Another Rough Week For Hotels

Weekly average hotel room rates fell to their lowest level of the year last week, according to data from Smith Travel Research, Inc. Given the ongoing deterioration in operating fundamentals, we reiterate our negative outlook on the sector, as well as our Sell ratings on Marriott International ((MAR - Analyst Report) and Starwood Hotels & Resorts (HOT - Analyst Report).

Average occupancy levels declined 10.2% year-over-year to 51.6% during the week ended May 30, 2009. During the same period, average daily room rate, or ADR, fell 9.6% to $93.00. Together, this resulted in a decline in revenue per available room, or RevPAR, of 18.9% to $47.96. This was the lowest RevPAR level since late January.

Chicago and New York City led the way lower last week, with ADR declines of 26.5% and 26.4%, respectively. These are major markets, with significant concentrations of hotels aligned with the large, publicly held lodging companies.

RevPAR declines were steep in the middle of the country last week, with Chicago, Detroit, and St. Louis posting the largest year-over-year declines, of 37.7%, 32.5%, and 30.5%, respectively. Next on the list was New York City, with a RevPAR decline of 30.2% versus the prior year.

Despite the continuing deterioration in operating fundamentals, hotel stocks have rallied in recent months, including Marriott, Starwood, Intercontinental Hotels Group (IHG - Snapshot Report) and Wyndham Worldwide (WYN - Analyst Report). We believe that these moves have been overdone, and are unwarranted. The sector has a history of false starts, as investors prematurely bid up shares in hopes of a quick recovery in the group. We expect that this will again be the case in this situation, and believe that hotel stocks are due for a correction.

We project that the current steps being taken by hotel companies to lower room rates in an effort to fill rooms will have long-lasting negative repercussions. In the short-term, the reductions to room rates are unlikely to be offset by occupancy gains, thus resulting in lower overall profitability.

More importantly, however, is our belief that the reductions in ADR will result in depressed room rates even after the economy stabilizes and begins to improve. This may in turn extend the downturn in the lodging industry.

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