HOTEL ONFERENCE RECAP · 2017-03-30 · lanes. It is a good deal for Marriott owners, Starwood owners, and our guests. – Liam Brown (Marriott) Take care of your people. They will

VINCE CIEPIEL [email protected]

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March 30, 2017

LODGING INDUSTRY UPDATE Important disclosures can be found in Appendix

2017 HUNTER HOTEL CONFERENCE RECAP

Key Takeaways

Tone has improved – Compared to the 2016 conference, participants and speakers are decidedly more optimistic. It sounds like

bid-ask spreads on hotels are more reasonable, the lending environment is no longer on lock down, and general growth

expectations have improved.

Cap rates could stabilize – Bid Ask spreads sound to have narrowed. Following an anemic deal landscape in 2016, most expect a

better set up for 2017. While the market does not sound deep, it sounds better than last year. It is consensus that the buyer pool in

2017 is much larger than 2016. The 2016 cap rates were up ~150bps vs. 2015. Most expect them to settle there, pointing to the

relative yield of lodging vs. other real estate classes (office, multifamily, etc.). While interest rates likely rise, the spread of

lodging cap rates vs. interest rates remains fairly large/could potentially compress if buyer interest is high enough in 2017. More

“market by market, deal by deal” valuation talk was prevalent in terms of the driver of cap rates vs. 2014/2015 when deals were

“on fire” and 2016 when the market was a “wasteland.”

More talk on cost inflation – NOI growth should be constrained as labor/wage inflation is likely to offset most of the rain gains

expected to drive RevPAR, pressuring margins. Construction costs consistently called out as rising and breaking deals.

RevPAR ok – RevPAR sounds to be tracking in line with industry participants expectations. January strong from inauguration.

Feb just ok. March benefits from Easter shift with extra Group business, but some are pointing to a less than hoped for pickup in

March. Most point to a 1Q in line with budget and 2017 as looking reasonable/no change vs. 90 days ago.

Cycle talk fatigue – The baseball/sports analogies continue but the frequency has diminished. The lodging industry was late in

the cycle/coming to a close according to some in 2013...2014...2015...2016, and now 2017. While growth in 2016 was not

anything to write home about, the cycle prognosticators seemed less opinionated on when the cycle will end at the conference this

year.

It just depends – 3 years ago, everything was good except NY. This year, whether the question/topic revolves around cap rates,

supply growth, RevPAR expectations, etc. the answer is the same – “It depends on the market.” The days of RevPAR is good,

valuations are rising, supply is not an issue are clearly behind the lodging industry, and it was hard to find a panelist willing to

make a general/industry wide statement about anything. A few years ago, the story was...if you net out NY, the U.S. is X. Then it

became, if you net out NY and Hou, the U.S. is X. As a number of additional cities have “fallen,” you do not hear of the netting as

much today.

Barry stole the show – Most entertaining discussion was Barry Sternlicht, who shared an insider’s view of life as a billionaire

and his assessment of the world today. The conversation touched on just about everything...Donald’s golf game, Donald’s growth

agenda, foreign capital, the role of capitalism, General Mattis’s bear rug, seeing his Starwood “baby” get swallowed by Marriott,

ragging on the OTA’s, etc.

OTA/Technology/Guest Experience – The “We own the guest experience and the OTA’s can never touch that” folks were at the

pulpits once again. It is hard to identify any meaningful change in terms of actually improving the guest experience to drive repeat

business at the hotel/brand level. The answer continues to be price, as the push to book direct at Brand.com rests on a discount.

Even Barry Sternlicht is scratching his head saying how did the OTA’s get this share for that commission rate.

Key Quotes from the Conference:

The market is just not deep in terms of interest. We expect 30-40 indications of interest, and hope for 8-10 bids. But market is thin

now. Only getting 2 bids. –Suril Shah (Starwood)

In our $3.4B sale last year of our select serve portfolio to the Chinese...they wanted more than just USD. They wanted yield. If

they just wanted USD, they could have bought an office building at a 3% cap. There is a reason they wanted lodging select serve

assets more than just USD. –Suril Shah (Starwood)

The non-traded REIT’s traditionally raised $20B annually from retail space to buy hotels... In 2016, they only raised $5B. That

contributed to the declines last year. The non-traded REIT sector has come back now, which is good. Lot of new non-traded REIT

money is a yield buyer this year. – Tyler Morse (MCR)

We are still positive on overall RevPAR...think we are at the top range of what most companies projected from a RevPAR

perspective. Should be more deal volume towards the middle to end of this year than there is today. – Mit Shah (Noble)

Going to be talking about some significant acquisition done by private capital in the next 12 months. – Suril Shah (Starwood)

I know Donald well. Won’t tell you about his golf game. It is his own set of rules. Just like right now. – Barry Sternlicht

(Starwood)

Left on its own, capitalism will go crazy. So you do need some regulation. I think it is probably like raising child. You have to let

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March 30, 2017

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VINCE CIEPIEL, CFA [email protected]

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HENRY GERLACH, CPA [email protected]

(216) 649-7206

them bang their head between guard rails of crib. Guard rails are there for irrational exuberance. – Barry Sternlicht (Starwood)

Hillary couldn’t even tell the truth about being sick. That’s sad. She made Donald look honest, which is really saying something.

– Barry Sternlicht (Starwood)

Funny story on James Mattis, Secretary of Defense. He is a tough guy. He has a bear rug at home. The joke is that the bear

wasn’t actually dead – it was just too afraid to move. – Barry Sternlicht (Starwood)

When you are legislating for 300M Americans it is supposed to be hard. Hopefully you come to the middle, which is how the

country should be run. – Barry Sternlicht (Starwood)

The internet is arbiter of truth. Now if you are a retailer, hotel, or restaurant – all these intermediaries/reviews say if what we say

as a brand is actually true. – Barry Sternlicht (Starwood)

Econ data has been on a run/beating expectations. CEO sentiment survey highest in years. Consumer confidence is off the charts.

– Aran Ryan (Tourism Economics)

Global economy generally better. U.S. consumer in decent shape – dealing with inflation and higher interest rates. Biz confidence

– still in wait and see mode. Expectation for flood gates to open. – Aran Ryan (Tourism Economics)

ADR is the name of the game. Would have expected a little more over the last 12 months, given occupancy is so high. – Jan

Freitag (STR)

I don’t know about you, but I am tired of being at the “peak” for the last few years. – Mark Woodworth (PKF)

Business on the books is down 1.2% vs. same time in 2016 and we are cautious on the 2017 RevPAR outlook – Katie Moro

(Travelclick)

1Q gives us confidence. Jan was good b/c DC exposure. Feb/Mar looking as we thought. GDP grows slow and steady. Not

anticipating any change in our full year view. – Liam Brown (Marriott)

1Q shaping up better than we expected. Running up 3%. Adv. bookings up by ~12% for the summer. – David Kong (Best Western)

The stock market’s reaction has been bigger than I thought. It feels like everyone priced in perfection. The question is – are all

those things going to happen. When people feel good about the economy/future, they spend. I hope that carries through. – RS

Lot of work to be done with the Starwood deal. Brands have swim lanes. It is multiple Olympic sized pool to have all those swim

lanes. It is a good deal for Marriott owners, Starwood owners, and our guests. – Liam Brown (Marriott)

Take care of your people. They will take care of the customer. They will come back and you will make money. – Bill Marriott

In 2016, public REITs were on the sideline. You will probably see a trend more towards public REIT buying this year. – Sam

Reynolds (Apple REIT)

Sure math says that if the debt component priced at higher rate, cap rates should go up. But lot of other factors impact cap rates.

