hotel industry overview fall 2011

8/2/2019 Hotel Industry Overview Fall 2011

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HOTEL INDUSTRY OVERVIEW: Fall 2011

Summary of Key Performance IndicatorsThe industry turned in a very solid performance in the third quarter, continuing on a pace of approximately 8%overall RevPAR growth. The contribution of ADR relative to occupancy improved- it made up almost half ofthe RevPAR growth, and a significantly higher proportion in key upper-end markets. Luxury continues tooutpace the rest of the industry, and grew even faster in the third quarter than in the first two, while upperupscale and resort slipped slightly.

Regionally, Miami, LA and San Francisco continue to lead the pack, with consistently strong performancesthroughout the year. Orlando has also been steady, with very high demand growth (due primarily to the HarryPotter attraction) offsetting increased supply, while still sustaining decent ADR growth. Boston and Phoenixalso had relatively good quarters, and New York has come back a little from a disappointing second quarterWashington continues to lag, and Chicago has also weakened. Among the smaller markets, Nashville, Tampaand Minneapolis were strong in the 3rd quarter, while St. Louis, Atlanta and Norfolk continue to be the weakestNew Orleans also showed a drop off, but this was mostly due to the spike in occupancy related to the crewscleaning up the BP oil spill last year. That market is still performing well. It should also be noted that St. Louisand Dallas will see at least a short term bump due to the baseball World Series.

3rd Quarter YTD (thru 10/22/11)ADR Occ. RevPAR ADR Occ. RevPAR

Industry Total 3.8% 4.0% 7.9% 3.4% 4.3% 7.9%

Luxury 6.6% 5.0% 12.0% 6.0% 5.1% 11.4%Upper Upscale 3.2% 2.8% 6.1% 3.4% 4.5% 8.1%Resort 4.8% 3.9% 9.0% 4.6% 4.9% 9.8%Key Markets

NY 5.7% 2.0% 7.9% 6.1% 0.0% 6.2%Boston 5.4% 3.6% 9.3% 4.8% 3.1% 8.2%DC (0.7%) (1.0%) (1.7%) 1.1% (0.5%) 0.9%Chicago 4.1% 2.5% 6.8% 5.1% 4.0% 9.6%

New Orleans 3.0% (6.6%) (3.1%) 6.1% 1.2% 9.0%Orlando 3.6% 7.1% 11.3% 4.4% 7.0% 12.1%Miami 9.5% 12.2% 22.9% 7.0% 9.1% 17.0%Phoenix 5.7% 7.9% 14.2% 3.4% 6.3% 10.1%LA 7.1% 5.9% 13.5% 6.0% 5.7% 12.2%SF 13.8% 3.8% 18.3% 14.1% 5.0% 20.0%

Source: Smith Travel Research, Raymond James US Research


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The performance of major brands that are operated by publicly traded hotel companies continues to closelytrack the national trends. Generally, the higher scale and more urban-oriented brands have achieved betterperformance. The Marriott full service brands have been lagging the overall market for over a year, as theyappear to be losing share to Starwood brands and also to their own limited service brands. Courtyard, forexample, had 9.5% RevPAR growth for the quarter.

Q3 2011 Rolling 4 Quarters

ADR Occ RevPAR ADR Occ RevPAR

Marriott (full service) 2.9% 2.2% 5.2% 3.8% 1.3% 5.1%Ritz-Carlton 9.1% 4.0% 13.5% 4.6% 5.2% 10.1%Sheraton 4.9% 3.3% 8.4% 3.5% 5.0% 8.8%Westin 4.6% 4.3% 9.1% 3.9% 5.3% 9.4%Luxury Collection 7.6% 4.4% 12.3% 5.7% 7.3% 13.5%W 4.4% 2.3% 7.0% 6.1% 6.2% 12.8%Le MeridienHyatt

3.7%3.5%

3.2%3.5%

10.0%7.1%

7.6%3.1%

4.4%2.8%

12.2%6.1%

Source: Company earnings releases

OutlookOver the past several months, indeed since signs of weakness began appearing in the US economy in latespring, industry pundits have been divided into two camps regarding the outlook for 2012 and beyond. This hasled to unusually large spreads in the range of forecasted results, even by individual analysts such as the highlyregarded Mark Woodworth of PKF, who says that RevPAR will increase by 2.5% to 7.5% depending onwhether or not we go into a recession.

