Hotel Industry Overview: Spring 2012


Hotel Industry Overview: Spring 2012

Summary of Key Performance Indicators

RevPAR performance continues to be solid with ADR contribution becoming well established in most segments and markets. Despite uneven macro-economic trends (more about this later), overall demand is running at record levels led by leisure and business transient travelers, while group is also on the upswing. Coupled with limited supply growth, especially in the full service sector, there is almost unanimous opinion throughout the industry that we are well into the upswing of the cycle, with at least two or three more years of expansion ahead. Hotel values, reflecting this trend, are also moving upwards, with secondary and tertiary markets now beginning to share in the growth as the prized center city major markets are becoming fully priced. The anticipated flood of properties into the market from distress situations has not (and may never) fully materialize, as it turns out that “extend and pretend,” or “delay and pray” have actually become sound strategies for lenders and borrowers alike.


The regional trends have not really moved much this year. Although Miami and Northern California are still showing double digit performances, they are now lagging behind Chicago and New Orleans, which have been very strong over the past year. New York is starting to bounce back, especially in ADR, while Washington (and other government-dependent markets) remains weak. Some other notably weak top 25 markets include Philadelphia, Norfolk and Seattle. Phoenix continues to struggle and Orlando is holding its own, while Hawaii and Texas (Houston and Dallas) remain strong.


2012 Q2 (thru5/5/12)

2012 YTD

Industry Total 4.9% 3.7% 8.9% 4.2% 3.1% 7.5%
Luxury 6.8% 7.1% 12.2% 5.1% 4.5% 9.3%
Upper Upscale 3.1% 2.4% 9.8% 3.6% 3.1% 6.2%
Resort NA NA 8.8% NA NA 9.6%
Key Markets
NY 6.8% 2.3% 9.6% NA NA 7.3%
Boston NA NA 8.5% NA NA 10.5%
DC NA NA 5.3% NA NA (1.1%)
Chicago NA NA 19.9% NA NA 15.4%
New Orleans NA NA 22.3% NA NA 20.9%
Orlando NA NA 7.8% NA NA 6.1%
Miami NA NA 8.6% NA NA 11.3%
Phoenix NA NA 2.0% NA NA 4.0%
LA NA NA 14.4% NA NA 9.3%
SF NA NA 14.6% NA NA 12.6%

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


Q1 2012

Rolling 4 Quarters

Marriott (full service) 2.6% 4.2% 6.9% 3.0% 2.6% 5.7%
Ritz-Carlton 5.8% 1.2% 7.1% 6.7% 3.1% 9.9%
Sheraton 2.6% 3.9% 6.7% 3.5% 3.3% 7.0%
Westin 2.8% 3.8% 6.8% 4.2% 4.2% 8.6%
Luxury Collection 4.3% 2.2% 6.7% 6.2% 5.6% 12.1%
W 3.6% 4.9% 8.8% 4.6% 4.0% 8.9%
Le MeridienHyatt 3.4%2.7% 2.0%5.1% 5.5%8.0% 4.9%2.7% 3.8%3.8% 9.0%6.7%

Source: Company earnings releases


As indicated above, there is a clear consensus among all of the major consulting firms and public companies that RevPAR will continue to grow in the 7 to 8% range, at least through the remainder of this year, with the outlook for 2013 and 14 only showing a slight slowdown. Luxury, urban select service and upscale hotels are leading this trend, with even the lower end economy brands showing signs of life. Some upper-upscale and lower midscale properties are lagging, due to price/value tradeoffs as those who previously have traded down are now able to move back up in class, while certain markets, notably those dependent on government business, are also falling behind, as noted above.


Even lenders, who are notoriously tight-fisted, are jumping on the bandwagon. Loan to value, debt yields and other metrics are all moving in the direction of higher leverage, while interest rates have declined to historically low levels. Concepts such as principal amortization, recourse (guarantees) and attention to borrower histories of defaults and even bankruptcy have been rapidly melting away as lenders are competing to get back in the game. While hotels still are commanding higher risk premiums than other forms of real estate such as office, retail and multifamily, spreads are narrowing, and the unique ability of the hotel space to rapidly change pricing in the face of inflation is attracting lender interest.


