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 Bear Stearns' Ader Sees Investment Opportunities
in the Lodging Industry;
Firm Announces Fourth-Quarter Supply Demand Chronicle
NEW YORK--March 12, 1998--Bear Stearns' lodging equity research team has just completed the fourth-quarter edition of its Bear Stearns Supply Demand Chronicle. This report incorporates Bear's normal quarterly discussion of supply, demand, occupancy, ADR, and RevPAR trends for the eight Bear Stearns brand segments with a look at the current state of the hotel construction market using data from the F.W. Dodge Construction Pipeline database. In addition, it discusses historical occupancy trends and individual brand performances relative to their competitive brand segments.

"We still believe that in the current industry environment several good investment opportunities exist within our lodging universe. The industry is maintaining ADR growth at levels well above inflation (5.0% for the fourth-quarter versus an inflation rate of 2.2%), further emphasizing the industry's potential for record profits once again in 1998," said Jason N. Ader, a senior managing director and senior lodging industry analyst with Bear, Stearns  Co. Inc. "Likewise, we saw impressive fourth-quarter results from several of the lodging companies. Host Marriott (Buy), Promus, Extended Stay America, and Prime Hospitality (all rated Attractive), Marriott
International (Neutral), as well as Starwood Hotels  Resorts reported significant improvements in operating margins in addition to solid year-over-year RevPAR growth. Although this quarter did not clearly indicate favorable supply and demand conditions in the upper end of the full-service sector, we believe that strong demand growth and modest supply growth in the deluxe, luxury, and upscale segments of the full-service sector - trends that we think should continue for at least the next 18-24 months - bode well for high-end full-service
lodging companies such as Host Marriott, Starwood, and Hilton Hotels. RevPARs - and, ultimately, profits - can be expected to increase as operators continue to exercise maximum pricing leverage. The rapid
growth in supply and continued strong absorption rates of new rooms also indicate a positive operating outlook for development-oriented extended-stay companies, especially those focused on midpriced properties in the lower-tier segment. Our picks - Sunburst Hospitality (Buy) and Extended Stay America - continue to rapidly develop new properties and experience quick absorption rates (with new properties generally reaching stabilization in less than one year). Occupancy rates remain high, and property-level margins continue to hit the
55%-60% range."

Highlights from the report are outlined below.

Flip-flopping trends don't signal fundamental change in macro environment
In a switch from previous quarters, supply growth exceeded demand growth in the full-service sector while nearly equaling it in the limited-service sector. In another first this quarter, demand growth outpaced supply growth in the lower-tier extended-stay segment. Despite overall demand growth surpassing supply growth by 80 basis points, RevPAR was up 4.2%, with full-service leading the way at 5.5%.

Full service overbuilding fears overblown.
Pipeline statistics should dispel the notion of full-service overbuilding. The number of projects in each full-service segment is still low relative to existing supply. Moreover, market-by-market analysis shows wide national dispersion of projects, with few markets having significant levels of multiple-project development. Heavy construction activity continues in the midscale without FB and lower-tier extended-stay segments.

Contstruction in Dallas, Atlanta, and Phoenix heats up, while east and west coast simmer.
Dallas tops the construction markets with 8,134 rooms under construction, followed by Atlanta (7,435 rooms),
Phoenix (7,335 rooms), Orlando (6,824 rooms), and Chicago (5,059 rooms). Together, these five markets account for 19% of the total number of rooms under construction. By contrast, construction activity in eight major East and West Coast urban markets (Boston, New York, Philadelphia, Washington, Seattle, San Francisco, San Diego, and Los Angeles) totaled 16,987 rooms, or only 8% of all rooms under construction.

Six brands report double digit revpar growth in fourth quarter.
Ritz-Carlton (up 12.0%), Marriott (up 10.0%), and Doubletree (up 10.2%) achieved the quarter's highest full-service RevPAR growth. Four Seasons, reeling from Asia, had its RevPAR drop 0.7%. Limited-service
was led by AmeriSuites (up 10.3%) and Wellesley Inns (up 8.4%). Limited-service's weakest performers were Fairfield (up 1.0%) and Red Roof Inns (up 3.3%). The quarter's highest RevPAR increases came from newcomers Extended Stay America (up 43%) and Hampton Inn  Suites (up 19.1%), reflecting fast-growing, rapidly stabilizing portfolios.

Own, manage, or franchise?
In this environment, most owners, managers, and franchisors of properties in the deluxe, luxury, and upscale segment of the full-service sector should prosper. With the exception of a few markets (notably Dallas/Ft. Worth, Phoenix, and Atlanta) new supply posses little competitive threat to sustained strong RevPAR growth for the foreseeable future. As such, full-service managers and franchisors should continue to benefit from higher
franchise and base management fees. Moreover, RevPAR-driven increases in property-EBITDA should continue to grow incentive management fees. Ownership also remains attractive, as the leverage inherent in the
lodging industry translates stronger RevPAR growth into even strong bottom line profits. The main risk to owners is that escalating asset prices with crimp returns, could potentially impair the future earnings of acquisition-driven companies.

The competitive environment in the limited-service sector requires a more selective approach. Success in this sector is likely to be limited to franchisors and managers who have limited capital exposure and who gain more from incremental unit growth than they lose from RevPAR softness. Alternatively, owner/operators of brands that are "category killers" in their competitive segments still have upside potential in the limited-service sector. "Category killers" are brands whose competitive characteristics are so superior that they substantially outperform their brand segments. Classic examples of this are Marriott's Courtyard in the midscale with FB segment and
Prime's AmeriSuites in the midscale without FB segment.

Strong absorption of extended-stay rooms continues to indicate that opportunities still exist in the sector. While the landscape is no longer as wide open as it was 18 months ago, we believe that those companies with a demonstrated ability to effectively manage a rapid development schedule and who possess a wide geographic distribution of product, (specifically in a wide variety of markets and submarkets with limited competition). Alternatively, distribution that focuses on markets with little or no extended-stay product is also a viable

To request a copy of the Bear Stearns Supply  Demand Chronicle, fourth-quarter edition, please call Noelle Whiting at (212) 272-4320.

Bear, Stearns  Co. Inc., a leading worldwide investment banking and securities trading and brokerage firm, is the major subsidiary of The Bear Stearns Companies Inc. (NYSE: BSC). With approximately $14.8 billion in total capital, Bear Stearns serves governments, corporations, institutions, and individuals worldwide. The company's
business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales and trading, private client services, derivatives, asset management, correspondent clearing, securities lending, and custody services. Headquartered in New York City, the company has approximately 8,700 employees located
in domestic offices in Atlanta, Boston, Chicago, Dallas, Los Angeles,and San Francisco; and an international presence in Beijing, Buenos Aires, Dublin, Geneva, Hong Kong, London, Lugano, Paris, Sao Paulo, Shanghai, Singapore, and Tokyo.


Adam Brecht
Mary Flounders Green
 Bear, Stearns  Co. Inc.

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