MONTANA LODGING AND HOSPITALITY ASSOCIATION 2015 Fall Tourism Conference & Trade Show October 27, 2015 Hilton Garden Inn Kalispell Presented By: Chris Kraus & Chris Burdett PKF Consulting CBRE Hotels chris.kraus@pkfc.com & chris.burdett@cbre.com 1
TOPICS Overview of PKF Consulting CBRE Hotels Summary of National Hotel Trend Data National Lodging Forecast The Supply Story Summary 2
OVERVIEW OF PKF CONSULTING CBRE HOTELS 3
OVERVIEW OF PKF CONSULTING Two Primary Areas of Specialization: Hospitality Consulting & Advisory Services Strategic Research 4
OVERVIEW OF PKF CONSULTING Primary Services Provided Market and economic feasibility studies Real estate appraisals and business valuations Tourism and recreational studies Strategic planning Operational reviews Asset management Financial consulting services Litigation support, expert witness, and arbitration services 5
OVERVIEW OF PKF CONSULTING Typical Clients Hotel owners and developers Hotel management and franchise companies Real Estate Investment Trust ( REITs ) Tourism organizations Financial institutions, insurance companies, and investors Public agencies and governments Attorneys, architects, and land planners 6
OVERVIEW OF PKF CONSULTING Bozeman Seattle Boston Chicago New York San Francisco Philadelphia Washington, DC Atlanta Los Angeles Jacksonville Dallas Houston Tampa 7
OVERVIEW OF PKF CONSULTING Representative Project #1 Project: Working with CBRE Capital Advisors, advised the Board of Directors of Hilton Worldwide on the acquisition of approximately $2.0 billion in hotel assets from Blackstone, a related party. Funds for this acquisition are from the sale of the Waldorf Astoria in New York. Upon completion of our analysis, we will issue a fairness opinion of this transaction to the Board. Client: Special committee of the Board of Directors of Hilton Worldwide Scope of Services Provided: Advised Board on the appropriateness of the proposed transaction Valued the hotels which are to be acquired At the appropriate time CBRE Capital Advisors will issue a fairness opinion on the planned transaction 8
OVERVIEW OF PKF CONSULTING Representative Project #2 Project: Proposed Westin Denver International Airport Client: Denver International Airport Authority Scope of Services Provided: Advised DIA on the development of a proposed 519-room, in-terminal Westin hotel Developed a market demand analysis and prepared a statement of operating results that was included in issuance of tax-exempt airport revenue bonds 9
OVERVIEW OF PKF CONSULTING Representative Project #3 Project: Yellowstone Club Spanish Peaks Mountain Club Moonlight Basin Resort Client: Cross Harbor Capital Partners, LLC Scope of Services Provided: Valuation of all three resorts Advised on programming and timing of resort build-out 10
OVERVIEW OF PKF CONSULTING Representative Project #4 Project: Downtown Billings Hotel Market Analysis Client: Downtown Billings Association Scope of Services Provided: Evaluated potential hotel sites in the North 27 th Expanded Tax Increment District of downtown Billings for development of a hotel facility Reviewed the historical supply, demand, and average daily room rate trends of the Billings lodging market Prepared a forecast of the likely performance of the Billings lodging market Provided recommendations regarding the market potential to support additional hotel development 11
OVERVIEW OF PKF CONSULTING Representative Project #5 Project: Element Hotel Bozeman Client: HomeBase Montana Local Montana Family Scope of Services Provided: Market Demand and Economic Feasibility of Project Recommended hotel operator and assisted in negotiation of management agreement Recommended hotel affiliation/brand and assisted in negotiation of license agreement Hotel Opened in September 2015 12
