Lodging Industry. Initiating Coverage. Global Markets Research. Company. Coverage Change. 20 September 2011

Transcription

1 Company Global Markets Research North America United States Consumer Gaming & Lodging 20 September 2011 Lodging Industry Initiating Coverage Coverage Change We Are Launching Coverage on Seven Lodging Stocks Our outlook on industry fundamentals for 2012 and 2013 is below that of our peers and reflects our macroeconomic-based findings that we identify and analyze throughout this report. Despite our sub Consensus outlook, we believe the ~25% pullback in shares in the year to date reflects much of the bad news. As such, we believe owning lodging stocks with international growth platforms, unique positioning within the domestic industry, or those with company-specific stories makes the most sense at this time. Carlo Santarelli Research Analyst (+1) Tim Wengerd Research Associate (+1) All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.

2 North America United States Consumer Gaming & Lodging 20 September 2011 Lodging Industry Initiating Coverage Carlo Santarelli Research Analyst (+1) Tim Wengerd Research Associate (+1) We Are Launching Coverage on Seven Lodging Stocks Our outlook on industry fundamentals for 2012 and 2013 is below that of our peers and reflects our macroeconomic-based findings that we identify and analyze throughout this report. Despite our sub Consensus outlook, we believe the ~25% pullback in shares in the year to date reflects much of the bad news. As such, we believe owning lodging stocks with international growth platforms, unique positioning within the domestic industry, or those with company-specific stories makes the most sense at this time. What Have We Done? In this report we examine a number of unique lodging and macro correlations, and we believe we have turned over some interesting statistical evidence that paints a rather dour domestic outlook for lodging. We note that some of our analysis is non-conventional and goes considerably beyond the typical GDP to RevPAR correlation work. Our analysis leads us to the conclusion that 2012 may well be a bumpy year for domestic lodging fundamentals. However, given our view that current valuations in the sector reflect a less optimistic outlook for 2012 RevPAR performance than our current forecast, we believe long opportunities exist. Despite Our Industry Outlook, Lodging Stocks Can Still Work We are initiating coverage with four Buy-rated stocks and three Hold-rated stocks. Broadly speaking, we favor companies with desirable brands in emerging markets and outsized international growth pipelines. This view largely underpins our Buy ratings on HOT, our top pick, and, to a lesser extent, H. Our Buy rating on WYN can be defined as a story-specific view that is largely lodging-neutral, and our Buy rating on OEH relates more to valuation and catalysts than to our out-year forecasts for luxury and/or international RevPAR performance. Each of our company initiations can be found in this report. Our RevPAR Forecasts Are Below Consensus Our current 2011, 2012, and 2013 total U.S. RevPAR forecasts are +7.7%, +4.4%, and +5.0%, respectively. Our 2011 (+7.7%) and 2012 (+4.4%) RevPAR forecasts compare to Smith Travel Research forecasts of +7.8% for 2011 and +7.0% for We believe it is important to note that our forecasts assume that business travel, which has been resilient so far this year, continues to hold up. Valuation and Risks We primarily value lodging stocks on multiples of EV/EBITDA. With lodging stocks largely trading below historical forward EV/EBITDA multiple averages, we believe the following sector risks remain pertinent: 1) further erosion of the domestic macroeconomic environment and flattening of out-year GDP forecasts, 2) an inability to resolve the current European crisis, 3) the erosion of corporate profits that curbs corporate travel demand, and 4) acts of terrorism or other exogenous factors that could curtail travel demand. Coverage Change Top picks Starwood Hotels & Resorts W (HOT.N),USD45.46 Buy Hyatt Hotels (H.N),USD35.56 Buy Orient-Express Hotels (OEH.N),USD8.04 Buy Wyndham Worldwide (WYN.N),USD32.15 Buy Companies featured Starwood Hotels & Resorts W (HOT.N),USD45.46 Buy 2010A 2011E 2012E EPS (USD) P/E (x) EV/EBITDA (x) Choice Hotels Intl. (CHH.N),USD30.69 Hold 2010A 2011E 2012E EPS (USD) P/E (x) EV/EBITDA (x) Gaylord Entertainment Co. (GET.N),USD22.82 Hold 2010A 2011E 2012E EPS (USD) P/E (x) EV/EBITDA (x) Hyatt Hotels (H.N),USD35.56 Buy 2010A 2011E 2012E EPS (USD) P/E (x) EV/EBITDA (x) Host Hotels & Resorts (HST.N),USD12.12 Hold 2010A 2011E 2012E EPS (USD) P/E (x) EV/EBITDA (x) Orient-Express Hotels (OEH.N),USD8.04 Buy 2010A 2011E 2012E EPS (USD) P/E (x) 35.3 EV/EBITDA (x) Wyndham Worldwide (WYN.N),USD32.15 Buy 2010A 2011E 2012E EPS (USD) P/E (x) EV/EBITDA (x) All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.

3 Table of Contents Executive Summary... 3 Overview of Top Picks... 5 Starwood Hotels (HOT) - Buy... 5 Wyndham Worldwide (WYN) - Buy... 5 Hyatt Hotels (H) - Buy... 6 Orient Express Hotels (OEH) - Buy... 6 Deutsche Bank Versus Consensus... 7 Lodging Industry Overview... 9 An Historical Perspective... 9 Review of Fundamental Drivers for Room Demand and Supply The Interplay of Lodging Metrics Operating Costs and Margin Trends Our Industry Forecasts The Business of Hotels: Owning, Managing, and Franchising Comparative Analysis & Valuations Lodging Comparative Valuations Lodging Stock Trends Starwood Htls. & Resort Wyndham Worldwide Orient-Express Hotels Hyatt Hotels Choice Hotels Intl Gaylord Entertainment Co Host Hotels & Resorts Appendix Lodging Industry Stock Returns Operating Statistics Hotel Segments Hotel Supply Page 2

