brand families rooms as % of existing rooms for new construction Brand families as a percentage of existing supply and rooms under construction


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

HLT MAR IHG H HOT CHH WYN

Existing Supply % Rooms under construction %



A closer look at timeshare operations

Timeshare or vacation ownership is a noticeable subset of our lodging companies’

operations, accounting for almost 49% of Wyndham’s revenues and roughly 13% for

Starwood in 2011. We would note that Marriott spun off its timeshare segment in

November 2011 to form the separately traded entity, Marriott Vacations Worldwide (ticker

VAC). Throughout the “golden age” of timeshare, in the early to mid-part of the last decade,

timeshare development companies would build and sell aggressively. Because companies

have to plan years out when building timeshare, they were building as if sales would

continue to growth at double digits. This was made possible because of the lucrative

securitization market. In addition, these loans were sold off with attractive spreads.

However, we are now seeing many of these companies slow their spending or completely

put it off on new developments and focus on running the business for cash and profitability.

In this section we take a closer look at how the industry has evolved, the industry dynamics,

the positives and the negatives of timeshare ownership, and how our hotel companies

make money in this business. We also perform a present-value analysis comparing a

timeshare purchase relative to staying in a hotel and describe the securitization process for

timeshare loans.

Quick timeshare review

Timeshare or vacation ownership typically entitles a buyer to the use of a fully furnished

condominium-style residence located in a vacation/tourist destination, generally for a one-

week period each year, known as a “vacation interval.” In addition, fractional ownership

interests are also available for 5-26 weeks at a time. These condo-type units are superior in

quality to a hotel room in the amount of space (typically two to three bedrooms) and level

of amenities (full kitchen and appliances). The only downside is service, which is

sometimes less when compared to a typical hotel stay.

The benefit to vacation ownership is that it allows consumers to purchase an interval that

guarantees them a unit at a specified time of year in a specific location at a fraction of full

ownership. Consumers pay a one-time purchase price for the interval in addition to annual

maintenance fees, which averaged $731 per year in 2010 off of average $19,300 interval.

Consumers can also buy specific weeks at a resort, or they can buy points into a larger

system for a right to use any resort in that system.

In addition, consumers with interval ownership have the right to exchange their interval for

another within the same system or outside the system via an interval exchange company

such as RCI (owned by Wyndham) or Interval International (IILG). This allows the consumer

to potentially change locations on an annual basis, providing a lifetime of vacations at

different locales. Consumers with a Marriott, Starwood, or Wyndham timeshare interval

have the ability to exchange their interval for points in the respective frequent-guest

programs, which allows the consumers to stay in any hotel in the system.

Industry facts

According to the American Resort and Development Association, the timeshare industry

has more than 1,548 resorts located in the United States with 197,700 units and annual US

timeshare sales of approximately $6.4 billion in 2010. Timeshare sales in the United States

had grown at a compounded rate of 11.6% from 1990 till 2008 but declined 35% in 2009.

Sales in 2010 grew at 1.6%. The hotel companies we follow that are involved in timeshare

development include Wyndham, Marriott Vacations Worldwide, and Starwood. Other key

Even though timeshares have existed for more than 30 years, market penetration of this vacation product remains low, with fewer than 10% of eligible US householders owning a timeshare interval.



industry participants in timeshare include Bluegreen and Sunterra (acquired in 2007 by

Diamond Resorts).

Timeshare still has some benefits for hotel companies despite the

recent market contraction

We believe that timeshare still has benefits for hotel companies even though some of these

benefits are likely to have been reduced when compared to the situation before the

recession. These benefits include (1) timeshare is a natural hedge against a decline in

business travel, (2) timeshare is a natural add-on to the core lodging business, and

(3) timeshare is a value-adding proposition.

Timeshare can be a hedge against changes in business travel, but it is capital

intensive. While revenues fell dramatically in 2008, it was because of the high correlation

in business and leisure demand, which is not always the case (see Exhibits 57-58). In

previous recessions this did not happen. For example, during the economic downturn of

2001 to 2003, it became apparent that the timeshare business, which is leisure oriented,

can serve as a hedge against a decline in business travel. However, in the most recent

recession, which was consumer led, timeshare sales suffered materially.

Exhibit 57: US timeshare revenues grew at a CAGR of 11.1% until 2007, and the industry

estimates that 2009 revenues declined 35% from 2008 growth and then flattened in 2010 US timeshare revenues (in billions); (1990-2011E)

Source: American Resort Development Association and IILG SEC filings.

0

2

4

6

8

10

12 US timeshare revenues grew at a CAGR of 10% till 2008, and the industry estimates that 2009 revenues fell 40% from 2008 and was almost flat in 2010-2011



Exhibit 58: US timeshare revenue growth, 1991-2011E

Source: American Resort Development Association and IILG SEC filings.

Timeshare is a natural add-on to the core lodging business. We believe there are three

reasons timeshare is a natural add-on to the core lodging business: (1) marketing

penetration of timeshare is increased due to brand affiliation, (2) there is an increased

utilization of hotel amenities by timeshare guests, and (3) there is an increase in the use of

excess land and room inventory at the existing hotel. However, we note that managements

have generally moved away from growing this segment, and as we saw Marriott did decide

to spin off this business.

Timeshare creates value with a high IRR. We believe that building a timeshare is value-

creating for the hotel companies. Wyndham believes that the IRR of building a timeshare is

67% for a securitized deal and 27% for an unsecuritized deal.

There are negatives for the timeshare business, however

Despite the positives above, there are negatives to our hotel companies’ timeshare

operations. These include (1) high risks on the capital structure side; (2) high selling

pressures to move the product can result in potential reputational risk; (3) negative impact

on return metrics; (4) potential earnings variability; and (5) significant margin pressure

given high sales and marketing costs.

The risks on the capital structure side are significant and were brought to the fore

during 2009 as the credit markets imploded. The risk on the capital structure side for our

hotel companies is significant in timeshare as hotels need to put up capital up-front and, in

some cases, give loans to consumers.

In addition, timeshare developers take risks on the loans to timeshare owners as the hotel

companies carry these loans on their books, either until they can be securitized or

indefinitely, if they cannot be sold off. This risk was not properly managed as we entered

the recent recession, and many hotel companies were left with a large amount of

receivables on their books.

One of the ways that companies have moved to mitigate this risk is to improve the quality

of the customer they sell to. For example, they are working to sell more to existing

customers, and if they are financing, they are looking to finance with customers that have

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%



higher credit ratings. For example, Wyndham has brought the average FICO score to 702 in

2011, up from 656 in 2005.

Timeshare selling has historically been high pressure. Nearly all of the salespeople in

timeshare are commission-based and have huge incentives to sell more units. This may

conflict with the hotel companies’ focus on treating customers in a friendly and low-key

manner.

Timeshare can lower near-term overall return metrics, but asset light timeshare is

helping. The addition of timeshare can lower overall near-term return metrics for our

lodging companies as they require a large amount of capital. However, we are seeing this

start to change as companies pursue asset light timeshare. Wyndham has argued that it

can achieve returns in the low 20s percentage range as it streamlines its efficiency, but we

have never seen a timeshare company with notably high returns.

High marketing costs can pressure profit margins. Marketing costs have always been

high in the timeshare industry, with marketing dollars ranging from about 40% to 50% of

sales. Over the past few years, it has become apparent that more and more marketing

dollars are needed to close a sale as top-line revenues have increased at a higher rate than

overall profits in some cases.

Some companies are looking at “asset light” timeshare to increase

returns

One of the interesting developments we have seen over the past several years is

Wyndham’s push to more of an “asset light” version of timeshare selling. Wyndham

created a program called Wyndham Asset Affiliation Model or WAAM that allows the

company to sell, as timeshares, units that were not built as timeshare. For example, there

are a number of mostly vacant condos throughout the country. Wyndham will align with

the owner of those condos and try to sell them as timeshare units. In doing so, Wyndham

does not take any of the capital risk and simply earns a fee if it makes a sale.

We believe it is possible that the future of timeshare is broadly similar to this model, and

timeshare developers are separate companies from the timeshare brands/sellers. This

could create an environment in which both businesses are valued more fairly, whereas

when the two activities are together, the overall entity likely receives a lower multiple given

the capital intensity.

One of the main problems with this strategy is that it creates an apparent conflict of

interest for Wyndham as it could lead to a circumstance in which it has to decide whether

to sell its own inventory (the product it built) or the affiliated inventory. Because this

program is currently small, relative to the size of the company’s overall business, it is not a

significant issue, but the company expects WAAM to increase to 15%-20% of its overall VOI

sales over the next few years.

Accounting treatment has brought securitizations “on balance

sheet”

As of the 2010 fiscal year the accounting treatment for timeshare securitizations has

changed, and companies must comply with Accounting Standards Update No. 2009-16

“Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets,” which

were formerly known as FAS 166/167. The first thing to note about this new treatment is

that there is no cash flow impact but there is an effect on the income statement and

balance sheet. Under the previous treatment of securitizations, companies such as

Starwood and, at the time, Marriott (Wyndham had already been accounting for its



securitization under this new method) had moved the assets and liabilities of their special

purpose entity off their balance sheets after the sale of the securitized notes. In addition,

the companies recognized a gain on the sale of the notes, which was the present value of

the interest spread they were earning. Because of these gains, timeshare earnings were

somewhat lumpy.

