Corporates
U.S.A. 2012 Outlook: Cross-Sector Lodging & Timeshare The Penthouse View Outlook Report
Rating Outlook Rating Outlook STABLE Lodging Upcycle Continues: Lodging demand trends continue on a solid recovery trajectory, despite heightened global macroeconomic risk stemming from European sovereign debt
Fitch’s U.S. concerns and a slowdown in China. U.S. RevPAR remains roughly 5% below the 2007 peak.
Industrywide RevPAR Slightly Softer 2012 Forecast: Fitch Ratings’ base case currently reflects 4%5%
Outlook industrywide RevPAR growth in the U.S. this year, followed by midsingle-digit growth in 2013. (%) 2011 Outlook 2012 Outlook This is a deceleration from the 8% growth realized in 2011, which was slightly stronger than 2011F 5.07.0 2011A 8.0 Fitch’s original forecast of 5%7% RevPAR growth for the year and a similar range in 2012. 2012F Similar to 2011 4.05.0 Fitch has slightly reduced its RevPAR outlook for 2012 based on slower broader economic 2013F Mid Single-Digit growth estimates. At this point, Fitch believes RevPAR growth in 2013 could meet or slightly Growth F Forecast. A Actual. exceed 2012, based on Fitch’s current forecast of a modest macroeconomic acceleration in
Source: Smith Travel Research, 2013 and muted supply growth. Fitch Ratings. Demand Trends Maturing: RevPAR growth has been increasingly driven by improvement in Related Research the average daily rate (ADR), while occupancy growth has been decelerating, which is typical See page 22. of a maturing lodging cycle. In second-half 2011, ADR was a bigger driver of RevPAR growth Analysts than occupancy. Fitch expects this trend to continue in 20122013, as hotels begin to achieve Lodging C-Corps Michael Paladino, CFA optimal occupancy levels, which will contribute to stronger margins and profitability. Luxury, +1 212 908-9113 upper upscale, and upscale hotels have shown the greatest improvement, which Fitch expects [email protected] to continue in 2012 as those segments continue to rebound from the steepest declines. Shawn Gannon +1 212 908-0223 [email protected] Attractive Supply Growth Outlook: U.S. supply growth will be less than 1% annually through
Lodging REITs at least 20122013, which provides cushion to downside scenarios. This is well below the long- Steven Marks term historical average of roughly 2%, and contrasts the situation during the recent recession +1 212 908-9161 [email protected] when supply growth was peaking at more than 3% in 20082009. Hotel property-level
Kimberly Chan operating performance should continue its solid improvement in 20122013 as a result of the +1 212 908-0346 favorable supply/demand outlook. [email protected]
Hotel CMBS Timeshare Cash Flow Improves: Timeshare contract volumes have been increasing, albeit with Jeff Watzke generally flat pricing; development pipelines have been downsized significantly; and the asset- +1 312 606-2358 [email protected] backed securities (ABS) market has been favorable, resulting in a solid near-term FCF outlook for Christopher Bushart that segment. Longer term, the capital intensity of the business, the cyclical nature of consumer +1 212 908-0606 [email protected] discretionary purchases, and a reliance on a healthy ABS market all hinder credit quality. Marriott International, Inc.’s timeshare spinoff was completed in November. Fitch believes that Timeshare ABS Bradley Sohl if there is solid market acceptance of the spinoff, other C-Corps could explore similar +1 312 368-3127 [email protected] transactions in upcoming years. Du Trieu +1 312 368-2091 What Could Change the Outlook [email protected]
Statistical Analysis RevPAR The lodging industry is highly cyclical, so the tenuous macroeconomic environment remains the James Batterman, CFA primary concern. Double-dip scenarios are cushioned by the attractive U.S. lodging supply +1 212 908-0385 [email protected] growth outlook and the healthier state of corporate balance sheets compared with the most
recent recession. Although not in Fitch’s outlook, the dynamics of another potential global recession could be driven by the European sovereign debt crisis, a hard landing of the Chinese economy/real estate market, and/or a slow-growth environment in the U.S. www.fitchratings.com January 19, 2012
Corporates
Table of Contents Cross-Sector Outlooks ...... 2 Lodging C-corps and REITs...... 2 CMBS with High Hotel Exposures ...2 Cross-Sector Outlooks Timeshare ABS...... 2 Hotel Operating Trends ...... 3 Lodging C-corps and REITs Broader Economic Outlook and Exposure ...... 3 Outlook Revised to Stable from Positive Higher Quality RevPAR Growth in 20122013...... 5 Most lodging C-corps aggressively reduced debt over the past several years, so current Supply Growth Outlook Attractive.....7 balance sheets are generally at comfortable levels. The expected operating performance Timeshare Operating Trends...... 8 improvement in 20122013 will provide lodging C-corps and real estate investment trusts Rebounding Volume, Not Price...... 8 Timeshare Downsized (REITs) with increased financial flexibility and cushion relative to downside stress scenarios. Post-Recession...... 9 Financial policies have broadly shifted from balance sheet improvement to growth initiatives, Marriott Timeshare Spinoff ...... 9 asset acquisitions, and shareholder-friendly actions, reflecting the positive operating Investing in Distressed Assets ...... 9 Liquidity and Financing Trends ...... 10 fundamentals. Lodging REITs accessed a significant amount of equity capital over the past two Financial Policies Transition for years, bolstering liquidity and fueling an acceleration of hotel transaction volume. C-Corps...... 10 Business Model Affects FCF Select issuers continuing to focus on balance sheet improvement will still be able to achieve Stability...... 10 positive rating momentum. However, Fitch believes most lodging C-Corps and REITs will Heavy Issuance Volume become increasingly more aggressive with respect to financial policies, outside of a material for REITs ...... 11 deterioration of the broader economic outlook. Flat Transaction Volume in 2012....12 Improving Performance Aids CMBS Hotel Liquidity...... 12 CMBS with High Hotel Exposures Similar CMBS Performance Expected in 2012 ...... 12 Stable Outlook Maintained Timeshare ABS Market Update .....13 Fitch expects the current ratings of transactions with high hotel exposure to remain stable in Appendix A: Primer on Asset Securitizations...... 14 2012. The majority of transactions with higher hotel exposures were floating-rate transactions Hotel CMBS Delinquency originated during 20052008 and were subsequently downgraded between 2009 and 2010. Trends...... 14 Hotel CMBS Loan Loss Trends .....14 Increased hotel loan origination in 2011 should extend into 2012, based not only on improved Upcoming CMBS Maturities ...... 15 industry factors but also the increased volume of loan maturities. Hotel performance and Timeshare ABS Delinquency and valuations improved throughout 2011, a trend that is expected to continue through 2012, Default Trends...... 16 though at a lower rate of growth. Accounting for Timeshare Receivable Securitizations...... 17 The hotel sector has historically demonstrated the most cash flow volatility of the major Appendix B: Statistical Analysis commercial mortgage-backed securities (CMBS) property types due to the daily resetting of of RevPAR...... 19 rates and high operating leverage. Background ...... 19 Correlation with Macro Indicators ..19 Modeling RevPAR...... 20 Timeshare ABS Appendix C: Related Research and Fitch Coverage...... 22 Stable Outlook Maintained Related Lodging Research...... 22 Selected Lodging Companies ...... 23 There was notable deterioration in delinquency and default performance of timeshare ABS (see Fitch-Rated Hotel CMBS chart on pages 17) during the recent recession. However, the sizable and often-growing levels Summary ...... 24 of credit enhancement shielded the Fitch-rated portfolio from negative rating actions. Fitch Fitch-Rated Timeshare expects stable collateral performance, combined with ample credit enhancement levels, to lead ABS Transactions...... 25 to stable ratings in 2012.
2012 Outlook: Cross-Sector Lodging & Timeshare 2 January 19, 2012 Corporates
Fitch’s GDP Forecasts Key Issues: Hotel Operating Trends (%) U.S. World 2010 3.0 3.9 Broader Economic Outlook and Exposure 2011F 1.7 2.7 2012F 1.8 2.4 Lodging RevPAR is highly correlated to the broader economy, particularly unemployment 2013F 2.6 3.0 levels (see Appendix B on page 19 for a statistical analysis of historical RevPAR trends). F Forecast. Source: Fitch Global Economic Outlook, Fitch’s 2012 economic growth forecast incorporates a sluggish growth scenario of relatively flat Dec. 12, 2011. GDP growth in the U.S before a modest acceleration in 2013. Marriott’s and Starwood’s credit profiles can withstand RevPAR declines of 10% or more while maintaining leverage comfortably below 4.0x, without any efforts to reduce debt.
Profit by Operating Segment Lodging (%) Owned Managed Franchised Timeshare Starwood 15 3540 3035 10 Marriott 5 50 30 15 Wyndhama 0 >5 1520 50 InterContinental 13 22 65 0 Hyatt 32 6065 510 N.M.b Choice 0 0 100 0 aSegments listed only sum to approximately 70%. The remainder is attributable to its Vacation Exchange and Rentals segment. b2% of Hyatt’s total rooms are timeshare units. Timeshare revenue is recorded in “Corporate and Other” and is not a meaningful part of overall profits. N.M. – Not meaningful. Source: Company filings; Fitch estimates.
