Find a website that describes a full service resort that you would like to visit some time in your life. Describe the concept of the resort and review all the amenities that the resort offers other than guest rooms and restaurants.

HVS Caribbean | #13 Professional Centre, Caves Village, Nassau, Bahamas www.hvs.com

CARIBBEAN HOTEL INVESTORS MANUAL WHAT YOU NEED TO KNOW

SEPTEMBER 2011

Parris E. Jordan Managing Director HVS Caribbean

CARIBBEAN HOTEL INVESTORS MANUAL – WHAT YOU NEED TO KNOW | PAGE 2

Introduction

The Caribbean benefits from its warm tropical weather and beautiful beaches. These natural attributes, coupled with the warmth of its people and a rich culture, attract millions of visitors to this part of the world each year. Therefore, the region’s main economic sector has naturally been the hospitality and tourism industry. As a result, the industry plays a vital role as a generator of wealth and employment across a broader sphere, acting as a catalyst for growth in other areas, such as agriculture, construction, and manufacturing. Overall, the tourism industry generates over $20 billion a year for the Caribbean region and provides more jobs than any other industry. During the last three years, the hospitality sector was significantly affected by the economic slowdown and lack of liquidity. Destinations like the Caribbean that rely on the leisure market were hit hard in particular as consumer confidence declined and other economic indicators, such as the housing market and employment numbers, showed little signs of recovery. This downturn led families to reduce their discretionary spending, which in many cases included leisure travel. Thus, visitation to the Caribbean region decreased noticeably in 2008 and 2009. However, the Caribbean hotel market has recently shown signs of recovery, with demand levels increasing in 2010 and strengthening further through the first half of 2011 compared to the same period last year. Occupancy levels are also improving, but although marketwide average rate improved in 2010, it has remained relatively flat throughout the first half of 2011. Overall, the Caribbean lodging market’s fundamentals are improving, which bodes well for the hotel industry.

Caribbean marketwide demand peaked in 2007, and we expect demand to attain levels significantly higher than the market’s historical peak by the end of 2011. With strengthening demand and relatively low levels of supply scheduled to enter the market over the next few years, the Caribbean market is positioned to benefit from the eventual economic recovery. We expect that as demand levels continue to strengthen, local hotel operators will gain greater confidence and begin to yield-manage more effectively, resulting in higher average rates and overall operating performance. Despite the recent challenges, the Caribbean market is poised for recovery. The Caribbean market is characterized by very limited inter-island travel and thus little regional demand. As such, the Caribbean hospitality and tourism sectors are highly dependent on the area’s source markets and are therefore reliant on the improved performance of the economies of the U.S., Europe, and Canada, the main source markets for the Caribbean region. Table 1 outlines the total number of tourist arrivals from the various source markets to each of the islands for 2010. Given its relative proximity and ease of access, the U.S. has been the major source market for tourism and thus hotel demand in the Caribbean region. Table 2 highlights the total number of arrivals and total number of U.S. tourist arrivals to each of the islands for the year 2010.

