CBRE HOTELS CANADA 2013 NATIONAL HOTEL OUTLOOK CANADIAN HOTEL INVESTMENT ACTIVITY REMAINED STRONG IN 2012 AMIDST MACROECONOMIC UNCERTAINTY STEADFAST FUNDAMENTALS: With Canadian hotel investment volume topping an Canada continues to attract global attention as a safe estimated $1.1 billion in 2012, there is no doubt hotels haven for investment; debt remains attractive and remain a highly attractive investment vehicle for a available; and, in most markets top line operating variety of owners, operators and developers confident performance has improved. Canada’s steadfast in Canada’s long term economic prospects. Volume fundamentals tempered the impact of global, in 2012 was slightly below the $1.2 billion transacted macroeconomic uncertainty, and were an important in 2011 and notably short of the frenzied merger and catalyst for strong hotel real estate activity that all acquisition activity in 2006/07 that averaged $3.8 indicators suggest, will continue in 2013. billion per annum, but it ranked within the top one-third of the busiest years since 1990, surpassing the average annual volume of $970.0 million recorded during this time. CANADIAN HOTEL TRANSACTION VOLUME $4,500 15.0% $4,000 10.0% G $3,500 DP RO 5.0% G WT AN H FORECAST DI % NA CA % $3,000 0 H T W % CHANGE O R $2,500 G -5.0% MILLIONS ($) R A P V E $2,000 R -10.0% $1,500 -15.0% $1,000 $500 2013 PROJECTION 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 F Sources: Conference Board of Canada; Smith Travel Research, CBRE Hotels 1 CBRE HOTELS CANADA 2013 NATIONAL HOTEL OUTLOOK CONTROLLED, STRATEGIC EXIT PLANS Early predictions for 2012 optimistically pegged hotel with fundamentals improving in most sectors despite transaction activity to reach a considerably higher heightened concerns surrounding debt and austerity level than was actually achieved, particularly given first issues in Europe and the well-known fiscal challenges quarter volume of $384.4 million was almost three times in the United States. Economic forecasts by the stronger than the start to 2011. As the year progressed, Conference Board of Canada have Canadian Gross a number of anticipated transactions, ranging in size Domestic Product (GDP) growing by 2.3% in 2013. This and market positioning, faced challenges that prolonged is somewhat higher than the 1.8% achieved in 2012, marketing programs or extended conditional periods remaining well above stall speed and sufficient enough that resulted in deals collapsing or being pushed into to generate 15,000 to 17,000 jobs per month, which 2013. should keep the national unemployment rate near 7.0%. Although buyers with the needed wherewithal across all The latest indicators continue to suggest economic asset classes were active, the depth of the buyer market expansion will be tempered in 2013, with overall growth narrowed somewhat and with underwriting criteria hampered by a slowing housing market, modest consumer remaining stringent, deals generally took longer to come spending increases, more cautious business investment together. Not an ideal scenario, but does speak to the plans, ongoing fiscal restraint and a challenging export diversity of seller motivations and the lack of distress environment. The Canadian dollar is expected to (3.2% of total volume) that allowed sellers to stay the remain near par, meaning exporters and tourism related course with controlled, strategic exit plans. Quarterly businesses will remain challenged by a relatively strong transaction volume slowed to $260.3 million in Q2 and currency compared to the U.S. dollar, British pound and $216.8 million in Q3, but finished slightly stronger with Euro. Central banks, including the Bank of Canada, are Q4 increasing to $226.9 million. Just weeks into 2013, expected to remain highly accommodative and maintain deals are transacting and setting the stage for building a low interest rate environment through 2013, into momentum once again. 2014, and quite possibly in 2015. CANADIAN QUARTERLY HOTEL TRANSACTION VOLUME $400 $300 $200 MILLIONS ($) $100 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 2012 TEMPERED ECONOMIC EXPANSION Strong commercial investment activity has stemmed from Canada’s ability to weather global economic volatility, a direct result of the country’s sound financial system and HILTON GARDEN = steady economic growth that offers attractive stability INN EDMONTON to domestic and international investors. Forecasts for WEST Purchased by Temple REIT for Canada’s economy continue to be generally favorable $193,500 per room 2 HOTEL INCOME GROWTH, ALBEIT MODEST: Nationally, top line hotel performance improved for the in this region attained RevPAR growth upwards of 5.0%, fourth consecutive year, albeit at modest levels, with the majority reached less than 3.0% with a