Weak Demand Offsets Positives For Lodging: Report

NEW YORK— Goldman Sachs reports this week that it is taking a “more cautious” stance toward lodging stocks, with a sector rating of “neutral.” “Our very bullish stance from late last year has been whittled away by the continually weak hotel demand drivers,” said the report, which said the neutral stance “is based on our fears of reduced business travel due to tighter corporate spending offset by the very compelling supply growth and reduced expense structures in the industry.” Additionally, Goldman Sachs noted that the poor demand outlook for hotel rooms is offsetting several positives, including the fact that supply growth is low and is expected to continue to decelerate for the fifth consecutive year. And operating expenses have been drastically reduced as labor levels have been cut at both the property and corporate levels, meaning hoteliers will benefit from “significant” margin expansion when revenues begin to increase again. Meanwhile, said the report, financing costs continue to dwindle due to the low interest rate environment, and debt levels are under control, as hoteliers have not over leveraged their balance sheets to support acquisitions or growth. Interestingly, the report noted that consolidation in the lodging sector has created “seven major companies in the industry, which may begin to show oligopolistic pricing and development strategies.”