Current and Expected Trends in Hotel Values

Are hotels still good value?

Russell KettChairman, HVS London

15 September 2020

The information presented in this report should not be disseminated to the public or third parties without the express written

consent of HVS. The information in this presentation is provided on an “as is” and “as available” basis and should not be construed

as investment, tax, accounting or legal advice

2

Agenda

1. An unprecedented downturn

2. Looking ahead

3. Hotel values

4. Conclusions

An

Unprecedented

Downturn

4

Data for Europe show

substantial declines –

anticipated to start

improving – most European

markets now open

Data Source: STR

1.4% -1.9%

-61.6%

-84.6% -82.3%

-72.9%

-57.0%

0%

50%

100%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Hotel Occupancy2019 2020

1.8% 1.2%

-10.5%-31.3% -34.4%

-35.1%

-21.1%

€70

€90

€110

€130

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Hotel ADR2019 2020

3.2% -0.6%

-65.6%

-89.4% -88.4%-82.4% -66.1%

€5€25€45€65€85

€105

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Hotel RevPAR2019 2020

The data excludes hotels that are closed. Given that an important number of hotels

temporarily closed from March 2020, we

expect the decline to be more significant

than the presented in the graph.

50%

55%

60%

65%

70%

75%

80%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Supply % Change Demand % Change Occupancy

5

Demand proved resilient to previous shocksEurope Overall

Sources: Eurostat; UNWTO; STR

Approx. 6 years Approx. 6 years

9/11 Impact GFC

FR

6

RevPAR recovery averaged 6 yearsEurope Overall

€ 40

€ 50

€ 60

€ 70

€ 80

€ 90

€ 100

Source: STR

2009 Global Financial Crisis (GFC)Occupancy and ADR drop 10% and 13% from peak

2016 Terrorist AttacksDriven by an ADR drop of 3%

Approx. 6 years Approx. 6 years

9/11 Impact Occupancy and ADR drop 7% and 8% from peak

Looking Ahead

FR

8

Winners and losers in the recovery

More Vulnerable

Full-service hotels, dependent

on group business or MICE

Hostels with dorms

Luxury hotels

Gateway markets that depend

on international travel

“Fly to” markets that depend

on air travel

Airport hotels

Independent properties

Markets influenced by the

energy sector

Airbnb and private rental

Hotels that primarily rely on

transient segments

Markets accessible by car to

recover faster than those

dependent on air travel

Suburban, small metro town

properties

Extended-stay hotels /

serviced apartments with

self-contained units

Properties affiliated with

strong brands

Economy / midscale

properties

Less Vulnerable

Secondary and tertiary

markets

ↆ

hold up better & trade at a

smaller discount to 2019 values

Gateway and primary markets

ↆ

more volatile, larger value

declines in the near term, with

greater potential for accelerated

appreciation thereafter

9

Noticeable recovery anticipated from 2021

2020 – strong declines in both occupancy and average rate based on year-to-June

actuals and monthly estimates for the rest of the year

From 2021 we project occupancy to build up first and recover by 2023, i.e. within 3½

years

Average rate – expected to lag behind, but we project a narrowing of the gap by 2024

(deflated to 2019 levels), i.e. 4½ years

Differences in recovery times between markets and individual properties are expected

Assumptions

2018 2019 2020 2021 2022 2023 2024

Occupancy 72% 72% 35% 61% 66% 72% 72%Percent Change 0.3% -52.1% 75.9% 8.3% 9.2% 0.0%

Average Rate in € 113 111 93 97 104 109 117Percent Change -2.1% -16.2% 3.8% 7.8% 5.0% 7.0%

RevPAR 82 80 32 59 69 79 84Percent Change -1.8% -59.8% 82.7% 16.8% 14.6% 7.0%

Forecast

Source: STR (Historics) and HVS (Projections)

Historical

10

RevPAR recovery anticipated to take until 2024

Years to Recovery reflects time from

trough year to the peak (a return to

prior levels)

Occupancy Forecast

• Demand recovery expected once travel

restrictions are lifted and COVID-19 virus

contained

Average Rate Forecast

• Average rate – similar time to recover as

in previous downcycles

• We expect rate to be a key marketing

tool used to stimulate certain demand

• Availability of shadow supply (e.g. Airbnb)

also influences average rate recovery

Source: HVS

>

11

Expect the wider supply pipeline to shrink

Given the recent events, supply growth now expected to be lower, at a slower pace, than

previously anticipated

Market conditions will likely lead to

delayed openings. Some projects

may be placed on hold indefinitely

Financing challenges will

delay construction start dates

Changes in market conditions

may render proposed projects unfeasible; some projects may be

postponed or cancelled

Under-construction

projects may face delays with

materials/FF&E, pushing back opening dates

Some properties may close and not re-open, resulting in negative supply

growth

FR

12

>

Positive

operating

leverage and

enhanced

operating

efficiency will

support

EBITDA recovery

Operating costs cut to the bone, minimize expense levels, opportunity to rethink policies, procedures and service standards from top to bottom

Limiting “touchpoints,” supplemented by increased reliance on technology, supports reductions in staffing and service costs

Food and beverage service curtailed, reduced or re-engineered

New cleanliness & safety protocols produce additional operating costs but can be mitigated by other operational savings (e.g. payroll)

