Is the US Economy Poised to Accelerate in 2014? Ian Weissman

1. Is the US Economy Poised to Accelerate in 2014? Ian Weissman Managing Director - Head of Lodging/Gaming Research iweissman@isigrp.com 212.446.9461

2. Agenda: • Looking Back Over the Last 18 Months • A Closer Look at Important Macro Drivers for Lodging • 2014 Macro Forecasts • Can We Still Make Money in the Lodging Sector?

3. First Piece of Advice: Pay Attention!!!! • Since we presented at the last HAMA conference 18 months ago, lodging stocks have materially outperformed…up 32%

4. Rewind…Our Thoughts 18 Months Ago Positive: • Bullish on lodging fundamentals – forecasting 7% RevPAR growth in Gateway cities for ‘12/’13 (market exceeded that) • Bullish on lodging stocks – forecasting 15%+ returns (market exceeded that) • 8% unemployment (finished ‘12 at 7.8%) • Capital markets would remain open, and deal pipelines would be active Potential Roadblocks: • Talk of Double Dip Recession • Oil prices were spiking • Investors were focused on the Deficit and fiscal drag – Fiscal Cliff • Eurozone financial crisis/recession • China slowdown • US elections had the 1%-errs thinking about defecting

5. What’s Happened with the Economy the Last 18 Months? • Macro Backdrop – Global Recovery Underway • Job Growth has averaged 170k/month • US unemployment rate has dropped 80bp to 7.4% • US averted a double dip recession • Oil prices are down $10/barrel to $110 • Housing prices up 15%-20% • US jumped off the ‘Fiscal Cliff’ with a parachute • Eurozone financial crisis behind us • China slowdown averted • …and Tiger Woods is Still without a Major win under his belt

6. What’s Happened with Lodging the Last 18 Months? • Lodging Has Been a Clear Winner… • RevPAR growth +6.5% (100bp higher in gateway cities) • ADR growth +4.2% • Supply remains in check • Company balances sheets continue to improve, as debt and equity markets remain wide open • Plenty of capital on the sidelines looking to invest into lodging (Blackstone, Thayer, sovereign wealth $$$, and REITs) • Hilton has finally filed plans to go public – good for the industry

7. What Can We Expect Over the Next 18 Months? • Lodging in mid-cycle - 4th inning • Limited new supply growth – good through 2016 • Stronger group – largely dependent upon business sentiment and jobs • Broader US lodging recovery – secondary and tertiary markets • Forecasting 6% to 7% RevPAR growth • Rate recovery to continue – 4%+ • Incentive management fee growth will accelerate • Consolidation – its coming

8. Econ 101 – US Macro Drivers

9. GDP: Important for Cyclical Sectors—Just NOT This Time Around US GDP growth has averaged a disappointing 2.2% per quarter since the ‘Great Recession’ GDP is tracking nearly 200bp lower than where the US was following the ‘01 and ‘90 recessions

10. US RevPAR Recovery: Solid, Especially in Gateways Despite tepid macro backdrop, its been a particularly strong recovery with RevPAR up +7.3% over the prior 14 quarters. Gateway cities continue to outperform, beating the broader US by 150bp

11. Consumer: Key to Lodging Recovery

12. Consumer: Stock Market is Back in a Big Way • S&P 500 is up 19% in ’13, surpassing the ‘07 peak in March ‘13 • Consumer net worth (i.e., stock market) is a key variable of our RevPAR forecasting models • Unlike prior cycles, however, QE has helped to drive equity values -- Bernanke wrote in 2010, “Higher stock prices boost consumer wealth and help increase consumer confidence which can spur spending”

13. Consumer: Household Debt Continues to Fall As a result of the surge in equity prices, and ultimately, historically low mortgage rates with tougher underwriting standards, Consumer’s have been able to repair their balance sheets as personal leverage ratios are down nearly 30-percentage points since peaking in 2010

14. Consumer Sentiment is on the Rise With stocks on the rise, consumer sentiment continues to move higher. The US consumer has been a key driver in the latest lodging recovery

15. While Consumer Spending Remains Robust Good news for the recovery has been that consumers are back on their feet with spending well past the prior peak

16. Housing Has Been an Important Driver of Recovery As we head into year four of the US economic recovery, Case-Shiller Home Index continues to move higher. Index is up 28% since bottoming in ’12, however, remains 36% ‘06 peak That said, recent spike in mortgage rates has ISI’s Housing Survey under pressure

17. With Housing Starts Nearly Doubling Housing starts have nearly doubled since bottoming in ‘08, but remain well off the ‘06 peak That said, keeping a watchful eye on recent softness amid rising interest rates. If the US economy is going to reaccelerate, Housing needs to be strong

18. Corporate America: Cautiously Optimistic

19. Corporate Profits: Up 17% Per Annum Since bottoming in late 2008, corporate profits are up 17% per annum, well past the ‘07 peak Cost cutting/savings remains the primary driver …yet Lodging companies have yet to witness the benefits of corporate America’s rebound (Group Business remains a disappointment)

20. Biggest difference has been Sentiment levels • Part of the explanation relates to “Confidence”. • Consumer confidence continues to surge, while Business sentiment has been flat throughout the recovery

21. As a Result: Rate Growth Has Been Disappointing Historically, there is a very strong correlation between Business Confidence (Measured by ISI’s Trucking Survey) and ADR Growth Both have flat-lined the last several years Without jobs, business sentiment will remain flat, and hotel operators will have a hard time pushing rates higher

