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    Jim Butler
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    Hotel Lawyers with the pulse of the hotel industry from ALIS. Mark Woodworth of PKF Consulting shared his latest analysis of the hotel industry with us, as well as his slides from the ALIS conference. The picture is not pretty. Mark says, that if you're waiting for the recovery, the key word is "PROTRACTED." Here are the details. A deteriorating situation getting worse. Mark Woodworth views employment as one of the best measures of the economy's health. Conversely, unemployment shows the economy's weakness. The situation is pretty bad and has been getting worse. Loan delinquencies growing. The picture on the loan delinquencies looks pretty grim, with home equity loan delinquencies peaking near the end of 2010. We can only guess where hotel CMBS delinquencies will go from here, but here is Mark's chart on results to date. Protracted hotel supply-demand disconnect, declines in occupancy and ADR, and record declines in NOI. PKF is projecting a protracted disconnect in supply and demand for at least 31 months -- a new record -- as shown in the chart. This leads to protracted declines in occupancy and ADR, with ADR recovering only in the second quarter of 2010. And these factors in turn cause, what Mark calls "a modern record" in NOI declines, which NOI going positive only in mid-to-late 2010. "Explosion" in hotel cap rates. PKF Consulting is forecasting an "explosion" in cap rates for hotels, up by 210 basis points from today through 2010 to 9.7%. Falling NOI and exploding cap rates lead to a projected decline in hotel values of more than 20% in 2009, with no significant improvement in values until 2012. Less than 30% of all CMBS Hotel loans since 2005 have LTVs over 70%. So where does this leave lenders and borrowers in terms of "loan to value" or "LTV" ratios? This final slide suggests that at the end of 2008, less than 20% of the CMBS loans originated since 2005 still had an LTV greater than 70%. Let me turn that around to say it differently: At the end of 2008, more than 80% of the hotel CMBS loans have less than a 70% LTV, and in 2009, the experts are predicting record RevPAR and NOI declines with an "explosion" in cap rates of 210 basis points . . . and no improvement in value for some time. This does not bode well. Hotel bankruptcies around the corner? Hotel bankruptcies have already begun, but we see the flow speeding up as lenders and owners "see the writing on the wall." There will be tremendous opportunities here for someone. See some of our selected articles at www.HotelLawBlog.com on hotel bankruptcies, workouts and turnarounds.

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    Hospitality Industry Prospects for 2009 Look Grim

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    Hotel Lawyers with the pulse of the hotel industry from ALIS. Mark Woodworth of PKF Consulting shared his latest analysis of the hotel industry with us, as well as his slides from the ALIS conference. The picture is not pretty. Mark says, that if you're waiting for the recovery, the key word is "PROTRACTED." Here are the details. A deteriorating situation getting worse. Mark Woodworth views employment as one of the best measures of the economy's health. Conversely, unemployment shows the economy's weakness. The situation is pretty bad and has been getting worse. Loan delinquencies growing. The picture on the loan delinquencies looks pretty grim, with home equity loan delinquencies peaking near the end of 2010. We can only guess where hotel CMBS delinquencies will go from here, but here is Mark's chart on results to date. Protracted hotel supply-demand disconnect, declines in occupancy and ADR, and record declines in NOI. PKF is projecting a protracted disconnect in supply and demand for at least 31 months -- a new record -- as shown in the chart. This leads to protracted declines in occupancy and ADR, with ADR recovering only in the second quarter of 2010. And these factors in turn cause, what Mark calls "a modern record" in NOI declines, which NOI going positive only in mid-to-late 2010. "Explosion" in hotel cap rates. PKF Consulting is forecasting an "explosion" in cap rates for hotels, up by 210 basis points from today through 2010 to 9.7%. Falling NOI and exploding cap rates lead to a projected decline in hotel values of more than 20% in 2009, with no significant improvement in values until 2012. Less than 30% of all CMBS Hotel loans since 2005 have LTVs over 70%. So where does this leave lenders and borrowers in terms of "loan to value" or "LTV" ratios? This final slide suggests that at the end of 2008, less than 20% of the CMBS loans originated since 2005 still had an LTV greater than 70%. Let me turn that around to say it differently: At the end of 2008, more than 80% of the hotel CMBS loans have less than a 70% LTV, and in 2009, the experts are predicting record RevPAR and NOI declines with an "explosion" in cap rates of 210 basis points . . . and no improvement in value for some time. This does not bode well. Hotel bankruptcies around the corner? Hotel bankruptcies have already begun, but we see the flow speeding up as lenders and owners "see the writing on the wall." There will be tremendous opportunities here for someone. See some of our selected articles at www.HotelLawBlog.com on hotel bankruptcies, workouts and turnarounds.

