Fitch: Pricing-Driven Demand Improvement Supports U.S. Lodging Outlook

NEW YORK--(BUSINESS WIRE)--In a special report issued today, Fitch Ratings says lodging demand recovered from the recession more quickly than anticipated due to an occupancy rebound, but further improvement in 2011 is expected to be driven by more profitable pricing improvement. Fitch's base case currently assumes U.S. industry-wide revenue per available room (RevPAR) growth of 5%-7% in 2011 and similar growth in 2012. At the same time, supply growth is decelerating, creating a favorable supply/demand outlook, which will drive a significant improvement in hotel property-level operating performance in 2011-2012.

Timeshare contract sales declines have subsided, development pipelines have been downsized, and the asset-backed securities (ABS) market has been accessible, resulting in a more favorable free cash flow outlook for that segment. Marriott International is attempting to capitalize on the improving outlook by announcing on Feb. 14, 2011 its intent to spin off the timeshare segment from its lodging business.

'The better-than-expected lodging recovery continues to pick up traction in 2011,' said Michael Paladino, Senior Director at Fitch. 'U.S. lodging issuers have positioned themselves well from an operating and financial standpoint post-recession, but growth initiatives and equity returns will become an increasingly higher priority for corporate managers this year.'

Fitch's outlook for lodging c-corps and lodging real estate investment trusts (REITs) is positive. While the expected operating performance improvement should fuel deleveraging for certain corporate issuers and provide some positive ratings momentum, financial policies are shifting from balance sheet improvement to growth initiatives and equity returns. Lodging REITs accessed a significant amount of equity capital over the past 18 months, bolstering liquidity and fueling an acceleration of hotel transaction volume as investors have become increasingly comfortable buying into the lodging recovery.

Fitch has a stable outlook in 2011 for commercial mortgage backed securities (CMBS) with large hotel exposures and timeshare ABS. The hotel sector has demonstrated the most cash flow volatility of the major CMBS property types due to the daily resetting of rates and high operating leverage. However, this price elasticity, coupled with the lodging recovery, has turned to positive, which should help support existing ratings with large hotel exposure. For timeshare ABS, Fitch expects stable collateral performance combined with ample credit enhancement levels to lead to stable ratings in 2011.

Fitch's special report titled '2011 Outlook: Lodging - The Penthouse View: Cross-Sector Lodging and Timeshare Outlook' is available on Fitch's website at 'www.fitchratings.com'.

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

Applicable Criteria and Related Research: 2011: Lodging Outlook (The Penthouse View: Cross-Sector Lodging and Timeshare Outlook)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=602425

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