Australian Hotel Development 9 May 2013

1

Dean Dransfield

Owner & Director

John Stawyskyj

Practice Head – Hotels, Gaming & Leisure

Michael Moret-Lalli

Director of Acquisitions

Lindsay Leeser

Director Development Pacific

Nonda Katsalidis

Founding Partner

Australian Hotel Development 9 May 2013

Australian Hotel Development

The next cycle 2013

3

Dransfield Hotels & Resorts

Hotel, Tourism & Leisure industry specialists

55,000 rooms, 500 projects, over 20 years experience

Principals & advisors over a wide range of hotel & resort assets

Complimentary service streams

Development,

- Advice and Management,

- Strata title

Transactions,

- Buy & Sell,

- Debt & Equity Raising

Operator selection

Independent Experts

Core clients

- Owners – corporates, funds, private equity, owner operators

- Developers – small - large

- Financiers – mortgage funds, banks

- Operators

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Dransfield Current Development Projects

Australia 108, Melbourne, 300 room 6 star new build, mixed use

Zoo, Eco Lodge <150 rooms

University, 4 star Hotel 200 rooms

Sydney fringe 3 star 120 rooms

Sydney Central, 120 room boutique 4 star with iconic bar

Brisbane Fringe 200 room 4 star

Various Regional In several states

The Watson, Adelaide mixed use 200 apartments

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Market Overview

2011 RevPAR growth of 4.6% slightly below our 5.3% forecast

- Perth (15.1%), Brisbane (7.6%) and Sydney (7.1%) strongest performing markets

- Gold Coast (-2.7%) and Adelaide (-2.2%) only markets to experience a decline

Market defined by limited supply and demand growth with rate growth the key to overall performance

High midweek occupancies in major cities continued to constrain demand and promote rate growth

2012 RevPAR growth of 4.1%YTD above our full year 3.8% forecast

- Darwin (16.5%) and Perth (10.5%) leading all markets

- Sydney and Melbourne displaying flatter growth with 2.0% and 1.5% growth respectively

Domestic departures experienced a 5.4% increase on prior year (averaged 9.6% previous 5 years)

International arrivals grew by 4.6% on the prior year (Averaged 1.2% previous 5 years)

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Hotel Room Supply

Supply growth constrained last 10 yrs, meaningful new supply 3-5 yrs away

In 2011 Australian major city hotel supply increased by only 1.2% slightly higher than 0.7% increase in 2010

This represents the 10th consecutive year of annual supply growth of <3%

A net total increase of only 10,319 (13.4%) rooms have been added since 2000

Sydney, Perth & Brisbane will find it difficult to generate demand growth as they are full midweek

Rooms

2011 # % 2000 2011

Melbourne 17,114 6,147 56.1% 73.6% 78.9%

Darwin 3,672 1,073 41.3% 67.2% 70.6%

Adelaide 4,598 1,075 30.5% 68.1% 74.5%

Brisbane 8,238 1,683 25.7% 64.4% 80.0%

Hobart 2,597 506 24.2% 62.6% 72.9%

Perth 5,820 651 12.6% 69.1% 84.1%

Cairns 7,396 480 6.9% 64.8% 62.4%

Gold Coast 13,114 -136 -1.0% 61.8% 65.3%

Sydney 19,770 -899 -4.4% 71.2% 85.8%

Canberra 4,761 -261 -5.2% 60.1% 73.2%

Australia 87,079 10,319 13.4% 67.4% 76.4%

Source: ABS

Growth OccupancyCity

Supply Movement Since 2000

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Market Overview – Supply Forecasts

Our supply forecasts over short, medium & long term are a downgrade on prior expectations

Hotel Development over the next 5 years in Australia is forecast to be more than triple that experienced over the past 5 years

Of the 25,000 rooms forecast to be added to 2020, only 25% can be attributed to specific projects

Hotels wanting to open by 2016 need to be commencing in 2013

Development Cycle on its way

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Melbourne v. Sydney

A very different supply story Melbourne

Sydney

Melbourne has increased supply by 56% since 2000 v. Sydney’s reduction of 4.4%

Demand has absorbed much of the new supply in Melbourne

Melbourne the only major market to add significant supply over the past 5 years adding 2,300 rooms or 16% since 2007

2011 occupancy of 78.9% was above the occupancy prior to the most recent development cycle

A combination of factors has constrained new development in Sydney:

Hotel development has not generally been feasible over last 10 yrs or not been best use

