CORNELL PETER AND STEPHANIE NOLAN SCHOOL OF HOTEL ADMINISTRATION CENTER FOR HOSPITALITY RESEARCH CENTER FOR REAL ESTATE AND FINANCE Cornell Hotel Indices: First Quarter 2023 Mixed Signals Portend Greater Uncertainty Ahead by Crocker H. Liu, Adam D. Nowak, and Robert M. White, Jr. EXECUTIVE SUMMARY Although hotels showed continued positive price momentum in all regions from the prior year (year over year), prices faltered in some regions from the prior quarter, especially in the Mid-Atlantic and to a lesser extent in the South Atlantic regions. Hotels in non-gateway cities continued to outper- form hotels in gateway cities, albeit the gain was relatively small compared to prior periods. The transaction volume for both large hotels and small hotels declined again this quarter as well as relative to the previous year. Based on our moving averages, a buying opportunity currently exists for both large and small hotels, although it might pay to continue to keep the gunpowder dry. Not surprisingly, the volume of hotel loan originations fell, while the interest rate on hotel loans continued to rise. Although lenders have reduced the amount of additional compensation they require to make hotel loans relative to other commercial real estate loans (i.e., hotel risk assessment), Wall Street’s valuation of REITs reveals an expectation of higher relative risk for hotels. Since the borrowing costs continue to exceed the return on hotels, economic profit and shareholder value added remain negative, indicating that anticipated future price gains are the primary driver of hotel investment performance. Looking towards the next quarter, our leading indicators of hotel price performance indicate that we should expect price momentum to moderate or decline for both large and small hotels. CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 1 ABOUT THE AUTHORS Crocker H. Liu is a professor of real estate at the School of Hotel Administration at Cornell where he is Robert A. Beck Professor of Hospitality Financial Management. He previously taught at New York University’s Stern School of Business (1988-2006) and at Arizona State University’s W.P. Carey School of Business (2006-2009) where he held the McCord Chair. His research interests are focused on issues in real estate finance, particularly topics related to agency, corporate gover- nance, organizational forms, market efficiency and valuation. Liu’s research has been published in the Review of Financial Studies, Journal of Financial Economics, Journal of Business, Journal of Financial and Quanti- tative Analysis, Journal of Law and Economics, Journal of Financial Markets, Journal of Corporate Finance, Review of Finance, Real Estate Economics, Journal of Urban Economics, Regional Science and Urban Economics, Journal of Real Estate Research and the Journal of Real Estate Finance and Economics. He is the former co-editor of Real Estate Economics, the leading real estate academic journal. He continues to be on the editorial board of Real Estate Economics. He is also an associate editor of Financial Review. He previously served on the editorial boards of the Journal of Real Estate Finance and Economics, the Journal of Property Research, and the Journal of Real Estate Finance. He is a past president of AREUEA (2019), the leading real estate academic organization. Professor Liu earned his BBA in real estate and finance from the University of Hawaii, an M.S. in real estate from Wisconsin under Dr. James A. Graaskamp, and a Ph.D. in finance and real estate from the Universi- ty of Texas under Dr. Vijay S. Bawa. Adam D. Nowak is an associate professor of economics at West Virginia University. He earned degrees in mathematics and economics at Indiana University–Bloomington in 2006 and a degree in near-east languages and cultures that same year. He received a Ph.D. from Arizona State University. He was the research analyst in charge of constructing residential and commercial real estate indices for the Center for Real Estate Theory and Practice at Arizona State University. Nowak’s research has been published in the Review of Financial Studies, American Economic Review: Insights, Economic Inquiry, Journal of Urban Economics, Regional Science and Urban Economics, Journal of Applied Econometrics, Real Estate Economics and the Journal of Real Estate Research. Robert M. White, Jr., CRE, is the founder and former president of Real Capital Analytics, Inc., an international research firm that publishes the Capital Trends Monthly. On August 2, 2021, he sold Real Capital Analytics to MSCI. MSCI-Real Capital Analytics provides real time data concerning the capital markets for commercial real estate and the values of commercial properties. Mr. White is the 2014 recipient of the James D. Landauer/John R. White Award given by The Counselors of Real Estate. In addition, he was named one of National Real Estate Investor Magazine’s “Ten to Watch” in 2005, Institutional Investor’s “20 Rising Stars of Real Estate” in 2006, and Real Estate Fo- rum’s “10 CEOs to Watch” in 2007. Previously, Mr. White spent 14 years in the real estate investment banking and brokerage industry and has orchestrated billions of commercial sales, acquisitions, and recapitalizations. He was formerly a managing director and principal of Granite Partners LLC and spent nine years with Eastdil Realty in New York and London. Mr. White is a Counselor of Real Estate, a Fellow of the Royal Institution of Chartered Surveyors and a Fellow of the Homer Hoyt Institute. He serves on the board of directors for the Pension Real Estate Association and the advisory board for the Real Estate Research Institution. He is also a member of numerous industry organizations and a supporter of academic studies. A