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.


2012 Q3

2012 YTD thru 11/2

Industry Total 4.5% 2.4% 7.1%   4.1% 2.3% 6.6%
Luxury 6.1% 3.5% 9.8% 4.8% 3.2% 8.2%
Upper Upscale 4.7% 2.4% 7.4% 4.2% 2.0% 6.3%
Resort 4.8% 3.0% 8.0% 4.7% 3.2% 8.1%
Key Markets
NY 4.4% 1.5% 6.1% 2.4% 2.3% 4.9%
Boston 9.3% 0.9% 10.8% 7.5% 0.9% 8.6%
DC 0.5% 3.0% 4.0% (1.0%) 0.1% (0.6%)
Chicago 4.8% 3.3% 9.1% 6.1% 4.6% 11.4%
New Orleans 7.8% (0.1%) 9.0% 11.3% 7.5% 20.8%
Orlando 3.6% 2.2% 5.9% 3.5% 2.3% 6.0%
Miami 6.5% 0.6% 7.2% 6.6% 0.9% 7.8%
Phoenix 1.8% 1.4% 3.4% 1.8% (0.3%) 1.7%
LA 7.0% 5.8% 13.4% 5.6% 4.8% 10.8%
SF 11.5% 2.0% 14.2% 11.2% 1.6% 13.4%

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 3rd 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

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



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.



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 5th 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.





A summary of major hospitality companies that have reported Q3 earnings so far this season is shown on the chart below. Most companies had solid beats; note that the two exceptions in the chart below (Hersha and LaSalle) both have above average exposure to the East Coast. Guidance for 2013 RevPAR growth generally shows a broad range as would be expected at this juncture, but many companies have reduced guidance below analysts’ prior expectations. Also note that Q4 2012 RevPAR guidance was dramatically affected by Hurricane Sandy for several of these companies, including Hersha, Host, LaSalle and Sunstone.



Date Reported

Reported EPS*

Consensus EPS*

Comments for 2013

Starwood 10/25/12 $0.58 $0.53 4 – 7% RevPAR
Marriott 10/03/12 $0.44 $0.40 5 – 7% RevPAR
Host Hotels 10/10/12 $0.21 $0.21 8% increase in group
LaSalle 10/17/12 $0.68 $0.70 7% RevPAR Q1, then 4-5%
Hersha 10/31/12 $0.12 $0.11 6% RevPAR
Choice 10/24/12 $0.76 $0.63 4.5% RevPAR
Hyatt 10/31/12 $0.18 $0.17 Does not provide guidance
Wyndham 10/24/12 $1.13 $1.10 RevPAR not primary driver
Pebblebrook 10/25/12 $0.37 $0.34 No guidance yet for ‘13
Sunstone 11/01/12 $0.23 $0.22 Lift due to renovations
Chesapeake 11/01/12 $0.53 $0.51 Also renovation story

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


Stock prices

Prices for large cap full service hotel companies have generally been crushed over the past few weeks, due to a combination of Hurricane Sandy, tepid earnings guidance and overall economic uncertainty. The REIT’s have given up all of their gains for the year, although Marriott (and to a lesser extent, Starwood) are still ahead. By way of comparison, the Dow is down 4.6% so far this quarter and is up 4.9% this year.


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


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

  • Marriott once again is facing a management contract performance lawsuit, this time at the Eden Roc resort in Miami, which they are managing under the Renaissance flag. The owners claimed mismanagement after they did a major renovation to the property, and attempted to physically remove Marriott from the premises. Marriott successfully obtained a restraining order, and another hearing will be held later this month, with arbitration expected.
  • Lawrence Geller, the often controversial head of Strategic Hotels and Resorts, abruptly announced his resignation on November 2nd, which immediately puts Strategic into play as a takeover candidate, with Host Hotels mentioned as a possible buyer as well as unnamed private equity firms. Geller is precluded from making his own bid for 18 months.
  •  In a sign of the times, Choice Hotels closed a call center in Colorado, citing volume declines as their clientele is shifting towards the internet.
  • Intercontinental Hotels is introducing a new brand, “EVEN Hotels,” which will have its first US location opening in New York in late 2014. This brand was “created with the frequent traveler in mind who wants to stay healthy while away from home.” They expect to have 100 managed and franchised properties signed up in the next five years.
  • Niki Leondakis, former president and COO of Kimpton Hotels has been named CEO of Commune Hotels & Resorts, the company formed as a result of the merger of Joie de Vivre Hospitalilty and Thompson Hotels.
  • A series of court rulings have affirmed that on line travel agencies (OTA’s) are not liable for hotel occupancy taxes on the fees that they charge; in other words, the guest must only pay tax on the net (wholesale) rate, not the gross (retail) rate. OTA’s hail this as a victory for their business model, while states and municipalities are concerned about declining revenues.



Special Feature- International Hotel Markets

Normally, we are focused only on the US, as there are still plenty of opportunities in the domestic markets, but global trends are becoming increasingly important as it becomes easier to move capital around. However, there are still many impediments to doing business overseas, including currency fluctuations, regulatory environment and other local customs. To illustrate, several years ago Doubletree was doing due diligence to acquire the Renaissance hotel chain (we were eventually outbid by Marriott), which had interests in several hotels in China. As part of this exercise, we had to review the management contracts, which of course were bulky documents all written in Chinese. When we asked for an English language version, it came out on one page. You think something might have got lost in the translation?


