Hotel REITs Going Strong
By Maria Maslovsky, Assistant Vice President & Analyst for Commercial Real Estate Finance, Moody’s Investors Service
The lodging industry has continued its stable growth in 2012. Strong corporate and returning group demand, as well as some personal income growth, coupled with historically small new supply have underpinned this positive performance. A third expansionary year in a row—after the dramatic collapse in 2009—bodes well for the hotel REITs’ profitability and credit profiles.
Moody’s maintains a stable outlook on both hotel fundamentals and on lodging REIT ratings, reflecting the cyclical upswing in the industry. Given the low levels of new construction and the caution that remains among lenders with respect to development, we feel that this business cycle may have a longer positive phase than some of the previous cycles in the hospitality industry. Still, Moody’s is cognizant of the weighty fiscal challenges facing the nation, as well as the slowdown in growth globally, particularly in Europe, China and India where many visitors to the United States originate.
Positive fundamentals have allowed the credit metrics of the lodging REITs to continue to stabilize in 2012, with declining leverage, strengthening coverage of fixed charges and good liquidity, which is illustrated in Figure 1.
Through August 2012, RevPAR (revenue per available room) grew by 7.3 percent following post-recession growth of 8.2 percent in 2011 and 5.4 percent in 2010, according to Smith Travel Research. Positively, in 2012, this growth was primarily fueled by ADR (average daily rate): 4.3 percent versus 3.7 percent in 2011 and 0 percent in 2010. The increase in ADR is very beneficial for margins and profitability. Record demand made the increase possible: in 2011, average daily rooms sold exceeded the previous industry peak achieved in 2007. Average daily rooms sold are also on track to post additional increases in both 2012 and 2013, according to PricewaterhouseCoopers. The advantage afforded by the robust demand statistics is reinforced by limited supply growth: new construction effectively ground to a halt in 2009 and has not increased since. While there is some anecdotal evidence of more interest in new hotel development, PricewaterhouseCoopers does not project any meaningful supply increases.
The risks for the continued lodging expansion include a fiscal tightening in the United States, as well as potentially reduced international travel in the wake of economic slowdown in Europe, China and India. A sharp budget cut in the nation in 2013 would likely impact GDP growth and, by extension, lodging, which is a pro-cyclical industry. By the same token, overseas economic malaise is liable to reduce foreign tourism to the United States. Positively, year-to-date, this has not been the case with the gateway markets that attract the majority of international tourists, which have been outperforming the broader national statistics.