CARIBBEAN HOTEL INVESTORS MANUAL – WHAT YOU NEED TO KNOW | PAGE 3

TABLE 1: ARRIVALS TO CARIBBEAN ISLANDS – 2010

TABLE 2: U.S. SHARE OF ARRIVALS TO CARIBBEAN ISLANDS – 2010

Arrivals 2010

2010

Percentage

United States Canada Europe Other United States Canada Europe Other Total

38,882 2,403 7,558 13,155 63 % 4 % 12 % 21 % 61,998

81,529 17,759 86,101 45,916 35 8 37 20 231,305

535,814 37,702 76,362 175,573 65 5 9 21 825,451

1,095,272 119,230 78,018 75,533 80 9 6 6 1,368,053

134,969 72,351 212,276 112,584 25 14 40 21 532,180

166,016 30,402 28,498 7,346 71 13 12 3 232,262

14,494 1,417 15,273 3,989 41 4 43 11 35,173

330,343

228,461 19,499 19,850 20,462 79 7 7 7 288,272

0 945,248 809,514 776,982 0 37 32 31 2,531,744

48,672 7,600 163,546 121,838 14 2 48 36 341,656

76,517

1,226,367 659,063 1,184,269 1,054,844 30 16 29 26 4,124,543

20,038 6,187 33,452 46,479 19 6 32 44 106,156

1,242,943 325,191 271,315 82,229 65 17 14 4 1,921,678

476,492

1,134 279 998 1,614 28 7 25 40 4,025

1,231,748 19,216 28,802 90,048 90 1 2 7 1,369,814

3,775 1,065 6,335 1,152 31 9 51 9 12,327

129,085 32,154 85,695 59,003 42 11 28 19 305,937

21,551 33,498 101,118 72,141 9 15 44 32 228,308

236,376 33,498 101,118 72,141 53 8 23 16 443,133

74,229 19,510 23,524 40,854 47 12 15 26 158,117

696,878 6,601 14,446 31,104 93 1 2 4 749,029

Source: Caribbean Tourism Organization and Caribbean Hotel & Tourism Association

US Virgin Islands *Non-resident hotel registrations only

St Lucia

St Vincent & the Grenadines

St. Martin/St. Maarten

Trinidad & Tobago

Jamaica

Martinique

Montserrat

Puerto Rico*

Saba

Cuba

Curacao

Dominica

Dominican Republic

Grenada

Bahamas

Barbados

Bermuda

Bonaire

British Virgin Islands

Cayman Islands

Anguilla

Antigua & Barbuda

Aruba

2010 Total Tourist

Arrivals

% Change

From

2009

2010 US

Share

2010 Estimated US

Tourist Arrivals

61,998 7.1 63 % 38,882

231,305 -1.3 35 81,529

825,451 1.6 65 535,814

1,368,053 3.1 80 1,095,272

532,180 2.6 25 134,969

232,262 -1.5 71 166,016

35,173 5.3 41 14,494

330,343 7 N/A N/A

288,272 6 79 228,461

2,531,744 4.2 0 0

341,656 -6.8 14 48,672

76,517 2.1 N/A N/A

4,124,543 3.3 30 1,226,367

106,156 -6.4 19 20,038

1,921,678 4.9 65 1,242,943

476,492 7.9 N/A N/A

4,025 -1.2 28 1,134

1,369,814 5.2 90 1,231,748

12,327 3.1 31 3,775

305,937 9.9 42 129,085

228,308 -3.9 9 72,141

443,133 0.7 53 236,376

158,117 -9.9 47 74,229

749,029 3.8 93 696,878US Virgin Islands *Non-resident hotel registrations only

Saba

St Lucia

St Vincent & the Grenadines

St. Martin/St. Maarten

Trinidad & Tobago

Jamaica

Martinique

Montserrat

Puerto Rico*

Cayman Islands

Cuba

Curacao

Dominica

Dominican Republic

Grenada

Bahamas

Barbados

Bermuda

Bonaire

British Virgin Islands

Anguilla

Antigua & Barbuda

Aruba

Source: Caribbean Tourism Organization and Caribbean Hotel & Tourism Association

CARIBBEAN HOTEL INVESTORS MANUAL – WHAT YOU NEED TO KNOW | PAGE 4

Investment Activity

As the Caribbean market continues to show signs of recovery, it has naturally resulted in increasing investor interest in the region. Although capital for new construction remains scarce and lenders are far more stringent than they were in the past, new projects are still being funded, and the banks that have been historically committed to hospitality projects in the region are slowly beginning to resume providing capital for acquisitions and are even considering new construction financing, although on a very selective basis. Notably, an alternative financing option for large-scale projects in the Caribbean region has been the Chinese Government, which has invested heavily in the region since 2004. According to Dr. Adam Wu, Chief Operating Officer of the China Business Network, the Chinese have already made substantial direct investments in the region, and their aim is to continue to do so. In 2009, the Chinese Government invested over $7 billion in the Caribbean on a wide range of tourism and non- tourism projects. The Chinese Government is currently financing the $2.6-billion Baha Mar project in the Bahamas and funded the Montego Bay Conference Center, which opened earlier this year. In mid September this year, the Chinese Government pledged another $1 billion in preferential loans to Caribbean Community Countries (CARICOM). It is clear that the Chinese Government is committed to investing in the Caribbean region and in particular in the region’s hospitality and tourism industry. As the Caribbean lodging market continues to improve and financing options become more available than a year ago, it is clear that hotel investment opportunities will also increase. With 32 islands nations that all feature

different characteristics, the Caribbean lodging market is unique; thus investors need to understand the various markets and islands within the Caribbean before pursuing opportunities.

