19th Annual

Meet the Money ‐ Meet the Money ‐ 2009 M t th M

R. Mark Woodworth
PKF Hospitality Research Atlanta, Georgia May 6, 2009 www.pkfc.com kf

Turning Points Turning Points
When Will the Lodging Industry Grow Again? h ill h d i d i ?

The Economy y Industry Profits Asset Values A F T k A Few Takeaways

Accuracy

What Did Bruce Baltin Say a Year Ago? What Did Bruce Baltin Say a Year Ago?

Turning Points Turning Points
What Did I Say a Year Ago? What Did I h id ?
Meet the Money - 2008 RevPAR Forecasts Actual/ Forecast Update 2008 1.0% -1.9% Not Too Bad pp 2009 4.0% -13.7% What Happened?
Sources: PKF-HR; STR (historical)

The Economy

4-Quarter Moving Average – U.S. All
Total Payroll Employment Change, Average Daily Room Night Demand
6.0% 4.0% 2.0% 0.0% 0 0% ‐2.0% ‐4.0% ‐6.0% ‐8.0% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Moody's Economy.com; STR;PKF‐HR

Employment

Demand

Total Payroll Employment in a  Long Contraction  Long Contraction
Date of Forecast:
3.0% 2.0% 1.0% 0.0% ‐1.0% ‐2.0% ‐3.0% ‐4.0% Aug‐08 Oct‐08 Feb‐ Feb‐09 Mar‐ Mar‐09 Apr‐ Apr‐09

Source: Moody's Economy.com

Remember the Jobless  Recovery?
Long Run Employment Levels
16 Qtrs 15 Qtrs
Forecast

10 Qt Qtrs

9 Qt Qtrs

Beginning / End of Contraction Period Turning Point
Source: Moody's Economy.com

Monthly  Unemployment Rate Monthly Unemployment Rate
Many More Lost Jobs to Come
Forecast

Local Maxima
Source: Moody's Economy.com

Difficult to Even Speculate on the  Ultimate Impact of the Stimulus Ul i I f h Si l

Have We Seen This Before?

This is the 11th Recession Since 1945 and Fifth Since 1980
Peak Nov 1973 Jan 1980 Jul 1981 Jul 1990 Mar 2001 Dec 2007 Trough Mar 1975 Jul 1980 Nov 1982 Mar 1991 Nov 2001 2009 Q2(est) Duration (Months) 16 6 16 8 8 17+/Decline in GDP -3.5% -2.8% -3.1% 3 1% -1.4% -0.5% -4.0% (proj)

Source: NBER, Moody’s Economy.com, Leamer

History Lessons History Lessons
• 122 recessions around the world: 1960‐2007. 122 recessions around the world: 1960‐ y ( ) g • Only four (4) had each of the following:
• Credit Crunch • House Price Bust • Equity Price Bust

• When all three conditions are present, the magnitude  of output losses (declines in GDP) are two to three  of output losses (declines in GDP) are two to three  times greater.

Turning Points:
Distance from Beginning of Official NBER Distance from Beginning of Official NBER  Recession (Quarters)

Source: Moody's Economy.com

Recovery Timelines Mixed Across  Markets
Quarters Until Employment Levels Turn Positive ‐ Quarters Until Employment Levels Turn Positive ‐ 4Q08

Growth Positive 1 Quarter 2Q Quarters t 3 Quarters > 4 Quarters
Source: Moody's Economy.com

Profit Outlook

Protracted Disconnect 
Between Property Cycle and Business Cycle
Forecast

Cycle Disconnect
Source: PKF Hospitality Research, Smith Travel Research

Big ADR Changes Fuel NOI Swings F l NOI S i
Forecast

‐30.1%
THIS IS A “MODERN RECORD”

Source: PKF Hospitality Research, Smith Travel Research

U.S. Lodging Industry
Historical Performance During Recessions* Historical Performance During Recessions
(Peak‐to‐Trough Change in Unit‐ (Peak‐to‐Trough Change in Unit‐Level Performance)

Inflation a Big Factor in the 1980’s

Note: * National Bureau of Economic Research ** Forecast as of March 4, 2009 Source: PKF Hospitality Research

U.S. Lodging Industry
Historical Performance During Recessions* g
(Peak‐to‐Trough Change in Unit‐ (Peak‐to‐Trough Change in Unit‐Level Performance)

Note: * National Bureau of Economic Research ** Forecast as of March 4, 2009 *** Before deductions for capital reserve, rent, interest, income taxes, amortization, and depreciation. Source: PKF Hospitality Research

Number of Markets Experiencing  Sustained RevPAR Growth d h
Forecast

Source: PKF Hospitality Research

Local Market Outlook Varies Considerably
Time frame when RevPAR begins a sustained positive growth trend

2nd Half of 2009 1st Half of 2010
• None of the 50 market s in our universe will achieve positive growth in RevPAR in 2009 2011 and beyond • Record low occupancies in 28 of our 50 market universe in 2009.
Source: PKF Hospitality Research

2nd Half of 2010

Asset Values

As Lending Standards Increase, Demand for R.E. Loans Declines
100

Net Percentage of Domestic Respondents Tightening Standards  for Commercial Real Estate Loans Net Percentage of Domestic Respondents Reporting Stronger  Demand for Commercial Real Estate Loans

80

60

40

20

0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

‐20

‐40

‐60

‐80

Source: Federal Reserve – April 30, 2009

2009

?

