will tomorrow be better than yesterday? hotels sector upd… · will tomorrow be better than...

HOTEL SECTOR UPDATEOCTOBER 31, 2017

CBRE HOTELS

The World’s Leading Hotel Experts.

WILL TOMORROW BE BETTER THAN YESTERDAY?

2 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017

THE AGENDA

1. U.S. Lodging Market • The Macro-Economy and Hotels• The Changing Traveler• Our Performance Forecasts• Cap Rates

THE MACRO ECONOMY AND HOTELS


A THOUGHT:

“Prediction is very difficult, especially if it's about the future.”

- Niels Bohr, Nobel laureate in Physics

"Generally speaking, the recent past is a good predictor of the near term future.”

- Me


MARKET OUTLOOK – THE ECONOMY

EMPLOYMENT:– Leading Markets: 5 of 60 (Tampa, Pittsburgh, Dayton, Cleveland)– Lagging Markets: 55 of 60 (San Francisco, San Jose, Nashville)

2018 VS. THE 2012 – 2016 AVERAGE:INCOME:

– Leading Markets: 16 of 60 (Tampa, Jacksonville, West Palm Beach)– Lagging Markets: 44 of 60 (Oakland, San Jose, Sacramento)

POPULATION:– Leading Markets: 13 of 60 (West Palm Beach, Raleigh-Durham, Tucson)– Lagging Markets: 47 of 60 (San Jose, Charleston, Oakland)


HOW IS THE ECONOMY TODAY?


HOW WILL THE ECONOMY BE IN 2018?


-3

-2

-1

0

1

2

3

4

5

6

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2018 2019

(GOVERNMENT) Government consumption expenditures and gross investment TRADE (Net exports of goods and services)

BUSINESS (Gross private domestic investment) CONSUMERS (Personal consumption expenditures)

Lodging Demand

THE OUTLOOK FOR THE DRIVERS THAT ARE MOST IMPORTANT TO HOTELS REMAINS FAVORABLE

These matter the most.

GDP Component Forecast

Source: BEA, Moody’s Analytics, CBRE Hotels | Americas Research Hotel Horizons: October 2017, STR, Inc.

THE CHANGING TRAVELER


QUESTIONS:


Year Weekday % ∆ Weekend % ∆ Total % ∆

2000 60.5% 68.3% 62.8%

2005 60.2% -0.6% 68.3% 0.0% 62.5% -0.4%

2010 54.8% -8.9% 62.5% -8.5% 57.0% -8.8%

2016 62.3% 13.8% 71.3% 14.0% 64.9% 13.9%

2000-16 Change 1.4% 1.8% 1.6%

COMPARING WEEKDAY VS. WEEKEND PERFORMANCE

Weekend Occupancy Level is 9.0 points Higher than the Weekday Level

ROOM TO GROW?

Occupancy Level

Source: STR


Year Weekday % ∆ Weekend % ∆ Total % ∆

2000 $82.41 $79.74 $81.57

2005 $87.73 6.5% $87.92 10.3% $87.79 7.6%

2010 $94.02 7.2% $93.18 6.0% $93.75 6.8%

2016 $118.54 26.1% $120.87 29.7% $119.28 27.2%

2000-16 Change 2% 2.6% 2.4%

LEISURE TRAVEL GAINSCOMPARING WEEKDAY VS. WEEKEND PERFORMANCE

ADR is Now Higher on the WeekendSource: STR

Average Daily Rate


MORE PEOPLE RENTING ROOMSWELL IN EXCESS OF WHAT HISTORICAL TRENDS WOULD SUGGEST

3

3.5

4

4.5

5

5.5

Mar

-88

Dec

-88

Sep-

89Ju

n-90

Mar

-91

Dec

-91

Sep-

92Ju

n-93

Mar

-94

Dec

-94

Sep-

95Ju

n-96

Mar

-97

Dec

-97

Sep-

98Ju

n-99

Mar

-00

Dec

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Sep-

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n-02

Mar

-03

Dec

-03

Sep-

04Ju

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Mar

-06

Dec

-06

Sep-

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n-08

Mar

-09

Dec

-09

Sep-

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Mar

-12

Dec

-12

Sep-

13Ju

n-14

Mar

-15

Dec

-15

Sep-

16Ju

n-17

Rooms sold including Airbnb Rooms sold Linear (Rooms sold)

Source: STR, Airdna, U.S. Census, CBRE Hotels’ Americas Research, Q2 2017.

RATIO OF ANNUAL ROOMS SOLD TO WORKING-AGE POPULATION OF THE U.S.