Lack of available quality sites

Assets selling at a significant discount to development cost

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Common Development Mistakes

Limited Australian hotel development experience

Misunderstanding on who bears forecast risk, particularly start-up

Brand presence and position vs. operator capability and suitability

Weighting of determining factors – i.e. best forecast not necessarily best operator

Blind obedience to truisms

Inability to match management structures with effects on end value

Design focus as opposed to financial outcome driven, VM failure

Missing project costs (underestimate equity requirements)

Demand study vs. feasibility

Process often driven from wrong person and core assumption (I should have a hotel rather than should I have a hotel)

Hotel development is poorly understood in Australia

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New Build Characteristics and Trends

Product type is typically smaller and investment friendly and includes:-

150-220 room 4-4.5 star

Smaller rooms, smarter design

Recent focus on medium/long term stay product, supported by kitchenette facilities

Very limited resort stock

Some regional stock – typically special purpose (mining/infrastructure/university)

Sources of new hotel development

1st time/inexperienced developer

Offshore – China and South East Asia

Traditional major developers and market participants, usually limited hotel experience

Mixed use/place making is a common driver and can change the financial rules

Institutional and new investors are open to hotels including some new

Reduced over built product

Oversupply of capital, undersupply of experienced developers

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Development Feasibility Process

Size

Access/Infrastructure

Stage 1

Location

Existing attractions

Approvals

Site

Assessment

Stage 2

Preliminary

Feasibility

Supply / Demand Equation

Key Product Assumptions

Stage 3 Stage 4

Structure &

Detail Execution

Work up alternative schemes

Financing Plan - debt/equity

Sell down/exit strategy

Sensitivity analysis

Operator selection & input

Further DA approval

Market testing

Marketing end product

Finance

Construction

Business Plan

Pre-opening

Operator Agreement

Opening

Pre-sales Key Risks

Initial Buildability

Financial Focus

Update Feasibility

Update Feasibility

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Hotel Development Stakeholders

Developer

Operator Financier

The Exit

Developer

• Often limited hotel experience

• Rely on Hotel operator to solve

• Don’t understand management options

• Confuse retail brand with development

needs

• Don’t understand MLR vs.

single title

• Wants to lay off operating

risks

• Trust architect

• Difficult exit

Financier

• Limited engagement

• Variable rules

• Final veto power

• Vacant possession highly desirable

Operator

• Generally passive approach to

development

• Many anti development rules

• Resist operating risk

• Limited/no capital

• “Technical Services” focus on brand

and operations

Feasible development relies on a relatively small overlap between stakeholders that needs to be skillfully managed, this is an operator opportunity

• One line

• Retail if strata/MLR

• Pre or post commencement

• Is it after construction and maturity?

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The role of Capital and other Discipline

A key issue that frustrates feasibility is the inability to manage capital costs

The Focus on the design goal needs to be reversed to a focus on a capital cost goal which is designed towards.

There is significant variance in market commentary on the cost per room for similar standard built form

Strong developers with good teams and building credentials send the able to bring in projects at appreciably lower cost than jigsaw teams

There often seems to be no hotel developer in the project team and sometimes no true developer

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Brisbane Case Study

• 4.5 Star, approx. 180 room hotel with mixed use components

• Proven short term accommodation location

• D&C contract in place

• In principle approval with council

• Full turn key solution including development management

• New build delivery 2015

• Good return on equity

• 50% of cost financed

Hotels in the right location with strong project credentials can now work

Project KPIs

Development Cost Per Room $245k Approx

Total Equity Contribution 23,798,747

Development Margin 28.97%

Project IRR 29.16%

Equity IRR 33.03%

Forecast Performance Yr3 (2017)

NOP 5,729,109

Mgmt Fees (excluding Marketing and IT) 863,253

Yield on value on completion @$310k per room 10.0%

Yield on Hotel Construct Costs @ $245k per room 12.7%

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Action Timing Investment + Cost

Sell As Is 3-6 Months Land + 50k

Rezoning 3-6 Months $100-$150k

Approval

Preliminary/Stage 1 DA 6-9 Months $250-$500k

Full DA 9-15 Months $1-$2m

Construction 18-24 Months $150-500k per room

Options for Sitting Land Owners – Extracting Value

Increase Cost, Risk

& End Value

Actions that Can Assist with Process

Advanced operator discussions on investment favourable management structure & terms

Fixed price construction contracts

Securing an end take out (Strata Presales/Mixed Use)

All about the removal of construction/development risk

Will vastly increase the number of potential parties

Financing on more agreeable terms

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Funding – Pre GFC vs. Post GFC

Sources of equity funding

- The increasing participation of sovereign wealth funds

- Hotels on radars of institutional investors and large PE as direct investment and clubs

