Gs Lodging Industry Primer 2012

April 10, 2012
Americas: Lodging
Equity Research
The essentials of lodging investing

Industry context
This is the place either to start research on this diverse $128 billion
industry or to brush up on a specific industry topic. We explain what to
look for in a lodging franchise, detail the most pressing questions facing
the industry, and discuss operating metrics and profit drivers.
Steven Kent, CFA Goldman Sachs does and seeks to do business with
(212) 902-6752 steven.kent@gs.com Goldman, Sachs & Co.
Eli Hackel, CFA
companies covered in its research reports. As a result,
(212) 902-9672 eli.hackel@gs.com Goldman, Sachs & Co. investors should be aware that the firm may have a conflict of
Robert Pokora interest that could affect the objectivity of this report. Investors
(212) 902-2632 robert.pokora@gs.com Goldman, Sachs & Co.
should consider this report as only a single factor in making
their investment decision. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-
US affiliates are not registered/qualified as research analysts
with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research

April 10, 2012 Americas: Lodging
Table of Contents
Overview: What’s new in this issue 3

From the analyst’s desk: Hotel stocks’ outperformance maybe measured in years not months 4
What could go right? 7
What could go wrong 11
Industry profile 13
Size, segmentation, and history of the lodging industry 14
How hoteliers make money and generate returns 22
Lodging fundamentals 26
We expect the Marriott brand to begin to pick up vs. its peers; Courtyard should benefit from refreshes 33
How big is “big”? Potential earnings power 39
Detailed assumptions and models surrounding our analysis 43
Ways to grow lodging companies 47
Supply is still not a concern in the United States 49
*New* While supply growth is low, the US still represents a great growth opportunity for the brands 54
A closer look at timeshare operations 60
A closer look at timeshare operations 60
A look at hotels from a global perspective 69
*New* Global c-corps and REITs with gateway exposure to benefit from growing Chinese travel 73
A closer look at lodging REITs – One of our favorite ways to directly benefit from the recovery 82
Key industry risks 84
Lodging consumer characteristics 85
Analysis of industry competitors 86
Top 10 brand franchise characteristics 88
What to ask company management 89
Valuation 90
Key earnings drivers 94
Economic and demand indicators 95
Analyzing lodging performance 96
Appendix I: Industry terminology 98
Disclosure Appendix 100
Goldman Sachs Global Investment Research 2

Overview: What’s new in this issue

This revised lodging primer contains several new items, including an analysis and
discussion of the following topics:
From the analyst’s desk

In the analyst’s desk section of the revised lodging primer we explain why we believe that
outperformance may be measured in years, not months.
While supply growth is low the US still represents a great growth

opportunity for the brands
In this section we wanted to see what brands were still being built and which ones were
able to get the most conversion activity. While there has been and we expect there will
continue to be low supply growth in the US it is still a market that should open 75,000 net
new rooms over the next three years, and it provides a good opportunity for brands to
grow their units through both new builds and conversion.
Global c-corps and REITs with gateway exposure to benefit from

growing Chinese travel
We took another look at the Chinese hotel market on both an intra country as well as
outbound level. While it is almost cliché at this point for the large brands to talk about how
many hotels they have in the pipeline in China, the fact is that demand is growing
extremely rapidly both intra China as well as outbound. We think both the c-corps and
REITs will benefit from this trend.

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

measured in years not months
In the next few pages we lay out our thesis for continued hotel stock outperformance. After
a difficult 2011 when the group underperformed, 2012 is off to a strong start with hotel
stocks showing outperformance. In the next few pages we note that the thesis has not
changed much, and might even be viewed as boring, but that assessment should not
dissuade investors from buying this sector. We are as confident about the group’s potential
for outperformance as when we upgraded it in May 2009. The lack of supply and steady
demand should lead to continued earnings and alpha growth.
Steady should not be viewed as uninspiring

Low supply growth We would continue to be broad-based buyers of the hotel sector as we expect demand to
almost always leads surprise to the upside while the slow supply growth environment takes away at least half
to stock of the historical risk of the sector for the next few years. The lack of supply as a risk should
outperformance.
not be minimized as we note that hotel stocks have historically trended higher when supply
was trending lower (see Exhibit 1). At the same time, demand trends also appear to be
improving with steady employment increases in the US, continued solid demand in Asia,
and Europe trends coming in slightly better than low expectations.
Exhibit 1: Lodging stocks have generally gone higher when supply growth is low
Lodging Index includes Marriott, Starwood, Hyatt, Hilton, and Host
900 5.0
Buy stocks when supply is low or growth ...sell stocks when supply growth is
is declining... above its historical growth growth
800
4.0
700
600 3.0
500
2.0
400
300 1.0
200
0.0
100
0 -1.0
Nov-91
Nov-92
Nov-93
Nov-94
Nov-95
Nov-96
Nov-97
Nov-98
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
May-91
May-92
May-93
May-94
May-95
May-96
May-97
May-98
May-99
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
May-11
Lodging Index US Supply Growth
Source: FactSet, Smith Travel Research, Goldman Sachs Research estimates.
In some ways hotels, where our thesis has largely remained unchanged for the last three
years, are becoming steady performers, especially relative to the other areas of our

coverage. But we think steady can be good, especially if it means solid appreciation over
the next couple of years. This is exactly what we are forecasting as we think the real
contrarian call right now is that the lodging cycle will be measured in years not quarters. At
the core of our bullish call on hotels stocks is our belief that supply growth will be lower
than employment growth. Simply put, more people with jobs versus more rooms opening
is good for hotel operations and stocks performance (see Exhibit 2). As this trend plays out
portfolio managers should view these stocks as evolving growth/cyclical names with
multiple legs rather than a trade. Our view is your should own the cycle as long as it lasts.
Exhibit 2: Employment growth is outpacing supply growth

yoy % change in US supply (TTM) vs. yoy % change in US employment
4.0%
Employment growth
outpaces supply
growth. 3.0%
2.0%
1.0%
0.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2009 2010 2011 2012E
-1.0%
-2.0%
Based on our GS economic team's forecast for
employment and our forecast for US room
supply, we expect employment growth to be
greater than supply growth throughout 2012.
-3.0%
-4.0%
-5.0%
US yoy room supply growth Employment growth yoy
Source: Smith Travel Research, Bureau of Labor Statistics, Goldman Sachs research estimates
MAR, HOT, IHG, HST, We are Buy rated on Marriott (CL-Buy), Starwood, InterContinental, Host, and LaSalle as
and LHO are our stocks that will benefit from this environment and because they are generally
favorites. geographically diverse. In addition, these stocks benefit from improving operating leverage
given a shift toward more rate-driven RevPAR growth. They should also benefit from
expense reductions that were implemented during the downturn, but we admit this is the
one part of our thesis that we have seen less evidence of. Although we are intrigued by a
number of mid-cap stocks, we have decided to stay on the sidelines on these name as they
do not provide the diversity of earnings stream due to geographic or price point
concentration.
The reasons hotel investing, at its core right now, is maybe relatively uneventful:
First, we get supply data going out for the next three years, and currently in North America
we are at a virtual standstill (see Exhibit 3-4). Investors do not have to even debate whether
a little bit of supply will negatively impact trends or certain markets. It is just not happening.

Exhibit 3: We expect supply growth in the US to remain Exhibit 4: The number of rooms under construction
at historically low levels remains at historical lows in the United States
US Supply growth over time Rooms under construction in the United States
1
350 We expect supply growth to continue to remain frozen through
9.0%
2012 as growth levels have been near zero since 2011.
200000 0.8
8.0%
300
0.6
7.0%
250
Percentage change (yoy)

6.0% 150000 0.4
Rooms Under Construction

Supply growth rate (%, yoy)
Room adds (000, yoy)
200 5.0% 0.2
150 4.0% 100000 0
3.0% -0.2
100
2.0% 50000 -0.4
50
1.0% -0.6
0 0.0%
0 -0.8
In Construction % change
Total number of room adds Supply growth (%, yoy)
Source: Smith Travel Research. Source: Smith Travel Research, Goldman Sachs Research estimates.
Second, we get weekly RevPAR results, by the end of the quarter we have a general sense
as to how demand trends have impacted pricing trends (see Exhibit 5). We note that YTD
RevPAR growth is coming in toward the high end of our guidance range of 5% to 7%.
Comparisons get slightly more difficult throughout the year, but conference and
convention “deals” set two and three years ago at low prices will also be rolling off, which
should provide an additional tailwind.
Exhibit 5: YTD RevPAR is up 7.0% Exhibit 6: Group business is still rolling out from the
Four-week moving average of % change in US RevPAR recession
Marriott Hotels & Resorts Group revenue by year booked
14.0%
12.0% Booked in
2005, 6%
Booked
in 2006,
4%
10.0%
Booked in 2007, 7%
8.0%
Booked in 2011, 30%
6.0%
Booked in 2008, 9%
4.0%
Booked in 2009, 12%

2.0%
0.0%
Booked in 2010, 32%
% Change in US RevPAR
Source: Smith Travel Research. Source: Company Data.
Third, there is little fashion risk in the group relative to the rest of consumer. Hotels brands
take years to evolve both in a negative and positive direction. We maintain that the end
consumer still picks a hotel based on its location first, price second, and other attributes
(frequent guest program, amenities, design) as distant tertiary issues.
With supply in check, near instantaneous trend updates, and little innovation risk, what
could go right and what could go wrong over the next 12 months?

What could go right?

Global demand drivers and trends come in better
The number of The inflow of business and leisure travelers into the US has increased at an average annual
international arrivals growth rate of 5% over the past five years. We expect the pace of inbound international
is rising and appears travel to increase, fueled by economic, tourism, and regulation drivers. International
poised to go even
visitors, as measured by arrivals, have increased 9% in 2010 and 6% in 2011 and are
higher.
expected to increase in 2012 and 2013 (see Exhibit 7). In addition, international consumers
have a high propensity for gateway cities and global brands, which should benefit some of
our favorite stocks.
Exhibit 7: The number of international arrivals should increase 40% by 2016

International visitor arrivals to the US
100 15%
90
80 10%
70
60 5%
50
40 0%
30
20 -5%
10
0 -10%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Millions of People Arriving % change YoY
Source: OTTI.
The US economy is growing faster than Western Europe, yet the dollar remains depressed,
attracting both business and leisure travelers into the market. The US market remains a top
global tourism draw, and most importantly the US is rolling out initiatives to ease travel
into the market.
According to OTTI projections, the biggest growth countries between 2010 and 2016 should
be China, and Brazil. The number of visitors from overseas is expected to increase by 46%
from 2010 to 2016 (see Exhibit 8).

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

International visitors to the US
Country 2010 2011E 2012E 2013E 2014E 2015E 2016E abs. change % change
Grand Total 59,745 63,154 66,522 70,063 73,668 77,595 81,466 21,721 36%
Canada 19,959 21,358 22,458 23,464 24,544 25,624 26,700 6,741 34%
Mexico 13,423 13,604 14,164 14,799 15,309 15,814 16,313 2,890 22%
Overseas 26,363 28,192 29,900 31,800 33,815 36,157 38,453 12,091 46%
UK 3,851 3,889 3,969 4,103 4,292 4,528 4,765 914 24%
Japan 3,386 3,284 3,386 3,462 3,581 3,739 3,857 471 14%
Germany 1,726 1,847 1,904 1,989 2,058 2,126 2,193 467 27%
France 1,342 1,503 1,596 1,686 1,802 1,941 2,083 741 55%
Brazil 1,198 1,497 1,744 1,998 2,205 2,569 2,811 1,613 135%
Korea 1108 1,163 1,247 1,358 1,468 1,581 1,697 589 53%
Australia 904 1,067 1,199 1,360 1,501 1,633 1,753 849 94%
Italy 838 914 942 974 1,007 1,040 1,073 235 28%
China 802 1,098 1,336 1,650 2,049 2,477 2,997 2,195 274%
India 651 670 719 783 846 911 978 327 50%
Spain 640 697 739 769 799 831 865 225 35%
Netherlands 570 604 623 641 660 680 701 130 23%
Colombia 495 505 535 572 601 643 688 193 39%
Venezuela 492 536 563 563 568 574 580 88 18%
Argentina 436 506 562 612 655 701 743 307 70%
Switzerland 391 480 519 545 567 584 601 211 54%
Sweden 372 450 486 515 541 562 579 208 56%
Ireland 360 350 353 357 360 367 375 14 4%
Source: OTTI.
Federal initiatives include (1) increasing visa processing capabilities by 40% in 2012, (2)
ensuring that 80% of visas are processed within three weeks, (3) increasing the Visa Waiver
Program and expanding the Global Entry program, making it easier for frequent travelers
to gain entry into the US. These initiatives will be especially relevant for boosting inbound
traffic from China and Brazil.
We found that the percentage of room nights occupied by foreign travelers has increased
from 7.4% in 2002 to 10.3% in 2010 and is expected to increase to 14.1% in 2016 (this
estimate is based on 2010 data as 2011 data has not been released yet). This assumes that
occupancy at that time is 61%, which is a normal occupancy rate for the US.
We note that this data only looks at overseas markets and not visitors from Canada or
Mexico. If we were to include these markets the numbers would clearly be higher, but
many visitors from these countries are simply coming in for short periods of time (for
example, just for the day) and are likely not the key drivers of increased lodging demand.

Exhibit 9: Percentage of rooms occupied by overseas Exhibit 10: We believe that by 2016 international visitors
travelers has been increasing could add over 300 bps of occupancy by themselves
The percentage of room nights occupied by overseas Each year’s additional occupancy is done on 2016E total
travelers room nights available
12.0% 350
300
10.0%
250
8.0%
200
6.0%
150
4.0%
100
2.0%
50
0.0% -
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 20313E 2014E 2015E 2016E
% of rooms occupied by international travelors Cummulative occupancy benefit from international travelors
Source: OTTI, Smith Travel Research, Goldman Sachs Research estimates. Source: OTTI, Smith Travel, Goldman Sachs Research estimates.
Given that occupancy is already at peak levels, we think there is potential for a surge in
rates with just some incremental international travel. In order to estimate the impact on
occupancy that these international travelers will have, we looked at the rooms we believe
will come online between now and 2016, which we assumed to be all of the rooms in the
US pipeline, including under construction, final planning, and planning. There were 1.76bn
available room nights in 2011, and doing this analysis we get 1.87bn available room nights
in 2016. Overseas visitors would account for 161 million occupied room nights in 2016, up
from 105 million in 2010 (based on 2010 data, see Exhibits 9 and 10).
While we do not have data related to the amount of time spent in top markets, we feel it is
safe to assume that the majority of overseas travelers spend their time in major cities. It is
therefore more likely that the distribution is more heavily weighted to these top markets
and that occupancy increases could be more severe in these markets. So, while the impact
to the overall industry may be north of 300bps of occupancy, we think it could be
substantially more in some of the more heavily visited major markets such as New York,
Los Angeles, and Miami.
Sustained US GDP growth in 2-3% range plus the potential for upside
GDP growth of 2% to Currently the GS Economics team is forecasting GDP growth of 2.2% in 2012 and 2.2% in
3% is enough to meet 2013. We believe this level of growth is supportive to our current RevPAR forecast of 6%
our RevPAR forecasts. annually for the next few years. At this level of economic activity we expect businesses to
continue to slowly add workers. Most importantly, without an economic downdraft we do
not expect significant layoffs.
The lack of a negative, in this case layoffs, is viewed as a very big positive for us. First, as
we noted, more employees means more business travel. Second, when CFOs make the
decision to lay employees off it is usually accompanied by a dramatic cutback in travel
expenditures. It seems unseemly to hold major conventions or meetings while at the same
time laying employees off. So we generally get concerned when we see layoff
announcements.
The good news is that most companies are financially sound with high cash levels, low
debt, and generally high profit margins. In addition, companies see incremental growth
opportunities, so they are inclined to send their salespeople and leaders out on the road to
ensure that they get their share of this growth.

At this point, with expectations for macro growth solid but not a far reach, any upside to
economic growth would also suggest upside to our RevPAR and earnings forecasts. Most
portfolio managers are assuming steady growth, but hotels, given their current high
occupancy, would be one of the first beneficiaries of a surge in economic conditions.
Capital allocation could become a bigger theme

Hotel stocks could We think hotel stocks have a huge opportunity to embrace their inner capital allocation
become bigger stories. The need for capital should diminish over the next few years as US building is at a
dividend and buyback standstill, timeshare operations have been exited or are winding down, and international
stories.
growth tends to be more low capital franchise/management driven rather then building
owned hotels.
In addition, Starwood, Intercontinental, and Marriott should start to see more cash come
over the transom. Starwood has said it is interested in selling hotels and is expecting the
condo sales at Bar Harbour to contribute at least $80mn in EBITDA in 2012. InterContinental
is also selling properties (Barclay in New York), and 62% of its earnings come from free
cash flow generating franchising. Marriott is 55% fee based and has said it plans on selling
Edition hotels that it has recently acquired.
So with fundamentally strong cash flow and increasingly lower capital expenditures, why
are we not seeing a more aggressive and consistent capital allocation story? We think it is
primarily managements’ mindset that if they start to pay a dividend they will no longer be
a growth stock. Also we expect it is more interesting to start a new brand, enter new
businesses, and buy hotels then to simply pay out a dividend.

Exhibit 11: Consumer discretionary capital allocation

in 2000, 75% of capital was allocated to growth, but by 2011 the number dropped to 39%. Capital returned to investors has
tripled from 19% to 57%
120000
Capex
Debt Paydowns
Buybacks
100000
Dividends
42%
80000
34% 39% 40% 42%
Cash Uses ($ millions)
2%
53%
60000
44% 9% 4%
4% 4%
54% 55%
53%
40000
5% 47%
63% 16% 42% 39% 37%
5% 42%
7%
65% 8%
75% 74% 31%
20000 24% 24%
31%
8% 30%
10%
6% 10% 20% 18%
17% 15% 15% 16%
11% 8% 11% 9% 14% 16%
9% 9% 9%
0 8% 8% 8%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
Use of Cash:
Debt paydown 6% 10% 10% 8% 8% 5% 5% 2% 7% 16% 9% 4% 4% 4%
Invest for Growth 75% 74% 65% 63% 52% 54% 53% 42% 55% 44% 34% 39% 40% 42%
(capex)
Return to Investors 19% 16% 25% 29% 39% 40% 43% 56% 38% 40% 57% 57% 55% 55%
(buybacks + dividends)
Source: Goldman Sachs Research estimates.
However, to us it seems there are enough brands out there and there are few “holes” in
the brand portfolio for the major companies, and entering new businesses (timeshare,
assisted living, cafeterias, condos) has been value destroying. Furthermore, focusing on
building same-store profits at existing hotels is the highest return on capital (management
and dollars). In addition, no investor is saying that hotel companies have to stop growing
or being innovative. They want both.
Companies like AutoZone, Bed Bath and Beyond, Coach, and Ralph Lauren have all shown
that they can “do both” and have seen their multiple expand as investor have recognized
these attributes. We expect hotels to start to follow these examples. Also, paying out a
healthy dividend would create a sense of discipline on building more hotels, which may
reduce the surges and cylical boosts on development.
What could go wrong

Financing for new builds could come back
Financing for new builds in the US could come back, creating an unexpected surge in
supply. We have seen few signs of life on financing for small or large hotels in the US.

Exhibit 12: Commercial real estate loans in the United States are declining
US commercial real estate loans
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
1990Q4
1991Q2
1991Q4
1992Q2
1992Q4
1993Q2
1993Q4
1994Q2
1994Q4
1995Q2
1995Q4
1996Q2
1996Q4
1997Q2
1997Q4
1998Q2
1998Q4
1999Q2
1999Q4
2000Q2
2000Q4
2001Q2
2001Q4
2002Q2
2002Q4
2003Q2
2003Q4
2004Q2
2004Q4
2005Q2
2005Q4
2006Q2
2006Q4
2007Q2
2007Q4
2008Q2
2008Q4
2009Q2
2009Q4
2010Q2
2010Q4
2011Q2
2011Q4
Commercial Real Estate Loans in the US
Source: SNL.
We are not naïve to think that hotel companies and developers would stop building based
on their assessment of market saturation. The appeal of building a new facility to take
market share or enhance a real estate investment has too big of an allure. Instead they
have tended to stop building only when capital is in short supply. Any signs that capital is
available would be a possible precursor to building surge, so we are especially focused on
it.
Lower economic growth is the obvious other risk

As much as we noted earlier that any increase in economic activity would be beneficial to
hotel trends, the obvious counterpoint is that a slowdown would be a true negative. In fact,
the hotel stocks traded off dramatically in 2011 when investors’ concerns about a double-
dip recession increased. As of now we are not particularly concerned about this issue.

Industry profile
Lodging is an influential economic force

With almost 4.9 million hotel rooms and an estimated $108 billion in total revenues (2011)
generated in the United States alone, the lodging industry has become an influential
economic force. According to the Travel Industry Association, lodging is a critical
component of the overall US travel and tourism industry, which is a $1.8 trillion industry
that pays about $118 billion in federal, state, and local taxes and supports more than 14
million jobs both directly and indirectly.
Highly segmented lodging product controlled by a handful of

lodging participants
The lodging industry is highly segmented with regard to product, with a variety of brands
targeting a wide array of price points and consumer needs. Nearly 71% of the hotels in the
United States are affiliated with a brand, but no one hotel brand accounts for more than 4%
of all hotel rooms in the United States. The end result is an industry comprised of a
multitude of brands that are controlled by a handful of lodging operators. The top nine
hotel companies, ranked by number of rooms in the United States, account for about 2.8
million hotel rooms. These top nine lodging companies continue to increase their share
and now account for around 57% of the total US room supply (see Exhibit 13).
Nearly 71% of hotel Exhibit 13: Top nine hotel companies ranked by total US hotel rooms
rooms in the United based on March 2012 figures
States are affiliated
Total Number of Percentage of Total Number of Brands
with a brand.
Company Rooms in the US Total US Rooms Operating in the US
Hilton Hotel Corp. 492,897 10.1% 11

Marriott International* 491,808 10.1% 13
Wyndham Worldwide 450,788 9.3% 15
Choice Hotels International 392,826 8.1% 11
InterContinental Hotels Group 373,190 7.7% 9
Best Western International 182,160 3.7% 1
Starwood Hotels & Resorts 179,600 3.7% 9
Accor 112,644 2.3% 14
Hyatt Hotels Corp. 109,935 2.3% 8
Total Rooms from Top Nine Companies 2,785,848 57% 91

Total Rooms in the US 4,867,183 100%
*Excludes timeshare
Source: Smith Travel Research, company data, Goldman Sachs Research.
Hotels derive revenues through a variety of means

In 2011 the lodging Hotels aim to “put heads in beds” or “feets in sheets” that is, fill up their rooms with
industry generated paying customers. This produces the majority of hotel revenues (more than 60% of
about $108 billion in both full service and limited service hotels), but additional revenues are earned from
room revenues.
food and beverage sales, rentals, internet use, spa amenities, and other income.
Depending on the type of hotel (full service or limited service), these additional revenues
can contribute significantly to overall hotel revenues (as much as 38% for full service) or
account for a small percentage of overall revenues (as little as 9% for limited service).