graduate of the McIntire School of Commerce at the University of Virginia, Mr. White’s is a noted authority on the real estate capital markets whose research has been published in the Journal of Real Estate Finance and Economics. He also has credits in The Wall Street Journal, Barron’s, The Economist, Forbes, The New York Times, and the Financial Times, among others. Acknowledgments We wish to thank Glenn Withiam for copy editing this paper. Disclaimer The Cornell hotel indices produced by The Center for Real Estate and Finance at the School of Hotel Administration at Cornell Univer- sity are provided as a free service to academics and practitioners on an as-is, best-effort basis with no warranties or claims regarding its usefulness or implications. The indices are not audited, and they are not necessarily free of errors or omissions although every effort has been made to minimize these. The reported indices for any quarter of any year should be considered preliminary and subject to revision. This is Volume 12, Issue 1, of the Hotel Indices report series. 2 The Center for Real Estate and Finance • Cornell University CORNELL CENTER FOR REAL ESTATE AND FINANCE Cornell Hotel Indices: First Quarter 2023 Mixed Signals Portend Greater Uncertainty Ahead by Crocker H. Liu, Adam D. Nowak, and Robert M. White, Jr. Analysis of Indices through Q1, 2023 Hotel prices in all regions continued to rise year over year, but prices faltered in some regions from a quarterly perspective. Exhibits 1a through 1d show that all regions exhibited a positive year-over-year price increase, continuing the trend in the prior year-over-year period. Quarter over quarter, however, a different story emerges, with the Mid-Atlantic region experiencing the largest price decline and hotel prices in the South Atlantic region also falling. In contrast, hotel prices in the Midwest and West- South-Central regions were relatively flat. The largest price gains occurred in the Mountain region followed by the New England and Pacific regions on a quarter-over-quarter basis. exhibit 1a Time series hotel performance for seven regions Sources: Cornell Center for Real Estate and Finance, CoStar, Real Capital Analytics CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 3 exhibit 1b Cross-section hotel performance for seven regions 0.7% QoQ 5.9% QoQ 7.1% YoY 22.6% YoY 2.1% QoQ 8.5% YoY -9.0% QoQ 14.5% QoQ 1.1% YoY 36.2% YoY -1.9% QoQ 11.7% YoY -0.2% QoQ 11.0% YoY Sources: Cornell Center for Real Estate and Finance, CoStar, Real Capital Analytics exhibit 1c In terms of standardized unexpected prices (Z-Scores), Changes in regional price indices, hotel prices reached a new year over year and quarter over quarter statistical high in the Midwest and New England regions, while prices continued to remain above their statistical high in the Mountain and West-South-Central regions.1 However, hotel prices trend- ed downwards below their statistical high confidence band in both the Pacific and South Atlantic regions this quarter. Hotel prices in the Standardized Unexpected Prices (Z-Scores) Mid-Atlantic region continue to revert downwards toward their (standardized) average price. 1 A new statistical high is achieved at z = 1.645 while a new statistical low occurs at z = -1.645. 4 The Center for Real Estate and Finance • Cornell University exhibit 1d Regional comparison of standardized unexpected prices (SUP), with confidence boundaries Midwest Middle Atlantic Mountain New England Pacific South Atlantic West South Central Note: Regions are as follows: Middle Atlantic region: New Jersey, New York, and Pennsylvania; New England region: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont; South Atlantic region: Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and West Virginia; East South Central region: Alabama, Kentucky, Mississippi, Tennes- see; East North Central region: Illinois, Indiana, Michigan, Ohio, and Wisconsin; West South Central region: Arkansas, Louisiana, Oklaho- ma, and Texas; West North Central region: Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota; Mountain region: Arizona, Colorado, Idaho, Montana, New Mexico, Nevada, Utah, and Wyoming; Pacific: Alaska, California, Hawaii, Oregon, and Washington. CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 5 exhibit 2 Hotel performance for gateway cities versus non-gateway cities Gateway cities are Boston, Chicago, Honolulu, Los Angeles, Miami, New York, San Francisco, and Washington, DC. Sources: Cornell Center for Real Estate and Finance, CoStar, Real Capital Analytics Hotels in non-gateway cities continued to outperform in non-gateway cities rose 1 percent this quarter compared gateway cities. Continuing the trend in the prior three to a 2-percent decline in the price of hotels in gateway periods, hotels in non-gateway cities outperformed those in cities, as shown in Exhibit 2. Year over year, hotel prices in gateway cities, albeit the gain was relatively smaller com- non-gateway cities rose 13 percent compared to a 1-percent pared to prior periods. More specifically, the price of hotels hotel price gain in gateway cities. Quarter over Quarter Gateway Cities Non-Gateway Cities Current Period (2023Q1) -2% 1% Prior Period (2022Q4) 2% 4% Year over Year Current Period 1% 13% (2023Q1/2022Q1) Prior Period 3% 19% (2022Q4/2021Q4) 6 The Center for Real Estate and Finance • Cornell University exhibit 3a Transaction volume (observed) and median sale price (1995–2003) CREF Hotel Indices • CHR Report • January 2022 • www.cref.cornell.edu • Vol. 22 No. 1 7 exhibit 3b Transaction volume (observed) and median sale price (continued, 2004–2012) 8 The Center for Real Estate and Finance • Cornell University exhibit 3c Transaction volume (observed) and median sale