The Highland Group Reports 2015:

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1 S P E C I A L R E P O R T S U M M A R Y The Highland Group Reports 2015: Lifestyle Hotels Soft Brand Collections Boutique Hotels Rumeli Han, Curio Collection by Hilton

2 March 25, 2015 The Hunter Hotel Investment Conference and The Highland Group are pleased to provide this complimentary Summary Report on Lifestyle Hotels, Soft Brand Collections & Boutique Hotels. This Summary will introduce you to this new publication and is designed to be useful as you Seize the Day. The complete detailed first annual report on Lifestyle Hotels, Soft Brand Collections & Boutique Hotels is available for $495 at The report provides developers and their consultants, operators, lenders and brands with data and insight as they pursue hotel development for the upcoming marketplace. Included are trends on supply and demand; occupancy and average rate, and financial performance for the three segments - with detail by market class for the boutique segment. Also included is a special section on boutique hotels with spas. We see increased interest in boutique and lifestyle hotels and soft brands as developers create and respond to market opportunities. Boutique hotels are unique in style, small and either independent or affiliated with small systems. They are gaining popularity. The chains have noted changing traveler tastes and the adapting interests of their development communities. Expanding on the boutique concept, the chains are responding in two ways presented in this report. Lifestyle brands are prescribed franchise products that are adapted to current trends. Soft brands give hotel owners and operators the opportunity to affiliate with a major chain distribution system while retaining the unique name and properties of an otherwise independent hotel. We expect all three segments to expand rapidly. We thank the sponsors of this report, including Hilton Worldwide, our Platinum sponsor. We deeply appreciate Smith Travel Research and their willingness to make this report possible. Our consulting firm has had the pleasure of providing feasibility studies and other services to the developers, franchisors, and operators of boutique, lifestyle, and soft branded hotels for many years. We dedicate this report to their continuing innovation. Sponsors Mark Skinner Kim Bardoul Peggy Berg Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

3 Executive Summary Lifestyle hotels, soft brand collections and boutique hotels are collectively an $11.5 billion industry and growing. Boutique hotel supply, which has been an established part of the US lodging market for many years, is growing at a 3.1 percent annual pace, over three times the rate for the hotel industry overall. Lifestyle hotels and soft brand collections, which are newer products being developed through franchise systems, are growing at 11.5 and 17.8 percent respectively. These segments are poised to become a significantly larger component of the lodging industry. These concepts perform very favorably in terms of revenue per available room (RevPar). On an annual basis, boutique and soft brand collection hotels average 33 and 10 percent in room revenue, respectively, above all US full-service branded hotels. Lifestyle hotels, which include more mid-rate and select-service products, average just 4 percent below full-service hotels. These segments also perform very well in net income delivered. Soft branded hotels averaged above the total US full-service segment as did larger boutique hotels. Small boutique hotels netted less per available room than the larger properties or the US average, reflecting their higher share of fixed costs. Smaller lifestyle hotels generated about 8 percent less net operating income than the overall US full-service average, but are simpler operations and should have lower development costs. Supply Growth Componded Annually % % 18% G 15% 17.8% r 12% o 9% 11.5% w 6% t 3% 0.8% 3.1% h 0% US Hotels Boutique Hotels Lifestyle Hotels Soft Brand Collections ( ) Sources: STR and THG Hotels: Net Operating Income per Available Room $35,000 $30,000 $25,000 $20,000 $17,201 $18,562 $20,553 $22,317 $24,563 $30,037 $31,045 $15,000 $13,034 $10,000 $5,000 $- Boutique Rooms Sources: STR and THG Lifestyle Rooms Total US Full-Service Boutique Rooms Soft Brand Rooms Lifestyle Rooms Soft Brand Rooms Boutique Rooms with Spa Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

4 Segments We classified boutique hotels, lifestyle hotels and soft brand collections using the following segment characteristics, with examples listed on the following page. Segment Characteristics Boutique Hotels Independent or part of small brands 40 to 300 guest rooms Design centric Less than 10,000 square feet of meeting space Restaurant and lounge on site or a selection of proximate interesting local dining and entertainment alternatives Generally upscale to luxury Lifestyle Hotels Nationally franchised Prescriptive Design centric Planned for travelers who are interested in boutique lodging With a lounge and, at least, light food on site Generally upper midscale to luxury Soft Brand Collections Affiliated with a major national franchise distribution system Signature hotels, individually named and branded Unique in design Generally with restaurant and lounge Generally upper midscale to luxury Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