Retaining these savings will enhance operating leverage as demand and revenue recovers

Owners and operators reporting lower break-even occupancy levels: e.g. 25%-35% limited-service hotels, 40%-45% full-service hotels

Hotel Values

14

Market values reached prior peak levels in 2019…Timeline of the European hotel investment cycle

Market PeakValues peaked in 2007 but began to slide

following the market shock in H2 2008

Market TroughValues bottomed out in 2009

Average value per key declined by 23% from

peak to trough

RecoveryValues reached prior peak in 2019, reflecting a

12-year recovery

Cap RatesCap rates began to rise in H1 2009 and peaked

in H2 2009. Cap rates began to rapidly decline

once hotel performance bottomed out, as cap

rates were based on depressed TTM EBITDANote: Cap rates displayed as a 12-Month Average.

>

Source: Real Capital Analytics; HVS

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

150

170

190

210

230

250

270

290

310

2007 08 09 10 11 12 13 14 15 16 17 18 19

€0

00

s

Value per Key Cap Rate

FR

15

...but have declined in 2020

Loss of incomeSharp revenue declines → more significant decreases in EBITDA (possibly

negative)

DebtMarket has pulled back from the hotel sector. Lower LTV

ratios and/or higher spreads could result in higher interest

rates, despite recent cuts by central banks

Bid-Ask gap between buyers and sellersCurrently hampering transactions but is expected to narrow

with ongoing financial pressure

16

Upward Pressure Downward Pressure

Market value: willing buyer and willing seller

Unprecedented revenue and EBITDA decline

Economic recession

Longer recovery of MICE business

Uncertainty regarding return of normalised

travel patterns

Potential for prolonged recovery, re-infection

Cash drain may force owners to sell

Improved business operating model

Return of positive operating leverage

Yield-hungry funds lining up capital should create competition and help to sustain values

Low cost of capital likely to continue

Some lenders will wait for values to rise before losses are recognised

FR

17

Scenario Analysis – assessing EBITDA to estimate value rangesModel reflects potential range and degree of impact on hotel values. Impact of current conditions on an individual property depends on characteristics of the property, its market and its location

In all scenarios, the capital market is assumed to result in higher discount rates in 2020, diminishing

as the market recovers

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

1 2 3 4 5 6 7 8

Base LineStable market conditions

ignoring the impact of Covid-19

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

1 2 3 4 5 6 7 8

Best CaseModerate declines in

EBITDA. Decline is

assumed to diminish over

time as the market

recovers

0

1,000,000

2,000,000

3,000,000

4,000,000

1 2 3 4 5 6 7 8

Most Likely CaseSignificant EBITDA impact

in the first year. Degree of

impact and decline to

diminish over time as the

market recovers

Worst CaseGreatest negative EBITDA in the

first year, followed by

diminishing negative impact as

the market recovers.

Long recovery period(3,500,000)

(1,500,000)

500,000

2,500,000

4,500,000

1 2 3 4 5 6 7 8

18

Hotel values evolve for each scenario

Best Case – the value decline is

5%-10% as of 2020. EBITDA

recovers to 2019 levels by 2024

Most Likely Case – the value

decline is 10%-20% as of 2020.

EBITDA recovers to 2019 levels

by 2024

Worst Case – the value decline

is 20%-30% as of 2020. EBITDA

recovers to 2019 levels by 2025.

For context, our HVI showed a

23% decline in value in the last

downturn

Source: HVS

€170,000

€190,000

€210,000

€230,000

€250,000

€270,000

€290,000

€310,000

€330,000

2019 2020 2021 2022 2023 2024 2025

Base Line €292,000 €293,500 €298,000 €302,500 €307,000 €311,500 €316,000

Best Case €292,000 €260,000 €277,500 €291,000 €301,500 €311,500 €316,000

Most Likely €292,000 €229,000 €253,000 €274,500 €292,500 €307,000 €316,000

Worst Case 292,000 198,000 225,000 250,500 272,000 291,500 303,000

Val

ue

Per

Ro

om

Base Line Best Case Most Likely Worst Case

Relationship to 2019 value

100% 89% 95% 100% 103% 107% 108%

100% 80% 88% 95% 102% 107% 108%

100% 68% 77% 86% 93% 100% 104%

Conclusions

20

Conclusions

RevPAR levels depressed until travel and other restrictions lifted, individuals comfortable travelling again and staying at hotels (vaccine will help)

Occupancy recovers faster than average rate – hotels use price to stimulate demand recovery

Supply growth slows – projects under construction delayed, new projects postponed or abandoned

Hotel operations suspended in the interim, to minimise EBITDA losses

Hotel values decline – to remain depressed until EBITDAs “hit bottom” and there is evidence of recovery

Hotel discount rates elevated in the near term –location, market and property specifics to determine the degree of elevation

Weight of capital might limit price discounting for hotel assets → most specialist hotel investors have not changed their investment strategy

Over the longer term, values will recover as cash flows improve and capital markets return to more traditional parameters

Opportunity for high returns – well-capitalised buyers to acquire hotels at prices well below replacement cost and recent norms

Thank you!

Russell Kett FRICS

rkett@hvs.com

+44 7802 411142

15 September 2020