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Presentation PKF Consulting at Meet the Money 2010

Presentation PKF Consulting at Meet the Money 2010

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  • What are the really big questions? It occurs to me that, if I were out there with you listening to this, I might want to know just how good PKF is at forecasting lodging performance. What did we say a year ago? Also, the typical U.S. hotel has realized a year-over-year decline in profits in each of the past two years – will 2010 be more of the same, or will the industry finally turn the corner? With so many questions about the economy, when will profit growth return and, importantly, when will this growth be sustained, or stabilized? And finally, we believe that the hotel investors that have been sitting on the sidelines will begin to move on to the field in greater numbers this year. When this begins to happen, where will cap rates likely go?
  • What are the really big questions? It occurs to me that, if I were out there with you listening to this, I might want to know just how good PKF is at forecasting lodging performance. What did we say a year ago? Also, the typical U.S. hotel has realized a year-over-year decline in profits in each of the past two years – will 2010 be more of the same, or will the industry finally turn the corner? With so many questions about the economy, when will profit growth return and, importantly, when will this growth be sustained, or stabilized? And finally, we believe that the hotel investors that have been sitting on the sidelines will begin to move on to the field in greater numbers this year. When this begins to happen, where will cap rates likely go?
  • What are the really big questions? It occurs to me that, if I were out there with you listening to this, I might want to know just how good PKF is at forecasting lodging performance. What did we say a year ago? Also, the typical U.S. hotel has realized a year-over-year decline in profits in each of the past two years – will 2010 be more of the same, or will the industry finally turn the corner? With so many questions about the economy, when will profit growth return and, importantly, when will this growth be sustained, or stabilized? And finally, we believe that the hotel investors that have been sitting on the sidelines will begin to move on to the field in greater numbers this year. When this begins to happen, where will cap rates likely go?
  • What are the really big questions? It occurs to me that, if I were out there with you listening to this, I might want to know just how good PKF is at forecasting lodging performance. What did we say a year ago? Also, the typical U.S. hotel has realized a year-over-year decline in profits in each of the past two years – will 2010 be more of the same, or will the industry finally turn the corner? With so many questions about the economy, when will profit growth return and, importantly, when will this growth be sustained, or stabilized? And finally, we believe that the hotel investors that have been sitting on the sidelines will begin to move on to the field in greater numbers this year. When this begins to happen, where will cap rates likely go?
  • Read above.
  • What are the really big questions? It occurs to me that, if I were out there with you listening to this, I might want to know just how good PKF is at forecasting lodging performance. What did we say a year ago? Also, the typical U.S. hotel has realized a year-over-year decline in profits in each of the past two years – will 2010 be more of the same, or will the industry finally turn the corner? With so many questions about the economy, when will profit growth return and, importantly, when will this growth be sustained, or stabilized? And finally, we believe that the hotel investors that have been sitting on the sidelines will begin to move on to the field in greater numbers this year. When this begins to happen, where will cap rates likely go?
  • At MTM 2009, the U.S. economic recession was just over a year old, the panic of Wall Street was in its 4 th month, and our new President was just checking into the White House. Lodging fundamentals were contracting dramatically, and uncertainty was rife. Comparing the actual 2009 data that Mark just shared with us to our forecasts of a year ago, we came fairly close on occupancy, but were well off in the magnitude of rate decline. Six months later, at BHN’s MTM Summer update, the economy continued to contract, but there was a growing sense that the end of the recession might be drawing near. Our mid-year forecasts were about on target, although rates turned out to be better that we thought. Our thinking for 2010 has not changed much, and a year from now , I hope to be saying “Not Too Bad” as I look back and judge the forecasts presented here today.
  • What are the really big questions? It occurs to me that, if I were out there with you listening to this, I might want to know just how good PKF is at forecasting lodging performance. What did we say a year ago? Also, the typical U.S. hotel has realized a year-over-year decline in profits in each of the past two years – will 2010 be more of the same, or will the industry finally turn the corner? With so many questions about the economy, when will profit growth return and, importantly, when will this growth be sustained, or stabilized? And finally, we believe that the hotel investors that have been sitting on the sidelines will begin to move on to the field in greater numbers this year. When this begins to happen, where will cap rates likely go?
  • The answer begins with a brief review of the economic outlook from Moody’s economy.com that is incorporated into our lodging forecasts.