5 Brands classified in each group are listed below. Most of the hotels in the boutique group are independent. The boutique group includes only hotels with 40 to 300 rooms. The lifestyle brands and soft brand collections include all hotels within the specified brands. Several of the lifestyle brands are newly launched. We expect the segment to expand significantly as these product lines ramp up. We also expect soft brand collections and boutique hotels to see significant inventory gains over the next several years. Segment Brands, Networks and Properties Boutique Hotels Some Relais et Chateaux Some Historic Hotels of America Some Small Luxury Hotels Some Preferred Hotel Group Commune by Thompson Delano by Morgans Joie de Vivre by Thompson Mondrian by Morgans Any many other unique and independent hotels Lifestyle Brands AC by Marriott Aloft by Starwood Andaz by Hyatt Cambria by Choice Canopy by Hilton Centric by Hyatt Dream by Wyndham Edition by Marriott Even by IHG Indigo by IHG Le Meridien by Starwood Moxy by Marriott Night by Wyndham Red by Radisson Tryp by Wyndham W by Starwood Soft Brand Collections Ascend by Choice Autograph by Marriott Curio by Hilton Kimpton by IHG Luxury Collection by Starwood Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

6 Methodology Not all independent hotels are boutique. Not all lifestyle brands and soft brand collections have operating hotels yet. Identifying and categorizing hotels for this study was challenging. We began by setting segment definitions. To identify the individual hotels comprising each segment we applied these segment definitions to a select census from Smith Travel Research. We qualified and classified each hotel by its restaurants and lounges, spas and design style, using hotel websites. We did not include resort properties with multiple buildings, many acres, ski facilities or golf facilities in the boutique segment. Some hotels with these facilities have characteristics of boutique hotels and they may be included in future reports. However, this report focuses on traditional hotel structures. These hotels were classified to define the current inventory of boutique, lifestyle and soft brand collection hotels in the United States. From this inventory, we drew samples for characteristic groups and we report on these groups using Smith Travel Research (STR) TREND and HOST reports. All individual property financial data is kept confidential within STR. Limitations The Highland Group Reports: Lifestyle Hotels, Soft Brand Collections & Boutique Hotels is a publication of The Highland Group, Hotel Investment Advisors, Inc. All information contained in this report is assembled and compiled by The Highland Group or purchased from Smith Travel Research. Although information in this publication has been obtained from sources that The Highland Group believes to be reliable and accurate, we do not guarantee its accuracy in whole or part. All opinions and estimates included in this report constitute the best judgment of The Highland Group and are subject to change without notice. This publication is not intended to represent the rendering of legal, accounting or professional services. Reproduction is prohibited without prior written authorization. Items may be quoted when full credit is given to The Highland Group Reports: Lifestyle Hotels, Soft Brand Collections & Boutique Hotels. For publication information or to purchase the full report: (404) kbardoul@highland-group.net Excluded from the Inventory Hotels with less than 40 or more than 300 rooms, except within the lifestyle brands and soft brand collections Economy and budget hotels National brands except the lifestyle brands and soft brand collections Motels, family vacation hotels Extended-stay hotels Condominiums, vacation rentals, timeshare Ski and golf resorts Casinos except in the soft brand collections Conference Centers All-inclusive properties Standard limited and full-service hotels Hotels with over 10,000 square feet of meeting space under roof Hotels not meeting our restaurant and lounge descriptors Properties with multiple buildings or many acres Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

7 Lifestyle Hotels The lifestyle brands in this report are defined as lifestyle by their franchise companies. We included only brands that are part of national franchise systems with multiple brands, national reservation and marketing programs, and over 100 hotels under the parent brand. New lifestyle brands are emerging and we expect the lifestyle segment to diversify. Cambria Hotel & Suites White Plains, NY Distribution We identified 178 hotels in 12 lifestyle brands. Lifestyle hotels are already in 34 states. Florida and New York have the most representation with 20 lifestyle hotels each while California has 18 and Texas has 17. New York City has the largest number of properties with 14, followed by Miami/Miami Beach with 7. We expect these products to reach all states and to see multiple properties in many cities within the next few years. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