Size, segmentation, and history of the lodging industry
Size of the industry

In 2011 the US lodging industry took in almost $108 billion in room revenues, according to
Smith Travel Research. Over the past 45 years, the sector has shown compound annual
revenue growth of approximately 6.6% (see Exhibit 14).
Exhibit 14: Lodging revenues moved up 8.8% yoy in 2011 vs. 14.3% decline in 2009
total US lodging industry revenues
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total Revenues ($mn)
Source: Smith Travel Research.
 The US lodging industry has 4.9 million hotel rooms. The dominant forces in the
lodging sector by number of rooms in the United States are Choice Hotels, Wyndham
Worldwide, Marriott International, and Hilton Hotels, each with about 400,000 or more
franchised/managed rooms. Together these companies control close to 40% of all the
rooms in the United States.
 Of the available 4.9 million hotel rooms at the end of 2011, approximately 60.0% were
occupied on average throughout the year, according to Smith Travel Research. This
was 250 bp better than the 2010 occupancy rate of 57.5% but lower than 63.1%
occupancy achieved in the most recent peak year of 2006.
 In terms of equity exposure, the hotel industry accounts for 0.23% of the S&P 500
index.

Exhibit 15: Total revenues for hotel companies and lodging REITS under our coverage,
Marriott continues to 2011
have the highest $ million; IHG does not account for pass-through revenues similar to the US based companies
revenues among hotel
companies in the
United States due to Company Revenue
its large managed
hotel portfolio. Lodging C- Corps
Marriott International $12,317
Starwood Hotels & Resorts $5,624
Wyndham Worldwide $4,254
Hyatt Hotels $3,698
InterContinental $1,768
Gaylord Entertainment $952
Choice Hotels International $639
Orient Express Hotels Ltd. $606
Interval Leisure $429
Lodging REITs
Host Hotels and Resorts $4,998
Felcor Lodging Trust $946
Sunstone Hotel Investors $835
RLJ Lodging Trust $759
LaSalle Hotel Properties $719
DiamondRock Hospitality $638
Source: Company data and Goldman Sachs Research.
RevPAR is driven by economic forces—most important is

employment
Over the years we have looked at many different economic indicators to find that they
generally have a positive correlation with RevPAR growth. The indicator we found to have
the highest r2 is change in employment. The r2 between RevPAR growth in the United
States and the percentage change in employment over the last 20 years is 0.68. This makes
sense as most of the room nights in hotels are from business travelers. On a more basic
level, hotels do well when the economies they are in do well (see Exhibit 16).

Exhibit 16: RevPAR growth is highly correlated to changes in employment

yoy change in RevPAR and change in absolute level of employment
6.0 15.0%
10.0%
4.0
5.0%
2.0
0.0%
0.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
-5.0%
-2.0
-10.0%
-4.0
-15.0%
-6.0 -20.0%
Change in Employment Yoy Change in RevPAR
Source: BLS, Smith Travel Research, Goldman Sachs Research estimates.
Individual hotels are segmented into brands

The lodging sector is segmented into brands. The lodging industry is highly segmented
as a result of the slow evolution into a multitude of brands. Hotel companies have
developed a variety of brands, which convey to the customer not only consistency and
quality of the property for the best brands but also amenity levels, price ranges,
accommodation types, and service levels. Consumers have been educated to the relative
merits of these variables and know the difference between a full-service Marriott and a
limited-service Hampton Inn based solely on their names.
The end result of the evolution of these many brands is a highly segmented industry with a
multitude of products catering to different types of travelers (business versus leisure),
different price points (high-end versus economy), and different consumer needs (short one-
night stays versus three-to-four week stays).
Hotels are segmented primarily into two types. Hotels are typically divided into two
types: either full-service hotels or limited-service hotels. Full-service hotels are generally
mid-price to upscale hotels featuring restaurants and meeting and convention space and
include more labor-intensive services such as room and concierge service. In contrast,
limited-service hotels typically do not include food and beverage service and have few
additional amenities.
Hotel operators are segmented into owner/operators, managers,

and franchisors
Hotel companies can earn revenues from individual hotels in three ways: they can own,
manage, or franchise hotels. Some hotel companies have portfolios consisting of a mixture

of the three with hotels that they own and operate, hotels that they manage for third-party
hotel owners, and hotels that they franchise. While C-corps can earn their revenues in any
way, hotel REITs are only allowed to own hotels and are not allowed by law to participate
in the management of the properties, although they can make suggestions to their
managers.
Hotel ownership—higher capital risk with greater reward. Hotel ownership is highly
capital intensive, requiring significant investment up-front. Hotel owners bear the direct
costs and typically assume losses for the first 12-24 months of operation until the property
ramps up to profitability. Because initial hotel earnings are often unknown, sometimes
management companies guarantee earnings for the first couple of years to induce owners
to use one of their brands. Full hotel ownership companies are heavily tied to the operating
leverage of the hotel business. In good times, hotel owners reap the benefits as revenues
increase against a highly fixed expense structure. However, the opposite is true in slowing
times as hotel owners feel the full brunt of declining revenues within the same fixed
expense structure. We noticed these negatives to an extreme during the recent downturn
as many REITs (which have no revenues other than ownership revenues) were forced into
very undesirable positions due to a lack of liquidity and higher than desired leverage levels.
On the positive side, ownership allows for greater control of the property and allows for
the benefits of asset appreciation that generally occur over time. Most hotels that are
owned by REITs are fee simple, which means they own the land. However, in some case
they are a lease interest, where they lease the land from another party. In addition, the
hotel owners have the ability to choose who manages the properties, and if they are not
happy with one manager, they can hire another (depending on their contract).
In Exhibit 17 we lay out the typical income statement for an owned full-service hotel.
Rooms normally provide only about 64% of hotel revenues with the next biggest item
being food, which makes up about 19% of revenues. Gross operated profits are typically
close to 30% with income before fixed charges being 26% of sales.

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

$, 2010
Per available Per occupied

% of Sales
room room night
Revenue
Rooms 63.6% $35,935 $150
Food 18.9 10,677 45
Beverage 5.4 3,051 13
Other Food & Beverage 4.8 2,717 11
Telecommunications 0.5 308 1
Other Operated Departments 4.5 2,537 11
Rentals & Other Income 2.0 1,109 5
Cancellation Fee 0.2 138 1
Total Revenue 100% $56,472 $236
Departmental Expenses
Rooms 28.2% $10,135 $42
Food & Beverage 76.3 12,546 52
Other Operated Depts & Rentals 3.5 2,019 8
Total Departmental Expenses 44.5% $25,121 $105
Total Departmental Profit 55.5% $31,351 $131
Undistributed operating expenses

Administrating & General 9.0% $5,077 $21
Marketing 7.2 4,084 17
Utility Costs 4.4 2,468 10
Property Operations & Maintenance 5 2,826 12
Total Undistributed Operating Expenses 25.6% $14,455 $60
Gross Operating Profit 29.9% $16,896 $71
Franchise Fees (Royalty) 0.9% $481 $2

Management Fees 3.0% $1,711 $7
Income Before Fixed Charges 26.0% $14,704 $61
Selected Fixed Charges

Property Taxes 3.6% $2,007 $8
Insurance 1.2 659 3
Reserve For Capital Replacement 2.1 1,196 5
Amount available for debt service & other

fixed charges 19.1% $10,842 $45
Source: Smith Travel Research, Goldman Sachs Research estimates.
If we look just at the payroll and related expense we can see that labor is approximately
35% of sales (see Exhibit 18).

Exhibit 18: Payroll & Related Expenses

$, 2010
Per available Per occupied

Payroll & Related Expenses % of Sales room room night
Rooms 17.7% $5,788 $25
Food & Beverage 45.2 6,318 28
Other Operated Departments 2.8 2,493 12
Administrative & General 5.1 2,506 11
Marketing 3.1 1,533 7
Property Operating & Maintenance 2.7 1,322 6
Total Payroll & Related Expenses 34.6% $18,307 $80
Hotel managers Hotel management—less capital intensive, more brand distribution. Companies that
typically contribute specialize in management contracts derive fees for managing the day-to-day operations for
their brands to the
third-party hotel owners (sometimes they can also own the hotel). These tasks include
properties and
every aspect of running the hotel, from the sales and marketing programs to the hotel
manage everything
from reservations to reservations and training of employees.
sales and marketing Management companies derive fees for their services in three ways: (1) base fees
functions.
calculated as a percentage of overall gross revenues at the hotel (typically 3%-5% of
revenues); (2) additional fees for services rendered for pre-opening development,
purchasing, marketing, reservations, and advertising for the hotel owner; and (3) incentive
fees, which serve as an additional bonus for outperformance at the hotel profit level.
Incentive fees are typically based on a percentage of adjusted gross operating profits and
are usually only paid if a certain threshold level of profits is achieved. This threshold level
is typically known as the “owner’s priority.” On average, incentive fees can be 10%-30% of
a hotel’s profits after an owner’s priority. However, it is important to note that most
international markets typically do not have owner’s priority agreements. Because there is
no owner’s priority, the incentive fee rates are generally lower, and management
companies typically begin to receive their incentive fees shortly after the hotel opens.
Incentive fees can be very volatile and are one of the ways that managing a hotel is
similar to ownership. For example, in 2007 Marriott earned almost $363 million in
incentive fees but in 2011 earned only $195 million. The positive element is that as
RevPAR and hotel profitably increase, incentive fees should increase quickly (once the
owner’s priority is reached), given the fixed operating structure of hotels.
Hotel management contracts are less capital intensive than outright hotel ownership, but
hotel management companies have been known to contribute through mezzanine loans
and sliver equity to acquire new management contracts, a process that lowers the returns
of what should be a high-return business. In addition, we believe that the market for
getting new management contracts is getting even more fierce, which could reduce returns.
There are also companies that will buy the land for a hotel site and manage the
construction process in order to secure a more favorable management contract. This adds
to their risk profile.
Hotel franchises—more brand distribution, less control of operations. The third way to
make money in hotels is through franchising. Hotel companies that franchise do not own
or manage the hotels but essentially license hotel owners the right to their brand name and
the advantages that come with it. The franchisee benefits from being affiliated with a brand
as it is included in national marketing and advertising programs, central reservation
systems, ongoing training programs for employees, and sales and technology support. In
return for these services, the franchisor receives the following fees: (1) a one-time

application fee; (2) recurring royalty fees, which are typically 4%-6% of room revenues and
2%-3% of food and beverage revenues for full-service hotels; and (3) fees for the use of the
franchiser’s central reservation system. The franchisee is also expected to contribute
toward the national marketing and advertising programs.
Franchisors also earn additional fees when hotel transactions occur (a hotel is bought or
sold). Most contracts give the company the ability to charge a re-franchising fee when a
hotel is bought or sold. During the recent downturn these fees have fallen dramatically as
the number of hotel deals has slowed. Generally, while we have seen a pickup in deals, the
number of transactions remains low. We expect a pickup in transaction levels to continue
to increase as the year goes on.
Exhibit 19 details the major differences among the three structures. Exhibit 20 breaks down
the major lodging operators and their brands.
Exhibit 19: Comparison between hotel ownership, management and franchise contracts
Ownership * Management Franchise
Hotel revenues 100% Base fee- 3% to 5% Royalty fee- 4% to 6%

Hotel profit 100% Variable - 10%-30% Zero
Incentive fees dependent upon contract:
(1) % of profit above set threshold
(2) % of total operating profit
Capital Contribution High Variable Minimal

Ownership companies are responsible for Management companies have been known Franchise companies contribute modestly to
100% of the development costs. Owners to aid hotel owners through mezzanine national and international advertising
can have partners and can receive financing, sliver equity, and loans. On campaigns to promote their brands.
mezzanine financing, sliver equity, and loans average management companies will take a
from additional sources. maximum 20% interest in hotels.
Benefits to hotel Greater reward during a growing economy Allows for aggressive unit growth with Vehicle for brand distribution without capital
corporation given the high operating leverage of the minimal capital risk. Less susceptible to risk. No ties to the operating leverage of the
business. 100% control of overall operating leverage as base fees are taken hotel business as royalty fees are taken as a
operations. as a percentage of overall hotel revenues. percentage of overall hotel revenues.
Total control over day-to-day operations at
the property level.
Drawbacks to hotel Greater downside to operations in a slowing Tied somewhat to the operating leverage of No control over property management or
corporation economy given the high operating leverage the business through incentive fees. Less upkeep. Brand consistency can be difficult
of the business. Ownership companies feel control over maintenance and upkeep at the to maintain across a franchise system.
the full brunt as top line revenues slow property level.
against a high fixed expense structure.
* assumes hotel is owned and operated by same hotel company
Source: Goldman Sachs Research.

April 10, 2012
Goldman Sachs Global Investment Research
Exhibit 20: Brand affiliations broken down by company
Company Accor Best Western International Wyndham Worldwide Choice Hotels Four Seasons Hotels Hilton Hotels Corp.
Owner/manager/franchiser Franchiser Franchiser/Manager Franchiser Owner/Manager Owner/Manager/Franchiser
Brands Sofitel Best Western Wyndham Cambria Suites Four Seasons Conrad Hotels
Pullman Days Inn Comfort Inn Doubletree
MGallery Ramada Comfort Suites Embassy Suites
Novotel Super 8 Quality Hampton
Suite Novotel Hawthorn Suites by Wyndham Ascend Home2Suites
Mercure Howard Johnson EconoLodge Hilton Hotels
Adagio Travelodge Clarion Hilton Garden Inn
All Seasons Knights Inn Sleep Inns Homewood Suites by Hilton
Etap hotel Wingate Inns Rodeway Inns The Waldorf-Astoria Collection
Ibis Baymont Inn and Suites MainStay Suites
Motel 6 RCI Suburban Extended Stay Hotel
Studio 6 Microtel Inn & Suites
Formulae 1 TRYP by Wyndham
hotelF1 The Resort Company
Orbis ResortQuest
Thalassa sea & spa James Villa Holidays
Hotels Barriere cottages4you
Hoseasons
Novasol
Landal GreenParks
Company Host Hotels and Resorts InterContinental Hotels Marriott International Orient Express Hotels Starwood Hotels & Resorts Hyatt
Owner-REIT Owner/manager/franchiser Owner/Manager/Franchiser Owner Owner/Manager/Franchiser Owner/Manager/Franchiser
Brands Marriott Inter-Continental Marriott Hotels & Resorts No affiliated brand Westin Park Hyatt
Ritz-Carlton Crowne Plaza Renaissance Hotels & Resorts Sheraton Hotel Andaz
Hyatt Hotel Indigo Courtyard by Marriott Four Points Grand Hyatt
Hilton/Embassy Suites Holiday Inn Residence Inn by Marriott St. Regis Hyatt Regency
Four Seasons Holiday Inn Express Fairfield Inn by Marriott W Hotels Hyatt
Fairmont Staybridge Suites TownePlace Suites by Marriott Aloft Hyatt Place
Westin Candlewood Suites SpringHill Suites by Marriott Le Meridien Hyatt House
Sheraton Holiday Inn Select The Ritz-Carlton Hotel Company L.L.C Element
Swissotel Holiday Inn SunSpree Resorts Marriott conference & centers The Luxury Collection
W EVEN Marriott Executive Apartments
Hualuxe EDITION Hotels
Autograph Collection
J W Marriott Hotels & Resorts
Marriott Vacation club
The Ritz-Carlton Destination Club
Grand Residences
AC Hotels by Marriott
Source: Company Data; Goldman Sachs Research.
Americas: Lodging
21
How hoteliers make money and generate returns

Below we lay out the three ways that hotel companies can make money (hotel
ownership, hotel management, and hotel franchising) and the returns each method
generates. In addition, we give examples of how each of these methods is accounted
for on the income statement and the balance sheet, and we discuss the returns
generated through each method. From these examples, it is clear that revenues
earned on franchise fees provide the highest returns followed respectively by
management and then owned.
In each case illustrated below, we have assumed that the company owns a hotel outright,
manages the hotel for a fee, or franchises the hotel.
 We point out that all hotel companies in our coverage universe, with the exception of
hotel REITS, can participate in hotel ownership, hotel management, and hotel
franchising.
 We looked at data from the HOST report to get an idea what an “average” full service
hotel income statement may look like. The analysis is done on a per room basis.
Hotel ownership: Returns are modest but capital appreciation is key

For hotels that are owned outright, revenues mainly consist of sales of hotel rooms, food
and beverage, and other revenues such as parking fees, internet usage, and telephone
charges. On the income statement, total revenues generated at the hotel level are recorded
as owned-hotel revenues with associated operating costs. On the balance sheet, the
company records the hotels’ buildings, land, and other assets under property and
equipment.
Exhibit 21 illustrates the revenue stream from a typical owned hotel and the way in which
events are accounted for on the company’s financial statements. We looked at hotel data
for the years 2010 and 2009 to get an idea of how a hotel may look during two different
time periods. We do not yet have data for 2011. The data clearly shows how much the
returns and the margins can drop off during a downturn for a hotel owner.
If we take the NOI and divide it by the assets we get a range of ROA from 6%-7%, and if we
divide by the Equity we get a ROE range of 16%-18%. These returns are lower than the
returns for a management or franchised business model. Hotel owners have higher risk
during economic downturns as sales tend to decline more than costs.
We also point out that not only may these returns and margins be lower; the actual dollar
contribution for an individual hotel is higher when a company owns it outright versus a
hotel where the same company is receiving just the franchise or management fees.
However, what we are not calculating here is the potential to generate returns through
capital appreciation, which has the potential to be significant.

Exhibit 21: Owned hotels—impact on hotel owner’s income statement and balance sheet
revenue and expense structure for an owned hotel; $ millions
Hotel Ownership
Income Statement 2010 2009 Balance Sheet
Room Revenue $35,935 $33,054 Assets
F&B and Other $20,537 $19,596 Hotel Investment, Net $150,000
Total Revenue $56,472 $52,650
Debt $90,000
Operating Expense $39,576 $37,164
Equity $60,000
Gross Operating Profit $16,896 $15,486
2010 2009
Management and Franchise Fee $2,192 $2,025 Return on Assets 7% 6%
Return on Equity 18% 16%
Fixed Charges including FF&E $3,862 $3,954
NOI $10,842 $9,507

Profit Margin 19% 18%
Source: Company data, Smith Travel Research, Goldman Sachs Research estimates.
Managing hotels: Provides a higher return and margins

The second way that hotels can make money is through hotel management. Hotel
management companies are responsible for the day-to-day running of the hotel and
overseeing the administrative functions, such as hiring and supervising employees. The
hotel manager also provides hotels with services such as a centralized reservation system,
national advertising, and accounting assistance.
Base fees are typically In contrast to an owned hotel, a hotel manager does not own the hotel’s land or buildings;
3%-5% of revenues. therefore, it does not have property and equipment associated with the managed hotel on
Incentive fees are its balance sheet (most of the time). However, in order to “get the contract” the manager
typically 10%-30% of
may provide sliver equity, mezzanine financing, or even help with capital costs, which
operating profits.
would then go on the manger’s balance sheet. In this example we do not assume any of
these occur, but in a more practical setting (especially in the United States) they are not
infrequent events.
The manager’s income statement captures management fee revenues, which consist of
base and incentive fees. These fees are paid by the hotel owner (typically a real estate fund,
private equity fund, or REIT) for the services that the manager provides on a day-to-day
basis. Base fees are calculated as about 3%-5% of a hotel’s revenues, and incentives fees
vary considerably but average 10%-30% of a hotel’s profits after an owner’s priority. An
owner’s priority is the amount of operating profits that must go to the owner before any
profits are shared with others, such as a manager—in other words, it is the owner’s
minimum return.
In this example, we Exhibit 22 illustrates how a manager would account for its management contracts and the
are assuming no typical returns it would achieve. Here we use the same example hotel as we did for the
equity interests or owned example, except we are now looking from a manager’s perspective. Again, we
loans to the individual
looked at 2010 and 2009 and can see that for both of these years the manager did not earn
hotels by the hotel
manager. any incentive fee as the profit level did not surpass the owner’s priority threshold. We
estimated what the margins would be in each year from looking at various C-corps we
cover. The returns of the business are somewhat difficult to figure out. What should be a
very high return business can see its returns eaten away by competition for the contract
and the brands’ desire for more units and locations.

