Hotel Industry Overview: Spring 2014   

May 27, 2014

 Summary of Key Performance Indicators

After a so-so month of January, 2014 regained momentum with over 7% RevPAR growth in February and March. Q2 is looking to be north of 6% as well, despite the Easter calendar shift. Much of the gain is from the usual sources including transients and West Coast markets. In the past few weeks, though, San Francisco has cooled somewhat, but San Diego is coming on strong. Also in recent weeks there has been a strong lift from the bottom (Economy) segment, indicating that discretionary leisure travelers are returning in force. The East (except for Boston which has a strong convention calendar) is still lagging. There continues to be a gloomy outlook for DC, but New York will probably come back during the summer, as they had tough post-Sandy comps in the first part of the year. What is critical there is whether operators will hold the line on ADR if the new supply cuts into their occupancy.  Among the other key markets, Nashville continues to show strength despite significant supply increases, while Dallas and Houston also remain strong. Orlando and Miami did fairly well through Spring Break/Easter, while Chicago and the Midwest are soft.

 

There have been some encouraging developments on the upper-end group side, as increased banquet spending as well as solid year-over-year pacing has been reported by some of the major brands and owners. Airline bookings are up, and theme park operators are also seeing solid performance.

 

 

Q 2 2014 (thru 5/10)

 

Q1 2014  

Total Year 2013

ADR Occ. RevPAR ADR Occ. RevPAR ADR Occ. RevPAR
Industry Total

4.2%

2.8%

7.8%

 

3.8%

2.6%

6.5%

 

3.9%

1.5%

5.4%

Luxury

5.3%

1.2%

6.9%

5.4%

0.3%

5.8%

6.0%

2.4%

8.7%

Upper Upscale

3.9%

1.3%

5.3%

4.4%

2.1%

6.7%

4.5%

2.2%

7.0%

Resort

5.2%

5.4%

10.8%

NA

NA

9.0%

NA

NA

7.2%

Key Markets
NY

1.0%

1.9%

2.7%

2.7%

(3.3%)

(0.3%)

4.4%

1.9%

6.5%

Boston

8.1%

6.2%

16.7%

4.1%

1.1%

5.3%

3.7%

2.2%

6.2%

DC 2.5%

(2.4%)

(0.4%)

(3.9%)

(0.7%)

(4.5%)

0.7%

(2.4%)

(1.0%)

Chicago

3.2%

0.1%

3.2%

0.3%

1.0%

1.7%

3.3%

0.8%

4.3%

SF

NA

NA

6.1%

12.3%

5.4%

17.7%

8.0%

3.6%

11.9%

LA

5.2%

3.5%

9.7%

6.7%

4.9%

12.0%

5.0%

2.0%

7.2%

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

 

 

The major brands controlled by the public companies are generally tracking the national averages for their respective segments (only luxury and upper upscale are shown in the chart below, but the lower-scale brands are also following along). As always, a few brands are doing notably better or worse than the averages. This time, Hyatt is the standout in the upper upscale group, as they have been consistently outperforming the market for the past year. W had another weak quarter, while Sheraton and Marriott have lagged over the 4 quarter period. Most of the brands said that they were happy with their first quarter results, and have maintained or slightly pushed RevPAR expectations for the year- generally in the 6% range for domestic locations.

 

 

 

 

Q1 2014

Rolling 4 Quarters

ADR Occ RevPAR ADR Occ RevPAR
Marriott Full Serv. 3.0% 2.4%

5.5%

3.7% 1.4%

5.1%

Ritz-Carlton 3.7% 1.4%

5.2%

5.8% 1.9%

7.8%

Waldorf-Astoria 6.5% (0.4%)

6.0%

NA NA

NA

Hilton 3.7% 2.0%

5.8%

NA NA

NA

Sheraton 2.6% 3.6%

6.2%

3.7% 1.2%

5.0%

Westin 3.9% 3.0%

6.9%

3.4% 2.4%

5.9%

Luxury Collection 7.4% 0.4%

7.8%

6.9% 2.5%

9.6%

W 3.3% 0.1%

3.5%

3.1% 1.4%

4.6%

Le Meridien 3.5% 1.7%

5.3%

4.5% 1.4%

6.0%

Hyatt 4.5% 3.0%

7.7%

4.0% 2.6%

6.8%

Source: Company earnings releases

 

