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Hotel Values & CAP RatesMeet The Money® 2014
May 7, 2014 – Sheraton Gateway Hotel Los Angeles
Presented by: Suzanne Mellen, MAI, CRE, FRICS, ISHC
Senior Managing DirectorHotel and Casino Consulting & ValuationHVS San Francisco, Los Angeles, and Las [email protected]
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Historical Sales (Total Assets >$2.5M)
Source: Real Capital Analytics (RCA)
$0
$5
$10
$15
$20
$25
$30
$35
$60,000
$80,000
$100,000
$120,000
$140,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
$ in
Bill
ion
s
Pri
ce P
er
Ke
y
Sales Volume Price Per Key
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Historical Sales Volume (Assets >$10M)
$0
$5
$10
$15
$20
$25
$30
$100,000
$130,000
$160,000
$190,000
$220,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
$ in
Bill
ion
s
Pri
ce P
er
Ke
y
Sales Volume Price Per Key
Source: Real Capital Analytics (RCA)
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Historical Sales (Assets $2.5-10M)
$0
$1
$2
$3
$4
$5
$6
$30,000
$35,000
$40,000
$45,000
$50,000
$55,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
$ in
Bill
ion
s
Pri
ce P
er
Key
Sales Volume Price Per Key
Source: Real Capital Analytics (RCA)
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Comparison of $ Sales Volumes
$0
$5
$10
$15
$20
$25
$30
$35
2005 2006 2007 2008 2009 2010 2011 2012 2013
$ in
Bill
ion
s
>$10M
$2.5-10M
+45.2%
+33.4%
Source: Real Capital Analytics (RCA)
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Comparison of # Properties Sold
Source: Real Capital Analytics (RCA)
895 1,020
886
590
236 313
531 683
905
622
724746
279
75
231
429379
480
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
>$10M
$2.5-10M
+26.6%
+32.5%
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MM Hotel Outperforming in 2013
Source: Real Capital Analytics (RCA)/Moody’s
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2013 Sales by Total Price Paid: $10M+
Source: Real Capital Analytics (RCA)
6%
7%
13%
18%
57%
Count Volume
27%
21%18%
14%
20%
> $200M
100 to 200M
50 to 100M
25 to 50M
10 to 25M
31
35
56
85
273
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2013 Sales By Price Per Room: $10M+
Source: Real Capital Analytics (RCA)
118 134
164208
45
5938
45
11
23
3
11
0
100
200
300
400
500
600
2012 2013
# o
f P
rop
ert
ies $750k+
$500-750k
$300-500k
$200-300k
$100-200k
<$100k
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Calistoga Ranch, Napa Valley, CA $1,100,000 per key
Prices Exceeding $1 Million Per Key
Park Lane Hotel, Manhattan, NY $1,090,909 per key
Langham Place Fifth Avenue, Manhattan, NY$1,070,093 per key
Source: HVS
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Major Hotel Sales Transactions (Assets $10M+)
Source: Real Capital Analytics (RCA)
YearNumber of
Hotels % ChangeAverage Price
per Room % Change
1Q 2014 118 31.1% $188,555 -13.3%
1Q 2013 90 $217,508
2013 480 26.6% $202,742 10.4%
2012 379 -11.7% $183,657 -3.3%
2011 429 85.7% $189,861 9.3%
2010 231 208.0% $173,769 21.3%
2009 75 -73.1% $143,229 -19.7%
2008 279 -62.6% $178,449 3.2%
2007 746 3.0% $172,880 -6.4%
2006 724 16.4% $184,687 18.6%
2005 622 $155,661
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Cap and Discount Rates – Select Set of Full Service Hotels
Source: HVS
2013 6.1 % 7.1 % 10.6 % 17.2 %
2012 5.8 7.2 10.8 16.5
2011 6.1 7.1 11.7 16.8
2010 4.6 5.4 11.8 15.9
2009 8.0 6.4 13.7 16.9
2008 6.7 5.8 11.6 19.3
2007 6.0 6.8 11.6 21.3
2006 5.5 5.7 10.8 18.9
2005 5.2 6.9 11.4 19.7
2004 5.8 7.4 12.2 19.7
2003 7.9 8.2 14.0 21.4
2002 8.9 9.8 13.6 21.0
2001 8.2 9.8 14.6 22.2
Source: HVS San Francisco
Unlevered Discount Rate Equity Yield
Cap Rate based
on Historical
NOI
Cap Rate based
on 1st Yr.
