Sector Spotlight
(ADR) declined 8. 8 percent last
year, while RevPAR fell 16. 9
percent, the greatest annual decline observed since the 1930s,
according to PKF-HR.
Showing Signs of
Improvement
During this downturn, lodging
REITs have focused on cutting
expenses and improving their
balance sheets. They’ve reduced
services, cut back on ameni-ties, downsized personnel and
renegotiated contracts. But it’s
unclear exactly how much of the
cost cutting is permanent.
“Many of these lodging companies are telling us that less
than 50 percent of these cuts are
sustainable and that expenses
are going to come back up
again, particularly those related
to staffing,” Katz says.
Yet lodging companies
continue to see their profits
squeezed, as evidenced by a recent PKF-HR survey of 6,000
hotels. Preliminary data indicates the average hotel in 2009
experienced a 35 percent decline
in year-over-year net operating
income, on top of a 5 percent
decrease in 2008, according to
Woodworth. This year, the firm
predicts that NOI will remain
flat or decrease 1 to 2 percent.
“The pressure in early 2009
was occupancy, and then there
was pressure on rates,” says
of RBC Capital Markets. “This
year, as demand increases, we
still expect to see some rate
pressure. 2010 is going to be an-
other challenging year.” To that
end, he expects sector NOI to
be down as much as 3. 5 percent,
while margins will drop another
150 to 275 basis points.
2009 Capital Offerings–Lodging Sector
of Offerings Amt Offered ($000)
Common Equity 27 2,665,968
Preferred Equity 1 NA
Senior Debt 4 1,736,000
Total Offerings 32 4,401,968
*Excludes shelf registrations and offerings by existing shareholders.
Source: SNL Financial
combined with suppressed levels of
group demand booked in advance
are expected to place continued
pressure on rates in the year ahead.
To that end, rate discounting is expected to continue into 2010, albeit
at a reduced rate of 1. 5 percent,
resulting in a RevPAR decline of
just 1. 1 percent. In fact, PKF-HR
is not forecasting RevPAR to increase until 2011 when the recent
surge in new supply has tapered off
and lodging demand begins to rise
above the long-term average.
Increasing Acquisition
Activity
Even as lodging REI Ts face all
these challenges, they are in much
better shape today than their pri-
vate peers. “In general, most were
not operating with extreme lever-
age, and many were able to access
the equity markets last year,”
Salinksy notes. “While their cash
flows were off a bit more, their
balance sheets were better than
private counterparts.”
While REITs were focused on
paying down debt in 2008 and
2009, the focus will change in
2010, according to Arabia. “Be-
cause most lodging REITs are in a
much healthier position this year,
they’re looking at external growth.
Their shares have rallied to the
point where the cost of equity
makes acquisitions appear at-
tractive. They’ve switched from a
defensive position to an offensive
position.”
Last year, U.S. hotel transaction
volumes were at their lowest level
of the decade, according to Jones
Lang LaSalle Hotels. The firm
reported that U.S. hotel transac-
tion volumes were $1.8 billion last
year. This year, deal volumes are
expected to rise to at least $2.8 bil-
lion, according to the firm’s “Hotel
Investment Outlook” report.
That’s 80 percent of the total
