Lodging is just one of those sectors that tends to defy conventional wisdom for long periods of time. At least that has been my experience dabbling in covering the sector the past two years.
On the one hand, there are Wall Street analysts yearning to be stock-picking gods by trying to pick the top in the lodging market. I can't tell you how many reports I have read that suggest average daily room rate growth has peaked along with development activity. Yet, over the last two years, lodging companies such as Choice Hotels (CHH), Hyatt (H), Marriott (MAR) and Starwood (HOT) have dumped on stock analysts.
A ton of capacity has been added, often with the players using a restaurant-like franchise model, and hotels have been able to raise room rates due to solid demand and a focus on squeezing more out of people for extra amenities. For example, I recently paid $20 a day to access the Internet on a work trip ... and still had problems with reliability).
As a result of the resilience in demand, which has extended overseas (except in certain pockets of Europe due to terrorist attacks), shares of the major hotel chains have stayed firm over the last two years even as Wall Street sounds the alarm bells. Indeed, despite less-than-stellar U.S. GDP growth so far this year and strong demand for cruise vacations, hotel stocks have continued to act well in recent months. It's impressive stuff, though I think part of the investor interest in the space has been fueled by a guessing game of who will be taken over next following Marriott's deal for Starwood.
However, we have gotten two developments this week that call into question whether the lodging industry's post-recession rebound finally is coming to an end and will be replaced by tepid room growth and slight quarter-to-quarter weakness in revenue per available room (RevPar), a key industry metric.
First, Choice Hotels badly missed consensus earnings estimates. At first, I thought this was mostly due to an exuberant stance taken on guidance, which is the norm with many service-type industries. However, the company fell short relative to its guidance for domestic RevPar and saw occupancy fall across its suite of hotels versus last year. Average daily rates were solid.
The company chose largely to maintain its full-year earnings guidance despite the earnings shortfall. I think trends in the first quarter demonstrate that cracks in the U.S. economy and industry have started to emerge and could put valuations at risk for the lodging names.
Please note I will be hosting Choice Hotels CEO Steve Joyce on-air for TheStreet today. The segment is to hit in the early afternoon, so do check back.
Second, Fitch put out a pretty damning report on the industry. Normally I take what the ratings agencies say with a grain of salt. But, seeing as the report came at a time in which RevPar is slowing for the industry, I am putting more stock in the analysis.
"The U.S. lodging industry is in the twilight of the current upcycle -- lodging fundamentals are softening and RevPAR growth is decelerating, with 2016 likely to come in at (or possibly below) the low end of our 4% to 5% estimate," said Fitch, adding, "Supply is growing, but is restrained by available capital."
In addition to softening industry fundamentals, Fitch cited weak U.S. conditions as further reason for its cautious outlook.
Hey, good enough for me!