U.S. Lodging Horizon 2008U.S. Lodging Horizon 2008U.S. Lodging Horizon 2008U.S. Lodging Horizon 2008”What Lies Ahead?”

E i F ti C tE i F ti C tEconomic Forecasting Center Economic Forecasting Center Georgia State University

Wednesday, May 14, 2008

Mark Woodworth@pkfc comMark.Woodworth@pkfc.com

Presentation OutlinePresentation Outline

I. The Economy II Current Horizon:I. The Economy II Current Horizon:II. Current Horizon:

Have We Seen this Before?III S Th ht t T k

II. Current Horizon: Have We Seen this Before?

III S Th ht t T kIII. Some Thoughts to Take-awayIII. Some Thoughts to Take-away

Question:Question:Question:Question:

Are we headed for aAre we headed for aAre we headed for a Are we headed for a recession?recession?

Or just a healthy correction?Or just a healthy correction?

Economy.com’s Current Outlook Economy.com’s Current Outlook Drives our ForecastsDrives our ForecastsDrives our ForecastsDrives our Forecasts90% Probability of a Recession90% Probability of a Recession

10%

51% High Growth

Current: RecessionCurrent: Recession

Recession, Slow Recovery

Moderate Recession

Severe Recession

25%

Severe Recession

Source: Moody’s Economy.com4%

10%

Probability of Occurrence

Much Happening in the Much Happening in the Much Happening in the Much Happening in the National EconomyNational EconomyNational EconomyNational Economy

I. Credit Crunch:• Stifles Consumer & Business Activity

I. Credit Crunch:• Stifles Consumer & Business Activity

II. High Oil Prices: • ‘Fuels’ Inflation; Impacts Travel

II. High Oil Prices: • ‘Fuels’ Inflation; Impacts TravelFuels Inflation; Impacts Travel

III. Low Dollar ValuationHelps In Bound International Travel

Fuels Inflation; Impacts TravelIII. Low Dollar Valuation

Helps In Bound International Travel• Helps In-Bound International Travel• Increases Exports, InflationInflation• Helps In-Bound International Travel• Increases Exports, InflationInflation

IV. Employment Growth SlowingIV. Employment Growth Slowing

Consumers Continue to MakeConsumers Continue to Make

Basis-point change - share of retail dollar 2002 - 2007

Tough DecisionsTough Decisions

Building Materials

Nonstore

Gas Stations

Home furnishings

Electronics

Health and Personal

R t t

Sport, book & music

Clothing

Home furnishings

Autos

Grocery

Restaurants

-400 -300 -200 -100 0 100 200 300

Source: BOCGasoline + 26% from a year ago

One of Six Leisure Travelers Plans One of Six Leisure Travelers Plans to Take Fewer Trips This Yearto Take Fewer Trips This Yearto Take Fewer Trips This Yearto Take Fewer Trips This Year

Not Because of Not Because of Time PovertyTime Poverty

Reasons For Taking Fewer Leisure Trips: 2007% 2008%Current economic conditions make it difficult for me to travel 16 19Have projects/things I need to do at home 22 15 †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 rather do with myThere are other things I d rather do with myvacation/leisure time than travel NA 11

Price of gasoline is too high 5 9 † Air travel is too big of a hassle 3 4Air travel is too big of a hassle 3 4I believe it is not safe to travel 1 4 † † Denotes statistically significant difference from prior year. NA Not asked in 2007.NA Not asked in 2007.

Source: YPartnership Leisure Travel Monitor

One Exception!

20072007--2009 Economic Outlook2009 Economic Outlook20072007--2009 Economic Outlook2009 Economic OutlookExpectations Decline DramaticallyExpectations Decline Dramatically

Forecast Point Employment Income GDP CPIPercent Change 2007 - 2008

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%

Forecast Point Employment Income GDP CPIPercent Change 2008 - 2009

October 2007 1.1% 3.3% 0.3% 1.9% January 2008 0.9% 3.2% 3.4% 2.0%

Source: Moody’s Economy.com

April 2008 0.9% 3.1% 3.3% 2.0%

InIn--Bound International TravelBound International TravelFinally Back to PreFinally Back to Pre--2001 Levels2001 Levels

2001 2002 2003 2004 2005 2006 2007 2007:2000Total All Countries -8.4% -7.1% -5.4% 11.8% 6.8% 3.8% 11.1% 10.7%

Inbound Travel to the United States

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%p 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%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).

