Blackbee Hospitality Sector Insights / May 2021 Hospitality Sector Insights

BlackBee Hospitality Sector Insights / May 2021 Hospitality Sector Insights

The scale 2020 RevPARs highlight the scale of the COVID 19 impact of COVID 19 The hotel sector has experienced its fair share of volatility over the past twenty years from the 9/11 terrorist attacks to Ireland’s economic collapse to now the COVID 19 pandemic. However, it has also always demonstrated considerable resilience in recovering from such often severe downturns. The COVID 19 pandemic was the most recent blow to the sector last year. Chart 1 really illustrates the severity of the downturn with national and provincial National and provincial RevPARs (Revenue per available room) collapsing by 66% and 54% respectively. Provincial RevPARs collapsed by hotels outperformed as the sector yo-yoed in and out of lockdown mainly thanks to a 66% and 54% respectively. greater exposure to domestic economic conditions (rather than international leisure and business spending) as well as the trend towards ‘staycations’ in Q3 in particular. Given the slow roll back of government restrictions, international travel is likely to remain dormant this year meaning that the more domestically oriented provincial hotel sector will probably again outperform in 2021.

Chart 1: Irish Hotel RevPAR (Rebased to 100) Chart 1: Irish Hotel RevPAR (Rebased to 100) 160

140

120

100

0 2014 2015 2016 2017 2018 2019 2020 Source: STR, March 2021 Provincial Hotels National Hotels

In the short-term government restriction levels This all points to a slow remain the ‘only game in town’ rollback of government restrictions and the Last quarter we produced projections for COVID-19 case numbers on a 30-60 day time probability that it may be horizon using a Long Short Term Memory Model, a machine learning model which used June or July before we historical time series data to predict short term COVID case numbers. At the time of writing see a marked reduction the 30 day model is still indicating case numbers averaging around 300 over the next month in restrictions. (Chart 2), well down from the average numbers of cases during lockdowns but still above the average case numbers that applied during periods of level 3 and level 4 restrictions in 2020. This all points to a slow rollback of government restrictions and the probability that it may be June or July before we see a marked reduction in restrictions, just in time for the crucial summer holiday season.

2 Hospitality Sector Insights

The other key factor that will drive the pace of easing of restrictions is how quickly the The impact of majority of the Irish population can be vaccinated against COVID 19. Chart 3 shows that at present approximately 10% of the Irish population has been fully vaccinated (i.e. received a vaccinations second dose) while close to double that percentage has received a first dose. The rollout in Europe has been much slower versus the US but a significant acceleration in vaccine supply is expected this quarter which should boost the efforts to open up the sector from this summer onwards. A significant acceleration in vaccine supply is expected this quarter Chart 2: Daily COVIDChart Case 2: Daily Forecast COVID Case fromForecast 30 from Day 30 Day Long Long Short Short Term TermMemory ModelMemory Model which should boost the efforts to open up the 9,000 sector from summer on. 8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21

Source: Blackbee, May 2021 Historical Cases Forecasted Cases

Chart 3: Percentage of Population Fully Vaccinated Chart 3: Percentage of Population Fully Vaccinated 35%

30%

25%

20%

15%

10%

0% 02-Apr-2021 05-Apr-2021 08-Apr-2021 11-Apr-2021 14-Apr-2021 17-Apr-2021 20-Apr-2021 23-Apr-2021 26-Apr-2021 29-Apr-2021 27-Dec-2020 30-Dec-2020 02-Jan-2021 05-Jan-2021 08-Jan-2021 11-Jan-2021 14-Jan-2021 17-Jan-2021 20-Jan-2021 23-Jan-2021 26-Jan-2021 29-Jan-2021 01-Feb-2021 04-Feb-2021 07-Feb-2021 10-Feb-2021 13-Feb-2021 16-Feb-2021 19-Feb-2021 22-Feb-2021 25-Feb-2021 28-Feb-2021 03-Mar-2021 06-Mar-2021 09-Mar-2021 12-Mar-2021 15-Mar-2021 18-Mar-2021 21-Mar-2021 24-Mar-2021 27-Mar-2021 30-Mar-2021 02-May-2021 05-May-2021

