Hotel Study

Transcription

Hotel Study

February 22, 2013
City of Duluth Department of Planning & Development
j Ms. Melissa Muscato
Development & Project Manager
City Hall, 2nd Floor
3167 Main Street
Duluth, Georgia 30096
Dear Ms. Muscato:
In accordance with our engagement letter, we have prepared a market analysis and projections
of occupancy, average daily rate (ADR) and cash flow for a proposed 100-unit select-service
hotel to be located in downtown Duluth, Georgia. This report sets forth our findings and the
support for our conclusions.
EXECUTIVE SUMMARY
Metropolitan Atlanta Overview
R
With a population of nearly 5.5 million, the 28-county Atlanta-Sandy SpringsMarietta metropolitan statistical area (Atlanta MSA) is the ninth largest in the
United States. It serves as a center of commerce, finance, culture and
transportation for the Southeast.
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The economy of the MSA is dominated by the trade and services sectors, with
a relatively minor contribution from manufacturing. Total nonagricultural
employment for the Atlanta MSA contracted at a compound annual rate of 1.0
percent over the past five years, caused primarily by a precipitous drop in 2009.
July 2010 was the first month to show positive growth in employment (as
compared to the same month in the prior year) since April 2008. Growth of 1.3
and 1.5 percent were experienced in 2011 and 2012, respectively.
R
Critical to the metropolitan area’s positioning is an extensive transportation
network, including the world’s busiest and one of its largest airports. Over 95
million passengers were served in 2012.
PKF Consulting USA, LLC * 4314 Pablo Oaks Court * Jacksonville, FL 32233
TEL: 904-821-0690 * FAX: 904-821-0242 * www.pkfc.com
February 22, 2013
Page 2
Site and Neighborhood Evaluation
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Duluth is located approximately 23 miles northeast of downtown Atlanta. It had
a 2010 population of 26,600.
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The City of Duluth has identified four potential hotel sites in the downtown area.
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Downtown Duluth is relatively vibrant, with numerous shops, restaurants and
businesses lining Main Street. Revitalization of the downtown area is being
approached in phases. The first two included development of the town green
followed by construction of a new 44,000-square foot city hall and pedestrian
improvements around Church Cemetery. The third phase of revitalization is to
encompass The Block, a 3.3-acre parcel including the former city hall and
warehouse space. It is to be redeveloped into a restaurant district with eight to
ten outlets and perhaps a salon or spa. Completion of The Block by the end
of 2015 is a critical assumption to our analysis.
Recommended Facilities
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There are no hotels within the Duluth city limits at present. Thus, given the
pioneering nature of the subject, we recommend pursuing development of a
relatively small (approximately 100 units) select-service hotel with a strong, high
quality brand with broad appeal to business travelers and leisure guests alike
and which will help drive demand through its reservation system. This
combination of size, orientation and branding will help minimize project costs
and the financial risks of the project.
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Amenities prototypical of the brand selected should be provided with perhaps an
expanded complement of meeting space, say 1,500 to 2,000 square feet. Some
select-service brands require the inclusion of a restaurant. For purposes of
analysis, we have assumed such a property would offer a restaurant leased to
and operated by a third party.
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Again because of the subject’s pioneering nature, we believe it is critical to its
success to be distinguished from the competitors via design elements and
support amenities. There are clear synergies resulting from the presence of
several hotels at a given location. A single hotel is therefore challenged to gain
adequate market exposure, absent a unique location or physical characteristics.
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For purposes of this analysis, we have assumed a January 1, 2015 opening
date.
February 22, 2013
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Supply and Demand Analysis
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There are six properties with a total of 716 guest rooms which would potentially
compete with the subject hotel. Three of the hotels are located proximate to the
Interstate 85 (I-85)/Sugarloaf Parkway interchange while the other three are in
the Johns Creek area.
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Market area occupancy and ADR were 67.3 percent and $97.76, respectively,
for 2012. The properties garner 56 percent of their accommodated demand
from business travelers, 22 percent from groups and 22 from leisure guests.
The Sugarloaf properties tend to perform best.
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We have identified no additions to the competitive supply of guest rooms other
than the subject hotel.
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Considering recent trends in the market, base growth rates are expected to be
moderately strong at the beginning of the projection period, tapering thereafter.
An additional level of “supply-driven” growth is anticipated to be generated by
the opening of the subject.
Estimated Levels of Utilization
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The proposed hotel is expected to achieve penetration levels approximating its
fair market share in all three demand segments.
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Projected market penetration, occupancy, ADR and revenue per available room
(RevPAR) are presented in the table below:
ESTIMATED MARKET PENETRATION, OCCUPANCY, AVERAGE DAILY RATE AND REVPAR
PROPOSED 100-UNIT SELECT-SERVICE HOTEL
2015 THROUGH 2019
Year
Occupancy
Penetration1
2015
2016
2017
2018
2019
88%
97
100
98
96
Occupancy
59%
66
69
69
69
Average Daily Rate
Constant
Inflated
2012 Dollars
Dollars2
$ 96.00
98.00
100.00
100.00
100.00
$105.00
110.25
116.00
119.50
123.00
RevPAR
(Inflated $)
$61.95
72.77
80.04
82.46
84.87
1
Presented as a percentage of fair market share.
2
Inflated annually at 3.0 percent and rounded to the nearest $0.25. Inflation rates were based on the
results of recent investor surveys and forecasts by the U.S. Congressional Budget Office.
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Financial Projections
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Projected cash flows from operations before debt service and income taxes, in
inflated dollars, are depicted in the following table.
PROJECTED CASH FLOWS FROM OPERATIONS
BEFORE DEBT SERVICE AND INCOME TAXES
2015 THROUGH 2019
Year
Inflated
Dollars
2015
2016
2017
2018
2019
$546,000
752,000
865,000
892,000
917,000
The projected cash flows generate an unleveraged internal rate of return (IRR) of 7.29 percent
and a leveraged IRR of 9.76 percent based on typical investment parameters and development
cost. These returns are unlikely to be sufficient to entice a qualified hotel developer to pursue
the project. Accordingly, some level of incentive must be considered if the property is to reach
fruition.
The foregoing projections of occupancy and ADR reflect the performance of the hotel on any
of the four sites being considered. In other words, these levels could be achieved on the least
desirable site. It is important to note, however, that the projections could differ depending upon
the site selected. As noted, it is our belief that development of The Block is critical to the
subject property’s viability. Accordingly, immediate proximity to restaurants, retail and
entertainment options could enhance the proposed property’s performance. It is our
recommendation that the projections be updated and adjusted once a specific site and brand
have been selected.
February 22, 2013
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METROPOLITAN ATLANTA OVERVIEW
An analysis of the economic characteristics of a given market area is critical in assessing
historical and future growth patterns and their impact on levels of lodging demand. Such an
analysis also contributes to a proper evaluation of market risks. For instance, a market heavily
oriented towards a single demand generator (e.g., a military installation) often carries a high
level of inherent risks. Conversely, a market having a diverse economy typically is less
vulnerable to downturns. Further, the sheer size of a market can impact risks through its ability
to recover from conditions of oversupply.
The City of Atlanta is the capital of Georgia and, along with its surrounding metropolitan area,
is the largest and most important city in the southeastern United States. Once a second-tier
city along with Memphis and Birmingham, Atlanta’s progressive leadership in the 1960s and
1970s placed the area at the forefront of the trend toward migration to the Sunbelt which began
at that time and continues today. In so doing, Atlanta unseated the region’s traditional major
cities, New Orleans and Miami, and became one of the principal metropolitan areas in the
United States.
Today, Atlanta is the primary center for commerce, finance, culture, transportation and the
federal government within the Southeast. The maps on the following pages depict the
metropolitan statistical area’s location within the state and region, and the subject’s location
within the metropolitan area.
Population: Population growth is an important factor in determining the economic strength
of a given area. Although the growth of a local population is not related directly to room-night
demand for hotels, it does reflect employment growth and future employment concentration
which, in turn, typically influence levels of commercial room-night demand.
The 28-county Atlanta MSA is the ninth largest in the United States with an estimated 2012
population of nearly 5.5 million. During the period from 2007 to 2012, the population of the
MSA grew at a compound annual rate of 1.6 percent. Gwinnett County, which encompasses
the subject site, contains approximately 15.6 percent of metropolitan Atlanta’s population. It
grew 2.2 percent compounded annually over the past five years, reflecting one of the strongest
rates within the MSA. Atlanta’s exceptional suburban growth is due largely to the high quality
of life, lower taxation and abundant supply of good quality housing available in the surrounding
areas at reasonable prices. Nonetheless, a resurgence of in-town development has occurred
in recent years as commute times have increased due to traffic congestion.
DeLorme Street Atlas USA® 2012
Data use subject to license.
© DeLorme. DeLorme Street Atlas USA® 2012.
www.delorme.com
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The following table depicts population characteristics for Gwinnett County, the MSA, the state
and the nation.
POPULATION
GWINNETT COUNTY, THE ATLANTA MSA, GEORGIA AND THE UNITED STATES
2007, 2012 AND 2017
(in thousands)
Gwinnett County
Atlanta MSA
Georgia
United States
Gwinnett County’s
Share of MSA
2007
2012
764.1
5,048.7
9,350.0
301,231.2
853.2
5,469.6
9,961.9
314,659.2
15.1%
15.6%
Compound
Annual Change
2007-2012
2.2%
1.6
1.3
0.9
2017
995.0
6,031.6
10,715.7
3306738.0
Compound
Annual Change
2012-2017
3.1%
2.0
1.5
1.0
16.5%
Source: Wood & Poole Economics, Inc. - 2013 CEDDS
Employment and Economy: The Atlanta MSA’s economy is distinguished from the national
economy by its greater concentration of trade and service employment, and relatively small
component of manufacturing employment. The overall composition of the area’s economy
therefore is well-diversified and has tended to partially insulate the city from the effects of past
national recessions and other cyclical downturns. Nonetheless, the recession at the beginning
of the decade’s focus on technology and telecommunications, in combination with the
slowdown in travel spurred by the recession and the September 11, 2001 terrorist attacks, was
particularly damaging to the Atlanta economy. Similarly, recent economic conditions have had
a substantial negative effect on the metropolitan area.
Employment by nonagricultural industry for the Atlanta MSA in 2007 and 2012 (preliminary) is
depicted in the following table.
