Why Analysts Doubt
Hotel REIT Rebound
After turning in the worst stock-price performance of all REITs in the third quarter of 2001 -- mainly because of Sept. 11's negative impact on the travel and leisure industry -- hotel REITs rallied in the fourth quarter to turn in the industry's best performance.
"The worst is over" for hotel real-estate investment trusts, says James W. Sullivan, an analyst at Prudential Securities Inc. in New York. "Yes, we have a recession. But supply growth in the industry is very, very low," meaning there is little risk of more hotel rooms than demand for them.
Mr. Sullivan, who raised his ratings on the stocks of LaSalle Hotel Properties, Bethesda, Md., and MeriStar Hospitality Corp., Washington, D.C., to "buy" from "hold" in November, raised his rating on the sector to "market outperform" from "market perform" on Jan. 9. "There is a lot more room on the upside," he says.
Other analysts aren't as bullish. "We should see hotel stocks pull back over the next two to three quarters because the fundamentals won't be there to support the prices that exist today," says Keith Mills, lodging analyst at UBS Warburg in New York. "There's more downside risk than upside potential over the next three quarters. The stocks have already taken into consideration a rebound in the industry that in our opinion will take longer to play out."
Hotel REIT stocks rose 25% in the fourth quarter as of Dec. 29 on a price-only basis after falling 45% to 50% in the third quarter, which included the weeks immediately following the terrorist attacks, according to Prudential Securities research. MeriStar rose 35% and LaSalle gained 27%. (REITs are usually judged on a total-return basis, the sum of the companies' stock prices and dividend payments to shareholders. But many hotel REITs suspended paying dividends or paid only nominal amounts as fallout from the attacks put pressure on their earnings.)
Hotel REITs' shares rose as Smith Travel Research, a research firm in Hendersonville, Tenn., reported that hotels' revenue per available room, a key measure of hotels' financial health, gradually improved in December, right up until the month's final week when the number declined slightly. Those numbers offered investors a glimmer of hope that conditions won't get any worse.
Moreover, MeriStar, whose agreement to merge with FelCor Lodging Trust Inc., Irving, Texas, was terminated shortly after the attacks, recently announced that it expects to meet or exceed the upper end of its estimate for funds from operations. Funds from operations is a commonly used measure of REITs' financial performance.
"Immediately after the terrorist attacks, we worked closely with our management company to implement significant cost-containment strategies," says MeriStar President John Emery. That resulted in the REIT achieving better-than-expected gross operating profit margins in both October and November, he says. MeriStar expects to meet or exceed the upper end of its fourth-quarter estimate of 15 cents to 25 cents a share.
But hotel REITs in general are expected to report their worst quarterly earnings results in more than a decade, says Rod Petrik, lodging analyst at Legg Mason Wood Walker Inc. in Baltimore. So expect "choppiness" in hotel REIT prices throughout the first quarter of 2002.
Bill Crow, lodging analyst at Raymond James & Associates, in St. Petersburg, Fla., doesn't think the fourth quarter's rally is sustainable in the near term, especially when the fourth quarter 2001 and first quarter 2002 results come out. "We don't anticipate that sort of price-appreciation near term again," he says. He estimates that hotel REITs' shares will rise about 10% to 15%, down from the fourth quarter's 25%.
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