Outlook

The major consultants (STR, PKF, PWC) have not issued any recent revisions to their 2014 RevPAR forecasts, still expected to be around 6%. As noted, some of the public companies have raised their guidance by 50-100 bp, which puts them in line with the consensus. The risks for the rest of the year have been reduced by the generally strong performance over the first four to five months, as the Easter calendar shift did not prove to be as much of an impact on April/May results as was initially feared. In addition, some encouraging stats have recently come out regarding the growth and stability of the US economy, as will be discussed later.

 

Several trends have been noted during recent industry conferences, including:

  • Even though most people felt that interest rates were rising, the effect would be offset by narrowing spreads, indicating that the risk profiles for hotel investment are improving
  • CMBS is driving the financing bus- now offering the lowest rates and up to 75% LTV. Life companies are big players but only in selective markets and still only at 50-55% leverage. Local and regional banks are becoming increasingly important, especially in deals below $25 million
  • Everyone is now lending on a non recourse basis
  • Public REIT’s are still primarily focused on the big coastal markets, but private equity is moving towards the secondary and tertiary markets
  • The feeling is still that 2017 will be the inflection point in the cycle, but most people are predicting (hoping) for a “soft landing” this time around, mostly for the following reasons:
    • Supply is still constrained by tighter construction lending
    • Leverage levels are not as high as they were in 2007-8
    • Banks are better capitalized, and may avoid the domino effect that followed Lehman Brothers
    • Although boutique and urban select service are still hot, there is an increasing focus on medium size (200-300 room) full service properties that can be efficiently operated, that is, not too many F&B outlets, and also for more sophisticated products in the tier of markets below the top group, such as St. Louis, Pittsburgh, Tampa, etc. Resorts are also viable, but it was cautioned that too much golf is a liability. Soft brands such as Autograph, are increasingly popular and have proven very successful in some cases (e.g. Diamondrock’s conversion of the Lexington Hotel in Manhattan), but as we know, the fees will weigh heavily into a decision if the hotel already has traction as an independent
    • The prevailing sentiment is still “buy not build,” as construction prices have been creeping up, and construction financing is difficult to get unless there is an extremely well capitalized sponsor with strong brand support.
    • However, there are still several mega convention hotels in the works in locations such as Austin, Houston, Louisville and others, which are, of course, impossible to build without substantial public financing.

 

Transactions

US hotel transaction volume is continuing to accelerate, fueled by the solid supply/demand dynamic and increasing availability of capital across the whole stack. Is it a buyer’s market or a seller’s market? It depends who you ask.

 

It is clearly a seller’s market for stable, cash flowing properties, as these are the preferred vehicles for portfolio investors such as REIT’s and other institutions looking for current yield. Cap rates are continuing to compress, as even 6 to 7% yields are attractive in the current interest rate environment. On the other hand, opportunistic buyers are trying to score bargain prices for turnaround situations. Most of these are older, full service properties in suburban or secondary market locations that are staring at sizeable PIP’s from the brands in order to keep their flags. Many of these properties were owned by lenders that foreclosed during the end of the last cycle. They have run out of extensions on their CMBS debt, and may have sold the controlling tranche of debt at a discount, so they should be able to at least break even or turn a small profit on the sale.