price (concluded, 2013–2023) Source: Cornell Center for Real Estate and Finance CREF Hotel Indices • CHR Report • January 2022 • www.cref.cornell.edu • Vol. 22 No. 1 9 exhibit 4 Median sale price and number of sales, large hotels (sale prices of $10 million or more) Sources: CoStar, Real Capital Analytics Full Sample Large Hotels Small Hotels Median No. of Median No. of Median No. of Price Sales Price Sales Price Sales 2023Q1 $5,000,000 348 $17,456,879 84 $3,585,000 264 Quarter over Quarter -12% -26% 7% -33% -10% -23% Year over Year -1% -21% -1% -29% 3% -18% Transaction volume declined again this quarter. The transaction volume fell 26 percent compared to 20-percent transaction volume on all hotel transactions (both large decrease in sales volume for gateway hotels this quarter. hotels and small hotels combined) continued to be weaker Despite the decline in transaction volume, median hotel whether measured on a quarter-over-quarter or year-over- prices increased this quarter for both large hotels and for year basis. 2 The number of smaller hotels traded declined hotels located in gateway cities. In contrast, small hotels, as 23 percent compared to a decline of 33 percent for larger well as hotels in non-gateway cities, experienced quar- hotels that transacted this quarter. Non-gateway hotel ter-over-quarter median price declines (-10% for small ho- 2 tels and -12% for non-gateway properties). However, only Please note that the number of transactions is limited to the sales that are included in the hedonic index. As such, it should not be construed necessarily as being representa- tive of the total market activity. 10 The Center for Real Estate and Finance • Cornell University exhibit 5 Median sale price and number of sales, small hotels (sale prices less than $10 million) Sources: CoStar, Real Capital Analytics Full Sample Gateway Hotels Non-Gateway Hotels Median No. of Sales Median No. of Sales Median No. of Sales Price Price Price 2023Q1 $5,000,000 348 $11,750,000 28 $4,850,000 320 Quarter over Quarter -12% -26% 26% -20% -12% -26% Year over Year -1% -21% -2% -33% -1% -19% the median price of small hotels rose on a year-over-year basis. Exhibit 3 reports the transaction volume and median price of large and small hotels, as well as hotels located in gateway and non-gateway cities. Exhibit 4 and Exhibit 5 show this year-over-year trend in the number of transac- tions for large hotels and small hotels. CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 11 exhibit 6 Hotel indices through 2022, quarter 3 Source: Cornell Center for Real Estate and Finance 12 The Center for Real Estate and Finance • Cornell University exhibit 7 Hedonic hotel indices for large and small hotel transactions Sources: Cornell Center for Real Estate and Finance, CoStar, Real Capital Analytics A buying opportunity exists for both large and small hotels based on moving averages. Small hotels continue to remain at a statistical high this quarter according to our standardized price metric. Exhibit 7 graphs the prices reported in Exhibit 6. The price of large hotels rose 2.2 per- cent compared to an almost imperceptible 0.6-percent gain for small hotels this quarter. CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 13 exhibit 8 Year-over-year change in large-hotel index with a moving average trendline Sources: Cornell Center for Real Estate and Finance, CoStar, Real Capital Analytics Sources: Cornell Center for Real Estate and Finance, CoStar, MSCI-Real Capital Analytics Sources: Cornell Center for Real Estate and Finance, CoStar, MSCI-Real Capital Analytics Exhibit 8 and Exhibit 9 show the historical year-over- and 5-year moving averages. Since the hedonic prices for year changes in large and small hotel indices. On a year- both large hotels and smaller hotels are both above their as- over-year basis, however, large hotels declined 2.2 percent, sociated 3-year and 5-year moving averages, this indicates compared to a 12.7-percent increase in the price of small a buy signal. To assess whether the price of a large or small hotels—continuing the trend in the last period. To gauge hotel has reached a new statistical high or low, we use the whether the prices of large and small hotels signal a buy statistical technique known as Z-scores to standardize pric- or sell, we compare the hedonic price relative to the 3-year es so that the average price is at zero (see Appendix, page 14 The Center for Real Estate and Finance • Cornell University exhibit 9 Year-over-year change in small-hotel index with a moving average trendline Sources: Cornell Center for Real Estate and Finance, CoStar, MSCI-Real Capital Analytics CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 15 exhibit 10 Moving average trendlines for large hotel index Sources: Cornell Center for Real Estate and Finance, CoStar, MSCI-Real Capital Analytics Hedonic Price Moving Average Standardized Unexpected Price (Z-Score) Large Hotels Price 3 Year 5 Year 3 Year 5 Year 2022Q3 163.50 2022Q4 165.88 2023Q1 169.48 165.46 166.07 0.52 0.49 Quarter over 2.2% Quarter Year over Year -2.2% Small Hotels Price 3 Year 5 Year 3 Year 5 Year 2022Q3 170.61 2022Q4 176.98 2023Q1 178.01 155.72 156.77 1.60 1.96* Quarter over 0.6% Quarter Year over Year 12.7% 16 The Center for Real Estate and Finance • Cornell University exhibit 11 Moving average trendlines for small hotel index Sources: Cornell Center for Real Estate and Finance, CoStar, MSCI-Real Capital Analytics 34). If prices rise above 1.645, this indicates a new statistical high, while a drop below -1.645 represents a new statistical low. Using this metric, the price of small hotels remains above its statistical high only in terms of using a 5-year mean and standard deviation to calculate standardized