pkf-hr hunter 2012

ALIS 2012ALIS 2012

U.S. Lodging Market Outlook U.S. Lodging Market Outlook

March 19, 2012Mark Woodworth

Accelerating success.PKF Hospitality Research

TopicsTopics

Accuracy AssessmentAccuracy AssessmentYou Pick the Forecast !You Pick the Forecast !Cap Rate OutlookCap Rate Outlook

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2

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Hunter Conference Hunter Conference 20112011Accuracy AssessmentAccuracy AssessmentAccuracy AssessmentAccuracy Assessment

United StatesUnited States20112011 20122012

HunterHunter20112011

2011 2011 A t lA t l

HunterHunter20112011

Current Current F tF t20112011 ActualActual 20112011 ForecastForecast

Occupancy 59.4% 60.1% 61.0% 61.0%

ADR 3.8% 3.7% 6.0% 4.1%

RevPAR 7 1%7 1% 8 2%8 2% 8 9%8 9% 5 8%5 8%RevPAR 7.1%7.1% 8.2%8.2% 8.9%8.9% 5.8%5.8%

Full Demand RecoveryFull Demand Recovery Less Optimistic on Less Optimistic on ADR PotentialADR Potential

3Source: PKF Hospitality Research, LLC – March-May 2012 Hotel Horizons®, Smith Travel Research

Why?Why?

Factors Impacting ADR in 2012Factors Impacting ADR in 2012

Main drivers of the demand recovery 2010 - 2011:

Real personal income growth- Corporate profit growth- Real personal income growth- Low room rates

4

Rate of Corporate Profit GrowthRate of Corporate Profit GrowthNot as Robust in 2012Not as Robust in 2012

50 0% 4 Q t M i A Ch

Not as Robust in 2012Not as Robust in 2012

40.0%

50.0% 4-Quarter Moving Average ChangeChange in U.S. Corporate Profits ForecastForecast

20.0%

30.0%

0.0%

10.0%

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

-20.0%

-10.0% 198

199

199

199

199

199

199

199

199

199

199

200

200

200

200

200

200

200

200

200

200

201

201

201

201

-30.0%Source: Moody’s Analytics

5

Change inChange inTotal Real Personal IncomeTotal Real Personal Income

J 11 A 11 O tO t 1111 JJ 1212

Total Real Personal IncomeTotal Real Personal Income

Date of Forecast:

Hunter 2011

6.0%

8.0%Jan-11 Apr-11 OctOct--1111 JanJan--1212

2.0%

4.0%

-2.0%

0.0%

A little more pessimistic

-6.0%

-4.0% going into 2012

Source: Moody's Analytics6

TodayHunter 2011

Leading Economic IndicatorsLeading Economic Indicators% change in last 6 months % change in last 6 months ––February 2012February 2012gg yy

15%

20%Leading Economic Indicators (% change in the last 6 months) U.S. Hotel Demand

5%

10%

15%

-5%

0%

5%

-15%

-10%

-25%

-20%

A Contraction A Contraction

6 to 8 Month Lag6 to 8 Month Lag

Source: The Conference Board, PKF-HR, STR 7

-30%Coming?Coming?

Room Rates Remain Well Below Room Rates Remain Well Below Past Peak in Most MarketsPast Peak in Most Markets

2011 ADR2011 ADRPercentage Point Difference From Previous PeakPercentage Point Difference From Previous Peak

0%

5%Percentage Point Difference From Previous PeakPercentage Point Difference From Previous Peak

U.S. is 5.4% below the previous peak.

-5%

0%

-10%

®®

-15%50 U.S. Horizons50 U.S. Horizons®® MarketsMarkets

Room Rates Still Have a Room Rates Still Have a LongLong Way to Go!Way to Go!

