Lodging concierge

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U.S. Lodging Cycle Concierge Gaming, Lodging & Leisure

February 2017

Fitch Ratings expects U.S. lodging RevPAR growth to decelerate to 1%–2% during 2017 as the industry enters the seventh year of this upcycle. Cumulative RevPAR growth during this recovery of 53% has exceeded the recoveries that began in the early 2000s (38%) and early 1990s upcycles (50%). Real RevPAR is 8% above its prior cycle peak, aided by mid-60% occupancy rates that are the strongest on record. Fitch continues to expect 2018 RevPAR to turn slightly negative. However, there is upside risk if U.S. economic growth reaccelerates under the new administration. Forward demand barometers are generally positive and have strengthened during the last three to six months. The index of leading economic indicators remains solidly positive. Lodging REIT shares have staged a strong recovery and are trading well ahead of their trailing 12-month (TTM) average. The latest New York Federal Reserve U.S. recession probability model readings are well below levels that have foreshadowed RevPAR downturns. Slightly positive TTM lodging industry occupancy growth is arguably the weakest indicator; however, it has shown some signs of stabilization. Market optimism, evidenced by the strong equity market rally (S&P 500 +10%) since the eve of the U.S. presidential election, has presaged positive economic forecast revisions. The 49 respondents to the Philadelphia Fed’s First Quarter 2017 Survey of Professional Forecasters increased their 10-year U.S. GDP growth expectations to 2.45% from 2.28% a year earlier. The survey puts monthly U.S. payroll employment gains at 180,300 compared with the prior 173,600 estimate. Higher inflation and interest rate expectations balance the positive growth expectations. RevPAR growth during 2017 will be on the back of average daily rate growth, rather than occupancy. Fitch expects RevPAR growth to remain strongest in the suburban and airport location segments, aided by little new supply due to their unloved status with many investors. Hotels in these segments are generally lower priced, which should keep limited service hotel RevPAR growth ahead of upscale properties. RevPAR comps against 2016 are easier in the first quarter of this year, but become more challenging in the higher-demand periods of April through October. Fitch expects supply growth to accelerate during 2017 to approximately 2%. Hotel rooms in the high visibility, under construction and in final planning stages of the pipeline are 23% above the prior cycle peak. Real ADR gains are supporting development economics. Construction loans are available for hotels with strong brands and proven sponsors. Lower dollar value limited service hotels remain favored by developers given solid demand trends, low equity requirements and construction loan availability. Stronger share prices could bring REITs back to the acquisition market this year, particularly if regulatory-driven CMBS market disruption limits private investor appetites. Related Research All Inclusive: U.S. Lodging & Leisure Handbook (February 2017) 2017 Outlook: U.S. Lodging & Leisure (Sector Propped Up by Healthy consumer Demand) (November 2016) Stephen Boyd, CFA +1 212 908-9153 stephen.boyd@fitchratings.com

www.fitchratings.com

Christopher Gallun +1 312 368-3123 christopher.gallun@fitchratings.com

RevPAR Recovery Now the Second Longest on Record (YOY Change In TTM U.S. Lodging RevPAR)

Consecutive Positive RevPAR Growth Months

(%)

TTM RevPAR

15 10 5 0 (5)

112 Months

(10)

65 Months

77 Months

(15) (20) 1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

105

112

YOY – Year over year.TTM – Trailing 12 month. Source: STR, Inc., Fitch Ratings.

Record Cumulative RevPAR Recovery

(Cumulative Trough-to-Peak Cycle RevPAR Change) Early 1990s

(%) 60

Early 2000s

Late 2000s

50 40 30 20 10 0

0

7

14

21

28

Source: STR, Inc., Fitch Ratings.

35

42 49 56 63 70 77 (Months from Cycle Trough [T = 0])

84

91

98

Occupancy and Real ADR Well Above Prior Cycle Peak (Cumulative Trough-to-Peak Cycle RevPAR Change)

Early 1990s (92 Months to Recovery) Early 2000s (78 Months) (Occ. %) 66 64 62 60 58 56 54 $50 $60 $70 $80 $90 (Real ADR [Prior Peak Dollars]) Occ. – Occupancy.

Late 2000s (89 Months) Current

$100

$110

Source: STR, Inc., Fitch Ratings.

