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Real, Nominal ADR Affect the US Hotel Sector’s Operating Income

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Jan. 22 2016, Updated 8:07 a.m. ET

ADR growth declines

ADR, or average daily rate, measures the average room price paid in the market. Hotels saw unprecedented occupancy levels in 2015 driven by strong demand. The hotel industry was successful in converting the growing demand to higher rates. It saw an average 5% monthly year-over-year (or YoY) growth rate for the first six months of 2015.

However, the monthly YoY growth rates are declining. In November 2015, the US hotel industry recorded 2.3% YoY growth.

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Real ADR

Inflation rate affects both ADRs, which in turn affect the hotel sector’s operating income. Moody’s Analytics estimates that the inflation rate in 2016 could increase to 2.6%, driven by the recovery in oil and commodity prices. Hotels can easily adjust their room rates depending on the rate of inflation. So, the nominal growth in the ADRs would also grow with the inflation rates when in fact, the real growth in ADRs would be lower.

Similarly, STR Global estimates that the nominal ADR could grow by 5.2% in 2016, which is still impressive. A high ADR growth rate would drive revenue growth in the hotel sector. The low occupancy growth rate expected for 2016 as discussed in the previous article could result in a lower increase in variable costs. The combination of revenue growth driven by ADR and low variable cost growth in the industry is expected to increase net operating income in 2016.

Investors can gain exposure to hotel stocks by investing in the Consumer Discretionary SPDR ETF (XLY), which holds 0.63% in Marriott International (MAR), 0.52% in Starwood Hotels (HOT), and 0.38% in Wyndham Worldwide (WYN). Other major hotel stocks include Hilton Worldwide (HLT) and Hyatt Hotels (H).

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