With credit market problems affecting seemingly all areas having to do with real estate, we wanted to ask senior hotels & leisure analyst
Sean P. Smith if the same was true in the hotels space. We also got in a couple questions about the state of cruise lines.
Do you expect, with recent events in the credit market, that we may have seen the last of the big hotel private equity buyouts for awhile? Why or why not?
At least in the near term, it is likely that the transaction volume in the hotel space will moderate somewhat, especially as it pertains to the private equity firms. Over the last year, transaction volume in the industry has been at record levels. Nearly every company in the sector has been fair game, from brands such as Four Seasons and
Hilton (HLT), to hotel real estate investment trusts (REITs) - where we've seen a number of companies agree to be taken private just in the last six months.
Much of this buyout activity has been fueled by the cheap debt to which private equity firms have had easy access. Being privately held, these buyers have been able to employ significantly more leverage than we would typically see in a publicly traded company. With a lower cost of capital, these firms have been able to generate attractive rates of return on the acquisitions of publicly-held companies.
Given the turmoil in the credit markets over the last several weeks, however, the cost and availability of that debt has changed substantially. As a result, we will probably see a bit of a cooling-off period in that regard.
Over all, how were Q2 earnings for hotels? About what you'd expected, better or worse?
In general, the second quarter earnings were about as expected. Importantly, the full-year outlook for most firms remained intact. In some cases, companies revised their projections for full-year revenue per available room (RevPAR) growth downward slightly, and that seemed to worry the market somewhat.
For example, Marriott (MAR) revised its full-year RevPAR growth guidance to a range of 6% - 7% from a range of 6% - 8%. In the grand scheme of things, however, we consider the quarter to be approximately inline with expectations.
We haven't heard much from cruise lines lately. Any noteworthy items in that group?
Both
Royal Caribbean (RCL) and
Carnival (CCL) (CUK) reported second quarter results that were largely inline with our expectations. The stocks have traded in a range over the last six months. Both stocks have been hampered somewhat by the impact of rising fuel prices.
Currently, we are waiting to learn the extent of the damage caused by Hurricane Dean to Costa Maya, Mexico, a port used by both companies. While it is not a major port for either company, each will need to make alternative arrangements while the port undergoes repairs.
What Buy recommendations in the travel & leisure sector do you have for us?
On the hotel side, we currently have a Buy rating on Starwood (HOT). The shares have pulled back roughly 20% from the highs reached in August. Starwood had been considered by many on the Street to be a potential takeover candidate, and given the recent developments in the credit markets, much of that takeover premium has been removed from the share price. We think that the selling has been overdone, however, and consider the current price to be attractive.
As for the cruise lines, we have a Buy rating on shares of Royal Caribbean (RCL), primarily due to valuation. The shares continue to trade at a discount to Carnival (CCL). While the impact of fuel prices and the potential for slowing consumer spending are concerns, we still believe that shares are undervalued near current levels.
Has anything changed in your outlook for fiscal 2007, or looking ahead to 2008?
We continue to believe that lodging industry fundamentals are holding up well. While we do not expect to see the continuation of rapid growth in operating results like we have over the last couple years, we anticipate that the group should post steady, moderate growth going forward.
Given that scenario, we expect that the sector will hold up well relative to the rest of the market. It may very well become more of a stock-picking market in this sector, but we expect that some good investment opportunities will still be available.
Sean P. Smith is a senior analyst covering hotels and cruise lines for Zacks Equity Research.
