Mark Woodworth, President Of Pkf Hospitality Research, Presentation At The Lodging Conference 2008, Arizona Biltmore Hotel

Lodging g g Conference 2008 ”What Lies Ahead?” or

“The Panic – When Will it End?” September 24, 2008 Arizona Biltmore Resort & Spa

[email protected]

Our Panelists 9 Jan Freitag -

9 Bruce Ford –

9 David Loeb –

PKF Hospitality Research P Presentation t ti Outline O tli Part 1: I. The Economy - A Panic on Wall Street Part 2: II. Current Horizon: Have We Seen this Before? III. Some Thoughts to Take-away

Question: How How are you feeling? are you feeling? Good Okay Bad d

Question: How are you feeling? y g Good Okay Bad I Don’t Know

Much Happening in the National Economy I. Credit Crunch: •

Stifles Consumer & Business Activity

II. High Oil Prices: •

Fuels Inflation; Impacts Travel ‘Fuels’

III. Low Dollar Valuation •

Helps In In-Bound Bound International Travel

•

Increases Exports, Inflation

IV. Employment Growth Slowing

PANIC!? Panic … is a sudden fear which  dominates or  or replaces or replaces thinking and often affects  groups of people or animals groups of people or animals.  Panics typically occur in  disaster situations. disaster situations. Wikipedia

The Bursting Housing Bubble Bubble… 200

180

-20.2% 20 2% 160

140 120

100 00

01

02

03

04

05

06

07

08

Fiserv Case Shiller National House Price Index, 2000Q1=100

…Ignites a Mortgage Crisis… First mortgage loan defaults, thousands, SAAR 3,000 , 2,500 2,000 1,500 1 000 1,000 500 00

01

02

03

04

05

06

Sources: Equifax, Moody's Economy.com

07

08

Another 10% to Go Go... H House price i

H Home sales l

H Housing i starts t t

0 -10 -20 -30 -40 -50

Current downturn to date C Current t downturn d t forecast f t Early 1990s Early 1980s

-60 Sources: Fiserv Lending Solutions, Census, Moody's Economy.com

...With Big Differences Across the Country Projected peak-to-trough house price decline

< -30% Sources: Fiserv Lending Solutions, Moody's Economy.com, OFHEO

-20 to -30%

-10 to -20%

0 to -10%

No decline

Loan Delinquencies Escalate The Peak is Around the Corner 6.00

2.00 1.80

1.78% Q109 5.00

1.60 1.40

4 00 4.00

5.06% Q209

1.20

3.00

1.00

0.72% Q408 2.00

0.80 0.60 0.40

1.00

0.20 0.00

0.00

30 D C dit C d D li 30 Day Credit Card Deliquency %, ABA (Left) % ABA (L ft)

30 D H 30 Day Home Equity Deliquency %, ABA (Right) E it D li % ABA (Ri ht)

60 Day Prime Loan Deliquency %, MBA (Right)

Source: PKF Hospitality Research, Moody’s Economy.com

Question: Now how how are you feeling? are you feeling? Good Okay Bad d

This Downturn is Relatively Mild Average monthly job losses, peak to trough, thousands

Source: Moody’s Economy.com

Change in Total Employment – U.S. Q109 Low Point

1988 - 2012F

Source: Moody’s Economy.com

2007--2009 Economic Outlook 2007 Expectations Decline Dramatically

Forecast Point October 2007 January 2008 September 2008*

Forecast Point October 2007 January 2008 S t b 2008* September

Percent Change 2007 - 2008 Employment Income GDP CPI 0.7% 0 7% 0.4% 0.0%

2.6% 2 6% 1.4% 0.3%

2.3% 2 3% 1.5% 1.9%

2.0% 2 0% 2.7% 4.4%

Percent Change 2008 - 2009 Employment Income GDP CPI 1.1% 0.9% 0 4% 0.4%

3.3% 3.2% 1 3% 1.3%

3.2% 3.4% 1 8% 1.8%

1.9% 2.0% 2 5% 2.5%

Source: Moody’s Economy.com

* Pre-Lehman, AIG, Merrill, $700 billion Federal plan, Stock market bottom-out, post Fanny, Freddy

Available Airline Seats vs. Lodging Demand Q Quarterly Change from Prior Year t l Ch f Pi Y 10.0% Change in Capacity = 3.9% Change in Demand 15.0%

