19th Annual

M t th M
Meet the Money ‐
Meet the Money  ‐ 2009

R. Mark Woodworth
PKF Hospitality Research
Atlanta, Georgia

May 6, 2009

www.pkfc.com
kf
 Turning Points
Turning Points
When Will the Lodging Industry Grow Again?
h ill h d i d i ?

The Economyy
Industry Profits
Asset Values
A Few Takeaways
AF T k
 Accuracy

What Did Bruce Baltin Say a Year Ago?

What Did Bruce Baltin Say a Year Ago?
Turning Points
Turning Points
What Did I
What Did 
h id I Say a Year Ago??

Meet the Money - 2008

RevPAR Forecasts
Actual/
Forecast Update
2008 1.0% -1.9% Not Too Bad
2009 4.0% -13.7% What Happened?
pp
Sources: PKF-HR; STR (historical)
The Economy
 4-Quarter Moving Average – U.S. All
Total Payroll Employment Change,
Average Daily Room Night Demand
6.0%
Employment Demand

4.0%

2.0%

0 0%
0.0%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
‐2.0%

‐4.0%

‐6.0%

‐8.0% Source: Moody's Economy.com; STR;PKF‐HR
 Total Payroll Employment in a 
Long Contraction
Long Contraction 
Date of Forecast: Aug‐08 Oct‐08 Feb‐‐09
Feb Mar‐‐09
Mar Apr‐‐09
Apr
3.0%

2.0%

1.0%

0.0%

‐1.0%

‐2.0%

‐3.0%

‐4.0%

Source: Moody's Economy.com
 Remember the Jobless 
Recovery?
Long Run Employment Levels
16 Qtrs 15 Qtrs

Forecast

10 Qt
Qtrs

9 Qt
Qtrs

Beginning / End of Contraction Period

Turning Point Source: Moody's Economy.com
 Monthly Unemployment Rate
Monthly  Unemployment Rate
Many More Lost Jobs to Come

Forecast

Local Maxima

Source: Moody's Economy.com
Difficult to Even Speculate on the 
Ul i
Ultimate Impact of the Stimulus
I f h Si l
Have We Seen This Before?
 This is the 11th Recession Since
1945 and Fifth Since 1980
Duration Decline in
Peak Trough (Months) GDP

Nov 1973 Mar 1975 16 -3.5%

Jan 1980 Jul 1980 6 -2.8%

Jul 1981 Nov 1982 16 -3.1%

3 1%

Jul 1990 Mar 1991 8 -1.4%

Mar 2001 Nov 2001 8 -0.5%

Dec 2007 2009 Q2(est) 17+/- -4.0% (proj)

Source: NBER, Moody’s Economy.com, Leamer

 History Lessons
History Lessons
• 122 recessions around the world: 1960
122 recessions around the world: 1960‐‐2007.
• Only four (4) had each of the following:
y ( ) g
• Credit Crunch
• House Price Bust
• Equity Price Bust
• When all three conditions are present, the magnitude 
of output losses (declines in GDP) are two to three 
of output losses (declines in GDP) are two to three 
times greater.
 Turning Points:
Distance
Distance from Beginning of Official NBER 
from Beginning of Official NBER
Recession (Quarters)

Source: Moody's Economy.com
 Recovery Timelines Mixed Across 
Markets
Quarters Until Employment Levels Turn Positive ‐‐ 4Q08
Quarters Until Employment Levels Turn Positive 

Growth Positive
1 Quarter
2Q
Quarters
t
3 Quarters
> 4 Quarters
Source: Moody's Economy.com
Profit Outlook
 Protracted Disconnect 
Between Property Cycle and Business Cycle

Forecast

Cycle Disconnect
Source: PKF Hospitality Research, Smith Travel Research
 Big ADR Changes
F l NOI S i
Fuel NOI Swings
Forecast

‐30.1%
THIS IS A “MODERN RECORD”

