Industry Update: Fall 2015

November 18, 2015

Summary of Key Performance Indicators

There is no question that the month of August, with a dismal 2.2% RevPAR growth, was a wake-up call for the industry. August was the first month to show a drop in year-over-year demand since September 2012, which in turn was the only other month since late 2009 to be negative. While most “insider” analysts, including STR, were quick to dismiss this as a calendar shift effect due to the lateness of Labor Day, Wall Street was seriously spooked. Fortunately, September bounced back with a solid 8% RevPAR gain, and October came in around 6%, which is below the pace set during the first half of the year but is still respectable. Furthermore, we have not seen any evidence of a slowdown from equity investors, developers, lenders and other capital providers who keep on shoveling money into the space.

There were not a lot of changes in the regional and product mix trends. The midscale and economy segments continue to outperform on RevPAR, while upper upscale and luxury are still bogged down by the slow recovery in business group travel. LA had the best third quarter performance among the major markets, and has consistently been in the top 3 all year along with Boston and San Francisco. Phoenix continues to be the overall leader with 14% YTD RevPAR growth, with Tampa and Nashville also showing strong growth throughout the year, as have San Diego and Atlanta. New York and Houston continue to bring up the bottom, although the Big Apple looks like they have finally turned the corner into positive RevPAR territory during the second half of the year. St. Louis, New Orleans, Detroit and Philadelphia are also lagging. Miami and Denver have softened in recent weeks, while Washington, Dallas and Minneapolis have been improving. Airport, Suburban and Resort locations have performed above average, while urban and highway properties have lagged, the former largely driven by New York.

Q 4 2015 (thru 11/07/15)

Q3 2015

2015 Year to Date

ADR

Occ.

RevPAR

ADR

Occ.

RevPAR

ADR

Occ.

RevPAR

Industry Total

4.5%

1.1%

5.7%

4.5%

1.4%

5.9%

4.6%

1.9%

6.6%

Luxury

2.4%

1.5%

4.0%

3.6%

0.7%

4.4%

4.5%

0.7%

5.2%

Upper Upscale

4.2%

1.6%

5.9%

3.6%

0.4%

4.0%

4.3%

0.8%

5.2%

Upscale

5.1%

0.2%

5.4%

5.2%

0.5%

5.7%

5.2%

0.8%

6.1%

Economy

4.8%

0.0%

4.8%

5.0%

1.0%

6.0%

5.2%

1.6%

6.9%

Resort

3.0%

2.5%

5.6%

5.2%

3.5%

8.7%

4.7%

3.0%

7.8%

Key Markets

NY

(0.3%)

0.8%

0.5%

0.2%

0.3%

0.6%

(1.3%)

0.0%

(1.3%)

Boston

7.2%

2.3%

10.1%

7.4%

(0.3%)

7.1%

7.0%

1.7%

8.9%

DC

4.8%

3.3%

8.5%

(0.1%)

0.4%

0.3%

3.7%

2.8%

6.6%

Chicago

2.6%

(0.5%)

2.5%

5.3%

(0.1%)

5.1%

6.5%

1.4%

8.1%

SF

10.2%

0.3%

10.8%

6.5%

(0.9%)

5.5%

8.5%

0.6%

9.2%

LA

6.9%

1.8%

8.8%

9.6%

1.4%

11.1%

7.8%

1.1%

8.9%

Source: STR, Inc., Raymond James, Sun Trust Robinson Humphries

The big winner among the upper-end brands last quarter was Hilton, as they achieved nearly 6% domestic RevPAR growth compared to about 4% for Starwood and Marriott. Hyatt also got close to 6% domestically, but that got dragged down to2% after currency adjustments affected their international operations. Wyndham also had a dichotomy with US results up 5% and system-wide RevPAR up only 3%overall. Choice continues to chug along at a solid 6% on its stable of midprice and economy brands. Among the smaller, lower end brands, Red Lion came in at 11% for the second consecutive quarter, while Extended Stay America posted a6.5% RevPAR growth and La Quinta registered a disappointing 2% mark due to a drop off in occupancy. This is typical at this point in the cycle, when travelers will trade up rather than staying in older, unrenovated products. As will be discussed below, most of the public companies have continued to trim their RevPAR guidance going forward, as their visibility on group bookings and other trends does not warrant undue optimism at this time.

