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Real Estate Research May 3, 2011

Trends in Hotel Capital Markets

David Loeb Managing Director Real Estate and Hotel Senior Analyst Robert W. Baird & Co. [email protected] 414.765.7063

Please refer to Appendix - Important Disclosures and Analyst Certification.

Today's Topics

· Hotel transaction market · Debt capital markets · Equity capital markets · Questions

Baird Real Estate Research | 2

Quick, Get Me Some Prozac!

Jan-031990 1991 1992 1993 1994 1995 1996 1997 1998 1999Jan-07 2001 2002 2003 2004 2005 2006 2007 Jan-10 2009 2010 2011 Jan-04 Jan-05 Jan-06 Jan-08 Jan-09 Jan-11 1989 2000 2008 Source: Baird Research, Smith Travel Research

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Transaction Market

Public REITs have cost-of- and access-to-capital advantage versus private investors

Public REITs Dominating Transaction Market

· 165 institutional-quality hotels traded in 2010 = $7.6 billion

· $2 billion in 2009, $46 billion in 2007

Sum m ary of 2010 Hotel Deal Flow : $7.6 billion and 165 hotels identified by Baird Research

Ownership of Existing Hotel Rooms

Number of Hotels

Dollar Amount

Public 5%

Public 32% Private 68% Private 55%

Public 45%

Private 95%

Source: Baird Research

· YTD 2011 transactions at $5 billion ­ REITs 80% of $ volume

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Real Estate Debt Capital Markets

Credit markets thawing; debt becoming available

Loan Originations & Refinancings

· Debt available for high-quality assets in top markets · Debt yields now sub-9% · Adding leverage appears to be a prudent strategy

· Still in early stages of recovery; downside fairly limited

· We expect all-equity buyers to begin layering on propertyspecific debt soon · Financing not as readily available outside of top 15 MSAs · Construction financing essentially non-existent

· Lenders still cautious · We've seen some financing for NYC and DC projects

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Real Estate Equity Capital Markets

Balance sheet delevering complete; capital raises now funding acquisitions

Baird/Smith Travel Research Hotel Index

Baird / Sm ith Travel Research Hotel Stock Index Versus Other Major Stock Indices

Since 2000

350% 200%

Since 2009

300%

150%

250%

200%

100%

150% 50% 100%

50%

0%

0%

-50% -50%

10/29/2009

5/18/2009

7/26/2010

11/15/2000

12/12/2003

10/28/2004

11/19/2007

8/22/2002

1/30/2003

7/28/2006

12/9/2010

6/12/2000

4/26/2001

10/8/2001

3/18/2002

5/21/2004

9/13/2005

2/21/2006

6/14/2007

4/29/2008

10/3/2008

3/13/2009

8/19/2009

1/27/2010

Baird/STR Hotel Stock Index S&P 500

Baird/STR Hotel Stock Index S&P 500 MSCI US REIT Index (RMZ)

MSCI US REIT Index (RMZ)

Source: Baird Research, SNL Financial

Baird Real Estate Research | 9

The Baird/STR Hotel stock index was created on June 1, 2010, and characterizes stock performance since January 1, 2000. Performance for time periods prior to the creation date is hypothetical. The index is comprised of 15 of the largest domestically available hotel stocks and reviewed quarterly for composition adjustments by Baird equity research. It is not possible to invest directly in the index.

