December 15, 2009 - PKF Hospitality Research (PKF-HR) today announced that, according to its December 2009 edition of Hotel Horizons®, the pace of recovery of the U.S. lodging industry has accelerated from previous expectations. Improving industry data for such key indicators as occupancy, RevPAR, and demand suggest that the recovery will arrive a full quarter earlier than the firm expected in September 2009. These improvements are reflected in the firm�s updated forecasts for 2009 and 2010 in its just published December issue of Hotel Horizons®.

�Make no mistake about it, 2010 will continue to be a tough year for U.S. hotel owners and operators,� said R. Mark Woodworth, president of PKF Hospitality Research. �We are forecasting that, on average, properties will continue to suffer year-over-year declines in revenue and profits from an already dismal 2009. However, given the deceleration of room rate discounting that we observed during the third quarter of 2009, we believe the severity of the losses incurred in 2009 and 2010 will be less than previously forecast. In addition, year-over-year growth in important measurements, such as occupancy, RevPAR, and demand, will be realized a full quarter earlier than we were thinking three months ago.�

As forecast in the September 2009 edition of Hotel Horizons®, the decline in average daily room rates (ADR) reached its cyclical low point in the third quarter of 2009. However, the magnitude of the ADR decline at its turning point was lower than anticipated, thus providing some credence to the firm�s future outlook. 

According to Smith Travel Research, ADR for U.S. hotels declined 9.8 percent in the third quarter of 2009 (3Q09) compared to the same period in 2008. This is a U.S. Lodging Recovery Accelerated 2 December 14, 2009 full 2.2 percentage points better than was forecast by PKF-HR earlier this year. Concurrently, the national occupancy level declined 7.9 percent, a near match to the 7.8 percent drop forecast by PKF-HR. The net result was an actual 16.9 percent decline in RevPAR during 3Q09, roughly two points less than PKF-HR�s projected decline.
 

                                U.S. Lodging Industry
                                 Forecast Annual Change
                                 ----------------------

                                               2009                2010
                                               ----                ----
    Occupancy                         -8.9%                0.4%
    ADR                                  -8.8%               -1.5%
    RevPAR                             -16.9%               -1.1%
    Supply                                  3.1%                1.5%
    Demand                              -6.1%                1.9%
    Unit-Level NOI*               -34.9%               -5.3%

    Note: * Before deductions for capital reserve, rent, interest,
    income taxes, depreciation, and amortization.
    Source: PKF Hospitality Research, December 2009 Hotel
    Horizons(R) Report
 

                    PKF-HR U.S. Hotel Horizons(R) Forecast
                        Comparison of Forecast to Actual
                         Third Quarter 2009 Performance
                            (Change from Prior Year)
                            ------------------------

                              Actual                  Forecast*
                              ------                  ---------
    Occupancy          -7.9%                           -7.8%
    ADR                   -9.8%                          -12.0%
    RevPAR             -16.9%                          -18.8%
    Supply                  3.2%                            2.6%
    Demand              -5.0%                           -5.4%

    Note: * September 2009 Hotel Horizons(R) Report
    Source: Smith Travel Research, PKF Hospitality Research
 

�While our forecast for ADR movement in the third quarter was a bit pessimistic, we recognize the change in pricing trends and have applied it to our thinking regarding the future. Accordingly, this year�s annual ADR forecast has been reduced to a decline of 8.8 percent, and our 2010 ADR forecast is now a minus 1.5 percent. These compare to declines of 10.4 percent and 3.1 percent that we forecast last quarter,� Woodworth observed.

Hotel Horizons® is a quarterly series of reports containing five-year forecasts of performance for the U.S. lodging industry and 50 major markets across the country. The lodging forecasts presented in the December 2009 edition of Hotel Horizons® are based on Smith Travel Research (STR) hotel performance data through September 2009 and Moody�s Economy.com�s October 2009 economic forecast for the nation.

Other Improvements

The enhanced outlook for ADR is not the only positive indicator driving the new PKF-HR forecast. A slight near-term improvement in Moody�s Economy.com�s view on employment recovery translates into an increase in the projected number of hotel rooms occupied in 2010. PKF-HR is now forecasting lodging demand to post a quarterly year-over-year increase during the first quarter of 2010, thus ending eight consecutive quarters of declines. On an annual basis, PKF-HR is now forecasting lodging demand to rise 1.9 percent in 2010, up from the 1.6 percent increase forecast back in September.

