HOTEL INVESTMENTS FOR DUMMIES ( AND LAWYERS) Hotel Investment

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 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

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

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 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

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

UNITED STATES: 3 RD QUARTER 2012 PERFORMANCE STATS = Below/Above Long Run Average Long Term Average 2008 2009 2010 2011 2012 2013F 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

2012 REVPAR: BEST / WORST PERFORMING MARKETS Source: STR

ADR $ CHANGES FROM PRIOR PEAK DECEMBER 2012 Source: STR

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

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

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

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 2014 1,000-room Marriott Marquis Convention HQ Hotel 2017 See Exhibits 2, 3

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 2012. Demand grew at 3.8% per year. Occupancy increased from 65.6% in 2006 to 69.0% in 2012. Refer to Exhibits 2-6 for detailed Supply & Demand analysis

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 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 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 - - - - - 240 22 - - 200 - - - 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 334,452 336,998 354,934 318,986 338,661 378,608 417,713 417,713 417,713 417,713 417,713 417,713 417,713 % 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 $130.53 $137.60 $147.13 $133.40 $134.30 $144.76 $150.05 $150.05 $150.05 $150.05 $150.05 $150.05 $150.05 % CHANGE #REF! 5.4% 6.9% -9.3% 0.7% 7.8% 3.7% Revpar $85.62 $90.94 $102.42 $83.45 $89.20 $91.72 $103.51 $103.51 $103.51 $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 2012 2013 2014 2015 2016 2017 2018 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

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.

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.

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 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 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 - - - - - 240 22 - - 200 - - - 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 334,452 336,998 354,934 318,986 338,661 378,608 417,713 426,067 421,807 447,115 460,528 460,528 460,528 % 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 $130.53 $137.60 $147.13 $133.40 $134.30 $144.76 $150.05 $159.80 $167.79 $174.50 $179.74 $185.13 $190.68 % 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 $102.42 $83.45 $89.20 $91.72 $103.51 $112.44 $116.88 $114.99 $121.99 $125.65 $129.42 % 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 2012 2013 2014 2015 2016 2017 2018 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

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 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 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 - - - - - 240 22 - - 200 - - - 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 334,452 336,998 354,934 318,986 338,661 378,608 417,713 426,067 421,807 447,115 460,528 460,528 460,528 % 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 $130.53 $137.60 $147.13 $133.40 $134.30 $144.76 $150.05 $159.80 $167.79 $174.50 $179.74 $185.13 $190.68 % 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 $102.42 $83.45 $89.20 $91.72 $103.51 $112.44 $116.88 $114.99 $121.99 $125.65 $129.42 % 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 2012 2013 2014 2015 2016 2017 2018 Occupancy 62.6% 66.5% 67.9% 67.9% MARKET PENETRATION 95.0% 98.0% 100.0% 100.0% Average Rate $ 155.00 $ 165.08 $ 173.33 $ 183.73 $ 191.08 $ 196.81 $ 202.71 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 $115.01 $127.09 $133.58 $137.58 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