4/15/2011

3/12/2009

4/15/2009

6/19/2009

7/23/2009

8/25/2009

9/28/2009

12/2/2009

3/15/2010

4/16/2010

5/19/2010

6/22/2010

8/26/2010

9/29/2010

11/1/2010

12/3/2010

3/15/2011

2/6/2009

2/9/2010

1/6/2011

1/5/2009

1/6/2010

1/5/2007

7/6/2010

1/4/2000

7/9/2003

4/7/2005

2/9/2011

-100%

-100%

Massive Amount of Equity Raised

· $7.3 billion raised over last three years (since May 2008) · Most companies raised multiple times

· LaSalle has raised nearly $800 million through four offerings and two at the market ("ATM") programs

Public Hotel Com m on Equity

Am ount (m il) 2008 2009 2010 2011 YTD $120,525 $2,508,705 $3,045,683 $1,627,120

# Offerings 2 11 15 8

# Com panies 2 8 12 9

Note: "# offerings" does NOT include ATM issuances, "amount" does

Source: Baird Research Baird Real Estate Research | 10

Stock Prices Up, but Market Cap Up More

· 2009 equity raises needed for survival, balance sheet restructuring · 2010 equity raises mostly for acquisition funding

· Stocks up sharply, but shareholders significantly diluted

Then vs. Now : March 9, 2009 vs. April 18, 2011 Market Capitalization (m il) Then AHT BEE DRH FCH HST HT LHO SHO $92 $58 $260 $56 $2,032 $66 $161 $104 Now $952 $1,205 $2,022 $822 $12,471 $1,052 $2,399 $1,234 Chg 936% 1971% 679% 1379% 514% 1504% 1393% 1083% Equity Issuance Amt (mil) $83 $399 $580 $340 $1,300 $527 $794 $469 Raises 1 2 3 2 1 5 4 3 Avg Price $9.65 $4.76 $8.04 $5.73 $9.52 $4.28 $18.14 $7.42 Then $0.91 $0.77 $2.85 $0.88 $3.58 $1.15 $3.99 $2.18 Stock Price Now $12.59 $6.86 $12.11 $6.59 $17.91 $5.94 $28.20 $10.50 Chg 1284% 791% 325% 649% 400% 417% 607% 382% Dilution 0.7x 2.5x 2.1x 2.1x 1.3x 3.6x 2.3x 2.8x

Note: "Raises" do NOT include ATM issuances, "Amt (mil)" does Source: Baird Research

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Preferreds Becoming Part of Capital Structure

· Provide "forever" capital · Less restrictive covenants than debt · Issuance does not dilute common equity

· Investor appetite high, yields attractive

Public Hotel Preferred Equity Proceeds ($000s) 76,487 68,750 125,000 115,000 75,000 $460,237

Issuer Ashford Hospitality Trust LaSalle Hotel Properties Pebblebrook Hotel Trust Sunstone Hotel Investors Ashford Hospitality Trust

Date 09/15/10 01/19/11 03/08/11 04/01/11 04/13/11

Coupon 9.11% 7.50% 7.875% 8.00% 9.00% Total

Source: Baird Research

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IPO Record Mixed

· Most "blind pool" IPOs have underperformed; investors skeptical of all REIT IPOs · Bar raised for each successive deal · Pristine corporate governance is a must · Only Pebblebrook has achieved "escape velocity"

Hotel Stock Perform ance: Blind Pool REITs 120 110 110 100 100 90 90

80 80 70

PEB CHSP

CLDT

70

PEB

CHSP

CLDT

Source: Baird Research

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IPO Record Mixed

· Non-blind pool hotel companies, Hyatt (C-Corp) and Summit (REIT), have done well

Hotel Stock Perform ance: Hyatt Hotels 200 180 160 140 103 120 100 100 80 97 94 Hotel Stock Perform ance: Sum m it Hotel Properties 115 112 109 106

Source: Baird Research

Source: Baird Research

Since their IPOs, shares of Hyatt have risen 78.0% and shares of Summit have risen 12.2%. Over the comparable periods, the S&P 500 has risen 30.0% and 3.0%, respectively.