Brand Detail

# Properties

Q3 2015

Rolling 4 Quarters

ADR

Occ

RevPAR

ADR

Occ

RevPAR

Luxury

Ritz-Carlton (Marriott)

72

3.6%

(0.3%)

3.3%

3.6%

(0.9%)

3.3%

Waldorf Astoria (Hilton)

12

1.5%

7.3%

8.8%

(1.4%)

9.0%

6.6%

St Regis/Lux Coll (Starwood)

27

2.7%

(1.0%)

1.7%

4.2%

0.2%

4.4%

W (Starwood)

25

1.3%

1.4%

2.8%

2.5%

1.6%

4.2%

Upper Upscale

Marriott (Marriott)

366

3.5%

0.8%

4.4%

4.5%

0.6%

5.1%

Hilton (Hilton)

238

4.3%

2.2%

6.5%

3.2%

2.5%

5.8%

Sheraton (Starwood)

195

2.2%

1.7%

4.0%

2.6%

1.5%

4.1%

Westin (Starwood)

122

2.1%

1.6%

3.7%

3.0%

2.0%

4.9%

Hyatt Regency (Hyatt)

155

0.6%

1.3%

1.9%

3.3%

1.4%

4.6%

Upscale

Doubletree (Hilton)

308

4.7%

1.3%

6.0%

4.6%

2.2%

6.8%

Courtyard (Marriott)

907

5.0%

(0.1%)

4.9%

5.6%

2.0%

7.5%

Four Points (Starwood)

119

(0.6%)

1.5%

1.0%

0.8%

2.3%

2.8%

Upper Midscale

Hampton Inn (Hilton)

1,960

3.6%

1.4%

5.1%

3.7%

2.9%

6.4%

Fairfield (Marriott)

749

4.3%

(0.4%)

3.8%

4.6%

1.4%

5.7%

Midscale

Ramada (Wyndham)

838

(6.2%)

0.9%

(5.3%)

(5.0%)

0.4%

(4.6%)

La Quinta (La Quinta)

884

4.0%

(2.0%)

2.0%

3.6%

1.7%

5.6%

Quality Inns (Choice)

1,325

4.9%

3.2%

8.2%

4.8%

5.0%

9.2%

Economy

Day’s Inn (Wyndham)

1,785

0.9%

0.7%

1.6%

3.5%

0.4%

3.3%

Econo Lodge (Choice)

854

3.2%

1.9%

5.2%

3.9%

5.1%

8.2%

Knights Inn (Wyndham)

383

5.0%

(2.0%)

3.0%

4.0%

2.8%

6.4%

Super 8 (Wyndham)

2,600

(4.8%)

2.8%

(2.2%)

(1.3%)

1.7%

0.0%

Source: Company earnings releases, 10-Q and 10-K SEC filings

Outlook

The “big three” are starting to let the air out of their 2015-16 forecasts, especially on ADR, where Airbnb, OTA’s and corporate price resistance have acted to temper the pace of price increases. Occupancy has not been affected as much, as supply projections have actually been reduced slightly across the board, and as previously has been stated, new construction is more of a localized than a national issue at this time.

STR’s forecast for 2015, which was last updated in early October, showed a slight (10 bp) reduction in each of supply and demand, but they trimmed ADR from 5.1% to 4.8%, resulting in a 30 bp reduction in RevPAR. Their 2016 forecast showed a slight uptick in both supply and demand, leaving occupancy unchanged, and projected similar reductions in ADR and RevPAR.

PWC’s latest forecast, released on November 11,reduced the 2015 occupancy projections by 10 bp despite a reduction of 20 bp in supply, as they lowered demand. ADR was reduced by 30 bp, resulting in a reduction of RevPAR from 7.0% to 6.5%. Their 2016 numbers followed a similar pattern, and they are now showing flat occupancy (vs. 0.1%) and a 40 bp cut in RevPAR.

PKF, who has historically been the most bullish, pared their 2015 demand growth and occupancy down by 0.1%, while holding steady on ADR. Their 2016 estimate was little changed, only dropping 10 bp on occupancy due to rounding. However, theirs was the earliest of this round of updates(released in early September), so it is likely they will pull back a little when their next forecasts are released in early December.

