Agenda. Introduction Grant Thornton Hotel Market overview Maximising asset value Hotel view from inside the business Debt model of the future

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2 Agenda Introduction Grant Thornton Hotel Market overview Maximising asset value Hotel view from inside the business Debt model of the future Adrian Richards Partner, Grant Thornton

3 About Grant Thornton and IHS Grant Thornton's Hotel experience Unique collaboration led by Grant Thornton Wide and knowledgeable skill base Extensive resource & experience Comprehensive 'one stop' solution

4 HOTEL MARKET OVERVIEW Current Performance David Bailey Deputy Managing Director, TRI Hospitality Consulting

5 TRI Hospitality Consulting Internationally recognised advisor to the hotel industry Highly experienced team with specialised knowledge Offices in London, Barcelona and Dubai Core services market appraisal due diligence planning acquisition operational studies development advisory services litigation support

6 Hot stats Unique capability Most comprehensive database of European hotel performance collected anywhere, comprising over 80 individual measures of hotel revenue generation, market statistics and operational costs 100 different brands across 70 countries covering the UK, Scandinavia, Southern/Western Europe, North Africa and Middle East Regions UK representation alone 120,000 bedrooms

7 Historic performance (occupancy) Recession UK Unemployment at 2m IRA bombs Iraq War Recession SARS Black Monday Gulf War 9/11 7/7 UK Recession

8 Historic performance (indexed ARR) Recession Gulf War 9/11 7/7 UK Recession Base index year 1989=100 Indexed against CPI Inflation

9 London RevPAR and GOPPAR MAT (2007/ /12) 120 Lehman Brothers collapse End of Recession? Elections Double Dip May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 RevPAR/GOPPAR ( ) GOPPAR MAT RevPAR MAT

10 Provinces RevPAR and GOPPAR MAT (2007/ /12) 60 Lehman Brothers collapse End of Recession? Elections Double Dip May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 RevPAR/GOPPAR ( ) GOPPAR MAT RevPAR MAT

11 London net average room rate % ARR - MAT May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 London Net_ARR London ARR

12 Provincial net average room rate % May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 ARR - MAT Provincial Net ARR Provincial ARR

13 London market performance Current YT Oct 2009 Current 0 RevPAR TrevPAR GOPPAR High Point Low Point Current Performance Current YT Oct 2009 Current YT Sep 2011 YT Oct 2009 Current

14 UK provincial market performance RevPAR TrevPAR GOPPAR High Point Low Point Current Performance YT May 2008 YT Apr 2010 Current YT May 2008 YT Apr 2010 Current YT May 2008 Current Current

15 RevPAR Performance Where are we? Aberdeen Glasgow Newcastle Liverpool Birmingham Strat. Avon Cardiff Southampton Edinburgh York Leeds Manchester Nottingham Bath Cambridge Oxford London Brighton Moving Annual Totals (May 2008 to May 2012) Current v Historic Peak Over 85% = Between 80 & 85% = Under 80% = Source:

16 GOPPAR Performance Where are we really? Aberdeen Edinburgh Glasgow Newcastle Liverpool Birmingham Strat. Avon Cardiff Southampton York Leeds Manchester Nottingham Cambridge Oxford London Bath Brighton Moving Annual Totals (May 2008 to May 2012) Current v Historic Peak Over 85% = Between 80 & 85% = Under 80% = Source:

17 Profit the key benchmark of performance London and UK provincial UK hotel markets 12 months to May 2012 v 2011 RevPAR TrevPAR GOPPAR London London UK Provinces UK Provinces % 4% 3% 2% 1% 0% (1%) (2%) (3%) (4%) (5%) RevPAR TrevPAR GOPPAR London 2012 v 2011 UK Provinces 2012 v 2011

18 Profit the key benchmark of performance Stronger/Resilient hotel markets 12 months to May 2012 v 2011 RevPAR TrevPAR GOPPAR Aberdeen Aberdeen Cambridge Cambridge York York % 14% 12% 10% 8% 6% 4% 2% 0% RevPAR TrevPAR GOPPAR Aberdeen 2012 v 2011 Cambridge 2012 v 2011 York 2012 v 2011

