Light at the end of the tunnel or oncoming train?

LOS ANGELES—People are beginning to loathe the site of the data experts.

But as much as the truth hurts, everyone knows the data is the only guidance they’ve got during this recession. Attendees at the 19th annual Meet the Money conference this week at the Sheraton Gateway in Los Angeles were all ears.

It was David Loeb, senior research analyst, managing director at R.W. Baird, who suggested rather than a light at the end of the tunnel, it could be an oncoming train. Loeb talked about publicly traded real-estate investment trusts and how things got to this point. He explained there has been an era of falling returns from 2000 to 2007.

There was too much money chasing too little of assets, Loeb said. And U.S. investors levered equity into huge portfolios, to the extent investment bank leverage was 40 to one.

Loeb illustrated that, historically, hotel stocks bottomed out at the revenue-per-available-room turning point. Sustained RevPAR growth is needed for a lasting rally coming out of a downturn.

“It’s still early,” Loeb said.

And even though there’s been a recent rally of doubling, tripling and even quadrupling of stock prices, there will continue to be volatility, and stock prices have much to regain.

Loeb also suggested public markets must be part of the solution, and deleveraging will have to include public execution, as it has in the past. Possible private-to-public opportunities are: Morgan Stanley, Whitehall Funds, Apollo, JER, Hilton assets/Hilton brand and Hyatt assets/Hyatt brand.

Further down the spiral

While Mark Lomanno couldn’t predict hotel performance, data suggests occupancy, average daily rate and RevPAR will dip further. Smith Travel Research’s president said the U.S. will almost certainly be the first to recover, but fundamental improvement—supply and demand recovery—could be 12 to 18 months away. Demand decreased 8.0 percent March year to date, while supply increased 3.2 percent.

STR President Mark Lomanno told attendees the most important thing to consider is demand.

U.S. occupancy was projected to be 56.5 percent for 2009 and 2010.

Rate shows no sign of near-term recovery, and Lomanno warned attendees about the danger of pricing cuts. ADR declined 7.7 percent as of March YTD.

“We know that from the last downturn it took until 2007 to recover ADR,” he said. “And those were some of the highest ADR growth years ever. It seems likely the ADR decline will be greater than in 2001-2002, which means recovery of rate is likely to take longer than six years.”

The level of discounting is exaggerated—it doesn’t need to be as much as it is, Lomanno said. STR’s projection for an ADR decrease of 3.6 percent in 2009 was one of the most optimistic of industry analysts.

“We believe that as demand is stabilized, the industry will act appropriately,” Lomanno said.

Growth was expected to be positive in 2010 at 1.5 percent change for ADR. The RevPAR projection for 2009 was a decrease of 9.8 percent.

(View Lomanno’s full presentation in the Industry Presentations section of HotelNewsNow.com.)

Employment counts

Mark Woodworth, president of PKF Consulting, illustrated average daily roomnight demand is correlated with total payroll employment change. Keeping this in mind, PKF’s data suggested it’ll be the first quarter of 2012 before employment levels recover.

“There are many more lost jobs to come,” he said.

Woodworth also shared a study of 122 recessions from 1960 to 2007, of which only four saw a trifecta of a credit crunch, a house-price bust and an equity-price bust. When all three events happen, the magnitude of GDP declines is two to three times greater.

The bad news didn’t end there. History showed big ADR changes fuel net operating income, according to Woodworth. Given current conditions, PKF predicted a 30.1-percent decline in NOI for 2009. This is the greatest number going back to 1936.

The housing recovery is what to look for, Woodworth said. Information from Moody’s Economy.com indicated house prices will begin rising in the third quarter of 2010. Some of PKF’s recovery forecasts, however, were placed before the housing recovery.

(To request a copy of Woodworth’s full presentation, click here.)