U.S.

Lodging Horizon 2008
”What Lies Ahead?”

NABHOOD 2008
Thursday, July 17, 2008

Mark Woodworth@pkfc com
Mark.Woodworth@pkfc.com

Presentation Outline

I. The Economy
II. Current Horizon:
Have We Seen this Before?
III. Some Thoughts to Take-away

Question:
Are
Are we headed for a 
we headed for a
recession?
Or just a healthy correction?

Economy.com’s Current Outlook
Drives our Forecasts
90% Probability of a Recession
10%

51%

High Growth
Current: Recession
Current: Recession
Recession, Slow Recovery
Moderate Recession
Severe Recession
Severe Recession

25%

10%
4%
Probability of Occurrence

Source: Moody’s Economy.com

The Recession Will Be Mild
Average monthly job losses, peak to trough, thousands

08
01-03
90-91
81-83
80
74-75
70
60-61
-250

-200

-150

-100

Source: Moody’s Economy.com

-50

0

Change in Total Employment – U.S.
Q109 Low Point – Recession Scenario Looks
Familiar
4.0%

Recession, Slow Recovery
Moderate Recession
Recession

3.5% ‐ January 1995
3.0%

2.1% ‐ February 2006
2.0%

1.0%

0.7% ‐ March 2008

‐1.0%

‐1.4% ‐ May 1991 

‐1.6% ‐ February 2002

‐2.0%

1988 - 2012F

Source: Moody’s Economy.com

‐1.6% ‐ February 2009

Jul‐12

Dec‐11

May‐11

Oct‐10

Aug‐09

Mar‐10

Jan‐09

Jun‐08

Nov‐07

Apr‐07

Sep‐06

Jul‐05

Feb‐06

Dec‐04

May‐04

Oct‐03

Mar‐03

Aug‐02

Jan‐02

Jun‐01

Nov‐00

Apr‐00

Sep‐99

Feb‐99

Jul‐98

Dec‐97

Oct‐96

May‐97

Mar‐96

Aug‐95

Jan‐95

Jun‐94

Nov‐93

Apr‐93

Sep‐92

Feb‐92

Jul‐91

Dec‐90

May‐90

Oct‐89

Aug‐88

Mar‐89

Jan‐88

0.0%

Much Happening in the
National Economy
I. Credit Crunch:

Stifles Consumer & Business Activity

II. High Oil Prices:

Fuels Inflation; Impacts Travel
‘Fuels’

III. Low Dollar Valuation

Helps In
In-Bound
Bound International Travel

Increases Exports, Inflation

IV. Employment Growth Slowing

2007-2009 Economic Outlook
2007Expectations Decline Dramatically

Forecast Point
October 2007
January 2008
June 2008

Forecast Point
October 2007
January 2008
June 2008

Percent Change 2007 - 2008
Employment Income
GDP
CPI
0.7%
0.4%
0 1%
0.1%

2.6%
1.4%
1 3%
1.3%

2.3%
1.5%
1 6%
1.6%

2.0%
2.7%
3 6%
3.6%

Percent Change 2008 - 2009
Employment
p y
Income
GDP
CPI
1.1%
0 9%
0.9%
0.6%

3.3%
3 2%
3.2%
2.7%

Source: Moody’s Economy.com

3.2%
3 4%
3.4%
2.7%

1.9%
2 0%
2.0%
2.1%

In--Bound International Travel
In
+11.5
+11 5 Percent Through April 2008
Forecast: ‘08: +6.0%;
+6.0%; ‘09: +
+4.7
4.7%;
%; ‘10: 5.0
5.0%
%
U S PORT OF ENTRY (ALL MODES) OF NON-RESIDENT
U.S.
NON RESIDENT ARRIVALS
2007
2007
Year End 2007/2006 Hotel Change
TOTAL
% change
ADR
RevPAR
PORTS
OVERSEAS 2007/2006
Rank
Occ
Grand Total-All
Total All U
U.S.
S
23 892 277
23,892,277
10%
-0
0.2%
2%
5 9%
5.9%
5 7%
5.7%
NEW YORK, NY
3,806,028
16%
1
1.4%
11.2%
12.8%
MIAMI, FL
2,847,413
13%
2
1.6%
10.7%
12.5%
LOS ANGELES, CA
2,293,241
6%
3
-0.2%
7.4%
7.2%
NEWARK, NJ
1,590,400
16%
4
3.2%
5.4%
8.7%
HONOLULU, HI
1,456,381
-2%
5
-6.7%
6.6%
-0.6%
SAN FRANCISCO, CA
1,320,723
10%
6
3.0%
7.3%
10.5%
CHICAGO, IL
1,302,177
8%
7
-0.2%
5.8%
5.6%
AGANA, GU
1,064,371
0%
8
N.A
N.A
N.A
ATLANTA, GA
940,700
12%
9
-2.1%
4.9%
2.7%
WASHINGTON, DC
774,556
15%
10
0.2%
5.2%
5.4%
ORLANDO, FL
592,684
14%
11
0.0%
4.1%
4.2%
BOSTON, MA
520,999
9%
12
1.8%
7.3%
9.2%
DETROIT, MI
515,628
17%
13
2.3%
0.2%
2.5%
HOUSTON, TX
496,792
14%
14
0.4%
8.6%
9.0%
SANFORD (Orlando), FL
444,496
-4%
15
0.0%
4.1%
4.2%
S
Source:
U
U.S.
S D
Department
t
t off Commerce,
C
ITA,
ITA Office
Offi off T
Travell & T
Tourism
i
IIndustries
d ti
from the Summary of International Travel to the U.S. (I-94) report. Smith Travel Research.
*Overseas includes all countries except Canada and Mexico