Risk inherent in the market is key. Should be a bigger pool of buyers this year. – Hank Staley CBRE

Bid Ask has narrowed over the last few months as some certainty has come in. – Sam Reynolds (Apple REIT)

They don’t speak in terms of ADR. They talk Rev per Bed or Rev per Sq ft. Residential, retail, industrial, all talk Rev per sq ft

except for the hotel industry. You see that becoming a focus now. – Hank Staley CBRE

I have seen more deals collapse in last 18 months than in my entire career due to construction costs. When that construction bid

comes in...it’s like uh oh – it doesn’t work – Hank Staley CBRE

State of the Industry Panel

Moderator – Teague Hunter

Mit Shah (Noble), Suril Shah (Starwood), Tyler Morse (CEO MCR)

Key Quotes

The market is just not deep in terms of interest. We expect 30-40 indications of interest, and hope for 8-10 bids. But market is thin

now. Only getting 2 bids. –Suril Shah (Starwood)

In our $3.4B sale last year of our select serve portfolio to the Chinese...they wanted more than just USD. They wanted yield. If

they just wanted USD, they could have bought an office building at a 3% cap. There is a reason they wanted lodging select serve

assets more than just USD. –Suril Shah (Starwood)

The non-traded REIT’s traditionally raised $20B annually from retail space to buy hotels... In 2016, they only raised $5B. That

contributed to the declines last year. The non-traded REIT sector has come back now, which is good. Lot of new non-traded REIT

money is a yield buyer this year. – Tyler Morse (MCR)

We are still positive on overall RevPAR...think we are at the top range of what most companies projected from a RevPAR

perspective. Should be more deal volume towards the middle to end of this year than there is today. – Mit Shah (Noble)

Going to be talking about some significant acquisition done by private capital in the next 12 months. – Suril Shah (Starwood)

Full Notes

TH – Spent a bunch in 2014. End of 2015 that slowed. 2016 was low from a transaction volume standpoint.

o TM – 2016 was wasteland. Volume was down 50%. Decel in RevPAR contributed. Huge bid-ask spread. Sellers thought it

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HENRY GERLACH, CPA [email protected]

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was 2015 still. Buyers were seeing Wall Street hotel co’s down 30%

o SS – Bid Ask spread was too wide. We hardly bought anything in 2016. We bought $450M in 16, $2B in 15, $1B in 14.

o TM – We only bought 2 hotels in 2016. Compare to that to 2015 – we spent $600M. In 2014 –we spent $400M

o MS – Just was no clarity last year. Market by market. Quarter after quarter, Wall Street taking down RevPAR estimates.

There was no confidence and no one wanted to buy into it.

TH – How has underwriting changed?

o SS – Cap rates up 150bps since 2015. Depends on asset and market. When underwriting today, there has to be a clear story to

a lot of cash flow (greatest hedge to a recession). Who knows when cycle ends? Can’t run a business assuming a recession

2yrs from now, every single year. Not over-levered or tight on coverage. We have been buying in-place cash flows and 2016

was pretty good for their yields.

o MS – It is about the in place cash flow vs. forward cash flow now. You could argue cap rates up 150bps but actually it is

more like 200bps when considering, people are now only paying for in place cash flow/trailing cash flow. Used to be

selling hotels at 7 caps on forward modeled cash flow. Now it is more like 8 caps on trailing.

o SS – The market is just not deep in terms of interest. We expect 30-40 indications of interest, and hope for 8-10 bids.

But market is thin now. Only getting 2 bids. What typically would go in a liquid fashion is very slow.

o TM – These guys (MS and SS) are Debbie downers. They must be in the market to buy something/talking things down. The

reality is more people are traveling every day in 2017 than they have in years. Discount carriers – each year a new one pops

up. All those folks flying around for $39 bucks with their knees on their chairs. You can stay in FL at a Springhill suites for

$89 and it’s a great cheap vacation. Select service is great – our cash flows are more stable in our 100 rooms hotels vs. the

2,000 room hotel we are staying in now.

o MS – It is important to consider lodging vs. other classes in real estate right now, and from there evaluate the cap rates. Look

at 5.5% industrial, Multifamily at a 4%. It’s pretty frothy in other classes. Makes lodging look cheap. Interesting

analysis shows that we can weather a 10% decline in in RevPAR and still be at a better yield than other real estate

assets. Right now, most people buying at forward 8% and 7.5% on current.

TH – Different markets

o SS – Austin hot market scares me. Hard to know when reaches top. I like Atlanta now. Has to be a story at the hotel where

we can dramatically improve cash flows.

o MS – Atlanta has been darling of investment community and not touching it. There is lot of interest across real estate classes

in Atl now. Population of individual markets. While ATL, decent as a whole, have to look at the sub markets.

o TM – Two least favorites are Atlanta and Chicago. They have never had the ADR. Mit knows more than I will ever know

and he is building here. So what do I know? There’s no barriers and new supply. I know Delta and Coke and some drivers.

Give me FL, TX, or GA with lower taxes. Building a few right now.

o TM – Higher degree of difficulty the greater the barrier to entry. With our NY/NJ airport hotel, we are dealing with 22

government agencies, 124 consulting agencies, building a power plant, in a historic building, 6 restaurants, 8 bars, and

rooftop pool. We spent 5M in chase costs to purse this project. 9 law firms. Going through port authority, community boards.

Going to be spectacular.

o SS – Good luck that’s awesome.

TH – The one big deal in 2016.

o SS – Sold 280 hotels select service. We weren’t in them until 2011 and 2012. $3.4B sale last year – mostly Asian to do equity

recap. I said on stage last year it would be done by June. Didn’t close until September. Went to China 6 times. Met with a

different chairman every time. Our Asian partners found that if you want stable cash flows in real estate – you buy select

serve hotels. The large portfolio was incredibly attractive to them as they value the world at 1% interest rates. Barry Sternlich

– offers a name brand. Similar to Blackstone. That offers the Chinese security. They wouldn’t have done the deal without that

brand and us staying in as an asset manager. They will probably continue to look for more deals like this.

o TH – How much was currency chase? – SS: Did not feel like they just wanted USD. But this was more that they wanted

the yield. If just wanted the USD, could have bought an office building. They wanted yield.

o MS – Two thoughts on select serve. Starwood was not really a player until Suril led them down that path. That added

significant positive momentum to our space. What Suril and Blackstone did with significant investment in select serve hotels

– that created an understanding of select serve. Feeling that this is a durable resilient asset classes. That was a value driver for

the Starwood fund. But it also impacts the market valuation of select serve.

o TM – I think it was the deal of the decade. Particular in a wasteland of transaction of 2016. One of the reasons 2016 was so

slow, is that yield buyers weren’t there. They were there in 2015. Weren’t in 2016. Suril found the one high quality yield

buyer. 600bps spread between Select Serve and treasury. It’s a more volatile cash flow stream than the treasury. The non-

traded REIT’s traditionally raised $20B annually from retail space. In 2016, they raised $5B. That contributed to the declines.

