Some Analysts Doubt
The Hotel-REIT Rally

Investors and analysts seem high on hotel real-estate investment trusts.

The group had a total return -- stock price plus dividend -- of 23% from Jan. 1 through March 7, the best performing group so far this year, according to the Morgan Stanley REIT Index. And analysts for the most part have been upgrading their outlooks on the stocks. In early March, Bear Stearns lodging analyst Jason Ader upgraded his rating to "buy" from "attractive."

But is the rally justified?

Part of the rally is being driven by a philosophy that essentially says things could have been a lot worse. Mike Rietbrock, analyst at Salomon Smith Barney Inc. in New York, says hotel stocks rallied "in light of how well the companies weathered the fundamental downturn in 2001 and the terrorist attacks. The companies really rebounded better than anyone thought."

Mr. Rietbrock believes this rally has legs. "It's based on low projected supply growth of new hotels and the anticipation of a rebound in business travel," he says.

But the speed of hotel REITs' recovery -- Bethesda, Md.,-based Host Marriott Corp.'s stock price nearly doubled between the end of September and early March -- is troubling some other analysts and investors.

"It's more momentum buying, sort of like you buy hotel stocks because they are going up, not because the fundamentals have improved enough to justify the prices that we're seeing," says Jim Trowbridge, portfolio manager at Invesco Realty Advisors, Dallas, which manages about $8.8 billion in real-estate assets. "We would like to see the actual earnings from hotels themselves catch up with investor expectations."

Keith Mills, lodging analyst at UBS Warburg in New York, also remains unconvinced and is maintaining his hold rating for the stocks. "We're not surprised to see sequential improvement in [revenue per available room] changes, but our research from a demand perspective still does not indicate that business travel will rebound until later this year at the earliest," he says.

Four of the bigger hotel REITs reported fourth-quarter funds from operations substantially lower than the year-earlier quarter, as expected. But that didn't stop James Sullivan, analyst at Prudential Securities Inc. in New York, from raising last week his 2002 and 2003 estimates on all four: Host Marriott; LaSalle Hotel Properties, of Bethesda, Md.; FelCor Lodging Trust Inc., Irving, Texas; and MeriStar Hospitality Corp. of Washington, D.C. Mr. Sullivan says the sector's substantial stock-price gains have occurred based on a combination of current lodging data and expectations.

He cites weekly lodging statistics published by Smith Travel Research, a research firm in Hendersonville, Tenn., that show revenue per available room improving, and signs that the economy is recovering. What's more, the industry will have easy comparisons in this year's third quarter from 2001, he adds.

Hotel REIT FelCor believes some analysts and investors aren't only looking to the future but also looking at the past -- and then betting that history will repeat itself. "In the prior three recessions, when the economy turns around, you get four or five years of growth," says FelCor Chief Executive Officer Thomas J. Corcoran Jr., based on a recent study by PricewaterhouseCoopers that shows strong performance for hotels following a downturn.

Mr. Corcoran is so sure that's true that the company raised its projections of 2002 funds from operations to between $2.20 and $2.60 a share, up from a December guidance of $2.10 to $2.60. But the projection still falls below FelCor's funds from operations of $2.75 a share in 2001 and $4.29 in 2000. He also has reassured investors that the company will distribute $1 a common share in dividend payments in 2002, compared with $1.70 in 2001, while other hotel REITs have suspended or drastically reduced theirs.

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