U.S. Lodging Horizon 2008 What Lies Ahead? Economic Forecasting Center Georgia State University Wednesday, May 14, 2008 Mark.Woodworth@pkfc.com com
Presentation Outline I. The Economy II. Current Horizon: Have We Seen this Before? III. Some Thoughts ht to Take-away
Question: Are we headed for a recession? Or just a healthy correction?
Economy.com s Current Outlook Drives our Forecasts 90% Probability of a Recession 10% 51% High Growth 25% Current: Recession Recession, Slow Recovery Moderate Recession Severe Recession 10% 4% Probability of Occurrence Source: Moody s Economy.com
I. Credit Crunch: Much Happening in the National Economy Stifles Consumer & Business Activity II. High Oil Prices: Fuels Inflation; Impacts Travel III. Low Dollar Valuation Helps In-Bound International Travel Increases Exports, Inflation IV. Employment Growth Slowing
Consumers Continue to Make Tough Decisions Basis-point change - share of retail dollar 2002-2007 Gas Stations Nonstore Building Materials Health and Personal Electronics Home furnishings Clothing Sport, book & music Restaurants t Grocery Autos Gasoline + 26% from a year ago -400-300 -200-100 0 100 200 300 Source: BOC
One of Six Leisure Travelers Plans to Take Fewer Trips This Year Not Because of Time Poverty Reasons For Taking Fewer Leisure Trips: 2007% 2008% Current economic conditions make it difficult for me to travel 16 19 Have projects/things I need to do at home 22 15 Not able to get away from my job/work/less vacation time 24 12 The overall cost of leisure travel is too high NA 12 There are other things I d Id ratherdowithmy vacation/leisure time than travel NA 11 Price of gasoline is too high 5 9 Air travel is too big of a hassle 3 4 I believe it is not safe to travel 1 4 Denotes statistically significant difference from prior year. NA Not asked in 2007. Source: YPartnership Leisure Travel Monitor One Exception!
2007-2009 2009 Economic Outlook Expectations Decline Dramatically Percent Change 2007-2008 Forecast Point Employment Income GDP CPI October 2007 0.7% 2.6% 2.3% 0.2% January 2008 0.4% 1.4% 1.5% 2.7% April 2008 0.2% 1.3% 1.5% 3.0% Percent Change 2008-2009 Forecast Point Employment Income GDP CPI October 2007 1.1% 3.3% 0.3% 1.9% January 2008 0.9% 3.2% 3.4% 2.0% April 2008 0.9% 3.1% 3.3% 2.0% Source: Moody s Economy.com
In-Bound International Travel Finally Back to Pre-2001 Levels Inbound Travel to the United States 2001 2002 2003 2004 2005 2006 2007 2007:2000 Total All Countries -8.4% -7.1% -5.4% 11.8% 6.8% 3.8% 11.1% 10.7% North America -0.7% -2.5% -5.2% 11.1% 6.8% 6.8% 11.7% 29.9% Overseas -15.9% -12.4% -5.7% 12.7% 6.7% 0.0% 10.3% -8.0% Europe Western Europe -18.5% -9.5% 0.6% 12.2% 6.2% -2.1% 12.6% -2.5% Eastern Europe -8.8% -7.7% -2.9% 10.3% 13.9% 6.3% 11.5% 21.5% Asia -16.4% -9.9% -12.1% 16.0% 6.8% -0.7% 3.7% -15.6% Middle East -8.3% -25.1% -7.3% 12.3% 5.0% 4.8% 12.1% -11.7% Africa -2.8% -16.0% -2.1% 1.9% 4.8% 0.1% 10.0% -6.0% Oceania -19.8% -9.8% -0.8% 25.8% 11.7% 2.6% 10.2% 14.0% South America -14.0% -28.3% -16.1% 8.1% 10.6% 5.9% 18.0% -22.7% Central America -6.2% -8.7% -6.8% 5.4% 0.7% -0.3% 13.3% -4.3% Caribbean -9.7% -12.4% -5.2% 9.7% 3.7% 5.6% 9.9% -1.1% Sources: U.S. Department of Commerce, ITA, Office of Travel & Tourism Industries; Statistics Canada (Canada); and Banco de Mexico/Secretaria de Turismo (Mexico).