Available Airline Seats vs. Lodging Demand
Q t l Ch
Quarterly Change from Prior Year
f
Pi Y
10.0% Change in Capacity = 3.9% Change in Demand
15.0%

10.0%

5.0%

199
91
1,99
91
199
92
199
92
1,99
93
199
93
199
94
199
94
199
95
199
95
199
96
199
96
199
97
199
97
199
98
199
98
199
99
199
99
200
00
200
00
200
01
200
01
200
02
200
02
200
03
200
03
200
04
200
04
200
05
200
05
200
06
200
06
200
07
200
07

0.0%

‐5.0%

‐10.0%

‐15.0%
Change in Available Airline Seats

Change in Lodging Demand

Sources: Department of Transportation, Smith Travel Research, PKF Hospitality Research

10 Year Inflation Expectations
116 bp Increase Since Q406
3.3%
3.0%
2.7%
2.4%
2.1%

Source: Economist View, January 8, 2008

1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08

1 8%
1.8%

Inflation is Good:

Inflation is Bad:

•Lifts ADR’s

•Hurts Overall Economy

Source: Federal Reserve Bank of Cleveland

•Increases Borrowing Costs

Inflation Rarely a Problem for
Hotel Profits
Annual Change
From 1960 to 2007
Revenue Change Greater Than CPI – 30 of 48 Years
Expense Change Greater Than CPI – 30 of 48 Years

15%
10%
5%
0%
‐5%
‐10%
‐15%
1960

1970

1980

Revenues

PKF Hospitality Research, BLS

1990

Expenses

2000

C.P.I.

2010

Loan Delinquencies Escalate
The Peak is Around the Corner
6.00

2.00
1.80

1.78% Q109
5.00

1.60
1.40

4 00
4.00

5.06% Q209

1.20

3.00

1.00

0.72% Q408
2.00

0.80
0.60
0.40

1.00

0.20
0.00

0.00

30 D C dit C d D li
30 Day Credit Card Deliquency %, ABA (Left)
% ABA (L ft)

30 D H
30 Day Home Equity Deliquency %, ABA (Right)
E it D li
% ABA (Ri ht)

60 Day Prime Loan Deliquency %, MBA (Right)

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

Where Are Cap Rates Going?

When Cash
Flows
Decelerate

When
Interest
R t
Rates
Increase

Cap Rates Increase

The more there is, 
Th
h
i
the higher the Cap 
Rate

So do Cap Rates

Three Main
Drivers of
Cap
p Rate
Change
PKF Hospitality Research

Volatility

Forecasts of Return Components
C R
Cap
Rates
t M
Moving
i U
Up – 190 b
bps b
by 2010
10 Year
Treasury

Treasury
Spread

Cap Rate

% Δ NOI

2005

4.3%

5.0%

9.3%

15.5%

2006

4.8%

3.7%

8.5%

13.3%

00
2007

4.6%

3.0%

7.6%

7.2%

2008F

4.1%

3.5%

7.6%

1.3%

2009F

5.4%

3.2%

8.6%

4.9%

2010F

5.6%

3.9%

9.5%

5.0%

LRA:

5.5%

4.8%

10.3%

4.7%

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

Presentation Outline

I. The Economy
II Current Horizon:
II.
Have We Seen This Before?
III Some
III.
S
Th
Thoughts
ht to
t Take-away
T k

High Supply Growth Preceded Last Two
Downturns
o tu s
Not This Time Around
6.0%

LRA Demand Δ: 1.9%
5.0%
4.0%
3 0%
3.0%
2.0%
1.0%
0.0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
‐1.0%
‐2.0%
‐3.0%
‐4.0%

