Low hotel supply coupled with increased business travel demand will continue to yield profits for hotel companies for the next couple of years, according to analysts Mark Falcone of Deutsche Bank, Joe Greef of Bear Stearns and Harry Curtis of JP Morgan, who gave their bullish outlooks as part of a panel at the 28th annual New York University International Hospitality Industry Investment Conference earlier this month.
"Hotel companies aren't seeing a lack of demand," said JP Morgan's Curtis. "Travel demand is high, especially business travel demand." Randy Smith, CEO of Smith Travel Research, said the hotel industry had enjoyed 36 months of uninterrupted growth in demand, which was increasing at an annual 3 percent clip. Curtis warned that the only barrier hoteliers faced was a potential decline in consumer confidence in pricing. PricewaterhouseCoopers projected that average daily rates would reach triple digits in 2007. According to Bjorn Hanson, leader of PwC's hospitality and leisure practice, the cumulative three-year ADR increase from 2006 to 2008 would be the highest of any three-year period since the three years ending in 1984. Deutsche Bank's Falcone echoed Curtis, saying, "Pricing power may catch up with consumers."
While all signs point to a healthy industry for suppliers, developers and investors alike, the industry is acknowledging the return of business travel as the fulcrum for its success. "Lodging is strong," according to Falcone, "and it has a strong dependence on business travel."
Bear Stearns' Greef speculated that the full-service tier would benefit the most from increased business travel demand. "Business travel at the full-service level will continue to be strong for the next two to three years," he said. A recent survey by PKF Hospitality Research corroborated Greef's assertion. "With full-service properties, the lag on development is longer—12 to 24 months—and in that time the existing full-service properties will continue to drive up occupancy and rates," said Scott Smith, vice president of PKF's Atlanta office
(BTN, June 5).Both Curtis and Greef particularly praised the branding efforts of Starwood Hotels & Resorts. "A great brand is the byproduct of strong management," said Curtis, "and Starwood has been the most innovative with its W brand, Aloft and Project ESW." Greef added that Starwood's brands benefit developers the most.
Another company gaining the analyst's attention was Hilton Hotels Corp., primarily due to its Hilton International purchase in February. All agreed that the realignment would allow Hilton to grow its select-service brands outside of the United States. "At some point, Hilton will hit a saturation with its select-service properties in the U.S., but now they can extend them internationally," said Greef.
In offering their lodging stock picks for the next 12 months, Bear Stearns' Greef played it safe with Hilton, JP Morgan's Curtis went with the FelCor Lodging Trust and Deutsche Bank's Falcone stepped out on a limb and chose deluxe hotel operator Orient Express, due to its upswing in occupancy rates and the European lodging recovery.