The non-traded REIT sector has come back now, which is good. Lot of new non-traded REIT money is a yield buyer.

o SS – amazing to see how select serve has transformed. Used to be pretty fragmented and has consolidated a bit.

TH – How does 2017 shape up? More capital?

o MS – Depends...will be market by market. Some RevPAR growing DD and others declining DD. Oil markets starting to

stabilize which bodes better for overall market. Wage inflation is real – seeing that in our hotels. You add $1 to RevPAR you

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HENRY GERLACH, CPA [email protected]

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should add some % in NOI in theory. But wage pressures are becoming realer. We are still positive on overall RevPAR for

industry this year. I think we are at the top range of what most companies projected from a RevPAR perspective.

Should be more deal volume towards the middle to end of this year than there is today.

o TM – Capital flow game..been seeing for 5 years and will continue to see this. If you are sov wealth or inst money managers

– the best place to put your money is still the U.S. Europe has anemic growth. Brexit. Could be additional exits. South

America back to old tricks – bad economics and politics. China keeps decreasing its growth. Japan has not changed for 25

years. The net of this they are coming to the U.S. We are seeing most are upping Real Estate allocation – Used to be 7-

8% now 11-12% of the portfolio. Comes at the expense of Hedge funds, which can’t seem to generate much alpha. Hotels

are complicated and there is alpha there. Think that keeps spread over treasuries quite high. If Fed tightens 50bps and

RevPAR grows 2.5% and labor grows 2% and its only 25% of economics, I call that win. I think Cap Rates will be driven by

money flow/demand side. This is driven by debt market. If you see covenant light loans, that will put a turbo boost on the

transaction market. Look at Bank of America. 68B loan book. Internally think they get paid off 25% of their loans – they

have to go loan that out. Bank balance sheets are wildly healthy. Deposits keep going up. Think all this bodes well for deals

this year.

TH – What are we talking about this time next year?

o SS – We are in the midst of raising 11th

fund. Buyers, like us, and other PE firms. Have to get aggressive. Going to be

talking about some significant acquisition done by private capital in the next 12 months.

o MS – Talking about next year? – Wasn’t as good as we thought, wasn’t as bad as we thought. Half and half will be saying

that. Right hotels with the right brands in right market makes the cash flow resilient. We will all recognize that it is still the

case.

o TM – We are in a good business. It’s the 10th

inning and we are playing an 18 inning game.

Barry Sternlicht

Speaker: Barry Sternlicht. Starwood Capital $50B asset manager. Invested $84B over the last 25 years across real estate.

Key Quotes

I know Donald well. Won’t tell you about his golf game. It is his own set of rules. Just like right now.

Left on its own, capitalism will go crazy. So you do need some regulation. I think it is probably like raising child. You have to let

them bang their head between guard rails of crib. Guard rails are there for irrational exuberance.

Hillary couldn’t even tell the truth about being sick. That’s sad. She made Donald look honest, which is really saying something.

Funny story on James Mattis, Secretary of Defense. He is a tough guy. He has a bear rug at home. The joke is that the bear

wasn’t actually dead – it was just too afraid to move.

When you are legislating for 300M Americans it is supposed to be hard. Hopefully you come to the middle, which is how the

country should be run.

The internet is arbiter of truth. Now if you are a retailer, hotel, or restaurant – all these intermediaries/reviews say if what we say

as a brand is actually true.

Full Notes

Big Picture: Very interested in economy and what is happening in the world. Sure there is my attention to detail/PL and margins.

But job I do now, it is more about watching the major macro changes which overwhelm fundamentals of an asset class. I think

about flow of funds. Direction of interest rates. Currency movements. Global economic growth. All this to say...it is a challenging

time.

The U.S. in Focus: As our new President was taking office, there were many yellow flags in terms of global growth and what

was happening in the U.S. We are now seeing how a new administration would/could change that. So I will talk a little about.

Again, fundamentals can be overwhelmed by macro. Macro most interesting of my career. With the global economy – U.S. in

focus.

“Donald” in Focus: I know Donald well. Won’t tell you about his golf game. It is his own set of rules. Just like right now. Time magazine interview – Donald says to the reporter “I must be doing pretty well b/c I am President and you are not.” It

somehow comes up that Richard Nixon was on more covers of Time than Donald. And the President’s reply: “Well I am going to

win” and be on more covers than Nixon.

Cheating: I think that the business community feels relieved. I was not in love with Obama. I like how Jamie Dimon put it – “If

Obama asked me to serve, I would have helped him...but Obama acted like I cheated.” I think that is how a lot of us felt. Made to

feel like we cheated b/c we did well for ourselves. When I think about my own background, my father European immigrant – my

success is an honor for him. That drove me. I love this country in that you can do whatever you want and make your own way.

Not the Villain: Donald made business community not the villain anymore. It is business that drives things. We create tons of

jobs. I have always been a proud supporter of Bill Marriott. Something I love about hospitality is that you can enter with few

skills and go from bellman to CEO.

Policy: Donald’s economic policies good – repatriation of foreign capital. So many companies have money trapped overseas.

Deregulation good overall, but I do think that some of Dodd Frank was good. It did strangle smaller banks. But reality is that we

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HENRY GERLACH, CPA [email protected]

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could have survived without some of the financial innovation on wall street which did end up hurting us. Left on its own,

capitalism will go crazy. So you do need some regulation. I think it is probably like raising child. You have to let them

bang their head between guard rails of crib. Guard rails are there for irrational exuberance.

Gov Spend/Tax Cuts: Tax cuts would be helpful. It is just stupid that companies put their headquarters offshore. How to pay for

the tax cuts is interesting. Individual tax cuts, capital gains would be great. Simplification of tax code would be great. The Fed

gov has a different P&L. If gov didn’t build roads, it would be a different world. How we can spend $2 trillion on Gulf

war...should be spent more on education. Then we would have more skilled workers and less incarcerated. Education is a great

investment – I just wish the government saw that more. Spend more on education and then have reasonable taxes on more

productive members of society and get a good ROI on their careers. It’s a tithe to the government. At the end of the day, the rich

can’t pay for all the people on food stamps.

Better foot forward: La Guardia...I used to land there. Not anymore. What a mess. China has built 21st century infrastructure.

With low interest rates, why haven’t we used 100 yr bonds to fund 100yr projects? I remember my youth –was awfully proud of

my country. Donald is right - our airports are not looking so good. As a show case for the world, we need immigration/tourism to

grow. We should put a better foot forward.

Obamacare: I talked with Paul Ryan two weeks ago. The problem with healthcare – we have twice as expensive healthcare with

half as good as outcomes. That’s really the ultimate goal. Not bringing costs down. Malpractice insurance 70% of income. Need a

new bill. New policy of democrats of saying no to everything is just as dumb as what republicans did.

The Donald: Some people want any cut to be paid for with new revenue. If Donald does all these things he is talking about at

once...Repeal & Replace Obamacare, Infrastructure, Tax cuts, Deregulation, Immigration reform, etc. – the economy could blow

up. Donald won on jobs. But not just on jobs. Enough people voted against Hillary vs. for Donald. The Democrats for some

reason thought they had to go further Left and probably did not have to. She is not a bad person. People just don’t trust her.

