Summary of Key Performance Indicators
RevPAR performance remained strong through the end of 2011 and into the first part of 2012. As expected, the balance between rate and occupancy has been maintained, with each component contributing roughly half of the growth on a national basis. Supply growth remains in check, running at an annual rate of less than 1%, while demand continues to expand at record levels. As will be discussed below, not all of this can be attributed to the usual macro drivers of employment and GDP, but the risk remains that if the economy falters, hotel performance will not reach expectations.
The regional trends that developed during 2011 are also continuing. San Francisco and Miami continue to lead in RevPAR growth, with markets such as Houston, Hawaii and Los Angeles also turning in consistently strong performances. Washington DC and other markets highly dependent on government business such as Norfolk VA continue to lag. Some markets such as Phoenix, Dallas and New Orleans were affected by one-off events that disproportionately affected the numbers, while others such as Orlando and San Diego seem to be recovering from significant supply increases in the 2008-2010 period. Finally, it appears that the Las Vegas lodging market is showing signs of life. Although most properties there do not report to Smith Travel because their revenues are distorted by gaming comps, we believe that occupancy is back to where it was before the large new resorts (including Aria and Cosmopolitan) were added, and room rates are also trending back upwards. However, not all is well in Sin City, as the ultra high rollers that these properties were designed to attract seem to be heading to places such as Macau, which has been showing 30%+ year over year growth for each of the past two years.
|2012 YTD (thru2/11/12)||Total Year 2011|
Source: Smith Travel Research, Raymond James US Research
The performance of major brands that are operated by publicly traded hotel companies continues to closely track the national trends, although as has been the case for the past several quarters, the Starwood brands (Sheraton, Westin, Luxury Collection, W and Meridien) have outperformed their peers.
|Q4 2011||2011 Total Year|
|Marriott (full service)||2.3%||3.0%||5.3%||3.3%||1.6%||5.0%|
Source: Company earnings releases
Most of the key industry analysts have nudged their 2012 RevPAR estimates higher. PWC is now estimating 6.5%, while PKF is at 6.1% and Smith Travel is a more conservative 4.3%. Guidance issued by publicly traded lodging companies is also in the 5 to 7% range. These are all close to the high end of the ranges that were suggested a few months ago, and while the 2012 forecasts are off by 100 bp or more from where they were a year ago, it is noted that 2011 came in a little stronger than expected (8% vs. a 7% consensus at the beginning of the year). We recently attended the Americas Lodging Investment Summit (ALIS) conference in Los Angeles, and noticed a cautiously optimistic overall sentiment, which is a contrast to the “irrational exuberance” that these folks usually have at this point in the cycle. Speaking of which, the hotel cycle is often compared with baseball, as in “what inning do you think the recovery is in?” If you asked that question at ALIS, most people would say that we are in the second or third inning. However, this analogy is flawed because no one wants to talk about the contraction portion of the cycle. Back at the last peak (mid 2007), most people would have said that we were still in the 7th or 8th inning, so I guess what happened is an earthquake hit the stadium and the game was called, because in 2008 and 2009 they all said that we haven’t come up to bat yet.
Seriously, there continue to be two schools of thought here, with the more conservative analysts citing European weakness and continued anemic GDP growth (still forecast in the 2-3% range vs. the 4-5% range typical for recovery periods) as the principal causes for concern. They were surprised at the industry’s strength in recent months, saying that for some reason hotel demand has “decoupled” from the macro growth drivers.
On the other hand, the more bullish analysts say that demand has not decoupled, but is merely returning to normal levels. PWC recently issued a study that correlated hotel demand with GDP over a long period, and claims that the current trend is more representative. Another factor is the increasing gap between the “haves” and “have-nots,” with the theory being that the “haves” (both individuals and corporations) are the ones that have the discretionary income to spend on travel. This is borne out by the lagging performance of economy hotels vs. the luxury and upscale segments. We have seen increasing anecdotal evidence that while companies are not throwing around money on incentive events like they did in the past, they are certainly spending more than they did a year or two ago. We have heard, for example, that Facebook IPO closing parties are currently being planned that will rival those thrown at the height of the tech bubble.