Exhibit 22: Managed hotels—effect on hotel manager’s income statement & balance sheet
revenue and expense structure for a managed hotel; $ millions
Hotel Management
Income Statement 2010 2009 Manager Capital
Room Revenue $35,935 $33,054 Sliver Equity??
F&B and Other $20,537 $19,596 Mezzanine Financing??
Total Revenue $56,472 $52,650 Corporate??
GOP $16,896 $15,486
Profit $13,034 $11,532
Owners Priority $15,000 $15,000
4% of Revenue $2,259 $2,106

20% of profits after Owners Priority $0 $0
Total Management Fees $2,259 $2,106
Overhead $1,005 $1,053

Margin 56% 50%
Manager Profit $1,254 $1,053
In terms of risk exposure, the incentive fees tend to be more affected during economic
downturns because they are calculated as a percentage of a managed hotel’s profits.
Nonetheless, management fees are highly profitable because the hotel owners bear all the
direct operating costs. We also point out that the hotel manager does not profit from
providing services, such as national advertising and reservations. The company “pools” all
the fees received from its managed properties for such services and uses them to acquire
the services on behalf of all its managed properties.
As we mentioned above, what we do not look at in this example is the cost of acquiring the
management contract, which can be significant in some cases and can add up over time.
For example, Marriott currently has $846 million of contract acquisition costs on its balance
sheet, and it has $210 million of guarantees to hotel owners.
Franchised hotels: Great source of profit, limited capital exposure

Franchise fees are Hotel companies with brands can also franchise their brand names to hotel owners in
highly profitable exchange for a franchise fee. In this case, the hotel owner is responsible for running the
because the hotelier hotel (they may also hire a third-party management company), and they are entitled to use
(Marriott, Hyatt,
one of the brand’s names in exchange for a franchise fee. Accordingly, the brand as the
Starwood) does not
incur any of a hotel’s franchisor would record no assets on its balance sheet associated with the hotel.
operating costs. Franchise fees are calculated as an initial application fee plus an ongoing royalty fee, which
typically ranges from 4% to 6% of room revenues, plus 3% of food and beverage revenues.
In addition, franchisees must contribute to the brand’s advertising and marketing programs
and pay fees to use its reservation system. The brand collects advertising and other fees on

behalf of all its franchised hotels and uses them to pay for these services. The company
does not profit from these activities.
Exhibit 23 depicts how a franchisor would account for its franchised revenues and
expenses on its financial statements. In this example, the franchisor has the highest
margins out of any of the types of hotel revenue generation as it has the lowest level of
costs associated with it. While in our examples we used the same hotel for ownership,
management and franchise, typically lower-segmented hotels tend to be franchised while
higher-end hotels tend to be managed. Given that the hotel franchisor does not have an
investment in its franchised hotel, returns on capital are high.
Exhibit 23: Franchised hotels – impact on franchisor’s income statement and balance sheet
revenue and expense structure for the hypothetical franchised hotel; $ millions
Hotel Management
Income Statement 2010 2009 Franchisor Capital
Room Revenue $35,935 $33,054 Corporate??
F&B and Other $20,537 $19,596
Total Revenue $56,472 $52,650
GOP $16,896 $15,486
5% of Room Revenue $1,797 $1,653

3% of F&B $460 $460
Total Franchise Fees $2,257 $2,113
Overhead $880 $845

Margin 61% 60%
Franchisor Profit $1,377 $1,268

Lodging fundamentals
The lodging industry is a highly consolidated (in terms of brands, not owners) and
regulated industry, exhibiting high barriers to entry for new lodging companies. This
creates significant opportunities for existing participants with significant expansion
potential abroad. The building of brands takes time, and new participants are rare.
Growth over the past several years has been shifting away from the United States
and more toward international markets, and we expect this trend could continue as
developing new hotels in the United States remains challenging.
Key economic characteristics

Lodging is part of the hospitality sector, making hotel revenues highly cyclical and
dependent on domestic and international consumer travel. Revenues for hotel
companies (conference/convention/group business) are greatly affected by corporate
travel budgets.
Lodging revenues are The industry is concentrated into a handful of major lodging competitors, but the sector is
cyclical. highly segmented with respect to products as no one hotel brand accounts for more than
4% of US hotel rooms. These brands are diversified geographically and by price point, with
the exception of a few niche competitors.
Overall, lodging operators have moved beyond the inflection point after the low end of the
business life cycle in the United States. Margins and operating performance improved
throughout 2011 and have continued into 2012 as RevPAR remains strong. Given that the
sector is highly dependent on business travel and general economic conditions, we expect
that conditions will continue to improve as business travel picks up in line with the rest of
the economy.
High barriers to entry characterize the lodging industry. Particularly in city and resort
locations, regulatory hurdles for new builds are substantial, upfront construction costs and
time are significant, and growth is capital intensive. Barriers for management companies
come in the form of brand recognition and consumer preference, which all take time to
build. Launching a new brand also takes significant capital as most owners are reluctant to
install an “unproven flag.” In this case the brand developers in the early years will look to
put equity into these new hotels or build the hotels on their own in order to get the image
of the new brand out in the open. The need for state-of-the-art reservation systems,
national and international advertising programs, and frequent-guest programs also serves
as a barrier to entry for new participants.
Industry economics
In our view, three key factors influence the lodging sector: (1) supply and demand
dynamics, (2) the state of the overall economy, and (3) the availability of capital.
Supply growth is now Low supply growth is key for solid lodging performance. Favorable industry
decelerating, which fundamentals—low supply growth accompanied by solid demand for hotel
we expect to continue accommodation—tend to be positive signals for industry revenue growth rates. Room
for several years.
supply is a function of the rate of change in inflation-adjusted room rate, availability of
capital, and cost of construction, which are dependent on factors such as the level of
interest rates, regulatory requirements (i.e., zoning approval), and investors’ willingness to
lend.
We believe that supply growth is one of the most important factors for hotel
companies in the long term. On the supply side, we monitor construction starts and new

room additions. When supply outpaces demand, occupancy falls, which eventually puts
downward pressure on room rates, thereby pressuring lodging revenues. Investors can
deal with slowing demand because they know that eventually the economy will recover.
However, continued supply growth is difficult to overlook as it creates a permanent

obstacle to overcome in each market.
As shown in Exhibit 24, supply surged in the mid to late 1980s owing to looser lending
practices by savings and loans (S&Ls) and tax advantages for building. Supply
reaccelerated in the early 1990s as a result of the improving capital markets and higher
demand. Supply growth peaked in 2000 and had dipped significantly below the 2.5%
average annual growth rate from 2004-2007 until 2008. The downturn in 2001 helped keep
supply growth low, and it has remained low despite the lodging recovery through 2007,
with RevPAR up 8.5% in 2005, 7.5% in 2006, and 5.7% in 2007. In the late part of the last
decade all of the inputs for strong room growth were turned fully on, which resulted in
room supply growth at over the historical average, which had not been seen since the late
1990s.
However, since the middle of 2008 we have seen a declining room pipeline, which has led
to slowing supply growth. We expect that supply will grow less than 0.5% in 2012 and
possibly under 1% for several years after.
Exhibit 24: Total US lodging industry supply growth has averaged about 2.6 % from 1968
9.0%
We expect supply growth will be below its

8.0% historical average growth rate of 2.6% f or the
next couple of years.
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012TD
-1.0%
-2.0%
Source: PricewaterhouseCoopers (1967-1986), Smith Travel Research (1987-2009).
New room supply is to come mostly from the Upper Midscale and
Unaffiliated segments
Looking at the different segments of the lodging industry, it appears that supply growth
will be most prominent in the Upper Midscale, with about 29% of existing rooms in the
pipeline, and Unaffiliated, with about 28% of existing rooms in the pipeline (see Exhibits
25-26).

Exhibit 25: Most of the supply is coming from the Upper Exhibit 26: The segments most advanced in the pipeline
Midscale and Unaffiliated segment are the Upper Midscale and Upscale
pipeline per segment as a % of total supply, February 2012 % of room in construction/final planning per segments
30% Luxury
29% 28% 2%
25% Unaffiliated Upper Upscale

25%
12% 9%
20%
Midscale
10%
15%
Upscale
31%
10%
8%
7%
5% Upper Midscale
34%
2% 2%
0%
Luxury Upper Upscale Economy Upper Midscale Unaffiliated
Upscale Midscale Economy
2%
Source: Smith Travel Research and Goldman Sachs Research. Source: Smith Travel Research and Goldman Sachs Research.
Hotel companies face the “prisoner’s dilemma” (see Exhibit 27) when determining
unit growth, additional franchise and management contracts, amenity levels, and
In the end, few benefit
from the development other variables. If one hotel develops more aggressively than its competition, it gains
game because market share and increases profits at the expense of the other hotels in the market. When
oversupply depresses all the hotels decide that accelerating unit growth and adding grander amenities will
returns for all. maximize profits, the resulting overcapacity minimizes revenue gains and reduces profits
for all. The same dilemma occurs when hotels use reduced fees to attract property owners
and use amenities and services to attract the consumer.
The prisoner’s dilemma is further complicated by the conflicting strategies of

management/franchise companies and real estate owners. Management and franchise
companies benefit from unit growth because they gain additional fees and are not as
affected by the deceleration in RevPAR growth rates from increased supply. They do not
have as much operating leverage as the owners of properties do. In contrast, real estate
owners would like to see limited development so that they can continue to raise prices
without facing supply-induced competition. Thus, management companies often accelerate
their unit growth in a downturn to maintain earnings growth, and hotel owners suffer the
consequences. However, we expect that it could be challenging for managers and
franchisors to continue to grow their rooms going forward at least in the US and in Europe,
even if they would like to, as the level of equity required for new construction is higher
than historical levels and financing for deals over $10 million is still hard to obtain even
though there has been economic growth. Even though managers are willing to provide
incentives for development, it is not enough to bridge the gap of the capital structure,
especially for full-service hotels.

Exhibit 27: Prisoner’s dilemma
Company A
DON'T BUILD BUILD
DON'T BUILD
WIN/WIN LOSE/WIN
Company B
BUILD
WIN/LOSE LOSE/LOSE
Availability of capital is an important criterion for growth. The final critical factors are
the availability of capital for development and capital maintenance opportunities. Hotels
can increase revenues by adding to their unit count or making acquisitions. Both of these
options depend on the availability of capital. Equally reliant are projects to refurbish
properties or change hotel brands. The lender’s receptivity to providing capital for these
sizable investments is influenced by interest rates and the operator’s existing debt levels. In
addition, lenders have increased their requirements on borrowers, such as personal
guarantees and requiring greater levels of equity than in the past.
There have been few large deals as of late

In the late 1990s, we saw extensive consolidation in the lodging industry as the larger
competitors acquired more brands and disposed of their hotel assets. The larger, more
mature ownership companies (e.g., Hilton) acquired management and franchise vehicles
(e.g., Promus) to diversify revenues and broaden their business mix. Other companies such
as Marriott, which already had a diverse portfolio of products, selectively acquired
additional brands (Renaissance, Ritz Carlton) to fill market niches and price points in their
hotel portfolios.
The larger, more mature hotel companies had a distinct advantage in this consolidation
trend, using their larger balance sheets and less expensive sources of capital to acquire
competitors and niche operators. These mergers have helped the larger corporations to
build out their systems, taking advantage of economies of scale to increase profits. Cross-
selling opportunities have also been a dominant driver of increased market share for the
larger operators that are now operating with a variety of brands in a variety of locations
and price points.
Toward the end of 2005 and into 2006, we saw the second leg in this public consolidation
trend following the lodging downturn at the turn of the century. The focus shifted more
toward increasing international exposure, and Hilton Corporation, based in the United
States, completed its purchase of Hilton International, while Starwood acquired the Le
Meridien brand. Late 2006 and the early part of 2007 saw a significant rise in activity from
private equity funds that have purchased lodging companies such as Hilton Hotels
(acquired by Blackstone for $26 billion), and Equity Inns (acquisition by Whitehall was
completed in October 2007). Another key acquisition was the management buyout of Four
Seasons, which included Kingdom Hotels and Cascade Investments. However, for the most
part, these were the last major deals to be done. As the credit markets started to

deteriorate and the CMBS market in particular broke down, the major driver of hotel
financing began to evaporate.
Only one deal was done in 2008 when Wyndham Worldwide acquired the US franchise
systems. Soon after that the economy went into a recession and consolidation activities
came to a halt due to the absence of liquidity.
More recently there have been a few large-scale deals out of former LBO portfolios. For
example late in 2010 a group acquired Extended Stay out of bankruptcy; in 2011 CNL,
Highland, and Innkeepers were all acquired in some form of restructuring process; and in
2012 Interval Leisure Group purchased Vacation Resorts International (see Exhibits 28-29).
Exhibit 28: Lodging deals – 1998-present

does not include individual hotel sales
Total
consideration Forward
Date Acquiror Acquiree ($mn) EV/EBITDA
February-12 Interval Leisure Group Vacation Resorts International NA NA
May-11 Chatham Lodging Trust, Cerberus Innkeepers USA 1130 NA
March-11 Ashford Hospitality Highland Hospitality 1300 NA
January-11 Paulson & Co. CNL Hotels NA NA
October-10 Paulson & Co., Blackstone, Centerbridge Extended Stay 3900 NA
June-08 Wyndham Worldwide U.S. Franchise Systems (from Hyatt) 131 13.0x
July-07 Blackstone Hilton Hotels 26000 13.4x
June-07 Whitehall Equity Inns Inc 2190 13.1x
April-07 JER Partners Highland Hospitality 2000 14.3x
April-07 Citigroup and Westbridge Hospitality Fund LP Red Roof Inn (Accor) 1320 11.2x
April-07 Apollo Investment Corp Innkeepers USA Trust 1500 12.0x
April-07 Lightstone ESA (Blackstone) 8000 13.3x
March-07 Inland American Winston Hotels 797 11.6x
January-07 Morgan Stanley Resort Holdings CNL Hotels (8 luxury assets) 4200 15.4x
January-07 Ashford Hospitality CNL Hotels (51 assets) 2400 11.1x
November-06 Kingdom Hotels/Cascade/Triples Holdings Four Seasons 3696.2 37.3x
Feb-06 Blackstone Group Meristar Hospitality 2600 13.0x
Jan-06 Colony Capital / Kingdom Hotels Fairmont Hotels and Resorts6 3900 16.4x
Dec-05 Hilton Hotels Corp Hilton Group PLC 5710 11.3x
Nov-05 Host Marriott Starwood 4096 11.4x
Nov-05 Blackstone Group La Quinta Corp. 3400 14.4x
Jul-05 Colony Capital Raffles Hotels & Resorts 1720 12.3x
Jun-05 Blackstone Group Wyndham International 3240 14.3x
Feb-05 JQH Acquisition LLC John Q. Hammons 1294 10.8x
Dec-04 Hyatt Corp. AmeriSuites 650 NA
Oct-04 Blackstone Group Boca Resorts, Inc. 1250 12.9x
Aug-04 Blackstone Group Prime Hospitality 790 11.3x
Jul-04 La Quinta Baymont 395 10.5x
Mar-04 Blackstone Group ESA 3100 13.5x
Feb-04 CNL Hospitality KSL Recreation 2200 11.5x
May-03 CNL Hospitality RFS Hotel Investors 688 10.4x
Sep-02 Westbrook Hotel Partners 13 hotels from Wyndham International 447 8.5x
Aug-02 Accor Dorint 50 6.0x
May-02 MeriStar Hotels & Resorts Interstate Hotels Corp 260 7.6x
Feb-02 NH Hoteles Astron 152 9.0x
May-01 Nomura Le Meridien 2640 9.5x
May-01 Felcor Lodging Trust Meristar Hospitality 2650 7.8x
Apr-01 Hilton Group Scandic 962 10.0x
Apr-01 Raffles Holdings Swissotel 241 10.4x
Apr-01 Six Continents Posthouse 1156 7.9x
Apr-01 MacDo -ld/Bk of Scotland Heritage Hotels 335 5.9x
Jul-00 Sol Melia Tryp Hoteles 356 9.2x
Apr-00 NH Hoteles Krasnopolsky 738 9.6x
Apr-00 Scandic Hotels Provobis 70 10.2x
Feb-00 Six Continents (formerly Bass Plc) Bristol Hotels & Resorts 156.1 10.1x
Nov-99 Whitbread Swallow 1122 12.2x
Sep-99 Millennium & Copthorne Regal Hotels 640 8.7x
Sep-99 Hilton Hotels Corp Promus 4270 9.4x
Jul-99 Accor SA Red Roof Inns 1175 7.8x
May-99 Accor/Blackstone/Colony CGIS (Vivendi) 494 13.5x
Apr-99 Jurys Hotel Doyle Hotel Group 335 7.7x
Apr-99 Management & Westbrook Funds Sunstone Hotel Investors 886 9.4x
Feb-99 Hilton Group Stakis 2194 11.5x
Jan-99 Marriott International ExecuStay 134 -
Jun-98 Krasnopolsky Golden Tulip 266 10.6x
Apr-98 Host Marriott 13 Luxury Hotels from the Blackstone Group 1766 9.7x
Apr-98 Blackstone & Colony Savoy 908 18.5x
Mar-98 Felcor Lodging Trust Bristol Hotel Company 1718 8.3x
Mar-98 CapStar American General Hospitality 1085 8.7x
Feb-98 Six Continents Inter-Continental 2889 14.7x
Jan-98 Meditrust La Quinta Inns 3061 10.4x
Average 2093 11.7x
Source: Company data, Goldman Sachs Research estimates.

Exhibit 29: Hotel deals and their multiples
18
17.5 Fairmont
17 (16.4x) 8 luxury CNL
assets
16.5
= $1bn consideration (13.3x) Blackstone
16 exited ESA
(13.3x)
15.5 Highland Hospitality
Wyndham International (14.3x)
15 (14.3x)
La Quinta
14.5 (14.4x)
ESA (13.5)
14 Hilton Hotels
Boca Resorts Meristar (13.4x)
13.5 (12.9x)
Raffles Holdings (13.0x)
13 (12.3X) Equity Inns
12.5 KSL Recreation (13.1x)
(11.5x) Winston Hotels USFS
12 Prime Hospitality (11.6x) (13.0x)
(11.3x) Innkeepers
11.5 Hilton Group PLC USA Trust
11 (11.3x) (12x)
John Q
10.5 Hammons
Red Roof
Baymont (10.8X) Inn (11.2x)
10 (10.5x) Starwood Boca Resorts
Wyndham portfiolio of (11.4x) (12.9x)
9.5
25 hotels (10X)
9
8.5
8
7.5
7
6.5
Jun-03 Jan-04 Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08
Individual hotel sales have picked up

REITs have been the primary buyer of individual hotels, with transaction activity picking up
in 2011 and in 2012 ytd. For the most part the deals have come in the major urban centers
of the country such as New York, Boston, Chicago, Washington DC, San Diego, and San
Francisco. While deals in these markets should continue, we expect that deals will start to
spread outside these areas as pricing has increased significantly.

Exhibit 30: Recent lodging deals

2006-2012 YTD
Date Name of the property Total # of rooms Total amount paid ($mn) Price per key REIT/Hotel Company involved
Mar-12 San Fransisco Airport Marriott 685 $112.70 $164,526 Host Hotels
Mar-12 Hotel Palomar 335 $143.80 $429,254 LaSalle
Feb-12 Knickerbocker Hotel 330 $115.00 $348,485 FelCor
Jan-12 The Park Central Hotel 934 $396.20 $424,197 LaSalle
Oct-11 Villa Florence 182 $67.20 $369,231 LaSalle
May-11 JW Marriott Denver 196 $72.60 $370,408 DiamondRock Hospitality
May-11 Radisson Lexington Hotel 712 $335.00 $470,506 DiamondRock Hospitality
May-11 New York Palace Hotel 899 $400.00 $444,939 Northwood Investors LLC
May-11 W Chicago 368 $128.80 $350,000 Chesapeake(Buy)/Starwood(Sell)
Apr-11 Mondrian Los Angeles 237 $137.00 $578,059 Pebblebrook Hotel Trust
Apr-11 The Royaltons and Morgans 282 $140.00 $496,454 Felcor
Apr-11 Hotel Monaco, Seattle, Washington 189 $51.20 $270,899 Pebblebrook
Apr-11 Westin Gaslamp Quarter hotel 450 $110.00 $244,444 Pebblebrook
Mar-11 JW Marriott New Orleans 494 $93.80 $189,879 Sunstone
Mar-11 Viceroy Santa Monica 162 $80.10 $494,444 LaSalle
Feb-11 Courtyard Washington Capitol Hill 204 $68.00 $333,000 Chesapeake
Feb-11 Manchester Grand Hyatt, San Diego 1625 $570.00 $350,769 Host Hotels
Jan-11 New York Helmsley Hotel 775 $313.50 $404,516 Host Hotels
Jan-11 Sheraton Bloomington Hotel 564 $20.00 $35,461 LaSalle
Jan-11 Hilton Washington D.C 496 $121.00 $243,952 Crow Holdings Realty Partners V, L.P
Jan-11 Argonaut Hotel , San Francisco 252 $84.00 $333,333 Pebblebrook
Dec-10 Le Meridien, San Francisco 360 $143.00 $397,000 Chesapeake
Dec-10 Sheraton Tyson Corner Hotel 443 $84.50 $190,745 Felcor
Dec-10 Sheraton Premiere Hotel, Virginia 443 $84.50 $191,000 Felcor
Dec-10 Chamberlain, West Hollywood, California 113 $38.50 $340,708 LaSalle
Nov-10 Sheraton Delfina, Santa Monica 310 $102.80 $331,613 Pebblebrook
Nov-10 Grand Hyatt, Tampa Bay 445 $58.50 $131,461 Hyatt
Nov-10 Skamania Lodge, Bethesda 254 $55.80 $219,685 Pebblebrook
Nov-10 Milford Plaza Hotel 1300 $200.00 $153,846 Milstein Family
Oct-10 Hotel Roger Williams, New York 193 $94.50 $489,637 LaSalle
Sep-10 St. Regis Aspen 179 $70.00 $391,061 Starwood
Sep-10 Westin City Center Dallas 407 $50.00 $122,850 LaSalle
Sep-10 Grand Hotel Minneapolis 140 $33.00 $235,714 Pebblebrook
Sep-10 Hilton Garden Inn, New York City 169 $68.40 $404,734 DiamondRock
Sep-10 Monaco Washington D.C 183 $74.00 $404,372 Pebblebrook
Sep-10 Hotel Monaco, San Francisco 201 $68.50 $340,796 LaSalle
Sep-10 Westin Philadelphia 294 $145.00 $493,197 LaSalle
Sep-10 Embassy Suites Philadelphia 288 $79.00 $274,306 LaSalle
Sep-10 Seaview Resort, Atlantic City 297 $20.00 $67,340 LaSalle
Aug-10 Royal Palm Hotel, Miami Beach 409 $117.00 $286,000 Sunstone
Aug-10 The Fairmont Copley Plaza, Boston 383 $98.50 $257,000 Felcor
Aug-10 Boston Marriott Newton , Massachusetts 430 $77.25 $180,000 Chesapeake
Aug-10 Courtyard Anaheim 153 $25.00 $163,000 Chesapeake
Jul-10 Le Meridien, Picadally London 266 $148.00 $556,391 Host Hotels
Jul-10 Westin Chicago North River 424 $165.00 $389,151 Host Hotels
Jul-10 W New York 270 $185.20 $685,926 Host Hotels
Jul-10 Renaisssance Charleston, South Carolina 166 $39.00 $234,940 DiamondRock
Jul-10 InterContinental Buckhead Hotel , Atlanta 422 $105.00 $248,815 Pebblebrook
Jun-10 Sir Francis Drake Hotel, San Francisco 416 $90.00 $216,346 Pebblebrook
Jun-10 Hilton Minneapolis 821 $155.50 $189,403 DiamondRock
Jun-10 DoubleTree Bethesda hotel 269 $67.10 $249,442 Pebblebrook
Jun-10 Buckingham Hotel 100 $60.00 $600,000 UBS Realty
Mar-10 Helmsley Carlton House 157 $169.40 $1,078,981 Helmsley Spear / Angelo Gordon
Feb-10 Holiday Inn Express Times Square 210 $56.50 $269,048 McSam Hotel Group/ Hersha
Feb-10 Candlewood Suites Times Square 188 $51.00 $271,277 Hersha
Feb-10 Hampton Inn Times Square 184 $56.00 $304,348 Hersha
Feb-10 W New York Court 198 $90.50 $457,071 Starwood Hotels
Feb-10 W New York Tuscany 130 $59.50 $457,692 Starwood Hotels
Mar-10 Sofitel Washington D.C 237 $96.00 $405,063 LaSalle
Oct-09 Windsor Court Hotel, New Orleans 264 $44.25 $167,614 Orient Express
Jul-09 W San Francisco 404 $90.00 $222,772 Starwood
Jun-09 Marriott Riverside, California 292 $19.30 $66,096 Sunstone
May-09 Marriott Napa, California 274 $36.00 $150,000 Sunstone
Jun-08 Hyatt Regency, Century Plaza, LA 726 $366.50 $505,000 Sunstone
Dec-07 Spring Hill Suites, Buckhead, Atlanta 220 $36.00 $163,636 DiamondRock
Dec-07 Sheraton Salt Lake City, Utah 326 $33.30 $102,147 Sunstone
May-07 Marriott Boston Quincy Hotel 464 $116.60 $251,000 Sunstone
Mar-07 Boston Marriott Long Wharf hotel 402 $228.20 $568,000 Sunstone
Jan-07 Westin Boston Waterfront hotel, Boston 793 $330.30 $416,520 DiamondRock
Jan-07 La Guardia Marriott Hotel 438 $69.00 $157,534 LaSalle
Jan-07 LAX Rennaissance Hotel, Los Angeles 499 $65.00 $130,000 Sunstone
Dec-06 Doubletree Guest Suites , Times Square 460 $68.50 $148,913 Sunstone
Dec-06 Holiday Inn Express 170 $5.25 $30,882 Sunstone
Dec-06 The Graciela burbank, California 99 $36.50 $368,687 LaSalle
Dec-06 Renaissance Waverly, Atlanta 521 $130.00 $249,520 DiamondRock
Dec-06 Renaissance Austin, Texas 492 $107.50 $218,496 DiamondRock
Nov-06 Allerton Crowne Plaza, Chicago 443 $70.00 $158,014 Felcor
Nov-06 Conrad Chicago Hotel 311 $117.50 $377,814 DiamondRock
Sep-06 Holiday inn , Wall Street, NY 138 $51.50 $373,188 LaSalle
Aug-06 Hotel Solamar, San Diego 235 $87.00 $370,213 LaSalle
Jun-06 W San Diego 259 $96.00 $370,000 Sunstone
Jun-06 Alexis hotel, Seattle 109 $38.00 $348,624 LaSalle
May-06 Westin Kierland Resort & Spa 732 $393.00 $536,885 Host Hotels
May-06 Embassy Suites, La Jolla 335 $100.00 $298,507 Sunstone
May-06 Westin Atlanta North, Atlanta 369 $61.50 $166,667 DiamondRock
Mar-06 Chicago Marriott Downtown 1192 $295.00 $247,483 LaSalle
Mar-06 Hilton Times Square 444 $242.50 $546,171 Sunstone
Mar-06 Holiday inn, Hollywood 160 $25.90 $161,875 Sunstone
Mar-06 Chicago Marriott Downtown, Chicago 1192 $295.00 $257,000 DiamondRock
Feb-06 Blued hotel Chicago 367 $114.50 $311,989 LaSalle
Jan-06 Parc Suite Hotel , West Hollywood , California 154 $47.00 $305,195 LaSalle
Jan-06 Westin Michigan Avenue, Chicago 751 $215.00 $286,285 LaSalle
Jan-06 San Diego Marriott Del Mar 284 $69.00 $243,000 Sunstone
Source: Company data, Goldman Sachs estimates.

