OREANDA-NEWS. June 09, 2015. The exposure of hotel profitability to changes in supply and demand for rooms would have led to lower ratings on some tranches of the Mint 2015 plc CMBS transaction if rated by Fitch. The difference is more pronounced for senior classes denominated in euros, where Fitch would not have assigned a 'AAAsf' rating.

This is because the Amsterdam market suffers from a structural declining trend in hotel revenues, which would affect Fitch's analysis at the higher rating levels. Fitch would also estimate sustainable free cash flow for the London hotels more conservatively than the other rating agencies, in light of threats from market competition and an overheating market.

As one of the best hotels in its market, the profitability of the Amsterdam asset is well insulated from a potential increase in the supply of rooms in the vicinity. Fitch would view current average daily rates (ADR) of EUR166 as sustainable. However, historical market data on revenue per available room (RevPAR) suggest that the Amsterdam market as a whole is above trend, and therefore vulnerable to a later correction. Moreover, the underlying long-term trend is downward, which in Fitch's CMBS analysis would warrant a greater haircut, particularly in the higher rating stresses.

For the hotel in question, Fitch would expect management, faced with a negative demand shock, to look to sacrifice occupancy to defend ADR as this would relieve a portion of room-related costs without jeopardising the significant income from its destination SkyBar. Nevertheless, Fitch estimates sustainable free cash flow of around EUR13m a year, well below the estimate of one of the other agencies, and would expect it to come under further pressure in a sharp economic downturn.

The London properties are quality hotels, but Fitch does not regard either as best in class or unique in its offering, and their current outperformance is likely to be unsustainable. Allowing for competition over the medium term, Fitch would expect sustainable ADR to be 5%-10% down from current levels, at GBP150-155 for London Tower and GBP130-135 for London Westminster. With this adjustment the premium in the hotels' profit margins over the market average would fall to a level commensurate with the quality of the properties, in Fitch's view.

Fitch would estimate sustainable free cash flow at around GBP20m a year, about 15% below the other agencies' published levels. In a downturn, Fitch would expect management to have less flexibility to protect ADR than in a market-leading London hotel, but overall would view operations as more resilient to market stress than the Amsterdam asset.

Prevailing yields for well-branded hotels in London are slightly below the 10-year average. Fitch estimates a sustainable market value of around GBP350m for the London hotels, about midway between the estimates of the other agencies. However, in Amsterdam, despite falling sharply below the five-year average in the last 18 months, prime yields remain around 150bp higher than in London. Fitch estimates a sustainable market value of EUR175m for the Amsterdam hotel, around 10% below the other agencies' levels.