Asia France Germany Ireland Italy Spain United Kingdom United States

Source: ourworldindata.org, May 2021

3 Hospitality Sector Insights

Recovery Realistic prospects for full recovery by 2024 prospects Forecasting the recovery path back to pre-COVID trading levels is complicated by the very nature of the downturn. Since 2020’s collapse in trading was caused by a ‘shutdown’ it stands to reason that a lot of the rebound or recovery will occur when the sector can take advantage of being fully ‘reopened’. Medium term improvements in the economy (specifically employment and wage growth as well as credit/debit card spending Provincial hotels are on accommodation and socialising) will also play a vital part in contributing to the capable of recovering sector’s recovery, as will the latent consumer spending potential for hospitality that has back to 2019 performance accumulated as Irish savings climbed over the past year. levels by the end of 2024. Chart 4 shows our projections that provincial hotels (which are more dependent on the domestic economy) are capable of recovering back to 2019 performance levels by the end of 2024. At this early juncture our view is that the recovery may take slightly longer for those hotel groups more heavily dependent on international leisure and business travel but that too could change. Current projections for the recovery in international travel tend to vary between 2023 (bull case) and 2025 (bear case).

Chart 4: Irish Provincial Hotel RevPaR (€) Chart 4: Irish Provincial Hotel RevPaR (€) 90

30 Our projections indicate domestically focused hotels could recover back to 20 2019 performance levels by 2024

0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021f 2022f 2023f 2024f

Source: STR data up to 2020, 2021-24 projections source Blackbee

The vast majority of inbound international travellers into Ireland come from the UK and North America so data on this will be a major swing factor for the medium-term recovery. For the moment however, it is heartening to see that US sentiment surveys regarding international travel appear to be improving. Chart 5 illustrates a gradual advance in international travel sentiment among US travellers from the Longwoods International US travel sentiment survey.

4 Hospitality Sector Insights

Chart 5: Responses* to Statement "I feel safe travelling outsideChart my 5: community" Responses* to Statement "I feel safe travelling outside my community" 60%

50%

40%

30%

06-May-20 06-Jun-20 06-Jul-20 06-Aug-20 06-Sep-20 06-Oct-20 06-Nov-20 06-Dec-20 06-Jan-21 06-Feb-21 06-Mar-21 Source: Longwoods International Travel Survey, April 2021 *Agree or Strongly Agree responses

Anecdotal evidence of 10-20% fall in hotel values because of pandemic Drop in hotel Since the onset of the pandemic there hasn’t been a significant amount of transactional valuation rates activity from which to gauge how much COVID 19 has impacted hotel valuations. The value of Irish hotel transactions fell by 75% in 2020 compared to a global fall of 50-60% (source: Savills and Jones Lang Lasalle). Generally the guidance from Irish estate agents points to potential falls of 10-20% in hotel values as a result of the pandemic. But this will vary from asset to asset.

As an example, chart 5 shows the prime yields for Dublin hotels since 2014 and how they The value of Irish hotel tightened as the sector strengthened in recent years. At present most hotel assets are being transactions fell by 75% sold off market but as ‘on market’ sales occur through the rest of the year we should get in 2020 compared to a a clearer sense of where prime hotel yields settle following the sector’s dislocation. In our global fall of 50-60% view we could see prime Dublin yields gap back up to around 5% over the next few quarters.

Chart 6: Prime Dublin Hotel Yields Chart 6: Prime Dublin Hotel Yields 0.08

0.07

0.06

0.05

0.04

0.03 41883 41974 42064 42156 42248 42339 42430 42522 42614 42705 42795 42887 42979 43070 43160 43252 43344 43435 43525 43617 43709 43800 43891 43983 44013 44044 44075 44105 44136 44166 44197

Source: CBRE, March 2021 Hotel Lease Management Agreement

5 Hospitality Sector Insights

Signs Transaction Activity - Signs of life returning of life There have been a limited number of hotel transactions since the onset of the pandemic but one of the most significant has been Dalata’s sale and leaseback of its Charlemont Hotel in Dublin 2 for c.€65 million in April 2020. Dalata will pay just over €3m a year in rent on a 35 year lease to German fund Deka indicating a yield of 4.62% today. Some more regional hotel transactions that have closed in recent months include the sale of The Blarney 5 hotel transactions Hotel & Golf Resort to the HSE for €3m and the sale of Liss Ard Estate in Cork for €3.5m to closed in the first 3 US investors. According to CBRE, 5 hotel transactions closed in the first 3 months of 2021 months of 2021. while negotiations are underway on several other hotel assets.. The five sales compared to just 10 sales for the whole of 2020, offering further hope that confidence in the hospitality sector is returning. Interestingly, the HSE intend to convert The Blarney Hotel into a public residential care facility for older people. The conversion potential of hotels to nursing homes is something that we could see more of in the coming months as the usual large size of hotel bedrooms makes them an ideal fit for conversion to HIQA standards.

