Mark Woodworth R. Mark Woodworth PKF Hospitality Research, LLC May 6, 2014 [email protected] Meet the Money 2014
Mark Woodworth
R. Mark Woodworth
PKF Hospitality Research, LLC
May 6, [email protected]
Meet the Money 2014
The Path to the Peak
•Some Happy Facts
•Our Forecasts
•The Supply Story
•Cap Rate Expectations
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Hotel Horizons®Forecasting Model
•STR, Inc.
Historical rooms occupied, room available,
rooms revenue
Pipeline of future hotel construction
•Moody’s Analytics
Economic forecasts
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1. Demand has fully recovered.
• Nationally and in 45 of 50 Top Markets.
2. 2013 Occupancy level was above the long run average.
• Occupancy has increased four years in a row – 2014 will be a record 5th.
3. Limited supply growth persists.
• Below long run average Nationally and in 47 of 50 top markets.
4. Urban locations at record occupancy levels.
• To be followed by Airport locations in 2014.
5. Profits have increased > 10% per year since 2011.
• A run that should last through 2015.
Some Happy Facts:
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6. Real average daily rates have a way to go.
A Not So Happy Fact:
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Our Forecasts
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Leading Economic Indicators
% change in last 6 months – March 2014
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Leading Economic Indicators (% change in the last 6 months) U.S. Hotel Demand
Source: The Conference Board, PKF-HR, STR, Inc. 7
6 to 8 month lagIncreasing Leading
Economic Indicators,
Demand to Follow?
What’s Different Now?
Source: policyuncertanity.com 8
Lowest
level since
November
2007
2 x’s
2 x’s10 x’s
What is Different Today?
•Remember the:
Fiscal Cliff
S+P Downgrade
Government Shutdown
Greece, Cyprus, Spain, etc.
•Today:
Russia
I hope Jim has ark at the Reception
tonight9
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-2.7%
2.0%
-2.0%
-8.3%
-5.4%
-0.4%
1.3%
3.9%
1.6%
3.9%
2.8%2.8%
-1.3%
3.2%
1.4%
4.9%
3.7%
1.2%
2.8%
0.1%1.1%
2.5%
4.1%2.6%
0.1%
3.8%3.8%4.0%4.1%
4.5%
3.9%
2.9%
-10
-8
-6
-4
-2
0
2
4
6
8
10
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 I II III IV
2008 2009 2010 2011 2012 2013 2014 2015
(GOVERNMENT) Government consumption expenditures and gross investment
TRADE (Net exports of goods and services)
BUSINESS (Gross private domestic investment)
CONSUMERS (Personal consumption expenditures)
Lodging DemandThese matter
the most.
GDP Component Forecast
Source: BEA, Moody’s Analytics, PKF Hospitality Research, LLC Hotel
Horizons: December - February 2014, Smith Travel Research
The Outlook for the Drivers that are Most
Important to Hotels Remains Favorable
Long Term
Average 2009 2010 2011 2012 2013 2014F 2015F
Supply 1.9% 2.8% 1.7% 0.5% 0.5% 0.7% 1.0% 1.3%
Demand 2.1% -6.2% 7.2% 4.7% 3.0% 2.2% 3.0% 3.0%
Occupancy 61.9% 54.5% 57.5% 59.9% 61.4% 62.2% 63.4% 64.5%
ADR 2.9% -8.7% 0.0% 3.8% 4.2% 3.9% 4.3% 5.4%
RevPAR 2.9% -16.7% 5.4% 8.2% 6.8% 5.4% 6.3% 7.1%
National Forecast – 2014/2015
Passing Through Long
Run Average Level
Very Limited New
Supply
Source: PKF Hospitality Research, LLC – Hotel Horizons® Preliminary Update May 6, 2014, STR, Inc. 11
Forecast Occupancy LevelsBy Chain-Scale
74.6% 71.9% 71.7%
63.8%55.8% 55.0%
75.0% 72.0% 72.1%
64.5%57.0% 56.2%
75.6% 72.3%72.1%
65.2%
58.0% 57.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2013 2014F 2015F
Source: STR, Inc., PKF Hospitality Research, LLC, March-May 2014 Hotel Horizons®
This is where meetings go.