Funding requirements

- LVR’s have significantly reduced, we use 50% of cost for good projects

- Pre sales volumes for strata developments have increased

Portfolio Rebalancing

- Banks limiting exposure in non CBD locations

- Multiple sources required for Strata Title (Purchaser funding)

Mezzanine Funding Replaced with Preferred equity at lower LVR’s

Primary financiers available but takes time

Require strong fundamentals that are not always being well presented

The fundamentals of lending have changed post GFC

AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN

PAPUA NEW GUINEA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

Legal Issues for Hotel Development Projects

John Stawyskyj Partner

Ashurst Hotels & Leisure Practice

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Global Coverage

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Hotels & Leisure Practice

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Areas of Expertise • Sale and purchase of hotel assets and hotel groups

(including due diligence)

• Property development

(including major refurbishment and redevelopment projects)

• Hotel financing including non-disturbance agreements and

tripartite arrangements with hotel operators

• Management agreements, franchise agreements and associated

agreements

• Branded residences, timeshare and fractional ownership

• Operational issues

• Intellectual property

• Dispute handling and litigation

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• Demonstrable track record, working on many of the largest and most significant hotel acquisitions and disposals in Australia, Asia and the Middle East. For more than 15 years, our fully integrated hotels & leisure team has been supporting clients in the hotels & leisure sector, giving us a specialist understanding of their unique needs.

• A full service offering (at a local and cross-border level) covering all legal areas relevant to the hotels & leisure sector including transactional, due diligence, financing and development, management and operating agreements, joint ventures, planning, tax, intellectual property, employment and general operational advice.

• A client and sector tailored approach - we make it our business to become familiar with clients' strategies, issues and challenges along with the way they like to operate, so that we can deliver relevant services efficiently, proactively solve problems and help to achieve commercial aims.

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Why Ashurst Hotels & Leisure?

Expertise recognised: we are the winner of the following awards:

“Number one firm in Hospitality & Tourism Law in Australia” Best Lawyers Australia, 2012 “Australian Real Estate Law Firm of the Year” Corporate INTL Legal Awards 2011 “Best Large Law Firm” BRW Client Choice Awards, 2011.

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Why Ashurst Hotels & Leisure?

• Role of Hotel Investor

– Joint Venture Partner

– Hotel Take Out Party

• Role of Hotel Operator

• Mixed Use Projects

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Agenda – Legal Issues to Consider

• Development Joint Ventures

• Hotel "Take-Outs"

– Mixed Use Development where site has been apportioned between uses

– Either:

• Purchaser takes development and construction risk

• Purchaser acquires completed Hotel on completion

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Hotel Development Projects

• Choosing the right structure

– Tax effective structures

– What is the preferred method of income distribution to partners

– Managing insolvency risk with effective security arrangements

– Saleability of JV interest – ease of exit if necessary

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Development Joint Ventures

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Funding and 'Bankability'

Effective security for financiers

Pre-sale requirements to obtain financing

(eg 50%?)

Debt v equity (thin capitalisation

issues)

Managing capital calls and ongoing

funding

Tripartite arrangements (eg

contractor, JV partners, banks)

• Knowing the development and underlying risks

– Due Diligence – property, planning approvals, feasibility

– Environmental and Contamination risk

– IP ownership and use rights

– Third party consent requirements and roadblocks

– Dealing with risks in pre-sales contracts where necessary – eg sunset dates

– Dealing with termination of related party contracts and cross default provisions

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• Managing the development

– Appointment of independent certifier

– PCG meetings and reports

– Deadlock structures to deal with JV partner issues

• Expert determination?

• Arbitration?

• Buy out?

– Development Management Fees

• Retention amounts

• Consider best structure for fees – eg match with project budget and outputs

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"Take Out" structures – some issues

Take on development / construction risk

Buy completed Hotel

• Due Diligence

• Condition of site and handover

• Contamination risk

• When do you take on land ownership costs?