Supply

Demand^

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

Historical Change
in U
U.S.
S Lodging Demand - Trough
12 Month Moving Average
6.0%

March 2008
4.0%

April 2007: <0.2%>
2.0%

0 0%
0.0%
1

3

5

7

9

11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

‐2.0%

November 1991: <1.2%>
‐4.0%

April 2002: <4.8%>
‐6 0%
‐6.0%

1989 ‐ 1994

1999 ‐ 2004

2004 ‐ 2009

Sources: PKF-HR, Smith Travel Research

Historical Change in U.S. Lodging
Demand – A Double
Double--Dip
12 Month Moving Average
6 0%
6.0%

March 2008
4.0%

April 2007 - <0.2%>
2.0%

0 0%
0.0%
1

3

5

7

9

11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

November 2008: <0.2%>
November 1991 - <1.2%>

‐2.0%

‐4.0%

April 2002 - <4.8%>
‐6 0%
‐6.0%

1989 ‐ 1994

1999 ‐ 2004

2004 ‐ 2009

Sources: PKF-HR, Smith Travel Research

Forecast

The Mild DoubleDouble-Dip Extends Recovery
12 Month Moving Average

6.0%

March 2008
4.0%

April 2007: <0.2%>

2.0%

1989
1989
1989
1990
1990
1991
1991
1991
1992
1992
1993
1993
1994
1994
1994
1995
1995
1996
1996
1996
1997
1997
1998
1998
1999
1999
1999
2000
2000
2001
2001
2001
2002
2002
2003
2003
2004
2004
2004
2005
2005
2006
2006
2006
2007
2007
2008
2008F
2009F
2009F
2009F

0 0%
0.0%

‐2.0%

November 1991: <1.2%>
N
November
b 2008
2008: <0.2%>
0 2%
‐4.0%

April 2002: <4.8%>

‐6 0%
‐6.0%

Supply

Demand

Sources: PKF-HR, Smith Travel Research

The DoubleDouble-Dip Extends a
Recovery
November
+ 1 Year
+ 2 Years
April
+ 1 Year
+ 2 Years
April
+ 1 Year
+ 2 Years
November
+ 1 Year
Y
+ 2 Years

12 Month Moving Averages
Supply Demand Occupancy ADR RevPAR
1991
2.1%
-1.2%
62.0%
0.6%
-2.7%
1 1%
1.1%
1 7%
1.7%
62 4%
62.4%
1 1%
1.1%
1 8%
1.8%
0.7%
2.1%
63.2%
2.4%
3.9%
2002
2.1%
-4.8%
58.9%
-3.9%
-10.4%
1 4%
1.4%
1 1%
1.1%
58 6%
58.6%
0 2%
0.2%
0 0%
0.0%
0.9%
2.6%
59.8%
1.0%
2.7%
2007
0.5%
-0.2%
63.1%
7.2%
6.5%
1 6%
1.6%
0 9%
0.9%
62 7%
62.7%
5 5%
5.5%
4 8%
4.8%
2.7%
0.9%
61.6%
4.0%
2.2%
2008F 2.3%
-0.3%
61.6%
4.6%
1.9%
2 8%
2.8%
3 1%
3.1%
61 8%
61.8%
3 3%
3.3%
3 6%
3.6%
2.5%
2.8%
62.0%
3.6%
4.0%
Sources: PKF-HR, Smith Travel Research

21

ADR Growth Will Continue
RevPAR Performance up in 2009
2008 = the Low Point Going Forward
Long
Term
Average
g
2004

= Below/Above Long Run Average

2005

2006

2007

2008F 2009F 2010F

Supply

1.9%

0.4%

-0.1%

0.2%

1.3%

2.5%

2.7%

2.3%

Demand

1 9%
1.9%

4 0%
4.0%

2 8%
2.8%

0 5%
0.5%

1 1%
1.1%

-0 1%
-0.1%

3 3%
3.3%

2 5%
2.5%

Occupancy

62.8%

61.3% 63.1% 63.3%

63.1%

61.6%

62.0%

62.1%

ADR

3.5%

4.2%

5.5%

7.5%

6.0%

4.1%

3.4%

3.7%

RevPAR

3.5%

7.9%

8.5%

7.8%

5.7%

1.5%

4.0%

3.9%

Source: PKF Hospitality Research, Smith Travel Research

2008: 62.2%, 4.7%, 3.0%

Upscale Hotels – USA
5.8% Supply Increase = Weak 2008
5 8% S
l I
W k 2008

2006

2007

2008F

2009F

Long-Term
Average

O
Occupancy

70 2%
70.2%

69 4%
69.4%

66 9%
66.9%

68 8%
68.8%

69 0%
69.0%

% Change

-0.2%

-1.1%

-3.5%

+2.7%

-

$111 53
$111.53

$118 21
$118.21

$121 05
$121.05

$125 63
$125.63

-

% Change

+8.7%

+6.0%

+2.4%

+3.8%

+3.4%

R PAR
RevPAR

$78 24
$78.24

$82 00
$82.00

$81 03
$81.03

$86 39
$86.39

-

% Change

+8.5%

+4.8%

-1.2%

+6.6%

+3.9%

ADR

LRA Supply: +7.1% Demand: +7.6%
Sources: Smith Travel Research, PKF Hospitality Research

