Fundamental Certainty.or No? a presentation at: R. Mark Woodworth PKF Hospitality Research, LLC May 7, 2013 mark.woodworth@pkfc.com
Hotel Horizons Forecasting Model Smith Travel Research Historical rooms occupied, room available, rooms revenue Pipeline of future hotel construction Moody s Analytics Economic forecasts For a Copy: www.pkfc.com/presentations 2
Happy Thoughts May 2013 History: - # of Consecutive Quarters of Increases Demand 13 Quarters Occupancy 13 Quarters ADR 11 Quarters RevPAR 12 Quarters Source: PKF-HR; STR 3
More Happy Thoughts May 2013 Forecast: - # of Consecutive Quarters above (below) Long Run Average Demand (2.1%) 10* Quarters *(starting Q4 2013) (Supply) (2.0%) 14 Quarters ADR (2.9%) 18 Quarters RevPAR (2.9%) 16 Quarters Source: PKF-HR; STR 4
May 2012 What Did We Say a Year Ago?
Hotel Horizons May 2012 April 2012 United States 2012 2013 STR Actual April 2012 Most Recent Update Occupancy 60.7% 61.4% 61.9% 62.0% ADR 4.7% 4.2% 5.3% 5.0% RevPAR 6.7% 6.8% 7.3% 6.1% Stronger than Expected Demand Growth ADR Recovery Slower than Expected Source: PKF Hospitality Research, LLC Hotel Horizons March--May 2012, 2013, Smith Travel Research 6
United States Q1 2013 Forecast PKF-HR Forecast Q1 2013 STR Q1 2013 Actual Supply 0.8% 0.7% Demand 2.3% 2.6% Occupancy 1.6% 1.8% ADR 5.8% 4.5% RevPAR 7.4% 6.4% Stronger than Expected Demand Growth (again) ADR Lift Very Good; Not Great Source: PKF Hospitality Research, LLC Hotel Horizons March--May 2012, 2013, Smith Travel Research 7
Key Economic Measures for the Lodging Industry
2000 2000 2001 2002 2003 2003 2004 2005 2006 2006 2007 2008 2009 2009 2010 2011 2012 2012 2013 2014 2015 2015 2016 2017 U.S.: All But Employment Has Recovered 160 150 140 130 120 Leisure and Hospitality Employment Real Personal Income Total Employment Rooms Sold Forecast 110 100 90 Source: PKF-HR, Moody's Analytics, STR (Historical Rooms Sold) 9
GDP Component Forecast 10.0% 8.0% Forecast 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV 2008 2009 2010 2011 2012 2013 2014 (GOVERNMENT) Government consumption expenditures and gross investment TRADE (Net exports of goods and services) BUSINESS (Gross private domestic investment) CONSUMERS (Personal consumption expenditures) -10.0% -12.0% These matter the most. Demand change Source: BEA, Moody s Analytics 10
Historic and Projected International Visitors to the U.S. Arrivals in Millions 90.0 80.0 Forecast 70.0 60.0 50.0 40.0 30.0 20.0 10.0-2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: International Trade Administration 11
Good News Summary 1. Supply Growth: Below Average through 2016. 2. Demand Growth: Above Average through 2015. 3. Occupancy: Above Average Level through 2016. 4. ADR Growth: 2 x s Average through 2015. 5. RevPAR Growth: 2.5 x s Average through 2015. 12
These Strong Market Conditions will Persist through 2017 ADR Historic and Forecast Occupancy and ADR 10% 8% 4 Quarter Moving Average Forecast 66% 64% 6% 4% 2% 0% -2% -4% -6% 62% 60% 58% 56% 54% 52% Occupancy -8% ADR Occ LRA = Long Run Average 50% -10% Source: PKF Hospitality Research LLC, Smith Travel Research 48% 13
Profit Growth Will be Above Average as Well 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 30.0% 20.0% 10.0% 0.0% -10.0% Forecast -20.0% -30.0% -40.0% Percent Change in NOI Long Run Average Source: PKF Hospitality Research, LLC 14
Nominal Dollar Operating Profits* Will Continue to Increase Dollars Per Available Room $10,483 $11,510 $12,972 $14,692 $16,191 $18,894 2009 2014F Forecast $18,000 $14,000 $10,000 $6,000 Source: PKF Hospitality Research LLC s Annual Trends Database Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. 15
Nominal Dollar Operating Profits* Surpass Previous Peak in 2014 Dollars Per Available Room $15,357 $16,908 $13,628 $12,320 $10,792 $12,022 $13,886 $15,735 $16,868 $16,227 $10,483 $11,510 $12,972 $14,692 $16,191 $18,894 $18,000 2009 2014F $14,000 $10,000 $6,000 Source: PKF Hospitality Research LLC s Annual Trends Database Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization. 16