number Smith Travel Research reporting revenue per available contracting due to both lower occupancy and average room (RevPAR) growth of 6.5% from 2009 to 2011 daily rates. and a further 2.6% increase in 2012, for RevPAR to The good news is further market growth is anticipated. reach $81.07. Although aggregate supply increased PKF Consulting is projecting RevPAR to increase only 0.5%, strengthening regional demand in select nationally in 2013 by 3.8%, with Western Canada markets has precipitated the threat of imminent and leading at 4.8%, followed by Atlantic Canada at 4.3% potentially substantial supply, particularly in Western and Central Canada at 3.8%. As top-line performance markets such as Richmond, Calgary (airport), Edmonton improves, greater operating efficiencies are attainable. (airport), Saskatoon and Winnipeg. Some buyers PKF Consulting has forecasted Net Operating Income continue to remain bullish on these markets due to their per Available Room to improve nationally by 7.3% strong underlying economies, while other investors are in 2013, with the West increasing 6.8%, Central and exercising caution and effectively narrowing the buyer Atlantic Canada by 7.5% and 5.0%, respectively. pool. Modest gains in national room-night demand of 1.6% moved occupancy up 1.0% and supported average TOP 5 / BOTTOM 5 MARKETS - REVPAR GROWTH daily rate growth of 1.6% in 2012. CALGARY 13.1% There was regional disparity in top line growth, the strongest occurring in resource based markets. Western ALBERTA NORTH AREA 11.1% Canada (British Columbia and Alberta) led RevPAR growth in 2012 at 4.9%, although it was Alberta’s 9.2% ALBERTA SOUTH AREA 8.4% increase, fuelled by growth of 13.1% in Calgary and 11.1% in Northern Alberta, which dominated due to BANFF 7.6% its robust resource based markets. Unfortunately larger EDMONTON 7.4% markets in British Columbia did not fare as well, with RevPAR declining 1.2% in Greater Vancouver and 3.4% -1.4% WINNIPEG in Victoria. Northern Canada (Northwest Territories, Nunavut and Yukon) followed closely behind Western -1.8% VANCOUVER DOWNTOWN Canada with RevPAR growth of 4.8%. The Prairies (Saskatchewan and Manitoba) achieved RevPAR growth -3.4% VICTORIA of 2.0% with the help of 4.5% and 6.1% growth in Regina and Saskatoon, respectively that helped to -4.5% MONTREAL DOWNTOWN counter a decline of 1.4% in Winnipeg. Central and -4.9% LONDON Atlantic Canada remained sluggish, improving only 1.3% and 0.4%, respectively. While some sub-markets Source: Smith Travel Research WESTERN CANADA CENTRAL CANADA ATLANTIC CANADA $700 15.0% $600 10.0% $500 5.0% $400 0 % CHANGE MILLIONS ($) $300 -5.0% $200 -10.0% $100 -15.0% ‘08 ‘09 ‘10 ‘11 ‘12 ‘08 ‘09 ‘10 ‘11 ‘12 ‘08 ‘09 ‘10 ‘11 ‘12 Sources: PKF Consulting, Smith Travel Research, CBRE Hotels REVPAR GROWTH % 3 CBRE HOTELS CANADA 2013 NATIONAL HOTEL OUTLOOK NOTABLE 2012 TRENDS: A number of notable trends within the Canadian hotel » Noticeable by Q3, sellers began to outnumber investment sector emerged during the past year that buyers, although it has not become a traditional provide an interesting snapshot of the building blocks buyers market as both sides remain highly disciplined that will influence the direction that the industry is in their pricing strategies. While fewer buyers are heading in 2013: stepping forward in bid processes, the ones that do are highly qualified. There are also a number » Pricing was relatively stable from 2011 of active opportunistic buyers aggressively pursuing to 2012 and given the relatively small size of product in strong locations with accretive value the Canadian sector with just 102 hotel sales in through capital investment and/or repositioning. For 2012 compared to 104 in the prior year, marginal example, with Saskatoon poised to be one of the differences from one year to the next can often be top three growth markets in terms of GDP during the explained as the result of just a handful of deals next 3 to 4 years, Temple REIT’s acquisition of the skewing final results. Although per room pricing 250-room Saskatoon Inn for $37.2 million, with an fell marginally over last year, from $107,000 to estimated $10.0 million capital need, facilitated the $100,000, eight hotels traded in excess of $30.0 buyer’s desire to be within this target market. million in 2012 compared to half of this in 2011. The Four Seasons Hotel Toronto sold for the highest » Seller and buyer motivations varied and we purchase price in 2012, however the $375,000 price witnessed great diversity of hotel assets brought to per room was far surpassed by the $462,000 paid market in terms of size, facility profile, marketing by Temple REIT (now Temple Hotels Inc.) for the 66- positioning and geography. While a number of room Clearwater Suites Timberlea in Fort McMurray.