The year 2012 is likely to end on a positive note for the
hotel & lodging industry, with lodging performance indicators
witnessing considerable improvement in most parts of the world.
In the recently concluded third quarter of 2012, most of the
sector heavyweights --
Starwood Hotels and Resorts Worldwide Inc.
Marriott International Inc.
Wyndham Worldwide Corp.
Hyatt Hotels Corp.
) -- surpassed their earnings expectations.
However, global economic and political issues like sovereign
debt, currency fluctuation, the U.S. fiscal cliff and sustained
economic instability in various countries will continue to affect
lodging companies in the first half of 2013.
Notwithstanding the hurdles expected ahead, the lodging sector
should continue its recovery into next year. International travel
and tourism volumes are anticipated to increase. Both Starwood
and Marriott expect corporate rate negotiations which will likely
lead to a high-single-digit increase in 2013.
Furthermore, big events in Europe and South America scheduled in
2012 through 2016 are expected to boost tourism. As owners and
operators strive to enhance value and competitiveness,
industry-best practices like sustainability and brand refreshment
will remain priorities in the industry.
Coming to near-term industry dynamics, hoteliers will likely
report modest RevPAR (revenue per available room) growth in the
fourth quarter backed by the improvement in room rates, strong
group performance occurring the week before an early
Thanksgiving, partially offset by somewhat lower occupancy growth
due to looming political concerns.
According to Smith Travel Research (STR), a leading information
and data provider for the lodging industry, hoteliers will end
the year with 2.6─2.8% growth in room nights sold with ADR growth
Owing to the saturation in the U.S. market, major hoteliers have
been exploring growth opportunities abroad. Some international
markets offer greater potential riding on a stepped-up pace of
economic growth. The operating environments in these markets help
hoteliers grab a bigger share of the overseas pie.
A number of U.S.-based hoteliers are targeting unsaturated
markets of India, Brazil, China, Russia and Africa. Major players
in the industry like Starwood and Marriott are primarily eyeing
the Asia-Pacific, Africa and Latin American regions.
China is set to fuel a recovery in global tourism, and is
expected to emerge as the world's most popular travel destination
by 2020. Both Starwood and Marriott generate their second largest
revenue stream from China.
India is another hot spot for the western hoteliers. The country
possesses a compelling investment proposition and is growing in
prominence as a global business hub, where the demand for
moderate-tier as well as upscale branded hotels is expected to
considerably outpace the supply over the next three to four
The prospects for Latin America, particularly Brazil, remain
outstanding. Brazil is the largest country in South America and
is the fastest-growing travel and tourism economy in Latin
America. For tourists, particularly domestic travelers, the
region is becoming one of the hottest destinations. Brazil
primarily attracts affluent domestic tourists in the flush of an
Moreover, with major events like the FIFA World Cup in 2014 and
the Summer Olympics in 2016, the Brazilian government has turned
its focus on improving the country's infrastructure as demand for
hotel rooms will shoot up and the events will significantly
increase tourism in the country.
According to Jones Lang LaSalle, hotel investment in Brazil will
be around $2.4 billion by 2014. The real estate consulting
company predicts that a large number of hotels will come up in
the country to cash in on the FIFA World Cup and the Olympics.
Mexico is also on the path of recovery with the crime situation
However, Argentina has been negatively impacting Latin American
RevPAR for the last six months. The situation is not likely to
improve in the near future with its stern economic and political
situation, adverse currency impact and strict government control
on imports. Starwood felt the brunt of this disruption in the
third quarter of 2012, with Latin American RevPAR declining by
450 basis points. In the Middle East, while Saudi Arabia and the
Gulf are performing well, the political situation in Egypt is
Business conditions in Canada have been sluggish for most of the
year due to a stronger currency resulting in slower U.S. inbounds
and group demand. However, things seem to be easing now with a
sequential improvement noted in the third quarter of 2012.
The hotel industry continues to witness an upside and remains on
track for improved performance. With lower supply in the U.S.,
RevPAR is improving based on strong demand and sustained higher
pricing. This is a turnaround from the recession when sagging
occupancy percentage led hoteliers to slash room rates in a bid
to woo visitors.
According to statistics released by the U.S. Department of
Commerce in November, total spending of international tourists
visiting the U.S. was $13.8 billion in August 2012, up 3% year
over year. We expect demand growth to continue in 2013 as well.
The U.S. government has also implemented a new National Travel
and Tourism Strategy, whose main objective is to attract more
than 100 million international visitors by 2021. The government
believes that this will provide significant growth stimulus for
the local economy. The strategy, if successful, will reap profits
for the U.S. hoteliers.
