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What Lies Ahead?
Thursday, July 17, 2008
. .
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Presentation OutlinePresentation OutlinePresentation OutlinePresentation Outline
I. The EconomyI. The Economy
II. Current Horizon:
Have We Seen this Before?
II. Current Horizon:
Have We Seen this Before?
III. Some Thoughts to Take-awayIII. Some Thoughts to Take-away
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recession?recession?
Orjustahealthycorrection?Orjustahealthycorrection?
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Economy.coms Current OutlookEconomy.coms Current Outlook
90% Probability of a Recession90% Probability of a Recession
10%
51% HighGrowth
Recession,SlowRecovery
ModerateRecession
25%
Source: Moodys Economy.com4%
10%
ProbabilityofOccurrence
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The Recession Will Be MildThe Recession Will Be MildAverage monthly job losses, peak to trough, thousands
01-03
08
81-83
90-91
74-75
80
60-61
70
-250 -200 -150 -100 -50 0
Source: Moodys Economy.com
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Change in Total EmploymentChange in Total Employment U.S.U.S.
FamiliarFamiliar
4.0%
Recession,SlowRecovery3.5% January1995
3.0%
ModerateRecession
Recession
2.1% February20062.0%
0.7% March2008
0.0%
1.0%
1.0%
Jan8
8
Aug8
8
Mar89
Oct89
May9
0
Dec9
0
Jul91
Feb
92
Sep9
2
Apr93
Nov9
3
Jun9
4
Jan9
5
Aug9
5
Mar96
Oct96
May9
7
Dec9
7
Jul98
Feb
99
Sep9
9
Apr00
Nov0
0
Jun0
1
Jan0
2
Aug0
2
Mar03
Oct03
May0
4
Dec0
4
Jul05
Feb
06
Sep0
6
Apr07
Nov0
7
Jun0
8
Jan0
9
Aug0
9
Mar10
Oct10
May1
1
Dec1
1
Jul12
1988 - 2012F1988 - 2012F Source: Moodys Economy.com1.6% February2009
1.4% May19911.6% February2002
2.0%
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Much Happening in theMuch Happening in theMuch Happening in theMuch Happening in theNational EconomyNational EconomyNational EconomyNational Economy
I. Credit Crunch: Stifles Consumer & Business Activity
I. Credit Crunch: Stifles Consumer & Business Activity
II. High Oil Prices:
II. High Oil Prices:
III. Low Dollar Valuation
III. Low Dollar Valuation
- Increases Exports, InflationInflation - Increases Exports, InflationInflation
IV. Employment Growth SlowingIV. Employment Growth Slowing
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20072007--2009 Economic Outlook2009 Economic Outlook20072007--2009 Economic Outlook2009 Economic OutlookExpectations Decline DramaticallyExpectations Decline Dramatically
Forecast Point Employment Income GDP CPIPercent Change 2007 - 2008
October 2007 0.7% 2.6% 2.3% 2.0%
January 2008 0.4% 1.4% 1.5% 2.7%. . . .
Forecast Point Em lo ment Income GDP CPI
Percent Change 2008 - 2009
October 2007 1.1% 3.3% 3.2% 1.9%
Source: Moodys Economy.com
. . . .
June 2008 0.6% 2.7% 2.7% 2.1%
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InIn--Bound International TravelBound International Travel..
Forecast: 08:Forecast: 08: +6.0+6.0%; 09: +%; 09: +4.74.7%; 10:%; 10: 5.05.0%%
2007TOTAL % change
PORTS OVERSEAS 2007/2006 Rank Occ ADR RevPAR- -
Year End 2007/2006 Hotel Change
. . -
2007
. . , , . . .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.AATLANTA, 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%Source: U.S. Department of Commerce, ITA, Office of Travel & Tourism Industries
from the Summary of International Travel to the U.S. (I-94) report. Smith Travel Research.
*Overseas includes all countries except Canada and Mexico
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AvailableAirlineSeatsvs.LodgingDemandAvailableAirlineSeatsvs.LodgingDemanduar er y
ange
rom
r or
earuar er y
ange
rom
r or
ear
10.0% Change in Capacity = 3.9% Change in Demand10.0% Change in Capacity = 3.9% Change in Demand10.0% Change in Capacity = 3.9% Change in Demand10.0% Change in Capacity = 3.9% Change in Demand
10.0%
15.0%
0.0%
5.0%
1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7
10.0%
5.0%
19
1,9 1
919
1,9 1
919
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
15.0%
ChangeinAvailableAirlineSeats ChangeinLodgingDemand
Sources: Department of Transportation, Smith Travel Research, PKF Hospitality Research
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10 Year Inflation Expectations10 Year Inflation Expectations10 Year Inflation Expectations10 Year Inflation Expectations116 bp Increase Since Q406116 bp Increase Since Q406
3.0%
3.3%
2.4%
2.7%
Source: Economist View, January 8, 20082.1%
.
