Fitch: U.S. Lodging Still in a Good Place

Accelerating U.S. GDP growth and low levels of new supply set the table for strong U.S. lodging industry fundamentals during 2015. Robust demand has boosted occupancy rates, providing hotels with material pricing power. Fitch Ratings expects U.S. RevPAR to increase by 6% this year, based on a 1% occupancy gain and 5% average daily room rate (ADR) growth.

Improving economic fundamentals and limited new supply support Fitch's view that this upcycle will endure for a longer-than-average period. Trailing 12-month (TTM) RevPAR growth has been positive for 54 sequential months during this cycle as of February 2015, a relatively short time compared to the 112-month recovery that began in the early 1990s. Although closer in duration to the 65-month recovery that started in the early 2000s, Fitch expects further RevPAR gains over the next 1-3 years based on its review of key lodging cycle leading indicators.

Lodging C-Corps enjoy some late-cycle advantages that should figure more prominently during 2015. C-Corps can benefit from increased room systems driven by the incremental supply and they typically earn higher incentive management (IM) fees as property cash flows increasingly surpass owners' priority returns. Lodging REITs tend to outperform earlier in the cycle due to their relatively high operating and financial leverage and are more sensitive to supply changes.

Fitch expects the ratings of CMBS transactions with high hotel exposure to remain stable in 2015. However, we have grown more conservative in our CMBS hotel collateral as this upcycle progresses. Fitch will continue to scrutinize the revenues and margins of hotel collateral in 2015 to ensure sustainability through the cycle. Many hotels exceeded previous net operating income peaks in 2013 and 2014.

Fitch has increasingly capped rooms revenues at 2013 levels in its CMBS hotel collateral analysis or reduced the most recent TTM room revenue by 2.5%-5.0% when growth is driven by improving market conditions, rather than capital investments. We may assume even lower RevPAR if we expect new competitive hotel product to enter the market. Fitch has sharply haircut (upwards of 15% to 20%) issuer underwritten cash flows in several large loan/single borrower hotel deals we reviewed during 2015 and used more stringent hurdle rates and reduced diversity credit levels in our analysis.

Fitch expects stable timeshare asset-backed security (ABS) ratings in 2015 based on solid collateral performance and sizable and often growing levels of credit enhancement. Fitch has observed consistent year-over-year delinquency improvements since 2012. Defaults improved in 2014 but remain elevated compared to pre-recession levels. Timeshare companies capitalized on strong investor demand by accessing this market at attractive all-in rates during 2014. Wyndham Worldwide Corporation's $204 million securitization of previously non-securitized receivables in late 2014 evidences the demand strength.

"The Penthouse View: Cross-Sector Lodging and Timeshare" report published at www.fitchratings.com highlights our lodging and timeshare views across three subsectors: Corporates, CMBS, and timeshare ABS. The 33-page report discusses industry trends and the liquidity and financing environment.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: 2015 Penthouse View (Cross-Sector Lodging and Timeshare ABS)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863757

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