Wall Street Checks In Hotels, Even As Travelers Stay Home

While hotel room rates and revenue projections continue on a downward spiral, lodging stocks are on a torrid upswing as investors try to get ahead of any recovery.

The recession-battered lodging industry is bearing the brunt of the commercial real-estate woes given steep declines in consumer spending and corporate travel as well as financing obstacles for debt-ridden developers. A growing number of hotel owners are also forfeiting troubled properties to lenders.

Nonetheless, Wall Street is sensing the tide is changing for the industry amid signs that declines in revpar, or revenue per available room, and occupancy levels are stabilizing. The sector rally is more dramatic given share prices had been trading at very low levels.

Underscoring the bullish sentiment, hotel real-estate investment trusts are up 30% since the beginning of the year, according to the National Association of Real Estate Investment Trusts. Such gains far outpace the 3.9% and .36% gains in industrial/office and retail sectors, respectively, as of Aug. 18.

Among individual stocks, Marriott International, Inc. (MAR) is up 27% year-to-date to $24.52, while Host Hotels (HST) is roughly 34% higher at $10.15. Shares of Starwood Hotels & Resorts Worldwide, Inc. (HOT) have gained about 67% to $30.

"I don't think the industry has seen the shift yet," but the market believes it's no longer falling off the cliff, said Tom Corcoran, chairman of The Owners Association of InterContinental Hotels Group.

"We have seen occupancy stabilize ... at the same time, the leisure market has come back fairly strong. But, at a much lower rate than in previous years," he said. "Rates are still under a lot of pressure at all hotel levels."

All types of hotels - from budget to luxury - have been cutting costs, including work force reductions, as tumbling occupancy and room rates have left some hotel companies without enough cash to cover expenses. Time-shares, a former industry profit center, are also suffering.

PKF Hospitality Research projects that revpar - the key performance measurement in the hotel industry - will decline 18.5% in 2009, but only drop 2.7% next year on expectations that the magnitude of rate discounts will taper off by the end of the year. The firm also anticipates a similar tapering off for average daily room rates, which are expected to drop 10.4% this year, but will decline only 3.1% in 2010.

But some analysts say the bull run is premature. "You have some investors that weren't invested ... at all. And then these stocks moved and they had to play," said Chris Woronka, an analyst at Deutsche Bank. "This isn't a basis for a sustainable rally and that puts the stocks in this sector on shaky ground."

Woronka said he didn't see pricing coming back in a meaningful way for at least two years. "I think there may come a day where investors have bid up these stocks and are going to be disappointed on this (so-called) recovery unfolding," he said.

Host Hotels swung to a second-quarter loss on write-downs as demand tumbled, and lowered last month its 2009 earnings outlook a second time. Marriott also in July reported dour second-quarter earnings and said it expected third-quarter revpar to decline 20% to 23% in North America and 22% to 24% elsewhere.

-By A.D. Pruitt, Dow Jones Newswires; 212-416-2197; [e-mail]