BOZEMAN PKF CBRE OFFICE List of Representative Projects Montana Properties Recently Appraised or Evaluated 2003-2015 Proposed Condominium Hotel Big Fork Proposed Bridger Bowl Development Gallatin County Best Western Bucks T4 Lodge Big Sky Proposed Staybridge Suites Great Falls Yellowstone Club Big Sky Hampton Inn Great Falls Spanish Peaks Mountain Club Big Sky Hilton Garden Inn Great Falls Moonlight Basin Resort Big Sky Holiday Inn Great Falls Rainbow Ranch Big Sky Super 8 Great Falls Proposed Limited-Service Hotel Billings Proposed Home2 Suites Great Falls Proposed Hilton Garden Inn Billings Red Lion Colonial Hotel Helena Proposed Homewood Suites Billings Proposed Home2 Suites Helena Proposed Downtown Hotel (DBP) Billings Proposed SpringHill Suites Kalispell Northern Hotel Billings Proposed Homewood Suites Kalispell Crowne Plaza Billings Proposed Hilton Garden Inn Kalispell Hampton Inn Billings Proposed Holiday Inn Express & Suites Lewistown Hampton Inn & Suites Billings Red Lion Hotel Missoula Proposed Hampton Inn & Suites Billings Courtyard by Marriott Missoula Big Horn Resort (Former Wingate Inn) Billings Proposed Homewood Suites Missoula Residence Inn Billings Proposed SpringHill Suites Missoula Proposed TownePlace Suites Billings Proposed Convention Center Hotel Missoula Proposed Home2 Suites Billings Proposed Element Hotel Missoula 13
BOZEMAN PKF CBRE OFFICE List of Representative Projects (Continued) Montana Properties Recently Appraised or Evaluated 2003-2015 Proposed Hilton Garden Inn Bozeman Proposed Downtown Boutique Hotel Missoula Proposed Armory Building Hotel Bozeman Super 8 Missoula Proposed Homewood Suites Bozeman Proposed Luxury Resort Paradise Valley Proposed Comfort Suites (Market Study) Bozeman Chico Hot Springs Resort Pray Proposed Comfort Suites (Appraisal) Bozeman Lupine Inn Red Lodge Proposed Boutique Hotel (East Main Street) Bozeman Proposed Microtel Inn & Suites Sidney Proposed Residence Inn Bozeman Proposed Wingate Inn Sidney Proposed Hospital Hotel Bozeman Proposed Candlewood Suites Sidney Proposed Courtyard by Marriott Bozeman Resort at Glacier - St. Mary's Lodge St. Mary Microtel Inn & Suites Bozeman Whitefish Lake Lodge Whitefish La Quinta Inn & Suites Bozeman Proposed Hampton Inn & Suites Whitefish Proposed Imperial Inn Boutique Hotel Bozeman Proposed Boutique Hotel Whitefish Proposed The Lark Hotel Bozeman Proposed Downtown Hotel Whitefish Baxter Hotel Bozeman Best Western Rocky Mountain Lodge Whitefish Proposed Country Inn & Suites Bozeman Pine Lodge Whitefish Proposed Element Hotel (Kenyon Site) Bozeman Holiday Inn SunSpree Resort West Yellowstone Proposed La Quinta Inn & Suites Bozeman Gray Wolf Inn & Suites West Yellowstone Proposed Airport Hotel Bozeman Yellowstone Park Hotel West Yellowstone Proposed Holiday Inn Express & Suites Butte Proposed Explorer Lodge West Yellowstone 14
OVERVIEW OF PKF HOSPITALITY RESEARCH PKF Hospitality Research Atlanta Manages an extensive database of hotel property income statements and sales prices, used to Identify trends in hotel markets Find answers to hotel business questions Has the technical ability to conduct custom research and the analytical skills to interpret data 15
OVERVIEW OF PKF HOSPITALITY RESEARCH PKF Hospitality Research Products HOTEL HORIZONS Quarterly regional economic summaries, historical reviews, and five-year supply, demand, occupancy, ADR, and RevPAR projections for 61 major US markets. Market forecasts are separated by full-service and limited-service hotels. 16
SUMMARY OF NATIONAL HOTEL TREND DATA 17
OVERVIEW OF PKF HOSPITALITY RESEARCH PKF Hospitality Research Products Annual voluntary survey of thousands of U.S. hotel financial statements First survey conducted in 1937 Occupancy: 64.4% ADR: $3.04 Data converted to USALI to ensure comparability 2015 Survey Sample 7,135 hotels across the U.S. Occupancy: 74.3% ADR: $158.62 18
COMPOSITION OF CHANGE IN REVPAR Impact On Change in NOI* Change in ADR (left axis) Change in Occupancy (left axis) Change in NOI* (right axis) 15% 20% 10% 5% 0% 10% 0% -5% -10% -10% -15% -20% -20% -30% -25% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F -40% Note: * Before deductions for capital reserves, rent, interest, depreciation, and amortization Source: PKF Hospitality Research, a CBRE Company, 2015 19