February 22, 2013
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EMPLOYMENT BY NONAGRICULTURAL INDUSTRY
ATLANTA MSA
2007 AND 2012
(in thousands)
Industry
TTU1
PBS2
Government
EHS3
Leisure & Hospitality
Manufacturing
Financial Activities
Other Services
Construction
Information
Mining & Logging
Total
1
2
3
2007
Employment
Number Percent
2012
Employment
Number Percent
Compound
Annual
Change
562.7
410.9
324.7
259.8
234.9
175.5
162.5
97.8
139.0
85.6
2.0
22.9%
16.7
13.2
10.6
9.6
7.1
6.6
4.0
5.7
3.5
0.1
543.5
417.9
311.7
295.6
222.0
150.3
135.2
93.8
87.2
78.7
1.3
23.3%
17.9
13.3
12.6
9.5
6.4
5.8
4.0
3.7
3.4
0.1
(0.7%)
0.3
(0.8 )
2.6
(1.1 )
(3.1 )
(3.6 )
(0.8 )
(8.9 )
(1.7 )
(8.3 )
2,455.4
100.0%
2,337.2
100.0%
(1.0%)
Trade, Transportation & Utilities
Professional & Business Services
Education & Health Services
Source: U.S. Department of Labor, Bureau of Labor Statistics
Between 2007 and 2012, total nonagricultural employment for the Atlanta MSA contracted at
a compound annual rate of 1.0 percent. After experiencing robust growth during the late 1990s
and into 2000, employment growth slowed in 2001 and a 1.9 percent decline (42,700 jobs)
occurred during 2002. Several major employers (including Lockheed Martin, Coca-Cola,
AT&T, BellSouth and Delta) announced cutbacks during this period. While the economy was
already showing signs of weakening prior thereto, the September 11th terrorist attacks
compounded and solidified in the minds of many that the country was in a recession. It directly
impacted Atlanta by causing weakened demand for air transportation and reduced convention
activity. Job losses began in earnest in September 2001 and continued through 2003.
Employment levels began increasing in January 2004 (rising 1.4 percent for the year), and
more than 186,000 jobs were added from 2005 to 2007. In response to the most recent
national economic recession, numerous companies cut jobs resulting in a decline of 26,000
jobs in 2008, 135,500 in 2009 and 19,900 in 2010. July 2010 was the first month to show
positive growth in employment (as compared to the same month in the prior year) since April
2008 and 28,900 jobs were added in 2011 reflecting a 1.3 percent increase from 2010. Based
on preliminary estimates, growth of 1.5 percent (34,200 jobs) was experienced in 2012.
Forecasts by Woods & Poole Economics, Inc. indicate employment growth for the MSA of 1.8
percent compounded annually through 2020. Compound annual employment growth for
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Gwinnett County is estimated at 2.3 percent. Graphical depictions of 2012 employment by
sector and the annual new job growth for the past five years are presented below.
During 2011, certain key sectors, namely TTU and manufacturing, turned a corner and are now
expanding. Due to the above, plus the continued expansion of the PBS and EHS sectors,
unemployment rates have dropped. As of November 2012, the unemployment rates for the
MSA and state were 8.0 and 8.4 percent, respectively. Comparatively, the unemployment rate
for the United States was 7.4 percent while that of Gwinnett County was 7.1 percent.
Despite the recent job losses, the mid- to long-term prospects for the MSA are quite favorable.
Thirteen of the Fortune 500 largest industrial and service corporations have their corporate
headquarters in the Atlanta area, and economic development officials throughout the Atlanta
MSA actively court both domestic and international corporate relocations. The city has
developed a national reputation as one which cooperates well with the private sector. The
MSA offers low costs, a high quality of life, several major colleges and universities, a temperate
climate, a good transportation network, a diversified economy and a well-developed
infrastructure which make the prospect of doing business in the area attractive to companies
thinking about establishing operations in the Southeast. Several national and international
nonprofit organizations, including the American Cancer Society, Habitat for Humanity
International, CARE International and the Boys & Girls Clubs of America, have chosen to locate
their headquarters in Atlanta, recognizing the city’s relatively low cost of doing business in
conjunction with its increasing prominence. Baxter International announced in April 2012 that
it will be building a plasma “factory” in Covington that will employ 1,500.
The Atlanta region’s top non-governmental employers are listed in the following table.
February 22, 2013
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LARGEST EMPLOYERS
METROPOLITAN ATLANTA
Employer
Product/Service
Delta Air Lines
Wal-Mart Stores
Emory University
AT&T
United Parcel Service
WellStar Health System
The Home Depot
Georgia Institute of Technology
Lockheed Martin Aeronautics
Cox Enterprises, Inc.
Airline headquarters/hub operation
Retail stores
Higher education and healthcare
Communications holding company
Logistics
Healthcare
Retail stores
Higher education and research
Military aircraft manufacturing
Media and communications
Number of
Employees
28,000
26,000
21,671
19,245
10,849
9,931
9,000
8,372
7,800
6,885
Source: Atlanta Business Chronicle, February 24-March 1, 2012
The presence of AmericasMart-Atlanta (with 6.2 million square feet of showroom and exhibit
hall space in the Merchandise, Gift and Apparel Marts) in conjunction with an excellent
transportation network and warehouse stock enable Atlanta to serve as a regional and national
center for wholesale trade and distribution.
Atlanta is one of the nation’s premier convention sites, and convention activity has a substantial
impact on the local economy as the city annually hosts in excess of three million attendees.
Its popularity is due in large measure to the presence of five major convention hotels in the
central business district (CBD) as well as the Georgia World Congress Center (GWCC) which
opened in 1976. Expansions of the GWCC were completed in 1985, 1992 and 2002. The
center now offers 1.4 million square feet of exhibit space. Another development which
supports Atlanta’s position as a convention destination is the Georgia Dome, a 71,200-seat
domed stadium proximate to the GWCC which opened in 1992. With 102,000 square feet of
floor space, the Dome is able to host conventions and trade shows in addition to Atlanta
Falcons football games, other sporting events and concerts. Smaller convention venues which
are located throughout the metropolitan area include the Georgia International Convention
Center in College Park, Gwinnett Center in Gwinnett County and Cobb Galleria Centre in Cobb
County.
Office Market: 2012 represented the best year since 2007 for the Atlanta office market. The
following table profiles the metropolitan speculative office market as of year-end 2012. The
subject site is located in the Northeast Atlanta sector. Positive absorption of 2,767,061 square
feet counteracted the delivery of 789,822 square feet during the year. Currently, there are
1,124,097 square feet of office space under construction in the metropolitan area, of which
344,476 square feet are in the Northeast Atlanta sector.
February 22, 2013
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METROPOLITAN ATLANTA OFFICE MARKET
FIRST QUARTER 2012
Sector
Downtown
Midtown
Buckhead
Central Perimeter
North Fulton
Northeast Atlanta
Northlake
Northwest Atlanta
South Atlanta
West Atlanta
Totals/Average
Existing
Square Feet
Percent
Vacant
YTD
Absorption
27,694,279
22,239,335
20,495,788
29,079,020
27,677,670
23,405,902
18,102,183
35,891,439
13,282,159
3,309,481
18.1%
15.6
16.3
18.3
17.1
19.1
14.4
16.9
13.3
26.2
( 322,476)
752,769
448,683
1,820,396
( 256,068)
235,129
( 135,198)
( 76,230)
188,044
112,011
221,177,256
17.0%
2,767,061
Source: Colliers International
Transportation: The Atlanta MSA’s infrastructure and accessibility are enhanced by the
convergence of three interstate highways (Interstates 20, 75 and 85) and a circumferential
highway (Interstate 285) providing access to most of the metropolitan area. Interstate 20 (I-20)
travels in an east/west manner connecting Interstate 95 (I-95) in South Carolina with
Interstate 10 in western Texas. Interstate 75 (I-75) links the Canadian border at Sault Ste.
Marie, Michigan with Miami, Florida, while I-85 connects I-95 in Virginia with Montgomery,
Alabama. Georgia Highway 400 (GA 400) is a heavily traveled commuter route which extends
from the northern suburbs to I-85 just north of downtown Atlanta.
As the largest hub of air travel in the United States and main hub of operations for Delta Air
Lines, Hartsfield-Jackson Atlanta International Airport is the world’s busiest and among its
largest. It is the largest employment center in Georgia, with approximately 58,000 persons
employed by airlines, vendors, terminal operations and regulatory agencies. In October 2008,
Delta merged with Northwest Airlines to form what at the time was the world’s largest
commercial carrier. In May 2011, Southwest Airlines announced it had completed its
acquisition of AirTran Airways which has its largest hub of operations in Atlanta. This move
will enable the nation’s dominant low-cost carrier to enter the Atlanta market when the two
companies are fully integrated by the end of 2014.
2000 marked the beginning of a decade-long, $5.4 billion expansion of the airport. The
expansion program is designed to meet an expected passenger load of 121 million by 2015.
Major features of the expansion include completion of a fifth runway (which opened in May
2006) and moving the rental car complex to a 67.5-acre site off Camp Creek Parkway. The
February 22, 2013
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rental car facility is connected to the passenger terminal by an automated people mover. Also
part of the plan was construction of a new international terminal (Maynard H. Jackson Jr.
International Terminal) on the east side of the airport. This facility is accessed from I-75 and
opened in May 2012.
The following table depicts historic passenger activity.
PASSENGER ACTIVITY
HARTSFIELD-JACKSON ATLANTA INTERNATIONAL AIRPORT
2007 THROUGH 2012
Year
Number of Passengers
Domestic
International
Total
2007
2008
2009
2010
2011
2012
79,796,551
80,416,839
79,061,501
80,099,037
82,532,069
85,632,354
8,897,291
9,180,491
8,832,195
9,139,022
9,856,954
9,854,343
Compound Annual Change
88,693,842
89,597,330
87,893,696
89,238,059
92,389,023
95,486,697
Percent
Change
1.0%
(1.9 )
1.5
3.5
3.4
1.5%
Source: Hartsfield-Jackson Atlanta International Airport
Public transportation is provided by the Metropolitan Atlanta Rapid Transit Authority (MARTA)
system of buses and commuter rail. The Cobb Community Transit and Gwinnett County
Transit bus systems serve the two respective counties and connect with MARTA at strategic
points.
Conclusion: Atlanta has a well-developed transportation and commercial services
infrastructure which will enable it to remain the regional center for commerce and trade in the
Southeast for the foreseeable future. Although the massive growth experienced during the
1980s and 1990s in virtually every sector of the economy has slowed, Atlanta continues to
attract new businesses and sustain net in-migration. Clearly, the city has not been immune to
the severe national economic downturn. Still, as the focal point of the Southeast, and the only
city of national and international stature within the region, Atlanta’s long-term prospects appear
favorable.
February 22, 2013
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SITE AND NEIGHBORHOOD EVALUATION
The neighborhood within which a hotel operates can have a significant impact on its operating
performance. Emerging neighborhoods experiencing substantial growth can generate
increasing levels of demand and provide an environment characterized by newer development
and, more importantly, popular support facilities (e.g., restaurants, retail, entertainment, etc.).
Conversely, a declining neighborhood or, in some cases, a mature one relative to a nearby
emerging one, can be detrimental to a property’s operations. In this section, we address the
location, access and development characteristics of the subject neighborhood.