She couldn’t even tell the truth about being sick. That’s sad. She made him look honest, which is really saying something.

Reality TV: You know it is strange seeing Donald, who was a good golf buddy. Feel like this is all a living in reality tv series. All

these tweets, etc. I spoke with David Tepper who started Appaloosa, likes to say... “He needs to tighten it up.” Referring to

Donald. But Donald, does have some good cabinet members. Funny story on James Mattis, Secretary of Defense. He is a

tough guy. He has a bear rug at home. The joke is that the bear wasn’t actually dead – it was just too afraid to move.

Immigration: We don’t have the workers to do all this, if we don’t fix immigration. 1M come here legally and they add half a

point to GDP. We have always let them in. Creates new households and that fuels housing market. We travel and that fuels the

economy.

Shouldn’t be easy: I think it is good that there is a back and forth. I like it. I like the fighting and bickering. It is meant to be

difficult to change the country over night; that’s how it was designed. If Donald does everything at once, interest rates will soar.

We could have a 6% 10yr. We see all this fiscal stimulus coming and 10 yr is flat to Jan of 2016. Credit markets are telling you

that economy is not going to grow as Donald promised. I don’t know where I am on the matter of this lower for longer on interest

rates. Things were ok I guess. We were growing modestly. Now we may have a crazy economy.

Wages going up: We are going to have wage inflation. It was coming. America needs it. Middle class wasn’t going anywhere

and this is a wake up call. We need more skilled employees. Don’t have enough which is going to drive wage inflation. Look at

4.7% unemployment. You can’t build enough houses b/c you can’t find labor to build the needed houses. All this goes back to

education. Our public high schools a mess.

What this all means: If the economy accelerates – wages go up, consumers spend, want a general increase inflation and interest

rates. Would love interest rates at 3.5%. If rates skyrocket, stock mkt will correct big time. And you will have a very Left person

for our President next. But, I think we will be ok. I think they will get some stuff done. Deregulation. Economy should pick up a

little. Cleaning up Washington is a great goal.

Mar-A-Lago: It’s Donald’s Winter/Southern Whitehouse. Sure spends a lot of time there. But, I think Donald is working...I

think. He’s certainly tweeting.

Don’t kick China: We sold our select serve hotels to Chinese company. Not a fan of all this rhetoric of anti-China. Everyone

knows that you don’t kick your banker in the face. You need these guys to show up and buy our debt. If they don’t, rates will

spike..not b/c economic growth but b/c they say we won’t back you anymore.

America first: Donald is probably right about free trade – it needs a close examination. Not a bad idea. But have to be careful.

Especially with the Middle East Sovereigns. You can’t rip apart Islam. That is not a good thing to say. To extent they boycott us

and not buy our debt. That’s a big problem going forward. So this whole America first movement – we need to be careful. The

average American is beating chest saying this is great. You have to know that our American companies are multinationals...not

just profits in America. S&P 500 generates like half its revenues overseas.

Cost to build going up: I am sure Donald will figure it out, I mean I hope...please God. And then we will all be happy together.

But if all this happens all at once, will have wage inflation, commodity inflation, everything that goes into construction will go up.

The cost of building anything new is harder today. Existing stuff will be cheaper. That’s good news with hotels – we get inflation,

we change rates nightly.

Cash accounting: Ryan says cash accounting. Write it off in the year I made it. That sounds like a rush of supply which would be

very bad. I don’t know if they know what they are doing. Actually as much as I know...they don’t know what they are doing.

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Moves to middle: You go to Washington – you can’t get anything done. A friend in politics with a background in business – I

asked him – how do you deal with this/it takes forever to get anything done there? He says I love it. When you are legislating

for 300M Americans it is supposed to be hard. Hopefully you come to the middle, which is how the country should be run.

World view: I feel pretty good overall on the world. China doing better. Brazil doing much better. Argentina doing better. Europe

not a disaster. Wild cards are insane stuff that Donald tweets out and the distractions it poses. I do hope that this economy grows

faster. 2-3% Revpar isn’t exciting. Happy that the minimum wage is not going up. It inspires people to move up curve. So glad

that isn’t being messed with.

Japan could step in: We watch Japanese investors closely. Huge inflow into American REITS were Japanese. Pouring money

into the REIT complex. We will see if they come in as direct investors. Interest rates are zero at home. Everyone around the world

thinks they understand real estate. So they buy yield. Maybe japan will step in and buy our debt if China boycotts us.

My Starwood: Marriott bought my Starwood. That was interesting...watching your baby get swallowed by a giant. I proposed

that to Bill Marriott. I said we would be a killer together. Lot of people don’t know that.

OTA’s a problem: When OTA’s were born – internet created a giant. I am surprised how this evolved. I took this to all hotel co

CEO’s. We should own that channel together. Couldn’t get everyone to work together. The OTA’s – I do hope that Marwood

takes them out. Can’t believe they take a 20% cut. That belongs to owners who put up capital. Hotels tonight – I said go offer 7%

to everyone. They didn’t do it. That margin is just too big. I’m surprised the way the industry evolved.

Airbnb: Airbnb showing the other side – charging like 3%. Airbnb...alternative accomodations already existed. Lot of little guys

doing it. Gobbled up. Now get 80% of the business. Have brought other people into the space. The internet age changes all of real

estate. You can’t lie to the consumer – have to be honest. The internet is arbiter of truth. Now if you are a retailer, hotel, or

restaurant – all these intermediaries/reviews say if what we say as a brand is actually true. Airbnb raises the game. You

have to create experiences you can’t get in Airbnb unit. It’s a force. Arne said its 1% of his occupancy. Hotels have to stand for

something. Mall owner – have to create events now. In the old days, 3 anchors and everyone comes to you. Now it needs to be 3D

and emotional. I like that.

Closing thoughts: Everyone has 24 hours in a day and how you chose to spend them is up to you. Any time government gets

involved it is interesting. This gov may get involved in a lot of stuff and it may be very interesting. On Starwood hotels – I built a

company with a great soul and I am proud of that. Travel breeds understanding in a world that’s so divisive. Travel teaches

diversity and global tolerance. This industry knits the world together and I am proud to be a part of it. And let‘s hope Donald does

a good job.

The Economist

Speaker – Aran Ryan (Tourism Economics )

Key Quotes

Econ data has been on a run/beating expectations. CEO sentiment survey highest in years. Consumer confidence is off the charts

Global economy generally better. U.S. consumer in decent shape – dealing with inflation and higher interest rates. Biz confidence

– still in wait and see mode. Expectation for flood gates to open.

Full Notes

Economic Outlook – Where do we go from here? 1 – Outside factors, 2 – Linking to Lodging

1 – Outside factors – A. Global Economy, B. U.S. Consumers, Business Confidence, Risks

A. Economy – Econ data has been on a run and beating expectations. Industrial production and purchasing manager turned

upward. Global savings still a bit of a constraint on consumption. Corporates mirroring this via saving/building cash or just

buying stock vs. investment. Manufacturing utilization still low/not a huge need for more capacity/cyclical rebound. China GDP

running 6.5% (slightly better than expected) – growing debt burden and heavy on fixed investment.