Under the new treatment of securitizations, everything stays on balance sheet and no gain

is recognized. Instead, the company recognizes the interest income associated with

receivables and the interest expense associated with the notes on its income statement.

Because this interest margin is now earned over the life of the notes it makes timeshare

earnings less volatile.

While this change is relatively straightforward, there is one nuance between the way

Starwood and Marriott reported that was different from Wyndham. Starwood and Marriott

both reported the interest expense associated with the securitized notes in the same line as

their corporate interest expense. Wyndham, on the other hand, reports this interest

expense as a timeshare operating activity. Therefore, the EBITDA numbers of the different

companies are not directly comparable. We adjust this when we look at the companies.

How hotel companies make money from timeshare

The hotel companies make money from timeshare operations through (1) selling timeshare

intervals, (2) financing interval purchases, and (3) resort operations.

Selling timeshare intervals. Hotel companies make roughly 45%-55% of their

timeshare revenues through selling the interval. Product costs on average are 20%-

35% of revenues, selling and marketing costs are roughly 40%-50%, and general/

administrative costs are about 10%, leading to a high-teens to low twenties margin for

the overall industry.

Financing revenues. The hotel companies also make money through financing the

purchase of timeshare intervals. Marriott Vacations and Wyndham help their

customers finance and generally 50%-70% of the total timeshare dollars amounts are

financed. Consumers will typically finance up to 80%-85% of the timeshare purchase

price. The hotel company makes money on the spread between the cost of debt and

the average financing rate it charges its timeshare purchasers. In addition, hotel

companies have the ability to securitize the notes receivable, which typically results in

periodic note sale gains for those who use this type of accounting treatment. This

allows the hotel companies to more quickly recycle capital to fund more buyers. For

Wyndham, roughly 20% of its vacation ownership revenue is from financing with a

higher percentage of EBITDA coming from financing due to its high margin.

Resort operations. The hotel companies also receive fees from existing timeshare

owners to manage the timeshare resorts. These fees are taken out of the annual

maintenance fees that timeshare owners are required to pay. Resort operations

account for roughly 15%-20% of timeshare revenues on average but do not contribute

much to the bottom line with only a 10%-15% margin. The one positive of these fees is

that they are in many ways a perpetuity as it is extremely unlikely that the company

would lose the contract for operating the resort.



Exhibit 59: Breakdown of timeshare revenues for Wyndham and Marriott Vacations 2011 revenues

Source: Company data.

We believe timeshare can be a value to consumers

One of the main marketing pitches to consumers—aside from product quality and program

flexibility—from timeshare companies is that the purchase makes financial sense relative to

purchasing hotel nights for the rest of one’s vacations. Customers are often shown a chart

detailing the absolute costs of timeshare compared with the projected cost for hotel stays.

We thought it was important to analyze the two opportunities from a financial perspective

and discount back the cash flows to get a better sense of the true value or cost of

purchasing a timeshare (see Exhibit 60). In our analysis, we determine that purchasing

timeshare does provide a present-value benefit. In our model, we calculate that the present

value of timeshare outflows is approximately 9% less than a comparable hotel product; this

compares with the 50% discount that could be pitched to consumers.

Exhibit 60: Timeshare/hotel assumptions and overview

we calculate timeshare to be about 5% cheaper than staying in a hotel


Management, 17.5% Management, 18.6%

Financing, 33.8%

Financing, 13.2%

VOI, 48.6%

VOI, 49.5%

4.2%

Other, 18.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

WYN VAC

Management Financing VOI Other

inflation rate 3.0%discount rate 10%risk free return 3.60%Interest rate on loan 12.0%Down payment % 20%Total hotel cost $246,809PV of hotel room $39,023

Timeshare cost $20,000Total cost of timeshare $175,342PV of timeshare purchase $36,977



Our assumptions: Similar to the previous analysis (in Exhibits 61-62), we assume 3%

inflation for the cost of two hotel rooms (2*$150/night) and for management fees

(HOA/club fees) that are paid by timeshare owners. For food/beverage costs, we work in

$30/person/day for the hotel customers (family of four) and apply a 25% discount for the

timeshare customers as their unit includes a kitchenette, which could be used to defray

food spending. On the financing side, we are also using a seven-year loan term at 12%

interest. Because the hotel user does not need a down payment, we forecast that these

consumers could invest the $4,000 that they did not spend on a down payment and earn a

3.6% risk-free annual return. Finally, we modeled in that the timeshare consumer could

receive a modest tax benefit from interest payments (we note that some states may not

allow tax deductions for interest paid on timeshare loans). The discount rate applied to all

cash flows is 10%, and we use a 50-year time horizon.

Exhibit 61: Hotel stay analysis we calculate a present value of $39,023

Exhibit 62: Timeshare purchase analysis we calculate a present value of $36,977

Source: Goldman Sachs Research estimates, company data.

Source: Goldman Sachs Research estimates, company data.

We find financial value in the timeshare product. Working in our assumptions, we

calculate that the cost of timeshare under these conditions is 9% less than a comparable

hotel product. Although there are many assumptions in our analysis of the “value” of

timeshare, we think that ultimately an economic case can be made for a consumer to

buy into a timeshare. Although investors may want to adjust the assumptions, we believe

we have captured a fair representation of the variables. Most important, our economic

analysis does not capture the intrinsic value of having a dedicated focus on taking a

vacation every year and the enormous difference in space and amenities.

Timeshare securitization: How it works

Timeshare is a capital-intensive business and requires companies like Wyndham, Marriott

Vacations, and Starwood to acquire land, build it out, and sell off the finished product to

consumers.

In order to be able harvest near-term cash flows from a timeshare development instead of

waiting eight or more years to collect their return, many companies have historically

securitized their timeshare receivables. This cash was typically used to fund future

timeshare developments, but now it seems to be a source of increasing cash flows given

the tail off in development.

The process typically begins when a customer visits a timeshare property or sales center

and buys the product. When the customer closes the timeshare purchase, documents are

immediately sent to the company’s consumer finance division, background data are

verified, and the documents are imaged and sent off to the custodian (see Exhibit 63).

Year RoomTax

(12%) Total Hotel F/BInvestment

Income Total Cumulative PV01 $2,100 $252 $2,352 $840 $144 $3,048 $3,048 $2,7715 $2,364 $284 $2,647 $945 $166 $3,427 $16,173 $2,128

10 $2,740 $329 $3,069 $1,096 $198 $3,967 $34,896 $1,52920 $3,682 $442 $4,124 $1,473 $282 $5,315 $81,656 $79030 $2,364 $284 $2,647 $1,980 $402 $4,225 $130,645 $24240 $3,176 $381 $3,558 $2,660 $572 $5,646 $180,373 $12550 $4,269 $512 $4,781 $3,575 $815 $7,542 $246,809 $64

Year MortgageHOA/ Club

Interest Tax

Savings F/B Total Downpay Cumulative PV0 $4,000 $4,000 $4,0001 $3,389 $700 -$551 $630 $4,168 $8,168 $3,7895 $3,389 $788 -$281 $709 $4,606 $25,874 $2,860

10 $913 $822 $1,735 $40,569 $66920 $1,227 $1,105 $2,332 $61,060 $34730 $1,650 $1,485 $3,134 $88,598 $18040 $2,217 $1,995 $4,212 $125,606 $9350 $2,979 $2,681 $5,661 $175,342 $48



Exhibit 63: Securitization flow chart shows how companies like Wyndham efficiently recycle capital these are general guidelines, and loans can follow a unique path through the process

Source: Goldman Sachs Research, company data.

After the custodian verifies all the documents and the down payment from the customer

clears, eligible loans are placed into a conduit (not all companies use conduit facilities;

some sell the loans directly into a term structure). Wyndham collects these eligible loans

and eventually borrows against them using a bank line. Wyndham used to receive an

advance rate in the low-80% range on these loans, but that percentage dropped

dramatically and the first such rates after the market re-opened were close to 50% in 2008.

This means that Wyndham had to put up $2 of loans to get $1 in cash (which is not a

particularly good deal). However, the securitization market has now recovered and is

actually stronger than it was during 2007, with Wyndham’s latest deal having a 87.5%

advance rate. The cash that the company does draw from this securitized conduit facility is

normally used for working capital needs such as paying down the company revolver.

As the paper seasons in the conduit, the company, depending on market conditions,

prepares the loans for a term structure securitization. The portfolio is carved up into

various debt tranches that are then sold to investors. Through the securitization, Wyndham

receives an advance rate on the loans (similar to the conduit). Once this cash is received,

Wyndham pays down its bank line from the conduit and uses the remaining portion for

business activities.