prices. Exhibit 12 and Exhibit 13 show standardized prices for large hotels and small hotels. The standardized price of large hotels continues to hover around its mean of zero, while the standardized price of small hotels has started to revert towards its mean of zero. CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 17 exhibit 12 Standardized unexpected price (SUP) for large hotel index Sources: Cornell Center for Real Estate and Finance, CoStar, MSCI-Real Capital Analytics exhibit 13 Standardized unexpected price (SUP) for small hotel index Sources: Cornell Center for Real Estate and Finance, CoStar, MSCI-Real Capital Analytics 18 The Center for Real Estate and Finance • Cornell University exhibit 14 Moving average trendline for repeat-sale hotel index Sources: Cornell Center for Real Estate and Finance, CoStar, MSCI-Real Capital Analytics Repeat Sale Price Moving Average Standardized Unexpected Price (Z-Score) Repeat Sale Hotels Price 3 Year 5 Year 3 Year 5 Year 2022Q3 227.29 2022Q4 228.17 2023Q1 235.01 203.30 194.49 1.56 2.12* Quarter over Quarter 3.0% Year over Year 12.2% Prices of frequently sold hotels remain above their like the case of small hotels, hotels that tend to sell moving averages, signaling a buy or hold. Prices of frequently (i.e., have repeat sales), rose 3 percent in repeat-sale hotels also remain above statistical highs, price this quarter as well as year over year (12.2%; based on a 5-year window. Since most hotels that sell see also Exhibit 16). As is the case with small hotels, frequently tend to be smaller hotels, it is not surprising that our repeat sale indicator continues to remain above CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 19 exhibit 15 Standardized unexpected price (SUP) for hotel repeat-sale index (full sample) Sources: Cornell Center for Real Estate and Finance; CoStar, Real Capital Analytics Sources: Cornell Center for Real Estate and Finance, CoStar, Real Capital Analytics both its short-term moving average (235.01>203.30) and its long-term moving average (235.01>194.49; see Exhibit 14), indicating that these hotels continue to remain a buying opportunity. Our SUP performance metric in Exhibit 15 indicates that the standardized price based its 5-year mov- ing average continues to remain above its statistical upper boundary although it continues to be below its 3-year moving average. 20 The Center for Real Estate and Finance • Cornell University exhibit 16 Year-over-year change in repeat-sale-hotel index with a moving average trendline CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 21 exhibit 17 Mortgage origination volume versus the loan-to-value ratio for hotels Sources: Mortgage Bankers Association, Cornell Center for Real Estate and Finance, Cushman Wakefield Sonnenblick Goldman MBAA Hotel Origination Volume Index (2001 Avq Qtr = 100) 2022Q2 162 2022Q3 236 2022Q4 145 Quarter over Quarter -38.6% Year over Year -45.9% Mortgage financing volume fell nearly 39 percent for The cost of hotel debt financing continues to rise. the most recent quarter reported. Exhibit 17 shows that Although Main Street lenders have lowered the amount the mortgage origination volume for hotels, as reported of additional compensation required to make hotel loans for the fourth quarter of 2022, fell 39 percent this quarter.3 relative to other CRE loans, Wall Street via REITs reveals Loan volume was also 46 percent behind the hotel loan that higher relative risk is expected for hotels. The cost of origination volume from a year earlier (year over year). The obtaining hotel debt financing, as reported by Cushman maximum loan to value (LTV) ratio for hotels, however, Wakefield Sonnenblick Goldman, continued to rise this declined from 65 percent to 60 percent this quarter. quarter as well as year over year.4 The interest rate as of 3 This is the latest information reported by the Mortgage Bankers Association as of 4 The interest rate reported by Cushman Wakefield Sonnenblick Goldman (CWSG) the writing of this report. is based on deals that CWSG has brokered as well as their survey of rates on hotel deals. 22 The Center for Real Estate and Finance • Cornell University exhibit 18 Interest rates on Class A versus Class B & C hotels Sources: Cornell Center for Real Estate and Finance, Cushman Wakefield Sonnenblick Goldman March 3, 2023, was 8.52 percent for full-service Class A interest rates over the prior March period, when inter- hotels and 8.77 percent for Class B&C properties. Those est rates stood at 5.76 percent on Class A hotels and 5.96 rates are up from 8.25 for Class A hotels and 8.5 percent for percent on Class B&C properties. This rise in interest rates Class B&C hotels in December 2022, representing a 3.3-per- continues to make hotel deals less financially feasible in cent increase in interest rates over a three-month period. the near term. Exhibit 18 displays the historical time series All told, these figures depict over a 47-percent rise in hotel graph of hotel interest rates. CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 23 exhibit 19 Interest rate spreads of hotels versus non-hotel commercial real estate Sources: Cornell Center for Real Estate and Finance, Cushman Wakefield Sonnenblick Goldman Interest Rates Interest Rate Spread Interest Rate Spread Full Service Hotels (Hotel – CRE) (Hotel – 10 Yr TBond) Class A Class B&C Class A Class B&C Class A Class B&C March 2022 5.76% 5.96% 2.09% 2.19% 4.05% 4.25% December 8.25% 8.50% 2.23% 2.29% 4.70% 4.95% 2022 March 2023 8.52% 8.77% 2.14% 2.18% 4.55% 4.80% Quarter over 3.3% 3.2% -4.1% -4.7% -3.2% -3.0% Quarter Year over 47.9% 47.1% 2.4% -0.4% 12.3% 12.9% Year To evaluate the risk assessment embodied in hotel in- as compared to loans on other major property types (due terest rates, we compare the interest rate on hotels to those to the relative riskiness of hotel loans). To obtain further for other types of commercial real estate (CRE). We found insights, we also compare the interest rate on hotels to the that the interest rate spreads for both higher quality (Class yield on a 10-year Treasury bond. The interest rate spread A) and lower quality (Class B&C) hotels have decreased on this metric has narrowed 15 bps for both Class A and approximately 10 basis points (bps) this quarter from the Class B&C hotels from 4.7 percent to 4.55 percent for Class previous quarter, indicating that lenders have lowered the A and, for Class B&C, 4.95 percent to 4.8 percent. additional compensation they demand to make hotel loans, 24 The Center for Real Estate and Finance • Cornell University exhibit 20 Risk differential between hotel REITs and non-hotel commercial-property REITs Sources: NAREIT, Cornell Center for Real Estate and Finance Another way to view default risk is to look at the risk that is unique to hotel properties, is currently at 4.82 equity market. Exhibit 20 shows that the total risk of hotel percent (sHotel - sCRE = 12.38% - 7.56%), up from 4.64 real estate investment trusts relative to the total risk of an percent (sHotel - sCRE = 12.46% - 7.82%) in the prior quar- equally weighted portfolio of commercial real estate equity ter. This indicates that the expected default risk for hotels REITs (that is, office, industrial, retail, and multifamily continues to climb relative to other major types of com- properties). 5 The risk differential, which should reflect the mercial real estate. This suggests that the cost of financing for hotels should be greater for hotels than for other major 5 We calculate the total risk for hotel REITs using a 12-month rolling window of property types. monthly returns on hotel REITs. CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 25 exhibit 21 30-plus-day delinquency rate for hotels Source: Trepp Trepp 30+ days CMBS Lodging Delinquency Rate Lodging Industrial Multifamily Office Retail March 2022 6.45 0.33 0.26 1.56 7.19 December 2022 4.40 0.42 2.17 1.58 6.97 March 2023 4.41 0.37 1.91 2.61 6.23 Quarter over 0.2% -11.9% -12.0% 65.2% -10.6% Quarter Year over Year -31.6% 12.1% 634.6% 67.3% -13.4% The delinquency rate on hotel loans was flat this quency rate is lower than the retail delinquency rate of 6.23 quarter. The CMBS delinquency rate (30+ days) of 4.41 per- percent, but higher than all other property types including cent for lodging properties in March is comparable to the office (2.61%), multifamily (1.91%), and industrial (.37%). hotel delinquency rate of 4.42 percent last quarter (Decem- Exhibit 21 displays the historical 30+ day delinquency rate ber 2022), although it is lower than the 6.45 percent hotel for hotels, while Exhibit 22 shows the standardized version delinquency rate last year (March 2022). The hotel delin- of the 30+ day delinquency rate for hotels. 26 The Center for Real Estate and Finance • Cornell University exhibit 22 Standardized 30-plus-day delinquency rate for hotels Source: Trepp exhibit 23 Economic value added (EVA) and equity (shareholder) value added (SVA) for hotels Sources: Cornell Center for Real Estate and Finance, Cushman Wakefield, NAREIT, MSCI-Real Capital Analytics, St Louis Fed CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 27 exhibit 24 Standardized unexpected RevPAR (36-month moving average) vs. NAREIT lodging-price index ROIC WACC EVA ROE Cost of Equity SVA June 2022 8.27% 8.84% -.57% 8.14% 9.78% -1.64% September 2022 8.41% 9.16% -.75% 7.88% 10.03% -2.15% December 2022 8.50% 9.58% -1.08% 7.34% 10.43% -3.08% February 2023 8.50% 9.45% -.95% 7.98% 10.34% -2.36% Cost of borrowing exceeds return for hotels. Our eco- Our reading of the tea leaves suggests we should nomic value added (EVA) or economic profit is -.95 percent, see slower to negative price momentum for both large while the shareholder value added stands at -2.36 percent. and small hotels near term. As predicted in our prior Both the EVA and SVA have remained negative since report, the standardized unexpected RevPAR continued to April 2022. This indicates that economic profit for hotels is exhibit positive price momentum, increasing from 1.47 in negative—that is, the return on hotels is less than their total December 2022 to 1.53 in March 2023, as shown in Exhibit borrowing cost (EVA) and the return on equity for hotels 24. The NAREIT Lodging Price Index increased from 71.82 is less than their cost of equity (SVA). Consequently, the last quarter to 73.36 this quarter. The standardized unex- return on hotels is driven mainly from anticipated future pected price of the NAREIT Lodging Index continues to price gains. Exhibit 23 depicts the historical EVA and SVA hover around its standardized average of zero, as Exhibit hotel performance. 25 depicts. Based on a 12-month moving average of the NAREIT Lodging Price Index, we expect hotel prices based on repeat sales to decline near term. 28 The Center for Real Estate and Finance • Cornell University exhibit 25 Standardized unexpected NAREIT lodging/resort price index Sources: Cornell Center for Real Estate and Finance, NAREIT exhibit 26 Repeat sales index versus the architecture billings index Note: ROIC is the return on invested capital (cap rate), WACC is the weighted average cost of capital, and ROE is the return on equity or cash on cash Sources: American Institute of Architects, Cornell Center for Real Estate and Finance Center for Real Estate and Finance CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 29 exhibit 27 Business confidence and high-price hotels index Sources: Cornell Center for Real Estate and Finance, Institute for Supply Management (ISM) The architecture billings index (ABI) for commercial The National Association of Purchasing Managers and industrial property shown in Exhibit 26 rose slightly (NAPM) index shown in Exhibit 27, an indicator of antici- (1.3%) this quarter to 45.8 from 45.2 (based on the February pated business confidence, fell 4 percent this quarter com- 2023 report). 