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1 The Forecasting in a Windstorm webinar will begin shortly. If you need technical assistance with the webcast or streaming audio, contact us at hsmai@commpartners.com and we will assist you immediately. 1 hsmai.org

2 Forecasting in a Windstorm Tuesday, February 3 rd, :00 3:00 PM EDT Hospitality Sales and Marketing Association International (HSMAI) 2 hsmai.org

3 Overview of Format and Topic Moderator Barb Taylor Carpender, CMM, CHSC Managing Director, HSMAI University 3 hsmai.org

4 HSMAI University Alliance Partner 4 hsmai.org

5 HSMAI University Alliance Partner 5 hsmai.org

6 POLL QUESTION #1 How many people are participating in this webinar at your location today? or more 6 hsmai.org

7 Today s s Presenters Jan D. Freitag Vice President, Global Development SMITH TRAVEL RESEARCH jan@smithtravelresearch.com R. Mark Woodworth President PKF International mark.woodworth@pkfc.com 7 hsmai.org

8 US LODGING INDUSTRY OVERVIEW Jan D. Freitag Vice President 8 hsmai.org

9 Thoughts about ALIS Fear and Loathing in San Diego transient demand, (is) a downward death spiral JP Morgan JP Morgan miserable 2009 management guidance RevPAR still a falling knife Baird Deutsche Bank 9

10 160 Total United States Estimated Revenue and Profitability Years Revenue Income Continually Profitable 2009 Smith Travel Research, Inc. 10

11 Total US Room Rates Actual vs Inflation Adjusted If year 2000 ADR had increased by CPI each year Nominal ADR Yr 2000, Grown by CPI It took 6 years to recover from Rate Reductions in Smith Travel Research, Inc. 11

12 12 Total US Overview

13 Total United States Room Supply/Demand Percent Change Twelve Month Moving Average 1989 to December Supply % Change Demand % Change Building Into The Downturn 2009 Smith Travel Research, Inc. 13

14 Total United States Room Demand/Occ/ADR Percent Change Twelve Month Moving Average 1989 to December ADR % Chg Demand % Change Occ % Chg % -1.6% -4.2% Focus on Demand Not Occupancy 2009 Smith Travel Research, Inc. 14

15 Total United States Hotel Rooms Sold vs. ADR Change Quarterly Change 1988 to Q Demand % Chg ADR % CHG q1 1991q1 1994q1 1997q1 2000q1 2003q1 2006q Yield Management Amplifies The Pain 2009 Smith Travel Research, Inc. 15

16 Total United States Key Performance Indicators Percent Change December YTD Supply Demand Occupancy ADR RevPAR -4.2 YE Results Mask The Deterioration of Fundamentals 2009 Smith Travel Research, Inc. 16

17 Total United States Key Performance Indicators Percent Change 2008 First 8 Months vs. Last 4 Months Jan-Aug Sept-Dec Supply Demand Occupancy ADR RevPAR A Tale of 2 Seasons 2009 Smith Travel Research, Inc. 17

18 Total United States Demand Percent Change Day of Week 2008 First 8 Months vs. Last 4 Months Jan-Aug Sept-Dec Sun Mon Tue Wed Thu Fri Sat Sunday / Thursday / Saturday Are Slowing Smith Travel Research, Inc. 18

19 Total United States ADR Percent Change Day of Week 2008 First 8 Months vs. Last 4 Months Jan-Aug Sept-Dec Sun Mon Tue Wed Thu Fri Sat Weekend Rates Are Deteriorating 2009 Smith Travel Research, Inc. 19

20 20 Chain Scales

21 Total United States Demand Percent Change Chain Scale 2008 First 8 Months vs. Last 4 Months Total US Luxury Upper Upscale -0.4 Jan-Aug Sept-Dec Upscale Mid W Mid W/O Economy High End Demand is Falling 2009 Smith Travel Research, Inc. 21