  • Their current forecast calls for an employment recovery period that, in terms of duration, will be about a year longer that the episode realized at the beginning of the last decade. Job losses this time around, however, are much greater. Total employment today is approaching the early 2003 level of 130 million jobs, and it will be another 2.5 years until past peak job levels return.
  • Many more people are without jobs to day than what was the case during the previous three U.S. recessions, and the peak of unemployment in the current cycle – at 10.5% according to Moody’s – will not arrive until the 3 rd quarter of this year.
  • Key among the several variables that factor into the models that support our forecasting efforts are the four measures shown here. According to Moody’s, GDP will experience a modest uptick this year, and all measures should show favorable trends in 2011 and 2012. Growing levels of lodging demand will reappear as a result.
  • Thinking locally, here we illustrate the employment outlook for each of the 50 cities that comprise our Hotel Horizon’s universe. It’s not all bad for everyone, but it is clear that the vast majority of markets will not begin to experience job increases until the back half of this year or sometime in 2011.
  • Development is now at minimum levels, and the domestic lodging industry is at the bottom of the cycle, poised for recovery. So: how soon, how much, and when will profit growth return?
  • The answer begins with a brief review of the economic outlook from Moody’s economy.com that is incorporated into our lodging forecasts.
  • The answer begins with a brief review of the economic outlook from Moody’s economy.com that is incorporated into our lodging forecasts.
  • The answer begins with a brief review of the economic outlook from Moody’s economy.com that is incorporated into our lodging forecasts.
  • The answer begins with a brief review of the economic outlook from Moody’s economy.com that is incorporated into our lodging forecasts.
  • To begin answering these questions, we turn to Hotel Horizons and our current forecasts.
  • As Mark just noted, the bad news has begun to get better. We believe that demand levels will finally expand early this year after 8 consecutive quarters of decline. Supply growth will fall below the STR long run average level of 1.9% this Spring. Occupancies will begin to increase such that RevPAR will grow in the 3 rd quarter and room rates will finally gain some lift towards the end of this year.
  • As Mark just noted, the bad news has begun to get better. We believe that demand levels will finally expand early this year after 8 consecutive quarters of decline. Supply growth will fall below the STR long run average level of 1.9% this Spring. Occupancies will begin to increase such that RevPAR will grow in the 3 rd quarter and room rates will finally gain some lift towards the end of this year.
  • Looking further ahead, demand growth will increase at a level above the STR long run average this year and will accelerate in 2011 and beyond. Supply growth will be benign well into 2013, although occupancy levels will still be well below their 62.6 % historical average. Because of the weak occupancy level, room rate recovery will be protracted. RevPAR contraction will end this year, growth will return in 2011, and strong increases should be sustained for several years beginning in 2012.
  • Looking further ahead, demand growth will increase at a level above the STR long run average this year and will accelerate in 2011 and beyond. Supply growth will be benign well into 2013, although occupancy levels will still be well below their 62.6 % historical average. Because of the weak occupancy level, room rate recovery will be protracted. RevPAR contraction will end this year, growth will return in 2011, and strong increases should be sustained for several years beginning in 2012.
  • Looking at a local level, most markets will not likely realize an increase in RevPAR until the second or third quarter of 2010. Overall, we expect 30 of these cities to realize an increase in RevPAR for the year, while all 50 of these markets should see RevPAR gains in 2011.
  • That being said, the record year-over-year declines in Net Operating Income for the typical U.S. hotel are behind us. While occupancy is expected to increase slightly in 2010, average daily rates will contract once again this year. Selling more rooms at a lower price will result in a slight decrease in NOI, but then the Good News begins. Profit growth will return in 2011 as occupancy and ADR both accelerate, leading to double-digit gains. Sustained bottom line earnings growth will return for the foreseeable future thereafter. Bu perhaps not soon enough for some.
  • According to data from Trepp LLC, loan delinquencies accelerated dramatically as industry fundamentals continued to weaken during a traditionally slow period of the year. Almost 1 in 5 CMBS loans was in some stage of delinquency at the beginning of this month, and we expect this trend to accelerate even further as 2010 progresses. But remember, delinquency does not necessarily mean default. Borrowers can recover, and lenders can re-work their terms. It bears noting that, in a 2004 study by Lancaster and Cable of CMBS loans issued during the period 1992 through March of 2003, the lifetime hotel default rate was 7.2 percent. The average loan loss severity, as a percentage of the loan balance at the time of default, was 48.2 percent (second only to healthcare and manufactured housing). Thus, there is often a significant motivation for the lender to avoid default if possible.