One school of thought, which is largely composed of Wall Street analysts, speculators and other momentumplayers argues that since GDP, employment growth and consumer confidence have not grown as expected, thiswill ripple through to the hotel sector and cause a dramatic slowdown of growth, if not contraction of RevPAR.This has resulted in a large correction in hotel stock prices, especially in the REIT sector, as will be shown later.

On the other hand, there are many people (including Woodworth, who is just hedging his bet) who feel that lackof supply growth and strength on the corporate side will be enough to maintain decent, if not robust growth inhotel income and profits. Most of the folks on this side seem to be more directly connected with hoteloperations, so it would seem that they have more credibility, and at least over the past few months the resultsseem to have borne this out, as indicated by the charts above. This camp cites some other evidence, somefactual and some anecdotal, to support their contentions, such as the following points:

No large-scale group cancellations have been noted, as was the case leading into the last recession.Convention calendars are strong in many major markets.

Overall labor costs will hold steady due to high unemployment rates. While increased union penetrationremains a threat, Washington gridlock has largely prevented policies such as card-check that would

make it easier to organize. Continuing decline in home values does not materially affect the upper-end leisure travelers, as home

equity is a less significant portion of their overall net worth

Middle class workers (at least those who are still employed) still feel it is their right to take a vacation ina destination such as Orlando

The current administration will do everything it can to prop up the economy in the months leading up tothe election


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Conversely, there are other arguments to support the pessimistic view:

Airline capacity has continued to decline, and fares will rise, thus discouraging travel Historical knee-jerk reactions by operators to cut rates at the slightest whiff of trouble- for example,

Hawaiian performance was doing great until the Japanese tsunami, but then they started madlydiscounting.

The overall fragility of the economic situation, in that an unexpected shock (natural disaster, disease,war, etc.) could send it over the edge very quickly

Increased class warfare tensions could lead to more AIG-effect fallout at high end hotels and resorts.Even the lower end is not immune as Gaylord Hotels (a major SMERF market player) got hammeredafter announcing disappointing Q3 earnings and reduced expectations for 2012 as their market segmentis very price sensitive.

On line travel agencies (OTAs) are increasing their market presence and are forcing prices down asconsumers shop for the best deals

There is obviously validity to many of the arguments on both sides, and everyone in the industry is anxiouslyholding their breath to see what develops. Right now, there does seem to be a bit more positive momentum inthe economy as preliminary 3rd quarter GDP was not as bad as expected, the stock market had a strong Octoberand jobless claims seem to be holding steady, so right now we are somewhat bullish about 2012 prospects, butstay tuned.

Transactions

This is one area that has definitely felt the impact since the credit downgrade, as many deals have been pulleddue to lack of financing. Except for the re-trade of the Cerebrus/Innkeepers portfolio (see below), and somerecent smaller select service transactions, only one major public REIT deal was closed in the last three monthsmost of these were private sales.


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Date Property Location # keys Price $MM Price/Key Buyer/Seller

Aug-11Ritz CarltonHighlands

Truckee CA 170 85.5 503 Private/Private

Aug-11 Fairmont Dallas 551 69.0 125 Inland America/Private

Aug-11 Hotel Chelsea New York 226 82.5 365 Private/Private

Aug-11 Mandarin Oriental San Francisco 158 63.5 402 Private/Cornerstone

Aug-11 Marriott LaGuardia New York 438 61.0 139 Capmark/RLJ

Aug-11 Holiday Inn San Diego 218 17.5 80 Pinnace/Rockpoint

Aug-11 Mark Hotel New York 180 145.0 806 Private/Private

Aug-11 6 hotel portfolio TX CA VA GA WI 875 238.4 272 Hyatt/LodgeWorks

Aug-11 93 Red Roof Inns Various 11,233 335.0 30 Five Mile/Citigroup Westmo

Sep-11 La Valencia Hotel La Jolla CA 115 41.0 357 Private/Private

Sep-11 Chateau Bourbon New Orleans 251 45.7 182 Private/Private

Sep-11 Doubletree Wilmington DE 219 12.0 55 Driftwood Apollo/Privat

Sep-11 Beverly Hilton Beverly Hills CA 569 NA NA Oaktree/Private

Sep-11 Lost Pines Resort Cedar Creek TX 500 NA NA Anschutz/Oklahoma Publish

Sep-11 The Broadmoor Colo. Springs CO 744 NA NA Anschutz/Oklahoma PublishSep-11 Marriott City Center Denver 613 119.0 194 Chesapeake REIT/Walton