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IPO Pipeline Drying Up

· Five IPOs completed since November 2009 · RLJ just launched road show, pricing expected May 10

· Not a blind pool, well-respected team

Public Hotel Com pleted, Pending, and Withdraw n IPOs

Issuer Com pleted Hyatt Hotels Pebblebrook Hotel Trust Chesapeake Lodging Trust Chatham Lodging Trust Summit Hotel Properties

Ticker

Com pletion Date

Proceeds (m il)

H PEB CHSP CLDT INN

11/03/09 12/08/09 01/21/10 04/15/10 02/08/11

$1,093 $405 $180 $183 $265 $2,125

Pending RLJ Lodging Trust

RLJ

02/02/11

$550

Withdraw n Pyramid Hotels & Resorts Reunion Hospitality Trust Clearview Hotel Trust Source: Baird Research

PYR RBSC CVW

12/07/09 03/23/10 05/10/10

$275 $250 $375

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Challenging IPO Market for ALL Real Estate

· Pristine corporate governance is a must · Investors like scale, proven management teams

· Real estate dedicated managers always skeptical of IPOs

· Most funds prefer $1 billion market cap; $500 million is threshold for investment for many · Only a few appeal to non-dedicated buyers; hotels more likely to have broader appeal

REIT Com pleted, Pending, Withdraw n IPOs Since January 2008 Deals Com pleted Still in Registration Withdraw n 24 11 24 Size (m il) $5,783 $4,337 $7,401

Source: Baird Research, Dealogic

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IPO Case Study: Summit

Deal Specifics:

· 65 select-service hotels · IPO proceeds of $253.5 million · $364.4 million post-deal market cap · 35% leverage ratio at IPO

Interested Investors:

· More small cap value managers

· A few real estate dedicated managers · Real estate investors likely to jump on in future deals as market cap and float grows · Larger hotel REITs much more likely to be owned by real estate dedicated managers

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Questions?

To Get Our Research, Send Full Contact Information To:

David Loeb

[email protected]

414-765-7063

· Hospitality Monthly · Industry and company research

· This presentation

Baird Real Estate Research | 19

Appendix: Transaction Tables

Selected 2010 Hotel Sales

Selected 2010 Hotel Transactions Price ($000s) $95,000 $44,800 $112,000 $90,000 $165,000 $185,233 $98,500 $117,000 $68,500 $145,000 $73,000 $68,400 Date Feb 2010 March 2010 March 2010 May 2010 July 2010 July 2010 Aug 2010 Aug 2010 Aug 2010 Aug 2010 Aug 2010 Sept 2010 Hotel Sofitel Washington DC Raffles L'Ermitage - Beverly Hills Hyatt Regency Boston Sir Francis Drake, San Francisco Westin Chicago River North W New York - Union Square Fairmont Copley Plaza Hotel Royal Palm - Miami Beach Hotel Monaco San Francisco Westin Philadelphia Hampton Inn Washington DC Hilton Garden Inn Chelsea NYC Room s 237 119 498 416 424 270 383 409 201 294 228 169 Per key $401 $376 $225 $216 $389 $686 $257 $286 $341 $493 $320 $405 Buyer LHO Viceroy CHSP PEB HST HST/Istithmar World FCH SHO LHO LHO HT DRH Kimpton HEI JBG Inland Fairmont Seller Whitehall/GEM Colony (Fairmont Raffles) H Chartres Tishman 7% cap TTM Will stay Kimpton. FTM 4.4x EBITDA, and 3% cap expected. 5.1% TTM cap rate Host majority partner; LEM Mezzanine seller; Dubai World bought for $282mm in 2006 $25mm renovation in 2004; less than 9.0x 2007 EBITDA; $162 RevPAR in 2009 Bought at foreclosure auction after purchasing junior debt at a discount $2.7million of capex expected; 3.6% TTM cap rate, 4.7% EBITDA yield 5.7% TTM cap rate, 6.4% TTM EBITDA yield 6.7% TTM cap rate, 7.1% TTM EBITDA yield; 8.3% projected cap rate and 11.7% IRR 12.9x 2010 EBITDA, 7% cap rate (2010 NOI), $2.5mm of EBITDA in '10, $6mm in '11 Assuming $56.1mm of debt at LIBOR+130bps; 4.7% NTM cap rate, 5.7% NTM EBITDA yield RLJ paid off $250mm of debt, adding $200mm new debt; 5.3% TTM EBITDA yld; last traded for $110.5mm in 2003 ($35mm renos since) Com m ents 15.7x 2009 EBITDA (ex-inauguration)