4 Executive Summary We are initiating coverage on seven lodging stocks with four Buy and three Hold ratings. Following two strong years of returns for lodging stocks as investors envisioned a repeat of the lodging cycle (see Figure 7), the sector has seen a meaningful pullback in 2011 as global economic fears have largely quelled exuberant expectations of rate growth and the pent-up demand thesis that we believe had been driving 2012 RevPAR expectations. Accordingly, our lodging coverage universe is down ~25% on a market-cap-weighted basis in the year to date. We believe the year-to-date weakness, and more specifically the 3Q-to-date weakness, has created several favorable risk/reward scenarios. Our views are based on our assumption that while out-year RevPAR has come into question as generally regarded macro-correlated data has softened, shares of several operators reflect a more draconian scenario than we currently believe exists. Accordingly, we assign Buy ratings to Starwood Hotels (HOT), Wyndham (WYN), Hyatt (H), and Orient Express (OEH). We assign Hold ratings to Gaylord Entertainment (GET), Host Hotels (HST), and Choice Hotels (CHH). In general, as it relates to the stocks, we favor companies with desirable brands in emerging markets and outsized international growth pipelines. This view largely underlies our Buy ratings on HOT and, to a lesser extent, H. Our Buy rating on WYN can be defined as a story-specific view that is largely lodgingneutral, and our Buy rating on OEH relates more to valuation and catalysts than to our outyear forecasts for luxury and/or international RevPAR performance. Each of our company initiations can be found in this report. Our current 2011, 2012, and 2013 total US RevPAR forecasts are +7.7% on 1.6% real GDP growth, +4.4% on 1.5% real GDP growth, and +5.0% on 1.8% real GDP growth, respectively. Our 2011 (+7.7%) and 2012 (+4.4%) RevPAR forecasts compare to Smith Travel Research forecasts of +7.8% for 2011 and +7.0% for For 2012, we are forecasting ADR growth of 2.5% and occupancy growth of 1.8% and for 2013 we are forecasting ADR growth of 3.0% and occupancy growth of 2.0%. We believe it is important to note that our forecasts assume that business travel, which has been resilient so far this year, continues to hold up and convention calendars buoy demand in uninspiring economic times. In the year to date, demand growth has been much stronger than we would expect based on statistical relationships. Year to date demand growth is up a solid 5.4%, while real GDP has averaged a mere 1.9% in the 1H The historical relationship suggests that demand growth be up only 1% with 1.9% GDP growth. The story is similar when we look at other indicators, like non-manufacturing ISM employment and airline seat miles. We believe business travelers are largely responsible for the statistical aberration that has existed in the year to date We have found that non-manufacturing ISM employment, which we believe has been largely ignored by the Street, is a leading indicator for lodging demand. This indicator suggests slowing demand growth in the 2H Beyond the 2H 2011, we are concerned that reversion to the mean will catch up to lodging demand in 2012 and With our demand framework in place, we believe our examination of the supply side of the equation may well draw the ire of concrete manufacturers and labor unions alike. Clearly, the bull case for lodging companies and lodging stocks is that supply remains flat or even negative. We are currently forecasting annual changes in total U.S. supply of +0.4%, +0.2%, and 0.0% for 2011, 2012, and 2013, respectively. Page 3

5 At present, we see a supply-demand equation that is considerably out of sync. Assume that supply stays flat at 2010 levels, despite this being somewhat unrealistic, even with supply approaching zero this year. Also assume that lodging demand in the 2H 2011 is equally as strong as in the 1H 2011, a stretch in our view given recent macro economic data. Lastly, assume that for each point in real GDP growth, lodging demand grows 0.608% (47.0% cumulative lodging demand growth divided by 77.4% cumulative real GDP growth from 1987 to 2010). Under these three assumptions, our analysis (Figure 32) indicates that the relative supply-demand equilibrium that the industry enjoyed through most of the late 1980's and 1990's should not be seen again until at least Furthermore, if we were to assume 1.5% GDP growth, 100 bps below the CAGR, and more in line with our current forecast, the balance would not be achieved until As we see it, it s time to stop the cranes. Lastly, we believe it is important to recognize that if our RevPAR forecast for next year proves aggressive, it could well be more than a slight miss; indeed, we could then see negative RevPAR in This view is based on our aforementioned real GDP/demand analysis and our analysis of the long-term relationship between RevPAR growth and CPI growth. Since 1988, the RevPAR CAGR is +2.5%, 40bps shy of the 2.9% CPI CAGR over the same time. The trend has been for RevPAR to grow more quickly than CPI during up-cycles, with harsh corrections ultimately bringing the RevPAR CAGR back to sub-cpi levels. We note that the last two corrections, 3Q 2001 and 1Q 2009, have been considerably more punitive than prior downturns. We believe Figure 47 in this report provides investors with a unique perspective of the negative skew of RevPAR over the past 33 years. Page 4

6 Overview of Top Picks Starwood Hotels (HOT) - Buy We are initiating coverage on Starwood Hotels with a Buy rating and a $58 price target. Despite our less optimistic forecast, when compared to Consensus, for the industry, we believe HOT is well positioned from both a fundamental and stock perspective, to outperform peers over the near and medium terms. While HOT has been a crowded Consensus idea, for the right reasons in our view, the stock has not worked given the overall sluggishness in the segment related to macroeconomic issues that have lowered the bar for 2012 RevPAR performance. We think our Outperform rating on HOT is likely to draw some raised eyebrows given our more pessimistic, when compared to Consensus, view of a sector in which HOT is generally thought of as one of the bellwethers. As such, we believe our view on HOT, despite our view on the domestic lodging environment, shows our level of conviction around HOT's domestic asset skew, international growth pipeline, financial flexibility, and brand strength. We expect shares to benefit from: 1) HOT s luxury and upper upscale segmentation and exposure to domestic urban markets, 2) solid near-term and out-year international fee growth stemming from a rich international development pipeline, 3) an underappreciated owned portfolio that we believe to be considerably undervalued at present, 4) a sound and flexible balance sheet, and 5) a favorable outlook for corporate profits, a historical driver of HOT RevPAR Wyndham Worldwide (WYN) - Buy We are initiating coverage on WYN with a Buy rating and a $41 price target. Given the ~10% macro-related pullback in shares since early July, we see current levels as a favorable entry point for what we think will another bull run for WYN shares as the company continues to maximize free cash flow to enhance shareholder value. We expect the Fed s policy with respect to keeping interest rates low for an extended period of time will drive higher financing margins and cash flow generation as ABS investors seek yield. Despite WYN being a Consensus idea, we find the improved balance sheet, attractive cash flow yields, inexpensive valuation, and ability to return value to shareholders to be too compelling to ignore. We expect shares to benefit from: 1) an extremely compelling free cash flow profile that provides flexibility to management and potential value to shareholders, 2) an inexpensive valuation, 3) a favorable rate environment, and 4) an improving but often forgotten lodging business Page 5