Currently, loan terms are being quoted in the range of 60-65% LTV, for a five year term at fixed rates below 5% with no amortization. Debt yields have fallen to the 10-11% range, however, these terms are only reserved for high quality sponsors for branded properties in strong markets with minimal capex/PIP requirements. In secondary markets, local and regional banks are starting to get interested in the hotel space, especially for loans in the $5 to $20 million range. Many borrowers are obtaining mezzanine financing to help get LTV up into the 70’s. Alternative sources of capital such as the EB-5 program are becoming more widespread.


As always, the health of the hotel industry is closely linked with the health of the overall economy. There is still a very strong correlation of hotel demand with metrics such as GDP growth, employment and personal income, although there has been somewhat of a decoupling on the employment side as those numbers have been relatively stagnant. This is rationalized by assuming that most of the hotel demand is generated by the people who have stable employment situations and corporations that are seeing very strong profit growth- the bottom half of the “99%” never were a strong force anyway. Besides, the theory goes, high unemployment also acts to keep wages down and keep a lid on labor costs, which also should help hotel profits. This is not entirely true, however, as the cost of benefits such as health insurance have risen at a much higher rate than overall inflation and the labor unions, particularly in large markets such as New York, Chicago and San Francisco, have been able to extract very high wage increases in recent contract negotiations. For example, a housekeeper in New York City will be earning $60K in a few years under the term of their new agreement.


There are obviously other threats to the glowing forecasts, including the usual suspects of war, terrorism, Euro zone instability and the inevitable natural disasters, but at least for now, the US seems to be a safe haven. In fact, several international lenders have announced that they are increasing their allocation of capital to their US subsidiaries with the intention of participating in the lodging sector. On the other hand, there are some ominous rumblings due to increased regulations (such as the ADA pool lift requirements), an easier path to unionization, and higher energy costs due to government policy decisions. The industry believes that they know who is to blame; a recent survey revealed that 46% of hoteliers felt that Obama’s re-election would be bad for the industry, 52% felt it would be neutral (because bureaucrats are like cockroaches and would survive and reproduce under any conditions) and only 2% thought that it would be positive.

With respect to property values, as indicated above, it appears as though major market (generally defined as coastal, gateway cities) values are continuing to grow, but the secondary markets are beginning to catch up as investors are realizing that there is more upside to these overlooked assets, as well as less volatility (see chart, left). Historically, the big markets have always led on the way up, but have crashed much harder on the way down, so now that the big run-up is behind us, a more prudent strategy is to go for the “steady Eddies.” Of course, not all markets and product types are created equally, so some caution is needed. Sound advice is to find markets that are not dependent on only one demand generator, still have reasonable barriers to new development, and have easy access by air and highway.


The other major factor is new development. While construction activity and development of large full service hotels is virtually non-existent because the numbers generally don’t work (when you can purchase this type of hotel for 50% or less of replacement cost, why would you build?), development of urban select service product such as Residence Inn can still be profitable, and activity is occurring in New York, Boston and San Francisco, to name a few markets. Construction/mini-perm financing is available for these projects provided they have strong sponsorship and brand affiliation. Smaller market construction still exists to replace obsolete products and in locations that have benefitted from demand shifts (e.g. North Dakota), but these are also not expected to have a material overall impact on supply. Most industry sources are still holding to supply growth in the 1% range for the next few years compared to 2-3% long term averages, so as long as demand keeps expanding, the markets should remain healthy. The consensus of opinion is that we are now in the 3rd or 4th inning of the proverbial cycle.