Risk Spreads Escalate for Hotels Risk Spreads Escalate for Hotels

Forecast
785 bp Q1 01 793 bp Q210

417 bp – LRA Spread

-220 bp Q2 84

118 bp Q3 06

Forecasts of Return Components
Cap Rates Exploding – Cap Rates Exploding – Up 490 bps by 2010
10 Year Treasury 2005 2006 2007 2008 2009F 2010F 4.3% 4.3% 4.6% 4 6% 3.7% 2.6% 4.5% 4 5% Treasury Spread 4.0% 3.8% 3.0% 3 0% 4.1% 7.9% 8.0% 8 0% %  NOI 15.5% 13.3% 7.2% 7 2% -3.8% -30.1% -7.9% 7 9% Cap Rate 8.3% 8.1% 7.6% 7 6% 7.9% 10.5% 12.5% 12 5%

Source: PKF Hospitality Research,  RERC, Moody’s Economy.com

Takeaways y

A Timeline to Recovery
Major Financial Failures Abate Employment Bottoms House Prices Resume Rising Fed Tightens

Foreclosures Peak Stock Market Bottoms Housing Starts Bottom

’08q1

’08q2

’08q3

’08q4

’09q1

’09q2

’09q3

’09q4

’10q1

’10q2

’10q3

’10q4

Oil Prices Peak

Home Sales Bottom House Prices Bottoms

Jobless Rate Peaks Extraordinary Writedowns End
28

$ Rises
Source: Moody's Economy.com

How Much Stress in  the Market? 
Approach: • Deal Specific Data from Trepp Deal Specific Data from Trepp
– Loan Amount, Terms, LTV, DSC @  Origination; actual performance data g ; p f

• PKF‐HR Hotel Horizonssm Forecasts • PKF HR Trends© Financial Data PKF‐HR Trends Financial Data • PKF‐HR Cap Rate Forecasts

How Much Stress in  the Market? 
Hotel CMBS Loans A Look at Atlanta
Vintage Pre-2006 2006 2007 2008 Total Number of Properties 20 22 16 58 Source: Trepp Number of Rooms 5,098 3,136 2,153 10,387

How Much Stress in  How Much Stress Atlanta? 
A Look at Atlanta 2008 Debt Service Coverage Vintage
Pre-2006 2006 2007 2008

Low
0.61 0.59 0.83 N.A.

High
2.50 2.36 2.12 N.A.

Average
1.72 1.48 1.34 N.A.

#< 1 0 1.0
3 5 5 N.A.

2009 Debt Service Coverage Vintage g
Pre-2006 2006 2007 2008

Low
0.1 0.24 0.37 N.A.

High g
1.69 1.69 1.34 N.A.

Average g
1.03 0.95 0.85 N.A.

#< 1.0
8 14 11 N.A.

Source: Trepp; PKF-HR

How Much Stress in  How Much Stress Atlanta? 
Debt Service Coverage Comparison 2008 2009 bp b Average Average Delta Vintage
Pre-2006 P 2006 2006 2007 2008 1.72 1 72 1.48 1.34 N.A. NA 1.03 1 03 0.95 0.85 N.A. NA (69) (53) (49) N.A. NA

Source: Trepp; PKF-HR

A Lot!

How Much Stress in  How Much Stress Atlanta? 
Estimated 2009 Loan-to-Value Estimated 2009 LTV
48.6% 114.0% 122.6% N.A. Source: Trepp; PKF-HR

Vintage
Pre-2006 2006 2007 2008

# Loans >100%
7/20 11/22 11/16

Even More

U.S. : Nothing Looks Normal
Supply Up – Demand Down: Supply Up – BIAS: Negative
2009 = the Low Point Going Forward

= Below/Above Long Run Average

Long Term  Average
Supply

2004 0.4% 4.0%
61.3%

2005 ‐0.1% 2.8%
63.1%

2006 0.2% 0.5% 63.3% 7.5% 7.8%

2007 1.3% 0.9% 63.1% 6.2% 5.8%

2008 2.7% ‐1.6% 60.4% 2.4% ‐1.9%

2009F 2.6 ‐5.4% 55.7% ‐6.4% ‐13.7%

2010F 0.9% 0.0% 55.2% ‐2.3% ‐3.2%

1.9% 1.9% 62.8% 3.5% 3.5%

Demand

Occupancy

ADR

4.2% 7.9%

5.5% 8.5%

RevPAR

Occupancy: “50’s are the new 60’s”
Source: PKF Hospitality Research – Preliminary First Quarter 2009 Hotel HorizonsSM Report, Smith Travel Research

Quarter When The Turning Point  Will Occur
United States Occupancy ADR RevPAR Supply Demand Employment GDP / GMP Leisure & Hospitality Employment 3Q 2010 3Q 2010 2Q 2010 2Q 2010 4Q 2009 1Q 2010 2Q 2010 2Q 2010 1Q 2010 2Q 2010

Source: PKF Hospitality Research, Moody's Economy.com

The Cycle of Real Estate Emotions-Opportunity Emotions-Opport nit

2007

2008 – 1st Half a

2004

2008 – 2nd Half

2011-12

2009-2010

2011

What Will Our Next Update  Look Like?
2009 -2.9% -3.7% -0.8% Source: Moody's Economy.com
The -13.7% RevPar for 2009 Will be Downgraded

Employment Assumption in these Forecasts April 2009 Update - Economy.com Downgrade

Implications From the Current E C t Economic Situation i Sit ti

In Asian Astrology, the New Moon of January 26, 2009 began the Year of the Ox. th Y f th O

Implications From the Current E C t Economic Situation i Sit ti

In Ox Years, Patience, Fortitude and  Hard Work, Rather than  Hard Work Rather than Leverage, Lead to Prosperity

For a Copy of this Presentation:

www.pkfc.com/presentations kf / t ti

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