Investment Considerations

As noted, each of the 32 Caribbean island nations constitutes a different submarket, and operating or investing in a hotel on one island is entirely different from operating or investing in a hotel on another island. Given these factors, here are some points that investors and operators should keep in mind when pursing deals in the Caribbean. Understanding Individual Market Trends

Although the opportunity is within the Caribbean, a thorough understanding of the specific island trends pertaining to the location of the hotel is paramount. Investors need to clearly recognize that the lodging industry is a market-by-market business that quite frequently acts in contradiction to the overall market. To illustrate this point, while the Caribbean market overall was up almost 5.0% in terms of RevPAR through the first six months of 2011, both St. Lucia and Curacao exhibited RevPAR increases in excess of 20.0%. Conversely, the U.S. Virgin Islands, one the highest-rated markets in the region, experienced a decline in RevPAR during the same period. It is therefore imperative for investors to understand the individual island market trends when making investment decisions and not to rely solely on the overall regional trend. Market and Product Selection

The investor seeking a specific opportunity in the Caribbean needs to understand the long- term characteristics of the island to determine

CARIBBEAN HOTEL INVESTORS MANUAL – WHAT YOU NEED TO KNOW | PAGE 5

whether the location can support the hotel. A market study should be conducted by the investor or by an independent consulting firm. Once the investor has a good knowledge of the market or island, the next step is to identify and select the type of lodging product that is best suited for the particular destination. The study will help the investor to understand the levels of demand for a hotel and can recommend the best options in terms of product that can cater to the specific market demand for the submarket or island. For example, there are a few markets within the region that can absorb a favorably located select-service hotel. Lender Requirements

Banks that lend on hotel projects in the Caribbean are slowly beginning to once again provide capital for acquisitions and are even considering new construction financing. However, they are mainly lending to very strong sponsors with proven track records in the hospitality industry – that is, investors that can bring a substantial amount of equity to the deal. In addition, lenders are very selective in terms of destination and product. Marginal projects will not receive funding. Projects must be well thought out, the locations need to have strong airlift, and branding is important. Financing for ground-up construction in the Caribbean is more difficult to acquire but not impossible. There are a few banks in the region that are committed to lending on hospitality projects, and some of these banks will consider new deals. Mixed-Use Model as Development Option

Prior to the economic downturn, many hotels in the Caribbean market were developed by underwriting mixed-use projects that included a residential component for sale in order to finance the hotel development. With the

backlog of stalled condominium mixed-use developments throughout the region and other parts of the world, an investor seeking to develop a hotel in the Caribbean using this approach will find it difficult to obtain financing. As credit markets tightened, the ability to borrow from U.S. banks against one’s primary residence or other assets in order to acquire a second or retirement home was curtailed. Sales of resort-residential product across the Caribbean slowed considerably. Notwithstanding the direct effects of the recent slowdown, the Caribbean remains well positioned to capture second-home and retirement sales in the mid- to long-term. However, developers considering this model may need to re-think their strategy in the short term. Understanding Submarket Operating Costs

In general, Caribbean hotel operators benefit from lower labor costs and significantly lower or no real estate tax expense compared to U.S.- based hotel operators. These savings are typically offset by significantly higher utilities and insurance costs. Again, we emphasize the importance for investors to understand the specific Caribbean market or island being considered. For example, utilities expenses for hotels in the Bahamas and the Grand Cayman are more than double the cost of the typical hotel operating in the U.S. and can be even higher on other islands. Conversely, utilities expenses for a hotel operating in Trinidad and Tobago are notably lower than this expense for a typical hotel operating in the U.S. Another example is the cost of insurance. Hotels located within the hurricane belt incur significantly higher insurance costs than properties located outside the hurricane belt. Investors often underestimate this expense. It is not surprising for a hotel situated within the hurricane belt to incur an insurance expense more than three or four times higher than a similar-sized hotel

CARIBBEAN HOTEL INVESTORS MANUAL – WHAT YOU NEED TO KNOW | PAGE 6

outside the hurricane belt. Understanding the various costs associated with each market or island is important to help an investor determine the estimated return on investment. Airlift, Airlift, Airlift