B. U.S. Consumers – Net wealth is 24.5% ahead of the prior peak. Should feed into consumption growth as wealth effects

take hold. Share of disposable income dedicated to paying debt is at very low level (15% - same as 80’s). Lodging gaining share

of wallet over the last 5 years. Experience economy gaining. Travel becoming easier/reduced friction. Labor market tightening

which should lead to wage growth. Households confident – higher than real consumer spending, but both growing. Going

forward, CPI inflation should remain around 2%, but step up in energy costs could be coming in next few years. Overall, spending

growth should continue near current pace.

C. Business Confidence – Nonres fixed investment (capex by companies) – 9 quarter lull even when backing out slowdown

in Oil & Gas. Slowed in 2015 and into 2016. Forecasted to turn positive next two years. CEO sentiment survey highest it

has been in years. The appreciation of the dollar – up 20% since 2014. Makes U.S. difficult place to be export oriented firm. As

Fed reserve raises rates (assume 3x this year and 3x next year) from accommodative to something more normal. Net all of this –

GDP should improve. With fiscal stimulus and deregulation, Should see 2.1% in 17 and 2.6% in 18 ahead of the 1.6% in 16.

Private sector confidence – Confidence is off the charts for small business. They are also highly uncertain. Interesting situation.

Risks – Trade protectionism, Uncertainty, Trial and Error presidency, Tourism

o Upside – GDP could be 3%+ next year.

o Downside – Isolation/more trade wars push economy into recession.

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HENRY GERLACH, CPA [email protected]

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o Sentiment – America first rhetoric, U.S. Mex relations strained.

o Overseas travel should decline 1% in 2017 and pick back up to 3% growth in 2018

Room demand – 1.7% vs. the 1.6% last year. Business trips per employee has been falling. Leisure trips per employee has been

growing. Should continue.

o Group should pick up – up 3% since 08, Transient up 35% since 08.

o 145k rooms under construction – should be 2% supply growth in 17, 2.2% growth in 18

o Varies by market. Supply as high as 13.6% in NY, 12% in Seattle, 10% in Den/Nash, 9% Dallas, 6% Miami

RevPAR – 3.2% in 2016 followed by 2.8% in both 17 &18 (slight occ declines, ADR drives growth)

Tighter labor market should bring wage cost increases to hotels.

Putting all together – Global economy generally better. U.S. consumer in decent shape – dealing with inflation and higher interest

rates. Biz confidence – still in wait and see mode. Expectation for flood gates to open. Risks looming include – policy deter or

promote growth. Key takeaway from lodging perspective – demand growth likely trails GDP a bit. Supply should moderately

exceed demand and weigh on rate growth.

Data Geeks

Speakers – Jan Freitag (STR), Mark Woodworth (PKF), Katie Moro (Travelclick)

Key Quotes

ADR is the name of the game. Would have expected a little more over the last 12 months, given occupancy is so high. – Jan

Freitag

I don’t know about you, but I am tired of being at the “peak” for the last few years. – Mark Woodworth

Business on the books is down 1.2% vs. same time in 2016 and we are cautious on the 2017 RevPAR outlook – Katie Moro

Full Notes

Jan Freitag STR

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HENRY GERLACH, CPA [email protected]

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TTM Feb – 1.6% supply, 1.8% demand, 0.2% Occ, 2.9% ADR, 3.2% RevPAR

ADR the name of the game – it is fine. Would have expected a little more given occupancy so high.

84 months positive vs. 56 months in prior and 111 months in prior

What will 2017 RevPAR be? 20% say 3%+, 67% say 0-3%, 8% say flat to down 3%

Demand side for Transient has been consistent/healthy in the 3% range for last 3 years. Transient ADR growth has decelerated

from 4.5-5.5% in 2014-2015 now towards the 2-3% range. This could have a signaling effect. If these occupancies are supporting

high rate growth, it could lead to a deceleration in Group rate growth going forward.

Group demand is essentially flat/slightly up. Group ADR has consistently been in 4% range. What has helped here is that we are

not building ballrooms anymore. Only 27.5% of supply growth is Upper Up vs. 64% in Up/Up Midscale which impacts Transient

primarily.

AirBNB

o Occupancy for AirBNB in low 40% during week and mid/upper 40% on weekend. Hotel industry close to 80%. Rates in

hotels are $175-$185. AirBNB at $150. Make up of AirBNB listings - 53.5% are 1-6 days. 29.2% are 2-29 days. 17.3% is 30+

days.

Estimates – 2017 - 2% supply, 1.7% demand, -0.3% Occ, 2.9% ADR, 3.2% RevPAR

Katie Moro Travelclick

Slide from 2016 Hunter Presentation

Slide from 2015 Hunter Presentation

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

Business on the books for the next 12 months is down 1.2% vs. 2016 and Katie is cautious on 2017 RevPAR. This is quite a

meaningful change from their 2016 Hunter presentation, when Travel Click was showing business on the books for the next 12

months up 3.7% vs. the same time last year. On that presentation, TC was far more bullish (expecting 2017 RevPAR at 7-10%)

than STR/PKF on the 2016 RevPAR outlook, which proved to be incorrect. Katie noted that following the March 2016

presentation, the pace for 2016 slipped every single month throughout the year, resulting in a major miss on their RevPAR

forecast.

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It is worth looking back on the 2015 presentation as well from Travel Click, which showed business on the books only up 1.1%.

This also proved to be inaccurate as 2015 RevPAR was quite strong.

Mark Woodworth PKF

Tired of being at the peak...New title: Bright Horizons...Dusty Dawns

Important to understand fundamental dynamics at the local level – wide divergence of performance by market

Economy – Business (private domestic investment) and Consumers (personal consumption) are two most important drivers of

GDP for lodging. Both look well positioned for the next couple of years.

Share of wallet – Hotel rooms and food are gaining share over the last 10 years. Nonstore retailers the largest share gainer.

Employment – Leisure and Hospitality has been one of the strongest categories of job growth

International travel – Even though the dollar has been strengthening the last 3-4 years, tourism spending has been rising.

International arrivals went negative for half of 2016. Arrivals look like they may turn positive in 2017. Strong USD impacts

Luxury/Upper Upscale in gateway cities.

Presidents Panel

Moderator – Stephanie Ricca (Hotel News Now)

Jim Merkel (CEO Rockbridge), Dave Johnson (CEO Aimbridge), David Kong (CEO Best Western),

Econ Impact of Trump Presidency? (Raised rates, consumer/corp confidence, and tax). Everyone at ALIS was too afraid, so going

to make you all talk about it.

o JM – The markets have spoken and look at it in a positive pro-business light. Seeing a reaction to that. Lot of speculation

about how quickly can policies be legislated. Change is constant. A good hotel deal that is well capitalized...going to be solid

regardless of politics. Banks were concerned about regulatory tightening, but banks are now feeling a bit better. There are

some good and some bad things.

o DJ – Very optimistic. We were all kind of shocked. Big business runs the U.S. Trump surrounding himself with a lot of

business talent. Set aside social issues. Corp tax cuts, job adds, less regulation, infrastructure spend – all good things. Trump

in hotel industry. Lot more good than bad can come out of that. Need to pull some of these things through congress. We are

very optimistic. Trump has met with lot of CEO’s in a lot of industries. Corp America has been sitting on cash, afraid to

spend. Think we are going to see CEO’s more confident and spend more on capex.

o LS – Animal spirits. Bringing cash back from overseas. Business has felt under assault. People don’t act when under assault.