10.0%

5.0%

199 91 1,99 91 199 92 199 92 1,99 93 199 93 199 94 199 94 199 95 199 95 199 96 199 96 199 97 199 97 199 98 199 98 199 99 199 99 200 00 200 00 200 01 200 01 200 02 200 02 200 03 200 03 200 04 200 04 200 05 200 05 200 06 200 06 200 07 200 07

0.0%

‐5.0%

‐10.0%

‐15.0% Change in Available Airline Seats

Change in Lodging Demand

Sources: Department of Transportation, Smith Travel Research, PKF Hospitality Research

Seat Capacity and Chain Scale D Demand d YOY Change Ch

Historical Relationships – Chain Scales L d i Demand Lodging D d : Airline Ai li Capacity C it

The Negative Economic Fallout Is Significant… Real GDP Growth, Annualized % Change 5 Pre-panic Post-panic

4 3 2 1 0 ((1))

08

09

10

Source: Moody’s Economy.com

PKF Hospitality Research P Presentation t ti Outline O tli Part 1: I. The Economy - A Panic on Wall Street Part 2: II. Current Horizon: Have We Seen this Before? III. Some Thoughts to Take-away

Forecasts Come from sm H t l Horizons Hotel H i

Continuing Signs of a Slow Down Number of Markets with Declining YearYear-Over Over--Year Demand

50 45 40 35 30 25 20 15 10 5 0

Number of Markets Source: PKF-HR, STR

High Supply Growth Preceded Last Two Downturns – Will this Happen Again? 6.0%

LRA Demand Δ: 1.9% 5.0% 4.0% 3 0% 3.0% 2.0% 1.0% 0.0% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ‐1.0% ‐2.0% ‐3.0% ‐4.0%

Supply

Demand^

Source: PKF Hospitality Research, STR, BLS, Moody’s Economy.com

Historical Change in U U.S. S Lodging Demand - Trough 12 Month Moving Average 6 0% 6.0%

June 2008 4.0%

April 2007: <0.2%> 2.0%

0 0% 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%

November 1991: <1.2%> ‐4.0%

April 2002: <4.8%> ‐6.0%

1989 ‐ 1994

1999 ‐ 2004

2004 ‐ 2009

Sources: PKF-HR, Smith Travel Research

Historical Change in U.S. Lodging Demand – A DoubleDouble-Dip 12 Month Moving Average 6 0% 6.0%

June 2008 4.0%

April 2007 - <0.2%> 2.0%

0 0% 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

November 2008: <0.2%> November 1991 - <1.2%>

‐2.0%

‐4.0%

April 2002 - <4.8%> ‐6 0% ‐6.0%

1989 ‐ 1994

1999 ‐ 2004

2004 ‐ 2009

Sources: PKF-HR, Smith Travel Research

Forecast

The Mild DoubleDouble-Dip Extends Recovery 12 Month Moving Average

6.0%

June 2008 4.0%

April 2007: <0.2%>

2.0%

1989 1989 1989 1990 1990 1991 1991 1991 1992 1992 1993 1993 1994 1994 1994 1995 1995 1996 1996 1996 1997 1997 1998 1998 1999 1999 1999 2000 2000 2001 2001 2001 2002 2002 2003 2003 2004 2004 2004 2005 2005 2006 2006 2006 2007 2007 2008 2008F 2009F 2009F 2009F

0 0% 0.0%

‐2.0%

November 1991: <1.2%> N November b 2008 2008: <0.2%> 0 2% ‐4.0%

April 2002: <4.8%>

‐6 0% ‐6.0%

Supply

Demand

Sources: PKF-HR, Smith Travel Research

ADR Growth Slows Supply pp y Up p – Demand Down:RevPAR Declines in ‘09 2009 = the Low Point Going Forward

Long Term Average g 2004

= Below/Above Long Run Average

2005

2006

2007

2008F 2009F 2010F

Supply

1.9%

0.4%

-0.1%

0.2%

1.3%

2.6%

3.5%

1.4%

Demand

1 9% 1.9%

4 0% 4.0%

2 8% 2.8%

0 5% 0.5%

1 1% 1.1%

-0 2% -0.2%

-1 1% -1.1%

2 8% 2.8%

Occupancy

62.8%

61.3% 63.1% 63.3%

63.1%

61.3%

58.7%

60.0%

ADR

3.5%

4.2%

5.5%

7.5%

6.0%

3.6%

1.3%

2.3%

RevPAR

3.5%

7.9%

8.5%

7.8%

5.7%

0.8%

-3.0%

3.0%

Source: PKF Hospitality Research ‐ Third Quarter 2008 Hotel HorizonsSM Report,  Smith Travel Research