Projected NOI
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Cap and Discount Rates – Derived from Sales
Source: HVS
%
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
Cap Rate - Historical NOI Cap Rate - 1st Yr. Projected NOI
Unlevered Discount Rate Equity Yield
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Derived Cap Rates Steady
Source: Derived from hotels appraised by HVS at time of sale
6.1
7.7
9.5
5.8
7.4
9.3
6.2
7.4
9.2
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Full Service SS & ES Ltd. Service
2012 20132011
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Comparative Rates of Return - 2013
Source: Derived from hotels appraised by HVS at time of sale
6.27.3
10.6
17.4
7.48.5
11.1
18.2
9.210.3
12.7
20.1
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
20.0%
22.5%
Historical NOI 1st Year NOI Discount Rate Equity IRR
Full Service SS & ES Ltd. Service
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Wide Range of Cap Rates on Historical NOI
2013 2012 2011
Property Type Average (%) Range (%) Average (%) Range (%) Average (%) Range (%)
Ful l Service Incl . Luxury
Select Service & Extended Stay
Limited Service
Source: HVS San Francisco
6.2 2.9 - 7.9
7.4 2.5 - 14.2
9.2 5.4 - 12.9 9.3 3.7 - 12.2
4.0 - 11.77.4
5.8 1.5 - 11.7 6.1
7.7
9.5
0.05 - 10.9
3.2 - 12.6
0.03 - 30.0
Source: HVS
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Cap Rates Remain Above Hotel Mortgage Interest Rates
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Cap Rate - Historical NOI Hotel Mortgage Int. Rate - ACLI 10-Year T-Bill Yield
Source: Federal Reserve, ACLI, and HVS
%
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Capitalization Rates – PWC Investor Survey
%
Source: PWC Real Estate Investor Survey
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
Regional Mall CBD Office Suburban Office Apartment
Full-Service Lodging Limited-Service Lodging Luxury Lodging Select Service Lodging
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5%
6%
7%
8%
9%
10%
11%
12%
13%
Full-Service Lodging Limited-Service Lodging Luxury Lodging Select Service Lodging
Trend in Hotel Cap Rates – Survey Range Impacts Average
Source: PriceWaterhouseCoopers Real Estate Investor Survey
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Discount Rates – PWC Investor Survey
%
Source: PWC Real Estate Investor Survey
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
Regional Mall CBD Office Suburban Office Apartment
Full-Service Lodging Limited-Service Lodging Luxury Lodging Select Service Lodging
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Downward Trend in Residual Cap Rates
Source: PWC Real Estate Investor Survey
9.56
11.25
8.81
NA
8.719.65
8.72 8.508.179.25
7.628.34
0%
2%
4%
6%
8%
10%
12%
Full-Service Lodging Limited-Service Lodging
Luxury Lodging Select Service Lodging
5 Years Ago (1Q2009) 1 Year Ago (1Q2013) 1Q2014
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Cap Ex Impacts Cap Rates and Values
Source: ISHC CapEx 2000 and STR
0
40,000
80,000
120,000
160,000
200,000
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Years
Range # of Rooms
% o
f To
tal
Reven
ue
# o
f US
Ho
tel R
oo
ms
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Cap Ex Impacts Cap Rates and Values
Source: ISHC CapEx 2000 and STR
0
40,000
80,000
120,000
160,000
200,000
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Years
Range # of Rooms +5 Years
% o
f To
tal
Reven
ue
# o
f US
Ho
tel R
oo
ms
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Hotel Lender Composition – Past 5 Years
Source: ISHC CapEx 2000 and STR
0
40,000
80,000
120,000
160,000
200,000
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Years
Range # of Rooms +10 Years
% o
f To
tal
Reven
ue
# o
f US
Ho
tel R
oo
ms
