Australian Hotel Development 9 May 2013 Dean Dransfield Owner & Director John Stawyskyj Practice Head – Hotels, Gaming & Leisure Michael Moret-Lalli Director of Acquisitions Lindsay Leeser Director Development Pacific Nonda Katsalidis Founding Partner 1
Australian Hotel Development The next cycle 2013
Dransfield Hotels & Resorts Hotel, Tourism & Leisure industry specialists 55,000 rooms, 500 projects, over 20 years experience Principals & advisors over a wide range of hotel & resort assets Complimentary service streams Development, - Advice and Management, - Strata title Transactions, - Buy & Sell, - Debt & Equity Raising Operator selection Independent Experts Core clients - Owners – corporates, funds, private equity, owner operators - Developers – small - large - Financiers – mortgage funds, banks - Operators 3
Dransfield Current Development Projects Australia 108, Melbourne, 300 room 6 star new build, mixed use Zoo, Eco Lodge <150 rooms University, 4 star Hotel 200 rooms Sydney fringe 3 star 120 rooms Sydney Central, 120 room boutique 4 star with iconic bar Brisbane Fringe 200 room 4 star Various Regional In several states The Watson, Adelaide mixed use 200 apartments 4
Market Overview RevPAR growth of 4.6% slightly below our 5.3% forecast 2011 - Perth (15.1%), Brisbane (7.6%) and Sydney (7.1%) strongest performing markets - Gold Coast (-2.7%) and Adelaide (-2.2%) only markets to experience a decline Market defined by limited supply and demand growth with rate growth the key to overall performance High midweek occupancies in major cities continued to constrain demand and promote rate growth RevPAR growth of 4.1%YTD above our full year 3.8% forecast 2012 - Darwin (16.5%) and Perth (10.5%) leading all markets - Sydney and Melbourne displaying flatter growth with 2.0% and 1.5% growth respectively Domestic departures experienced a 5.4% increase on prior year (averaged 9.6% previous 5 years) International arrivals grew by 4.6% on the prior year (Averaged 1.2% previous 5 years) 5
Hotel Room Supply Supply growth constrained last 10 yrs, meaningful new supply 3-5 yrs away In 2011 Australian major city hotel supply increased by only 1.2% slightly higher than 0.7% increase in 2010 This represents the 10th consecutive year of annual supply growth of <3% A net total increase of only 10,319 (13.4%) rooms have been added since 2000 Sydney, Perth & Brisbane will find it difficult to generate demand growth as they are full midweek Supply Movement Since 2000 Rooms Growth Occupancy City 2011 # % 2000 2011 Melbourne 17,114 6,147 56.1% 73.6% 78.9% Darwin 3,672 1,073 41.3% 67.2% 70.6% Adelaide 4,598 1,075 30.5% 68.1% 74.5% Brisbane 8,238 1,683 25.7% 64.4% 80.0% Hobart 2,597 506 24.2% 62.6% 72.9% Perth 5,820 651 12.6% 69.1% 84.1% Cairns 7,396 480 6.9% 64.8% 62.4% Gold Coast 13,114 -136 -1.0% 61.8% 65.3% Sydney 19,770 -899 -4.4% 71.2% 85.8% Canberra 4,761 -261 -5.2% 60.1% 73.2% Australia 87,079 10,319 13.4% 67.4% 76.4% Source: ABS 6
Market Overview – Supply Forecasts Development Cycle on its way Our supply forecasts over short, medium & long term are a downgrade on prior expectations Hotel Development over the next 5 years in Australia is forecast to be more than triple that experienced over the past 5 years Of the 25,000 rooms forecast to be added to 2020, only 25% can be attributed to specific projects Hotels wanting to open by 2016 need to be commencing in 2013 7
Melbourne v. Sydney A very different supply story Melbourne Melbourne has increased supply by 56% since 2000 v. Sydney’s reduction of 4.4% Demand has absorbed much of the new supply in Melbourne Melbourne the only major market to add significant supply over the past 5 years adding 2,300 rooms or 16% since 2007 2011 occupancy of 78.9% was above the occupancy prior to the most recent development cycle Sydney A combination of factors has constrained new development in Sydney: Hotel development has not generally been feasible over last 10 yrs or not been best use Lack of available quality sites Assets selling at a significant discount to development cost 8
Common Development Mistakes Hotel development is poorly understood in Australia Limited Australian hotel development experience Misunderstanding on who bears forecast risk, particularly start-up Brand presence and position vs. operator capability and suitability Weighting of determining factors – i.e. best forecast not necessarily best operator Blind obedience to truisms Inability to match management structures with effects on end value Design focus as opposed to financial outcome driven, VM failure Missing project costs (underestimate equity requirements) Demand study vs. feasibility Process often driven from wrong person and core assumption ( I should have a hotel rather than should I have a hotel) 9