InIn--Bound International TravelBound International TravelInIn Bound International TravelBound International Travel

U S PORT OF ENTRY (ALL MODES) OF NON RESIDENT ARRIVALS

2007TOTAL % change

PORTS OVERSEAS 2007/2006 Rank Occ ADR RevPARGrand Total-All U S 23 892 277 10% -0 2% 5 9% 5 7%

Year End 2007/2006 Hotel Change

U.S. PORT OF ENTRY (ALL MODES) OF NON-RESIDENT ARRIVALS2007

Grand Total All U.S. 23,892,277 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.AATLANTA, 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%S U S D t t f C ITA Offi f T l & T i I d t iSource: U.S. Department of Commerce, ITA, Office of Travel & Tourism Industries 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?Where Are Cap Rates Going?Where Are Cap Rates Going?Where Are Cap Rates Going?

When Cash Flows

Decelerate

When Interest R t

Cap Rates Increase VolatilityTh hRates

IncreaseSo do Cap Rates

The more there is, the higher the 

Cap Rate

Three Main Drivers of Cap Rate pChange

PKF Hospitality Research

Forecasts of Return ComponentsForecasts of Return ComponentsC R t M i UC R t M i U 190 b b 2010190 b b 2010Cap Rates Moving Up Cap Rates Moving Up –– 190 bps by 2010190 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%00

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%

PKF Hospitality Research, Moody’s Economy.com, RERC

LRA: 5.5% 4.8% 10.3% 4.7%

Presentation OutlinePresentation Outline

I. The EconomyII Current Horizon:I. The EconomyII Current Horizon:II. Current Horizon:

Have We Seen This Before?III S Th ht t T k

II. Current Horizon: Have We Seen This Before?

III S Th ht t T kIII. Some Thoughts to Take-awayIII. Some Thoughts to Take-away

HighHigh Supply Growth Preceded Last Two Supply Growth Preceded Last Two DownturnsDownturns

HighHigh Supply Growth Preceded Last Two Supply Growth Preceded Last Two DownturnsDownturns

6.0%

o tu so tu sNot This Time AroundNot This Time Around

o tu so tu sNot This Time AroundNot This Time Around

3 0%

4.0%

5.0%LRA Demand Δ: 1.9%

Forecast

1.0%

2.0%

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 2008F2009F2010F

‐4.0%

‐3.0%

Supply Demand^

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

Historical ChangeHistorical Changein U S Lodging Demandin U S Lodging Demand -- TroughTroughin U.S. Lodging Demand in U.S. Lodging Demand TroughTrough

12 Month Moving Average12 Month Moving Average

4.0%

6.0%

March 2008

0 0%

2.0%

April 2007:

‐2.0%

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 1991:

‐6 0%

‐4.0%

April 2002:

‐6.0%

1989 ‐ 1994 1999 ‐ 2004 2004 ‐ 2009

Sources: PKF-HR, Smith Travel Research

Historical Change in U.S. Lodging Historical Change in U.S. Lodging DemandDemand –– A DoubleA Double--DipDipDemand Demand A DoubleA Double DipDip12 Month Moving Average12 Month Moving Average

6 0%

4.0%

6.0%

March 2008

April 2007 -

0 0%

2.0%

November 1991 - ‐2.0%

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:

April 2002 -

‐6 0%

‐4.0%

Sources: PKF-HR, Smith Travel Research

‐6.0%

1989 ‐ 1994 1999 ‐ 2004 2004 ‐ 2009 Forecast

The Mild DoubleThe Mild Double--Dip Extends RecoveryDip Extends Recovery12 Month Moving Average12 Month Moving Average12 Month Moving Average12 Month Moving Average

4.0%

6.0%

April 2007:

March 2008

0 0%

2.0%

‐2.0%

0.0%

1989

0119

8906

1989

1119

9004

1990

0919

9102

1991

0719

9112

1992

0519

9210

1993

0319

9308

1994

0119

9406

1994

1119

9504

1995

0919

9602

1996

0719

9612

1997

0519

9710

1998

0319

9808

1999

0119

9906

1999

1120

0004

2000

0920

0102

2001

0720

0112

2002

0520

0210

2003

0320

0308

2004

0120

0406

2004

1120

0504

2005

0920

0602

2006

0720

0612

2007

0520

0710

2008

0320

0808

2009

0120

0906

2009

11

November 1991: N b 2008 0 2%

‐6 0%

‐4.0%April 2002:

