Hedgeye - 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