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

Transcription

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

2 We Have Definitely Arrived How Long Will it Last?

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

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

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

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

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

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

9 Real Estate Recovery Business of the Business Improves Supply increases Lenders compete, spreads drop, LTV increases Spreads decrease CMBS back 2017 Peak Dumb Money Left in Market Cautious optimism continues Strengthening business 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 2014 Middle Recovery Late Upturn Early Upturn

10 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

11 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

12 A Tale of Two Cities Atlantic City and Philadelphia

13 One-Hour Drive: Atlantic City Versus Philadelphia Potential Market Size 4.6 Million Adults 60-Minutes Drive Times 1.13 Million Adults Atlantic City

14 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

15 Philadelphia s Casino Offering 4 Philadelphiaarea casinos opened between 2006 and Offering: 8,234 Slots 389 Tables Generating $1.1 billion in Gross Gaming Revenue

16 Either build a better mousetrap or put the trap closer to the mice. Regional Competition

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

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

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

20 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

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

22 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

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

24 Commissions Rise at 2x the Rate of Revenue Growth (retail commissions only) 40% 35% 30% Commissions Total Revenue 25% 20% 15% 10% 5% 0% 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

25 Speaking of Distribution

26 .And Disruptors

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

28 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 repositionings?

29 CapEx ISHC & HAMA Study Releasing new version in January 2015

30 Measuring the Recovery Muddy Waters

31 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