Bankruptcy Watch: 10 Riskiest Hotel Stocks

NEW YORK (TheStreet) -- Hotel operators are emerging from one of the biggest downturns the sector has ever faced. Industry metrics are clearly starting to improve, with occupancy and room rates growing, but individual hoteliers are not out of hot water just yet.

While a number of hotel operators such as Starwood Hotels & Resorts(HOT), Marriott International(MAR) and Hyatt Hotels(H) have reported growth in revPAR, or revenue per available room, a key industry metric, occupancy and average room rates remain off their 2007 peaks. Several hotels have filed for bankruptcy protection or been foreclosed on over the last few years. Notable among them: W New York - Union Square, the St. Regis Monarch Beach and the Los Angeles Marriott Downtown.

The hotel sector has turned a corner because room rates and occupancies are rising, and cash flow is moving in the same direction, Stifel Nicolaus analyst Rod Petrik told TheStreet. He pointed out that many of the hotel properties that entered bankruptcy protection in recent years were individual assets, not entire branded chains. The hardest hit were highly levered high-end investments made at the peak of the cycle in 2007.

Publicly traded hoteliers have recently reported occupancies as high as 90%, which means their properties are close to selling out on weeknights. That's led rates to rise as much as 10% year-over-year, even further from the trough of the market in March and April of 2009. Corporate travel is leading the comeback, Petrik said, an especially good thing for hotel operators since corporate travelers pay higher rates than leisure travelers. Group and convention bookings are also up as more people attend conferences.

Now the sector is in what Petrik called an "extend and pretend" situation, where lenders and owners are pushing to restructure loans of distressed hotel properties so they can be paid over adjusted periods of time, and the hotels can stay in business.

One way to test if a company runs the risk of filing for bankruptcy is through the Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968. The Altman Z-Score measures several aspects of a company's financial health -- including sales, working capital, retained earnings, earnings before interest and tax, and market value of equity -- to forecast the probability of it going bankrupt within two years. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior to the filing, according to Investopedia.

On a general basis, companies with a Z-Score higher than 3 are considered safe with little danger of bankruptcy, while those with a score of 1.81 or lower are considered distressed, and are more likely to go bankrupt. Anything in between is a grey area.

While the formula, of course, isn't the only indicator of financial health -- and is by no means a guaranteed barometer of a company's bankruptcy risk -- it is a metric worth considering for those hotels that fall below the safety zone. Those whose Z-Score is declining year-over-year may also raise a red flag.

Taking this into account, we offer the hotel operators with a Z-Score below 3 for the trailing twelve months, according to data from I-Metrix, from the least risky to the most risky, with a little detail on what each hotelier has been up to lately.