7 Hyatt Hotels (H) - Buy We are initiating coverage on H with a Buy rating and a $44 price target. We believe macro concerns, recent earnings disappointments caused by hotel renovations, and an underappreciated recent acquisition have created a favorable riskreward scenario for H shares at present. We expect the cessation of large-scale renovations to create a tailwind by the 4Q 2011 and throughout much of Furthermore, as evidenced by the RevPAR outperformance of its young select service brands, we believe H has proven it can make smart acquisitions and revitalize brands and we believe this has been an unheralded part of the Lodgeworks transaction. Lastly, we expect H s growing international footprint in China and India to support long-term growth and serve as a buffer to potential domestic softness. We expect shares to benefit from: 1) the Lodgeworks acquisition and an already strong select service franchise, 2) better-than-peer operating leverage, 3) meaningful international growth opportunities, 4) an inexpensive valuation, and 5) a fresh portfolio and the shedding of the overhang from renovations Orient Express Hotels (OEH) - Buy We are initiating coverage on OEH with a Buy rating and an $11 price target. After seeing shares fall 87% in 2008, OEH realized gains of 32% in 2009 and 28% in While solid, the growth was considerably below that of its peer set over the period. While we believe the reasons for the considerable underperformance at the time were valid, we believe OEH is still being painted with largely the same brush, as it remains a non-consensus long idea despite a considerably different outlook at present. Currently, we see a stock / collection of assets that is meaningfully undervalued despite considerable reasons for fundamental optimism and several catalysts that we believe could change investor perceptions. Lastly, we see a significantly favorable risk-reward scenario with prospective downside of $5 and upside of $18. We expect shares to benefit from: 1) limited expectations for margin enhancements despite the potential for significant improvements in flow through, 2) washed-out shares that price in much of the negative macro news that has seemingly already been discounted for both lodging and luxury peers, 3) limited Consensus support and elevated short interest in the face of several positive catalysts, and 4) continued strength in the Italian portfolio through the seasonally strong 3Q 2011 in Europe and beyond Page 6

8 Deutsche Bank Versus Consensus Figure 1: Deutsche Bank Ratings Versus Consensus Ratings Company Ticker DB Rating Consensus Buy Ratings Consensus Hold Ratings Consensus Sell Ratings Starwood Hotels HOT Buy Hyatt Hotels H Buy Gaylord Entertainment GET Hold Orient Express Hotels OEH Buy Wyndham Worldwide WYN Buy Choice Hotels CHH Hold Host Hotels HST Hold Source: Deutsche Bank and Factset. Figure 2: Calendar 3Q 2011 Deutsche Bank Estimates Versus Consensus 3Q 2011 EPS Ticker DB Estimate Consensus Estimate Delta DB Estimate Consensus Estimate Delta HOT $0.38 $0.39 ($0.01) $229.6 $233.8 ($4.2) H $0.06 $0.08 ($0.02) $115.3 $121.4 ($6.1) GET ($0.01) $0.05 ($0.06) $50.3 OEH $0.08 $0.15 ($0.07) $41.8 $45.3 ($3.6) WYN $0.88 $0.88 ($0.00) $307.1 $313.4 ($6.3) CHH $0.61 $0.60 $0.01 $60.5 $60.3 $0.2 HST $0.15 $0.17 ($0.02) $208.9 $211.8 ($2.9) Note: "EPS" for HST represents FFO. Source: Deutsche Bank and Factset. Note: "EBITDA" for GET represents CCF. 3Q 2011 EBITDA Figure 3: Calendar 2011 Deutsche Bank Estimates Versus Consensus 2011 EPS 2011 EBITDA Ticker DB Estimate Consensus Estimate Delta DB Estimate Consensus Estimate Delta HOT $1.72 $1.75 ($0.03) $981.6 $978.6 $3.0 H $0.49 $0.53 ($0.04) $522.3 $525.7 ($3.4) GET $0.25 $0.43 ($0.18) $220.8 OEH ($0.13) ($0.00) ($0.13) $94.6 $103.2 ($8.6) WYN $2.39 $2.40 ($0.00) $953.1 $969.4 ($16.3) CHH $1.78 $1.76 $0.02 $178.3 $178.5 ($0.2) HST $0.89 $0.91 ($0.02) $1,029.3 $1,036.3 ($7.0) Note: "EPS" for HST represents FFO. Source: Deutsche Bank and Factset. Note: "EBITDA" for GET represents CCF. Page 7

9 Figure 4: Calendar 2012 Deutsche Bank Estimates Versus Consensus 2012 EPS 2012 EBITDA Ticker DB Estimate Consensus Estimate Delta DB Estimate Consensus Estimate Delta HOT $2.15 $2.31 ($0.16) $1,076.8 $1,131.1 ($54.3) H $0.80 $0.94 ($0.14) $641.2 $666.1 ($24.9) GET $0.47 $0.90 ($0.43) $239.3 OEH $0.23 $0.21 $0.02 $121.3 $118.5 $2.8 WYN $2.58 $2.75 ($0.17) $1,006.5 $1,050.6 ($44.1) CHH $1.89 $1.88 $0.01 $187.5 $192.9 ($5.5) HST $1.06 $1.17 ($0.11) $1,180.9 $1,242.3 ($61.5) Note: "EPS" for HST represents FFO. Source: Deutsche Bank and Factset. Note: "EBITDA" for GET represents CCF. Figure 5: Calendar 2013 Deutsche Bank Estimates Versus Consensus 2013 EPS 2013 EBITDA Ticker DB Estimate Consensus Estimate Delta DB Estimate Consensus Estimate Delta HOT $2.74 $2.91 ($0.17) $1,189.5 $1,278.3 ($88.8) H $1.16 $1.32 ($0.16) $731.9 $764.4 ($32.5) GET $0.53 $1.03 ($0.50) $253.1 OEH $0.40 $0.33 $0.07 $143.8 $136.6 $7.2 WYN $2.74 $3.08 ($0.33) $1,049.8 $1,100.0 ($50.2) CHH $2.06 $2.05 $0.01 $201.0 $204.0 ($3.0) HST $1.21 $1.37 ($0.16) $1,294.7 $1,391.1 ($96.4) Note: "EPS" for HST represents FFO. Source: Deutsche Bank and Factset. Note: "EBITDA" for GET represents CCF. Page 8

