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Tickers in this Article: HOT, IHG, CHH, WYN
Lately, negative trends have been battering the hotel industry. Large amounts of supply are hitting the market just as the recession is cutting demand for hotel rooms, and the industry is not receiving any help from the White House administration, which seems to be viscerally hostile to business travel. In the short term, things are not looking good for the industry as a whole.

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Industry Outlook
Demand for hotel rooms in the United States has grown at a compound annual growth rate of 2.7% for the last 40 years. In the long term, the demand trend is cyclical with peaks occuring every decade or so. Each peak usually coincides with the beginning of a recession, and then business falls with cutbacks in travel by businesses and consumers.

The hotel industry uses a metric called RevPAR, which stands for revenue per available room. During the last significant downturn in 2001, growth in RevPAR became slightly negative in the second quarter of 2001, and then fell sharply in the third and fourth quarters after the September 11 attacks. The third quarter of 2001 saw a 22% decline in RevPAR, and growth didn't become positive until the fourth quarter of 2002.

In the current cycle, growth in RevPAR turned slightly negative in the third quarter of 2008, and declined 12% in the fourth quarter. The last full report for January 2009 shows an 18% decline in RevPAR, and February is showing similar declines.

The hotel industry is heavily leveraged and is not being helped by the falling values of its assets. The latest report shows that capitalization rates moved up to an average of 9.8%, up 160 basis points from just six months earlier. (Margin loans, futures and ETF options can all mean better returns, but which should you pick? See Leveraged Investment Showdown.)

The latest supply numbers from industry sources show that the construction pipeline contained 5,494 hotels with 590,207 rooms as of January 2009. While this was down from the December 2008 numbers, the same report predicts the supply of rooms to increase by 5.6% during the two-year period.

Another problem for the industry is the political rhetoric coming out of the White House and from some congressional Democrats, who have spent much time blasting business travel as a waste of taxpayer-supplied bailout money.

Starwood Hotels & Resorts Worldwide Inc. (NYSE:HOT) has seen its fortunes tumble along with the industry. It is trading down 76% from its 52-week high and saw its RevPAR fall by 12.1% in its most recent quarter.

Intercontinental Hotels Group plc (NYSE:IHG), another high-end hotel operator, also saw a RevPAR decline of 12.2% in January and sees no sign of improvement for 2009.

If there's a silver lining in recent industry news, it's that travelers may be trading down and substituting lower-cost rooms. This seems to be the case, but demand is also declining for the lower-cost rooms, just at a lower level. Choice Hotels International Inc. (NYSE:CHH), which concentrates on more economical brands, saw its RevPAR fall by only 7.7% in the fourth quarter.

Wyndham Worldwide Corporation (NYSE:WYN), which operates the Ramada, Days Inn and Super 8 brands, also saw a smaller decline in RevPAR - 9.2% in the fourth quarter. However, the company was forced to pull an offering of stock after large shareholders objected. (Different types of stock shares are important for analyzing ratios. See The Basics Of Outstanding Shares And The Float.)

The Bottom Line
The hotel industry is on the bust side of one of its periodic cycles as the overbuilding fed by easy and cheap money several years ago is increasing supply just when demand is being crushed. The bust, however, is part of a larger overall cycle, and the industry will probably pick up when the economy does.

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