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    784 views20 pages

    Hospitality Industry Prospects For 2009 Look Grim

    Uploaded by

    Jim Butler
    Hotel Lawyers with the pulse of the hotel industry from ALIS. Mark Woodworth of PKF Consulting shared his latest analysis of the hotel industry with us, as well as his slides from the ALIS conference. The picture is not pretty. Mark says, that if you're waiting for the recovery, the key word is "PROTRACTED." Here are the details. A deteriorating situation getting worse. Mark Woodworth views employment as one of the best measures of the economy's health. Conversely, unemployment shows the economy's weakness. The situation is pretty bad and has been getting worse. Loan delinquencies growing. The picture on the loan delinquencies looks pretty grim, with home equity loan delinquencies peaking near the end of 2010. We can only guess where hotel CMBS delinquencies will go from here, but here is Mark's chart on results to date. Protracted hotel supply-demand disconnect, declines in occupancy and ADR, and record declines in NOI. PKF is projecting a protracted disconnect in supply and demand for at least 31 months -- a new record -- as shown in the chart. This leads to protracted declines in occupancy and ADR, with ADR recovering only in the second quarter of 2010. And these factors in turn cause, what Mark calls "a modern record" in NOI declines, which NOI going positive only in mid-to-late 2010. "Explosion" in hotel cap rates. PKF Consulting is forecasting an "explosion" in cap rates for hotels, up by 210 basis points from today through 2010 to 9.7%. Falling NOI and exploding cap rates lead to a projected decline in hotel values of more than 20% in 2009, with no significant improvement in values until 2012. Less than 30% of all CMBS Hotel loans since 2005 have LTVs over 70%. So where does this leave lenders and borrowers in terms of "loan to value" or "LTV" ratios? This final slide suggests that at the end of 2008, less than 20% of the CMBS loans originated since 2005 still had an LTV greater than 70%. Let me turn that around to say it differently: At the end of 2008, more than 80% of the hotel CMBS loans have less than a 70% LTV, and in 2009, the experts are predicting record RevPAR and NOI declines with an "explosion" in cap rates of 210 basis points . . . and no improvement in value for some time. This does not bode well. Hotel bankruptcies around the corner? Hotel bankruptcies have already begun, but we see the flow speeding up as lenders and owners "see the writing on the wall." There will be tremendous opportunities here for someone. See some of our selected articles at www.HotelLawBlog.com on hotel bankruptcies, workouts and turnarounds.

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    of 20

    R M

    R. Mark
    kWWoodworth
    d th
    President
    PKF Hospitality Research
    J b B
    Jobs Becoming
    i M More Scarce
    S
    Total Payroll Employment in a Long
    Contraction

    Source: Moody's Economy.com


    Current Contraction Looks Like the Last One
    Remember the Jobless Recovery?
    Forecast
    Long Run Employment Levels
    15 Qtrs
    16 Qtrs

    10 Qt
    Qtrs

    9 Qt
    Qtrs

    Beginning / End of Contraction Period


    Turning Point Source: Moody's Economy.com
    Turning Points:
    Distance from Beginning of Official NBER
    Recession (Quarters)

    Source: Moody's Economy.com


    Loan Delinquencies Increase
    Pain Will Escalate into Late 2010

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


    H t l CMBS D
    Hotel Delinquency
    li R
    Rate
    t
    1998 - 2008
    2008