Dec 2010

Sofitel Philadelphia

306

$87,000

$284

PEB

Whitehall/GEM

Dec 2010

DoubleTree Metropolitan Hotel NYC

755

$335,000

$444

RLJ

Whitehall/Highgate/ Rockw ood

Source: Baird Research

Baird Real Estate Research | 21

Selected YTD Hotel Sales

Selected 2011 Hotel Transactions Date Hotel Nam e Room s Price Per Key Buyer Seller Highgate/ Whitehall Clearview Helmsley Estate AHT Com m ents SHO bought 62% interest from partners; $286mm implied valuation; 14.7x 2010 EBITDA; 9.1x 2007 peak EBITDA 7.8% 2010 EBITDA yield; 6.3% 2010 cap rate $5mm EBITDA in 2011 during conversion to Westin, $30-$35mm EBITDA in 2012 3.7% TTM cap rate $30mm EBITDA in 2011; renovation costs not disclosed AHT-PREI ow ned mezz-4 piece, restructured capital stack; 6.1% TTM cap rate, 35% perkey discount to '07 take-private value Kor Morgans 4% TTM cap rate (thru Feb), 5% TTM EBITDA yield; 7.5mm peak EBITDA (10.7x), 6.4mm peak NOI (8% cap) $6-$6.5mm EBITDA in 2011 during FCH ow nership SHO bought 8/2010 for $126mm gross; $42.6mm reno to continue as planned; SHO providing $90mm financing SHO bought 75% interest; 13.8x 2010 EBITDA, 6.2% cap rate; opened Dec 2008 w / cost of $348mm $110mm plus $10mm reno reimburse; planning add'l $13mm reno; 5.8% NTM EBITDA yield, 5.1% cap on $133mm price Reno 4Q11; $2.95mm NTM EBITDA = 5.44% (4.5% cap) on $54.2mm price Jan 2011 Feb 2011 Mar 2011 Feb 2011 Mar 2011 DoubleTree Times Square JW Marriott New Orleans Helmsley Hotel JW Marriott San Francisco Manchester Hyatt San Diego 285 494 775 338 1625 $177,320 $93,800 $313,500 $96,000 $570,000 $622 $190 $488 $284 $351 SHO SHO HST Thayer HST

Mar 2011

Highland portfolio - 28 hotels

8,084

$1,277,000

$158

AHT/PREI

Mar 2011 Apr 2011

Viceroy Santa Monica Morgans Hotel & Royalton Hotel

162 282

$80,100 $140,000

$494 $496

LHO FCH

Apr 2011

Royal Palm - Miami Beach

409

$130,000

$318

KSL

SHO

Apr 2011

Hilton San Diego Bayfront

893

$356,250

$399

SHO

Apr 2011

Westin Gaslamp - San Diego

450

$110,000

$296

PEB

HOT

Apr 2011

Hotel Monaco Seattle

189

$51,200

$287

PEB

Kimpton

Source: Baird Research

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Loan Originations & Refinancings

