The hotels and lodging industry shaped up pretty well in 2011
thanks to the gradual global economic recovery, and seems to be
poised for long-term growth. With the return of business as well as
leisure travelers coupled with decelerating supply growth, pricing
power remained steady in the year.
Improvement in the U.S. economy and the consequent rise in
operating metrics helped most of the hoteliers report strong
quarterly results. Group bookings appear to be gaining momentum and
the companies registered strong advance bookings and pricing for
2012 and beyond. Booking windows are also lengthening. However,
macro headwinds can partially restrain the booking momentum in
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 enabled
hoteliers to grab a bigger share of the overseas pie.
A number of U.S.-based companies are targeting fast-growing
emerging economies, with
Starwood Hotels and Resorts Worldwide Inc.
Marriott International Inc.
) eyeing the Asia-Pacific and Latin American regions.
The stellar performance from the Asia-Pacific region is expected to
continue in the near future. 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 2.1%,
6.9% and 21.3% to 71.9%, $143.08 and $102.89 in November 2011.
Major growth markets within Asia-Pacific, China and India, remained
more or less unaffected by the global economic turmoil and are
enjoying rising economic growth rates. The availability of local
capital is another positive factor.
China is set to bring about a recovery in global tourism, and by
2020, is expected to be the world's largest travel destination.
Both Starwood and Marriott derive their second largest revenue
chunks from that country.
In the past, hotels in China were mainly occupied by Western
travelers, but today, more than 50% of the guests are Chinese. This
is indicative of China's fast growing domestic travel market.
Moreover, according to an analysis on the enrollment and travel
trends of Starwood Preferred Guest members, around 100 million
outbound travelers are expected to visit China by 2015 but the
country has only a fraction of high-end hotels ready to serve them.
Apart from China, India is another hot spot for the western
hoteliers. India has a compelling investment proposition with its
rising importance as a global business hub, where the demand for
moderate-tier as well as upscale branded hotels will considerably
outpace the supply for the next three to four years. Moreover,
western hoteliers also find the built-cost to operating returns
favorable. All these factors testify to the longest development
pipeline that the hotel companies have in India.
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 by ADR over that same
period. Changes in either occupancy or ADR will impact RevPAR, but
with different implications for bottom-line profitability.
Given the recovery in the U.S. economy, it isn't surprising that
hotel occupancy percentages have stepped up. However, declining
occupancy percentages during the recession compelled some hotel
owners to slash room rates in an effort to woo visitors. In most
cases, this tactic results in material long-term damage to the
business primarily for some reasons:
First, increase in occupancy is accompanied by escalating operating
expenses. For every room that is filled, there are additional costs
such as housekeeping, laundry and utilities that must be borne.
Margins are compressed when room rates decline and variable
operating expenses increase. Changes in ADR, however, affect almost
entirely the bottom line.
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 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 the
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 with the economic revival.
The hotel industry is finally experiencing improvements and remains
on track to turn around. We expect the positive demand growth trend
to continue in 2011 and beyond. According to Smith Travel Research,
the leading information and data provider for the lodging industry,
the U.S. hotel industry reported increases across all three key
performance measures -- occupancy level, ADR and RevPAR -- between
December 11-17, 2011.
Comparing the operating metrics with the prior-year period, the
industry's occupancy increased 5.9% to 49.0%. Average daily rate at
the end of the week grew 4.2% to US$95.35. The week also ended with
a 10.4% rise in RevPAR to reach US$46.71.
Demand Exceeds Supply
Smith Travel Research projects that the hotel industry will end
2011 with growth across all three key metrics. Occupancy is
expected to grow 4.0% to 59.9%; ADR is projected to rise 3.6% to
$101.58 and RevPar is estimated to increase 7.7% to $60.81. Supply
is projected to inch up 0.7%, while demand growth is estimated at
4.7%. Room rates swung back to profit in an environment marked with
higher demand and lower supply, thus resulting in RevPar growth in
According to data published by Smith Travel Research in November,
the total active U.S. hotel development pipeline comprises 2,861
projects totaling 310,196 rooms, down 6.3% year over year. Among
the chain scale segments, the luxury segment reported the largest
increase in rooms in the total active pipeline, up 48.5% with 5,910
rooms. However, despite reporting biggest increases in both rooms
under construction and rooms in the total active pipeline the
Luxury segment still accounts for a small number of actual rooms
compared to other segments.
Brazil is a Hot Spot
Brazil is set to witness a surge in demand fueled by the resurgence
of the middle class. Additionally, a renowned consulting firm
specializing in real estate, Jones Lang LaSalle, believes that
hotel investment in Brazil will be around $2.4 billion by 2014. The
consulting company predicts that a large number of hotels will be
constructed in the country to cash in on the FIFA World Cup
scheduled in 2014 and the Olympics in 2016.