    Source: Trepp, LLC


    Protracted Disconnect
    B t
    Between P
    Property
    t C
    Cycle
    l and
    d
    Business Cycle
    Forecast

    Cycle Disconnect
    Source: PKF Hospitality Research, Smith Travel Research
    Protracted Declines Lead to
    Record Low Occupancy in 2009

    Forecast

    Source: PKF Hospitality Research, Smith Travel Research


    Weak Occupancy Postpones
    ADR Growth Until 2Q 2010

    Forecast

    Source: PKF Hospitality Research, Smith Travel Research


    High ADR Changes
    Fuel NOI Growth
    Forecast

    THIS IS A “MODERN RECORD”

    Source: PKF Hospitality Research, Smith Travel Research


    Forecast Spreads Above LRA
    But Below 2Q 2003 Peak

    Source: PKF Hospitality Research, Moody’s Economy.com, Real Estate Research Corporation
    Forecasts of Return Components
    Cap Rates Exploding – Up 210 bps by 2010
    10 Year Treasury
    Treasury Spread % Δ 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%

    2008E 3.7% 4.1% -1.7% 7.8%

    2009F 3.6% 5.2% -18.8% 8.8%

    2010F 4 8%
    4.8% 4 9%
    4.9% 0 0%
    0.0% 9 7%
    9.7%

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


    Cumulative Value Decline Falls
    Sh t off 2001 – 2003 E
    Short Experience
    i
    Factors Influencing Value of Upper Priced Hotels
    Note: Cap Rate Influence = Change In Value – Change In NOI (after reserve)

    Source: PKF Hospitality Research, Real Estate Research Corporation


    A Longer Journey This Time Around
    Number of Quarters from Beginning of Official
    NBER Recession Until Turning Point

    *Until supply falls below its LRA


    Source: PKF Hospitality Research
    Nothing
    g Looks Normal
    Supply Up – Demand Down:
    Big RevPAR Declines in ‘09
    2009 = the Low Point Going Forward

    = Below/Above Long Run Average


    Long
    Term
    Average 2004 2005 2006 2007 2008E 2009F 2010F

    Supply 1.9% 0.4% -0.1% 0.2% 1.3% 2.7% 2.9 1.0%

    Demand 1.9% 4.0% 2.8% 0.5% 1.0% -1.4% -2.8% 1.3%

    Occupancy
    p y 62.8% 61.3% 63.1% 63.3% 63.1% 60.5% 57.2% 57.4%

    ADR 3.5% 4.2% 5.5% 7.5% 6.1% 2.4% -4.6% 1.0%

    RevPAR 3.5% 7.9% 8.5% 7.8% 5.7% -1.7% -9.8% 1.3%

    Source: PKF Hospitality Research – Preliminary Fourth Quarter 2008 Hotel HorizonsSM Report, Smith Travel Research
    Impact of Revenue Declines on
    NOI Depends on Where You Start
    Low and High Occupancy Hotels

    Hotels with Occupancy


    Greater than 70%

    Hotels with Occupancy


    Less than 70%

    Note: * After capital reserve expense and before rent , interest, income taxes, and amortization.

    Source: PKF Hospitality Research


    Negative Impact on Debt Service
    Coverage Capability is Significant
    Resulting Debt Coverage Ratio

    Source: PKF Hospitality Research


    E it is
    Equity i Evaporating
    E ti
    1 of 3 CMBS Loans Since 2005 LTV > 70%

    Are these hotels


    under water?

    Source: Trepp, LLC


    Final Thoughts

    ƒ Nothing really new ahead,


    although all that is bad about this
    phase
    h off the
    th cycle
    l iis protracted
    t t d
    in nature.
    ƒ NOI and asset value declines are
    big but not unprecedented –
    owners and lenders will still
    experience significant stress.
    ƒ The Turning Point: consensus
    view is mid-2010.
    T Download
    To D l d A Copy
    C Of This
    Thi
    Presentation
    www pkfc com/presentations
    www.pkfc.com/presentations

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