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

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

CASE STUDY: COMPARABLE OPERATING STATEMENTS Revenues Year aloft, TX - 2011 Courtyard, TX - 2012 Hyatt Place, NY - TTM May 2012 Rooms Available Daily 175 200 120 130 625 Rooms Available Annually 63,875 73,200 43,800 47,580 228,455 Annual Rooms Occupied 47,500 49,000 37,000 38,200 171,700 Occupancy Percentage 74.36% 66.94% 84.47% 80.29% 75.16% Average Daily Rate $147.37 $158.16 $140.54 $131.68 $0.00 Revenue Per Available Room $109.59 $105.87 $118.72 $105.72 $0.00 Departmental Expenses $ % PAR POR $ % PAR POR $ % PAR POR $ % PAR POR $ % PAR POR Rooms $ 7,000,000 87.06% $ 40,000 $ 147.37 $ 7,750,000 88.77% $ 38,750 $ 158.16 $ 5,200,000 94.77% $ 43,333 $ 140.54 $ 5,030,000 89.79% $ 38,692 $ 131.68 $ 24,980,000 89.67% $ 39,968 $ 145.49 Food & Beverage 650,000 8.08% 3,714 13.68 570,000 6.53% 2,850 11.63 213,000 3.88% 1,775 5.76 507,000 9.05% 3,900 13.27 1,940,000 6.96% 3,104 11.30 Telephone 5,000 0.06% 29 0.11 9,000 0.10% 45 0.18-0.00% - - 1,650 0.03% 13 0.04 15,650 0.06% 25 0.09 Parking 310,000 3.86% 1,771 6.53 300,000 3.44% 1,500 6.12-0.00% - - - 0.00% - - 610,000 2.19% 976 3.55 Other 75,000 0.93% 429 1.58 101,000 1.16% 505 2.06 74,000 1.35% 617 2.00 63,500 1.13% 488 1.66 313,500 1.13% 502 1.83 Total $ 8,040,000 100.00% $ 45,943 $ 169.26 $ 8,730,000 100.00% $ 43,650 $ 178.16 $ 5,487,000 100.00% $ 45,725 $ 148.30 $ 5,602,150 100.00% $ 43,093 $ 146.65 $ 27,859,150 100.00% $ 44,575 $ 162.25 Rooms $ 1,100,000 15.71% $ 6,286 $ 23.16 $ 1,150,000 14.84% $ 5,750 $ 23.47 $ 1,000,000 19.23% $ 8,333 $ 27.03 $ 822,000 16.34% $ 6,323 $ 21.52 $ 4,072,000 16.30% $ 6,515 $ 23.72 Food & Beverage 360,000 55.38% 2,057 7.58 415,000 72.81% 2,075 8.47 113,000 53.05% 942 3.05 455,000 89.74% 3,500 11.91 1,343,000 69.23% 2,149 7.82 Telephone 30,000 600% 171 0.63 21,000 233% 105 0.43 - #DIV/0! - - 10,800 655% 83 0.28 61,800 395% 99 0.36 Parking 160,000 51.61% 914 3.37 156,000 52.00% 780 3.18 - #DIV/0! - - - #DIV/0! - - 316,000 51.80% 506 1.84 Other 30,000 40.00% 171 0.63 42,500 42.08% 213 0.87 44,000 59.46% 367 1.19 26,000 40.94% 200 0.68 142,500 45.45% 228 0.83 Total $ 1,680,000 20.90% $ 9,600 $ 35.37 $ 1,784,500 20.44% $ 8,923 $ 36.42 $ 1,157,000 21.09% $ 9,642 $ 31.27 $ 1,313,800 23.45% $ 10,106 $ 34.39 $ 5,935,300 21.30% $ 9,496 $ 34.57 Gross Operating Income $ 6,360,000 79.10% $ 36,343 $ 133.89 $ 6,945,500 79.56% $ 