In-Bound International Travel U.S. PORT OF ENTRY (ALL MODES) OF NON-RESIDENT ARRIVALS 2007 2007 TOTAL % change Year End 2007/2006 Hotel Change PORTS OVERSEAS 2007/2006 Rank Occ ADR RevPAR Grand Total-All U.S. 23,892,277 277 10% -0.2% 5.9% 5.7% 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.A ATLANTA, 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: US U.S. Department tof fcommerce, ITA, Office of ftravel l&t Tourism Industries ti from the Summary of International Travel to the U.S. (I-94) report. Smith Travel Research. *Overseas includes all countries except Canada and Mexico
Where Are Cap Rates Going? When Cash Flows Decelerate When Interest Rates Increase So do Cap Rates PKF Hospitality Research Cap Rates Increase Three Main Drivers of Cap Rate Change Volatility The more there is, the higher the Cap Rate
Forecasts of Return Components Cap Rates Moving Up 190 bps by 2010 10 Year Treasury Treasury Spread Cap Rate % Δ NOI 2005 4.3% 5.0% 9.3% 15.5% 2006 4.8% 3.7% 8.5% 13.3% 2007 4.6% 2.9% 7.6% 7.2% 2008F 4.1% 3.5% 7.5% 2.9% 2009F 5.4% 3.3% 8.6% 4.9% 2010F 5.6% 3.9% 9.5% 5.0% LRA: 5.5% 4.8% 10.3% 4.7% PKF Hospitality Research, Moody s Economy.com, RERC
Presentation Outline I. The Economy II. Current Horizon: Have We Seen This Before? III. Some Thoughts ht to Take-away
High Supply Growth Preceded Last Two Downturns Not This Time Around 6.0% 5.0% LRA Demand Δ: 1.9% 4.0% Forecast 30% 3.0% 2.0% 1.0% 0.0% 1.0% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F2009F2010F 2.0% 3.0% 4.0% Supply Demand^ Source: PKF Hospitality Research, STR, BLS, Moody s Economy.com
Historical Change in U.S. Lodging Demand - Trough 12 Month Moving Average 6.0% March 2008 4.0% 2.0% April 2007: <0.2%> 00% 0.0% 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 2.0% 4.0% 60% 6.0% April 2002: <4.8%> 1989 1994 1999 2004 2004 2009 November 1991: <1.2%> Sources: PKF-HR, Smith Travel Research
Historical Change in U.S. Lodging Demand A Double-Dip Dip 12 Month Moving Average 60% 6.0% March 2008 4.0% 2.0% April 2007 - <0.2%> 00% 0.0% 2.0% 4.0% 60% 6.0% 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: <0.2%> November 1991 - <1.2%> April 2002 - <4.8%> 1989 1994 1999 2004 2004 2009 Forecast Sources: PKF-HR, Smith Travel Research
6.0% 4.0% 2.0% 00% 0.0% 2.0% The Mild Double-Dip Dip Extends Recovery 12 Month Moving Average March 2008 April 2007: <0.2%> 198901 198906 198911 199004 199009 199102 199107 199112 199205 199210 199303 199308 199401 199406 199411 199504 199509 199602 199607 199612 199705 199710 199803 199808 199901 199906 199911 200004 200009 200102 200107 200112 200205 200210 200303 200308 200401 200406 200411 200504 200509 200602 200607 200612 200705 200710 200803 200808 200901 200906 200911 4.0% 60% 6.0% November 1991: <1.2%> November 2008: <0.2%> April 2002: <4.8%> Supply Demand Sources: PKF-HR, Smith Travel Research
The Double-Dip Dip Extends a Recovery 12 Month Moving Averages Supply Demand Occupancy ADR RevPAR November 1991 2.1% -1.2% 62.0% 0.6% -2.7% +1Year 11% 1.1% 17% 1.7% 62.4% 11% 1.1% 18% 1.8% + 2 Years 0.7% 2.1% 63.2% 2.4% 3.9% April 2002 2.1% -4.8% 58.9% -3.9% -10.4% + 1Year 1.4% 1.1% 58.6% 0.2% 0.0% + 2 Years 0.9% 2.6% 59.8% 1.0% 2.7% April 2007 0.5% -0.2% 63.1% 7.2% 6.5% + 1 Year 1.5% 1.2% 63.0% 5.7% 5.4% + 2 Years 2.6% 0.9% 61.6% 0.7% -0.9% November 2008F 2.3% -0.3% 61.6% 2.8% 0.1% + 1 Year 2.7% 3.0% 61.8% 0.4% 0.7% +2Years 27% 2.7% 28% 2.8% 61.8% 32% 3.2% 32% 3.2% Sources: PKF Hospitality Research; Smith Travel Research
ADR Growth Will Continue RevPAR Performance up in 2009 2008 = the Low Point Going Forward Long = Below/Above Long Run Average Term Average 2004 2005 2006 2007 2008P 2009P 2010P Supply 1.9% 0.4% -0.1% 0.2% 1.3% 2.5% 2.7% 2.3% Demand 19% 1.9% 40% 4.0% 28% 2.8% 05% 0.5% 11% 1.1% -0.1% 33% 3.3% 25% 2.5% 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% 4.0% 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 = (P) Preliminary Q2 2008 2008: 62.8%, 5.3%, 4.5% 2008: 62.2%, 4.7%, 3.0%
