Lodging/Hotel Operator Bonds May Lag: Report

NEW YORK— Bonds issued by U.S. lodging companies will likely lag corporate bonds overall in 2003, especially if the United States goes to war, according to research service CreditSights Inc., Reuters reported. “We continue to be very down on the lodging sector as weak demand from the corporate sector persists and as debt protection measures deteriorate,” wrote senior analyst Frank Lee. “From a total return perspective, we believe the lodging sector universe will underperform this year as corporate profitability remains anemic,” he added. “If war breaks out, the sector will be in for a very, very bad year.” Lodging companies own lodging real estate, franchise and manage hotel operations, or both, he noted. Larger publicly traded companies include: Cendant Corp., FelCor Lodging Trust Inc., Hilton Hotels Corp., Hospitality Properties Trust, Host Marriott Corp., Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. The sector suffered from less occupancy after the Sept. 11 attacks. Revenue per available room, or RevPAR, fell for the first time since 1991 and stayed negative for most of 2002, Lee wrote. Smith Travel Research data shows that lodging demand fell in the second half of 2002 from the prior half, he said. Most lodging companies, though, have done as much cost-cutting from operations as they can, and more cuts might weaken the accommodations quality, “a no-no,” Lee said. Companies, therefore, need to boost flexibility by cutting debt and raising liquidity at a time banks are growing more defensive, he said. Various December events portend more bad news ahead, Lee said. Host Marriott scrapped its fourth-quarter dividend and said 2003 RevPAR will likely hit the low end of expectations. FelCors fourth-quarter RevPAR will fall below guidance, and its banks cut a credit line to $300 million from $615 million. And Standard & Poors said it may cut Starwoods debt ratings. The only positive for the sector, Lee said: the planned pace of new construction has fallen to an eight-year low. Within the sector, CreditSights favors Marriott, whose senior debt is rated “Baa2” by Moodys Investors Service and “BBB-plus” by S&P, and Cendant, rated “Baa1” by Moodys and “BBB” by S&P— all low investment grades. Lee said both companies have relatively strong credits, and that their manager/franchisor business model is less sensitive to industry weakness. Cendant also is diversified, with residential real estate and travel operations, and may use half of an expected $2 billion of free cash flow to cut debt. SOURCE: REUTERS