22 Total United States ADR Percent Change Chain Scale 2008 First 8 Months vs. Last 4 Months Total US Luxury Upper Upscale Jan-Aug Sept-Dec Upscale Mid W Mid W/O Economy Midscale Hotels Maintain Rate 2009 Smith Travel Research, Inc. 22

23 Increasing Occupancy and ADR Chain Scales Percent of Properties Year End rd & 4 th Quarters YE Q Q Luxury Upper Upscale Upscale Mid With Mid W/O Economy 14 Only 7 Luxury Hotels Increased ADR & OCC 2009 Smith Travel Research, Inc. 23

24 Declining Occupancy and ADR Chain Scales Percent of Properties Year End rd & 4 th Quarters YE Q Q Luxury 2.2 Upper Upscale Upscale Mid With Mid W/O Economy Most Properties See Falling ADR & OCC 2009 Smith Travel Research, Inc. 24

25 25 Major Markets

26 Key 10 Global Markets ADR Percent Change (Local Currency) December 2008 YTD Chicago, IL New York, NY Phoenix, AZ San Diego, CA 2.0 San Francisco/San Mateo, CA 5.4 Top 25 US Markets All Other US Markets Berlin Hong Kong SAR Dubai London 4.4 Rio de Janeiro Sluggish Global Rate Growth 2009 Smith Travel Research, Inc. 26

27 Key 10 Global Markets Occupancy Percent Change December 2008 YTD Chicago, IL New York, NY Phoenix, AZ San Diego, CA -4.7 San Francisco/San Mateo, CA -0.1 Top 25 US Markets All Other US Markets Berlin -2.1 Hong Kong SAR -3.7 Dubai -5.2 London -1.6 Rio de Janeiro Global OCC Declines 2009 Smith Travel Research, Inc. 27

28 Total US vs. Resort Locations Demand Percent Change Twelve Month Moving Average 2005 to December Total US Demand Resort Demand Resort Demand Drops Faster / More Steeply 2009 Smith Travel Research, Inc. 28

29 U.S. Lodging Industry Projections As of January

30 Total US Industry Consecutive Quarterly Declines Key Indicators 1990/ /2002 Current Room Demand Occupancy Average Daily Rate RevPAR Room Revenue Smith Travel Research, Inc.

31 Total United States Active Development Pipeline Thousand of Rooms Change From Last Year Phase December 2008 December 2007 % Change In Construction % Final Planning % Planning % Active Pipeline % Pre-Planning % Total % Source: STR / TWR / Dodge Construction Pipeline 31 Under Construction Pipeline Is Shrinking

32 Total United States Abandoned Rooms Year-over-year percent change 90% 70% 70% 75% 56% 50% 30% 31% 34% 10% 16% 17% Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Source: STR / TWR / Dodge Construction Pipeline 32 Rate of Abandonment is Increasing

33 5 4 Total United States Supply/Demand Percent Change P 4.0 Supply % Chg Demand % Chg P 2010P 20 Yr Average 2009 Smith Travel Research, Inc. 33

34 Total United States Occupancy Percent Change P Year Average: -0.4% P 2010P 2009 Smith Travel Research, Inc. 34

35 Total United States Occupancy Percent P P 2010P 2009 Smith Travel Research, Inc. 35

36 Total United States ADR Percent Change P Year Average: 3.5% P 2010P 2009 Smith Travel Research, Inc. 36

37 Total United States RevPAR Percent Change P Year Average: 3.4% P 2010P 2009 Smith Travel Research, Inc. 37

38 110 Total US Room Rates Actual vs Inflation Adjusted If year 2000 ADR had increased by CPI each year Nominal ADR Yr 2000, Grown by CPI It took 6 years to recover from Rate Reductions in

39 Turning Points When will the Lodging Industry Grow Again? R. Mark Woodworth PKF Hospitality Research Atlanta, Georgia 39

40 Turning Points When will the lodging industry grow again? What is a Turning Point? That point at which period to period change begins a sustained directional shift. Key Questions: When will they occur? What will we see along the way? Are we about to chart new territory, or have we seen this before? Word for the day: Protracted 40