While the subject will be influenced by activities throughout the area extending from the I-85/
Sugarloaf Parkway interchange westward to Johns Creek, its immediate neighborhood is
focused on activities within the City of Duluth, specifically downtown Duluth. The city had a
2010 population of 26,600 and encompasses 10.1 square miles. It is located approximately
23 miles northeast of downtown Atlanta.
Four sites in the downtown area, as listed below and depicted on the map on the following
page, have been identified by the City for potential hotel development.
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Site A - Proximate to the southeast quadrant of the intersection of Hill and West
Lawrenceville streets.
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Sites B & C - In the northeast and northwest quadrants of the intersection of Hill
Street and Ridgeway Road, respectively.
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Site D - Across Main Street from City Hall.
Downtown Duluth is located approximately four miles northwest of I-85 via Duluth Highway.
It is relatively vibrant, with numerous shops, restaurants and businesses lining Main Street.
These include the Red Clay Theatre, a 257-seat live music venue managed Eddie Owen who
helped launch the careers of the Indigo Girls, Sugarland and John Mayer. Plans call for
expanding the Red Clay Theatre to include additional gathering space, a bar and potentially
a restaurant. Downtown also is site of festivals (Duluth Fall Festival, BeerFest Duluth,
Halloween on the Green) and events (SummerStage Concerts, No Reason Block Party, Flicks
on the Bricks) throughout the summer and fall months.
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Revitalization of the downtown area is being approached in phases. The first two included
development of the town green followed by construction of a new 44,000-square foot city hall
and pedestrian improvements around Church Cemetery. On the northern edge of the town
green is the Duluth Festival Center which includes two 960-square foot meeting rooms.
The third phase of revitalization is to encompass The Block, a 3.3-acre parcel in the southeast
quadrant of the intersection of Hill and West Lawrenceville streets including the former city hall
and warehouse space. It is to be redeveloped into a restaurant district with eight to ten outlets
and perhaps a salon or spa, with completion anticipated in approximately 30 months. Hotel
Site A is within The Block. A prospective developer has proposed construction of 350 luxury
apartments on the west side of downtown, west of Hardy Industrial Boulevard, concurrent with
redevelopment of The Block. Future plans with market-driven timing call for 185 residential
condominiums or townhomes on the north side of Hill Street (including Hotel Site C) and streetlevel retail (40,000 square feet) with office space (100,000 square feet) above lining both sides
of Main Street between City Hall and Hardy Industrial Boulevard (including Hotel Site D).
Completion of The Block by the end of 2015 is a critical assumption to our analysis.
Other key developments in the surrounding area which could influence the performance of the
subject include the following:
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Located at the northern edge of Duluth is the headquarters for AGCO, one of the
MSA’s Fortune 500 firms and a global manufacturer of agricultural machinery.
AGCO generates some 2,000 room-nights of hotel demand annually.
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The Payne-Corley House is a popular venue for weddings and other social
events. It is located just east of downtown Duluth.
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Gwinnett Medical Center recently purchased a vacant shopping center adjacent
to its Duluth campus at the intersection of Pleasant Hill and Howell Ferry roads
in the western portion of the city. It is to be redeveloped into an outpatient
campus which could offer diagnostic, urgent care, rehabilitation and ambulatory
surgery services, with a focus on professional athlete rehabilitation.
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In 2012, Primerica broke ground on a 344,476-square foot headquarters within
the Legacy office park at the intersection of Meadowbrook Parkway and Duluth
Highway. It is to be completed by mid-2013.
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Gwinnett Center and The Arena at Gwinnett Center comprise a convention and
entertainment complex situated on 80 acres at the intersection of Sugarloaf
Parkway and Satellite Boulevard. The campus includes: a convention center
featuring an exhibit hall with 50,000 square feet of unobstructed space, a
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21,600-square foot ballroom and assorted breakout rooms; a 708-seat
performing arts center; and the 13,000-seat Arena at Gwinnett Center. The
Jacqueline Casey Hudgens Center for the Arts also is located adjacent to the
center and serves as additional space for smaller social events with 2,200
square feet of indoor meeting space and a 28,000-square foot outdoor Sculpture
Garden. The convention center and performing arts sections of the complex
were constructed in 1992. The ballroom complex opened in 2002, and the
arena opened in 2003. Development of a headquarters hotel has been
proposed.
Although removed from the existing focal points of lodging development, the neighborhood
offers an array of amenities within walking distance and proximity to a major demand generator
(AGCO). Further, the various festivals hosted by the city as well as the event venues (Duluth
Festival Center and the Payne-Corely House) should prove to be sources of lodging demand.
Still, the downtown area likely lacks a sufficient critical mass of commercial activity to
adequately support a new hotel. Development of The Block will substantially mitigate this
concern, through the offering of eight to ten new dining/entertainment options.
RECOMMENDED FACILITIES
There are no hotels within the Duluth city limits at present. Thus, given the pioneering nature
of the subject, we recommend pursuing development of a relatively small (approximately 100
units) select-service hotel with a strong, high quality brand with broad appeal to business
travelers and leisure guests alike and which will help drive demand through its reservation
system. Examples of such brands include Hampton Inn & Suites, Courtyard by Marriott, Hilton
Garden Inn, SpringHill Suites by Marriott, Aloft and Hyatt Place. This combination of size,
orientation and branding will help minimize project costs and the financial risks of the project.
Amenities prototypical of the brands mentioned (complimentary breakfast or a restaurant
serving breakfast, swimming pool, exercise room, sundry shop, business center and guest
laundry) should be provided with perhaps an expanded complement of meeting space, say
1,500 to 2,000 square feet. Brands such as Courtyard by Marriott and Hilton Garden Inn
require the inclusion of a restaurant. For purposes of this analysis, however, we have assumed
such a property would offer a restaurant leased to and operated by a third party. Such an
arrangement would allow the property to realize the benefits of a full-service property without
the incremental risks and operating costs.
Again because of the subject’s pioneering nature, we believe it is critical to its success to be
distinguished from the competitors via design elements and surrounding support amenities.
February 22, 2013
Page 18
There are synergies that result from the presence of numerous hotels in proximity to one
another. Further, it has been clearly established that the presence of immediately adjacent
support amenities (e.g., restaurants, retail, entertainment, etc.) can have a substantial positive
effect on a property’s operations. Perhaps the best examples of this are hotels located within
a “lifestyle” retail complex. These properties typically perform measurably better than
physically similar hotels located on the periphery of the complex. For this reason, it is our
recommendation that proximity to support amenities be a prime consideration in site selection.
For purposes of this analysis, we have assumed a January 1, 2015 opening date.
HOTEL INVESTMENT MARKET OVERVIEW
In the analysis of hotel investments, it is essential to understand overall market trends and their
potential impact on a given property. The following paragraphs outline factors influencing the
current hotel investment market.
Throughout the 1980s, hotels were developed at a record pace. The unparalleled activity was
due to several factors, the most prominent of which were a highly favorable tax code,
substantial availability of funds through savings and loan establishments, and the introduction
of a large number of new limited-service brands. The resulting oversupply caused many hotels
to decline in value during the early 1990s as net operating income levels plummeted. In
addition, the failure of numerous lending institutions placed vast numbers of assets in the
hands of federal regulators, many of which were disposed of at below-market values.
In the mid-1990s, market conditions improved. In fact, until late 1998, there were far more
willing buyers than willing sellers, particularly with the advent of several highly capitalized real
estate investment trusts (REITs) and other large equity groups targeting the hotel industry.
After several years of declining occupancy, the nation’s lodging industry began improving in
1992. Continued gains in occupancy and stronger rate growth were experienced from 1993
through 1995, with ADR increasing at a pace in excess of inflation in 1994 and 1995. Strong
rate growth was upheld in 1996, but occupancy began a slight decline. This trend continued
through 1999, and in 2000 a slight increase in occupancy was experienced as well.
Occupancy, ADR and RevPAR all dropped in 2001 and 2002. Since 2002, national supply and
demand conditions have changed as depicted below.
February 22, 2013
Page 19
OCCUPANCY, AVERAGE DAILY RATE AND REVPAR
NATIONAL LODGING MARKET
2002 THROUGH JANUARY 2013
Year
Occupancy
Percent
Change
Average
Daily Rate
Percent
Change
RevPAR
Percent
Change
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
59.0%
59.1
61.3
63.1
63.3
63.1
60.3
54.5
57.5
59.9
61.4
0.2%
3.7
2.9
0.3
(0.3 )
(4.4 )
(9.6 )
5.5
4.2
2.5
$ 83.19
83.11
86.24
90.95
97.89
104.04
106.96
98.17
98.06
101.85
106.10
(0.1%)
3.8
5.5
7.6
6.3
2.8
(8.2 )
(0.1 )
3.9
4.2
$49.04
49.11
52.88
57.39
61.96
65.61
64.49
53.50
56.43
61.02
65.17
0.1%
7.7
8.5
8.0
5.9
( 1.7 )
(17.0 )
5.5
8.1
6.8
YTD 1/12
YTD 1/13
49.2%
51.0
3.6%
$100.84
105.96
5.1%
$49.64
54.02
8.8%
Source: Smith Travel Research and PKF Consulting USA
RevPAR was down 2.9 percent in 2002, primarily as a result of deteriorating economic
conditions. Occupancies dropped precipitously after the September 11, 2001 terrorist attacks
and then rebounded. However, it was not until 2005 that RevPAR returned to pre-September
11th levels. Occupancy levels began to decline in mid-2007, a trend which did not reverse until
2010.
Total returns on hotel investments as reported by NCREIF demonstrate the steady
improvement in industry performance through the end of 2006. The consistent decline in
returns which began thereafter was punctuated by a dramatic plunge at the end of 2008. The
following chart presents the median rolling one-year total return for the period from the second
quarter of 2008 through the third quarter of 2012.
February 22, 2013
Page 20
PKF Hospitality Research is projecting supply and demand growth at 0.5 and 3.0 percent,
respectively, for 2012, resulting in an occupancy increase of 2.6 percent. ADR is projected to
increase 4.2 percent, resulting in RevPAR growth of 6.8 percent. Projections for 2013 call for
RevPAR to increase 6.0 percent.
Several industry trends are evident:
R
New construction has been limited over the past few years. According to STR,
supply contracted 0.1 percent in 2005 while demand grew at a rate of 2.8
percent. Demand growth in 2006 was only slightly more than supply. In 2007,
for the first time in several years, supply exceeded demand. Supply grew 1.3
percent while demand grew 1.0 percent. The gap widened in 2008, with supply
up 2.6 percent and demand down 1.2 percent. Nonetheless, from a historical
perspective, supply growth was still minimal. The dearth of financing combined
with poor economic fundamentals should insure modest supply growth for the
foreseeable future. In fact, many projects that were in the development pipeline
have been delayed indefinitely.