2015

2016

STR

PKF

PWC

STR

PKF

PWC

Supply

1.2%

1.1%

1.1%

1.5%

1.8%

1.9%

Demand

2.9%

3.3%

2.9%

2.3%

2.2%

1.9%

Occupancy

1.7%

2.2%

1.8%

0.8%

0.4%

0.0%

ADR

5.1%

5.0%

4.7%

4.8%

5.9%

5.7%

RevPAR

6.8%

7.2%

6.5%

5.7%

6.3%

5.7%

At last month’s Lodging Conference in Phoenix, the usual optimism prevailed. The August dip was a hot topic, as evidenced by this slide from STR’s presentation:

image001

However, it was understood that there was a growing perception from outside the industry that the cycle is peaking, although most commentators are still predicting relatively good times ahead for the next few years (for example, PKF is showing4% to 5% RevPAR growth through 2018). There are still no immediate threats from macroeconomic forces including oversupply, national or global economic conditions and energy issues. Some concerns have been highlighted regarding alternate channels like Airbnb and increasing consolidation in the OTA area, as well as impacts from changing labor laws and the fragmentation of the marketplace by the proliferation of new “lifestyle” brands, but there are strategies in place to deal with these.

Transactions

Transaction activity over the past few months was dominated by the sale of the Strategic REIT portfolio to Blackstone, which included several Four Seasons and Ritz-Carlton properties in the $1 million per key range, led by the Essex House on Central Park in New York which went for nearly $1.5 million per room. The largest single asset in that group, however, was the Westin St. Francis in San Francisco, which sold for almost $1.1 billion, or about $900K per room.

Public REIT’s were again noticeably absent from this list as their cost of capital is not competitive with the private equity funds. Foreign buyers continue to turn up in the gateway markets, most notably the Korean group Lotte, who completed the purchase of the New York Palace for $805 million, and another Korean firm, Mirae, who is reportedly buying the San Francisco Fairmont. A Chinese investor bought the a Marriott in Washington DC for over $100 million, and Singapore-based Ascott bought the newly-constructed Element extended stay hotel in Times Square for almost $400K per key. We were quoted in a recent Boston Globe article about possible purchasers for the Mandarin Oriental hotel there, which is for sale because its owner, Anglo Irish Bank was forced to declare bankruptcy and wants to liquidate some of its assets while the market is still strong.

Activity  also continues to pick up in the next tier of markets, with large hotels in  Denver, Portland and Austin being sold, as well as several in Silicon Valley.


image002

Public Company News

The most recent quarter saw a large number of guidance reductions for the rest of this year, although the 2016 outlook remained relatively positive. Some short-term issues affected a couple of the companies, but as will be evident in the discussion of stock prices, most of the negativity was already factored in, and share prices generally have recovered along with the rest of the market over the past few weeks.

 Results are summarized as follows:

Company

Release Date

Reported EPS*

Consensus EPS*

Comments

Starwood

10/28/15

$0.74

$0.72

More interest in buyout rumors (see below) than actual results. Timeshare unit has been spun off to Interval International. Continue to guide towards 4% – 6% RevPAR for 2016 excluding Forex impact. Asset sales continue, most notably one in Rome Italy

Marriott

10/28/15

$0.78

$0.74

Earnings beat driven by soft items like G&A. Reduced guidance for Q4 2015 by 100 bps to 4% to 6% RevPAR, which they think is also the range for 2016. They increased their share buyback this quarter. Performance characterized as “good but not great,” and most analysts do not have a compelling reason to recommend purchase

Host Hotels

10/29/15

$0.34

$0.32

Incrementally positive operating results. They are re-aligning their portfolio to dump some international hotels and also some suburban US ones, but outside of share buybacks, not clear what they are going to do with the cash. They have also converted from brand management to third party management on hotels in Indianapolis and Chicago, recognizing the favorable economics of this strategy

Hilton

10/28/15

$0.23

$0.23

Relatively strong quarter; earnings were dragged down by taxes but top line fees and G&A were favorable. Other positives were continued deleveraging of their balance sheet (debt has been reduced by $850MM YTD) and having the largest pipeline in the industry which will contribute to future fee growth. They dropped high end of Q4 guidance from 7% to 6.5% and initiated 2016 RevPAR guidance at 4% – 6%

LaSalle

10/22/15

$0.87

$0.89

Their excuse for missing earnings was that they had to take rooms out of service at two NYC hotels due to union health & safety allegations, which will also affect Q4 earnings. They lowered RevPAR guidance by 150 bps. They still have concentration issues in markets like New York and their booking trends are not picking up. This one looks like a good candidate for consolidation