SENIORS REPRESENT GREATER SHARE OF HOUSEHOLDS AND SPENDING


EFFECT OF STRONG DOLLAR

70

80

90

100

110

120

130

5,000

10,000

15,000

20,000

25,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Total Travel and Tourism-Related Exports(Left) FRB Broad Currency Index (Right)

Source: Federal Reserve Board, International Trade Association, Q2 2017Note: Quarterly data in real terms, '97 = 100

Exchange Rate Index and International Tourism Spending


INTERNATIONAL TRAVEL TO THE USRATIO OF INTERNATIONAL HOTEL STAYS AS A SHARE OF ROOM NIGHTS - 2015

0 10 20 30 40 50 60 70

MiamiNew York

OahuSan Francisco

Los AngelesOrlandoBoston

Ft. LauderdaleSan Diego

Washington DCSeattle

PhiladelphiaChicago

TampaSan Jose-Santa Cruz

U.S. AverageNew Orleans

HoustonAnaheim

AtlantaDallas

% of Total

Source: U.S. Department of Commerce ITA, STR, City Visitor Reports, CBRE Hotels’ Americas Research.

OUR FORECASTS


TIMES ARE GOOD...WILL THEY GET BETTER?U.S. NATIONAL FORECASTFORECAST CALLS FOR A CONTINUAL DECLINE IN REVPAR GROWTH

Long Run Average 2014 2015 2016 2017F 2018F

Supply 1.9% 0.6% 1.0% 1.5% 1.9% 2.6%

Demand 2.0% 4.0% 2.6% 1.6% 2.2% 2.0%

Occupancy

62.2% 64.4% 65.4% 65.4% 65.9% 65.9%

ADR 3.1% 4.6% 4.5% 3.1% 2.2% 2.5%

RevPAR 3.3% 8.2% 6.2% 3.2% 2.9% 2.5%Source: STR CBRE Hotels’ Americas Research, Q3 2017 – Preliminary Update.


Chain Scales 2016 2017F 2018FLuxury 1.3% 2.1% 2.5%Upper Upscale 1.9% 1.0% 1.0%Upscale 2.2% 0.7% 1.2%Upper Midscale 2.2% 1.6% 2.8%Midscale 2.4% 3.1% 1.8%Economy 3.0% 3.1% 3.4%All Hotels 3.2% 2.9% 2.5%

REVPAR FORECAST BY CHAIN-SCALEECONOMY HOTELS CONTINUE UP THE RECOVERY CURVE – OUTPACING ALL OTHERS

Source: STR CBRE Hotels’ Americas Research, Q3 2017 – Preliminary Update.


LOCAL MARKET POSITION IN THE CURRENT CYCLE VARIES

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-20%

-10%

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10%

20%

30%

40%

50%

60%

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REAL REVPAR CHANGE FROM PRE-RECESSION PEAK

Source: STR CBRE Hotels’ Americas Research, Q3 2017.

Expansion Recovery Recession


TOP 60 MARKET OUTLOOK – U.S. HOTELS

OCCUPANCY LEVELS: (65.9% - FLAT)• Up in 8• Flat in 4• Down in 48

AVERAGE DAILY RATE LEVELS: ($129.94 - UP 2.5%)• Up in 59• Down in 1

REVPAR LEVELS: ($85.59 – UP 2.5%)• Up in 53• Down in 7

2018 VS. 2017:


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6.0%

7.0%

8.0%

9.0%

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SUPPLY CHANGE 2018 - FORECAST2017 TO 2018

Source:, CBRE Hotels’ Americas Research, Q2 2017.

45 Markets where the Average Supply Growth is Forecast to be Greater than 2%.


194,455

192,132

90,000

110,000

130,000

150,000

170,000

190,000

210,000

2014 2015 2016 2017

PIPELINE PEAKING – U.S. ROOMS UNDER CONSTRUCTION

Source: STR, CBRE Hotels’ Americas Research, Q2 2017.


New Rooms Jan'16 - June '17

Class Airport Interstate Small Metro Resort Suburban Urban Total

Luxury 0.0% 0.0% 0.4% 2.0% 0.5% 2.2% 5.1%

Upper Upscale 0.7% 0.3% 0.3% 1.1% 1.9% 7.3% 11.6%

Upscale 1.9% 1.5% 3.3% 2.9% 14.0% 9.9% 33.5%

Upper Midscale 1.9% 5.7% 8.3% 1.5% 16.4% 5.3% 39.1%

Midscale 0.2% 0.9% 1.5% 0.1% 2.1% 0.7% 5.5%

Economy 0.5% 0.8% 0.7% 0.2% 2.6% 0.4% 5.2%

Total 5.2% 9.2% 14.5% 7.8% 37.5% 25.8%

RECENT NEW U.S. SUPPLY

Source: STR, CBRE Hotels’ Americas Research, Q2 2017.