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
Lifts ADRs Hurts Overall Economy
Increases Borrowing CostsSource: Federal Reserve Bank of Cleveland
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Inflation Rarely a Problem forInflation Rarely a Problem for
Annual ChangeAnnual ChangeFrom 1960 to 2007
Revenue Change Greater Than CPI 30 of 48 Years
15%
Expense Change Greater Than CPI 30 of 48 Years
5%
10%
10%
5%
15%
1960 1970 1980 1990 2000 2010
Revenues Expenses C.P.I.
PKF Hospitality Research, BLS
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Loan Delinquencies EscalateLoan Delinquencies EscalateLoan Delinquencies EscalateLoan Delinquencies Escalate
The Peak is Around the CornerThe Peak is Around the CornerThe Peak is Around the CornerThe Peak is Around the Corner
2.006.00
1.40
1.60
1.80
5.00
1.78% Q109
0.80
1.00
1.20
3.00
.
5.06% Q209
0.72% Q408
0.20
0.40
0.60
1.00
2.00
0.000.00
Source: PKF Hospitality Research, Moodys Economy.com
30DayCre itCar De iquency%,ABA Le t 30DayHomeEquityDe iquency%,ABA Rig t
60DayPrimeLoanDeliquency%,MBA(Right)
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Where Are Cap Rates Going?Where Are Cap Rates Going?Where Are Cap Rates Going?Where Are Cap Rates Going?
When CashFlowsDecelerate
When
Interest
CapRatesIncrease
Volatilitya es
Increase
SodoCapRates
T emoret ere s,
thehighertheCap
Rate
Three MainDrivers ofCa RateChange
PKF Hospitality Research
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Forecasts of Return ComponentsForecasts of Return Componentsap a es ov ng pap a es ov ng p ps yps y
10 Year Treasury
Treasury Spread Cap Rate % NOI2005 4.3% 5.0% 9.3% 15.5%
2006 4.8% 3.7% 8.5% 13.3%
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%
PKF Hospitality Research, Moodys Economy.com, RERC
LRA: 5.5% 4.8% 10.3% 4.7%
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Presentation OutlinePresentation OutlinePresentation OutlinePresentation Outline
I. The EconomyI. The Economy
.
Have We Seen This Before?
.
Have We Seen This Before?
. ome oug s o a e-away. ome oug s o a e-away
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HighHigh Supply Growth Preceded Last TwoSupply Growth Preceded Last Two
DownturnsDownturns
HighHigh Supply Growth Preceded Last TwoSupply Growth Preceded Last Two
DownturnsDownturns
6.0%
Not This Time AroundNot This Time AroundNot This Time AroundNot This Time Around
4.0%
5.0%
LRA Demand : 1.9%
1.0%
2.0%
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
4.0%
3.0%
Supply Demand^
Source: PKF Hospitality Research, STR, BLS, Moodys Economy.com
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Historical ChangeHistorical Change
--. .. .12 Month Moving Average12 Month Moving Average
4.0%
6.0%
March 2008
2.0%
April 2007:
2.0%
.
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 1991:
4.0%
April 2002:
.
1989 1994 1999 2004 2004 2009
Sources: PKF-HR, Smith Travel Research
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Historical Change in U.S. LodgingHistorical Change in U.S. Lodging
--12 Month Moving Average12 Month Moving Average
4.0%
6.0%
March 2008
April 2007 - 2.0%
November 1991 - 2.0%
.
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:
April 2002 -
4.0%
Sources: PKF-HR, Smith Travel Research
.
1989 1994 1999 2004 2004 2009 Forecast
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The Mild DoubleThe Mild Double--Dip Extends RecoveryDip Extends Recovery
4.0%
6.0%
April 2007:
March 2008
2.0%
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
November 1991:
4.0%April 2002:
ovem er : < . >
.
Supply Demand
Sources: PKF-HR, Smith Travel Research
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The DoubleThe Double--Dip Extends aDip Extends aRecoveryRecovery
Supply Demand Occupancy ADR RevPARNovember 1991 2.1% -1.2% 62.0% 0.6% -2.7%
. . . . .
+ 2 Years 0.7% 2.1% 63.2% 2.4% 3.9%
April 2002 2.1% -4.8% 58.9% -3.9% -10.4% . . . . .
+ 2 Years 0.9% 2.6% 59.8% 1.0% 2.7%
April 2007 0.5% -0.2% 63.1% 7.2% 6.5%
. . . . .
+ 2 Years 2.7% 0.9% 61.6% 4.0% 2.2%
November 2008F 2.3% -0.3% 61.6% 4.6% 1.9%
+ ear . . . . .
