Fitch Ratings | February 21, 2017

Fitch Ratings-New York-21 February 2017: Smaller hotel brand owners and operators are flexing their balance sheets to support rooms system growth to stay relevant amid industry consolidation and increasing competition from alternative accommodation providers, according to Fitch Ratings. This could weaken the credit profiles for smaller lodging C-Corp issuers by increasing leverage and adding more volatile owned and leased assets and contingent obligations in the form of off-balance sheet performance and loan guarantees. Fitch expects more consolidation in the sector involving smaller issuers, which poses merger and acquisition event risk for bondholders. Hyatt Hotels Corporation's fourth-quarter and full-year 2016 results illustrate the dynamics at play. The company guided to 2017 capital spending of $430 million from roughly $210 million during 2016. The company's 2017 guidance includes $65 million of hotel developments to accelerate growth in rooms systems, particularly for newer, smaller brands. The balance of the increase relates to spending at its recently acquired Miraval Group assets ($55 million) and the build-out of its new headquarters building ($50 million) and higher reinvestment in its owned and leased hotel portfolio ($50 million). In addition to identified investments, Hyatt outlined plans for strong investment spending in the form of acquisitions, equity investments in unconsolidated hospitality joint ventures, debt investments, contract acquisition costs and other investments. The company plans to fund these investments over time through asset sales, presumably assuming that conditions in the hotel investment market remain favorable. Hyatt's 2017 guidance also reflects some risks associated with management and franchise investments. The company expects performance guarantees at four properties in France to reduce its income by $80 million this year. Lodging C-Corps periodically give owners performance guarantees to win brand franchise and management contracts, usually to gain (or maintain) a beachhead in strategic markets. US hotel franchisees and owners are showing a clear preference toward aligning with the largest brands that, in turn, have the largest customer loyalty rewards systems. Marriott-branded rooms comprised 28.6% of the US hotel development pipeline, according to STR Global, which is well above the company's 14.4% share of existing US rooms supply. Comparable measures for Hilton, the industry's second-largest player, were 22.8% and 11.6%, respectively. Hyatt-branded hotels comprised 2.1% of total rooms in the US hotel pipeline, which matched its share of the existing stock. Contact: Stephen Boyd, CFA Senior Director Corporate Finance +1 212 908-9153 Fitch Ratings 33 Whitehall Street New York, NY