Just a few months ago, hotel companies were basking in the fading glow of record financial performance. In February, stocks for lodging and resort firms were up more than 9 percent. That growth was on top of last year's stellar performance, which saw lodging issues up more than 50 percent at a time when most other market indices were going down the tubes.

What a difference four months makes. Second-quarter numbers look bad for many lodging companies, which are placing blame squarely on the economic downturn.

The initial run-up in lodging stocks could be attributed to two factors.

First, these stocks were undervalued at the beginning of 2000. And secondly, continued excelled quarterly results almost consistently across the board had prompted prices of lodging stocks to rise accordingly.

The result was a superstar standout sector in an otherwise healthily growing real estate market.

Yet over the past week, three related lodging companies have issued earnings warnings. And all three -- MeriStar Hotels & Resorts (NYSE: MMH), MeriStar Hospitality Corporation (NYSE: MHX) and FelCor Lodging Trust Incorporated (NYSE: FCH) -- blame a decrease in business travel caused by a weakening economy.

These are no small players. MeriStar Hotels & Resorts claims to be the nation's largest independent hotel management company, while FelCor and MeriStar Hospitality are the country's second- and third-largest real estate investment trusts (REITs), respectively.

Paul Whetsell, chairman and CEO of both MeriStar companies, directed the blame away from the executive suite as he announced the new, lower earnings guidance.

"There was a substantial decline in corporate housing demand in the second quarter as corporations reduced extended business travel," Whetsell said, speaking for MeriStar Hotels & Resorts. "However, the flexible structure of our corporate housing business allows us to quickly modify our leases, and we now are reducing our leased inventory for the third quarter, which should diminish the negative impact on earnings for the second half of the year."

For the remainder of the year, Whetsell noted that reduced business travel will continue to affect lodging demand.

"We are taking advantage of the flexible nature of our cost structure to minimize the effect of the sluggish economy during the remainder of 2001," he said. "We expect our operating performance to improve in the third and fourth quarters, but fall below previous expectations."

MeriStar Hotels & Resorts now expects to break even or lose one cent per share for the second quarter, compared to previous consensus estimates of earning 4 cents per share.

Meanwhile, the MeriStar REIT has seen revenue per available room (RevPAR) drop between 5.5 percent and 6 percent at its hotels, a dramatic reversal from last year's steady increases. The company is lowering its second-quarter predicted funds from operations to $1.13 to $1.15 per share, compared to a previous estimate of $1.25.

MeriStar Hospitality still is on track to complete a merger in the third quarter with FelCor, which lowered its second-quarter earnings significantly as well. Instead of funds from operations of $1.12 per share, FelCor now expects to bring in from 94 cents to 96 cents..

"There has been a sharp decline in lodging demand as companies have reduced travel and technology related business activity has slowed," said Thomas Corcoran, Jr., FelCor's president and CEO. "The slowdown in demand was expected, but the speed and extent of the decline was greater than anticipated."

FelCor estimates a decline in RevPAR for the second quarter of about 7 percent, compared to the same period for 2000. Occupancy decreased by about 6 percent, while the average daily rate was $104, which was relatively flat with the same period for 2000. "We expect a challenging operating environment for the remainder of the year and negative RevPAR in the range of 2 percent to 4 percent for full year 2001," Corcoran added.

For more articles by Lesley Hensell, please press here.

Published: July 13, 2001

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