Industry pundits PKF, Smith Travel Research and others have tempered their 2011 forecasts. PKF is cu

We are pleased to provide an update of our hotel industry coverage. As markets have stabilized and patterns have settled in, we will be doing this on a quarterly rather than a monthly basis going forward unless there are urgent developments that need to be reported on.
The industry recovery has continued over the past several months despite signs of weakness in the overall US economy. RevPAR gains have been maintained despite increasingly more difficult year-over-year comps. miami american airlines arena This is illustrated by the fact that for June and July, weekly year over year growth has generally been in only the 5 to 6% range, compared to the 8-10% numbers we saw through May. However, more of the growth is coming in rate as opposed to occupancy. miami american airlines arena Upper-upscale chains such as Marriott and Hilton, as well as suburban and urban hotels continue to lag some of the other market segments, as do the big Eastern cities, mostly because they were ahead of the curve on the upswing last year and have tougher miami american airlines arena comps. Other segments and markets, including luxury, resort and West Coast locations are still playing catch-up, and have racked up some pretty impressive growth numbers so far this year.
Real strength is observed in Florida, where Orlando in particular has absorbed significant supply growth and still managed to register big gains in both rates and occupancy. Universal Studio s new Harry Potter attraction miami american airlines arena deserves a lot of the credit for this. Hawaii, at least Oahu, also seems to be doing very well on the STR numbers miami american airlines arena despite anxieties caused by the Japanese earthquake and high airfares, but anecdotally there has been significant softening on the outer islands in recent weeks.
miami american airlines arena There is fundamental weakness, however, in Washington DC and other government-dependent markets (e.g. Norfolk VA and smaller state capitals), for the short term, as government-related business is down due to uncertainties as to the outcome of the deficit-cutting and debt ceiling measures.
The performance of major brands that are operated by publicly traded hotel companies reinforce these trends. Generally, higher scale and more urban-oriented brands miami american airlines arena have achieved better performance. It has not gone unnoticed that Marriott brands have been lagging the overall market for the past year or so. Part of this is due to the fact that they started to recover earlier and thus have tougher comparisons, but it is also true that their stable of brands is considered very conservative (less of that urban edge ) than their competitors, particularly Starwood and Hyatt.
There are some mixed signals on the overall outlook. On one hand, new supply growth continues at a very low pace of 0.8% YTD, as compared to a 5.8% annual rate on demand growth, however as will be discussed below, the pipeline is building, especially in certain markets. Gasoline and jet fuel prices are still relatively high, which has both direct and indirect impacts on travel patterns, but they appear to be stable for now. On the other hand, persistent weakness in the job and housing markets have dampened consumer confidence, and GDP growth coming out of the recession seems to have stalled; preliminary estimates of 2 nd quarter growth are in the 1 – 2 % range, which is far below typical recovery levels.
Industry pundits PKF, Smith Travel Research and others have tempered their 2011 forecasts. PKF is currently predicting 6.9% RevPAR growth for the year (down from 7.1% three months ago), about 1/3 from rate and the balance in occupancy. For 2012, PKF is looking for 8.7%, also down a couple of tenths, however more of the growth (over half) is expected to come from ADR improvement.
STR s current RevPAR forecast for 2011 is 6.1%, and 8.6% for 2012, again with growth coming largely from occupancy this year and rate next year, but those have not been updated since February. A new set of forecasts is expected to be released in early August at Smith Travel s Data Conference.
Our view is that hotel operators are anxious to drive rate, but they are still a little nervous because no one wants to be the first in their market to raise prices; they would rather follow than lead. Although demand miami american airlines arena in general is up, it is still spotty on the group side in the short term (although 2012 is looking very strong in some markets), which makes compression more difficult. The other factor is price sensitivity, as on the business side, corporations are still putting pressure on hotels to keep rates steady, and leisure customers are increasingly turning to OTA s (online travel agencies) to seek out the best deals. It is now more important than ever for hotels to employ sophisticated revenue management strategies to maximize yields, and increasing penetration of social networks beyond the basic Facebook/Twitter paradigms will be a key to this.
