Even before the recent outbreak of Severe Acute Respiratory Syndrome sparked a drastic decline in Asian travel, a weak economy and persistent fears of terrorism had sent the airline and hotel industries into a tailspin. Not surprisingly, lodging real estate investment trust stocks have been hammered. Between January 1 and early May, they were off 12 percent, reports the National Association of Real Estate Investment Trusts; that follows last year’s decline of 1.4 percent. At the same time, the broad Nareit composite index, which tracks all REIT shares, had gained 8.3 percent through early May, following a 5.2 percent increase in 2002.
Is there a break in the clouds? Not this year. Most analysts don’t foresee decent revenue gains for lodging REITs until 2004, and even that forecast is based on an assumption of no new wars or terrorist attacks. These days businesspeople make travel plans at the last minute, and they are quick to cancel. Travel uncertainties helped push hotel occupancy rates down to 59.2 percent in 2002, well off the 1997 peak of 64 percent, according to Smith Travel Research in Hendersonville, Tennessee.
Hotels have also been more apt to strike deals with discount Internet bookers. “When you’ve got a weak demand market, it’s going to push down rates,” says Thomas Corcoran Jr., CEO of Dallas-based FelCor Lodging Trust.
The key barometer of hotel REIT health -- revenue per available room, or RevPAR -- is languishing across the industry. It fell 2.5 percent last year, to $49.24 per day, following a 6.6 percent drop in 2001. PricewaterhouseCoopers projects an anemic growth rate this year of 0.5 percent. But that recovery will almost certainly be wiped out by a rise in energy and insurance costs.
Hotel REITs have slashed their dividends, and they will be hard-pressed to keep payments at current levels, analysts conclude. Shares of FelCor, which missed its fourth-quarter earnings target partly because of slower than expected RevPAR growth, were trading at about $6 in early May, down from $22 in April 2002.
Shares of Bethesda, Marylandbased Host Marriott Corp. have held up relatively well, trading at about $8 a share in mid-April, down from $12 a year earlier. Its high-end city locations could have better pricing power when travel resumes.
Another concern for investors: Lodging REITs are more leveraged than most hotel franchisers. John Arabia, an analyst at Newport Beach, Californiabased research firm Green Street Advisors, points out that the ratio of debt to current value of assets is high among such REITs as FelCor (90 percent) and MeriStar Hospitality Corp. (95 percent). Franchisers like Hilton Hotels Corp. (49 percent) are burdened with less leverage.
REITs such as FelCor, Host Marriott and MeriStar are identifying noncore assets to unload. Last year FelCor sold off a Holiday Inn and 50 percent stakes in five other properties for a combined $12.6 million. It plans to sell 33 of its 169 hotels by 2006. Says Joyce Minor, an analyst at Lehman Brothers in New York, “Companies are clearly looking to sell some noncore assets to deleverage.”
Few new hotel rooms are coming on the market, which could help hotels to raise room rates once travel picks up again. Last year new room supply increased by about 1.8 percent, to 4.4 million. Supply growth is expected to slow to 1.1 percent this year and next, according to PricewaterhouseCoopers.
“Eventually, the cycle will turn,” suggests Bjorn Hanson, head of the global hospitality and leisure industry practice at PricewaterhouseCoopers in New York. “There will be a recovery,” says Hanson, who started following the sector back in 1973. “It’s just a matter of when.”