6 However, on a year-over-year basis, it was pared to a 5-percent decline last quarter.7 It also declined down 17 percent, declining from 55.3 to 45.8. Based on the 19 percent year over year, down from the 17.5-percent moving average of the ABI index, which trended down year-over-year decrease in the prior period. Expect high- on both a quarter-over-quarter (-4.7%) and year-over-year priced hotels to decline in price near term. (-13.4%) basis, we should expect price momentum to trend downwards in the next period. 7 The ISM: Purchasing Managers’ Index, (Diffusion index, SA) also known as the National Association of Purchasing Managers (NAPM) index is based on a survey 6 of over 250 companies within twenty-one industries covering all 50 states. It not only http://www.aia.org/practicing/economics/aias076265 measures the health of the manufacturing sector but is a proxy for the overall economy. It is calculated by surveying purchasing managers for data about new orders, production, employment, deliveries, and inventory, in descending order of importance. A reading over 50% indicates that manufacturing is growing, while a reading below 50% means it is shrinking. 30 The Center for Real Estate and Finance • Cornell University exhibit 28 Consumer confidence and low-price hotels Sources: Conference Board, Cornell Center for Real Estate and Finance Sources: Conference Board, Cornell Center for Real Estate and Finance Center for Real Estate and Finance The Conference Board’s Consumer Confidence Index graphed in Exhibit 28, our proxy for anticipat- ed consumer demand for leisure travel and a leading indicator of the hedonic index for low price hotels, fell almost 4 percent this quarter. Expect low price hotels to decline in the near term based on a four-quarter moving average of the Consumer Confidence Index. We also look at the expected growth rate in Wall Hotel Valuation Model (HOTVAL) Has Been Updated We have updated our hotel valuation regres-sion model to include the transaction data used to generate this report. We provide this user-friendly hotel valuation model in an Excel spreadsheet entitled HOTVAL Toolkit as a comple- ment to this report, which is available for download from our CREF website (cref.cornell.edu). CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 31 exhibit 29 Street analysts’ earnings (revenue) estimates for Hotel REITs both in Analysts’ forecasts of hotel REIT earnings and terms on next quarter earnings revenue growth per share (EPS) and annual EPS.8 Exhibit 29 indicates that analysts are expecting the quarterly EPS growth rate to rise between 35 percent (median) and 22 percent (mean), while annual EPS growth rate is expected to rise between 163 percent (median) to 482 percent (mean). Exhibit 30 graphs the median hotel REIT expected EPS growth rates. Taken together, these exhibits show that the expected growth rate in hotel REIT EPS is in- creasing, albeit at a decreasing rate. Since analysts’ estimates reflect the earnings guidance from manage- ment, this suggests that we should expect prices to rise at a decreasing rate, reflecting a moderating of earnings guidance near term. n 8 We obtain the growth rate in earnings and revenue estimates from https://www.earningswhis- pers.com Note: Adjusted for CDOR (Condor) and CPLG (CorePoint Lodging) which are no longer publicly traded REITs 32 The Center for Real Estate and Finance • Cornell University exhibit 30 Analysts’ quarterly and annual REIT forecasts Expected Median EPS: Quarterly Growth Rate Expected Median EPS: Annual Growth Rate CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 33 Appendix SUP: The Standardized Unexpected Price Metric The standardized unexpected price metric (SUP) is similar to the standardized unexpected earnings (SUE) indicator used to determine whether earnings surprises are statistically significant. An earnings surprise occurs when the firm’s reported earnings per share deviates from the street estimate or the analysts’ consensus forecast. To determine whether an earnings surprise is statistically significant, analysts use the following formula: SUE SUP data and s calculation for high-price hotels Q = (AQ – mQ)/sQ (12 quarters/3 years) Price where SUEQ = quarter Q standardized unexpected earnings, surprise High-price Moving indicator A = quarter Q actual earnings per share reported by the firm, Quarter hotels m average s (SUP) Q mQ = quarter Q consensus earnings per share forecasted by analysts in quarter Q-1, and sQ = quarter Q standard deviation of earnings estimates. From statistics, the SUEQ is normally distributed with a mean of zero and a standard deviation of one (~N(0,1)). This calculation shows an earnings surprise when earnings are statistically significant, when SUEQ exceeds either ±1.645 (90% significant) or ±1.96 (95% significant). The earnings surprise is positive when SUEQ > 1.645, which is statistically significant at the 90% level assuming a two-tailed distribution. Similarly, if SUEQ < -1.645 then earnings are negative, which is statistically significant at the 90% level. Intuitively, SUE measures the earnings surprise in terms of the number of standard deviations above or below the consensus earnings estimate. From our perspective, using this measure complements our visual analysis of the movement of hotel prices relative to their three-year and five- year moving average (µ). What