34,728 $ 141.74 $ 4,330,000 78.91% $ 36,083 $ 117.03 $ 4,288,350 76.55% $ 32,987 $ 112.26 $ 21,923,850 78.70% $ 35,078 $ 127.69 Undistributed Expenses Administration & General $ 625,000 7.77% $ 3,571 $ 13.16 $ 710,000 8.13% $ 3,550 $ 14.49 $ 470,000 8.57% $ 3,917 $ 12.70 $ 451,000 8.05% $ 3,469 $ 11.81 $ 2,256,000 8.10% $ 3,610 $ 13.14 Marketing 500,000 6.22% 2,857 10.53 600,000 6.87% 3,000 12.24 260,000 4.74% 2,167 7.03 269,000 4.80% 2,069 7.04 1,629,000 5.85% 2,606 9.49 Management Fees 241,200 3.00% 1,378 5.08 261,900 3.00% 1,310 5.34 164,610 3.00% 1,372 4.45 252,000 4.50% 1,938 6.60 919,710 3.30% 1,472 5.36 Franchise Fees (% rms) 665,000 9.50% 3,800 14.00 581,250 7.50% 2,906 11.86 442,000 8.50% 3,683 11.95 458,000 9.11% 3,523 11.99 2,146,250 7.70% 3,434 12.50 Property Operations & Maintenance 250,000 3.11% 1,429 5.26 305,000 3.49% 1,525 6.22 135,000 2.46% 1,125 3.65 230,000 4.11% 1,769 6.02 920,000 3.30% 1,472 5.36 Energy 300,000 3.73% 1,714 6.32 400,000 4.58% 2,000 8.16 250,000 4.56% 2,083 6.76 178,000 3.18% 1,369 4.66 1,128,000 4.05% 1,805 6.57 Total $ 2,581,200 32.10% $ 14,750 $ 54.34 $ 2,858,150 32.74% $ 14,291 $ 58.33 $ 1,721,610 31.38% $ 14,347 $ 46.53 $ 1,838,000 32.81% $ 14,138 $ 48.12 $ 8,998,960 32.30% $ 14,398 $ 52.41 Gross Operating Profit $ 3,778,800 47.00% $ 21,593 $ 79.55 $ 4,087,350 46.82% $ 20,437 $ 83.42 $ 2,608,390 47.54% $ 21,737 $ 70.50 $ 2,450,350 43.74% $ 18,849 $ 64.15 $ 12,924,890 46.39% $ 20,680 $ 75.28 Fixed Charges Insurance $ 70,000 0.87% $ 400 $ 1.47 $ 60,000 0.69% $ 300 $ 1.22 $ 50,000 0.91% $ 417 $ 1.35 $ 21,500 0.38% $ 165 $ 0.56 $ 201,500 0.72% $ 322 $ 1.17 Property Taxes 500,000 6.22% 2,857 10.53 550,000 6.30% 2,750 11.22 145,000 2.64% 1,208 3.92 201,000 3.59% 1,546 5.26 1,396,000 5.01% 2,234 8.13 Reserve for Replacement 321,600 4.00% 1,838 6.77 436,500 5.00% 2,183 8.91 219,480 4.00% 1,829 5.93 224,086 4.00% 1,724 5.87 1,201,666 4.31% 1,923 7.00 Lease Payments 7,500 0.09% 43 0.16 8,000 0.09% 40 0.16-0.00% - - - 0.00% - - 15,500 0.06% 25 0.09 Total 899,100 11.18% $ 5,138 $ 18.93 1,054,500 12.08% $ 5,273 $ 21.52 414,480 7.55% $ 3,454 $ 11.20 446,586 7.97% $ 3,435 $ 11.69 2,814,666 10.10% $ 4,503 $ 16.39 Net Operating Income $ 2,879,700 35.82% $ 16,455 $ 60.63 $ 3,032,850 34.74% $ 15,164 $ 61.89 $ 2,193,910 39.98% $ 18,283 $ 59.29 $ 2,003,764 35.77% $ 15,414 $ 52.45 $ 10,110,224 36.29% $ 16,176 $ 58.88 See Exhibit 7 Hilton Garden Inn, UT - TTM Mar 2012 COMP AVERAGE

