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2004 Economic Forecast for Innkeepers U.S. Lodging Industry Historical Perspective and Future Forecast Presented to: Massachusetts Lodging Association Geoff Baekey November 6, 2003 PwC Topics 1. Recent lodging trends 2. Why is this cycle so different? 3. U.S. lodging industry forecasts 2 PricewaterhouseCoopers 1. Recent Lodging Trends 3 PricewaterhouseCoopers U.S. 2002 Occupancy Was The Lowest In The Past 31 Years Occupancy Percentage 72% 70% 68% 66% 64% 62% 2001 59.7% 60% 2002 59.1% 58% 75 77 79 81 83 85 87 89 91 4 Sources: PricewaterhouseCoopers L.L.P. (1975 to 1986), Smith Travel Research (1987 to 2002) 93 95 97 99 01 PricewaterhouseCoopers 2002 U.S. Lodging Occupancy 2002 occupancy was 59.1% Occupancy has been lower in only: 5 of the past 75 years 2 of the past 35 years 5 Sources: PricewaterhouseCoopers L.L.P. based on Smith Travel Research data PricewaterhouseCoopers Annual Average Daily Rate Declines In 2001 and 2002 Were The First In The Past 24 Years Percentage Change From Prior Year 20% Nominal ADR 15% 10% 5% CPI 0% -5% 2001 2.8% 2002 1.6% 2001 2002 -1.0% -1.5% 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 6 Sources: PricewaterhouseCoopers L.L.P. (1967 to 1986), Smith Travel Research (1987 to 2002) PricewaterhouseCoopers Relevant Performance Year to Date September 2003 U.S. Lodging Market Total U.S. Occupancy 2003 2002 60.7% 60.9% ADR 2003 $83.50 2002 $83.82 RevPAR 2003 2002 $50.67 $51.06 7 Sources: PricewaterhouseCoopers L.L.P. (1967 to 1986), Smith Travel Research (1987 to 2002) Percent Change Occ. ADR RevPAR -0.3% -0.4% -0.8% PricewaterhouseCoopers Performance of Top 25 Markets Anaheim-Santa Ana, CA Atlanta, GA Boston, MA Chicago, IL Dallas, TX Denver, CO Detroit, MI Houston, TX LA-Long Beach, CA Miami-Hialeah, FL Minn-St Paul, MN-WI Nashville, TN New Orleans, LA New York, NY Norfolk-VA Beach, VA Oahu Island, HI Orlando, FL Philadelphia, PA-NJ Phoenix, AZ San Diego, CA San Fran-San Mateo, CA Seattle, WA St Louis, MO-IL Tampa-St Pete, FL Washington, DC-MD-VA Occupancy % 2003 2002 67.7 65.9 57.7 59.5 61.1 64.3 61.6 60.1 53.8 55.3 60.6 62.2 56.3 57.9 57.2 60.9 67.6 66.8 64.0 62.4 61.4 62.0 59.7 57.7 63.5 62.7 72.5 72.2 63.7 64.5 72.4 70.5 63.6 64.5 65.6 65.7 60.3 58.5 71.6 71.6 63.1 62.0 63.5 62.6 60.2 62.9 63.1 62.4 67.9 67.9 ADR $ 2003 2002 92.44 92.22 74.11 77.02 115.43 122.86 101.57 101.96 74.16 76.92 74.56 76.19 77.99 78.64 72.85 74.66 91.41 92.59 108.05 104.74 81.36 84.65 74.58 73.65 107.98 115.67 158.98 167.53 83.07 80.54 115.18 113.62 84.56 88.17 92.78 96.40 94.50 94.25 112.80 110.92 117.08 124.20 93.60 94.40 73.37 72.77 82.37 82.74 110.89 110.74 RevPAR $ 2003 2002 62.55 60.77 42.80 45.80 70.54 79.04 62.58 61.27 39.91 42.52 45.18 47.41 43.88 45.56 41.69 45.46 61.77 61.85 69.17 65.40 49.99 52.51 44.50 42.53 68.54 72.49 115.25 120.89 52.93 51.94 83.44 80.14 53.74 56.82 60.85 63.32 56.96 55.12 80.79 79.41 