Lodging Segment Exposure Summary
Luxury
Hyatt
Starwood Marriott
Hilton
Consumer — Focus Corporate — Focus IHG
Choice
Wyndham
Economy
Source: Fitch Ratings.
2012 Outlook: Cross-Sector Lodging & Timeshare 3 January 19, 2012 Corporates
Scenario Analysis for Fitch-Rated C-Corps Marriott International Starwood Hotels & Resorts ($ Mil.) (BBB/Stable)a (BB+/Positive) 2011 Estimate Revenue 10,600 5,433 Fitch Consolidated EBITDAR 1,100 1,048 Fitch Core EBITDAR (Excluding Consumer Financing Profit) N.A. 1,011 Lease Adjusted Debt 3,179 3,397 Core Lease-Adjusted Debt 3,179 2,799 Leverage Metrics (x): Consolidated Lease Adjusted Leverage 2.9 3.2 Core Lease Adjusted Leverage 2.9 2.8 Coverage Metrics (x): Consolidated Lease Adjusted Coverage 4.9 3.8 Core Lease Adjusted Coverage 4.9 3.7
Scenario 1: RevPAR Decline of 5% Fitch-Consolidated EBITDAR 985 970 Fitch Core EBITDAR (Excluding Consumer Financing Profit) 985 940 Leverage Metrics (x): Consolidated Lease Adjusted Leverage 3.2 3.5 Core Lease Adjusted Leverage 3.2 3.0 Coverage Metrics (x): Consolidated Lease Adjusted Coverage 4.4 4.1 Core Lease Adjusted Coverage 4.4 4.0
Scenario 2: RevPAR Decline of 10% Fitch Consolidated EBITDAR 870 900 Fitch Core EBITDAR (Excluding Consumer Financing Profit) 870 860 Leverage Metrics (x): Consolidated Lease Adjusted Leverage 3.7 3.8 Core Lease Adjusted Leverage 3.7 3.3 Coverage Metrics (x): Consolidated Lease Adjusted Coverage 3.8 3.8 Core Lease Adjusted Coverage 3.8 3.7 aMarriott figures adjusted for timeshare spinoff; Starwood debt balances pro forma for fourth-quarter activity. Starwood downside scenarios do not factor in declines to timeshare segment. Assume debt balances remain constant despite both companies aggressively reducing debt in past recession. Both MAR and HOT reduced debt by roughly 25% from year- end 2008 to year-end 2009. N.A. Not available. Source: Company Filings, Fitch estimates.
Certain issuers are more heavily exposed to corporate and business travel, while others are more sensitive to consumer and leisure travel (see the chart at the bottom of page 3). If the broader economic environment deteriorates, Fitch anticipates there will be more stability within corporate travel trends, given solid liquidity and balance sheets across much of the corporate sector.
International Exposure by Company (%) Starwood Wyndham Marriott IHG Hyatt Choice Current Portfolio (No. of Rooms) U.S. 50 75 80 50 70 80 Outside U.S. 50 25 20 50 30 20 EMEA 20 8 8 20 6 7 China 510 <5 <5 <5 <5 <5
Pipeline (No. of Rooms) U.S. 1520 40 55 3040 30 80 Outside U.S. 8085 60 45 6070 70 20 EMEA 1015 N.A. 510 20 N.A. 6 China 45 N.A. 1020 1015 2025 <5 N.A. Not available. Source: Company filings, Fitch estimates.
The most topical macro risks include the European sovereign debt crisis and the potential for a hard landing of the Chinese economy or the bursting of a China real estate bubble. Negative outcomes with respect to these issues could have far-reaching effects due to the increasingly integrated nature of world economies and financial markets.
2012 Outlook: Cross-Sector Lodging & Timeshare 4 January 19, 2012 Corporates
Starwood Hotels & Resorts Worldwide Inc. and InterContinental Hotels Group have the most non-U.S. exposures. Although non-U.S. exposure of the current portfolio of rooms is significant, it is even greater for most of the companies’ supply pipelines.
Higher Quality RevPAR Growth in 20122013
Pricing power returned earlier than expected following the recent recession, as industrywide ADR turned consistently positive in mid-June 2010. This trend continued in 2011 as rate contributed as much to RevPAR growth as occupancy. Fitch expects ADR growth to make up an increasingly greater portion of RevPAR growth in 20122013, resulting in stronger profitability compared with occupancy-driven RevPAR growth. This should lead to property- level margin expansion and strong increases in incentive management fees.
Corporate travel has been a significant contributor to the recovery in 2011 due to strong corporate profits. Both Marriott and Starwood, which generate a majority of their revenues from business travel, have noted very strong business transient demand despite reduced discounting and special offers.
RevPAR, ADR, and Occupancy Growth
RevPAR Growth ADR Growth Occupancy Growth (%) 20 10 0 (10) (20) (30)
9 1 3 5 7 88 9 0 0 0 0 09 11 9 0 0 0 0 0 0 1 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 19 2000 2 2002 2 2004 2 2006 2 2008 2 2010 2
Source: Smith Travel Research, Fitch Ratings.
RevPAR Comparisons YTD (% Change) 2006 2007 2008 2009 2010 20111Q11 2Q11 3Q11 C-Corps Marriott Internationala 9.5 7.6 0.1 (18.4) 5.8 6.5 6.8 6.9 6.7 Starwood Hotels & Resorts Worldwide, Inc. 9.9 10.3 1.7 (20.7) 10.6 10.4 11.8 11.6 11.3 Hyatt Hotels Corp. N.A. N.A. N.A. (18.7) 9.2 9.5 7.3 8.2 8.3 Wyndham Worldwide 12.7 4.4 (2.0) (15.1) 2.6 7.4 9.7 6.3 7.7 InterContinental Hotels Groupb 9.8 7.0 0.9 (14.7) 5.5 6.9 6.7 6.4 6.6 Choice Hotels International Inc. 6.1 4.0 (1.8) (14.4) 0.5 5.5 6.6 5.4 5.7
REITs Host Hotels & Resorts, Inc.c 8.5 6.5 (2.6) (19.9) 5.8 5.4 6.7 6.4 6.3 Hospitality Properties Trust 8.9 5.5 (1.6) (20.5) 2.2 7.5 8.2 7.7 7.6 Felcor Lodging Trust 7.8 3.3 1.0 (17.6) 3.8 6.3 6.2 5.0 5.7 LaSalle Hotel Properties 10.1 5.4 (1.7) (17.0) 2.6 7.1 6.3 6.4 6.5
U.S. Industry (Smith Travel) 7.8 5.8 (1.9) (16.7) 5.4 9.0 8.1 7.5 8.0 a2008 figure is pro forma to exclude incremental 53rd week. bFigures are provided on a constant currency basis. c2007 figure is pro forma for the acquisition of the Starwood portfolio on April 2006. N.A. Not available. Note: The description of the RevPAR figure cited for each company is as follows: Marriott International Worldwide Comparable Systemwide Properties RevPAR; Starwood Hotels & Resorts Worldwide Systemwide for Same-Store Hotels RevPAR; Wyndham Worldwide Systemwide RevPAR; InterContinental Hotels Group Global RevPAR; Hyatt Hotels Corp. Systemwide RevPAR; Choice Hotels International Inc Domestic Systemwide RevPAR; Host Hotels & Resorts, Inc Comparable Hotel RevPAR; Hospitality Properties Trust Consolidated RevPAR; Felcor Lodging Trust Consolidated RevPAR; LaSalle Hotel Properties Consolidated RevPAR. Source: Company filings, Smith Travel Research, Fitch estimates.
2012 Outlook: Cross-Sector Lodging & Timeshare 5 January 19, 2012 Corporates
Segment Chains by Company Luxury Upper Upscale Upscale Upper Midscale Midscale Economy Starwood St. Regis Westin Four Points Luxury Collection Le Meridien Aloft W Hotel Sheraton (10%) (10%) (80%) Hyatt Park Hyatt Hyatt Hyatt Place Andaz Hyatt Regency Hyatt Summerfield Suites Grand Hyatt (60%) (20%) (20%) Marriott Ritz-Carlton Marriott Courtyard Fairfield Inn Edition Renaissance Residence Inn TownPlace Suites Bulgari Autograph Collection Springhill Suites (10%) (5%) (45%) (40%) Hilton Conrad Hotels Hilton Doubletree Hampton Inn Waldorf Astoria Embassy Suites Hilton Garden Home2 Suites (<5%) (20%) Homewood Suites (50%) (30%) IHG InterContinental Crowne Plaza Holiday Inn Candlewood Suites (10%) Staybridge Suites Holiday Inn Express (5%) Hotel Indigo (65%) (20%) Choice Ascend Comfort Inn Quality Inn Econo Lodge Cambria Suites Comfort Suites Sleep Inn Rodeway Inn (<5%) Clarion MainStay Suites Suburban (50%) (30%) (15%) Wyndham Wyndham Wingate by Wyndham Days Inn (5%) Hawthorn Suites Super 8 Ramada Howard Johnson Express Howard Johnson Travelodge Baymont Microtel Inn (30%) Knights Inn (65%) Note: Percentages are Fitch estimates of total based on room count. Brand classification was determined from company filings and STR 2011 chain scales. Source: Company filings, 2011 STR US Chain Scales.