70.0% 69.0% 68.7%
63.5% 57.3% 57.8%
Long Run Average
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The Supply Story
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Troubling Signs in the Pipeline?
Phase 2014 2013 % Change
In Construction 102,855 72,509 41.9%
Final Planning 133,090 96,365 38.1%
Planning 145,558 151,876 -4.2%
Active Pipeline 381,503 320,750 18.9%
Total U.S. Pipeline, Number of Rooms by Phase, March 2014 and 2013
Source: STR, Inc.
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Question:
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When Was Overbuilding Last an Issue?
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U.S. Supply Change
4.0%
3.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1988
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
1997
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
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Source: PKF Hospitality Research LLC, STR, Inc.
Long Run
Average =
1.9%
Q2 1999
Q1 2009
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Today vs. the Previous Peak of Construction Activity – Q1 2008
Phase 2014 Q1/2008
%
Difference
Change
In Construction 102,855 207,468 -50.4%
Final Planning 133,090 113,419 17.3%
Planning 145,558 344,363 -57.7%
Active Pipeline 381,503 665,250 -42.7%
Total U.S. Pipeline, Number of Rooms by Phase, March 2014 and March 2008Source: STR, Inc. 17
New Construction:Not a Near-Term Threat
$90
$95
$100
$105
$110
$115
$120
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Re
al A
DR
Le
ve
l (2
01
4 D
oll
ars
)
Ye
ar
ove
r Y
ea
r S
up
ply
Ch
an
ge
Supply Change Real ADRForecast
Source: Moody’s Analytics, STR, Inc., PKF Hospitality Research, LLC Hotel Horizons® March-May 2014 1818
Real ADR Has Recovered in Six Markets
1919
2013-2015
Supply Growth
Market Top 50 Rank
Austin # 2
Nashville # 3
Pittsburgh # 4
New Orleans # 13
San Francisco # 45
Oahu # 47
New York = #1Source: STR, Inc., PKF Hospitality Research, LLC, March-May 2014 Hotel Horizons®
Cap Rate Expectations
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Three Main Drivers of Cap Rate Change
When
Interest Rates
Increase
So do Cap Rates
When Cash Flows
Accelerate
Cap Rates
Decline Volatility
The more there is, the higher the Cap Rate
Where are Cap Rates Going?
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Hotel Profits:A Strong, Favorable Run
-40%
-30%
-20%
-10%
0%
10%
20% Change in NOI Forecast
Source: PKF Hospitality Research, LLC22
Forecasts of Return Components
Cap Rate Baa
Hotel Risk
Premium % Supply
% Net
Operating
Income
2011 8.2% 5.6% 2.6% 0.5% 12.7%
2012 8.1% 4.9% 3.2% 0.4% 10.2%
2013 8.0% 5.0% 3.0% 0.7% 10.1%
2014F 8.3% 6.0% 2.3% 1.0% 12.4%
2015F 8.8% 6.9% 1.9% 1.3% 14.2%
2016F 8.8% 7.6% 1.2% 1.7% 6.3%
Source: PKF Hospitality Research, LLC, STR, Inc., RERC, RCA, Moody’s Analytics
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Hotel Risk Premium Contracts
Unit Level Hotel Profits* andHotel Transaction Volume
0
500
1,000
1,500
2,000
2,500
3,000
3,500
$10,000
$15,000
$20,000
$25,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
Unit Level NOI* $PAR (Left Axis) Number Properties Sold (Right Axis)
Note: * Before deduction for capital reserve, rent, interest, income taxes, depreciation, and amortization.
Sources: Real Capital Analytics March 2014, PKF Hospitality Research, LLC, March 2014 Hotel Horizons® Report25
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Summary Thoughts:
1. The Economic Outlook for 2014 Has Remained Relatively
Consistent Over the Past Three Years; Uncertainty is Disapating.
2. Industry Fundamentals Remain Solid.
3. Supply Growth will Remain in Check for at Least Another Two
Years as Real ADR’s Recover.
4. Attractive Hotel Profit Growth Continues and will Serve to Mitigate
the Impact of Rising Interest Rates.
5. Owners and Investors will be Rewarded as a Result.
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