R
As often happens during cyclical downturns, substantial equity is being
assembled for the purpose of acquiring distressed assets. An increasing
number of mortgage defaults and/or breaches of debt covenants bodes well for
opportunistic buyers. Thus far, however, there have been few quality assets for
sale.
February 22, 2013
Page 21
R
Until 2007, demand for sites by condominium developers in coastal and/or resort
locations had severely limited the construction of hotels in these environments.
In fact, the inventory of hotel rooms actually shrunk in some markets as hotels
were converted to condominium use. In 2007 this situation largely subsided.
The exodus of speculators from the market left a severe imbalance between
supply and demand in many areas.
R
Major hotel companies have a renewed interest in developing new brands.
Hilton’s Home2 Suites, Choice Hotels’ Cambria Suites, Starwood’s Aloft and
Element brands and Global Hyatt Corporation’s Hyatt Place have garnered
considerable attention.
R
Due in part to the massive demand for residential product and competition for
materials from other countries, construction costs increased at a dramatic pace
from 2003 through 2007. This situation eased somewhat during the latter half
of 2007 as transactions became increasingly difficult to finance and the
residential market collapsed. As a result, construction costs have declined a
considerable degree.
R
Prompted by the troubles of the sub-prime mortgage market, securitized
mortgage lending came to a dramatic halt. Thus, the massive debt availability
that characterized the industry in recent years has diminished considerably. In
fact, debt capital is extremely scarce and terms are far more stringent. Loan-tovalue ratios are now in the 60 percent range for new construction with debt
service coverage ratios as high as 1.4 to 1.6. Many loans are now relationship
driven rather than asset driven, with only the strongest borrowers gaining
traction.
The performance of the industry over the past three years suggests the worst may be over.
Though occupancy and ADR levels are still below peak levels, they are nonetheless
consistently improving. RevPAR growth for 2011 was quite strong, and a significant gain was
realized in 2012 as well.
SUPPLY AND DEMAND ANALYSIS
The supply and demand analysis involves a qualitative and quantitative evaluation of the
lodging facilities in the Duluth area with which the proposed select-service hotel would
potentially compete for various segments of demand. This section includes a description of
the existing supply of, and demand for, hotel rooms in the subject market area, identification
of proposed competitive properties, and a discussion of the growth potential of area demand
by segment. The analysis is for the period through 2019 to encompass the first five full years
of operation for the subject following its anticipated opening by January 1, 2015.
February 22, 2013
Page 22
Understanding the relationship between supply and demand is a critical component of any
market study, particularly with respect to hotels. Unlike other property types, hotels essentially
lease their rooms on a daily basis. While this characteristic allows for an immediate response
to changes in market conditions, it also requires a high level of management intensity. There
is an inverse relationship between occupancy and ADR, and raising or lowering rates typically
has an immediate impact on room-nights sold. Effective management entails finding the proper
balance that allows for the maximization of revenue.
In this section we first identify the subject property’s competitive set (e.g., those hotels that tend
to compete for the same sources of demand). We then identify relevant demand sources,
analyze historical growth patterns and assess the potential for growth (or lack thereof) in
demand by segment. The result is a projection of future market performance. Lastly, we
conclude with a projection of occupancy and ADR for the subject property, taking into
consideration its competitive strengths and weaknesses relative to the overall market.
Obviously, some hotels are more directly competitive than others based on their locations,
facilities, branding, etc. This disparity in the level of competitiveness can be handled in a
number of ways. Some consultants assign a percentage to each property and include only a
portion of their guest rooms in the competitive set. This technique, while theoretically sound,
is highly subjective and the overall analysis can be extremely sensitive to the assumptions
made. Alternatively, we have chosen to address this issue through our projected penetration
rates. For example, the introduction of a new property that is only marginally competitive will
have a limited impact on the subject property’s penetration level, whereas a directly competitive
property will likely have a substantial effect. Regardless of the method employed, properly
assessing the relationship between supply and demand and its impact on the subject property
and market occupancy requires a level of professional judgment.
Existing Competitive Facilities: We have identified six properties with a total of 716 guest
rooms which would potentially compete with the subject 100-unit select-service hotel. These
include the highest quality, most strongly branded select-service hotels located closest to
downtown Duluth. Three of the hotels are located proximate to the I-85/Sugarloaf Parkway
interchange while the other three are in the Johns Creek area. The Sugarloaf Parkway
interchange (Exit 108) is the most vibrant, growing interchange in the area. From a lodging
location perspective, it is the most desirable. Sugarloaf Parkway runs along the northern
entrance of the Sugarloaf Mills with a number of restaurant and retail uses nearby as well as
growing mixed-use centers and office parks. The three competitors at the interchange tend
to perform at a higher level than the Johns Creek properties, in large part due to their proximity
to an extensive array of support amenities and the presence of I-85.
February 22, 2013
Page 23
Although additional lodging facilities are located in the market area, they are not considered
directly competitive due to disparities in terms of markets served, quality of facilities, services
offered and/or rate structure. Accordingly, a guest who patronizes one of the competitive
properties is not likely to be the same type of traveler who, under normal market conditions,
would choose these other facilities.
The map on the following page depicts the location of each property in relation to downtown
Duluth. The tables on the page after the map provide a summary profile of the defined
competitive properties. Additional information on the competitors is provided in the following
paragraphs.
R
The 127-unit Hampton Inn Atlanta-Lawrenceville-I-85-Sugarloaf is located
across Sugarloaf Parkway from the Sugarloaf Mills mall. Benefitting from this
location and a strong brand, it is the market leader with respect to occupancy
and RevPAR. The property’s lobby, breakfast area and meeting rooms are in
the final stages of renovation.
R
The Hilton Garden Inn Atlanta NE/Gwinnett Sugarloaf was the first hotel to
open at the I-85/Sugarloaf Parkway interchange. Its lobby was renovated in
June 2012, and refurbishment of its meeting space and 122 guest rooms
presently is underway.
R
The 143-room Holiday Inn Gwinnett Center is located adjacent to the
convention center/arena complex. As such, it accommodates a disproportionate
share of group and leisure demand which in turns places downward pressure
on its ADR. The hotel opened as a prototype for the chain’s then new design,
and it has continued to serve as a testing ground for the brand’s look and feel.
The brand’s Hub lobby/restaurant concept was implemented in 2011, and carpet
is to be replaced throughout the hotel this year.
R
The Hyatt Place Atlanta/Duluth/Johns Creek was converted from an
AmeriSuites in May 2007 and underwent a complete renovation at that time.
The 122-room hotel is located at the center of Technology Park/Johns Creek,
a 1900-acre mixed-use development that currently has some 5.8 million square
feet of office/technology/medical/professional space.
Despite the vast
employment base, however, the Johns Creek submarket performs poorly.
Scale 1 : 68,750
TN
0
www.delorme.com
MN (5.0°W)
0
¼
½
¾
1
1" = 1.09 mi
1
2
3
Data Zoom 11-5
mi
km
SUMMARY OF COMPETITIVE PROPERTIES
DULUTH AREA
PROPOSED 100-UNIT HAMPTON INN & SUITES
Estimated 2012
Percent
Average
Occupancy
Daily Rate
Number
of Units
Year
Opened
Hampton Inn Atlanta-LawrencevilleI-85-Sugarloaf
Hilton Garden Inn Atlanta NE/
Gwinnett Sugarloaf
Holiday Inn Gwinnett Center
Hyatt Place Atlanta/Duluth/
Johns Creek
Hilton Garden Inn Atlanta North/
Johns Creek
Holiday Inn Express Hotel & Suites
Atlanta-Johns Creek
127
2003
75%-79%
$100-$104
$75-$79
122
2001
70-74
105-109
143
122
2004
1997
70-74
55-59
122
1999
80
2002
Total/Averages
716
Name of Property
Name of Property
Hampton Inn Atlanta-LawrencevilleI-85-Sugarloaf
Hilton Garden Inn Atlanta NE/
Gwinnett Sugarloaf
Hyatt Place Atlanta/Duluth/Johns Creek
Hilton Garden Inn Atlanta North/Johns Creek
Holiday Inn Express Hotel & Suites
Atlanta-Johns Creek
2
3
4
Amenities
20%
20%
1,200
C-E-F-G
75-79
55
25
20
1,780
A-B-C-D-F
85-89
95-99
60-64
55-59
25
70
35
15
40
15
1,725
1,020
A-B-C-D-F
A-B-C-E-F-G
60-64
105-109
65-69
75
15
10
1,400
A-B-C-E-F
50-54
85-89
40-44
70
15
15
625
C-F-G
$97.76
$65.82
56%
22%
22%
Estimated 2012 Market Share Percentage2
Total
Commercial
Group
Leisure
Estimated 2012 Market Penetration
as a Percentage of Fair Market Share3
Total
Commercial
Group
Leisure
20.83%
22.28%
18.72%
19.26%
117%
126%
106%
17.04
18.24
17.88
20.48
16.86
107
105
120
99
115
19.97
17.04
17.04
11.17
21.97
14.44
16.21
8.31
9.79
18.02
21.67
10.36
34.55
9.73
10.92
5.60
40.62
10.01
7.49
5.76
110
85
95
74
49
106
127
93
173
57
64
50
203
59
44
52
98
84
104
67
Occupancy × average daily rate.
Property’s accommodated demand ÷ total demand accommodated in market.
Market share percentage ÷ fair market share.
Property's RevPAR ÷ market RevPAR.
Source: Properties concerned and PKF Consulting USA
109%
RevPAR
Penetration4
17.74%
Notes:
1
Total Sq. Ft.
Meeting Space
60%
67.3%
Fair Market
Share
RevPAR1
Estimated 2012
Demand Segmentation
Commercial
Group
Leisure
120%
Amenities Key
A = Restaurant(s)
B = Lounge(s)
C = Exercise Room
D = Indoor Swimming Pool
E = Outdoor Swimming Pool
F = Complimentary High-Speed
Internet Access
G = Complimentary Breakfast
February 22, 2013
Page 26
R
The 122-room Hilton Garden Inn Atlanta North/Johns Creek is the occupancy
leader amongst the Johns Creek hotels and achieves the highest ADR of all
competitors. In 2012, the property accommodated over 1,800 room-nights of
AGCO demand. A full-service bar was added to the hotel in 2012.
R
The Holiday Inn Express Hotel & Suites Atlanta-Johns Creek underwent a
complete renovation approximately a year ago. The 80-unit hotel achieves the
market’s lowest occupancy and RevPAR despite its small size. This is a
reflection of its weaker branding (as compared to the competitors) and the poor
state of the Johns Creek submarket.
