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
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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