  • Read above
  • Read above.
  • Thanks for your time and attention, and all the best for the year ahead.

31002261 Mark Woodworth Pkf Consulting What Better Time 31002261 Mark Woodworth Pkf Consulting What Better Time Presentation Transcript

  • Prepared for Meet the Money 2010 By: Mark Woodworth PKF Hospitality Research May 4, 2010 www.pkfc.com U.S. LODGING INDUSTRY OVERVIEW
  • WHAT BETTER TIME?
    • How accurate was our MTM 2009 forecast ?
        • Was Q1 2010 a fluke?
    2. When will profit growth return and be sustained?
  • WHAT BETTER TIME?
    • Asian Astrology:
      • 2010 is the Year of the ___?
  • 2010: The Year of Jim Butler Meet the Money ®
  • 2010: and the Year of the Metal (White) Tiger
  • 2010: Year of the Metal (White) Tiger
      • In Asian Astrology, the New Moon on February 14 began the Year of the Metal or White Tiger.
      • Tiger Years are the Autumn of Very Long Cycles.
      • Build Reserves and Strength
      • Prepare to Pounce on Opportunities
      • Beware of Charismatic Leaders
    6
      • Source: Wintonbury Risk Management
  • WHAT BETTER TIME?
    • How accurate was our MTM 2009 forecast ?
        • - Was Q1 2010 a fluke?
    • When will profit growth return and be sustained?
  • MTM 2009 ACCURACY ASSESSMENT Not Too Bad A Little More Optimistic 2009 2010 MTM 2009 2009 Actual MTM 2009 Current Forecast Occupancy 55.7% 55.1% 55.2% 55.2% ADR -6.4% -8.8% -2.3% -1.5% RevPAR -13.7% -16.7% -3.2% -1.1%
  • WHAT BETTER TIME?
    • How accurate was our MTM 2009 forecast ?
        • - Was Q1 2010 a fluke?
    • When will profit growth return and be sustained?
  • The Economy WHAT BETTER TIME?
  • The Great Recession Is Over… Recessions since World War II Sources: NBER, BEA, FRB, BLS, Moody’s Economy.com Duration in Months Peak-to-Trough % Change Jobless Rate Peak Trough Recession Peak to Trough Expansion Trough to Peak Real GDP Industrial Production Nonfarm Employment Low High Change Dec-07 Aug-09 20 73 -3.9% -19.2% -6.1% 4.4% 10.2% 5.9% Mar-01 Nov-01 8 120 -0.4% -6.3% -2.0% 3.8% 6.3% 2.5% Jul-90 Mar-91 8 92 -1.3% -4.3% -1.5% 5.0% 7.8% 2.8% Jul-81 Nov-82 16 12 -2.9% -9.5% -3.1% 7.2% 10.8% 3.6% Jan-80 Jul-80 6 58 -2.2% -6.2% -1.3% 5.6% 7.8% 2.2% Nov-73 Mar-75 16 36 -3.1% -14.8% -2.7% 4.6% 9.0% 4.4% Dec-69 Nov-70 11 106 -1.0% -5.8% -1.4% 3.4% 6.1% 2.7% Apr-60 Feb-61 10 24 -1.3% -6.2% -2.3% 4.8% 7.1% 2.3% Aug-57 Apr-58 8 39 -3.8% -12.7% -4.4% 3.7% 7.5% 3.8% Jul-53 May-54 10 45 -2.7% -9.0% -3.3% 2.5% 6.1% 3.6% Nov-48 Oct-49 11 37 -1.7% -8.6% -5.1% 3.4% 7.9% 4.5% Average 10 57 -2.0% -8.3% -2.7% 4.4% 7.6% 3.2%
  • U.S. TOTAL EMPLOYMENT LEVELS 7.1 Million Jobs Lost – 5 Years From Peak-to-Peak Source: Moody’s Economy.com, April 2010 12 Quarters 17 Quarters 19 Quarters
  • U.S. UNEMPLOYMENT RATE Six Months to Go Before Unemployment Peaks Source: Moody’s Economy.com, April 2010
  • What Industries Can Drive This Recovery?