is missing in the visual analysis is whether prices diverge significantly from the moving average in statistical terms. In other words, we wish to determine whether the current price diverges at least one standard deviation from µ, the historical average price. The question we wish to answer is whether price is reverting to (or diverging from) the historical mean. More specifically, the question is whether this is price mean reverting. To implement this model in our current context, we use the three- or five-year moving average as our measure of µ and the rolling three- or five- year standard deviation as our measure of σ. Following is an example of how to calculate the SUP metric using high price hotels with regard to their three-year moving average. To calculate the three-year moving average from quarterly data we sum 12 quarters of data then divide by 12: Average (µ) = (70.6+63.11+58.11+90.54+95.24+99.70 +108.38+99.66+101.62+105.34+109.53+115.78) = 93.13 12 Standard Deviation (σ) = 18.99 Standardized Unexp Price (SUP) = (115.78-93.13) = 1.19 18.99 34 The Center for Real Estate and Finance • Cornell University Center for Hospitality Research Reports Mark Lomanno Advisory Board Chair Linda Canina, Dr. Michael Dang Director, Partner & Senior Advisor Center for Hospitality Research Kalibri Labs Nicole McQuiddy-Davis, Program Manager Kate Walsh, Dean, E.M. Statler Professor Robert Mandelbaum ’81 Cornell Peter and Stephanie Nolan School of Hotel Administration Director of Research Information Services Statler Hall CBRE Hotels Research Cornell SC Johnson College of Business Ithaca, NY 14853 Kelly McGuire MMH ’01, PhD ’07 607-254-3383 • www.chr.cornell.edu Manging Principal, Hospitality ZS Jacqueline Nunley CHR Advisory Board Senior Industry Advisor - Travel & Hospitality Salesforce David Oppenheim Senior Vice President of Global Insights, Joe Ahmed-Youssef Analytics, & Data Executive Vice President, Business Intelligence IHG and Data Solutions Amadeus Andrada Paraschiv Vice President of Hospitality Pablo Alonso Beekeeper Chief Executive Officer HotStats Vinay Patel Past Chair Scott Barghaan AAHOA Vice President and AMER GM, Travel, Transportation, & Hospitality Vertical Stephanie Perrone Goldstein ’01 Salesforce Principal Deloitte Scott Berman ’84 Principal and Industry Leader, Hospitality & Jess Petitt ’05 Leisure Group (Retired) Senior Vice President, Commercial Strategy, PwC Insights & Analytics Hilton Vivek Bhogaraju MMH ’06 GM Revenue Performance Solutions, Data & Prashanth Radhakrishnan Technology Partnerships, Loding & Vacation Vice President, Topline Analytics Rental Marriott International Expedia Group Guido Salvatori, MMH ‘02 Matt Carrier ’11 Senior Director, Integrations Vice President of Innovation Policy and Research Duetto AHLA Michele Sarkisian Carolyn Corda MPS ’89 Partner Senior Advisor Avenger Capital ADARA Stacy Silver Steve Hood President Senior Vice President of Research Silver Hospitality Group STR Liesl Smith Klaus Kohlmayr Senior Vice President for Marketing, Chief Evangelist and Head of Strategy Communications, and Sales Enablement IDeaS FreedomPay Jamie Lane Randell Smith Vice President of Research Founder (Retired) AirDNA STR CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 35 Cornell Center for Real Estate and Finance Steven Carvell, Arthur Adler ’78 and Karen Newman Adler ’78 Director Elizabeth Cunningham, Program Manager Kate Walsh, Dean, E.M. Statler Professor Cornell Peter and Stephanie Nolan School of Hotel Administration Statler Hall Cornell SC Johnson College of Business Ithaca, NY 14853 607-254-3383 • www.cref.cornell.edu Cornell Center for Real Estate and Finance Advisory Board Arthur Adler ’78 Adam Docks Alan Kanders ’87 Chairman, CREF Partner and Firmwide Co-chair, Principal President Hotels and Leisure Industry Group Three Wall Capital Adler Hotel Advisors LLC Perkins Coie LLP Rob Kline ’84 Jun Ahn MPSRE ’00 Joel Eisemann, MPS RE ’80 CEO and Co-founder CEO, Core Value, and Managing Director of Chief Development Officer, The Americas The Chartres Lodging Group Real Estate Division InterContinental Hotels Group (IHG) Jeffrey Kruse ’16 YIDO Habib Enayetullah Managing Director Bob Alter ’73 SVP for Real Estate and Asset Management Kolter Group President Hilton Worldwide Jason Lee ’95 Seaview Investors LLC Russell Galbut ’74 Managing Director, Chief Investment Officer– Richard Baker ’88 Managing Principal Asia and Senior Portfolio Manager Governor and Executive Chairman Crescent Heights AEW Hudson’s Bay Company (HBC) Nolan Hecht ’97 Michael Lipson Michael Barnello ’87 Senior Managing Director and Head of Real Estate Chairman of the Board and CEO Former President & CEO Certares Management LLC Access Point Financial LLC LaSalle Hotel Properties Kate Henrikson ’96 Terence Loh ’97 Kenneth M. Blatt ’81 SVP, Investment and Portfolio Analysis Senior Vice President Principal RLJ Lodging Trust CDIB Capital CPG Real Estate Faron A. Hill, MBA ’20 William Lovejoy Robert Buccini A&S ’90 Founder and President President and CEO Co-president Peregrine Oak Masterworks Development Co. LLC The Buccini/Pollin Group Kenneth Himmel ’70 Neil Luthra Marty Burger P ’17, P ’20 President and CEO Founding Partner Chief Executive Officer Related Urban Newbond Holdings Silverstein Properties Co-managing Partner Jay Mantz P ’21 Adam Burinescu CALS ’03 Gulf Related President, New York Managing Director David Hirschberg Rialto Centerbridge Partners Managing Director David Mei ’94 Rodney Clough ’94 H.I.G. Realty Partners Vice President, Global Capital Investments Managing Partner Jeffrey Horwitz and Transactions HVS Senior Partner, Co-head of Private Equity Real IHG Hotels and Resorts Howard Cohen ’89 Estate Alfonso Munk ’96 Chief Executive Officer Proskauer