SHO is not yet one of core followings but they do typically provide a thoughtful preview of quarterly hotel trends.  Despite the huge moves in hotel stocks, SHO provided little optimism to justify such enthusiasm.

Below are our takeaways:

·         No sign that RevPAR has stabilized or bottomed - RevPAR decreases continues to increase

·         While SHO agrees with our thesis that occupancy bottoming out is the first sign of a bottom, they haven’t seen it yet

·         Future booking pace continues to slow in line with the accelerating decline in RevPAR

·         1Q is a seasonably slower quarter, and therefore the only way to fill the rooms is to try to steal market share by cutting rate.  Unfortunately, it’s now the beginning of Q2 and there are no signs of the ADR slide abating

·         Specific market commentary:

o   Continued weakness in Chicago, Detroit & Minneapolis

o   Mid Atlantic being propped up by DC

o   Continued weakness in Orlando & Atlanta

o   Houston relatively strong

·         On the positive side, they have had some success in offsetting some of the revenue declines by cutting costs – this has been a theme across the industry and is the silver lining

·         Asset sales are likely to remain difficult to consummate until:

o   There’s more visibility on how 2009 will shake out

o   There is some sense on when we reach bottom and what the numbers look like at trough

o   The financing environment improves

·         Following in the footsteps of DRH, AHT, BEE, and Interstate Hotels, SHO is making headways in negotiating an amendment to its credit facility that would result in covenant relief

o   In exchange, SHO will reduce the size of the facility, provide a pool of 10 unencumbered assets as security for the facility, and pay a premium on its borrowing cost

·         Sunstone is also making some headway in securing mortgage financing but at materially less favorable terms than we’ve seen in the past

o   50% Loan-to-Value

o   Value based on ~20%  haircut to 2008 NOI and cap rate ranging from 9-11%

o   Pricing around L +550 with a 1% LIBOR floor


SHO provided evidence that this early cycle move in lodging stocks my ultimately prove to be too early.



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