Has anyone noticed that hotel rooms in Hawaii have been dirt cheap the past couple of years? Maybe that's because occupancy rates had fallen off a cliff. While that was really bad for hotels, I did enjoy getting oceanfront rooms for $200 a night plus furry slippers.

2009 was as bad for hoteliers as animal activists are for the circus. Industry occupancy rates fell 8.7%, and the average daily rate (ADR) fell 8.8%. RevPAR, or revenue per available room, fell almost 17%. The folks at industry guru Smith Travel Research called the environment "unprecedented" and "incomprehensible."

Hotels primarily depend on debt financing, then use cash flow from operations to pay the mortgage and capital expenditures for ongoing maintenance. The recession so devastated revenues that hotels had to drastically cut expenses, yet they still had to spend enough to keep properties from falling apart, while also paying interest on their debt. Consumers were far more concerned about paying their own mortgages and staying employed than going to Hawaii, so inevitably, cash flow got hammered.

Crushed under debt
 Hotel conglomerates have many debt concerns, aside from trying to keep guests from partying too loudly in the Presidential Suite. The first is paying mortgages on individual properties. In the event of a default, the owner may try to negotiate with the lienholder to refinance the property. If not, they just hand the keys off to the owner, as happened with the San Diego W Hotel, owned by Sunstone Hotel Investors (NYSE: SHO) and managed by Starwood Hotels and Resorts (NYSE: HOT). This situation was not unique. Numerous hotels defaulted on loans in 2009.

The second concern is that hotel companies have overarching debt covenants they must meet, such as a maximum leverage ratio. Ashford Hospitality Trust (NYSE: AHT), for example, must not exceed 65%. As of 3/31, they were at 58.8%. If they bust a covenant, the giant credit facilities they carry with big lenders go bye-bye, and many times, the company does, too.

Next comes the issue of debt maturity dates. All loans must be paid back at some point. While the local loan shark won't break the Concierge's kneecaps if a hotel doesn't pay up, properties securing first mortgages can be taken away. The smart way to handle this is to arrange debt that has staggered maturities, so a company doesn't have to come up with billions all at once. Generally speaking, if a property is "cash flowing" (making its interest payments) and business looks sound, the lender will extend the maturity date by a few years.

Plenty of trouble
Many chains have struggled through this recession, so short-selling sharks have plenty of blood to sniff out. Here are a few chains that may be chum.

Morgans Hotel Group Co. (Nasdaq: MHGC) has made many positive steps lately, including the extension of loan maturities on two New York hotels, and company RevPAR is improving. However, with $700 million in debt, and TTM losses from operations of over $150 million, the company is facing serious trouble. The New York hotel extensions are only through October of next year. While the company has enough cash on hand to make debt service payments, things must turn around very quickly. I think the present $7 stock price reflects unwarranted optimism.

Great Wolf Resorts (Nasdaq: WOLF) is howling in pain. The company has had FY operating losses of $25 million the past two years, barely broke even so far this year, and thus is paying $40 million of TTM interest on its $533 million in debt from its dwindling cash on hand. The stock is at $2. I'm not hopeful.

Orient-Express Hotels (NYSE: OEH) is still on the tracks, but there are problems. The company pays about $30 million in interest annually on its $547 million of debt. Unfortunately, those payments wipe out its TTM operating income. They are in a better cash position with $129 million cash on hand, but have been running significantly cash-flow negative thanks to capex for the past three years. The company can only extend maturities so far and so often. How long before mortgage holders get nervous about how the company pays back principal? $11 a share seems generous, as this one could go either way in the long-run.

The takeaway is that there are short opportunities in the sector, but it will take some research. There are also compelling buys. Either way, Investors need to dive into quarterly reports to assess each company's debt and cash flow situation. It's also important to ask yourself what you think will happen to the economy. If a double-dip becomes a reality, the only reason to check into many hotels will be for their low prices -- the ones for the rooms and the ones next to the ticker symbol.