10 Lodging Industry Overview An Historical Perspective Following a rapid recovery in lodging demand in 2010 and through 2011 to date, we believe the lodging industry is poised to experience several years of moderating demand growth. Fortunately, net supply growth is expected to diminish and is likely remaining below 1% through 2013, as banks limit exposure to new real estate development. Relative to the 2003 to 2007 lodging upcycle, we expect a weaker recovery in fundamentals due to a less-friendly credit environment and the global impact of government fiscal crises in Europe and the United States. Occupancy is the leading indicator at the top and bottom of the cycle. Rates follow occupancy. Business mix shifts away from higher-priced corporate and business travel during a downturn. Reliable lodging data is available for periods after 1988 from Smith Travel Research. Since then, the industry has experienced three major downturns: 1991, , and Through upswings and downturns, occupancy responds first, followed by accelerations or decelerations in rate growth. At the inflection point in the cycle, high-paying business transient guests (individuals traveling for work) tend to be the first guests to decrease travel. Hotels adjust to the lower occupancy in the downturn by reducing prices to appeal to pricesensitive travelers. When occupancy and price fall, booking windows shorten. Business mix shifts away from business transient and premium corporate business as hotels often source more business through online travel agents during a downturn, which tends to yield lowerpriced leisure business. At the bottom of the cycle, occupancy growth generally recovers first as business travel and corporate business picks up. Early in the recovery, occupancy growth turns positive while rate growth remains negative. Transient demand, demand from individuals, recovers first. Group business has a longer lead time and tends to lag. As the recovery progresses and occupancy recovers, rate growth comprises a larger portion of RevPAR growth. The Last Fundamental Upcycle: Following the downturn, the U.S. lodging industry experienced a year of slow RevPAR growth (2003) followed by four consecutive years ( ) of strong, high-singledigit RevPAR growth (6 9%), according to data from Smith Travel Research. From February 1, 2003, through the cyclical peak in May 2007, lodging stocks gained 251% versus an 82% gain for the S&P 500. Upper upscale RevPAR grew slightly less than the industry s RevPAR over the cycle. Industry RevPAR growth just outpaced nominal GDP growth. In the last upcycle, upper upscale s RevPAR growth was slightly below RevPAR growth for the whole industry. Typically, high-end segments outperform the industry in a recovery and underperform in a downturn; however, the luxury and upper upscale brands are losing some of their high-beta nature as the segments become a larger part of the hotel industry. Upper upscale segment RevPAR grew 31.0% over the five-year upcycle compared to cumulative industry RevPAR growth of 34.5%. Luxury s cumulative growth of 46.9% from 2003 to 2007 outpaced the industry s RevPAR growth by more than 12 percentage points. Nominal GDP grew 32.6% during the last upcycle, which is just slightly less than the industry s RevPAR growth and real growth accounted for about 50% of nominal growth. Industry and upper upscale RevPAR both experienced growth similar to nominal GDP growth. Rate growth accounted for 76% of the industry RevPAR growth from 2003 to Page 9

11 Peak occupancy did not reach prior-cycle high, due in part to the high supply growth in late 90 s. Occupancy growth accounted for the remaining 24% of the industry RevPAR growth in Industry occupancy grew from 59.0% (trough of downturn) to a peak of 63.1% in 2006 before declining to 62.8% in the last year of the upcycle. Luxury occupancy also peaked in 2006 (71.8%) while upper upscale actually peaked in 2005 (70.7%). Peak occupancy for the upcycle did not surpass the 64.8% occupancy peak level from 1995 during the prior lodging upcycle ( ). Additionally, with respect to occupancy, the lodging upcycle was the strongest since Smith Travel has been tracking occupancy. Robust economic growth during the technology boom fueled high levels of transient demand. Demand in turn caused developers to add supply. High levels of supply growth in the late 1990s made re-attaining peak occupancy more challenging during the upcycle. Industry supply growth averaged 3.5% from 1997 to 2000, compared to the average of 2.1% from 1988 to present. As the stock performance chart (Figure 7) indicates, occupancy does not necessarily need to surpass the prior peak in order for the stocks to perform better than in the prior cycle. Other factors like real estate lending, interest rates, and the corresponding impact on real estate valuation can drive stock prices higher. Cycle benefited from low supply growth in Low supply growth, which actually turned negative in 2005, helped the industry drive the robust RevPAR growth seen in While the CMBS market expanded rapidly over this period, the room growth that occurred as a result of the lending boom did not occur until Supply growth is now dissipating from the lending boom that occurred in the last half of the upcycle. Lastly, the lack of development financing availability over the past three years bodes well for the industry s RevPAR this year and as far out as Figure 6: The Last Lodging Upcycle ( ) Total Industry Luxury Chains Upper Upscale Chains Macro Economic Indicators Year RevPAR Supply RevPAR Supply RevPAR Supply Real GDP CPI % 1.0% -0.1% 7.1% -2.0% 2.3% 3.9% 2.3% % 0.4% 10.5% 3.1% 8.0% 1.4% 2.9% 2.7% % -0.1% 11.6% 0.4% 9.6% -0.5% 2.8% 3.4% % 0.2% 11.3% 4.9% 7.0% -1.2% 2.4% 3.2% % 1.2% 7.0% 4.1% 5.7% 0.6% 2.2% 2.9% Cumulative Growth 34.5% 2.9% 46.9% 21.0% 31.0% 2.5% 15.0% 15.3% Source: Deutsche Bank, Smith Travel Research : An Impressive Period for Lodging Stocks Returns in Upcycle: 2/03-5/07 Lodging +251% 2/03-10/07 S&P % Lodging Stocks returned 3x and 2x the returns of the S&P 500 in the and lodging upcycles. Lodging total stock returns were 3x greater than the S&P 500 total returns in the last lodging upcycle from February 2003 to May Lodging stocks returned 248% compared to the S&P 500 total return of 82%. The S&P 500 did not peak until October 2007; the total return for the S&P 500 from February 2003 to October 2007 was 84% (lodging stocks +238% over the same period). The gains in the cycle were significantly better than the return in the prior lodging upcycle from October 1993 to October 1997 when Marriott International, Host Marriott Corporation, and Hilton Hotels gained 230% relative to the S&P 500 gain of 113% over the same time period. The impressive return for lodging stocks in from 2003 to 2007 was likely due to a confluence of factors: 1) lodging is a cyclical industry with higher highs and lower lows, 2) the real estate lending cycle drove up commercial real estate prices and reduced interest rates (drove up valuation multiples), 3) large buyouts by private equity companies pushed valuations in the sector even higher, and 4) supply growth in was well below the long-term industry average. Page 10

