Hospitality industry research report

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2

CoVenture !esis

1 !e US hotel industry, which peaked in 2007, has recovered from lows since the 2008 recession and revenue has reached peak levels

3 Labor and customer acquisition costs have increased, and hotels must strive to find cost-cutting methods in order to maintain margins

Revenue management has become an essential focus for hotel executives, and innovative techniques such as upselling, technological services, and pricing analysis are booming 2

4 Transactions have recovered since the slump in 2008, with an increased focus on lower-value, higher-quantity deals

1 | !e Hotel Industry

28.0 24.5 34.1 34.4

2007 2009 2011 2013

111.4 101.2 112.8 128.6

2007 2009 2011 2013

139.4 125.7 146.9 163.0

2007 2009 2011 2013

5.8 6.4 6.6 6.5

2007 2009 2011 2013

65.5 53.5 61.0 68.6

2007 2009 2011 2013

103.9 97.9 101.7

110.4

2007 2009 2011 2013

63%

55%

60% 62%

2007 2009 2011 2013

Hotel Industry Snapshot

Source: American Hotel and Lodging Association, Damodoran (NYU Stern), CoVenture Analysis

Profitability in the US hotel industry fell in 2009 due to the economic recession, but has since risen again as revenues and consumer confidence increase

Percent

$US

$US

Millions

$US Billions

$US Billions

$US Billions

Occupancy Rate �

Average Daily Rate �

RevPAR �

Annual Bookings �

Total Revenue �

Pre-Tax Income �

Pre-Tax Expenses �

4

US Hotel Market Size

Source: American Hotel and Lodging Association, Damodoran (NYU Stern), CoVenture Analysis

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Industry Revenue $US Billions

139 141 126

134 147

156 163

171

2007 2008 2009 2010 2011 2012 2013 2014

+6.4% p.a.

Total Industry Revenue

!e US hotel industry peaked in performance in 2007-2008, but as a result of the great recession, shrank considerably in 2009. Since then, industry performance has steadily risen at a growth rate of 6.4% per annum to an estimated $171 billion in 2014, exceeding pre-recessionary peak levels of $140 billion. As a result, major players in the industry have grown in capital, with the largest company valued at $22 billion market capitalization.

Industry Overview

Estimated

Source: American Hotel and Lodging Association, CoVenture Analysis

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Key Performance Drivers Occupancy Rate

Average Daily Rate

Revenue Per Available Room 63.1%

54.7%

60.0% 62.2%

2007 2009 2011 2013

Percent

103.9

97.9 101.7

110.4

2007 2009 2011 2013

$US

•  During the recession, average occupancy rate fell significantly as travelling declined

•  Since lows of 2009, consumer travel has recovered and occupancy rates have nearly reached 2007 highs

•  Average daily rate also fell during the recession as daily spend on hotel amenities decreased

•  ADR has since rebounded and reached all-time highs of $110.4 in 2013

$US

65.5 53.5 61.0 68.6

2007 2009 2011 2013

+6.6% p.a.

CAGR

+6.7% p.a.

+6.2% p.a. 6.8% 6.1%

•  RevPAR has thus recovered at a blistering rate since 2009, exceeding pre-recessionary levels

Source: American Hotel and Lodging Association, CoVenture Analysis

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Impact of Lodging Alternatives on Annual Bookings

Total Room Rentals per Year Millions

5.83 5.97

6.43 6.48 6.60 6.54 6.51 6.48

2007 2008 2009 2010 2011 2012 2013 2014

-0.6% p.a.

US Annual Bookings Insights

Peer-to-Peer Rental Competitors

Since the launch of airbnb, P2P rental space companies have grown rapidly in size and number. !is has recently impacted the number of annual bookings, which has fallen since 2011. In New York City, where there are approximately 100,000 hotel rooms, airbnb has around 30,000 listings, nearly an increase of a third of the market size. P2P renting primarily impact low-end hotels with a#ordable rates and a lack of amenities. !ere is currently less of an impact in high-end hotels because they typically o#er services such as conference rooms that airbnb rentals are unable to provide.

Lodging alternatives present challenges to conventional hotel sales models, and further pressure hotels into adapting new revenue management techniques

Source: eMarketer, CoVenture Analysis

Increasing Popularity of Mobile Booking Smartphone Bookers

Insights

As Americans’ propensity to book travel online overall increases, so too will their inclination to book via mobile devices. By 2016, there will be a predicted 36 million annual bookings through mobile devices, up 22% per year from 2013 levels. Mobile booking will naturally increase popularity in other mobile hotel applications. !ese include guest service technologies and hotel rating and review so$ware.

