HOTEL INVESTMENTS FOR DUMMIES ( AND LAWYERS) Hotel Investment

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1 HOTEL INVESTMENTS FOR DUMMIES ( AND LAWYERS) Understanding Hotel Investment & Valuation Methodologies and Proformas/Analysis

PRESENTERS David Parker Principal o f DP Consulting Graduate o f University o f Houston Fo rmerly w ith PKF Consulting Developer o f various fo rms o f real estate to include hotels and

S mith, Associate Directo r Investment & Po rtfolio Analysis, R L J Lodging Trust Involved w ith both hotel acquisitions and dispositions at R L J Lodging Trust, w hich o w ns 145 hotels in

2 PRESENTERS David Parker Principal o f DP Consulting Graduate o f University o f Houston Fo rmerly w ith PKF Consulting Developer o f various fo rms o f real estate to include hotels and residential Licensed Real Estate B ro ker Emily U. S mith, Associate Directo r Investment & Po rtfolio Analysis, R L J Lodging Trust Involved w ith both hotel acquisitions and dispositions at R L J Lodging Trust, w hich o w ns 145 hotels in 21 states and Washingto n, D.C. Previously worked on over 100 hotel appraisals, feasibility, and market studies at HVS N ew Yo rk Graduated f ro m the Master s Pro gram at the Conrad N. Hilto n College o f Hotel & Restaurant Management at the University o f Houston; awarded the co llege s Distinguished Yo ung Alumnus award in 2009

3 AGENDA 1. Major terms you should know to sound smart 2. Types of hotels 3. Real estate and hotel market trends 4. The owner-operator relationship 5. The role of the brands 6. Case study: valuing a proposed hotel in downtown Houston Supply and Demand Existing competition and new supply Demand generators by segment and seasonality Penetration index Financial Analysis and pro-forma creation Comp operating statements Line by line financial projections Valuation IRR on Equity Investment 7. Take Aways

4 TERMINOLOGY Essential Erudite Show Off 1. Available room nights 1. Going-in cap rate 1. Uniform System of Accounts 2. Occupied room nights 2. Terminal cap rate 2. Discounted cash flow analysis (DCF) 3. Rooms sold 3. Penetration rate 3. Internal rate of return (IRR) 4. Occupancy rate 4. Gross rooms revenue (GRR) 4. Net present value (NPV) 5. Average daily rate (ADR) 5. Departmental expenses 5. Rooms revenue multiplier (RRM) 6. Revenue per available room (RevPAR) 7. Smith Travel Research (STR) / STAR Report 6. Undistributed expenses 6. EBITDA 7. Fixed expenses 7. PAR 8. Pro-forma 8. Gross operating profit (house profit) 8. POR 9. Cap rate 10. Net operating income (NOI) 9. Unaccommodated demand

TYPES OF HOTELS Primary distinction: full

Extended stay limited service Branded vs.

5 TYPES OF HOTELS Primary distinction: full service vs. limited service vs. resort All about the food and beverage Select service the annoying (but profitable) hybrid Extended stay limited service Branded vs. independent BONUS: select vs. limited vs. focused service.?! See Exhibit 1

6 THE HOTEL MARKET CYCLE Equilibrium ADR Rapid Development Lodging Decline, Leads Other Sectors Development Picks Up Rapid Development U.S. is Here Long Run Occupancy Occupancy Declines, ADR Follows ADR and Margins Recover Development Slows Occupancy Recovers Development at Minimum Levels Lodging Recovery Lags Other Sectors

7 UNITED STATES: 3 RD QUARTER 2012 PERFORMANCE STATS = Below/Above Long Run Average Long Term Average F 2014F 2015F 2016F Supply 2.0% 2.4% 2.8% 1.7% 0.5% 0.5% 0.8% 1.4% 1.6% 2.1% Demand 1.8% -2.5% -6.2% 7.2% 4.7% 3.0% 1.8% 3.5% 2.7% 1.5% Occupancy 61.9% 59.8% 54.5% 57.5% 59.9% 61.5% 62.1% 63.4% 64.1% 63.7% ADR 2.9% 3.0% -8.7% 0.0% 3.8% 4.2% 5.0% 6.2% 6.1% 4.5% RevPAR 2.7% -2.0% -16.7% 5.4% 8.2% 6.8% 6.0% 8.4% 7.3% 3.9% Source: PKF Hospitality Research Hotel Horizons Report, Smith Travel Research 7

