Fitch: Strong Demand, Limited New Supply to Support U.S. Lodging

NEW YORK--()--Link to Fitch Ratings' Report: 2014 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View

Fitch Ratings anticipates another good year in 2014 for the U.S. lodging industry. Strong corporate and leisure transient demand, improving group demand and limited new supply will help to increase U.S. revenue per available room (RevPAR) by 5.5% next year, with average daily rate (ADR) growth again leading the charge.

The U.S. lodging industry is in the middle innings of recovery compared with the previous two that occurred in the early 1990s and 2000s. The trajectory of the current recovery has been unusually strong. However, an examination of the length of prior cycles suggests this one has not yet run its course. Real RevPAR remains 8% below prior peak levels. Fitch expects RevPAR to exceed the prior cycle peak, consistent with the last two cycles.

We believe group demand, defined as rooms booked in blocks of 10 or more, has lagged so far during this recovery due to cyclical and secular challenges. Despite that, a brighter outlook for group demand in 2014 should support stronger cash flow growth by giving hotel managers the confidence to raise room rates more aggressively.

Fitch expects U.S. hotel supply to increase by 1.1% during 2014. This represents a modest acceleration from the 0.7% supply growth anticipated by the agency for all of 2013, but is still well below the 2% annual industry average since 1988. The low level of new supply supports our outlook for a stronger and longer upswing in this lodging cycle.

We expect minimal ratings and/or outlook changes for the lodging coverage universe in 2014 as most companies are operating at, or comfortably within, their stated leverage targets. Fitch expects lodging C-Corps will continue to balance capital allocations between brand acquisitions, share repurchases and dividends. We expect lodging REITs are likely to be net sellers of assets during 2014, taking advantage of strong asset pricing to prune underperforming hotels from their portfolios.

Fitch views external factors, such as an unanticipated material deterioration in the U.S. economy, as the principal near-term risk to its forecast. Longer term, the agency is watching closely for signs that the cycle is peaking. Occupancy declines have historically been a good early warning indicator - particularly when combined with an environment of solid ADR-led RevPAR growth and expectations for elevated new supply.

The Penthouse View highlights our outlook across four subsectors: lodging C-Corps, lodging REITs, CMBS with high hotel exposures, and timeshare ABS. The 31-page report discusses industry trends, the liquidity and financing environment, and provides statistical analysis of cyclicality.

See "2014 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View," published today at www.fitchratings.com.

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: 2014 Outlook: Cross-Sector Lodging & Timeshare (The Penthouse View)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726600

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Contacts

Fitch Ratings
Michael Paladino, CFA, +1-212-908-9113
Senior Director
Corporates
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Stephen N. Boyd, CFA, +1-212-908-9153
Director - U.S. REITs
or
Timothy Lee, +1-312-368-3179
Analyst - Corporates
or
Kellie Geressy-Nilsen, +1-212-908-9123
Senior Director
Fitch Wire
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Michael Paladino, CFA, +1-212-908-9113
Senior Director
Corporates
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Stephen N. Boyd, CFA, +1-212-908-9153
Director - U.S. REITs
or
Timothy Lee, +1-312-368-3179
Analyst - Corporates
or
Kellie Geressy-Nilsen, +1-212-908-9123
Senior Director
Fitch Wire
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com