Local Market RevPAR Horizon Forecast F Change Ch 2008-2009 2008National = <3.2%> <3 2%>

The PKF‐HR Hotel Horizon MSA Universe ‐ 2009  Δ RevPAR Forecast RevPAR Δ < 0%

0% < RevPAR Δ < 3.5%

3.5% < RevPAR Δ < 7%

7.5% < RevPAR Δ

Nominal Dollar Operating Profits* Just Back to 2000 $18,000 $15,641 $14,590

$15,678 $14,239

$11,148

$10,007

$10,000

Estima ated

$11,423

Estima ated

$12,875

$12,636

Estima ated

$14,000

$16,127 $16,458 $15,649

$ $6,000 1999

2000 2001 2002

2003 2004

2005 2006

2007 2008 2009

Dollars per Available Room Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. Source: PKF Hospitality Research

2010

Operating Profits* A Decade of No Real Growth (2007 Constant Dollars) $21 000 $21,000 $18,962 $17,765

$13,621 $13,096

$13,000

$12,150 $11,173

$9,000 1999

2000

2001

2002

2003

2004

2005

2006

2007

$14,755 $15,109

Estima ated

$14,744

$15 641 $15,658 $15,641

Estima ated

$14,996

Estima ated

$17,000

2008

2009

2010

Dollars per Available Room Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. Source: PKF Hospitality Research

Change In Select Unit Level Revenues And Expenses 2006 - 2007 6 0% 6.0%

R Rooms R Revenue

5.0%

Food and Beverage Revenue

5.5%

Total Revenue

7.8%

Labor Costs

3.6%

Total Operated Department Expenses

7.4%

A&G

6.9%

Maintenance

4 6% 4.6%

Utility Costs

7.9%

Management Fees

4.6%

Property Taxes

7.9%

Insurance

7.2%

NOI*

0%

3%

6%

Note: * Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research

9%

Inflation Rarely a Problem for Hotel Profits Annual Change From 1960 to 2007 Revenue Change Greater Than CPI – 30 of 48 Years Expense Change Greater Than CPI – 30 of 48 Years

15% 10% 5% 0% ‐5% ‐10% ‐15% 15% 1960

1970

PKF Hospitality Research, BLS

1980

Revenues

1990

Expenses

2000

C.P.I.

2010

Utility Expenses Annual Change Compared to Energy CPI 40% 30% 20% 10% 0% -10% -20% 1958

1963

1968

1973

1978

Utility Costs PAR

1983

1988

1993

1998

2003

CPI: Urban Consumer - Energy

Source: PKF Hospitality Research, U.S. Bureau of Labor Statistics, Moody’s Economy.com

2008F

PKF Hospitality Research P Presentation t ti Outline O tli Part 1: I. The Economy - A Panic on Wall Street Part 2: II. Current Horizon: Have We Seen this Before? III. Some Thoughts to Take-away

Something to Take Away 9 U.S. Economy Might be in a Recession, Hotels Just Below Average 9 Double Demand Dip This Cycle is Unique: (1) High ADR’s (2) Weak Economy

9 Trough of Current Downturn Q3 2008 (US + ATL) 9 Supply/Demand Imbalance Will Drag Rate Growth Recovery in 2010 9 Profits Should Decline Slightly in 2009 9 Watch those Expenses!

A Timeline to Recovery Financial i i l Failures il Abate

Self-Sustaining Self Sustaining Economic Expansion Begins

Foreclosures Home Sales Peak Bottom Housing Starts Stock MarketBottom Bottoms

’08q1

’08q2

’08q3

Oil Prices Peak

’08q4

’09q1

’09q2

Employment B tt Bottoms Fed Tightens

$ Rises

’09q3

’09q4

’10q1

Jobless Rate Peaks House Prices Bottoms

House Prices Resume Rising

’10q2

’10q3

’10q4

Extraordinary Writedowns End

Something to Take Away The Wild Cards 9 Capital Market Turmoil Slows New Construction - We Assume a Pause in Starts Until 2010 9 Airline Capacity Cuts are Real and Continue in 2009 - We Assume <1.0> Demand Loss in 2009 9 No Meaningful Relief in Oil Prices - If There is, Demand Will Jump

Thank You For copies of this presentation:

[email protected] g @ PKF Hotel Horizons Econometric forecasts for 50 U.S. markets, plus six national ti l chain-scales. h i l www.pkfc.com/horizons