The table on the following page depicts trends in occupancy, ADR, RevPAR, supply and
demand for the defined competitive supply since 2006. As shown, both room demand and
ADR declined significantly in 2009. This was due to the reduction in travel caused by the
economic downturn and, in turn, operators discounting rate while unsuccessfully trying to
maintain occupancy levels. A surge in business travel led to strong occupancy growth in 2010,
but with rates for 2010 negotiated in 2009 before it was known market occupancy would
rebound, ADR declined further in 2010. Nonetheless, RevPAR increased 4.4 percent that year
and has been fairly robust since.
Supply Additions: Based on our fieldwork, we have identified no additions to the competitive
supply other than the subject. There are, however, three projects of note as described below.
R
A 117-unit Residence Inn by Marriott is under construction proximate to the
northwest quadrant of the I-85/Sugarloaf Parkway interchange and is to be
completed by September 2013. It has not been included as a supply addition
due to its extended stay orientation.
R
A 234-unit Embassy Suites has been proposed for development along Satellite
Boulevard at the entrance to Gwinnett Center, but the developer has been
unsuccessful in securing financing and the project is unlikely to reach fruition in
the near to mid-term.
R
As previously noted, a headquarters hotel has been proposed at Gwinnett
Center. The hotel would be affiliated with Marriott and likely include 250 to 300
rooms. It has not been included as a supply addition due to its preliminary
nature, large size and full-service orientation.
Should any competitive supply additions occur beyond the subject, the estimates of occupancy
(and possibly ADR) contained herein would thus be affected and a revision might be required.
HISTORICAL OCCUPANCY, ADR, REVPAR, SUPPLY AND DEMAND
DEFINED COMPETITVE SUPPLY
DULUTH AREA
Year
2006
2007
2008
2009
2010
2011
2012
Avg
January
65.3%
57.9
60.7
51.5
52.3
52.6
58.7
57.0%
February
66.2%
60.7
65.6
57.8
60.0
63.1
64.1
62.5%
March
70.1%
70.2
68.9
59.2
69.8
68.7
68.8
68.0%
April
68.3%
67.3
80.0
63.3
63.5
64.1
71.0
68.2%
May
68.4%
73.7
68.6
59.4
65.0
62.8
68.8
66.7%
June
71.3%
74.3
67.9
59.5
67.2
65.8
67.0
67.6%
July
71.8%
69.0
72.2
61.6
68.3
65.4
69.9
68.3%
Occupancy
August
September
68.2%
67.2%
65.5
69.1
69.2
63.9
57.8
62.8
68.5
65.9
70.2
63.0
75.2
69.8
67.8%
66.0%
October
72.7%
72.8
69.7
65.3
68.6
68.8
75.9
70.5%
November
65.6%
68.6
54.5
56.5
60.8
63.9
64.5
62.1%
December
50.5%
54.8
51.9
51.8
51.4
51.5
54.1
52.3%
Total Year
67.1%
67.0
66.1
58.9
63.4
63.3
67.3
64.7%
YTD Dec
67.1%
67.0
66.1
58.9
63.4
63.3
67.3
64.7%
% Change
-0.2%
-1.4
-10.9
7.8
-0.2
6.3
% Change YTD
-0.2%
-1.4
-10.9
7.8
-0.2
6.3
Year
2006
2007
2008
2009
2010
2011
2012
Avg
January
$91.72
101.01
107.65
102.50
91.97
94.33
96.70
$97.99
February
$93.82
108.99
109.17
101.13
92.91
98.01
99.01
$100.43
March
$95.36
104.07
107.33
101.41
96.12
99.71
96.34
$100.01
April
$93.73
103.74
110.10
100.01
91.09
99.20
99.99
$100.03
May
$94.25
99.62
106.68
91.86
91.37
95.66
97.07
$96.82
June
$93.10
101.98
106.51
95.96
93.29
98.92
99.33
$98.50
July
$90.20
103.19
102.66
91.48
89.37
93.26
95.99
$95.27
ADR
August
September
$94.64
$93.95
103.09
102.50
102.68
105.63
93.13
93.29
94.07
92.93
108.16
96.38
97.80
97.48
$99.21
$97.48
October
$98.70
105.96
109.10
95.60
94.54
99.07
103.15
$100.98
November
$96.46
99.75
100.70
89.86
91.42
93.84
95.64
$95.44
December
$90.76
96.97
98.18
87.13
86.61
89.36
93.00
$91.78
Total Year
$93.97
102.58
105.76
95.26
92.28
97.44
97.76
$97.94
YTD Dec
$93.97
102.58
105.76
95.26
92.28
97.44
97.76
$97.94
% Change
9.2%
3.1
-9.9
-3.1
5.6
0.3
% Change YTD
9.2%
3.1
-9.9
-3.1
5.6
0.3
Year
2006
2007
2008
2009
2010
2011
2012
Avg
January
$59.86
58.49
65.30
52.76
48.06
49.60
56.80
$55.84
February
$62.11
66.20
71.67
58.46
55.73
61.85
63.45
$62.78
March
$66.85
73.01
73.90
60.07
67.13
68.53
66.26
$67.97
April
$64.06
69.81
88.06
63.27
57.85
63.59
70.97
$68.23
May
$64.51
73.41
73.15
54.56
59.41
60.03
66.77
$64.55
June
$66.34
75.79
72.36
57.10
62.65
65.11
66.60
$66.56
July
$64.73
71.17
74.15
56.37
61.05
61.02
67.10
$65.08
RevPAR
August
September
$64.53
$63.17
67.47
70.86
71.10
67.54
53.80
58.59
64.42
61.20
75.88
60.76
73.53
68.01
$67.25
$64.30
October
$71.74
77.14
76.01
62.43
64.81
68.18
78.25
$71.22
November
$63.25
68.41
54.92
50.76
55.59
60.00
61.72
$59.23
December
$45.79
53.17
50.96
45.14
44.50
46.03
50.29
$47.98
Total Year
$63.07
68.74
69.90
56.08
58.55
61.71
65.82
$63.41
YTD Dec
$63.07
68.74
69.90
56.08
58.55
61.71
65.82
$63.41
% Change
9.0%
1.7
-19.8
4.4
5.4
6.7
% Change YTD
9.0%
1.7
-19.8
4.4
5.4
6.7
Year
2006
2007
2008
2009
2010
2011
2012
Avg
January
22,258
22,258
22,258
22,258
22,258
22,258
22,258
22,258
February
20,104
20,104
20,104
20,104
20,104
20,104
20,104
20,104
March
22,258
22,258
22,258
22,258
22,258
22,258
22,196
22,249
April
21,540
21,540
21,540
21,540
21,540
21,540
21,480
21,531
May
22,258
22,258
22,258
22,258
22,258
22,258
22,196
22,249
June
21,540
21,540
21,540
21,540
21,540
21,540
21,480
21,531
July
22,258
22,258
22,258
22,258
22,258
22,258
22,196
22,249
Supply
August
September
22,258
21,540
22,258
21,540
22,258
21,540
22,258
21,540
22,258
21,540
22,258
21,540
22,196
21,480
22,249
21,531
October
22,258
22,258
22,258
22,258
22,258
22,258
22,196
22,249
November
21,540
21,540
21,540
21,540
21,540
21,540
21,480
21,531
December
22,258
22,258
22,258
22,258
22,258
22,258
22,196
22,249
Total Year
262,070
262,070
262,070
262,070
262,070
262,070
261,458
261,983
YTD Dec
262,070
262,070
262,070
262,070
262,070
262,070
261,458
261,983
% Change
0.0%
0.0
0.0
0.0
0.0
-0.2
% Change YTD
0.0%
0.0
0.0
0.0
0.0
-0.2
Year
2006
2007
2008
2009
2010
2011
2012
Avg
January
14,527
12,888
13,501
11,457
11,631
11,704
13,073
12,683
February
13,309
12,211
13,198
11,622
12,060
12,687
12,885
12,567
March
15,604
15,614
15,325
13,184
15,545
15,299
15,267
15,120
April
14,722
14,495
17,229
13,627
13,679
13,807
15,246
14,686
May
15,234
16,402
15,261
13,219
14,472
13,969
15,267
14,832
June
15,349
16,007
14,634
12,818
14,466
14,178
14,402
14,551
July
15,974
15,350
16,077
13,714
15,205
14,564
15,516
15,200
Demand
August
September
15,178
14,482
14,568
14,891
15,413
13,772
12,858
13,528
15,244
14,185
15,616
13,579
16,688
14,986
15,081
14,203
October
16,178
16,205
15,507
14,536
15,259
15,318
16,837
15,691
November
14,123
14,771
11,749
12,168
13,097
13,772
13,861
13,363
December
11,231
12,205
11,552
11,531
11,436
11,466
12,003
11,632
Total Year
175,911
175,607
173,218
154,262
166,279
165,959
176,031
169,610
YTD Dec
175,911
175,607
173,218
154,262
166,279
165,959
176,031
169,610
% Change
-0.2%
-1.4
-10.9
7.8
-0.2
6.1
% Change YTD
-0.2%
-1.4
-10.9
7.8
-0.2
6.1
Note: The room count at the Hilton Garden Inn Atlanta North/Johns Creek was reduced by two in March 2012.
Source: Smith Travel Research
February 22, 2013
Page 28
Principal Sources of Demand: The principal sources of demand for transient lodging
accommodations for the defined competitive set are the commercial, group and leisure
segments. From our analysis of the operating performance of the existing competitive
properties, it is estimated that the total demand accommodated by these properties in 2012
was segmented as follows:
ESTIMATED ACCOMMODATED DEMAND SEGMENTATION
DEFINED COMPETITIVE SUPPLY
DULUTH AREA
2012
Demand Segment
Commercial
Group
Leisure
Total
Annual Accommodated
Room-Nights
Percent of
Total Demand
98,600
39,100
38,100
56%
22
22
175,800
100%
Seasonality of Demand: The subject market area is moderately seasonal. As with most
commercial markets, December and January typically are the weakest months of the year due
to the holidays. The table and graphs on the following page profile the trend in seasonality for
the defined competitive supply from January 2011 through December 2012.
With the exception of being somewhat lighter during the summer months and holiday periods,
commercial demand is fairly consistent on a year-round basis and generally is concentrated
on Monday through Thursday nights. Group meetings are most prevalent during the spring and
fall months, while social groups are more evenly spread throughout the year. Leisure demand
is concentrated during the summer months, particularly on weekends, and corresponds with
typical vacation practices.