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

Courtyard should benefit from refreshes
We have taken a look at how several brands from Starwood and Marriott performed vs.
each other and their chain scales. For Marriott, RevPAR in real terms and property-level
Sheraton fell more, margins are materially below their peak, and we believe Marriott is poised to return to
creating an easier
those historical levels. Marriott is making renovations to Great Rooms and starting to see
relative setup.
increased guest satisfaction, intent to return, F&B per room, and profit. It is also seeing
RevPAR index up 500bps above non renovated hotels. Marriott has one-quarter of hotels
with the new lobby now and expects half done by 2013. Last year investors started to
question whether there was a specific issue at Marriott that was causing its RevPAR growth
to be less robust than that of the industry and of Starwood. Our analysis suggests that the
Marriott brand (not to be confused with the corporation) has experienced some
underperformance relative to the Sheraton brand in North America over the last year but is
beginning to regain traction, and we think that will continue as group business returns.
However, some of this underperformance is simply because the Sheraton brand fell more
in the recession, creating easier comparisons. In addition, the Marriott brand grew faster
toward the end of the last cycle, creating tougher comparisons. One of the reasons for this
latent strength is Marriott’s focus on group business, which strengthened prior to the
economic downturn. We also analyzed the Marriott brand vs. the upper upscale chain and
found that it tends to outperform during the mid to late part of cycles. This supports our
contention that because of Marriott’s group focus, it tends to show strength, thereby
creating tougher comparisons.
Ritz Carlton and We also looked at Marriott Corporation’s other price points. In this case it does appear that
Courtyard seem to be Starwood’s luxury brand St. Regis is showing greater growth recently than Marriott’s high-
underperforming end Ritz Carlton. These two brands grew at similar rates during the last boom, so they have
recently.
similar, easier/weaker comparisons. However, in the past year the St. Regis brand has been
growing more rapidly.
Finally, we looked at Courtyard by Marriott, and found that this brand routinely
outperformed the upscale chain in the 1990s but has only outperformed half of the time
since then, suggesting that this brand may be struggling. However, we believe Marriott is
beginning to reverse this trend through its extensive Courtyard lobby renovation program.
So far, in the Courtyards with the new lobby, F&B sales are up 45% and the profit is nearly
double.
We focused on brands from Marriott and Starwood because they are the most widespread
branded companies in our coverage for the higher-end segments. We do not believe that
Hyatt has a large enough footprint to be as comparable, and Intercontinental is more
concentrated in the midscale segment. Hilton would have been appropriate, but the
company is private and does not disclose data. While there are clearly differences in the
geographies between Marriott’s and Starwood’s hotels, we believe they are broad enough
to permit us to derive general trends.
Sheraton is outperforming on growth but partially due to

underperformance in the downturn
We looked back at quarterly trends since 2005 for RevPAR growth of the Marriott Hotels
and Resorts brand vs. the RevPAR growth of the Sheraton brand in North America (see
Exhibit 31). While we would have preferred to review a longer period of time (Starwood
has Sheraton data only back to 2005), we believe we can extract trends from this data
series.

First, the Sheraton brand outperformed in the beginning of the last cycle and has been
outperforming again in the beginning of this cycle. However, in 2005 and 2006 Sheraton
RevPAR growth was 10% on average while Marriott was 9% on average (we used the
simple average). But if we look at 2007 and 2008 the Marriott brand grew faster at 3% vs.
Sheraton at only 2%. From 1Q2010 to 1Q2011 the differences are a little more dramatic:
Sheraton RevPAR had grown 8% on average vs. 4% on average for the Marriott brand.
However, we have begun to see a convergence between the two brands over the last year
as we extend further into the recovery.
Second, the Marriott brand experienced slight outperformance during the downturn. If we
look at 2009 the Marriott brand went down 18% while the Sheraton brand went down 19%.
Our conclusion from this analysis is that fears that the Marriott brand has somehow lost its
way seem misplaced. The trends maybe simply be following an historical cycle, creating
easier/tougher comparisons. Our view is that Marriott RevPAR growth will likely move
closer to that of Sheraton and may even outperform as the cycle moves forward.
Exhibit 31: Marriott Hotels and Resorts brand tends to outperform during the late part of
the cycle
Quarterly RevPAR growth
15.0%
Sheraton RevPAR grew faster in 2005-2006 but So far this upcycle Sheraton is
Marriott grew faster in 2007-2008 growing faster.
10.0%
5.0%
0.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
Sheraton RevPAR fell more during
the downturn
-30.0%
Marriott RevPAR Growth Sheraton RevPAR Growth
If we look from an absolute RevPAR perspective we can see that Sheraton RevPAR during
the last up cycle came close to but never overtook Marriott RevPAR. In the later part of the
cycle Marriott RevPAR widened its lead on Sheraton, and now that the cycle has turned,
the RevPARs are again close together.

Exhibit 32: Marriott Hotels and Resorts RevPAR and Sheraton RevPAR move close during
the beginning of cycles and apart during the end and downturns
$160
$140 Sheraton absolute RevPAR moved

close to Marriott during the earlier
part of the last upcycle. Sheraton is again catching up
with Marriott during the early
$120 part of this cycle.
$100
$80
Marriott pulled away from Sheraton

in 2007-2009.
$60
$40
$20
$-
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011
Marriott Absolute RevPAR Sheraton Absolute RevPAR
A final way we compare the Marriott Hotels and Resorts brand vs. Sheraton is by looking at
the relative ratio of the two on an annual basis (see Exhibit 33). The exhibit shows that
Marriott had the greatest relative RevPAR to Starwood during the worst part of the
downturn in 2009 and then again last year in 2011.

Exhibit 33: Marriott rates peak relative to Starwood in downturns
$120 116%
$100 114%
$80 112%
$60 110%
$40 108%
$20 106%
$0 104%
2005 2006 2007 2008 2009 2010 2011
Marriott Systemwide NA RevPAR Sheraton Systemwide NA RevPAR Marriott RevPAR relative to Sheraton RevPAR
Marriott’s larger We are not completely sure why this anomaly seems to be appearing, but we can suggest
hotels and group two possible reasons. First, we believe that Marriott in general may have slightly better
focus may result in a positioned hotels on average. During downturns it tends to hold up better than the
slightly slower
Sheraton hotels as a group. Second, Marriott may tend to have larger hotels and to do
recovery pace.
larger group business, which is more late cycle and, because it is booked far in advance,
generally holds up during downturns. While Starwood does do significant group business,
our sense is that Marriott groups are likely larger than Starwood groups on average.
Earlier last year, Marriott had been having some issues with the rollout of its Sales Force
One initiative, which had affected the booking of group meetings. This may have come into
play with the Marriott Hotels and Resorts brand’s underperformance in 2011, but through
our discussions with hotel owners and the managers of lodging REITs, we believe this
issue is in the process of being corrected, if not corrected already.
Marriott Hotels and Resorts going through a normal cycle, while

Courtyard may begin to come around due to recent renovations
We also took a deeper look at how Marriott’s brands perform relative to the broader
industry. To do this we looked at the Marriott Hotels and Resorts brand as well as the
Courtyard brand versus their chain brand segment, as defined by Smith Travel Research.
Our conclusion is that Marriott Hotels and Resorts tends to outperform the chain scale
during the middle to end part of cycles and perform in line with the chain scales during the
down part of cycles. Marriott has also been rolling out its Great Room, which we believe
will begin to increase guest satisfaction, intent to return, and profitability. For the Courtyard
brand we had begun to see a slow degradation vs. the upscale chain over time. However,

due to Marriott’s focus on the Courtyard renovations, we are optimistic on its ability to turn
the brand around.
Exhibit 34: Marriott Hotels and Resorts tends to outperform during the mid to later part of
the cycle
Annual RevPAR growth
15.0%
Marriott underperformed the chain scale in the

early part of the 1990s cycle and the 2000s
10.0%
5.0%
0.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-5.0%
-10.0%
-15.0%
Marriott performed inline with the chain

scale during the last two downturns.
-20.0%
Marriott Hotels and Resorts RevPAR Growth Upper Upscale RevPAR Growth
Source: Smith Travel Research, company data.
From 1990 to 2000 Courtyard outperformed the upscale chains for eight out of the 11 years.
However, from 2001 to 2011 Courtyard only outperformed half of the time. It is difficult to
know exactly why this is the case, but we would note that Starwood has been launching a
limited service strategy and Hyatt is also going after this segment. We note that we expect
the Courtyard brand to see relative strength on a go-forward basis. Marriott has been
updating the Courtyard lobbies and has already begun to see improved F&B spend and
profitability. In the Courtyards with the new lobby F&B sales are up 45% and the profit is
nearly double. They currently have the new lobby in half of the domestic hotels.

Exhibit 35: It seems that Courtyard has lost some of its outperformance
Annual RevPAR growth
15%
The Countyard brand outperformed the

upscale chain scale throughout the 1990s.
10%
5%
0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-5%
-10%
The Countyard brand has seen less
outperformance in the 2000 and had been
underfoerfmring the chain Scale since 2008.
-15%
-20%
Courtyard RevPAR Growth Upscale RevPAR Growth
Source: Smith Travel Research, company data.

How big is “big”? Potential earnings power

We have updated our forward-looking analysis and ask, what will the next earnings
peak be? In other words, how big is “big”? Valuations looking at near-term earnings
may not be fully capturing this rapidly growing and rebounding business.
Our conclusion is that it is likely that the next earnings peak may be higher than the
previous peak. We base this fundamental view on RevPAR’s historical ability to trend
at or above the rate of inflation, unit growth, and cost-cutting initiatives. When we
put current stock prices relative to peak forward earnings, the valuation clearly looks
more compelling. If we discount the earnings back to 2013 (the year on which we
base our price targets), valuations are still below their historical averages. Therefore,
while valuations are above historical averages, if we look at them with respect to the
next projected earnings peak they still appear reasonable.
Because it is difficult to know exactly how the next peak may look, we ran three scenarios.
 Scenario one: RevPAR reaches the last nominal peak level (no inflation adjustments).
We further trim this outlook by assuming flat unit count to current levels.
 Scenario two: RevPAR reaches the last peak (assuming there is inflation). For this
scenario we assume that next peak’s RevPAR gets back to the prior peak assuming
annual inflation of 2% since the last peak. It also assumes no additional unit growth
from current levels (for Hyatt we assume slightly higher RevPAR given large
disruptions currently due to renovations).
 Scenario three: RevPAR reaches the last peak (assuming there is inflation), and all the
rooms in the company’s pipeline come online by the time the next peak occurs. We
use the same inflation assumption as in scenario two.
While scenario three may sound the most aggressive, it is also maybe the most probable
for several reasons. First, historically RevPAR has been able to grow faster than inflation,
indicating it is likely to move higher than the previous peak in real terms. Second,
considering that most of the hotels in the pipeline have financing and real estate clearance,
these hotels are likely to be opened in the next three to four years. In addition, an increased
percentage of the pipeline is outside of the United States in regions where capital is less of
an issue and the need for hotels is very strong.
Exhibit 36 suggests that the next peak would be higher for Marriott, Starwood, and Hyatt
under scenario three. Hyatt’s peak scenario is the highest as the company has made large
acquisitions.
Exhibit 36: We see several ways for the next peak to be higher than the previous peak
If we then take these three scenarios (see Exhibit 37) and look how the companies’
multiples look relative to them, they paint a valuation picture that is less daunting than
looking at more near-term earnings. We looked at all three scenarios with three different

capital structures: the current year, 2012, and 2013. While we assume for computational
purposes that the peak is in 2015, we believe that after 2013 each of these companies’
capital structures may not change dramatically, and therefore for ease of calculation we
only look at these three structures.
The range of multiples we arrive at is 8.7X-11.9X for Marriott, 7.7X-10.4X for Starwood, and
7.8X-12.3X for Hyatt. Currently, Marriott is trading at 12.6X 2013E, Starwood is at 9.9X
2013E, and Hyatt is trading at 10.7X 2013E, so there is still some way to go in terms of
being valued at peak earnings. While we are not suggesting that this will happen during
the next few months, it appears to justify our contention that these stocks should move
higher for an extended period of time as earnings move closer to peak levels.
Exhibit 37: The valuations look much more reasonable under our three scenarios
If we look at this in the context of Marriott, Starwood, and Hyatt, they are all in line to
below their historical averages. Marriott has traded in a range of 7X-17X (average of 12X)
forward EV/EBTIDA; Starwood has traded in a range of 6X-16X (average of 11X) forward
EV/EBITDA; and Hyatt has traded in a range of 9X-17X (average of 12X) forward EV/EBITDA
(see Exhibit 38). We would note that over the past 10 years Starwood has moved to more
of a franchise and management model, and Hyatt does not have much history.

Exhibit 38: Marriott, Starwood, and Hyatt’s historical forward multiples are on average
12X-13X
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
12/1/1999
12/1/2000
12/1/2001
12/1/2002
12/1/2003
12/1/2004
12/1/2005
12/1/2006
12/1/2007
12/1/2008
12/1/2009
12/1/2010
12/1/2011
8/1/1999
4/1/2000
8/1/2000
4/1/2001
8/1/2001
4/1/2002
8/1/2002
4/1/2003
8/1/2003
4/1/2004
8/1/2004
4/1/2005
8/1/2005
4/1/2006
8/1/2006
4/1/2007
8/1/2007
4/1/2008
8/1/2008
4/1/2009
8/1/2009
4/1/2010
8/1/2010
4/1/2011
8/1/2011
Marriott forward EV/EBITDA Starwood forward EV/EBITDA Hyatt forward EV/EBITDA
Source: FactSet.
The next peak looks set to be higher than the last

Our analysis suggests that the next peak in earnings will likely be greater than the previous
peak for Marriott, Starwood, and Hyatt. We base this on three key points:
 Unit growth since the last peak is significant. While supply growth in general tends
to weigh on hotel operators’ ability to raise rates, as the demand grows into the supply
having additional rooms does benefit a hotel manager and franchisor. If we assume
that Marriott’s, Starwood’s, and Hyatt’s pipelines come online by 2015, then each
company would show 49%, 51%, and 53% room growth since 2007 (see Exhibit 39). We
believe this is a reasonable assumption considering that the average time it takes to
develop a hotel is two to four years, and some of these hotels are conversions, which
require much less time.
Exhibit 39: Marriott, Starwood, and Hyatt should have over 49% more rooms by the next
peak than at the last peak
Last Peak Current Rooms Growth from

(2007) Rooms Pipeline by 2015 last peak
Marriott 504,157 643,196 + 110,000 = 753,196 49%
Starwood 272,227 322,300 + 90,000 = 412,300 51%
Hyatt 111,294 132,727 + 38,000 = 170,727 53%

While it is likely that some rooms will be taken out of Marriott, Starwood, and Hyatt
systems over the next several years, it is also likely that additional rooms will be added
to the pipeline. For our analysis we assume that these two effects offset each other.
 Low supply growth and history suggest pricing power in the United States. We
are currently in a favorable supply period in the United States given that we believe
that supply will increase by less than 1% in 2012 and 2013. We do not expect supply
growth to accelerate dramatically beyond that as we would need to see a pickup now
given the long lead time required to build a hotel, which we are not seeing. This should
return pricing power to hotels and allow rates to rise back to the previous peak (in
nominal terms) and likely beyond. In addition, many companies are now focusing on
their growth internationally given the stronger relative economic growth rates, which
should further keep a lid on US room supply growth.
If we look back at history (see Exhibit 40) it is clear that US RevPAR has risen faster
than inflation, and the last three RevPAR peaks were all higher than the one before on
a real basis. This gives us confidence that hotels have true pricing power over the long
term.
In our scenario we assume that it takes seven years for real RevPAR to get back to its
previous peak. During the last three cycles it took between five and eight years.
Exhibit 40: Real RevPAR has grown consistently over time

Real RevPAR growth
$80.00 25%
Af ter the last three recessions it look between f ive and eight years
for real RevPAR to equal its previous peak.
20%
$70.00
15%
$60.00
10%
$50.00
5%
$40.00
0%
$30.00
-5%
$20.00
-10%
$10.00
-15%
$0.00 -20%
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Real RevPAR % Change
 Permanent cost cutting should lead to higher peak margins. While the downturn
severely affected short-term results, it did force hotel operators to re-examine how
they operated. Since the last recession a significant amount of costs had come into
hotel operating structures. One of the most consistent remarks we hear from our
companies is that before the downturn, many hotels simply had too many managers.

For example, many hotels may not need an assistant general manager and a general
manager, and the general manager can help out at the front desk when he is not doing
anything else.
Although some occupancy-related costs (such as increased housekeeping costs) will

come back, we believe that many of the expense reductions are permanent. This
should lead to strong profit flow-through once rates begin to increase, which we
expect to occur in the second half of this year. We have already started to see margin
growth, although it has been slow as some unavoidable cost increases such as
employee bonuses and utilities are increasing. However, our view is that these
increases in costs are fast now but will moderate at the same time rate growth is
accelerating.
Detailed assumptions and models surrounding our analysis

Exhibit 41 shows the assumptions we used for the three different scenarios for Marriott,
Starwood, and Hyatt. We chose these three companies because they are broad-based
lodging companies that we believe generally represent the industry. There are clearly
differences between the three companies, and there are also other companies for which
this analysis is not as applicable (most notably the REITs given lack of room growth), but it
does give an idea in terms of what is possible.
Exhibit 41: Assumptions we used in our analysis
Assumptions for all companies Scenario 1 Scenario 2 Scenario 3

RevPAR Equal to 2007 Grow 2007 at inflation until 2015 Grow 2007 at inflation until 2015
Inflation 2% 2% 2%
Management fees Grow 2012E by increase of RevPAR from 2007 Grow 2012E by increase of RevPAR from 2012 Grow 2012E by increase of RevPAR from 2012
and half of current room pipeline growth
Franchise fees Grow 2012E by increase of RevPAR from 2007 Grow 2012E by increase of RevPAR from 2012 Grow 2012E by increase of RevPAR from 2012
and half of current room pipeline growth
Incentive fees Equal to 2007 Grow 2007 by inflation until 2015 Grow 2007 by inflation until 2015 and half of
current room pipeline growth
Owned Revenue Grow 2012E by increase of RevPAR from 2007 Grow 2012E by increase of RevPAR from 2012 Grow 2012E by increase of RevPAR from 2012
Owned Profit Margin Equal to 2007 Company specific increase Company specific increase
Timeshare Profit Equal to 2012E Equal to 2012E Equal to 2012E
SG&A Grow at 2% from 2012 to 2015 Grow at 2.5% from 2012 to 2015 Grow at 3% from 2012 to 2015
D&A Grow at 2% from 2012 to 2015 Grow at 2% from 2012 to 2015 Grow at 2% from 2012 to 2015
UJV EBITDA Company specific increase Company specific increase Company specific increase
Exhibits 42-44 show the models we used to come up with our analysis for Marriott,
Starwood, and Hyatt.