    • 1. Healthcare and education provide stability
    • 2. Manufacturing and construction level off;
        • Inventory restocking; capital goods
    • 3. Export industries
        • Tech products, info tech., advanced materials and equipment
    • 4. Professional services
        • Accounting, legal, engineering, advertising etc.
    • 5. Finance, retail, leisure & hospitality
    Potential order of industry recovery: Source: Moody’s Economy.com
  • ECONOMIC ASSUMPTIONS DRIVING OUR FORECASTS Upturn Accelerates in 2011 Source: Moody’s Economy.com, April 2010 Payroll Employment Real Personal Income Real GDP CPI (Inflation) 2009 -4.3% -1.9% -2.4% -0.3% 2010 -0.7% -0.2% 2.9% 2.0% 2011 1.6% 3.3% 3.9% 2.0% 2012 3.1% 4.8% 5.1% 2.8% 2013 3.1% 4.8% 3.4% 2.5%
  • RECOVERY TIMELINES MIXED ACROSS MARKETS Quarter When Employment Levels Turn Positive Source: Moody's Economy.com 6 Updated 1/19/2010 - aw 1Q 2010 2Q 2010 3Q 2010 4Q 2010 2011 or later
  • THE HOTEL MARKET CYCLE Moving Past the Trough Rapid Development Occupancy Declines, ADR Follows Development at Minimum Levels Lodging Decline, Leads Other Sectors Occupancy Recovers ADR and Margins Recover Development Picks Up Development Slows Lodging Recovers, Lags Other Sectors Long Run Occupancy Rapid Development Equilibrium ADR U.S. is Here 2011-2012 Meet The Money 2011
  • What Happened in the First Quarter?
  • 6 Preliminary Update - Income and Demand Estimates May 2010 Q1 2010 Q4 2002 2 Quarter Lag Sources: PKF-HR; STR; Moody’s Economy.com
  • 6 Published Income and Demand Estimates March 2010 Q1 2010 Q4 2002 2 Quarter Lag Sources: PKF-HR; STR; Moody’s Economy.com
  • Other Signs the Turning Point has been Reached WHAT BETTER TIME?
  • A Look into the Future from The Rubicon Group
    • Rubicon’s Primary Data…
    • 42 million future competitive rates are collected each day.
    • Daily load of reservation and block information for the coming 12 months provided for all brands operated by Gaylord, Hilton, Hyatt, InterContinental, Loews, Marriott and Starwood.
    • Daily load of all GDS transactions that pass through the Pegasus switch.
  • A Look into the Future from The Rubicon Group Rubicon’s Primary Data… The data is forward looking based on future reservations activity (as of May 1). The concept of “new business added” describes the percent increase in the number of reservations taken during April for the future period when compared to April of 2009 and its respective future period.
  • Aggregate Demand & ADR Top 25 North American Markets © 2010 Rubicon – All Rights Reserved
  • Committed Demand is Positive in Many Markets © 2010 Rubicon – All Rights Reserved Top 25 North American Markets
  • Group Committed Demand has Improved © 2010 Rubicon – All Rights Reserved Top 25 North American Markets
  • Transient Business Demand is Vastly Improved © 2010 Rubicon – All Rights Reserved Top 25 North American Markets
  • Transient Leisure Demand Also Shows Gains © 2010 Rubicon – All Rights Reserved Top 25 North American Markets
  • If There is a Concern… © 2010 Rubicon – All Rights Reserved Top 25 North American Markets
  • … But ADR Improvement is Evident © 2010 Rubicon – All Rights Reserved Top 25 North American Markets
  • The Pace of New Business Shows Recovery Strength © 2010 Rubicon – All Rights Reserved Top 25 North American Markets
  • FORECASTS COME FROM HOTEL HORIZONS® U.S. by Chain Scale, All Hotels, 50 MSA’s Our Forecasts
  • Published March 2010 Forecast 6
  • Preliminary Updated Forecast -May 2010 – a Quicker Turnaround 6
  • Source: PKF Hospitality Research – March 2010 Hotel Horizons ® Report, Smith Travel Research National Horizon A Slow Recovery from a Deep Fall 6 Record Decline Record Increase Long Term Average 2006 2007 2008 2009 2010F 2011F 2012F Supply 1.9% 0.2% 1.3% 2.6% 3.2% 1.2% -.01% 0.0% Demand 1.6% 0.5% 0.9% -1.8% -5.8% 1.5% 2.2% 3.4% Occupancy 62.6% 63.3% 63.0% 60.3% 55.1% 55.2% 56.5% 58.4% ADR 3.4% 7.5% 6.2% 2.6% -8.8% -1.4% 3.4% 6.8% RevPAR 3.1% 7.8% 5.8% -1.8% -16.7% -1.1% 5.8% 10.5%