According to Smith Travel Research the U.S. hotel industry
reported increased occupancy level, ADR and RevPAR for the third
quarter of 2012. Results were favorable for the fourth week of
November as well.
Comparing the operating metrics on a year-over-year basis, the
industry's occupancy, average daily rate and RevPAR in the third
quarter inched up 1.2% to 67.1%, 3.9% to $107.34 and 5.1% to
A similar trend was noticed in November. At the end of the week
ending November 24, the industry's occupancy, average daily rate
and RevPAR jumped 5.2% to 47.2%, 5.9% to $96.06 and 11.4% to
For 2013, Smith Travel Research predicts occupancy to be
virtually flat with a 0.3% increase to 61.4%, ADR to rise 4.6% to
$111.01 and RevPAR to grow 4.9% to $68.17.
Demand Exceeds Supply
In the U.S., Smith Travel Research expects the sector to end the
year with 0.5% increase in supply and 2.6% growth in demand.
Room rates are on the rise in an environment marked by higher
demand and lower supply. PWC, Smith Travel Research and Lodging
Econometrics are all forecasting less than 1% supply growth in
2013 while Smith Travel Research predicts demand growth to be
around 1.2% in 2013.
According to Marriott International, fewer supplies combined with
nearly peak occupancy levels will help hoteliers charge higher
for the rooms in 2013. Smith Travel Research anticipates room
rates will likely reach 2008 levels on a nominal basis, going
According to data published by Smith Travel Research in November,
the total active U.S. hotel development pipeline comprises 2,590
projects, down 6.6% year over year. Among the chain scale
segments, Luxury reported the largest increase in rooms in the
total active pipeline (up 54.4%).
Shift Toward Asset-Light Model
Since late 2010, transitioning to an "asset light" business model
has gained prominence in hotels and REIT industries. Asset sales
remain a long-term strategy to strengthen financial flexibility,
which help companies grow through management and licensing
arrangements instead of direct ownership of real estate. A higher
concentration of management and franchise fees reduces earnings
volatility and provides a more stable growth profile.
Hence, the hoteliers are focused on rebalancing their portfolios
by increasing contributions from managed and franchised hotels.
This fee-based business is attractive as growth is powered by
multiple sources like RevPAR growth, unit additions and incentive
fee escalation. The business is also capital efficient as
owner/developer partners provide the capital and the company
earns a fee by managing/franchising the property.
Following the industry trend, many industry players like
Morgans Hotel Group Co.
Red Lion Hotels Corporation
Great Wolf Resorts Inc.
) and Starwood embarked on an asset disposition strategy.
Increased Capital Expenditure on Renovation
Most of the hoteliers are increasingly investing on property
renovations in recent times. Hotel companies are diligently
working on guest satisfaction to enhance their position in a
cut-throat environment. Brand conversion and remodeling has
emerged as a trend for major hoteliers. Many industry bigs like
Starwood, Marriott and
InterContinental Hotels Group
) have walked the same path.
There are several well-positioned, older hotels in metro markets,
which are good candidates for restructuring. Hence, we believe
that 2013 will likely witness further renovations.
Among the more bullish names,
Marriott Vacations Worldwide Corp.
) holds a Zacks #1 Rank (short-term Strong Buy rating) and
Choice Hotels International Inc.
) holds a Zacks #2 Rank (short-term Buy rating).
Deterrents for Fourth-Quarter 2012
The performance of the U.S. hotel industry in the fourth quarter
of 2012 is expected to be muted due to the persisting global
economic uncertainty, looming fiscal cliff, inclusion of US
presidential election week (November 6) and a mid-week Halloween
in the U.S. According to Marriott and Starwood, these factors
will likely disturb last-minute business-related hospitality
demand in the quarter. We support this view.
There is also Hurricane Sandy to bother some hoteliers'
financials in the fourth quarter due to the cancellation of
bookings for quite a few days. Sandy, which hit the U.S. East
Coast on October 28, led to a two-day shutdown of the U.S. stock
MGM Resorts International
) believes it will lose 4,000 room nights on account of the
storm, leading to an anticipated revenue loss of about $1
million. As the majority of cancellations occurred during one of
the biggest conventions, namely 'SEMA,' MGM management expects
the impact on revenue to be harsh in the fourth quarter.
The International Monetary Fund (IMF) anticipates the U.S.
economy to recover at a slower pace in 2013 at about 2.4%.
However, any sudden deterioration in the European debt crisis and
a rise in gas prices could undermine the momentum. If the
recovery is actually thwarted, growth in the hotel sector - one
of the key indicators of measuring discretionary spending of
consumers - would be the worst hit.