Exhibit 42: Marriott analysis
Last peak and 2012 estimate Peak Scenarios

2007 2012E Scenario 1 Scenario 2 Scenario 3
Worldwide Systemwide RevPAR $103.19 $96.82 $103.19 $120.90 $120.90
-6% 7% 25% 25%
Fees
Base management fees 620 599 638 747 805
Franchise fees 439 623 664 778 851
Incentive management fees 369 224 396 464 500
Total Fee Revenue 1,428 1,445 1,698 1,989 2,156
Owned and Other

Owned and other revenue 1,240 1,099 1,157 1,318 1,318
Owned and other expense 1,062 960 993 1,124 1,124
Owned and Other Profit 178 140 164 194 194
margin 14% 13% 14% 15% 15%
Timeshare
Timeshare sales and services 1,747 0 0 0 0
Timeshare expenses 1,397 0 0 0 0
Timeshare profit 350 0 0 0 0
margin 20% 0% 0% 0% 0%
Total Revenues 4,415 2,544 2,855 3,307 3,474
SG&A 768 665 706 717 727

Percentage of revenue 17.4% 26.2% 24.7% 21.7% 20.9%
Operating Income 1,188 919 1,156 1,467 1,623

D&A 197 144 153 153 153
UJV EBITDA 85 17 65 65 65
Other adjustments 13 38 16 16 16
Adjusted EBITDA $1,483 $1,118 $1,390 $1,701 $1,857

Exhibit 43: Starwood analysis

Worldwide Systemwide RevPAR $123.13 $121.21 $123.13 $144.27 $144.27
-2% 2% 19% 19%
Owned and Other
Owned and other Revenue 2429 1781 1809 2119 2119
Owned and other expense 1805 1435 1344 1543 1543
Owned and Other Profit 624 345 465 576 576
Margin 26% 19% 26% 27% 27%
Timeshare
Timeshare Revenue 1025 884 576 576 576
Timeshare expense 758 668 435 435 435
Timeshare profit 267 217 141 141 141
Margin 26% 25% 25% 25% 25%
Management fees, franchisee and other

Franchise Fees 151 206 209 245 262
Base Management fees 280 338 344 403 487
Incentive Fees 155 164 169 223 270
Other 253 179 179 179 179
Total fee and other revenue 839 887 900 1049 1197
SG&A 513 367 389 395 401

Percentage of revenue 12% 10% 12% 11% 10%
D&A 306 260 276 276 276
Consolidated EBITDA 1217 1082 1117 1372 1514

UJV EBITDA 119 34 88 88 88
Other adjustments 20 -20 -18 -18 -18
Company EBITDA $1,356 $1,096 $1,187 $1,442 $1,584

Exhibit 44: Hyatt analysis

Worldwide Systemwide RevPAR $123.10 124.84 $123.10 $149.99 $149.99
1% -1% 20% 20%
Owned and leased
Owned and leased Revenue 2039 2,036 2007 2446 2446
Owned and leased expense 1524 1,568 1,500 1,791 1,791
Owned and leased Profit 515 468 507 654 654
Margin 25% 23% 25% 27% 27%
Management and franchise

Franchise Fees 14 52 51 62 67
Base Management fees 155 182 180 219 266
Incentive Fees 134 118 140 164 199
Other 12
Total Fee and other revenue 315 352 371 445 532
Timeshare and other

Timeshare Revenue 103 70 70 70 70
Timeshare Expenses 42 24 24 24 24
Timeshare Profit 61 46 46 46 46
Margin 59% 66% 66% 66% 66%
SG&A 292 297 316 320 325

% of Revenue 11.9% 12.1% 13% 11% 11%
Operating Income 599 568 608 825 907
EBITDA Calculation
Net income 270 124 191 408 490
D&A 270 350 371 371 371
Income taxes 208 59 0 0 0
Interest expense, net 0 45 45 45 45
JV EBITDA 94 90 94 126 126
JV Equity earnings -15 -10 -10 -10 -10
Minority interest 1 0 0 0 0
Other -120 0 0 0 0
Adjusted EBITDA $708 $658 $692 $941 $1,023

Ways to grow lodging companies

We see five ways for lodging companies to grow in a relatively mature lodging
market:
 Unit growth through new builds or conversions (converting from one brand to
another).
 Improving profits through operating efficiencies.
 Accelerating top-line growth by stealing existing market share from competitors.
 Brand extension opportunities such as timeshare and residential communities.
 Growth by acquisition.
Unit growth through new builds and conversions

We believe that new builds and conversion opportunities are the best vehicles for
growth in the lodging industry. Furthermore, international expansion will likely play a
major role over the next decade given the highly fragmented nature of the lodging
business outside the United States. Europe is the largest lodging market outside the
United States, yet it is highly fragmented with regard to its product, with roughly only 30%
of its hotel rooms affiliated with a brand vs. approximately 70% in the United States.
Realizing the advantages of international expansion (e.g., increased brand awareness,

brand distribution), US-based Marriott, Starwood, and Hyatt and UK-based Intercontinental
have established solid footholds. Hilton jump-started its presence with its acquisition of
Hilton International in early 2006, which added 400 international properties to its total
portfolio. We expect international development to begin to account for a larger and larger
portion of overall hotel development for the major US-based lodging operators going
forward.
Improve operating efficiencies

We believe that many Given the rapid advances in technology, improving operating efficiencies at the hotel and
of the cost cuts made corporate level are ongoing. Profitability has already been enhanced by more automated
in the recent services such as customer checkout, billing, and online reservations. The internet has
downturn will be
alleviated a lot of the stress on hotel operators as it has provided an additional means for
permanent.
customers to book reservations and to obtain information. Over the course of the most
recent downturn we are, for the first time in a while, able to see all of the costs that can
come out of hotels as companies look to streamline their operations to offset declining
revenues. While some of the costs that have come out will ultimately return as the
economy picks up, we expect that a large proportion of these cost removals could be
permanent, and we expect the next peak in margins to be higher than the last.
Increase sales through taking market share

Given the high barriers to entry in some of the major lodging markets, increased revenues
at the hotel level (absent new unit growth in the market) can only be derived from taking
market share. We believe that solid brands (backed by excellent service and high product
quality) and a strong frequent-guest program are the necessary tools for taking market

share. Room rates are just one of many criteria that hotel consumers weigh when deciding
whether or not to stay at a particular hotel.
Frequent-guest programs, which allow consumers to build points for future rewards, give
customers an extra incentive as they know that building points will result in a “freebie” at
some future point. When deciding between two competing brands in comparable locations
and at comparable price points, the ability to build points will likely sway the undecided.
We believe that those hotels that are not affiliated with a frequent-guest program and have
less well-regarded brand affiliations will likely lose market share to the more dominant
competitors over time. Starwood has generally been known to have the most advanced
rewards program, but other companies such as Choice are rapidly growing their
membership base as well.
Brand leverage opportunities

Over different points in history, many traditional lodging companies have extended their
operations into timeshare, corporate, and residential apartments. Branching into these
markets allows lodging companies some diversification from lodging and travel cycles;
however, these “add-on” products did not provided any insulation from the recent general
lodging downturn. For example, timeshare grew heavily dependent on the securitization
market as its growth became too fast to be supported by current operations’ cash flow. We
still believe there are opportunities for lodging companies to grow through such
businesses, although the opportunity, when compared to several years ago, has
diminished. In fact, just last year, Marriott spun off its timeshare division.

Supply is still not a concern in the United States

Over the pasts several years supply went from a concern, to less of a concern, and
now is not much of a concern at all. Growth over the past year dipped to 0.3% in
February 2012 from the peak of 3.2% in September 2009. We expect that over the
next couple of years supply growth will decline below its historical average of 2.5%
and should be less than 1% through 2012 and 2013.
A lack of new supply could support significant future rate growth

In 2008 we were concerned about new supply hitting the market as well as the continued
growth in the development pipeline. We changed that view in late 2009 as the US pipeline
started to contract. Currently we are not concerned with the supply picture in the United
States. We expect that the decreasing pipeline will help to drive rates for years as long as
the economy continues to grow. We expect supply growth to be below 1% for 2012 and
2013 (see Exhibit 45).
While this lack of new developments hurts franchisors and managers, which need large
pipelines to grow revenues, it helps owners, which should outperform as new competition
is limited and asset values increase due to scarcity. We expect net new room additions in
2012 to be relatively flat, in contrast to 2008 when it was just over 150,000.
Exhibit 45: Supply growth should continue to be frozen at near zero levels through 2012
and 2013
number of rooms added each year, in thousands. Growth is measured at the end of one year
from end of previous year and not average growth for the year. (Does not adjust for
restatements)
350 9.0%
The supply surge this time around was much shorter than
the past few cycles
8.0%
300
7.0%
250
6.0%
Supply growth rate (%, yoy)

Room adds (000, yoy)
200 5.0%
150 4.0%
3.0%
100
2.0%
50
1.0%
0 0.0%
Total number of room adds Supply growth (%, yoy)
As shown in Exhibit 46, the amount of room supply coming on in 2011 should be
significantly lower than the historical average and remain at these historically low levels

through 2013. We expect that this below-trend growth could last for a couple more years
before the debt market opens up to support new hotel construction.
Exhibit 46: Supply growth has remained below historical average of 2.6% at 0.5% in 2011
room supply growth in % yoy
9.0%
We expect supply growth will be below its

8.0% historical average growth rate of 2.6% f or the
next couple of years.
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012TD
-1.0%
-2.0%
When we looked at previous cycles we found that periods of below-trend room supply
growth were concurrent with periods of above-trend average daily rate (ADR) growth.
While such a conclusion easily follows from simple supply-demand theory, we highlight it
as we believe the next few years will be a period of sustained below-trend room supply
growth, which could provide a support for above-trend ADR growth (see Exhibit 47).

Exhibit 47: Strong ADR growth has only taken place during periods of below trend supply
growth
ADR growth Yoy, and supply growth YoY
10%
8%
6%
4%
2%
(Percentage)
0%
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
-2%
-4%
-6%
-8%
-10%
-12%
Average Daily Rate Supply Growth YoY
Continuously shrinking pipeline indicates less supply in out years

After increasing for several years the US room pipeline now represents only about 6.0% of
total existing room supply (see Exhibit 48), which is down from 6.7% last year and its 14.6%
peak. There are 158,770 fewer rooms currently under construction as of February 2012
since the number of rooms under construction peaked in December 2007. Given the
difficulty of obtaining financing for new construction, despite the incrementally improving
debt markets, we expect the number of rooms under construction to stay at historically low
levels (see Exhibit 49). In addition, given that the pipeline in absolute terms increased far
above historical levels during the supply peak in 2007, we think it could be likely that the
pipeline several years out could end up dramatically lower than historical levels as the
country continues to recover from a glut of new rooms.

Exhibit 48: The pipeline as a percentage of existing supply continues to decline

pipeline (number of rooms)
16.0% The pipeline declined at an accelarated pace since March

We became concerned about a 2008. Though the rate of decline has mellowed down as
supply glut in the offing when we expect very little supply to convert through pipeline in
the pipeline spiked in 2006 and 2012-2013
14.0% we downgraded the group on
concerns about the future
supply/demand imbalance
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Jan-03
Apr-03
Jan-04
Apr-04
Jan-05
Apr-05
Jan-06
Apr-06
Jan-07
Apr-07
Jan-08
Apr-08
Jan-09
Apr-09
Jan-10
Apr-10
Jan-11
Apr-11
Jan-12
Jul-03
Oct-03
Jul-04
Oct-04
Jul-05
Oct-05
Jul-06
Oct-06
Jul-07
Oct-07
Jul-08
Oct-08
Jul-09
Oct-09
Jul-10
Oct-10
Jul-11
Oct-11
Exhibit 49: All segments of the pipeline continue to shrink

pipeline (number of rooms)
700000
The number of rooms in the final planning and

planning stage of the pipeline have been declining
600000 as projects get cancelled and no new projects have
replaced it
500000
Pipeline (Number of rooms)
400000 The number of hotels under continue to diminish as no

new projects are coming through despite the slight
improvement in CMBS market
300000
200000
100000
In Construction Final Planning % of existing supply

A large amount of rooms continue to be deferred or canceled. As seen in Exhibit 50, the
number of rooms that have been abandoned or deferred over the last 12-months is
approximately 165,138. While this absolute number has started to moderate, the number of
rooms deferred or cancelled remains significant, despite a reduction in rooms under
planning and preplanning.
Exhibit 50: The amount of canceled rooms continues to be above historical average
despite significant reduction in the pipeline of rooms under planning and preplanning
Number of rooms abandoned or deferred (rolling 12-month cumulative)
350,000
300,000
250,000
200,000
150,000
100,000
Abandoned & Deferred

*New* While supply growth is low, the US still represents a great

growth opportunity for the brands
While there has been and we expect there will to continue to be low supply growth in the
US, it is still a market that should open 75,000 net new rooms over the next three years and
provides a good opportunity for brands to grow their units through both new builds and
conversion. We think that brands overall will continue to gain share in the US vs.
independents hotels. More specifically, however, we believe that Marriott, Hyatt, Hilton,
and InterContinental will gain share and grow their units whereas Starwood, Wyndham,
and Choice may have a more difficult time as evidenced by what is under construction
currently relative to their existing base of rooms in the US.
Given there has been limited financing availability in the US, we wanted to see what
brands were still being built and which ones were able to get the most conversion activity.
Hyatt and Starwood seem to be doing the most conversions, and InterContinental and
Marriott seem to be able to grow by new builds relative to their existing US hotel base.
While much of the focus on company pipelines has been on international growth, the US is
still generally the biggest or one of the biggest markets for each the companies relative to
their pipelines. Marriott has the greatest percentage of its pipeline in the US with over 50%,
and Starwood has the lowest percentage at under 15%.
Exhibit 51: While the US is shrinking as a % of company pipeline, it is still a big component
Percentage of company pipelines in the US
60%
50%
40%
30%
20%
10%
0%
Marriott InterConteintal Hyatt Starwood
US as % of Pipeline
In addition to the brands still relying on their US pipeline for a large percentage of their
growth, more broadly brands continue to increase in importance in the US hotel industry.
Brands have become a more important part of the pipeline and now make up over 70% of
the pipeline vs. below 60% for much of 2010. We think part of the reason is that it is harder
to finance independent hotels. This provides as opportunity for the brands to grow their
share as they convert out independents that are having a difficult time making it in the
environment or can give the final push on getting financing for a new build.

Exhibit 52: Brands have been gaining share as a % of the pipeline

Brands as a percentage of the US rooms pipeline
73%
72%
71%
70%
69%
68%
67%
66%
65%
64%
63%
Brands as % of US Room Pipeline
Source: STR, Goldman Sachs Research estimates.
We dug deeper to see which brands are growing fastest in the US and by what method. We
have looked at brand growth in three primary ways: first, by way of new build; second, by
way of conversion; and third, by looking at total growth, which combines the first two as
well as includes hotel room additions and room closures.
InterContinental, Hilton, and Marriott are showing the most growth from new
builds
If we look at which brands have seen the most benefit of their growth from new build
hotels, IHG and Marriot are the top for our covered companies, and Hilton is also up there
but is still private. We would note that when we are looking at new builds we are looking at
net new builds, which takes into account hotels that have closed. Marriott and IHG are
strong operators in the limited service space and have dominant brands in that space, such
as Courtyard and Fairfield for Marriott and Holiday Inn Express for IHG. Limited service
brands tend to be smaller hotels that are less expensive to build, which is a large reason
we think they are getting done. Also, along with several Hilton brands including Hilton
Garden Inn and Hampton Inn, these are all proven brands that tend to give banks more
comfort because of their long track record and proven operating structure.
Starwood and Hyatt both have less experience in the limited service space, which is the key
reason we think they are not seeing as much growth by new build. Starwood is working
hard to get into the space with Element and Aloft and Hyatt with Hyatt Place and Hyatt
House. As these brands gain traction with developers and lenders they may be able to take
a bigger piece of the pie, but that is a long process.

Exhibit 53: IHG, Hilton, and Marriott have seen the greatest new build growth
Brands with greatest % of net new builds last 12 months
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
IHG HLT MAR H HOT WYN CHH
-0.2%
-0.4%
Net new builds over the last 12 months as a % of existing base
Starwood and Choice have seen the most growth from conversions
We did a similar analysis by looking at the brands that are seeing the most strength from
net new conversions. The results of this analysis show that Starwood and Choice are at the
top of this list in terms of growth by conversion. We were surprised that Starwood was at
the top since it does not have as many conversion brands, so we took a deeper look and
saw that majority of its conversion came from the Sheraton brand (almost 3,000 rooms). It
is not clear to us if this was one or two hotels on a one-off basis that really moved the
needle, but nonetheless it put Starwood at the top of the list. We think that this could be
difficult to keep up as there are not as many higher end conversion opportunities that
become available.
We were not surprised that Choice was the second on this list in terms of net conversion
growth as the company has a wide array of conversion brands. Hyatt, which is third from
the top, is not getting credit for buying a large part of its growth, including the LodgeWorks
portfolio, in this analysis, but the company has been able to supplement its growth by
buying independents or small chains and converting them.
IHG is at the bottom of the list, not surprisingly as it continues to convert out Holiday Inn’s
and Crowne Plazas and opens Holiday Inn Expresses mostly as new builds. IHG is in the
middle of reworking its Crowne Plaza brand, and we would expect the trend in that brand
may continue for some time. However, we do think the reworking of the Holiday Inn brand
is closer to being finished.

Exhibit 54: Brands with the highest absolute net room conversions
Selected brands conversion activity over last 12 months as a % of existing room base in the US
1.5%
1.0%
0.5%
0.0%
Starwood Choice Hyatt Marriott Wyndham Hilton IHG
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
Conversion over last 12 months as a % of existing base
Hyatt has seen the greatest percentage of room growth overall

When we look at the brands in terms of net unit growth over the last year (which includes
not only net new builds and net conversions but also room adds and room removals),
Hyatt has seen the most growth followed by Starwood and Marriott. Part of this is at least
due to the smaller size of Hyatt’s room base, and therefore it is easier to grow off it, but the
company is also very active, including committing its own capital to growing its brands.
Also, according to Smith Travel, Hyatt gained over 1,200 rooms with Hyatt (the brand)
room additions at existing properties, which added materially to its growth. Without these
rooms Hyatt’s growth would have been only 1.1% and it would have been more in the
middle of the pack.

Exhibit 55: Hyatt has seen the most net room growth in the last 12 months
Net room growth over the last 12 months
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
H HOT MAR HLT CHH WYN IHG
-0.5%
Net growth
In order to take a stab at looking forward we also analyzed the relative proportion within
each brand family of what they have under construction versus their current existing
properties. We think that the brands that are the strongest with long periods of success
have the best chance of getting financing and therefore getting built. From this analysis we
see that several brand families seem especially well positioned to grow in absolute terms
as well as in relative terms. Hilton, Marriott, InterContinental, and Hyatt rooms all make up
a larger percentage of the US construction pipeline then they do of the existing base. We
looked at this in two ways: first, as the spread between these two percentages, and, second,
the ratio of these two percentages. Hilton has the largest spread with the company having
10.1% of its existing rooms base under construction but 20.7% of the rooms or a spread of
10.6% (20.7%-10.1%). Doing the same math we find Marriott has a spread of 8.6%,
InterContinental 6.8%, and Hyatt 4.4%.
Looking at the ratio of these percentages gives us an idea of the relative growth of the
brands. Hyatt has this biggest ratio as although it only has 6.3% of the pipeline they only
make up 1.9% of the existing rooms, so they are really “punching above their weight” with
a ratio of 3.4. Hilton, Marriott, and InterContinental all have a ratio close to 2.

Exhibit 56: Brand families rooms as % of existing rooms for new construction
Brand families as a percentage of existing supply and rooms under construction
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
HLT MAR IHG H HOT CHH WYN
Existing Supply % Rooms under construction %

A closer look at timeshare operations

Timeshare or vacation ownership is a noticeable subset of our lodging companies’
operations, accounting for almost 49% of Wyndham’s revenues and roughly 13% for
Starwood in 2011. We would note that Marriott spun off its timeshare segment in
November 2011 to form the separately traded entity, Marriott Vacations Worldwide (ticker
VAC). Throughout the “golden age” of timeshare, in the early to mid-part of the last decade,
timeshare development companies would build and sell aggressively. Because companies
have to plan years out when building timeshare, they were building as if sales would
continue to growth at double digits. This was made possible because of the lucrative
securitization market. In addition, these loans were sold off with attractive spreads.
However, we are now seeing many of these companies slow their spending or completely
put it off on new developments and focus on running the business for cash and profitability.
In this section we take a closer look at how the industry has evolved, the industry dynamics,
the positives and the negatives of timeshare ownership, and how our hotel companies
make money in this business. We also perform a present-value analysis comparing a
timeshare purchase relative to staying in a hotel and describe the securitization process for
timeshare loans.
Quick timeshare review

Even though Timeshare or vacation ownership typically entitles a buyer to the use of a fully furnished
timeshares have condominium-style residence located in a vacation/tourist destination, generally for a one-
existed for more than week period each year, known as a “vacation interval.” In addition, fractional ownership
30 years, market
interests are also available for 5-26 weeks at a time. These condo-type units are superior in
penetration of this
vacation product quality to a hotel room in the amount of space (typically two to three bedrooms) and level
remains low, with of amenities (full kitchen and appliances). The only downside is service, which is
fewer than 10% of sometimes less when compared to a typical hotel stay.
eligible US
The benefit to vacation ownership is that it allows consumers to purchase an interval that
householders owning
a timeshare interval. guarantees them a unit at a specified time of year in a specific location at a fraction of full
ownership. Consumers pay a one-time purchase price for the interval in addition to annual
maintenance fees, which averaged $731 per year in 2010 off of average $19,300 interval.
Consumers can also buy specific weeks at a resort, or they can buy points into a larger
system for a right to use any resort in that system.
In addition, consumers with interval ownership have the right to exchange their interval for
another within the same system or outside the system via an interval exchange company
such as RCI (owned by Wyndham) or Interval International (IILG). This allows the consumer
to potentially change locations on an annual basis, providing a lifetime of vacations at
different locales. Consumers with a Marriott, Starwood, or Wyndham timeshare interval
have the ability to exchange their interval for points in the respective frequent-guest
programs, which allows the consumers to stay in any hotel in the system.
Industry facts
According to the American Resort and Development Association, the timeshare industry
has more than 1,548 resorts located in the United States with 197,700 units and annual US
timeshare sales of approximately $6.4 billion in 2010. Timeshare sales in the United States
had grown at a compounded rate of 11.6% from 1990 till 2008 but declined 35% in 2009.
Sales in 2010 grew at 1.6%. The hotel companies we follow that are involved in timeshare
development include Wyndham, Marriott Vacations Worldwide, and Starwood. Other key

industry participants in timeshare include Bluegreen and Sunterra (acquired in 2007 by

Diamond Resorts).
Timeshare still has some benefits for hotel companies despite the
recent market contraction
We believe that timeshare still has benefits for hotel companies even though some of these
benefits are likely to have been reduced when compared to the situation before the
recession. These benefits include (1) timeshare is a natural hedge against a decline in
business travel, (2) timeshare is a natural add-on to the core lodging business, and
(3) timeshare is a value-adding proposition.
Timeshare can be a hedge against changes in business travel, but it is capital

intensive. While revenues fell dramatically in 2008, it was because of the high correlation
in business and leisure demand, which is not always the case (see Exhibits 57-58). In
previous recessions this did not happen. For example, during the economic downturn of
2001 to 2003, it became apparent that the timeshare business, which is leisure oriented,
can serve as a hedge against a decline in business travel. However, in the most recent
recession, which was consumer led, timeshare sales suffered materially.
Exhibit 57: US timeshare revenues grew at a CAGR of 11.1% until 2007, and the industry
estimates that 2009 revenues declined 35% from 2008 growth and then flattened in 2010
US timeshare revenues (in billions); (1990-2011E)
12
US timeshare revenues grew at a CAGR of 10% till 2008, and the industry estimates that 2009
revenues fell 40% from 2008 and was almost flat in 2010-2011
10
Source: American Resort Development Association and IILG SEC filings.

