Hotel Industry Overview: Fall 2012

HOTEL INDUSTRY OVERVIEW: Fall 2012

 

Summary of Key Performance Indicators

RevPAR trends have been decelerating. September?s 3.8% growth marked the lowest year over year change since the recovery began, although it was partly due to the timing of Labor Day and the Jewish holidays. October has been better (up 5.6%), but it is still lagging the performance of the first half of the year. There was also an impact due to Hurricane Sandy, with major Eastern markets taking a hit during the last week in October and first week of November. The consensus for full year 2012 has now edged down towards 6.0%, but still with more than half of the growth coming from average daily rate (ADR). No significant movement has been seen recently across the various chain scales or locations, as luxury and upper midscale (e.g. Hampton Inn) have continued to outperform, as have resort and urban locations, while small town markets and the lower end chains have not kept up. Regionally, Chicago and Los Angeles have accelerated in recent weeks, while the major Eastern markets (NY, Boston, Washington) have declined. New Orleans also continues its strong performance despite Hurricane Isaac. Florida, particularly Orlando, has slipped a bit as demand is lagging, while the Western markets have been steady.

 

Source: Smith Travel Research, JP Morgan North American Equity Research

 

The performance of major brands that are operated by publicly traded hotel companies lagged a bit during the 3^rd quarter (overall RevPAR for this group up 5.1% vs. 7.8% for comparable chain scales nationally). Bucking recent trends, Marriott brands including Ritz-Carlton, outperformed Hyatt and the Starwood brands, particularly the Luxury Collection, which went from 12.2% RevPAR growth in Q2 down to 5.1% in Q3. One of the reasons for this is the concentration of these brands in the major Eastern markets, which as mentioned previously are currently not doing as well. Note that there are several major upscale and upper upscale brands that are not part of public companies, most notably the Hilton family (including Doubletree, Embassy Suites and Homewood), and those are reportedly performing well.

 

 

 

 

	Q3 2012				Rolling 4 Quarters
	ADR	Occ	RevPAR		ADR	Occ	RevPAR
Marriott (full service)	4.9%	2.4%	7.4%		3.3%	3.0%	6.4%
Ritz-Carlton	5.1%	2.0%	7.2%		6.2%	1.3%	7.5%
Sheraton	2.6%	1.2%	3.8%		2.8%	2.8%	5.6%
Westin	4.2%	0.8%	5.1%		4.0%	2.4%	6.5%
Luxury Collection	4.1%	1.0%	5.1%		5.5%	3.7%	9.5%
W	3.0%	1.3%	4.2%		3.3%	2.8%	6.2%
Le MeridienHyatt	1.5%4.9%	2.6%(0.7%)	4.1%4.2%		3.4%3.6%	1.9%3.0%	5.4%6.8%

Source: Company earnings releases

 

Outlook

Although the lodging industry has recovered significantly better than the overall US economy, the cycle has now matured to the point where a more normal growth rate would be expected. During the summer, the absolute level of hotel room demand (i.e. the total number of occupied hotel rooms) reached all time high levels, and due to stagnant supply growth (especially in the full service segments), occupancy is pretty much back to where it was pre-recession. ADR growth has been slower to rebound, and although it will be close to 2007-2008 peak levels in many markets by next year, it will still be lagging significantly if expressed in real (adjusting for inflation) dollars. As shown in the graphic on the next page, real ADR in 2011 is actually lower than it was in 1987, and is considerably below its 2008 peak. This graph also illustrates a couple of other trends in terms of recovery. Note that from its peak in 1987, it took 10 years for ADR to recover in real dollar terms, and this was during a period of steady economic growth, although there were large supply increases during this period. The recovery time from the 2000 peak only took 6 years, as this was more of a ?V-shaped? recovery for both the economy and the industry. Now, however, the 2008 peak was much higher and we are nearly 4 years past it and there has been virtually no growth. Most industry experts feel that we will not see real ADR fully recovered for at least another 4 to 5 years, which is problematic on several levels. First of all, it is likely that at some point during this time the overall economy will contract, which will impact demand, and most importantly, at a time that rates are lagging, growth in expenses keeps chugging along. Going back to the earlier example, outside of consumer electronics, can you think of anything else that is even remotely close in price to what it was 25 years ago? To refresh your memory, in 1987:

• Price of a gallon of gasoline: 95 cents
• Price of a gallon of milk: $1.98
• Price of first class postage stamp: 22 cents
• Price of a new car: $13,000
• Minimum wage was $3.35 per hour
• Cost of one year at an Ivy league college: $17,000

 

What this means is that unless ADR growth continues at a rate that outpaces inflation, profit margins will necessarily fall.

The outlook for RevPAR growth in 2013 is still showing a wide spread, as the impact of the election results is still not entirely clear. The good news is that almost everyone believes that the ?fiscal cliff? will be averted, as some sort of compromise will be reached to remove or delay the most serious consequences, namely sequesterization of spending and massive middle-class tax hikes (although the FICA tax holiday and extension of unemployment benefits will almost certainly come to an end). On the other hand, there are still lingering issues weighing down the economy, including (in no particular order), Eurozone uncertainty, slowing of growth in China, the impact of Hurricane Sandy (both short term and long term, including its effects on insurance premiums) and, as a result of the recent election, the impact of more regulations and a strengthened organized labor presence. The consensus seems to be settling in the 4% to 6% range, with virtually all growth on the ADR side, but there is optimism for the later part of the year and into 2014 as long as supply growth continues to be constrained.