The recovery in longer term group business revenue growth has lagged due to the advanced negotiations of price. Roughly two-thirds of group business is booked in the prior year, and about one-third is booked within the same year. Group business (typically 35%40% of the customer mix for full-service hotels) has continued to show encouraging improvement as booking windows lengthened and pricing strengthened. Group business should provide further ADR improvements in 2012 as the lower rates continue to roll off and rate increases take affect.
Industrywide pricing in the luxury, upper upscale, and urban segments has consistently been outperforming the broader U.S. market since the middle of second-quarter 2010. This is another positive indicator that the lodging recovery has been gaining traction, since the higher price point segments are more volatile and reflect greater operating leverage. At this stage of the cycle, this trend benefits companies that are more exposed to the higher end segments, such as Marriott, Starwood, and Host Hotels & Resorts Inc.
Property-Level Profit Margins (Basis Points Change) 2011 Issuer 2006 2007 2008 2009 2010 1Q11 2Q11 3Q11 YTD Marriott International Inc. 230 150 (70) (380) 30 30 70 90 60 Starwood Hotels & Resorts Worldwide, Inc. N.A. N.A. N.A. N.A. N.A. 90 90 140 N.A. Host Hotels & Resorts, Inc. 210 70 (140) (520) (20) (10) 115 110 80 N.A. Not available. Note: The description of the property-level profit margin figure cited for each company is as follows: Marriott International Worldwide Comparable Company-Operated House Profit Margins; Starwood Hotels & Resorts Worldwide Same-Store Company-Operated Gross Profit Margins; Host Hotels & Resorts, Inc Comparable Hotel Adjusted Operating Profit Margins. Source: Company filings.
2012 Outlook: Cross-Sector Lodging & Timeshare 6 January 19, 2012 Corporates
Supply Growth Versus Demand Growth Supply Growth Demand Growth Long-Term Supply Growth Average (2.1%)
(%) 10
5
0
(5)
(10)
(15)
9 0 2 3 4 5 7 8 0 2 3 5 6 7 8 0 1 8 9 9 9 9 9 9 0 0 0 0 0 0 1 1 9 9 9 9 9 9 9 999 0 0 0 0 0 0 0 0 1988 1 1 1991 1 199 1 1 1996 1 1 1 2 2001 2 2 2004 2 200 2 2 2009 2 2
Source: Smith Travel Research, Fitch Ratings.
Supply Growth Outlook Attractive
Above-average supply growth during the recent recession exacerbated the pressure on hotel operating fundamentals. However, the current U.S. supply outlook is attractive, which provides support to lodging downside scenarios. U.S. supply growth will remain less than 1% through at least 20122013. This is well below the long-term average of 2% and contrasts with the recent recession, when supply growth was peaking at more than 3% in late 2008/early 2009.
Fitch expects growth initiatives for lodging C-Corps to be targeted internationally, with the majority of development pipelines focused on Asia.
With respect to the supply pipeline of lodging C-corps, Fitch reviews the extent to which lodging C-corps participate in creating new supply. Lodging C-corps can support projects in the form of loan guarantees, loans to hotel owners, and minority equity investments in order to maintain the growth in the supply pipeline while project financing remains tight.
Fitch expects such participation in hotel projects and investments will increase, as long as the industry continues its solid recovery trajectory. Further, the hotel transaction environment has been steadily improving, which indicates that bid/ask spreads on hotel assets have narrowed. This bodes well for C-corps that plan to strategically sell assets, such as Starwood, Hyatt Hotels Corp., and Accor SA.
C-corp Supply Growth 2006 2007 2008 2009 2010 1Q11 2Q11 3Q11 Supply Pipeline (No. of Rooms) (a) Marriott International 100,000 125,000 125,000 100,000 105,000 95,000 100,000 105,000 Starwood Hotels & Resorts Worldwide, Inc. 100,000 120,000 100,000 85,000 85,000 85,000 90,000 90,000 Wyndham Worldwide 92,000 105,000 111,000 108,000 103,000 102,000 111,000 115,000
Period-End Room Base (b) Marriott International 513,832 535,093 560,681 595,000 618,000 631,000 634,000 638,000 Starwood Hotels & Resorts Worldwide, Inc. 272,498 281,935 292,000 298,522 308,736 311,403 312,374 316,344 Wyndham Worldwide 543,200 550,600 592,900 597,000 612,700 609,600 612,900 611,200
Forward Supply Growth (a divided by b) (%) Marriott International 19.5 23.4 22.3 16.8 17.0 15.1 15.8 16.5 Starwood Hotels & Resorts Worldwide, Inc. 36.7 42.6 34.2 28.5 27.5 27.3 28.8 28.5 Wyndham Worldwide 16.9 19.1 18.7 18.1 16.8 16.7 18.1 18.8 Source: Company filings, Fitch.
2012 Outlook: Cross-Sector Lodging & Timeshare 7 January 19, 2012 Corporates
Key Issues: Timeshare Operating Trends
Rebounding Volume, Not Price
Timeshare (i.e., vacation ownership) sales have continued to slowly rebound in 2011, driven by modest increases in contract sales volume and generally flat to slight increases in average price. This is a sign that sellers may be getting more comfortable with current inventory levels and, thus, starting to pull back on the aggressive price reductions and promotional activity that drove contract volume in 2010. Fitch expects continued tight consumer discretionary spending will constrain increases in the average price per unit to low single-digit growth in 2012, with sales volume growing slightly faster in the midsingle-digit range.
Starwood Timeshare Contract Sales Trend
Average Price Per Vacation Ownership No. of Contracts Signed (%) 20 10 0 (10) (20) (30) (40)
7 7 8 8 8 9 9 9 0 0 0 1 1 0 0 0 0 1 1 1 Q Q Q Q Q 2Q 3Q0 4Q07 1 2Q0 3Q08 4 1Q0 2Q 3Q0 4Q09 1 2Q1 3Q10 4 1Q1 2Q11 3
Source: Company filings, Fitch Ratings.
The timeshare business is more meaningful to Wyndham Worldwide Corp.’s credit profile (approximately 50% of profits) than to Marriott’s (prior to spinoff) and Starwood’s (approximately 10%15% of profits). Fitch generally views the timeshare segment less favorably than the managed/franchised fee segment and owned/leased hotel segment,
Timeshare Restructuring Actions Taken During Recession Company Action Taken Financial Impact Wyndham Announced realignment plans that would reduce 2009 VOI $1.3 billion goodwill impairment charge (4Q08). sales by approximately 40% to reduce its reliance on the securitization market and reduce costs and capital funding. Marriott Exited luxury fractional and residential resort segment. $760 million writedown (3Q09) $324 million writedown (4Q11), prior to spin-off). Starwood Elected not to develop certain sites and future phases of $380 million in restructuring and existing projects. impairment related charges (4Q09).
VOI Vacation ownership interest. Source: Company filings.
Timeshare Contract Sales Trend (%) YTD Issuer 2006 2007 2008 2009 2010 1Q11 2Q11 3Q11 2011 Marriott International 17.0 (14.0) (15.0) (37.0) (5.7) (15.7) (2.5) 6.3 (4.1) Starwood Hotels & Resorts Worldwide, Inc. 19.2 (3.8) (26.0) (39.0) (3.1) 6.5 8.1 3.8 6.1 Wyndham Worldwide 24.9 14.3 (0.3) (33.8) 11.3 3.6 11.1 10.4 8.7 a2012E (estimate) reflects the companies’ outlooks, not Fitch’s outlooks. Note: The description of the timeshare contract sales figure cited for each company is as follows: Marriott adjusted timeshare contract sales; Starwood originated contract sales; and Wyndham gross vacation ownership interest (VOI) sales. Source: Company filings.
2012 Outlook: Cross-Sector Lodging & Timeshare 8 January 19, 2012 Corporates
because it is more capital-intensive and relies on loan receivable sales to support its cash flow profile, thereby creating greater FCF volatility.
Timeshare Downsized Post Recession
After a decline of roughly 35%40% in 2009, declines in timeshare contract sales moderated in 2010 and have picked up only minimally. Wyndham has consistently outperformed Marriott and Starwood, likely due in part to its flexible points-based system, which has enabled it to maintain more price integrity by offering shorter term products. Recognizing the value and flexibility of the product to consumers, Marriott also implemented a points-based system in June 2010.
Wyndham, Marriott, and Starwood all took steps to restructure their businesses by reducing cost structures, curtailing development, and writing down inventory as timeshare demand deteriorated during the recession. This was in an effort maximize near-term cash flow and reduce capital investment.
Marriott Timeshare Spinoff
Marriott capitalized on the improving cash flow outlook of its timeshare segment by spinning it off from its lodging business, which finalized on Nov. 21, 2011. The transaction was positive for Marriott’s credit profile in terms of business risk, due to the removal of the negative timeshare credit considerations noted earlier. However, there was no rating impact, as indicated in Fitch’s comment dated Feb. 15, 2011. Fitch believes if the spinoff is well received, it could prompt other companies to take a similar strategy.