• Interaction with other parts of site and development – eg access, damage etc

• Due diligence – eg on developer, property

• Ensure sufficiently certain project brief

• Consider need for any approval rights during development

• Query involvement (if any) in development

• Reporting obligations on developer

• Purchaser issue – security for any pre-payments

• Developer issue – security for end payment

• Fit out contract and interface with construction contract and staged delivery

Hotel Operator's Role

• Practical issues when looking at hotel projects and the interaction with the hotel operator's requirements including

– brand standards

– operator approvals - professional team and plans

– interacting with the operator's technical services team

– finishing construction whilst the operator wants to start pre-opening activities

– performing works at a hotel after it has commenced operation

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Brand Selection

• Style of Hotel

• Market

• Strength of brand reputation

• Distribution system of operator

• ROI requirements

• Other issues to consider

– construction costs

– operating costs

– fees

– commercial terms

– impact of brand on broader development

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Issues Between Owner and Operator

• Construction program

• Impact of brand standards

• Costs of works

• Timing of opening

• ROI

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Owner's Responsibilities

• To construct and fit out the Hotel

– in accordance with

• plans approved by operator

• operator's brand standards

– by contractors approved by operator

• To purchase initial operating supplies

• To fund

– initial pre-opening budget

– initial working capital requirements

– on-going working capital requirements

– capital repairs

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Brand Standards

• The core of any international hotel operator is their brand and the related “brand standards”

• What are brand standards

• Brand standards include

– room sizes and configurations

– room fit out

– spatial requirements

• Changes to brand standards

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Operator Approvals

• Operator approval

– plans and designs

– Consultants

• Changes to plans

• Completion of works

• Installation of fit out

• Warranties

• Defect rectification

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Operator’s Technical Services Team

• Technical Services Team

• Regular meetings

• Site inspections

• Costs of site visits

• Timing of approvals

• Impact on development and development timing

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Pre-Opening Activities

• 6 – 12 months prior to Opening Date

• Staff on site

• Hiring program

• Construction program

• OH&S issues

• Testing

• Pre-opening marketing

• Soft opening

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Works Post Opening Date

• Operator control of Hotel

• Operator approval rights

– plans

– consultants

– construction program

• Impact on Hotel operation

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Practical issues, from a legal perspective, in relation to mixed use projects and how the

different pieces work together

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• Strata and stratum subdivisions

– Body corporate control

– Body corporate rules - eg

• Ensuring prohibitions on short term letting for residential portions

• Access to hotel facilities by residential / retail lots

• Standard of development of residential / retail / commercial commensurate with hotel standard

– Shared costs and apportionment between lots

– Building Management Statements

• Easements for access, use and light

• Interaction and discussions with third parties

• Signage rights – internal and external

• Branding rights (eg licence to apply hotel brand to residential lots)

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Mixed Use Developments

Components of Project

• Who owns what

• Who controls what

• Who pays for what

• Can, and to what extent will, the operator manage the additional facilities as well as the Hotel

• How do all the component parts of the scheme compliment each other

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Consistent Standard

• Brand standards

• Who operates what portion of the development

• Potential impact on the Hotel/guests, e.g.

– shared access/noise/disturbance/competing facilities with those of the Hotel/impact on revenue, e.g. car park and its impact on feasibility and projected income

• Control over the operators of the additional facilities, in particular, in relation to casinos and health clubs

• Requirement to ensure the other component parts of the scheme are constructed and maintained to a standard at least equivalent to that of the Hotel

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Components

• What are the shared facilities and services

• Is the scheme consistent with what guests would expect from staying in a particular Brand hotel

• Are all components parts of a similar standard and consistent with Brand Standards

• Essential facilities of the Hotel which should remain part of the Hotel and operated by the operator, e.g. restaurant/car parking/health club (Brand Standards)

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Users of the Components

• Any shared facilities – ensure these do not impact on guest experience

• Potential disturbance to the guests and operations from these facilities, e.g. music, noise, late night opening hours, access to these facilities

• Timing of construction of additional facilities – operating the hotel in the middle of a building site

• Competing facilities, e.g. food and beverage facilities, retail

• Restrict use of any other component as a hotel or other lodging facility

• Potential financial implications, both positive and negative

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Sharing of Services and Facilities

• Need to understand who is responsible for maintenance/repair/upkeep and the associated costs

• Equitable apportionment of those costs to the operation of the Hotel or if operator is managing, apportion costs to other facilities

• Estate Charge e.g. for maintenance, security, communal lighting – how will that be apportioned to the Hotel

• Ability of Hotel to have some form of control over costs if charged back to the Hotel operation

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Car Parking

• Often overlooked, but key component of any scheme

• Adequacy of spaces set aside for Hotel and its guests, visitors and employees

• Are there designated spaces/area for use by Hotel guests, visitors and employees

• Obligations regarding signage, maintenance, plant machinery, e.g. lift that goes from the car park to the Hotel

• If operated by a third party and therefore revenue and costs are outside of Hotel P&L, right to have some control mechanism on pricing

• operator to have the ability to charge users of the Hotel spaces different amounts, compared to the published prices

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• FIRB approvals for foreign investors

– Standard conditions regarding commencement of development and minimum development spend