Transaction pace is still running below the first half of 2011. Recent deals have been dominated by New York City REIT acquisitions, with pricing still very strong (cap rates are still in the range of 5-6% on trailing and 7-8% on future/stabilized income). REIT’s are starting to work themselves back into the market, as their share prices have rebounded 50% off their October 2011 lows. Private buyers are being very selective, generally sticking to major international gateway markets, and pretty much ignoring secondary or even suburban locations. There have been a number of distressed asset sales of mid-price hotels at very low prices (<$30K per key) in NH, Texas, Iowa and Ohio. Everyone is still waiting for the much-anticipated glut of REO’s to hit the market, but as operating fundamentals have improved, many of the hotels are taking advantage of extensions to work themselves out. However, there are two factors which will start to become more important, one being the limit of how far special-serviced CMBS loans can be extended (three years at the most) and also the threat of higher tax rates may prompt owners of so-called legacy assets with a low basis to sell during this calendar year. Significant deals are summarized in the chart on the following page.
Public Company News
IPO, Financing, Mergers and Acquisitions
- Ashford REIT restructured approximately $200MM of mortgage debt which was due in December 2011, paying it down by about 10% and extending it until March 2014. New coupon will be L+450 and 85% of cash flow will be swept to further pay down principal.
- Strategic Hotels bought back about $85MM of its preferred stock, which represented about 22% of its outstanding shares, in an effort to improve its capital structure
- Starwood officially completed its corporate headquarters relocation from White Plains NY to Stamford CT. They also announced that they are purchasing a non-controlling stake in Germany’s Design Hotels AG, a consulting and sales firm with over 200 European independent hotel clients.
- HPT closed on its previously announced acquisition of Sonesta, which included hotels in Cambridge MA and New Orleans and the acquisition of Sonesta’s management company by an affiliate. They also redeemed their 8.875% preferred stock and issued $275MM of new 7.125% preferred shares
- Host Hotels elected Walter Rakowich to their board, increasing the size from eight to nine. Rakowich is co-CEO of Prologis, a major industrial real estate developer. They also increased the size of their credit facility from $600MM to $1.0Bn
- Hersha refinanced a $27MM loan on a Washington DC hotel. The new loan matures in 2015 with a two year extension, and has a fixed rate coupon of 3.79%. The LTV on this asset is approximately 50%. They are also attempting to acquire the Rittenhouse Hotel in Philadelphia. Hersha says they are still conducting due diligence, but there are rumors that the deal is unwinding.
- LaSalle elected Jeff Foland to their board, replacing Kelly Kuhn. Foland is an executive at United Airlines who is in charge of their loyalty programs. Kuhn’s reason for departure was unusual, and garnered a few chuckles from the media. According to LaSalle’s SEC filing, “Ms. Kuhn resigned due to her recent promotion at Carlson Wagonlit Travel and relocation to Singapore, which would have made her regular attendance at company board of trustees meetings difficult.” I guess they never heard of Skype. They also increased the size of their credit facility from $450MM to $750MM.
- Marriott increased their share buyback program to 40 million shares; it was previously only 5 million. They bought back 43.4 million shares for $1.4Bn in 2011.
- Pebblebrook refinanced the Hotel Monaco Washington with a $46MM fixed rate loan at 4.36% for five years. This represents about 60% the price it paid for the property in 2010.