As part of the spinoff, Marriott Vacation Club will have exclusive rights to the Marriott and Ritz- Carlton brand names as they relate to the vacation ownership business. In return, Marriott will receive royalty fees, which will be roughly $60 million$70 million in 2012. Fitch estimates Marriott’s lease-adjusted leverage at 2.9x, assuming annual pro forma EBITDAR of roughly $1.1 billion and $100 million for Marriott and Marriott Vacation Club, respectively. Fitch estimates Marriott Vacation Club’s consolidated leverage in the low double digits and its core leverage (excluding consumer financing profit and nonrecourse debt) at 4.0x5.0x.
Investing in Distressed Assets
In 2010, Wyndham implemented a more capital efficient model, the Wyndham Asset Affiliation Model (WAAM). The model charges a fee for a turnkey solution and leaves the ownership with the developer or owner, rather than Wyndham purchasing developed condominium and hotel inventory to sell. Wyndham converts the inventory into a timeshare, and the affiliate has access to Wyndham’s extensive sales and marketing channels to sell it. WAAM sales account for about 6%7% of Wyndham’s gross VOI sales, a number it would like to get to 15%20% over the next several years.
Diamond Resorts has executed a more capital-intensive strategy of acquiring distressed timeshare companies with the intent to add the properties to its system. It has suspended development of new timeshare inventory, instead selling the acquired properties, as well as recaptured inventory.
2012 Outlook: Cross-Sector Lodging & Timeshare 9 January 19, 2012 Corporates
Key Issues: Liquidity and Financing Trends
Financial Policies Transition for C-Corps
C-Corps actively tapped the capital markets during the post-recession refinancing surge, with issuances of bonds, equity, convertible securities, and timeshare ABS. C-Corps bolstered liquidity, pushed out near-term maturities, and strengthened balance sheets. In doing so, they tapped the capital markets less frequently, with financial policies shifting toward growth initiatives and shareholder-friendly actions. Marriott increased dividends by 14% and increased its share repurchase authorization. YTD through September, Marriott repurchased approximately $1.1 billion in shares. Wyndham repurchased shares totally $675 million YTD through September, leaving approximately $550 remaining on its increased authorization. It also increased its dividend by 25% in the first quarter of 2011. Hyatt acquired 20 hotels, four management agreements, and other assets from LodgeWorks, L.P. for $661 million. It also repurchased approximately $400 million of common B stock. Starwood’s board approved a $250 million share repurchase authorization, and increased the annual dividend 67% to $0.50 per share.
Fitch expects financial policies to continue to be more growth oriented and shareholder friendly in 2012, assuming there is no material deterioration of the broader economic outlook.
Select Recent Capital Market Activity C-Corps Spread at Issuance Amount Coupon Yield at Issuance Pricing Date Price (%) ($ Mil.) Transaction Type (%) Maturity Issuance (%) (bps) Starwood Hotels & Resorts Worldwide, Inc. 11/05/09 97.56 250 Sr. Unsecured Notes 7.150 2019 7.50 396 04/30/09 96.29 500 Sr. Unsecured Notes 7.875 2014 8.75 676
Hyatt Hotels Corp. 08/04/11 99.57 250 Sr. Unsecured Notes 3.875 2016 4.00 288 08/04/11 99.85 250 Sr. Unsecured Notes 5.375 2021 5.40 300 11/04/09 25.00/Share 127.3a Common Stock 08/10/09 99.46 250 Sr. Unsecured Notes 5.750 2015 5.86 313 08/10/09 99.86 250 Sr. Unsecured Notes 6.875 2019 6.90 313
Wyndham Worldwide Corp. 02/23/11 99.13 250 Sr. Unsecured Notes 5.625 2021 5.74 225 09/15/10 99.95 250 Sr. Unsecured Notes 5.750 2018 5.76 365 02/22/10 100.00 250 Sr. Unsecured Notes 7.380 2020 7.38 378 05/13/09 95.80 250 Sr. Unsecured Notes 9.880 2014 11.00 902 05/13/09 100.00 200 Convertible Notes 3.500 2012 —
Choice Hotels 08/18/10 99.76 250 Sr. Unsecured Notes 5.700 2020 5.73 310 aReflects net proceeds received by Hyatt from the 5.7 million shares sold by the company. As part of the IPO, selling stockholders sold another 38 million shares. Source: Bloomberg, Company filings and releases.
Business Model Affects FCF Stability
Most lodging C-Corps have adopted or are transitioning to an asset-light business model, focusing on brand value and recurring management/franchise fees, and reducing capital intensity (see table on page 4). As a result, lodging C-corps generally maintained solid positive FCF models through the recent recession.
2012 Outlook: Cross-Sector Lodging & Timeshare 10 January 19, 2012 Corporates
FCF generation was more challenging for lodging REITs due to dividend payment requirements and a heavier asset base. However, an Internal Revenue Service (IRS) ruling allowed REITs to pay dividends in cash and stock in 2009, which helped preserve cash while capital market conditions were poor.
Heavy Issuance Volume for REITs
REITs are heavily reliant on regular access to the capital markets due largely to periodic refinancing of mortgage debt and a limited ability to retain earnings. As such, credit profiles can be materially affected when capital market access is impaired for an extended period. This was highlighted by the Chapter 11 bankruptcy filing of General Growth Properties Inc. (GGP) in April 2009.
Strong capital markets in 2011 provided REITs with the sources for acquisition with common equity. Fitch expects these equity-funded acquisitions to create incremental EBITDA and improve leverage from a debt/EBITDA standpoint.
U.S. equity REITs raised approximately $14.5 billion of senior unsecured notes, though only $4.9 billion has been raised since June 2011. In 2010, REITs raised $16.5 billion in bond issuance in 45 transactions, compared with $10.4 billion in 26 transactions in 2009. Most of the offerings in 2011 were public offerings in the REIT sector, and terms ranged from 530 years with an average coupon rate of roughly 4.37%.
Additional fixed-income transactions in the REIT sector included $3.9 million in preferred stock transactions. In addition, REITs raised approximately $20 billion in follow-on equity offerings in 2011.
Select Recent Capital Market Activity —REITs Spread at Issuance Amount Coupon Yield at Issuance Pricing Date Price (%) ($ Mil.) Transaction Type (%) Maturity Issuance (%) (bps) Host Hotels & Resorts, Inc. 05/19/11 17.29/Share 74 Common Stock 06/17/11 17.29/Share 116 Common Stock 11/14/11 100 300 Sr. Unsecured Notes 6.000 2021 6.00 397 05/19/11 99.198 red Notes 75 Sr.5.875 Unsecu 2019 6.00 321 05/05/11 99.198 425 Sr. Unsecured Notes 5.875 2019 6.00 321 10/19/10 N.A. cured Notes 500 6.000Sr. Unse 2020 6.00 340 05/05/09 96.6 400 Sr. Unsecured Notes 9.000 2017 9.63 673 04/24/09 6.60/Share 479 Common Stock
LaSalle Hotel Properties 04/26/11 27.45/Share 217 Common Stock 01/18/11 25.00/Share 69 Preferred Stock 7.500 06/10/09 14.75/Share 141 Common Stock 04/23/09 10.10/Share 119 Common Stock
FelCor Lodging Trust Incorporated 03/29/11 6.00/share 165 Common Stock 11/01/11 N.A. red Notes 525 6.750Sr. Secu 2019 N.A. 536.3 04/27/11 N.A. 525 Sr. Secured Notes 6.750 2019 N.A. 451.5 06/16/10 5.50/Share 166 Common Stock 09/18/09 89.64 636 Sr. Secured Notes 10.000 2014 12.86 1,050 06/15/09 N.A. 200 Secured Term Loan L + 350 2013 03/31/09 N.A. 120 Secured Loan 9.020 2014
Hospitality Properties Trust 08/11/09 17.25/Share 152 Common Stock 08/07/09 98.99 red Notes 300 7.880Sr. Unsecu 2014 8.25 530 06/15/09 11.50/Share 222 Common Stock N.A. Not available. Source: Bloomberg; Company filings and releases.
2012 Outlook: Cross-Sector Lodging & Timeshare 11 January 19, 2012 Corporates
In 2011, Host and FelCor Lodging Trust were the only hotel REITs to access the unsecured bond market. Host offered three sets of private placement unsecured notes totaling $800 million of nine- and 10-year senior notes at a weighted-average 5.92% (rated ‘BB’ by Fitch). FelCor issued a total of $1.05 billion 6.75% senior unsecured notes, half of which were publicly placed in August 2011 and the other half privately placed in April 2011.
Six hotel REITs accessed the preferred equity market, issuing nearly $700 million of redeemable cumulative perpetual preferred stock with a weighted-average interest rate of 8.18%. Common equity offerings for the lodging REIT sector totaled $1.72 billion in 2011, as compared with $2.8 billion in 2010.
Flat Transaction Volume in 2012
Jones Lang LaSalle is forecasting global hotel transaction volumes of $30 billion in 2012, which is flat with 2011 and reflects a deceleration from the 13% growth last year. REITs drove the increase in the first half of 2011, while private equity investment accelerated in the second half of the year. The buyer mix is broadening with additional demand from sovereign wealth funds and private high net worth individuals, but REITs may be less active and there will be fewer distressed opportunities if the recovery trajectory remains intact.