Nominal Dollar Operating Profits* Still Not Back to 2000 $21,000 $17,000 $13,000 $9,000 $18,887 $17,731 $16,886 $15 641 $16,100 $14,801 $13,172 $15,014 $15,641 $13,676 $12,242 $11,282 Estim mated Estim mated 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 U.S. Trends Sample Dollars per Available Room Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. Source: PKF Hospitality Research
Operating Profits* A Decade of No Real Growth (2007 Constant Dollars) $18,000 $14,000 $10,000 000 $6,000 $14,239 $15,678 $15,641 $15,631 $15,956 $14,590 $12,875 $12,636 $11,423 $11,148 $10,007 ated Estim ated Estim 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 U.S. Trends Sample Dollars per Available Room Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. Source: PKF Hospitality Research
Lodging Same-Store Store Sales NOI Stays Positive This Time Around 20.0% Forecast Forecast 15.0% 10.0% 5.0% 0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F2009F2010F 5.0% 10.0% 15.0% 20.0% 25.0% Revenue Expenses NOI Source: PKF Hospitality Research, STR,
Real RevPAR Growth 90 Days Ago Forecast Change 2007-2008 2008 Top 5: Anaheim Oakland Fort Lauderdale Tucson Richmond Change 7.4% 7.3% 6.6% 64% 6.4% 6.2% Bottom 5: Fort Worth Houston San Antonio Indianapolis Jacksonville Change 3.2% 2.6% 2.4% 1.1% 1.0% RevPAR growing faster than CPI RevPAR growing on par with CPI RevPAR growing slower than CPI PKF Hospitality Research, Moody s Economy.com
Real RevPAR Growth Today Revised Forecast Change 2007-2008 2008 Top 5: Salt Lake City Austin San Francisco Fort Lauderdale Denver Change 3.9% 3.7% 3.5% 33% 3.3% 3.3% Bottom 5: Fort Worth San Antonio Long Island Jacksonville Houston Change 5.4% 3.7% 2.9% 2.8% 2.0% RevPAR growing faster than CPI RevPAR growing on par with CPI RevPAR growing slower than CPI PKF Hospitality Research, Moody s Economy.com
Historical Change Atlanta MSA Lodging Demand in Atlanta 12 Month Moving Average 15.0% March 2008 10.0% 5.0% 0.0% July 2007 - <4.1%> August 1991-1.0% 5.0% 10.0% June 2002 - <7.0%> 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 61 63 65 67 69 71 1989 1994 1999.10 2005.9 2004.11 2008.03 Sources: PKF-HR, Smith Travel Research
Atlanta MSA Lodging Demand A Second Dip Has Started 12 Month Moving Average 15.0% March 2008 10.0% 5.0% 0.0% July 2007 - <4.1%> August 1991-1.0% 5.0% 10.0% June 2002 - <7.0%> September 2008 1.9% 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 61 63 65 67 69 71 1989 1994 1999.10 2005.9 2004.11 2008.03 2004:11 2009:12 Sources: PKF-HR, Smith Travel Research
Atlanta-The Tale of Two Recessions Demand Declines as Supply Accelerates Forecast Source: PKF Hospitality Research, STR
Atlanta-The Tale of Two Recessions Occupancy Remains Above Previous Trough Forecast Long Run Average = 64.3% Source: PKF Hospitality Research, STR
Atlanta MSA All Hotels- 2008 Weak Occupancy = Below Average Revenue Growth 2005 2006 2007 2008F Long-Term Average Occupancy 65.3% 64.9% 63.5% 62.0% 64.3% % Change +7.8% -0.7% -2.1% -2.3% - ADR $80.56 $88.41 $92.76 $95.26 - % Change +5.6% +9.7% +4.9% +2.7% +2.6% RevPAR $52.63 $57.37 $58.92 $59.06 - % Change +13.8% +9.0% +2.7% +0.2% +2.7% Sources: Smith Travel Research, PKF Hospitality Research
Presentation Outline I. The Economy II. Current Horizon: Have We Seen This Before? III. Some Thoughts ht to Take-away
Something to Take Away U.S. Economy Might be in a Recession, But Not Hotels Double Demand Dip This Cycle is Unique: (1) High ADR s (2) Weak Economy Trough of Current Downturn Q3 2008 (US + ATL) Supply/Demand Imbalance Will Temper Recovery - 2010 NOI Essentially Flat in 2008 Increasing Cap Rates Will Moderate Appreciation Increasing Cap Rates Will Moderate Appreciation for the Balance of the Decade
For a copy of this presentation please contact Claude Vargo (404) 842 1150 ext. 237 Claude.Vargo@pkfc.com 33