Hotel ADRs are starting to crash. That’s bad for margins, EBITDA, and earnings. A dollar RevPAR decline due to ADR is obviously much more detrimental to margins and EBITDA than from occupancy. Room rate declines drop right to the bottom line. Street estimates need to come down for HOT, MAR, HST, and most of the rest of the sector. The 2009 “trough year” thesis should be discarded, particularly after the recent 30%+ move in lodging stocks over the past month. We believe 2010 will fall significantly short of 2009 in terms of sector EBITDA and earnings. In contrast, the Street is still projecting generally flat EBITDA.
In a sort of perverse way, the downward move in rates could expedite the beginning of the trading cycle in the stocks. Historically, lodging stocks do not sustain rallies until occupancy stabilizes. At that point in the cycle it ceases to be a numbers game. Earnings still decline as rates continue to fall. However, the inflection point indicates that the cycle is troughing, earnings, while lower, become more predictable and investors can see the light at the end of the tunnel. As can be seen from the charts below, ADR change exceeds occupancy change at the bottom of the cycle. That appears to be where we are heading.
Before the bulls get too excited, they need to realize that we are not there yet. In this cycle, rates may fall farther, estimates need to come down, and the stocks probably need to approach valuation support at lower levels.