Hotel Earnings Show Pricing Power

Increased pricing power and strong occupancies bolstered third-quarter hotel performances for Hilton Hotels Corp., Marriott International and Starwood Hotels & Resorts, all of which released quarterly financial results this month. The three major hotel companies said their pricing power would remain strong for the remainder of the year and into 2006.

Positive performance by the hotel giants is indicative of continued improvement in the U.S. lodging market at large. Smith Travel Research said U.S. hotels this quarter posted record per-room revenue growth with an 8.3 percent increase from the previous year. Likewise, occupancies across the U.S. this quarter rose 2.7 percent and average daily rate jumped 5.6 percent. The numbers reflect the highest growth rate in a third quarter across the U.S. lodging industry since Smith Travel Research began recording such data in 1987.

"September year-to-date industry performance was surprisingly good, especially when considering last year's strong results," said Smith Travel Research president Mark Lomanno. "New room supply growth continues to hover at historically low levels, constricted further by hurricane closings, while solid demand growth continues. We recently revised our full year 2005 industry RevPAR growth forecast upward to 8.2 percent, based primarily on the effects of hurricane Katrina. If the industry achieves our forecasted RevPAR growth, it will be the highest full year increase since STR began tracking lodging industry data."

At a time when many hotels are benefiting from the demand market and limited supply growth, Hilton, Starwood and Marriott are exceeding performance averages noted by Smith Travel Research.

Starwood CEO Steven Heyer boasted an "industry-leading performance," as the company recorded a 13 percent rise in revenue per room at owned hotels in North America, and 11.9 percent worldwide. The chain's average daily rate, meanwhile, increased 10 percent in North America and 8.5 percent worldwide.

Hilton said its total occupancy increased by 3.2 percentage points to 82.4 percent, as the chain's average daily rate was up 8.9 percent.

Marriott International—with an 18 percent increase in revenues and 9.2 percent rise in RevPAR—during its earnings call said, "rarely have we seen a more favorable pricing climate for our industry."

Cendant also released earnings last week, noting that for its lodging group RevPAR grew by 8 percent, yet did not break out occupancy and rate figures. More transparency should come next year as the company by the summer of 2006 will split into four separate companies—one of which will comprise its hotel brands.

To the chagrin of buyers, hoteliers are attributing RevPAR increases largely to growth in average rate. "Approximately 70 percent of the quarterly RevPAR increase at the comparable owned hotels was attributable to the ADR gains," Hilton noted in its third-quarter earnings report.

For the quarter, Hilton recorded a net income of $89 million, compared with $61 million from the same period last year.

Although Starwood's net income of $39 million for the third quarter was significantly lower than last year's $107 million, the company attributed the dwindling figure to one-time charges during the quarter.

"Excluding special items, income from continuing operations was $131 million in the third quarter of 2005 compared to $85 million in the same period of 2004," the company said in its earnings statement.

Marriott's revenues totaled $2.7 billion—an 18 percent increase over the same period in 2004. Fueled by an 8 percent average daily rate increase and a nearly one-percentage-point increase in occupancy, which averaged at 75.8 percent, systemwide RevPAR jumped 9.2 percent over the same period last year.

On the heels of a strong quarter for each of the hotel companies, the lodging industry is poised for continued success, the companies contend. "We are still in the recovery stages of the lodging up-cycle," Starwood's Heyer said during the company's conference call.

Marriott projected 2006 RevPAR to jump an additional 7 percent to 9 percent, Starwood is anticipating RevPAR to increase between approximately 8 percent and 10 percent—the same growth pace forecasted by Hilton.

"Based on our strong results in the third quarter and our expectations for continued high levels of demand, we are looking forward to a strong finish to 2005 and are optimistic for our prospects as we head into 2006," said Stephen Bollenbach, co-chairman and CEO of Hilton.

In other developments, Starwood said it is exploring selling up to $4 billion in real estate assets, while Hilton during its call last week with investors was mum on details of a possible acquisition of Hilton International properties in Europe. The company acknowledged it is in the midst of discussions, but said it could not comment further.