41 Outline Turning Points: When will the lodging industry grow again? The Economy Profit Outlook Asset Values Takeaways 41

42 The Economy Profit Outlook Asset Values Takeaways 42

43 Total Payroll Employment in a Long Contraction Source: Moody's Economy.com 43

44 Remember the Jobless Recovery? Long Run Employment Levels 16 Qtrs 15 Qtrs Forecast 10 Qtrs 9 Qtrs Beginning / End of Contraction Period Turning Point Source: Moody's Economy.com 44

45 Monthly Unemployment Rate Forecast Local Maxima Source: Moody's Economy.com 45

46 Monthly Inflation Rate This hasn t happened since 1954 Oil explains much of the volatility Forecast Local Maxima / Minima Source: Moody's Economy.com 46

47 47 Have We Seen This Before?

48 Current Recession Much Longer than Last Two More than Half Is Behind Us: Q209 Source: PKF Hospitality Research, Smith Travel Research, Dr. Edward Leamer, UCLA 48

49 Turning Points: Distance from Beginning of Official NBER Recession (Quarters) Source: Moody's Economy.com 49

50 Recovery Timelines Mixed Across Markets Quarters Until Employment Levels Turn Positive 4Q08 Growth Positive 1 Quarter 2 Quarters 3 Quarters > 4 Quarters Source: Moody's Economy.com 50

51 How Much Worse Will It Be? Many Markets Will Realize Record Declines Single Worst Quarter Employment Forecast vs. History < -1% -1% - 0% 0% - 1% 1% - 2% > 2% Source: Moody's Economy.com 51

52 I guess he was right! 52

53 Loan Delinquencies Increase Pain Will Escalate into Late 2010 Source: PKF Hospitality Research, Moody s Economy.com 53

54 Hotel CMBS Delinquency Rate Source: Trepp, LLC 54

55 The Economy Profit Outlook Asset Values Takeaways 55

56 Protracted Disconnect Between Property Cycle and Business Cycle Forecast Source: PKF Hospitality Research, Smith Travel Research Cycle Disconnect 56

57 Protracted Declines Lead to Record Low Occupancy in 2009 Forecast Source: PKF Hospitality Research, Smith Travel Research 57

58 Weak Occupancy Postpones ADR Growth Until 2Q 2010 Forecast Source: PKF Hospitality Research, Smith Travel Research 58

59 High ADR Changes Fuel NOI Swings Forecast THIS IS A MODERN RECORD Source: PKF Hospitality Research, Smith Travel Research 59

60 Number of Markets with Declining Year over Year Quarterly Demand, Occupancy Source: PKF Hospitality Research Turning Point 60

61 Local Market Outlook Varies Considerably Number of Quarters Until RevPAR Change Turns Positive 2 Quarters 3 Quarters 4 Quarters 5 Quarters 6 Quarters 7 Quarters 8 Quarters Among our 50 market universe, only New Orleans is expected to achieve growth in RevPAR in 2009 Record low occupancies in 17 of our 50 market universe in Source: PKF Hospitality Research 61

62 The Economy Profit Outlook Takeaways Asset Values 62

63 63 Where are Cap Rates Going?

64 Forecast Spreads Above LRA But Below 2Q 2003 Peak Source: PKF Hospitality Research, Moody s Economy.com, Real Estate Research Corporation 64

65 Forecasts of Return Components Cap Rates Exploding Up 210 bps by Year Treasury Treasury Spread % NOI Cap Rate % 4.0% 15.5% 8.3% % 3.8% 13.3% 8.1% % 3.0% 7.2% 7.6% 2008E 3.7% 4.1% -1.7% 7.8% 2009F 3.6% 5.2% -18.8% 8.8% 2010F 4.8% 4.9% 0.0% 9.7% Source: PKF Hospitality Research, RERC, Moody s Economy.com 65