73.83 76.95 59.47 59.14 44.18 45.79 51.94 51.62 75.33 75.21 8 Sources: PricewaterhouseCoopers L.L.P. (1967 to 1986), Smith Travel Research (1987 to 2002) Percent Change Occ. ADR RevPAR 2.7 0.2 2.9 -3.0 -3.8 -6.6 -5.0 -6.0 -10.8 2.5 -0.4 2.1 -2.7 -3.6 -6.1 -2.6 -2.1 -4.7 -2.8 -0.8 -3.7 -6.1 -2.4 -8.3 1.2 -1.3 -0.1 2.6 3.2 5.8 -1.0 -3.9 -4.8 3.5 1.3 4.6 1.3 -6.6 -5.4 0.4 -5.1 -4.7 -1.2 3.1 1.9 2.7 1.4 4.1 -1.2 -4.1 -5.4 -0.2 -3.8 -3.9 3.1 0.3 3.3 0.0 1.7 1.7 1.8 -5.7 -4.1 1.4 -0.8 0.6 -4.3 0.8 -3.5 1.1 -0.4 0.6 0.0 0.1 0.2 PricewaterhouseCoopers Profits Declined 25.3 Percent In 2001 And 15.5 Percent In 2002 Income Before Income Taxes, Billions of Dollars $30 $25 $22.5 $20 $16.8 $14.2 $15 $10 $5 $0 -$5 -$10 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 Note: Smith Travel Research has a different calculation method for 2001 and 2002. 9 Sources: PricewaterhouseCoopers L.L.P. (2002 to 2004), Smith Travel Research (1998 to 2001) 97 98 99 00 01 02E PricewaterhouseCoopers Room Starts Declined, But Less Than Previous Trough Room Starts 200,000 160,000 120,000 80,000 40,000 0 67 10 71 75 79 83 87 91 95 99 03E PricewaterhouseCoopers Sources: PricewaterhouseCoopers L.L.P. (2003 to 2004), PricewaterhouseCoopers L.L.P. based on F.W. Dodge data (1967 to 2002) 2. Why Is This Cycle So Different? 11 PricewaterhouseCoopers By Many Measures, The 2001 Recession Has Been Mild… Percentage Change from Peak to Trough Real GDP Personal Consumption Expenditures Industrial Production Gross Private Domestic Investment Nonfarm Payroll Employment Federal Funds Rate (%) at Trough 12 Source: PricewaterhouseCoopers L.L.P. 1973-1975 1980 1981-1982 1990-1991 2001 -3.4 -0.4 -2.9 -1.5 -0.6 -2.0 -2.4 -0.8 -1.3 0.0 -14.8 -7.0 -10.3 -4.5 -7.1 -29.4 -19.6 -22.2 -15.1 -17.1 -3.0 -1.5 -3.1 -1.6 -1.4 5.54 9.03 9.20 6.12 1.75 PricewaterhouseCoopers More Robust Economic Growth Ahead While Inflation Remains Low Percentage Change from Prior Year 6% Real GDP 2001 2002 2003 2004 2005 Real GDP 0.3% 2.4% 2.4% 4.0% 3.8% Inflation 2.8% 1.6% 2.2% 1.2% 1.8% 4% Inflation 2% Q4 Q3 Q2 2005 Q1 Q4 Q3 Q2 2004 Q1 Q4 Q3 Q2 2003 Q1 Q4 Q3 Q2 2002 Q1 0% PricewaterhouseCoopers 13 Source: Macroeconomic Advisers L.L.C. Capital Costs Will Remain Low, Re-hiring Will Lag Percentage Change from Prior Year Unemployment Rate 6% 10-Year Treasury Yield Real GDP 4% Inflation Fed Funds Rate 2% Q4 Q3 Q2 2005 Q1 Q4 Q3 Q2 2004 Q1 Q4 Q3 Q2 2003 Q1 Q4 Q3 Q2 2002 Q1 0% Sources: Macroeconomic Advisers L.L.C. PricewaterhouseCoopers 14 Source: Macroeconomic Advisers L.L.C. Daily U.S. Occupancy Performance Seven-Day Moving Average of Occupancy Jun. 30 Alert Oct. 12 Bali Bomb May 20 Alert Mar. 17 Alert Sep. 10 Alert Oct. 29 Alert 30% Nov. 14 Alert May 21 Alert Feb. 7 Alert Feb. 12 Alert Oct. 11 Alert 80 70 Percentage Change From Prior Year Nov. 12 A/A Crash 20% 60 10% 50 40 0% 30 -10% Occupancy Percentage Change 20 -20% 10 15 0 Sep -30% Nov Jan. 2002 Mar May Jul