2006 Hotel Earnings Reflect Seller's Market Endurance

Fourth-quarter and full-year hotel company earnings reported in February confirmed analyst expectations of ongoing strong growth in revenue and rates for the industry in 2006 and beyond.

"They have continued to indicate to us that the market remains very strong," said Sean Hennessey, president of New York-based Lodging Investment Advisors. "From the corporate travel planners' perspective, at least this year, there will be more of the same, with hotels increasing the pricing of their corporate accounts as well as the rack rate accounts."

Those gains, particularly within upscale brands, drove Hilton Hotels Corp.'s fourth-quarter income to nearly double its numbers in 2005, to $207 million from $105 million. That brought full-year income to $572 million, compared with $460 million in 2005.

For the quarter, growth in revenue per available room was strongest in the upscale brands: Scandic leading at 18.1 percent, the Conrad brand at 15.8 percent and the Hilton brand at 12.2 percent. Embassy Suites and Doubletree both grew RevPAR by almost 10 percent, Hampton by 9 percent, Hilton Garden Inn by more than 8 percent and extended stay brand Homewood Suites by about 7 percent.

Starwood Hotels & Resorts—parent to the Westin, Sheraton and St. Regis brands—reported its fourth-quarter income was up to $203 million, compared with $159 million for the same period of 2005. That brought the full year's income to $1.04 billion, more than double the $422 million reported in 2005.

Starwood's RevPAR was up 11.7 percent worldwide for the quarter, including an 8.6 percent increase for North American hotels. Starwood executives also noted double-digit-percentage corporate rate increases.

Marriott International, meanwhile, saw earnings fall, but excluding its synthetic fuel business, earnings were up 7 percent for the quarter to $219 million and up 16 percent to $712 million for the full year.

In 2006, Marriott's RevPAR increased 9.5 percent worldwide and 8.9 percent for North America rooms. Average daily rates were up 8.9 percent.

Wyndham Worldwide, in its first full quarter as a stand-alone company, saw only a slight increase in earnings for the quarter, up to $92 million compared with $91 million in 2005. RevPAR, however, was up 13 percent for the year. Wyndham's brands include its upscale namesake and the lower-tiered Ramada, Days Inn and Travelodge brands.

RevPAR growth was a bit softer for Choice Hotels International, at 6.1 percent for the year and 3.7 percent for the quarter. Growth was stronger in its midprice without food and beverage brands—Comfort Inn, Comfort Suites and Sleep Inn—up 9 percent in RevPAR for the year and 6 percent for the quarter. The tier also had the strongest growth in average daily rates, up 6.5 percent compared with 5.2 percent for Choice overall.

Earnings for Choice were up 10 percent to $39.9 million for the fourth quarter an up 15 percent to $176 million for the full year.

Hotels, however, still are forecasting a robust 2007. Hilton predicted worldwide RevPAR growth of 9 to 11 percent for the year, Starwood predicted a growth of 8 to 10 percent and Marriott predicted its RevPAR for North American hotels would increase 7 to 9 percent.

Hotel companies also continued to report ambitious development plans. Marriott reported its pipeline was up to a record 100,000 rooms by the end of 2006, compared with 70,000 rooms at the end of 2005. Starwood signed a company-record 156 new hotel contracts for the year, and Hilton has a development pipeline of 775 hotels and 110,000 rooms, about 90 percent of which will be in the Americas.

As those planned rooms become a reality, they along with external factors could be a source of relief for corporate travelers.

"We are starting to see a strong uptake in the development cycle that will ease the supply constraints," Hennessey said. "The rebound in demand, which has been occurring since 2001, is starting to level, and another factor is the concern that the economy is likely to slow."