Transactions

Once again, several high-profile sales (especially in New York) dominate the transaction news. It is also rumored that the Four Seasons hotel, currently owned by Beanie Babies magnate Ty Warner, is for sale at $900MM ($2.4MM per key). However, the overall pace continues to be sluggish. Total sales volume in 2012 ran at less than half of the 2011 pace during the first half of the year ($6 billion vs. $13 billion), but the second half of 2011 was very slow due to the collapse of REIT stock prices, which as shown later on, are still below last years? levels. Whereas REIT?s accounted for about 35% of the volume in 2011, through August of this year they are only at about half that level (18%). Distressed asset sales as a percentage of total volume has also shrunk dramatically (from 31% last year to 12%), as improving fundamentals have helped sellers. What is also interesting is the continuing trend of the REIT?s (especially FelCor and Sunstone) to re-juggle their portfolios, typically moving from smaller markets to larger ones, as well as the continuing shedding of real estate assets by Starwood, Hyatt and Red Lion.

 

The good news is that pricing has improved (at least if you are a seller). Average price per key has increased by about 5% (although this may be influenced more by weighting towards urban locations), and cap rates have declined by almost 100 bp (national average is now in the range of 8.5% to 9%). Financing is much more readily available than it was last year, at least for well-located assets in major markets that are not over levered. Typical terms are 65% LTV, with interest in the 5% range (either fixed or variable). Amortization (typically on a 30 year schedule) is still common, but guarantees are becoming more negotiable.

 

Some of the highlights of deals made over the past few months are listed below. Additional details on these and other transactions in the past three months can be found on the chart on the following page.

• The 518 room Essex House on Central Park in New York was purchased by a joint venture between Strategic Hotels & Resorts and KSL for $362MM ($700K per key). It will be converted to a JW Marriott.
• Manhattan at Times Square (formerly Sheraton Manhattan): $275MM ($413K/key)- sold by Starwood, bought by Rockpoint
• Setai New York 5^th Avenue: $229MM (1.1MM/key)- private sale
• Ritz-Carlton Reynolds Plantation (Georgia): $160MM ($637K/key)- bought by Met Life at auction; price includes real estate, golf and other assets besides the hotel.
• W Chicago Lakeshore at $126MM/$242K per key and W Los Angeles at $125MM/$485K/key, both sold by Starwood and acquired by Chesapeake and Pebblebrook respectively
• Hotel Palomar San Francisco $58MM/$296K per key acquired by Pebblebrook
• In select service land, Summit Properties acquired a portfolio of 10 hotels, including 8 Hyatt Place hotels from Hyatt, for a total price of $115MM ($84K per key).

 

Public Company News

IPO, Financing, Mergers and Acquisitions

Recent activity included the following:

• Ashford replaced a $154MM non recourse mortgage loan which was at 12.72% interest with a $211MM facility at LIBOR + 615, representing a substantial cash savings.
• FelCor also improved its cash flow by refinancing about $160MM of 9% debt with sub 5% fixed rate debt.
• Strategic closed on a $90MM mortgage for the Hyatt La Jolla from Met Life. The $72MM A note is at L+400 interest only, and the B note is fixed at 10% with principal paid down from swept cash flow. They also had a major management change (see below).
• Chesapeake completed a follow on offering of 7.5MM common shares, which raised $132MM. Deutsche Bank, JP Morgan and Wells Fargo were the joint book runners.
• DiamondRock announced that they had reached a settlement in the bankruptcy of the Allerton Hotel in Chicago. They had purchased the debt of this distressed asset in the hope of a ?loan to own? plan, but the hotel will now be marketed at auction in January 2013. However, they look to make a profit of over $10MM on their loan investment.
• Hersha expanded its credit line from $250MM to $400MM with further options to increase to $550M. The first tranche of the term loan portion of this facility will have a 3.195% interest fixed for four years. The facility was arranged by Citigroup and Wells Fargo.
• Intercontinental plans a $500MM special dividend during Q4 2012 and will also start a $500MM share buyback proceeds, which would be partially funded by the anticipated proceeds of the sale of their Barclay hotel in New York which is back on the market; this property is expected to sell for north of $300MM ($437K per key).
• Summit Hotel Properties, which as noted above has been in acquisition mode, closed a 12MM share offering which will net nearly $100MM. Deutsche Bank, Citigroup, RW Baird and RBC acted as joint book runners.
• LaSalle announced that Denise Coll, former President North America for Starwood, will be joining their board effective in March 2013.
• Red Lion called off its unsuccessful attempt to sell itself, and will continue to concentrate on selling its real estate assets while retaining franchises, as well as continuing to market franchises in the Northwestern US. Two key board members, brothers Donald and Richard Barbieri will retire as of December 31.
• Wyndham announced that it issued $275MM of asset-backed notes related to its timeshare receivables. Weighted average coupon was 2.06%. Note that the availability of financing for timeshare unit purchasers has fueled a resurgence in this market, especially in the moderate price segment (under $20K for a week-equivalent).
• Kayak, who only went public about 4 months ago, agreed to be acquired by Priceline in a $1.8 billion consolidation in the OTA space. The price ($40/share) represented a 57% premium above its IPO price.