Hotel Industry Overview: Summer 2012


Hotel Industry Overview: Summer 2012

Summary of Key Performance Indicators
RevPAR performance was generally solid across all segments and most major markets for the second quarter, continuing the trend for the past several quarters. Luxury and resort segments continue to outpace the rest of the industry. “Upper Upscale” brands such as Marriott and Hilton, especially those in urban markets, and “Upper Midscale” brands such as Hampton Inn are running about average in terms of RevPAR growth, while lower scale brands are lagging with YTD RevPAR growth in the 5% range, which implies that travelers are still trading up. As shown in the table below, it is becoming increasingly clear that occupancy is approaching peak levels, with ADR picking up more and more of the load, which is good for the industry but may start to be an issue as guest satisfaction levels are starting to trend downwards. A recent study by J.D. Power and Associates showed a 7 point drop in satisfaction since last year, which may indicate that the value proposition is no longer there. One of the biggest concerns was transparency in pricing, particularly for items such as internet service.


The California markets are continuing their strong performance despite concerns about that state’s economy. New Orleans and Chicago have also been steady performers, while Boston is doing very well due to a strong citywide convention calendar. Houston has also done well this year, riding an energy boom, and Nashville has come back, although there is significant new supply on their horizon. Florida is steady, with Miami and Tampa doing well while Orlando is in the middle of the pack as it continues to absorb supply. Washington DC continues to lag as the government cuts back on travel; recent GSA scandals and the threat of lower per diems will continue to create problems for markets that depend on the government sector. Other laggards include Denver, Seattle and Minneapolis. Phoenix’s overall economy is improving, but this is not reflected in the RevPAR numbers as they have a tough comparison with strong 2011 performance. By the way, hoteliers in London are rejoicing at very strong Olympic numbers- occupancy near 90% with citywide ADR the equivalent of about $350.



2012 Q2

2012 YTD thru 7/28

Industry Total 4.5% 2.4% 7.1% 4.2% 2.6% 7.0%
Luxury 6.1% 3.5% 9.8% 5.1% 3.5% 8.8%
Upper Upscale 4.7% 2.4% 7.4% 4.1% 2.4% 6.8%
Resort 4.8% 3.0% 8.0% 4.9% 3.2% 8.3%
Key Markets
NY 4.4% 1.5% 6.1% 2.8% 3.0% 6.0%
Boston 9.3% 0.9% 10.8% 8.4% 2.3% 11.0%
DC 0.5% 3.0% 4.0% (0.7%) 1.0% 0.6%
Chicago 4.8% 3.3% 9.1% 5.5% 4.6% 10.9%
New Orleans 7.8% (0.1%) 9.0% 11.8% 3.5% 17.2%
Orlando 3.6% 2.2% 5.9% 4.2% 2.5% 6.9%
Miami 6.5% 0.6% 7.2% 7.8% 1.7% 9.7%
Phoenix 1.8% 1.4% 3.4% 2.3% (0.6%) 1.9%
LA 7.0% 5.8% 13.4% 5.2% 4.3% 9.8%
SF 11.5% 2.0% 14.2% 11.4% 2.1% 14.3%

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. While the upscale and upper upscale brands are relatively balanced between occupancy and ADR growth, luxury brands are skewing more towards rate, for example, even though the Le Meridien chain reported a slight drop in occupancy in Q2, we would not be too concerned as their occupancy rate for the quarter was still over 87%!


Q2 2012

Rolling 4 Quarters

Marriott (full service) 3.4% 2.7% 6.1% 2.8% 3.0% 5.9%
Ritz-Carlton 6.2% 0.4% 6.7% 7.0% 1.8% 8.8%
Sheraton 2.8% 3.2% 6.2% 3.4% 3.3% 6.8%
Westin 4.3% 1.7% 6.0% 4.1% 3.3% 7.5%
Luxury Collection 7.3% 4.6% 12.2% 6.4% 4.6% 11.3%
W 3.6% 2.1% 5.8% 3.7% 3.1% 6.9%
Le MeridienHyatt 5.6%4.8% (0.5%)3.9% 5.0%8.7% 4.7%3.3% 2.1%4.2% 6.9%7.7%

Source: Company earnings releases


The fundamental picture in the lodging industry has not really changed in the past year or so. Additions to supply are still running well below historical levels (up 0.4% in the past 12 months vs. long term average of close to 3%), while demand continues to grow (up 4.0% in last 12 months vs. long term average which is also around 3%), which leads to occupancy growth which in turn provides the opportunity to raise room rates.