Jones Lang LaSalle Hotels recently estimated that 2012 transaction volume will be comparable to the approximately $15 billion that was achieved in 2011.  This in turn represented about a 30% growth above 2010. Most of the 2011 activity occurred in the first half of the year, driven by public REIT’s, whose appetite shrank when their stock values sharply declined last fall. This year, public REIT’s are still a factor, but most of the larger deals have been done by private equity. In fact, several REIT’s have disposed of “non strategic” assets this year in an effort to clean up their balance sheets and free up cash to move into what they believe to be better markets.


Notable recent transactions (see chart on the following page for more detail) include:

  • Wyndham Parc 55 Hotel in San Francisco, purchased by Blackstone from Highgate Holdings for $235MM (233K per key)
  • Fairmont San Francisco, purchased by a joint venture of Woodbridge Capital Partners and Oaktree Capital for $200MM (338K per key)
  • $400MM investment by Inland America (a private REIT) in five properties ranging from the St. Louis Hilton to the San Francisco Airport Marriott, most of which were purchased from public REIT’s including Host and Diamond Rock.
  • Highest prices per key are still in NY, which has 4 out of the top 5 plus one more in the top 10, led by the $764K per key paid for the boutique Cassa Hotel near Times Square by private investors, however that figure may include some condominium units. Most of the higher priced hotels are independent (not affiliated with major brands).


Public Company News

IPO, Financing, Mergers and Acquisitions

Recent activity included the following:

  • Hersha and Strategic have each completed equity raises in the $120-130MM range
  • Pebblebrook has obtained a total of $95MM in mortgage debt financing for two of its properties with average rates in the low 4’s, with 60% LTV
  • Marriott, Host, and Wyndham each issued senior notes to refinance those coming due at much lower interest rates (new rates are in the 3-5% range; total was almost $2 billion)
  • HPT issued $275MM of preferred stock and $400MM of unsecured debt to redeem maturing notes and fund its recent acquisition of Sonesta


A summary of major hospitality companies that have reported Q1 earnings so far this season is as follows:



Date Reported

Reported EPS*

Consensus EPS*

Guidance for 2012

Starwood Apr 26 0.65 0.52 6 – 8% RevPAR
Marriott Apr 19 0.30 0.29 6 – 8% RevPAR
Host Hotels Apr 30 0.14 0.13 5 – 7% RevPAR
Hyatt May 2 0.03 0.09 Does not provide
Wyndham Apr 25 0.60 0.55 5 – 8% RevPAR
Gaylord May 8 0.12 0.05 3 – 6% RevPAR
Chesapeake May 2 0.19 0.13 7.5%-9% RevPAR

*Generally excludes unusual items; figures are for FFO on REITS

Starwood and Marriott raised their range of 2012 RevPAR guidance by 100 bp, as did Chesapeake on the bottom end (top end raised by 50 bp). The others were unchanged. Most companies performed better than expected in Q1, with the notable exception of Hyatt, which had extraordinarily high SG&A expense this quarter as well as lower operating margins. Timeshare performance was strong at Wyndham and at Marriott’s new timeshare spin off. In general, most analysts raised their price targets and earnings/EBITDA estimates for the balance of 2012.


Stock prices
Prices for large cap full service hotel companies have been flat to slightly down so far this quarter, mirroring the overall market, although Hyatt had a deeper loss due to its disappointing earnings report. Since the beginning of the year, most stocks have traded up, especially Marriott, which was very strong (up over 30%). This compares to DJIA performance of down 4% since March 31 and up 4% for the year. Hotel stocks, which tend to be a leading indicator, bottomed out last fall in the face of reports of economic uncertainty. This was a major shock for the REIT sector, as it severely limited their access to capital and virtually froze their acquisition process during the second half of last year, although as stated previously, it has recovered a bit this year.