12 Exception to higher highs, lower lows rule : Tech Boom From 10/97-10/00 Lodging -15% return S&P % return At first glance, it may seem that lodging stocks just move in the same direction as the market with higher highs and lower lows. This has generally been the case in the past decade (Figure 7). Lodging stocks rallied at 2x the market rate from 1993 to 1997, but from October 1997 to October 2000, lodging stocks lost 15% while the S&P 500 rallied 60%. During this period, lodging suffered from the economic impact of the Asian financial crisis. With the exception of the hiccup from this crisis, RevPAR performance was actually quite strong, especially in This period coincides with the top of the tech boom. A flurry of economic activity associated with the tech boom created demand growth from business transient guests, which tend to be higher-paying guests. We have tracked stock returns for the seven lodging companies on which we are initiating coverage, plus Hilton Hotels and Four Seasons. The Lodging Index return as shown in Figure 7 is based on the total monthly market-value-weighted returns for the nine companies in the index. Index weights are set at the beginning of each month. Hilton and Four Seasons were purchased in 2007 by private equity. Orient-Express Hotels (August 2000), Wyndham Worldwide (July 2006), and Hyatt Hotels (November 2009) were included for the months in which these companies were publicly traded. Figure 7: Lodging Stock Price Performance, February 2000 Present Lodging index falls 31% in Sep 2001 due to terrrorist attacks. Upper Upscale RevPAR down 23% in 4Q01 Lodging stocks begin Cyclical Upcycle from Feb 2003 to May Upper Upscale RevPAR grows 31% from May 2007 Lodging stocks peak, +251% from Feb Oct 2007 S&P500 peaks, +84% from Feb Nov 2001 Recession Ends Upper Upscale supply growth of -0.5%, -1.2%, and 0.6% from allow excellent RevPAR growth. Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 S&P 500 Index Lodging Index Feb Present Source: Deutsche Bank, Smith Travel Research, Factset. Page 11

13 A Look at the Financial Crisis and Recovery in Room Night Demand Lodging stocks plummeted during the 2008 financial crisis. Figure 8 shows the vital statistics on a month by month basis starting in January Similar exhibits for each chain scale segment are available in the Appendix to the industry section of this report. The numbered notes below correspond to items in Figure 8. 1 RevPAR peaked throughout late 2007 and early Currently, RevPAR is 2.1% below peak. Specifically, July 2011 RevPAR is 2.1% below July 2008 RevPAR. Since RevPAR is highly seasonal, comparisons to peak are to the peak month in 2007 or Peak months are shaded in Figure 8. 2 The S&P declines 4.4% in November Lodging stocks fall 2.2x the S&P decline. The recession begins in November RevPAR decelerates 360 bps from +8.9% in October to 5.3% in November. December, January, and February are all down months for both the S&P 500 and lodging stocks. While RevPAR growth slows to low-single-digit growth, each month is a record high for industry RevPAR. 3 Bear Stearns collapses in March RevPAR falls 0.6% year over year, ending an elongated run of year over year growth. The decline in RevPAR is driven by occupancy, due to cancelations in the midst of the crisis. March 2008 occupancy falls 350bps (-5.3% year over year), though rate grows 5.0% year over year. At this point, occupancy is past its peak for the cycle. 4 Lehman files for bankruptcy in October Lodging stocks fall 23.7%, or 1.4x the S&P 500 decline and rates decline year over year following an extended run of monthly year over year growth. November 2008 is the largest single-month decline of the crisis for lodging stocks (-25.3%). The decline is 3.4x the S&P 500 decline. 5 The market and lodging stocks bottom in March of One year later, RevPAR grows for the first time in 20 months. During this span from March of 2009 (stocks trough) to March of 2010 (RevPAR growth) RevPAR remains approximately 20% below peak levels. 6 For the first time since April of 2008, demand turns positive in December of 2009, though RevPAR doesn t show year over year growth until March of In the first year of the recovery, RevPAR recovers about 1/3 rd of RevPAR lost from the peak. Page 12

