hospitality lawyer: pkf hospitality tells us "what lies ahead"?

8/14/2019 Hospitality Lawyer: PKF Hospitality tells us "What Lies Ahead"?

1/31

What Lies Ahead?

Thursday, July 17, 2008

. .


2/31

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


3/31

recession?recession?

Orjustahealthycorrection?Orjustahealthycorrection?


4/31

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


5/31

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


6/31

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%


7/31

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


8/31

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%


9/31

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


10/31

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


11/31

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


12/31

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


13/31

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)


14/31

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


15/31

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%


16/31


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


17/31

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


18/31

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


19/31

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%


.

1989 1994 1999 2004 2004 2009 Forecast


20/31

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



21/31

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


22/31

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%


23/31

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%


24/31

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%


25/31

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


26/31

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


27/31

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.


Dollars per Available Room


28/31

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.



29/31


I. The EconomI. The Econom

II. Current Horizon:II. Current Horizon:

III. Some Thoughts to Take-away

III. Some Thoughts to Take-away


30/31

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!


31/31

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

hospitality lawyer: pkf hospitality tells us "what lies ahead"?

Documents