Mr. Loeb: We view the hotel world as likely to be under a great deal of fundamental stress over the next 18 months, followed by a period of very strong recovery in fundamentals. So it's sort of a tale of two cities. We think that same-store RevPAR, revenue per available room, is likely to continue to decline over the next 18 months and slowly start to rise again by sometime late next year, and that property-level cash flow is likely to decline for another six months following the turn positive in RevPAR, likely into the first half of 2011. So we think in that environment, there will be more financial distress among hotel owners. There may be some additional pressure on the stocks, but we think it sets up for a time of tremendous opportunity to make acquisitions ahead of what should be a very, very strong recovery.
At the core of this is a supply/demand imbalance. For the last several years, supply growth has been above historic averages. We expect to see about 3% supply growth this year. That should trail off dramatically by next year, but is likely to continue to exceed demand growth in what we expect to be a fairly modest economic recovery. Therefore, occupancy is likely to keep falling throughout at least the first six months of 2010, and likely rate growth will be negative during that same period. Eventually - probably in the second half of 2010 - we will see occupancy stabilize and perhaps turn positive, and that is likely to be followed about six months later by rate growth. Once there is enough occupancy growth to offset the negative rate growth that we expect, then RevPAR will be positive. But it will probably, as I said, be another six months into 2011 before we actually see margins stabilize such that we can see cash flow growth at the property level. Then what we expect to happen is that supply growth goes away due to the absence of development financing; and there is effectively a supply holiday that may last for several years.
This supply growth phenomenon really started with the easy money of the last several years. A number of hotel projects were started and financed when money was easy, and today money is impossibly tight. It's almost impossible to get construction financing today, regardless of the property type. So looking ahead, we expect that this lack of construction financing will lead to a lack of construction starts, which will lead to a lack of new hotel openings. And that period when there is virtually no openings is likely to last for several years, perhaps for three or four years into 2014, and perhaps even through 2015 or 2016. Therefore, in a time when the economy is growing and there is very little new supply, we expect occupancy to grow and return back closer to historic norms, and that's likely to lead to substantial rate growth as well. We think that property level cash flow has a really strong growth trajectory; we just think it's a couple of years out.
Therefore we are advising caution, and we think that the stocks tend to be a bit overvalued here relative to current fundamentals. Our read of the historic stock trading pattern is that stocks tend to rally no more than a few months in advance of a turn positive in RevPAR. Clearly, the stocks overreacted on the downside through the March 2009 lows. And we expected a bit of a relief rally, but we think that the stocks are now discounting a recovery that investors appear to think is imminent. And we think that investing for a recovery more than six months ahead of the turn positive in RevPAR is premature. So we think there is risk to the stocks in the near term, and that we're likely to see a pullback once investors realize that 2010 is not the recovery year that many think it might be, but that 2011 is more likely that recovery year. There has been a lot of investing along the second derivative - things getting less bad or perhaps getting worse more slowly - and we think that's perhaps a little bit premature. We think less worse is still bad, and that with fundamentals continuing to deteriorate, valuations are getting more and more out of hand.
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