Source: PKF Hospitality Research, Smith Travel Research

 U.S. Lodging Industry
Historical Performance During Recessions*
Historical Performance During Recessions
(Peak‐‐to
(Peak to‐‐Trough Change in Unit
Trough Change in Unit‐‐Level Performance)

Inflation a Big Factor in the 1980’s

Note: * National Bureau of Economic Research

** Forecast as of March 4, 2009
Source: PKF Hospitality Research
 U.S. Lodging Industry
Historical Performance During Recessions*
g
(Peak‐‐to
(Peak to‐‐Trough Change in Unit
Trough Change in Unit‐‐Level Performance)

Note: * National Bureau of Economic Research

** Forecast as of March 4, 2009
*** Before deductions for capital reserve, rent, interest, income taxes, amortization, and depreciation.
Source: PKF Hospitality Research
 Number of Markets Experiencing 
Sustained RevPAR Growth
d h
Forecast

Source: PKF Hospitality Research

 Local Market Outlook Varies
Considerably
Time frame when RevPAR begins a sustained positive
growth trend

2nd Half of 2009

1st Half of 2010
2nd Half of 2010• None of the 50 market s in our universe will achieve positive growth in RevPAR in 2009
2011 and beyond • Record low occupancies in 28 of our 50 market universe in 2009.

Source: PKF Hospitality Research

Asset Values
 As Lending Standards Increase,
Demand for R.E. Loans Declines

100
Net Percentage of Domestic Respondents Tightening Standards 
for Commercial Real Estate Loans
80
Net Percentage of Domestic Respondents Reporting Stronger 
Demand for Commercial Real Estate Loans
60

40

20

0
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
‐20

‐40

‐60
?
‐80

Source: Federal Reserve – April 30, 2009

 Risk
Risk Spreads Escalate for Hotels
Spreads Escalate for Hotels

Forecast
785 bp
793 bp
Q1 01
Q210

417 bp – LRA -220 bp

Spread Q2 84

118 bp
Q3 06
 Forecasts of Return Components
Cap Rates Exploding –– Up 490 bps by 2010
Cap Rates Exploding 

10 Year Treasury
Treasury Spread %  NOI Cap Rate
2005 4.3% 4.0% 15.5% 8.3%

2006 4.3% 3.8% 13.3% 8.1%

2007 4 6%
4.6% 3 0%
3.0% 7 2%
7.2% 7 6%
7.6%

2008 3.7% 4.1% -3.8% 7.9%

2009F 2.6% 7.9% -30.1% 10.5%

2010F 4 5%
4.5% 8 0%
8.0% -7.9%
7 9% 12 5%
12.5%

Source: PKF Hospitality Research,  RERC, Moody’s Economy.com
Takeaways
y
 A Timeline to Recovery
Major Financial
Failures Abate Employment
Bottoms

Foreclosures House Prices

Peak Resume Rising
Stock Market Housing Starts Fed Tightens
Bottoms Bottom

’08q1 ’08q2 ’08q3 ’08q4 ’09q1 ’09q2 ’09q3 ’09q4 ’10q1 ’10q2 ’10q3 ’10q4

Oil Prices
Peak Home Sales
Bottom Jobless Rate
House Prices Peaks
Bottoms Extraordinary Writedowns
$ Rises End

28
Source: Moody's Economy.com
 How Much Stress in 
the Market? 
Approach:
• Deal Specific Data from Trepp
Deal Specific Data from Trepp
– Loan Amount, Terms, LTV, DSC @ 
Origination; actual performance data
g ; p f
• PKF‐HR Hotel Horizonssm Forecasts
• PKF‐HR Trends
PKF HR Trends© Financial Data
Financial Data
• PKF‐HR Cap Rate Forecasts
 How Much Stress in 
the Market? 
Hotel CMBS Loans
A Look at Atlanta