-20%8Source: PKF Hospitality Research, March – May 2012 Hotel Horizons®

But Fundamentals are ImprovingBut Fundamentals are ImprovingBut Fundamentals are ImprovingBut Fundamentals are Improving

Number of Top U.S. Markets with Number of Top U.S. Markets with Increasing:Increasing:

Average Daily Rates Occupancy

Increasing:Increasing:

Rates Occupancy2008 47 42009 0 02010 9 49 Houston

Outliers Outliers

2010 9 492011 48 49

2012F 50 44

Atlanta and San AntonioHouston

New Orleans

2013F 50 482014F 50 492015F 50 48

9Source: STR, PKF Hospitality Research, March – May 2012 Hotel Horizons®

Rates and Occupancies are Going Up !Rates and Occupancies are Going Up !

Pi k Y OPi k Y OPi k Y OPi k Y OPick Your Own Pick Your Own F tF t

Pick Your Own Pick Your Own F tF tForecastForecastForecastForecast

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Pick Your Own Forecast:Pick Your Own Forecast:

Three Scenarios

1 Mild Second Recession

2 Expected Case

1. Mild Second Recession

2. Expected Case

3. Strong Near-term Reboundg

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Mild Second RecessionMild Second Recession

• European Sovereign and banking debt problems intensify causing the European recession to worsenintensify, causing the European recession to worsen.

• U.S. business confidence weakens and total U.S. exports level off and begin to decline.exports level off and begin to decline.

• Lack of progress on the U.S. fiscal situation further undermines business confidence.

• A mild second recession occurs during first and second quarters of 2012.U l t t i ki t 11 1% i Q1• Unemployment rate rises, peaking at 11.1% in Q1 2013.

2012 Mild Second Recession Economic ForecastI E l t CPI GDP

12

Income Employment CPI GDP1.5% -0.3% 0.8% 0.1%

Source: Moody’s Analytics

Mild Second RecessionMild Second Recession

MeasureMeasure 20112011 20122012Supply 0.6% 0.7%

Demand 5.0% -0.1%5.0% 0.1%Occupancy 60.1% 59.6%

Average Daily Rate 3 7% 2 7%Average Daily Rate 3.7% 2.7%RevPAR 8.2% 1.9%

13Source: PKF Hospitality Research; Smith Travel Research

Expected Case ScenarioExpected Case Scenario

• Unemployment is expected to remain above 8% through 2012 even with the addition of 2 million jobsthrough 2012 even with the addition of 2 million jobs.

• Extend payroll tax holiday and emergency unemployment insurance through the rest of 2012.unemployment insurance through the rest of 2012.

• Housing prices continue to fall through Q2 2012 as foreclosures and short sales increase.

• Mild European Recession.• Business Investment increases 8.9%.

2012 Expected Case Economic ForecastIncome Employment CPI GDP

14Source: Moody’s Analytics

Income Employment CPI GDP2.5% 1.1% 2.1% 2.6%

Expected Case ScenarioExpected Case Scenario


Demand 5.0% 2.2%5.0% 2.2%Occupancy 60.1% 61.0%



Strong NearStrong Near--term Reboundterm Rebound

• Better than expected progress on the European sovereign debt crisis and the U S federal fiscal debatesovereign debt crisis and the U.S. federal fiscal debate raises business confidence, speeding up fixed investment & hiring.g

• Consumer sentiment rebounds strongly.• No further declines in house prices.• Unemployment rate declines to less than 8%.• Federal Reserve begins to raise the federal funds rate

l l th f 2012slowly over the course of 2012.2012 Strong Near-term Rebound Economic Forecast

Income Employment CPI GDP

16Source: Moody’s Analytics

Income Employment CPI GDP3.4% 1.7% 2.3% 3.7%

Strong NearStrong Near--term Reboundterm Rebound


Demand 5.0% 2.9%5.0% 2.9%Occupancy 60.5% 61.6%



You Pick the ForecastYou Pick the Forecast

20122012Mild Mild Strong Strong

MeasureMeasureSecond Second

RecessionRecessionExpected Expected

CaseCaseNearNear--term term ReboundRebound

Demand 0.6% 2.2% 2.9%Occupancy 60.1% 61.0% 61.6%

Average Daily Rate 2.1% 4.1% 4.6%RevPAR 2.3% 5.8% 7.3%

18Source: PKF Hospitality Research1.1. 2.2. 3.3.

