Fitch: Lower Oil Helps, Strong Dollar Hurts US Lodging Industry

NEW YORK--()--A strong dollar could pressure visitation to the US while the drop in oil prices will likely provide a net benefit to domestic lodging demand, according to Fitch Ratings.

The strong dollar raises acquisition costs for foreign buyers in their local currency. However, the appeal of hotel assets may increase if foreign investors anticipate further dollar gains, which could boost returns from price appreciation when profits are taken and converted back into the investor's local currency.

We expect currency translation losses caused by US dollar strength to temper system wide RevPAR growth for most lodging C-Corps by 100 to 200 basis points (i.e. 4%-6% versus 5%-7% in constant currency). The strong dollar will also lower inbound international visitation rates to the US and prompt more Americans to travel abroad. A predominantly domestic focus protects lodging REITS from currency losses, but not lower visitation rates. The global focus of most lodging C-Corps will balance the effect from lower net visitation to the US. Lower oil prices should help lodging demand and provide cover for price increases, given higher discretionary income and lower transportation costs.

The roughly 50% drop in oil prices since summer 2014 should provide a net benefit to US lodging demand. Lower oil prices should increase consumer discretionary income and reduce gasoline and jet fuel costs, making travel more affordable. Lower price tier hotels and leisure-oriented drive-to and destination resorts are likely to benefit most.

US dollar strength will negatively affect inbound international visitation rates (about 10% of demand) from key markets in Europe, Asia and Latin America. US ADRs have appreciated by 5% during the last year in dollars, but are up anywhere from 10%-20% in JPY, EUR and GBP. Dollar strength makes it more affordable for Americans to travel abroad, which amplifies the hit to demand from currency movements.

Fitch views gateway markets, such as New York, Los Angeles, San Francisco and Miami as most exposed to currency-related declines. So far, few companies have seen a slowdown. However, the effect will primarily be felt in the transient demand segment, which has shorter booking lead times and skews toward the summer months. This will challenge drawing any conclusions for several months. Fitch will be watching closely for changes in weekday/weekend demand split in key visitation markets for signs of leisure transient (primarily weekend demand) weakness.

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: Lower Oil Helps, Strong Dollar Hurts (What U.S. Lodging C-Corps and REITs Are Saying)

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Contacts

Fitch Ratings
Stephen Boyd, CFA
Director
US REITs
+1 212-908-9153
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Stephen Boyd, CFA
Director
US REITs
+1 212-908-9153
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com