Lodgian (LGN)

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Lodgian's revenue increased by 6.2% in 2007, a significant drop-off from the 17.2% increase in its revenue in 2006.^[2] This decrease in growth partially resulted from the 77% increase in oil prices, which led to a subsequent decline in business for the hospitality industry.^[3]

In Q2 2008, Lodgian's revenue was $66.91 million (less than 1% difference from Q2 20007). However, its net income increased by an astronomical 2550% in Q2 2008 compared with its figures from just a year before.^[1]

[edit] Business Overview

[edit] Business and Financial Metrics

2007 Revenue by Geographic Segment: Year ending Dec. 31^[4]

Lodgian's net revenue increased by 6.2% in 2007, a significant dropoff from the 17% growth in 2006. This declining growth can be partially explained by displacement - revenues lost from rooms being out of service due to renovation. Displacement was responsible for the loss of $1.9 million in 2007, and also played a factor in the 38% decline in operating income.^[6] The decrease in operating income can also be explained by increases in expenses across the board, especially a 5.5% increase in food and beverage expenses, driven primarily by higher food and beverage revenues.^[7] Additionally, rooms expenses increased by 7.9%, compared to a 5.3% increase in revenue.^[8]

[edit] Business Segments

2007 Revenue by Segments: Year ending Dec. 31^[6]

The majority of Lodgian's business comes from its hotel operations. Of the 46 hotels Lodgian operated in fiscal 2007 (up from 44 in 2006),^[9] the majority operate under brand names that franchised their properties to Lodgian. Franchising is the business practice in which one company (such as Marriott International (MAR)) allows another (Lodgian in this case) to use its trademarks or business philosophies.^[10] 44 of Lodgian's properties operate under franchised brand names, while only 2 are independent unbranded properties.^[11]

[edit] Rooms (75% of 2007 Revenue)

This segment consists of revenue obtained from the renting out of Lodgian's guest rooms in its hotels located in 24 states and Canada. Revenue from this segment increased by 5.3% ($10.5 million) from 2006 to 2007, up to $208.2 million.^[6] The primary drivers behind the increase in this segment were similar increases in ADR (average daily rate), occupancy, and RevPAR (revenue per available room).^[6] In 2007, ADR - total room revenues divided by total room nights sold - increased by 3.8%, from $101.47 to $105.29.^[6] Occupancy, total room nights sold divided by total available room nights, increased from 67.5% in 2006 to 68.4% in 2007.^[6] The RevPAR, which can be found by dividing total room revenues by total available room nights, grew 5.2% to $72.00, from $68.45 the year before.^[6] The company's RevPAR Index, which measures its RevPAR as a ratio against the market's RevPAR, grew by 0.9% to 99.3% in 2007.^[6]

[edit] Food and Beverage (22% of 2007 Revenue)

The food and beverage segment consists of revenue from hotel restaurants, room service, hotel catering, and meeting room rentals.^[6] Revenue from this segment increased by 9.2%, up to $60.9 million in 2007, driven by an emphasis in improving food and beverage operations.^[6] However, two of Lodgian's hotels, known as Midscale without Food & Beverage hotels,^[12] do not offer such food and beverage services, thus contributing nothing to its revenue in this segment.^[6]

[edit] Other (3% of 2007 Revenue)

This segment consists of programs that do not fit in either room or food and beverage operations.^[6] Most notable in this segment, new programs at the company's beachfront and resort hotels grew by 8.3% in 2007, up to $9.0 million.^[6]

[edit] Key Trends and Forces

Domestic Crude Oil Prices per Barrel: Inflation adjusted for 2007 prices^[13]

[edit] Rising oil prices are negatively affecting the hospitality industry

Hotel operators such as Lodgian depend heavily on overall economic strength for its revenue, as people tend to travel only when they feel they have enough disposable income to afford such vacations. In the first half of 2008, however, the price of crude oil rose to $98.66/barrel, up 76.8% from the year before,^[13] causing an increase in the price of jet fuel from $850/metric ton at the beginning of 2008 to $1300/ton by June.^[3] The increasing fuel costs lead to spikes in airline prices,^[14] which in turn drastically lower the numbers of people who can afford travel costs.^[15] This in turn takes business from tourists away from hotels, as evidenced by Lodgian's 6% revenue growth in 2007, compared to 17% the year before.^[16]

[edit] Lodgian's North American emphasis makes it vulnerable to the fluctuating conditions of the U.S. Economy

Lodgian's emphasis on the U.S. market makes it more vulnerable to the declining conditions of the United States economy. Lodgian obtained 98% of its 2007 revenue from the United States, which magnifies the effect of domestic economic trends on the company's business. The increasing oil prices and struggling U.S. housing market helped contribute to an overall harsh economy in Lodigan's Fiscal 2007, which hurt Lodgian's growth (6% revenue growth as opposed to 17% in 2006).^[17]

[edit] Lodgian's inability to take advantage of the booming hotel industry in China is detrimental to its business

