Hotel Metrics Down, Others Finally Catching On

The second quarter of 2009 proved to be even more challenging than the first for hotel companies in the United States. And as it becomes increasingly clear that a recovery in the industry isn’t likely to happen any time in the near term, others on Wall Street have begun to change their outlooks.

After declining 19.0% in the first quarter of the year, weekly average revenue per available room, or RevPAR, declined 20.1% in the second quarter. Looking at the composition of these numbers, however, we see that the damage to the businesses was even greater than the 110 basis point change.

Average weekly occupancy declined 11.6% in the second quarter, compared to a decline of 12.5% year-over-year in the first quarter. However, hoteliers began cutting room rates more substantially during the just-ended quarter, with Q2 average daily rate, or ADR, down 9.6% versus the year-ago period. In the first quarter, ADR was down 7.4% year-over-year.

By continuing to cut room rates in an attempt to fill rooms, we believe that the hotel operators are actually more likely to increase the length and severity of this downturn. Changes in ADR have a greater impact on profitability, as more of the change falls directly to the bottom line. In addition, hotel companies will likely have difficulty pushing room rates higher even after the economy has stabilized.

We have been negative on the lodging sector for months, as we have maintained that investors have been too optimistic regarding the chances for a second-half recovery in the group.

Earlier this week, an analyst at a major Wall Street brokerage firm lowered their outlook on the group to negative, and lowered their rating on shares of Starwood Hotels (HOT) and Marriott International (MAR) to Underweight.

We have had Sell ratings on these shares for some time, and as we recently noted, the shares have begun to pull back after rallying along with the broad market for approximately three months.

As the challenges facing the group going forward become more obvious, we anticipate that more investors will realize that a near-term recovery in operating fundamentals is highly unlikely. As a result, we expect to see more pressure on the shares of lodging companies in the coming months.

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