Sep Sources: PricewaterhouseCoopers L.L.P. based on Smith Travel Research data Nov Jan. 2003 Mar May Jul PricewaterhouseCoopers Factors Promoting Faster Growth 16 • Stock market recovery • Expanding manufacturing and non-manufacturing activity • Improving corporate profits • Low interest rates, amid higher loan to values are narrowing financing gaps • Strong productivity growth • Fiscal stimulus PricewaterhouseCoopers 3. U.S. Lodging Industry Forecasts 17 PricewaterhouseCoopers The Concept of the “Demand and ADR Gap” Nominal ADR (Seas. Adj.) 90 Room Nights Sold in Thousands (Seas. Adj.) A D R G a p 85 80 2,800 Demand 70 Actual ADR Gap 2,600 2,500 Long-Run Demand Trend 65 60 2,400 Actual 2,300 Long-Run ADR Trend 75 2,700 Demand 55 2,200 50 2,100 45 87 2,000 1,900 60 1,800 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 55 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Nominal RevPAR (Seas. Adj.) 50 Rev PAR Gap Long-Run RevPAR Trend 45 Actual RevPAR 40 35 30 18 87 88 89 90 91 Sources: PricewaterhouseCoopers L.L.P. based on Smith Travel Research data through June 2003 92 93 94 95 96 97 98 99 00 01 02 03 PricewaterhouseCoopers U.S. Macroeconomic Assumptions 2000 2001 2002 2003 2004 2005 Real GDP Growth 3.8 0.3 2.4 2.4 4.0 3.8 Consumer Price Inflation 3.4 2.8 1.6 2.2 1.2 1.8 19 Source: Macroeconomic Advisers L.L.C. as of August 2003 PricewaterhouseCoopers Forecast Uncertainties Geopolitical • Duration of military action in Iraq and post military action resolution • Personal safety • Further terrorist actions against U.S. interests • Lower expenditures Macroeconomic • Sustainability of corporate profit performance and investment spending 20 Travel Concerns • Effect of lack of job growth on consumer spending growth • Inconvenience of travel • Substitute effect Others • Resurge in SARS cases in the winter season PricewaterhouseCoopers U.S. Lodging Industry Forecasts History Occupancy Level (%) Forecast 2000 2001 2002 2003 2004 2005 63.3 59.7 59.1 59.2 60.8 61.6 Percentage Change From Prior Year Average Daily Rooms Sold End-of-Year Room Supply 3.4 -3.5 0.7 1.5 4.0 2.8 2.6 1.9 1.7 1.3 1.3 1.5 Average Daily Rate 5.5 -1.0 -1.5 0.1 2.2 2.1 Revenue per Available Room 6.2 -6.6 -2.4 0.2 4.9 3.4 21 Sources: PricewaterhouseCoopers L.L.P. (2003 to 2005), Smith Travel Research (1999 to 2002) PricewaterhouseCoopers Emerging Acceleration In Lodging Demand In Late Summer Room Nights Sold in Thousands (Seas. Adj.) FORECAST 2,900 2,800 2,700 2,600 2,500 2,400 2,300 2,200 2,100 1997 1998 1999 2000 2001 2002 2003 22 Sources: PricewaterhouseCoopers L.L.P. (2003 Q3 to 2005 Q4), Smith Travel Research (1997 Q1 to 2003 Q2) 2004 2005 PricewaterhouseCoopers Historical and Estimated Future Travel Demand 170 Real US PDI 1987 =100 Lodging Demand 1987=100 Air Travel Demand 1987=100 160 150 140 130 120 Actual Forecast 110 23 Sources: PricewaterhouseCoopers L.L.P. (2003 to 2004), Smith Travel Research (2001 