Hotel Industry Overview: Summer 2013
Summary of Key Performance Indicators
RevPAR trended downwards during the second and third quarters, with the national average clocking in below 5%, compared to over 7% for the first quarter. The Q2 performance was not entirely unexpected as June 2012 was extremely strong due to the midweek timing of last year?s Fourth of July holiday which shifted demand from July to June. July 2013. So far in Q3, transient demand has been strong but group has been flat to slightly down, which has held back overall RevPAR performance.
Luxury and upper upscale continue to outperform, especially in urban locations, notching RevPAR in excess of 6% due in part to strong April performance arising from group travel patterns which were affected by this year?s early Easter. Midscale lagged, as did economy sector and rural/highway locations. Resorts and suburban were in the middle of the pack.
Individual markets have varied considerably. Hawaii (especially Honolulu), San Francisco, Nashville and Houston have consistently done well, averaging double digits so far in Q3. Washington DC and Norfolk remain in negative territory, while Boston and most of the other Northeastern markets are close to flat. Florida is running slightly below average, while the Midwest and the West (except for San Diego, which is flat) are generally doing well.
New supply continues to gain momentum, although it is still running below the long term average of 2.0% annual growth. Lodging Econometrics, the industry authority on supply, projects that new hotel openings will amount to 1.1% of existing inventory in 2013, rising to 1.3% in 2014 and 1.6% in 2015, which is still well below the 2008 peak of 3.0%.
10 out of the top 25 markets are currently seeing growth in excess of 2%, including New York (10.5%), Nashville (5.4%), Denver (4.1%) and Washington DC (2.8%). On the other hand, Honolulu, San Francisco, Minneapolis and Norfolk have minimal hotel construction activity.
|Q 3 2013 (thru 8/3)||?||Q2 2013||Q1 2013|
Source: Smith Travel Research, Deutsche Bank, Sun Trust Robinson Humphries
Major public company upper upscale and luxury brands continue to mirror these trends. This past quarter, Starwood and Marriott slipped a little, while Hyatt reversed its trend and outperformed. As noted below, issues remain in the group and government sectors, which tend to impact most heavily on the urban and suburban full service upper upscale brands that have historically been the bread and butter of these companies.
Rolling 4 Quarters
|Marriott Full Serv.||4.4%||0.8%||
Source: Company earnings releases
The hotel industry keeps moving forward in the recovery cycle, but there is now no question that we are in the mature phase, or ?middle innings? in the common vernacular. RevPAR guidance from the public companies and the major consultants has generally narrowed, with the top end being trimmed. The consensus seems to be around 5% for the rest of the year, which would be consistent with how Q2 and Q3 have performed after a very strong Q1. For 2014, the outlook is for improved performance based on continued gradual strengthening of the domestic economy coupled with below-average supply growth. PKF is optimistically predicting 7.7% national RevPAR growth, while PWC recently released a figure of 6.2%. STR is projecting 6.0%, but they have not updated their official estimate since early 2013.
Transaction volume has surged over the past few months with several high profile acquisitions including Omni?s purchase of a 5 hotel resort portfolio from KSL and Host Hotel?s sale of a San Francisco Ritz to Thayer. Overall deal volume is up 20% compared to a year ago, as several large portfolios have changed hands. In many markets, properties are now trading at or above replacement costs. This normally triggers a wave of new construction, but so far this has mostly been focused on select-service properties in strong markets. Full service hotels are generally only being built in conjunction with convention facilities, as those are still tough without significant financial assistance such as tax credits and/or programs like EB-5 and other highly levered financing vehicles. Conventional financing for new construction is available, but lenders are selective, requiring well capitalized sponsors.
Also of note, Blackstone has recently announced a series of mega-deals that could shake up the industry, starting with some moves towards the long awaited Hilton IPO. They have hired a ?dream team? of investment bankers (Morgan Stanley, Deutsche Bank, Goldman Sachs and B of A/Merrill Lynch) to try to restructure approximately $13 billion of debt in advance of the IPO now planned for early 2014. Blackstone bought Hilton for about $26 billion including assumed debt in 2007. Not only was this the largest lodging industry deal ever done, it also ranks in the top 10 largest LBO?s in any industry. Blackstone also recently announced that it is putting the La Quinta chain up for sale. It has approximately 800 hotels, about 2/3 of which are owned with the balance franchised. The price is reportedly about $4.5 billion, about twice what they paid for it in 2006. Potential buyers might include Wyndham and Hospitality Properties Trust, who had expressed interest to Blackstone earlier this year. Morgan Stanley and JP Morgan will be providing advice to Blackstone. Rounding out the trifecta, Extended Stay America has filed for an IPO, which would most likely be a late 4th?quarter execution. They are presently owned by a venture between Blackstone, Paulson and Centerbridge Partners, and had filed for bankruptcy in 2009 due to inability to service the crushing debt load accumulated during their LBO. The filing is for $100MM, but management has reportedly indicated that they could raise as much as $500 million. Deutsche Bank and J.P. Morgan Chase have been engaged to lead the offering.
Interest rates have backed off a little from their recent peaks, but are holding steady at the elevated levels. 10 year Treasuries are now around 2.60%, compared to 2.73% in early July, but they still are 100 bps above year-ago levels and 80-90bps above where rates were as recently as 90 days ago. This is illustrated in the chart below; note that spreads have remained fairly stable. Capital remains available, albeit at a slightly higher cost, as more lenders are competing for fewer deals. Some fairly large CMBS transactions are in the process of being finalized, most notably Chatham?s $950MM loan on the Innkeper portfolio being financed by Cerberus; this facility has been increased from $850 million due to strong interest from high-yield investors for the mezzanine tranches.. With increased competition from non-traditional lenders, the supply-demand imbalance for loans could keep rates low in the near term, which would be a positive for hotel valuations and a boon to private equity investors that are so dependent on leverage.
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