NEW YORK -(Dow Jones)- Analysts at Deutsche Bank said Tuesday that investors should stop buying shares in a number of companies that invest in hotels, saying they will struggle as business travel falls and operating costs rise well into next year.
The slowing economy, job cuts at financial institutions and soaring airline ticket prices will cut into demand for hotel rooms, analysts Chris Woronka and Bill Lerner wrote in a note to clients. Meanwhile, new construction already under way will increase supply at just the wrong time, and costs for food and labor will continue to climb, spelling tough times for hotel real estate investment trusts.
The analysts cut their profit expectations for the entire sector through 2009 and dropped their Buy rating on Host Hotels & Resorts Inc. (NYSE:HST) (HST), Strategic Hotels & Resorts Inc. (BEE), Sunstone Hotel Investors Inc. (NYSE:SHO) (SHO) and DiamondRock Hospitality Co. (NYSE:DRH) (DRH), cutting their recommendation to "hold."
The analysts profit estimates for the hotel REITs are now 6% below the average Street estimate for 2008 and 11% below for 2009.
"We are increasingly concerned that as job cuts (particularly in the financial sector) continue to pile up and airline ticket prices continue to soar, more group and transient business will need to be replaced with lower rate and lower margin contract business," the analysts wrote.
All four stocks, as well as FelCor Lodging Trust Inc. (NYSE:FCH) (FCH) and LaSalle Hotel Properties (NYSE:LHO) (LHO), also rated hold at Deutsche Bank, fell in morning trading.
Stephen Schafer, vice president of strategic planning and investor relations at FelCor, said the hotel industry "is in much better shape than it's been in previous downturns."
Schafer said FelCor early this year considered the effect layoffs among bankers, builders and mortgage lenders may have on corporate travel and factored that into its expectation of 7.5% growth in revenue per available room this year. The company, he said, has yet to see an effect from layoffs.
LaSalle Hotel Vice President of Finance Justin Boutwell said his company cautioned investors about the effects of a potential slowdown, but that LaSalle expects RevPAR to grow this year between 2% and 5%, outperforming the industry's growth, which it puts at between 0% and 2%.
The Deutsche Bank analysts said expectations for RevPAR growth this year and next "remain too optimistic." Deutsche expects average RevPAR growth of 0.5% to 1% this year and 1% to 1.5% next year.
A spokesman for DiamondRock declined to comment. Representatives of the other hotel REITs weren't immediately available to comment.
In recent trading, Host Hotels was down 2.4% to $16.46; Strategic Hotels was down 3.8% to $13.29; Sunstone was down 3.9% to $17.25; DiamondRock was down 5% to $12.85; FelCor was down 1.3% to $12.21; and LaSalle was down 1.8% to $29.90.
-Ed Welsch, Dow Jones Newswires; 201-938-5244; edward.welsch@dowjones.com
(END) Dow Jones Newswires 04-22-08 1349 Copyright (c) 2008 Dow Jones & Company, Inc.
