Check-In Time for Hotels

Using fourth-quarter numbers, Torto Wheaton projects limited-service and full-service hotels will post 4.5% annual RevPAR growth each year in 2006 and 2007. Marks admits that her firm will likely increase its forecast once the full amount of first-quarter data comes in. Starwood recently projected 9% to 11% RevPAR growth at its hotels this year.

"We like the hotel sector because not only are the fundamentals good, but the picture for the future fundamentals looks good as well," says Dean Frankel, portfolio manager with Urdang Securities Management, which owns Starwood, Host Hotels (HST Quote), and Sunstone Hotel Investors (SHO Quote), among others.

"We're in the middle of a recovery, but there are plenty of years to grow," he says.

Frankel expects hotel companies to post 20% core earnings growth this year (which excludes the effects of options expensing and other non-core issues). That compares to about 7.8% growth among all real estate investment trusts.

Frankel believes it is a good time to buy full-service hotel owners like Starwood, Host, Sunstone, and Hilton (HLT Quote). He likes the fundamentals at LaSalle Hotel, but believes the stock is expensive.

He also says the hotel sector is a great hedge against inflation since it has the shortest leases of any real estate sector. "You want to be in short leases right now to attack inflation," he says.

One of the major issues benefiting the group is a lack of new supply. While room revenues are pretty much back to 2000 peak levels -- in some case, above them -- expenses have since shot up. So have land costs, due to the large demand from condo converters. These factors make it a lot less profitable to build hotels. That's great news for hotel owners, and it helps explain why private equity firms and other institutions continue to gobble up hotel properties.