CASE STUDY: STABILIZED YEAR PROJECTIONS Revenues $ % PAR POR Year - Dollars 2012 Rooms 8,414,991 100.00% $42,075 $169.77 Rooms 200 Food & Beverage 0 0.00% $0 Rooms Available 73,000 Telephone 0 0.00% $0 Room Nights 49,567 Parking 0 0.00% $0 Occupancy % 67.90% Other 0 0.00% $0 Deflated Stabilized ADR $169.77 Total 8,414,991 100.00% $42,075 $169.77 RevPAR $115.27 Departmental Expenses Rooms 0 0.00% $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% $0 $0.00 GOI 8,414,991 100.00% $42,075 $169.77 Undistributed Expenses Administration & General 0 0.00% $0.00 Marketing 0 0.00% $0.00 Management Fees 0 $0 $0.00 Franchise Fees (% rms) 0 $0 $0.00 Property Operations & Maintenance 0 0.00% $0.00 Energy 0 0.00% $0.00 Total 0 0.00% $0 $0.00 GOP 8,414,991 100.00% $42,075 $169.77 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% $0 $0.00 Total 0 0.00% $0 $0.00 NOI Before Incentive 8,414,991 100.00% $42,075 $169.77 See Exhibit 8

CASE STUDY: COMPLETED STABILIZED YEAR PROJECTIONS Revenues $ % PAR POR Year - Dollars 2012 Rooms 8,414,991 88.39% $42,075 $169.77 Rooms 200 Food & Beverage 693,938 7.29% $3,470 $14.00 Rooms Available 73,000 Telephone 2,478 0.03% $12 $0.05 Room Nights 49,567 Parking 322,186 3.38% $1,611 $6.50 Occupancy % 67.90% Other 86,742 0.91% $434 $1.75 Deflated Stabilized ADR $169.77 Total 9,520,335 100.00% $47,602 $192.07 RevPAR $115.27 Departmental Expenses Rooms 1,263,959 15.02% $6,320 $25.50 Food & Beverage 485,757 70.00% $2,429 $9.80 Telephone 24,784 1000.00% $124 $0.50 Parking 164,315 51.00% $822 $3.32 Other 34,697 40.00% $173 $0.70 Total 1,973,510 20.73% $9,868 $39.82 GOI 7,546,825 79.27% $37,734 $152.26 Undistributed Expenses Administration & General 720,000 7.56% $3,600 $14.53 Marketing 520,000 5.46% $2,600 $10.49 Management Fees 285,610 3.00% $1,428 $5.76 Franchise Fees (% rms) 799,424 9.50% $3,997 $16.13 Property Operations & Maintenance 300,000 3.15% $1,500 $6.05 Energy 350,000 3.68% $1,750 $7.06 Total 2,975,034 31.25% $14,875 $60.02 GOP 4,571,791 48.02% $22,859 $92.23 Fixed Charges Insurance 80,000 0.84% $400 $1.61 Property Taxes 575,000 6.04% $2,875 $11.60 Reserve for Replacement 380,813 4.00% $1,904 $7.68 Lease Payments 7,500 0.08% $38 $0.15 Total 1,043,313 10.96% $5,217 $21.05 NOI Before Incentive 3,528,478 37.06% $17,642 $71.19 See Exhibit 9

