The year 2012 started on a positive note for the hotel &
lodging industry, with lodging performance indicators witnessing
considerable improvement in most regions of the world. However,
global economic and political issues like sovereign debt, currency
fluctuation and sustained economic instability in various countries
will likely take their toll on lodging companies in the second half
Notwithstanding the hurdles expected in the second half of 2012,
the lodging sector is expected to continue its recovery trail this
year. International travel and tourism volumes are anticipated to
increase on the back of the rapidly growing BRIC economies.
Furthermore, mega events in Europe and South America scheduled from
2012 through 2016 will boost tourism. As owners and operators
strive to enhance value and competitiveness, industry-best
practices like sustainability and brand refreshment, will remain
priorities this year.
Owing to the saturation in the U.S market, major hoteliers are
exploring growth opportunities abroad. Some international markets
offer greater potential based on the prevailing higher pace of
economic growth. The operating environment in those markets helped
hoteliers grab a bigger share of the overseas pie.
A number of U.S.-based hoteliers are targeting the fast-growing
emerging economies, including India, Brazil, China, Russia and
Africa. Major players in the industry like
Starwood Hotels and Resorts Worldwide Inc.
Marriott International Inc.
) are primarily eyeing the Asia-Pacific, Africa and Latin American
The stellar performance of the Asia-Pacific region is expected to
continue. Hotels in the Asia-Pacific region have been registering
significant upside across all three key performance metrics,
according to Smith Travel Research. The region's Occupancy, ADR and
RevPAR increased a respective 1.8%, 5.4% and 7.3% to 66.2%, $136.87
and $90.66 in June 2012.
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
chunk from China.
Apart from China, India is another hot spot for the western
hoteliers. India 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 years.
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
domestic tourists, who are enjoying an economic resurgence in
Moreover, with major events like the FIFA World Cup in 2014 and the
Summer Olympics in 2016, the Brazilian government has turned its
focus to improving the infrastructure of the country 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.
In evaluating hotel companies, we pay close attention to changes in
average daily room rate (ADR) to figure out the likely pace of
improvement in the sector.
A key operating metric in the lodging industry is RevPAR (revenue
per available room), which is derived by multiplying the occupancy
percentage of a hotel over a given period with ADR over that same
period. Changes in either occupancy or ADR will impact RevPAR, but
with different implications for bottom-line profitability.
With lower supply in the U.S. economy, the hotel occupancy
percentage is stepping up based on strong demand coupled with
continued higher pricing. However, declining occupancy percentages
during the recession compelled some hoteliers to slash room rates
in a bid to woo visitors.
Large group hotels are still being impacted by group business
booked in 2008-2009, which were recessionary years. In most cases,
this tactic results in material long-term damage to the business,
primarily for these reasons:
- First, increase in occupancy is accompanied by escalating
operating expenses. For every room that is occupied, there are
additional costs such as housekeeping, laundry and utilities that
must be incurred. Margins are compressed when room rates decline
and variable operating expenses increase. Changes in ADR,
however, affect the bottom line considerably.
- Second and more importantly, cuts in ADR will be difficult to
recoup when the operating environment eventually improves. After
slashing room rates in an effort to fill up rooms, attempts to
restore these to the previous levels are likely to be met with
significant resistance from clients. The ability to benefit from
an improving economy will thus be delayed.
- Finally, the ability of lodging companies to sustain room
rates should have a significant impact on their capability to
weather any kind of economic uncertainty. By keeping an eye on
changes in ADR, investors can gain some insight into companies
that are best poised to benefit from the economic revival.
The hotel industry continues to witness upside and remains on track
for improved performance. According to statistics released by the
US Department of Commerce in May, total annual spending of
international tourists visiting United States has reached $14
billion, up 8% year over year. We expect the positive demand growth
trend to continue in 2012 and beyond.
The US government has released a new National Travel and Tourism
Strategy whose main objective is to attract more than 100 million
international visitors by 2021, thus generating $250 billion
annually in visitor spending by 2012. The government believes that
this will provide significant growth stimulus for the local
economy, which is currently hurt by the global economic crisis. If
government succeeds, it will also create huge growth opportunities
for the hoteliers.
According to Smith Travel Research, the leading information and
data provider for the lodging industry, the U.S. hotel industry
reported increased results across all three key performance
measures -- occupancy level, ADR and RevPAR -- for the second
quarter of 2012 as well as for the fourth week of July.
Comparing the operating metrics on a year-over-year basis, the
industry's occupancy, average daily rate and RevPAR at the end of
the second quarter jumped 3.1%, 4.7% and 7.9% to 65.1%, US$106.41
and US$69.32, respectively.
PwC expects the US lodging industry to enjoy increased pricing in
2012, driven by improved occupancy levels, particularly in the
higher-priced segments of the industry and a recovery in travel.
PwC forecasts RevPAR growth of 6.5% in 2012, benefiting heavily
from a 5.1% increase in ADR.
Demand Exceeds Supply
In the U.S., Smith Travel Research noticed growth of 3.5% in demand
and an upside of 0.4% in supply during the second quarter of 2012.
The firm expects the same trend to continue in the second half of
2012, but at a slower pace. In the U.S., PwC expects supply in 2012
to inch up 0.5% but demand to increase 1.8%.
Room rates are on the rise in an environment marked with higher
demand and lower supply, thus resulting in RevPAR growth in 2012.
