2018 CANADIAN HOTEL INVESTMENT REPORT COLLIERS INTERNATIONAL HOTELS INTRODUCTION The Canadian hotel investment market is in a sustained period of growth having posted its seventh consecutive year of transaction volumes well above the $1 billion threshold with strong pricing metrics and healthy gains in operating performance. The thesis for new investors is still strong and intact: Canada is a global bright spot and natural destination for capital, whether the origin of capital is domestic or from across borders. SPECIAL FEATURE: EVOLUTION OF THE CANADIAN HOTEL INDUSTRY Much like a jigsaw puzzle, the Canadian hotel industry has evolved over time by the foresight and vision of business leaders putting the pieces together. The special feature of the 2018 Canadian Hotel Investment Report is presented on pages 4 and 5 and includes a timeline analysis of two notable Canadian lodging leaders: Canadian Pacific Hotels and Journey’s End Hotels. As a follow-up to our special feature from 2008, we document the critical events that have shaped their respective evolutions. This includes Canadian Pacific Hotels’ remarkable history with over a century of significant developments that led to eventual purchase by global powerhouse AccorHotels, and Journey’s End Hotels’ humble beginnings in the late 1970s to its current form under InnVest as Canada’s largest hotel owner. In addition to highlighting landmark events, it provides a retrospective account of how companies are continually evolving and transforming to put the proverbial pieces together. 2 Colliers International Hotels 2018 INDUSTRY OUTLOOK $2.0-$2.5 BILLION IN CONTINUED DEBT TRANSACTION VOLUME CAPITAL LIQUIDITY We anticipate deal flow will be muted compared to the The cost of financing is anticipated to increase throughout record activity recorded in 2016 and 2017. Despite the year coinciding with several rate hikes that are expected relatively limited opportunities in the transaction in Canada and the U.S. Despite this, rates remain below the pipeline, full-year volume should nonetheless pace long-term historical average and there continues to be an within the cycle average of $2.3 billion. abundance of financing available, including a growing trend of debt funds. FOREIGN INTEREST REBOUND IN ON KEY OFFERINGS ENERGY MARKETS Canada remains a stable location for global capital amid 2017 marked a rebound in operating performance in political and economic uncertainties in peer nations. energy-linked markets, correlating somewhat to a rise Key offerings in gateway markets or deals with an in WTI crude oil prices, which are now averaging over attractive long-term land play will continue to appeal to US$65 per barrel. We expect transaction activity to strategic cross-border purchasers. continue to rise in Alberta and neighbouring Western Canada energy markets in 2018. EXPANDED DIVERSITY GROWTH IN THE OF EQUITY POOLS DEVELOPMENT PIPELINE While pension funds, private equity and hedge fund New hotel construction is accelerating in many major groups have been net sellers over the course of urban and suburban markets nationally with growth the current cycle, we anticipate these players will expected to average about 1.5%-2.0% per year over the reemerge as buyers on strategic offerings in the next three years; activity not seen since 2005-2008. pursuit of yield and diversification. CONTINUED LIFESTYLE TOURIST BOOM RENAISSANCE A competitive Canadian dollar, friendly environment Demographic preferences and cost competitiveness are and growing global tourist market are luring visitation supporting growth in boutique and lifestyle hotels. We from increasingly international markets. Coming off expect this to be an increasing theme in both conversions/ a record year for Canadian tourism with 20.8 million renovations and new construction going forward. overnight tourists welcomed in 2017, we expect the trend line will continue rising in 2018 to create a new record. 2018 Canadian Hotel Investment Report 3 SPECIAL FEATURE 2007 Legacy Hotels REIT privatized by a partnership created by InnVest REIT and Cadbridge Investors LP (a limited partnership formed by Cadim, a division of the Caisse de depot et placement du EVOLUTION OF CANADIAN Quebec, and an affiliate of Westmont Hospitality Limited). This included the sale of 25 Fairmont and Delta assets PACIFIC HOTELS valued at over $2.5 billion. 1997 Legacy Hotels REIT formed; purchased 11 hotels from CPH for $835.6M. The formation was a first of its kind in Canada and marked CPH’s shift from owner/operator to more of a pure operator. CPH retained a minority interest in Legacy with the rest being publicly held. 1886 1888 1987 1988 1998 Canadian Pacific The Fairmont Banff Canadian Pacific Limited, CPH acquires CN Hotels, CPH acquires Delta Hotels’ Railway (CPR) Springs opens and is parent company of CPR making CPR the nation’s management company and brand. builds its first hotel. designated a National and Canadian Pacific Hotels largest hotel owner. Historic Site to recognize either owned or managed its role in opening the 25 properties (CPH). 