Exhibit 58: US timeshare revenue growth, 1991-2011E
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Source: American Resort Development Association and IILG SEC filings.
Timeshare is a natural add-on to the core lodging business. We believe there are three
reasons timeshare is a natural add-on to the core lodging business: (1) marketing
penetration of timeshare is increased due to brand affiliation, (2) there is an increased
utilization of hotel amenities by timeshare guests, and (3) there is an increase in the use of
excess land and room inventory at the existing hotel. However, we note that managements
have generally moved away from growing this segment, and as we saw Marriott did decide
to spin off this business.
Timeshare creates value with a high IRR. We believe that building a timeshare is value-
creating for the hotel companies. Wyndham believes that the IRR of building a timeshare is
67% for a securitized deal and 27% for an unsecuritized deal.
There are negatives for the timeshare business, however

Despite the positives above, there are negatives to our hotel companies’ timeshare
operations. These include (1) high risks on the capital structure side; (2) high selling
pressures to move the product can result in potential reputational risk; (3) negative impact
on return metrics; (4) potential earnings variability; and (5) significant margin pressure
given high sales and marketing costs.
The risks on the capital structure side are significant and were brought to the fore
during 2009 as the credit markets imploded. The risk on the capital structure side for our
hotel companies is significant in timeshare as hotels need to put up capital up-front and, in
some cases, give loans to consumers.
In addition, timeshare developers take risks on the loans to timeshare owners as the hotel
companies carry these loans on their books, either until they can be securitized or
indefinitely, if they cannot be sold off. This risk was not properly managed as we entered
the recent recession, and many hotel companies were left with a large amount of
receivables on their books.
One of the ways that companies have moved to mitigate this risk is to improve the quality
of the customer they sell to. For example, they are working to sell more to existing
customers, and if they are financing, they are looking to finance with customers that have

higher credit ratings. For example, Wyndham has brought the average FICO score to 702 in
2011, up from 656 in 2005.
Timeshare selling has historically been high pressure. Nearly all of the salespeople in
timeshare are commission-based and have huge incentives to sell more units. This may
conflict with the hotel companies’ focus on treating customers in a friendly and low-key
manner.
Timeshare can lower near-term overall return metrics, but asset light timeshare is
helping. The addition of timeshare can lower overall near-term return metrics for our
lodging companies as they require a large amount of capital. However, we are seeing this
start to change as companies pursue asset light timeshare. Wyndham has argued that it
can achieve returns in the low 20s percentage range as it streamlines its efficiency, but we
have never seen a timeshare company with notably high returns.
High marketing costs can pressure profit margins. Marketing costs have always been
high in the timeshare industry, with marketing dollars ranging from about 40% to 50% of
sales. Over the past few years, it has become apparent that more and more marketing
dollars are needed to close a sale as top-line revenues have increased at a higher rate than
overall profits in some cases.
Some companies are looking at “asset light” timeshare to increase

returns
One of the interesting developments we have seen over the past several years is
Wyndham’s push to more of an “asset light” version of timeshare selling. Wyndham
created a program called Wyndham Asset Affiliation Model or WAAM that allows the
company to sell, as timeshares, units that were not built as timeshare. For example, there
are a number of mostly vacant condos throughout the country. Wyndham will align with
the owner of those condos and try to sell them as timeshare units. In doing so, Wyndham
does not take any of the capital risk and simply earns a fee if it makes a sale.
We believe it is possible that the future of timeshare is broadly similar to this model, and
timeshare developers are separate companies from the timeshare brands/sellers. This
could create an environment in which both businesses are valued more fairly, whereas
when the two activities are together, the overall entity likely receives a lower multiple given
the capital intensity.
One of the main problems with this strategy is that it creates an apparent conflict of
interest for Wyndham as it could lead to a circumstance in which it has to decide whether
to sell its own inventory (the product it built) or the affiliated inventory. Because this
program is currently small, relative to the size of the company’s overall business, it is not a
significant issue, but the company expects WAAM to increase to 15%-20% of its overall VOI
sales over the next few years.
Accounting treatment has brought securitizations “on balance

sheet”
As of the 2010 fiscal year the accounting treatment for timeshare securitizations has
changed, and companies must comply with Accounting Standards Update No. 2009-16
“Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets,” which
were formerly known as FAS 166/167. The first thing to note about this new treatment is
that there is no cash flow impact but there is an effect on the income statement and
balance sheet. Under the previous treatment of securitizations, companies such as
Starwood and, at the time, Marriott (Wyndham had already been accounting for its

securitization under this new method) had moved the assets and liabilities of their special
purpose entity off their balance sheets after the sale of the securitized notes. In addition,
the companies recognized a gain on the sale of the notes, which was the present value of
the interest spread they were earning. Because of these gains, timeshare earnings were
somewhat lumpy.
Under the new treatment of securitizations, everything stays on balance sheet and no gain
is recognized. Instead, the company recognizes the interest income associated with
receivables and the interest expense associated with the notes on its income statement.
Because this interest margin is now earned over the life of the notes it makes timeshare
earnings less volatile.
While this change is relatively straightforward, there is one nuance between the way
Starwood and Marriott reported that was different from Wyndham. Starwood and Marriott
both reported the interest expense associated with the securitized notes in the same line as
their corporate interest expense. Wyndham, on the other hand, reports this interest
expense as a timeshare operating activity. Therefore, the EBITDA numbers of the different
companies are not directly comparable. We adjust this when we look at the companies.
How hotel companies make money from timeshare

The hotel companies make money from timeshare operations through (1) selling timeshare
intervals, (2) financing interval purchases, and (3) resort operations.
 Selling timeshare intervals. Hotel companies make roughly 45%-55% of their

timeshare revenues through selling the interval. Product costs on average are 20%-
35% of revenues, selling and marketing costs are roughly 40%-50%, and general/
administrative costs are about 10%, leading to a high-teens to low twenties margin for
the overall industry.
 Financing revenues. The hotel companies also make money through financing the
purchase of timeshare intervals. Marriott Vacations and Wyndham help their
customers finance and generally 50%-70% of the total timeshare dollars amounts are
financed. Consumers will typically finance up to 80%-85% of the timeshare purchase
price. The hotel company makes money on the spread between the cost of debt and
the average financing rate it charges its timeshare purchasers. In addition, hotel
companies have the ability to securitize the notes receivable, which typically results in
periodic note sale gains for those who use this type of accounting treatment. This
allows the hotel companies to more quickly recycle capital to fund more buyers. For
Wyndham, roughly 20% of its vacation ownership revenue is from financing with a
higher percentage of EBITDA coming from financing due to its high margin.
Resort operations. The hotel companies also receive fees from existing timeshare
owners to manage the timeshare resorts. These fees are taken out of the annual
maintenance fees that timeshare owners are required to pay. Resort operations
account for roughly 15%-20% of timeshare revenues on average but do not contribute
much to the bottom line with only a 10%-15% margin. The one positive of these fees is
that they are in many ways a perpetuity as it is extremely unlikely that the company
would lose the contract for operating the resort.

Exhibit 59: Breakdown of timeshare revenues for Wyndham and Marriott Vacations
2011 revenues
100%
4.2%
90% Other, 18.8%
80%
70%
VOI, 48.6%
60%
VOI, 49.5%
50%
40%
30% Financing, 33.8%

Financing, 13.2%
20%
10% Management, 17.5% Management, 18.6%
0%
WYN VAC
Management Financing VOI Other
Source: Company data.
We believe timeshare can be a value to consumers

One of the main marketing pitches to consumers—aside from product quality and program
flexibility—from timeshare companies is that the purchase makes financial sense relative to
purchasing hotel nights for the rest of one’s vacations. Customers are often shown a chart
detailing the absolute costs of timeshare compared with the projected cost for hotel stays.
We thought it was important to analyze the two opportunities from a financial perspective
and discount back the cash flows to get a better sense of the true value or cost of
purchasing a timeshare (see Exhibit 60). In our analysis, we determine that purchasing
timeshare does provide a present-value benefit. In our model, we calculate that the present
value of timeshare outflows is approximately 9% less than a comparable hotel product; this
compares with the 50% discount that could be pitched to consumers.
Exhibit 60: Timeshare/hotel assumptions and overview

we calculate timeshare to be about 5% cheaper than staying in a hotel
inflation rate 3.0%

discount rate 10%
risk free return 3.60%
Interest rate on loan 12.0%
Down payment % 20%
Total hotel cost $246,809
PV of hotel room $39,023
Timeshare cost $20,000

Total cost of timeshare $175,342
PV of timeshare purchase $36,977

Our assumptions: Similar to the previous analysis (in Exhibits 61-62), we assume 3%
inflation for the cost of two hotel rooms (2*$150/night) and for management fees
(HOA/club fees) that are paid by timeshare owners. For food/beverage costs, we work in
$30/person/day for the hotel customers (family of four) and apply a 25% discount for the
timeshare customers as their unit includes a kitchenette, which could be used to defray
food spending. On the financing side, we are also using a seven-year loan term at 12%
interest. Because the hotel user does not need a down payment, we forecast that these
consumers could invest the $4,000 that they did not spend on a down payment and earn a
3.6% risk-free annual return. Finally, we modeled in that the timeshare consumer could
receive a modest tax benefit from interest payments (we note that some states may not
allow tax deductions for interest paid on timeshare loans). The discount rate applied to all
cash flows is 10%, and we use a 50-year time horizon.
Exhibit 61: Hotel stay analysis Exhibit 62: Timeshare purchase analysis
we calculate a present value of $39,023 we calculate a present value of $36,977
Interest
Tax Investment HOA/ Tax
Year Room (12%) Total Hotel F/B Income Total Cumulative PV Year Mortgage Club Savings F/B Total Downpay Cumulative PV
0 0 $4,000 $4,000 $4,000
1 $2,100 $252 $2,352 $840 $144 $3,048 $3,048 $2,771
1 $3,389 $700 -$551 $630 $4,168 $8,168 $3,789
5 $2,364 $284 $2,647 $945 $166 $3,427 $16,173 $2,128
5 $3,389 $788 -$281 $709 $4,606 $25,874 $2,860
10 $2,740 $329 $3,069 $1,096 $198 $3,967 $34,896 $1,529
20 $3,682 $442 $4,124 $1,473 $282 $5,315 $81,656 $790
10 $913 $822 $1,735 $40,569 $669
30 $2,364 $284 $2,647 $1,980 $402 $4,225 $130,645 $242 20 $1,227 $1,105 $2,332 $61,060 $347
40 $3,176 $381 $3,558 $2,660 $572 $5,646 $180,373 $125 30 $1,650 $1,485 $3,134 $88,598 $180
50 $4,269 $512 $4,781 $3,575 $815 $7,542 $246,809 $64 40 $2,217 $1,995 $4,212 $125,606 $93
50 $2,979 $2,681 $5,661 $175,342 $48
Source: Goldman Sachs Research estimates, company data. Source: Goldman Sachs Research estimates, company data.
We find financial value in the timeshare product. Working in our assumptions, we

calculate that the cost of timeshare under these conditions is 9% less than a comparable
hotel product. Although there are many assumptions in our analysis of the “value” of
timeshare, we think that ultimately an economic case can be made for a consumer to
buy into a timeshare. Although investors may want to adjust the assumptions, we believe
we have captured a fair representation of the variables. Most important, our economic
analysis does not capture the intrinsic value of having a dedicated focus on taking a
vacation every year and the enormous difference in space and amenities.
Timeshare securitization: How it works

Timeshare is a capital-intensive business and requires companies like Wyndham, Marriott
Vacations, and Starwood to acquire land, build it out, and sell off the finished product to
consumers.
In order to be able harvest near-term cash flows from a timeshare development instead of
waiting eight or more years to collect their return, many companies have historically
securitized their timeshare receivables. This cash was typically used to fund future
timeshare developments, but now it seems to be a source of increasing cash flows given
the tail off in development.
The process typically begins when a customer visits a timeshare property or sales center
and buys the product. When the customer closes the timeshare purchase, documents are
immediately sent to the company’s consumer finance division, background data are
verified, and the documents are imaged and sent off to the custodian (see Exhibit 63).

Exhibit 63: Securitization flow chart shows how companies like Wyndham efficiently recycle capital
these are general guidelines, and loans can follow a unique path through the process
Custodian verifies documents;

Docs sent to WCF; data and payments verified, eligible
down payment verified, docs
loans placed in dedicated
imaged and originals are sent
bank line or financed on
to the custodian
balance sheet
DAY 90
When loans ready WYN borrows against eligible

(seasoned), company puts loans from a dedicated bank
them into a term structure line and uses proceeds for
(market conditions influence working capital needs (i.e. pay
timing) down revolver)
Cash advanced based on

WYN collects interest/principal
contractual percentage with
payments and services
banks (70%-80% range); cash
portfolio based on waterfall in
used to pay down bank line;
securitization
leftover cash used for
WYN earns spread on what

they pay out to investors and
interest rate charged to
customers
Source: Goldman Sachs Research, company data.
After the custodian verifies all the documents and the down payment from the customer
clears, eligible loans are placed into a conduit (not all companies use conduit facilities;
some sell the loans directly into a term structure). Wyndham collects these eligible loans
and eventually borrows against them using a bank line. Wyndham used to receive an
advance rate in the low-80% range on these loans, but that percentage dropped
dramatically and the first such rates after the market re-opened were close to 50% in 2008.
This means that Wyndham had to put up $2 of loans to get $1 in cash (which is not a
particularly good deal). However, the securitization market has now recovered and is
actually stronger than it was during 2007, with Wyndham’s latest deal having a 87.5%
advance rate. The cash that the company does draw from this securitized conduit facility is
normally used for working capital needs such as paying down the company revolver.
As the paper seasons in the conduit, the company, depending on market conditions,
prepares the loans for a term structure securitization. The portfolio is carved up into
various debt tranches that are then sold to investors. Through the securitization, Wyndham
receives an advance rate on the loans (similar to the conduit). Once this cash is received,
Wyndham pays down its bank line from the conduit and uses the remaining portion for
business activities.
After executing the securitization, Wyndham services the portfolio. The company receives
interest/principal on the timeshare loans from its customers and then pays out investors
based on the waterfall provisions set forth in the term securitization. Wyndham makes
money on the difference between these two amounts. While the spreads narrowed
considerably during the downturn, they are now strong, coming in at about 10% in 2012 for
Wyndham.

Exhibit 64: Recent securitization deals
Date Company Size ($mn) Traunches Coupons Advance Rate

3/21/2012 Wyndham $450 A, BBB 2.84%; 3.58% 87.50%
11/10/2011 Wyndham $300 A, BBB, BB Wtd avg. of 4.12% 94%
8/31/2011 Wyndham $300 A, BBB, BB Wtd avg. of 4.01% 92%
3/25/2011 Wyndham $400 A, BBB-, BB 3.35%, 4.23%, 3.7% 98%
11/12/2010 Marriott $229 NA 3.54%; 4.52% 95%
10/21/2010 Wyndham $300 A, BBB 3.51%, 4.44% 88%
7/26/2010 Wyndham $350 A, BBB 3.84%, 5.31% 83.25%
3/19/2010 Wyndham $300 A 4.48% 72.25%
10/7/2009 Wyndham $350 AAA, A 4.52%, 7.62% 55%, 70%
5/28/2009 Wyndham $225 NA 9% 65%
3/16/2009 Wyndham $46 A 9.79% 54%
3/9/2009 Marriott $205 NA 72% 72%
6/30/2008 Wyndham $450 NA 7.15% NA
6/10/2008 Marriott $246 NA 7.20% 100%
10/30/2007 Marriott $250 NA 5.93% 100%
5/23/2007 Wyndham $600 NA NA NA

A look at hotels from a global perspective

As the room supply pipeline in the United States continues to slow, it is increasingly
important for hotel companies to look at international markets for unit growth expansion.
Brands will The major brands have been expanding their footprint for years, and we expect this will
increasingly focus
continue. First, the brands have established footholds in just about every market, so they
outside the United
States. have built awareness and some local expertise. Second, with the BRIC and other emerging
markets now showing faster economic growth than North America and Western Europe,
hotel companies need to be in these markets to capture where the visiting and local
business traveler is spending time. The appeal of a clean room and a safe location makes
branded hotels truly appealing to travelers worldwide.
How hotels are developed around the world

Developing Western branded hotels around the world is quite different from region to
region. These regions can be combined into three general buckets: Western Developed;
China, Middle East, and India; and Other. Below we highlight some of the key differences
between these regions.
 Western Developed: The United States and Europe are the most developed and
Developed markets mature hotel markets in the world, as seen in the number of rooms cited above. One of
have a large the clearest distinctions of these markets is the large number, not just of managed
franchising presence
properties but also of franchised hotels, as this approach allows a third party to own,
as well as
management. operate and maintain brand standards. From the brand owner’s perspective it allows
them to grow very fast with limited capital at risk.
Although managing and franchising are well established in North America, they have
also created competition for new management contracts. This creates a situation in
which the large brand owners compete very heavily to get new business and offer
incentives to the hotel developers in the form of mezzanine financing, sliver equity, or
key money, driving down returns.
 China, India, and the Middle East: These developing markets are notable because of
the large amount of local capital available. Because of this, the brand owners have to
China, India, and the put in little to no capital to develop hotels, and many are financed exclusively with
Middle East have
equity and no debt. This created a precedent in the market for no need for owner’s
large amounts of local
capital. priority or hurdle rates for the managed properties (which most of them are). Owner’s
priority allows for the owner of the property to achieve some minimum level of return
before it has to pay the management company any incentive fees.
According to Marriott, a significant portion of the money comes from local

governments, which are more interested in spurring development and not as
concerned if the management companies take some “off the top” right at the
beginning. Even though currently more of the hotels are using some debt to finance
their development, the contracts have not changed, and there is still no owner’s
priority.
Unlike the more developed markets of North America and Europe, the overwhelming
majority of the Western branded hotels in these markets are managed and not
franchised.
As these markets become more mature we expect them to increase in

competitiveness. In addition, we expect some of the characteristics that are present in
the United States to start to appear there as well, such as key money and mezzanine
financing. We also believe that as these markets develop they will be able to move
increasingly toward franchising.

 Other non-developed: We include the majority of the other hotel markets in the world
where Western brands are developed into a third catch-all bucket. Many of these
markets have unique circumstances and do not have enough local capital. Therefore,
they need incentives from the brand owners in order to grow.
There are many Most of these areas are throughout South America and Africa and are too early in their
markets in the world development stages. The Western brands are now just figuring out the correct
that are still working approach. Like most international markets, most of the Western branded hotels are
to create their own
managed in these markets. However, there are already many existing independent
identity.
hotels in South America, so perhaps there is more of a conversion opportunity vs.
Asia, which is almost exclusively new build.
For now, we expect that most companies’ efforts are focused on China and India,
considering the potential for growth in those markets. We believe other developing
regions of the world will receive more attention in a significant way only after those
two markets have been somewhat satisfied.
Most companies in our coverage are still US-concentrated but are rapidly
increasing their presence in the international markets
We have seen a strong push by the broad-based hotel companies to grow faster outside
North America. Currently, of the branded hotel companies under our coverage, Starwood
has the biggest percentage of its rooms outside North America with InterContinental
coming in second (see Exhibit 65).
Exhibit 65: Starwood has the biggest percentage of its rooms outside North America
Percentage of rooms outside of North America as of 4Q2011
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Starwood Intercon Hyatt Choice Wyndham Marriott Gaylord
Marriott has historically been more focused on the domestic side, but now, because in
many ways it must and also because there are significant opportunities, it is focusing more
of its efforts internationally. Exhibit 66 shows how these percentages changed over time
for Starwood, Marriott, and InterContinental.

Exhibit 66: International growth was slow relative to domestic the past few years, but we
expect that to change
Historical percentage of rooms outside North America
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Marriott Starwood InterContinental
Note: Marriott’s % of international rooms declined in the early part of last decade after it no longer had Ramada in its system,
which was all international.
International growth has been accelerating rapidly over the past several years. While the
growth in the United States on an absolute basis has been high, increased focus has been
placed on growing in Asia. For example, from 2001 to 2011 Starwood’s Asia footprint grew
by 157% and its North American footprint grew only 21%. While Asia was growing off a
smaller base, on an absolute basis the company added 30,600 rooms in North America and
just over 40,800 rooms in Asia. Starwood added over 8,400 rooms in Asia in 2011 alone.
Starwood has the Of the broad-based hotel companies, currently Marriott and InterContinental have the most
largest percentage of rooms in North America. However, when we look internationally in terms of absolute
its portfolio outside rooms, Intercontinental and then Starwood have the most rooms. Specifically looking at
of North America.
Asia, as a percentage of its portfolio Hyatt has the most, closely followed by Starwood and
then InterContinental (see Exhibit 67-68).
Note that InterContinental does not break out the Americas, so all Americas are included in
North America.

Exhibit 67: Rooms by geography Exhibit 68: Percentage of rooms by geography

As of December 31, 2011 As of December 31, 2011
600,000 90%
80%
500,000
70%
400,000 60%
50%
300,000
40%
200,000 30%
20%
100,000
10%
- 0%
NA EAME LAD Asia NA EAME LAD Asia
Marriott Hyatt Starwood InterContinental Marriott Hyatt Starwood InterContinental
Source: Company data, Smith Travel Research, Goldman Sachs Research Source: Company data, Smith Travel Research, Goldman Sachs Research
estimates. estimates.
International pipelines Looking at Marriott’s, Starwood’s, and InterContinental’s historical percentage pipeline
have been increasing. outside of the North America (for InterContinental the Americas) shows that their
international pipelines have picked up over the past couple of periods (see Exhibit 69). We
expect that this trend will continue as new development financing remains difficult in the
United States and international markets present better growth opportunities.
Exhibit 69: Percentage of pipeline that is outside the United States for Marriott, Starwood,
and InterContinental
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011
Marriott Starwood InterContinental

*New* Global c-corps and REITs with gateway exposure to benefit

from growing Chinese travel
We are taking another look at the Chinese hotel market on both an intra country as well as
outbound level. While it is almost cliché at this point for the large brands to talk about how
many hotels they have in the pipeline in China, the fact is that demand is growing
extremely rapidly both intra China as well as outbound. We think both the c-corps and
REITs will benefit from this trend. InterContinental, Starwood, and Marriott have the most
exposure to China and will benefit from unit growth in the country as well as having
recognizable brands when Chinese travelers come to the US. We do have a concern that
supply may overtake demand in certain cities, but overall the country should see positive
growth. Despite these concerns we take comfort in the fact that the c-corps are not putting
their own capital into developing hotels, and they tend to get incentive fees on the first
dollar of profit. We think that hotel REITs with strong gateway city exposure, such as
LaSalle and Host, will also benefit. Chinese visitors could drive an additional 12 million
room nights by 2016.
What does the Chinese hotel landscape look like for US brands?
We took a look at the exposure of InterContinental, Starwood, Marriott, and Hyatt’s
exposure in China. InterContinental has the most hotels at 157 followed by Starwood with
91, Marriott with 57, and Hyatt with 21. If we look at these numbers as a percentage of their
existing hotel footprint they make up 4% for InterContinental, 8% for Starwood, 2% for
Marriott, and 4% for Hyatt. So while the country is growing faster in terms of units, it is still
not a very large percentage of a company’s hotels.
Exhibit 70: Number of hotels in china for major US focused brands

Major brands in China and number of hotels
180
160
140
120
100
80
60
40
20
0
InterContinental Starwood Marriott Hyatt
China Hotels

The US is generally still the largest market by far for the major companies we follow. For
example, Marriott has over 50X the number of hotels in the US that it has in China, and
InterContintal has over 20X, and hotels in the US tend to generate higher RevPARs.
Starwood has the lowest ratio at 6X. So while economic growth is important for global
growth and for all the global brands under our coverage, the US is still by far the most
important market.
Exhibit 71: The US is still many times the size of each company’s hotel exposure in China
Ratio of hotels in the US to China
60X
50X
40X
30X
20X
10X
0X
Marriott InterContinental Hyatt Starwood
US Hotels to China Hotels
We also looked at where the hotels are for each company in terms of most populous cities.
For this analysis we look at hotels in the actual city and did not count hotels in suburbs of
main cities. To do this we went on each company website and searched for hotels in each
city. From Exhibit 72 we can see several interesting trends. Marriott is the most
concentrated in the top five cities with 63% of its hotels in China in those cities. Starwood
has the lowest percentage with only 30% of its hotels in the top five cities. This is
interesting since although there is a view that Starwood is “bigger” in China, which they
are overall, Marriott actually has more hotels in the top markets. We do believe that all
companies have room for expansion as most have very limited exposure outside the top 10
cities.

