Third Quarter 2017: Bigger Is Not Better: Smaller Hotels Outperform Larger Hotels

Abstract

Our moving average trend lines, supported by our standardized unexpected price (SUP) performance metrics, indicate a positive price momentum for smaller hotels with a decline for larger hotels. The return on invested capital for hotels exceeded total borrowing cost this quarter, resulting in a positive economic value added. This was partly attributable to a slight decline in the cost of debt financing, with no change in the cost of equity financing during the current quarter. The total risk of hotel REITs relative to the total risk of equity REITs as a whole has declined during the recent period. If this trend continues, expect lenders to loosen lending standards, at best, or maintain current lending standards, at worst. Expect the price of large hotels and smaller hotels to rise per our leading indicators of hotel price performance. This is report number 24 of the index series.