The industry is now hitting on all cylinders, as even the incentive segment that had dropped off the face of the earth during the recession is starting to reappear. Tourism continues to be strong as gas prices have leveled off and even dropped for a while, while corporate travel is also steady. In addition to the statistical barometers, the anecdotal indicators such as number of suits (and walk-up air fares) on the NY-Boston-DC shuttles, attendance at trade shows and openings of trendy restaurants are also positive. The former is a good illustration of sticker shock- it now costs about $900 for a round trip fare between New York and Boston; I may be dating myself, but I can remember when it was $14 full fare ($8 on a student or military discount) on the old Eastern Shuttle, and they would roll out another plane when they filled up the first one. You would just walk on the plane and instead of serving beverages, the flight attendants would walk down the aisle with a credit card machine to collect your fare.



A couple of major deals this quarter, including

  • Blackstone sale of four hotels (Boston, Washington, San Diego and Burlington VT) to Diamondrock for $495MM
  • Host Hotels purchased the Washington DC Grand Hyatt for $400MM ($450K/key) after backing out of the deal last year
  • Other REIT transactions by Sunstone, RLJ and Pebblebrook as buyers, while FelCor continues to sell assets
  • Loews bought a 632 key hotel in Hollywood CA for an all-in cost of nearly $200MM


Also, it was recently reported that the Plaza Hotel in New York has yet another new owner- a 75% interest (60% from Israel’s Elad group and the rest from a Saudi Prince) was purchased by the Sahara group from India for $570MM. That would equate to about $2.7MM per key, but there are condominiums, retail and other factors which influence the price. The Israeli JV made out pretty well on the deal, reportedly netting almost a billion dollar profit, mostly from sales of condominiums.


Additional details on these and other transactions in the past three months can be found on the chart on the following page. There appears to be a lot of activity in the market, both from public and private buyers, although some industry sources believe that total volume is likely to be lower in 2012 than it was in 2011. The rationale for this is that EBITDA is expected to improve with rising ADR’s in 2013 and 2014 which would make pricing more attractive for sellers. Also, many CMBS extensions were granted over the past year at attractive interest rates (usually in exchange for a 5-10% pay down of loan principal), which freezes out those assets. However, should interest rates or cap rates turn due to changes in economic conditions, this could prove to be a missed opportunity for sellers.


In general, pricing is still very much on a two-tier basis, with prime properties in gateway markets trading in the range of 6% cap rates (12-14X EBITDA), while those in less favorable locations (or those needing significant capital improvements) are still trading “by the pound,” or in the $40-$60K per room range for full service hotels. Most of those do not even make this chart as the total dollar amounts of these transactions are less than the $20MM cut off. While there still may be some “fire sale” opportunities out there as lenders look to streamline their REO portfolios, many of those will require extensive PIPs as the brands are taking advantage of improving market conditions to force prospective owners to upgrade or risk being thrown out of their systems, which would be the kiss of death for many mid market and small market properties.


