Zacks Industry Outlook Highlights: Morgans Hotel Group, Red Lion Hotels, Great Wolf Resorts, Wynn Resorts and Wyndham Worldwide

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May 31, 2011, 09:30 ET

CHICAGO, May 31, 2011 /PRNewswire/ -- Today, Zacks Equity Research discusses the Hotels & Lodging Industry, including Morgans Hotel Group Co. (Nasdaq: MHGC), Red Lion Hotels Corporation (NYSE: RLH), Great Wolf Resorts Inc. (Nasdaq: WOLF), Wynn Resorts Ltd. (Nasdaq: WYNN) and Wyndham Worldwide Corporation (NYSE: WYN).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at http://www.zacks.com/stock/news/54165/Hotels+%26amp%3B+Lodging+Industry+Outlook+-+May+2011

The hotel industry has begun to show signs of a turnaround. We expect the trend of positive demand growth to continue in 2011 and beyond. According to Smith Travel Research, the leading information and data provider for the lodging industry, the U.S. hotel industry reported increases in all three key performance measures -- occupancy level, ADR and RevPAR -- during the first week of May.

Comparing the operating metrics with the prior-year period, the industry's occupancy increased from 60.0% to 60.3%. Average daily rate ended the week with a 4.8% growth to US$101.73. The week also ended with an 11.1% rise in RevPAR to reach $61.31.

Positive Changes Across the Board

RevPAR in the Luxury and Upper Upscale markets was up 13.1% and 12.0%, respectively, during the week of May 1-7, 2011.

Occupancy increases across the board were 5.5% for Luxury, 5.5% for Upper Upscale, 5.5% for Upscale, 7.3% for Upper Midscale, 5.8% for Midscale and 6.1% for Economy.

Rate increases across the board were 7.2% for Luxury, 6.1% for Upper Upscale, 4.4% for Upscale, 3.8% for Upper Midscale, 0.6% for Midscale and 2.0% for Economy.

Strong Projection for 2011 and 2012: Demand Exceeds Supply

Smith Travel Research projects that the hotel industry will end 2011 with increases in all three key metrics. The expected growth is 1.8% for Occupancy to 58.5%, 4.2% for ADR to $102.21 and 6.1% for RevPAR to $59.78. While supply is projected to inch up 0.7%, demand growth is estimated at 2.5%.

Smith Travel Research also anticipates increases in all three key performance metrics during 2012. Occupancy is expected to rise 1.7% to 59.5%, ADR will increase 6.8% to US$109.16, and RevPAR is projected to end the year with an 8.6% increase to US$64.93.

The year 2012 is expected to end with a virtually flat to a modest 0.5% increase in supply, and demand is projected to rise 2.2%. An environment marked with higher demand in the face of lower supply leads to our anticipation that the room rate will gradually swing back to profits leading to RevPAR growth in 2011 and 2012. According to data published by Smith Travel Research in April, the total active U.S. hotel development pipeline comprises 3,053 projects totaling 322,423 rooms, down 12.2% year over year.

The operating environment in the international market has shown a marked improvement, propelling hoteliers to grab bigger shares of the overseas pie. Hotels in the Asia-Pacific region have been registering rises on all three key performance metrics, according to Smith Travel Research. The region's Occupancy, ADR and RevPAR increased a respective 8.9%, 11.4% and 21.3% to 66.0%, $132.80 and $87.69 in 2010.

Shift Toward Asset-light Model

Since late 2010, transition to an "asset light" business model has gained momentum in the hotels and REIT industry. Asset sale remains a long-term strategy to strengthen financial flexibility, which would help the companies grow through management and licensing arrangements instead of direct ownership of real estate. A higher concentration of management and franchise fees reduces earnings volatility and provides a more stable growth profile.

According to a recent research report by Jones Lang LaSalle, a financial and professional services company specializing in real estate, hotel sales and acquisitions as well as new deals will increase to 25% in 2011 in the Americas. Jones Lang further projected that Hotel transaction volume would total approximately $13.0 billion in 2011.

Hence, the hoteliers are focused on rebalancing their portfolios by increasing contributions from managed and franchised hotels. This fee-based business is attractive as growth is powered by multiple sources-RevPAR growth, unit additions and incentive fee escalation. The business is also capital efficient as owner/developer partners provide the capital and the company earns a fee by managing/franchising the property.

Following the industry trend, many industry players like Morgans Hotel Group Co. (Nasdaq: MHGC), Red Lion Hotels Corporation (NYSE: RLH), Great Wolf Resorts Inc. (Nasdaq: WOLF) and Starwood embarked on an asset disposition strategy.

The stocks with Zacks #1 Rank (Strong Buy) are Wynn Resorts Ltd. (Nasdaq: WYNN) and Wyndham Worldwide Corporation (NYSE: WYN).

We believe companies such as Wyndham are better positioned as they are likely to benefit from their fee-for-service based business shift. Marriott and Starwood should also benefit from their global pipeline.

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