This is our short term rating system that serves as a timeliness indicator for stocks over the next 1 to 3 months. How good is it? See rankings and related performance below.
|Zacks Rank||Definition||Annualized Return|
Zacks Rank Education - Learn more about the Zacks Rank
Zacks Rank Home - All Zacks Rank resources in one place
Zacks Premium - The only way to get access to the Zacks Rank
This page is temporarily not available. Please check later as it should be available shortly. If you have any questions, please email customer support at firstname.lastname@example.org or call 800-767-3771 ext. 9339.
The hotels and lodging industry is finally showing improvements, and seems poised for long-term growth, thanks to the gradual global economic recovery. The industry has been witnessing a return of business travelers and a growing demand for leisure, though concerns about the health of the U.S. economic recovery pose some risks to this outlook.
Riding on the back of improvement in the U.S. economy and the consequent rise in operating metrics, most of the hoteliers have started reporting strong quarterly results. Profits are expected to rise further in 2011 as bookings continue to improve.
Despite some uncertainty about the near-term economic growth outlook notwithstanding, group bookings appear to be gaining momentum and the companies are recording strong advance bookings and pricing for 2012 and beyond. Booking windows are also lengthening. Positive estimate revisions give us ample evidence of this growth momentum.
Since the U.S. market is somewhat saturated, hoteliers are exploring growth opportunities abroad. International markets offer greater potential based on the higher pace of economic growth that they currently enjoy.
The U.S.-based companies are targeting fast-growing emerging economies. Given the lackluster U.S. economic growth prospects, industry stalwarts such as Starwood Hotels and Resorts Worldwide Inc. ([url=http://www.zacks.com/stock/quote/hot]HOT[/url]) and Marriott International Inc. ([url=http://www.zacks.com/stock/quote/mar]MAR[/url]) are eyeing the Asia-Pacific and Latin American regions as they promise solid growth going forward.
The stellar performance from the Asia-Pacific region is expected to continue in the near future. Major growth markets within Asia-Pacific, China and India, remain 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. We believe, Marriott and Starwood should benefit from their global pipeline.
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.
Despite the halting nature of the U.S. economic recovery, hotel occupancy percentages have been improving. However, declining occupancy percentages during the recession prompted some hotel owners to slash room rates in an effort to woo visitors. This tactic will likely have a material negative impact on the business in the long run, for a number of 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 will 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 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 the back half of 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 –– during the second week of August.
Comparing the operating metrics with the prior-year period, the industry's occupancy increased 1.3% to 69.1%. Average daily rate ended the week with a 3.4% growth to US$102.52. The week also ended with a 4.8% rise in RevPAR to reach $70.86.
In recent months, July reported the largest number of rooms sold, representing a 3.6% increase in demand with more than 105 million roomnights sold. This is only the second time the industry has sold more than 100 million roomnights in any given month, the last time being July 2010.
Strong Projection for 2011 and 2012: Demand Exceeds Supply
Smith Travel Research projects that the hotel industry will end 2011 with increases in all three key metrics. The expected growth is 1.8% for Occupancy to 58.5%, 4.2% for ADR to $102.21 and 6.1% for RevPar to $59.78. While supply is projected to inch up 0.7%, demand is growth is estimated at 2.5%.
Smith Travel Research also anticipates increases in all three key performance metrics during 2012. Occupancy is expected to rise 1.7% to 59.5%, ADR will increase 6.8% to US$109.16, and RevPAR is projected to end the year with an 8.6% increase to US$64.93.
The year 2012 is expected to end with a virtually flat to a modest 0.5% increase in supply, while demand is projected to rise 2.2%. An environment marked with higher demand in the face of lower supply leads to our anticipation that the room rate will gradually swing back to profits leading to RevPAR growth going forward.
According to data published by Smith Travel Research in July, the total active U.S. hotel development pipeline comprises 2,990 projects totaling 323,070 rooms, down 10.1% year over year. Among the chain scale segments, the upscale segment is expected to open the largest number of rooms for the remainder of 2011, representing a 0.2% of year-over-year growth.