Public Company News

IPO, Financing, Mergers and Acquisitions
Recent activity included the following:

  • Choice Hotels sold $400MM of 5.75% long term notes, the proceeds of which will be used towards paying a $600MM ($10 per share) cash dividend to stockholders, which raised some eyebrows on the Street. The company wants to take advantage of the low interest environment to lever up their balance sheet and pay out the dividend to pump up the share price (which has lagged well behind its peers), but unlike most of the public companies, Choice is a pure-play franchisor, and cannot simply grow through acquisitions. The jury is still out on this one.
  • Chesapeake sold $120MM of 7.75% preferred equity, which will be used to pay down its revolver and towards future acquisitions. They have been relatively quiet on the transaction front lately, as they are still constrained by underperforming stock price and low liquidity, but they still reportedly have a solid pipeline, at least according to their bankers; the rest of the Street has a somewhat more conservative view.
  • Diamondrock, on the other hand, was successfully able to raise $200MM of new equity which was used to fund a portion of the purchase price of the portfolio recently acquired from Blackstone.
  • Breaking News (Aug. 7): The Gaylord deal to sell off its operating and branding business to Marriott while re-inventing itself as a REIT is back on track after it paid $185MM to buy 5 million shares from TRT, who had objected to the move. A shareholder vote scheduled for September 19 is now just a formality.
  • Host Hotels took out a $500MM five year term loan. Proceeds will be used to finance its recent Washington acquisition as well as pay down its revolver and redeem senior notes. The note is floating rate with the spread dependent on leverage ratios; currently the rate would be L + 180 (or barely over 2%) with no floor. It was co-underwritten by several major institutions including Wells Fargo, Merrill Lynch and JP Morgan. Comparing these terms with some of the other recent transactions illustrates the gap between the “haves” and “have-nots” in the publicly traded hotel space.
  • Hersha took out a $60MM term loan (four years plus a one year extension) at 4.32% to develop land it owns in Miami. Also, industry veteran Mike Leven (currently with gaming operator Las Vegas Sands, but who has held high level positions with US Franchise Systems, Holiday Inn and Days Inn) joined their board, replacing Thomas Capello, a retired bank executive.
  • Pebblebrook expanded and lowered the rate on its revolving credit facility, which now is up to $200MM, priced on a grid between 175-250 over LIBOR, and also has commitments for up to $600MM in future term loans. They also did a $100MM secondary share offering in June, which is their third one since they went public in 2009. They are also currently considered to be a “have,” as their stock price has rebounded off a low of $14 last fall up to its current $22-23 range.
  • Sunstone netted about $100MM from a secondary share offering, which will be used to fund purchases including recently acquired properties in Chicago (Hilton Garden Inn and Hyatt (formerly Wyndham) Miracle Mile).


A summary of major hospitality companies that have reported Q2 earnings so far this season is shown on the chart below. Most companies had solid beats, but with a couple of exceptions generally kept their RevPAR guidance unchanged.



Date Reported

Reported EPS*

Consensus EPS*

Guidance for 2012

Starwood July 26 $0.70 $0.62 6 – 8% (unchanged)
Marriott July 11 $0.42 $0.42 6 – 8% (unchanged) for N. America but lowered int’l
Host Hotels July 17 $0.34 $0.33 5.5-7% (up from 5-7%)
Choice July 27 $0.55 $0.52 5% for Q3; 6-7% for yr, previously 5-7%
Hyatt Aug 1 $0.24 $0.22 Does not provide
Wyndham July 25 $0.87 $0.84 5 – 8% (unchanged)
Pebblebrook Aug 2 $0.37 $0.34 8 – 10% (unchanged)
Sunstone Aug 2 $0.35 $0.33 5.5% – 7.5% (unchanged)
Chesapeake July 31 $0.50 $0.49 8.5%-9.5% (up 50-100bps)

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


Stock prices
Prices for large cap full service hotel companies have been mixed, with C-Corps generally doing better than the REITs, especially in recent weeks. Choice did get a nice pop over the past few weeks due to its big dividend payout. Several REITs including La Salle (which had an earnings miss for the quarter) and Hersha (which many analysts think is too overexposed to New York City) crossed below their 200 day moving average, which is usually a bad sign for stock prices. By way of comparison, the major indices are up about 1 to 2% this quarter and 10% for the year and are close to their post-recession highs


Publicly traded hotel company stock performance (US based companies with market capitalization in excess of $1 Bn plus selected companies over $500MM)