Exhibit 72: Starwood is the most spread out, and Marriott is the most concentrated in the
top five markets
Table of top 20 cities in China and hotels in each city
City Population Marriott Starwood InterContinental Hyatt

TOP 20 CITIES
(2010 Census, in mn) # of hotels % of total # of hotels % of total # of hotels % of total # of hotels % of total
Shanghai 14.2 19 33% 9 10% 28 18% 4 19%
Beijing 10.3 9 16% 7 8% 21 13% 2 10%
Guangzhou [Canton] 7.5 3 5% 5 5% 7 4% 1 5%
Tianjin [Tientsin] 6.8 4 7% 5 5% 10 6% 2 10%
Wuhan 6.8 1 2% 1 1% 1 1% 0 0%
TOTAL TOP 5 45.7 36 63% 27 30% 67 43% 9 43%
Shenzhen 6.5 2 4% 5 5% 4 3% 1 5%
Chongqing [Chungking] 5.1 1 2% 2 2% 4 3% 1 5%
Shenyang 4.6 0 0% 1 1% 3 2% 0 0%
Chengdu [Chengtu] 4.3 0 0% 1 1% 9 6% 0 0%
Foshan 4.0 0 0% 1 1% 2 1% 0 0%
TOTAL TOP 6-10 24.4 3 5% 10 11% 22 14% 2 10%
Xi'an [Sian] {Xian} 3.9 0 0% 3 3% 2 1% 0 0%
Dongguan 3.9 0 0% 1 1% 0 0% 1 5%
Nanjing [Nanking] 3.8 1 2% 2 2% 3 2% 0 0%
Harbin 3.6 0 0% 0 0% 1 1% 0 0%
Hangzhou [Hangchou] 3.2 2 4% 2 2% 7 4% 1 5%
Shantou 3.1 0 0% 0 0% 0 0% 0 0%
Dalian [Dairen] 2.9 0 0% 0 0% 2 1% 0 0%
Jinan 2.8 0 0% 1 1% 1 1% 1 5%
Changchun 2.8 0 0% 0 0% 0 0% 0 0%
Qingdao [Tsingtao] 2.7 0 0% 2 2% 4 3% 1 5%
TOTAL TOP 11-20 32.6 3 5% 11 12% 20 13% 4 19%
TOTAL TOP 20 102.8 42 74% 48 53% 109 69% 15 71%
TOTAL HOTELS 57 100% 91 100% 157 100% 21 100%
Source: Company data, China census, Goldman Sachs Research estimates.
A final way we looked at the major brands exposure in China is by chain scale. Hyatt skews
the highest end with over half of its hotels in the luxury category and the rest in upper
upscale. InterContinental is the most diverse with hotels from luxury to upper midscale. We
think that as development continues there will likely be a migration to more middle scales
for most hotel companies as they tend to open up luxury first.
Exhibit 73: China hotels by chain scale for each company

China hotels by chain scale for Marriott, Starwood, InterContinental, and Hyatt
100%
90% 16%
20%
80%
48%
54%
70%
60%
60%
50%
73%
40%
30% 32%
52%
20%
25%
10%
14%
8%
0%
Marriott Starwood InterConteintal Hyatt
Luxury Upper Upscale Upscale Upper Midscale

Looking from a higher level we think the Chinese hotel market has structural tailwinds for
growth. We feel that domestic travel is still in an early state and should benefit from
supportive government policies (Exhibits 74-75).
Exhibit 74: We believe government policy is supportive of Exhibit 75: We look for 10% CAGR in Chinese domestic
the development domestic tourism during the 12th Five travel
Year Plan (2011-2015) Domestic travel volume trend
Major China policy on domestic tourism
Policy Effective date Issuer Major content Progress

The 12th Five-Year Plan for Dec-10 National Tourism Outlines the objectives of the 19 provinces have already mn person Domestic travel volume (LHS) YoY change (RHS) YoY %
the Tourism Industry Administration development of China's tourism included travel and leisure in their 4,000 18
industry from 2011 to 2015. 12FYPs. The objective was
Targets 10% CAGR domestic reiterated in December's Central
15% 10% CAGR from
travel volume growth from 2011 Economic Work Conference. 3,500 15% 2011E to 2015E 16
to 2015.
14
3,000
Outline for National 2012E National Tourism Policies will ensure paid annual In the public consultation stage
Tourism and Recreation Administration leave time for employees, and is expected to officially launch 11% 12
expanding the market size of in 2012.
2,500 10% 10%
tourism and recreation, and 10
improving the standard of living. 2,000 6%
8
1,500
6
1,000
4
500 2
0 0
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Source: Government, Xinhuanet, Sina, Goldman Sachs Research estimates. Source: CEIC, Goldman Sachs Research estimates.
In addition, when we compare China to the US there seems to be additional room for
growth. We estimate that at the end of 2011 China had eight times the number of people
per hotel room that the US had (Exhibit 76). The number has been declining for some time
and is down from 35X in 1999, but we think there could be more to go. However, we would
admit that if we look at this another way, adjusting for the size of each economy and not
just the number of people, the ratio is not as favorable. So when we divide the number of
people per hotel room by each country’s GDP the number is 72 for China and 4 for the US.
But what it indicates is that population in and of itself relative to hotel rooms is not a
perfect indicator of penetration. If we adjust for economic condition or per capita income
and the financial means to travel, China may have less room for unit growth relative to the
US than is widely assumed.

Exhibit 76: China has still has 8X the number of people Exhibit 77: …However, adjusted for GDP the ratio is not
per hotel room that the US has … as attractive
Hotel room per person Hotel room per $mn of GDP per capita
3,000 69 2,500 8
7
68
2,500
2,000
6
67
2,000
5
1,500
66
1,500 4
65
1,000
3
1,000
64
2
500
500
63
1
0 62 0 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
People per Hotel Room in the US (left axis) People per Hotel Room in China (right axis) People per Hotel Room divided by GDP in the US (right axis) People per Hotel Room divided by GDP in China (left axis)
Source: Chinese Government statistics, STR, Goldman Sachs Research. Source: Chinese Government statistics, STR, Goldman Sachs Research.
What we may see instead of unit growth as GDP continues to grow is increased rate
growth.
Increasing Chinese visitors to the US is a positive secular change

While there is a significant focus on Chinese demand inside China, we believe that
increasing Chinese travel to the US is a large secular change that is not getting as much
attention as it should. Since 1995 travel from China has increased at a CAGR of 12%,
although most of the growth has come since 2003 where the CAGR has been 24%. The
growth rates have been elevated in the past two years at 53% in 2010 and 36% in 2011.

Exhibit 78: Historical chart of inbound Chinese visitors to the US

Historical chart of inbound Chinese visitors to the US
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: OTTI.
While the number of travelers from China has been growing at a fast rate for some time, it
is now actually starting to matter in terms of its size relative to other countries. China now
represents the ninth biggest source of travelers to the US which is up from sixteenth place
in 2007 (see Exhibit 79). If we exclude Canada and Mexico, which include a large number of
drive-in visitors, it is the seventh largest source of international visitors to the US.

Exhibit 79: China is now the ninth largest source of international visitors to the US
China ranked against other countries in term of size of travel to the US; China excludes HK
Rank (2007) Country Visitors Rank (2011) Country Visitors

1 Canada 17,735,000 1 Canada 21,028,177
2 Mexico 15,089,000 2 Mexico 13,414,020
3 United Kingdom 4,497,858 3 United Kingdom 3,835,300
4 Japan 3,531,489 4 Japan 3,249,569
5 Germany 1,524,151 5 Germany 1,823,797
6 France 997,506 6 Brazil 1,508,279
7 South Korea 806,175 7 France 1,504,182
8 Australia 669,536 8 South Korea 1,145,216
9 Brazil 639,431 9 People's Republic of China 1,089,405
10 Italy 634,152 10 Australia 1,037,852
11 India 567,045 11 Italy 891,571
12 Spain 516,471 12 Spain 700,183
13 Netherlands 506,852 13 India 663,465
14 Ireland 491,055 14 Netherlands 601,013
15 Venezuela 458,678 15 Venezuela 561,080
16 People's Republic of China 397,000 16 Argentina 512,258
17 Columbia 389,752 17 Colombia 496,814
18 Sweden 337,474 18 Switzerland 476,502
19 Isreal 313,077 19 Sweden 438,972
20 Taiwan 311,020 20 Ireland 346,879
Source: OTTI.
While China has been increasing in terms of the absolute number of travelers visiting the
US, the US is below its peak in terms of the percentage of Chinese travelers who come to
the US versus other locales. The US peaked in 1999, when 4.2% of Chinese outbound
travelers came to the US, but only 1.4% of these travelers visited the US in 2010 (we do not
have 2011 data yet). This number is off a low of 0.7% in 2004 (Exhibit 80).
Exhibit 80: US Share of Chinese travelers is recovering but very slowly

US share of worldwide Chinese outbound travel
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US Share of Chinese Outbound Travelers
Source: OTTI.

We believe there is large potential for the US to get an increasing percentage of this
growing base of travelers. One of the biggest reasons for the loss of share of Chinese
travelers is the difficulty of getting a visa to come to the US. On January 19, 2012, President
Obama signed an executive order focusing on China, India, and Brazil. The order seeks to
(1) increase visa processing capacity by 40% over the coming year, (2) ensure 80% of visas
are processed within 3 weeks, (3) increase the Visa Waiver Program, and (4) expand
programs like the Global Entry program, making it easier for frequent international
travelers to visit the US. We think these steps will help the US reach its full potential of
attracting international business and could accelerate visitor growth from China and Brazil.
We think that the executive order as well as growing demand will push Chinese demand
even higher over the next few years.
Exhibit 81: Chinese inbound travel to the US could increase by 75% over the next five
years
China expected traveler growth over the next years
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2011 2012E 2013E 2014E 2015E 2016E
Chinese Travelers to the US
Source: OTTI.
Because we have data on what percentage of Chinese travelers use hotel rooms and how
long they stay, we can figure out how many more room nights they will require if the Office
of Travel and Tourism forecasts prove correct. In 2011 we estimate that Chinese tourists
used close to seven million room nights. By 2016 we estimate they could require over 19
million room nights.

Exhibit 82: Expected additional room nights needed

Expected additional room nights needed for Chinese incoming travelers
25,000
20,000
15,000
10,000
5,000
0
2011 2012E 2013E 2014E 2015E 2016E
Room Nights
Source: OTTI, Goldman Sachs Research estimates.
We expect that between the end of 2011 and 2016 there is likely to be an additional
150,000-200,000 more rooms or an additional 55-73 million room nights. When we
compare this with the additional 12 million more room nights Chinese travelers will require,
we can see that even one country can make an impact. Also, Chinese travelers tend to
concentrate their visits in certain locations. In 2010 over half went to California, over a third
went to New York, and almost a fifth went to Nevada.

A closer look at lodging REITs – One of our favorite ways to directly

benefit from the recovery
In this section we take a closer look at an important subsector within the lodging industry,
lodging REITs. We detail the qualifications to become a REIT, lay out the competitive
landscape, and discuss lodging REIT valuation.
What is a REIT?
A real estate investment trust (REIT) is a company that owns and usually operates income-
producing real estate, including office and industrial buildings, malls, shopping centers,
multifamily properties, hotels, health care facilities, storage units, and even mortgages. The
REIT structure permits a company to deduct dividends paid to investors from its corporate
taxable income, thereby eliminating the issue of double taxation. Per the National
Association of Real Estate Investment Trusts (NAREIT), the key provisions for a company to
qualify as a REIT, as mandated by the tax code, include the following:
 It must distribute at least 90% of its taxable income in the form of dividends to
investors.
 At least 75% of the total assets must be invested in real estate assets.
 At least 75% of the gross income must come from property rents or interest on
mortgages.
 No more than 20% of assets consist of stocks in taxable REIT subsidiaries.
 The REIT structure provides investors a tax-efficient option for investing in real estate
and a way to participate in the income stream without owning properties.
Lodging REITs
In addition to the qualifications above, Lodging REITs are not permitted to operate the
hotels or derive any income from the operations of the hotels. Lodging REITs typically
acquire the hotel and pay fees to a third-party manager to operate the property. The REIT
Modernization Act of 2002, which permitted the formation of taxable REIT subsidiaries
(TRS), still maintains that the TRS may not operate or manage a lodging facility. The TRS
may only lease the lodging facility from the REIT at market rates.
Lodging REITs may only own their assets. A lodging REIT is typically a collection of
assets with no unifying brand, and it is heavily tied to the operating leverage of the hotel
business. Lodging REITs make money by buying a hotel and bringing in a third-party
manager to run the hotel. For example, Host Hotels would partner with Marriott to manage
its hotel, and after the manager pays all expenses and receives its compensation through
base fees and incentive fees, the remainder goes to Host Hotels. REITs benefit from
RevPAR growth and operating leverage, along with real estate appreciation at the property
level. The provisions to qualify as a REIT restrict lodging REITs from management and
franchise opportunities, which we view as two highly profitable growth strategies within
the lodging sector.
During the recession REITS were given the option of paying dividends partially in stock. In
December 2008 the Internal Revenue Service issued Revenue procedure 2008-68, which
permits listed REITS to pay elective stock dividends. Under this guidance, a REIT can
provide its shareholder with a choice between stock or cash dividend, and the entire
dividend distribution is treated as a distribution of cash for the purposes of tax rules to
qualify as REIT. However, the REITs will have to pay 10% of its total dividend in cash. Most
of the public hotel REITS took advantage of this ruling and issued stock dividends in 2009

to save on the much needed cash balance. However, with the stabilizing operating
environment, hotel REITs are increasingly returning to cash dividends.
We are more balanced on C-corps vs. REITs than we have been in

the past
We have historically been more bullish toward the C-corp structured lodging stocks based
on their multi-pronged growth strategies. Over the long term we believe the diversified
sources of growth for C-corps will lead to greater and extended returns versus the more
narrowly defined, less creative, and lower-margin opportunities available to lodging REITs.
However, at the current point in the cycle we believe that REITs look attractive given their
high operating leverage and our viewpoint that rate growth will be accelerating. In Exhibit
83, we review the growth strategies for lodging C-corps and lodging REITs.
Exhibit 83: Lodging REITs versus C-corps

Lodging C-corps such as Marriott, Starwood and Hilton have multi-pronged growth strategies
Growth Strategies
RevPAR growth
Lodging REIT
Real estate appreciation
Growth Strategies
Operating leverage
Growth by acquisition
Organic unit growth Lodging C-Corp
Franchising Growth Strategies
Management
Timeshare initiatives
Valuation comparison for lodging REITs vs. C-corps

The lodging REITs are trading at higher EBITDA multiples than our C-corps in general. We
believe this is occurring as many investors want to own the operating leverage at this point
in the cycle. Over a longer period of time REITs and C-corps have traded at similar
multiples, but REITs went lower during the downturn and higher during the upturn.
We point out that there is higher risk to lodging REITs given that hotel rooms are “rented”
daily, and apartment and office REITs can be considered more stable given the longer-term
nature of their lease agreements. Nonetheless, when looking at lodging REITs versus the
broader REIT sectors, the multiples tend to be toward the lower end of the range.
Net asset value may also be used to value REITs

An additional metric used to value lodging REITs is net asset value (NAV). NAV is a value
for the company based on where the assets would trade in the sales market. The analysis
involves taking the company’s net operating income (less 4% for an FF&E reserve) and
dividing it by the appropriate capitalization rate. Capitalization rates are set by the market
based on current sales transactions and are a similar metric to EBITDA multiples used for
the lodging C-corps. EBITDA multiples are calculated as total transaction cost divided by
EBITDA, whereas capitalization rates are calculated as net operating income divided by
total transaction cost. Property types tend to trade within a band of capitalization rates over
time that are differentiated based on age, market, and quality. Historically, capitalization
rates for lodging REITs have been in the 6%-12% range.

Key industry risks

 Economic weakness. All lodging companies are susceptible to a lodging cycle
downturn as a result of a slowing economy. Historically, when business travel has
slowed dramatically, major corporations have cut back on costs and have laid off
employees. Occupancies tend to decline, hurting overall room revenues along with
food and beverage and conference revenues.
 Imbalances in supply and demand. As the supply rate increases and surpasses the
rate of demand, earnings are at increased risk. Increased supply growth also implies
increased competition. Overbuilding in this sector is extremely difficult to overcome.
 Brand deterioration. Consistency is the most important factor for brand recognition. If
consistency falters, the brand name suffers. This is an ongoing risk for management
and franchise companies as they market their brands, but sometimes they do not have
a say on the capital expenditures at the property level. However, most of the major
operators have protected the integrity of their brands through their management
contracts. Currently, many management contracts require hotel owners to put a
percentage of annual hotel revenues back into the property for normal maintenance
expenditures.
 Location and lack of geographic diversification. Urban hotels and big convention
hotels are generally affected more during a downturn than suburban locations.
 High degree of leverage. While leverage is now on its way down because of the
largely fixed cost nature of the business, leverage can increase quickly when revenues
decline. We believe that hotels are unlikely to return to the high debt levels they held
going into the last downturn.

Lodging consumer characteristics
Typical lodging customer

According to the American Hotel and Lodging Association, customers travel for business
roughly 40% of the time and for leisure purposes the other 60% of the time. For business,
the customer is either a transient traveler attending an individual or small group meeting
or a traveler attending a conference/large group meeting. The leisure customer is either
traveling on vacation or traveling for personal, family, or other special-event reasons (see
Exhibit 84).
Exhibit 84: Leisure travelers compose the greatest share of lodging customers
lodging customer type, 2009
Business
40%
Leisure
60%
Source: D.K. Shifflet & Associates Ltd and AHLA.
Business traveler characteristics

For the high-end According to the American Hotel and Lodging Association, the typical business traveler is
hotels, business male (68%), age 35-54 (47%), employed in a managerial or professional position (54%), and
travelers typically earns an annual income of $116,578. These business travelers make reservations 91% of
account for over 70%
the time and pay an average $124 per room night. About 36% spend one night, 22% spend
of revenues.
two nights, and 42% spend more than two nights.
Leisure traveler characteristics

According to the American Hotel and Lodging Association, the typical leisure travel stay is
by two adults (52%), aged 35-54 (37%), and each earns an annual $87,327. They typically
travel by auto (79%), make reservations (88%), and pay an average of $105 per room night.
Roughly 49% of leisure travelers spend one night, 25% spend two nights, and 27% spend
over two nights.

Analysis of industry competitors

We believe that hotel companies are branded consumer service companies. Increasing the
number of distribution points is critical to long-term success as it leads to more brand
awareness and greater brand leverage opportunities. This creates value over a larger base
of hotels. We value solid unit growth and expansion potential as dominant drivers of long-
term cash flow growth.
Strength of business model: We favor a management-oriented structure. We evaluate

the strength of the business model based on whether a company owns and operates,
manages, or franchises its hotel products. We typically view management-oriented and
franchise-oriented companies more favorably than ownership companies. This is due to
the low capital risk, greater unit growth potential, and greater brand distribution potential
(see Exhibit 85). As has been seen in this last downturn, management companies are
shielded somewhat (but not completely) from the negative operating leverage of the hotel
business. They receive a percentage of the top-line revenues and are not subject to losses
at the hotel level.
Exhibit 85: Lodging industry segmentation
Companies that own their hotels (REITs)- (100% EBITDA from owned hotels)
Owns hotels that are managed by manager hotel companies like Starwood, Marriott or independents
100% EBITDA from owned hotels
Ownership focused operators- (majority of EBITDA from owned hotels)

Orient Express Hotels
No unified brand- hotels include the Cipriani, Copacabana Palace, Reid's Palace and Grand Hotel Timeo
84% EBITDA from owned hotels, 16% EBITDA from management/partially owned hotels, restaurants, train lines and real estate development
Management and franchise focused operators (majority of EBITDA from management/franchise contracts)
Wyndham Worldwide
Franchised brands include Wyndham, Days Inn, Ramada, Super 8, Howard Johnson, Travelodge, Knights Inn, Wingate, Baymont Inn and Suites
23% of EBITDA from its lodging business; 47% from selling timeshare; 30% from vacation exchange/rental
Marriott International
Brands include Marriott Hotels & Resorts, Renaissance, Courtyard, Residence Inn, Fairfield Inn, TownePlace Suites, Spring Hill Suites
80% revenues from managed/franchised hotels, 20% revenues from owned operations
Choice Hotels
Brand include Cambria suites, Comfort Inn, Quality Inn, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, Mainstay Suites
Almost 100% of its EBITDA from franchising business
Companies shifting to a more fee-based model

Starwood Hotels & Resorts
Brands include Sheraton, Westin, W Hotel, St. Regis/Luxury Collection, Four Points, Le Meridien, Aloft, Element
31% revenues from owned hotels, 56% from management/franchise fees and 13% from timeshare/other operations

April 10, 2012
Goldman Sachs Global Investment Research
Exhibit 86: Lodging timeline
Pre-1980's Early-Mid 1980's Late 1980's - Early 1990's - 2000 to 2003 2004
--Hotel companies were --Real estate downturn sets --Capital into the industry --Industry experiences --Industry fundamentals --Reversal in operating trends
managers, franchisers, and real in slows hyper-growth slow with Internet bubble
estate owners and slowing economy --Sharp recovery in transient
--Hotel companies begin to --Recession induced demand --Building stops, demand business travel that led to
--Occupancy levels were high sell real estate because of deceleration accelerates --September 11 above expectation RevPAR
leading to increased building negative operating leverage significantly alters travel performance
--Supply starts to stabilize --Earnings momentum patterns
and building in most states develops --Supply growth remained low
comes to a halt --Earnings momentum
decelerates as demand
lags with increased
conflicts in the Middle
East and impact of SARS
2005 2006 2007 2008 2009 2010
--Continued RevPAR --Third year in a row of high --Fourth year in a row of --RevPAR continues to --RevPAR continues its --RevPAR turned positive in
improvement with rate driving single-digit RevPAR growth; RevPAR growth, albeit trends decelerate and turns downward trend with the luxury early 2010
almost 70% of the upside rates drove over 90% of the starting to moderate in the negative in the second half segment being hit the most
upside. mid-single digit range. of the year. ..Occupancy which turned
--Margin expansion ..ADR under pressure with positive in February 2010 is now
occurring, but companies still --Supply growth continues to --Supply pipelines building --Supply pipeline at record declining occupancy gaining strength
significantly below peak come in below expectations and growth starting to pick up highs, with growth expected
levels to rise further --Supply growth decelarates --ADR has moved past its
--Margin expansion story --Even with decelerating with most projects in planning inflection point and is expected
intact as companies still 400- trends private equity interest --Earnings momentum phase and pre planning phase to turn positive by 2010 year
500bps below peak levels in hotel assets remains high decelerating being deffered or cancelled. end
--Private equity interest in --Private equity interest --Earnings momentum flat --Supply growth continues to
hotel assets remains high and almost non-existent given decelarate.
the major operators continue
shift to a more "asset light" --Earnings momentum
business model developing and margins have
begun to expand
2011 2012
--Continued RevPAR --RevPAR continuing to

strengthening strengthen
--Rates turned positive and --Margins expanding due to

operating leverage
are expected to strengthen as
business travel gains
--Supply continues to remain
momentum
at historically low levels
..Supply continues to freeze
--As occupancy levels return
to historical peaks, RevPAR
--Margins expanding due to
Americas: Lodging
is increasingly driven by rate
operating leverage
Source: Company Data, Smith Travel Research and Goldman Sachs Research.
87
Top 10 brand franchise characteristics
Below is a review of our framework for judging brand dominance in the hospitality sector.
We believe that these “top 10 brand franchise characteristics” are crucial for
outperformance in the lodging sector. The companies that master all these characteristics
should have the strongest lodging company in the end.
 Pricing flexibility. Strong brands allow for more aggressive pricing as customers are
willing to pay up for the perceived quality of the brand. We believe that Marriott/
Starwood/Hilton have some of the strongest brands in the lodging market today,
allowing them to achieve significant RevPAR premiums in their respective
marketplaces.
 Low-cost producer. The purchasing power, unique product characteristics, or

economies of scale make it difficult for competitors to match costs. Marriott, Accor,
InterContinental, Wyndham, Hilton Hotels, and Starwood, given their massive size,
have the biggest pricing power and can aggressively beat the expense structures of
independent hotels.
 International opportunities. Rapidly expanding economies offer additional growth

venues in international markets. The consistency of a brand is often of even greater
value in emerging markets.
 Significant barriers to entry. Product development time and expense, sourcing

capabilities, production expertise, or simply customer perceptions protect the market
share of branded franchise companies.
 Low penetration of product. Opportunities for increased market share, particularly

outside the home market, afford additional growth paths. Although the US-based
lodging companies are fairly well represented in the United States, outside the United
States hotel chains are highly fragmented. In Europe, which is the largest lodging
market outside the United States, only 25%-30% of the market is currently branded.
Marriott, Wyndham, and Starwood have already implemented aggressive international
expansion programs.
 Solid balance sheet and strong free cash flow generation. A relatively
underleveraged balance sheet and strong cash generation allow for greater financial
flexibility, including share buybacks, higher dividend payouts, opportunistic
acquisitions, and new product capital expenditures.
 Increasing market share. Relative to the competition, branded companies usually

build or sustain market share at a higher rate.
 Active new product development. New products and the refinement of existing ones
are critical to sustaining the growth and vitality of the brand.
 Stable to increasing margins. Great branded companies should improve margins

either through pricing flexibility or increased operating leverage, and they tend to
show improving returns on capital.
 Shareholder-oriented management teams. Shareholder-oriented management is

often achieved through incentive-based compensation or significant stock ownership.
We favor companies with a high percentage of inside ownership and those companies
that base compensation (including stock option grants) of senior management on
meeting earnings goals.
What to ask company management