Pebblebrook

10/22/15

$0.83

$0.82

They have lowered their Q4 outlook, citing slower growth in San Francisco and softness in business transient booking throughout their system. Their premium pricing above other REIT’s seems to be evaporating, as they are starting to lose favor among analysts, although they just announced they are planning a $100 million private placement of equity directly to institutional investors

Hersha

10/28/15

$0.67

$0.65

Slight beat despite 45% of assets in NYC, which showed stronger than expected top line but only modest margin expansion. One of the few REIT’s currently buying- two northern CA properties being acquired under favorable terms

Choice

10/30/15

$0.72

$0.72

Not much changing here. Risks remain due to increasing competition in midscale space from new Hilton and Marriott entrants. One analyst (Baird) has stopped covering them, which is another indication that this is a snoozer despite new advertising and steady RevPAR performance

Company

Release Date

Reported EPS*

Consensus EPS*

Comments

Sunstone

10/29/15

$0.36

$0.35

Property performance in line, earnings beat driven by lower G&A, which (like most REIT’s) was affected by lower performance-based bonus payouts. Generally has positive outlook for 2016 with strong group bookings. They are expected to be net sellers, dumping some mature non-core assets. Not clear what is driving their relatively strong recent stock performance; no buyout rumors have been noted but on the surface they would be a good candidate for consolidation

Hyatt

11/03/15

$0.30

$0.25

Solid quarter. As noted above, RevPAR was pretty good (before Forex), and they continue to aggressively repurchase shares. They were one of the players in the Starwood sweepstakes, as they are sitting on a lot of cash and are relatively underlevered

Wyndham

10/27/15

$1.78

$1.69

Again, this is perceived as a time share company, not a hotel company despite the fact that they franchise more hotels than just about anyone. Hotel performance was below expectations, but time share was good this quarter with increased tour volume, and they even threw the analysts a bone with higher loan loss provisions to negate allegations of “cookie jar accounting.” Because they are so asset-light, this company has the best free cash flow of anyone in the industry

Chesapeake

11/02/15

$0.73

$0.73

In line quarter. Trimmed Q4 RevPAR by 50 bps. Despite favorable group outlook for 2016, most analysts have reduced their price target on this one

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

In other public company news:

  • The big deal, of course is the announcement that Marriott is acquiring Starwood in a stock and cash deal. The details and implications of this transaction are highlighted in a separate article, below.

 

  • In conjunction with this transaction, Starwood sold off their vacation ownership to Interval International, and it would not be surprising to see Hilton do the same. Marriott shed their unit a few years ago, so the only “Lodging” company to still be a major player in this industry is Wyndham, who actually acts more like a time share company than a lodging company. This is one of those industries that does very well during good times, but is one of the first to go down the tubes when the economy tanks, especially in a high interest rate environment.

 

  • As reported by Bloomberg and others, Hotel REITs look ripe for M&A as private equity groups close on new funds. Just this week (Oct 2), Blackstone and KSL Capital Partners had final closings for their latest funds with committed capital of $15.8 billion and $2.7billion, respectively. Blackstone Real Estate Partners VIII has already been investing and has targeted publicly traded REITs, including its announced acquisition of Strategic Hotels & Resorts. Recently, Jon Gray commented on today’s discounted public market valuations, noting, “There’s a disconnect, and that creates opportunity.” Additionally, he maintained his bullish view on lodging fundamentals saying, “The U.S. lodging cycle still has room to run.”KSL Capital Partners IV will focus its investments exclusively in the travel and leisure sector globally. With hotel REITs trading at approximately 20%discounts to NAVs and fundamentals still on solid footing, we see M&A on the horizon as PE funds, particularly hospitality-focused ones, look to deploy dry powder and capitalize on today’s discounted public market valuation.

