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Hoteliers: Wait 'Til Next Year Really

This time is different, promise hotel operators and analysts. After two straight years of unrealized expectations, the hotel sector is truly poised for a rebound in 2004. While the pipeline of new projects is drying up, rooms are beginning to fill up with greater frequency.

“We see occupancies picking up over the next couple years and, with that, an increase in room rates,” says Mark Woodworth, executive managing director of Atlanta-based The Hospitality Research Group, a division of PKF Consulting. “The level of income growth is going to be significant.”

Indeed, The Hospitality Research Group forecasts that revenue per available room (RevPAR) will rise by a whopping 8.9% next year and 6.4% in 2005 in the wake of three consecutive years of declining RevPAR, including a projected 0.5% decline this year. Such big increases are feasible, the firm notes, largely because the industry performed so miserably over the past three years, with cumulative RevPAR declining by more than 16% over that time span.

The industry's previous predictions didn't pan out, Woodworth says, because the economy remained sluggish for longer than anticipated. In addition, the war in Iraq contributed to a decline in occupancy in the first half of the year as elevated terrorist alerts caused some wary travelers to postpone trips.

But there are now signs of an economic recovery, including the creation of 126,000 jobs nationwide in October. At the same time, developers are building hotels at a slower rate. Merrill Lynch and Henderson, Tenn.-based Smith Travel Research expect room supply to rise by 1.3% this year and 1.2% in 2004, a big drop from the 3.8% supply increase in 1999. And there has been an upswing in demand in recent months, with occupancy levels increasing by 2% to 65.6% in the third quarter of this year compared with third-quarter 2002, and RevPAR rising by 2.3% to $54.71, according to Smith Travel Research.

“I look upon the occupancy trend as incredibly positive,” says Ted Darnall, president of the real estate group at White Plains, N.Y.-based Starwood Hotels and Resorts Worldwide Inc. “You need that pressure to give hotels the confidence to start adjusting their rates.”

As Corporate America slashed travel budgets in response to declining profits over the past couple years, the business segment became the weakest link in the hotel sector. Soft business demand is particularly damaging because corporate customers are willing to pay more for rooms, an average of $30 per night more than leisure travelers, according to Hilton Hotels. And there are positive signs on this front as well: Hilton Hotels reports a 12% increase in advance bookings for 2004 in its third-quarter income statement.

Cash Flow Projections Improve

Hotel analysts aren't the only experts predicting RevPAR growth in 2004. The industry's three biggest hotel operators — Bethesda, Md.-based Marriott International Inc., Hilton Hotels and Starwood Hotels — are forecasting RevPAR increases next year. Starwood forecasts RevPAR will increase by 4% to 5% next year, while Marriott and Hilton expect RevPAR to rise by 3% to 4% thanks to continued strong demand among leisure travelers, along with expected increases in business and group travel.

Stock prices have rebounded strongly at all three hotel companies this year, indicating that investors are counting on substantial income growth in upcoming years. But analysts warn that stock prices are in danger of falling next year unless revenues climb significantly. Starwood's stock was up by 45% through Oct. 31, while Marriott's increased by 33% and Hilton's by 28%.

Buyers Prepare to Pounce

Although hotel revenues are projected to rebound next year, some hotel buyers believe there will be opportunities to purchase properties at a discount. Even if revenues rise at the rate predicted by The Hospitality Research Group, income levels still are likely to lag behind the record-breaking RevPAR rates of 2000, which averaged $69.13 nationwide before plummeting to $58.55 in 2002.

Neil Shah, director of acquisitions and development at Philadelphia-based Hersha Hospitality Trust, notes that owners frustrated that revenues have failed to meet their projections may want to unload their properties.

In October, Hersha made bargain purchases on two hotels that had been open for less than one year, a 132-room Hilton Garden Inn in Edison, N.J., and a 148-room Hampton Inn in Newark, N.J. Shah says Hersha was able to purchase both properties, which are close to Manhattan and geared toward business travelers, at less than replacement cost.

“Looking forward, the business opportunities get even better. On the one hand, the buyer can have a little more certainty of improving fundamentals in different markets,” says Shah. “Still, in most cases, operating results in 2003 and 2004 are going to be lower than in 1999 and 2000, so that creates opportunities for us.”

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