February 21, 2017


U.S. Lodging Cycle Concierge Gaming, Lodging & Leisure

Leading RevPar Indicators LEI Hanging In; Lodging Demand Growth Stabilizing

REITs Have Rallied Sharply; TTM Average Turning Up

(Index of Leading Economic Indicators Versus U.S. Lodging Demand Growth) TTM U.S. Lodging Demand

(%)

Leading Economic Indicators

(Index Value)

10

4.0

Positive RevPAR Growth (YOY) FTSE NAREIT Lodging REIT Index TTM FTSE NAREIT Lodging REIT Index Average

(Index) 400 350

5

2.0

300 250

0

0.0

200 150

(5)

(2.0)

100 50

(10) 1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

0 1994

(4.0)

1996

1998

2000

2002

2004

2006

2008

TTM – Trailing 12 month. Source: STR, Inc., Federal Reserve of Philadelphia, Fitch Ratings.

TTM – Trailing 12 month. YOY – Year over year. Source: NAREIT, STR, Inc., Fitch Ratings.

Occupancy Approaching Declines; Pulling Down RevPAR Growth

Fed Model Puts Low Odds on U.S. Recession

TTM RevPAR (LHS)

TTM Occupancy (RHS)

2012

2014

2016

(New York Federal Reserve U.S. Recession Probability Model)

(TTM U.S. Lodging RevPAR and Occupancy)

(%)

(%)

9

9

50

6

6

3

3

35

0

0

30

(%)

2010

(3)

(3)

(6)

(6)

(9)

(9)

Months with Positive RevPAR Growth

Probabilities of Recession Index

45 40

25 20 15 10 5

(12) 1989

1992

1995

TTM – Trailing 12 month. Source: STR, Inc., Fitch Ratings.

www.fitchratings.com

1998

2001

2004

2007

2010

2013

2016

(12)

0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Source: Federal Reserve Bank of New York, STR, Inc., Fitch Ratings.

February 21, 2017


U.S. Lodging Cycle Concierge Gaming, Lodging & Leisure

Economic Lodging Demand Indicators Stock Market Rally Foreshadowing Stronger PNFI Growth

Rate Increases A Concern, But Higher Inflation Could Benefit ADR

(Real U.S. GDP and Fixed Investment Growth) Real GDP

(%)

(10-Year Constant Maturity U.S. Treasury Rate)

Fixed Investment

10-Year Treasury Rate

(%)

10

TTM Average

6.0 5.0

5

4.0

0

3.0 (5) 2.0 (10)

1.0

(15) 2002

2004

2006

2008

2010

2012

2014

2016F

2018F

0.0

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F – Forecast. PNFI – Private nonresidential fixed investment. Source: BEA, Fitch Ratings.

TTM – Trailing 12 month. Source: Federal Reserve, Fitch Ratings.

Consumers Confident, But D.C. Dysfunction Could Dampen the Mood

Low Unemployment: Good for Travel, Bad for Hotel Labor Cost Trends

(U.S. Consumer Confidence Index)

Consumer Confidence

(Index Value)

TTM Average

(U.S. Civilian Unemployment Rate)

Unemployment Rate

(%)

TTM Average

11

120

10

100

9 80

8

60

7 6

40

5 20 0 2005

4 2006

2007

2008

TTM – Trailing 12 month. Source: Bloomberg, Fitch Ratings.

www.fitchratings.com

2009

2010

2011

2012

2013

2014

2015

2016

3 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

TTM – Trailing 12 month. Source: BLS, Fitch Ratings.

February 21, 2017


U.S. Lodging Cycle Concierge Gaming, Lodging & Leisure

Lodging Fundamentals RevPAR Decelerating — Growth Entirely ADR Led

Expect Smaller Margin of Outperformance from Low Price Hotels in 2017

(U.S. Lodging Occupancy, ADR and RevPAR) Occupancy

(%)

(U.S. Lodging RevPAR by Price Class)

ADR

RevPAR

2014

(%)

9.0

a

2015

2016

10

7.5

8

6.0

6

4.5 4 3.0 2 1.5 0.0

0 2011

2012

2013

2014

2015

2016

Luxury

Upper Upscale

Upscale

Upper Midscale

Midscale

Source: STR, Inc., Fitch Ratings.