SEASONALITY TRENDS
DULUTH AREA
JANUARY 2011 THROUGH DECEMBER 2012
Occupancy
Average Daily Rate
2011
2012
Month
2011
2012
January
February
March
April
May
June
July
August
September
October
November
December
52.6%
63.1
68.7
64.1
62.8
65.8
65.4
70.2
63.0
68.8
63.9
51.5
58.7%
64.1
68.8
71.0
68.8
67.0
69.9
75.2
69.8
75.9
64.5
54.1
$ 94.33
98.01
99.71
99.20
95.66
98.92
93.26
108.16
96.38
99.07
93.84
89.36
$ 96.70
99.01
96.34
99.99
97.07
99.33
95.99
97.80
97.48
103.15
95.64
93.00
Annual
63.3%
67.3%
$ 97.44
$ 97.76
February 22, 2013
Page 30
Due to typical commercial travel patterns, the market often fills mid-week. Special events,
group activity and leisure travel patterns can also result in strong occupancies on occasional
weekends. The following table presents daily occupancy and ADR patterns for the three-year
period ended December 2012.
OCCUPANCY AND ADR BY DAY OF THE WEEK
DULUTH AREA
THREE YEARS ENDED DECEMBER 2012
Day of the Week
Occupancy
ADR
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
40.5%
68.2
79.7
77.4
64.9
61.1
61.4
$ 92.53
103.10
105.28
104.88
99.72
80.50
77.81
Three-Year Average
64.7%
$ 95.86
It is estimated that the defined market reaches capacity on 80 nights per year and
unaccommodated demand approximates 10 to 25 percent of inventory on fill-days.
Accordingly, some 12,000 room-nights of unaccommodated demand were included in our
analysis.
Future Demand: Future room-night demand for the commercial, group and leisure segments
was estimated based upon an analysis of key economic and demographic indicators. For each
segment, relevant factors were identified and weighted according to their relative impact on
demand. The annual growth rates estimated for each segment are discussed in the following
paragraphs.
Commercial Demand: This segment consists of demand generated by vendors, service
representatives, corporate executives and other visitors to area businesses and industries.
Transient government demand also is included here. Those commercial travelers on a per
diem tend to choose lower-priced facilities offering a good price/value relationship (and often
including complimentary food and beverage), while business people on an expense account
consider the quality of the accommodations to be more important than the price charged. In
general, business travelers pay the highest rates available in the market, although certain
accounts may negotiate lower rates in return for a guaranteed level of demand.
February 22, 2013
Page 31
Commercial demand is generated by the area’s large and growing base of corporate firms.
Major corporate employers in Gwinnett County include AGCO, Primerica Financial Services,
NCR Corporation, Fiserv and Scientific-Atlanta. The county has a disproportionate share of
technology-oriented companies including Scientific-Atlanta, EMS Technologies, Broadcom and
National Semiconductor. Gwinnett County, which is part of the Northeast Atlanta office/
industrial submarket, has experienced significant expansion in the corporate sector in recent
years and has participated in the area’s strong economic recovery, experiencing the largest
occupancy gains in industrial and office space in the Atlanta MSA. The submarket also has
the largest amount of industrial space under construction. In 2012, Primerica broke ground on
a new 344,476-square foot headquarters at the Legacy office park, at the corner of
Meadowbrook Parkway and Duluth Highway. In addition, construction began on a 560,000square foot Mitsubishi Electric facility at the Huntcrest Business Center located on Satellite
Boulevard. International Paper expanded in the county as well, leasing 356,000 square feet
on Horizon Drive at the I-85/Lawrenceville Suwanee Road interchange. In nearby Norcross,
FedEx Ground has expanded into a new 215,000-square foot, $55-million distribution center
and Hyundai Construction Americas, Inc. announced the relocation of its Americas
headquarters. Also, RockTenn, now the third Fortune 500 company headquartered in Gwinnett
County, announced that it would expand its operations in Norcross adding 500 new jobs.
Commercial demand levels tend to reflect trends in employment. Employment for the MSA
decreased at a compound annual rate of 1.0 percent between 2007 and 2012. It increased 1.3
percent in 2011, however, and another 1.5 percent in 2012. Woods & Poole forecasts growth
of 1.8 percent compounded annually through 2020 for the MSA and 2.3 percent for Gwinnett
County. Overall, commercial demand growth is anticipated to be moderate throughout the
period analyzed.
Group Demand: Group demand accruing to the subject market area is generated by
conventions, conferences, trade shows and the like hosted by Gwinnett Center as well
corporate meetings/training activity, SMERF (social, military, ethnic, religious and fraternal)
groups such as family reunions and weddings, and youth sports teams. Faith-based groups,
corporations and associations are the primary users of Gwinnett Center. According to a
representative of the Gwinnett Convention and Visitors Bureau, faith-based groups account for
47 percent of group business county-wide. Those properties at the I-85/Sugarloaf Parkway
interchange benefit most from Gwinnett Center due to their proximity thereto.
A degree of “supply-driven” growth in the group segment is expected to be generated by the
full-service Marriott as Gwinnett Center and The Arena at Gwinnett Center will be able to attract
more events with the addition of on-site lodging facilities. Based on discussions with
February 22, 2013
Page 32
representatives of Gwinnett Center, the facility currently generates 20,000 to 25,000 roomnights of demand annually. In addition, there is room for an eventual Phase III expansion
which would include an additional 75,000-square feet of exhibit hall space between the existing
exhibit hall and the Arena as well as a parking deck. In any event, most of the incremental
demand generated by the expansion of the facility or the addition of a hotel is likely to accrue
to properties in the immediate vicinity.
Leisure Demand: The leisure demand segment consists primarily of highway motorists en
route to other destinations on I-85, friends and relatives of local residents, visitors to local
attractions and those attending events. Concerts at The Arena at Gwinnett Center are a
primary generator of the latter. Two entertainment industry publications recently ranked it
among the top 10 arenas in the world based on box office sales and attendance figures for live
entertainment.
Festivals held in Duluth include the Duluth Fall Festival (including a parade, carnival,
entertainment and road race) held the last weekend in September, BeerFest Duluth slated for
the first Saturday in June and Halloween on the Green (including trick or treating, a costume
contest, a kids zone, hay rides, entertainment and a car show) the last Saturday in October.
In April, the PGA Champions Tour will return to the Atlanta area for the first time since 2000
with the Greater Gwinnett Championship at TPC Sugarloaf in Duluth. This should result in a
near-term boost in leisure demand. Thereafter, leisure demand growth is anticipated to be
moderate due to a lack of any indication otherwise.
Overall Demand Growth: The segmented growth rates and overall lodging demand growth
anticipated for the subject lodging market area are as shown in the following table. The higher
rates of growth in 2015 reflect the opening of the subject which should draw a level of demand
to the market by its presence and in-house marketing efforts.
February 22, 2013
Page 33
ESTIMATED ANNUAL GROWTH RATES BY SEGMENT AND TOTAL DEMAND
DULUTH AREA
2012 THROUGH 2019
Commercial
Percent
Change Amount
Year
2012
2013
2014
2015
2016
2017
2018
2019
1
3.0%
2.5
3.6
2.0
2.0
2.0
2.0
106,4001
109,600
112,300
116,400
118,700
121,000
123,400
125,800
Group
Percent
Change Amount
3.0%
2.5
3.8
2.0
2.0
2.0
2.0
Leisure
Percent
Change Amount
41,8001
43,100
44,200
45,800
46,700
47,700
48,600
49,600
4.0%
2.0
3.4
2.0
1.5
1.5
1.5
39,6001
41,200
42,000
43,400
44,300
45,000
45,600
46,300
Total
Percent
Change Amount
3.2%
2.4
3.6
2.0
1.9
1.9
1.9
187,8001
193,900
198,500
205,600
209,700
213,700
217,600
221,700
Includes unaccommodated demand as discussed herein.
Estimated Relationship of Supply to Demand: Based on the foregoing discussion of growth
in demand for transient lodging facilities in the market area, together with our analysis of
existing and foreseeable supply characteristics, the following table indicates resulting market
occupancy levels estimated for the defined competitive supply from 2012 through 2019.
ESTIMATED RELATIONSHIP OF SUPPLY TO DEMAND
DULUTH AREA
2012 THROUGH 2019
Year
2012
2013
2014
2015
2016
2017
2018
2019
Estimated
Rooms Supply
Daily
Annual
7161
716
716
8162
816
816
816
816
261,340
261,340
261,340
297,840
297,840
297,840
297,840
297,840
Estimated Annual
Demand in Room-Nights
TotalB
Accommodated
187,800
193,900
198,500
205,600
209,700
213,700
217,600
221,700
175,800
181,400
185,800
199,100
203,000
206,800
210,600
214,500
Estimated
Market Area
OccupancyC
67%
69
71
67
68
69
71
72
A
Includes unaccommodated demand which, due to capacity constraints, is turned away from
the market.
C
Based on estimated levels of accommodated demand in the market area. Rounded to the
nearest whole percentage point.
1
Existing competitive supply.
2
First full year of operation for the subject 100-unit select-service hotel.
February 22, 2013
Page 34
ESTIMATED LEVELS OF UTILIZATION
Projected levels of occupancy and average daily rate for the subject hotel are discussed in
detail in this section. The bases of the estimates were determined through the evaluation of
the subject property’s competitive position, future supply and demand, and fair share
penetration rates, which are also presented.
Estimated Occupancy and Market Segmentation: Prospective levels of utilization for the
subject hotel have been analyzed for its first five full years of operation, 2015 through 2019.
Our quantitative analysis anticipated the hotel’s ability to capture future market area demand
in terms of its “fair share” percentage of the competitive room supply. Fair market share is
based on the ratio of the hotel’s available guest rooms to the total market supply.
As discussed previously, there are 716 rooms in the competitive market. This number will
increase to 816 in 2015 following the opening of the subject 100-unit hotel. Accordingly, the
subject‘s fair market share will be 12.25 percent (100 ÷ 716). This fair market share is
expected to remain constant through 2019 based on our assumption no other competitive
supply additions will occur. The existing competitive properties’ estimated 2012 penetration
as a percentage of fair market share and market capture percentage are depicted by the
following graphs.
The proposed subject is anticipated to achieve a market penetration levels approximating its
fair market share in all three demand segments. Its overall penetration is projected to range
between 88 and 100 percent of fair market share during the period analyzed. These
projections are based on the following factors:
February 22, 2013
Page 35
R
The recommended brands are highly appealing to both business and leisure
travelers.
R
The Hilton HHonors and Marriott Rewards frequent traveler programs are
among the most popular. This factor should render the subject appealing to
commercial and leisure guests who participate in such programs. Should a
Hilton brand be selected, however, this benefit may be mitigated to some extent
by the presence of three other Hilton properties in the competitive set.
R
The subject is unlikely to perform as well from an occupancy standpoint as the
three Sugarloaf Parkway competitors which offer proximity to I-85, Gwinnett
Center and numerous office parks.
R
The subject will offer a unique setting within walking distance of an array of
service amenities including numerous restaurants and the Red Clay Theatre.
This should help mitigate the locational disadvantages noted above and render
it popular with visitors to residents in surrounding neighborhoods.