 

  • Apollo has called off its deal to buy out non-traded REIT giant American Realty Capital, but it still may acquire their brokerage network. ARC, which owns $19 billion of hotels, office buildings and other assets in a variety of funds, started floundering earlier this year when accounting irregularities were uncovered, throwing suspicion onto its principal, Nicholas Schorsch. The ongoing investigation was cited as one of the possible reasons for the breakup. Schorsch and his chief lieutenants would have been able to walk away with a big chunk of cash and Apollo stock had the deal gone forward. There was also an accusation, made by the Massachusetts Secretary of State, that ARC rigged the proxy voting to amend their corporate charters to permit the acquisition. Non traded REIT’s, although controversial because of their lack of liquidity and transparency, have had some successes, particularly in relatively stable products like net leased office and medical buildings, but they have always been marginal players in hospitality, and this may be the final straw

Stock Prices

HotelC-Corp stock prices are up about 12% since September 30, but this only makes up for the losses that they suffered during the tumultuous months of August and September. They are still down marginally for the year, especially Hyatt, while the broad market indices have been flat on balance and the tech-heavy NASDAQ is up 7.5%.

REIT’s,however, are still well off the pace, despite a bit of a comeback in recent weeks. They are down about 23% year to date, but at least are now about 6% off their lows which were mostly hit in late September. This is all about interest rates and relative yields- REIT’s have a high risk compared to bonds and other investments during rising rate climates, and it also impacts their cost of capital. As REIT’s cannot readily issue new shares in this environment, they can only raise funds to acquire new properties by selling assets, which they are doing, but they are instead using the proceeds to buy back their stock because they can’t compete with private equity funds who are able to put more leverage on their investments. Other REIT asset classes are also affected by these factors, not just hotels.

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

Company

Type

Primary Segment (s)

Price as of

11/11/15

Change since 09/30/15

Change since 12/31/14

Marriott International

C-Corp

Upper Upscale,

Luxury, Resorts

$76.04

11.5%

(2.6%)

Starwood Hotels

C-Corp

Upper Upscale, Luxury

76.86

15.7%

(5.2%)

Choice

C-Corp

Limited Service

53.47

12.2%

(4.6%)

Wyndham

C-Corp

Ltd Service, timeshare

81.17

12.9%

(5.4%)

Hilton

C-Corp

All except economy

25.76

12.3%

(1.3%)

Hyatt

C-Corp

Upper Upscale

51.27

8.9%

(14.8%)

Host Hotels

REIT

Upper Upscale, Luxury

17.31

9.5%

(27.2%)

La Salle

REIT

Urban boutique, Upper Upscale

29.85

5.1%

(26.2%)

Diamondrock

REIT

Upper Upscale, Luxury, Urban Limited Service

11.45

3.6%

(23.0%)

RLJ

REIT

Limited Service with some Upper Upscale

25.49

0.9%

(24.0%)

Sunstone

REIT

Upper Upscale

14.59

10.3%

(11.6%)

Pebblebrook

REIT

Upper Upscale, Luxury

34.72

(2.1%)

(23.9%)

Hersha*

REIT

Urban Limited Service

24.83

9.6%

(11.7%)

Chesapeake

REIT

Upper Upscale

28.31

8.6%

(23.9%)

Hospitality Properties Trust

REIT

Limited Service

27.27

6.6%

(12.0%)

Company

Type

Primary Segment (s)

Price as of

11/11/15

Change since 09/30/15

Change since 12/31/14

C-Corp Weighted Average

45.41

12.4%

(4.3%)

REIT Weighted Average

19.90

6.6%

(19.6%)

Overall Hotel Stock Average

32.70

10.5%

(7.4%)

Dow Jones Industrial

(comparison)

17749.92

9.0%

(0.4%)

Nasdaq Composite

(comparison)

5090.25

10.2%

7.5%

S&P 500

(comparison)

2080.53

8.4%

1.1%

*Note Hersha 1 for 4 reverse split on 6/23/15. Source: Yahoo! Finance

Other News and Trends in Brief

  • Airbnb continues to make headlines. In San Francisco, a ballot initiative that would have put some modest additional regulations on prospective renters failed by a 55%-45%margin, which was not totally unexpected. Of more concern was a study that claimed that Airbnb had a $2 billion + impact on the New York City hotel market, but some analysts take this figure with a grain of salt. There is no doubt, however, that Airbnb kept a lid on hotel prices in Philadelphia during the Pope’s recent visit, and they have now replaced on line travel agencies (OTA’s) as the number one boogey man for hotel operators. Some have even seriously suggesting prosecuting them under the RICO statues for deliberately ignoring regulatory
    laws.

 

  • In addition to  the Pope, there are several other individuals who can move the market,
    including Taylor Swift, who was credited with creating a 34% occupancy increase
    and a 62% RevPAR increase during her performance in Tampa on Halloween.