After executing the securitization, Wyndham services the portfolio. The company receives

interest/principal on the timeshare loans from its customers and then pays out investors

based on the waterfall provisions set forth in the term securitization. Wyndham makes

money on the difference between these two amounts. While the spreads narrowed

considerably during the downturn, they are now strong, coming in at about 10% in 2012 for

Wyndham.

Docs sent to WCF; data and down payment verified, docs imaged and originals are sent

to the custodian

Custodian verifies documents; payments verified, eligible loans placed in dedicated bank line or financed on

balance sheet

When loans ready (seasoned), company puts them into a term structure

(market conditions influence timing)

WYN borrows against eligible loans from a dedicated bank line and uses proceeds for

working capital needs (i.e. pay down revolver)

Cash advanced based on contractual percentage with

banks (70%-80% range); cash used to pay down bank line;

leftover cash used for

WYN collects interest/principal payments and services

portfolio based on waterfall in securitization

WYN earns spread on what they pay out to investors and

interest rate charged to customers

DAY 90



Exhibit 64: Recent securitization deals


3/21/2012 Wyndham $450 A, BBB 2.84%; 3.58% 87.50%

11/10/2011 Wyndham $300 A, BBB, BB Wtd avg. of 4.12% 94%

8/31/2011 Wyndham $300 A, BBB, BB Wtd avg. of 4.01% 92%

3/25/2011 Wyndham $400 A, BBB-, BB 3.35%, 4.23%, 3.7% 98%

11/12/2010 Marriott $229 NA 3.54%; 4.52% 95%

10/21/2010 Wyndham $300 A, BBB 3.51%, 4.44% 88%

7/26/2010 Wyndham $350 A, BBB 3.84%, 5.31% 83.25%

3/19/2010 Wyndham $300 A 4.48% 72.25%

10/7/2009 Wyndham $350 AAA, A 4.52%, 7.62% 55%, 70%

5/28/2009 Wyndham $225 NA 9% 65%

3/16/2009 Wyndham $46 A 9.79% 54%

3/9/2009 Marriott $205 NA 72% 72%

6/30/2008 Wyndham $450 NA 7.15% NA

6/10/2008 Marriott $246 NA 7.20% 100%

10/30/2007 Marriott $250 NA 5.93% 100%

5/23/2007 Wyndham $600 NA NA NA

Date Company Size ($mn) Traunches Coupons Advance Rate



A look at hotels from a global perspective

As the room supply pipeline in the United States continues to slow, it is increasingly

important for hotel companies to look at international markets for unit growth expansion.

The major brands have been expanding their footprint for years, and we expect this will

continue. First, the brands have established footholds in just about every market, so they

have built awareness and some local expertise. Second, with the BRIC and other emerging

markets now showing faster economic growth than North America and Western Europe,

hotel companies need to be in these markets to capture where the visiting and local

business traveler is spending time. The appeal of a clean room and a safe location makes

branded hotels truly appealing to travelers worldwide.

How hotels are developed around the world

Developing Western branded hotels around the world is quite different from region to

region. These regions can be combined into three general buckets: Western Developed;

China, Middle East, and India; and Other. Below we highlight some of the key differences

between these regions.

Western Developed: The United States and Europe are the most developed and

mature hotel markets in the world, as seen in the number of rooms cited above. One of

the clearest distinctions of these markets is the large number, not just of managed

properties but also of franchised hotels, as this approach allows a third party to own,

operate and maintain brand standards. From the brand owner’s perspective it allows

them to grow very fast with limited capital at risk.

Although managing and franchising are well established in North America, they have

also created competition for new management contracts. This creates a situation in

which the large brand owners compete very heavily to get new business and offer

incentives to the hotel developers in the form of mezzanine financing, sliver equity, or

key money, driving down returns.

China, India, and the Middle East: These developing markets are notable because of

the large amount of local capital available. Because of this, the brand owners have to

put in little to no capital to develop hotels, and many are financed exclusively with

equity and no debt. This created a precedent in the market for no need for owner’s

priority or hurdle rates for the managed properties (which most of them are). Owner’s

priority allows for the owner of the property to achieve some minimum level of return

before it has to pay the management company any incentive fees.

According to Marriott, a significant portion of the money comes from local

governments, which are more interested in spurring development and not as

concerned if the management companies take some “off the top” right at the

beginning. Even though currently more of the hotels are using some debt to finance

their development, the contracts have not changed, and there is still no owner’s

priority.

Unlike the more developed markets of North America and Europe, the overwhelming

majority of the Western branded hotels in these markets are managed and not

franchised.

As these markets become more mature we expect them to increase in

competitiveness. In addition, we expect some of the characteristics that are present in

the United States to start to appear there as well, such as key money and mezzanine

financing. We also believe that as these markets develop they will be able to move

increasingly toward franchising.

Brands will increasingly focus outside the United States.

Developed markets have a large franchising presence as well as management.

China, India, and the Middle East have large amounts of local capital.



Other non-developed: We include the majority of the other hotel markets in the world

where Western brands are developed into a third catch-all bucket. Many of these

markets have unique circumstances and do not have enough local capital. Therefore,

they need incentives from the brand owners in order to grow.

Most of these areas are throughout South America and Africa and are too early in their

development stages. The Western brands are now just figuring out the correct

approach. Like most international markets, most of the Western branded hotels are

managed in these markets. However, there are already many existing independent

hotels in South America, so perhaps there is more of a conversion opportunity vs.

Asia, which is almost exclusively new build.

For now, we expect that most companies’ efforts are focused on China and India,

considering the potential for growth in those markets. We believe other developing

regions of the world will receive more attention in a significant way only after those

two markets have been somewhat satisfied.

Most companies in our coverage are still US-concentrated but are rapidly increasing their presence in the international markets

We have seen a strong push by the broad-based hotel companies to grow faster outside

North America. Currently, of the branded hotel companies under our coverage, Starwood

has the biggest percentage of its rooms outside North America with InterContinental

coming in second (see Exhibit 65).

Exhibit 65: Starwood has the biggest percentage of its rooms outside North America

Percentage of rooms outside of North America as of 4Q2011


Marriott has historically been more focused on the domestic side, but now, because in

many ways it must and also because there are significant opportunities, it is focusing more

of its efforts internationally. Exhibit 66 shows how these percentages changed over time

for Starwood, Marriott, and InterContinental.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Starwood Intercon Hyatt Choice Wyndham Marriott Gaylord

There are many markets in the world that are still working to create their own identity.



Exhibit 66: International growth was slow relative to domestic the past few years, but we

expect that to change Historical percentage of rooms outside North America

Note: Marriott’s % of international rooms declined in the early part of last decade after it no longer had Ramada in its system, which was all international.


International growth has been accelerating rapidly over the past several years. While the

growth in the United States on an absolute basis has been high, increased focus has been

placed on growing in Asia. For example, from 2001 to 2011 Starwood’s Asia footprint grew

by 157% and its North American footprint grew only 21%. While Asia was growing off a

smaller base, on an absolute basis the company added 30,600 rooms in North America and

just over 40,800 rooms in Asia. Starwood added over 8,400 rooms in Asia in 2011 alone.

Of the broad-based hotel companies, currently Marriott and InterContinental have the most

rooms in North America. However, when we look internationally in terms of absolute

rooms, Intercontinental and then Starwood have the most rooms. Specifically looking at

Asia, as a percentage of its portfolio Hyatt has the most, closely followed by Starwood and

then InterContinental (see Exhibit 67-68).

Note that InterContinental does not break out the Americas, so all Americas are included in

North America.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Marriott Starwood InterContinental

Starwood has the largest percentage of its portfolio outside of North America.



Exhibit 67: Rooms by geography

As of December 31, 2011

Exhibit 68: Percentage of rooms by geography

As of December 31, 2011



Looking at Marriott’s, Starwood’s, and InterContinental’s historical percentage pipeline

outside of the North America (for InterContinental the Americas) shows that their

international pipelines have picked up over the past couple of periods (see Exhibit 69). We

expect that this trend will continue as new development financing remains difficult in the

United States and international markets present better growth opportunities.

Exhibit 69: Percentage of pipeline that is outside the United States for Marriott, Starwood,

and InterContinental


-

100,000

200,000

300,000

400,000

500,000

600,000

NA EAME LAD Asia

Marriott Hyatt Starwood InterContinental

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

NA EAME LAD Asia

Marriott Hyatt Starwood InterContinental

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2003 2004 2005 2006 2007 2008 2009 2010 2011

Marriott Starwood InterContinental

International pipelines have been increasing.



*New* Global c-corps and REITs with gateway exposure to benefit

from growing Chinese travel

We are taking another look at the Chinese hotel market on both an intra country as well as

outbound level. While it is almost cliché at this point for the large brands to talk about how

many hotels they have in the pipeline in China, the fact is that demand is growing

extremely rapidly both intra China as well as outbound. We think both the c-corps and

REITs will benefit from this trend. InterContinental, Starwood, and Marriott have the most

exposure to China and will benefit from unit growth in the country as well as having

recognizable brands when Chinese travelers come to the US. We do have a concern that

supply may overtake demand in certain cities, but overall the country should see positive

growth. Despite these concerns we take comfort in the fact that the c-corps are not putting

their own capital into developing hotels, and they tend to get incentive fees on the first

dollar of profit. We think that hotel REITs with strong gateway city exposure, such as

LaSalle and Host, will also benefit. Chinese visitors could drive an additional 12 million

room nights by 2016.

