Meet The Money 2009: Mark Woodworth Pkf 5-6-09
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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 pp 2009 4.0% -13.7% What Happened? 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%
‐2.0%
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
0 0% 0.0%
‐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: 3.0% 2.0% 1.0% 0.0% ‐1.0% ‐2.0% ‐3.0% ‐4.0%
Source: Moody's Economy.com
Aug‐08
Oct‐08
Feb‐‐09 Feb
Mar‐‐09 Mar
Apr‐‐09 Apr
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 Peak
Trough
Duration (Months)
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
Decline in GDP
History Lessons History Lessons • 122 recessions around the world: 1960 122 recessions around the world: 1960‐‐2007. y ( ) g • Only four (4) had each of the following: • 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
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
‐20
1995
0
‐40
?
‐60
‐80
Source: Federal Reserve – April 30, 2009
Risk Risk Spreads Escalate for Hotels Spreads Escalate for Hotels
Forecast 785 bp Q1 01
417 bp – LRA Spread
793 bp Q210
-220 bp 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 Peak Stock Market Bottoms
’08q1
’08q2
’08q3
Oil Prices Peak
’08q4
Housing Starts Bottom
’09q1
’09q2
’09q3
Home Sales Bottom House Prices Bottoms
$ Rises Source: Moody's Economy.com
House Prices Resume Rising Fed Tightens
’09q4
’10q1
’10q2
’10q3
’10q4
Jobless Rate Peaks Extraordinary Writedowns End 28
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 Vintage
Number of Properties
Pre-2006 2006 2007 2008
20 22 16 -
5,098 3,136 2,153 -
Total
58
10,387
Source: Trepp
Number of Rooms
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 2006 2007 2008
0.61 0.59 0.83 N.A.
2.50 2.36 2.12 N.A.
1.72 1.48 1.34 N.A.
3 5 5 N.A.
2009 Debt Service Coverage Vintage g
Low
High g
Average g
#< 1.0
Pre-2006 2006 2007 2008
0.1 0.24 0.37 N.A.
1.69 1.69 1.34 N.A.
1.03 0.95 0.85 N.A.
8 14 11 N.A.
Source: Trepp; PKF-HR
How Much How Much Stress Stress in Atlanta? Debt Service Coverage Comparison 2008 2009 b bp Average Average Delta Vintage Pre-2006 P 2006 2006 2007 2008
1.72 1 72 1.48 1.34 NA N.A.
1.03 1 03 0.95 0.85 NA N.A.
Source: Trepp; PKF-HR
A Lot!
(69) (53) (49) NA N.A.
How Much How Much Stress Stress in Atlanta? Estimated 2009 Loan-to-Value
Vintage
Estimated 2009 LTV
# Loans >100%
Pre-2006 2006 2007 2008
48.6% 114.0% 122.6% N.A.
7/20 11/22 11/16
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
2004
2008 – 1st Half a
2011-12
2008 – 2nd Half
2009-2010
2011
What Will Our Next Update Look Like?
Employment Assumption in these Forecasts April 2009 Update - Economy.com
2009 -2.9% -3.7%
Downgrade
-0.8% Source: Moody's Economy.com
The -13.7% RevPar for 2009 Will be Downgraded
Implications From the C Current tE Economic 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 tE Economic 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
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 pp 2009 4.0% -13.7% What Happened? 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%
‐2.0%
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
0 0% 0.0%
‐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: 3.0% 2.0% 1.0% 0.0% ‐1.0% ‐2.0% ‐3.0% ‐4.0%
Source: Moody's Economy.com
Aug‐08
Oct‐08
Feb‐‐09 Feb
Mar‐‐09 Mar
Apr‐‐09 Apr
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 Peak
Trough
Duration (Months)
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
Decline in GDP
History Lessons History Lessons • 122 recessions around the world: 1960 122 recessions around the world: 1960‐‐2007. y ( ) g • Only four (4) had each of the following: • 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
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
‐20
1995
0
‐40
?
‐60
‐80
Source: Federal Reserve – April 30, 2009
Risk Risk Spreads Escalate for Hotels Spreads Escalate for Hotels
Forecast 785 bp Q1 01
417 bp – LRA Spread
793 bp Q210
-220 bp 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 Peak Stock Market Bottoms
’08q1
’08q2
’08q3
Oil Prices Peak
’08q4
Housing Starts Bottom
’09q1
’09q2
’09q3
Home Sales Bottom House Prices Bottoms
$ Rises Source: Moody's Economy.com
House Prices Resume Rising Fed Tightens
’09q4
’10q1
’10q2
’10q3
’10q4
Jobless Rate Peaks Extraordinary Writedowns End 28
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 Vintage
Number of Properties
Pre-2006 2006 2007 2008
20 22 16 -
5,098 3,136 2,153 -
Total
58
10,387
Source: Trepp
Number of Rooms
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 2006 2007 2008
0.61 0.59 0.83 N.A.
2.50 2.36 2.12 N.A.
1.72 1.48 1.34 N.A.
3 5 5 N.A.
2009 Debt Service Coverage Vintage g
Low
High g
Average g
#< 1.0
Pre-2006 2006 2007 2008
0.1 0.24 0.37 N.A.
1.69 1.69 1.34 N.A.
1.03 0.95 0.85 N.A.
8 14 11 N.A.
Source: Trepp; PKF-HR
How Much How Much Stress Stress in Atlanta? Debt Service Coverage Comparison 2008 2009 b bp Average Average Delta Vintage Pre-2006 P 2006 2006 2007 2008
1.72 1 72 1.48 1.34 NA N.A.
1.03 1 03 0.95 0.85 NA N.A.
Source: Trepp; PKF-HR
A Lot!
(69) (53) (49) NA N.A.
How Much How Much Stress Stress in Atlanta? Estimated 2009 Loan-to-Value
Vintage
Estimated 2009 LTV
# Loans >100%
Pre-2006 2006 2007 2008
48.6% 114.0% 122.6% N.A.
7/20 11/22 11/16
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
2004
2008 – 1st Half a
2011-12
2008 – 2nd Half
2009-2010
2011
What Will Our Next Update Look Like?
Employment Assumption in these Forecasts April 2009 Update - Economy.com
2009 -2.9% -3.7%
Downgrade
-0.8% Source: Moody's Economy.com
The -13.7% RevPar for 2009 Will be Downgraded
Implications From the C Current tE Economic 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 tE Economic 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
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