Hotel Valuation and Transaction Trends for the U.S. Lodging Industry - - PowerPoint PPT Presentation

• 1 -

Hotel Valuation and Transaction Trends for the U.S. Lodging Industry

Presented by Stephen Rushmore Jr. srushmorejr@hvs.com

• 2 -

A little about myself…

• Graduated from the

Cornell Hotel School in 1996

• Joined HVS in 2002
• Co-President and COO
• State certified appraiser
• Active biker and hiker

• 3 -

Married with two kids

• 4 -

Talking points for today

• 1. Valuation trends and predictions
• 2. Transaction trends
• 3. Cap rate trends
• 4. Who is buying and selling?
• 5. The state of new construction
• 6. HVS research
• 7. Hotel Valuation Software

• 5 -

Let's start with the ending…

• 1. Less buying, but more selling opportunities
• 2. Still plenty of upside potential in value growth
• 3. Average rate will drive REVPAR and NOI growth
• 4. Extended period of increased values through 2016
• 5. Limited growth of new hotel supply
• 6. Construction financing still scarce

• 6 -

The HVI measures changes in value and provides a tool for identifying hotel acquisition and disposition

• pportunities

The 2012 Hotel Valuation Index (HVI)

• 7 -

HVS Focuses on Value

• Each year HVS values thousands of hotels throughout the

world

• In the U.S. the HVI shows the value of a typical hotel in 66

markets from 1987-2016

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$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

U.S. Hotel values projected to surpass 2006 peak in 2013

Projected

Source: HVS/STR Hotel Valuation Index

• 9 -

United States value growth projected to persist through 2016

Projected

• 40.00%
• 30.00%
• 20.00%
• 10.00%

0.00% 10.00% 20.00% 30.00% 40.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: HVS/STR Hotel Valuation Index

• 10 -

Miami and San Francisco values per room increased the most between 2010-2011

Rank 1 Miami $83,280 2 San Francisco $81,389 3 New York $63,493 4 Boston $41,523 5 Los Angeles $40,918 6 San Jose $38,057 7 West Palm Beach $35,244 8 Las Vegas $33,786 9 Oahu $32,412 10 Oakland $30,329 33 United States $13,205

Source: HVS/STR Hotel Valuation Index

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Santa Fe values per room decreased the most between 2010-2011

Rank 59 Rochester ($2) 60 Huntsville ($1,280) 61 Albuquerque ($1,996) 62 Syracuse ($2,151) 63 Norfolk ($2,156) 64 Omaha ($4,207) 65 Tucson ($5,240) 66 Santa Fe ($9,186)

Source: HVS/STR Hotel Valuation Index

• 12 -

Las Vegas values per room increased the most between 2010-2011

Rank 1 Las Vegas 125% 2 Hartford 80% 3 Tampa 76% 4 Oakland 54% 5 Detroit 52% 6 Wilmington 52% 7 WPB - Boca Raton 42% 8 Nashville 40% 9 San Jose 38% 10 West Palm Beach 37% 27 United States 20%

Source: HVS/STR Hotel Valuation Index

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Tucson values per room decreased the most between 2010-2011

Rank 60 Huntsville

• 2%

61 Syracuse

• 3%

62 Albuquerque

• 4%

63 Omaha

• 8%

64 Santa Fe

• 8%

65 Norfolk

• 9%

66 Tucson

• 15%

Source: HVS/STR Hotel Valuation Index

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Convention cities projected to capture largest value growth in 2012

Rank 1 Las Vegas 57% 2 New Orleans 50% 3 Tampa 47% 4 Sacramento 46% 5 Richmond 43% 6 WPB - Boca Raton 39% 7 Chicago 34% 8 Nashville 33% 9 Winston-Salem 33% 10 Oakland 32% 47 United States 15%

Source: HVS/STR Hotel Valuation Index

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Tucson values expected to decline the most in 2012

Rank 57 Atlanta 10% 58

• St. Louis

8% 59 Rochester 7% 60 Santa Fe 7% 61 Dallas 5% 62 San Diego 2% 63 Denver 1% 64 Phoenix

• 5%

65 Washington DC

• 8%

66 Tucson

• 23%

Source: HVS/STR Hotel Valuation Index

• 16 -

Tucson value not expected to fully recover in the foreseeable future

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Projected

Source: HVS/STR Hotel Valuation Index

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Tucson occupancy also not expected to fully recover in foreseeable future

50% 52% 54% 56% 58% 60% 62% 64% 66% 68% 70% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Projected

Source: HVS/STR Hotel Valuation Index

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However…Tucson expected to show the most significant value increase through 2016

Rank 1 Tucson 170% 2 Tallahassee 94% 3 Las Vegas 92% 4 Norfolk 89% 5 Sacramento 88% 6 Hartford 76% 7 WPB - Boca Raton 74% 8 Kansas City 72% 9 United States 69% 10 Wilmington 65%

Source: HVS/STR Hotel Valuation Index

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Cities with the smallest value appreciation projection through 2016