Improving Performance Aids CMBS Hotel Liquidity
CMBS issuance grew from $12 billion in 2010 to approximately $33 billion in 2011. Forty-three U.S. CMBS transactions came to market during 2011, and the transaction pipeline is expected to be similar in 2012.
There was an increase in the number of loans backed by hotel properties, in addition to the growth in overall issuance. In 2010, Fitch-rated transactions included, on average, 4.2% of hotel properties. Meanwhile, 2011 Fitch-rated transactions averaged 10.2%. This year-over- year is a positive sign that CMBS investors are becoming more comfortable with the sustainability of the recent performance.
In 2011, in addition to hotel loans in multiborrower conduit transactions, there were two single- borrower hotel transactions and two large loan floating-rate transactions, which had moderate to significant exposure to hotel loans. The market had not seen a floating-rate CMBS issuance of this nature since 2007.
The two single-borrower transactions backed by hotels were COMM 2011-THL (rated by Fitch), a $685 million fixed-rate offering backed by 168 hotel properties located in 33 states, and City Center Trust 2011-CCHP (not rated by Fitch), a $425 million floating-rate offering backed by 13 hotels. The two floating-rate transactions were COMM 2011 FL1 (rated by Fitch), a $784 million offering in which hotels accounted for 80.1% of the pool, and JPMCC 2011 FL1 (not rated by Fitch), a $609 million offering in which hotels accounted for 39.5% of the pool.
Similar CMBS Performance Expected in 2012
General economic fears over Europe caused the widening of loan spreads, resulting in a slowdown of CMBS loan originations in the third quarter of 2011. Continuing economic uncertainty will probably cause lenders to focus on market-leading, flagged hotels located in primary and destination markets. Hotel loans may continue to account for an increasing percentage of new transactions in 2012, if hotel performance continues its positive momentum.
2012 Outlook: Cross-Sector Lodging & Timeshare 12 January 19, 2012 Corporates
Timeshare ABS Market Update
Lodging C-corps regularly access the ABS market by securitizing and selling timeshare receivables, which supports timeshare segment cash flow generation and helps to fund the business. The temporary shutdown of the ABS market in late 2008/early 2009 during the recession raised liquidity and cash flow concerns. However, despite the temporary shutdown, the companies were able to demonstrate solid access to the market during the recession, albeit at less attractive terms.
The timeshare ABS market remains stable, and Fitch expects 2012 issuance volume to be comparable to 2011 levels. Issuance is expected to be dominated by repeat issuers that have been able to tap the ABS sector over the past two years. Advance rates and interest rates are also expected to remain relatively unchanged from the prior year.
Transaction terms since 2009 have become increasingly more attractive, as advance rates and interest rates return to or exceed prerecession levels. Some of the improvements shown in the table below are attributable to differences in structure and ratings for each transaction, but overall the transactions have been economically more favorable for the lodging C-corps on an aggregate/blended basis.
Timeshare ABS Securitizations ($ Mil.) Original Total Original Weighted Average Original Original Aggregate Amount of Interest Rate on $ Amount OC (% of Advance Closing Date Pool Size Issuing Trust Notes Issued Notes Issued (%) of OC Collateral) Rate (%) Marriott International 11/12/10 229.0 Marriott Vacation Club Owner Trust 2010-1 218.0 3.64 11.0 4.8 95.2 10/21/09 380.0 Marriott Vacation Club Owner Trust 2009-2 317.0 4.81 63.0 16.6 83.4 03/09/09 284.0 Marriott Vacation Club Owner Trust 2009-1 205.0 9.87 79.0 27.8 72.2 06/10/08 300.0 Marriott Vacation Club Owner Trust 2008-1 246.0 7.20 54.0 18.0 82.0 10/30/07 250.0 Marriott Vacation Club Owner Trust 2007-2 250.0 5.93 0.0 100.0 June 2007 270.0 Marriott Vacation Club Owner Trust 2007-1 270.0 5.57 0.0 100.0 September 2006 280.0 Marriott Vacation Club Owner Trust 2006-2 280.0 5.41 0.0 100.0 June 2006 250.0 Marriott Vacation Club Owner Trust 2006-1 250.0 5.81 0.0 100.0
Starwood Hotels & Resorts Worldwide, Inc. 11/03/11 210.0 SVO 2011-A VOI Mortgage LLC 200.0 3.70 10.0 4.8 95.2 08/01/10 300.0 SVO 2010-A VOI Mortgage Corporation 279.0 3.80 21.0 7.0 93.0 12/10/09 200.0 SVO 2009-B VOI Mortgage Corporation 166.0 5.75 34.0 17.0 83.0 06/08/09 181.0 SVO 2009-A VOI Mortgage Corporation 125.0 8.00 56.0 30.9 69.1 11/28/06 133.0 SVO 2006-A VOI Mortgage Corporation 125.0 5.40 8.0 6.0 94.0 11/29/05 221.0 SVO 2005-A VOI Mortgage Corporation 205.0 5.44 16.0 7.2 92.8
Wyndham Worldwide 11/10/11 319.1 Sierra Timeshare 2011-3 Receivables Funding LCC 300.0 4.12 19.1 6.0 94.0 08/31/11 326.1 Sierra Timeshare 2011-2 Receivables Funding LCC 300.0 4.01 26.1 8.0 92.0 03/28/11 408.2 Sierra Timeshare 2011-1 Receivables Funding LCC 400.0 3.70 8.2 2.0 98.0 10/21/10 340.9 Sierra Timeshare 2010-3 Receivables Funding LLC 300.0 3.67 40.9 12.0 88.0 07/26/10 420.4 Sierra Timeshare 2010-2 Receivables Funding LLC 350.0 4.11 70.4 16.8 83.3 03/19/10 415.2 Sierra Timeshare 2010-1 Receivables Funding LLC 300.0 4.48 115.2 27.8 72.3 10/07/09 318.2 Sierra Timeshare 2009-2 Receivables Funding LLC 175.0 4.52 143.2 45.0 55.0 10/07/09 250.0 Sierra Timeshare 2009-3 Receivables Funding LLC 175.0 7.62 75.0 30.0 70.0 06/01/09 77.0 Sierra Timeshare 2009-B Receivables Funding, LLC 50.0 9.00 27.0 35.1 70.0 05/28/09 416.7 Sierra Timeshare 2009–1 Receivables Funding LLC 225.0 9.79 191.7 46.0 54.0 03/13/09 116.8 Special Asset Facility, 2009-A, LLC 46.0 9.00 70.8 60.6 70.0 06/30/08 598.8 Sierra Timeshare 2008-2 Receivables Funding, LLC 450.0 7.15 148.8 24.9 70.0 05/01/08 257.2 Sierra Timeshare 2008-1 Receivables Funding, LLC 200.0 7.95 57.2 22.2 77.8 11/02/07 507.0 Sierra Timeshare 2007-2 Receivables Funding, LLC 455.0 5.37 52.0 10.3 89.7 05/23/07 678.0 Sierra Timeshare 2007-1 Receivables Funding, LLC 618.6 5.27 59.3 8.7 91.3 N.A. Not available. Source: Company filings, Fitch Ratings.
2012 Outlook: Cross-Sector Lodging & Timeshare 13 January 19, 2012 Corporates
Appendix A: Primer on Asset Securitizations
Lodging C-corps and REITs may issue CMBS collateralized by hotel assets or ABS collateralized by timeshare receivables in order to diversify sources of capital and potentially reduce their overall cost of capital. In addition, Fitch rates numerous transactions issued by financial sponsors that are either fully or partially collateralized by lodging assets.
Structured finance transactions rely on the concept of a bankruptcy-remote special-purpose vehicle (SPV) to enhance the likelihood of separation of the SPV from its originator and other affiliates in the event of insolvency of any such affiliates. The key feature that distinguishes a structured finance transaction from a corporate credit is the structural isolation or “delinking” of an underlying pool of assets from the corporate credit risk of the owner or “originator” of those assets. This is typically achieved in structured finance by the sale of an identifiable and specific pool of the originator’s assets to an SPV so that neither the assets, nor their proceeds on realization, will be available for distribution as part of the bankruptcy estate of the originator.
Hotel CMBS Delinquency Trends
The hotel delinquency rate improved to 12.02% in December 2011 from the 14% reported in December 2010. Hotels are now benefiting from their ability to reset rates on demand, resulting in enhanced liquidity and renewed investor interest. Hotel delinquencies are higher than the 8.37% overall U.S. CMBS Loan Delinquency Index (LDI) recorded at the end of December 2011. The overall LDI rate declined for the fifth straight month after hitting an all-time high of 9.01% in July 2011.
The hotel delinquency rate benefited from $604 million in resolved hotel-backed loans in September 2011. The largest two resolutions were the $252.9 million (Fitch-rated pari passu notes) RRI Hotel Portfolio loan, which was previously 90-days delinquent and whose notes sold for a loss of just more than 50%, and the $160.6 million Jameson Inn Pool loan, which was previously nonperforming matured and is now performing matured. The special servicer continues to work with the Jameson borrower on potential workouts, including a modification. The servicer is trapping all cash and keeping the loan current.
