Anything less than 14% Upper Upscale RevPAR growth in August should be seen as a disappointment.
Can higher sequential YoY growth actually represent sequential slowing? You betcha. Given the immense volatility in RevPAR over the last few years, we believe it is more rigorous to analyze sequential RevPAR trends in terms of absolutes rather than percent change – after adjusting for seasonality, of course.
Historically, July and August are very close to each other in absolute RevPAR for the Upper Upscale (UU) segment. July UU RevPAR should come in around $100. Assuming stable trends, August should also be around $100, which would indicate 14% RevPAR growth over August of 2009. The first week of August appears to be falling short, up 8.7%.
July was up 7.8%, so analysts will cheerlead an August accelerating sequential growth story. We won't. The slowdown will be apparent in October, December, and most of 2011, when at that level of seasonally, adjusted RevPAR YoY growth will slow to low single digits and even go negative in some months of 2011. The problem won’t be 2010 estimates which look reasonable, but 2011 projections. The Street consensus is currently estimating over 6% RevPAR growth in 2011. Implicit in that estimation is that June/July is the new normal and RevPAR will grow off that base at a rate faster than GDP.
Our theory is that May/June/July represented a period of pent up demand and that the new normal is more like March/April. Cleverly, we will call this the Pent-Up Demand Theory. Using March/April as the new base, we think RevPAR will grow at just under 4% in 2011. For the rest of 2010, we are at the high end of HOT/MAR guidance of 5-7%. Here are our monthly RevPAR projections based on historical seasonal factors, GDP growth of 3%, and a recovery UU RevPAR multiple of 1.33x to GDP.
If anything, our 4% RevPAR projection could prove aggressive. As we showed in our 03/22/10 post, “HOTEL DEMAND: IT’S NOT ALL ABOUT GDP, ” unemployment may be a big hindrance to a RevPAR snapback. Moreover, our Hedgeye Macro team is more negative than consensus on GDP going forward - 1.7% versus the consensus 2.9% we are using in our model. The sensitivity to our forecast is about 1.1% for every 1.0% change in GDP.
While 2010 may not disappoint, we fear that sequential trends in seasonally adjusted RevPAR (dollars) over the coming months could signal that the Street is indeed too high in its 2011 RevPAR projections.