Real Estate Investment Trust specialized in hotels (1993)

$2.83 B of market capitalization

02/16/2009

Profile

Leader in the lodging real estate sector

119 luxury and full service hotels managed by strong brands (Marriott)

StrategyMaximize shareholder value by acquiring assets

high quality in prime locationswith significant barriers to entry

Create value through aggressive asset management

Expand their leadership to take advantage:greater scale geographic diversification in top markets (Europe, Asia)

Be flexible: cash and not too leveraged 3

ManagementSimple organizational structure => flexibility

Experienced and promoted from within expertise in the lodging real estate.knowledge of real estate cycles and crisis

CompetitorsMain direct competitor: Lasalle Hotel Properties. Unquestionable Leader (market capitalization, revenues,

assets…)Higher capital efficiency and return on assetsLower growth (rationalization) Lower operating profit margin

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Profitability

After tax operating profit margin= 16%

ROIC= 8%

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Good profitability Real estate cycles

Financial conditionLT Debt/ Equity = 1.07Debt maturing 78% in 2012 and after.

Current ratio= 4.9Important amount of cash (4.7% of assets)Increasing operating cash flow= $1.050 billionIncreasing free cash flows= $741 million

Low financial risks, flexibility and options

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RisksFuture decrease in hotels valueLasalle Hotel PropertiesCredit crunch Volatility of profit and profitabilityStock price volatility => 8.55% of Default within 6

months (Merton model).S&P BB rating.

Modest financial risk profileFocus on prime location in constrained marketsDiversificationGood cash flow statement

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Historical Cash Flows

Quarterly Cash Flows

Historical TRS & Volatility

Cumulative log return

Volatility

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Valuation (base case)

V= 0.87

Valuation (stress case)Decrease of ROIC from 4% to 3% during phase 1 and from

12% to 11% in stage 2.Decrease of sales growth from -10% to -12% in phase 1, from

8% to 7% in phase 2 and from 6% to 5% in phase 3Decrease of capital efficiency by 50 basis points in stage 1

and 3 as well as 20 basis points in stage 2.Increase of cost of capital from 14% to 15% in stage 1 and

from 10% to 11% in stage 3

Price= $4.89Undervalued by 1%.

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Recommandation

Buy shares to take advantage of the:undervalued stock,future economic recoveryleading position in lodging real estategood financial condition.

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