 

  • Among the new brands that have popped up over the past few months is an offering from Best Western called “GLo,” which on the surface does not really seem that much different than their other unusually-spelled brand, “Vib,” and it will certainly face competition from offerings such as Marriott’s Moxy and Hilton’s Canopy and other new midscale brands, not to mention Aloft, Kimpton and a host of others, which really begs the question of “why?” David Kong, Best Western’s CEO (who happens to be the longest-tenured CEO of any of the brands, as shown below) answered by saying “There was a huge void in the marketplace among the boutique and lifestyle brands. There is nothing in the midscale segment. Also, if you look at the prototypes from the leading brands, they tend to look the same, which can be a bit boring. We are not taking a cookie-cutter approach with the brand. Instead, this is an unusual and very different product that what is out there today. People want something that is affordable, chic and exciting. I think we will get a lot of traction, possibly even faster than Vib.” We wish them success, but this is a perfect illustration of someone seeing a niche and everyone else piling in behind.

 

  • (as reported by David Loeb from Baird & Co.) A crushing blow was dealt to the adult video industry. Earlier this week, Hilton announced that it will no longer provide on-demand adult videos in hotel rooms worldwide effective July 1, 2016. Marriott was the first to make this move when it banned on-demand adult movies in its rooms in2011. The National Center on Sexual Exploitation (NCSE), an activist group, applauded the effort and removed Hilton from its an annual “Dirty Dozen” list of companies that contribute to “sexual exploitations,” which includes companies such as YouTube and Cosmopolitan. Hilton stated “adult video-on-demand entertainment is not in keeping with our company’s vision and goals moving forward.” We would assume that significantly reduced revenues from these channels over the years also played a role in the decision to eliminate the on-demand video offering. On an unrelated note, Hilton’s Wi-Fi policy remains unchanged; they, along with Marriott have been sued by individuals and wireless providers claiming that their services were deliberately blocked.

 

  •  Musical CEO’s. As detailed in this link, many hotel CEO’s have been at their current positions  for only 3 years or less, with no one being there over 10 years.

 

  • Several New York soap operas are continuing to play out, including the Plaza Hotel, where it now looks like the Indian Government may seize the property and sell it (along with several other high profile properties) to the highest bidder to cover owner Subrata Roy’s billion dollar plus bail. Roy has applied for an extension, but time is running out. Also, the Morgan’s saga has taken another twist, as its largest shareholder, Jason Kalishman, opposed the merger with SBE group. Two large hotels (the Hudson in New York and the Delano in Miami Beach), valued at$590 million, are also back in play.

 

  • Finally, the National Labor Relations Board has proposed what may be a far-reaching ruling that may have a significant effect on the industry. They want to allow labor organizers to force local franchisees to follow the practices of the parent companies, rather than acting as independent employers. Although targeted at McDonalds and other fast-food companies, hotels are clearly covered by this as well, and the industry’s lobbying arm, the American Hotel & Lodging Association, is organizing a challenge to this proposal.

Special Feature: Marriott-Starwood Deal

On November 16, an unexpected development occurred in the Starwood acquisition. While most observers expected either a Chinese management company or (more likely) Hyatt to be the buyer, Marriott announced that they had made a deal to
acquire the company. The deal was unanimously approved by both boards, but they still need shareholder approval and to clear various other regulatory hurdles and change of control provisions. The key deal terms are as follows:

 The combined company will be the largest hotel company in the world with approximately 5,500 properties and 1.1 million rooms.

  • It will have a total of 30 brands (see below)
  • The total deal is valued at  approximately $12 billion, which would make it one of the biggest deals even in the lodging space, probably second only to Blackstone’s taking Hilton private back in 2007 which was worth $26 billion
  •  Each Starwood shareholder would get 0.92 shares of Marriott stock, plus $2.00 in cash, for a total value $72.08, as calculated using Marriott’s volume weighted average stock price (VWAP) through November 13.
  • In addition, Starwood would go through with the previously announced sale of its timeshare business to Interval International, which will give shareholders an additional $7.80 based on Interval’s VWAP
  • The value of the total package results in just a small premium above Starwood’s recent $75 to $77 trading range.
  • Deal is expected to close in mid 2016
  • An estimated $100 to $150 million of one-time transaction costs would be incurred
  • Should Starwood find another bidder, or the deal failed to close, there would be a $400 million breakup fee payable to Marriot
  • Arne Sorenson, Marriott’s current CEO will remain CEO of the combined operation, and 3 Starwood directors will be added to Marriott’s board, bringing the membership up to 14
  • The deal is expected to be accretive to Marriott by the second year

