We Have Definitely Arrived How Long Will IT Last International - - PowerPoint PPT Presentation

We Have Definitely Arrived – How Long Will “IT” Last

International Society of Hospitality Consultants (“ISHC”)

We Have Definitely Arrived – How Long Will it Last?

Peak Peak Early Downturn Early Downturn Late Downturn Late Downturn Bottom Trough Bottom Trough Early Recovery Early Recovery Late Recovery Late Recovery

Hospitality is a Three‐Ring Circus!

Operations Finance Development

Peak Peak Early Downturn Early Downturn Late Downturn Late Downturn Bottom Trough Bottom Trough Early Recovery Early Recovery Late Recovery Late Recovery

Where Are We Now?

Operations Finance Development

2011 2016 2008 2010 2017

Real Estate & Market Cycle

Early downturn Late downturn Peak Peak Trough Early upturn Late upturn

The 14 Stages of Developer Emotion

Despondency ** Capitulation ** Panic Desperation Fear Denial Anxiety Euphoria Thrill Excitement Optimism Optimism Relief Hope Depression Point of Maximum Financial Risk Point of Maximum Financial Opportunity Year‐End 2014

Stages of Operational Rollercoaster

Bottom Trough

• Sinking

Ship

• Cut

Services

• Trim labor

Early Recovery Late Recovery

• Revenue

flow through declines

Peak

• We can do

no wrong

• Confusing

talent for timing

Real Estate Recovery

Peak Peak Bottom Trough Bottom Trough Early Upturn Early Upturn Late Upturn Late Upturn

2017 2010 2014 Middle Recovery  Real estate values double trough to peak in

top markets

 Market euphoria and optimism  Significant rate growth (supply demand

imbalance)

 Construction increases significantly  Interest rates up  Last chance to harvest real estate  8% RevPAR growth  Easy money for acquisition and focused‐

service development

 Supply pipeline explodes  Real interest rates remain low  Construction lending increases in all

sectors

 5% to 7% RevPAR growth  Time to sell

Real Estate Recovery

Peak Peak Early Upturn Early Upturn Late Upturn Late Upturn

2017 2014 Middle Recovery

Business of the Business Improves

 Supply increases  Lenders compete, spreads drop,

LTV increases

 Spreads decrease  CMBS back Cautious optimism continues Strengthening business

fundamentals

Lenders return (slowly) Debt and equity available: 70% LTV,

9‐11% debt yield

Mezzanine returns: 15%+, LTV to

85%

Primarily market driven on

excellent business prospects Dumb Money Left in

Market

Fires Burning Optimism

 Low interest rate environment  Occupancy fully recovered, transient driven  Groups are back and spending  ADRs increasing double digit  6% to 8% RevPAR increases three years running  Sale value : replacement cost and historic valuations  Inbound tourism  Subsidy and public/private ventures  Very little “distressed” real estate

Yield Signs

 Lenders start making loans on new full‐service hotels and

resorts – Immutable Law #6

 Equating luck with skill – Immutable Law #5  70% national occupancy = supply growth  Growth in supply (just before the cliff) – Immutable Law #7  10% RevPAR growth = unsustainable  Industry euphoria = it is all great and never ends > everyone

drinks the Koolade

 The really big, bold, eye‐popping deal – Blackstone bought

Hilton

 Brand breeding  Federal, state, and city telling hospitality what to pay its staff  Historic valuations

A Tale of Two Cities

Atlantic City and Philadelphia

One-Hour Drive: Atlantic City Versus Philadelphia

Potential Market Size 1.13 Million Adults 4.6 Million Adults

Atlantic City 6 0 -Minutes Drive Tim es

Atlantic City…America’s Second Casino Destination

First Casino opens 1978

American Gaming Association, 2013 State of the States

At end of 2013, 12 casino resorts with 26,000 slots, 17,000 hotel rooms, employing 35,000 people

Billion $

2014 Closures

• Revel
• Showboat
• Trump Taj Mahal
• Trump Plaza

Philadelphia’s Casino Offering

Offering:

• 8,234 Slots
• 389 Tables

4 Philadelphia- area casinos

• pened between

2006 and 2012. Generating $1.1 billion in Gross Gaming Revenue

Regional Competition

“Either build a better mousetrap…or put the trap closer to the mice.”

Expansion Continues in the NE…With Hotels

MGM National Harbor (Washington D.C.) Genting, New York State Wynn Everett (Boston) Casino Hotels:

• Unbranded
• Complimentary
• Not the highest-margin element
• Can be complementary fit

We Have Definitely Arrived – 2015 Late Recovery Stage

Chad Sorensen, President ISHC

Stage 3 of Operational Rollercoaster

Late Recovery

• Revenue

flow through declines

Late Recovery Characteristics

Inundation of New Brands & Concepts

Happy feet abound: Short‐term memory loss and a blind eye to dangers on the horizon; loss of Brands focus on existing operations

Continued RevPAR Growth

RevPAR growth fueled by ADR (see Early Recovery stage for

• ccupancy growth)

BUT…reduced flow through of incremental revenue

ADR

Reduced Flow Through ‐ Operations

 Amenity and service creep  Labor cost creep/leap;

Managers, FTEs, wages, benefits, loss of focus on productivity

 Loyalty program

stranglehold

 Acceptance of rising

distribution costs

Rising Distribution Costs

Source: Kalibri Labs

Cost of Customer Acquisition Travel Vendor Cost as % Revenue AIRLINES 3‐6% CAR RENTAL 4‐6% HOTELS 15‐25%

Commissions Rise at 2x the Rate of Revenue Growth (retail commissions only)

0% 5% 10% 15% 20% 25% 30% 35% 40% 2009 2010 2011 2012 Room Revenue Total Revenue Total S&M Commissions Total Acq Costs

Source: “The Rising Costs of Customer Acquisition,” A White Paper Prepared for Hospitality Asset Managers Association by Frank Comacho, January 2014

Commissions

Total Revenue

Speaking of Distribution…

….And Disruptors

Reduced Flow Though ‐ Increased Brand Pressures

 New and/or revamped

brand mandated programs

 Brands further off loading

• f expenses

 Property Improvement

Plans & CapEx

CapEx – 4% Isn’t Even Close

 Brand arms race (3 to 4

percent just to maintain brand standards)

 What about facilities and

systems?

 Renovations and re‐

positionings?

CapEx – ISHC & HAMA Study

 Releasing new version in

January 2015

Measuring the Recovery – Muddy Waters

2015 Take Aways

 You can’t manage what you can’t measure; so

measure

 Understand and challenge Brand programs and costs

(one size does not fit all)

 Stop talking about distribution costs; do something

about it (Net RevPAR vs. RevPAR)

 Be honest with yourself on expense “Fat” and cutting

too deep during the downturn

 Develop a thoughtful long‐term CapEx plan