Growth Decelerating, but Still Solid: Fundamentals in the U.S. lodging industry will remain strong during 2015 against the backdrop of accelerating U.S. GDP growth and low levels of new supply. Robust demand has boosted occupancy rates, providing hotels with material pricing power. We expect U.S. RevPAR to increase by 6% during 2015, based on a 1% increase in occupancy and 5% ADR growth.
Measured Supply Growth: We expect hotel supply to grow during 2015, up modestly from 0.9% in 2014. Although development is picking up, it remains comfortably below the 1.8% average growth rate over the last 25 years. Pockets of oversupply have emerged in select markets, such as New York City, Houston and Miami where hotel rooms under construction exceed 8% of the existing room base in each of these markets. On balance, rooms under construction exceed 2% of existing rooms in 17 of the top 26 U.S. markets.
Mohegan Sun Hotel Capacity to Increase By 33%: We estimate the addition of a 400-room hotel at Mohegan Tribal Gaming Authority’s Connecticut property will increase EBITDAR by ~$5MM before nearby competition comes online. The estimate is gross of lease payments to the tribe, which will be hotel owner. The hotel, in addition to other initiatives (Cowlitz, cost cutting, etc.), may help support the refinancing of the tribe’s $1.1B maturity wall in 2018. For our estimate we assume $86 RevPAR for $12.5MM of room revenue and multiply that by factor of 1.5 to take into account extra casino and F&B spending by the hotel patrons. The estimate incorporates a 25% margin. MTGA stated that it turned away 480K rooms in FY14.
Starwood Plans Spin-Off of Timeshare: Spinning off its more volatile and capital intensive timeshare business to shareholders is a positive strategy shift that will improve the company’s credit profile over the cycle. However, the company’s leverage will likely increase to the upper bound of our target at the ‘BBB’ rating, in the near term, making the tactical execution less bondholder friendly. Separately, Starwood’s plan to more aggressively use its balance sheet to bolster its rooms system growth is a modest incremental negative, albeit within the scope of its rating.
Marriott Expands in Canada with acquisition of Delta Hotels and Resorts for $135MM. The portfolio consists of 38 hotels across 30 Canadian cities. This latest step follows on building the company’s brand portfolio and growing in international regions. With inbound visitations from Canada accounting for the largest international source for the company’s US properties’, a strong Canadian brand presence is inline with Marriott’s strategy. The company expects that the purchase price will represent a 10x EBITDA multiple, post stabilization and synergies.
Starwood Capital sells Baccarat Hotel to Sunshine Insurance Group, a Chinese company for $230MM, representing $2MM per room for the 114 rooms. Fitch expects interest in hotel assets from China (Waldorf Astoria NY $1.95B sale last year) and demand from hotel private equity funds to support asset valuations.