CASE STUDY: PRO-FORMA Proposed aloft Houston Downtown Year 2015 2016 2017 2018 2019 2020 Rooms Available Daily 200 200 200 200 200 200 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 $183.73 $191.08 $196.81 $202.72 $208.80 $215.06 Revenue Per Available Room $115.01 $127.09 $133.58 $137.58 $141.71 $145.96 Revenues Departmental Expenses $ % $ % $ % $ % $ % $ % Rooms $ 8,396,094 88.29% $ 9,277,373 88.39% $ 9,751,090 88.39% $ 10,043,623 88.39% $ 10,344,931 88.39% $ 10,655,279 88.39% Food & Beverage 699,096 7.35% 765,045 7.29% 804,109 7.29% 828,232 7.29% 853,079 7.29% 878,672 7.29% Telephone 2,497 0.03% 2,732 0.03% 2,872 0.03% 2,958 0.03% 3,047 0.03% 3,138 0.03% Parking 324,580 3.41% 355,199 3.38% 373,336 3.38% 384,536 3.38% 396,072 3.38% 407,955 3.38% Other 87,387 0.92% 95,631 0.91% 100,514 0.91% 103,529 0.91% 106,635 0.91% 109,834 0.91% Total $ 9,509,654 100.00% $ 10,495,980 100.00% $ 11,031,921 100.00% $ 11,362,878 100.00% $ 11,703,765 100.00% $ 12,054,878 100.00% Rooms $ 1,273,354 15.17% $ 1,393,474 15.02% $ 1,464,627 15.02% $ 1,508,566 15.02% $ 1,553,823 15.02% $ 1,600,437 15.02% Food & Beverage 489,367 70.00% 535,531 70.00% 562,876 70.00% 579,763 70.00% 597,155 70.00% 615,070 70.00% Telephone 24,968 1000% 27,323 1000% 28,718 1000% 29,580 1000% 30,467 1000% 31,381 1000% Parking 165,536 51.00% 181,152 51.00% 190,402 51.00% 196,114 51.00% 201,997 51.00% 208,057 51.00% Other 34,955 40.00% 38,252 40.00% 40,205 40.00% 41,412 40.00% 42,654 40.00% 43,934 40.00% Total $ 1,988,179 20.91% $ 2,175,732 20.73% $ 2,286,828 20.73% $ 2,355,433 20.73% $ 2,426,096 20.73% $ 2,498,879 20.73% Gross Operating Income $ 7,521,474 79.09% $ 8,320,248 79.27% $ 8,745,092 79.27% $ 9,007,445 79.27% $ 9,277,668 79.27% $ 9,555,999 79.27% Undistributed Expenses Administration & General $ 786,763 8.27% $ 810,366 7.72% $ 834,677 7.57% $ 859,718 7.57% $ 885,509 7.57% $ 912,074 7.57% Marketing 568,218 5.98% 585,265 5.58% 602,823 5.46% 620,907 5.46% 639,534 5.46% 658,720 5.46% Management Fees 285,290 3.00% 314,879 3.00% 330,958 3.00% 340,886 3.00% 351,113 3.00% 361,646 3.00% Franchise Fees (% rms) 797,629 9.50% 881,350 9.50% 926,354 9.50% 954,144 9.50% 982,768 9.50% 1,012,252 9.50% Property Operations & Maintenance 327,818 3.45% 337,653 3.22% 347,782 3.15% 358,216 3.15% 368,962 3.15% 380,031 3.15% Energy 382,454 4.02% 393,928 3.75% 405,746 3.68% 417,918 3.68% 430,456 3.68% 443,370 3.68% Total $ 3,148,173 33.11% $ 3,323,442 31.66% $ 3,448,339 31.26% $ 3,551,789 31.26% $ 3,658,343 31.26% $ 3,768,093 31.26% Gross Operating Profit $ 4,373,302 45.99% $ 4,996,807 47.61% $ 5,296,753 48.01% $ 5,455,656 48.01% $ 5,619,325 48.01% $ 5,787,905 48.01% Fixed Charges Insurance $ 87,418 0.92% $ 90,041 0.86% $ 92,742 0.84% $ 95,524 0.84% $ 98,390 0.84% $ 101,342 0.84% Property Taxes 628,318 6.61% 647,168 6.17% 666,583 6.04% 686,580 6.04% 707,177 6.04% 728,393 6.04% Reserve for Replacement 380,386 4.00% 419,839 4.00% 441,277 4.00% 454,515 4.00% 468,151 4.00% 482,195 4.00% Lease Payments 8,195 0.09% 8,441 0.08% 8,695 0.08% 8,955 0.08% 9,224 0.08% 9,501 0.08% Total $ 1,104,318 11.61% $ 1,165,489 11.10% $ 1,209,296 10.96% $ 1,245,575 10.96% $ 1,282,942 10.96% $ 1,321,430 10.96% Net Operating Income $ 3,268,984 34.38% $ 3,831,318 36.50% $ 4,087,457 37.05% $ 4,210,081 37.05% $ 4,336,383 37.05% $ 4,466,475 37.05% See Exhibits 10, 11

CASE STUDY: COST AND DEBT ASSUMPTIONS See Exhibit 12

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 2015 2016 2017 2018 2019 2020 Occ% 62.6% 66.5% 67.9% 67.9% 67.9% 67.9% ADR $183.73 $191.08 $196.81 $202.72 $208.80 $215.06 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 2.15 2.10 2.24 2.30 2.37 2.44 See Exhibit 12

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

CASE STUDY: IRR ANALYSIS Internal Rate of Return Construction 2013 2014 2015 2016 2017 2018 2019 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 29,709,957 21.3% Cash on Cash Reurn - by Year 13% 15% 17% 18% 218% See Exhibit 12

RISK PROFILES OF HOTELS AS REAL ESTATE INVESTMENTS

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?