�Concurrent with the 1.9 percent annual increase in demand, the pace of new hotel supply is projected to diminish to 1.5 percent. With demand outpacing supply, our 2010 occupancy forecast shows a 0.4 percent increase. While this is just a slight boost to occupancy, it does end a three year trend of declines in this measure,� noted John B. (Jack) Corgel, the Robert C. Baker professor of real estate at the Cornell Hotel School and senior advisor to PKF-HR. �The PKF-HR revised forecast change in RevPAR for the U.S. market in 2010 remains negative, but it too has improved from a minus 2.7 percent to a decline of just 1.1 percent.

Local Markets Recover

�The U.S. hotel industry, like politics, is local,� said Aaron Walls, research analyst with PKF Hospitality Research. �The good news is that 45 of the 50 cities for which we produce local hotel market forecast reports are expected to enjoy an increase in lodging demand in 2010. Unfortunately, because of the residual impact of hotel openings in 2009, the pace of new supply growth is forecast to exceed the lift in demand in 24 of the 50 markets.�

In 2009, all 50 markets in the Hotel Horizons® universe are forecast to suffer an annual decline in RevPAR. However, according to the 2010 RevPAR forecast, most markets will begin to enjoy year-over-year gains over the course of the year. �In 28 of the 50 markets, RevPAR growth will occur as early as the first half of the 2010, while another 16 will enjoy RevPAR gains during the latter part of the year. Unfortunately, weak local market fundamentals will keep six markets from achieving RevPAR growth until 2011,� Walls noted.

Brighter Bottom Line

�A deceleration in ADR declines is significant not only because it mitigates the fall off in revenue, it also has a positive impact on bottom line profitability,� Woodworth said. Research conducted by PKF-HR reveals that both positive and negative changes in unit-level Net Operating Income (NOI) are greater when revenue changes are most heavily influenced by movements in ADR.

Given the forecasted improvement in ADR decline in 2009 from 10.4 percent to 8.8 percent, PKF-HR has adjusted its projection of a 39.1 percent decline in unit-level NOI to a 34.9 percent decline. �Any improvement in the outlook for profits is great news for hotel owners and their bankers. However, it still needs to be noted that the 34.9 percent decline now forecast for NOI is by far the greatest annual decrease our firm has observed since we began tracking U.S. hotel performance in the 1930s,� Woodworth said. �Unfortunately PKF-HR is forecasting another 5.3 percent decline in unit-level NOI for 2010.�

Stress: The Rocket has Left the Pad � the Moon or Mars Ahead?

The steep declines in RevPAR and the resulting historic contraction in Net Operating Income at the property level have severely undermined the ability of many owners to meet their debt service obligations. This difficulty has been compounded by the economic reality that many hotels that are serving as the sole source of collateral for the mortgage holders of these assets are no longer worth the face amount of the debt. Data from Trepp LLC illustrates how rapidly this situation has deteriorated. At the beginning of the financial panic in September 2008, only 0.55 percent of the roughly 3,700 CMBS hotel loans were in some form of delinquency or default. By June of 2009, this number had increased to 4.31 percent. As of December 10, 2009, the volume of non-performing CMBS hotel loans had sky-rocketed to 13.47 percent.

�With the expectations of continued declines in profits for all property types in most markets next year, the volume of loan defaults will increase substantially in the months ahead,� noted Bob Eaton, executive managing director of San Francisco-based PKF Capital. �We expect that many of these loans will get restructured, although many will not. The good news is that we are seeing more and more buyers come to the market � more sales will occur as a result.�

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To purchase Hotel Horizons® forecast reports for the United States, or one of 50 individual markets, please visit the firm�s online store at www.HotelHorizons.com, or call (866) 842-8754. To view a video that describes the updated forecast, please visit www.pkfc.com/horizonsupdate.

PKF Hospitality Research (www.pkfc.com) offers econometrically based hotel forecasts, hotel benchmarking, hotel financial reports, and hotel research services. PKF Consulting offers hotel appraisal and hotel valuation services, hotel market studies, hospitality litigation support, and hotel advisory services. PKF Capital offers hotel brokerage and hotel transaction as