The Wall Street Transcript has just published its Lodging/Hotels & Resorts issue, a report offering a timely review of the sector to serious investors and industry executives. This 49-page feature contains a roundtable forum, plus commentary from an industry analyst on the online travel and hotel reservations sector, and in-depth interviews with top management of 7 hotel companies. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
The lodging industry appears to be in a recovery cycle. Occupancy rates have reached maximum levels from most perspectives. Business travel is bouncing back, and discounted rates on leisure are gone. The recovery is on track for a multiple-year period lasting at least through 2007. Our panel experts agree that this is a great time to own hotel stocks and over the next couple of quarters there should be more positive earnings surprises than negative. Topics include: C-Corps and urban hotels, Limited service and extended stay segments, Impact of the weakened dollar, Converting hotels into residential properties, Outlook for timeshare business, RevPAR growth, Competitive environment, Hotel room differentiation methods, Growth segments Industry consolidation, Online booking, Industry expansion, Stock recommendations, Stocks to avoid.
Companies include: Choice Hotels International (CHH); Fairmont Hotels & Resorts Inc. (FHR); Four Seasons Hotels (FS); Great Wolf Resorts, Inc. (WOLF); Hilton Hotels (HLT); Host Marriott (HMT); Innkeepers USA (KPA); InnSuites Hospitality Trust (IHT); Intrawest Corporation (IDR); La Quinta (LQI); Lodgian, Inc. (LGN); Marriott International (MAR); Starwood Hotels & Resorts (HOT); Sunterra Corporation (SNRR); WestCoast Hospitality Corporation (WEH). Analysts include: David B. Katz of CIBC World Markets, Rod Petrik, William Truelove of UBS Investment Research and Paul Keung of CIBC World Markets.
In the following excerpt, the roundtable analysts discuss new customer-oriented features that hotels have introduced to win market share.
TWST: David, let's start with you. As you look at the lodging industry today, where are we in the recovery that everybody has been talking about?
Mr. Katz: I think we're in an interesting place. Occupancy rates have reached a sweet spot or maximum levels from most perspectives. What happens under those circumstances is that hotel operators begin to push rates. That's the pricing power that everyone's talking about. Just intuitively, when companies begin to push rates, the flow through on rate increases should be a lot greater than that on occupancy.
TWST: Is this pushing of rates beginning to happen broadly?
Mr. Katz: Pretty much across the board. There certainly are some softer markets across the country (I assume we're speaking predominantly about the US), but there are some softer markets across the country and some that are stronger. New York is a particularly strong market. Hawaii has been a particularly strong market. Some of the markets in Texas, for example, have been a little softer.
TWST: Rod, what's your take on where we stand in this environment?
Mr. Petrik: We agree with what has been said. We believe we're early in the recovery cycle. The last downturn was business-driven. The economy was soft, but the consumer really didn't participate and that was reflected in hotel operations. Consumer leisure travel remained steady but it was very price sensitive in the downturn. Today, as business travel is bouncing back, those discounted rates on leisure are gone. We have seen a pickup in business travel over the past couple of quarters, which has increased occupancy with much higher rated tenants.
TWST: Will, how about from your perspective? Where are we, and what are we looking at over the balance of this year and into next?
Mr. Truelove: I think that the recovery is still on its track for a multiple-year recovery at least through 2007 and possibly through 2008. Not only are the demand indicators on the corporate side such as those that David and Rod talked about doing well, but we're also seeing a reduction in supply growth in areas that count. Those areas that count are urban locations.
We actually saw 1.8% supply growth in urban locations in 2004, which was almost double the national average of 1%. What we're going to see going forward is that while the national average of supply growth will accelerate and add more rooms, which in the past has never been a good thing, the supply growth in urban locations will actually fall to around 1% in 2005 and maybe even below that for the next couple of years. Even though the only thing left to do is raise rates, with no additional rooms coming online in the urban areas, we're pretty confident in the rate growth scenario, which does flow down to the bottom line, just as the others have indicated. We believe it will last at least through 2007, assuming demand continues.
