We Have Definitely Arrived How Long Will IT Last International - PowerPoint PPT Presentation

We Have Definitely Arrived – How Long Will “IT” Last International Society of Hospitality Consultants (“ISHC”)

We Have Definitely Arrived – How Long Will it Last?

Hospitality is a Three ‐ Ring Circus! Peak Peak Development Late Late Early Early Recovery Recovery Downturn Downturn Finance Operations Early Early Late Late Recovery Recovery Downturn Downturn Bottom Bottom Trough Trough

Where Are We Now? 2017 Peak Peak Development Late Late Early Early 2016 2008 Recovery Recovery Downturn Downturn Finance Operations Early Early Late Late 2011 Recovery Recovery Downturn Downturn Bottom Bottom Trough Trough 2010

Real Estate & Market Cycle Peak Peak Early downturn Late upturn Late Early downturn upturn Trough

The 14 Stages of Developer Emotion Point of Maximum Financial Risk Euphoria Anxiety Thrill Denial Excitement Fear Optimism Optimism Desperation Relief Panic Hope ** Capitulation ** Year ‐ End Depression 2014 Despondency Point of Maximum Financial Opportunity

Stages of Operational Rollercoaster Bottom Early Late Peak Trough Recovery Recovery • Sinking • Revenue • We can do Ship flow no wrong through • Cut • Confusing declines Services talent for timing • Trim labor

Real Estate Recovery 2017 Peak Peak  Real estate values double trough to peak in top markets  Market euphoria and optimism  Significant rate growth (supply demand Late Late Upturn Upturn imbalance)  Construction increases significantly 2014  Interest rates up Middle Recovery  Last chance to harvest real estate  8% RevPAR growth  Easy money for acquisition and focused ‐ service development Early Early  Supply pipeline explodes Upturn Upturn  Real interest rates remain low  Construction lending increases in all sectors  5% to 7% RevPAR growth Bottom Bottom  Time to sell Trough Trough 2010

Real Estate Recovery Business of the Business Improves Dumb 2017  Supply increases Money Peak Peak  Lenders compete, spreads drop, Left in LTV increases Market  Spreads decrease  CMBS back Late Late Upturn Upturn  Cautious optimism continues 2014  Strengthening business Middle Recovery fundamentals  Lenders return (slowly)  Debt and equity available: 70% LTV, 9 ‐ 11% debt yield  Mezzanine returns: 15%+, LTV to 85%  Primarily market driven on excellent business prospects Early Early Upturn Upturn

Fires Burning Optimism  Low interest rate environment  Occupancy fully recovered, transient driven  Groups are back and spending  ADRs increasing double digit  6% to 8% RevPAR increases three years running  Sale value : replacement cost and historic valuations  Inbound tourism  Subsidy and public/private ventures  Very little “distressed” real estate

Yield Signs  Lenders start making loans on new full ‐ service hotels and resorts – Immutable Law #6  Equating luck with skill – Immutable Law #5  70% national occupancy = supply growth  Growth in supply (just before the cliff) – Immutable Law #7  10% RevPAR growth = unsustainable  Industry euphoria = it is all great and never ends > everyone drinks the Koolade  The really big, bold, eye ‐ popping deal – Blackstone bought Hilton  Brand breeding  Federal, state, and city telling hospitality what to pay its staff  Historic valuations

A Tale of Two Cities Atlantic City and Philadelphia

One-Hour Drive: Atlantic City Versus Philadelphia Potential Market Size 6 0 -Minutes 4.6 Million Adults Drive Tim es 1.13 Million Adults Atlantic City

Atlantic City…America’s Second Casino Destination First Casino opens 1978 Billion $ 2014 Closures • Revel • Showboat • Trump Taj Mahal • Trump Plaza At end of 2013, 12 casino resorts with 26,000 slots, 17,000 hotel rooms, employing 35,000 people American Gaming Association, 2013 State of the States

Philadelphia’s Casino Offering 4 Philadelphia- area casinos opened between 2006 and 2012. Offering: • 8,234 Slots • 389 Tables Generating $1.1 billion in Gross Gaming Revenue

Regional Competition “Either build a better mousetrap…or put the trap closer to the mice.”

Expansion Continues in the NE…With Hotels Genting, New York State MGM National Harbor (Washington D.C.) Casino Hotels: • Unbranded • Complimentary • Not the highest-margin element • Can be complementary fit Wynn Everett (Boston)

We Have Definitely Arrived – 2015 Late Recovery Stage Chad Sorensen, President ISHC

Stage 3 of Operational Rollercoaster Late Recovery • Revenue flow through declines Late Recovery Characteristics

Inundation of New Brands & Concepts Happy feet abound: Short ‐ term memory loss and a blind eye to dangers on the horizon; loss of Brands focus on existing operations

Continued RevPAR Growth RevPAR growth fueled by ADR BUT…reduced flow through of (see Early Recovery stage for incremental revenue occupancy growth) ADR

Reduced Flow Through ‐ Operations  Amenity and service creep  Labor cost creep/leap; Managers, FTEs, wages, benefits, loss of focus on productivity  Loyalty program stranglehold  Acceptance of rising distribution costs

Rising Distribution Costs Cost of Customer Acquisition Travel Cost as Vendor % Revenue AIRLINES 3 ‐ 6% CAR RENTAL 4 ‐ 6% HOTELS 15 ‐ 25% Source: Kalibri Labs

Commissions Rise at 2x the Rate of Revenue Growth (retail commissions only) 40% Commissions 35% 30% Total Revenue 25% 20% 15% 10% 5% 0% 2009 2010 2011 2012 Room Revenue Total Revenue Total S&M Commissions Total Acq Costs Source: “The Rising Costs of Customer Acquisition,” A White Paper Prepared for Hospitality Asset Managers Association by Frank Comacho, January 2014

Speaking of Distribution…

….And Disruptors

Reduced Flow Though ‐ Increased Brand Pressures  New and/or revamped brand mandated programs  Brands further off loading of expenses  Property Improvement Plans & CapEx

CapEx – 4% Isn’t Even Close  Brand arms race (3 to 4 percent just to maintain brand standards)  What about facilities and systems?  Renovations and re ‐ positionings?

CapEx – ISHC & HAMA Study  Releasing new version in January 2015

Measuring the Recovery – Muddy Waters

2015 Take Aways  You can’t manage what you can’t measure; so measure  Understand and challenge Brand programs and costs (one size does not fit all)  Stop talking about distribution costs; do something about it (Net RevPAR vs. RevPAR)  Be honest with yourself on expense “Fat” and cutting too deep during the downturn  Develop a thoughtful long ‐ term CapEx plan