Annual Hotel Bookings by Mobile Devices in the US Millions

8

12

16

20

25

30

36

2010 2011 2012 2013 2014 2015 2016

+22% p.a.

As mobile booking becomes increasingly prominent, mobile support for other services will rise in popularity and importance

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Source: Expert Interviews, Cornell University Website

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Revenue Management

Revenue management is about selling the right room, to the right customer, at the right time, for the right price. In the past, the revenue manager focused on selling large blocks of rooms at a group deal rate, as well as make deals with large corporations for the travelling businessman to guarantee higher occupancy and subsequently higher revenue. While those two groups are still important, with the evolution in technology, revenue managers have many more tools at their disposure, and the leisure travel demographic has grown in focus. New techniques for revenue management include Online Travel Agencies, Opaque Booking Channels, Last-Minute Booking Sites/Apps, data aggregators that recommend optimal prices for rooms, upsell technology and many more.

Overview

Industry Expert Insights

Revenue management is becoming an increasingly essential focus for hospitality executives to maintain high margins

“!e most important area that hotels are focusing on right now is revenue management. !e key in revenue management is understanding how to price rooms to

maximize revenue.”

-  Founder and CEO Chartres Lodging Group

“!e revenue management function will become more central to hotel operations … the application of revenue

management will become more strategic … as it includes more of hotels’ income streams.”

-  Dr. Sheryl Kimes

Cornell University School of Hotel Administration

Source: CoVenture Analysis

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Revenue Management Techniques

Example Companies Comments Method

Flash Sale Applications

•  Heavily discount rooms for same-day sales, allowing hotels to more easily fill up last-minute occupancy

•  Loosens pressure of having to sell discounted rooms on OBCs

Online Travel Agencies (OTA)

•  Serve as a great medium for hotels to increase their scope and overall revenue

•  Many OTAs are pricey, decreasing hotel margins and increasing customer acquisition costs

Opaque Booking Channels (OBC)

•  Show price, number of stars, and general location of a hotel but not its name

•  Have not maintained strong growth over the past two years

Increasing in Popularity

As technology improves, traditional OTA and OBC methods are gradually becoming replaced by last-call flash sale applications

Note: Revenue figures are estimates. Source: Company Websites, CapitalIQ, MatterMark, Crunchbase, CoVenture Analysis

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Ventures in Revenue Management

Company Financials $US Millions Business Focus Highlights

Nor1 Revenue: N/A Funding: $29m

•  Upselling •  Risk-free upselling to the customer allows for higher average spend and RevPAR

•  Mobile support for products •  Wide range of corporate partners in hospitality

industry

1

Duetto Revenue: N/A Funding: $33m

•  Pricing analysis •  Revenue analysis and management solutions based on historical and competitor data

•  Supports separation of gaming and non-gaming revenues for casino-based hotels

2

Intelity Revenue: $5m Funding: N/A

•  Guest service technology

•  Guest service replacement with digital technology •  Compatible with wide range of technical devices •  Prominent technical partners including Samsung and

wide range of corporate clients

3

Sources: Company Website, CapitalIQ, MatterMark, Crunchbase

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Case Study: Nor1 Background Information Business Overview

Location and HQ United States, Europe, Asia; Headquartered in Santa Clara, CA

Employees 98

Investors •  Data-driven pricing and solutions to increase RevPAR and guest satisfaction

•  A$er booking, customers will be o#ered room upgrades (i.e. views, suites, etc.) at a discount

•  Upgrade awarded if available at check-in, otherwise customer package is unchanged

•  Results in 32% average increase in booking value, 1-5% increase in ADR

•  Mobile support with eReach

Description

Products

Corporate Partners

Global company with institutional investment from major equity funds

Results-driven products with wide range of corporate partners in the hospitality industry

Management Team

Past Experience

Art Norins Founder/Chairman

•  Founder and chairman of Sandium, a B2B air ventilation system supplier

Jason Bryant Founder/CEO

•  Founder of DRCI, a world-class o#shore so$ware developer

•  Speaker, World Travel Market

Ravneet Bhandari CCO

•  Executive Consultant, Starwood Capital Group

•  SVP, Trump Entertainment


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Case Study: Duetto Background Information Business Overview

