On Jan. 29, 2020, S&P Global Ratings published "The Wuhan Coronavirus Outbreak Will Negatively Affect The Cash Flow Of Gaming And Lodging Companies Exposed To The Asia-Pacific Region," and at that time we said the outbreak will adversely impact lodging companies that operate a material percentage of their rooms in China and the greater Asia-Pacific region. Over the past few weeks, efforts at containment failed, and travel bans and reports of voluntary travel restrictions are sweeping the globe. We believe this will result in a global travel downturn until the virus is contained, and that revenue per available room (RevPAR) will decline in nearly all major travel markets as long as consumers and businesses postpone or cancel travel due to fear of the virus.

While there continues to be high uncertainty about the rate of spread and timing of the peak of the COVID-19 disease, modeling by academics with expertise in epidemiology indicates a likely range for the peak of up to June 2020. For the purpose of assessing the economic and credit implications, we assume the global outbreak will subside during the second quarter 2020, consistent with our recent report "Global Credit Conditions: COVID-19’s Darkening Shadow,” published March 3, 2020". As the situation evolves, we will update our assumptions and estimates accordingly.

U.S.: Significant impact, but more moderate compared to Europe and Asia

While U.S. RevPAR was up 2% year-to-date through February, Smith Travel reported U.S. RevPAR declined nearly 12% in the week ended March 7, 2020. The hardest hit markets for the week were San Francisco (down 46%), Anaheim (down 42%), and Seattle (down 35%), and several other Top 25 markets were down double digits. Under our base-case virus scenario that the outbreak subsides in the second quarter, we are assuming a travel downturn in the U.S. could persist through the second quarter, when hotels typically generate higher RevPAR than in the first quarter. RevPAR in March and April could be substantially worse than the first week of March, and the recovery could be slow. Furthermore, hotels typically generate higher RevPAR in the second quarter than in the first quarter. As a result, managers and franchisers typically earn more fees and hotel owners typically earn more hotel profit in the second quarter. Reflecting the seasonal trend upward, U.S. RevPAR was $79.68 in March 2019, $82.18 in April 2019, and $84.02 in May 2019.

The outbreak is causing businesses and groups to cancel travel and ban nonessential travel, which we presume includes any travel not directly related to revenue generation. We assume many leisure travelers are also cancelling or postponing plans, although leisure travel is typically higher in the summer. Given the rapid increase in reported restrictions, the travel downturn could persist into the second quarter. For purposes of modeling the impact, we are assuming RevPAR declines meaningfully in March, and 20% to 30% in the second quarter. This could result in a full year 2020 RevPAR decline of 5% to 10%, depending upon the pace of recovery after the second quarter. Base management and franchise fees generated in the U.S. could fall 5% to 10%, and hotel profit could fall 10% to 20% applying a 2x profit multiplier to the RevPAR impact.

Table 1

Europe: Occupancy severely depressed at least through April, and recovery could be slow, causing a RevPAR decline at least through the second quarter

Travel Weekly reported Smith Travel Research data for the week of Feb. 24 that showed hotel occupancy fell 80% in Milan, 70% in Venice, 50% in Athens, 35% in Barcelona, 25% in Vienna, and just over 20% in Prague and Munich. With Italy under lockdown and cases spreading through Europe, we are assuming occupancy is severely depressed in many markets at least through April. Recovery could be slow and cause a decline in RevPAR at least through the second quarter. We are assuming European RevPAR declines meaningfully in the aggregate February through June, causing a full year 2020 RevPAR decline of 10% to 20%, depending upon the pace of recovery after the second quarter. We are not incorporating the possibility that pent-up demand for travel causes the recovery to be fast and robust once fears subside. However, this is a plausible outcome if recovery ramps up during the summer holiday season, and could result in a much lower 2020 RevPAR decline.

On the other hand, if the virus is not contained in the second quarter and extends to the third quarter, which is the summer season, we believe that the impact on lodging companies would be more severe. We will be monitoring this possibility and its potential impact in the next few weeks depending on how the virus develops.