Sep-11 Embassy Suites Deerfield IL 237 18.0 76 Oaktree/C III Capital

Sep-11 Paramount Hotel New York 597 275.0 461 Private/Walton St JV Westb

Sep-Oct 5 HGI/Homewoods NE TX AZ OH IN 649 91.5 141 Apple REIT/various priva

Oct-11 Hawks Cay Resort Marathon FL 177 76.8 434Related JV Deutsche

Bank/Behringer Harvard

Oct-11 Kyoto Grand Hotel Los Angeles 436 NA NA Rim Hospitality/Private

Oct-11 Hilton Downtown Miami 527 24.4 46 Genting from Related JV

Oct-11 64 hotel select serv. Various 8,101 1,020.0 126 Cerebrus Chatham JV/Apo

Nov-11 Courtyard Miami FL 263 95.0 361 Hersha/Private

Nov-11 Courtyard Atlanta 150 28.7 191 Summit/Private

Nov-11 Residence Inn Kansas City 96 9.9 103 Summit/Private

Public Company NewsIPO, Financing, Mergers and Acquisitions

Ashford REIT issued $30MM of 9% preferred stock in October, with proceeds to be used for generalcorporate purposes. They also closed on a $105MM revolving line of credit in September

Chesapeake Lodging added $50MM to their revolver, and lowered their overall interest cost. Chatham Lodging, in a joint venture with Cerebrus, recently closed on the bankrupt Innkeepers portfolioof 64 select service hotels. The deal was originally scheduled to close in August, but was pulled because

the buyers cited a Material Adverse Change clause. After a contentious court battle, the price wasreduced by about $100MM

Strategic Hotels announced a buyback program for its 8.25% and 8.50% Preferred Stock issues at aslight premium to their original issuance prices. They will also pay accrued but unpaid dividends. Totalvalue of this transaction will be over $400MM


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Diamond Rock entered into an agreement to sell three non core hotels to Inland America for$262.5MM ($185K per key). The hotels are Marriott or Renaissance branded and are located in AustinTX, Lexington KY and Atlanta. The transaction is expected to close by year end

Felcor modified a CMBS agreement on $178MM of its outstanding debt to pay down $20MM of thebalance and extend the facility for up to two more years

Starwood is prepaying over $600MM of 7.875% notes due next year, including all interest anddefeasance charges

Hospitality Properties Trust announced that it would acquire two Sonesta hotels (Cambridge MA andNew Orleans) for $150.5MM ($170K per key). In addition, its affiliated management company wouldbe acquiring Sonestas management and franchise operations for a cash price of $31 per share(representing a premium of about 72% above its recent market price, but this stock is very thinly traded)HPT also renewed and extended a $750MM revolving credit agreement; at a base interest rate of LIBOR+ 130 bp. Wells Fargo is the administrative agent

Hersha announced that they will sell 18 non core limited service hotels to an affiliate of StarwoodCapital Group for $155MM. ($81K per key). This price is an 8.4% cap on trailing 12 months NOI and a10.3 multiple on TTM EBITDA

Summit Hotels consolidated and refinanced about $120MM of mortgage debt, including $28MM ofloans from ING that were called, and also issued $50MM of 9.25% preferred stock to pay down itsrevolving line of credit

LaSalle Hotel approved a $100MM share buyback program Marriotts board approved the previously announced spin-off of its timeshare business. Pricing and

record date have not yet been set, but the new company has already begun trading on a When Issuedbasis

Pebblebrook netted $82MM from the issuance of 8.00% preferred stock, about half of which will beused to pay down their revolving credit line.

Red Lion acquired 10 previously leased hotels for a total of $37MM. These include many of the olderRed Lions located in Oregon, Washington, Idaho and Montana. They also refinanced and expanded theircredit facilities with Wells Fargo

Sunstone refinanced its loan on the Doubletree Times Square. They paid down $90MM of the original$270MM principal; the new loan will bear interest at 3 month LIBOR + 325. They also sold the $90MMloan that they held on the Royal Palm hotel in Miami for a 12% discount, but still retains some earn-outrights on the sale of that property

Wyndham hotels announced that Moodys upgraded their debt to investment grade (BAA3); it waspreviously at BA1. They already have an investment grade rating from S&P

EarningsA summary of reported Q3 earnings for the some of the larger-cap companies is as follows:

Company DateReported

ReportedEPS*

ConsensusEPS*

RevPAR Guidance for2012

Starwood Oct 27 0.42 0.39 4-8%

Marriott Oct 5 0.29 0.27 3-7%Host Hotels Oct 12 0.16 0.17 3-7%

La Salle Oct 19 0.50 0.49 NA, but group up 8%

Sunstone Nov 8 0.20 0.20 in line w/industry

Diamondrock July 25 0.16 0.15 NA; group pace +10%*Generally excludes unusual items; figures are for FFO on REITS

In general, most companies met or exceeded Street earnings estimates. Guidance for Q4 remained largelyunchanged, but as shown above, there is considerable uncertainty as to next year. Note that most of the larger


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publicly traded companies are typically more heavily weighted to big-box hotels in top 25 markets, and aremore dependent on business transient and groups as opposed to leisure travelers, so given the current state ofthe market, these companies would be expected to outperform the industry as a whole.

Stock pricesPrices for large cap full service hotel companies are generally down about 10% since June 30 and 20% for theyear to date, while limited service companies such as Choice have done relatively better. Some, such asWyndham (not shown on chart) are actually up over 10% for the year. REIT stocks have rallied strongly over

the past month; they are now, on average only down 18% for the year, whereas at the beginning of Octoberthey were down 35%.

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

Company Type Primary Segment (s)

Price as

of11/8/11

ChangeSince

6/30/11

ChangeSince

12/31/10

Marriot International C-Corp Upper Upscale,Luxury, Resorts

$31.83 (10.3%) (23.4%)

Starwood Hotels C-Corp Upper Upscale, Luxury $50.74 (9.5%) (16.5%)

Choice C-Corp Limited Service $35.32 5.9% (7.7%)

Hyatt C-Corp Upper Upscale $36.80 (9.8%) (19.6%)

Host Hotels REIT Upper Upscale, Luxury $14.37 (15.2%) (19.6%)

Hospitality PropertiesTrust

REIT Limited Services $23.53 (3.0%) 2.1%

Note- all prices adjusted for dividends paid

Source: Yahoo! Finance

Other Industry News Intercontinental Hotels announced plans to revamp its Crowne Plaza brand in a three phase program

(Freshen Up, Move Up and Shine) over the next 3 to 4 years.

Interstate Hotels, which is now privately owned, purchased Noble Management Group, which adds over50 hotels and 9.000 keys to its operations.

Overseas expansion by US-based companies continues, with Starwood, Carlson and others announcingdeals in China, India, Turkey and other emerging markets

Hard Rock is the first major chain to announce that it has entered into a partnership to develop a casinoresort in Massachusetts under new legislation which is expected to be enacted this year. This propertywould be in Holyoke, an industrial city about 90 miles west of Boston. Up to three such casinos areexpected to be built.

A Miami Federal court denied Fairmont Hotels request for an injunction to reinstate it as manager ofthe Turnberry hotel. This continues a recent trend of courts supporting terminations of managemenagreements.


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Industry veteran Mark Lomanno left Smith Travel to join newBrandAnalytics, which provides businessintelligence from social media customer feedback. This venture is backed by some of the biggest namesin the industry, including Barry Sternlicht and Neil Shah from Hersha

US Economy General Statistics

Key Economic Indicators

Measure Period Value/Trends

GDP Q3 2011 Preliminary figure of 2.5%, an improvement from the 1.3% advance in Q2, but still wshort of normal post-recession recovery levels.

ConsumerConfidence

Oct-11 The University of Michigan Consumer Sentiment Index was 60.9, up slightly frAugust and September levels, but still well below the 71.5 in June and the 74.3 in May

Unemployment Oct-11 9.0%, down slightly from last month. It has ranged from 9.0% to 9.2% since April

CPI Sept-11 Up 0.3% for the month, at an annual rate of 3.9%, which is the highest level in sotime. Food costs were up 0.6% (close to 5% for the year) and energy prices werealmost 20%. So-called core inflation without food & energy was up only 0.1%, butthe average consumer, this is a meaningless statistic.

Retail Sales Sept-11 Up 1.1% for month; up 7.9% vs. year ago. Along with the consumer confidence trenthis will be a good indication of where the economy is headed in the short term

New Home Sales Sept-11 313K units, up from 296K in August, but slightly below September 2010 levInventories of existing houses remain high and prices are still declining in most marke

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

hotel industry overview fall 2011

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