Tension in the Eurozone
Hoteliers' expansion plan through management and franchise deals
in Europe seem to be under pressure due to the prevailing credit
crunch. European banks have curtailed lending to real estate
developers in the wake of the Eurozone debt crisis. Until the
prevailing economic challenges are resolved in Europe, the
tourism industry will remain challenged.
Hence, hoteliers will likely witness a soft booking trend in the
region as most of their European businesses are driven by the
leisure segments located specifically in Spain, Italy and Greece.
Notably, two markets posted double-digit RevPAR decreases:
Athens, Greece (-14.2% to EUR58.54) and Lisbon, Portugal (-12.2%
to EUR67.81) in October 2012. These European countries are
significantly exposed to sovereign debt challenges. The economic
crisis is not uniform across the region.
As per the IMF's October 2012 projection, Eurozone economic
growth is expected to shrink 0.4% in 2012 and inch up 0.2% in
2013. Both the estimates were cut down from the July forecast of
0.3% reduction in 2012 and 0.7% growth in 2013.
In addition, in 2013, hoteliers will be facing tough comparisons
in Europe as they will lap some major events of 2012 like the
Olympics, the Euro Cup Championship, and a grand 2012 fair
schedule in Germany.
Slowdown in Emerging Markets
As per IMF, the emerging markets have started to witness a
slowdown owing to weaker external environment, a sharp
deceleration in domestic demand and policy tightening as well as
a fragile export environment which could possibly hurt the
performance of the lodging sector in the near term.
The IMF has trimmed its forecast for emerging economies in
October. Growth has slowed in a number of major emerging
economies, especially in Brazil, China and India. Apart from
slower GDP growth, RevPAR in 2013 will suffer on account of
higher supply growth in a few emerging markets and lower in-bound
traffic from Europe.
The GDP figure for China remains lackluster. In the third quarter
of 2012, the country recorded GDP growth of 7.4%, declining for
the seventh straight quarter and the first miss of the official
target since the first quarter of 2009. As per IMF's October
forecast, China is expected to grow by 7.8% in 2012, down from
its earlier July forecast of 8.0%.
The IMF has warned that the worsening debt crisis in the Eurozone
will pose a "key risk" to China 's growth. For 2013, growth in
China is now expected to be 8.0% as compared to the earlier
projection of 8.5%. The recent China-Japan and Korea-Japan
political tension, transition in Chinese government and monetary
tightening in China are hurting lodging sector bookings.
The agency estimates weakening growth in India for 2012 and 2013.
In its October projection, the agency cut down its growth
forecast for India from 6.1% and 6.5% to 4.9% and 6.0%,
respectively. For Brazil, the agency reduced its growth forecast
from 2.5% and 4.6% to 1.5% and 4.0%, respectively, in 2012 and
Competition is also getting more intense across the sector. Every
hotel company is not only competing with major hotel chains in
national and international venues but also with home-grown hotels
in regional markets. Heightened competition and potential
addition of new supply will restrict market share gains.
Operating Margins Under Pressure
Though RevPAR has fairly picked up since the recovery in the
industry in 2009, operating margins are yet to reach the industry
peak of 2007 in the U.S. This is due to the spike in overall
inflation. As a result of economic uncertainty, it is now
estimated that peak levels will not be achieved anytime soon.
Some hoteliers like Marriott even feel that the golden days of
the lodging industry will not be back before 2014 or 2015. The
impact of unfavorable currency, given the recessionary scenario,
raises concerns about the ability of hoteliers to post stronger
By the look of things, we currently refrain from getting too
enthusiastic on a number of stocks in our universe, which
continue to hold a Zacks #3 Rank (Hold). These include
The Marcus Corporation
China Lodging Group Limited
Wyndham Worldwide Corporation
Home Inns & Hotels Management Inc.
Orient-Express Hotels Ltd.
We also remain concerned about the prospects of
Morgans Hotel Group
), which currently retains a Zacks #4 Rank (Sell).
HYATT HOTELS CP (H): Free Stock Analysis
HOME INNS&HOTEL (HMIN): Free Stock Analysis
STARWOOD HOTELS (HOT): Free Stock Analysis
CHINA LODGING (HTHT): Free Stock Analysis
INTERCONTL HTLS (IHG): Free Stock Analysis
MARRIOTT INTL-A (MAR): Free Stock Analysis
MARCUS CORP (MCS): Free Stock Analysis Report
MORGANS HOTEL (MHGC): Free Stock Analysis
ORIENT EXP HOTL (OEH): Free Stock Analysis
RED LION HOTELS (RLH): Free Stock Analysis
(WOLF): ETF Research Reports
WYNDHAM WORLDWD (WYN): Free Stock Analysis
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