Boom to Bust; Eagle Ford Shale Lodging Markets Update

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Dylan Stafford
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1 hotel-online.com Boom to Bust; Eagle Ford Shale Lodging Markets Update By Jonathan Jaeger and Robert Van Laer The current lodging industry fundamentals within the Eagle Ford Shale (EFS) markets have changed dramatically over the past twelve months. As previously discussed within the Hotel Rush! Texas Energy Lodging Markets 2014 article, the EFS is one of the largest single economic developments in the history of the State of Texas as a result of technological advances to allow for economically feasible domestic oil & natural gas production. In many rural areas throughout south Texas, demand for hotel rooms had been growing exponentially due to increased activity from drilling crews, land surveyors, engineers, and others associated with the oil & gas boom. Energy companies have been well capitalized and willing to pay relatively high rates for scarcely available hotel product, rendering this unique demand as price inelastic. Previously nonexistent sub markets have blossomed and new hotel development has occurred throughout south Texas to accommodate demand from shale exploration and extraction. However, given the sudden and dramatic decrease in the price of oil, coupled with new hotel supply and alternative accommodations such as man or crew camps within these markets, demand for hotel rooms has decreased. The declining performance in the EFS during 2015 has heightened concern for market participants and hotel transactions in the EFS during 2015 are almost nonexistent. The EFS has witnessed the largest drop in production (±510,000 barrels per day decrease compared to peak levels) out of all the shale areas in the United States. The following chart exhibits the price of crude oil since 2008, with a notable decrease of 54% since November The price of crude oil began its decent in July 2014 and continued throughout 2015, with the largest percentage decrease occurring in December 2014 following OPEC s decision not to reduce production at its meeting in Vienna (November 2014). Multiple factors have led to the decrease in the price of oil which include: 1) Domestic production in the United States has nearly doubled over the last six years; 2) Europe and developing countries are economically weak; 3) Growing trend in energy-efficient cars/technology; and 4) OPEC s over supply of the world market at reduced prices. Additionally, U.S. crude oil reserves have continued to increase, but not at the pace needed to stabilize oil prices.

As a result of the recent decrease in the price of oil, the feasibility of oil

As evidenced below, the trend of overall lodging demand appears to be correlated to drilling

Year-to-date lodging demand through September 2015 experienced a 4% decrease compared to the

2 As a result of the recent decrease in the price of oil, the feasibility of oil exploration/extraction in the U.S. has also been dramatically reduced. As evidenced below, the trend of overall lodging demand appears to be correlated to drilling activity. Year-to-date lodging demand through September 2015 experienced a 4% decrease compared to the same time period last year. In addition to the decline in oil & gas related demand, new hotel supply and alternative accommodations entering the markets have also caused downward pressure on occupancy and average daily rates (ADR).

3 Counties with the largest hotel supply increases between 2013 and 2014 include La Salle, McMullen, Karnes, De Witt, and Wilson. Largest hotel supply increases year-to-date through September 2015 over the previous year include Karnes, Robertson, Gonzales, Goliad, and McMullen Counties. With the decrease in oil & gas demand, submarkets with substantial new supply have experienced decreases in occupancy and ADR. As expected, a majority of the new supply additions are nationally-branded limited service hotel brands such as Holiday Inn Express, Hampton Inn, La Quinta, Best Western, etc.

4 25 of the 30 EFS counties have witnessed year-to-date decreases in occupancy through September 2015 compared to the previous year. The counties most heavily impacted (more than 20 percent decrease) include: Atascosa, Gonzales, Karnes, Lavaca, Live Oak, and Wilson. The counties of Austin, Milam, and Colorado have been able to exhibit positive occupancy growth as a result of their diverse economies and proximity to major metropolitan areas. Maverick and Zavala Counties have benefited from limited supply increases compared to other counties. Year-to-date occupancy for all 30 counties combined would have experienced a 4% decrease if there was no new hotel supply.

The overall ADR for all 30 EFS counties have experienced a 13% decrease in year-to-date figures through September 2015 compared to the previous year.

5 The overall ADR for all 30 EFS counties have experienced a 13% decrease in year-to-date figures through September 2015 compared to the previous year. As evidenced above, the trend of overall ADR appears to be directly correlated to new supply. Maverick, Bastrop, Colorado, Brazos, and Washington Counties were the only five to experience positive ADR growth as a result of limited hotel supply increases. Worst performing counties include Gonzalez (29% supply increase), Goliad (29% supply increase), Bee (12% supply increase), De Witt (14% supply increase), and Karnes Counties (52% supply increase). The substantial 13% decrease in ADR year-to-date 2015 is surprising; in downturns, typically occupancy rates fall more dramatically during the initial twelve months of distress.

Given the combination of decreased oil & gas related demand and the entrance of new supply within EFS counties, RevPAR has decreased in 26 of the 30 counties.