Think this is going to open up more investment – think Trump may tweet to Nancy Pelosi – “Hey let’s work together babe.”

View from the Top

Moderator: Kirk Kinsel

Speakers: Robert Sarver – Western Alliance, David Kong – Best Western, Liam Brown – Marriott N. Am

Key Quotes

1Q gives us confidence. Jan was good b/c DC exposure. Feb/Mar looking as we thought. GDP grows slow and steady. Not

anticipating any change in our full year view. – LB

1Q shaping up better than we expected. Running up 3%. Advanced bookings up by ~12% for the summer. – DK

The stock market’s reaction has been bigger than I thought. It feels like everyone priced in perfection. The question is – are all

those things going to happen. When people feel good about the economy/future, they spend. I hope that carries through. – RS

Lot of work to be done with the Starwood deal. Brands have swim lanes. It is multiple Olympic sized pool to have all those swim

lanes. It is a good deal for Marriott owners, Starwood owners, and our guests. – LB

Take care of your people. They will take care of the customer. They will come back and you will make money. – Bill Marriott

Full Notes

KK – 1st job in hotels?

o LB – first job was dishwasher. Pantry boy. Been with Marriott 28 years. Now run franchising in N. Am.

o DK – From HK originally. Came to U.S. and started industry as dishwasher. We have 4,000 hotels, 1/2 outside the U.S.

o RS – Dad worked in hotels/Tuson Arizona. First job only lasted a day. Wanted to work at pool b/c thought it was cool. Got

burnt really bad. Grew up in hotel business. 18B bank holding company. 2B hotel portfolio. Acquired GE platform last year.

KK – what are you seeing YTD?

o LB – 1Q gives us confidence. Jan was good b/c DC exposure. Feb/Mar looking as we thought. GDP grows slow and

steady. Not anticipating any change in our full year view.

o DK – 1Q shaping up better than we expected. Running up 3%. Advanced bookings up by ~12% for the summer.

o RS – After election, saw lot of confidence and optimism. Loan pipelines picked up. Data came out for 1Q and not up much.

Lot of optimism. But is that carried through and actually executed politically (tax reform, infrastructure spending, etc.).

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HENRY GERLACH, CPA [email protected]

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Cautiously optimistic with a fair amount of uncertainty. As an owner, it’s a good time to sell a property. We are contrarians.

We do not build or develop/just trade assets. As a lender, it has a been a great run. We try to partner with good operators.

Hope this recovery has few more years in it.

KK – shifts in demand ?

o LB – Look at global picture. It is growing. Travel is 10% of world’s exports. China outbound is growing exponentially. We

need to make sure we have a welcome mat out front the U.S.

o DK – In general, I don’t see a big change in mix of customers. Leisure side very strong – that’s our sweet spot.

KK – post Trump, what’s been the biggest surprise/unexpected?

o RS – The stock market’s reaction has been bigger than I thought. It feels like everyone priced in perfection. The

question is – are all those things going to happen. When people feel good about the economy/future, they spend. I hope

that carries through. Job growth real important to this industry. For me, it is a little wait and see. I feel like markets are

ahead of themselves and the reality of getting these things done may be difficult.

o DK – Stock market up so much. That is good for our industry. Shapes confidence and gets corporates moving.

KK – What do we need to be careful on?

o LB – Republicans need to show they can get stuff done. If there is a belief that tomorrow is better, consumers plan vacations,

spend more, and businesses invest. That’s good for our business. Our society is divided. D.C. is very partisan.

KK – Any challenges?

o RS – Met with our clients who are operators of 50 hotels. You wear two hats – on one hand you are an investor and the other

a manager. It is a struggle. Try to balance the ownership and management.

o LB – Challenge is the margins on hotels in 1-3% RevPAR environment. Cost pressure on the wage side.

o KK – Construction costs keep on rising, labor and materials. More expensive to put new stuff in place.

KK – “Marriott grown via Starwood. Scale wins. We heard from owners. How do you bridge with owners on a bright future.”

o LB –We are digesting an elephant. There is a lot of work to be done to understand. Overarching idea as Arne says – We

believe there are revenue synergies. Cost synergies. Great value proposition for a guest perspective. World we live in with

OTA’s and Google – you have to be big to compete with that. Lot of work to be done. Brands have swim lanes. It is multiple

Olympic sized pool to have all those swim lanes. It is a good deal for MAR owners, HOT owners, and our guests. Arne says

we are keeping them all. KK – “will there be more brands?” If you look at our history, Gaylord, Protea, Delta, Rennisance,

etc – we have demonstrated great ability to bolt on. Starwood is the biggest deal. Technologically, people perspective.

Everything.

KK – “ You have grown your brands. Talked about M&A.”

o DK –For Best Western, we ventured into Economy segment. Trip Advisor minimum requirement. Surprise inspection. By

end of this year, will have 100 hotel signed. Scale is really important in the current complex operating environment. It is

difficult to grow organically. So acquisitions make sense.

KK – GE hotel portfolio – how working out?

o RS – We are a business bank. I like to find niches that are not commodity based loans, which tend to not have good risk

adjusted returns. We tend to have products that are differentiated. Customer needs a banker that understands the specifics of

their business. Within the GE portfolio – we know it well. Good geographic diversification. Team of 25 people really knew

the business. Good systems in place. Price was really good. Portfolio is 1.3B. Our plan is to grow new relationships and

manage existing for the long term. We tend to be a lot more aggressive in down markets and conservative in up markets. But

we want to be there in both.

KK – the business of hotels and the hotel business. Technology plays a big role. What are thoughts there?

o LB – How do you free up staff to engage guests at an emotional level. Technology has ability to do that. Mobile should

enable more chatting and solving problems quicker. People remember the human connection. Residence Inn – you got to

know your customers well when you are there for extended stay. We have 100M loyalty program members. Adding 1M per

month. Tech enables us to mine the opportunity there. Open a hotel every 14 hours somewhere around the world.

o DK – It is all about creating experience. We map out customer journey. From time of booking, check in, during stay, check

out, post stay. How tech comes into play is important. In 10-15 years, when Boomers not traveling as much, will be a whole

new group of travelers that are riddled with tablets and smart phones. Our customers want to text with us vs. have a phone

call. In hotel experience is how differentiae from OTA. We are testing Alexa in our hotel rooms. Use for room service, wake

up calls. House keeper can leave message for maintenance guy that something needs attention.

o DK – I stay awake thinking about the pace and scale of change. Happens so fast. These changes driven by tech and customer

expectations. Competition. Everyone investing into loyalty. Product experience. OTA’s constantly evolving also. AirBNB

not standing still either. They are buying up Luxury/Urban locations. Becoming more formidable.

o RS – I am not going into someone’s house. I don’t even like staying at my in-laws house.

