Hotel Stocks: Continuing Deterioration

By Sean P. Smith

The ongoing recession continues to take its toll on the lodging industry, with weekly operating metrics consistently posting substantial year-over-year declines.

According to data from Smith Travel Research, Inc., occupancy has fallen 12.1% year-over-year in the second quarter to date, while average daily room rate, or ADR, has fallen 9.4% versus the year-ago period. Together, this has resulted in revenue per available room, or RevPAR, falling 20.3% thus far in the second quarter.

We note that this represents a decline from the first quarter of the year, when RevPAR was down 19.0% year-over-year.

The chart below presents the weekly year-over-year changes in U.S. RevPAR during 2009. Although we expect that the year-over-year comparisons will begin to ease later this year -- due to weak performance in the latter half of 2008 -- the trend thus far has been steady declines in top-line revenue versus the year-ago periods.

Importantly, declines in ADR have accelerated in the second quarter, down 9.4% thus far, versus a decline of 7.4% in the first quarter. This trend seems poised to continue, as Marriott (MAR) announced Friday that it is offering 20% off weekend room rates at more than 2,500 hotels worldwide.

The deterioration in room rates is a troubling sign, in our opinion.

We believe that it is generally a mistake for hotel operators to cut room rates in an attempt to drive occupancy higher. Changes in room rates fall to the bottom line at a much higher percentage than do changes in occupancy. Additionally, when the economy does eventually stabilize, hotel operators may find it more difficult to raise rates back to historical levels, thus prolonging the problems faced by the industry.

The road ahead clearly remains extremely challenging for the large hotel companies, including Marriott, Starwood (HOT) and Intercontinental Hotels Group (IHG). With no clear sign on the horizon that operating fundamentals in the hotel industry will improve in the near future, we maintain our negative outlook on the group.