QUESTION:

Record Occupancies Leads to Scarcity in Many Markets.

Why has Real ADR Growth Been Just Okay, and Not Great?


A question or problem having only a conjectural answer.

Conjecture: Without Evidence

CONUNDRUM


(8.0)%

(6.0)%

(4.0)%

(2.0)%

0%

2.0%

4.0%

6.0%

8.0%

10.0%

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

demand^

demand^

STRONG DEMAND GROWTH HAS CHARACTERIZED THIS CYCLE SINCE 2010

REAL REVPAR CHANGE – WHAT WE LEARN FROM PAST CYCLES

Forecast


(1.0)%

0%

1.0%

2.0%

3.0%

4.0%

5.0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

supply^

supply^

MODEST SUPPLY RESPONSE IN THE CURRENT CYCLE

REAL REVPAR CHANGE – WHAT WE LEARN FROM PAST CYCLES

Forecast


PRICING POWER IS ABSENT THIS TIME AROUNDREAL REVPAR CHANGE – WHAT WE LEARN FROM PAST CYCLES

50

52

54

56

58

60

62

64

66

68

70

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

U.S. Occupancy and ADR Change

ADR (L) Occupancy - 4 Quarter Moving Average(R)

Year-over-Year Change (%)Occupancy Level (%)

Source: CBRE Hotels' Americas Research, STR, Q3 2017.


WHAT EXPLAINS LACKLUSTER ADR GROWTH?

• SHORTENED BOOKING LEAD TIMES.• GROWTH OF THE SHARING ECONOMY AND THEIR IMPACT ON PRICING POWER

DURING PEAK DEMAND PERIODS.• CHAINS INCENT MANAGERS TO MAXIMIZE OCCUPANCY AND NOT

NECESSARILY REVENUE.• INTERMEDIARIES CAPTURING A GREATER PORTION OF THE PRICE INCREASES

THAT THE CONSUMER PAYS (YET THE HOTEL DOES NOT RECEIVE).• NEW SUPPLY IN MANY OF THE LARGER MARKETS ERODES PRICING POWER.


THE JOB MARKET - GETTING TIGHT!

0

100

200

300

400

500

600

700

800

900

1000

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

U.S. Unemployment Rate (Left) L&H Job Openings (Right)Source: BLS, Q3 2017.


-15%

-10%

-5%

0%

5%

10%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CBRE - Change in Total Hours Worked

BLS - Change in Average Hourly Compensation for Hospitality Employees

CBRE - Annual Change in Total Labor Costs

Source: 2017 Trends® in the Hotel Industry, Bureau of Labor Statistics

Annual Change in Components to Total Labor CostsMANAGEMENT REACTS


HOTELS ARE MAKING MONEYGROSS OPERATING PROFIT* - DOLLARS PER AVAILABLE ROOM

Note: * Before deduction for Management Fees and Non-Operating Income and Expenses** Earnings before Interest, Taxes, Depreciation, and Amortization

Source: 2017 Trends® in the Hotel Industry

$22,

141

$21,

896

$15,

630

$16,

721

$18,

359

$19,

957

$21,

733

$24,

058

$25,

574

$26,

520

$27,

323

$27,

818

$0

$8,000

$16,000

$24,000

$32,000

3.0% 1.8%69.7% from

2009 to 2016


AIRBNB

Source Airbnb

“As many guest arrivals in 2016 as all other previous

years combined”


BUSINESS TRAVEL ON AIRBNB?

“11% of all Airbnb Guests are business

travelers”“30% of Airbnb Guests in

Urban Markets are business travelers”

Source Airbnb


% OF UNITS THAT ARE BUSINESS READY (TOP 10)

MARKET SUBMARKET% BUSINESS

READYSacramento Central Business District 30.3%

San Antonio Central Business District 30.2%

Des Moines, IA Des Moines Airport/West, IA 28.4%

Nashville Central Business District 27.2%

Texas North Amarillo, TX 26.9%

Seattle Central Business District 26.7%

Nashville Airport 25.4%

Denver Central Business District 25.1%

Charlotte CBD / Airport 25.0%Source: Airdna, CBRE Hotels’ Americas Research, Q2 2017.