C R t F tC R t F tC R t F tC R t F tCap Rate ForecastCap Rate ForecastCap Rate ForecastCap Rate Forecast

19

The Credit Spigot Is OpeningThe Credit Spigot Is OpeningNet % of senior loan officers…

8050Willi t k

40

60

20

30

40 Willing to make a consumer loan (L)

0

20

0

10

-40

-20

-30

-20

-10

Tightening standards for C&I loans to small

-80

-60

-50

-40

90 92 94 96 98 00 02 04 06 08 10 12

businesses (R)

90 92 94 96 98 00 02 04 06 08 10 12

Source: Federal Reserve Senior Loan Officer Survey – January, 2012

Hotel Cap Rate Forecasting ModelHotel Cap Rate Forecasting Model

Accounting for Growth and Risk Accounting for Growth and Risk (Gordon Growth Model)(Gordon Growth Model)

Moody’s AnalyticsMoody’s AnalyticsPKF Hotel PKF Hotel RERC Survey/ RCA

RERC Survey/ RCAData Moody s AnalyticsMoody s AnalyticsHorizons/ STRHorizons/ STRSurvey/ RCA

Trans.Survey/ RCA

Trans.Data

10-Year Treasuries Moody’s Baa Corp Bond

Changes in Income

Hotel Cap RateVariables

R Hotel ΔRevPAR Risk Free AlternativeT10

Market RiskBaa - T10

The equity risk Change in Risk free Proxy for all

21

applied to hotels

incomeRisk free

alternative toany investment

Proxy for allother rated

debt

Forecasts of Return ComponentsForecasts of Return ComponentsLodging Risk Premium Stays Below L.R.A.Lodging Risk Premium Stays Below L.R.A.

10 Year Treasury Market Risk PremiumLodging Risk Premium Hotel Cap Rate

2005 4 3% 1 8% 2 8% 8 9%

Base Case ScenarioBase Case Scenario

2005 4.3% 1.8% 2.8% 8.9%

2006 4.8% 1.7% 2.0% 8.5%

2007 4.6% 1.9% 1.5% 7.9%

2008 3.7% 3.8% 0.9% 8.4%

2009 3.3% 4.0% 2.0% 9.3%

2010 3.2% 2.8% 1.9% 7.9%

2011 2.8% 2.8% 2.5% 8.1%

2012F 2 5% 2 9% 2 3% 7 7%

3.5%5 0%

2.4%2 0%

2.3%1 8%

8.2%8 8%2012F 2.5% 2.9% 2.3% 7.7%

2013F 4.0% 2.4% 2.2% 8.6%

L.R.A. 5.3% 2.3% 2.7% 10.0%

5.0%

5.2%

2.0%

1.7%

1.8%

1.7%

8.8%

8.6%

Source: PKF Hospitality Research, RERC, RCA, Moody’s Analytics

Long Run Average (L.R.A.) = 1992-2011

22Hunter 2011 = REDHunter 2011 = RED

S Thi tS Thi tS Thi tS Thi tSome Things to Some Things to Think AboutThink About

Some Things to Some Things to Think AboutThink AboutThink AboutThink AboutThink AboutThink About

23

In Asian Astrology…..In Asian Astrology…..

J 23rd 2012 bJ 23rd 2012 bJanuary 23rd, 2012 began the year of the

January 23rd, 2012 began the year of theyy

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In Asian Astrology…..In Asian Astrology…..

• This should be a year of aggressive positioning for the future.

• This should be a year of aggressive positioning for the future.p gp g

• “Conventional wisdom” should not be allowed to stand in the way of

• “Conventional wisdom” should not be allowed to stand in the way ofbe allowed to stand in the way of progress.be allowed to stand in the way of progress.

Th h fid t i th iTh h fid t i th i• Those who are confident in their ideas and ventures should proceed.

• Those who are confident in their ideas and ventures should proceed.

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A Final ThoughtA Final Thought

“Each New Day “Each New Day Brings a Rising Tide”Brings a Rising Tide”

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pkf-hr hunter 2012

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