Hotel CMBS Loan Loss Trends
According to Fitch’s U.S. CMBS Loss Study dated Oct. 12, 2011, the average loss severity rate for U.S. CMBS loans resolved with losses in 2010 was 53.4%, compared with 57% in 2009. The slight decline in losses can be somewhat attributed to improved market liquidity and a stabilization in property values. CMBS special servicers resolved a new all-time high of 1,427 loans totaling $19.4 billion in 2010, compared with 516 loans totaling $3.6 billion resolved in 2009.
Fitch expects overall CMBS loss severities to continue to exceed the historical average of 42.9% through 2012. Average loss severities declined for all major property types except retail, which had an average loss severity of 56.9%. Hotel properties represented the fifth-largest amount of resolutions with losses by number of assets, with 58 assets totaling $416.4 million. Losses ranged from 2.7%102.9%, with an average loss severity of 48.6%, which was a significant improvement from a hotel loss severity of 81.9% in 2009 for seven loans.
2012 Outlook: Cross-Sector Lodging & Timeshare 14 January 19, 2012 Corporates
Historical Loss Severity by Property Type and Resolution Yeara (%) Cumulative Property Type 2010 2009 2008 2007 2006 2005 2004 2003 2002 (20022010) Multifamily 55.4 58.0 38.6 45.4 26.9 22.5 37.2 31.3 31.3 39.9 Hotel 48.6 81.9 67.8 32.0 49.8 44.1 35.2 44.9 44.9 42.5 Retail 56.9 48.2 38.4 48.0 25.9 22.6 40.1 54.7 54.7 45.3 Office 51.3 56.9 67.1 37.5 35.8 30.3 28.2 22.0 22.0 43.2 Industrial 48.9 48.8 15.9 54.2 49.9 40.7 38.1 73.8 73.8 46.1 Healthcare 35.4 32.6 N.A. 38.5 17.5 17.6 86.4 28.5 28.5 41.0 Other 49.6 75.3 50.7 32.1 40.8 22.2 73.3 2.9 2.9 44.4 Total/Average 53.4 57.0 42.9 41.5 31.8 29.6 40.1 44.1 44.1 42.9 aWeighted by original securitized balance. N.A. Not available. Source: Fitch Ratings U.S. CMBS Loss Study, dated Oct. 12, 2011.
Hotel resolutions were aided by positive hotel performance and improving valuations on hotels in strong locations. However, hotels have the second-highest cumulative defaults as a percentage of issuance balance, with 22.6% of all U.S. CMBS hotel loans defaulting, compared with 12.4% for all property types combined. Special servicers still have many hotel loans to resolve. Hotel defaults are expected to rise due to the capital needed to refinance pending loan maturities and complete contractual property improvement plans. However, continued good performance in the sector and improving valuations should aid liquidity and keep loss severities below 2009 levels.
Loss severities for hotel properties will be highly dependent upon the economic outlook and continued improvement in hotel operating performance. However, loss severities should trend toward the historical average as the recovery continues, with liquidity remaining in the market and investors continuing to show an interest in hotel acquisitions.
Upcoming CMBS Maturities
In transactions rated by Fitch, approximately 1,200 commercial mortgage loans totaling $17.3 billion are scheduled to mature in 2012. This represents a sizeable drop compared with 2,000 loans totaling $22.5 billion that matured in 2011. Maturities remain modest in 2013 and 2014 at $13.3 billion and $15.5 billion, respectively, before jumping to $29 billion in 2015.
Loans scheduled to mature in 2012 have an average balance of $13.9 million and were originated between 1996 and 2007. Loans secured by office properties represent the largest concentration of maturing loans next year at 38%, with multifamily (22%) and retail (20%) properties to follow. Hotel properties do not represent a significant amount of maturing loans in any quarter of 2012.
The majority of maturities are expected in the first half of 2012, a breakdown by quarter follows: First-quarter 2012: $6.3 billion (43% office properties); Second-quarter 2012: $5.1 billion (47% office properties); Third-quarter 2012: $3.4 billion (31% retail properties); and Fourth-quarter 2012: $2.5 billion (45% retail properties).
Fitch continues to expect the majority of loans to pay off at maturity despite the short-term volatility of the capital markets. Many of these loans are from the 2002 vintage and benefit from stable performance, reasonable underwriting practices, and years of scheduled amortization, which make them more easily financeable in today’s market.
2012 Outlook: Cross-Sector Lodging & Timeshare 15 January 19, 2012 Corporates
With respect to fixed-rate CMBS deals, loss expectations from loans that cannot refinance at maturity are reflected in Fitch’s current ratings using a refinance test, as described in the criteria report, “Surveillance Methodology for U.S. Fixed-Rate CMBS Transactions,” dated Dec. 21, 2011.
Top 10 Largest Fitch-Rated Hotel Loans Scheduled to Mature in 2012 ($) No. of Loan Maturity Specially Modeled Loss Transaction Loan Balance ($) Keys Status Date Serviced Stressed LTVa (%) MSCI 2007-IQ15 Hilton Washington D.C. 215,000,000 1,119 Current 06/05/12 N 108.9 0 BACM 2007-3 Renaissance Mayflower Hotel 200,000,000 657 Current 03/10/13 N 137.6 27 WBCMT 2007-C30 Four Seasons Avaira Resort – Carlsbad, CA 186,500,000 329 Current 02/11/12 N 150.0 33 GCCFC 2007-GG9 Hyatt Regency Bethesda 140,000,000 390 90 Days 01/06/12b Y 146.1 41 ML-CFC 2007-9 DLJ West Coast Hotel Portfolio 128,384,847 887 REO 07/06/12 Y 227.9 56 CDCMT 2007-CD4 LowesLake Las Vegas 117,000,000 493 Foreclosure 01/01/12 Y 2,266.3 96 COMM 2011-FL1 The Barton Creek Resort & Spa 75,000,000 312 Current 12/09/12 N 70.4 0 BSCMSI 2007-PWR17 Logan Hotel Portfolio 70,300,000 985 Current 07/01/12 N 104.04 JPMCC 2007-LDP12 Hard Rock Hotel Chicago 69,500,000 381 Current 08/01/12 N 98.4 0 BSCMS 2007-PWR18 Norfolk Marriott 62,000,000 405 Current 08/01/12 Y 141.9 30 aBased on stressed NOI amount capitalized at a market rate; may not exactly correspond to the modeled loss percentage in the case of loans assigned a less than 100% probability of default. The stressed LTV is stated with respect to only contributed A note amounts in the case of loans with subordinate debt. bThe Four Seasons Avaira loan, which was scheduled to mature on Feb. 11, 2012, was recently extended for five years. The new maturity is Feb. 11, 2017. Source: Fitch Ratings, trustee reports.
For floating-rate transactions, a loan is a potential maturity default if the stressed cash flow causes its DSCR to fall below 1.25x based on a stressed refinance constant of approximately 9%11%, as described in the criteria report, “Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions,” dated Dec. 1, 2011.
Timeshare ABS Delinquency and Default Trends
During the recession, there was notable deterioration in delinquency and default performance in the universe of timeshare ABS. However, the sizable and often-growing levels of credit enhancement shielded the Fitch-rated portfolio from negative rating actions during the recession.
Most timeshare ABS incorporate three forms of credit enhancement that protect securityholders from potential defaults in the securitization pool: Excess spread, or the positive differential between the interest rate on the loans and the interest liability of the securitization. Total levels of excess spread range from 4%9% per annum. Overcollateralization, or the amount by which the principal balance of the loan pool exceeds the principal balance of the notes. Small cash reserve account, which can be drawn to pay interest or principal payments, as needed.
Expected cumulative gross defaults on underlying transactions can range from 10% to more than 20%. Defaults on virtually all timeshare transactions in the Fitch-rated portfolio have been consistently repurchased or substituted for by the seller. Such repurchases are typically capped at about 15%20% of the pool. However, there is no obligation for sellers to repurchase loans, and Fitch’s ABS analysis assumes no repurchases or substitutions will occur going forward.
In most cases, excess cash flow released to the seller from retained interests in the securitization has been sufficient to cover the amount of cash spent to repurchase loans. In effect, sellers of timeshare receivables are using excess cash flow from the transaction to repurchase loans. In the absence of repurchases, excess spread is the first credit enhancement available to absorb defaults. The reserve account would be drawn upon if excess spread is insufficient to cover required
2012 Outlook: Cross-Sector Lodging & Timeshare 16 January 19, 2012 Corporates
distributions to securitization noteholders. Finally, overcollateralization is available as additional protection.
There has been deterioration in the Fitch-rated portfolio. However, virtually all defaults to date have been repurchased by the transactions’ respective seller/servicers. As such, credit enhancement has built from initial levels on all Fitch-rated transactions. Projected defaults on rated transactions may exceed initial expectations. However, credit-enhancement growth has generally been sufficient to prevent negative rating actions to date.
According to the results of Fitch’s latest timeshare ABS index, as of third-quarter 2011, U.S. timeshare ABS delinquencies were up modestly over the last quarter, though they remain lower than one year ago. Total delinquencies for third-quarter 2011 were 3.56%, up from 3.28% at the end of second-quarter 2011 but virtually unchanged from third-quarter 2010 of 3.55%. Year-over-year improvements observed in recent years have generally subsided, as delinquencies have receded to levels closer to historical norms. Fitch now expects delinquencies and defaults to settle into seasonal trends unless larger macroeconomic deterioration takes hold.