As of 2008, Lodgian operates entirely in the North American market. The hotel market in China is shifting strongly towards branded hotels, as is its tourism industry, with China expected to become the world's number one travel destination within the next 10-15 years.^[18] A report in January 2008 highlighted the growth in China's budget hotel ($50 or less/night) industry, with the number of budget hotel rooms growing from nearly zero to over 100,000 since 2000. During this boom, over 100 brands have been competing for a piece of this rapidly expanding tourist market, but Lodgian has as of yet been unable to put its foot in the door of the Chinese hotel industry.^[19] With several of LGN's primary competitors, such as Intercontinental Hotels Group (IHG), Marriott International (MAR), and Starwood Hotels & Resorts Worldwide (HOT) entering the Chinese tourist market,^[20] Lodgian's inability to do the same puts it at a competitive disadvantage for the foreseeable future. For example, in fiscal 2007, Marriott International (MAR) had 32 properties in China, good for approximately $228 million in revenue^[21], good for 2% of Marriott's entire 2007 revenue.^[22]

[edit] Competition

There is no one hotel company that had more than a 12% share of the overall U.S. market as of January 2007. As such, Lodgian competes with hotel operators and franchisers throughout North America, the only market in which it operates:

• Intercontinental Hotels Group (IHG) is the largest hotel company in the world by number of rooms, with 590,361 rooms in over 100 countries worldwide. IHG makes most of its money through the franchising of popular hotel chains such as Intercontinental Hotels and Resorts, Crowne Plaza Hotels and Resorts, Holiday Inn, and Holiday Inn Express. Its total revenue in 2007 was $1.86 billion.^[18]
• Marriott International (MAR) is a worldwide operator and franchiser of hotels and related lodging facilities. Although Lodgian is a franchiser of Marriott hotels, its non-LGN owned properties compete with Lodgian for business. The company's revenue is divided into five segments, all of which compete with Lodgian, except the International Lodging segment. Another internationally respected name, and thus a popular choice for vacation lodging, Mariott's 2007 revenue was $13 billion.^[23]
• Choice Hotels International (CHH), the company behind the nation's first hotel chain, is a franchiser of hotels around the world. Choice Hotels franchises over 5,400 hotels under brands such as Comfort Inn, Cambria Suites, Sleep Inn, Quality Inn, and EconoLodge in the US and more than 40 countries and territories.^[24] CHH's 2007 revenue was approximately $615 million.^[25]
• Wyndham Worldwide (WYN), another company whose properties are partially franchised by Lodgian, it is the largest hotel franchiser, vacation exchange network, and vacation ownership company in the world, owning properties in four continents. In 2007, Wyndham made $3.84 billion in total revenue, with 78% (about $3 billion) coming from North American operations. This large influence on the North American market makes Wyndham another large competitor for LGN, whose entire revenue comes from North America.^[26]

[edit] Market Share of Hotel Brands

As of January 2007, there was no clear cut market share leader in the hotel industry, with no one hotel brand commanding more than 12% of overall market share, and with six brands commanding at least 4% of the overall U.S. hotel market.^[30] These brands are not the same as hotel companies. For example, the Marriott brand has a 5% market share,^[30] but not all of these hotels are operated by Marriott International (MAR).^[9] Some of these properties are franchised to companies such as Lodgian, while Marriott itself has properties that are under names other than Marriott as well.^[9]

Lodgian operates hotels under three of these top 8 hotel brands: Hilton (about 5%), Marriott (about 5%), and Wyndham (about 11.5%).^[30] By the end 2007, the hotel industry took in about $139.4 billion in revenue, giving Lodgian an approximate 0.20% share of the U.S. hotel industry.^[31]

CHH Analyst Presentation, August 2007^[30]

[edit] References

1. ↑ ^{1.0 1.1 1.2} Google Finance: LGN
2. ↑ ^{2.0 2.1} LGN 2007 10-K, Item 6: Selected Financial Data, page 28
3. ↑ ^{3.0 3.1} Wall Street Journal: More Fuel Surcharges Could Curb Air Travel
4. ↑ LGN 2007 10-K, Item 1: Business, page 3
5. ↑ LGN 2006 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, pages 41, 54
6. ↑ ^{6.00 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 6.12} LGN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Discussion, page 34
7. ↑ LGN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 36
8. ↑ LGN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 37
9. ↑ ^{9.0 9.1 9.2} LGN 2006 10-K, Item 1: Business, page 1
10. ↑ Wikipedia: Franchising
11. ↑ Lodgian: About Lodgian
12. ↑ LGN 2007 10-K, Item 1: Business, page 6
13. ↑ ^{13.0 13.1} Inflation Data: Historical Oil Prices
14. ↑ New York Times: Airlines Face ‘Desperate’ Situation, Official Says
15. ↑ Hotel Marketing: TripAdvisor’s US travel outlook for 2008
16. ↑ LGN 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 48
17. ↑ LGN 2007 10-K, Item 1A: Risk Factors, page 19
18. ↑ ^{18.0 18.1} Wikinvest: IHG
19. ↑ International Herald Tribune: China's budget hotel industry is booming as tourism grows
20. ↑ AllBusiness: Starwood, Marriott, Hilton Enter Or Expand In Asia
21. ↑ MAR 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 31
22. ↑ MAR 2007 10-K, Item 6: Selected Financial Data, page 21
23. ↑ ^{23.0 23.1} Google Finance: LVS
24. ↑ Wikinvest: CHH
25. ↑ Google Finance: CHH
26. ↑ Wikinvest: WYN
27. ↑ Google Finance: IHG
28. ↑ Google Finance: CHH
29. ↑ Google Finance: WYN
30. ↑ ^{30.0 30.1 30.2 30.3} CHH Investor Relations
31. ↑ Hotels Magazine, "STR: U.S. Posts Record Revenue In 2007", Jul 17, 2008