Publicly traded hotel company stock performance (US based companies with market capitalization in excess of $1Bn)


Company Type Primary Segment (s)

Price as of





Change Since


Marriot International C-Corp Upper Upscale,Luxury, Resorts




Starwood Hotels C-Corp Upper Upscale, Luxury




Choice C-Corp Limited Service




Hyatt C-Corp Upper Upscale




Host Hotels REIT Upper Upscale, Luxury




Hospitality PropertiesTrust REIT Limited Service




Source: Yahoo! Finance


 Other Industry News

  • Great Wolf Resorts (a publicly traded company that operates 11 mostly Midwestern hotels with indoor water parks) was the subject of a spirited bidding war. An unsolicited offer was made by Apollo at $5 per share which was raised by KSL resorts to $6.25. After several rounds of bidding, Apollo emerged victorious at $7.85. This price is still well below industry average valuation. It equates to a multiple of about 8.5X at a time when most of the peers are valued at 12 to 13X current EBITDA, but Great Wolf has historically traded at a deep discount due to its high leverage, low brand value and low growth prospects.
  • Marriott was sued for mismanagement at Eden Roc hotel in Miami
  • Marriott is considering selling the real estate for its 3 owned Edition hotels and using the proceeds to expand the brand both domestically and internationally
  • The deadline for ADA pool lift regulations was extended through May 21. Strong industry lobbying efforts are underway to attempt to stop enforcement for a year, as arguments have been advanced that these lifts are dangerous, expensive and difficult to procure in a timely fashion, while the inconvenience factor for handicapped guests is not that extreme (i.e. the wait for a portable lift is not excessive)
  • International hotel news is generally positive. RevPAR is up in Latin America and Asia (particularly China), while European hotels are lagging and the Middle East is recovering. Extensive construction activity is being reported in China.
  • Starwood will be holding its 2013 leadership conference in Dubai, and is “relocating” its headquarters there for a month.
  • Paramount Pictures is planning to launch a California/Hollywood themed hotel chain worldwide, with price points in the luxury range and amenities such as private screening rooms. The first deals are expected to be announced later this year. They hope they will fare better than Planet Hollywood.
  • Hotels are getting their turn in the “reality show” genre. The Travel Channel has introduced a show called “Hotel Impossible,” where struggling hotels are fixed by industry veteran Anthony Melchiorri, former GM of the Algonquin Hotel in New York and owner of a hospitality consulting practice. Based on the first few shows, it appears as though he is picking his spots carefully. Most of the hotels have great locations (e.g. on the beach in Miami) and do not appear to be in terrible physical shape; the issues are mostly in management and marketing, and after a spirited pep talk with the owners, some hands on instruction with the housekeeping staff about how to clean a room, and a few thousand bucks spent in modernizing the lobby, everyone lives happily ever after. Another show starring notorious chef Gordon Ramsay, called Hotel Hell is in the works, and that one promises to be a little louder and more uncouth.


US Economy General Statistics

Key Economic Indicators




GDP Q1 2012 Advance figure of 2.2%, which is lower than Q4 2011 adjusted rate of 3.0%. To quote the official news release, “The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in PCE and in exports.”In other words, consumers are buying again but no one is investing in new plants and equipment.
ConsumerConfidence May-12 The University of Michigan Consumer Sentiment Index was 77.8, which represents a four year high; most experts had felt that the index would have declined.
Unemployment Apr-12 8.1%, continuing its downward trend, although the labor force participation rate, which reflects “discouraged” workers is still at historically low levels. Job creation is still running below population growth.
CPI Apr-12 Unchanged for the month and up 2.3% year over year; core index (excluding food & energy) was up 0.2% for the month and 2.3% for the year. Gasoline prices had their biggest decline in 6 months, and in general, inflation continues to be moderate.
Retail Sales Mar-12 Up 0.8% for the month and 6.5% vs. year ago. Trend is holding steady.
New Home Sales Mar-12 328K units, down 7% from the previous month and up 7% vs. prior year levels. The Case-Schiller home price index is down about 4% in the top 20 markets. Prices have “double dipped,” but have flattened out in the last few months are beginning to recover in many markets.

Sources: National Bureau of Economic Research; various government agencies including US Department of Commerce