HOT: ANALYST DAY NOTES, PART II

HOT: ANALYST DAY NOTES, PART II

NOTES

Global Pipeline and Owned Portfolio

• 72-73 hotel openings this year
• Building owner preference to own more hotels
  • HOT booking channels generate a large % of hotel room nights- especially corporate room nights
  • Yield management system
  • HOT marketing efforts
  • Brand recognition allows them to diversify the origin base of guests for hotels
• Pipeline
  • 5.4% CAGR in operating rooms since 2004
  • Largest relative growth potential out of their competitive set.  Their pipeline represents 28% of their existing room base.
    • HLT's pipeline is 22% of their base
    • Hyatt's is 21%
    • MAR's is 16%
  • Four Points is well positioned as a conversion brand for Western Europe and NA.  This brand is also well positioned for primary and secondary cities in emerging markets
• Owned real estate portfolio and strategy to maximize value
  • 21,000 room/ 62 hotels
  • 85% wholly owned
  • Remain committed to asset light
  • Mostly in NA, and in urban markets which protect them from supply growth as these are higher barriers to entry markets
• Maximizing shareholder value - owned portfolio
  • 60% don't require a lot of capex and are relatively easy to sell
    • Sheraton on the Park in Sydney (considered offers for the asset in 2009 but prices didn't meet expectations and this year will achieve peak earnings levels)
    • St. Regis San Fran
    • St. Regis Rome
    • St. Regis NY
    • Park Tower
    • The Phoenician
    • W Chicago
    • Westin Excelsior Florence
    • Westin Excelsior Rome
    • Sheraton Gateway Toronto
    • Sheraton Centre Toronto
    • Sheraton Maria Isabel
    • Sheraton BA
  • 25% need a lot of capex
    • St. Regis Aspen which was just sold is a good example- needed a renovation - sold for $70MM to an owner that was willing to invest in the asset
    • Grand Florence
    • Gritti Palace
    • W New Orleans
    • W Chicago - Lakeshore
    • Westin Gaslamp
    • Westin St. John
    • Westin Cancun
    • Sheraton Kauai
    • Sheraton Steamboat
  • 15% of hotels are very large and would meaningfully benefit from a repositioning and redevelopment - may need a partner
    • Manhattan at Times Square is a good example (was Sheraton Manhattan) - unclear that a hotel is the highest and best use for this hotel
    • Sheraton Rio
    • Westin Peachtree
    • Westin Maui

Summary and Financial Update

• Since 2000 they have sold 110 hotels for $7.5BN
• For 10 years, 70% of their business came from the US; now 62% of their business is international
  • Added 338 mgm'd and franchised hotels (79k rooms) since 2000, 70% (55k rooms) outside the US
  • Expect to drive 80% of profits outside the US eventually
• Launched new brands:
  
  • W in 1998
  • Westin Heavenly launch 1999
  • Sheraton Revitalization (2007)
  • Launch of Aloft and Element (2008)
• Targets of their transformations:
  • Higher growth trajectory
  • Lower cyclicality
  • Higher margins
  • Higher capital efficiency
  • Superior cash flow generation
• 50% of their Luxury brands are located outside the US and 52% of their UUP brands are internationally located.  This is very hard to replicate.
• WHY HOT?
  • Largest international presence
  • Huge pipeline
  • High value owned hotel portfolio
  • Best global team
  • Secular demand growth in EM
  • Low supply growth in developed market
  • Cash flow generation ability
• Value of their owned portfolio:
  • Cap rate using average (04-08 NOI)
    
    • 5.5% = $5.6BN
  • Using per keys: $275k/room = $5.7BN; $325k/room = $6.7BN
  • If they sold these hotels, they could still retain ~$80MM in fees, creating another $1BN of value
  • SVO can continue to generate $150-200MM of cash flow for them assuming one note sale per year
  • Bal Harbour is their largest non-cash flow generating asset on their balance sheet
    • 307 residential units
    • Have 141 contracts in place with 20% deposits
    • On track for certificate of occupancy by Oct 2011
    • Invested $450MM by YE 2010 and expect to spend an additional $200MM
    • Cash from deposits: $60MM, expect to net $550MM through 2013 in closing and an additional $165MM in cash flow post 2013
    • Then they will still own a 210 room St. Regis
  • Have 10,125 unconsolidated JV room, with $60MM of pro-rata share EBITDA
• Assumptions 2011-2013:
  • RevPAR: 7-9%
  • Margin improvement: 450-600bps (cumulative)
  • Earnings growth: 16-20%
  • 1% (+/-) RevPAR CAGR: -/+ $35-40MM of owned/ leased earnings through 2013
  • Base mgmt fee growth: 7-9%
  • Incentive fee growth: 10-13%
  • Franchise fee growth: 7-9%
  • Net room growth:  3-5%
  • Total fee revenue fee growth: 10-12%
  • VOI: flat originated sales and flat operating income growth
  • Timeshare capital spend: $80-100MM and cash flow: $450-600MM [cumulative]
  • Bal Harbour net cash flow: $350-400MM [cumulative]
  • SVO/Bal Harbour Net Cash Flow: $800-1BN [cumulative]
• So they think they can get to $1.25BN -$1.375BN EBITDA by 2013 and EPS of $2.70-$3.20
• 2010 Ending Cash flow: $500MM
  • + 3 yr estimated hotel operating CF ($2.3-2.5BN)
  • + 3 year CF from SVO/Bal Harbour ($800MM-1BN)
  • - Capex ($800-$900MM)
  • - Cash taxes & Interest ($900MM-1BN) =
  • $1.9-2.1BN of cash flow + asset sales =
  • Funds for growth/ debt reduction/ returning cash to shareholders
• Already received $140MM of tax refund money - and expect to get the remaining $90MM before year end
• Goal is to get to 3.0x leverage from an estimated 4.4x at 12/31/2010 - that equates to about $1.2BN of debt reduction

Q&A

• Assumptions: 7-9% RevPAR growth with 6% coming from ADR why only 150bps of margin expansion?
  • There are inflation and cost pressure
• Why such a low incentive fee recovery?
  
  • In international markets they are more tied to top line
  • In NA, F&B and other revenues lag RevPAR typically
• In Asia, the demand for key money is a lot lower
• Don't have to give as much key money in general now than they used to given their value proposition
• Platinum SPGs visit 4 of their brands each year on average
• Current transaction market?
  • Broad spectrum of buyers hasn't really returned yet
  • Think that for them a rifle shot approach to asset sales is the best approach for now.
  • They think a larger transaction is a little ways off just given the current environment. Most of the action are driven by large REITs looking for clean transactions with little required capex
  • Haven't seen the return of the leveraged transaction - but think asset values will move up a lot when and if the leverage market returns
• Have 140 units under contract; prices are in the range of 1,000/psf.  Assume that they will not close all 140 units, but that sales will continue for a few years
• Vast majority of hotel in the china pipeline are under construction - there is plenty of financing. In the rest of Asia - financing is also not really an issue. Owners are either high net worth or conglomerates.
• In NA and Western Europe are where they are using more of their capital to support the pipeline. Have a lot of conversion opportunities.
• 70% of customers in their Chinese hotels are Chinese
• Think that any upside to their projections will come primarily from rate
• Why no SVO growth?
  
  • Will only invest money where they are confident there is demand
• With the hotels that require a large reposition (15% of rooms) they will wait until they find the right partner given the capex requirement
• Their intent is to preserve their NOLs