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Percentage of Appraised Hotels Requiring Cap Ex* Upon Sale and Cap Ex as % of Purchase Price
Full Service 82 15
Select Service 76 13
Limited Service 71 12
* Capita l expenditures above and beyond reserve for replacement
Hotel Product Type
Average Cap Ex* as
% of Purchase Price
% w/Expected
Cap Ex* Upon
Source: HVS
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Valuation Scenarios –Impact of Terminal Cap Rate
Differential
Loan/Value 65% 65%
Amortization 25 25
Term 10 10
Interest Rate 5.50% 5.50%
Terminal Cap Rate 11.00% 9.00% 200 bps
Transaction Costs 3.0% 3.0%
Equity Yield 19.0% 19.0%
Al l In Value Before Cap Ex 9,700,000 10,400,000 7.2%
Al l In Value Per Room 115,000 126,000
As Is Value After Cap Ex 7,700,000 8,400,000 9.1%
As Is Value per Room 92,000 102,000
Revers ionary Sa les Price 11,400,000 13,900,000 21.9%
Unlevered Discount Rate 11.2% 11.5% 30 bps
Overal l Rate (Al l In TTM NOI) 8.3% 7.8% 50 bps
Overal l Rate (Al l In Year 1 NOI) 8.6% 8.0% 60 bps
Overal l Rate (As Is -TTM NOI) 10.5% 9.6% 90 bps
Overal l Rate (As Is -Year 1 NOI) 10.8% 9.9% 90 bps
Valuation Input
Valuation Output
Source: HVS
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Cap Rate Differential – “As-Is” vs. “All-In”
Full Service 6.2% 5.4% 20 - 180 7.2% 6.4% 10 - 230
Select Service 7.7% 6.9% 20 - 160 8.7% 7.8% 30 - 190
Limited Service 8.9% 8.1% 10 - 190 10.6% 9.5% 30 - 160
Hotel Product Type
Cap Rate on Historical NOI Range of Cap
Rate
Differential
Cap Rate on 1st Range of
Cap Rate
Different
"As Is" After
Cap Ex
"All In"
Before Cap
"As Is"
After Cap
"All In"
Before
Source: HVS
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Summary
Ideal conditions for another strong transaction year – activity expected to equal or exceed that of 2013
Wide array of buyers will continue to pursue hotel investments
More sellers will come to the table as sales prices near peak pricing
Availability of debt will continue, with lender competition putting pressure on interest rates and loan-to-value ratios
Interest rates expected to rise only moderately – no major concern
Capitalization rates expected to remain steady despite rise in NOI due to availability of capital and buyer competition for quality assets
Values will continue to rise driven by ADR and profit gains coupled with low cost of capital and increasing leverage
Values likely to peak within next two to three years
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Please, Call Me or e-mail Me With Any Questions
415-268-0351
Thank You!
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Suzanne R. Mellen, MAI, CRE, FRICS, ISHC
Suzanne R. Mellen is the Senior Managing Director of Consulting & Valuation for HVS San
Francisco, Los Angeles, and Las Vegas, and President of HVS Gaming Services. HVS is a full-
service consulting and valuation firm specializing in hotel, gaming, and hospitality properties
worldwide. HVS offices under her leadership are renowned for excellence and integrity. Ms. Mellen
has appraised thousands of hotels, gaming assets, and related real estate over the past 35 years.
She has authored numerous articles and is a frequent lecturer and expert witness on the valuation
of hotels, casinos, and related issues.
Ms. Mellen has a B.S. degree in Hotel Administration from Cornell University and holds the following
designations: MAI (Appraisal Institute), CRE (Counselor of Real Estate), FRICS (Fellow of the Royal
Institution of Chartered Surveyors), and ISHC (International Society of Hospitality Consultants).
Suzanne Mellen’s professional experience includes consulting and appraisal positions with HVS
New York, Morgan Guaranty Trust, Laventhol & Horwath, and Helmsley-Spear Hospitality Services,
Inc. in New York City and Harley-Little Associates in Toronto, Canada.
