As our RevPAR data indicates, the demand in US and global lodging market has been strong in the past several years driven by general economic growth. Gradually picking up industry supplies may be putting more pressure on growth in occupancy rate and daily room rate in 2016/17 but seems to well be offset by the strong industrial fundamentals in 2017/18. During the same time period, we have seen strong demand for time share accommodation in the past several years.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• The global industry RevPAR continued to grow in 2017/18 as it has done between 2015 and 2017 driven by rising rate in US market and increasing occupancy rate in Asia market.
• It seems that the supplies of industry have picked up gradually, especially in 2018, as indicated by fast increasing rooms, which may be putting pressure on occupancy rate and thus in the daily rate. However, data indicates that the increased supplies have been well diluted by the continuously increasing demands so far.
• Strong US dollars may the one of factor that dragged away the performance of US hotels from fundamentals in the past two years as proved by the strong performance of hotels in other parts of the world, especially in Asia Pacific area, in terms of growth in occupancy rate while room rate pick up quickly based on strong demand and probably intensive competition.
• Slowing down occupancy rate and thus the increasing pressure on the price in US market seems more obvious among luxury and upscale hotels than midscale hotels as indicated by their decreased occupancy rates with the continuingly increasing daily price. For example, for the sector of up& middle scale hotels, we have seen an annual growth of about 1-3.5% in ADR and annual growth of 0.5-2% in occupancy rate in the past three years. For the sector in luxury &upscale hotels, we have seen an annual growth of about 1-4% in ADR and annual growth of 0.2-1.0% in occupancy rate in the past three years.
• Large and highly recognized brands have been benefiting more from the growth in the industry than small brand due to economic scales.
• Companies gradually increase franchising business to take full use of the upward trend in this industry.
• Royalty revenue rise up as revenue from franchised hotels in all scales goes up, driven by increasing room rate, occupancy rate and number of rooms.
• Driven by the same fundamentals as those behind hotels, time share real estate sales increased quickly.

 

Causes behind the trend

There is a close correlation historically between GDP and growth in lodging industry. Strong fundamental economy has been behind the growth in demand for rooms in the past several years.

Favourable changes in regulation also played a role behind the increase in demand.

Increase in RevPAR in the past several years has mainly been a result of raising daily rate in the situation where the increase in supply of rooms is slightly slower than increase in demand. However, it seems the supplies have caught up after 2016.

Demand in US market is strong benefiting from the favourable industrial situation but pressed by international demand under the pressure of the strong US dollars.

Industry Future

As industry supplies catch up and as we have seen in the past two years, occupancy rate and ADR may not be able to grow as fast as before. However, sustainable positive cycle of lodging industry will continue to bring increasing revenue, while less profitable, to companies in this industry as economy recovery accelerates. Large brands have opportunities to grab more shares in this upward trend.

General Financial Performance of Companies In the Sector

It seems that it is consistent in terms of increase in demand for hotels in this sector and in other sectors: companies in this sector have benefited more from the increase in royalty fees (annual growth rate of 1-6% due to the good performance of their franchised hotels in the past three years. Data indicates that increase in royalty revenue has been primarily attributable to increase in room rate (increased by 1-4% annually) and, to lesser extent, to increase in number of rooms and occupancy rate. However, the trend that the increase in both ADR and occupancy rate slowed down in 2016/17 was obviously observed among the companies in this sector, which caused the increase in RevPAR to go down from average 4% to near 1% in 2017. After starting of 2018, benefiting from larger increase in room rate, rooms and occupancy rate, revenue grew faster than those in 2016 and 2017. 

Our data indicate that the typical companies’ average gross margins (including marketing and reservation system fees and expenses and depreciation but excluding managed hotels expenses) are around 64% and all presented an improved SG&A (19%).  The typical operating margin is 43%. Due to continuously increasing revenue the cash flow of companies has increased in the past three years.

According to our analysis, the current companies’ enterprise price/EBI ratio is 32 with an interest/EBITDA ratio of 11%.

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