8 2012 REVPAR: BEST / WORST PERFORMING MARKETS Source: STR

9 ADR $ CHANGES FROM PRIOR PEAK DECEMBER 2012 Source: STR

10 THE OWNER-OPERATOR RELATIONSHIP Owner Owner- Operator 3 rd Party Management Franchisor- Operator

11 THE ROLE OF THE BRANDS PROS Create product consistency Reservation System Affinity program built-in customer base Have lower CAP rates and therefore higher Values Shorter time on Market CONS Fees, fees and more fees Royalty Marketing (plus extra for affinity/loyalty guests) PMS/Technical Inflexible renovation schedule; often changing brand initiatives (PIPs) Termination / Renewal

12 CASE STUDY PROPOSED 200-ROOM HOTEL IN DOWNTOWN HOUSTON, TEXAS

13 CASE STUDY: SUPPLY ANALYSIS A good project should satisfy a niche in the Market. Our hypothetical study looks at Downtown Houston for a Lifestyle Brand. We chose our comp set from the existing hotel inventory. There are 16 hotels with 5,085 rooms in Downtown Houston 7 hotels with 1,659 rooms would be competitive with a Lifestyle Brand A prudent analysis looks into new supply and conversions coming into the market Inn at the Ballpark becoming a Westin JW Marriott 300 Rooms ,000-room Marriott Marquis Convention HQ Hotel 2017 See Exhibits 2, 3

14 CASE STUDY: TREND ANALYSIS Results of Supply Analysis: One addition to competitive supply over last five years Embassy Suites with 262 Rooms Increased supply by 19% Compound Average over 6 years is 2.9%. Results from Demand analysis: Room Nights Sold increased from 334,500 in 2006 to 417,700 sold in Demand grew at 3.8% per year. Occupancy increased from 65.6% in 2006 to 69.0% in Refer to Exhibits 2-6 for detailed Supply & Demand analysis

15 CASE STUDY: SUPPLY AND DEMAND ANALYSIS SUPPLY AND DEMAND ANALYSIS Houston Upper-Priced PKF Forecast - Hotel Horizons Occ Growth 5.3% 3.5% 1.1% 1.6% 0.2% Hurricane Ike ADR Percent Growth 5.0% 6.7% 6.4% 5.8% 3.9% Sep-08 Supply Growth 1.6% 2.0% 1.5% 3.9% 5.7% Actual Actual Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast MARKET SUPPLY-KEYS Inventory Start 1,397 1,397 1,397 1,397 1,397 1,397 1,637 1,659 1,659 1,659 1,859 1,859 1,859 Added/Deleted Inventory Year End 1,397 1,397 1,397 1,397 1,397 1,637 1,659 1,659 1,659 1,859 1,859 1,859 1,859 % CHANGE 0.0% 0.0% 0.0% 0.0% 0.0% 17.2% 1.3% 0.0% 0.0% 12.1% 0.0% 0.0% 0.0% MARKET DEMAND Room Nights 334, , , , , , , , , , , , ,713 % CHANGE #REF! 0.8% 5.3% -10.1% 6.2% 11.8% 10.3% TOTAL MARKET Occupancy 65.6% 66.1% 69.6% 62.6% 66.4% 63.4% 69.0% 69.0% 69.0% 61.6% 61.6% 61.6% 61.6% % CHANGE #REF! 0.8% 5.3% -10.1% 6.2% -4.6% 8.9% 0.0% 0.0% -10.8% 0.0% 0.0% 0.0% Average Rate $ $ $ $ $ $ $ $ $ $ $ $ $ % CHANGE #REF! 5.4% 6.9% -9.3% 0.7% 7.8% 3.7% Revpar $85.62 $90.94 $ $83.45 $89.20 $91.72 $ $ $ $92.37 $92.37 $92.37 $92.37 % CHANGE #REF! 6.2% 12.6% -18.5% 6.9% 2.8% 12.8% 0.0% 0.0% -10.8% 0.0% 0.0% 0.0% Proposed 200-room Downtown Positioning Positioning Positioning Forecast Forecast Forecast Forecast Houston Hotel Occupancy 0.0% 0.0% 0.0% 0.0% MARKET PENETRATION Average Rate $ - $ - $ - $ - $ - $ - $ - MARKET PENETRATION 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Average Rate Growth Yield $0.00 $0.00 $0.00 $0.00 MARKET PENETRATION 0.0% 0.0% 0.0% 0.0% See Exhibit 4