  • Source: PKF Hospitality Research – Preliminary May 2010 Hotel Horizons ® Report, Smith Travel Research National Horizon Preliminary Update – May 2010 6 A Quicker Turnaround? Long Term Average 2006 2007 2008 2009 2010F 2011F 2012F Supply 1.9% 0.2% 1.3% 2.6% 3.2% 1.2% -.01% -.01% Demand 1.6% 0.5% 0.9% -1.8% -5.8% 4.8% 2.9% 3.3% Occupancy 62.6% 63.3% 63.0% 60.3% 55.1% 56.6% 58.4% 60.3% ADR 3.4% 7.5% 6.2% 2.6% -8.8% -1.6% 5.6% 6.4% RevPAR 3.1% 7.8% 5.8% -1.8% -16.7% 1.8% 8.8% 10.0%
  • RevPAR Inflection Point Mixed Across Markets Quarter When RevPAR Change Turns Positive Source: PKF Hospitality Research Updated 1/19/2010 - aw 1Q 2010 2Q 2010 3Q 2010 4Q 2010 2011 or later
  • Virtually Everyone Suffered In 2009 Percent of Hotels* Posting an Increase or Decrease From 2008 to 2009 Notes: * 2010 Trends ® in the Hotel Industry sample. ** Before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, 2010 Trends® in the Hotel Industry report.
  • PKF Annual Trends® Change In Operating Results 2008 to 2009 Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research 2010 Trends ® in the Hotel Industry report.
  • PKF Annual Trends® Change In Select Operating Expenses 2008 to 2009 Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. ** Includes franchise royalty payments, marketing assessments, and guest loyalty program costs. Source: PKF Hospitality Research 2010 Trends ® in the Hotel Industry report.
  • PKF Annual Trends® Change In Labor Costs 2008 to 2009 Source: PKF Hospitality Research 2010 Trends ® in the Hotel Industry report.
  • 2009 U.S. Hotel Operating Performance Average Change – 2008 to 2009 Notes: * Before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, 2010 Trends® in the Hotel Industry report.
  • RECOVERY WILL BE STRONG THROUGH 2013 Annual Change in Unit-Level NOI* +64.6% - 1943 -22.4% - 1938 -19.4% - 2001 -35.4% - 2009F +11.3% - 2011F +15.6% - 2012F +19.7% - 2013F Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research, Trends® in the Hotel Industry sample.
  • BUT NOT SOON ENOUGH AS DELINQUENCIES SOAR Approaching 1 in 6 Source: Trepp LLC
  • INTEREST PAYMENT ANALYSIS Percent of Hotels Not Covering Interest Payments* Note: * Percent of Trends® in the Hotel Industry sample that reported interest payments. Source: PKF Hospitality Research
  • SUMMARY
    • How accurate was our MTM 2009 forecast?
      • Pretty good.
    • When will profit growth return and be sustained?
      • Eight consecutive quarters of demand contraction ended in Q1 2010. Supply/demand imbalance; capital market turmoil and depressed market values will keep development at a standstill.
      • Signs are positive that recovery might have begun to accelerate; however, a buyer’s market will persist into 2011. Eight consecutive quarters of rate declines will end in Q4 2010, leading to
      • Profit growth in 2011 – stays well-above average through 2014.
    6
  • SUMMARY
    • Where are cap rates going?
      • Lack of liquidity and an absence of income growth have lifted cap rates to a cyclical peak in 2009.
      • Increasing profits and reduced risk premiums will overcome escalating interest rates; cap rate compression will result.
      • Although the cumulative loss in value has been substantial since 2008, significant asset appreciation will commence in 2011 and persist through 2014 as cap rates fall further in response to stabilizing incomes.
    • Forecast bias is positive.
    6
  • The Cycle of Hotel Real Estate Emotions- What Better Time? 2007 2004 2009-2010 2011 2008 – 1 st Half 2008 – 2nd Half 2011-12
  • 6 For a Copy of This Presentation: www.PKFC.COM/Presentations Thank You for the Opportunity