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
The second concern is that hotel companies have overarching debt covenants they must meet, such as a maximum leverage ratio. Ashford Hospitality Trust
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.
Great Wolf Resorts
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.
Matthew Brown loves a deal, especially at hotels, but right now he does not hold shares in any company mentioned. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.