KK – Starwood never invested deeply in culture but did in technology/innovation. How do you bring those two together?

o LB – Having a bias towards change and a powerful culture. We are family business with great history. You have to hand it to

Mr. Marriott. He identifies our vision – Take care of your people. They will take care of the customer. They will come back

and you will make money. At his 85th

yr birthday, he said he wants his legacy to be one of opportunity – I provided

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HENRY GERLACH, CPA [email protected]

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opportunity. My mother and father provided me with opportunity to run small food business. What opportunity are we

providing for other people to grow and develop. What’s the mission – do I have the tools to accomplish? Does anyone care?

Bill Marriott – We are good but can always get better.

Buying & Selling Hotels

Moderator: Danny Givertz – Hunter

Speakers: Kate Henriksen – RLJ, McKenna Luke – HVS, Sam Reynolds – Apple, Hank Staley – CBRE

Key Quotes

In 2016, public REITs were on the sideline. You will probably see a trend more towards public REIT buying this year. – SR

Sure math says that if the debt component priced at higher rate, cap rates should go up. But lot of other factors impact cap rates.

Risk inherent in the market is key. Should be a bigger pool of buyers this year. – HS

Bid Ask has narrowed over the last few months as some certainty has come in. – SR

They don’t speak in terms of ADR. They talk Rev per Bed or Rev per Sq ft. Residential, retail, industrial, all talk Rev per sq ft

except for the hotel industry. You see that becoming a focus now. – HS

I have seen more deals collapse in last 18 months than in my entire career due to construction costs. When that construction bid

comes in...it’s like uh oh – it doesn’t work – HS

Full Notes

DG – 2016 showed 8.5% average select serve cap rate – what should we see in 2017?

o HS – We are close to the peak valuation phase. Even though supply exceeds demand, the occupancy decline is minimal. Still

expect 2.5-3% in 2017 and 2018. But valuations have peaked.

o ML – In 2016, RevPAR was going everywhere and values were going everywhere. Some markets already entered contraction

period where supply outpaced demand. Majority of properties should show moderate growth in 2017.

DG – Who’s in, who’s out? Who’s buying?

o SR – 36% foreign investors. Coming out of 2016, lot of PE involved. In 2016, public REITs were on the sideline. You will

probably see a trend more towards public REIT buying this year.

DG – Marwood ...does the deal make certain assets more desirable?

o SR – We historically stayed with Hilton and Marriot only. So yes, we are now evaluating Starwood brands.

o KH – More inclined to look at Starwood brands this year vs. 2 years ago.

o HS – Brand is very important when it comes to valuation. Historically, Marriott and Hilton have been the twin 800lb gorillas.

I think it most definitely enhances Starwood’s value.

DG – with regards to interest rates, how does that affect the value? If they rise, could hotel cap rates still be stable?

o ML – Rates have gone up. The Fed’s increase recently. Lenders building that into the spread. Cost of capital is going up.

o HS – Sure math says that if the debt component priced at higher rate, cap rates should go up. But lot of other factors impact

cap rates. Risk inherent in the market is key. Since 2011, Cap rates have ranged from a low of 7.1% to a high of 7.6% - very

tight range in Full Service. The 7.6% was 2016, which was up 40-50bps. Mostly interest rate driven. To extent rates go up,

cap should go up accordingly. But sheer demand for product is important. The cost to build has made acquisitions more

viable option. So that could push cap rates down. So if demand for hotel assets picks up, that could offset a rise in

interest rates. o KH – Interest rates going up. Anticipation is there. Think some already baked in. Anticipated growth also baked in. Cap rates

likely to increase as RevPAR growth flattens out thought. That is happening now.

o HS – Spread between going in cap rates and trailing has decreased b/c NOI growth looks modest.

DG – $10B of hotels owned on this stage. We have seen financing getting tighter. What are you seeing?

o ML – Financing has become more stringent. Sponsorship more important. How much cash flow already in place. For new

construction, going to have to be a good project that they feel solid about.

o HS – Construction financing difficult thing to deal with.

o ML – Has to be the right deal. Not just every deal more

DG – Does transaction volume remain flat with rising rates?

o KH – Private equity has money to put to work. REIT’s have cash to put to work as well. Trying to find the best deal we

can. But there is a lot of money that is going to be put to work at some point and it could be 2017.

o SR – Bid Ask has narrowed over the last few months as some certainty has come in. Which helps.

DG- Building new hotels – brand availability, construction costs, when acquisition?

o HS – I have seen more deals collapse in last 18 months than in my entire career due to construction costs. When that

construction bid comes in...it’s like uh oh – it doesn’t work. When you look at brands – Residence vs. 10 years ago. They

are smaller. The sq footage is down. Look at Hilton’s Tru – $20,000 less per unit to build than a Hampton. It is because less

sq footage. I stayed at a few hostels in South Beach. Poshtels – Posh hostels. Few in Europe and they are coming to the U.S.

Which is kind of odd in and off itself given my age. Vast social areas. Rooms are very small. Private rooms small. Dorm

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rooms with 4-6 beds are normal hotel room size. They don’t speak in terms of ADR. They talk Rev per Bed or Rev per

Sq ft. Residential, retail, industrial, all talk Rev per sq ft except for the hotel industry. You see that becoming a focus

now, with what the brands are doing. Construction costs are all about sq footage. All this is about Millenials. You can do so

better if you interact with locals.

o Flashpacker is a backpacker with a money. When we stayed a hostel, it was b/c we did not have money.

DG – Trump, overseas travelers, what’s going ?

o KH – Mixed bag. Strong dollar has already impacted international traveler. International searches to the U.S. are down. Not

just from the 6 banned countries but from a broader cross section of the world. U.S. note perceived as being as open or

friendly. Time will tell how that shakes out. Gateway markets could feel some pain from that.

o SR – It is more about what we do not know. Guesses are just that.

o ML – It is very uncertain at this point. But we have some concerns for gateway markets.

Foreign investment represents 35% of the deal volume – do you compete with them?

o KH – As foreign capital go into select serve, they are looking for scale. So portfolio deals. We did sell a couple individuals

select serves in NY to China buyers. Could see more of that.

o SR – Lot more foreign capital circling for deals than actually got done. So this could go higher.

Airbnb (& Other)

Moderator: David Eisen, Editor-in-Chief, Questex Hospitality Group

Speakers: Jan Freitag, SVP of Lodging Insights (STR), Bjorn Hanson, Lodging and Tourism Professor (NYU), Abhijit Pal, Head

of Operations of Global Partner Group (Expedia), Al Young, EVP & COO (LaSalle)

Key Quotes

Owners/STR research support theory of declining number of compression nights each year in Airbnb markets.

Owners want powerful distribution and less fees than they have to pay now – Airbnb has potential to offer that down the line.

Airbnb regulations are still evolving NY has legislation passed, San Fran passed some legislation, number of cities do.. but it’s

not being enforced. If enforcement doesn’t catch up, then regulation needs to change.

Reason for the sluggish rate growth during such high occupancy period is OTA commission rates. Brands discounted a lot,

offered special promotions, member rates, etc. to drive direct bookings, and the younger generations are more accustomed to rate

transparency via the internet.

Direct booking initiatives have had minimal impact on Expedia growth. If anything, we have had better margins as we shift

towards a better mix of hotels for us in terms of commission rates.

