Starwood’s former strengths are now weaknesses. During the boom Starwood’s world-class real-estate holdings, higher-end brands and international growth allowed significant multiple expansion. Today, each of these former positives exposes the company to higher-than-average risks, for which we do not believe investors are compensated at present levels.
Starwood’s brands cater to high-end corporate and group travelers, the two weakest segments in the industry today. We believe the recovery in these segments will also lag, as corporate restrictions won’t ease until after positive signs have emerged.
You may recall that in the links last month I highlighted a bankrupt Starwood Hotel, the W Scottsdale, which exemplified the problem at the luxury end of the spectrum (See Phoenix Bears the Brunt of Hotel Market’s Steep Downturn from the Wall Street Journal). In May, I also indicated that the implosion in commercial real estate will see the hotel industry under stress (“Hotel industry getting crushed along with CRE”).
When you think about property, you should really be looking at its worth as the present value of future cash flow streams. This is true for residential, commercial, rental or travel property. One reason is that property is fungible, meaning what is a owner-occupied primary residence ca just as easily be a rental accommodation. It might even be a Bed & Breakfast. What is a hotel today can always become a condo, like New York City’s Plaza Hotel. An apartment building can become a condo conversion as well. It is this fungibility that creates an arbitrage opportunity when one property market gets out of whack with the others as the residential property market did.
Now that residential property is coming back to earth, it is increasingly apparent that other markets like commercial real estate (CRE) were also bid up to unsustainable levels. Hotels are another area of excess where there is going to be a lot of pain.
Clearly, this is the case now with RevPAR (revenue per available room) down 20% across the board at hotel chains. Higher end places are suffering even more. Hence, the downgrade to Starwood.