Rank 57 Oahu 24% 58 Albuquerque 22% 59 Washington DC 21% 60 Denver 20% 61 Miami 16% 62 Anaheim 15% 63 Buffalo 14% 64 Charlotte 10% 65 Boston 7% 66 San Francisco

• 1%

33 United States 39%

Source: HVS/STR Hotel Valuation Index

• 20 -

Gateway cities are the most volatile

Rank 1 New York 121% 2 Miami 98% 3 Los Angeles 69% 4 Las Vegas 67% 5 WPB - Boca Raton 67% 6 Tallahassee 61% 7 West Palm Beach 54% 8 Anaheim 54% 9 Austin 48% 10 Omaha 38%

Source: HVS/STR Hotel Valuation Index

• 21 -

Secondary cities are the least volatile

Rank 1 Santa Fe

• 56%

2 Dayton

• 47%

3 Cincinnati

• 47%

4 Albuquerque

• 47%

5 Syracuse

• 46%

6 Rochester

• 40%

7 Winston-Salem

• 39%

8 Indianapolis

• 33%

9 Orlando

• 31%

10

• St. Louis
• 31%

Source: HVS/STR Hotel Valuation Index

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Long-Term Hold: Average Annual Compounded Growth in Value 1987-2016

Rank 1 Miami 11% 2 Austin 10% 3 New York 10% 4 Houston 8% 5 Omaha 7% 6 Oahu 7% 7 Portland 7% 8 New Orleans 6% 9 Denver 6% 10 San Antonio 6% 31 United States 4%

Source: HVS/STR Hotel Valuation Index

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Long-Term Hold: Average Annual Compounded Growth in Value 1987-2016

Rank 57 Hartford 2% 58 Dayton 2% 59 Long Island 2% 60 New Haven 1% 61 Tucson 1% 62 Winston-Salem 1% 63 Albuquerque 1% 64 Detroit 1% 65 Rochester 1% 66 Norfolk 0%

Source: HVS/STR Hotel Valuation Index

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Where are the buying and selling

• pportunities?

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The Southwest has buying opportunities

• Tucson
• Phoenix
• Las Vegas

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Where and when to sell

• Sell Now
• San Francisco
• Boston
• Washington DC
• Sell Next Year
• New Orleans
• Atlanta
• Chicago
• Philadelphia
• Cleveland

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Transactional Trends

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Major hotel sales transactions ($10+ million) are rebounding from 2009 lows

10 20 30 40 50 60 70 80 90 100 Q1 - 2005 Q3 - 2005 Q1 - 2006 Q3 - 2006 Q1 - 2007 Q3 - 2007 Q1 - 2008 Q3 - 2008 Q1 - 2009 Q3 - 2009 Q1 - 2010 Q3 - 2010 Q1 - 2011 Q3 - 2011

Source: HVS San Francisco

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Annual transaction volume converges with 21 year average

50 100 150 200 250 300 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: HVS San Francisco

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California tops most active market for transactions in 2011

Market $ Volume (Millions) $/Room No. Properties San Diego 1,700 279,000 18 SF Metro 700 231,000 16 NYC Metro 2,700 417,000 16 South Fla. 500 237,000 12 DC Metro 700 296,000 10 LA Metro 600 228,000 10 Chicago 400 232,000 4 Dallas 100 104,000 4 Hawaii 200 149,000 3 Boston 100 381,000 1

Source: HVS San Francisco

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Property Name City State Room Count Price Per Room Hilton Garden Inn Birmingham SE Liberty Park Birmingham AL 130 $88,462 Hotel Milano San Francisco CA 108 $277,778 Marriott San Francisco Airport Waterfront Burlingame CA 685 $157,664 Hotel Palomar Washington D.C. Washington DC 335 $429,254 Perry South Beach Miami Beach FL 340 $676,471 Indian Creek Hotel Miami Beach FL 61 $196,721 Homewood Suites Gainesville Gainesville FL 103 $141,262 Royal Plaza Lake Buena Vista FL 394 $40,609 Courtyard Atlanta Downtown Atlanta GA 150 $190,000 Renaissance Waverly Atlanta Atlanta GA 521 $184,599 Marriott Lexington Griffin Gate Resort Lexington KY 409 $184,599 Holiday Inn Baltimore Inner Harbor Downtown Baltimore MD 365 $56,712 Hilton Saint Louis Downtown Saint Louis MO 195 $115,897 King & Grove Williamsburg Brooklyn NY 64 $520,000 Novotel New York Times Square New York NY 480 $191,667 Rittenhouse Hotel Philadelphia PA 111 $215,315 Renaissance Austin Arboretum Austin TX 492 $184,599 Le Meridien Arlington Arlington VA 154 $300,000

Source: HVS

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Who is buying and selling?