Other implications of the deal include

  • Anti-trust is not believed to be an issue, as the combined company still would have less than a 15% market share, comparable to Hilton, and there are obviously many other competitors
  • It is expected that Starwood would continue to sell its hotel real estate assets, which could generate up to $2 billion of proceeds over the next two years
  • As is often the case in M&A, there are already rumblings from stockholders who feel that their shares were undervalued, but most of the Wall Street analysts think that the price was fair in light of Starwood’s recent difficulties, especially in getting traction for the Sheraton brand
  • Combining the loyalty programs will be interesting. Marriott has far more members, but Starwood Preferred guests generally expect more perks. They also tend to spend better on F&B and other upgrades when they redeem their points
  • Integrating the corporate cultures may be even more of a challenge, as Marriott tends to be a little more “buttoned down” than Starwood. Not quite as extreme as if, say, IBM bought Google, but speaking from experience with similar (albeit somewhat smaller) deals, there will definitely be an “us and them” situation going on for a while. There will also obviously be some consolidation of home office functions, so the City of Stamford CT may be feeling some heat for their recent decision to grant Starwood incentives for relocating their headquarters there
  • This deal may create more incentive for the next tier of brand companies to combine in order to compete effectively. Hyatt and IHG have been mentioned in this regard
  • Finally, the key is how the brands will overlap or be complimentary. The lineup of all 30 brands looks like this(note, some of these do not presently operate in the US):
    • Luxury: Ritz-Carlton, JW Marriott, Bulgari African Pride, Edition, St. Regis, Luxury Collection, W
    • Upper Upscale: Marriott, Renaissance, Autograph, Gaylord, Westin, Le Meridien, Sheraton, Delta, Tribute
    • Upscale: Courtyard, Residence Inn, AC, Spring Hill Four Points, Aloft, Element
    • Upper Midscale: Fairfield, Towne Place, Protea
    • Midscale: None
    • Economy: Moxy
    • Other: Marriott Executive Apartments, Marriott Vacation Club
  • In addition to causing possible consumer confusion, this creates some issues for operators and developers, as there is now less competition in brand selection, which may cause a reduction in key money and other incentives to switch brands, in addition to possibly tightening of PIP’s. There may also be issues with STAR reports, as they restrict how many hotels in a comp set can be part of the same brand family

US Economy General Statistics

An erratic mix of numbers has characterized the economy over the past few months. The first read on Q3 GDP was disappointing, but the October jobs report was better than expected, which may be the last piece to fall in place to support an interest rate increase in December. Housing is steady, and retail sales are OK, but confidence has been rattled by market volatility. Inflation is lurking out there but has been masked by declining gasoline prices.

Measure

Period

Value/Trends

GDP

Q3 2015

GDP growth was reported to be 1.5% for the third quarter, which was lower than expected, but the second quarter figure was raised up to 3.9%. Pretty much all sectors shared in the deceleration, including personal consumption, government spending and fixed investment, although imports were down. An update will be coming out later in November which may provide more clarity on the direction of the overall economy, which has certainly been very volatile over the past few quarters

Consumer

Confidence

October 2015

The University of Michigan’s consumer sentiment was 90.0, rebounding from September’s 87.2. Interestingly enough, the October gain came from lower income households, while upper income families actually lost confidence due to stock market concerns. Echoing this, the Conference Board’s index dropped from 102.6 in September to 97.6 in October, with subdued expectations about the job market and likelihood of further economic strengthening

Employment

October 2015

Job creation was a relatively robust 271K in October, leaving the unemployment rate unchanged at 5.0%. Small upward revisions were also made to the August and September figures. Leading industries in October included healthcare, retail, food service and construction, while except for mining (which continued its downward trend), employment in all other sectors, including manufacturing remained relatively unchanged

Interest Rates

November 2015

As of November 12, rates for 3 month, 5 year and 10 year US Treasuries were at 0.11%, 1.70% and 2.31%. respectively. Rates are up all along the curve, by as much as 40 bp since last month, mostly in anticipation of the long-awaited Fed move, which now seems more and more likely to occur in December. An interesting side effect is the slump of gold prices, which are down to about $1,100 per ounce, which is close to the 5 year low

