Cleveland Research April 2, 2018 Page 2
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April 2, 2018 HUNTER HOTEL CONFERENCE RECAP Important disclosures can be found in Appendix OPTIMISM ON DEMAND AND DEAL FLOW We include a recap of the Hunter hotel conference, some key takeaways, key quotes, and a short review of the last handful of Hunter hotel conferences below. For full notes, see the Appendix. Key Takeaways Sick of baseball – Bob Hunter said it best...Cycles don’t die of old age. In ‘14 and ‘15 we were in the 6th inning of a double header. In ‘16 we were concerned. In ‘17 we were in the 10th inning of an 18 inning game. In ‘18, we are tired of baseball analogies. We are now 96 months positive vs. 56 months prior (’02 - ’09) and 111 months prior (’92 - ’99). RevPAR looking decent – RevPAR sounds to be tracking slightly ahead of budgets with industry participants YTD. Lapping the Inauguration/Women’s March was not as bad as feared, Feb was ok, and a March hindered by the Easter shift looks pretty decent. Most still expect a slight acceleration in RevPAR growth into 2Q tied to a more favorable calendar and some modest improvement in Corporate. The expectation looks like 2.5-3% RevPAR for 2018 with flat occupancy and rate driving growth, as better core trends offset the lapping of the hurricanes and inauguration benefit. This follows 2017 also up ~3%. Push price please – Industry demand growth accelerated from 2% in 2016 to 3% in 2017. That is good. Industry rate growth decelerated from 3% in 2016 to 2% in 2017. That is bad. The speakers keep telling everyone to push pricing. Who is listening? More buyers than sellers – For 2018, we are hearing of growing buyer interest in what sounds like a smaller pool of good assets for sale. This follows 2017 when buyer interest recovered/bid-ask spreads narrowed. As a reminder, 2016 the appetite for deals was “anemic” following 2014/2015 which was “on fire.” Single assets deal volume should continue to grow – In 2017, the $24B in deal volume was down from the $29B in 2016 largely due to the Anbang/Strategic deal which added $5.5B to 2016 numbers. Single-asset transactions were up yr/yr in 2017 and the appetite for deals was healthier. For 2018, most expect single-asset deals to continue to grow. Stable Caps – Consensus calls for stable cap rates over the next 12 months as interest rates rise, pointing to a compression of the spread/risk premium for hotels. This follows 2017 when cap rates were fairly stable yr/yr (risk premium compressed despite a rise in interest rates) and 2016 when cap rates were up ~150bps yr/yr (reflecting a growing risk premium). Average cap for 2018 looking near 8%, a 500bps premium to the 10yr. Compares to ’07 when cap rates were near 6.5%, 150bps premium to the 10yr. Vacation days growing – Vacation days picked up in 2017 to 17.5 days per year on average, up from 16 in 2016, but still shy of peak of 20 days per year. Seeing more leisure days tacked on to corporate trips vs. week long strictly leisure vacations. GDP should...decel in the next 2 years – GDP growth picking up and more synchronized globally than it has been in some time. 3% is a nice figure. According to the NFIB, small business optimism is at a historic high...as is uncertainty. In the U.S. consumer expenditure looks good now but should decelerate 2 years from now by 2020 (for the last 5 years, it has been supposed to decelerate “2 years from now”/must be an economist thing). Watch those margins – Rate growth not looking so hot coupled with rising labor costs and years of cutting/eliminating inefficiencies in the cost structure...all seems to point to margin pressures for owners. Brand Proliferation – New brand launches and brand acquisitions continue. Today there is less asking about “how many brands is too many” and more “how many will survive.” Each brand company seems to think they have the right recipe to do so. Scale – Brand consolidation continues. Scale matters as it helps illuminate duplicative costs and benefits from combined infrastructure for sales/marketing. Better leverage with distribution/OTA’s. Lines between brand and OTA continue to blur. Supply in check – We are hearing lending standards remain high and construction costs continue to rise, both of which are keeping supply growth in check. Supply was 1.8% in 2017 and looks like 2% in 2018 & 2019. Rooms under construction plateaued in 2016, picked back up slightly in 2017, and looks down slightly in 2018 (193k under construction in Jan 18 shy of the 111k in Dec ’07). 