 

The chart below summarizes the larger deals (single properties over $50 million) over the past several months. Some more recent ones that did not make the list were high profile acquisitions including Deutsche Bank’s sale of the Cosmopolitan in Las Vegas to Blackstone for over $1.7 billion and Northstar’s nearly $1 billion purchase of an 90% interest of about 50 select service properties from Cerberus; Chatham Lodging will continue to own the remaining 10% and manage the properties. In addition, Canadian developer Brookfield Asset Management recently announced that it had purchased Thayer Lodging for an undisclosed price. Thayer, led by Fred Malek and Lee Pillsbury, has been one of the premiere hotel developers over the past 25 years and owns several high profile assets including the Ritz-Carlton in San Francisco and Hilton Los Cabos. However, they are not selling their stake in Interstate Hotels, the largest independent management company, which is a joint venture with Jin Jiang from China. Thayer says that they will continue to run their hotel development and acquisition operations and this deal will give them access to capital in order to pursue more large scale projects.

 

While there are a few from New York and San Francisco on the list, it is notable that there are many Florida and Hawaiian resort properties there as well. Some other interesting ones include the venerable Brown Palace in Denver, the Raleigh hotel in Miami which was bought by an entity controlled by Tommy Hilfiger, and the Claremont in Berkeley, which was part of the portfolio controlled by Paulson that was sold to GIC last year in a bankruptcy sale. That hotel is now going to Fairmont. Pyramid was the manager of that property for the past six years and was able to generate significant increases in net operating income as well as managing project improvements which contributed to lift the value of the hotel.

 

 

 

Source: RCA Analytics

 

 

Public Company News

Financing, Mergers and Acquisitions, Executive Changes

 

  • Blackstone has completed its “Trifecta,” successfully launching La Quinta to follow up on its recent Hilton and Extended Stay America IPO’s. While none of these have been spectacular performers to date, they are all solid and should benefit from the continuing recovery in the industry.
  • Starwood announced the abrupt resignation of their CFO, Vasant Prabhu, who is taking a similar position at NBC Universal. They have appointed their #2 as an interim and are conducting a search for a permanent replacement.
  • Choice Hotels added Monte Koch to its Board. He is co founder/vice chairman of auctions.com
  • IHG named Lew Fader to replace Bob Morse as COO of the Americas
  • Ashford and Ashford Prime announced the retirement of their CFO, David Kimichik, who will be replaced by Deric Eubanks, currently senior VP of finance.
  • Eric Danziger, former Wyndham CEO (among his other industry credits) is now running Hampshire Hotels Management in New York, who operate several iconic hotels in Manhattan.
  • Chatham Lodging Trust avoided a proxy battle with HG Vora through 2015 by agreeing to certain terms regarding future dividend distributions and debt and equity issuance. As previously noted, they were involved in a transaction that flipped ownership of most of their portfolio
  • AirBnb said that it will not go forward on an IPO this year. They still value it at $10 billion, or roughly the same as Hyatt, despite not actually having any hotel properties or contracts. Company executives claim they already are well capitalized, but there has been increasing scrutiny of its operations by taxing and regulatory authorities, not to mention the vice squad
  • Ashford is continuing its reorganization, having officially filed with the SEC to spin off its advisory company, “Ashford Inc.” to go along with splitting their original REIT in two (Ashford and Ashford Prime, which has 10 upper-end properties). No near-term impact is expected, but investors will be closely watching performance
  • Strategic Hotels ended their proxy fight with activist investor Orange Capital by agreeing to appoint David Johnson (CEO of Aimbridge Hospitality) to its board. They also entered into a new $300MM secured credit facility (initially priced at L+200) placed by DB and JP Morgan, terminated its swap agreements, and redeemed some of its preferred convertible stock.
  • Morgans Hotel, however, is gearing up for an interesting annual stockholder’s meeting later this month, as dissident Kerrisdale Capital Management is still arguing about the direction of the company
  • InterContinental Hotels Group said shareholders will receive $750 million in a special dividend as a result of the company’s strongest RevPAR performance in the past seven quarters and a $394 million gain from the sale of the InterContinental Mark Hopkins San Francisco and an 80% share in the InterContinental New York Barclay.

 

Earnings

The table below summarizes Q1 2014 earnings reported by major public hospitality companies. In general, operating results were very strong, helped by improvements in group, some of which may be attributable to the Easter calendar shift, which would go the other way in Q2. Share buybacks are continuing to be executed by many of the major companies including Starwood, Marriott and Hyatt, which may indicate that new hotel acquisitions do not have as high a return potential, at least in the short term.