Monthly defaults for September declined to 0.62% from 0.80% in June and were also unchanged from the same period last year. Default trends typically lag those of delinquencies and are expected to mirror the recent increase in delinquencies in the coming months. Fitch's rating outlook for timeshare ABS remains stable due to near-term performance expectations, delevering structures by note amortization in most timeshare transactions, and ample credit enhancement at current levels.
Fitch Timeshare ABS Delinquency and Default Index
Total Delinquencies Total Defaults (%) 6 5 4 3 2 1 0
7 8 8 9 0 1 2 3 3 4 5 5 6 7 7 8 9 0 1 /9 9 /9 /0 /0 /0 0 /0 0 /0 /1 /1 3 9/97 3/9 9/ 3/99 9 3/00 9/0 3 9/01 3 9/02 3/0 9 3/04 9/0 3/ 9/0 3 9/06 3/0 9/ 3/08 9 3/09 9/0 3 9/10 3 9/11
Source: Fitch.
Accounting for Timeshare Receivable Securitizations
On June 12, 2009, the FASB published two new accounting standards (Statement of Financial Accounting Standard [SFAS] 166 and SFAS 167) that determine whether securitizations and other transfers of financial instruments are given off-balance sheet treatment. The revisions to the standards, which became effective on Jan. 1, 2010, for issuers with calendar year ends, resulted in many existing off-balance sheet securitizations being treated as secured financing and coming on balance sheet. The new standards replace the former quantitative test for consolidation with a qualitative approach that focuses on the power to direct the activities of the entity and the rights to receive benefits or absorb losses that could potentially be significant.
2012 Outlook: Cross-Sector Lodging & Timeshare 17 January 19, 2012 Corporates
With respect to lodging C-corps, off-balance sheet debt related to the securitization of timeshare loan receivables was consolidated on balance sheet beginning in 2010. These accounting changes did not result in any rating action, since there was no change to the economics of the off-balance sheet transactions, which were already incorporated in existing ratings. The debt remains legally nonrecourse to the lodging companies. Although the debt is legally nonrecourse to the sellers of the receivables, lodging C-corps have provided support to the ABS-issuing subsidiary primarily (1) to support the brand names that are attached to transactions and (2) to maintain future access to the securitization markets.
Support from the sellers of timeshare receivables is permitted in the securitization documents, which typically allow the lodging companies to repurchase defaulted loans and, as indicated in the Timeshare ABS Delinquency and Default Trends section on page 16, have generally done so in all cases. The incentive for the lodging companies to repurchase defaulted loans is to have control of the asset and potentially resell it through the company’s system. However, the amount of repurchased defaulted loans is normally limited to 20% in timeshare ABS transactions, because permitting an amount greater than that would raise concern relative to the true sale opinion.
On Jan. 7, 2011, Fitch published the first edition of its periodic “Inn the Footnotes” report, which offers a detailed discussion of contingency risks and a comparison of adjusted credit metrics across lodging C-corps.
2012 Outlook: Cross-Sector Lodging & Timeshare 18 January 19, 2012 Corporates
Appendix B: Statistical Analysis of RevPAR
Background
The chart below shows Smith Travel data for revenue per available room (RevPAR) since 1987. There is obvious seasonality exhibited by these metrics, so unadjusted sequential month comparisons are largely irrelevant. The solid green line is a 12-month moving average, which removes the effect of the seasonality. Not surprisingly, these metrics ebb and flow with the business cycle, as evidenced by the decline seen during the current and previous downturns, as indicated by the shaded areas in the chart below. Notably, RevPAR shows an upward trend over this time period. However, apart from seasonal and business cycle effects, this increase can be explained principally by higher general price levels.
Monthly RevPAR Through Time Highlighting Major Macro Economic Slowdowns
Slowdown/Recession RevPAR 12 per. Mov. Avg. (RevPAR) ($) 80 70 60 50 40 30 20 10 0
7 0 5 8 1 6 9 8 9 9 9 0 0 0 9 9 9 9 0 0 0 1 1988 1989 1 1991 1992 1993 1994 1 1996 1997 1 1999 2000 2 2002 2003 2004 2005 2 2007 2008 2 2010 2011
Source: STR and Fitch Ratings.
Correlation with Macro Indicators
It is often better to compare the change in metric levels, as opposed to nominal levels, when examining (and in particular when quantifying) the relationship between different time series data, such as RevPAR and key macro indicators. The chart on page 21 shows quarterly RevPAR data on a real, year-over-year percentage change basis, along with several key macro indicators found to be significant explanatory variables. Clearly, changes in unemployment, GDP, and corporate profits are significantly correlated to changes in RevPAR. The three vertical lines show the approximate trough of the last three recessions, where GDP, as well as other macro indicators, fell (or rose, in the case of unemployment) the most on a year-over-year basis.
In the past, Fitch has examined several key macroeconomic indicators and identified the aforementioned as among the most highly correlated to changes in RevPAR. Other key measures of broad economic activity, such as consumption and personal income, are also highly correlated to changes in RevPAR. In the chart at the top of page 21, the percentage change in unemployment and GDP are shown relative to changes in RevPAR on a coincident basis, as this generally exhibited the strongest relationship relative to measures of broad economic activity from a previous basic review of lags and leads of the various series examined. In some cases, these variables also exhibited good results with a slight lag.
2012 Outlook: Cross-Sector Lodging & Timeshare 19 January 19, 2012 Corporates
Year over Year % Change in RevPAR Relative to GDP, Unemployment and Corporate Profits (Quarterly)
RevPAR Change (LHS, Real) GDP Change (LHS, Real) Corporate Profits (LHS, Real) — Lagged Unemployment (RHS, Scale Inverted) (%) (%) 80 (40)
60 (20) 40 0 20 20 0 40 (20) (40) 60 (60) 80
1 6 1 6 90 9 95 9 0 0 11 9 9 0 0 0 1989 1 19 1992 1993 1994 1 19 1997 1998 1999 2000 2 2002 2003 2004 2005 2 2007 2008 2009 2010 2
Source: STR, BEA, and Fitch Ratings.
However, corporate profitability showed a meaningfully stronger relationship with a more significant lag.
Modeling RevPAR
The chart below shows the actual historical performance of RevPAR, as well as several simple model estimates that quantify the historical relationship between changes in the aforementioned macro indicators and RevPAR from 1989 through to the current period. Projections for the change in RevPAR for 2012 utilize Fitch’s own forecast for key explanatory variables. Of note, three model estimate lines are shown, all exhibiting significant explanatory power, though also significant error. It appears the change in unemployment as an independent variable may provide a better fit than the change in GDP. Somewhat better still is a multivariate approach utilizing the change in unemployment, corporate profits, and hotel room supply. In this case, low to midsingle-digit growth in RevPAR is indicated for 2012, with growth
Year/Year % Change in RevPAR — Actual vs. Estimated RevPAR Actual Estimate 1 Fx (Change in Unemployment, Supply, and Corporate Profits) Estimate 2 Fx (Change Unemployment Only) Estimate 3 Fx (Change GDP Only) RevPAR Historic Median (%) 20 15 10 5 0 (5) (10) (15) (20) (25)
1 6 1 6 1 90 9 95 9 00 0 05 0 10 1 9 9 0 0 0 1989 1 19 1992 1993 1994 1 19 1997 1998 1999 2 20 2002 2003 2004 2 20 2007 2008 2009 2 20 2012
Source: STR and Fitch Ratings.
2012 Outlook: Cross-Sector Lodging & Timeshare 20 January 19, 2012 Corporates
of 4%5% being a more focused estimate. However, given the significant error involved, a confidence interval constructed around this estimate would be quite wide.
Forecasts utilizing this type of approach should only be thought of as providing some guidance with regard to the general order of magnitude as to the possible evolution of the dependent variable, which in the case is RevPAR. Model error stems from the fact that changes in the independent variables historically are far from perfectly correlated to changes in the dependent variable. Further, it is important to keep in mind that forecasts emanating from any model built on historical data can only be meaningful if the historical relationship between the explanatory and dependent variables is likely to be similar for the current and forecasted period. Any significant structural change in the sector could render the analysis invalid. Finally, a significant additional source of error stems from the fact that the analysis embeds macro projections for the independent variables (e.g., for future unemployment), which are themselves subject to error. In the future, Fitch may extend and refine the relatively simple analysis shown here.
2012 Outlook: Cross-Sector Lodging & Timeshare 21 January 19, 2012 Corporates
Appendix C: Related Research and Fitch Coverage
The table below contains links related to lodging and timeshare research, as well as relevant macroeconomic, criteria, and accounting research.