According to data published by Smith Travel Research in June, the
total active U.S. hotel development pipeline comprises 2,741
projects totaling 296,333 rooms, down 6.7% year over year. Among
the chain scale segments, Luxury reported the largest increase in
rooms in the total active pipeline, with 6,358 rooms (up 54.4%).
Among the rooms under construction, the upscale segment reported
the maximum increase of 52.9% with 18,692 rooms.
Shift Toward Asset-Light Model
Since late 2010, transition to an "asset light" business model has
gained prominence in the hotels and REIT industries. Asset sales
remains 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.
Focus on Acquisitions
According to Jones Lang LaSalle, hotel operators are becoming
proactive on the acquisition front, a trend which emerged last year
and gaining momentum in 2012. Hotel operators are presently
focusing on purchasing assets, mainly to aid brand development, in
a small number of key cities. Consistent with this trend, industry
behemoth Marriott has inked a definitive acquisition agreement with
Gaylord Entertainment Co for an upfront payment of $210 million in
cash by October 2012.
Increased Capital Expenditure on Renovation
Most of the hoteliers are increasingly investing on property
renovations in recent times. Hotel companies are working hard 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 biggies like Starwood, Marriott
and others have tread the same path.
There are several well positioned, older hotels in metro markets,
which are good candidates for restructuring. Hence, we believe that
2012 will likely witness further renovations.
Tough Comparisons in 2012
The U.S. hotel industry is expected to witness fragmented growth
across all the three metrics in 2012 due to the persisting global
economic uncertainty, tougher year-over-year comparisons, upcoming
presidential election and fiscal cliff in the U.S.
IMF projections for 2012 indicate global growth of 3.5%, down from
the forecast of 3.6% in April. Financial turmoil and the deepening
Eurozone crisis are responsible for sluggish global growth outlook
and IMF warned that the outlook could dim further if policymakers
in Europe and the US fail to act. For 2013, IMF has trimmed its
global growth forecast from 4.1% to 3.9%.
IMF anticipates the U.S. economy to recover at a slow pace in 2012
and 2013-at about 2% and 2¼%, respectively. As per the World Trade
Organization (WEO), U.S GDP could decline more than 4% in 2013, if
policymakers fail to deal with the "fiscal cliff."
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 not resolved in Europe, the
tourism industry in Europe 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.
However, the Olympic Games in London brought more visitors in
Europe, resulting in improved business for the hoteliers in the
These European countries are significantly exposed to sovereign
debt challenges. Some companies anticipate weak performance in the
British provinces, arising from the government austerity efforts.
However, the economic crisis is not uniform across the region.
As per the IMF's July 2012 projection, Eurozone economic growth is
expected to shrink 0.3% in 2012 and inch up 0.7% in 2013. The IMF
has sharply revised down its growth projections for the United
Kingdom as the Eurozone crisis weighs on the recovery. The IMF now
projects growth of only 0.2% in 2012 and 1.4% in 2013 for the
United Kingdom. In April, the fund expected the UK economy to
expand 0.8% in 2012 and 2.0% in 2013.
Slowdown in Emerging Markets
As per IMF, the emerging markets have started to witness a slowdown
owing to weaker external environment and a sharp deceleration in
domestic demand in response to capacity constraints and policy
tightening, which could possibly hurt the performance of the
lodging sector in the near term.
IMF has trimmed its July forecast for emerging economies,
projecting an expansion of 5.6% in 2012 and 5.9% in 2013. Both
figures are 0.1% lower than the April projection. Growth has slowed
in a number of major emerging economies, especially Brazil, China
The growth prospects for China remain lackluster as in the second
quarter of 2012, the country recorded growth of 7.6%, which marks
the slowest three-month annual growth in three years. As per IMF's
July forecast, China is expected to grow by 8.0% in 2012, down from
its earlier April forecast of 8.2%.
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 8.5% as compared to earlier projection of
The agency estimates weakening growth for India in 2012 and 2013.
In its July projection, the agency cut down its growth forecast for
India from 6.8% and 7.2% to 6.1% and 6.5%, respectively. For
Brazil, the agency reduced its growth forecast from 3.1% to 2.5% in
Competition is also growing considerably 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.
Lags RevPAR Benchmark
Though RevPAR has fairly picked up since the recover of the
industry in 2009, it has yet to reach the industry's peak level
seen in 2007 in U.S. As a result of economic uncertainty, it is now
estimated that industry's peak level will not be achieved before
Moreover, surging commodity prices and an unfavorable currency
impact raise concerns about the ability of hoteliers to control
By the looks of things, we currently refrain from being too
enthusiastic on a number of stocks in our universe, which continue
to have a Zacks #3 Rank (Hold). These include Starwood, Marriott,
China Lodging Group Limited
) Great Wolf Resort,
Wyndham Worldwide Corporation
), Morgans Hotel Group and
Hyatt Hotels Corp.
We also remain concerned about the prospects of
Home Inns & Hotels Management Inc.
), which currently retains a Zacks #4 Rank (Sell), and
Orient-Express Hotels Ltd.
), which holds a Zacks #5 Rank (Strong Sell).
Intercontinental Hotels Group plc
) holds a Zacks #2 Rank (short-term Buy rating) and
The Marcus Corporation
) holds a Zacks #1 Rank (short-term Strong Buy rating).
HYATT HOTELS CP (H): Free Stock Analysis Report
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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