R
The subject will be well located to capture wedding and other social event
groups using the Duluth Festival Center or the Payne-Corley House as their
venue. Likewise, it will be ideally suited to capture any demand generated by
the festivals held in downtown Duluth.
R
While further removed from Gwinnett Center than the Sugarloaf Parkway
properties, the subject will be close enough to garner some demand therefrom.
R
The subject will be the second smallest hotel in the competitive set. This should
enable it to more easily maintain occupancy levels during non-peak periods.
R
A representative of AGCO expressed an interest in having a property proximate
to their headquarters. As previously noted, the company generates some 2,000
room-nights of demand annually. This includes both individual visitors and
training groups.
Based on the foregoing considerations and assuming competent management, the penetration
rates by segment and the resulting estimated occupancy and corresponding room-nights for
the subject were projected as shown on the following page. The stabilized occupancy
represents a long-term average. Year-to-year fluctuations can be expected in actuality, and
the property may in fact achieve occupancies and/or rates (as discussed below) higher than
those depicted here during the first five years of our analysis.
ESTIMATED MARKET PENETRATION, OCCUPANCY AND MARKET SEGMENTATION
DULUTH, GEORGIA
2015
2016
2017
2018
2019
Market Area Accommodated Demand
111,400
113,600
115,900
118,100
120,500
Subject's Capture Percentage
10.56%
11.87%
12.12%
11.86%
11.60%
Room-Nights Captured
11,800
13,500
14,000
14,000
14,000
86%
97%
99%
97%
95%
44,700
45,600
46,500
47,400
48,400
10.96%
11.96%
12.21%
12.04%
11.83%
4,900
5,500
5,700
5,700
5,700
89%
98%
100%
98%
97%
42,900
43,700
44,400
45,000
45,700
10.93%
12.08%
12.38%
12.19%
11.96%
4,700
5,300
5,500
5,500
5,500
89%
99%
101%
99%
98%
199,100
203,000
206,800
210,600
214,500
10.73%
11.93%
12.20%
11.97%
11.73%
21,400
24,200
25,200
25,200
25,200
88%
97%
100%
98%
96%
55.1%
22.9%
22.0%
100.0%
55.8%
22.7%
21.9%
100.0%
55.6%
22.6%
21.8%
100.0%
55.6%
22.6%
21.8%
100.0%
55.6%
22.6%
21.8%
100.0%
59%
66%
69%
69%
69%
Commercial
Penetration as a Percentage of Fair Market Share
Group
Leisure
Total
Market Segmentation
Commercial
Group
Leisure
Total
Projected Occupancy
February 22, 2013
Page 37
Estimated Average Daily Rate: The estimates of future average daily rates for the proposed
Hampton Inn & Suites are based on the following factors:
R
The competitive advantages and disadvantages outlined previously;
R
Anticipated rate structure relative to the competitive lodging supply; and
R
Estimated economic inflation of 3.0 percent per annum.
Average daily rates for each of the competitive properties in 2012 were as follows:
ESTIMATED 2012 AVERAGE DAILY RATES
DULUTH AREA
Property
Average
Daily Rate
Hampton Inn Atlanta-Lawrenceville-I-85-Sugarloaf
Hilton Garden Inn Atlanta NE/Gwinnett Sugarloaf
Hyatt Place Atlanta/Duluth/Johns Creek
Hilton Garden Inn Atlanta North/Johns Creek
Holiday Inn Express Hotel & Suites Atlanta-Johns Creek
$100-$104
105-109
85-89
95-99
105-109
85-89
Market Average
$97.76
Considering the subject’s pioneering location, it may need to offer rates lower than its brand
peers in order to fully penetrate the market. Nonetheless, a strong brand, small size and
unique setting should enable it to achieve an ADR approximating the market average. Thus,
assuming competent management, the subject property’s ADR has been projected as depicted
in the following table. The lower rates in 2015 and 2016 reflect discounting to induce trial.
February 22, 2013
Page 38
ESTIMATED AVERAGE DAILY RATE
2015 THROUGH 2019
Year
Constant
2012 Dollars
2015
2016
2017
2018
2019
$ 96.00
98.00
100.00
100.00
100.00
1
Inflated
Dollars1
$105.00
110.25
116.00
119.50
123.00
Inflated annually at 3.0 percent and rounded to the nearest $0.25. Inflation
rates were based on the results of recent investor surveys and forecasts
by the U.S. Congressional Budget Office.
The foregoing projections of occupancy and ADR reflect the performance of the hotel on any
of the four sites being considered. In other words, these levels could be achieved on the least
desirable site. It is important to note, however, that the projections could differ depending upon
the site selected. As noted, it is our belief that development of The Block is critical to the
subject property’s viability. Accordingly, immediate proximity to restaurants, retail and
entertainment options could enhance the proposed property’s performance.
FINANCIAL PROJECTIONS
Bases of Financial Projections: Estimates of cash flow before debt service and income
taxes have been prepared for the property’s first five years of operation, 2015 through 2019.
All projections and calculations were based on an analysis of the proposed facilities, operating
data for comparable hotels, the experience of the consultants and industry statistics for similar
type properties.
In preparing the financial projections, stabilized year amounts were projected first on the bases
presented in the following table. The fixed and variable components of each line item were
then estimated and the projections for the years prior to stabilization were prepared. The fixed
and variable components presented in the table were based on industry standards and the
consultants’ experience.
February 22, 2013
Page 39
BASES OF PROJECTIONS AND FIXED AND VARIABLE COMPONENT PERCENTAGES
Line Item
Basis
Rentals & Other Income (Net)
Rooms Payroll
Rooms Other Expense
Administrative & General
Management Fees
Franchise Fees
Marketing
Utility Costs
Property Operation & Maintenance
Property Taxes
Insurance
Replacement Reserve
$1.00/occupied room
$16.50/occupied room
$9.00/occupied room
$2,300/available room
4.0% of total revenues
10.0% of guest room revenues
$900/available room
$4.75/occupied room
$1,200/available room
$111,000 annually
$300/available room
4.0% of total revenues
Fixed
5%
70
35
75
0
0
75
65
75
100
100
0
Variable
95%
30
65
25
100
100
25
35
25
0
0
100
Each line item was evaluated on the most appropriate basis for that particular revenue or
expense. For example, rooms department payroll was projected on a "per occupied room"
basis versus a percentage basis since increases in average daily rate do not result in
corresponding increases in payroll. The following notes explain the basis and assumptions
used in each line item of the financial projections which, unless otherwise noted, were prepared
based on the above listed factors.
Prospective revenues and expenses were first prepared and expressed in constant 2012
dollars. These amounts were then inflated at 3.0 percent annually and rounded to the nearest
thousand dollars. The 3.0 percent inflation rate was selected based upon recent investor
surveys and forecasts by the U.S. Congressional Budget Office. Statements were then
prepared in inflated dollars (Exhibit I). If higher or lower inflation rates are experienced, these
statements would thus be affected and a revision would be appropriate.
All account classifications generally conform to the definitions prescribed by the American
Hotel and Motel Association in the Uniform System of Accounts for the Lodging Industry. All
percentage relationships presented in the following pages were computed on the basis of the
financial projections expressed in 2012 dollars. All dollar amounts are expressed in 2012
dollars unless otherwise noted.
Revenues:
Room revenue is a factor of occupancy and average daily rate, both of which are driven by
the competitive market environment, as discussed in the Estimated Levels of Utilization section
of this report. The projected levels of occupancy, average daily rates and total annual guest
room sales are depicted in the financial analyses presented as Exhibit I.
February 22, 2013
Page 40
Rentals and other income is usually presented net of expenses and includes miscellaneous
items such as vending machines, newspapers, postcards, etc.
It also includes
telecommunications income and expenses. Rentals and other income has been projected to
stabilize at $1.00 per occupied room.
Based on the foregoing, total revenues are projected at approximately $97.00 per occupied
room in year one, stabilizing at $101.00 per room.
Departmental Expenses:
Rooms payroll includes regular pay, overtime pay, vacation pay, severance pay, incentive
pay, holiday pay and bonuses for employees of the rooms department. Employee benefits
such as payroll taxes, payroll-related insurance expense, pension and other related expenses
are also included in rooms payroll. Specifically, rooms department personnel include the
following as appropriate:
Rooms division manager
Front office:
Front office manager
Room clerks
Night clerks
Housekeeping:
Housekeeper and assistants
Security officers
Rooms payroll has been projected to stabilize at $16.50 per occupied room.
Rooms other expenses include commissions, contract cleaning, guest transportation, laundry/
dry cleaning, linen, operating supplies, reservations, uniforms and miscellaneous other
expenses of the rooms department. Complimentary services such as breakfast or cocktails
are also included here. Rooms other expenses are estimated to stabilize at $9.00 per
occupied room.
Total rooms department expenses are projected to stabilize at $25.50 per occupied room.
Undistributed Operating Expenses:
Administrative and general expenses (A&G) tend to be a "catch-all" for items not easily
classified. In theory, these expenses should benefit the entire property. Salaries and wages
are a significant component of A&G and include the general manager, resident manager,
manager's office personnel, night auditors, receiving clerks, timekeepers and personnel in the
accounting, human resources, data processing and transportation departments. Other typical
expenses classified as A&G include the following:
February 22, 2013
Page 41
Credit card commissions
Data processing services
Dues and subscriptions
Human resources (training, relocating, etc.)
Operating supplies
Postage and delivery charges
Contributions
Professional fees
Provision for doubtful accounts
Travel and entertainment
Cash overages and shortages
Other expenses not classified elsewhere
Administrative and general expenses are projected to stabilize at $2,300 per available room.
Management fees reflect the cost of management services and supervision of the property.
Competition for management contracts has increased in recent years. As a result, fees
charged have declined. Management fees usually include both base and incentive
components with base fees calculated on total revenue and the incentive fee calculated as a
percentage of profit. Recent trends have been towards lower base fees and greater incentive
fees. Regardless of the fee structure employed, the total fees paid typically range between two
and five percent of total revenues. Management fees are 100 percent variable and have been
projected at 4.0 percent of total revenues.
Franchise fees include royalties, national marketing assessments and frequent traveler
program fees paid to the franchisor. Chain fees are 100 percent variable and have been
projected at 10.0 percent of guest room revenues based on the typical fees for a select service
franchise.
Marketing expenses consists of four categories:
sales, reservations, advertising/
merchandising, and fees/commissions. With respect to sales and reservations, wages and
benefits are a significant expense. Marketing expense varies widely depending upon property
type. In a convention-oriented hotel, sales salaries may contribute the bulk of expenditures.
These expenses have been projected to stabilize at $900 per available room.