16 CASE STUDY: DEMAND ANALYSIS What caused demand to increase? Will it increase further? Houston economy Major employers; changes to demand HESS Tower fully leased 845,000 SF BG Group Place 973,000 SF Exxon consolidating at its new campus by 2015 Convention calendar 2013 will be a banner year Changes to downtown Discovery Green Park; new soccer stadium; Houston Pavilions; light rail extension; increased residential development; etc. Demand appears likely to have further increases.

17 CASE STUDY: FUTURE ESTIMATED OCCUPANCY AND ADR Based on modest continued growth in demand, future market occupancy likely to remain in upper 60% s. Future increases to ADR will likely outpace inflation as market continues to recover. As a new project, subject will likely penetrate below market first year, but should stabilize at or above fair share overall. Helpful to start with a base year positioning for ADR i.e. what sort of rate would the hotel have if it were open today? Rare that a project penetrates above fair share first year.

18 CASE STUDY: COMPLETED MARKET SUPPLY AND DEMAND SUPPLY AND DEMAND ANALYSIS Houston Upper-Priced PKF Forecast Occ Growth 5.3% 3.5% 1.1% 1.6% 0.2% Hurricane Ike ADR Percent Growth 5.0% 6.7% 6.4% 5.8% 3.9% Sep-08 Supply Growth 1.6% 2.0% 1.5% 3.9% 5.7% Actual Actual Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast MARKET SUPPLY-KEYS Inventory Start 1,397 1,397 1,397 1,397 1,397 1,397 1,637 1,659 1,659 1,659 1,859 1,859 1,859 Added/Deleted Inventory Year End 1,397 1,397 1,397 1,397 1,397 1,637 1,659 1,659 1,659 1,859 1,859 1,859 1,859 % CHANGE 0.0% 0.0% 0.0% 0.0% 0.0% 17.2% 1.3% 0.0% 0.0% 12.1% 0.0% 0.0% 0.0% MARKET DEMAND Room Nights 334, , , , , , , , , , , , ,528 % CHANGE #REF! 0.8% 5.3% -10.1% 6.2% 11.8% 10.3% 2.0% -1.0% 6.0% 3.0% 0.0% 0.0% TOTAL MARKET Occupancy 65.6% 66.1% 69.6% 62.6% 66.4% 63.4% 69.0% 70.4% 69.7% 65.9% 67.9% 67.9% 67.9% % CHANGE #REF! 0.8% 5.3% -10.1% 6.2% -4.6% 8.9% 2.0% -1.0% -5.4% 3.0% 0.0% 0.0% Average Rate $ $ $ $ $ $ $ $ $ $ $ $ $ % CHANGE #REF! 5.4% 6.9% -9.3% 0.7% 7.8% 3.7% 6.5% 5.0% 4.0% 3.0% 3.0% 3.0% Revpar $85.62 $90.94 $ $83.45 $89.20 $91.72 $ $ $ $ $ $ $ % CHANGE #REF! 6.2% 12.6% -18.5% 6.9% 2.8% 12.8% 8.6% 4.0% -1.6% 6.1% 3.0% 3.0% Proposed 200-room Downtown Positioning Positioning Positioning Forecast Forecast Forecast Forecast Houston Hotel Occupancy 0.0% 0.0% 0.0% 0.0% MARKET PENETRATION Average Rate $ - $ - $ - $ - $ - $ - MARKET PENETRATION 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Average Rate Growth Yield $0.00 $0.00 $0.00 $0.00 MARKET PENETRATION 0.0% 0.0% 0.0% 0.0% See Exhibit 5

