by Scott Smith MAI, Hospitality Net

According to PKF Consulting USA, LLC’s (PKFC) 2013 edition of Caribbean Trends® in the Hotel Industry, the average Caribbean hotel that participated in the survey enjoyed a 10.9 percent increase in net operating income (NOI). This is the second year in a row that Caribbean hotels have experience a double-digit increase in NOI. This is the highest growth in profits that Caribbean hotels have seen since 2008.

While this continued profit growth is encouraging, the Caribbean is still not back to its pre-recession levels. Recovery in the Caribbean is slow moving, and lagging behind the recovery seen in the U.S. This is a mixed-message for a region whose economy depends primarily on the tourism industry.

Unique Operating Environment

The Caribbean hotel industry is made up of a disproportionately large number of resort properties, which creates the opportunity to earn profits from a variety services and amenities. Properties in the Caribbean Trends® sample reported the highest level of revenue growth (+6.4%) in other operated departments, meaning that visitors to the Caribbean are spending more money on extra amenities such as golf courses, casinos, and spas. This is in contrast to U.S. resorts where operators struggled to generate revenue beyond the rental of guest rooms.

Unfortunately, Caribbean hotels have higher operating costs than comparable U.S. properties. For example, in 2012 the average Caribbean hotel incurred 20.1 percent greater food and beverage expenses than the average U.S. hotel. This is attributable to the fact that importing the necessary food, equipment, and supplies to the region is very costly. Utilities continue to be a large expense in the Caribbean as well. Many Caribbean nations lack the infrastructure to produce cost-efficient energy, and this is clearly reflected in the report. Utilities grew by 5.0 percent from last year, and are 164.8 percent higher than the cost of utilities in comparable U.S. properties.

Looking Forward

The overall outlook in the Caribbean is a positive one with occupancy, ADR, and profits all increasing. While growth is welcome news, hotels in the region still lag pre-recession levels of performance. There are also issues, such as airlift, rising expenses, and increased competition from newly constructed properties. The challenges that Caribbean hoteliers will face in the future are multi-faceted. If handled properly, all participants in the region should enjoy continued healthy increases in performance. If not, the recovery could be extended.

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PKF survey finds optimism in hotel investments

June 18, 2013, Atlanta, Ga. – Rising profits, limited supply growth and improved access to capital make 2013 and 2014 an excellent time to invest in the U.S. lodging industry. This is the sentiment expressed by participants in the recently released 2013 edition of PKF Consulting USA, LLC’s (PKFC) Hospitality Investment Survey.

“It has been a while since we have seen such a convergence of positive operating fundamentals and a favorable, yet practical, financing environment,” said Scott Smith, MAI, vice president in the Atlanta office of PKFC. “While opinions may vary among industry professionals regarding the cause for all the optimism, at PKFC we believe that several factors support our positive outlook for hotel real estate.”

Due to limited supply growth, revenue per available room (RevPAR) is forecast to grow between 6.0 to 7.0 percent in most major U.S. lodging markets.

Given the strong outlook for revenue growth, net operating income (NOI) is forecast to increase in excess of 10 percent through 2015.

Interest rates for hotel development and acquisition purposes remain at historically low levels, therefore the dividend yield from a hotel investment looks very attractive given the risk.

As special servicers and banks work-out their troubled lodging assets, fewer distressed properties remain to have their loans modified or sold.

Few quality hotels are available for sale causing interested parties to bid aggressively.

Conducted in the spring of 2013, the current edition of the Hospitality Investment Survey tracks changes in investment and financing criteria over the prior 12 months.

Investment Criteria

“One metric that continues to improve is capitalization rates. Lower interest rates, higher dividend expectations and investor confidence are driving capitalization rates lower,” Smith added. “With more equity and debt coming into the market, cash buyers with a pocket full of money are finding fewer deals to execute, thus pushing yields lower.” In 2013, the overall capitalization rate (OAR) decreased to 8.38 percent, a 35 basis point decline compared to the 2012 survey results and the lowest OAR recorded since the inception of the Hospitality Investment Survey.

This year’s survey also indicated that discount rates, or un-leveraged IRR’s, for hotels decreased 37 basis points to 11.05 percent. “This further demonstrates that a majority of investor sentiment is positive, and the hotel sector is not viewed as risky as it was just a few years ago. Investors now are willing to accept a lower return just to get in on the action,” Smith noted.

Despite the positive outlook for industry performance, many survey participants are anticipating a shorter holding period. These respondents fear increases in supply and potential upward pressure on interest rates.

Financing Criteria

In general, the sentiment of the survey indicates that financing, though not abundant, is becoming more available and affordable. “Many survey respondents, particularly investors active in the limited-service segment, indicated that new-construction financing is becoming more available in second-tier and tertiary markets,” Smith responded.

Interest rates fell in 2013 to 5.54 percent, a comparative year-over-year drop of 104 basis points. “This is by far the lowest interest rate PKFC has recorded since the mid 1990s. Several lenders stated that good sponsors with solid balance sheets are able to secure rates between 400 and 600 basis points above the one-month LIBOR rate,” Smith noted.

Debt service coverage ratios increased slightly, though they remain near 2007/2008 levels. Loan-to-value ratios (LTV) experienced minimal change compared to 2012. At 64.63 percent, LTVs are below the historical Hospitality Investment Survey long-run average of 66.0 percent.

Summary

While most investment and financing criteria remained relatively unchanged over the past 12 months, two of the most important criteria continue to improve: access to capital and interest rates.

Investors and lenders surveyed continue to be bullish regarding the next few years, and due to the lack of high-quality assets being marketed for sale, PKFC expects the transaction activity of well-branded assets in second-tier and tertiary markets to increase over the next 12 to 18 months.

“As real estate cycles go, the positive RevPAR and NOI expectations for the lodging sector during the near term will allow property values to continue to grow. For industry participants that believe increasing NOI, limited supply growth and improved access to capital is a reason to invest in hotels, then now is their time,” Smith concluded.

The 2013 Hospitality Investment Survey presents the results from surveys of active hotel owners, equity investors, and debt providers concerning the criteria used for hotel transactions that have, or will occur during 2012 and 2013. The six-page report contains tables that show the current and historical averages of a dozen critical investment measurements, including capitalization rates and mortgage terms by property type.

The 2013 Hospitality Investment Survey is available for purchase at www.pkfc.com/store, or by calling (855) 223-1200.

ABOUT PKF CONSULTING USA, LLC

Headquartered in San Francisco, PKF Consulting USA, LLC (www.pkfc.com) is an advisory and real estate firm specializing in the hospitality industry. PKF Consulting USA is owned by FirstService Corporation (FSRV) and is a subsidiary of Colliers International. The firm operates two companies: PKF Consulting USA, LLC and PKF Hospitality Research, LLC. The firm has offices in New York, Boston, Indianapolis, Chicago, Philadelphia, Washington DC, Atlanta, Jacksonville, Orlando/Tampa, Dallas/Houston, Los Angeles, Bozeman, and San Francisco.