• Green star and NABERS rating requirements

– Consider cost and requirement by end-users

– Impact on design and delivery

• Form of construction contract

– Design and Construct

– Novated Design and Construct

– Construct Only

• Development Management Agreements

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Other points

Hotel Development

Development Support

Development Team

4 member team based in Sydney

Technical Services Team


Regional teams based in Western Sydney

Melbourne, Brisbane, Perth & Auckland

Procurement Team


Experience

Over $300 million in new hotel development in

Australia & New Zealand since 2008

Refurbishment of more than 50 hotels in the

region since 2008

Novotel Auckland Airport

Recent Developments

Pullman Sydney Olympic Park

Recent Developments

Novotel Auckland Airport

Novotel Christchurch

Recent Developments

Mercure Sydney Liverpool

Mercure Gladstone

Recent Developments

Ibis Adelaide

Ibis Sydney King Street Wharf

Recent Developments

Ibis Budget Auckland Airport

Ibis Budget Sydney Olympic Park

Growth via M&A

Mirvac Acquisition

Hotel management company

Property assets: Sebel Newcastle & Sebel Mandurah

49.2% investment in Mirvac Wholesale Hotel Fund

The Sebel Mandurah Novotel Newcastle Beach (Previously The Sebel)

Investor Profiles

0

1000

2000

3000

4000

5000

6000

7000

79%

21%

Domestic International

24%

49%

22%

5%

Owned/Leased Managed Franchised Strata

Growth Opportunities

Acquisition of

Management Letting

Rights

Upscale Mixed Use

Development

New Build

Economy Hotels

Regional

Franchise

59 59

Pictured: Mantra Circle of Cavill, Queensland (two tall towers in centre of image)

Pictured: Peppers Dunmore, Brisbane, Queensland

Second largest accommodation provider in Australasia – 112 properties

Three well known consumer brands – Peppers, Mantra and BreakFree (Corporate and Leisure)

$7 billion of hotel assets under management

4,000 employees

2+ million guests per annum

$500 million turnover per annum

Mantra Group at a glance

29 properties / 2,577 rooms(1)

Positioning: 5 star


Positioning: 4–4.5 star


Positioning: 3 star

Mantra Group brands

Consolidation of Mantra Group

Exposure to Leases and MLRs/Serviced Apartments

Ownership of business on Balance Sheet

Strategies and structures that maximise Profit / ROI

Unique Structure

A. Three Brand Strategy

Business Ownership - control of marketing dollars ($25+ million per annum)

Outcome: best revenue outcomes by developing 3 brands vs. multiple brands

B. Truly Centralised Group Services Platform

Corporate and regional grouping of all back-of-house support departments

Outcomes;

i) Relieve management to focus on service delivery (our guests)

ii) Ability to attract highly specialised and best in market team

iii) Realise significant overhead savings - deliver average GOP’s at 55%+

C. Dedicated Asset Management Division

Originated out of our exposure to strata-titled properties

Dedicated team providing “only-in-class” complete development solution for Strata Hotels or mixed-use

developments

Outcome: end-to-end solution

Unique Structure continued

Mantra Group offer a range of flexible and tailored development friendly solutions to the market

Flexible and Tailored Development Solutions

Mantra Group Development

Solutions

Lease

Management Letting Rights

Serviced Apartments

Mixed Use

Ownership Franchise

Hotel Management

Agreement

Long Term Covenants

65 65

Gold Coast – Peppers Broadbeach

MLR Purchase

Pictured: Peppers Broadbeach, Queensland (two tall towers in foreground)

66 66

Pictured: Peppers Cradle Mountain Lodge, Cradle Mountain, Tasmania

Tasmania – Peppers Cradle Mountain Lodge

Guaranteed Management Agreement

67 67

Pictured: Peppers Dunmore, Brisbane, Queensland

Brisbane – Peppers Dunmore

MLR and Apartment Stock Purchase

68 68

Pictured: Mantra Townsville, Queensland

Townsville – Mantra Townsville

Guaranteed Management Agreement

69 69

Pictured: Mantra Nusa Dua, Bali

Bali – Mantra Nusa Dua

Franchise

70 70

Pictured: BreakFree Sing Ken Ken, Bali

Bali – BreakFree Sing Ken Ken

Management Agreement

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Dean Dransfield

Owner & Director

John Stawyskyj

Practice Head – Hotels, Gaming & Leisure

Michael Moret-Lalli

Director of Acquisitions

Lindsay Leeser

Director Development Pacific

Interview and Questions

Documents

Australian Hotel Development 9 May 2013