19 CASE STUDY: COMPLETED SUBJECT HOTEL SUPPLY AND DEMAND ANALYSIS SUPPLY AND DEMAND ANALYSIS Houston Upper-Priced PKF Forecast Occ Growth 5.3% 3.5% 1.1% 1.6% 0.2% Hurricane Ike ADR Percent Growth 5.0% 6.7% 6.4% 5.8% 3.9% Sep-08 Supply Growth 1.6% 2.0% 1.5% 3.9% 5.7% Actual Actual Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast MARKET SUPPLY-KEYS Inventory Start 1,397 1,397 1,397 1,397 1,397 1,397 1,637 1,659 1,659 1,659 1,859 1,859 1,859 Added/Deleted Inventory Year End 1,397 1,397 1,397 1,397 1,397 1,637 1,659 1,659 1,659 1,859 1,859 1,859 1,859 % CHANGE 0.0% 0.0% 0.0% 0.0% 0.0% 17.2% 1.3% 0.0% 0.0% 12.1% 0.0% 0.0% 0.0% MARKET DEMAND Room Nights 334, , , , , , , , , , , , ,528 % CHANGE #REF! 0.8% 5.3% -10.1% 6.2% 11.8% 10.3% 2.0% -1.0% 6.0% 3.0% 0.0% 0.0% TOTAL MARKET Occupancy 65.6% 66.1% 69.6% 62.6% 66.4% 63.4% 69.0% 70.4% 69.7% 65.9% 67.9% 67.9% 67.9% % CHANGE #REF! 0.8% 5.3% -10.1% 6.2% -4.6% 8.9% 2.0% -1.0% -5.4% 3.0% 0.0% 0.0% Average Rate $ $ $ $ $ $ $ $ $ $ $ $ $ % CHANGE #REF! 5.4% 6.9% -9.3% 0.7% 7.8% 3.7% 6.5% 5.0% 4.0% 3.0% 3.0% 3.0% Revpar $85.62 $90.94 $ $83.45 $89.20 $91.72 $ $ $ $ $ $ $ % CHANGE #REF! 6.2% 12.6% -18.5% 6.9% 2.8% 12.8% 8.6% 4.0% -1.6% 6.1% 3.0% 3.0% Proposed aloft Downtown Positioning Positioning Positioning Forecast Forecast Forecast Forecast Houston Occupancy 62.6% 66.5% 67.9% 67.9% MARKET PENETRATION 95.0% 98.0% 100.0% 100.0% Average Rate $ $ $ $ $ $ $ MARKET PENETRATION 103.3% 103.3% 103.3% 105.3% 106.3% 106.3% 106.3% Average Rate Growth 6.5% 5.0% 6.0% 4.0% 3.0% 3.0% Yield $ $ $ $ MARKET PENETRATION 100.0% 104.2% 106.3% 106.3% RevPAR % Change #DIV/0! #DIV/0! #DIV/0! #DIV/0! 10.5% 5.1% 3.0% See Exhibit 6

20 CASE STUDY: FINANCIAL ANALYSIS The Supply & Demand Analysis produces Occupancy and ADR (Top Line Revenue) The rest of the Pro-forma is based on Units of Comparison found in Comp Statements POR Per Occupied Room PAR Per Available Room Can be other Managed Properties Can be published aggregates STR Host Report PKF Trends in the USA See Exhibit 7

21 CASE STUDY: FINANCIAL ANALYSIS Step 1: Prepare Stabilized year pro-forma as if subject were operating today See Exhibit 8 and 9 Step 2: 10-year pro-forma Assumes startup inefficiencies See Exhibit 10