MORE HOTELS ENJOYING GROWTH IN PROFITS* Percent of Hotels** Posting an Increase in Total Revenue or Profits From Prior Year (*) - Before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization. (**) - Trends in the Hotel Industry sample. 100% 80% 60% 70.2% 61.6% 47.9% 44.4% 67.4% 58.9% 80.8% 77.1% 79.3% 72.3% 70.4% 70.4% 86.2% 78.2% 40% 20% 0% 4.5% 8.6% 2007 2008 2009 2010 2011 2012 2013 2014 Total Hotel Revenue Source: PKF Hospitality Research, a CBRE Company, Trends in the Hotel Industry reports. 20
2014 U.S. HOTEL REVENUES AND PROFITS Change 2013 to 2014 (*) - Before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization. Full-Service Limited-Service 7.0% 7.9% 11.5% 13.0% Suite Hotels With F&B Suite Hotels Without F&B Convention Hotels 5.6% 7.8% 7.8% 9.2% 10.6% 12.3% Resorts 7.4% 15.0% All Hotels 6.9% 12.3% 0% 6% 12% 18% Total Hotel Revenues Profits* Source: PKF Hospitality Research, a CBRE Company, 2015 Trends in the Hotel Industry report. 21
REVENUE VS EXPENSE* GROWTH Annual Real Change (*) - Before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization. 12% 8% 4% 4.9% 5.4% 3.7% 3.1% 5.0% 2.6% 3.0% 1.9% 3.2% 3.1% 1.7% 2.9% 3.9% 5.3% 0% 1.0% 1.2% 2.3% 3.2% -4% -8% -5.1% -4.1% -12% -16% -20% -18.2% -11.5% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Rev Exp CPI Source: PKF Hospitality Research, a CBRE Company, Trends in the Hotel Industry, September 2015 Hotel Horizons forecast, Moody s Analytics 22
WHERE DID THE DOLLARS GO? Percent of Total Operating Expenses* Salaries, Wages, and Benefits 44.2% Cost of Goods Sold 8.6% Management Fees 4.9% Operating Expenses 36.1% Property Taxes and Insurance 6.2% Note: * Before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization Source: PKF Hospitality Research, a CBRE Company, 2015 23
NOMINAL DOLLAR OPERATING PROFITS* Six Years of Double Digit Growth Nominal Dollars Per Available Room $25,000 Compound Annual Growth 2010 2016F: 12.0% $20,000 $15,000 $10,000 $5,000 $17,042 $16,394 $10,591 $11,629 $13,105 $14,442 $15,894 $17,849 $20,384 $23,010 $0 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F Note: * Before deductions for capital reserves, rent, interest, depreciation, and amortization Source: PKF Hospitality Research, a CBRE Company, 2015 24
NATIONAL LODGING FORECAST 25
THE HOTEL MARKET CYCLE Rapid Development Lodging Decline, Leads Other Sectors Development Picks Up Accelerated Development? 2016/7 U.S. is Here 2015 2014 Equilibrium ADR Occupancy Declines, ADR Follows A Year Ago ADR and Margins Recover Development Slows Occupancy Recovers Development at Minimum Levels Lodging Recovers, Lags Other Sectors (Not this Time!) 26
NATIONAL FORECAST ALL U.S. HOTELS 2014-2016 Long-Run Average 2012 2013 2014 2015F 2016F Supply 1.9% 0.4% 0.7% 0.8% 1.1% 1.8% Demand 2.0% 2.8% 2.0% 4.4% 3.3% 2.2% Occupancy 62.0% 61.4% 62.2% 64.4% 65.8% 66.1% ADR 3.0% 4.2% 3.9% 4.5% 5.0% 5.9% RevPAR 3.2% 6.6% 5.2% 8.2% 7.2% 6.3% RevPAR driven by ADR Growth Source: PKF Hospitality Research - Hotel Horizons September-November, 2015, STR, Inc. 27
MONTANA MAJOR MARKETS As reported by STR, Inc. Occupancy & ADR by Location $140.00 $120.00 64% 65% 66% 64% $100.00 62% 62% $80.00 $60.00 $40.00 $115 60% $95 $94 $110 59% $90 58% $85 60% 58% $20.00 56% $0.00 54% ADR 28 Occupancy
REVPAR FORECAST BY LOCATION Only Interstate and Small Town Behind Pre-Recession Occupancy Location 2014 2015F 2016F Urban 7.3% 6.9% 6.2% Suburban 9.2% 8.3% 6.0% Airport 9.7% 8.7% 8.8% Interstate 7.3% 6.1% 5.2% Resort 8.4% 7.3% 7.4% Small Town / Metro 7.0% 5.5% 5.6% All Hotels 8.2% 7.2% 6.3% Source: PKF Hospitality Research - Hotel Horizons September-November, 2015, STR, Inc. 29
REVPAR FORECAST BY CHAIN-SCALE Lower-Priced Categories Moving Up The Recovery Curve Chain-Scale 2014 2015F 2016F Luxury 6.3% 6.4% 7.0% Upper-Upscale 7.1% 6.1% 6.0% Upscale 8.5% 6.4% 6.5% Upper-Midscale 8.3% 6.8% 7.1% Midscale 8.3% 7.7% 6.0% Economy 8.7% 7.3% 7.1% All Hotels 8.2% 7.2% 6.3% Source: PKF Hospitality Research - Hotel Horizons September-November, 2015, STR, Inc. 30
