Hotel Industry Overview: Winter 2013


Hotel Industry Overview: Winter 2013

Summary of Key Performance Indicators

After a surprisingly strong Q4 of 2012 (7.3% overall increase), RevPAR has continued to accelerate during the first quarter of 2013. Week to week results are choppy due to holiday timing, but US average RevPAR increased 8.2% through February 16. Luxury, Resort and Urban properties have led the way so far in 2013, with RevPAR increases of 14.5%, 13.6% and 11.1% respectively. Economy and midscale have generally lagged the overall averages, posting numbers in the 5% range YTD, consistent with the notion that lower-income travelers continue to be most affected by the sluggish economy, while the other scales (Upper Upscale, Upscale and Upper Midscale), which accommodate the vast majority of business travel, have performed near the overall average. Suburban properties, however, have lagged the averages, for reasons discussed below.


Although not shown on the chart below due to space limitations, a very important factor beginning to show up in the numbers is group vs. transient. Group has been significantly off for several months as continuing economic uncertainty make advance booking decisions difficult. Year to date transient RevPAR is up 13.5%, while group is up only 2.1%. This is the primary reason that suburban upper upscale hotels have been underperforming, as midweek mid-size corporate group has been a tough sell; the independent upper-tier hotels have also been lagging in this area.


The strongest markets YTD have been New York (which is actually being helped by Hurricane Sandy), New Orleans (helped by the Super Bowl), Miami and Oahu, which are running in the 20% range. Washington DC was also solid due to the inaugural, as were Nashville and Houston. Laggards included Norfolk, Philadelphia and Chicago, as well as San Francisco, which was one of the top performers last year.


2013 YTD(thru 2/16)


2012 Q4

2012 Total Year

Industry Total






















Upper Upscale




















Key Markets




























































Source: Smith Travel Research, Deutsche Bank, Sun Trust Robinson Humphries



As usual, the public company higher-end brands follow the overall trends. In Q4, the luxury brands were weaker than the upscale ones. Starwood’s mid-priced brands such as Four Points and aloft/element actually did much better, gaining 8-10% for the quarter, and the best performing Marriott brand was Spring Hill Suites (a mid price extended stay brand) at 7.7% for the quarter and 7.8% for the year. It is noteworthy that Le Meridien is the first high end brand to show a quarterly decline in RevPAR since Q1 of 2010. However, all major brands are continuing to show guidance of 4-7% for 2013 RevPAR, which is consistent with PKF, STR and PWC forecasts; as will be discussed, the wide range is primarily due to uncertainty about the direction of US economic policy.




Q4 2012

Total Year 2012

Marriott Full Serv. 3.7% 0.8% 4.5% 4.8% 1.2% 6.1%
Ritz-Carlton 3.7% 1.4% 5.1% 3.4% 2.5% 5.9%
Sheraton 4.3% 2.6% 7.0% 3.1% 2.6% 5.7%
Westin 3.4% 1.0% 4.5% 3,4% 1,8% 5.2%
Luxury Collection 2.3% (0.6%) 1.7% 4.2% 1.6% 5.9%
W 3.5% 0.0% 3.4% 3.6% 2.0% 5.7%
Le Meridien 1.6% (2.1%) (0.6%) 0.1% 2.8% 2.9%
Hyatt 4.4% 1.0% 5.3% 4.2% 2.2% 6.5%

Source: Company earnings releases



The general sentiment of the industry continues positive although clouds are still gathering on the horizon. At the recent annual ALIS conference held in LA which was attended by thousands of hospitality executives, seldom was heard a discouraging word. The unexpected drop in GDP during Q4 was shrugged off, as it was attributed to Hurricane Sandy, which was probably a net positive for the industry due to displacement of homeowners and mobilization of FEMA workers, and cutbacks in government spending, which currently only affect a handful of markets. However, at least on the surface, the fundamentals are still strong, as supply growth is still well below historical levels (although as noted below it is starting to pick up), and the demand from corporations and higher end individual travelers is persistent. Occupancy is generally fully recovered, which means that compression during peak periods can support higher room rates, and hotel revenue and yield management is becoming more sophisticated in order to take advantage of these opportunities.


As is normal in this part of the cycle, new supply is starting to catch up, especially for urban select service, generally 200 keys or less. These hotels have high operating margins compared to full service properties, and ADR’s have recovered enough to justify new development especially in the current low interest rate environment. Markets such as New York City, Washington DC, Denver and Nashville are seeing above-average construction activity, and new hotels will be opening soon in Boston, Philadelphia, Orlando, Miami and Chicago as well as many smaller markets. On the other hand, Hawaii, Atlanta, Seattle, San Francisco and Dallas are seeing minimal present activity, in some cases due to the scarcity of available sites but in other cases (Dallas and Atlanta) it is because the markets are not fully recovered and numbers still do not pencil for new construction.