22 CASE STUDY: COMPARABLE OPERATING STATEMENTS Revenues Year aloft, TX Courtyard, TX Hyatt Place, NY - TTM May 2012 Rooms Available Daily Rooms Available Annually 63,875 73,200 43,800 47, ,455 Annual Rooms Occupied 47,500 49,000 37,000 38, ,700 Occupancy Percentage 74.36% 66.94% 84.47% 80.29% 75.16% Average Daily Rate $ $ $ $ $0.00 Revenue Per Available Room $ $ $ $ $0.00 Departmental Expenses $ % PAR POR $ % PAR POR $ % PAR POR $ % PAR POR $ % PAR POR Rooms $ 7,000, % $ 40,000 $ $ 7,750, % $ 38,750 $ $ 5,200, % $ 43,333 $ $ 5,030, % $ 38,692 $ $ 24,980, % $ 39,968 $ Food & Beverage 650, % 3, , % 2, , % 1, , % 3, ,940, % 3, Telephone 5, % , % % - - 1, % , % Parking 310, % 1, , % 1, % % , % Other 75, % , % , % , % , % Total $ 8,040, % $ 45,943 $ $ 8,730, % $ 43,650 $ $ 5,487, % $ 45,725 $ $ 5,602, % $ 43,093 $ $ 27,859, % $ 44,575 $ Rooms $ 1,100, % $ 6,286 $ $ 1,150, % $ 5,750 $ $ 1,000, % $ 8,333 $ $ 822, % $ 6,323 $ $ 4,072, % $ 6,515 $ Food & Beverage 360, % 2, , % 2, , % , % 3, ,343, % 2, Telephone 30, % , % #DIV/0! , % , % Parking 160, % , % #DIV/0! #DIV/0! , % Other 30, % , % , % , % , % Total $ 1,680, % $ 9,600 $ $ 1,784, % $ 8,923 $ $ 1,157, % $ 9,642 $ $ 1,313, % $ 10,106 $ $ 5,935, % $ 9,496 $ Gross Operating Income $ 6,360, % $ 36,343 $ $ 6,945, % $ 34,728 $ $ 4,330, % $ 36,083 $ $ 4,288, % $ 32,987 $ $ 21,923, % $ 35,078 $ Undistributed Expenses Administration & General $ 625, % $ 3,571 $ $ 710, % $ 3,550 $ $ 470, % $ 3,917 $ $ 451, % $ 3,469 $ $ 2,256, % $ 3,610 $ Marketing 500, % 2, , % 3, , % 2, , % 2, ,629, % 2, Management Fees 241, % 1, , % 1, , % 1, , % 1, , % 1, Franchise Fees (% rms) 665, % 3, , % 2, , % 3, , % 3, ,146, % 3, Property Operations & Maintenance 250, % 1, , % 1, , % 1, , % 1, , % 1, Energy 300, % 1, , % 2, , % 2, , % 1, ,128, % 1, Total $ 2,581, % $ 14,750 $ $ 2,858, % $ 14,291 $ $ 1,721, % $ 14,347 $ $ 1,838, % $ 14,138 $ $ 8,998, % $ 14,398 $ Gross Operating Profit $ 3,778, % $ 21,593 $ $ 4,087, % $ 20,437 $ $ 2,608, % $ 21,737 $ $ 2,450, % $ 18,849 $ $ 12,924, % $ 20,680 $ Fixed Charges Insurance $ 70, % $ 400 $ 1.47 $ 60, % $ 300 $ 1.22 $ 50, % $ 417 $ 1.35 $ 21, % $ 165 $ 0.56 $ 201, % $ 322 $ 1.17 Property Taxes 500, % 2, , % 2, , % 1, , % 1, ,396, % 2, Reserve for Replacement 321, % 1, , % 2, , % 1, , % 1, ,201, % 1, Lease Payments 7, % , % % % , % Total 899, % $ 5,138 $ ,054, % $ 5,273 $ , % $ 3,454 $ , % $ 3,435 $ ,814, % $ 4,503 $ Net Operating Income $ 2,879, % $ 16,455 $ $ 3,032, % $ 15,164 $ $ 2,193, % $ 18,283 $ $ 2,003, % $ 15,414 $ $ 10,110, % $ 16,176 $ See Exhibit 7 Hilton Garden Inn, UT - TTM Mar 2012 COMP AVERAGE

