Of course, all manner of public hotel companies—REITs, owner/operators and franchisors—have been adversely affected. But with their collectively much larger market capitalization, it’s the franchisors—or what is also known as the lodging C Corp segment—that generate most of the investment scrutiny, though these firms are currently and cumulatively outperforming, for example, the hotel REITs, according to analysts. Arguably representing the “big five” in this lodging C Corp realm are now Marriott International, Inc., Starwood Hotels & Resorts Worldwide, Inc.; Wyndham Worldwide, Choice Hotels International and InterContinental Hotels Group, the latter of which trades on the London Stock Exchange; the others are traded on the New York Stock Exchange. Former C Corp. Hilton Hotels Corp. left this group when it was taken private by the Blackstone Group slightly more than a year ago. And since that time, it’s been a rough ride for the remaining five, although that has been no specific fault of their own, just the business they are in—a business the public markets are not particularly fond of currently. “I believe the franchisors have been hit and have been hit harder than the broader market,” noted John Arabia, the Newport News, CA-based managing director of Green Street Advisors. “It’s a consumer cyclical product that they’re selling and their profits are tied to it. With respect to this environment, there have been significant cut backs in commercial travel and travel is largely a discretionary item for both corporations and leisure consumers. So in this type of environment, where corporations are concerned more with just employing people, the travel budget gets heavily scrutinized. All of that has a significant impact on hotel valuations.” Looking at the numbers, that fact is obviously and painfully true with the big five firms’ stock prices far off from their 52-week highs. At press time, Choice was trading at $22.47 with the 52-week high having been $37.24; Marriott was at $14.57 with a previous high of $37.89; Starwood was at $14.22 with a previous high of $56; Wyndham was at $3.61 with a previous high of $30.85; and IHG was trading at $7.26 in London. Leslie McGibbon, IHG’s senior vp of corporate affairs in London, said that IHG’s stock has been hovering around $10 and the price was about double that a year ago. “The hotel stocks have underperformed the broader market,” added Robert LaFleur, the Stamford, CT-based lodging industry analyst at Susquehanna Financial Group. “If you go back to Oct. 1 of last year, the [Standard & Poor’s 500] is down 40% since then and Marriott, for example, is down about 60%. [Hotel companies] are seen as consumer discretionary and cyclical and those are stocks that don’t perform well in a down economy. Stocks anticipate future results and clearly a slowing economy is not a positive for the hotel business or its companies’ stocks. So we’ve seen a pretty decent deceleration in RevPAR over the past year and that’s been much worse the last couple of months. It’s been fairly negative with RevPAR, and in the past weeks that trend has been just awful. So there’s not an investor interest in hotel companies now.” It all shapes up as a classic weathering the storm scenario for the public franchisors, even though they made tremendous strides during the last upcycle to shed owned hotels, which weighed them down during the last downcycle. In other words, this situation could actually have been worse from a stock price perspective. “I think the hotel franchisors/ managers selling off their real estate has a significant impact,” Arabia said. “It’s put them in a much better position this time around versus hotel REITs. The large hotel operators tend to have more dual fee income streams. They also tend to be lower levered financially than, for example, the hotel REITs. As a result, the franchisors are more durable during a downturn, but they are obviously not impervious to the downturn.” LaFleur put the franchisors’ significant real estate sell-off in further perspective, noting that without the real estate in the upcycle, the firms miss out on positive operating leverage. However, in a down market, they avoid the negative operating leverage. “So over time you’ll see more stable earnings from [the lodging C Corps]because you’re not seeing the gyrations in property-level profits,” he noted. Of course, stock price gyrations could be entirely avoided by the lodging C Corps if they were privately held. Consequently, it would seem as if the people at Hilton are overjoyed the company was brought private in the nick of time last year. But that’s not entirely true. “Right now, if you ask the guys at Hilton, they would be smiling because those who sold the stock to Blackstone made a lot of money,” LaFleur said. “But Blackstone bought Hilton heavily levered, so they would feel differently right now. Hilton’s debt is trading at 70 cents to the dollar. So the company is dealing with a much higher degree of leverage than the other major hotel companies have. So in this environment, there’s a lot of focus on balance sheet issues because there’s never really been a situation where there’s a downturn in fundamentals and a complete lack of liquidity in the capital markets. There are multiple compounding events.” Arabia echoed that statement, adding, “The simple fact is hotel values are down, public or private. The average hotel is worth far less than it was 18 months ago. There’s no denying that.” That begs the question of what the lodging C Corps can do moving forward as they watch their share prices tumble. According to McGibbon, there’s not much. “At the moment, I don’t think there’s anything you can do with your individual share price. The market conditions are bigger than any individual hotel company,” he said. “All they can do, from a stock market point of view, is outperform the competition. If you do, that puts you in a good spot. In our third quarter report, we managed to outperform most of our major competitors in the major markets. That included a 5.7% RevPAR decline in the U.S. for us, but that was still better than our competition.” Despite conditions, on Oct. 23 UBS upgraded IHG stock from “neutral” to “buy.” And overall, analysts’ opinions on the firm have been mixed, ranging from buy to hold to underperforming. As for the other four U.S.