Even though the “fiscal cliff” was averted by a last-minute deal, fights over the debt ceiling and spending will continue to create uncertainty for the financial community, which is bound to have some effect on hotel demand, particularly from the government sector and for large group meetings. On the operations side, rising healthcare and energy costs are a matter of concern, although the industry may have dodged a bullet with the recent favorable court decision on the NLRB recess appointees, which means that new rules designed to encourage unionization may not be implemented.



2012 finished the year at about the same level as 2011, with about $17.5 billion of transactions in the Americas (per Jones Lang LaSalle). However, single asset transactions were down, as the mix leaned more towards portfolio sales including Blackstone’s purchases of Motel 6 ($1.9 billion), Apple REIT Six ($1.2 billion) and Eagle Hospitality Properties ($600MM). Another major transaction was Starwood Capital’s acquisition of In-Town Suites for $735MM. Some of the more noteworthy single property acquisitions in the 4th quarter included:

  • Plaza Hotel (New York): $575MM (Elad Group to Sahara India Pariwar)
  • Dream Downtown (New York): $220MM (Hampshire Hotels & Resorts to Sahara India Pariwar)
  • The Madison (Washington DC): $145MM (Jamestown Properties to Loews Hotels)
  • Sofitel Chicago Water Tower: $125MM (GEM Realty Capital to Blackstone Group)
  • Beekman Tower (New York): $85MM (Lone Star Funds to Silverstein Properties et al); possible residential conversion.


As has previously been noted, most of the buying is being done by private entities, although a couple of the REIT’s, most notably LaSalle, Pebblebrook and Summit (in the limited service sector), have been very active lately. Chesapeake is also back in the game, having completed its equity issuance, and Sunstone has disposed of some properties and completed a new equity offering which will give it more dry powder.


The outlook for 2013 is expected to be more of the same. Most experts think that transaction volume will be up a little, but will still be concentrated in the gateway markets (New York, Chicago, Washington and Miami accounted for over 1/3 of the volume in 2012). Everyone is still waiting for the “great deleveraging” when the lenders and servicers finally pull the plug on the vintage 2006-07 CMBS deals that are still cluttering up the pipeline, but there is still a very large gap between seller’s expectations and what buyers are willing to pay. Much of this is because of product type and location. The suburban upper-upscale product is not in great demand right now because of changes in corporate meeting patterns leading to significant reduction in group occupancy, and these hotels are also becoming tired and in need of extensive PIP renovations to maintain their brand affiliation. They are also being targeted by some of the new select-service products that have entered some of these markets, especially the “hipper” boutique brands such as aloft that appeal more to younger business travelers (who are notoriously less brand loyal than their older counterparts).


In any event, 2013 is off to a busy start, with several deals announced in the first seven weeks of the year, including:

  • $293MM Marriott Marquis Atlanta (1,663 keys) sold by Host Hotels to an Abu Dhabi investor
  • $210MM portfolio of hotels in Rochester MN (home of the Mayo Clinic) sold by Sunstone to a private investor
  • $180MM sale of the Flatotel (New York) out of bankruptcy to a group that will probably convert it to residential use; this buyer (Chetrit Group) also bought a Miami Beach hotel for $117MM from Blackstone last month
  • $170MM sale of the Liberty Hotel in Boston from the local developer to LaSalle REIT
  • $120MM sale of the Clift San Francisco to HPT, who continues to grow through their Sonesta acquisition into the upscale segments
  • $112.5MM sale of the Embassy Suites San Diego to Pebblebrook
  • $104MM sale of five limited service Hiltons in the South (avg. price a surprisingly high $165K/key), acquired by Carey Watermark Investors from a private fund


A schedule of transactions from the past few months is shown below:







Public Company News

IPO, Financing, Mergers and Acquisitions

  • Chesapeake Lodging Trust issued 8.3MM common shares, raising $166MM of net proceeds to be used for acquisitions; this is significant because the offering size was increased (in addition to the shoe being executed) and the price was above its IPO price. This stock is now trading close to its all time high of $22. Lead underwriters were JP Morgan, Deutsche Bank, Wells Fargo and RBC Capital Markets. They also closed on a $32MM mortgage loan on the Hilton Checkers Los Angeles, which is a 30 year amortizing loan at a 10 year fixed rate of 4.11%. This represented a 70% loan to cost ratio.
  • Choice hotels announced a marketing alliance with Bluegreen Vacation Club, marking their first entry into the world of timeshare, as they too seek to move up the chain scale away from pure economy brands.
  • Diamondrock Hotels announced that their COO, John L. Williams will be retiring and has engaged a national search for a successor. They also expanded their Board of Directors and appointed Bruce Wardinski to fill the new slot. Wardinski is CEO of Playa Hotels and Resorts. He was formerly CEO of Barcelo Crestline and has an extensive hospitality industry background.
  • FelCor extended its $225MM secured line of credit at substantially improved terms; interest is at L+337.5 (no floor), with an unused line fee of only 10 bp. The facility is secured by 8 hotels and runs through 2017; JP Morgan and Merrill Lynch were the lead bookrunners.
  • Starwood has authorized the repurchase of about $680MM worth of common stock, comprised of $500MM new plus $180MM left over from last year, when they bought back $320MM worth. Although such repurchases are generally good news for shareholders, it indicates a very conservative strategy by management, as they apparently do not have a better use for the capital, most of which was generated from asset sales.
  • Marriott has also increased its buyback authorization to a total of 34 million shares, worth about $1.3 billion at current prices, which is approximately 12% of its float. It repurchased 31.2 million shares for $1.2 billion in 2012.
  • Hersha also authorized a $75MM share buyback, which is interesting because they have been in acquisition mode. However, their balance sheet is relatively weak.
  • A major shareholder of Strategic Hotels & Resorts sent a letter to the company pushing for its sale, citing the departure of its founder and long-time CEO Laurence Geller. The company views the letter as a means to incite a short-term lift in the stock price, which it has- it is up 13% in the last 3 weeks.
  • Pebblebrook refinanced its New York portfolio (a JV with Denihan) with a $410MM non recourse 5 year fixed rate 3.67% loan.
  • Red Lion appointed Jim Evans (former Brand USA director and Best Western CEO) to their board, along with Dave Johnson (who was their CEO when they were owned by KKR back in the 90′s), Mike Vernon (who was their CFO at that time) and Robert Wolfe, an investment banker.
  • Sunstone had a follow on offering of 22 million shares (plus a green shoe of 3.3 million), priced at $11.80, which it used to redeem $179MM of  8% coupon convertible preferred stock and also provide some dry powder for acquisitions. Citigroup was the sole manager of the offering.
  • Wyndham announced tender offers and mandatory redemption on some of its debt securities, looking to reduce their cost of capital in light of the currently favorable interest rate climate



This is a summary of Q4 2012 earnings reported by major public hospitality companies:


Company Date Reported Reported EPS* Consensus EPS* Comments
Starwood 02/07/13 $0.70 $0.65 Dragged down by sluggish international growth trends
Marriott 02/19/13 $0.56 $0.55 4 – 7% RevPAR guidance, down 1 pt at low end; guidance is tempered due to sequesterization
Host Hotels 02/21/13 $0.40 $0.38 Strong start to’13; 6%+ RevPAR anticipated. More bullish than Marriott
LaSalle 02/20/13 $0.47 $0.45 Solid beat for Q4 but 3-6% RevPAR guidance for 2013 is conservative
Hersha 02/21/13 $0.11 $0.10 RevPAR guidance 5-7% but heavy weight to NY should be a positive
Choice 02/11/13 $0.45 $0.41 4.5% to 5.5% RevPAR; pickup in unit growth
Hyatt 02/21/13 $0.20 $0.12 Not a clean beat- EBITDA missed- poor margins
Wyndham 02/06/13 $0.63 $0.60 Dividend and EBITDA guidance raised for 2013
Pebblebrook 02/21/13 $0.30 $0.29 5-7% RevPAR guidance, unchanged from last month
Sunstone 02/19/13 $0.30 $0.26 Guidance softened due to renovation impacts
Chesapeake 02/21/13 $0.40 $0.38 5-7% RevPAR guidance; has $350MM of dry powder

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

Stock prices

Hotel stock prices have generally increased in line with the overall stock market so far in 2013, but they strongly outperformed in Q4 of 2012. Strong performers YTD include Strategic (rumored buyout), HPT (upscale acquisitions) and Ashford (improving balance sheet), while La Salle (overweighted in DC) and Diamondrock (renovation issues) have lagged. These same stocks have led and lagged for the period since bottoming out last November; in addition,