A summary of major hospitality companies that have reported Q4 earnings so far this season is as follows:
|Company||Date Reported||Reported EPS*||Consensus EPS*||Guidance for 2012|
|Starwood||Feb 2||0.61||0.57||5 – 7% RevPAR|
|Marriott||Feb 16||0.41||0.47||5 – 7% RevPAR|
|Host Hotels||Feb 14||0.32||0.30||4 – 6% RevPAR|
|Hyatt||Feb 16||0.31||0.13||“no guidance, as usual”|
|Wyndham||Feb 8||0.47||0.44||5 – 8% RevPAR|
|Gaylord||Feb 7||0.16||0.15||3 – 6% RevPAR|
|Chesapeake||Feb 8||0.32||0.33||6.5%-8.5% RevPAR|
*Generally excludes unusual items; figures are for FFO on REITS
In general, as has been the case for the last several quarters, most companies, or at least those who have reported so far, have met or exceeded Street earnings estimates. Although Marriott’s EPS was below the consensus, this was due to the spin off of their timeshare business, which occurred in November and made the results difficult to compare. Hyatt’s EPS for the quarter was distorted by a $28MM one-time tax benefit; their EBITDA and other metrics were in line with estimates.
Guidance for 2012 remained largely unchanged on the upper end, but most companies have tightened their ranges, reflecting a somewhat more optimistic view of the domestic economy. Note that most of the larger publicly traded companies are typically more heavily weighted to big-box hotels in top 25 markets, and are more dependent on business transient and groups as opposed to leisure travelers, so given the current state of the market, these companies would be expected to outperform the industry as a whole. However, given the recent runup in prices (see below), many analysts now consider the industry to be fully valued and are tending towards neutral to underweight ratings, with the exception of a few special circumstances which they think will result in higher stock prices, notably Hersha (due to its concentration in the “hot” sector of urban select service) and Ashford (due to upside in connection with last years’ acquisition of the Highland portfolio). Some analysts also like Summitt, who is consolidating in the select service secondary market area; as mentioned before, these properties are generally flying below the radar.
Prices for large cap full service hotel companies are generally up in the 10-15% range since the first of the year and 30-40% since bottoming last fall. By way of comparison, the Dow Jones Industrials are up about 5% for the year and 17% since September 30. This is consistent with the way that these stocks usually perform, leading the market on both the way up and the way down. As previously noted, this trend has enabled REIT stocks to find their footing and although no new equity issuances are on the immediate horizon, they have been able to clean up their balance sheets by refinancing debt at lower interest rates and using their free cash and credit lines to start acquiring again.
Publicly traded hotel company stock performance (US based companies with market capitalization in excess of $1Bn)
|Company||Type||Primary Segment (s)||Price as of2/15/12||ChangeSince12/31/11||Change Since9/30/11|
|Marriot International||C-Corp||Upper Upscale,Luxury, Resorts||$34.73||19.1%||27.5%|
|Starwood Hotels||C-Corp||Upper Upscale, Luxury||$53.75||12.0%||38.5%|
|Host Hotels||REIT||Upper Upscale, Luxury||$16.18||9.5%||47.9%|
|Hospitality PropertiesTrust||REIT||Limited Service||$24.81||8.0%||16.9%|
Source: Yahoo! Finance
Other Industry News
- New ADA regulations are scheduled to go into effect as of March 15, which could have an impact on the industry. Particularly onerous are requirements related to swimming pool access which may require expensive remodeling to provide sloped entries and/or automatic lifts.
- The 773 room Helmsley Hotel in New York, purchased last year by Host Hotels, will be rebranded as a Westin after a $65MM renovation
- Several REITs, including FelCor and Sunstsone have announced plans to sell “non-core” assets so that they can concentrate on more upscale, urban properties
- In a sign that credit markets may be opening, Wells Fargo has announced that it is actively pursuing refinancing opportunities, with the $40-$60MM range in “gateway cities” being their “sweet spot.” They did not rule out loans for new construction, but pointed out that the approval process would be more rigorous.