November 2008:

‐6.0%

Supply Demand

Sources: PKF-HR, Smith Travel Research

The DoubleThe Double--Dip Extends a Dip Extends a RecoveryRecovery

Supply Demand Occupancy ADR RevPARNovember 1991 2.1% -1.2% 62.0% 0.6% -2.7%+ 1 Year 1 1% 1 7% 62 4% 1 1% 1 8%

12 Month Moving Averages

+ 1 Year 1.1% 1.7% 62.4% 1.1% 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%+ 1 Year 1.4% 1.1% 58.6% 0.2% 0.0% 1 Year 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%+ 2 Years 2 7% 2 8% 61 8% 3 2% 3 2% + 2 Years 2.7% 2.8% 61.8% 3.2% 3.2%

Sources: PKF Hospitality Research; Smith Travel Research

ADR ADR Growth Will ContinueGrowth Will ContinueADR ADR Growth Will ContinueGrowth Will ContinueRevPAR RevPAR Performance Performance up in 2009up in 2009

2008 = the Low Point Going Forward2008 = the Low Point Going Forward

RevPAR RevPAR Performance Performance up in 2009up in 20092008 = the Low Point Going Forward2008 = the Low Point Going Forward

Long Term

Average 2004 2005 2006 2007 2008P 2009P 2010P

= Below/Above Long Run Average

g

Supply 1.9% 0.4% -0.1% 0.2% 1.3% 2.5% 2.7% 2.3%

Demand 1 9% 4 0% 2 8% 0 5% 1 1% -0 1% 3 3% 2 5%Demand 1.9% 4.0% 2.8% 0.5% 1.1% -0.1% 3.3% 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*Nominal Dollar Operating Profits*Still N t B k t 2000Still N t B k t 2000Still Not Back to 2000Still Not Back to 2000

$17,731 $18,887

$15 641$16,100

$16,886 $17,000

$21,000

$14,801

$13,172

$11 282$12,242

$13,676 $15,014

$15,641

$13,000

$17,000

mat

ed

mat

ed

$11,282

$9,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Estim

Estim

Dollars per Available RoomU.S. Trends SampleNote: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.

Source: PKF Hospitality Research

Operating Profits*Operating Profits*A Decade of No A Decade of No RealReal GrowthGrowth

(2007 Constant Dollars)(2007 Constant Dollars)

$14 239$15,678

$14,590 $15,641 $15,631 $15,956

$18,000

$14,239

$12,636 $11,423

$10,007 $11,148

$12,875

$10 000

$14,000

ated

ated

$6,000

$10,000

Estim

Estim

$ ,1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

U.S. Trends Sample

Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.

Source: PKF Hospitality Research

Dollars per Available Room

Lodging SameLodging Same--Store SalesStore Sales

20.0%

NOI Stays Positive This Time AroundNOI Stays Positive This Time Around

Forecast

10.0%

15.0%

Forecast Forecast

0.0%

5.0%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F2009F2010F

‐10.0%

‐5.0%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F2009F2010F

‐20.0%

‐15.0%

‐25.0%

Revenue Expenses NOI

Source: PKF Hospitality Research, STR,

Real RevPAR Growth Real RevPAR Growth 90 Days Ago90 Days Ago……Real RevPAR Growth Real RevPAR Growth 90 Days Ago90 Days Ago……Forecast Change Forecast Change –– 20072007--20082008Forecast Change Forecast Change –– 20072007--20082008

Top 5: Change

Anaheim 

Oakland 

Fort Lauderdale 

Tucson

7.4%

7.3% 

6.6% 

6 4%Tucson 

Richmond

Bottom 5:

6.4% 

6.2%

Change

Fort Worth 

Houston 

San Antonio

Indianapolis

‐3.2%

‐2.6%

‐2.4%

‐1.1%Indianapolis 

Jacksonville

1.1%

‐1.0%

RevPAR growing on par with CPI

RevPAR growing slower than CPI

RevPAR growing faster than CPI

PKF Hospitality Research, Moody’s Economy.com

Real RevPAR Growth Real RevPAR Growth TodayToday……Real RevPAR Growth Real RevPAR Growth TodayToday……Revised Forecast Change Revised Forecast Change –– 20072007--20082008Revised Forecast Change Revised Forecast Change –– 20072007--20082008