Midscale Hotels without F&B - USA
ADR Lift Off‐
ADR Lif Off‐Sets 4.9% Supply Increase in 2008
ADR Lift Off
S 4 9% S
l I
i 2008

2006

2007

2008F

2009F

Long-Term
Average

O
Occupancy

66 1%
66.1%

65 4%
65.4%

63 3%
63.3%

63 1%
63.1%

65 2%
65.2%

% Change

+0.9%

-1.0%

-3.2%

-0.4%

-

ADR

$81 37
$81.37

$87 12
$87.12

$91 13
$91.13

$92 69
$92.69

-

% Change

+8.0%

+7.1%

+4.6%

+1.7 %

+4.1%

R PAR
RevPAR

$53 81
$53.81

$57 01
$57.01

$57 72
$57.72

$58 48
$58.48

-

% Change

+9.0%

+5.9%

+1.3%

+1.3%

+4.4%

LRA Supply: +10.7% Demand: +11.0%
Sources: Smith Travel Research, PKF Hospitality Research

Real RevPAR Growth Today…
Today…
Revised Forecast Change – 2007
2007--2008

RevPAR growing faster 
than CPI

RevPAR growing on par 
with CPI

Top 5:

Change

Salt Lake City

3.9%

Austin

3.7%

San Francisco

3.5%

Fort Lauderdale
Fort Lauderdale

3 3%
3.3%

Denver

3.3%

Bottom 5:

Change

Fort Worth

‐5.4%

San Antonio

‐3.7%

Long Island

‐2.9%

Jacksonville

‐2.8%
2.8%

Houston

‐2.0%

RevPAR growing slower 
than CPI
PKF Hospitality Research, Moody’s Economy.com

U.S. HOTEL INDUSTRY
Change In Select Unit Level Revenues And Expenses
2006 - 2007

6 0%
6.0%

R
Rooms
R
Revenue

5.0%

Food and Beverage Revenue

5.5%

Total Revenue

7.8%

Labor Costs

3.6%

Total Operated Department Expenses

7.4%

A&G

6.9%

Maintenance

4 6%
4.6%

Utility Costs

7.9%

Management Fees

4.6%

Property Taxes

7.9%

Insurance

7.2%

NOI*

0%

3%

6%

Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and
amortization.
Source: PKF Hospitality Research

9%

Nominal Dollar Operating Profits*
Still Not Back to 2000
$18,000

$16,886
$15,641 $16,100
$14,590

$15,678
$14,239

$11,148
$10,007
$
,

$10,000

Estima
ated

$12,875

$12,636
$11,423

Estima
ated

$14,000

2008

2009

$6 000
$6,000
1999

2000

2001

2002

2003

2004

2005

2006

2007

U.S. Trends Sample
Dollars per Available Room
Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.
Source: PKF Hospitality Research

Operating Profits*
A Decade of No Real Growth
(2007 Constant Dollars)
$21 000
$21,000
$18,887
$17,731

$13,676
$13,172

$13,000

$12,242
$11 282
$11,282

$9,000
1999

2000

U.S. Trends Sample

2001

2002

2003

2004

2005

2006

2007

Dollars per Available Room

Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.

Source: PKF Hospitality Research

Estim
mated

$15,014

$14,801

$15 641 $15,631 $15,956
$15,641

Estim
mated

$17,000

2008

2009

Presentation Outline

I. The Economy
y
II. Current Horizon:
Have We Seen This Before?
III. Some Thoughts to Take-away

Something to Take Away
9 U.S. Economy Might be in a Recession, But Not
Hotels
9 Double Demand Dip This Cycle is Unique:
(1) High ADR’s (2) Weak Economy

9 Trough of Current Downturn Q3 2008
9 Supply/Demand Imbalance Will Temper Recovery 2010
9 NOI Essentially Flat in 2008
9 Watch those Expenses!

SPECIAL OFFER
CLAUDE.VARGO@PKFC.COM
71st Edition
“TRENDS IN THE HOTEL INDUSTRY”
plus

“HOTEL HORIZONS”
“HOTEL HORIZONS”
Detailed National, Local and Chain Scale Forecasts
25% Discount
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Discount
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