Baird Real Estate Research | 23

Public Companies Actively Raising Equity

Public Hotel Com m on Equity Proceeds ($000s) 65,340 55,185 86,451 124,861 499,950 148,781 103,500 147,500 231,438 14,250 158,700 53,504 131,000 21,495 165,600 405,200 8,492 49,383 158,600 138,000 155,250 180,234 113,821 117,300 55,400 Proceeds ($000s) 25,564 182,500 349,140 193,200 173,938 332,350 76,500 105,000 147,631 166,750 199,875 83,230 250,000 150,887 73,600 265,052 73,500 255,160 50,000 165,600 100,000 235,980 39,000 218,341 Issuer Hersha Hospitality Trust Orient-Express Hotels Ltd. DiamondRock Hospitality Company LaSalle Hotel Properties Host Hotels & Resorts, Inc. Orient-Express Hotels Ltd. Sunstone Hotel Investors, Inc. LaSalle Hotel Properties Hospitality Properties Trust Hersha Hospitality Trust Hospitality Properties Trust DiamondRock Hospitality Company Host Hotels & Resorts, Inc. DiamondRock Hospitality Company Sunstone Hotel Investors, Inc. Pebblebrook Hotel Trust Hersha Hospitality Trust DiamondRock Hospitality Company Host Hotels & Resorts, Inc. Orient-Express Hotels Ltd. Hersha Hospitality Trust Chesapeake Lodging Trust LaSalle Hotel Properties Hersha Hospitality Trust Host Hotels & Resorts, Inc. Date 05/13/08 11/14/08 04/14/09 04/23/09 04/24/09 04/28/09 05/21/09 06/10/09 06/18/09 08/04/09 08/11/09 09/11/09 09/11/09 10/08/09 10/16/09 12/08/09 12/31/09 12/31/09 12/31/09 01/12/10 01/14/10 01/21/10 03/02/10 03/19/10 03/26/10 Issuer Date DiamondRock Hospitality Company 03/26/10 Chatham Lodging Trust 04/15/10 Strategic Hotels & Resorts DiamondRock Hospitality Company FelCor Lodging Trust Pebblebrook Hotel Trust LaSalle Hotel Properties Host Hotels & Resorts, Inc. Chesapeake Lodging Trust Hersha Hospitality Trust Sunstone Hotel Investors Ashford Hospitality Trust Host Hotels & Resorts, Inc. DiamondRock Hospitality Company Chatham Lodging Trust Summit Hotel Properties LaSalle Hotel Properties Chesapeake Lodging Trust Strategic Hotels & Resorts FelCor Lodging Trust Host Hotels & Resorts, Inc. Pebblebrook Hotel Trust LaSalle Hotel Properties LaSalle Hotel Properties 05/13/10 05/25/10 06/16/10 07/22/10 08/31/10 09/30/10 10/06/10 10/19/10 11/09/10 12/14/10 12/31/10 01/18/11 02/02/11 02/08/11 02/23/11 03/01/11 03/11/11 03/29/11 03/31/11 04/01/11 04/11/11 04/26/11

Total Note: IPOs in bold italics Source: Baird Research, SNL Financial

$7,302,033

Baird Real Estate Research | 24

Baird Hospitality Real Estate Contacts

Research Investment Banking Trading

David Loeb [email protected] 414.765.7063 Michael J. Bellisario [email protected] 414.298.6130

Justin Glasgow [email protected] 703.821.5763

Mike Lanigan [email protected] 414.298.5275 Jeff Goddard [email protected] 414.298.7792

Equity Capital Markets

Rick Conklin [email protected] 312.609.5480

Baird Real Estate Research | 25

Appendix ­ Important Disclosures and Analyst Certification

Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months. Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H - Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report.

Distribution of Investment Ratings. As of April 29, 2011, Baird U.S. Equity Research covered 654 companies, with 52% rated Outperform/Buy, 47% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 12% of Outperform/Buy-rated, and 7% of Neutral/Hold-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst's recommendations and stock price performance; 2) Ratings and direct feedback from our investing clients, our sales force and from independent rating services; and 3) The analyst's productivity, including the quality of the analyst's research and the analyst's contribution to the growth and development of our overall research effort. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research Oversight Committee. Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking transactions. A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspxYou can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202.

Analyst Certification

The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.

Disclaimers Baird prohibits analysts from owning stock in companies they cover.

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws. Copyright 2011 Robert W. Baird & Co. Incorporated

Other Disclosures

UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W Baird Limited holds an ISD passport.

This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W Baird Limited, which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services Authority requirements, this investment research report is classified as objective.

Robert W Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws.

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