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




La Salle REIT Urban boutique, Upper Upscale




Diamondrock REIT Upper Upscale, Luxury, Urban Limited Service




RLJ REIT Limited Service with some Upper Upscale




Sunstone REIT Upper Upscale




Strategic REIT Upper Upscale, Luxury




Pebblebrook REIT Upper Upscale. Luxury




Hersha REIT Urban Limited Service




Chesapeake REIT Upper Upscale




Ashford REIT Diversified-all segments




Hospitality PropertiesTrust REIT Limited Service




Source: Yahoo! Finance


Other Industry News

  • Hotel loyalty programs are coming under fire, as a recent study claims that these programs are costing  $10 billion in lost business due to travelers feeling that they are not getting sufficiently rewarded for their loyalty.
  • In a related story, J.D. Power and Associates released its annual rankings of hotel chains. Overall results were generally not surprising, including perennial winners Ritz Carlton in the luxury end and Drury in the moderate priced segment. They noted that overall guest satisfaction is down, citing trends towards higher costs and fees, particularly for high speed internet, which is increasingly becoming a basic necessity for travelers. They also noted that guests booking through OTA’s generally had lower satisfaction (or higher expectations) than those who booked directly with the hotels or brands.
  • Also, AAA has announced that it is changing its methodology in rating hotels and awarding diamonds to penalize hotels that charge resort fees or have excessive charges for high speed internet access. This is in response to an increasing trend in dissatisfaction among hotel guests (see above) that they are being “nickeled and dimed,” as hotels are following the lead of many airlines in piling on charges. It was reported that some airlines make more money from luggage fees, change fees, etc. than they do on the basic tickets.
  • European economic concerns are having an impact, as major operators such as Starwood and Marriott have noted a drag on their earnings due to relatively poor performance. For example, RevPAR at Starwood’s European hotels was down 8% last quarter compared to a 7% average increase across the rest of the world. Other foreign markets are also lagging US performance, as China is starting to exhibit signs of a slowing growth rate, although Latin America and the Middle East are still holding up.
  • Brokerage firm Molinaro-Koger was ordered to pay nearly $23 million in damages to Host Hotels after being accused of fraud in a property-flipping scheme. The settlement came days before the case was scheduled for a civil trial. Host claimed M-K held the bidding down on hotels they were trying to sell, and the buyers then flipped the hotels at a higher price.
  • The pool lift controversy continues. After successfully pushing for an extension until January 2013, the hotel industry is continuing to lobby for relief of the requirement to install permanent pool lifts at all hotel pools, preferring to use portable lifts which they say are safer and less expensive. However, advocates for the disabled are pressing for full compliance and are threatening boycotts. While most of the big chains are prepared to comply (although production of the equipment is a bottleneck), there is a lot of push back from “mom and pop” independents, who are citing this as another example of excessive regulations stifling small business.
  • Hyatt Hotels still has an unsettled labor situation. They have claimed that unions have negotiated in bad faith, thus preventing contract agreements to be reached, thereby denying raises to workers. The unions have threatened strikes and promoted boycotts and have also stepped up their organizing efforts at non-union Hyatt properties.
  • Industry legend John Q. Hammons (age 93), who retired in 2010 and has been in seclusion since then, is in the news because Atrium Hotels, the owner of many of the hotels managed by his company has filed a lawsuit claiming that the person that Hammons appointed as his successor is incompetent, has conflicts of interest and has diverted company funds.
  • On a lighter note, a British hotelier generated some controversy with his plans to replace the Bible in guestrooms with the novel Fifty Shades of Grey, which he felt would be more relevant for his female guests.

Special Feature

From time to time in this newsletter, we try to go inside the hotel industry to provide a glimpse of its workings to outsiders. Today, we are providing this list of commonly used acronyms and abbreviations. Additional definitions of these items and other hotel industry jargon can be found in our June 2010 newsletter (please email Jack Levy to request a copy).


