We as a firm are concerned. We have the strongest macro call on the Street, in my opinion, but it's not positive. If you know anything about lodging you know that RevPAR is a function of supply and demand and demand is driven by Macro.
- I'm not just worried about GDP. This time around the lodging beta could be significantly higher than the typical 1.0. Airline capacity is declining and airfares are going up. About time if you are an airline but clearly not good for the hotel industry. It might be time to invest in video conferencing finally, but probably not the time for lodging stocks. There is no RevPAR story, not here, not globally. As far as I can see the only growth story is global brand penetration driving new units. While certainly an investable story, it is a long term thesis. The near and intermediate story may be margins. We can argue about where the economy is heading but history shows us that margins have a long way to fall should we hit a downturn. As the chart displays, margins fell by a whopping 850 bps during the last downturn (2000 to 2002). Applying that margin degradation to the most recent revenues posted by the big four lodging companies results in an average EBITDA hit of 45%.
- We don't want to be all gloom and doom. The demand for international branded hotel product appears insatiable. We see Marriott and Hilton as the primary beneficiaries although Starwood should capitalize as well. The supply situation is favorable domestically and more fee based business models could soften the economic blow. However, estimates look like they need to come down, potentially in a big way. In other words, as we like to say at Research Edge: Investors are not bearish enough.