8 Market Performance Lifestyle Hotels Supply and Demand Lifestyle Hotels Our census includes 30,982 rooms in lifestyle hotels as of Lifestyle hotels increased from 0.4 percent of all US hotels to 0.6 percent in the past 6 years. They hold a small share of total inventory, but are seeing much stronger growth than the industry overall. Lifestyle inventory has been increasing at an average of 11.5 percent annually and is likely to gain momentum. We analyzed a TREND sample of lifestyle properties of 300 rooms and less. This segment has been gaining demand at an annual average pace of nearly 20 percent since 2009, far above the US rate of 4.2 percent. This is partly due to the growing availability of inventory in new desirable properties. But demand continues to grow at well above the rate of supply increase. Occupancy and Average Rate Lifestyle Hotels The lifestyle segment delivered 74 percent occupancy in Average rate for this group of hotels was $ for the year, based on the sample of properties with 300 rooms or less. Financial Performance Lifestyle Hotels To provide insight into the financial performance of lifestyle hotels, we present two statements of income and expense in Lifestyle Hotels, Soft Brand Collections & Boutique Hotels, summarized on the following page. Each is an average of the performance of a group of lifestyle hotels; one group of 100 to 199 rooms and the other of larger hotels in the range of 200 to 299 rooms. These are averages of assorted hotels from 2013 and are not predictive of the potential future performance of any individual hotel. Net operating income is 28 to 29 percent of revenues for these samples, two to three points above national averages for full-service hotels. However, these lifestyle hotel samples yield $17,201 and $24,563 net income per available room, respectively. In comparison, the average net income ratio for US full-service hotels was 26.2 percent equating to $18,562 in Like select service hotels, lifestyle products are designed to be room revenuefocused and efficient. However, they typically have a café or coffee bar where guests can buy breakfast. They seek to have lounges that become gathering places for locals as well as guests. This is reflected in more food and beverage revenue than typical for a select service hotel, and a higher proportion of beverage revenue than typical for traditional hotels. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

9 The statements summarized in the following table are organized according to the Uniform System of Accounts for Hotels published by the American Hotel and Lodging Association. Lifestyle Hotels Per Available Room Rooms Rooms Revenues $60,062 $85,375 Expenses $42,861 $60,812 Net Operating Income $17,201 $24,563 Net Operating Income % 28.6% 28.8% Data Year Properties Rooms 3,386 2,361 Affiliation Lifestyle Brands Lifestyle Brands Ratio to sales based on Total Revenue except Departmental Expenses; may not add due to rounding The information contained in this report is based upon independent surveys and sources considered reliable but no representation is made as to its completeness or accuracy. This information is in no way to be constructed as a recommendation by STR Analytics of any industry standard and is intended solely for the internal purposes of your company and should not be published in any manner unless authorized by STR Analytics. Copyright 2013 STR Analytics, a division of STR, Inc. All rights reserved. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

10 Soft Brand Collections In the boutique marketplace, soft brand collections enable unique independent boutique hotels to access national sales and marketing platforms, reservation systems and loyalty programs. However, hotels retain their name, as well as unique designs, orientation toward their local community, and boutique operations. The soft brand collections in this report are all within large multi-brand franchise companies. Grand Bohemian Hotel Asheville, Autograph Collection Hotels Distribution There are 208 hotels in the soft brand collections included in this report. Five soft brands are represented. We expect both the number of brands and the number of hotels represented to increase over the next few years. Soft brand hotels are now in 43 states as well as the District of Columbia. California has 34 including 10 in San Francisco. The other states typically have a few each. Among cities, New York City has 12, and Washington DC has 9. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

11 Market Performance Soft Brand Collections Supply and Demand Many soft brand hotels are conversions. As the new brands gain traction and attract new development as well as properties that were previously independent or affiliated with traditional franchises, soft brand supply should grow rapidly. There are 208 soft brand hotels with 35,000 rooms as of year-end Average annual inventory increase over the past four years has been 17.8 percent. Share is 0.7 percent of total US inventory and should exceed 1 percent within the next few years. Demand grew slightly faster than supply, at 19.7 percent on an average annual basis, from 2011 through Occupancy and Average Rate Soft Brand Hotels Average rate for soft brand collection hotels under 300 rooms has been gaining at an annual average of at 5 percent, faster than inflation and the overall industry. For 2014, the segment averaged $202. Occupancy has been relatively stable, inching up to 72.4 percent for 2014, as hotels fill shoulder periods. Financial Performance Soft Brand Hotels We analyzed two sample average income statements for soft brand hotels: 100 to 199 rooms and 200 to 299 rooms. Summaries of the two samples follow. Each includes as many participating hotels as possible within the confidentiality constraints maintained by Smith Travel Research. There are fewer hotels in these samples than in the foregoing market performance statistics and they perform better in occupancy and average rate, on average. The larger hotels generate more revenue per room, driven by higher occupancy and rate. The share of revenue from the rooms department is similar in the two samples. However, with more distributed fixed charges and higher revenues per room, the larger hotels carry more to the bottom line. Soft brand hotels have a higher contribution to revenue from food and beverage operations than the lifestyle hotels, on average. They include more hotels with formal restaurants and substantial banquet operations. These hotels are also more likely to include related businesses, like spas, in their other operated departments. The statements summarized in the following table are organized according to the Uniform System of Accounts for Hotels published by the American Hotel and Lodging Association. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