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






 Source: Yahoo! Finance


 Other Industry News

  • Penny Pritzker, a billionaire whose family founded Hyatt Hotels, is being considered for the post of US Secretary of Commerce. She is a long time Chicago associate of President Obama and was a key part of fundraising for his 2008 campaign.
  • A controversy has erupted over the ground lease between the City of New York and the Marriott Marquis Times Square (owned by Host Hotels). The City contends that the Marriott got a sweetheart deal when they renegotiated the lease in 1998, which allows them to buy the ground for $20MM when the lease expires in 2017 (probably less than 5% of what it is worth). The City’s controller (who is possibly running for Mayor in the next election) says that Marriott has breached their contract by not providing certain financial records and owes interest on back rent, so he wants to use this as a lever to force renegotiation. Marriott officials, in turn, responded that the hotel anchored Times Square when the area was considered unsavory, created 1,500 jobs, paid a billion dollars in property taxes over the years and have paid every penny of rent that was owed.
  • Red Lion Hotels announced that it was creating a new “soft brand,” called Leo Hotels. No one took them seriously until a few days later when it was announced that the first hotel to join Leo was the Las Vegas Hotel & Casino, the 3,000 room former Hilton property. However, ownership of this asset is in play and it is not clear whether Leo is a long term fit.
  • Four Seasons Hotels announced the retirement of CEO Kathleen Taylor, a 25 year company veteran and one of the most prominent female executives in the lodging industry.
  • Marriott is moving ahead with the development of a 1,500 room Gaylord resort near Denver, which had been on hold for several years due to economic conditions.
  •  Drury Hotels, a relatively small (130 unit) upper midscale chain, has posted the world’s highest customer satisfaction rating in a survey from Market Metrix, edging out the likes of Ritz-Carlton and JW Marriott. Drury has won the J. D. Power and Associates midscale award for each of the last seven years.
  • America’s Best Franchising has acquired the Jameson brand. Jameson, once an independent public company, has over 100 economy properties, primarily in the Southeast, and together with its affiliated management companies and other economy brands, has been fighting through a foreclosure attempt for the last two years.
  • Former Molinaro Koger COO Jonathan Propp pled guilty in federal court to conspiracy charges stemming from a $20MM hotel “flipping” scheme that defrauded Host Hotels.
  • The ADA mandated pool lift requirements went into effect January 31, after a mad scramble by hotels to comply. While most chain-affiliated properties were able to meet the deadline, there are anecdotal reports of smaller independent hotels being forced to close their pools. No reports have yet been received about enforcement or claims of discrimination being filed, but this is being watched closely, especially in California where there is a history of “drive-by” ADA filings that lead hotel owners to settle rather than face a lengthy, expensive court process.


Special Feature- Who is behind the brands?

Not to be confused with ownership of the real estate or day-to-day management of the properties, the franchising/branding of hotels is extremely concentrated. The top companies in terms of world-wide property count (not rooms count) are shown on the chart below. Figures are based on company websites and press releases and are approximate as of December 31, 2012.



GDP Q4 2012 Decreased 0.1%, for the first quarterly decline since 2009. This was blamed on Hurricane Sandy and cutbacks in Federal government spending. However, the Q3 figure was revised upwards from 2.1% to 3.0%, so GDP for the calendar year grew 2.2%, which is slightly up from the 1.8% growth in 2011.
ConsumerConfidence Feb-13 The University of Michigan Consumer Sentiment Index rose to 76.3 up from 73.8 in January, which was better than expected as payroll tax and gasoline price increases were expected to weigh more heavily. The housing recovery and stock market were cited as major reasons driving the improvement.
Unemployment Jan-13 Unemployment was steady at 7.9%. 157K jobs were created, which is slightly below the monthly average of 181K for all of 2012. Private sector jobs, particularly in construction and health care are trending up, while government is declining; manufacturing has not significantly changed since last summer
CPI Jan-13 CPI was unchanged for the month of January, and increased 1.6% over the past 12 months. The index was also unchanged for December 2012. Gasoline was down again for the month, but has risen significantly in February. Food prices were flat in January. Costs for shelter, apparel, health care, recreation and airline fares all increased.
Retail Sales Jan-13 Up 0.1% for the month and up 4.4% vs. year ago; trend has been steady for the past few months. Sales trends do not vary significantly by sector- general retail, food & beverage, automotive, electronics, etc. all seem to be following the same pattern. However, Wal-Mart has reported very slow sales for the first few weeks in February.
Housing Dec-12 New home sales were at a seasonally adjusted annual rate of 369K units, down 7.3% from the previous month but up 8.8% vs. prior year levels, as the housing recovery continues. Total new home sales in 2012 were up 19.9% vs. 2011. Sales of existing homes were up only 11%, but the base is much larger- there are about 4.8 million sales in 2012. The Case-Schiller home price index dropped slightly in November due to seasonal factors, but the year over year trend continues strong, especially in the Sunbelt markets; the Northeast and Midwest are relatively the weakest.

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