14 Figure 8: A Month-by-Month Look at the Collapse and the Recovery Total U.S. yoy vs Total U.S. yoy Total U.S. yoy % Change In Room Lodging S&P 500 Month RevPAR % Chg. Peak Occupancy % C hg. ADR % Chg. Demand Supply Revenue Index Return Jan-07 $ % -3.6% 52.3% -2.1% $ % -1.3% 0.8% 5.6% 2.2% 1.4% Feb-07 $ % -2.7% 59.8% -1.8% $ % -0.9% 1.0% 6.5% 1.8% -2.2% Mar-07 $ % 0.0% 65.5% 0.0% $ % 0.9% 1.0% 7.7% 0.8% 1.0% Apr-07 $ % -3.8% 63.6% -1.4% $ % -0.4% 1.1% 5.5% -2.4% 4.3% May-07 $ % -1.0% 64.5% 0.2% $ % 1.3% 1.1% 7.7% 3.5% 3.3% Jun-07 $ % 0.0% 71.1% 1.0% $ % 2.2% 1.2% 8.4% -5.9% -1.8% Jul-07 $ % -0.3% 70.4% -0.9% $ % 0.4% 1.3% 6.5% -6.7% -3.2% Aug-07 $ % 0.0% 69.5% 1.9% $ % 3.3% 1.3% 10.4% 2.6% 1.3% Sep-07 $ % 0.0% 64.3% -0.9% $ % 0.4% 1.3% 6.8% 0.2% 3.6% Oct-07 $ % 0.0% 66.2% 1.1% $ % 2.5% 1.4% 10.4% -1.6% 1.5% Nov-07 $ % 0.0% 57.8% -1.5% $ % 0.1% 1.6% 7.0% -9.7% -4.4% Dec-07 $ % 0.0% 48.3% -3.1% $ % -1.5% 1.7% 5.0% -11.1% -0.9% Jan-08 $ % 0.0% 51.0% -2.4% $ % -0.6% 1.9% 5.7% -0.2% -6.1% Feb-08 $ % 0.0% 58.7% -1.8% $ % 0.1% 1.9% 4.7% -1.6% -3.5% Mar-08 $ % -0.6% 62.0% 3-5.3% $ % -3.3% 2.1% 1.5% 0.2% -0.6% Apr-08 $ % 0.0% 62.9% -1.1% $ % 1.1% 2.2% 6.2% 2.8% 4.8% May-08 $ % 0.0% 62.4% -3.2% $ % -1.1% 2.2% 3.2% -2.8% 1.1% Jun-08 $ % -1.5% 67.5% -5.1% $ % -2.9% 2.3% 0.8% -18.2% -8.6% Jul-08 $ % 1 0.0% 68.6% -2.6% $ % -0.2% 2.5% 2.8% -6.0% -1.0% Aug-08 $ % -0.6% 66.8% -4.0% $ % -1.5% 2.6% 2.0% 8.3% 1.2% Sep-08 $ % -3.1% 60.1% -6.5% $ % -4.0% 2.7% -0.6% -12.8% -9.1% Oct-08 $ % -7.3% 61.4% -7.2% $ % -4.7% 2.7% -4.7% -23.7% % Nov-08 $ % -13.2% 51.3% -11.2% $ % -8.7% 2.9% -10.7% -25.3% -7.5% Dec-08 $ % -10.2% 44.7% -7.5% $ % -4.6% 3.1% -7.4% 13.1% 0.8% Jan-09 $ % -15.8% 45.3% -11.2% $ % -8.5% 3.1% -13.2% -17.5% -8.6% Feb-09 $ % -17.2% 52.6% -10.3% $ % -7.5% 3.1% -14.6% -21.1% -11.0% Mar-09 $ % -20.6% 54.8% -11.7% $ % -9.0% 3.0% -17.6% 11.6% 8.5% Apr-09 $ % -19.4% 55.8% -11.3% $ % -8.6% 3.0% -17.0% 61.3% 9.4% May-09 $ % -20.4% 55.1% -11.8% $ % -9.2% 2.9% -18.1% 6.8% 5.3% Jun-09 $ % -19.7% 60.8% -9.9% $ % -7.3% 2.9% -16.1% -5.8% 0.0% Jul-09 $ % -15.6% 63.6% -7.4% $ % -4.7% 2.9% -13.1% 4.5% 7.4% Aug-09 $ % -19.4% 60.1% -10.0% $ % -7.4% 2.9% -16.6% 14.1% 3.4% Sep-09 $ % -18.5% 56.1% -6.6% $ % -3.9% 2.9% -13.4% 13.1% 3.6% Oct-09 $ % -20.2% 57.4% -6.5% $ % -3.8% 2.9% -11.4% -10.4% -2.0% Nov-09 $ % -23.8% 48.9% -4.6% $ % -1.9% 2.8% -9.8% 6.3% 5.7% Dec-09 $ % -17.3% 43.6% -2.3% $ % 0.3% 6 2.7% -5.5% 8.7% 1.8% Jan-10 $ % -22.2% 45.1% -0.5% $ % 2.1% 2.6% -5.2% -4.4% -3.7% Feb-10 $ % -20.3% 53.0% 0.7% $ % 3.2% 2.5% -1.4% 9.9% 2.9% Mar-10 $ % % 57.9% 5.7% $ % 8.2% 2.4% 6.1% 18.5% 5.9% Apr-10 $ % -16.8% 58.3% 4.5% $ % 6.8% 2.3% 5.6% 11.4% 1.5% May-10 $ % -14.8% 58.9% 6.8% $ % 9.1% 2.1% 9.2% -10.9% -8.2% Jun-10 $ % -13.4% 64.9% 6.7% $ % 8.8% 2.0% 10.0% -10.0% -5.4% Jul-10 $ % -8.5% 67.9% 6.9% $ % 8.7% 1.7% 10.3% 12.9% 6.9% Aug-10 $ % -12.9% 63.9% 6.4% $ % 8.0% 1.6% 9.8% -5.6% -4.7% Sep-10 $ % -11.3% 59.9% 6.7% $ % 8.2% 1.4% 10.4% 10.9% 8.8% Oct-10 $ % -13.6% 61.3% 6.8% $ % 8.1% 1.2% 9.6% 5.7% 3.7% Nov-10 $ % -14.8% 53.3% 8.9% $ % 10.1% 1.1% 13.0% 3.7% -0.2% Dec-10 $ % -11.2% 45.9% 5.2% $ % 6.2% 1.0% 8.4% 7.1% 6.5% Jan-11 $ % -15.3% 47.6% 5.7% $ % 6.6% 0.9% 9.8% -1.3% 2.3% Feb-11 $ % -14.2% 55.7% 5.1% $ % 5.9% 0.8% 8.7% 1.0% 3.2% Mar-11 $ % -9.4% 61.3% 5.9% $ % 6.8% 0.8% 10.9% -5.0% -0.1% Apr-11 $ % -10.2% 61.1% 4.8% $ % 5.5% 0.7% 8.6% 1.8% 2.8% May-11 $ % -7.4% 61.4% 4.4% $ % 5.1% 0.7% 9.5% 1.5% -1.4% Jun-11 $ % -6.6% 67.6% 4.1% $ % 4.9% 0.7% 8.7% -6.1% -1.8% Jul-11 $ % 1-2.1% 69.9% 2.9% $ % 3.6% 0.7% 7.7% -4.8% -2.1% Source: Deutsche Bank, Smith Travel Research, Factset. Page 13