New Build Characteristics and Trends Product type is typically smaller and investment friendly and includes:- 150-220 room 4-4.5 star Smaller rooms, smarter design Recent focus on medium/long term stay product, supported by kitchenette facilities Very limited resort stock Some regional stock – typically special purpose (mining/infrastructure/university) Sources of new hotel development 1st time/inexperienced developer Offshore – China and South East Asia Traditional major developers and market participants, usually limited hotel experience Mixed use/place making is a common driver and can change the financial rules Institutional and new investors are open to hotels including some new Reduced over built product Oversupply of capital, undersupply of experienced developers 10
Development Feasibility Process Stage 1 Stage 2 Stage 3 Stage 4 Site Structure & Preliminary Execution Assessment Detail Feasibility Size Update Feasibility Supply / Demand Equation Work up alternative schemes Access/Infrastructure Marketing end product Update Feasibility Key Product Assumptions Location Pre-sales Financing Plan - debt/equity Key Risks Existing attractions Finance Sensitivity analysis Financial Focus Approvals Construction Sell down/exit strategy Initial Buildability Operator Agreement Operator selection & input Business Plan Market testing Pre-opening Further DA approval Opening 11
Hotel Development Stakeholders Feasible development relies on a relatively small overlap between stakeholders that needs to be skillfully managed, this is an operator opportunity Developer Operator • • Often limited hotel experience Generally passive approach to • Rely on Hotel operator to solve development • Don’t understand management options • Many anti development rules • • Confuse retail brand with development Resist operating risk Developer • needs Limited/no capital • Don’t understand MLR vs. • “Technical Services” focus on brand single title and operations • Wants to lay off operating risks • Trust architect • Difficult exit Operator Financier Financier • Limited engagement The Exit • One line • Variable rules • Retail if strata/MLR • Final veto power • Pre or post commencement • Vacant possession highly desirable • Is it after construction and maturity? 12
The role of Capital and other Discipline A key issue that frustrates feasibility is the inability to manage capital costs The Focus on the design goal needs to be reversed to a focus on a capital cost goal which is designed towards. There is significant variance in market commentary on the cost per room for similar standard built form Strong developers with good teams and building credentials send the able to bring in projects at appreciably lower cost than jigsaw teams There often seems to be no hotel developer in the project team and sometimes no true developer 13
Brisbane Case Study Hotels in the right location with strong project credentials can now work • 4.5 Star, approx. 180 room hotel with mixed use components • Proven short term accommodation location • D&C contract in place • In principle approval with council • Full turn key solution including development management • New build delivery 2015 • Good return on equity Project KPIs • 50% of cost financed Development Cost Per Room $245k Approx Total Equity Contribution 23,798,747 Development Margin 28.97% Project IRR 29.16% Equity IRR 33.03% Forecast Performance Yr3 (2017) NOP 5,729,109 Mgmt Fees (excluding Marketing and IT) 863,253 Yield on value on completion @$310k per room 10.0% Yield on Hotel Construct Costs @ $245k per room 12.7% 14
Options for Sitting Land Owners – Extracting Value Action Timing Investment + Cost Sell As Is 3-6 Months Land + 50k Rezoning 3-6 Months $100-$150k Increase Cost, Risk Approval & End Value Preliminary/Stage 1 DA 6-9 Months $250-$500k Full DA 9-15 Months $1-$2m Construction 18-24 Months $150-500k per room Actions that Can Assist with Process Advanced operator discussions on investment favourable management structure & terms Fixed price construction contracts Securing an end take out (Strata Presales/Mixed Use) All about the removal of construction/development risk Will vastly increase the number of potential parties Financing on more agreeable terms 15
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