Hotel Valuation and Transaction Trends for the U.S ......Stephen Rushmore Jr. ... Source: HVS/STR...

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

Presented by

Stephen Rushmore Jr.

[email protected]

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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

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Married with two kids

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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

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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

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

The 2012 Hotel Valuation Index (HVI)

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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 2

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

Projected

Source: HVS/STR Hotel Valuation Index

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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% 2

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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


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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)


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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%


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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%


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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%


7 Chicago 34%

8 Nashville 33%

9 Winston-Salem 33%

10 Oakland 32%



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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%


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Tucson value not expected to fully recover in the foreseeable future

$0

$20,000

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$60,000

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Projected


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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% 2

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Projected


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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%


8 Kansas City 72%

9 United States 69%

10 Wilmington 65%


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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%



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Gateway cities are the most volatile

Rank

1 New York 121%

2 Miami 98%

3 Los Angeles 69%

4 Las Vegas 67%


6 Tallahassee 61%

7 West Palm Beach 54%

8 Anaheim 54%

9 Austin 48%

10 Omaha 38%


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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%


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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%


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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%


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Where are the buying and selling opportunities?

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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

0

10

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Q1

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Q3

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Source: HVS San Francisco

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Annual transaction volume converges with 21 year average

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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


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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

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5.0

6.0

7.0

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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


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New Construction

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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

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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

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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

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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

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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 of 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 over 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

Hotel Valuation and Transaction Trends for the U.S ......Stephen Rushmore Jr. ... Source: HVS/STR...

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Transcript of Hotel Valuation and Transaction Trends for the U.S ......Stephen Rushmore Jr. ... Source: HVS/STR...