Tourism to any island destination is dependent first and foremost on the accessibility of the destination. In most cases, accessibility is principally provided by air service, consisting of either scheduled commercial service or charter flights. Typically referred to as “airlift,” the seat capacity and frequency of flights are critical factors that essentially control the level of tourism to any island destination. The airlift therefore also dictates the potential demand for lodging facilities. Airlift and lodging inventory can be described as a “chicken-or- egg” circumstance. Airlines will not initiate or expand flight service unless and until the lodging capacity is sufficient to support that service, providing facilities that can accommodate the guests flying to the island. In this respect, the lodging facilities effectively generate the demand. The character of the accommodations is also a critical factor, in that the profile of the tourists will be directly influenced by the caliber of the accommodations offered. For example, destinations that do not offer first-class accommodations built to the standards to which North American travelers are accustomed are unlikely to attract or support significant airlift from U.S. carriers or North American points of origin. At the same time, developers are unlikely to build new resort properties unless and until the airlift is sufficient to support the hotel(s). American Airlines recently reduced the number of flights to some locations in the Caribbean; however, JetBlue and Copa Airlines added new routes throughout the region in 2011. A firm understanding of the current and planned airlift for the specific island is critical to the

investment analysis. Investors should interview local tourism and government officials as well as other operators to understand “airlift” for the specific island. Understanding the Nuances of Business Conduct

It is important for international investors to have a local knowledgeable partner on the ground. It is difficult and can be time consuming and expensive to venture into an unfamiliar market without some type of local partner that can facilitate the process. International investors should bear in mind that the development process in the region is typically longer and not as clear and straightforward as it is in the U.S. Having a local partner that is familiar with the country, laws, and nuances of conducting and operating business locally is extremely helpful.

Conclusion

The overall Caribbean lodging industry is showing signs of improvement, and the market is expected to strengthen further and gain momentum over the next couple of years as hotel fundamentals continue to improve. Comprising 32 islands nations that are all different, the Caribbean is truly a unique lodging market. Investors considering a specific island for a hotel project should do their due diligence so that they fully understand that specific submarket. For all interested in hotel investment opportunities in the Caribbean join us for our unique event the 2011 HVS Caribbean Hotel and Investment Conference and Operations Summit at the Atlantis resort in Nassau Bahamas on November 10 and 11 this year.

HVS Caribbean | #13 Professional Centre, Caves Village, Nassau, Bahamas www.hvs.com

About HVS

HVS is the world’s leading consulting and services organization focused on the hotel, restaurant, shared ownership, gaming, and leisure industries. Established in 1980, the company performs more than 2,000 assignments per year for virtually every major industry participant. HVS principals are regarded as the leading professionals in their respective regions of the globe. Through a worldwide network of 30 offices staffed by 400 seasoned industry professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. For further information regarding our expertise and specifics about our services, please visit www.hvs.com.

HVS CARIBBEAN is the latest addition to HVS’ global network of expertise in hospitality consulting. The office is located in Nassau, on New Providence Island. HVS Bahamas specializes in the development of new hotels and resorts, especially in the Caribbean and Central America, and works with developers and other team members to conceptualize the optimal accommodation product for any particular site.

About the Author

Parris E. Jordan is the

Managing Director of HVS

in the Bahamas, where he

oversees hospitality

consulting and valuation

assignments in the

Caribbean, the United

States, Central America,

and Mexico from the HVS

office in Nassau. Prior to

assuming the Managing Director role, he was a Vice

President with HVS in New York.

During his career, Parris has performed hundreds of

complex hotel consulting and valuation assignments

throughout the United States, the Caribbean, Mexico,

and Central America. Clients include major

investment banks, lenders, governments, private

equity firms, developers, and hotel brands.

Parris holds an MS from the Preston Robert Tisch

Center for Hospitality and Tourism at New York

University (NYU) where he also lectured as an

adjunct professor on lodging development from

2007 to 2009. Parris speaks at hotel investment and

tourism conferences all over the world, including

the largest such conference, the NYU International

Hospitality Industry Investment Conference.

Parris can be contacted at HVS, Unit #13, Caves

Professional Centre, Caves Village,

P.O. Box SP 61487, Nassau, The Bahamas • Phone:

+1 242-327-6913 (The Bahamas) or

+1 516-248-8828, ext. 253 (New York)• E-mail:

[email protected] • Website: www.hvs.com.