Source: STR, Inc., Fitch Ratings.

Low Supply Benefiting Suburbs, Solid Leisure Demand Helping Resorts

Annual RevPAR Comps Tougher in Key Head and Sholder Demand Months

(U.S. Lodging RevPAR by Location Segment) 2013

(%) 12

2014

2015

(YOY Change in Monthly RevPAR)

2016

a

2015

2016

12

10

10

8

8

6

6

4

4

2

2

0

a

2014

(%)

Economy

Urban

Suburban

Source: STR, Inc., Fitch Ratings.

www.fitchratings.com

Airport

Interstate

Resort

Small Metro/Town

0

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

YOY – Year over year. Source: STR, Inc., Fitch Ratings.

February 21, 2017


U.S. Lodging Cycle Concierge Gaming, Lodging & Leisure

Hotel Supply Outlook Real ADR Growth Helping Development Feasibility

Fully Loaded Pipeline Represents 13% of Existing Rooms

(Real ADR and U.S. Supply Growth Through January 2017) Supply Growth (LHS)

(%)

(U.S. Hotel Pipeline by Development Phase)

Real ADR (RHS)

($) 132

5.0

126

4.0

(000s Rooms) 5,800 181 5,600 205

120

3.0

5,400 114

2.0 108 1.0

102

0.0

190 5,200

5,000

96

(1.0) 1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

90

4,800

5,794

102

5,116

Existing Supply

Recently Opened

Under Construction

Final Planning

Planning

Total

Source: STR, Inc., BLS, Fitch Ratings.

Source: STR, Inc., Fitch Ratings.

Hotels Under Construction and Final Planning 23% Above Prior Peak

Development Concentrated in Limited Service Hotels, New York City

(U.S. Hotel Pipelines Phases)

Current

(No. of Rooms)

(U.S. Development Pipeline by Chain Scale)

2008 Peak

700,000

Unaffiliated 16%

600,000

Luxury 2%

Upper Upscale 9%

Economy 2%

500,000 400,000

Midscale 9%

300,000

Upscale 28%

200,000 100,000 0

Upper Midscale 33% Under Construction

Source: STR, Inc., Fitch Ratings.

www.fitchratings.com

Final Planning

Planning

Total Source: STR, Inc., Fitch Ratings.

February 21, 2017


U.S. Lodging Cycle Concierge Gaming, Lodging & Leisure

Hotel Investment and Capital Markets Deal Volumes Down in 2016; Cap Rates Up With Long End of Rate Curve (U.S. Hotel Transaction Volumes and Cap Rates) Hotel Sales Volumes (LHS)

($ Bil.) 250

Cap Rates (RHS)

(%) 10

200

9

150

8

100

7

50

6

0

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

% Hotel (RHS)

a

(%)

250

20

200

16

150

12

100

8

50

4

0

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

aData

for Fitch-rated U.S. CMBS 2.0 conduits not available prior to 2010. Source: Fitch Ratings.

Higher REIT Valuations Could Renew Acquisition Appetite

Banks Still Net Tightening, But to a Lower Degree

(U.S. Hotel Equity REIT External Investment Activity) Acquisitions

(Net % of Banks Tightening Commercial Real Estate Loan Standards)

Dispositions

(%)

12

Nonfarm Nonresidential

Construction and Land Development

35

10

30

8

25

6

20

4

15 10

2

5

0

0

(2)

(5)

(4) (6)

CMBS Issuance (LHS)

($ Bil.)

5

Note: Cap rate not available for 2009. Source: Bloomberg, Fitch Ratings.

($ Bil.)

CMBS Volumes and Hotel Share Down in 2016

(10) 2003

2004

2005

2006

2007

2008

TTM – Trailing 12 months as of Sept. 30, 2016. Source: SNL Financial, Fitch Ratings.

www.fitchratings.com

2009

2010

2011

2012

2013

2014

2015

TTM

(15)

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

Source: Fed Loan Officer Survey, Fitch Ratings.

February 21, 2017


U.S. Lodging Cycle Concierge Disclaimer ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS:// FITCHRATINGS.COM/ UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGSAREAVAILABLE ON THEAGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings

www.fitchratings.com

Gaming, Lodging & Leisure and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

February 21, 2017


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