6 Given the combination of decreased oil & gas related demand and the entrance of new supply within EFS counties, RevPAR has decreased in 26 of the 30 counties. The year-to-date RevPAR decrease for all counties on an aggregate basis is 23%. While overall demand has decreased, the decreases in RevPAR are primarily attributed to new hotel supply. With the continued oversupply of oil & gas both domestically and abroad leading to the lowest price levels in recent history, taking into account new hotel supply, RevPAR is anticipated to continue to decrease in the near term. The following chart details historical production and projections going forward for the Eagle Ford Shale. The U.S. Energy Information Administration projects oil production to decrease at a calculated annual growth rate of 3.5 percent, while shale gas is anticipated to increase by 2.6 percent on an annual basis over the next ten years. The projected decrease in oil production over the next ten years is anticipated to lead to higher oil prices. Overall, we anticipate the majority of the EFS lodging markets to continue to struggle in the near term as the price of crude oil remains low and new hotel projects are completed. While each sub-market must be analyzed on an individual basis, investors should be wary given the current market fundamentals. When considering an equity and/or debt investment in an energy related market, it is critical to understand the dynamics of supply and demand trends and underwrite to a reasonable level that takes into consideration the additional risk with boom/bust type markets. While the current metrics of the EFS counties indicate negative trends during the short term, most markets are expected to improve over the next cycle given the importance and long term growth estimates for the energy sector. About Jonathan Jaeger, MAI

7 Jonathan Jaeger currently serves as a Managing Director with LW Hospitality Advisors, based in New York City. Prior to joining LWHA, Mr. Jaeger had been with Pinnacle Advisory Group from January of 2008 through January of He began as a Consultant in the Boston office and was promoted to Vice President and head of the New York Practice. During his tenure at both Pinnacle and LWHA, Mr. Jaeger has been involved in the execution of over 1,000 consulting and valuation assignments throughout the United States. Prior to his advisory career, Mr. Jaeger held various operational and accounting/finance positions with Starwood Hotels & Resorts and Kimpton Hotels & Resorts. He graduated with a Bachelor of Science from the Boston University School of Hospitality Administration in addition to a minor in Business Administration from the Boston University School of Management. Mr. Jaeger is a State Certified Real Estate Appraiser specializing exclusively in the evaluation of hotel and resort properties. During his time in Boston, he served on the Emerging Leaders Committee of the Massachusetts Chapter of the Appraisal Institute as well as a Council Member of the Massachusetts Lodging Association Under 30 Gateway Chapter. Beginning in the spring of 2011, Mr. Jaeger joined the adjunct faculty at Boston University, serving as co-instructor of the Hotel Asset Management course. In addition to teaching a course at Boston University, Mr. Jaeger has written several articles for industry wide publications; topics included the Manhattan Lodging Market, Highest and Best Use Analyses, E- Commerce in the Hotel Industry, Texas Energy Lodging Markets, among others. In New York City, Jonathan is a member of YHIP, the Young Hospitality Investment Professionals Group and also participates with the NYC & Company Hotel Committee. Mr. Jaeger is also a member of the Metro NY Chapter of the Appraisal Institute. Beginning in the Fall of 2014, Mr. Jaeger joined the Adjunct Faculty at New York University; teaching the Lodging Development course. Mr. Jaeger is a designated member of the Appraisal Institute (MAI); he achieved this designation in June of In addition, Mr. Jaeger is an active member of the American Hotel & Lodging Association (AH&LA) as well as a Development Coach for the United States Professional Tennis Association (USPTA). Contact: Jonathan Jaeger Jonathan.jaeger@lwhadvisors.com / X 116 About Robert Van Laer Robert Van Laer currently serves as Vice President for LW Hospitality Advisors, based in New York City. In addition to being a native New Yorker, Mr. Van Laer holds significant hospitality operational experience accumulated in Belgium, Greece, and Switzerland with both independent and chain-affiliated hotels. His in-depth knowledge of the hospitality industry has served him well in performing market and feasibility analyses for not only the hotel and restaurant industry, but also the distilled beverage industry. Mr. Van Laer s most recent professional experience includes holding revenue management and hotel development positions with Empresas Bern in Panama City, Panama. Previously, Mr. Van Laer was employed in the Marketing & Corporate Communications department of Natixis U.S. Corporate Investment Banking, where he supported brand development and compliancy of the company s standards. He has collaborated with the UNWTO and South Korean Ministry of Culture, Sports and Tourism to develop a sustainable tourism strategy for the Silk Road Initiative. Mr. Van Laer holds a Bachelor of Science in International Hospitality Management from Ecole Hôtelière de Lausanne (EHL) with a specialization in Finance (Corporate; Market; Real Estate), and he serves on the New York Chapter of the school s alumni organization AEHL. Contact: Robert Van Laer Robert.vanlaer@lwhadvisors.com / X 105

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