March 7, 2011 U.S. Lodging Industry Overview Prepared for the. Hunter Investment Conference

Transcription

1 March 7, 2011 U.S. Lodging Industry Overview Prepared for the Hunter Investment Conference R. Mark Woodworth PKF Hospitality Research Accelerating success.

2 Good and Getting Better 1. The economy. 2. Lodging forecast. 3. Profit growth expectations. 4. Cap rates. For a copy: Claude.Vargo@pkfc.com 2

3 4-Quarter Moving Average U.S. All Total Payroll Employment Change, Average Daily Room Night Demand Source: Colliers PKF Hospitality Research, Moody s Analytics, Smith Travel Research 3

4 U.S. Total Employment Levels 8.3 Million Jobs Lost 5+ Years From Peak-to to-peak We re Here 22 Quarters 17 Quarters 12 Quarters Source: Moody s Analytics, January

5 Profits Surge and Jobs Should Follow % change a year ago Job growth (L) Profit growth, lagged 3 quarters (R) Sources: BLS, BEA, Moody s Analytics 5

6 YOY Employment Change 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 a Year Ago Positive Change No Change* Negative Change *Change is within 0.5% and -0.5% Source: Colliers PKF Hospitality Research, Moody s Economy.com 6

7 YOY Employment Change 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 Positive Change No Change* Negative Change *Change is within 0.5% and -0.5% Source: Colliers PKF Hospitality Research, Moody s Economy.com 7

8 YOY Employment Change 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 Positive Change No Change* Negative Change *Change is within 0.5% and -0.5% Source: Colliers PKF Hospitality Research, Moody s Economy.com 8

9 Employment Levels Return to Historical Maximum in Year The map below displays the year in which Employment levels are forecast to once again achieve their historical maximum: 2 in 2011, 5 markets in 2012, 8 markets in 2013, 21 markets in 2014, and 14 in 2015 or later & Beyond Source: Colliers PKF Hospitality Research March 2011 May 2011 Hotel Horizons Report, Smith Travel Research 9

10 Economic Assumptions Driving Our Forecasts: Payroll Employment Real Personal Income Real GDP CPI (Inflation) % 4.3% 1.9% 2.0% 2.6% 2.4% 0.3% 0.3% % 0.7% 1.3% 0.6% 2.9% 2.3% 1.6% 1.5% % 0.1% 4.0% 2.4% 3.9% 1.4% 1.5% 0.8% % 1.9% 3.8% 3.6% 4.0% 3.8% 2.5% 2.8% % 3.2% 4.6% 3.8% 3.7% 4.5% 3.2% 3.1% L.R.A. 1.2% 2.7% 2.7% 2.9% Source: Moody s Analytics, January 2011 L.R.A. = Long Run Average (July 2010) 10

11 Exports Rally in South and West Exports of goods and commodities, value: 2008Q2=100 Source: Census

12 Trade Through Southern Ports Is Improving Value of exports and imports by customs districts, $ billions 3-mo moving averages Savannah Miami Source: Census, Federal Reserve

13 Although Jobs Just Beginning to Respond Employment, Atlanta MSA, thousands Air Transport (L) Trucking and wholesale trade (R) Source: Census, Federal Reserve

14 More House Price Declines Are Coming Case Shiller Home Price Index, 2000Q1=100 Sources: Fiserv, Moody s Analytics

15 Good and Getting Better 1. The Economy. 2. Lodging forecast. 3. Profit growth expectations. 4. Cap rate outlook. 15

16 The Hotel Market Cycle Moving Along the Road to Recovery Equilibrium ADR Rapid Development Lodging Decline, Leads Other Sectors Development Picks Up Rapid Development Long Run Occupancy Occupancy Declines, ADR Follows U.S. is Here A Year Ago ADR and Margins Recover Development Slows Occupancy Recovers Development at Minimum Levels Lodging Recovers, Lags Other Sectors 16

17 Question: Room rate discounting induces lodging demand. True False 17

18 A Review of the Drivers of Demand Change Demand = f (Income, Employment, ADR) Real Personal Income (RPI) - Sluggish but not the problem or solution Employment - Who lost their jobs? ADR Plunged! 18

19 4-Quarter Moving Average U.S. All Total Payroll Employment Change, Average Daily Room Night Demand Forecast Source: Colliers PKF Hospitality Research, Moody s Analytics, Smith Travel Research 19

20 National Horizon - Forecasts through 2012 Long Term Average F 2012F Supply 2.2% 0.2% 1.3% 2.5% 3.0% 2.0% 0.7%.06% Demand 1.5% 0.5% 0.7% 2.5% 6.1% 7.7% 4.0% 3.4% Occupancy 62.2% 63.1% 62.8% 59.8% 54.5% 57.5% 59.4% 61.0% ADR 2.9% 7.6% 6.4% 2.9% 8.5% 0.1% 3.8% 6.0% RevPAR 2.3% 7.9% 5.9% 2.1% 16.6% 5.5% 7.1% 8.9% Severe Rate Discounting Set the Stage For a Record Decline Source: Colliers PKF Hospitality Research March-May 2011Horizons Report, Smith Travel Research And a Quicker Demand Turnaround Approaching Long Run Average 20

21 When Supply Change Reaches U.S. Long Run Average Beyond 2015 Source: Colliers PKF Hospitality Research March May 2011 Hotel Horizons Report, Smith Travel Research 21

22 Recovery Timelines Mixed Across Markets: Distance to Long Run Average Occupancy Level Distance to Long Run Average Occupancy Already There & Beyond Source: Colliers PKF Hospitality Research March - May 2011 Hotel Horizons Report, Smith Travel Research 22