What does the Chinese hotel landscape look like for US brands?

We took a look at the exposure of InterContinental, Starwood, Marriott, and Hyatt’s

exposure in China. InterContinental has the most hotels at 157 followed by Starwood with

91, Marriott with 57, and Hyatt with 21. If we look at these numbers as a percentage of their

existing hotel footprint they make up 4% for InterContinental, 8% for Starwood, 2% for

Marriott, and 4% for Hyatt. So while the country is growing faster in terms of units, it is still

not a very large percentage of a company’s hotels.

Exhibit 70: Number of hotels in china for major US focused brands

Major brands in China and number of hotels


0

20

40

60

80

100

120

140

160

180

InterContinental Starwood Marriott Hyatt

China Hotels



The US is generally still the largest market by far for the major companies we follow. For

example, Marriott has over 50X the number of hotels in the US that it has in China, and

InterContintal has over 20X, and hotels in the US tend to generate higher RevPARs.

Starwood has the lowest ratio at 6X. So while economic growth is important for global

growth and for all the global brands under our coverage, the US is still by far the most

important market.

Exhibit 71: The US is still many times the size of each company’s hotel exposure in China

Ratio of hotels in the US to China


We also looked at where the hotels are for each company in terms of most populous cities.

For this analysis we look at hotels in the actual city and did not count hotels in suburbs of

main cities. To do this we went on each company website and searched for hotels in each

city. From Exhibit 72 we can see several interesting trends. Marriott is the most

concentrated in the top five cities with 63% of its hotels in China in those cities. Starwood

has the lowest percentage with only 30% of its hotels in the top five cities. This is

interesting since although there is a view that Starwood is “bigger” in China, which they

are overall, Marriott actually has more hotels in the top markets. We do believe that all

companies have room for expansion as most have very limited exposure outside the top 10

cities.

0X

10X

20X

30X

40X

50X

60X

Marriott InterContinental Hyatt Starwood

US Hotels to China Hotels



Exhibit 72: Starwood is the most spread out, and Marriott is the most concentrated in the

top five markets Table of top 20 cities in China and hotels in each city

Source: Company data, China census, Goldman Sachs Research estimates.

A final way we looked at the major brands exposure in China is by chain scale. Hyatt skews

the highest end with over half of its hotels in the luxury category and the rest in upper

upscale. InterContinental is the most diverse with hotels from luxury to upper midscale. We

think that as development continues there will likely be a migration to more middle scales

for most hotel companies as they tend to open up luxury first.

Exhibit 73: China hotels by chain scale for each company

China hotels by chain scale for Marriott, Starwood, InterContinental, and Hyatt


# of hotels % of total # of hotels % of total # of hotels % of total # of hotels % of total

Shanghai 14.2 19 33% 9 10% 28 18% 4 19%

Beijing 10.3 9 16% 7 8% 21 13% 2 10%

Guangzhou [Canton] 7.5 3 5% 5 5% 7 4% 1 5%

Tianjin [Tientsin] 6.8 4 7% 5 5% 10 6% 2 10%

Wuhan 6.8 1 2% 1 1% 1 1% 0 0%

TOTAL TOP 5 45.7 36 63% 27 30% 67 43% 9 43%

Shenzhen 6.5 2 4% 5 5% 4 3% 1 5%

Chongqing [Chungking] 5.1 1 2% 2 2% 4 3% 1 5%

Shenyang 4.6 0 0% 1 1% 3 2% 0 0%

Chengdu [Chengtu] 4.3 0 0% 1 1% 9 6% 0 0%

Foshan 4.0 0 0% 1 1% 2 1% 0 0%

TOTAL TOP 6-10 24.4 3 5% 10 11% 22 14% 2 10%

Xi'an [Sian] {Xian} 3.9 0 0% 3 3% 2 1% 0 0%

Dongguan 3.9 0 0% 1 1% 0 0% 1 5%

Nanjing [Nanking] 3.8 1 2% 2 2% 3 2% 0 0%

Harbin 3.6 0 0% 0 0% 1 1% 0 0%

Hangzhou [Hangchou] 3.2 2 4% 2 2% 7 4% 1 5%

Shantou 3.1 0 0% 0 0% 0 0% 0 0%

Dalian [Dairen] 2.9 0 0% 0 0% 2 1% 0 0%

Jinan 2.8 0 0% 1 1% 1 1% 1 5%

Changchun 2.8 0 0% 0 0% 0 0% 0 0%

Qingdao [Tsingtao] 2.7 0 0% 2 2% 4 3% 1 5%

TOTAL TOP 11-20 32.6 3 5% 11 12% 20 13% 4 19%

TOTAL TOP 20 102.8 42 74% 48 53% 109 69% 15 71%

TOTAL HOTELS 57 100% 91 100% 157 100% 21 100%

Marriott Starwood InterContinental HyattCity Population

(2010 Census, in mn)TOP 20 CITIES

25%

8%14%

52%

60%

73%

48%

16%20%

32%

54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Marriott Starwood InterConteintal Hyatt

Luxury Upper Upscale Upscale Upper Midscale



Looking from a higher level we think the Chinese hotel market has structural tailwinds for

growth. We feel that domestic travel is still in an early state and should benefit from

supportive government policies (Exhibits 74-75).

Exhibit 74: We believe government policy is supportive of

the development domestic tourism during the 12th Five

Year Plan (2011-2015) Major China policy on domestic tourism

Exhibit 75: We look for 10% CAGR in Chinese domestic

travel Domestic travel volume trend

Source: Government, Xinhuanet, Sina, Goldman Sachs Research estimates.

Source: CEIC, Goldman Sachs Research estimates.

In addition, when we compare China to the US there seems to be additional room for

growth. We estimate that at the end of 2011 China had eight times the number of people

per hotel room that the US had (Exhibit 76). The number has been declining for some time

and is down from 35X in 1999, but we think there could be more to go. However, we would

admit that if we look at this another way, adjusting for the size of each economy and not

just the number of people, the ratio is not as favorable. So when we divide the number of

people per hotel room by each country’s GDP the number is 72 for China and 4 for the US.

But what it indicates is that population in and of itself relative to hotel rooms is not a

perfect indicator of penetration. If we adjust for economic condition or per capita income

and the financial means to travel, China may have less room for unit growth relative to the

US than is widely assumed.

Policy Effective date Issuer Major content ProgressThe 12th Five-Year Plan for the Tourism Industry

Dec-10 National Tourism Administration

Outlines the objectives of the development of China's tourism industry from 2011 to 2015. Targets 10% CAGR domestic travel volume growth from 2011 to 2015.

19 provinces have already included travel and leisure in their 12FYPs. The objective was reiterated in December's Central Economic Work Conference.

Outline for National Tourism and Recreation

2012E National Tourism Administration

Policies will ensure paid annual leave time for employees, expanding the market size of tourism and recreation, and improving the standard of living.

In the public consultation stage and is expected to officially launch in 2012.

15%15%

6%

11%10% 10%

0

2

4

6

8

10

12

14

16

18

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

YoY %mn person Domestic travel volume (LHS) YoY change (RHS)

10%CAGR from 2011E to 2015E



Exhibit 76: China has still has 8X the number of people

per hotel room that the US has … Hotel room per person

Exhibit 77: …However, adjusted for GDP the ratio is not

as attractive Hotel room per $mn of GDP per capita

Source: Chinese Government statistics, STR, Goldman Sachs Research.

Source: Chinese Government statistics, STR, Goldman Sachs Research.

What we may see instead of unit growth as GDP continues to grow is increased rate

growth.

Increasing Chinese visitors to the US is a positive secular change

While there is a significant focus on Chinese demand inside China, we believe that

increasing Chinese travel to the US is a large secular change that is not getting as much

attention as it should. Since 1995 travel from China has increased at a CAGR of 12%,

although most of the growth has come since 2003 where the CAGR has been 24%. The

growth rates have been elevated in the past two years at 53% in 2010 and 36% in 2011.

62

63

64

65

66

67

68

69

0

500

1,000

1,500

2,000

2,500

3,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E

People per Hotel Room in the US (left axis) People per Hotel Room in China (right axis)

0

1

2

3

4

5

6

7

8

0

500

1,000

1,500

2,000

2,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E

People per Hotel Room divided by GDP in the US (right axis) People per Hotel Room divided by GDP in China (left axis)



Exhibit 78: Historical chart of inbound Chinese visitors to the US Historical chart of inbound Chinese visitors to the US

Source: OTTI.

While the number of travelers from China has been growing at a fast rate for some time, it

is now actually starting to matter in terms of its size relative to other countries. China now

represents the ninth biggest source of travelers to the US which is up from sixteenth place

in 2007 (see Exhibit 79). If we exclude Canada and Mexico, which include a large number of

drive-in visitors, it is the seventh largest source of international visitors to the US.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



Exhibit 79: China is now the ninth largest source of international visitors to the US China ranked against other countries in term of size of travel to the US; China excludes HK

Source: OTTI.