19 Profit the key benchmark of performance Weaker hotel markets 12 months to May 2012 v 2011 RevPAR TrevPAR GOPPAR Cardiff Cardiff Leeds Leeds Liverpool Liverpool Nottingham Nottingham Southampton Southampton % 0% (5%) (10%) (15%) (20%) RevPAR TrevPAR GOPPAR Cardiff 2012 v 2011 Leeds 2012 v 2011 Liverpool 2012 v 2011 Nottingham 2012 v 2011 Southampton 2012 v 2011

20 Conclusions 1 London trading remains strong, Olympics and Farnborough will ensure RevPAR, TRevPAR and GOPPAR growth for UK provincial hotel market is a varied picture, markets require micro-assessment to ascertain short, mid and long-term prospects. Capex, sales and marketing and other operating strategies difficult to plan/execute given the lack of visibility in the market and pressure on operating profit performance. London in 2013? Post-Olympics hangover? Impact on GOPPAR performance? Supply impact? What constitutes a strong/poor performing hotel? Correct benchmarking/research/analysis essential to understand full context of market and performance of a hotel asset.

21 Vision Hospitality Asset Management Securing optimum returns for the investor not the operator Clive Hillier, CEO

22 Vision Formed 2002 Independent hospitality asset manager Act for investors and lenders Circa 3 billion under asset management Approximately 150 hotels from Moscow to Lisbon, from Split to Edinburgh More than 350 years industry experience between the 25 strong professional team

23 Operational Outlook Provincial UK provincial TrevPar tracks GDP Flat TrevPar outlook Cost pressures mitigating but GOP still a challenge London Positive outlook but uncertain 2012

24 Provincial 2012 TrevPAR growth % change y/y (0.5) (1.0) Q1 Q2 Q3 Q4 FY Budget Actual Forecast

25 Provincial 2012 GOPPAR growth % change y/y (2.0) (4.0) (6.0) (8.0) Q1 Q2 Q3 Q4 FY Budget Actual Forecast

26 Cost pressure mitigation 2011 CPI was 4.2% and consensus forecast CPI for 2012 is 3.2% Major contributors to 2011 growth were: Housing / household services 1.0% Transport 0.9% Hotels / restaurants 0.5% F&B 0.5% CPI to March 2012 was 3.5%. Speculation around upside risk to 2012 CPI forecasts 2012 mitigators include public spending cuts, weak wage growth, high unemployment and continued global slowdown to weaken pressure on commodities

27 GOP outlook London Some growth Regional Flat with downside risk

28 Investment Outlook Strong international focus solely on London Absence of senior debt but mezzanine finance and pref equity appearing Wait and See period coming to an end?

29 Maximising Asset Value Opening routes to market Reducing commissionable business Driving sales effectiveness Optimising cost base Re negotiating agreements Prudent CAPEX plans Optimising hold periods

30 Vision s Participation in IHS Optimising Performance Condition Review and Strategic CAPEX plans Renegotiating agreements Step In management

31 Optimising Performance 800m purchasing leverage for operational supplies and services 150 hotels under asset management Macro and Micro analysis Immediate communication with Management Team Up to date review of performance v budget and the market

32 Condition Review and Strategic Capex Plans Competitive positioning Value added Capex plans not brand icons and ego boosting Micro analysis of value for money Programme implementation with minimum disruption Finding the funds

33 Re-negotiating Agreements Leases Management Agreements Franchise Agreements Supplier Agreements

34 Step In Management Direct Hotel Management With Franchise With Marketing Affiliations Long Term Solutions

35 The hotel view from inside the business Jas Dhooper Head of Hotels, Grant Thornton

36 Drivers of performance Operational performance drivers Product Management Revenue Service

37 Operational success factors Product Revenue Viable trading platform Service

38 Areas to watch out for Managers Are they managers? Yield Is it really understood? Social media Is it being maximised? TPIs Are you working with them or against them? How much support is coming from the brand?