66 Cumulative Value Decline Falls Short of Experience Factors Influencing Value of Upper Priced Hotels Note: Cap Rate Influence = Change In Value Change In NOI (after reserve) Source: PKF Hospitality Research, Real Estate Research Corporation 66

67 U.S. Hotel Industry The Last Time Change In Select Unit Level Revenues And Profits* Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research 67

68 U.S. Hotel Industry The Last Time Change In Select Unit Level Expenses Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research 68

69 Change In Unit Level Marketing Department Expenditures* Note: * Does not include franchise related fees and assessments. Sample of properties that reported marketing payroll. Source: PKF Hospitality Research 69

70 Increased Payroll Spending Composition Of Unit Level Marketing Department Expenditures* Note: * Does not include franchise related fees and assessments. Sample of properties that reported marketing payroll. Source: PKF Hospitality Research 70

71 The Economy Profit Outlook Asset Values Takeaways 71

72 A Longer Journey This Time Number of Quarters from Beginning of Official NBER Recession Until Turning Point *Until supply falls below its LRA Source: PKF Hospitality Research 72

73 Nothing Looks Normal Supply Up Demand Down: Big RevPAR Declines in = the Low Point Going Forward = Below/Above Long Run Average Long Term Average E 2009F 2010F Supply 1.9% 0.4% 0.1% 0.2% 1.3% 2.7% % Demand 1.9% 4.0% 2.8% 0.5% 1.0% 1.4% 2.8% 1.3% Occupancy 62.8% 61.3% 63.1% 63.3% 63.1% 60.5% 57.2% 57.4% ADR 3.5% 4.2% 5.5% 7.5% 6.1% 2.4% 4.6% 1.0% 73 RevPAR 3.5% 7.9% 8.5% 7.8% 5.7% 1.7% 9.8% 1.3% Source: PKF Hospitality Research Preliminary Fourth Quarter 2008 Hotel Horizons SM Report, Smith Travel Research

74 74 Hotels on the Watch List

75 Impact of Revenue Declines on NOI Depends on Where You Start Low and High Occupancy Hotels Hotels with Occupancy Greater than 70% Hotels with Occupancy Less than 70% Note: * After capital reserve expense and before rent, interest, income taxes, and amortization. Source: PKF Hospitality Research 75

76 Negative Impact on Debt Service Coverage Capability is Significant Resulting Debt Coverage Ratio Source: PKF Hospitality Research 76

77 Final Thoughts Nothing really new ahead, although all that is bad about this phase of the cycle is protracted in nature. NOI and asset value declines are big but not unprecedented owners and lenders will still experience significant stress. The Turning Point: consensus view is mid All expenses will continue to be scrutinized marketing no exception. Non labor related areas were cut the most last time around. 77

78 Questions? Jan D. Freitag Vice President, Global Development SMITH TRAVEL RESEARCH R. Mark Woodworth President PKF International 78 hsmai.org

79 Upcoming HSMAI University Programs 3 rd Annual Hotel Sales Strategy Conference March 31 st, Swissotel Chicago Managing Business Results/Managing Revenue March 2 nd - March 6 th Location: Johnson & Wales University-Denver CHBA Certified in Hospitality Business Acumen Driving Revenue Through Successful Public Relations Tuesday, February 10 th Presenters are HSMAI Lifetime Achievement Award, the Winthrop W. Grice Award in Public Relations Evolving Travel Intentions Tuesday, February 17 th Peter Yesawich, Ph.D., President & CEO, Y Partnership Internet Marketing Series Thursday, February 26 th and Tuesday, March 3 rd Getting Your Message Across With An Integrated Marketing Strategy All webinars are 2:00 3:00 p.m. EST 79 hsmai.org

80 Evaluation Please take a moment now to click on the Evaluation link in the LINKS box and complete the evaluation. Be sure to click on Submit when you have completed the evaluation to send us your responses. Your comments & suggestions are very important to us, and they help us to provide you with quality programming. 80 hsmai.org