International market conditions vary widely by region. According to Smith Travel, the regions are defined as follows (key countries in parentheses)

  • Americas
    • North America (US, Canada and Mexico)
    • Caribbean (Bahamas, Puerto Rico, Jamaica)
    • Central America (Panama)
    • South America (Brazil, Argentina)
  • Europe
    • Eastern Europe (Czech Republic, Russia)
    • Northern Europe (UK, Scandinavia)
    • Southern Europe (Italy, Greece, Spain)
    • Western Europe (France, Germany)
  • Middle East and Africa
    • Middle East (UAE, Saudi Arabia)
    • Northern Africa (Egypt, Libya)
    • Southern Africa (Kenya, Nigeria, South Africa)
  • Asia Pacific
    • Central & South Asia (India, Pakistan)
    • Northeastern Asia (China, Japan, Korea)
    • Southeastern Asia (Indonesia, Thailand, Singapore)
    • Australia/Oceania (New Zealand, Pacific islands)


As would be expected, hotel markets generally follow overall economic growth trends. Right now (as of November 2012), Europe is probably has the weakest economy, with China still experiencing the highest growth rates (although they are not as strong as they were a few years ago). Comparison of RevPAR growth is interesting, and it really shows the effect of currency exchange rates:


                            RevPAR Growth YTD Sept 2012 vs. 2011

In US Dollars

In Euros

In British Pounds

Asia Pacific












Middle East/Africa




Source: Smith Travel Research


Within the regions, the areas showing the strongest growth (using US dollar comparison) include the Caribbean, up 11.3%, Northern Africa (up 10.1%) and the Middle East (up 8.0%), while the weakest areas are Northeastern Asia (down 13.4%), Southern Europe (down 8.9%) and Western Europe (down 6.9%).


The figures for publicly traded hotel companies with large international presences (note that regions may be divided somewhat differently) show some similarities in that Europe is consistently the weakest (especially Starwood for the quarter), but they are showing more strength in Asia than the STR data, which may indicate that upper scale properties are doing better over there.


Starwood (Q3 2012 vs. 2011)

  • North America            + 4.8%
  • Europe                        – 9.1%
  • Asia Pacific                 + 0.7%
  • Africa/Middle East     + 3.2%
  • Latin America             +3.0%


Intercontinental (Q3 2012 vs. 2011)

  • Americas                     + 4.6%
  • Europe                         + 3.0%
  • Africa/Middle East     +5.0%
  • “Greater China”          +9.8%


Marriott (8 mo. ended Aug. 31 2012 vs. 2011)

  • Caribbean & Latin America    +5.9%
  • Europe                                     +3.3%
  • Middle East & Africa             +8.8%
  • Asia Pacific                             +10.1%
  • North America                        +6.6%


In general, we would have to say that international markets are subject to the same pressures as US markets, but are much more volatile, as the impact of a Eurozone meltdown or slowing Chinese growth would obviously be more immediate. New supply may not be as constrained, as if a government wants to improve its tourism profile or promote new business, for example, it can order new construction. Most of the development activity is in China, where over 300,000 new hotel rooms are under construction and another 100,000 are in active planning. These numbers are by far the largest in the world, according to Lodging Econometrics. Other areas experiencing strong development include Indonesia, Panama and Brazil, while India (which is experiencing an economic downturn), Mexico, the rest of Central America and Europe are lagging.


US Economy General Statistics

There have been positive movements in almost all of the major economic indicators over the past few months:




GDP Q3 2012 Grew at 2.0%, an improvement from the 1.3% revised Q2 figure. Much of this was driven by increased federal government (defense) spending as well as a pickup in consumer spending.
ConsumerConfidence Nov-12 The University of Michigan Consumer Sentiment Index rose to 84.9, the fourth straight monthly index and the highest since July 2007. A decline in gas prices and rising home values were cited as the primary reason.
Unemployment Oct-12 Unemployment edged up to 7.9%. Job creation has been steady over the past few months but is still well below replacement levels; the quality of jobs created (many of them being part-time service sector positions) is also a concern
CPI Sept-12 CPI was up 0.6% for the month, and is running at a 2.0% annual rate. For this period, gas prices (up 7%, after a 9% increase in August) were a major factor, but since then prices have moderated considerably. Food index was almost flat (0.1%) as the effects of this summer’s drought have not yet showed up in the market.
Retail Sales Sept-12 Up 1.1% for the month and up 5.4% vs. year ago. The trend has turned around in the last couple of months after being negative during the spring, and this is echoed in the consumer confidence and GDP numbers. Outlook for the holiday season also appears encouraging; online sales are expected to increase by about 15%, while the consensus for overall holiday sales is in the 4 to 5% range, as bargain-hunting consumers are putting pressure on prices.
Housing Sept-12 New home sales were 389K units, up 5.7% from the previous month and up 27.1% vs. prior year levels, as the housing recovery continues. The Case-Schiller home price index showed increases in 19 of the 20 major markets it tracks. Seattle was the only area showing a drop, while Phoenix has been the strongest market recently, with four consecutive months of annualized double digit increases. National prices rose by 0.9% in September, the fifth consecutive month of increases.

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