23 CASE STUDY: STABILIZED YEAR PROJECTIONS Revenues $ % PAR POR Year - Dollars 2012 Rooms 8,414, % $42,075 $ Rooms 200 Food & Beverage % $0 Rooms Available 73,000 Telephone % $0 Room Nights 49,567 Parking % $0 Occupancy % 67.90% Other % $0 Deflated Stabilized ADR $ Total 8,414, % $42,075 $ RevPAR $ Departmental Expenses Rooms % $0 Food & Beverage 0 $0 $0.00 Telephone 0 $0 $0.00 Parking 0 $0 $0.00 Other 0 $0 $0.00 Total % $0 $0.00 GOI 8,414, % $42,075 $ Undistributed Expenses Administration & General % $0.00 Marketing % $0.00 Management Fees 0 $0 $0.00 Franchise Fees (% rms) 0 $0 $0.00 Property Operations & Maintenance % $0.00 Energy % $0.00 Total % $0 $0.00 GOP 8,414, % $42,075 $ Fixed Charges Insurance 0.00% $0 $0.00 Property Taxes 0.00% $0 $0.00 Reserve for Replacement 0 $0 $0.00 Lease Payments % $0 $0.00 Total % $0 $0.00 NOI Before Incentive 8,414, % $42,075 $ See Exhibit 8

24 CASE STUDY: COMPLETED STABILIZED YEAR PROJECTIONS Revenues $ % PAR POR Year - Dollars 2012 Rooms 8,414, % $42,075 $ Rooms 200 Food & Beverage 693, % $3,470 $14.00 Rooms Available 73,000 Telephone 2, % $12 $0.05 Room Nights 49,567 Parking 322, % $1,611 $6.50 Occupancy % 67.90% Other 86, % $434 $1.75 Deflated Stabilized ADR $ Total 9,520, % $47,602 $ RevPAR $ Departmental Expenses Rooms 1,263, % $6,320 $25.50 Food & Beverage 485, % $2,429 $9.80 Telephone 24, % $124 $0.50 Parking 164, % $822 $3.32 Other 34, % $173 $0.70 Total 1,973, % $9,868 $39.82 GOI 7,546, % $37,734 $ Undistributed Expenses Administration & General 720, % $3,600 $14.53 Marketing 520, % $2,600 $10.49 Management Fees 285, % $1,428 $5.76 Franchise Fees (% rms) 799, % $3,997 $16.13 Property Operations & Maintenance 300, % $1,500 $6.05 Energy 350, % $1,750 $7.06 Total 2,975, % $14,875 $60.02 GOP 4,571, % $22,859 $92.23 Fixed Charges Insurance 80, % $400 $1.61 Property Taxes 575, % $2,875 $11.60 Reserve for Replacement 380, % $1,904 $7.68 Lease Payments 7, % $38 $0.15 Total 1,043, % $5,217 $21.05 NOI Before Incentive 3,528, % $17,642 $71.19 See Exhibit 9

25 CASE STUDY: PRO-FORMA Proposed aloft Houston Downtown Year Rooms Available Daily Rooms Available Annually 73,000 73,000 73,000 73,000 73,000 73,000 Annual Rooms Occupied 45,698 48,552 49,545 49,545 49,545 49,545 Occupancy Percentage 62.6% 66.5% 67.9% 67.9% 67.9% 67.9% Average Daily Rate $ $ $ $ $ $ Revenue Per Available Room $ $ $ $ $ $ Revenues Departmental Expenses $ % $ % $ % $ % $ % $ % Rooms $ 8,396, % $ 9,277, % $ 9,751, % $ 10,043, % $ 10,344, % $ 10,655, % Food & Beverage 699, % 765, % 804, % 828, % 853, % 878, % Telephone 2, % 2, % 2, % 2, % 3, % 3, % Parking 324, % 355, % 373, % 384, % 396, % 407, % Other 87, % 95, % 100, % 103, % 106, % 109, % Total $ 9,509, % $ 10,495, % $ 11,031, % $ 11,362, % $ 11,703, % $ 12,054, % Rooms $ 1,273, % $ 1,393, % $ 1,464, % $ 1,508, % $ 1,553, % $ 1,600, % Food & Beverage 489, % 535, % 562, % 579, % 597, % 615, % Telephone 24, % 27, % 28, % 29, % 30, % 31, % Parking 165, % 181, % 190, % 196, % 201, % 208, % Other 34, % 38, % 40, % 41, % 42, % 43, % Total $ 1,988, % $ 2,175, % $ 2,286, % $ 2,355, % $ 2,426, % $ 2,498, % Gross Operating Income $ 7,521, % $ 8,320, % $ 8,745, % $ 9,007, % $ 9,277, % $ 9,555, % Undistributed Expenses Administration & General $ 786, % $ 810, % $ 834, % $ 859, % $ 885, % $ 912, % Marketing 568, % 585, % 602, % 620, % 639, % 658, % Management Fees 285, % 314, % 330, % 340, % 351, % 361, % Franchise Fees (% rms) 797, % 881, % 926, % 954, % 982, % 1,012, % Property Operations & Maintenance 327, % 337, % 347, % 358, % 368, % 380, % Energy 382, % 393, % 405, % 417, % 430, % 443, % Total $ 3,148, % $ 3,323, % $ 3,448, % $ 3,551, % $ 3,658, % $ 3,768, % Gross Operating Profit $ 4,373, % $ 4,996, % $ 5,296, % $ 5,455, % $ 5,619, % $ 5,787, % Fixed Charges Insurance $ 87, % $ 90, % $ 92, % $ 95, % $ 98, % $ 101, % Property Taxes 628, % 647, % 666, % 686, % 707, % 728, % Reserve for Replacement 380, % 419, % 441, % 454, % 468, % 482, % Lease Payments 8, % 8, % 8, % 8, % 9, % 9, % Total $ 1,104, % $ 1,165, % $ 1,209, % $ 1,245, % $ 1,282, % $ 1,321, % Net Operating Income $ 3,268, % $ 3,831, % $ 4,087, % $ 4,210, % $ 4,336, % $ 4,466, % See Exhibits 10, 11