-based public franchisors, in a recent report by J.P. Morgan’s Joseph Greff, he placed neutral ratings on Marriott, Starwood and Choice and an overweight rating on Wyndham. However, Susquehanna’s LaFleur placed a “positive” rating on Wyndham in late June, as it is trading below its perceived value. Other analyst ratings, according to Thomson/First Call, are mostly in the buy range for Wyndham In response to a question about how Wyndham is dealing with its stock status, Stephen Holmes, Wyndham Worldwide’s chairman and CEO, said in a statement, “The market is the market. We educate our shareholders, associates, partners and the media about our company, our stable and flexible business platform, our three businesses and we have consistently delivered the results we promised. At this time, virtually all companies in all sectors are down.” The recent performance of Marriott stock may be the most significant evidence of Holmes’ point, as Susquehanna, JMP Securities and Oppenheimer have all downgraded their ratings for the company this year. However, JMP dropped Marriott from market outperform to market perform, Oppenheimer dropped it from outperform to perform and LaFleur at Susquehanna moved it from positive to neutral. “But that rating is not Marriott-specific,” LaFleur asserted. Other analyst ratings for Marriott, according to Thomson/First Call, are predominantly in the buy range. In response to questions about its stock price condition, Marriott issued a statement to HOTEL BUSINESS®, noting, “While we don’t typically comment on our stock price, we feel confident in our industry leadership, our increasing market share and the commitment of our owners and our company in redefining and refreshing our brands. No one can predict when the economy will turn up, but premium brands and best-in-class companies rise to the top. And just like the other downturns we’ve seen since our founding in 1927, we believe that’s where we’ll be when the economy rebounds.” Meanwhile, in Arabia’s opinion, “Marriott has a very durable capital structure with significant liquidity and great access to it. It’s among the most durable of hotel companies. Starwood also has a very durable capital structure, although it has a little more real estate exposure than Marriott.” With regard to Starwood, LaFleur placed a positive rating on the firm, which he said is equivalent to a buy rating. He explained that the company is trading at a valuation level that makes a compelling case for investment. Most analysts, according to Thomson/First Call, place Starwood in the hold category, including Citigroup, which moved it from buy to hold in September. Starwood offered president and CEO Fritz van Paasschen’s comments from the company’s third quarter earnings release conference call as its response to its stock price. He remarked at one point, “To summarize our valuation exercise, it’s not difficult to get a stock price several times our current $19 a share. This analysis suggests that value comprised of an owned hotel portfolio of $21, vacation ownership assets of $8 plus a fee business worth another $38. In total, you’d arrive at a stock price of $67, which is again why we believe the stock represents a great long-term opportunity.” As for Choice’s situation, LaFleur said its fee business is strong, but on a valuation basis its stock price is pretty fair, which is why he has a hold rating on the firm. In early November, Argus upgraded its Choice rating from sell to hold. Oppenheimer downgraded its rating in June from outperform to perform. According to Thomson/First Call, most analysts have a hold rating for Choice. In a statement, David White, Choice’s CFO, treasurer and senior vp, stated, “Choice does not publicly comment on its stock price. We believe we are well positioned for long-term growth and value creation for our shareholders on account of our fee-based operating model and strong balance sheet with low financial leverage. Our free cash flow and strong capital structure have historically created opportunities to return value to shareholders.” But even while the lodging C Corps exude confidence in their statements and assertions and have already gone through the violent times of the third quarter, Arabia concluded that the worst is still far from over for these firms in the public eye. “We’re nowhere near the bottom of where hotel operating fundamentals will go,” Arabia said. “I think we are many quarters away from seeing the bottom of RevPAR. And what you can say about the hotel stocks is that they are trading on the basis of fairly conservative earnings forecasts. And that suggest to me a significant amount of pain is already priced in the stocks. Having said that, some companies will still face very significant balance sheet issues. It’s definitely questionable whether all the current public hotel companies out there will survive this downturn.”
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