According to a survey done by Jones Lang LaSalle Hotels, RevPAR, a
measure of occupancy and rates, increased a record 17% in 2010.
Occupancy rates rose from 26% in 2003 to 68.5% in 2010. However,
while high occupancy rates are beneficial for the investors, rising
real estate prices could restrain new developments. Credit crisis
is also an added concern.
Shift Toward Asset-Light Model
Since late 2010, transition to an "asset light" business model has
gained momentum in the hotels and REIT industry. Asset sale remains
a long-term strategy to strengthen financial flexibility, which
would help the 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.
According to a recent research report by Jones Lang, hotel sales
and acquisitions as well as new deals will grow 25% in the Americas
by 2011. Jones Lang further projected that hotel transaction volume
would total approximately $13.0 billion in 2011.
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-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 in Renovation
Hotel companies are increasingly investing for renovating their
properties in recent times. Hotel companies are working hard on
guest satisfaction to uplift their positions in a cut-throat
environment. Brand conversion and remodeling has emerged as a trend
for major hoteliers. Many industry biggies like Starwood, Marriott,
MGM Resorts International
) have treaded 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. As for reference, the
selling rate for renovated rooms at Bellagio of MGM is $30 higher
than the average ADR at Bellagio.
Currently, the stocks with a Zacks #2 Rank (Buy) in the hotel
universe are Starwood,
Wyndham Worldwide Corporation
), Great Wolf Resorts,
Intercontinental Hotels Group plc
The Marcus Corporation
Tough Comparisons in 2012
The U.S. hotel industry is expected to witness fragmented growth
across all the three metrics. Smith Travel Research recently
slashed its forecast. Occupancy is currently expected to rise 0.2%
to 60.0%, ADR will increase 3.7% to US$105.29, and RevPAR is
projected to end the year with a 3.9% increase to US$63.18. The
forecast was slashed keeping in mind the persisting global economic
uncertainty and the tougher year-over-year comparisons the industry
will face in 2012.
IMF's September 2011 projections indicated a global growth of 4%
for 2012 as opposed to over 5% in 2010. The financial turmoil and
the deepening Eurozone crisis are responsible for the sluggish
global growth and weak investor projections. Hence, lack of
worldwide growth and strong-than expected demand in 2011 will make
the situation tougher for 2012.
Tension in Eurozone
Hoteliers' expansion plan through management and franchise deals in
Europe seem to be under pressure due to prevailing credit crunch.
European banks have curtailed on lending to real estate developers
in the wake of the Eurozone debt crisis. The companies will likely
witness a soft booking trend in the ongoing fourth quarter as most
of their European businesses are driven by the leisure segments
located specifically in Spain, Italy and Greece.
These countries are significantly exposed to sovereign debt
challenges. Some companies anticipate weak performance in the
British provinces, arising from the government austerity efforts.
Performance in Germany will likely moderate due to the timing of
this year's fairs in Germany, as well as tougher comparables.
However, the effect of crisis is not uniform across the region.
Competition is also building up 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.
Stricter U.S. Visa Policy
These days, Europe trips have increased five times as compared to
the U.S. owing to the availability of visas to European countries.
This is also validated by the Starwood management's account, which
reported that the U.S. has lost one third of its share of global
travel over the last decade due to its stringent visa policy. Hotel
companies are in talks with lawmakers in the U.S. regarding the
need for visa reform as the companies are losing opportunity from
rising outbound international travel, especially from China.
Comparatively Slower Growth in ADR
Though occupancy levels have fairly picked up, ADR is yet to show
meaningful improvement in the U.S. We believe the rate of upside in
ADR continues to remain tardy in tandem with sluggish economic
revival. We believe that the acceleration in room rates will not
reach the peak level seen in 2006 and 2007 before the end of 2012.
Additionally, the rebound is not uniform as many secondary and
tertiary markets are yet to see strong recovery. Additionally,
surging commodity prices raised concerns about the ability of hotel
companies to control costs.
By the look 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
Hyatt Hotels Corp.
China Lodging Group Limited
Home Inns & Hotels Management Inc.
Orient-Express Hotels Ltd.
We also remain concerned about the prospects of Morgans Hotel Group
and Marriott which currently retain a Zacks #4 Rank (Sell).
CHOICE HTL INTL (
): Free Stock Analysis Report
HYATT HOTELS CP (
): Free Stock Analysis Report
HOME INNS&HOTEL (
): Free Stock Analysis Report
STARWOOD HOTELS (
): Free Stock Analysis Report
CHINA LODGING (
): Free Stock Analysis Report
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
GREAT WOLF RSRT (WOLF): Free Stock Analysis
WYNDHAM WORLDWD (WYN): Free Stock Analysis
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