Number of Number of
Vintage Properties Rooms

Pre-2006 20 5,098
2006 22 3,136
2007 16 2,153
2008 - -

Total 58 10,387

Source: Trepp
 How Much 
How Much Stress
Stress in 
Atlanta? 
A Look at Atlanta
2008 Debt Service Coverage

Vintage Low High Average #< 1

1.0
0

Pre-2006 0.61 2.50 1.72 3

2006 0.59 2.36 1.48 5
2007 0.83 2.12 1.34 5
2008 N.A. N.A. N.A. N.A.
2009 Debt Service Coverage

Vintage
g Low High
g Average
g #< 1.0

Pre-2006 0.1 1.69 1.03 8

2006 0.24 1.69 0.95 14
2007 0.37 1.34 0.85 11
2008 N.A. N.A. N.A. N.A.
Source: Trepp; PKF-HR
 How Much 
How Much Stress
Stress in 
Atlanta? 
Debt Service Coverage Comparison
2008 2009 b
bp
Vintage Average Average Delta

Pre-2006
P 2006 1.72
1 72 1.03
1 03 (69)
2006 1.48 0.95 (53)
2007 1.34 0.85 (49)
2008 NA
N.A. NA
N.A. NA
N.A.
Source: Trepp; PKF-HR

A Lot!
 How Much 
How Much Stress
Stress in 
Atlanta? 
Estimated 2009 Loan-to-Value

Estimated # Loans
Vintage 2009 LTV >100%

Pre-2006 48.6% 7/20

2006 114.0% 11/22
2007 122.6% 11/16
2008 N.A.
Source: Trepp; PKF-HR

Even More
 U.S. : Nothing Looks Normal
Supply Up 
Supply Up –– Demand Down:
BIAS: Negative
2009 = the Low Point Going Forward

= Below/Above Long Run Average

Long Term 
Average 2004 2005 2006 2007 2008 2009F 2010F

Supply 1.9% 0.4% ‐0.1% 0.2% 1.3% 2.7% 2.6 0.9%

Demand 1.9% 4.0% 2.8% 0.5% 0.9% ‐1.6% ‐5.4% 0.0%

Occupancy 62.8% 61.3% 63.1% 63.3% 63.1% 60.4% 55.7% 55.2%

ADR 3.5% 4.2% 5.5% 7.5% 6.2% 2.4% ‐6.4% ‐2.3%

RevPAR 3.5% 7.9% 8.5% 7.8% 5.8% ‐1.9% ‐13.7% ‐3.2%

Occupancy: “50’s are the new 60’s”

Source: PKF Hospitality Research – Preliminary First Quarter 2009 Hotel HorizonsSM Report, Smith Travel Research
 Quarter When The Turning Point 
Will Occur

United States
Occupancy 3Q 2010
3Q 2010
ADR 2Q 2010
RevPAR 2Q 2010
Supply 4Q 2009
Demand 1Q 2010
Employment 2Q 2010
2Q 2010
GDP / GMP 1Q 2010
Leisure & Hospitality Employment 2Q 2010

Source: PKF Hospitality Research, Moody's Economy.com
 The Cycle of Real Estate
Emotions--Opportunity
Emotions Opport nit

2007
2008 – 1st
Half
a

2011-12
2008 – 2nd
Half
2004
2011
2009-2010
 What Will Our Next Update 
Look Like?

2009
Employment Assumption in these Forecasts -2.9%
April 2009 Update - Economy.com -3.7%

Downgrade -0.8%
Source: Moody's Economy.com

The -13.7% RevPar for 2009 Will be Downgraded

 Implications From the
C
Current
tEEconomic
i Situation
Sit ti

In Asian Astrology,
the New Moon of
January 26, 2009 began
th Y
the Year of the Ox.
f th O
 Implications From the
C
Current
tEEconomic
i Situation
Sit ti

In Ox Years, Patience, Fortitude and 
Hard Work Rather than
Hard Work, Rather than 
Leverage,
Lead to Prosperity
For a Copy of this Presentation:
www.pkfc.com/presentations
kf / t ti