 

 

Company Release Date Reported EPS* Consensus EPS* Comments
Starwood 04/24/14 $0.63 $0.56 Solid quarter. Good trend in China as well as US. Look to continue asset disposition strategy. Guidance unchanged (5-7% RevPAR)
Marriott 04/29/14 $0.57 $0.51 Most of the beat was not clean- non recurring tax and depreciation adjustments accounted for a large part of the gain. Depreciation and A&G was also favorable, while fee income was below expectations. However, RevPAR guided upwards by 50 bp, and some encouraging news on F&B spend and development pipeline
Host Hotels 05/01/14 $0.33 $0.30 Solid operating performance driven by F&B (esp. group) and margin expansion. Outlook is stable, but not spectacular
Hilton 05/09/14 $0.13 $0.09 Strong quarter on all fronts- fees and timeshare up, overhead down, owned properties outside NY did well on improving margins. Guidance on RevPAR raised 50 bp to 5.5-7.0%
LaSalle 04/23/14 $0.32 $0.30 NY and DC exposure weighed on Q1 RevPAR. Outlook is positive for existing portfolio, but acquisition opportunities appear limited.
Hersha 05/01/14 $0.06 $0.04 Beat was due to insurance recoveries. Weak NY market still weighed, but comparisons should be easier going forward. Recent Key West acquisition raised some eyebrows- may be an overreach
Choice 04/28/14 $0.32 $0.29 Stronger RevPAR (5.6% for quarter, raised guidance to 4.5-5.5% for balance of year) offset by lower unit growth. Still struggling with tech roll out.
Hyatt 04/30/14 $0.13 $0.12 Despite narrow numbers on EPS, quarter was actually very strong, with solid beats on RevPAR and margins on owned/operated. Group was strong in the quarter. Continuing to recycle capital by selling older properties.
Wyndham 04/24/14 $0.78 $0.75 On balance, close to expectations, and a clear improvement since last quarter’s disappointing results. Relatively strong domestic RevPAR; time share a mixed bag; corporate expenses higher than expected.
Pebblebrook 04/24/14 $0.26 $0.23 Solid beat as concentration in SF area boosts RevPAR. NY area should improve. Possibly looking at recycling capital to fund further West Coast acquisitions.
Chesapeake 04/30/14 $0.25 $0.21 Modest increase in guidance. Completion of major renovation projects will enhance EBITDA, but no acquisition activity on the horizon. Mixed view from analysts on sustainability of relatively high multiple, which could inhibit share price growth.

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

Stock prices

So far this year, the markets have been relatively stable, with the major indices narrowly mixed. Most of the hotel REIT’s have done fairly well over the past few months as investors are attracted by their relatively high yields. Many of these are trading close to 52 week highs. The C-corps are a mixed bag, with Hyatt and Marriott trading up based on strong earnings and stock buybacks, while Hilton continues to trade flat and Starwood has given up its recent gains. Choice has continued to underperform its peers.

 

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

05/16/14

Change

Since

3/31/14

Change Since

12/31/13

Marriot International C-Corp Upper Upscale,Luxury, Resorts

$57.88

3.3%

17.3%

Starwood Hotels C-Corp Upper Upscale, Luxury

77.01

(3.3%)

(3.1%)

Choice C-Corp Limited Service

44.10

(4.1%)

(10.2%)

Hilton C-Corp All except economy

21.70

(2.4%)

(2.5%)

Hyatt C-Corp Upper Upscale

57.37

6.6%

16.0%

Host Hotels REIT Upper Upscale, Luxury

21.59

6.7%

11.1%

La Salle REIT Urban boutique, Upper Upscale

31.93

2.0%

3.5%

Diamondrock REIT Upper Upscale, Luxury, Urban Limited Service

11.82

0.6%

2.3%

RLJ REIT Limited Service with some Upper Upscale

27.09

0.4%

11.4%

Sunstone REIT Upper Upscale

14.03

2.2%

4.7%

Strategic REIT Upper Upscale, Luxury

10.63

4.3%

12.5%

Pebblebrook REIT Upper Upscale, Luxury

34.29

1.5%

11.5%

Hersha REIT Urban Limited Service

6.01

3.1%

7.9%

Chesapeake REIT Upper Upscale

27.96

8.7%

10.6%

Hospitality PropertiesTrust REIT Limited Service

29.07

1.2%

7.5%

Dow Jones Industrial (comparison)

