NEW YORK (
) -- 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
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
. 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
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
, from the least risky to the most risky, with a little detail on what each hotelier has been up to lately.
Altman Z-Score, Current: 2.81
Altman Z-Score, 2009: 2.68
earned a Z-Score of 2.81 in the trailing-12 months, pretty close to the metric's safety zone. It is the least risky of the risky, showing an improvement from its score of 2.68 in 2009.
Marriott said in July it enjoyed the benefit of increased business travel bookings coupled with higher revPAR and daily room rates for the
in its recent quarter. Marriott forecast revPAR growth between 4% and 6% this year.
Marriott reported significant earnings improvement last quarter and the stock rose slightly more than 50% in the past 52 weeks. The Bethesda, Md.-based hotelier pays an annual dividend of 16 cents per share for a yield of 0.46%.
Hudson Securities and Argus Research each have buy ratings on Marriott's stock. Argus' John Staszak recently noted that "We expect Marriott to continue to benefit from improving lodging industry conditions. During the first and second quarters, MAR reported an increase in business travel at many locations."
Staszak expects business and leisure travel to gain momentum in 2011 and that increased occupancy will lead to room rate increases.
Altman Z-Score, Current: 2.55
Altman Z-Score, 2009: 2.25
garnered a Z-Score of 2.55, still slightly below the safety zone but a definite improvement from its score of 2.25 in 2009.
Hyatt Hotels, which beat earnings expectations but missed top-line estimates for the second quarter,
, including an increase of 6.8% at North American properties and 21.4% at international locations. Occupancy rose to 74.5%.
The typical recovery cycle in the hotel industry begins with a return in demand, Hudson Securities analyst Robert LaFleur told
last month when discussing Hyatt's earnings. Higher demand then reinflates occupancy rates to a point where hoteliers can comfortably raise rates. That provides a compounding effect to revPAR recovery, or what LaFleur calls "the double whammy," of increasing occupancy
room rates concurrently.
"Despite concerns in the broader market about economic recovery, its sustainability and the possibility of a double dip, we're not seeing evidence in hotels that the recovery is running out of gas," he said. "In many ways it's accelerating."
Starwood Hotels & Resorts Worldwide
Altman Z-Score, Current: 1.27
Altman Z-Score, 2009: 1.17
Starwood Hotels & Resorts Worldwide
is another big-name chain unlikely to go bankrupt anytime soon despite a distressed Z-Score of 1.27 in the trailing-12 months.
Starwood, which operates hotels under the St. Regis, W, Sheraton and Le Meridien brands, among others, was a top pick on
's recent ranking of top-performing hotel stocks after it grew more than 70% in the past 52 weeks.
Even so, last fall Starwood cut its dividend by nearly 78% to 20 cents per share, and sold off some of its non-core assets like the Bliss spa unit. Its current dividend yield is 0.4%.
for the second quarter, and said recovering occupancy rates will help drive future earnings.
The White Plains, N.Y.-based company forecast revPAR growth between 7% and 9% this year. It grew revPAR by 13.1% in its recent quarter with the strongest growth in the firm's Asian properties. The best-performing brand was W Hotels with a 33.1% quarterly jump in revPAR.
Starwood lifted its full-year profit outlook as hotel occupancy and financial metrics continued to improve. The company now expects to earn between 93 cents and $1.05 per share in 2010, compared with a previous outlook of 88 cents, while analysts predict it will book earnings per share of 95 cents. Starwood's current quarter outlook was not quite as bright, with guidance in a range between 15 and 19 cents, while analysts expect earnings of 20 cents per share.
Altman Z-Score, Current: 0.87
Altman Z-Score, 2009: 0.83
came in with an unimpressive Z-Score of 0.87 in the trailing-12 months, though the score did improve from 0.83 in 2009.
Wyndham's stock was LaFleur's
, citing its strong cash flow generation and attractive valuation.
The Parsippany, N.J.-based company's shares have grown more than 72% over the last year, and Standard & Poor's thinks the stock has gotten over its head and is overvalued.
is also cautious about the sharp run-up and has a hold rating on the stock, while
reported system-wide revPAR actually declined 1.2% last quarter, but sales momentum across the company's three business segments -- lodging, vacation rentals and vacation ownership -- helped push total revenues up 5% year-over-year to $963 million, easily beating expectations for sales of $940.2 million.
RevPAR rose in June, the company said, and it continued to see "meaningful improvement" during the first three weeks of July. That strengthening led Wyndham to raise its revPAR expectations for 2010 to growth of as much as 3%, compared with its previous estimates for flat or a 3% decline.
Wyndham pays an annual dividend of 48 cents per share for a yield of 1.89%.
Altman Z-Score, Current: 0.83
Altman Z-Score, 2009: 0.53
earned an improved Z-Score of 0.83 in the trailing-12 months.
Famous for owning the Opryland Hotel, Nashville, Tenn.-based Gaylord recently reopened the resort after damage from a massive flood forced its closure. The stock delivered 6% appreciation in the second quarter and gained 49.9% in the past year.