NATIONAL SUPPLY & DEMAND Approaching the 1939-1946 Record for Years of Expansion 8.0% 6.0% 4.0% 2.0% 0% (2.0)% (4.0)% Seven Years of Expansion (6.0)% (8.0)% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F2016F2017F2018F2019F Supply^ Demand^ Source: STR, Inc., PKF-HR 31
THE SUPPLY STORY 32
U.S. SUPPLY CHANGE When did we hit our last peak number of new hotels entering the market? 5.8% Forecast 4.8% 4.0% 3.8% Q2 1999 3.0% 2.8% Q1 2009 1.8% 0.8% Long Run Average = 1.9% -0.2% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: PKF Hospitality Research, STR, Inc. 33
TODAY VS. THE PREVIOUS PEAK OF CONSTRUCTION ACTIVITY U.S. Pipeline, Number of Rooms by Phase, August 2015 and March 2008 Phase 2015 Q1/2008 % Difference Change In Construction 132,401 2.5% 207,468-36.1% Final Planning 175,090 0.7% 113,419 54.4% Planning 132,353 3.5% 344,363-61.6% Active Pipeline 439,844 2.1% 665,250-33.9% Source: STR, Inc. Change from July 2015 34
WHY SO LITTLE NEW CONSTRUCTION? Financing remains a challenge. Elevated uncertainty that characterized this past cycle has not yet been forgotten. Construction costs are rising faster than property values in many markets, undermining the feasibility of new development. Scarcity of brands that lenders are willing to finance. 35
HOTEL TRANSACTIONS 36
37
38
39
MONTANA SALES As of October 26, 2015 CBRE - Montana Hotel Sales Property Close City Sales Price Rooms PPR La Quinta Inn & Suites 9/1/2015 Bozeman $6,350,000 56 $113,393 Wingate Inn 1/26/2015 Helena $5,800,000 100 $58,000 Best Western Yellowstone Hotel 1/14/2014 Livingston $3,000,000 100 $30,000 Fairfield Inn & Suites 2/11/2014 Helena $3,250,000 58 $56,034 Holiday Inn 7/1/2014 Helena $4,500,000 71 $63,380 Comfort Inn & Suites 10/3/2014 Great Falls $4,500,000 88 $51,136 Red Lion Missoula 2/21/2013 Missoula $1,950,000 76 $25,658 Best Western War Bonnet Inn 3/24/2013 Miles City $2,400,000 51 $47,059 La Quinta Inn & Suites 12/6/2013 Butte $4,400,000 83 $53,012 Comfort Inn 7/10/2012 Helena $1,775,000 56 $31,696 Red Lion Helena 7/31/2012 Helena $5,600,000 149 $37,584 AmericInn 8/15/2012 Missoula $1,875,000 52 $36,058 Sleep Inn 12/28/2012 Missoula $1,100,000 59 $18,644 Average: - - $3,576,923 77 $47,820 Source: CBRE Transactions Real Capital Analytics - Montana Hotel Sales Property Close City Sales Price Rooms PPR Motel 6 6/19/2015 Butte $2,235,000 66 $33,864 Courtyard by Marriott 4/21/2015 Missoula $12,200,000 92 $132,609 Oak Tree Inn 10/29/2014 Glendive $4,900,000 50 $98,000 Lexington Inn & Suites 6/10/2014 Billings $5,750,000 87 $66,092 Best Western Yellowstone Inn 1/14/2014 Livingston $3,000,000 100 $30,000 Courtyard by Marriott 12/12/2012 Missoula $7,700,000 92 $83,152 Comfort Inn 8/12/2012 Missoula $1,900,000 52 $36,538 Great Falls Comfort Inn 7/12/2012 Great Falls $3,600,000 64 $56,367 Average: - - $5,160,625 75 $67,078 Source: Real Capital Analytics 40
SUMMARY 41
WHAT COULD DERAIL THE RECOVERY? 1. The Economy Stable to Increasing Performance 2. Asset Price Bubble Stable 3. Unpredictable Demand Shock??? 4. Oil/Energy Price Increases Decreasing Risk 5. Over Building Mostly No, Some Yes 42
SUMMARY THOUGHTS The Very Good Will Get Even Better 1. No threats from the factors that historically have brought an end to the good times. 2. The fundamentals are solid across the vast majority of markets. 3. Elevated industry growth will persist comfortably through 2016 and likely beyond. 4. High occupancy levels will provide the leverage needed to achieve large real ADR increases for the next two-three years. 5. Competition for building materials and labor will continue to present challenges for developers in most markets. Below average hotel construction will be the result for the next three years. 6. Above long run average occupancy levels will lead to strong profit growth comfortably through 2016, enough to off-set increasing labor costs. 7. It is a great time to be in the hotel business! 43
MONTANA LODGING AND HOSPITALITY ASSOCIATION Chris Kraus & Chris Burdett PKF Consulting CBRE Hotels 44