Smaller US Hoteliers Will Take More Risk to Stay Relevant
February 21, 2017 12:09pm
Fitch Ratings-New York-21 February 2017: Smaller hotel brand owners and operators are flexing their balance sheets to support rooms system growth to stay relevant amid industry consolidation and increasing competition from alternative accommodation providers, according to Fitch Ratings. This could weaken the credit profiles for smaller lodging C-Corp issuers by increasing leverage and adding more volatile owned and leased assets and contingent obligations in the form of off-balance sheet performance and loan guarantees. Fitch expects more consolidation in the sector involving smaller issuers, which poses merger and acquisition event risk for bondholders.
Hyatt Hotels Corporation's fourth-quarter and full-year 2016 results illustrate the dynamics at play. The company guided to 2017 capital spending of $430 million from roughly $210 million during 2016. The company's 2017 guidance includes $65 million of hotel developments to accelerate growth in rooms systems, particularly for newer, smaller brands. The balance of the increase relates to spending at its recently acquired Miraval Group assets ($55 million) and the build-out of its new headquarters building ($50 million) and higher reinvestment in its owned and leased hotel portfolio ($50 million).
In addition to identified investments, Hyatt outlined plans for strong investment spending in the form of acquisitions, equity investments in unconsolidated hospitality joint ventures, debt investments, contract acquisition costs and other investments. The company plans to fund these investments over time through asset sales, presumably assuming that conditions in the hotel investment market remain favorable.
Hyatt's 2017 guidance also reflects some risks associated with management and franchise investments. The company expects performance guarantees at four properties in France to reduce its income by $80 million this year. Lodging C-Corps periodically give owners performance guarantees to win brand franchise and management contracts, usually to gain (or maintain) a beachhead in strategic markets.
US hotel franchisees and owners are showing a clear preference toward aligning with the largest brands that, in turn, have the largest customer loyalty rewards systems. Marriott-branded rooms comprised 28.6% of the US hotel development pipeline, according to STR Global, which is well above the company's 14.4% share of existing US rooms supply. Comparable measures for Hilton, the industry's second-largest player, were 22.8% and 11.6%, respectively. Hyatt-branded hotels comprised 2.1% of total rooms in the US hotel pipeline, which matched its share of the existing stock.
Stephen Boyd, CFA
+1 212 908-9153
33 Whitehall Street
New York, NY
For 100 years, Fitch Ratings has been making the future a little more predictable through independent and prospective credit ratings, commentary and research. Our global expertise draws on local market knowledge and spans the fixed-income universe. The additional context, perspective and insights we provide have helped the world's investors fund a century of growth.
Contact: Alyssa Castelli
+1 (212) 908 0540
Fitch's 2018 Outlook for U.S. Lodging: Fitch Predicts Uninspiring Growth, with Some Upside Risk from Brighter Corporate Outlook
Fitch: Need for Scale Could Drive More US Lodging Consolidation
U.S. Lodging RevPAR to Decelerate According to Fitch
Hotels Among Biggest Beneficiaries of Trump Economic Growth Policies Says New Fitch Report
Healthy Consumer, Spending Shifts Benefit U.S. Lodging & Leisure
Fitch Expects 1-2% US Lodging RevPAR Growth in 2017
Slow Growth, Higher Labor Costs to Challenge U.S. Hotel Margins Says Fitch Ratings
Cyclical Challenges Drive Gaming, Lodging, & Restaurant Bankruptcies
US Leisure Strength Unsustainable; RevPAR Likely to Turn
With U.S. Hotels at Peak, CMBS Being Watched with a Wary Eye
US RevPAR Forecast Lowered to 3%-4% Amid Signs of Fatigue
Tourism Spending to Buoy US Leisure Sector Demand
U.S. Hotels Gain Incremental Negotiating Strength Over OTAs
US Lodging in Twilight of Latest Upcycle; Caution Ahead
Flexible Models Ease US Leisure Cos. Cuban Market Entry Says Fitch Ratings
Revised Starwood Offer Likely Delays Marriott's Ratings Momentum
China Investors in US Hotels Pursue Core-At-Any-Cost Plan
Starwood Merger Termination Would Temper Marriott's Ratings Momentum
US RevPAR Forecast Trimmed on Weak Transient Trends Says Fitch
Hotel Lenders Tightening the Screws
Please login or register to post a comment.