15 Figure 9: Lodging Stocks Versus the S&P 500 Through the Financial Crisis Feb 2009 Cyclical Trough Lodging Stocks -77% S&P500-52% Stocks bottom in March before recovering Dec 2010 Lodging +290% from Trough, -10% from Peak Apr il 2011 S&P % from Trough, -11% from Peak Nov 2007 Recession Starts Mar 2008 Bear Stearns collapse Oct 2008 Lehman BK Aug 2011 Lodging -25% from Dec 2010, +192% from 2009 Trough Aug 2011 S&P500-11% from Apr 2011,+66% from 2009 Trough June 2009 Recession Ends May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 S&P 500 Index Lodging Index May Present Source: Deutsche Bank, Factset A Quick Comment on the August 2011 Lodging Sell-Off The 2010 lodging recovery anticipated RevPAR growth of about 6 8% in 2011 with similar to slightly stronger growth in 2012 as hotels benefit from waning supply. The re-emergence of European debt problems, the U.S. political stalemate over the debt ceiling and spending cuts, the S&P one-notch downgrade to the U.S. credit rating, negative GDP forecast revisions, and poor economic data combined to drive the S&P 500 down 5.7% in August. Lodging stocks fell 2.5x the market decline. Forward Year RevPAR Changes and Employment Expectations Move Lodging Stocks We found that what investors correctly anticipate about next year s RevPAR growth and changes in the services sector employment situation throughout the year have the strongest relationships with lodging stocks. The lodging index we use for this analysis, which is shown in Figure 10, includes: Marriott, Starwood, Host Marriott, Wyndham, Gaylord Entertainment, Orient Express Hotels, Choice Hotels, Hyatt, Hilton Hotels, and Four Seasons. 1 One might expect RevPAR growth to be correlated with lodging stock returns. We checked. There is zero correlation between lodging stock returns and RevPAR growth for the year (#1 in Figure 10). 2 RevPAR changes next year, or the extent to which investors correctly estimate RevPAR changes for next year, does a better job of explaining lodging stock returns. It should go without saying that investors are focused on the year ahead rather than on the current year. RevPAR next year has a regression R squared of 0.38 when Lodging Index total returns are the dependent variable. Page 14

16 3 The year-over-year change in RevPAR next year has a regression R squared of 0.23 when lodging total returns are the dependent variable. When we say change in RevPAR next year, we mean investors ability to correctly anticipate changes in RevPAR next year. As the end of the year approaches, investors begin to have a clearer picture of what the year ahead might look like, and they purchase or sell stocks accordingly. 4 Changes in service sector employment as measured by the ISM Non-Manufacturing Employment Index have a regression R squared of 0.62 when lodging stocks total return is the dependent variable. Unlike RevPAR, index changes during the year not next year are related to Lodging Index total returns. The ISM Non-Manufacturing Employment Index had the strongest relationship with lodging demand growth that we found. Airline capacity (ASM) also has a strong relationship with lodging demand growth, more on this later. 5 The Lodging Index has an S&P 500 Beta (using annual returns the common calculation is based on monthly returns) of Figure 10: Expectations for Next Year s RevPAR Drive Stock Performance Total U.S. Total Return Market Wt. Non-MFG Year RevPAR MAR HOT HST WYN GET OEH CHH H HLT FS Index S&P 500 ISM HLT FS SP % 12.4% % 27.3% % -68.0% -53.6% -60.3% -6.6% % 61.1% 11.9% 29.7% 26.3% % 26.8% 10.0% 17.7% 4.5% % 140.0% 43.6% 92.6% 7.1% % 5.5% 14.1% 11.5% -1.5% % 36.4% -7.9% 6.1% 34.1% % 94.9% 36.5% 72.7% 69.2% 20.3% % 26.1% 63.2% 22.7% 7.6% 14.6% 27.8% 31.0% % -6.3% -58.7% -14.8% -3.7% -14.5% -34.9% -7.3% -21.0% 26.7% -7.5% % 9.5% 6.0% -35.1% 2.1% 25.1% -24.5% 82.3% -1.8% 19.5% 4.1% % 34.7% 53.4% 71.2% -30.3% -20.1% 10.8% 19.6% 31.5% -10.1% -1.1% % -3.2% -13.0% -24.8% 17.8% -16.1% 61.8% 4.7% -26.4% -7.1% -13.0% -14.9% % -18.5% -17.7% -1.7% -16.3% -25.4% 2.5% 17.1% -39.5% -12.1% -23.4% 5.4% % 41.6% 55.1% 39.2% 44.9% 21.9% 55.3% 35.6% 81.4% 44.6% 26.4% 14.9% % 37.2% 64.7% 40.9% 39.1% 25.7% 67.4% 33.3% 60.1% 45.0% 9.0% 1.3% % 7.0% 10.8% 12.2% 5.0% 53.8% 46.2% 6.6% -39.1% 8.2% 3.0% 2.7% % 43.4% 22.7% 34.0% 16.8% 50.5% 2.0% 45.6% 65.0% 34.9% 13.6% -6.9% % -27.9% -28.1% -27.1% -26.2% -20.5% 21.8% -19.9% 33.6% -13.7% 3.5% 1.0% % -42.3% -57.1% -53.4% -71.7% -73.2% -86.6% -6.8% -54.0% -38.5% -33.9% % 42.4% 105.4% 58.1% 213.9% 82.2% 32.4% 8.1% 65.6% 23.5% 27.8% % 53.4% 67.0% 53.5% 51.5% 82.0% 28.1% 23.5% 53.5% 54.3% 12.8% 17.9% 2011 YTD 8.2% -29.1% -25.2% -32.0% 8.9% -36.5% -38.1% -19.0% -22.3% -24.6% -3.3% -0.2% CAGR 2.6% 6.7% 6.2% 6.9% 1.5% -2.0% -8.4% 11.0% 9.2% 8.4% 11.3% 8.3% 6.9% S&P500 Total Return β R^ Same-year RevPAR Change β R^ Forward-year RevPAR Change β R^ YOY change in RevPAR growth rates (% points) β R^ Non-Manufacturing ISM Employment Index growth β R^ Source: Deutsche Bank, Smith Travel Research, Factset. Page 15

17 Review of Fundamental Drivers for Room Demand and Supply From a Fundamental Perspective, Economic Activity Drives Lodging Demand Hotel guests may travel for business or pleasure, but either way, the reason for traveling usually involves spending or making money along the way. Naturally, demand for hotel room nights is highly correlated with gross domestic product (GDP). Fundamentally, economic activity and demand for hotel room nights move coincidently. In 2010, 60% of hotel guests traveled for leisure while 40% traveled for business, according to the American Hotel and Lodging Association (AHLA). The typical business traveler is male (68%), age (47%), has a managerial role, and earns about $115,000. Business travelers usually make reservations and travel alone. Most spend three or more nights (42%). Last year, business travelers paid $124 per room night on average. The typical room night purchased by leisure guests was for two adults (52%), ages (37%) and 55+ (37%), with an average household income of $87,000. Leisure travelers usually drove to their destination (79%), made reservations (88%), and paid $105 per room night. The typical leisure stay was one room night (49%). Figure 11: Why Do People Travel? % of Room nights sold Family, Personal Vacation* & Other Reasons Business Transient* Conference/ Group % 40% % 40% % 43% % 44% % 44% % 48% % 50% % 52% % 22% 29% 25% % 20% 30% 27% % 22% 28% 25% *Starting in 2003, AH&LA reported only the Business & Leisure split Source: Deutsche Bank and the American Hotel and Lodging Association. Page 16