 What is your ideal business segment allocation among owned, managed, franchised,
and timeshare?
 What factors will influence the staying power of your family of brands? Are there
potential new brands under development?
 The frequent-guest program has to cost somebody more money given the added
benefits. Who is losing and where does the loss show up?
 What percentage of your properties are truly up to standard? Do you consider your
brands consistent across the entire portfolio? As a manager and/or owner, how do you
ensure the consistency of your product?
 What will capital expenditures be over the next few years and how do you measure
your returns on investment? For your franchised/managed properties, how do you
work with your owners to ensure they are investing the necessary capital?
 Cross-selling your family of brands is critical in an increasingly competitive

environment. What is the percentage of cross-selling across your portfolio and how do
you measure this?
 What percentage of your rooms is booked 12, 6, 3, and 1 month in advance?
 What is your plan for international expansion? What markets to do you see as most
attractive?
 One of the major drivers of lodging earnings is unit growth. What are the capital
requirements for expansion internationally? Are you finding that you have to put more
upfront capital into the Asian and European markets to get the management deals as
those markets develop further?
 What is your rationale for investing in new hotel mezzanine financing and sliver
equity? What are your investment parameters for these types of investments? What
are your off-balance-sheet exposures and off-balance-sheet guarantees?
 What has been the trend for independent hotels converting to your family of brands?
Do you actively approach independent hotel owners or do the independent hotel
owners approach you?
 How long is the typical management contract for each brand? What is the incentive fee
structure for you brands? Are there periods where parties can get out of the contract?
 What portion of cash flow is dedicated to capex, share buybacks, and debt reduction?
Will these proportions change going forward?
 What is your ideal leverage level?
 When evaluating acquisition opportunities, what do you look for with regard to
individual properties and whole companies?
 What is the composition of your customer mix (i.e., business versus leisure, group
versus free independent traveler (FIT), United States versus international)?
 How do you use the online travel agents (OTAs) as a distribution point?
 What markets do you see as attractive for growth?

Valuation
Key valuation metrics—EV/EBITDA and P/E ratios

 The enterprise-value-to-EBITDA (EV/EBITDA) ratio is the primary metric for
valuing lodging companies. Our primary metric to value lodging companies is
enterprise value-to-earnings before interest, taxes, depreciation, and amortization. The
EV/EBITDA ratio makes global comparisons easier as it accounts for the effects of
differing capital structures and ignores non-cash depreciation and amortization
expenses, which run high for most lodging companies (see Exhibits 87-88).
On an EV/EBITDA basis, hotel management companies (i.e., Choice, Marriott) have

historically traded at a premium to companies more levered to hotel ownership (i.e.,
Starwood). As they continue to evolve toward more management/franchise companies
with less exposure to ownership, we may see the valuation gap begin to close.
 The price-to-earnings (P/E) ratio is used less often, but as the majority of our
companies continue to reduce their real estate exposure, we believe that price-to-
earnings may come more into focus. We use absolute and relative price-to-earnings
ratios to value lodging stocks (see Exhibits 89-90).
Exhibit 87: Forward EV/EBITDA: C-Corps Exhibit 88: Forward EV/EBITDA: REITs
2002 – February 2012 2002 – February 2012
18.0x 20.0x
18.0x
16.0x
16.0x
14.0x
14.0x
12.0x
12.0x
10.0x
10.0x
8.0x
8.0x
6.0x
6.0x
4.0x
4.0x
2.0x 2.0x
0.0x 0.0x
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Forward EV/EBITDA (C-Corps) Long Term Average(C-Corps) Forward EV/EBITDA (REITs) Long Term Avg (REITs)
Source: Company data, FactSet, Goldman Sachs Research. Source: Company data, FactSet, Goldman Sachs Research.

Exhibit 89: Forward P/E: C-Corps Exhibit 90: Forward P/FFO : REITs
2000 – February 2012 2003 – February 2012
60.0x 30.0x
50.0x 25.0x
40.0x 20.0x
30.0x
15.0x
20.0x
10.0x
10.0x
5.0x
0.0x
Jan-00
Sep-00
Jan-01
Sep-01
Jan-02
Sep-02
Jan-03
Sep-03
Jan-04
Sep-04
Jan-05
Sep-05
Jan-06
Sep-06
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09
Sep-09
Jan-10
Sep-10
Jan-11
Sep-11
Jan-12
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
May-11
0.0x
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Price/FFO (REITs) Long term average

Forward P/E (C-Corps) Long term average (C-Corps)
Source: Company data, FactSet, Goldman Sachs Research. Source: Company data, FactSet, Goldman Sachs Research.
What drives lodging stocks?

We do not believe that valuation in and of itself should be the ultimate driver of an
investment recommendation. Instead, sustainability of earnings growth should be the main
driver for lodging performance. We ultimately believe that hotel stocks trade as a group
based on sector supply/demand dynamics, but the companies with the strongest brand and
development opportunities lead the group.
Investors will pay the most for top-line growth, giving the greatest value to same-store or
RevPAR growth (revenue per available room), followed closely by unit growth. Margin
expansion initiatives are also highly valued, followed by growth by acquisition, share
buyback, and debt paydown, in that order (see Exhibit 91).
Exhibit 91: What investors pay for
Lowest
Debt Paydown/ Share Repurchase

Investor Credit for Growth
Acquisitions
Margin Expansion
Organic Growth
Highest

Historical price performance analysis

Lodging shares are typically viewed as growth stocks given their high unit growth and
brand expansion potential. With that said, lodging stocks do have a cyclical component as
shares react to the rise and fall of the economy.
Looking at the past roughly 25 years of hotel data and the performance of our Goldman
Sachs Lodging Index (GSLI), we have found that lodging stocks have largely perform in
accordance with the spread between supply and demand growth. Over the past 24 years,
demand growth has outpaced supply growth 13 times (see Exhibits 92-94).
Exhibit 92: Demand minus supply growth

basis point difference
600
400
200
(200)
(400)
(600)
(800)
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Exhibit 93: GS Lodging Index annual percentage change
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
GSLI Annual Percentage Change
Source: Goldman Sachs Research, FactSet.

Exhibit 94: Goldman Sachs Lodging Index
873
1000 ANNUAL PRICE PERFORMANCE
% S&P % Relative
GSLI Change 500 Change GSLI/S&P 500
900 Jan-11 908 -0.9% 1286 2.3% -3.1%
Feb-11 921 1.4% 1327 3.2% -1.8%
Mar-11 876 -4.8% 1326 -0.1% -4.7%
Apr-11 901 2.8% 1360 2.6% 0.2%
800 May-11 906 0.5% 1345 -1.1% 1.6%
Jun-11 852 -5.9% 1321 -1.8% -4.1%
Jul-11 814 -4.5% 1292 -2.1% -2.3%
Aug-11 690 -15.1% 1219 -5.7% -9.5%
700 Sep-11 625 -9.5% 1131 -7.2% -2.3%
Oct-11 770 23.1% 1253 10.8% 12.4%
Nov-11 753 -2.2% 1247 -0.5% -1.7%
600 Dec-11 773 2.7% 1258 0.9% 1.9%
Jan-12 866 12.0% 1312 4.4% 7.7%
2011 YTD 873 -4.7% 1366 8.6% -13.3%
500
400
817
300
200
Goldman Sachs Lodging Index

100 S&P 500 Perf. Since 1984
0
Mar-90
Mar-97
Mar-04
Mar-11
Aug-89
Oct-90
May-91
Aug-96
Oct-97
May-98
Aug-03
Oct-04
May-05
Aug-10
Oct-11
Dec-84
Sep-86
Dec-91
Sep-93
Dec-98
Sep-00
Dec-05
Sep-07
Jul-85
Apr-87
Jan-89
Jul-92
Apr-94
Jan-96
Jul-99
Apr-01
Jan-03
Jul-06
Apr-08
Jan-10
Nov-87
Nov-94
Nov-01
Nov-08
Feb-86
Jun-88
Feb-93
Jun-95
Feb-00
Jun-02
Feb-07
Jun-09
Source: Goldman Sachs Research, FactSet.

Key earnings drivers

The key earnings drivers for lodging companies include unit growth, international
brand extension and expansion opportunities, and supply/demand relationships. Also
enhancing growth are same-store sales metrics such as increases in average daily
rates and occupancy.
 Unit growth. New unit development is the ultimate driver of earnings.
 International brand extension and expansion opportunities. With only 25%-30% of
the European lodging market branded and many markets outside the United States
underpenetrated, there is substantial opportunity for US companies to expand abroad.
 Supply/demand relationships. Spread between industry supply and demand growth

is closely monitored. Historically, RevPAR growth accelerates when demand growth
outpaces supply growth.
 RevPAR growth. Revenue per available room measures the average daily room rate
times the average occupancy rate.
 Average room rate. Room rate increases are highly profitable, more so than
occupancy gains.
 Room occupancy. Room occupancy levels are a prime determinant of hotel

productivity. When occupancy levels are abnormally high, it may mean that rates are
too low.
 Effective cash flow deployment. Cash flow from operations that is used for low
internal rate of return (IRR) projects, such as maintenance and programs that have not
been carefully evaluated, ultimately lower earnings. Additional property-level
amenities such as spas and workout facilities, however, add to earnings.
 Degree of operating leverage. Higher levels of operating leverage exacerbate the

effect of a slowdown on operating profits given slowing top-line revenues on a
relatively high fixed expense structure. However, in robust times the high operating
leverage accelerates profits as revenues increase and costs remain relatively fixed.
 Favorable labor costs. Labor is currently the highest expense for hoteliers.
 Balance sheet leverage. Owners of lodging assets are generally highly levered.
Changes in interest rates can have a significant impact on EPS to the upside and
downside.

Economic and demand indicators

 Gross domestic product (GDP). Lodging is an economically sensitive sector, with
lodging demand correlated to GDP.
 Consumer price index (CPI). We compare room rate increases with overall inflation
growth to measure pricing trends.
 After-tax corporate profits. Corporate profits are another important economic

indicator for hotels and, according to Marriott management, are one of the best
leading indicators of future hotel demand.
 Supply and demand. Supply and demand comparisons alert us to secular imbalances.
 Convention attendance statistics. Conferences and large conventions have been a
significant driver of visitation and mid-week occupancy for the large city-centered
hotels. Large convention cities include Las Vegas, New York, Orlando, San Francisco,
Chicago, and New Orleans.

Analyzing lodging performance

RevPAR is widely When analyzing lodging performance, we look at three variables: average daily rate
used as the key (ADR), occupancy (percentage of rooms rented over total rooms available), and
lodging metric. revenue per available room (RevPAR), which is calculated by multiplying ADR times
occupancy.
We look at RevPAR to analyze lodging performance

RevPAR is calculated by multiplying ADR by occupancy and is widely regarded as the best
metric by which to analyze lodging performance. Balancing ADRs and occupancies at the
hotel level is difficult. Typically when hotel rates rise, occupancies fall and vice versa. The
problem that hoteliers face is determining the right combination of rate and occupancy to
maximize revenues at the property level. Years of hotel data have been compiled and
complex yield management systems have been developed to help hotel companies do just
that.
Looking at either Exhibit 95 details how revenues can increase from the $70 per available room level.
occupancy or ADRs Hoteliers can achieve a higher $72 per available room by either raising or lowering rates.
individually can be Depending on hotel demand, the changes in rates will have a varying impact on hotel
misleading when
occupancy. More important to note is that raising hotel rates does not always result in
analyzing the impact
on overall revenues. higher revenues. Higher rates may in fact keep on-the-margin consumers at home,
resulting in lower occupancies and lower overall revenues.
Exhibit 95: Raising rates does not always result in higher revenues at the property level
analysis of changes in occupancy and ADRs on RevPAR
Average daily
Occupancy rate (ADR) RevPAR
Lower occupancy at various rates 60% $120.00 $72.00
60% $110.00 $66.00 Achieve same

revenue per
Base occupancy and rate 70% $100.00 $70.00 available room
Higher occupancy at various rates 80% $90.00 $72.00
80% $80.00 $64.00
Source: Goldman Sachs Research estimates.
We look at rates and occupancies individually to analyze hotel

profits
When analyzing revenue at the property level, we use RevPAR, but when analyzing the
impact of these changes on the profit line we look more closely at RevPAR’s components.
At the profit level, it does matter how RevPAR increases are achieved. Hoteliers achieve
higher profits through increases in rates rather than increases in occupancies. The reason
is that increases in rates are not accompanied by incremental costs. Increases in
occupancies, however, are typically accompanied by higher costs as hotels need people to
clean the rooms and serve the customers. Currently, the US lodging industry is near
historical occupancy highs, and we are seeing a strong recovery in rates. With improving
rates and cost at its lowest levels, we expect margins to improve through 2012 and 2013.

History of RevPAR
 Over the past 44 years (1968-2011), RevPAR growth has averaged 5.5% (see Exhibit 96).
Exhibit 96: Annual RevPAR growth has been negative only five times over last 42 years
25.0%
20.0%
15.0%
10.0%
% change
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Appendix I: Industry terminology

Average daily rate (ADR): Average daily rate achieved for domestic hotels.
Average weekly rate (AWR): Average weekly rate achieved for extended-stay properties.
Central reservation system (CRS): Database that compiles all property pricing and
availability information for individual hotel companies.
Chain scale: Classifications of hotels into segments that are based primarily on the actual,
system-wide average room rates of the major chains. Independent hotels are included in a
separate category. The segments are Luxury, Upper Upscale, Upscale, Midscale with F&B,
Midscale without F&B, and Economy.
Franchise contracts: Companies whose franchise typically derives its revenues through a
percentage of room revenues. This percentage is typically higher than a base fee
percentage for management contracts as the hotel companies do not benefit from
incentive fees.
Free independent traveler (FIT): Free independent travelers are consumers not tied to
business travel, convention, or group business. These consumers are typically leisure-
oriented.
Funds from operations (FFO): An industry-wide standard for measuring operating

performance for lodging REITs; calculated as net income according to GAAP, plus real
estate depreciation, any extraordinary charges, and any repayments of principal on debt
balances.
Global distribution system (GDS) (Amadeus, SABRE, Galileo, Worldspan): Electronic

network used by agents to book hotel, airline, and car reservations.
Location segment: Classifications dictated by physical location of the hotel.

 Urban—Hotels located in the Central Business District (CBD), usually the downtown
area of large metropolitan markets (e.g., Atlanta, Boston, New York).
 Suburban—Hotels located in the suburban areas of metropolitan markets (e.g., College
Park or Marietta, Georgia, near Atlanta).
 Highway—Hotels located on an interstate or other major road or in a small town or city
(e.g., Evergreen, Alabama, or Colorado City, Texas).
 Airport—Hotels located within five miles (usually) of a major municipal airport.
 Resort—Hotels located within a market that attracts mostly leisure travelers such as
Orlando, Florida, or Lake Tahoe, Nevada.
Management contracts: Companies that specialize in management contracts derive fees
for managing the day-to-day operations for third-party owners. Management companies
derive fees in three ways: (1) base fees usually taken as a percentage of overall revenues;
(2) additional fees for services rendered for pre-opening development, purchasing,
marketing, reservations, and advertising for the hotel owner; and (3) incentive fees that
serve as an additional bonus for increased performance at the hotel profit level. Incentive
fees are typically based on a percentage of overall profits and are usually only paid if a
certain threshold level of profits is achieved.
Occupancy rates: The percentage of rooms filled divided by the total number of rooms
available.
Price/FFO: A valuation ratio defined as price divided by funds from operations. This
multiple is used to value REITs instead of the more common P/E approach used in equity
analysis, owing to lodging REITs’ large depreciation expenses.
RevPAR: Revenue per available room measures the occupancy times the average daily rate.

Exhibit 97: Lodging: 12-month ratings, price targets, and risks

Company Ticker Rating Price on Price Target Methodology Risks
4/10/12 (12-months)
Lodging
Choice Hotels CHH Neutral $36.43 $39.50 1/3 DCF & 2/3 2013E EV/EBITDA Upside risk: Mid-scale and economy RevPAR better than expected; Downside risk: Weaker than expected Midscale and economy RevPAR.
Gaylord Entertainment GET Neutral $29.20 $29.50 1/3 DCF & 2/3 2013E EV/EBITDA Upside risk: Better-than-expected convention business; Downside risk: Decline in business travel.
Hyatt Hotels Corporation H Neutral $39.53 $47.50 1/3 DCF & 2/3 2013E EV/EBITDA Slower than expected economic growth
Interval Leisure IILG Neutral $17.16 $17.00 1/3 DCF & 2/3 2013E EV/EBITDA Upside risk: Better than expected growth in new membership base; Downside risk: Lower than expected Hawaii RevPAR; timeshare activity.
InterContinental Hotels Group PLC IHG.L Buy 1,415.00p 1,725.00p 1/3 DCF & 2/3 2013E EV/EBITDA Downside risk: weaker than forecast RevPAR growth and lower system growth than current forecast
Marriott International MAR Buy $36.47 $42.00 1/3 DCF & 2/3 2013E EV/EBITDA Downside risk: Slower-than-expected recovery or inability to control expense growth as revenue increases.
Downside Risks: Not being able to exit the Luxury and Europe businesses as quickly as expected or that consumer confidence falls. There is
Marriott Vacations Worldwide VAC Neutral $27.79 $29.50 2013E EV/EBITDA
also investor base risk as MAR investors may not be attracted to VAC. Upside Risks: ability to sell excess land and faster margin improvement.
Orient-Express Hotels Ltd. OEH Neutral $9.75 $10.50 1/3 DCF & 2/3 2013E EV/EBITDA Upside risk: Faster-than-expected reduction in debt levels. Downside risk: Disappointing performance in international markets.
Starwood Hotels & Resorts HOT Buy $53.19 $66.00 1/3 DCF & 2/3 2013E EV/EBITDA Lower - than - expected RevPAR recovery.
Wyndham Worldwide WYN Buy $44.81 $55.00 SOTP analysis Downside risk: Worse - than - expected timeshare results
Lodging REITs
Diamond Rock Hospitality DRH Neutral $9.68 $10.50 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Upside risk: Better growth; Downside risk: Large capital expenditure on one hotel.
Felcor Lodging Trust FCH Neutral $4.00 $3.85 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Upside risk: Sooner than expected hotel sales. Downside risk: Inability to sell hotels.
LaSalle Hotel Properties LHO Buy $26.53 $31.50 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA High concentration Washington D.C. and a slower economy.
RLJ Lodging Trust RLJ Neutral $17.65 $18.00 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Downside Rsk: slowdown in the economy, signs of accelerating supply growth, poor use of capital; Upside risk: faster than expected improvement in rate growth
Host Hotels and Resorts, Inc. HST Buy $15.57 $18.75 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Slowdown in the economy and business travel
Sunstone Hotel Investors SHO Neutral $9.27 $10.00 1/3 DCF, 1/3 P/FFO, 2/3 2013E EV/EBITDA Upside risk: Faster - than - expected improvement in business travel; Downside risk: Slower than expected improvement in business travel and
Note: Marriott International is a CL-Buy.
Source: Goldman Sachs Investment Research, FactSet.

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April 10, 2012

The essentials of lodging investing

The Goldman Sachs Group, Inc. Global Investment Research

Overview: What’s new in this issue 3

Goldman Sachs Global Investment Research 2

Overview: What’s new in this issue

From the analyst’s desk

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

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

Goldman Sachs Global Investment Research 3

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

Steady should not be viewed as uninspiring

Lodging Index US Supply Growth

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

Goldman Sachs Global Investment Research 4

Exhibit 2: Employment growth is outpacing supply growth

Goldman Sachs Global Investment Research 5

Percentage change (yoy)

Rooms Under Construction

200 5.0% 0.2

150 4.0% 100000 0

Booked in 2009, 12%

Booked in 2010, 32%

Source: Smith Travel Research. Source: Company Data.

Goldman Sachs Global Investment Research 6

What could go right?

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

Millions of People Arriving % change YoY

Goldman Sachs Global Investment Research 7

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

Goldman Sachs Global Investment Research 8

Goldman Sachs Global Investment Research 9

Capital allocation could become a bigger theme

Goldman Sachs Global Investment Research 10

Exhibit 11: Consumer discretionary capital allocation

Source: Goldman Sachs Research estimates.

What could go wrong

Goldman Sachs Global Investment Research 11

Lower economic growth is the obvious other risk

Goldman Sachs Global Investment Research 12

Lodging is an influential economic force

Highly segmented lodging product controlled by a handful of

Hilton Hotel Corp. 492,897 10.1% 11

Total Rooms from Top Nine Companies 2,785,848 57% 91

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

Hotels derive revenues through a variety of means

Goldman Sachs Global Investment Research 13

Size, segmentation, and history of the lodging industry

Size of the industry

Source: Smith Travel Research.

Goldman Sachs Global Investment Research 14

Source: Company data and Goldman Sachs Research.

RevPAR is driven by economic forces—most important is

Goldman Sachs Global Investment Research 15

Exhibit 16: RevPAR growth is highly correlated to changes in employment

Change in Employment Yoy Change in RevPAR

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

Individual hotels are segmented into brands

Hotel operators are segmented into owner/operators, managers,

Goldman Sachs Global Investment Research 16

Goldman Sachs Global Investment Research 17

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

Per available Per occupied