Location and HQ United States; Headquartered in San Francisco, CA

Employees 40

Investors

•  Cloud-based application providing revenue strategy solutions to hotels and casinos

•  Analyzes both historical client data and competitor sales data to generate all-around insights

•  Duetto Edge delivers insights on pricing and demand •  Duetto Insight forecasts demand and optimizes pricing for

focused-service properties •  GameChanger determines total value of each guest by gaming

and non-gaming revenue potential

Description

Products

Past Projects

US start-up with sizable workforce and impressive venture capital backing

Revenue analysis solution suitable for gaming-focused hotel chains and regional boutiques

Management Team

Past Experience

Patrick Bosworth Founder/CEO

•  Director, ELIOSUR •  Director, Wynn Las Vegas •  MBA, Harvard Business School

Marco Benvenuti Founder/CPO

•  Executive Director, Wynn and Encore •  Founder, Enterprise Strategy Group

Craig Weissman Founder/CTO

•  CTO, Salesforce.com •  MSc Computer Science, Harvard

University


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Case Study: Intelity Background Information Business Overview

Management Team

Location and HQ United States, United Kingdoms; Headquartered in Orlando, FL

Employees 10

Founding

•  Online platform for integrating all digital guest services for hotels •  Supports panel, TV, tablet, phone, and laptop •  Results in 18% higher in-room dining orders, 8% hotel restaurant

reservation, 80% guest service e%ciency, 4% golf and spa revenues, 22% direct marketing revenue, and 7% Internet revenue

•  Also increases average savings of 75%-90% on in-room printed materials

Description

Corporate Partners

Small-sized start-up with primary operations in the US and UK

Diverse range of technical partners and established corporate clients

Technical Partners

2007

Revenue (LTM) $5 million

Past Experience

David Adelson Founder/CEO

•  Director of Sales and Marketing, Peabody Orlando; Grand Hyatt New York

Chris Grey CTO

•  CTO, Tribune Media Orlando •  Commodities Corporation •  Credit Suisse

Didier Jupillat CFO

•  CFO, Florida Tree Source •  MBA, ESSEC; Wharton School

Source: IBISWorld, Damodoran (NYU Stern), CoVenture Analysis

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Hotel Industry Cost Breakdown 2009 Cost Percent

2014 Cost Percent Activities

Growth Percent

Wages

COGS

Depreciation

Marketing

Rent & Utilities

Other

Total 83

2.5

7.6

2.0

6.5

38

26

While costs have decreased as a whole, margins are still thin and increasing costs in marketing and wages must be addressed.

•  Front desk, concierge workers •  Back-of-house activities

•  Bedding and room supplies •  Meals and liquor

•  Capital investments on room fixtures and fittings, and restaurant equipment

•  Customer acquisition costs •  Booking and internet fees

•  REITs and falling ownership of buildings

•  Franchising fees, booking and internet fees, insurance, printing, and motor vehicle expenses

-3.1%

Decrease

Increase

+36%

86

2.5

9.2

1.5

6.8

40

25

N/A

+4.1%

-17%

-4.8%

-5.7%

Minimum Wage Costs in Hotel Industry

Source: Mercer Consulting, White House

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Share of Minimum Wage Workers Percent

37%

26%

12%

5%

5%

Hospitality and Leisure

Wholesale and Retailing

Education and Health Services

Professional and Business Services

Other Services

In March 2014, President Obama called on Congress to raise the national minimum wage from $7.25 to $10.10 an hour over the course of a two year period in the form of the Minimum Wage Fairness Act. !e US senate debated the Minimum Wage Fairness Act in April 2014, with strong support from Obama and the Democratic Senators and strong opposition from Republicans. !e hospitality sector has the highest share of minimum wage workers in the US, which means that an increase in minimum wage would have a major impact on hotel margins, which are already razor-thin.

Top Five Sectors with Leading Share of Minimum Wage Workers Insights

Source: Mercer Consulting

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Impact of Obamacare on Costs

46%

40%

33%

32%

31%

Retail and Hospitality

Health Care Services

Manufacturing

Financial Services

Transporation/Utility

Obamacare presents further unknown costs on hotels, as they will now have to provide health care to employees or pay a penalty, significantly increasing labor costs. A study by Mercer found that employers in the hospitality sector expect the Patient Protection and A#ordable Care Act (PPACA) to a#ect them more than employers in other industries. Nearly half expect at least a 3% increase in costs as a result of PPACA. Hospitality employers typically employ more lower-paid workers, meaning that they will be more a#ected by key provisions in the PPACA set to take e#ect in 2014.

