2012 Outlook: Cross-Sector Lodging & Timeshare
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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