TRAVEL: European hotels to exceed 2007 margin peak on recovery, rising tourism

Europe's growing economy and the rising influx of tourists could strengthen the credit quality of European hotel companies, as the resulting boost to occupancy and average daily rates looks set to push margins beyond pre-crisis levels, Moody's Investors Service said in a report.

"European hotel margins rediscovered their 2007 peak last year and look set to move higher as occupancy and average daily rates continue to rise on the back of steady but subdued GDP growth in Europe and increasing tourist traffic," said Maria Maslovsky, author of the report.
Moody's expects hotels like Whitbread plc (unrated) and InterContinental Hotels Group PLC (unrated) with significant exposure to higher-growth economies like the UK and US to benefit the most. In addition, Moody's believes that the number of visitors to Europe will continue rising by approximately 2.8% per annum owing to the low oil prices, stronger US dollar and weaker euro filling up more rooms at a higher cost. The low interest rate environment has also reduced average funding costs for hotel companies.
Average daily rates in Europe increased gradually to EUR106 in 2014 from EUR95 in 2009 supported by a rise in hotel occupancy to 68.8% in 2014 from 60.5% at the bottom of the cycle in 2009. European hotel companies' profitability is recovering following the severe and prolonged recession and margins in Europe last year recaptured their 2007 peak. This positive trend in operating margins has bolstered European hotel companies' leverage and coverage metrics, strengthening their credit profiles.
However, Moody's still sees room for additional margin growth.
Moody's expects that leverage across the sector will remain in the 4.5x – 5.0x range in the next 12-18 months.