Zacks Industry Outlook Highlights: Starwood Hotels and Resorts Worldwide, Marriott International, Morgans Hotel Group, Red Lion Hotels and Great Wolf Resorts

CHICAGO, Jan. 4, 2012 /PRNewswire/ -- Today, Zacks Equity Research discusses the Hotels & Lodging, including Starwood Hotels and Resorts Worldwide Inc. (NYSE: HOT), Marriott International Inc. (NYSE: MAR), Morgans Hotel Group Co. (Nasdaq: MHGC), Red Lion Hotels Corporation (NYSE: RLH) and Great Wolf Resorts Inc. (Nasdaq: WOLF).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at  

http://www.zacks.com/stock/news/67220/Hotels+and+Lodging+Stock+Outlook+-+Jan.+2012

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. (NYSE: HOT) and Marriott International Inc. (NYSE: MAR) 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.

Metrics Analysis

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.

OPPORTUNITIES

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 2011.

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.

Brazilis 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. (Nasdaq: MHGC), Red Lion Hotels Corporation (NYSE: RLH), Great Wolf Resorts Inc. (Nasdaq: WOLF) and Starwood embarked on an asset disposition strategy.

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