Foreign Exchange

November 2015

Rates are currently about $1.08 per Euro, $1.52 per Pound, 123 Yen and 1.33 Canadian per dollar; currencies have traded in a narrow range over the past few months, but rising US interest rates could lead to another sell off. Of all the currencies listed above, the Canadian dollar has been the weakest so far this year

CPI

September 2015

Prices fell in September by 0.2%, and the CPI is essentially unchanged over the year-ago period, which had the immediate effect of freezing all Social Security and other COLA indexed items. Again, the main driver was gasoline prices, down 9% for the month and nearly 30% for the year. Food, however, continues to go up, rising 0.4% in September and 1.6% on the year. Housing and medical services also showed relatively large (> 2%) increases year-over-year, but were relatively flat for the month

Retail Sales

September 2015

Retail sales in September were up 1.0% from August and were up 2.4% vs. last year.  Big gainers on the year have been automobiles (up 8.8%) and restaurants (up 7.9%), while gas station sales dropped 20%, reflecting the price reductions noted above. On-line and other “non store” retailers actually dropped 0.2% in August, but were still ahead 5.7% since last year. Other segments continued their recent trends, with electronic/appliance stores down almost 6% since last year, with most others up in the 2% to 5% range

Housing

August-September 2015

Widespread gains in home prices for August were reported by Case-Shiller, with the national average up 4.7% and higher gains in certain large markets including San Francisco, Denver and Portland. Phoenix now has the longest streak, at nine consecutive years of annual gains. Other indicators including housing starts and resales are also strong, although September new home sales dropped sharply possibly due to low inventories. Mortgage rates continue to be stable, actually dropping by about 20 bp (to sub 4%) over the last two months

 Sources: National Bureau of Economic Research; various government agencies including US Department of Commerce and Federal Reserve Board

Inside Pyramid

Pyramid has had a very active few months, highlighted by its acquisition of the management assets of Winegardner and Hammons Inc. (WHI), a long established Cincinnati-based operator with a portfolio of 17 hotels, mostly full service Marriott products in the Midwest. WHI also has several development projects in the pipeline. Pyramid also took over management at the Radisson Hotel in Manchester NH, the Hilton Boston-Woburn MA, Sunshine Suites on Grand Cayman Island, and the Dahlman Campus Inn in Ann Arbor Michigan. Pyramid also signed a contract to operate a Residence Inn in downtown Hartford CT, with transition scheduled in late November or early December. Finally, Pyramid entered into an agreement to manage the Guest House at Graceland, a 450 key hotel currently under construction in Memphis TN adjacent to Elvis Presley’s former residence which is scheduled to open next fall.

 Q3 2015 Performance Statistics

Through the second quarter of 2015, Pyramid’s portfolio of managed hotels have continued to perform extremely well in both top-line revenue and bottom-line profitability. Same Store Year-to-date September 2015 RevPAR was up 6.6%to Prior Year, while NOI was up 12.2% to Prior Year.

ABOUT THE AUTHOR

 Jack Levy – Senior Vice President – Finance, Pyramid Hotel Group

Jack Levy has had over 40 years of experience in the analysis and structuring of complex financial transactions in the hotel, real estate (both commercial and residential) and leisure industries. He is the former Executive Vice President and Treasurer of the Pebble Beach Company, and has held senior management positions with the Promus Hotel Company, DoubleTree Hotels Corporation and Beacon Properties. He has also provided consulting services to organizations including Del Webb Corporation, Best Western Hotels, Candlewood Hotels and the General Electric Pension Trust. He is a graduate of the Massachusetts Institute of Technology.

About Pyramid Group – Pyramid Hotel Group is a privately held, Boston-based hotel company with some 80 hotels and resorts under hotel management and asset management, comprising more than 22,000 rooms and approximately10,000employees. Pyramid Hotel Group, ranked among the largest U.S. hotel management companies by independent sources, provides hotel management, asset management and project management services to a broad array of hotel assets ranging from a90-room select-service hotel to world-class properties with more than 1,000rooms. Pyramid Hotel Group is a franchisee of all major hotel brand companies and an operator of independent four- and five-star hotels and resorts. Pyramid’s Resort Group currently manages resorts throughout the United States, Caribbean and Europe. For more information, please go to www.pyramidhotelgroup.com


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