LLP Chief Investment Officer–Americas Atlantic | Pacific Companies David Israel ’09 Hines Kevin Davis Senior Vice President, CHA Chip Ohlsson Senior Managing Director—Hotels and hotelAVE Executive Vice President and Chief Hospitality Group Dana Jacobsohn ’92 Development Officer, North America JLL Senior Vice President, Global Mixed-use Wyndham Hotel Group Navin Dimond P ’14, P ’19 Development Mark Owens ’00 Chairman and CEO Marriott International, Inc. Executive Vice President and Head of Stonebridge Companies David Jubitz ’04 Hospitality Capital Markets Co-chief Investment Officer CBRE Clearview Hotel Capital 36 The Center for Real Estate and Finance • Cornell University Daniel Peek ’92 DRA Advisor Chief Operating Officer Seth Singerman ’99 HWE Managing Partner David Pollin ’90 Singerman Real Estate (SRE) Co-founder and President Justin D. Smith ’00 The Buccini/Pollin Group President Ray Potter CALS ’87, MBA ’92, P ’22 Prestige Hospitality Group Founder and Managing Partner Jackie Soffer P ’20 R3 Funding Chairman & CEO Michael Profenius, P ’15, P ’17 Turnberry Chief Operating Officer Robert Springer ’99 Northwood Investors President and Chief Investment Officer Rachel Roginsky ’79 Sunstone Hotel Investors Principal Richard Stockton ’92 Pinnacle Advisory Group Founder and CEO David Rosenberg P ’11, P ’13, P ’19 Braemar Hotels & Resorts Chief Executive Officer Andrew Taffet A&S ’05 Sawyer Realty Holdings Chief Investment Officer and Head of Asset Chuck Rosenzweig ILR ’85, JD ’88 Management Founder and Managing Partner The Carrington Companies, LLC Criterion Real Estate Capital Alan Tantleff ’87 Ben Rowe ’96 Senior Managing Director–Corporate Finance/ Founder and Managing Partner Restructuring, Practice Leader, Hospitality KHP Capital Partners Gaming and Leisure FTI Consulting Paul Rubacha, CALS ’72, MBA ’73 Co-Founder and Principal Dan Unger ’97 Ashley Capital Chief Development Officer Tishman Richard Russo ’02 Principal Eva Wasserman Highgate Managing Director GEM Realty Capital John Ryan Founder and CEO Shai Zelering ’01 Metro Development Group Managing Partner Brookfield Real Estate Group C. Patrick Scholes ’94 Managing Director, Lodging and Leisure Equity Shai Zelering ’01 Research Managing Partner Truist Securities Brookfield Real Estate Group Nirav Shah MMH ’05 Regional Vice President, Development Hyatt Matthew Shore ’00 Cheif Investment Officer CREF Hotel Indices • CHR Report • April 2023 • www.cref.cornell.edu • Vol. 23 No. 1 37 About the Cornell Hotel Indices In our inaugural issue of the Cornell Hotel Index series, we introduced three new quarterly metrics to monitor real estate activity in the hotel market. These are a large hotel index (hotel transactions of $10 million or more), a small hotel index (hotels under $10 million), and a repeat-sale index (RSI) that tracks actual hotel transactions. These indices are construct- ed using the CoStar and RCA commercial real estate databases. The large and small hotel indices are similar in nature and construction to the consumer price index (CPI), while the repeat-sale hotel index is analogous to the retail concept of same-store sales. Using a similar logic process for hotels, we compare the sales and resales of the same hotel over time for that index. All three measures provide a more accurate representation of the current hotel real estate market conditions than does reporting the average transaction prices, because the average-price index doesn’t account for differences in the quality of the hotels, which also is averaged. A more detailed description of these indices is found in the first edition of this series, “Cornell Real Estate Market Indices,” which is available at no charge from the Cornell Center for Real Estate and Finance. Starting with our 2018Q1 issue, we introduced the Gateway Cities Index as a new metric in our hotel analytics arsenal.*1 In our 2019Q2 issue, we introduced our new regional indices to add further granularity to hotel performance. More recently, we have included information on hotel delinquencies, as well as short-term and long-term hotel earnings expectations to aid hotel decisionmakers. We also present updates and revisions to our hotel indices along with commentary and support- ing evidence from the real estate market. Starting in 2021Q2, we included standardized unexpected price for our regional price indices as well as standardized unexpected RevPAR for the U.S. as a whole. We also introduced shareholder value added (SVA) as a complementary metric to EVA so that readers can now compare the profitability of hotel real estate to investors’ equity return. * Cities that we define as gateway cities are Boston, Chicago, Honolulu, Los Angeles, Miami, New York, San Francisco, and Washington, DC. For a general discus- sion on what constitutes a gateway city, please see Corgel, J.B. (2012), What is a Gateway City?: A Hotel Market Perspective, Center for Real Estate and Finance Reports, Cornell University School of Hotel Administration (https://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?article=1007&context=crefpubs). The study of Corgel, J. B., Liu, C., & White, R. M. (2015). Determinants of hotel property prices. Journal of Real Estate Finance and Economics, 51, 415-439 finds that a significant driver of hotel prop- erty prices is whether a hotel is located in a gateway city. The presumption is that hotels (and other real estate) in gateway cities exceed other cities as IRR generators in part due to a generally stronger economic climate as a result of higher barriers to entry, tighter supply, and/or relatively stronger performance in terms of revenue per available room than other top cities that are not gateways. 38 The Center for Real Estate and Finance • Cornell University