39 Social Media - What is it? Facebook Twitter Google ITunes - Apple Android A way to communicate (and get to know you) fast

40 What works Incentive to upsell Interaction with the guests Get the basics right Communication top down Benchmarking

41 Key operational considerations Internal Management Product/brand External Viability General Manager Team structure - experience Incentives Use of cluster How effective is the labour force Using the brand Is the brand/product right for the facility Marketing visibility Central support Ability to flex pricing policies Capex maintenance Location Market pipeline External economic factors Finance - over-indebted - appropriate finance structure Complexity of fix

42 Competitor benchmarking Ahead Losing Ahead and losing Change in management New supply Lack of investment Change in pricing policy Behind and losing Lack of investment Poor Management Lack of Brand support New supply Ahead and gaining New hotel Correct branding positioning Good management team Continued investment Behind and gaining Has a new strategy been employed Has management changed Has investment been made in the product Has branding changed Has the market supply shrunk Gaining Behind

43 Operational profit improvement tools Strengths Best value hotel in location Good product F&B and comprehensive leisure facilities Overall strong demand for hotel market Sector demand No brand Brand Opportunities Untapped tour operators Untapped local market Market upturn Local demand driver set for upturn Weaknesses No sales direction No marketing (local + operators) Lack of management Slow pick up to date main demand driver Product investment No Brand Poor monitoring on build /product / market Threats Downward pressure on demand drivers Development Terrorism

44 Operational profit improvement tools Short term actions Appointment of a General Manager/Operations manager Focus on differentiating factors that add value for the guest Focus staff Business approach Investment in product Key focus - S&M /drive yield Top 20 clients (increase production) Visit local business Face to face meetings with tour operators (list of over100) Reservation/groups manager to manage inventory and selling strategy Target volume group business Medium term actions Focus sales team Marketing programme (local + operators) Incentive plans / upselling Slow pick up to date main demand driver Product investment Poor monitoring on build /product / market Immediate key revenue KPIs set From demand driver - Increase ARR by (impact k) Demand driver growth - Increase by x% (impact k) Key markets - Target X room nights (impact k) Local market - Target X room nights (impact k) Leisure -Target X room nights (impact k) Leisure others - Target X room (impact k)

45 Operational success factors Product Revenue Viable trading platform Service

46 Conclusions Operations 1 Benchmarking 2 Non financial indicators 3 Communication 4 Investment 5 Sales TPIs / Brands / Social Media

47 The debt model of the future Sarah Bell Turnaround & Strategic Solutions, Grant Thornton

48 Overview Lender considerations at what stage will growth move the market from amend, extend and pretend to mend, expand and realise potential Trends in the debt community Outlook

49 The current state of play The good Transactions, in terms of number continue to increase 2011/2012 Upper and luxury end offerings continue to drive transactions with yields for trophy assets at pre crisis levels The not so good This has not been without its over-leveraged victims What does this mean for debt? LTV remains at 50% - 60% Higher margins and arrangement fees Tighter controls Focus on debt serviceability

50 The trends 2013 will be characterised by continued introduction of stock More investors such as private equity, REITs, institutional funds and high net worth at Mezzanine levels Brands strategic acquisitions Debt providers "open for business" (on a selective basis) Development finance and asset repositioning likely to remain challenging Debt providers seeking to be more active are focusing on being sector specialists There is a shift from investing in high returns to investing in the industry (property asset to trading asset) Debt structures likely to include industry players at some level Big question - who is going to fund the under invested asset?

51 Certain key areas debt providers should engage with Owners Ownership documentation and brand proposition (franchise v management) Feasibility studies Competitor landscape Annual budget approval Working capital who funds? Capex who funds? Cost base

52 Internal benchmarking Ahead Losing Ahead and losing Change in management New supply Lack of investment Change in pricing policy Behind and losing Lack of investment Poor Management Lack of Brand support New supply Ahead and gaining New hotel Correct branding positioning Good management team Continued investment Behind and gaining Has a new strategy been employed Has management changed Has investment been made in the product Has branding changed Has the market supply shrunk Gaining Behind

