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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
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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
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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)
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HOW IS THE ECONOMY TODAY?
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HOW WILL THE ECONOMY BE IN 2018?
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-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
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QUESTIONS:
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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
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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
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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
-00
Sep-
01Ju
n-02
Mar
-03
Dec
-03
Sep-
04Ju
n-05
Mar
-06
Dec
-06
Sep-
07Ju
n-08
Mar
-09
Dec
-09
Sep-
10Ju
n-11
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.
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SENIORS REPRESENT GREATER SHARE OF HOUSEHOLDS AND SPENDING
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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
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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
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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.
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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.
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LOCAL MARKET POSITION IN THE CURRENT CYCLE VARIES
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
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New
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Salt
Lake
City
Mem
phis
Fort
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REAL REVPAR CHANGE FROM PRE-RECESSION PEAK
Source: STR CBRE Hotels’ Americas Research, Q3 2017.
Expansion Recovery Recession
21 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
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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0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
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ork
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Oak
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each
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%.
23 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
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.
24 THE LODGING CONFERENCE 2017 | OCTOBER 31, 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.
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QUESTION:
Record Occupancies Leads to Scarcity in Many Markets.
Why has Real ADR Growth Been Just Okay, and Not Great?
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A question or problem having only a conjectural answer.
Conjecture: Without Evidence
CONUNDRUM
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(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
28 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
(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
29 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
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.
30 THE LODGING CONFERENCE 2017 | OCTOBER 31, 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.
31 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
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.
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-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
33 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
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
34 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
35 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
AIRBNB
Source Airbnb
“As many guest arrivals in 2016 as all other previous
years combined”
36 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
BUSINESS TRAVEL ON AIRBNB?
“11% of all Airbnb Guests are business
travelers”“30% of Airbnb Guests in
Urban Markets are business travelers”
Source Airbnb
37 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
% 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
39 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
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
40 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
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
42 THE LODGING CONFERENCE 2017 | OCTOBER 31, 2017
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.