While China has been increasing in terms of the absolute number of travelers visiting the

US, the US is below its peak in terms of the percentage of Chinese travelers who come to

the US versus other locales. The US peaked in 1999, when 4.2% of Chinese outbound

travelers came to the US, but only 1.4% of these travelers visited the US in 2010 (we do not

have 2011 data yet). This number is off a low of 0.7% in 2004 (Exhibit 80).

Exhibit 80: US Share of Chinese travelers is recovering but very slowly US share of worldwide Chinese outbound travel

Source: OTTI.

Rank (2007) Country Visitors Rank (2011) Country Visitors

1 Canada 17,735,000 1 Canada 21,028,177

2 Mexico 15,089,000 2 Mexico 13,414,020

3 United Kingdom 4,497,858 3 United Kingdom 3,835,300

4 Japan 3,531,489 4 Japan 3,249,569

5 Germany 1,524,151 5 Germany 1,823,797

6 France 997,506 6 Brazil 1,508,279

7 South Korea 806,175 7 France 1,504,182

8 Australia 669,536 8 South Korea 1,145,216

9 Brazil 639,431 9 People's Republic of China 1,089,40510 Italy 634,152 10 Australia 1,037,852

11 India 567,045 11 Italy 891,571

12 Spain 516,471 12 Spain 700,183

13 Netherlands 506,852 13 India 663,465

14 Ireland 491,055 14 Netherlands 601,013

15 Venezuela 458,678 15 Venezuela 561,080

16 People's Republic of China 397,000 16 Argentina 512,258

17 Columbia 389,752 17 Colombia 496,814

18 Sweden 337,474 18 Switzerland 476,502

19 Isreal 313,077 19 Sweden 438,972

20 Taiwan 311,020 20 Ireland 346,879

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US Share of Chinese Outbound Travelers



We believe there is large potential for the US to get an increasing percentage of this

growing base of travelers. One of the biggest reasons for the loss of share of Chinese

travelers is the difficulty of getting a visa to come to the US. On January 19, 2012, President

Obama signed an executive order focusing on China, India, and Brazil. The order seeks to

(1) increase visa processing capacity by 40% over the coming year, (2) ensure 80% of visas

are processed within 3 weeks, (3) increase the Visa Waiver Program, and (4) expand

programs like the Global Entry program, making it easier for frequent international

travelers to visit the US. We think these steps will help the US reach its full potential of

attracting international business and could accelerate visitor growth from China and Brazil.

We think that the executive order as well as growing demand will push Chinese demand

even higher over the next few years.

Exhibit 81: Chinese inbound travel to the US could increase by 75% over the next five

years

China expected traveler growth over the next years

Source: OTTI.

Because we have data on what percentage of Chinese travelers use hotel rooms and how

long they stay, we can figure out how many more room nights they will require if the Office

of Travel and Tourism forecasts prove correct. In 2011 we estimate that Chinese tourists

used close to seven million room nights. By 2016 we estimate they could require over 19

million room nights.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2011 2012E 2013E 2014E 2015E 2016E

Chinese Travelers to the US



Exhibit 82: Expected additional room nights needed Expected additional room nights needed for Chinese incoming travelers

Source: OTTI, Goldman Sachs Research estimates.

We expect that between the end of 2011 and 2016 there is likely to be an additional

150,000-200,000 more rooms or an additional 55-73 million room nights. When we

compare this with the additional 12 million more room nights Chinese travelers will require,

we can see that even one country can make an impact. Also, Chinese travelers tend to

concentrate their visits in certain locations. In 2010 over half went to California, over a third

went to New York, and almost a fifth went to Nevada.

0

5,000

10,000

15,000

20,000

25,000

2011 2012E 2013E 2014E 2015E 2016E

Room Nights



A closer look at lodging REITs – One of our favorite ways to directly

benefit from the recovery

In this section we take a closer look at an important subsector within the lodging industry,

lodging REITs. We detail the qualifications to become a REIT, lay out the competitive

landscape, and discuss lodging REIT valuation.

What is a REIT?

A real estate investment trust (REIT) is a company that owns and usually operates income-

producing real estate, including office and industrial buildings, malls, shopping centers,

multifamily properties, hotels, health care facilities, storage units, and even mortgages. The

REIT structure permits a company to deduct dividends paid to investors from its corporate

taxable income, thereby eliminating the issue of double taxation. Per the National

Association of Real Estate Investment Trusts (NAREIT), the key provisions for a company to

qualify as a REIT, as mandated by the tax code, include the following:

It must distribute at least 90% of its taxable income in the form of dividends to

investors.

At least 75% of the total assets must be invested in real estate assets.

At least 75% of the gross income must come from property rents or interest on

mortgages.

No more than 20% of assets consist of stocks in taxable REIT subsidiaries.

The REIT structure provides investors a tax-efficient option for investing in real estate

and a way to participate in the income stream without owning properties.

Lodging REITs

In addition to the qualifications above, Lodging REITs are not permitted to operate the

hotels or derive any income from the operations of the hotels. Lodging REITs typically

acquire the hotel and pay fees to a third-party manager to operate the property. The REIT

Modernization Act of 2002, which permitted the formation of taxable REIT subsidiaries

(TRS), still maintains that the TRS may not operate or manage a lodging facility. The TRS

may only lease the lodging facility from the REIT at market rates.

Lodging REITs may only own their assets. A lodging REIT is typically a collection of

assets with no unifying brand, and it is heavily tied to the operating leverage of the hotel

business. Lodging REITs make money by buying a hotel and bringing in a third-party

manager to run the hotel. For example, Host Hotels would partner with Marriott to manage

its hotel, and after the manager pays all expenses and receives its compensation through

base fees and incentive fees, the remainder goes to Host Hotels. REITs benefit from

RevPAR growth and operating leverage, along with real estate appreciation at the property

level. The provisions to qualify as a REIT restrict lodging REITs from management and

franchise opportunities, which we view as two highly profitable growth strategies within

the lodging sector.

During the recession REITS were given the option of paying dividends partially in stock. In

December 2008 the Internal Revenue Service issued Revenue procedure 2008-68, which

permits listed REITS to pay elective stock dividends. Under this guidance, a REIT can

provide its shareholder with a choice between stock or cash dividend, and the entire

dividend distribution is treated as a distribution of cash for the purposes of tax rules to

qualify as REIT. However, the REITs will have to pay 10% of its total dividend in cash. Most

of the public hotel REITS took advantage of this ruling and issued stock dividends in 2009



to save on the much needed cash balance. However, with the stabilizing operating

environment, hotel REITs are increasingly returning to cash dividends.

We are more balanced on C-corps vs. REITs than we have been in

the past

We have historically been more bullish toward the C-corp structured lodging stocks based

on their multi-pronged growth strategies. Over the long term we believe the diversified

sources of growth for C-corps will lead to greater and extended returns versus the more

narrowly defined, less creative, and lower-margin opportunities available to lodging REITs.

However, at the current point in the cycle we believe that REITs look attractive given their

high operating leverage and our viewpoint that rate growth will be accelerating. In Exhibit

83, we review the growth strategies for lodging C-corps and lodging REITs.

Exhibit 83: Lodging REITs versus C-corps Lodging C-corps such as Marriott, Starwood and Hilton have multi-pronged growth strategies


Valuation comparison for lodging REITs vs. C-corps

The lodging REITs are trading at higher EBITDA multiples than our C-corps in general. We

believe this is occurring as many investors want to own the operating leverage at this point

in the cycle. Over a longer period of time REITs and C-corps have traded at similar

multiples, but REITs went lower during the downturn and higher during the upturn.

We point out that there is higher risk to lodging REITs given that hotel rooms are “rented”

daily, and apartment and office REITs can be considered more stable given the longer-term

nature of their lease agreements. Nonetheless, when looking at lodging REITs versus the

broader REIT sectors, the multiples tend to be toward the lower end of the range.

Net asset value may also be used to value REITs

An additional metric used to value lodging REITs is net asset value (NAV). NAV is a value

for the company based on where the assets would trade in the sales market. The analysis

involves taking the company’s net operating income (less 4% for an FF&E reserve) and

dividing it by the appropriate capitalization rate. Capitalization rates are set by the market

based on current sales transactions and are a similar metric to EBITDA multiples used for

the lodging C-corps. EBITDA multiples are calculated as total transaction cost divided by

EBITDA, whereas capitalization rates are calculated as net operating income divided by

total transaction cost. Property types tend to trade within a band of capitalization rates over

time that are differentiated based on age, market, and quality. Historically, capitalization

rates for lodging REITs have been in the 6%-12% range.