CAP RATES


31%

MARKET RETURN, RISK, AND INCOME GROWTH (FROM GORDON GROWTH MODEL)

HOTEL CAP RATE FORECASTING MODEL

Risk Free Rate(10-Year Treasury)

Risk Free Rate(10-Year Treasury)

Risk Premium (Moody’s Baa –

10-Year Treasury)

Risk Premium (Moody’s Baa –

10-Year Treasury)

Income Growth (∆NOI)

Income Growth (∆NOI)

Futures Markets/CBRE EA/Moody’s Analytics

Futures Markets/CBRE EA/Moody’s Analytics

Hotel Cap Rate

(Rhotel)

Hotel Cap Rate

(Rhotel)

Hotel Horizons/

STR

Hotel Horizons/

STR

RERC Survey/ RCA Trans.

RERC Survey/ RCA Trans.

Data

VariablesVariables

*other variables such as debt/GDP ratio are used which contribute <5% in predictive power

Contribution*:Contribution*: 27% 36%*2005-2016


Year10 Year Treasury

Risk Premium (Aaa - 10 Yr Treasury)

Real Estate Risk Premium (Hotel Cap Rate - Aaa)

Hotel Cap Rate

2012 1.8 1.87 4.85 8.25

2013 2.35 1.89 3.91 8.15

2014 2.54 1.62 3.98 8.15

2015 2.14 1.75 4.49 8.38

2016 1.84 1.83 4.85 8.52

2017F 2.53 1.52 4.84 8.89

2018F 3.18 1.55 4.14 8.86

2019F 1.85 1.84 4.8 8.91

L.R.A (1995 - 2016) 3.99 1.51 3.89 9.39

WHERE ARE CAP RATES GOING?

Source: CBRE Hotels’ Americas Research, Q3 2017, RERC, RCA.

Forecast show that treasuries will rise

Slightly overshooting

LRA

Cap rates will remain below LRA

SUMMARY THOUGHTS


SUMMARY THOUGHTS WILL TOMORROW BE BETTER THAN YESTERDAY?

1. THE FUNDAMENTALS REMAIN ATTRACTIVE ACROSS THE VAST MAJORITY OF MARKETS.2. GROWING LEVELS OF DISPOSABLE INCOME AND WEALTH WILL CONTINUE TO DRIVE

INCREASES IN DOMESTIC AND INTERNATIONAL TRAVEL. 3. HIGH OCCUPANCY LEVELS PROVIDE LEVERAGE TO ACHIEVE ADR INCREASES FOR THE

NEXT TWO-THREE YEARS. 4. HOTEL CONSTRUCTION LEVELS OFF. SCALE OF NEW SUPPLY IN SOME MARKETS

RETARDS PERFORMANCE.5. ABOVE LONG RUN AVERAGE OCCUPANCY LEADS TO REVENUE GROWTH. INCREASING

LABOR COSTS WILL PRESSURE PERFORMANCE. PROFIT GROWTH TO REMAIN BUT DURABLE.

6. OUTLOOK FOR U.S. LODGING IN MOST MARKETS REMAINS FAVORABLE.

MARK WOODWORTHSenior Managing Director+ 1 404 812 [email protected]

CBRE Hotels | Americas Research3280 Peachtree Road, Suite 1400 Atlanta, GA 30305

CBRE © 2017 All Rights Reserved. All information included in this proposal pertaining to CBRE—including but not limited to its operations, employees, technology and clients—are proprietary and confidential, and are supplied with the understanding that they will be held inconfidence and not disclosed to third parties without the prior written consent of CBRE. This proposal is intended solely as a preliminary expression of general intentions and is to be used for discussion purposes only. The parties intend that neither shall have any contractualobligations to the other with respect to the matters referred herein unless and until a definitive agreement has been fully executed and delivered by the parties. The parties agree that this proposal is not intended to create any agreement or obligation by either party to negotiate adefinitive lease/purchase and sale agreement and imposes no duty whatsoever on either party to continue negotiations, including without limitation any obligation to negotiate in good faith or in any way other than at arm’s length. Prior to delivery of a definitive executed agreement, andwithout any liability to the other party, either party may (1) propose different terms from those summarized herein, (2) enter into negotiations with other parties and/or (3) unilaterally terminate all negotiations with the other party hereto.

The information contained in this document has been obtained from sources believed reliable. While CBRE, Inc. does not doubt its accuracy, CBRE, Inc. has not verified it and makes no guarantee, warranty or representation about it. It is your responsibility to independently confirm itsaccuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the property. The value of this transaction to you depends on tax and other factors which should be evaluated by yourtax, financial and legal advisors. You and your advisors should conduct a careful, independent investigation of the property to determine to your satisfaction the suitability of the property for your needs.

CBRE HOTELS

The World’s Leading Hotel Experts.

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