42 of the 60 major cities will have supply above 2% in 2018, up from 36 of the 60 in 2017. Review of the last 5 Hunter Conferences – It has been an interesting ride over the last 5 years of Hunter Conferences. Sweet Spot: March of 2014 Conference – It was the 6th inning of what might be a “double header” in the “sweet spot” of the cycle. We didn’t have to worry about downside until 2016/maybe 2017. Capital was more readily available and LTV was rising. Supply was just crossing 1% after 3 years of sub 1%. It was “as good as we have ever seen the lodging industry,” and the “time to push rate was now.” Airbnb was a $10B valuation...is it really worth that? Chris Nassetta of Hilton told us that things were like Goldilocks – “not too hot and not too cold.” Extra Year: March of 2015 Conference – It was the 6th or 7th inning of a “double header” (hey we found an extra year). Inflation adjusted rate was back in line with the prior peak. It was “not a bad time to buy or sell.” We reflected on 2014, which turned out to be the year of the select serve portfolio deals. We realized there was some “millennial in us all” and fully embraced VINCE CIEPIEL, CFA HENRY GERLACH, CPA MATT VARABKANICH [email protected] [email protected] [email protected] (216) 649-7253 (216) 649-7206 (216) 649-7316 Cleveland Research April 2, 2018 Page 2 “brand proliferation.” We were warned that supply of Airbnb could negatively impact rate growth. Steve Joyce of Choice told us that “if we weren’t having fun now, we should get out of the industry b/c it doesn’t get better than this.” Back to Reality: March of 2016 Conference – Following a “lofty” market in 2015 with deal flow reaching cycle highs, there was a macro repricing of cash flows. Cap rates rose 150bps as the embedded risk premium rose. Deal financing became more difficult to obtain. Yr/Yr RevPAR growth was slowing, but you “can’t grow at 7% forever.” Anbang had just come over top of Marriott for Starwood and many thought both “had room to sweeten the deal.” Stop Clicking Around from Hilton was helping to “take back what was leaking out of the business to a place that did not deserve to have it.” Feeling Better: March of 2017 Conference – Compared to March of 2016, we were decidedly more optimistic. Hotels looked like a good deal/favorable yield vs. other real estate asset classes. Talk on cost inflation ticked up. RevPAR sounded fine against a lower bar. Cycle prognosticators seemed less opinionated as it has been “late in the cycle” for a number of years now. Supply was approaching 2% and rate was going to drive RevPAR going forward. Airbnb was worth $31B. Barry Sternlicht told us about Trump’s golf game and feelings on seeing his baby Starwood get swallowed by Marriott. Maybe a Few More Years: March of 2018 Conference – Most are feeling better on deal flow and RevPAR vs. same time last year. Hearing more deals collapse on rising construction costs keeping supply in check. Cap rates expected to remain stable as interest rates rise. We are sick of baseball and are taking more vacations. Key Quotes from the Conference: Cycles don’t die of old age. – Bob Hunter Averages don’t mean a thing. This is a street corner business. – Bob Hunter New construction is at a reasonable level....Thank you lenders. – Bob Hunter Good to be a seller – not a lot for sale. Buyers are back, but back cautiously. – Bob Hunter Trend in the industry: select service is a real institutional investment class. 2011 was our first select serve. Now Mit raising core plus fund (select service) and investors are coming to the conclusion we already knew. Quality is not just RevPAR. It’s consistency in under-writeability and cash flows – Suril Shah (Starwood) I remember a time when you could buy any Amerisuite you wanted for an 11 cap. Your pick. I’ve been in the industry too long. – Teague Hunter (Hunter) Investors want predictability. They don’t care whether it’s full service or select service. They used to care. They don’t today. – Tyler Morse (MCR) Replacement costs…I used to spend so much time thinking about it, and think far less about it now. It is just a function of cash flow potential of the asset. We miss so many opportunities thinking about replacement costs. – James Merkel (Rockbridge) Following Feb/Jan, 2018 shaping up to a good year despite what you are hearing from the REITs. We feel good we’ll beat budget. – Suril Shah (Starwood) On new development projects, clients tell us construction costs are up 25-30% since we started underwriting deals. That is killing some of these new deals and its keeping supply in check.