Asia: Severe RevPAR decline through March; earlier recovery compared to U.S. and Europe

Reported COVID-19 cases continue to fall in China, suggesting containment is working, albeit with high economic costs, according our economists. Outside of China, Korea and Japan appear most exposed with the most cases. We assume hotel occupancy has been severely impacted in China since January, but that recovery may occur earlier if containment holds in China and is achieved elsewhere. It is not clear whether any hotel revenue is currently being generated inside China. We assume severe occupancy declines through at least March in China, and at least through April in major Asian markets outside China. As a result, we are assuming 2020 RevPAR declines more than 20%.

Most rated lodging companies can withstand the cash flow decline

We believe most rated lodging companies currently have substantial flexibility in leverage measures compared to downgrade thresholds, substantial cash flow generation, good liquidity sources, and can reduce spending on shareholder returns and other investments to limit the damage from a prolonged global travel downturn. On March 2, Hyatt withdrew its 2020 outlook based on the negative impact on travel demand outside of Greater China, and new corporate travel restrictions in the U.S. and Europe.

On March 9, Ryman disclosed a high level of group room night cancellations for the week of March 7, and indicated that about 75% of cancellations were for the month of March and 25% for the month of April. We placed our ratings on Ryman on CreditWatch with negative implications as a result.

Also on March 9, Host Hotels & Resorts Inc. withdrew its 2020 financial guidance due to uncertainty regarding travel and hotel demand related to COVID-19. These are not likely to be the last revisions or withdrawals.

Host also indicated the negative effects on revenue and EBITDA to date, primarily due to group business cancellations, 58% of which were in California. Host also indicated that transient cancellations have increased significantly due to government and corporate travel restrictions. Under our current base case, which assumes the outbreak subsides during the second quarter, and assuming the current pace of cancellations continues at least through April, we estimate Host's 2020 revenue could be as much as $500 million below our previous base case, including an estimate of cancellation fees owed, assuming they are collectible. We view this estimate as preliminary and plan to update it in the coming weeks, partly because Host stated that it has not been notified of group business cancellations beyond the first half of 2020, which suggests cancellations are being made within a relatively narrow window. Under these assumptions, the effect on Host's EBITDA could also be material even if the cancellations are temporary. Host's reported EBITDA decline to date is significant compared to the revenue decline, and we believe this is because it can take a while to reduce costs in reaction to sudden revenue declines. To conduct a sensitivity analysis, if we assume a 10%-20% hit to EBITDA in 2020, Host's lease-adjusted debt to EBITDA could increase up to the low- to mid-2x area in 2020 (assuming no hotel acquisitions or share repurchases), compared to the high-1x area in 2019. Despite the possible spike in leverage, this would represent a good cushion compared to our 3.25x downgrade threshold on the company.

We also placed ratings on independent hotel manager Aimbridge Acquisition Co. Inc. on CreditWatch with negative implications because of very high leverage and a very high level of uncertainty surrounding the duration and severity of impact on travel and hotel demand due to COVID-19.

That being said, under our base case for containment by the end of the second quarter, hotel managers and franchisers may experience a drop in fees largely in line with lower RevPAR in affected regions, and hotel owners may experience a decline in hotel profit that is twice the decline in RevPAR in affected regions. If 2020 RevPAR declines 5% to 10% in the U.S., 10% to 20% in Europe, and more than 20% in Asia, we can overlay the geographic footprint of rooms and the percentage of revenues from fees compared to owned hotels and estimate a potential range of EBITDA impact. We currently believe all lodging managers and franchisors can withstand the decline in cash flow in 2020 given a combination of existing leverage cushion and the near certain prospect that many companies will forego share repurchases and other discretionary investment spending, and can probably keep leverage inside downgrade thresholds.

In Table 2 below, we outline the leverage capacity, cash flow generation and spending among rated lodging companies. Under our current RevPAR assumptions in the U.S., Europe, and Asia, we believe nearly all of our lodging companies have sufficient flexibility to withstand the cash flow decline. Ryman and Host focus on group and business travelers, and they own hotels. As a result, we believe their businesses are more exposed to business travel cancellations and postponements with less margin (relative to most managers and franchisers) to cushion high anticipated EBITDA volatility for a period of time. We are also closely surveilling Accor given its meaningful exposure to China and Europe.

Table 2

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