Utility costs include electricity, gas, oil, coal, steam, water and sewage. Particular attention
is given to local utility charges when projecting this item. The fixed portion of utility costs is
based upon the amount of public space in a property. Hotels with extensive meeting space
and numerous food and beverage outlets tend to have a higher fixed percentage than rooms
only properties. This line item has been projected to stabilize at $4.75 per occupied room.
Property operation and maintenance expenses include wages and benefits for maintenance
personnel, building supplies, electrical and mechanical equipment, engineering supplies,
grounds and landscaping, operating supplies, waste removal, swimming pool maintenance and
uniforms. Also included is the cost of materials and labor relating to painting, decorating and
repairing FF&E. The replacement of FF&E is not included. Property operations and
maintenance expenses are projected to stabilize at $1,200 per available room. Since the hotel
February 22, 2013
Page 42
is new at the beginning of the projection period, these expenses are expected to be lower in
the first two years of operation.
Fixed Charges:
Property taxes are estimated to be approximately $111,000 per available room throughout the
period analyzed based on the assessment of comparable Gwinnett County hotels.
Insurance includes the cost of insuring the buildings and contents against damage or
destruction by fire, weather, or other causes as well as general liability insurance. Insurance
has been estimated at $300 per available room.
Reserve for replacement of fixed assets represents an amount set aside each year in
anticipation of needed capital improvements. This line item is almost always calculated as a
percentage of total revenue and is usually set forth in management contracts. Most properties
reserve anywhere from three to five percent of revenues. The amount is often lower in the
early years of operation, increasing thereafter as the property ages. Reserve for replacement
of fixed assets has been projected at 2.0 percent of total revenues in the first year of the
projection period, 3.0 percent in the second year and 4.0 percent thereafter based on industry
norms.
Investment Summary: Based on the foregoing, we have prepared an investment summary
as presented as Exhibit II reflecting hypothetical return levels given certain investment
parameters. The following assumptions were employed:
INVESTMENT SUMMARY ASSUMPTIONS
Assumption
Project costs
Interest rate
Terminal capitalization rate
Sales costs
Amortization period (monthly payments)
Debt ratio
Amount
$11,500,000
6.00 percent per annum
9.25 percent
2.0 percent
20 years
65 percent
As depicted by the investment summary, the project would generate an unleveraged internal
rate of return (IRR) of 7.61 percent and a leveraged IRR of 9.76 percent. These return levels
are not sufficient to attract a qualified developer. Based on our most recent investor survey,
and our observation of other development projects, an unleveraged IRR of 10.00 to 12.00
percent and a leveraged IRR of 15.00 to 18.00 percent would likely be required.
February 22, 2013
Page 43
We have also prepared a discounted cash flow analysis (Exhibit III). As depicted, the projected
cash flows support development costs of $9,000,000, or $90,000 per room. Total development
costs for a select-service property, including land, are likely to approximate $115,000 per key.
Obviously, these returns will vary depending upon the actual project costs and debt terms.
Returns of this magnitude are not sufficient to meet the yield requirements of most hotel
investors. Thus it will be necessary to provide economic incentives to bridge the gap.
Incentives could take the form tax abatements, tax increment financing, direct investment in
project infrastructure (e.g. parking), free or bargain priced land, etc. The precise value of the
incentives will vary depending upon the project costs and deal structure. Nonetheless, it can
be assumed that the benefits would materially alter investment returns.
TERMS AND CONDITIONS
The projections of occupancy, average daily rate and cash flow presented in this report are
based on estimates, assumptions and other information developed from research of the market
as of February 22, 2013, knowledge of the industry and other factors including certain
information provided by you. Some assumptions inevitably will not materialize, and
unanticipated events and circumstances may occur; therefore, actual results achieved during
the period covered by our analysis may vary from the estimates, and these variations may be
material. Further, the performance estimates assume the hotel will be professionally and
effectively managed.
PKF Consulting USA, LLC will make no representations or warranty as to the accuracy or
completeness of the information contained within this report, including any estimates, and shall
have no liability for any representations (expressed or implied) contained herein. This report
is intended for your internal information only. Otherwise, neither our report, nor any reference
to our firm, may be included or quoted in any offering circular or registration statement,
prospectus, sales brochure or appraisal.
*******
February 22, 2013
Page 44
We appreciate your consideration of PKF Consulting USA for professional services. Please
contact us should you have any questions regarding this report.
Sincerely,
PKF Consulting USA, LLC
EXHIBIT I
DULUTH, GEORGIA
PROJECTED CASH FLOW FROM OPERATIONS BEFORE
DEBT SERVICE AND INCOME TAXES
EXPRESSED IN THOUSANDS OF INFLATED DOLLARS
2015 THROUGH 2019
2015
Amount
Percent
Revenues:
Rooms
Rentals and Other Income (Net)
2016
Amount
Percent
2017
Amount
Percent
2018
Amount
Percent
2019
Amount
Percent
$2,261
24
99.0%
1.0
$2,656
27
99.0%
1.0
$2,921
29
99.0%
1.0
$3,010
30
99.0%
1.0
$3,098
31
99.0%
1.0
2,285
100.0
2,683
100.0
2,951
100.0
3,040
100.0
3,129
100.0
Departmental Expenses:
Rooms
659
28.8
710
26.4
745
25.2
767
25.2
790
25.2
Gross Operating Income
1,626
71.2
1,974
73.6
2,206
74.8
2,273
74.8
2,339
74.8
240
91
226
94
124
105
10.5
4.0
9.9
4.1
5.4
4.6
255
107
266
100
133
122
9.5
4.0
9.9
3.7
4.9
4.5
267
118
292
104
139
139
9.0
4.0
9.9
3.5
4.7
4.7
275
122
301
107
143
143
9.0
4.0
9.9
3.5
4.7
4.7
283
125
310
111
147
148
9.0
4.0
9.9
3.5
4.7
4.7
881
38.5
982
36.6
1,059
35.9
1,091
35.9
1,123
35.9
Cash Flow From Operations Before
Fixed Charges
746
32.6
992
37.0
1,147
38.9
1,182
38.9
1,216
38.9
Fixed Charges:
Property Taxes
Insurance
122
33
5.3
1.4
125
34
4.7
1.3
129
35
4.4
1.2
133
36
4.4
1.2
137
37
4.4
1.2
154
6.8
159
5.9
164
5.6
169
5.6
174
5.6
591
25.9
833
31.0
983
33.3
1,013
33.3
1,042
33.3
46
2.0
80
3.0
118
4.0
122
4.0
125
4.0
Undistributed Operating Expenses:
Administrative and General
Management Fees
Franchise Fees
Marketing
Utility Costs
Property Operation and Maintenance
Reserve For Replacement of
Fixed Assets
Reserve For Replacement of Fixed Assets
Debt Service and Income Taxes
Statistics:
Number of Rooms
Percentage of Occupancy
Average Daily Rate
$546
23.9%
100
$752
100
59%
$105.00
28.0%
$865
100
66%
$110.25
29.3%
$892
100
69%
$116.00
Notes:
- Percentages of departmental expenses are to departmental revenue; all other percentages are to total revenue.
- Totals may not add due to rounding.
29.3%
$917
100
69%
$119.50
29.3%
69%
$123.00
EXHIBIT I-A
DULUTH, GEORGIA
PROJECTED ROOMS DEPARTMENTAL INCOME
EXPRESSED IN THOUSANDS OF INFLATED DOLLARS
2015 THROUGH 2019
2015
Amount
Percent
Rooms Department:
Room Revenue
Payroll and Related Expenses
Other Expenses
Departmental Income
2016
Amount
Percent
2017
Amount
Percent
2018
Amount
Percent
2019
Amount
Percent
$2,261
434
224
100.0%
19.2
9.9
$2,656
462
248
100.0%
17.4
9.3
$2,921
482
263
100.0%
16.5
9.0
$3,010
496
271
100.0%
16.5
9.0
$3,098
511
279
100.0%
16.5
9.0
$1,602
70.9%
$1,946
73.3%
$2,177
74.5%
$2,243
74.5%
$2,308
74.5%
Notes:
- Percentages of departmental expenses are to departmental revenue.
- Totals may not add due to rounding.
EXHIBIT II
INVESTMENT SUMMARY
DULUTH, GEORGIA
Assumptions:
Loan Amortization Period (months):
Interest Rate (monthly):
Cost per Room:
Rooms:
Total Costs:
Equity Percent:
Debt Percent:
240
0.50%
$115,000
100
$11,500,000
35.00%
65.00%
Equity Amount:
Debt Amount:
Monthly Payment:
Terminal Capitalization Rate:
Sales Costs:
$4,025,000
$7,475,000
$53,553
9.25%
2.00%
Cash Flow Before Debt Service
One
$546,000
Two
$752,000
Three
$865,000
Four
$892,000
Five
$917,000
Six
$945,000
Seven
$973,000
Eight
Nine
$1,004,000 $1,033,000
Annual Debt Service (monthly amortization)
642,639
642,639
642,639
642,639
642,639
642,639
642,639
642,639
642,639
642,639
Cash Flow After Debt Service
-96,639
109,361
222,361
249,361
274,361
302,361
330,361
361,361
390,361
418,361
Cash On Cash Return
-2.40%
2.72%
5.52%
6.20%
6.82%
7.51%
8.21%
8.98%
9.70%
10.39%
Unleveraged Internal Rate Of Return
n/a
n/a
0.35%
2.89%
4.47%
5.52%
6.30%
6.85%
7.27%
7.61%
Leveraged Internal Rate Of Return
n/a
n/a
n/a
n/a
1.97%
4.90%
6.89%
8.19%
9.08%
9.76%
Debt Service Coverage
0.85
1.17
1.35
1.39
1.43
1.47
1.51
1.56
1.61
1.65
Note: The foregoing is based upon market, financial and costs assumptions that may differ materially from actual circumstances. Accordingly, these projections should
not be construed as results which will actually be achieved.
Ten
$1,061,000
EXHIBIT III
DISCOUNTED CASH FLOW ANALYSIS
DULUTH, GEORGIA
A) Present Value of Annual Cash Flows:
Year
Cash Flow
Available For
Debt Service and
Income Taxes
Present Value
Factor @
11.25%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
$546,000
752,000
865,000
892,000
917,000
945,000
973,000
1,004,000
1,033,000
1,061,000
0.8989
0.8080
0.7263
0.6528
0.5868
0.5275
0.4741
0.4262
0.3831
0.3443
Present Value
$491,000
608,000
628,000
582,000
538,000
498,000
461,000
428,000
396,000
365,000
4,995,000
B) Present Value of Reversion:
2025 cash flow of:
capitalized at
Less 2% sales costs
$1,092,000
9.25%
$11,805,000
236,000
Net reversionary value
11,569,000
X Present value factor
0.3443
Present Value of Reversion
Supported Development Costs
Rounded
Per Room
3,983,000
$8,978,000
$9,000,000
$90,000

Hotel Study

Transcription

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