Fitch: View is Still Cloudy for U.S. Lodging Sector in 2010

NEW YORK--(BUSINESS WIRE)--As the U.S. economy slowly emerges from the recession, 2010 will be characterized by continued lodging stabilization, though meaningful recovery for the industry is not likely until 2011, according to Fitch Ratings in its cross-sector U.S. lodging and timeshare outlook report.

Although the most significant cyclical demand declines related to the recession likely have passed, operating trends are expected to remain weak well into 2010. In light of the ongoing operating weakness coupled with significant pressure on commercial real estate values, Fitch's industry outlook for lodging continues to be negative.

'Next year will continue to be challenging for the lodging industry. However, demand trends are stabilizing if not modestly improving, while supply growth is at a cyclical peak and should subside in 2010 and 2011,' said Michael Paladino, Corporates Senior Director at Fitch. 'A pricing recovery for the sector will be difficult over the next 12 months, which will constrain a rebound in lodging profits.' Following a roughly 17% RevPAR decline in 2009, Fitch anticipates meaningful year-over-year RevPAR growth will not resume until late 2010, and currently estimates a full year industrywide RevPAR decline of 3%-5% next year and low single-digit growth in 2011.

According to the report, the most troubling residual effect of the recession that has yet to fully play out is the decline in commercial real estate property values. Fitch estimates that hotel property values may decline as much as 50% from their peak, noted Fitch CMBS Managing Director Eric Rothfeld. Stagnant lending activity, reduced asset sales and declining demand for hotels have put tremendous pressure on the sector. With such limited activity, value declines have been both rapid and steep.

This has limited the ability of owners of hotel assets to optimize portfolios and improve credit profiles through asset sales. Fitch expects an increase in distressed asset sales over the next 12-18 months, leading up to the largest concentration of CMBS hotel loan maturities in 2011 and 2012. This could create attractive investment opportunities, but also elevated acquisition risk, for lodging C corporations (C-corps) and REITs, according to Fitch REITs Managing Director Steven Marks.

The industry outlook for timeshare (i.e. vacation ownership) is also negative. Demand was heavily affected during the recession and Fitch expects a very slow rebound in consumer spending, which will result in continued pressure on timeshare sales. Although most timeshare operators currently anticipate roughly flat timeshare sales in 2010, Fitch believes that slight declines are more likely due to continued tight consumer discretionary spending and that recent quarterly contract sales declines continue to be substantial (in the 35%-40% range as of the third quarter of 2009).

Marriott International, Inc. (Marriott), Starwood Hotels and Resorts Worldwide Inc. (Starwood), and Wyndham Worldwide Corporation (Wyndham) all have taken steps to restructure their timeshare business by reducing cost structures and curtailing development in order to maximize near-term cash flow. Reducing exposure to timeshare development has benefited these issuers' credit profiles, but the timeshare business models remain reliant on receivable securitizations to generate positive cash flow.

During the current recession, there has been notable deterioration in delinquency and default performance in the universe of timeshare ABS. However, the sizeable and oftentimes growing levels of credit enhancement have shielded the Fitch-rated portfolio from negative rating actions during the current recession. According to Fitch ABS Director Brad Sohl: 'Although Fitch expects delinquency performance and default experience to worsen in the coming months, the growth in credit enhancement should continue to insulate the portfolio, which underpins the Stable Outlook on timeshare ABS ratings.'

For specific credit outlook implications for each subsector, including liquidity, operating trends and financing trends, please visit Fitch's web site at 'www.fitchratings.com' to download the special report, 'The Penthouse View: Fitch's Cross-Sector Lodging and Timeshare Outlook'.

Additional information is available at 'www.fitchratings.com'.

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