Fitch: Group Demand Recovery on Track for U.S. Lodging Space

NEW YORK--()--Improved group lodging demand is a key element that will help sustain revenue per available room (RevPAR) and drive cash flow growth higher for owners, according to Fitch Ratings.

Lodging C-Corps and REITs generally reported solid group bookings pace for 2014, ranging from low to mid single-digit growth in room night demand, which should translate into mid to high single-digit growth for owners after considering group room rate increases.

A majority of companies noted an improvement in outyear bookings (ie beyond 2014), suggesting that the bookings window is expanding. We believe this is important as an expansion in the bookings window suggests large group demand is accelerating. Large groups tend to book the furthest in advance and this has been the weakest segment of group demand during the economic recovery. So far, group strength has principally been concentrated in smaller corporate groups booking in the period; for the period.

Incentive trips have historically been an important source of group demand, particularly at large resort hotels. For example, Starwood Hotels & Resorts (BBB/Stable) has noted relative strength in incentive group demand. Companies use incentive travel primarily as an employee retention tool. Incentive demand tends to increase during the later stages of the economic cycle when unemployment rates are low and competition for talent is intense.

Both Host Hotels & Resorts (BBB-/Stable) and Hyatt noted an improvement in association group demand. Fitch believes some associations moved to a shorter format for group events during the downturn to save costs and maintain participation rates. The success of these events has led some associations to permanently implement the practice despite the stronger economy. Certainly, a return to longer format association meetings would have positive implications for group demand.

Group demand has a number of benefits, but we view its influence on pricing as the most important. Hotel managers often rely on a solid base of advance group bookings for the confidence to aggressively increase room rates for the remaining unsold room nights. Although average daily room rate (ADR) growth has driven and will continue to drive RevPAR growth, the level of growth has been somewhat muted so far, particularly given occupancy rates above prior cycle peaks in many markets. Some industry participants have attributed the subpar ADR growth to the weakness in group demand and Fitch shares this view.

We note that exposure to group demand trends varies by company. Within Fitch's rated universe, Marriott International (BBB/Stable) and Host Hotels & Resorts have the greatest exposure to group demand given their emphasis on full service, domestic, upper upscale hotels. Starwood has a smaller but still meaningful exposure to group demand due to its greater exposure to luxury hotels and international markets. Wyndham Worldwide Corp.'s (BBB-/Stable) concentration in the lower price tier, limited-service segment of the lodging industry results in limited exposure to group demand trends.

In our report published today, "U.S. Lodging: Group Demand Recovery on Track," we highlight what U.S. lodging C-Corps and REITs are saying about group demand trends.

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: U.S. Lodging: Group Demand Recovery on Track (What U.S. Lodging C-Corps and REITs Are Saying)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=739056

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Contacts

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

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Contacts

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