The transaction pace continues at dizzying levels. The overall economic uncertainty miami american airlines arena and supposed lack of debt capital does not seem to be affecting asset pricing, which appears to be defying gravity especially for public company acquisitions in major markets. Here is a sample of key transactions over the past several months:
Note- these are only the highlights of transactions for full service miami american airlines arena hotels and resorts in major US markets. There were many more deals reported for international properties, gaming miami american airlines arena assets, small market and limited service properties. According to hotel broker Jones Lang LaSalle, total transactions in the Americas are expected to top $16 Billion this year, up from their previous forecast of $13 Billion. Transaction volume is up 187% year to date, but much of it was driven by some of the pricier New York deals.
In early June, RLJ executed an IPO that raised $568MM including the green shoe. Share price has declined slightly (from $18 to about $17.50) since the offering. They also completed a $300MM non-secured revolver. RLJ owns approximately 140 hotels, mostly in the select service category, in many major urban markets.
Another large REIT, Strategic Hotels and Resorts, completed a $300MM senior credit facility, underwritten by Deutsche Bank. The facility is secured by a portfolio of Ritz-Carlton miami american airlines arena hotels, and is priced on a grid with rates 275-375 over LIBOR. It matures in three years.
Chesapeake Lodging (REIT), which has been very active on the acquisition front (see above), has completed a number of financing transactions, including a $130MM three year term loan secured by hotels in San Francisco and Chicago (rate was fixed via swaps at 4.65%) and a $95MM five year fixed rate loan on the Hyatt Boston at 5% w/30 year amortization.
Felcor, another REIT actively acquiring properties, sold $575MM of 6.75% senior notes in June. In addition to financing acquisitions, the proceeds were also used to retire more expensive (9-10%) corporate debt obligations. They also had a $159MM equity offering in April.
Hospitality Properties miami american airlines arena Trust renegotiated lease/management agreements on 71 hotels with Marriott, which extends them through 2025 (with future options) and also provides for certain guarantees and commitments for capital spending. They also renegotiated their IHG leases; this provided for the release and possible sale of 42 hotels.
Host Hotels raised about $500MM through a privately miami american airlines arena placed sale of senior debt, at a 5.875% coupon due in 2019; the proceeds were used to retire more expensive debt as well as financing some of their recent acquisitions and providing capital for future expansion
La Salle REIT raised about $200MM in late April from a common stock offering pursuant to its shelf registration. Most of this was used in connection with their $405MM purchase of the Park Central hotel in Manhattan in June
The Pebblebrook REIT amended and restated its unsecured credit facility which will now provide $200MM with a three year term and an option for a fourth year as well as an accordion feature to expand it to $400MM. Interest is the greater of 7% or 10 year Treasuries plus 300 bp. There were also other provisions relating to which properties it may include in its borrowing base for this facility.
Again, a mixed bag. Starwood Host and Wyndham had solid beats. Marriott was viewed miami american airlines arena as a disappointment, and LaSalle and Diamondrock also missed their numbers, but those were primarily due to ramp-up miami american airlines arena on new acquisitions. Our view is that the REIT s who are actively acquiring miami american airlines arena properties, especially Pebblebrook and Chesapeake, will see pressure on their EBITDA/earnings as they based their (high) purchase prices miami american airlines arena more on future performance than how those hotels are actually doing.
As shown in the table (below), most hotel stocks have been trending sharply downwards; most of the damage was done in the May-June period, which is when it generally became clear that economic growth in 2011 was going to be below expectations. Hotel stocks tend to be a leading indicator, miami american airlines arena and they had run up quite a bit in the last quarter of 2010 and the first couple of months miami american airlines arena in 2011. Choice was particularly hard hit because it plays in the low-end segment which is most sensitive to gas prices, and Marriott was slammed because of a combination of its lagging growth compared to its peers and the spin off of its timeshare units, which was not favorably viewed by the Street. miami american airlines arena The only large cap hotel stock to buck the trend was HPT, which was driven in large part by its recent renegotiation of its lease terms with major operators (see above). By comparison, the Dow is up 6% for the year and is flat since April 1.
The pace of development activity, from both public and private companies, seems to be accelerating miami american airlines arena in recent months. While there is the usual assortment of lower-end limited service highway hotels and convention center-oriented properties in tertiary markets, there are also a couple miami american airlines arena of notable full service projects which appear to be gaining momentum, including:
1,000 key Marriott Marquis property in Austin Texas (by White Lodging, who recently opened a similarly sized property in Indianapolis). They are also planning a 130 key R