18 Figure 12: The Typical Business Traveler Typical Business Traveler Avg Room Rate Avg Income* Travel Alone** 1 Night Stay 2 Nights 3 or More Nights 2010 $124 $116,578 61% 36% 22% 42% 2009 $123 $105,764 64% 36% 22% 42% 2008 $125 $105,532 58% 35% 26% 39% 2007 $119 $89,600 55% 33% 26% 41% 2006 $112 $85,900 56% 35% 26% 39% 2005 $99 $82,000 73% 40% 25% 35% 2004 $96 $81,100 73% 39% 24% 37% 2003 $91 $82,800 76% 40% 24% 36% 2002 $93 $81,600 61% 42% 25% 33% 2001 $95 $76,394 62% 42% 25% 33% 2000 $91 $72,240 81% 36% 25% 39% *Starting in 2008, AH&LA reported Avg Household income ** , AH&LA reported "guests that remain in their rooms" Source: Deutsche Bank and the American Hotel and Lodging Association. Figure 13: The Typical Leisure Traveler Typical Leisure Traveler Avg Room Avg Household Travel 1 Night 2 3 or More Rate Income by Car 2 Adults Stay Nights Nights 2010 $105 $87,327 79% 52% 49% 25% 26% 2009 $105 $90,712 80% 51% 48% 25% 27% 2008 $112 $91,155 78% 51% 41% 31% 28% 2007 $109 $78,800 78% 53% 42% 30% 28% 2006 $103 $77,100 77% 42% 42% 30% 28% 2005 $94 $75,400 74% 54% 45% 28% 27% 2004 $89 $72,600 74% 51% 45% 28% 27% 2003 $87 $74,000 73% 52% 47% 26% 27% 2002 $85 $71,600 74% 52% 46% 27% 27% 2001 $87 $69,174 74% 51% 47% 27% 26% 2000 $84 $64,386 75% 50% 43% 28% 29% Source: Deutsche Bank and the American Hotel and Lodging Association. The Long Standing Relationship Between GDP and Lodging Demand The relationship between demand for hotel room nights and economic activity is evident in the high correlation between GDP growth and growth in room nights sold (Figure 14). The correlation is 0.78 since Figure 14: Total US Room Demand Growth vs. Real GDP Growth 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Demand Growth and GDP Growth have a correlation of % 1Q88 4Q88 3Q89 2Q90 1Q91 4Q91 3Q92 2Q93 1Q94 4Q94 3Q95 2Q96 1Q97 4Q97 3Q98 2Q99 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 U.S. Total Demand GDP Source: Deutsche Bank, Smith Travel Research, Factset. Page 17

19 Since 1988, real GDP growth has averaged 2.6% while lodging demand has grown at a 1.8% CAGR. Lodging demands beta to changes in real GDP has been 1.26 since 1988, but sensitivity to changes in GDP have been different during periods in which GDP is growing and those in which GDP is declining. During economic downturns, lodging demand has exhibited greater sensitivity to GDP growth. When the economy slows, lodging demand falls fast and hard as businesses cut travel expenses. In quarters where GDP has been negative, lodging demand has fallen by an average of 180% of the decline in real GDP. Negative shocks to GDP that directly impact travel are even more painful for the lodging industry. For example, airlines were grounded for three days following the terrorist attacks on 9/11/2001, which occurred while the economy was already in a recession. Lodging demand declined 7% during the 3Q 2001 while real GDP grew 0.4%. In years when GDP grows, lodging demand growth is less sensitive to GDP growth. For a 1% increase in real GDP, lodging demand increases 0.8% on average. In our opinion, this serves as confirmation that that the U.S. lodging industry is mature and subsequently, we expect the long-term growth of room night demand to be tied to GDP growth. From 1988 to 2010, the lodging industry generally needed real GDP growth in excess of 2% to generate positive demand. Over this same span, there were 15 quarters when GDP growth was 0 2%. Lodging demand averaged -1.1% in these 15 quarters. In two-thirds of the quarters where GDP growth was 0 2%, lodging demand was negative. In the four years where GDP growth has been in the 0 2% range ( and ), lodging demand has averaged -0.7%. Slow GDP growth has not been a good environment for lodging demand growth. Expectations for the current economic recovery are low. Historically, low-growth environments (0 2% real GDP growth) have yielded poor lodging demand growth. Figure 15: Average Room Demand at Various Real GDP Growth Rates, Annual Changes in GDP ( ) <0% 0-.99% % % % >4% Occurrences Years Avg. yoy % chg in Demand in Periods -4.3% -0.5% -0.2% 2.6% 4.5% 2.6% Avg. yoy % chg in RevPAR in Periods -9.3% -2.3% -2.5% 6.4% 3.1% 4.2% Source: Deutsche Bank, Smith Travel Research, Factset. Page 18

20 Figure 16: Average Room Demand at Various Real GDP Growth Rates, % 4.5% 4% 3% 2% 2.6% 2.6% 1% 0% -1% -0.5% -0.2% -2% -3% -4% -5% -4.3% <0% 0-.99% % % % >4% Source: Deutsche Bank, Smith Travel Research, Factset. Corporate Profits Drive High End Demand Corporate travel is more important to the major lodging companies than to the industry as a whole. While business travel comprises 40% of industry room nights for the industry as a whole, large brand owners, like Marriott, Starwood, Hyatt, and Hilton, are more reliant on business travelers than the rest of the industry with two-thirds or more of revenue coming from corporate travel. Corporate profitability has recovered. Although a low-growth environment does not bode well for room night demand growth, demand for business travel stemming from corporate profitability should benefit companies and brands that target this segment. Through the 2Q 2011, corporate profits have remained strong and operating EPS margins for S&P500 companies passed prior peak levels in the 1Q As a one-quarter leading indicator, changes in corporate profit margins do a reasonable job of predicting changes in lodging demand (Figure 17. Operating EPS margins for S&P 500 companies have a beta of 1.85 and correlation of Page 19