53 There is more than one owner to consider... Revenue maximisation Profit enhancement Asset value Brand protection Owner investor Operator Brand owner Most important Selection of most appropriate operating model to suit asset owners' investment motivation Critical importance of governing agreements to manage conflicts Detailed terms of governing agreements can impact value

54 Amend and expand Ensure you engage, information is readily available Objective forecasts and KPIs can provide early warning Delay potentially leads to greater fix Timely actions to restore liquidity include: focus on performance improvement cash and working capital management revisit strategy and management team right size operations back to core? look for balance sheet quick wins renegotiation of credit terms sell, fix or close But how to choose the optimal path, consider, size of business, complexity of structure, business cycle

55 Profit improvement or turnaround A question of timing...? Profitability/ cash flow Profit Improvement 5 5 Business on track Plan Actual 0 1 Short-term underperformance 1 Time 2 2 Deteriorating performance/ stressed business 3 3 Significantly underperforming - distressed 4 4 Lost control 5 5 Business getting back on track Turnaround 6 6 Loss

56 Conclusions Debt market 1 Number of brands are seeking to build UK footprint 2 3 Major operators historically asset light are now considering opportunistic strategic purchases/alliance Impact of capex on debt structure, scope for mezzanine strip 4 5 Industry players, private equity, REITs and insurance funds returning to market Debt providers shifting to an industry investment as opposed to property play

57 How to engage with IHS Adrian Richards Partner, Grant Thornton

58 What owners, operators and lenders can get from IHS Criteria Commercial and strategic intelligence Geographic reach Our response Whether invested, investing or a lender to the sector, knowledge of specific markets, key statistics and competitor strategy will be vital. IHS has a unique offering which provides detailed analysis of market trends including demand, capacity and macro and micro economic factors which will influence future performance and value of particular assets As a network organisation all HIS participants have a capability in Europe, North America, EMEA and Asia Pacific to supplement the offering in the UK. Each jurisdiction is fully accredited and possesses hotel and leisure experience. The UK IHS team can draw on this local capability and knowledge on international assignments to ensure a seamless response is provided Transaction expertise International tax specialists Hands on operational and on going improvement Accounting services and back office support Assurance and risk management With the range of different operating and investment models in the sector IHS s knowledge of industry players and transaction structures is critical to the analysis of strategic options, while the team s execution skills and hands on experience can ensure effective implementation, whether through restructuring, refinancing or exit The complex nature of hotel acquisition structures is principally driven by local and international taxation considerations. Our recent work has involved a review of such structures and the associated actual and contingent liabilities relevant to change in control situations. The IHS team is equipped with international tax specialists who work alongside our restructuring teams to deliver solutions to the inevitable tax issues arising in corporate reorganisations We blend our varying expertise to deliver a full suite of performance improvement projects, provide support during merger integrations and carve outs as well as providing specific functional expertise within the sector and a strong track record of Asset Management One critical aspect of any change in hotel ownership is the resource allocation required to transition systems and back office functions to a common platform or modify systems to best practice in order that regular reliable output is produced on a consistent basis Statutory and regulatory compliance and risk assessment (whilst continuing to apply a commercial approach) are critical to any owner or lender particularly in situations where HMAs and AMAs may restrict the clarity of trading and cash flow data flowing to the key financial stakeholders. As well as specific experience of management structures and reporting, we have cross boarder teams to advise on critical and legal nuances pertinent to interested parties

59 Implementation support Stage 1: Current situation analysis Market Management Owner v operator Product Trading Capex Capital structure Value Stage 2: Assessment and options validation Tax structure New monies Lender position/ syndicate Market liquidity Solvency/ regulation Risk v reward Stage 3: Presentation of options (primary) Hold/ Resets Restructure Align risk/ reward Asset sale - full/piecemeal Debt sale

60 Contacts Adrian Richards M:+44 (0) T:+44 (0) F:+44 (0) E: Clive Hillier M:+44 (0) T:+44 (0) F:+44 (0) E: Jas Dhooper M:+44 (0) T: +44 (0) E: David Bailey T: +44 (0) F: +44 (0) E: Sarah Bell M:+44 (0) T:+44 (0) F:+44 (0) E:

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