2007 Delta brand sold to bcIMC, West of Canada to and subsequently sold to tourism, and the building Continued development of hotels across the country. Marriott International in 2015. of a nation. 1999 2000 2001 2006 2010-2015 2016 CPH acquires the CPH renames to FHR spun out by FHR acquired and Related Qatari AccorHotels acquires Fairmont Hotel Fairmont Hotels Canadian Pacific privatized by Kingdom interests acquire FRHI for US$2.7 management business & Resorts (FHR) Limited as a public Holding Company & a majority stake in billion, expanding the creating Fairmont Hotels with Delta Hotels company trading Colony Capital. The FRHI in two separate Group’s portfolio with & Resorts Inc. together continuing as a on the TSX. company was combined transactions. iconic assets and a key with partners Kingdom subsidiary. with Raffles Holdings luxury-oriented foothold Hotels (USA) Ltd., and Limited and renamed in North America. Maritz Wolff & Co., who Fairmont Raffles Hotels each held 16.5%. International (FRHI). 2018 SELECT ACCORHOTELS IN CANADA Starting as a fully integrated real estate and lodging management company Canadian Pacific Hotels transitioned into a largely management-oriented hospitality company, first as Fairmont and subsequently as FRHI. Today, AccorHotels is a worldwide travel and lifestyle group and digital innovator Fairmont Chateau Lake Louise Fairmont Pacific Rim Vancouver offering unique experiences in more than 4,300 hotels, resorts and residences, as well as in over 10,000 of the finest private homes around the globe. With over 20 brands in 100 countries, the Group has a strong development pipeline over the next five years, which includes the addition of 870 hotels worldwide. In North America, AccorHotels operates over 80 hotels, more than half of which are in the luxury segment. Several new developments have been announced in North America, with a focus on introducing new brands to key strategic markets in the region over the next few years. With robust growth plans, the Group aims Novotel Toronto Centre Sofitel Montreal Golden Mile to continue to expand its presence worldwide. 4 Colliers International Hotels SPECIAL FEATURE EVOLUTION OF JOURNEY’S END CORPORATION Expansion of brand 1993 throughout the 1980s with Choice Canada was launched as a 50/50 inventory peaking at 137 JV with Choice International. motels across Canada. Each Journey’s End’s founders wanted to maintain property cost about $2-$4 momentum of the brand they developed; million to build. Introduced concept of no-frills motels subsequently reflagged almost all of the hotels One of the First Journey’s End under the Choice Canada brands Quality or and positioned their properties Motels in Ottawa next to older, full-service Comfort. properties. Low maintenance 1978 costs, a central computer 1990 First 58-unit Journey’s End system and high occupancy Journey’s End quickly became the Motel opens in Belleville, ON. were keys to their success. largest economy-hotel chain in Canada. 69 $265M Hotels 1997 1998 1999 Journey’s End Corporation acquired Commonwealth In an effort to consolidate Westmont Hospitality Group and Whitehall Real Estate Hospitality Limited and renamed the company to UniHost ownership of the hotels it (Goldman Sachs) acquired and privatized UniHost Corporation. The acquisition made the company the 6th managed, UniHost acquired 69 Corporation in a hostile takeover. largest hotel management company in the world with hotels for $265 million from At the time, UniHost had a portfolio of 122 properties, more than 15,000 rooms in 140 properties. limited partners. 102 owned, with the balance managed. This added The renaming reflected dramatic changes undergone at to Westmont’s existing portfolio of 8,500 rooms at 45 the corporation as it evolved from an operator of limited- properties across Canada. The Group now managed service motel properties to the largest fully-integrated a wide variety of brands under Choice, Delta, Hilton, hospitality company in Canada. InterContinental, Radisson and Starwood. 2002 2007 2009-2013 2014 2016 Formation of InnVest REIT, directly or InnVest REIT’s portfolio Non-core dispositions Activist investor Orange Capital Bluesky announces indirectly acquiring 114 Canadian hotel increased to 148 hotel and portfolio influences changes to the REIT and closes on properties, making it the largest hotel properties under banners rationalization; including the internalization of takeover of all portfolio, measured by both number of such as Best Western, Comfort Inn portfolio management, expansion of the board outstanding shares of hotels and guest rooms. Comfort Inn, Delta, renovation program. of trustees and introduces KingSett REIT units in a $2.1 Fairmont, Hilton, Holiday 16 hotels sold - Capital as a strategic capital partner. billion privatization Manager of InnVest’s hotels is Westmont Inn, Quality Suites, $139M. transaction. Hospitality Canada Limited, one of the New CEO announced; acceleration of Radisson, Sheraton largest investors in InnVest REIT. strategic plan and focus on “best in 2016 - YTD 2018 30 Suites and Travelodge.