Full Notes

Industry needs to do a better job of competing in an environment with Airbnb around – they are here to stay

Important to realize – Airbnb and OTAs have fluid business models, may look very different in the next 5 years

STR: Looked at a combination of 13 markets (7 in the US, 6 international) for hotels/Airbnb to examine current impact

o As a baseline – just under 50% of all stays in this survey for the US markets were for 7 or more nights

o US markets: Found that hotel occupancy was relatively higher on weeknights, Airbnb’s most popular nights are weekends

Hotels are more incentivized to vary price and ensure occupancy, Airbnb generally ok with lesser occupancy

Hotel ADR by weeknight varies significantly due to revenue management strategies and price adjustments

For Airbnb – ADR is consistent, have a price they charge and typically do not lower that to fill the room

This will likely evolve as Airbnb works to maximize revenue

2016 Occ was highest since 1984, while rate went up 3.1%

o Disappointing that they couldn’t get a 2% premium to inflation – part is Airbnb, part OTAs, other external factors

o Statement on pricing power

o Hotels don’t love the OTA customer – they are less loyal, less valuable customer, more likely to complain/write bad reviews

on TripAdvisor, etc.

Airbnb – impact on pricing in peak periods we know, but also potentially could impact volatility of the cycles

o On the supply side, softer economics likely leads to people seeking additional income, adding to Airbnb supply and causing

incremental impact to pricing power

Back on rate: what is the biggest driver to rate pressure – is it supply or something else?

o OTAs commissions are a huge driver

o Chains trying to compete with OTAs by offering member rates, special promos, discounts

o New generation of consumers accustomed to better rate transparency

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HENRY GERLACH, CPA [email protected]

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Airbnb – in 2-5 years does it just become one big OTA? How do they evolve?

o Many are expecting Airbnb to add hotel inventory – would allow them to grow in valuation

However public statements by them to maintain the unique experience are to the contrary

Contradicts their philosophy to an extent/could lose some of their identity

o Airbnb could theoretically protect its platform and form separate but parallel business on OTA side

o Owners want powerful distribution and less fees than they have to pay now – Airbnb has potential to offer that

o Regulation still evolving – needs to catch up

o Opportunity as younger consumers growing up with the Airbnb model (Uber as well) are used to and comfortable with this

method – may never see the use for an OTA platform

Airbnb – making acquisitions in luxury retreats

o Seems like they are working to add full service travel component

o Entering new avenues

Regulatory perspective in terms of taxation/fees:

81% of Airbnb US revenue comes from bull unit rentals

o NY has legislation passed, San Fran passed some legislation, number of cities

Enforcement remains the issue

Needs to be enforced better or rules need to change

Believes the issue will get fixed and playing field will level out

o Other issue is zoning issues

Safety/security of neighborhoods

Does the Airbnb unit bring down the value of the surrounding neighborhood?

Lot of issues that need to be resolved

People disregarding rules in terms of home sales/rentals

OTAs also here to say – been around 20 years now

o 200 sites in 75 countries, 35 languages

o Last year – grew about 18% - growth continues to go strong

o Strong partnerships with suppliers

Work with them because they see value

o Shifting from pure distribution to technology services for the industry

For example - Vacations by Marriot powered by Expedia

Also powering some foreign language Starwood sites

o Brands working with EXPE seeing lots of benefits – Red Lion worked with them and in the first two weeks they launched the

loyalty acquisition program with them, they got more memberships than they did in the first 6mo of 2016

Will more traditional brands collaborate with Expedia’s of the world in similar type efforts?

o Expedia: about to launch two major Spanish chains on the loyalty acquisition program in the coming months

What is Expedia doing to bring down distribution costs?

o Expedia has passed on significant cost savings to hotels

o Brought commission rates down 300-400bps over last 5 years

o Examining ways to reinvest profits to add more values to suppliers

Efforts underway with Marriott, do help promote hotel loyalty programs

Also do leak off users to brand.com as a result to help them grow in direct

o Looking at profit in business for Expedia – for every hundred dollars that hotels priced their product – Expedia only kept

$0.64 during 2016

Spend $4.4B in marketing, and $1.2B in tech

Most of the revenue gets reinvested

o Expedia seems to have minimized dimming practice

o All about finding equilibrium for balance of OTA vs. direct

o Independents will utilize them more than brands

Marriott-Starwood

o Scale is vastly important, gives them an avenue to push back against OTAs and Airbnb

o Broader distribution alleviates some of that need

o Brands offer significant value in loyalty and distribution

Customers also value having choice

Likely driving better conversion

Lodging

March 30, 2017

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VINCE CIEPIEL, CFA [email protected]

(216) 649-7253

HENRY GERLACH, CPA [email protected]

(216) 649-7206

o Lot of companies do see better online conversion rates as scale increases

o Loyalty program huge

Brand standards evolving is another challenge

o In the past consumers have valued consistency across the brand

o Evolving to uniqueness, soft brands

o Longer-term thinking, begs question of what is the role of a brand

Brands exist to provide distribution- typically do better on occupancy and rate

If something (i.e. soft brand) comes along with a strong distribution model but more relaxed on fees/brand standards,

could be very disruptive

Brands Direct Booking initiatives:

o Minimal impact to Expedia’s business/growth rates

o Margins increased due to more favorable mix shift towards higher commission rate properties

o Still in the beginning of the brands trying to find best reaction

o From brands perspective, sounds like it did help them to drive more direct

How do you view Google?

o Expedia is a top ad spender for Google, relationship is good

o Would love to be able to rely less on them but they are such a valuable traffic driver

o Doesn’t foresee Google diving into the customer side of the business, dealing with call centers and issues that arise

o Will spend more focus on advertisement portion of their business which has driven their growth and profitability to date

Future issues?

o Unsure why businesses in the industry allow free cancellations – most other industries don’t allow for that, thinks it needs to

change. Would create more stability in revenue management.

o Can’t take Airbnb too lightly, can’t ignore it – don’t want to be the next Kodak in 1998

Can offer customers number of options and as platform grows, will offer more and more options

o Airbnb growth slowed in major cities, but growing substantially in vacation rental markets

Lodging

March 30, 2017

Page 15

VINCE CIEPIEL, CFA [email protected]

(216) 649-7253

HENRY GERLACH, CPA [email protected]

(216) 649-7206

Appendix

Important Disclosures:

Companies Mentioned:

Hilton Worldwide Holdings Inc. (HLT: $58.61 – BUY)

Hyatt Hotels Corporation (H: $53.54 – NEUTRAL)

Marriott International Inc. (MAR: $94.59– NEUTRAL)

Disclosures

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

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

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

Valuation and Risk: Price targets are established under various valuation methods including P/E, P/S, EV/EBITDA on financial estimates based on forward earnings. Price targets are not

established for every stock. The price target’s effectiveness may be affected by various outside factors. Risk assessments can be found in the most recent research on these stocks.

Other Disclosures: I, Vince Ciepiel, certify that the views expressed in the research report(s) accurately reflect our personal views about the subject security(s). Further, we certify that no

part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report(s). The analysts responsible for the

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

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Member FINRA/SIPC

Rating Percent

Buy 17%

Neutral 81%

Underperform 2%

Cleveland Research Company - Ratings Distribution