Related Lodging Research Date Title Lodging C-corps 12/05/11 Fitch: Starwood’s Ratings Unaffected from Share Repurchase Authorization 02/16/11 2011 Outlook for U.S. Lodging The Penthouse View 02/15/11 Fitch Affirms Marriott’s Ratings Following Announcement of Timeshare Spinoff Transaction 02/04/11 Fitch Affirms Starwood's IDR at ‘BB+’; Outlook Revised to Positive 01/07/11 Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps 12/08/10 Fitch Upgrades Marriott's IDR to ‘BBB’; Outlook Stable 04/23/10 Fitch Rates Starwood's New Credit Facility ‘BB+’; Outlook Stable 03/19/10 Fitch Affirms Marriott's IDR at ‘BBB’;Outlook Revised to Stable 03/11/10 Fitch Affirms Starwood's IDR at ‘BB+’; Outlook Revised to Stable
Lodging REITs 12/08/11 2012 Outlook: U.S. Equity REITs 10/10/11 REIT Report Quarterly 04/13/11 Host Hotels & Resorts, Inc. (Host Hotels & Resorts, L.P.) Credit Analysis 03/01/11 Fitch Upgrades Host Hotels & Resorts’ IDR to ‘BB’; Outlook Stable 06/09/10 2010 U.S. Equity REIT Midyear Outlook (Steadying the Ship) 04/08/10 U.S. Equity REIT Liquidity Update: Repositioning for the Future 03/12/10 Fitch Affirms Host's IDR at ‘BB’; Outlook to Stable
Hotel CMBS and Commercial Real Estate Related 10/12/11 U.S. CMBS Loss Study: 2010 05/24/11 U.S. CMBS 2010 Loan Default Study 02/25/11 U.S. CMBS Servicing Portfolio Statistics Year-End 2010 12/09/10 2011 Outlook: U.S. Structured Finance 08/11/10 CMBS 2Q10 Servicing Volume Record Volume of Transfers In and Out
Timeshare ABS 12/01/11 Fitch: U.S. Timeshare ABS Delinquencies Settle into Historical Patterns 11/10/11 Fitch Rates Sierra Timeshare 2011-3 Receivables Funding LLC 11/02/11 Sierra Timeshare 2011-3 Receivables Funding LLC Presale Report 10/20/11 Fitch Affirms Orange Lake 2006-A 02/07/11 Fitch: Seasonal Trends Drive U.S. Timeshare ABS Delinquencies Higher 11/19/10 Fitch: U.S. Timeshare ABS Delinquencies Rise Modestly 10/21/10 Fitch Rates Sierra Timeshare 2010-3 Receivables Funding LLC 08/11/10 Fitch: U.S. Timeshare ABS Delinquencies to Rise Modestly Later in 2010 07/23/10 Fitch Rates Sierra Timeshare 2010-2 Receivables Funding LLC 07/14/10 Sierra Timeshare 2010-2 Receivables Funding, LLC Presale Report 03/30/10 Term ABS Credit Action Report: February 2010 03/18/10 Fitch Rates Sierra Timeshare 2010-1 Receivables Funding, LLC 03/10/10 Sierra Timeshare 2010-1 Receivables Funding, LLC Presale Report
Relevant Macro, Criteria, and Accounting 12/12/11 Global Economic Outlook: Moderate Growth, Heightened Uncertainties 09/26/11 Criteria for Analyzing Large Loans in U.S. Commercial Mortgage Transactions 08/12/11 Criteria for Analyzing Multiborrower U.S. Commercial Mortgage Transactions 08/12/11 Corporate Rating Methodology 08/04/11 Global Structured Finance Rating Criteria 06/30/11 Criteria for Rating U.S. Timeshare Loan ABS 06/13/11 Criteria for Special-Purpose Vehicles in Structured Finance Transactions 05/12/11 Recovery Rating and Notching Criteria for Equity REITs 05/12/11 Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers 03/15/11 Criteria for Rating U.S. Equity REITs and REOCs 06/22/09 Off-Balance Sheet Accounting Changes: SFAS 166 and SFAS 167 Source: Fitch Ratings.
2012 Outlook: Cross-Sector Lodging & Timeshare 22 January 19, 2012 Corporates
Selected Lodging Companies
Fitch publicly rates the following lodging C-corps and REITs, and closely follows other notable comparable companies that publicly report financial information.
Selected Lodging Companies Company Name IDR Rating Outlook/Watch C-Corps Marriott International BBB Stable Starwood Hotels & Resorts Worldwide, Inc. BB+ Positive Wyndham Worldwide NPR NPR Hyatt Hotels Corp. NPR NPR InterContinental Hotels Group NPR NPR Choice Hotels International Inc. NPR NPR
REITs Host Hotels & Resorts, Inc. BB Stable Hospitality Properties Trust NPR NPR Felcor Lodging Trust NPR NPR LaSalle Hotel Properties NPR NPR
IDR Issuer default rating. NPR Not publicly rated. Source: Fitch Ratings.
2012 Outlook: Cross-Sector Lodging & Timeshare 23 January 19, 2012 Corporates
Fitch-Rated Hotel CMBS Summary
Hotel loans are most concentrated in Fitch-rated floating-rate U.S. CMBS transactions, often representing more than 50% of the principal balance. More diverse, fixed-rate, multiborrower transactions are generally composed of less than 10% of hotel loans.
Floating-rate loans are typically secured by transitional assets in which cash flows may be expected to improve. In the case of floating-rate hotel loans, the majority in the 20052008 vintage transactions were originated based on values that anticipated future income growth (which in many cases exceeded in-place cash flows) that is now unlikely to materialize as quickly as anticipated by hotel management, even with the recent improvement in performance. As a result, between 2009 and 2010, significant downgrades took place across Fitch’s rated portfolio where floating-rate transitional loans served as collateral.
A positive sign for the hotel market during 2011 was the increase in liquidity. This led to an increase in the percentage of hotel loans included in fixed-rate conduit transactions, as well as the issuance of single-borrower and floating-rate transactions that were collateralized by hotel loans.
Fitch currently rates two single borrower transactions that have hotels as collateral. One transaction, already mentioned above, was rated in 2011. The other is COMM 2006-CNL2. This is a floating-rate transaction collateralized by a single loan, CNL Hotels & Resorts. The loan is secured by five resort hotels. The five properties securing the loan experienced declines in cash flow, largely due to the economy-driven lower travel demand by both the business and leisure sectors. Performance has recovered but remains below expectations from origination. The loan, which is in special servicing, matured on Feb. 1, 2011. The original borrower was replaced after subordinate debt lenders successfully foreclosed under their interests in the capital structure. The loan remains current, and workout negotiations continue between the borrower and special servicer.
An updated portfolio valuation from mid-2011 indicated recovery prospects remain strong, and the ratings were affirmed in Fitch’s most recent review of the transaction. Please see the press release, “Fitch Affirms COMM 2006-CNL2; Revises Outlooks”, dated July 28, 2011, for more details.
2012 Outlook: Cross-Sector Lodging & Timeshare 24 January 19, 2012 Corporates
Fitch-Rated Timeshare ABS Transactions
Fitch publicly rates the timeshare ABS transactions noted in the table below.
Fitch Publicly Rated Timeshare ABS Deals (As of October 2011, Except as Otherwise Noted) Original Current Total Original Total Current Original OC Current OC Collateral Collateral Note Balance Note Balance (% of (% of Issuer Sponsor/Originator Balance ($) Balance ($) ($) ($) Collateral) Collateral) Sierra Timeshare 2011-3 Receivables Funding, LLC Wyndham Worldwide 340,909,090.9 300,559,211.0 300,000,000.0 264,492,106.0 12.0 12.0 Sierra Timeshare 2011-2 Receivables Funding, LLC Wyndham Worldwide 420,420,701.0 324,890,992.0 300,000,000.0 254,470,571.0 16.8 21.7 Sierra Timeshare 2011-1 Receivables Funding, LLC Wyndham Worldwide 415,230,746.0 278,546,997.0 400,000,000.0 163,316,251.0 27.8 41.4 Sierra Timeshare 2010-3 Receivables Funding, LLC Wyndham Worldwide 340,909,090.9 189,027,339.0 300,000,000.0 166,344,058.0 12.0 12.0 Sierra Timeshare 2010-2 Receivables Funding, LLC Wyndham Worldwide 420,420,701.0 217,736,768.0 350,000,000.0 165,153,339.0 16.8 24.1 Sierra Timeshare 2010-1 Receivables Funding, LLC Wyndham Worldwide 415,230,746.0 188,726,874.0 300,000,000.0 113,236,124.0 27.8 40.0 Sierra Timeshare 2009-3 Receivables Funding, LLC Wyndham Worldwide 250,004,080.0 97,423,804.0 175,000,000.0 22,419,723.0 30.0 77.0 Sierra Timeshare 2008-1 Receivables Funding, LLC Wyndham Worldwide 257,247,732.0 68,522,790.0 200,000,000.0 38,030,144.0 22.3 44.5 Sierra Timeshare 2007-1 Receivables Funding, LLC Wyndham Worldwide 677,967,561.0 134,518,927.0 618,645,000.0 104,045,626.0 8.8 22.7 OrangeLake Timeshare Trust 2006-A Orange Lake Country Club, Inc. 166,712,097.0 55,238,176.0 000,000.0145, 48,858,167.0 13.0 11.5 Source: Fitch Ratings, trustee reports.
2012 Outlook: Cross-Sector Lodging & Timeshare 25 January 19, 2012 Corporates
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2012 Outlook: Cross-Sector Lodging & Timeshare 26 January 19, 2012