23 Recovery Timelines Mixed Across Markets: Year When ADR Levels Return to Previous Peak & Beyond Source: Colliers PKF Hospitality Research March May 2011 Hotel Horizons Report, Smith Travel Research 23

24 Nominal RevPAR Levels Return to Historical Maximum in Year The map below displays the year in which nominal RevPAR levels are forecast to once again achieve their historical maximum: 1 market in 2010, 0 in 2011, 10 markets in 2012, 23 markets in 2013, 8 markets in 2014, and 8 markets in 2015 or later. Already There & Beyond Source: Colliers PKF Hospitality Research March - May 2011 Hotel Horizons Report, Smith Travel Research 24

25 2011 RevPAR Forecast By Chain-Scale Forecast Change 2010 to 2011 Luxury 9.6% Upper-Upscale 7.1% Upscale 6.0% Midscale with F&B 5.3% Midscale without F&B 7.4% Economy 6.4% 0% 4% 8% 12% Source: Colliers PKF Hospitality Research, March May 2011 Hotel Horizons report. 25

26 U.S. Hotel Markets Greatest and Least Change in RevPAR Forecast Change 2010 to 2011 Seattle Oakland San Diego Portland Minneapolis National Average 8.9% 8.4% 8.3% 8.1% 7.8% 7.1% New York Raleigh-Durham Philadelphia 1.0% 1.9% 1.7% Indianapolis Washington DC -1.3% -0.3% -4% 0% 4% 8% 12% Source: Colliers PKF Hospitality Research, March - May 2011 Hotel Horizons report. 26

27 Good and Getting Better 1. The Economy. 2. Lodging forecast. 3. Profit growth expectations. 4. Cap rate outlook. 27

28 RevPAR Components and NOI* Change NOI Change = ADR Occupancy R 2 =.97 Source: Colliers PKF Hospitality Research s Annual Trends Database Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. 28

29 Annual Change Unit-Level NOI* 80% +64.6% % 40% +10.9% F +19.0% F 20% 0% -20% -40% -19.4% % % F Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: Colliers PKF Hospitality Research, Trends in the Hotel Industry sample. 29

30 But Not Soon Enough as Delinquencies Soar Approaching 1 in 5 at the End of 2010 Source: Trepp LLC 30

31 Nominal Dollar Operating Profits* Surpass 2005 Dollars in 2012 $18,000 $15,621 $17,198 $13,862 $12,531 $10,977 $12,229 $14,124 $16,006 $17,158 $16,506 $10,663 $11,333 $12,568 $14,954 $14,000 $10,000 $6,000 Dollars Per Available Room F 2011F 2012F Source: Colliers PKF Hospitality Research s Annual Trends Database Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. 31

32 Peak to Trough Decline in Operating Profits* 50% Decline in Real Terms $30,000 $20,167 $21,526 $16,738 $14,866 $12,684 $13,792 $15,463 $17,024 $17,756 $16,405 $10,663 $11,162 $12,211 $14,224 $20,000 $10,000 $0 Dollars Per Available Room F 2011F 2012F Source: Colliers PKF Hospitality Research s Annual Trends Database Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. 32

33 Good and Getting Better 1. The Economy. 2. Lodging forecast. 3. Profit growth expectations. 4. Cap rate outlook. 33

34 Hotel Cap Rate Forecasting Model Accounting for Growth and Risk (Gordon Growth Model) Data RERC Survey/ RCA Trans. PKF Hotel Horizons/ STR Moody s Analytics Variables Hotel Cap Rate Changes in Income 10-Year Treasuries Moody s Baa Corp Bond R Hotel ΔRevPAR Risk Free Alternative T 10 Market Risk Baa - T 10 The equity risk applied to hotels Change in income Risk free alternative to any investment Proxy for all other rated debt 34

35 The Banking System Is Profitable Again Return on assets at depository institutions Source: FDIC

36 And the Credit Spigot Is Opening. Net % of senior loan officers Willing to make a consumer loan (L) Tightening standards for C&I loans to small businesses (R) Source: Federal Reserve Senior Loan Officer Survey

37 Perceptions and Reality Diverge RERC Investor Survey Cap Rates RCA Observed Transaction Cap Rates 5.7 Not Many Buyers 0 Source: RERC, RCA 37

38 Forecasts of Return Components Lodging Risk Premium Stays Below L.R.A. 10 Year Treasury Market Risk PremiumLodging Risk Premium Hotel Cap Rate % 1.8% 2.8% 8.9% % 1.7% 2.0% 8.5% % 1.9% 1.5% 7.9% % 3.8% 0.9% 8.4% % 4.0% 2.0% 9.3% % 2.8% 2.0% 7.9% 2011F 3.5% 2.4% 2.3% 8.2% 2012F 5.0% 2.0% 1.8% 8.8% 2013F 5.2% 1.7% 1.7% 8.6% L.R.A. 5.3% 2.3% 2.7% 10.0% Long Run Average (L.R.A.) = Source: Colliers PKF Hospitality Research, RERC, RCA, Moody s Analytics 38

39 The Cycle of Hotel Real Estate Emotions- Relief and Optimism st Half nd Half

40 Summary No Tailwinds Yet: * Persistent high levels of unemployment * Continued weakness in housing * Higher inflation lifts appeal of hotels * Airline capacity constraints getting better Forecast bias = very slight positive. 40

41 Thank you for your time. For a copy: Claude.Vargo@pkfc.com 41