to 2002) 1Q04 1Q03 1Q02 1Q01 1Q00 1Q99 1Q98 1Q97 1Q96 1Q95 1Q94 1Q93 1Q92 1Q91 1Q90 1Q89 1Q88 100 PricewaterhouseCoopers Little Occupancy Recovery in 2003 Change in Occupancy Points From Prior Year History Segment U.S. Upper Upscale Upscale Midscale with F&B Midscale without F&B Economy Forecast 2000 2001 2002 2003 2004 2005 0.4 0.9 0.6 0.1 -0.2 0.2 -3.6 -6.7 -5.3 -3.8 -2.5 -2.1 -0.6 0.6 -0.3 -1.3 -0.3 -1.7 0.1 0.3 0.4 -0.2 -0.2 -0.7 1.6 2.7 2.2 0.9 1.5 0.8 0.8 1.1 0.8 0.5 0.7 0.7 24 Sources: PricewaterhouseCoopers L.L.P. (2003 to 2005), Smith Travel Research (1999 to 2002) PricewaterhouseCoopers Robust Demand Growth For All Segments In 2004 Change in Demand From Prior Year History Segment U.S. Upper Upscale Upscale Midscale with F&B Midscale without F&B Economy Forecast 1995 2001 2002 2003 2004 2005 3.4 4.3 11.1 -0.7 8.8 3.6 -3.5 -6.1 -0.7 -8.2 3.7 -1.7 0.7 3.7 6.4 -4.2 5.3 -1.9 1.5 2.9 6.5 -2.6 4.4 -2.0 4.0 5.7 7.2 1.5 6.2 2.5 2.8 2.9 5.3 0.4 5.4 2.3 25 Sources: PricewaterhouseCoopers L.L.P. (2003 to 2005), Smith Travel Research (1999 to 2002) PricewaterhouseCoopers Rate Growth Will Return in 2004 Percentage Change in Nominal ADR From Prior Year US Upper Upscale Upscale Midscale w/ F&B Midscale w/o F&B Economy 2000 5.5% 6.0% 3.7% 4.3% 4.7% 2.8% History 2001 -1.0% -2.7% -0.2% 0.2% 2.3% 0.1% 2002 -1.5% -4.2% -4.2% -1.5% -0.2% -0.2% 26 Sources: PricewaterhouseCoopers L.L.P. (2003 to 2004), Smith Travel Research (2001 to 2002) 2003 0.1% -1.2% -1.3% -0.2% 0.6% 0.0% Forecast 2004 2.2% 2.3% 2.3% 1.3% 1.6% 0.7% 2005 2.1% 2.2% 2.1% 1.6% 2.2% 1.7% PricewaterhouseCoopers RevPAR Will Exceed Inflation For All Segments By 2004 Percentage Change in Nominal RevPAR From Prior Year History Segment U.S. Upper Upscale Upscale Midscale with F&B Midscale without F&B Economy Forecast 2000 2001 2002 2003 2004 2005 6.2 7.4 4.6 4.6 4.4 3.1 -6.6 -11.8 -7.6 -6.2 -1.6 -3.5 -2.4 -3.3 -4.6 -3.9 -0.7 -3.2 0.2 -0.8 -0.7 -0.6 0.3 -1.3 4.9 6.5 5.8 3.0 4.0 2.2 0.8 3.8 3.4 2.5 3.3 3.0 27 Sources: PricewaterhouseCoopers L.L.P. (2003 to 2005), Smith Travel Research (1999 to 2002) PricewaterhouseCoopers Nominal RevPAR Losses For 2001 To 2002 Will Exceed 2003 And 2004 Increase For Four Segments Cumulative Percentage Change in RevPAR 12% Increase between 2003 and 2004 8% 4% 5.7% 5.1% 0% 4.4% 0.8% -2.3% -6.6% -4% -8% 2.4% -14.7% -11.9% -9.8% -12% Decline between 2001 and 2002 -16% -20% Upper Upscale Upscale Midscale with F&B 28 Sources: PricewaterhouseCoopers L.L.P. (2003 to 2004), Smith Travel Research (2001 to 2002) Midscale without F&B Economy PricewaterhouseCoopers Conclusions 1. Most severe occupancy and rate declines in 75 years 2. Profits exceeded what would have been achieved in any prior cycle 3. 2004 will be the year of robust demand growth in this cycle 4. Higher than historical supply growth with constrain ADR and RevPAR growth 5. Not until 2004 Q4 will RevPAR equal 1999 Q4 levels 29 PricewaterhouseCoopers pwc