Several licensed premises traded hands in Dublin in 2020, despite the uncertainty surrounding the hospitality sector. However, the largest transaction, the c.€15m sale of The Old Storehouse in Temple Bar closed pre Covid-19. Since then, a number of large sales have transacted, however signifying where the licensed premises market was in 2020, many were purchased for alternative uses. The Magic Carpet pub in Cornelscourt, Dublin 18 was sold for €9m to Dunnes Store as it came with the benefit of a large development site next door. The Ruin bar in Dublin 2 was purchased by Marlet for c.€8m off market as a development site, given its proximity to Marlet’s existing development of the former Apollo House. A quick scan of Daft.ie and Agent’s websites found that there are around 20 hospitality premises currently for sale in Ireland with a price tag greater than €1m. Within Cork, the three premises for sale all offer guest accommodation and are situated along The Wild Atlantic Way, a popular destination for both domestic and international tourists and include entire holiday complexes such as the Berehaven Lodge in Castletownbere for €3.5m. Further inland, as reported in The Irish Times recently, The Celbridge Manor Hotel is for sale at €6.5m (€100k per room).

There has been some mixed reviews from locals and council members to planning applications for hotels in Dublin with Dublin’s Lord Mayor Hazel Chu stating that Dublin City Council needs to restrict the development of further hotels to prevent “over-concentration” in the city. The sitting Lord Mayor has said Dublin City Council should introduce clear thresholds that measure hotel and aparthotel “over-concentration“ in given geographical areas. Since 2015, Dublin City Council has approved plans for more than 10,000 hotel or aparthotel rooms to be built in Dublin. Despite these comments from the Lord Mayor, a number of hotels have been granted permission in recent months including a 60-bedroom 5 star hotel at Hatch Hall, Dublin 2 and a 76 bedroom hotel in Rathmines, Dublin 6. Encouragingly, several developers have submitted planning applications for hotels in both Cork and Dublin in recent months, including for a 194-bedroom hotel on Camden Place in Cork City.

Whilst transaction activity in the hospitality sector has increased from the lows experienced in 2020, until the vaccination programme has been rolled out extensively we will not see activity return to normal with the majority of licensed premises continuing to be purchased for alternative uses.

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Overall - Hotel sector recovery should begin in H2 Pace of Sector and gather pace through 2022 Recovery The hotel sector in Ireland came into the COVID 19 crisis in reasonably good shape having rehabilitated itself following the collapse in the Irish economy during the Global Financial crisis. The COVID 19 crisis is a fresh blow but one which we believe the sector can recover from over the medium term. The dominant theme for the sector in the next few months will be the rollback of government restrictions which we believe will happen in time for the key We see a full recovery summer season. The likely pickup in vaccination pace over the next few months should then in the sector by 2024 provide a platform for 2022 to represent the year where the hotel recovery really gathers or early 2025 pace. We see this culminating in a full recovery in the sector by 2024 or early 2025.

Disclaimer:

Certain statements contained within this document may be statements of future This document is for information purposes only and shall not be treated as giving any expectations and other forward-looking statements, which are based on management’s investment advice and/or recommendation whatsoever. current views and assumptions, and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially These materials are directed only at relevant persons and must not be acted upon or from those expressed or implied in such statements. In addition to statements which relied upon by persons who are not relevant persons. Any investment or investment are forward-looking by reason of context, words such as “may”, “will”, “should”, “view”, activity to which these materials relate is available only to relevant persons and will be “see”,“expects”, “plans”, “contemplates”, “intends”, “anticipates”, “believes”, “estimates”, engaged in only with relevant persons. “predicts”, “potential”, or “continue” and similar expressions typically identify forward- looking statements. Figures in this document may have been rounded, this could result in percentage changes differing slightly from those provided in such reports. We have exercised By their nature forward-looking statements involve known and unknown risks and utmost diligence in the preparation of this document. However, rounding, transmission, uncertainties because they relate to events and depend on circumstances that may or printing and typographical errors cannot be ruled out. We are not responsible or liable may not occur in the future. As such, no forward-looking statement can be guaranteed. for any omissions, errors or subsequent changes which have not been reflected herein Undue reliance should not be placed on these forward-looking statements. and we accept no liability whatsoever for any loss or damage howsoever arising from any use of this document or its content or third party data or otherwise arising in Subject to applicable law requirements, we disclaim any intention or obligation to connection therewith. update or revise any forward-looking statements set forth herein, whether as a result of new information, future events, or otherwise. 7

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