Growth StrategiesRevPAR growthReal estate appreciationOperating leverageGrowth by acquisitionOrganic unit growthFranchisingManagementTimeshare initiatives

Lodging REIT Growth Strategies

Lodging C-Corp Growth Strategies



Key industry risks

Economic weakness. All lodging companies are susceptible to a lodging cycle

downturn as a result of a slowing economy. Historically, when business travel has

slowed dramatically, major corporations have cut back on costs and have laid off

employees. Occupancies tend to decline, hurting overall room revenues along with

food and beverage and conference revenues.

Imbalances in supply and demand. As the supply rate increases and surpasses the

rate of demand, earnings are at increased risk. Increased supply growth also implies

increased competition. Overbuilding in this sector is extremely difficult to overcome.

Brand deterioration. Consistency is the most important factor for brand recognition. If

consistency falters, the brand name suffers. This is an ongoing risk for management

and franchise companies as they market their brands, but sometimes they do not have

a say on the capital expenditures at the property level. However, most of the major

operators have protected the integrity of their brands through their management

contracts. Currently, many management contracts require hotel owners to put a

percentage of annual hotel revenues back into the property for normal maintenance

expenditures.

Location and lack of geographic diversification. Urban hotels and big convention

hotels are generally affected more during a downturn than suburban locations.

High degree of leverage. While leverage is now on its way down because of the

largely fixed cost nature of the business, leverage can increase quickly when revenues

decline. We believe that hotels are unlikely to return to the high debt levels they held

going into the last downturn.



Lodging consumer characteristics

Typical lodging customer

According to the American Hotel and Lodging Association, customers travel for business

roughly 40% of the time and for leisure purposes the other 60% of the time. For business,

the customer is either a transient traveler attending an individual or small group meeting

or a traveler attending a conference/large group meeting. The leisure customer is either

traveling on vacation or traveling for personal, family, or other special-event reasons (see

Exhibit 84).

Exhibit 84: Leisure travelers compose the greatest share of lodging customers lodging customer type, 2009

Source: D.K. Shifflet & Associates Ltd and AHLA.

Business traveler characteristics

According to the American Hotel and Lodging Association, the typical business traveler is

male (68%), age 35-54 (47%), employed in a managerial or professional position (54%), and

earns an annual income of $116,578. These business travelers make reservations 91% of

the time and pay an average $124 per room night. About 36% spend one night, 22% spend

two nights, and 42% spend more than two nights.

Leisure traveler characteristics

According to the American Hotel and Lodging Association, the typical leisure travel stay is

by two adults (52%), aged 35-54 (37%), and each earns an annual $87,327. They typically

travel by auto (79%), make reservations (88%), and pay an average of $105 per room night.

Roughly 49% of leisure travelers spend one night, 25% spend two nights, and 27% spend

over two nights.

Business40%

Leisure60%

For the high-end hotels, business travelers typically account for over 70% of revenues.



Analysis of industry competitors

We believe that hotel companies are branded consumer service companies. Increasing the

number of distribution points is critical to long-term success as it leads to more brand

awareness and greater brand leverage opportunities. This creates value over a larger base

of hotels. We value solid unit growth and expansion potential as dominant drivers of long-

term cash flow growth.

Strength of business model: We favor a management-oriented structure. We evaluate

the strength of the business model based on whether a company owns and operates,

manages, or franchises its hotel products. We typically view management-oriented and

franchise-oriented companies more favorably than ownership companies. This is due to

the low capital risk, greater unit growth potential, and greater brand distribution potential

(see Exhibit 85). As has been seen in this last downturn, management companies are

shielded somewhat (but not completely) from the negative operating leverage of the hotel

business. They receive a percentage of the top-line revenues and are not subject to losses

at the hotel level.

Exhibit 85: Lodging industry segmentation


Companies that own their hotels (REITs)- (100% EBITDA from owned hotels)Owns hotels that are managed by manager hotel companies like Starwood, Marriott or independents100% EBITDA from owned hotels

Ownership focused operators- (majority of EBITDA from owned hotels)Orient Express Hotels No unified brand- hotels include the Cipriani, Copacabana Palace, Reid's Palace and Grand Hotel Timeo 84% EBITDA from owned hotels, 16% EBITDA from management/partially owned hotels, restaurants, train lines and real estate development

Management and franchise focused operators (majority of EBITDA from management/franchise contracts)Wyndham Worldwide Franchised brands include Wyndham, Days Inn, Ramada, Super 8, Howard Johnson, Travelodge, Knights Inn, Wingate, Baymont Inn and Suites 23% of EBITDA from its lodging business; 47% from selling timeshare; 30% from vacation exchange/rentalMarriott International Brands include Marriott Hotels & Resorts, Renaissance, Courtyard, Residence Inn, Fairfield Inn, TownePlace Suites, Spring Hill Suites 80% revenues from managed/franchised hotels, 20% revenues from owned operationsChoice Hotels Brand include Cambria suites, Comfort Inn, Quality Inn, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, Mainstay Suites Almost 100% of its EBITDA from franchising business

Companies shifting to a more fee-based modelStarwood Hotels & Resorts Brands include Sheraton, Westin, W Hotel, St. Regis/Luxury Collection, Four Points, Le Meridien, Aloft, Element 31% revenues from owned hotels, 56% from management/franchise fees and 13% from timeshare/other operations

Am

ericas: LodgingA

pril 10, 2012

87G

oldman Sachs G

lobal Investment R

esearch

Exhibit 86: Lodging timeline

Source: Company Data, Smith Travel Research and Goldman Sachs Research.

--Hotel companies were managers, franchisers, and real estate owners

--Occupancy levels were high leading to increased building

--Capital into the industry slows

--Recession induced demand deceleration

--Supply starts to stabilize and building in most states comes to a halt

--Industry experiences hyper-growth

--Building stops, demand accelerates

--Earnings momentum develops

--Real estate downturn sets in

--Hotel companies begin to sell real estate because of negative operating leverage

--Industry fundamentals slow with Internet bubble and slowing economy

--September 11 significantly alters travel patterns

--Earnings momentum decelerates as demand lags with increased conflicts in the Middle East and impact of SARS

--Reversal in operating trends

--Sharp recovery in transient business travel that led to above expectation RevPAR performance

--Supply growth remained low

--Continued RevPAR improvement with rate driving almost 70% of the upside

--Margin expansion occurring, but companies still significantly below peak levels

--Third year in a row of high single-digit RevPAR growth; rates drove over 90% of the upside.

--Supply growth continues to come in below expectations

--Margin expansion story intact as companies still 400-500bps below peak levels

--Private equity interest in hotel assets remains high and the major operators continue shift to a more "asset light" business model

--Fourth year in a row of RevPAR growth, albeit trends starting to moderate in the mid-single digit range.

--Supply pipelines building and growth starting to pick up

--Even with decelerating trends private equity interest in hotel assets remains high

--RevPAR continues to decelerate and turns negative in the second half of the year.

--Supply pipeline at record highs, with growth expected to rise further

--Earnings momentum decelerating

--Private equity interest almost non-existent given

--RevPAR continues its downward trend with the luxury segment being hit the most

..ADR under pressure with declining occupancy

--Supply growth decelarates with most projects in planning phase and pre planning phase being deffered or cancelled.

--Earnings momentum flat

--RevPAR turned positive in early 2010

..Occupancy which turned positive in February 2010 is now gaining strength

--ADR has moved past its inflection point and is expected to turn positive by 2010 year end

--Supply growth continues to decelarate.

--Earnings momentum developing and margins have begun to expand

--Continued RevPAR strengthening

--Rates turned positive and are expected to strengthen as business travel gains momentum

..Supply continues to freeze

--Margins expanding due to operating leverage

Pre-1980's Early-Mid 1980's Late 1980's - Early 1990's - 2000 to 2003 2004

2005 2006 2007 2008 2009 2010

2011

--RevPAR continuing to strengthen

--Margins expanding due to

operating leverage

--Supply continues to remain

at historically low levels

--As occupancy levels return to historical peaks, RevPAR is increasingly driven by rate

2012

Top 10 brand franchise characteristics

Below is a review of our framework for judging brand dominance in the hospitality sector.

We believe that these “top 10 brand franchise characteristics” are crucial for

outperformance in the lodging sector. The companies that master all these characteristics

should have the strongest lodging company in the end.

Pricing flexibility. Strong brands allow for more aggressive pricing as customers are

willing to pay up for the perceived quality of the brand. We believe that Marriott/

Starwood/Hilton have some of the strongest brands in the lodging market today,

allowing them to achieve significant RevPAR premiums in their respective

marketplaces.

Low-cost producer. The purchasing power, unique product characteristics, or

economies of scale make it difficult for competitors to match costs. Marriott, Accor,

InterContinental, Wyndham, Hilton Hotels, and Starwood, given their massive size,

have the biggest pricing power and can aggressively beat the expense structures of

independent hotels.

International opportunities. Rapidly expanding economies offer additional growth

venues in international markets. The consistency of a brand is often of even greater

value in emerging markets.

Significant barriers to entry. Product development time and expense, sourcing

capabilities, production expertise, or simply customer perceptions protect the market

share of branded franchise companies.