Cost Impact of Patient Protection and A$ordable Care Act Insights

Expected Cost Increase of 3% or More Due to PPACA Requirements in 2014 Percent

Source: Kalibri Labs & STR. 2013 Hama Study

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Customer Acquisition Costs

Acquisition and Retention Expenses

Revenue and Acquisition Costs

Percent of 2009

Customer acquisition costs are rising at a faster rate than hotel revenue; Outsourcing marketing initiatives to third-party vendors will be necessary to improve margins

111 92 117

2007 2009 2012

Total Room Revenue $US Billions

Acquisition Costs $US Billions

9 16 19

2007 2009 2012

+c28%

+c1.8%

8%

15%

23%

16%

23%

36%

2009 2010 2011 2012

Acquisition Costs Commissions

2 | Transaction Activity

Venture capital and IPO boom

Resurgence of leveraged buyouts and mega-buyouts

Increasing prominence of internet hotel ventures

2.1 1.3 0.3 0.3 4.6

12 14 11

4.7 3.9 3.9 8.1

37

19

51 52

5.1 8.4

19

25 24 27

12

<1990 1990 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Notes: 1. Transactions include closed M&A, public o#erings, and private placements; 2. Transactions for 2014 up to August 9th, 2014. Source: CapitalIQ

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Private and Market Activity

Closed Transaction Value $US Billions

Total Deal Volume

Transaction value and frequency peaked in pre-recessionary years of 2006-2007 and fell significantly in 2008, but has been rising steadily since then at a lower volume per deal

Value

Number

Notes: 1. Transactions include closed M&A, public o#erings, and private placements from 1984 to 2014; 2. Transactions for 2014 up to August 9th, 2014. Source: CapitalIQ

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Largest Buyers and Investors

Top 10 Buyers by Number of Transactions

Top 10 Buyers by Transaction Value

Transactions $US Billions

Financial investors (especially private equity firms) contribute to majority of transaction number and values, while major hotel chains side towards high-value, low-count strategic transactions

Strategic

Financial

60

39

37

34

33

32

31

30

28

25

43

29

28

28

14

8.3

8.0

8.0

5.3

4.3

Note: Years 2011-2015 include transactions up to August 9th, 2014. Source: CapitalIQ

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Shi% in Transaction Focus Transaction Type

Insights

Deal volume for both securities o#erings and acquisitions have increased substantially since before 1995. Securities o#erings rose during the venture capital and IPO boom of 1996-2000 and fell alongside the market in 2001-2005, but has since rallied and reached peak levels in 2011-2015. Acquisition activity rose dramatically between 1995 and 2006, and peaked in the early 2006-2010 years with the resurgence of leveraged buyouts and mega-buyouts. Deal volume has since fallen to around $49 billion so far in the years 2011-2015.

<1985

1986-1990

1991-1995

1996-2000

2001-2005

2006-2010

2011-2015

Private/Public O$ering and Acquisition Volume $US Billions

0.6

2.9

0.3

32

61

109

50

N/A

N/A

0.3

16

10

27

38

O#ering

Acquisition

InterContinental (1998) $2.9b

Note: Transaction value in $US Billions, historical conversion rate. Source: CapitalIQ

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Select Major Transactions

1990-1995 1995-2000 2000-2005

Financial Transactions

Strategic Transactions

2005-2010 2010-2014

M&A IPO

Hilton (1999) $3.9b

Caesars Entertmnt (1999) $3.0b

Starwood Hotels (2002) $1.5b

Blackstone PE (2004) $3.1b

Blackstone RE (2005) $3.3b

Avis Budget Group (2004) $1.3b

Issuer/Acquirer (Year) $Value Target

Blackstone PE (2007) $25.1b


Hilton (2013) $2.4b

Fortis (2013) $1.4b

Priceline Group (2012) $1.8b


Pinnacle Entertmnt (2012) $2.9b

TPG Capital (2006) $27.9b

Wimar Tahoe Corp (2006) $2.8b

Accor (1990) $1.3b

Aoki Corp (1987) $1.5b

FelCor Lodging (1998) $1.8b

InterActiveCorp (2003) $1.1b

Starwood (1997) $1.8b

Ali Hamed, CoVenture Managing Partner

@alibhamed Ali @ CoVenture.Us

Brian Harwitt, [email protected] Clark Zhang, [email protected]

Hospitality industry research report

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