Hotel Abbreviations and Acronyms

AAA:              American Automobile Association
AAHOA:        Asian American Hotel Owners Association
ADR:              Average Daily Rate
AHLA:            American Hotel & Lodging Association
BAR:               Best Available Rate
CRS:               Central Reservation System
CVB:               Convention and Visitors Bureau
DMO:             Destination Marketing Organization
DOS/DOSM: Director of Sales/Director of Sales and Marketing
EB-5:              Loan program to encourage foreign investment in US hotels
EBITDA:        Earnings Before Interest, Taxes, Depreciation and Amortization
EMEA:           Europe, Middle East & Africa (one of the global regions)
EMC:              Executive Meeting Center
Exec Comm:  Executive Committee
FAM:              Familiarization (as in FAM Trips for travel agents)
F&B:               Food and (alcoholic) Beverage
FF&E:             Furnishings (or Furniture), Fixtures and Equipment
FFO:               Funds from Operations (a REIT metric)
FIT:                Free (or frequent) Individual Traveler
GBTA:            Global Business Travel Association
GDS:               Global Distribution System
GM:                 General Manager
GOP:               Gross Operating Profit
GSS:                Guest Satisfaction Score
HOT:               Ticker symbol for Starwood Hotels & Resorts
HSIA:             High Speed Internet Access
HVS:               Hospitality Valuation Services- independent appraisal and industry consultants
IACC:                         International Association of Conference Centers
IBFC:              Income Before Fixed Charges
IBT:                Independent (or Individual) Business Traveler
IHG:               Intercontinental Hotel Group
MOD:             Manager On Duty; also Minor Operated Departments
MTD:             Month To Date
NOI:               Net Operating Income
OSAT:            Overall (guest) Satisfaction
OTA:               On –line Travel Agency
PAR:               Per Available Room
PIP:                Product Improvement Plan
PKF:               Pannell, Kerr & Forster- independent industry consultants
POM/POMEC: Property Operations and Maintenance
POR:               Per Occupied Room
POS:               Point of Sale (computerized cash register system)
PMS:              Property Management System
PTAC:            Packaged Terminal Air Conditioner
PWC:              PricewaterhouseCoopers
REIT:             Real Estate Investment Trust
REO:               Real Estate Owned (by a bank or other institution not normally in the RE business)
REVPAR:       Revenue Per Available Room
REVPOR:       Revenue Per Occupied Room
SALT:             Service And Loyalty Tracking (proprietary Hilton guest satisfaction scoring method)
SMERF:          Social, Military, Educational, Religious and Fraternal
SPG:                Starwood Preferred Guest
STR:                Smith Travel Research
TOT:               Transient Occupancy Tax
TTM:              Trailing Twelve Months
UFOC:            Uniform Franchise Offering Circular
YTD:               Year to Date


US Economy General Statistics

Key Economic Indicators




GDP Q2 2012 Grew at 1.5%, which is the slowest growth rate since Q2 of last year. Continues the pattern of mid-year slowdowns in each of the past three years. The figure was not totally unexpected given other statistical data on manufacturing, unemployment, consumer sentiment, retail sales, etc. but it is still viewed as disappointing.
ConsumerConfidence July-12 The University of Michigan Consumer Sentiment Index fell to 72.3 in July, its lowest level this year.
Unemployment July-12 Unemployment edged up to 8.3%. The number of jobs created (163K) was better than it had been for the past few months but still is well below full recovery levels.
CPI June-12 Unchanged for the month and up 1.7% year over year; core index (excluding food & energy) was up 0.2% for the month and also up 1.7% for the year. Principal contributors to the increase were medical costs, clothing and recreation. Gasoline prices have started to inch back up, but did not have an impact in the current period.
Retail Sales June-12 Down 0.5% for the month and up 3.8% vs. year ago. Trend is definitely decelerating.
New Home Sales June-12 350K units, down 8.4% from the previous month and up 15.1% vs. prior year levels. A recovery in housing appears to be taking hold in most markets. Inventory levels are down below 5 months. The Case-Schiller home price index showed increases in all 20 major markets it tracks, with national prices rising by 2.2% in May, the second consecutive increase after six months of declines, however the 20 city index is still down 0.7% over the past year.

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