16443.54

0.7%

(0.8%)

Nasdaq Composite (comparison)

4070.17

(3.1%)

(2.5%)

S&P 500 (comparison)

1871.77

(0.0%)

1.3%

 

Source: Yahoo! Finance

 

Other News and Trends in Brief

  • New 600 room Omni hotel and  convention center proposed for Louisville KY
  • Sahara group reportedly received offers to buy the Plaza and other hotel assets, by groups trying to capitalize on the company’s troubled situation (founder in jail, among other things).
  • Inland America announced that they were absorbing their management entity to become self-advised, possibly in a move towards an eventual IPO.
  • Thomas Bravo to acquire Travel Click for $930MM

 

US Economy General Statistics

The economy saw some weather-related hiccups during the first quarter, but most indicators are stable and some improvement has been noted, especially in the employment picture. Consumers continue to be cautious and inflation is picking up in certain areas.

 

 

Measure

Period

Value/Trends
GDP Q1 2014 The preliminary figure for Q1 was a dismal 0.1%, which was blamed primarily on the weather in the Northeast. Q4’s rate was revised down from 3.2% growth rate to 2.6%. Ironically, increased health care spending lifted GDP into positive territory. Construction, durable goods purchases and inventories were all negative for the quarter. Most of the income growth was attributable to an increase in government transfer payments.
ConsumerConfidence Apr/May-14 The Conference Board’s consumer confidence index fell slightly in April, after bumping up in March to the highest levels since early 2009. Both short- and mid-term outlooks were essentially stable in terms of employment prospects and the overall perception of economic growth. The University of Michigan’s index dropped in May after increasing in April to the highest level in over a year, but the overall trend is still up. The UM index correlates very strongly with the GDP
Employment Apr-14 One of the best months so far during the recovery. 288K jobs were added, and the unemployment rate dropped to 6.3%. Additionally, job creation numbers for the previous two months were revised upwards, and these gains are across the board in all industry segments. However, hours worked and hourly wages were little changed, and there is still a disturbing shrinkage in the labor force, which accounts for most of the drop in the UE rate.
CPI Apr-14 The CPI-U increased 0.5% in April and is up 2.0% on an annual basis, which is the largest increase since last July. Food, particularly meat, gasoline and shelter were the categories with the biggest gains; medical care, airline tickets and new vehicle prices were also up.  Electricity and fuel oil declined while other items were largely stable.
Retail Sales Apr-14 Retail sales were up 0.1% for the month and 4.0% above year ago levels. February and March numbers were revised slightly upwards; the year to date increase has been 3.0%. The primary drivers continue to be on-line retailers (up 6.0%), but sales of automobiles and health/personal care products were also strong. Department stores and retailers of books, music and sporting goods/hobbies are the ones being most affected by the trend towards on-line purchases.
Housing Feb/Mar/ Apr-14 The Case-Schiller index continues to show double digit year-over-year price increases in most major markets, led by Las Vegas, San Francisco, San Diego and LA with increases in the 20% range, while Cleveland, New York (!) and Charlotte lagged, only up 3 to 6%. New home sales, however, continue to be down significantly, off 13% in March. Sales of existing homes are also down compared to last year. Again, this is mainly due to a lack of inventory, which is expected to pick up as the weather gets warmer. This is borne out by strong housing starts and building permit data for April, showing 13% and 8% increases respectively over March on a seasonally adjusted basis. Housing completions were up over 21% since April 2013. Higher interest rates (30 year mortgages are about 80 bp higher than 2013) and tighter credit standards are definitely factors here as well.

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


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