Hospitality Sector Update 11/19/2015

"Expansion in the Hospitality Sector Not Slowing Down Through 2016"

The hospitality industry has been growing steadily since the Great Recession, as evidenced by a significantly high occupancy rate of 65.6 percent by December 2015, an increasing average daily room rate, and revenue per available room. While these increases have obviously been a positive for the industry, there is also some concern as to what this means in the bigger picture. Because this business sector is extremely cyclical, meaning it expands and contracts in somewhat predictable patterns, many people worry that the peak is coming sooner rather than later. The hospitality data firm Lodging Econometrics reported that, as of the third quarter of 2015, there has been a twenty percent increase in the number of new hotel projects (4,038 hotel projects and 507,221 rooms) when compared to the third quarter of 2014. Lodging Econometrics predicts that this growth will continue through 2017, which it believes will be the peak. Because the expansion phase is not over yet, J.P. Ford, the senior vice president at Lodging Econometrics, believes the most desirable properties are under brands such as Courtyard, Holiday Inn and Hampton Inn because they are cheaper and take less time to build, which is important with a peak looming. Essentially, the hospitality market is still a great choice to invest in, but the window of opportunity is quickly closing.

"Another Potential Buyer, Hyatt, Emerges For Starwood"

Starwood Hotels & Resorts Worldwide has recently seen the price for its shares rise steadily after news came out that Hyatt Hotels Corp. has reportedly been in discussions with Starwood regarding a potential takeover. Hyatt, along with three Chinese companies (Shanghai Jin Jiang International Hotels Co., HNA group, and sovereign-wealth fund China Investment Corp.), has shown interest in acquiring Starwood. Interestingly, only one Chinese company will end up bidding, if any at all, because of government regulations preventing the Chinese companies from entering into a bidding war and driving up the price. Starwood’s shares have increased steadily from $68.55 October 26th to $79.87 October 30th and the company has a market value of approximately $13.6 billion, so any bid will need to be in that price neighborhood. Hyatt makes for an interesting suitor because it is a smaller company that still owes money for the financing of other purchases, so a purchase of this magnitude may not be feasible. If Hyatt is able to make the deal, however, they will move from the 10th largest hotel company with about 160,000 hotel rooms globally to becoming the 6th largest with the absorption of Starwood’s more than 350,000 rooms. Another potential issue in the deal is the fact that both companies have performed well among higher-end brands as their brands are seen as competitors, while they have both struggled in the limited-service hotel segment, which are hotels that do not typically have many of the services and amenities offered by more luxurious hotels. Thus a merger would not necessarily provide them with optimal benefits because it would add to their debt and not aid the sectors in which they are lagging.