+ 2 Years 2.5% 2.8% 62.0% 3.6% 4.0%21Sources: PKF-HR, Smith Travel Research
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ADR Growth Will ContinueADR Growth Will ContinueADR Growth Will ContinueADR Growth Will Continue
RevPAR Performance up in 2009RevPAR Performance up in 2009
2008 = the Low Point Going Forward2008 = the Low Point Going Forward
RevPAR Performance up in 2009RevPAR Performance up in 2009
2008 = the Low Point Going Forward2008 = the Low Point Going Forward
LongTermAverage 2004 2005 2006 2007 2008F 2009F 2010F
= Below/Above Long Run Average
Supply 1.9% 0.4% -0.1% 0.2% 1.3% 2.5% 2.7% 2.3%
-. . . . . . . .
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%
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Upscale HotelsUpscale Hotels USAUSA
.
upp y
ncrease=
ea
.
upp y
ncrease=
ea
2006 2007 2008F 2009F Long-TermAverage
ccupancy . . . . .
% Change -0.2% -1.1% -3.5% +2.7% -
. . . . -
% Change +8.7% +6.0% +2.4% +3.8% +3.4%
ev . . . . -% Change +8.5% +4.8% -1.2% +6.6% +3.9%
Sources: Smith Travel Research, PKF Hospitality Research
LRA Supply: +7.1% Demand: +7.6%
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Midscale Hotels without F&BMidscale Hotels without F&B -- USAUSA
t
t
ets
.
upp y
ncrease
n
ets
.
upp y
ncrease
n
2006 2007 2008F 2009F Long-TermAverage
ccupancy . . . . .
% Change +0.9% -1.0% -3.2% -0.4% -
. . . . -
% Change +8.0% +7.1% +4.6% +1.7 % +4.1%
ev . . . . -% Change +9.0% +5.9% +1.3% +1.3% +4.4%
Sources: Smith Travel Research, PKF Hospitality Research
LRA Supply: +10.7% Demand: +11.0%
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Real RevPAR GrowthReal RevPAR Growth TodayTodayReal RevPAR GrowthReal RevPAR Growth TodayToday
Revised Forecast ChangeRevised Forecast Change 20072007--20082008Revised Forecast ChangeRevised Forecast Change 20072007--20082008
Top5: Change
SaltLakeCity
Austin
SanFrancisco
3.9%
3.7%
3.5%
Denver
Bottom5:
.
3.3%
Change
FortWorth
SanAntonio
LongIsland
5.4%
3.7%
2.9%
2.8%
Houston2.0%
RevPARgrowingonpar
with
CPI
RevPARgrowingslower
than
CPI
RevPARgrowingfaster
than
CPIPKF Hospitality Research, Moodys Economy.com
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U.S. HOTEL INDUSTRYU.S. HOTEL INDUSTRYChange In Select Unit Level Revenues And ExpensesChange In Select Unit Level Revenues And Expenses
--
7.8%
5.5%5.0%
.
Labor Costs
Total RevenueFood and Beverage Revenue
ooms evenue
6.9%
7.4%
3.6%
Maintenance
A&G
Total Operated Department Expenses
7.9%
4.6%
7.9%
4.6%
Insurance
Property Taxes
Management Fees
Utility Costs
7.2%
0% 3% 6% 9%
NOI*
Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, andamortization.
Source: PKF Hospitality Research
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Nominal Dollar Operating Profits*Nominal Dollar Operating Profits*
14 239
$15,678$16,100$16,886
$14,590$15,641
$18,000
$12,636
$11,423
10 007
$11,148
$12,875$14,000
ted
ted
$10,000
Estim
Estim
,
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
U.S. Trends Sample
Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.
Source: PKF Hospitality Research
Dollars per Available Room
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Operating Profits*Operating Profits*
A Decade of NoA Decade of No RealReal GrowthGrowth(2007 Constant Dollars)(2007 Constant Dollars)
$18,887$17,731
15 95617 000
,
$14,801
$13,172
$12,242
$13,676
$15,014, $15,631
$13,000 at
ed
at
ed
$11,282
$9,000 Esti
Esti
DollarsperAvailableRoomU.S. Trends Sample
Note:*Beforecapitalreserve,debtservice,rent,incometaxes,depreciation,amortization.
Source: PKF Hospitality Research
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Presentation OutlinePresentation OutlinePresentation OutlinePresentation Outline
I. The EconomI. The Econom
II. Current Horizon:II. Current Horizon:
III. Some Thoughts to Take-away
III. Some Thoughts to Take-away
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U.S. Economy Might be in a Recession, But Not
Hotels
ou e eman p s yc e s n que:
(1) High ADRs (2) Weak Economy
Supply/Demand Imbalance Will Temper Recovery -2010
NOI Essentially Flat in 2008
Watch those Expenses!
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SPECIAL
OFFERSPECIAL
OFFER
[email protected]@PKFC.COM71st Edition
TRENDSINTHEHOTELINDUSTRY
plus
HOTELHORIZONS
DetailedNational,LocalandChainScaleForecasts
Code:
=NABHOOD2008
www.pkfc.comcode ex ires Au ust 31 2008
69