• Increasing investments from Asia and Brazil
• Hotel owners that cannot justify the cost of mandated PIPs

will put properties in the market

• Loan maturities are expected to stimulate more sales of

underperforming hotels in 2012 / 2013

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Typical financing terms

Leverage Interest Rate Equity Yield Total Property Yield Trophy (Top 3%) 65 - 70% 5 - 6% 13 - 15% 9 - 9.5% High Quality 65 - 70% 5.5 - 6.5% 15 - 17% 9.5 - 11% Middle Quality 60 - 65% 6.5 - 7% 17 - 18% 11.5 - 13% Lower Quality 60% 7.5 - 9% 19 - 22% 13.5 - 16%

Source: HVS

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Derived capitalization rates by product type

2010 2011 Full Service 5.30% 5.60% Select and Extended-Stay 7.80% 6.70% Limited Service 8.50% 9.40%

Source: HVS

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Cap Rates Increasing as recovery in NOI is realized

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Cap Rate based on Historical NOI Cap Rate based on Historical NOI Cap Rate based on 1st Yr. Projected NOI Free and Clear Discount Rate Equity Yield 2011 5.8 6.9 11.4 16.3 2010 4.2 5.2 11.2 15.2 2009 8.7 6.5 11.8 14.1 2008 7.1 7.2 11.2 18.2 2007 7.0 8.1 11.1 20.4 2006 6.1 7.3 10.9 19.3 2005 5.2 6.9 11.4 19.7 2004 5.8 7.4 12.2 19.7 2003 7.9 8.2 14.0 21.4 2002 8.9 9.8 13.6 21.0 2001 8.2 9.8 14.6 22.2 2000 9.2 10.4 14.0 21.0 Source: HVS San Francisco

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New Construction

• 38 -

New build financing is very limited

• Little traction in new hotel construction
• Debt is selectively available on feasible projects with LTV of 50-60%

cost range

• Those seeking financing are using non-traditional lenders
• Debt REIT’s
• Private debt funds
• EB-5 programs
• New construction financing will become more available as
• Market recovery continues with increased occupancy and ADR

growth

• Lack of new supply continues

• 39 -

New construction continued…

• New hotel projects in the pipeline are predominately select-

service and extended-stay properties with low barriers to entry

• Renovations are driving the hotel construction trade and are

expected to increase in 2012, 2013

• Drive up cost of materials and wait times
• New construction alternative - Increasing opportunities for

acquiring distressed properties badly in need of CapEx

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Hotel revenues and expenses have one component that is fixed and another that varies directly with occupancy or revenue source

The fixed and variable regression analysis

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Methodology – Annual operating histories

• Sample included 586 properties with annual operating

statements

• Time spanned between 2001-2011
• Minimum of 7 consecutive years of reporting
• Mix of full service, select service and limited service

properties located throughout the country

• 516 branded, 70 independent

• 42 -

Methodology – Annual operating histories

• Additional property characteristics were segmented and

analyzed:

• Brand Affiliation
• Room Count
• Meeting Space Size - Square Footage
• Number of Meeting Rooms
• Number of Food and Beverage Outlets
• Food and Beverage Outlet Type
• Corridor Type
• Location

• 43 -

The percentage of fix costs are declining for all expenses

• Hotel operators are more adept at controlling expenses with

the ebb-and-flow of seasonality and hotel cycles

• Revenue and yield management tools are becoming

increasingly sophisticated and more widely utilized

• As a whole, makes hotels a lower risk Investment risk for the

savvy investor and operator

• 44 -

Food, Beverage and Other Income is correlated to Rooms Revenue and not Occupancy

• Guests are more likely to patronize a hotel bar or room

service, which is usually priced at a premium, when they have paid more for a hotel room

• OTA can be a double-whammy for service hotels, because

those guests are less likely to use other hotel services

• Full service properties need to give closer attention to

maintaining average rate to boost bottom line

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Utility costs have dropped from 75% fixed to 50% fixed in the past ten years

• Heating, cooling and lighting are usually the biggest expense
• f a hotels utilities
• The hospitality industry has increasingly implemented

sophisticated energy efficient climate control systems in guest rooms, meeting rooms, and public spaces.

• Many hotels have instituted opt-in policies for cleaning linens
• ver multi-night stays to reduce laundry, which in return

lowers utility consumption.

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Final Recommendations

Revenues Fixed Food Room Revenue 41% Beverage Room Revenue 38% Other Income Room Revenue 46% Departmental Expenses Rooms Total Revenue 46% Food and Beverage Food and Beverage Revenue 35% Other Income Other Income 40% Undistributed Operating Expenses A&G Total Revenue 46% Marketing Total Revenue 50% PO&M Occupancy 52% Utilities Total Revenue 50%

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The Hotel Valuation Software

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In Conclusion…

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Key takeaways

• 1. Less buying, but more selling opportunities
• 2. Still plenty of upside potential in value growth
• 3. Average rate will drive REVPAR and NOI growth
• 4. Extended period of increased values through 2016
• 5. Limited growth of new hotel supply
• 6. Construction financing still scarce