Low penetration of product. Opportunities for increased market share, particularly

outside the home market, afford additional growth paths. Although the US-based

lodging companies are fairly well represented in the United States, outside the United

States hotel chains are highly fragmented. In Europe, which is the largest lodging

market outside the United States, only 25%-30% of the market is currently branded.

Marriott, Wyndham, and Starwood have already implemented aggressive international

expansion programs.

Solid balance sheet and strong free cash flow generation. A relatively

underleveraged balance sheet and strong cash generation allow for greater financial

flexibility, including share buybacks, higher dividend payouts, opportunistic

acquisitions, and new product capital expenditures.

Increasing market share. Relative to the competition, branded companies usually

build or sustain market share at a higher rate.

Active new product development. New products and the refinement of existing ones

are critical to sustaining the growth and vitality of the brand.

Stable to increasing margins. Great branded companies should improve margins

either through pricing flexibility or increased operating leverage, and they tend to

show improving returns on capital.

Shareholder-oriented management teams. Shareholder-oriented management is

often achieved through incentive-based compensation or significant stock ownership.

We favor companies with a high percentage of inside ownership and those companies

that base compensation (including stock option grants) of senior management on

meeting earnings goals.



What to ask company management

What is your ideal business segment allocation among owned, managed, franchised,

and timeshare?

What factors will influence the staying power of your family of brands? Are there

potential new brands under development?

The frequent-guest program has to cost somebody more money given the added

benefits. Who is losing and where does the loss show up?

What percentage of your properties are truly up to standard? Do you consider your

brands consistent across the entire portfolio? As a manager and/or owner, how do you

ensure the consistency of your product?

What will capital expenditures be over the next few years and how do you measure

your returns on investment? For your franchised/managed properties, how do you

work with your owners to ensure they are investing the necessary capital?

Cross-selling your family of brands is critical in an increasingly competitive

environment. What is the percentage of cross-selling across your portfolio and how do

you measure this?

What percentage of your rooms is booked 12, 6, 3, and 1 month in advance?

What is your plan for international expansion? What markets to do you see as most

attractive?

One of the major drivers of lodging earnings is unit growth. What are the capital

requirements for expansion internationally? Are you finding that you have to put more

upfront capital into the Asian and European markets to get the management deals as

those markets develop further?

What is your rationale for investing in new hotel mezzanine financing and sliver

equity? What are your investment parameters for these types of investments? What

are your off-balance-sheet exposures and off-balance-sheet guarantees?

What has been the trend for independent hotels converting to your family of brands?

Do you actively approach independent hotel owners or do the independent hotel

owners approach you?

How long is the typical management contract for each brand? What is the incentive fee

structure for you brands? Are there periods where parties can get out of the contract?

What portion of cash flow is dedicated to capex, share buybacks, and debt reduction?

Will these proportions change going forward?

What is your ideal leverage level?

When evaluating acquisition opportunities, what do you look for with regard to

individual properties and whole companies?

What is the composition of your customer mix (i.e., business versus leisure, group

versus free independent traveler (FIT), United States versus international)?

How do you use the online travel agents (OTAs) as a distribution point?

What markets do you see as attractive for growth?



Valuation

Key valuation metrics—EV/EBITDA and P/E ratios

The enterprise-value-to-EBITDA (EV/EBITDA) ratio is the primary metric for

valuing lodging companies. Our primary metric to value lodging companies is

enterprise value-to-earnings before interest, taxes, depreciation, and amortization. The

EV/EBITDA ratio makes global comparisons easier as it accounts for the effects of

differing capital structures and ignores non-cash depreciation and amortization

expenses, which run high for most lodging companies (see Exhibits 87-88).

On an EV/EBITDA basis, hotel management companies (i.e., Choice, Marriott) have

historically traded at a premium to companies more levered to hotel ownership (i.e.,

Starwood). As they continue to evolve toward more management/franchise companies

with less exposure to ownership, we may see the valuation gap begin to close.

The price-to-earnings (P/E) ratio is used less often, but as the majority of our

companies continue to reduce their real estate exposure, we believe that price-to-

earnings may come more into focus. We use absolute and relative price-to-earnings

ratios to value lodging stocks (see Exhibits 89-90).

Exhibit 87: Forward EV/EBITDA: C-Corps 2002 – February 2012

Exhibit 88: Forward EV/EBITDA: REITs 2002 – February 2012

Source: Company data, FactSet, Goldman Sachs Research.


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Exhibit 89: Forward P/E: C-Corps

2000 – February 2012

Exhibit 90: Forward P/FFO : REITs

2003 – February 2012



What drives lodging stocks?

We do not believe that valuation in and of itself should be the ultimate driver of an

investment recommendation. Instead, sustainability of earnings growth should be the main

driver for lodging performance. We ultimately believe that hotel stocks trade as a group

based on sector supply/demand dynamics, but the companies with the strongest brand and

development opportunities lead the group.

Investors will pay the most for top-line growth, giving the greatest value to same-store or

RevPAR growth (revenue per available room), followed closely by unit growth. Margin

expansion initiatives are also highly valued, followed by growth by acquisition, share

buyback, and debt paydown, in that order (see Exhibit 91).

Exhibit 91: What investors pay for


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Acquisitions

Margin Expansion

Organic Growth

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Lowest

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Historical price performance analysis

Lodging shares are typically viewed as growth stocks given their high unit growth and

brand expansion potential. With that said, lodging stocks do have a cyclical component as

shares react to the rise and fall of the economy.

Looking at the past roughly 25 years of hotel data and the performance of our Goldman

Sachs Lodging Index (GSLI), we have found that lodging stocks have largely perform in

accordance with the spread between supply and demand growth. Over the past 24 years,

demand growth has outpaced supply growth 13 times (see Exhibits 92-94).

Exhibit 92: Demand minus supply growth

basis point difference


Exhibit 93: GS Lodging Index annual percentage change

Source: Goldman Sachs Research, FactSet.

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GSLI Annual Percentage Change



Exhibit 94: Goldman Sachs Lodging Index

Source: Goldman Sachs Research, FactSet.

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S&P 500 Perf. Since 1984

873

817

ANNUAL PRICE PERFORMANCE% S&P % Relative

GSLI Change 500 Change GSLI/S&P 500Jan-11 908 -0.9% 1286 2.3% -3.1%Feb-11 921 1.4% 1327 3.2% -1.8%Mar-11 876 -4.8% 1326 -0.1% -4.7%Apr-11 901 2.8% 1360 2.6% 0.2%May-11 906 0.5% 1345 -1.1% 1.6%Jun-11 852 -5.9% 1321 -1.8% -4.1%Jul-11 814 -4.5% 1292 -2.1% -2.3%

Aug-11 690 -15.1% 1219 -5.7% -9.5%Sep-11 625 -9.5% 1131 -7.2% -2.3%Oct-11 770 23.1% 1253 10.8% 12.4%Nov-11 753 -2.2% 1247 -0.5% -1.7%Dec-11 773 2.7% 1258 0.9% 1.9%Jan-12 866 12.0% 1312 4.4% 7.7%

2011 YTD 873 -4.7% 1366 8.6% -13.3%



Key earnings drivers

The key earnings drivers for lodging companies include unit growth, international

brand extension and expansion opportunities, and supply/demand relationships. Also

enhancing growth are same-store sales metrics such as increases in average daily

rates and occupancy.

Unit growth. New unit development is the ultimate driver of earnings.

International brand extension and expansion opportunities. With only 25%-30% of

the European lodging market branded and many markets outside the United States

underpenetrated, there is substantial opportunity for US companies to expand abroad.

Supply/demand relationships. Spread between industry supply and demand growth

is closely monitored. Historically, RevPAR growth accelerates when demand growth

outpaces supply growth.

RevPAR growth. Revenue per available room measures the average daily room rate

times the average occupancy rate.

Average room rate. Room rate increases are highly profitable, more so than

occupancy gains.

Room occupancy. Room occupancy levels are a prime determinant of hotel

productivity. When occupancy levels are abnormally high, it may mean that rates are

too low.

Effective cash flow deployment. Cash flow from operations that is used for low

internal rate of return (IRR) projects, such as maintenance and programs that have not

been carefully evaluated, ultimately lower earnings. Additional property-level

amenities such as spas and workout facilities, however, add to earnings.

Degree of operating leverage. Higher levels of operating leverage exacerbate the

effect of a slowdown on operating profits given slowing top-line revenues on a

relatively high fixed expense structure. However, in robust times the high operating

leverage accelerates profits as revenues increase and costs remain relatively fixed.

Favorable labor costs. Labor is currently the highest expense for hoteliers.

Balance sheet leverage. Owners of lodging assets are generally highly levered.

Changes in interest rates can have a significant impact on EPS to the upside and

downside.



Economic and demand indicators

Gross domestic product (GDP). Lodging is an economically sensitive sector, with

lodging demand correlated to GDP.

Consumer price index (CPI). We compare room rate increases with overall inflation

growth to measure pricing trends.

After-tax corporate profits. Corporate profits are another important economic

indicator for hotels and, according to Marriott management, are one of the best

leading indicators of future hotel demand.

Supply and demand. Supply and demand comparisons alert us to secular imbalances.