TWST: Let's go back to the basic lodging business. With occupancy up and rates beginning to rise, competition seems to have heated up. Will, let's talk about what's going on. I've seen this proliferation of bedding wars that seems to be besetting the industry. What does that mean, and is it good or bad?
Mr. Truelove: It's definitely good for the consumer if they want a better night's sleep. That's for sure. I don't know if I would say the competition is heating up. I think it's just changing tunes. This is an industry, especially among the four-star, standard, heavily business travel kind of hotel chains such as the Hilton, the Sheraton and the Marriott, that has become seen as a commodity product. The only real difference was either the loyalty program you were with or the location of the hotel relative to where you needed to go.
This dynamic started changing when the chains started saying, "Let's make our hotel products different enough so we can differentiate and drive incremental room revenues." This was started mainly by Starwood by doing the Heavenly Bed with Westin and the Heavenly Shower, and it was very successful. There's no doubt about it. And when things are successful, obviously you want to copy them. That's exactly what we're seeing in the lodging industry today.
After bedding is done, what's the next trick up someone's sleeve to try to differentiate themselves again? It's probably going to go toward more service-oriented, brand-specific services. That's a little harder because you don't control all of your hotels by doing that, but it might be a way of differentiating yourself that can't be easily copied. The best example of that would be Four Seasons Hotels (FS). They have such a brand standard of service that no one else seems to be able to copy that, and they seem to be able to generate economic returns by doing that. Look for other hotel companies to try to emulate a service-oriented differentiated structure going forward.
TWST: David, is this a new level of competition or just a change in how they're competing?
Mr. Katz: I think it's a natural progression. To Will's point, I do agree that Starwood has been an innovator in that area, and I think we will see more innovation coming out of the hotel industry. It may not even be so much with tangible product within the rooms, whether it's interesting soap or shampoo or buying the bed or the entire catalog of stuff when you stay at a Westin, but we're starting to think about things beyond just the tangible product. It might be free Internet. Where that winds up is kind of an interesting dynamic. It might be something intangible like satellite radio or some other kind of benefit that draws consumers to a specific branded hotel.
TWST: Rod, what's your take on the competitive environment that's out there now?
Mr. Petrik: Talking about the bedding, I think Barry Sternlicht deserves a lot of credit. When he introduced the Heavenly Bed, a number of industry prognosticators thought it was a gimmick, but it was a focus on the customer, the business traveler. The typical business traveler checks in at 6 PM or 7 PM, and they're out at 7 AM. The bulk of their time is spent sleeping. Starwood focused on giving the customer the best sleeping experience they could, which the rest of the industry is now playing catch-up on.
Several years ago, Chris Nassetta became CEO at Host Marriott. One of the first things he did was to get real beds into all of his major urban market hotels and get rid of the block of foam that was standard in the typical Marriott room. While there is some catch-up to Westin's lead, again, people are just being responsive to the needs of their customers.
TWST: As we look out, is there anything new on the horizon in this vein, Rod, or is this current trend going to be around for a while?
Mr. Petrik: I think one of the things you're going to see as the next capital expenditure item in the rooms is the shift to the flat screen television, which gets rid of a big piece of furniture that could allow for some different room designs and even smaller rooms in hotels going forward.
TWST: David, we've been talking about the Starwoods and the Hiltons and the change with the bedding wars. Is anything going on in the smaller chains or the non-urban hotels of the same nature?
Mr. Katz: Interestingly, since we're talking about the different services that hotel companies are offering, free Internet appears to be pervading some of the lower-cost hotels, while in the more expensive chains people are still paying $10-$11 for 24 hours of Internet, myself included. I think you're also going to see additional bedding product rolling out in some of the lower-priced chains. In fact, at La Quinta or Hampton Inns, I think you will see some publicly announced bedding product rolling out not too far down the road.
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