22. Currently, Rate Accounting for 80-90% of RevPAR Rate growth accounting for 85%+ of RevPAR gains… Sector could be doing better. Operators remain hesitant to push rates on Group

23. Monthly Job Growth and ADR Growth Are Flat Near perfect correlation between monthly job growth and ADR growth Both have flat-lined over the last two years

24. Key is Employment: That Relations Goes back 25 Yrs

25. Unemployment Needs to Be Below 5% • Rate (ADR) growth rarely exceeds 5% (on a consistent basis), unless the US unemployment rate runs at 5% or lower. • ISI economists estimate that the US would need to add 225k jobs per month to get to under 5% unemployment • 2+ more years

26. Macro Economic Forecasts

27. What the “Experts” are Saying: Only Getting Better • While ‘12 was about “Growth Problems”, the current view by ISI economists is considerably more bullish – “ The US economy is poised for a reacceleration” • How do we know that? • Unemployment claims and PMI data have both dramatically improved • Diffusion index of ISI’s company surveys has recently ‘hooked up’ • Global expansion underway – Eurozone, UK, Japan and China • Gasoline prices continue to fall • Taper-delay, the new QE? • Housing is key to U.S. growth accelerating: while the Homebuilding Survey has recently dropped, recent back up in mortgage rates could help reaccelerate growth

28. More Bullish Signals for Lodging Fundamentals • Airline survey ticking higher – should lead to accelerating RevPAR growth… • while leading macro indicator, ISI’s Company Survey Index, continues to push higher

29. ISI Economists Remain Bullish on US Economy • ‘14 GDP: 3% • ‘14 Job Growth: ~2.4mn jobs (200k/mos) • ‘14 Unemployment Rate: 6.8% • ’14 10-Year Bond: 3.5%

30. ISI Forecast: Expecting RevPAR of 6%+ in ‘14 • We are forecasting +6%+ RevPAR growth in ‘14 • REIT executives putting out ranges of +5% to +7% • Everything dependent upon job growth • West Coast likely to continue to outperform

31. Lodging Stock Valuations – Can We Still Make Money????

32. Lodging Stocks Have Had a Very Solid Run the Last 5 Yrs…

33. Still Forecasting 10% Returns – Valuations Reasonable Forecasted Returns: Upside Left in Lodging While Group ‘Fairly’ Valued

34. Investment Thesis on Lodging… • In a rising interest rate environment, the story this year has been own lodging (shorter lease duration play) • Investor sentiment has shifted – less concerned about Macro blow-ups • Among the best internal growth stories relative to other asset classes • Deals, deals and more deals. Consolidation talk continues. Anticipate the private market bid for lodging will remain robust. • Even talk of cap rate compression --- unique only to lodging • Management teams have been very disciplined this cycle • Balance sheets are in great shape • Accretive acquisitions • Capital recycling improves the overall quality of the portfolio • We expect lodging stocks to continue to outperform in ‘14….however, questions still remain on employment trends and supply

35. C-Corps the Better Play in ‘14? • In ‘14, within the lodging sector, we prefer Lodging C-Corps vs. Lodging REITs in 2014 • Valuations more compelling • ADR will dominate • Incentive management fee growth will accelerate, which should lead to multiple expansion Risks to C-Corp Call: China RevPAR Stalling – HOT and H Weaker Group – MAR

36. Questions???

37. Analyst Certification and Disclosures • ANALYST CERTIFICATION: The views expressed in this Report accurately reflect the personal views of those preparing the Report about any and all of the subjects or issuers referenced in this Report.  No part of the compensation of any person involved in the preparation of this Report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by research analysts in this Report. • DISCLOSURE:  Neither ISI nor its affiliates beneficially own 1% or more of any class of common equity securities of the subject companies referenced in the Report.  No person(s) responsible for preparing this Report or a member of his/her household serve as an officer, director or advisory board member of any of the subject companies.  No person(s) preparing this report or a member of his/her household have a financial interest in the subject companies of this Report.  At various times, the employees and owners of ISI, other than those preparing this Report, may transact in the securities discussed in this Report.  Neither ISI nor its affiliates have any investment banking or market making operations. No person(s) preparing this research Report has received non-investment banking compensation form the subject company in the past 12 months. ISI does and seeks to do business with companies covered in this research Report and has received non-investment banking compensation in the past 12 months. • DISCLAIMER:  This material is based upon information that we consider to be reliable, but neither ISI nor its affiliates guarantee its completeness or accuracy.  Assumptions, opinions and recommendations contained herein are subject to change without notice, and ISI is not obligated to update the information contained herein.  Past performance is not necessarily indicative of future performance.  This material is not intended as an offer or solicitation for the purchase or sale of any security. • ISI RATING SYSTEM:  Based on stock’s 12-month risk adjusted total return. • Strong Buy                        Return > 20% • Buy                                        Return 10% to 20% • Neutral                               Return 0% to 10% • Cautious                             Return -10% to 0% • Sell                                       Return < -10% • ISI has assigned a rating of STRONG BUY to 19% of the securities rated as of 6/30/13. • ISI has assigned a rating of BUY to 29% of the securities rated as of 6/3013. • ISI has assigned a rating of NEUTRAL to 44% of the securities rated as of 6/30/13. • ISI has assigned a rating of CAUTIOUS to 3% of the securities rated as of 6/30/13. • ISI has assigned a rating of SELL to 1% of the securities rated as of 6/30/13. • (Due to rounding, the above number may add up to more/less than 100%).