Real Changes In NOI* Still Below All-Time High and Previous Peak Dollars Per Available Room $21,951 $17,345 $15,285 $12,983 $14,023 $15,744 $17,385 $17,974 $17,363 $10,939 $11,847 $12,972 $14,458 $15,644 $17,818 $30,000 $20,000 $10,000 $0 Source: PKF Hospitality Research LLC s Annual Trends Database Note: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization 17 2011 Constant value dollars
Mixed Signals on New Hotel Construction Source: Engineering News Record Q1 2013 Report 18
Question What do you care more about? The magnitude of the upside? The depth of the downside? 19
A Different Way to Look at Markets Variance Semi-Variance Semi-Variance Semi-variance only considers values (below) above the target value. 20
1988 1988 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 A Close Look at Two Markets 30.0% RevPAR Change (1988-2013) 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% San Francisco St. Louis -40.0% -50.0% Source: STR Focus is Here 21
Which Market Has a Higher Return Requirement? Downside Variance Upside Variance Difference San Francisco 7.7% 6.4% -1.2% St. Louis 2.9% 3.7% 0.7% Source: STR, PKF Hospitality Research, LLC 22
SAN FRANCISCO BOSTON Semi-Variance Differential: Smaller Markets In the Positive NEWARK MINNEAPOLIS CHICAGO DALLAS OAKLAND JACKSONVILLE SACRAMENTO PHOENIX TUCSON DETROIT CINCINNATI KANSAS CITY RICHMOND LOS ANGELES SEATTLE MIAMI SAN DIEGO PHILADELPHIA RALEIGH-DURHAM BALTIMORE DENVER SAINT LOUIS ATLANTA TAMPA CHARLOTTE ORLANDO AUSTIN CLEVELAND ALBUQUERQUE ANAHEIM WEST PALM BEACH MEMPHIS COLUMBUS SALT LAKE CITY SAN ANTONIO NASHVILLE PITTSBURGH PORTLAND FORT WORTH FORT LAUDERDALE OAHU LONG ISLAND INDIANAPOLIS NEW ORLEANS HOUSTON 2.5% 2.0% 1.5% 1.0% 0.5% San Francisco, Boston, New York, All U.S. 0.0% -0.5% NEW YORK ALL U.S. HARTFORD WASHINGTON DC -1.0% -1.5% Source: SemiVariance Differential PKF Hospitality Research LLC, Smith Travel Research 23
Longer Term Outlook Remains Strong Across Markets Oakland Oahu Tucson West Palm Beach Baltimore Newark Chicago Denver San Diego Dallas Hartford Houston Orlando Seattle Atlanta San Francisco San Antonio Anaheim New York Tampa Jacksonville Fort Lauderdale Boston Los Angeles Charlotte Sacramento Long Island Cleveland Portland Columbus Fort Worth Raleigh-Durham Minneapolis Miami Detroit Pittsburgh Phoenix Kansas City Indianapolis Salt Lake City Washington DC Memphis Austin Nashville Saint Louis Cincinnati Albuquerque Richmond New Orleans Philadelphia 9.0% 8.0% Average Annual RevPAR Change (2013-2017) 7.0% 6.0% U.S. Average 5.9% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: PKF Hospitality Research LLC, Smith Travel Research 25
Forecast Occupancy Levels By Chain-Scale 80% 74.0% 71.2% 70% 71.1% 73.3% 70.7% 70.9% 60% 71.0% 63.7% 69.3% 69.5% 55.1% 54.9% 50% 62.8% 54.9% 54.3% 40% 61.3% 53.2% 53.4% 30% 20% 10% 0% This is where meetings go. 2011 2012 2013F Source: STR, PKF Hospitality Research, LLC, March-May 2013 Hotel Horizons 26
Where are Cap Rates Going? When Interest Rates Increase So do Cap Rates When Cash Flows Accelerate Cap Rates Increase Three Main Drivers of Cap Rate Change Volatility The more there is, the higher the Cap Rate
1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 Hotel Risk Premium Slowly Contracts Hotel Cap Rates, 10 Year Treasuries and Risk Premium 14.0 12.0 10.0 8.0 6.0 Spread 10-Year Treasury Hotel Cap Rate 2Q 2003 7.4% 4Q 2008 3.9% 1Q 2012 5.7% Forecast Hotel Risk Spreads at Their Minimum 4.0 3Q 2007 2.6% 2.0 0.0 Source: PKF Hospitality Research LLC, Moody's Analytics, RERC, RCA 28
Summary 1. Uncertainty continues to be a drag an important impediment to the recovery of the group segment and pricing overall. 2. Industry growth, while still positive, will slow relative to what we have become used to. Q2 and Q3 2013 will be weaker ; 2014 should be next really good year. 29
Summary 3. Positive momentum will persist as industry fundamentals solidify and greater levels of debt and equity find their way into the market. The hotel risk premium contracts as a result. 4. It is a great time to be in the hotel business! (But when will the window begin to close?) 30
2007 Hotel Real Estate Emotions 2014-16 2017? 2008 1 st Half 2011-13 2004 2013-14 2008 2nd Half 2009-2010 2011 31
Thanks for Your Time Fundamental Alignment For a Copy: www.pkfc.com/presentations 32