Convention attendance statistics. Conferences and large conventions have been a

significant driver of visitation and mid-week occupancy for the large city-centered

hotels. Large convention cities include Las Vegas, New York, Orlando, San Francisco,

Chicago, and New Orleans.



Analyzing lodging performance

When analyzing lodging performance, we look at three variables: average daily rate

(ADR), occupancy (percentage of rooms rented over total rooms available), and

revenue per available room (RevPAR), which is calculated by multiplying ADR times

occupancy.

We look at RevPAR to analyze lodging performance

RevPAR is calculated by multiplying ADR by occupancy and is widely regarded as the best

metric by which to analyze lodging performance. Balancing ADRs and occupancies at the

hotel level is difficult. Typically when hotel rates rise, occupancies fall and vice versa. The

problem that hoteliers face is determining the right combination of rate and occupancy to

maximize revenues at the property level. Years of hotel data have been compiled and

complex yield management systems have been developed to help hotel companies do just

that.

Exhibit 95 details how revenues can increase from the $70 per available room level.

Hoteliers can achieve a higher $72 per available room by either raising or lowering rates.

Depending on hotel demand, the changes in rates will have a varying impact on hotel

occupancy. More important to note is that raising hotel rates does not always result in

higher revenues. Higher rates may in fact keep on-the-margin consumers at home,

resulting in lower occupancies and lower overall revenues.

Exhibit 95: Raising rates does not always result in higher revenues at the property level

analysis of changes in occupancy and ADRs on RevPAR

Source: Goldman Sachs Research estimates.

We look at rates and occupancies individually to analyze hotel

profits

When analyzing revenue at the property level, we use RevPAR, but when analyzing the

impact of these changes on the profit line we look more closely at RevPAR’s components.

At the profit level, it does matter how RevPAR increases are achieved. Hoteliers achieve

higher profits through increases in rates rather than increases in occupancies. The reason

is that increases in rates are not accompanied by incremental costs. Increases in

occupancies, however, are typically accompanied by higher costs as hotels need people to

clean the rooms and serve the customers. Currently, the US lodging industry is near

historical occupancy highs, and we are seeing a strong recovery in rates. With improving

rates and cost at its lowest levels, we expect margins to improve through 2012 and 2013.

OccupancyAverage daily

rate (ADR) RevPAR

Lower occupancy at various rates 60% $120.00 $72.00

60% $110.00 $66.00

Base occupancy and rate 70% $100.00 $70.00

Higher occupancy at various rates 80% $90.00 $72.00

80% $80.00 $64.00

Achieve same revenue per available room

RevPAR is widely used as the key lodging metric.

Looking at either occupancy or ADRs individually can be misleading when analyzing the impact on overall revenues.



History of RevPAR

Over the past 44 years (1968-2011), RevPAR growth has averaged 5.5% (see Exhibit 96).

Exhibit 96: Annual RevPAR growth has been negative only five times over last 42 years


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Appendix I: Industry terminology

Average daily rate (ADR): Average daily rate achieved for domestic hotels.

Average weekly rate (AWR): Average weekly rate achieved for extended-stay properties.

Central reservation system (CRS): Database that compiles all property pricing and

availability information for individual hotel companies.

Chain scale: Classifications of hotels into segments that are based primarily on the actual,

system-wide average room rates of the major chains. Independent hotels are included in a

separate category. The segments are Luxury, Upper Upscale, Upscale, Midscale with F&B,

Midscale without F&B, and Economy.

Franchise contracts: Companies whose franchise typically derives its revenues through a

percentage of room revenues. This percentage is typically higher than a base fee

percentage for management contracts as the hotel companies do not benefit from

incentive fees.

Free independent traveler (FIT): Free independent travelers are consumers not tied to

business travel, convention, or group business. These consumers are typically leisure-

oriented.

Funds from operations (FFO): An industry-wide standard for measuring operating

performance for lodging REITs; calculated as net income according to GAAP, plus real

estate depreciation, any extraordinary charges, and any repayments of principal on debt

balances.

Global distribution system (GDS) (Amadeus, SABRE, Galileo, Worldspan): Electronic

network used by agents to book hotel, airline, and car reservations.

Location segment: Classifications dictated by physical location of the hotel.

Urban—Hotels located in the Central Business District (CBD), usually the downtown

area of large metropolitan markets (e.g., Atlanta, Boston, New York).

Suburban—Hotels located in the suburban areas of metropolitan markets (e.g., College

Park or Marietta, Georgia, near Atlanta).

Highway—Hotels located on an interstate or other major road or in a small town or city

(e.g., Evergreen, Alabama, or Colorado City, Texas).

Airport—Hotels located within five miles (usually) of a major municipal airport.

Resort—Hotels located within a market that attracts mostly leisure travelers such as

Orlando, Florida, or Lake Tahoe, Nevada.

Management contracts: Companies that specialize in management contracts derive fees

for managing the day-to-day operations for third-party owners. Management companies

derive fees in three ways: (1) base fees usually taken as a percentage of overall revenues;

(2) additional fees for services rendered for pre-opening development, purchasing,

marketing, reservations, and advertising for the hotel owner; and (3) incentive fees that

serve as an additional bonus for increased performance at the hotel profit level. Incentive

fees are typically based on a percentage of overall profits and are usually only paid if a

certain threshold level of profits is achieved.

Occupancy rates: The percentage of rooms filled divided by the total number of rooms

available.

Price/FFO: A valuation ratio defined as price divided by funds from operations. This

multiple is used to value REITs instead of the more common P/E approach used in equity

analysis, owing to lodging REITs’ large depreciation expenses.

RevPAR: Revenue per available room measures the occupancy times the average daily rate.



Exhibit 97: Lodging: 12-month ratings, price targets, and risks

Note: Marriott International is a CL-Buy.

Source: Goldman Sachs Investment Research, FactSet.

Company Ticker Rating Price on 4/10/12

Price Target (12-months)

Methodology Risks

LodgingChoice Hotels CHH Neutral $36.43 $39.50 1/3 DCF & 2/3 2013E EV/EBITDA Upside risk: Mid-scale and economy RevPAR better than expected; Downside risk: Weaker than expected Midscale and economy RevPAR.

Gaylord Entertainment GET Neutral $29.20 $29.50 1/3 DCF & 2/3 2013E EV/EBITDA Upside risk: Better-than-expected convention business; Downside risk: Decline in business travel.

Hyatt Hotels Corporation H Neutral $39.53 $47.50 1/3 DCF & 2/3 2013E EV/EBITDA Slower than expected economic growth

Interval Leisure IILG Neutral $17.16 $17.00 1/3 DCF & 2/3 2013E EV/EBITDA Upside risk: Better than expected growth in new membership base; Downside risk: Lower than expected Hawaii RevPAR; timeshare activity.

InterContinental Hotels Group PLC IHG.L Buy 1,415.00p 1,725.00p 1/3 DCF & 2/3 2013E EV/EBITDA Downside risk: weaker than forecast RevPAR growth and lower system growth than current forecast

Marriott International MAR Buy $36.47 $42.00 1/3 DCF & 2/3 2013E EV/EBITDA Downside risk: Slower-than-expected recovery or inability to control expense growth as revenue increases.

Marriott Vacations Worldwide VAC Neutral $27.79 $29.50 2013E EV/EBITDADownside Risks: Not being able to exit the Luxury and Europe businesses as quickly as expected or that consumer confidence falls. There is

also investor base risk as MAR investors may not be attracted to VAC. Upside Risks: ability to sell excess land and faster margin improvement.

Orient-Express Hotels Ltd. OEH Neutral $9.75 $10.50 1/3 DCF & 2/3 2013E EV/EBITDA Upside risk: Faster-than-expected reduction in debt levels. Downside risk: Disappointing performance in international markets.

Starwood Hotels & Resorts HOT Buy $53.19 $66.00 1/3 DCF & 2/3 2013E EV/EBITDA Lower - than - expected RevPAR recovery.

Wyndham Worldwide WYN Buy $44.81 $55.00 SOTP analysis Downside risk: Worse - than - expected timeshare results

Lodging REITsDiamond Rock Hospitality DRH Neutral $9.68 $10.50 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Upside risk: Better growth; Downside risk: Large capital expenditure on one hotel.

Felcor Lodging Trust FCH Neutral $4.00 $3.85 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Upside risk: Sooner than expected hotel sales. Downside risk: Inability to sell hotels.

LaSalle Hotel Properties LHO Buy $26.53 $31.50 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA High concentration Washington D.C. and a slower economy.

RLJ Lodging Trust RLJ Neutral $17.65 $18.00 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Downside Rsk: slowdown in the economy, signs of accelerating supply growth, poor use of capital; Upside risk: faster than expected improvement in rate growth

Host Hotels and Resorts, Inc. HST Buy $15.57 $18.75 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Slowdown in the economy and business travel

Sunstone Hotel Investors SHO Neutral $9.27 $10.00 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Upside risk: Faster - than - expected improvement in business travel; Downside risk: Slower than expected improvement in business travel and



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