26 CASE STUDY: COST AND DEBT ASSUMPTIONS See Exhibit 12

27 CASE STUDY: CASH FLOW AFTER DEBT SERVICE Net Operating Income Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Full Year of Operation Occ% 62.6% 66.5% 67.9% 67.9% 67.9% 67.9% ADR $ $ $ $ $ $ Room Revenue 8,396,094 9,277,373 9,751,090 10,043,623 10,344,931 10,655,279 Other Income 1,113,560 1,218,607 1,280,831 1,319,255 1,358,834 1,399,598 Total 9,509,654 10,495,980 11,031,921 11,362,878 11,703,765 12,054,878 Total Expenses 6,240,670 6,664,662 6,944,464 7,152,797 7,367,382 7,588,403 Net Operating Income 3,268,984 3,831,318 4,087,457 4,210,081 4,336,383 4,466,475 Debt Service (Year 1 Interest Only) 1,524,000 1,827,430 1,827,430 1,827,430 1,827,430 1,827,430 Potential Distributable Dividends 1,744,984 2,003,888 2,260,027 2,382,651 2,508,953 2,639,045 Debt Coverage Ratio See Exhibit 12

28 CASE STUDY: REVERSION Reversion Analysis 2020 NOI 4,466,475 Terminal Cap Rate 8.5% Reversion Value (Sales Price) 52,546,764 Sales Price per Key 262,734 RE Commission + Title Policy 3.0% Less Sales Cost (1,576,403) Net Sale 51,233,095 Less Outstanding Debt (24,032,091) Net Proceeds to Equity 27,201,004 See Exhibit 12

29 CASE STUDY: IRR ANALYSIS Internal Rate of Return Construction IRR Initial Equity Investment (13,600,000) Potential Distributable Dividends - 1,744,984 2,003,888 2,260,027 2,382,651 2,508,953 Reversion 27,201,004 Total Equity Return (13,600,000) - 1,744,984 2,003,888 2,260,027 2,382,651 29,709, % Cash on Cash Reurn - by Year 13% 15% 17% 18% 218% See Exhibit 12

30 RISK PROFILES OF HOTELS AS REAL ESTATE INVESTMENTS

31 TAKE AWAYS Challenge the assumptions: Do you agree with the Comp Set? Does the brand, price point make sense? Are other new competitors missing? Have the sources of demand and market conditions been thoroughly analyzed? Is the deal over leveraged? Does the assumed sale make sense? Is the Terminal Cap Rate too low? Is the Return on Investment adequate? Achievable?

IN THE HOTEL INDUSTRY USA EDITION 2018 SAMPLE $395

IN THE HOTEL INDUSTRY USA EDITION 2018 $395 Credits... Inside front cover FULL-Service Hotels About the Cover... 1 Publisher s Message... 4 Natural Occupancy: What Is It and What Does It Mean for ADR?...