12 Soft Brand Collections Per Available Room Rooms Rooms Revenues $85,813 $106,546 Expenses $63,496 $76,509 Net Operating Income $22,317 $30,037 Net Operating Income % 26.0% 28.2% Data Year Properties Rooms 3,127 3,385 Affiliation Soft Brand Collection Soft Brand Collection Ratio to sales based on Total Revenue except Departmental Expenses; may not add due to rounding The information contained in this report is based upon independent surveys and sources considered reliable but no representation is made as to its completeness or accuracy. This information is in no way to be constructed as a recommendation by STR Analytics of any industry standard and is intended solely for the internal purposes of your company and should not be published in any manner unless authorized by STR Analytics. Copyright 2013 STR Analytics, a division of STR, Inc. All rights reserved. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

13 Boutique Hotels HarbourView Inn, Charlestowne Hotels Distribution We identified 659 boutique hotels by the criteria defined in this report. The boutique concept is performing well and is increasingly fashionable, so hotels that may not meet our boutique criteria use the term. Conversely, some hotels that are included in our census may not be marketed primarily as boutique properties. Boutique hotels are located in 46 states and the District of Columbia. California has the strongest representation with 165 hotels, followed by New York with 87 and Florida with 73. Boutique hotels in New York and Florida are concentrated in New York City and Miami/Miami Beach respectively while those in California are more widely distributed. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

14 Market Performance - Boutique Hotels Boutique hotels have captured the interest of affluent and trend-setting travelers. As a result, their rate and occupancy performance has been strong. Traditionally found in premium markets, they are attracting the interest of developers in secondary markets as well. Supply and Demand Boutique Hotels Boutique hotels have been gaining inventory at an average pace of 3.1 percent annually since Demand has been growing 6.7 percent on an annual average basis so occupancies have been increasing. Occupancy and Average Rate Boutique Hotels Boutique hotels averaged 75.3 percent occupancy in 2014 at an average rate of $ Roundly 70 percent of the boutique hotels in our census are included in the averages. Financial Performance Boutique Hotels Boutique hotels are differentiated by market class, location, and facilities, among other characteristics. To provide meaningful information on financial performance, we identified groups of roundly a dozen boutique hotels that shared characteristics within a range. Larger Boutique Hotels with Spa Spa in-house Restaurant and lounge operation 120 to 220 guest rooms Upper upscale and luxury class Independent or affiliated with a small chain or referral system Larger Boutique Hotels without Spa No spa Restaurant and lounge operation 140 to 240 guest rooms Meeting space greater than 2,500 square feet Independent or affiliated with a small chain or referral system Small Boutique Hotels without Spa No spa Restaurant and lounge operation 50 to 100 guest rooms Upscale, upper upscale and luxury class Independent or affiliated with a small chain or referral system We analyzed statements compiled by Smith Travel Research from the HOST database. All individual property financial data is kept confidential within STR. Highlights of the statements are shown in the following table. The statements summarized on the following page are organized according to the Uniform System of Accounts for Hotels published by the American Hotel and Lodging Association. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels

15 Boutique Hotels Rooms Rooms Rooms Per Available Room No Spa No Spa With Spa Revenues $73,776 $57,900 $131,173 Expenses $53,223 $21,272 $100,129 Net Operating Income $20,553 $13,034 $31,045 Net Operating Income % 27.9% 22.5% 23.7% Data Year Properties Rooms 2,457 1,047 2,189 Affiliation Independent Independent Independent Ratio to sales based on Total Revenue except Departmental Expenses; may not add due to rounding The information contained in this report is based upon independent surveys and sources considered reliable but no representation is made as to its completeness or accuracy. This information is in no way to be constructed as a recommendation by STR Analytics of any industry standard and is intended solely for the internal purposes of your company and should not be published in any manner unless authorized by STR Analytics. Copyright 2013 STR Analytics, a division of STR, Inc. All rights reserved. Lifestyle Hotels, Soft Brand Collections & Boutique Hotels