The operating environment in the international market has shown a marked improvement, propelling hoteliers to grab bigger shares of the overseas pie. Hotels in the Asia-Pacific region have been registering rises on all three key performance metrics, according to Smith Travel Research. The region's Occupancy, ADR and RevPar increased a respective 8.9%, 11.4% and 21.3% to 66.0%, $132.80 and $87.69 in 2010.
Brazil is a Hot Spot
Brazil is set to witness significant growth in demand, fueled by the resurgence of the middle class there. 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 construction of 92 new hotels to cash in on the FIFA World Cup scheduled in 2014.
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.
Shift Toward Asset-Light Model
Since late 2010, transitioning 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 increase to 25% in 2011 in the Americas. Jones Lang projects 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. This business model is also more 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. ([url=http://www.zacks.com/stock/quote/mhgc]MHGC[/url]), Red Lion Hotels Corporation ([url=http://www.zacks.com/stock/quote/rlh]RLH[/url]), Great Wolf Resorts Inc. ([url=http://www.zacks.com/stock/quote/wolf]WOLF[/url]) and Starwood have embarked on an asset disposition strategy. In its recently concluded second quarter of 2011, Starwood sold two big hotels –– Westin Gaslamp, W Chicago Center as well as an interest in Boston Park Plaza, a consolidated joint venture hotel.
Currently, the stocks with a Zacks #2 Rank (Buy) in the hotel universe are Starwood, Red Lion, Intercontinental Hotels Group plc ([url=http://www.zacks.com/stock/quote/ihg]IHG[/url]), The Marcus Corporation ([url=http://www.zacks.com/stock/quote/mcs]MCS[/url]) and Hyatt Hotels Corp. ([url=http://www.zacks.com/stock/quote/h]H[/url]). The stock with Zacks #1 Rank (Strong Buy) is Wyndham Worldwide Corporation ([url=http://www.zacks.com/stock/quote/wyn]WYN[/url]).
We believe companies such as Wyndham are better positioned as they are likely to benefit from their fee-for-service based business shift.
Comparatively Slower Growth in ADR
Though occupancy levels have fairly picked up, ADR is yet to show meaningful improvement in the U.S. We continue to see the improvement trends in ADR to remain tardy due to the sluggish economic revival. Compared to other segments, the economy segment is suffering the most in terms of ADR improvement.
We are eagerly awaiting rebounding room rates, which will drive RevPAR growth in in the rest of 2011 and 2012. We believe the acceleration in room rates can take place in the second half of 2011, but may not reach the peak levels seen in 2006 and 2007 before 2012.
Additionally, surging commodity prices add to concerns about the ability of hotel companies to control costs.
Disruption in the Middle East and the Earthquake in Japan
Unrest in the Middle East and North Africa and the earthquake in Japan remain causes of near-term concern. In North Africa, the political upheaval has had a materially negative impact on tourism volumes.
Starwood management expects lesser management fees in 2011 from around 24 hotels across the affected North African countries, with no incentive fees earned, and base fees sharply down. In fact, Starwood expects a substantial EBITDA shortfall in Japan for the year. Marriott also expects RevPAR to remain weak in the Middle East and Japan, although a modest improvement is anticipated over the current level later this year.
Tough Comparison in China
Another near-term international apprehension will come from China where the companies will see tough comparisons in the third quarter of 2011 as the country laps some one-time profits from revenues owing to World Expo in Shanghai, China. The Expo was a third quarter of 2010 event.
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 the potential addition of new supply will restrict market share. Additionally, inflationary pressure from high commodity prices and continued high unemployment rate remain headwinds for the economic recovery.
We prefer to stay on the sidelines regarding a number of stocks in our universe that have have a Zacks #3 Rank (Hold). These include Morgans Hotel Group, Marriott, Home Inns & Hotels Management Inc. ([url=http://www.zacks.com/stock/quote/hmin]HMIN[/url]), Great Wolf Resorts, Orient-Express Hotels Ltd. ([url=http://www.zacks.com/stock/quote/oeh]OEH[/url]) and China Lodging Group Limited ([url=http://www.zacks.com/stock/quote/htht]HTHT[/url]).
We anticipate continued positive RevPAR growth for the foreseeable future owing to decelerating growth in supply. The U.S. market will likely experience easy comparisons and modest economic improvement that will drive occupancy as well as pricing.
Please login to Zacks.com or register to post a comment.