Top 5: Change

Salt Lake City

Austin

San Francisco

Fort Lauderdale

3.9%

3.7%

3.5%

3 3%Fort Lauderdale

Denver

Bottom 5:

3.3%

3.3%

Change

Fort Worth

San Antonio

Long Island

Jacksonville

‐5.4%

‐3.7%

‐2.9%

‐2.8%Jacksonville

Houston

2.8%

‐2.0%

RevPAR growing on par with CPI

RevPAR growing slower than CPI

RevPAR growing faster than CPI

PKF Hospitality Research, Moody’s Economy.com

Historical ChangeHistorical Changeinin AtlantaAtlanta MSA Lodging DemandMSA Lodging Demand

15 0%

in in AtlantaAtlanta MSA Lodging DemandMSA Lodging Demand12 Month Moving Average12 Month Moving Average

March 2008

10.0%

15.0%

5.0%

‐5.0%

0.0%

August 1991 - 1.0%July 2007 -

‐10.0%

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

June 2002 -

1989‐1994 1999.10‐2005.9 2004.11‐2008.03

Sources: PKF-HR, Smith Travel Research

Atlanta MSA Lodging DemandAtlanta MSA Lodging DemandA Second Dip Has StartedA Second Dip Has Started

15 0%

A Second Dip Has StartedA Second Dip Has Started12 Month Moving Average12 Month Moving Average

March 2008

10.0%

15.0%

5.0%

‐5.0%

0.0%

August 1991 - 1.0%July 2007 -

‐10.0%

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

June 2002 - September 2008 – 1.9%

1989‐1994 1999.10‐2005.9 2004.11‐2008.03 2004:11‐2009:12

Sources: PKF-HR, Smith Travel Research

AtlantaAtlanta--The Tale of Two RecessionsThe Tale of Two RecessionsDemand Declines as Supply AcceleratesDemand Declines as Supply Accelerates

ForecastForecast

Source: PKF Hospitality Research, STR

AtlantaAtlanta--The Tale of Two RecessionsThe Tale of Two RecessionsOccupancy Remains Above Previous TroughOccupancy Remains Above Previous Trough

ForecastForecast

Long Run Average = 64.3%

Source: PKF Hospitality Research, STR

Atlanta MSAAtlanta MSAAll HotelsAll Hotels 20082008All HotelsAll Hotels-- 20082008

Weak Occupancy = Below Average Revenue GrowthWeak Occupancy = Below Average Revenue Growth

2005 2006 2007 2008FLong-Term

Average

O 65 3% 64 9% 63 5% 62 0% 64 3%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 26ADR $80.56 $88.41 $92.76 $95.26 -

% Change +5.6% +9.7% +4.9% +2.7% +2.6%

R PAR $52 63 $57 37 $58 92 $59 06RevPAR $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 OutlinePresentation Outline

I. The EconomyII Current Horizon:I. The EconomyII Current Horizon:II. Current Horizon:

Have We Seen This Before?III S Th ht t T k

II. Current Horizon: Have We Seen This Before?

III S Th ht t T kIII. Some Thoughts to Take-awayIII. Some Thoughts to Take-away

Something to Take AwaySomething to Take Away

U S Economy Might be in a Recession But NotU.S. Economy Might be in a Recession, But Not Hotels

Double Demand Dip This Cycle is Unique:p y q(1) High ADR’s (2) Weak Economy

Trough of Current Downturn Q3 2008 (US + ATL)g ( )

Supply/Demand Imbalance Will Temper Recovery -2010

NOI Essentially Flat in 2008

Increasing Cap Rates Will Moderate AppreciationIncreasing Cap Rates Will Moderate Appreciation for the Balance of the Decade

For a copy of this presentationFor a copy of this presentationpy ppy p

please contactplease contact

Claude VargoClaude Vargo(404) 842 1150 ext. 237(404) 842 1150 ext. 237( )( )

Claude.Vargo@pkfc.comClaude.Vargo@pkfc.com

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