- A group of major hotel brands, including Hilton, Marriott, Hyatt, Intercontinental, Choice and Wyndham, in an effort to fight back against discounting and the high commission rates charged by on-line travel agencies (OTA), have created a search engine called Roomkey.com which would compete against these other websites. This will be closely watched to see if it affects the amount of inventory available to the OTA’s. Perhaps coincidentally, Priceline recently aired a commercial where William Shatner apparently gets killed in a bus accident. Shatner should not complain, however, as he reportedly earned $600MM over the last 14 years for his efforts (a lot more than he made commanding a starship), and he still has a year to go in his contract, so he could be back.
- Hilton is still considering an IPO, but it says that the time is not yet right. They restructured their debt in 2010 and have been rapidly expanding their international base, as well as re-inventing their Doubletree brand (now tagged as “Doubletree by Hilton”) to be more attractive to franchisees. If market trends continue strong, however, look for the IPO to happen later this year.
- Marriott has doubled down on the Ian Schrager “Edition” brand. They plan to commit as much as $800MM of corporate funds in an effort to compete against W in the upscale “Lifestyle” segment. As noted above, their brands have been lagging in RevPAR growth.
- The Obama Administration has made an effort to streamline the visa process in order to attract more international tourists to the US, focusing on China and Brazil. If successful, this initiative is expected to positively impact several markets including Hawaii and Florida.
- Loews Hotels and Resorts recently named industry veteran Paul Whetsell as their new CEO, succeeding Jack Adler, who is retiring. Loews plans on continuing to invest in major US markets to grow from their present portfolio of 18 properties.
- Carlson Hotels and Rezidor Group formally announced their merger. Carlson has had controlling interest in Rezidor, who is the master franchisor for Radisson hotels in Europe and the Middle East since 1994.
- Hyatt is relabeling its extended stay brands (Summerfield and Sierra) into “Hyatt House,” and is aggressively expanding it in places like India and China.
- Bill Marriott (J.W. Marriott Jr.), who greatly expanded the company that his father created, stepped down as CEO, but will remain as Chairman. His successor, Arne Sorenson, is a long-time Marriott executive.
- In December, Host Hotels backed out of a deal to acquire the 888 room Washington DC Grand Hyatt, due to a drop in its stock price that made the deal uneconomic. They reportedly forfeited a $16MM deposit.
- Hilton terminated its franchise on the 2,950 room Las Vegas Hilton, which has been in financial trouble for a while. No official reason was stated, but the cost of upgrading to current Hilton brand standards was probably an important factor.
US Economy General Statistics
Key Economic Indicators
|GDP||Q4 2011||Advance figure of 2.8%, but Q3 was revised down to 1.8%. The rebound continues to slowly gain momentum.|
|ConsumerConfidence||Feb-12||The University of Michigan Consumer Sentiment Index was 72.5, down from 75.0 in January. It is above where it was last fall, but about the same as a year ago.|
|Unemployment||Jan-12||8.3%, continuing its downward trend, although many economists think this is misleading because of the people who have excluded themselves from the workforce; that number increased by 2.4 million in the last 12 months. A more accurate indicator is possibly the total number of people employed, which is up about 1.7% over last year, barely ahead of total population growth.|
|CPI||Dec-11||Unchanged for the month and up 3.0% for the year; core index (excluding food & energy) was up 0.1% for the month and 2.2% for the year. The outlook for 2012 is for inflation to remain moderate, although energy will still be volatile, no extreme movements in food prices is expected.|
|Retail Sales||Dec11||Up 6.5% vs. year ago. The 4th quarter was up 7.0%, so holiday sales were decent last year|
|New Home Sales||Dec-11||307K units, down 2% from the previous month and 7% vs. prior year levels. Existing home sales have increased in each of the last three months, and inventory levels have dropped. Historically low mortgage rates (in the 3’s) are cited as an important driving factor. Prices are stable in most markets but are not likely to accelerate in the near term|
Sources: National Bureau of Economic Research; various government agencies including US Department of Commerce