BGB Securities analyst Sam Yake raised his target price on the stock to $32 from $30 in early August. He noted at the time that "We do not think that GET shares are considerably undervalued at current levels, but we do believe that the company has a bright long-term outlook."
The hotelier booked a second-quarter loss after flooding closed its Nashville properties in May. Excluding its closed properties, revPAR grew 5.1% in the quarter. The company forecast full-year revPAR to grow 3% to 4.5% for its three properties excluding the Nashville Opryland, up from its previous forecast for revPAR growth of 2% to 4%.
Last month Gaylord purchased 13 acres of land adjacent to 110 acres it already owned near the Opryland hotel, though the company stated no definitive plans for the property. CEO Colin Reed said the land would not be used to open a theme park that operated there until 1997.
Altman Z-Score, Current: 0.81
Altman Z-Score, 2009: 0.84
saw its Z-Score decline from a worrisome 0.84 to an even more worrisome 0.81, clearly below the metric's safety zone.
The Dallas-based timeshare operator's profits fell 29.6% year-over-year to $1.9 million, or 5 cents per share, in the recent quarter. Revenue fell 12.8% to $59.1 million.
Silverleaf shares traded between $1.73 and 59 cents in the trailing-52 weeks, falling nearly 31% in that time frame.
Despite its ability to remain profitable, skepticism for Silverleaf's longevity remains for a company in the timeshare business loaded with debt -- $412.6 million, to be precise -- at the end of the second quarter.
It also does not benefit from the recent pickup in transient business travel.
Red Lion Hotels
Altman Z-Score, Current: 0.78
Altman Z-Score, 2009: 0.81
Red Lion Hotels
garnered a Z-Score of 0.78 in the trailing-12 months, well below the safety zone and slightly worse than the score of 0.81 it earned in 2009.
The operator and franchisor of its namesake hotels said last month its
, while average daily room rates at owned and leased hotels edged up 0.2% to $84.58. Occupancy declined 120 basis points to 59.3%.
Total revenue fell 6.6% to $42.5 million; net losses came to $100,000, or zero cents per share, compared with year-earlier profits of $1.5 million, or 8 cents per share.
CEO Jon Eliassen said group demand was particularly soft in the second quarter, and that "pricing remains highly competitive in this occupancy-led recovery" as higher-end chains reduced their rates, putting pressure on Silverleaf's performance.
Altman Z-Score, Current: 0.68
Altman Z-Score, 2009: 0.71
came in with a trailing-12 month Z-Score of 0.68, worse than the 0.71 it logged in 2009.
The owner or part-owner of 50 hotel and travel properties in 24 countries, including deluxe hotels,
last quarter, helping it drastically narrow quarterly losses.
The Bermuda-based hotelier's overall performance was "a solid and better than expected report driven by international markets,"
Orient-Express' quarterly performance was far from stellar, but results were a marked improvement from the corresponding period in 2009. RevPAR grew in North America by 16% in local currency. RevPar in South Africa surged 57%, 32% in South America, 12% in Asia Pacific and 1% in Europe.
Quarterly revenue and earnings included insurance income of $2.8 million from PeruRail, which was impacted by the damage to tracks caused by regional floods during the first quarter of 2010.
Great Wolf Resorts
Altman Z-Score, Current: -0.22
Altman Z-Score, 2009: -0.18
Great Wolf Resorts
earned a dismal Z-Score of -0.22 in the trailing-12 months, a decline from the score of -0.18 it earned in 2009.
The water park and family entertainment resort operator said
, though average daily room rates increased 3.4%.
Net losses widened to $12.8 million, or 41 cents loss per share. Revenue fell 0.3% to $68.4 million.
Great Wolf, based in Madison, Wis., expects to book losses of as much as $4.8 million, or 16 cents per share, in the current quarter, and predicts losses up to $43.8 million for 2010. The firm's guidance assumes revPAR in a range of a 2% decline to 1% growth in the current quarter, and a range of 2% decline to 2% growth for the year.
Morgans Hotel Group
Altman Z-Score, Current: -0.46
Altman Z-Score, 2009: -0.33
Morgans Hotel Group
ranked as the riskiest hotel stock in
's list. The small-cap developer of boutique hotel properties in U.S. and European gateway cities earned a Z-Score of -0.46, down from -0.33 in 2009.
RevPAR surged 13.3%, led by a 23.1% increase in Morgans' New York-based hotels, its flagship market, driven by rising occupancies and average daily room rates which showed positive growth for the first time since 2008. Still, net losses more than doubled what Wall Street analysts had expected.
If Morgans is able to drive revPAR growth of 8% to 10% in 2010, the hotelier expects adjusted earnings of up to $55 million for the year, higher than the $52.4 million analysts expect.
The New York City-based company's main issue is its debt load, which stood at more than $700 million as of June 30. On the positive side, it's got a presence in markets with high barriers to entry like New York and London, and it's been renovating key hotels like the Royalton in New York while refinancing debt in London. Another attractive characteristic of the company is its focus is on the luxury market, which could show resilience if the recovery continues.
-- Written by Miriam Marcus Reimer in New York.
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