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Why Hotel Stocks Are Not a Place to Rest Your Cash


This article is written by InvestorPlace’s Neil George.

Hotel stocks have been on a tear over the past several months, with the industry leaders generating an average return so far of over 41% this year.

That’s more than 2.7 times what the S&P 500 has done — which is impressive until you actually look behind the stock tickers and eyeball the companies and businesses behind those spectacular returns. Then it might not be so spectacular.

Perhaps a good first place to look might be one of the most famous and expensive hotels in the U.S.: The Inn at Little Washington.

It’s not a public company, so you can’t invest in The Inn at Little Washington. But recent talk about its predicament gives us a glimpse into what is really going on in the industry.

The Inn at Little Washington is a destination hotel founded by Chef Patrick O’Connell and his former partner Reinhardt Lynch in Washington, Virginia, not far from the nation’s capital. The hotel has maintained its designation as the best hotel dining in the world by numerous industry and food and travel organizations. And from first-hand experience, I concur.

For those that haven’t had the over-the-top culinary experience of the Inn, I’ll start with the bad news. This place is not just expensive — it’s I-might-have-to-skip-the-mortgage-payment kind of expensive.

For a typical Saturday stay, the rock bottom price is $755. And in the past, you had better have made the reservation weeks or more in advance, or you wouldn’t get this “cheap” room. The rates go up from there to an astounding $2,700 for the top accommodations. That’s for one night — not the week or the weekend.

The dinner menu starts at $178 per person (on weekdays) and only gets pricier depending on how much you really want to experience O’Connell’s artistry in the kitchen. If you want to see the master and his entourage at work, there’s even a stove-side table in the kitchen that, for me, was more like a temple to gastronomy. But don’t even think about booking that unless you’re ready for a four-figure tab at the end of the meal.

Those that have had the experience — including the dean of American restaurant critics, the former Craig Claiborne, who was the New York Time’s foodie for 29 years — have called dinner at the Inn the most fantastic meal of their lives.

But even the best in the world have to deal with changes in the markets. And the reality is that the rich aren’t getting richer, and the number of rich is beginning to fall.

Blame the stock markets, real estate or Bernie Madoff, but in the most recent data compiled by the Bureau of Economic Analysis (BEA) from data sources including the Internal Revenue Service (IRS), the number of households with investable net worth of one million or more fell by 17% from 2007 to 2008 alone! And it’s likely that number will have only gotten worse this year.

Catering to the Rich Has Its Price

So, those that serve the top-end are beginning to suffer, and perhaps now, there’s even trouble facing the Inn, considered by some the top hotel and restaurant in the world. 

While private, its tax records give us a good indication of the challenges facing even the best of hospitality purveyors, with year-over-year receipts reported down 30%. Even worse, not only are revenues down from declining patrons in this softer economy, but the cost side of the Inn’s ledger is soaring.

Like so many other hotels, leverage has become an issue. O’Connell bought out his partner in 2007, leaving the Inn with higher debt, a punishing nut to cover each month which alone on a daily basis can amount to more than the whole operation earns throughout the month.

Local tax authorities, stressed by the softer economy, are preparing to levy a massive new schedule of property tax and other assessments, which could measure close to the Inn’s debt costs.

And of course, that’s all before the usual business expenses of labor and materials, which continue to climb around the nation even if demand is lower.

The Inn is not alone, as occupancy levels for top luxury hotels around the world are down to 57%, plummeting another 20% from last summer when conditions weren’t much better. On top of that, room rates are down 16% for top-end hotels, and even middle-market hotels are suffering a drop of 13% in their rates.

In response, major publicly-traded hotel groups are cutting corners, reducing amenities and even giving up stars to keep the doors open around the US and the world.

The leaders in the market sector, including Starwood (HOT), Marriott (MAR), Morgan’s (MHGC) and Hilton’s owners, Blackrock (BX), continue to show declines in revenues and margins year-over-year by similar percentages, with the exception of Intercontinental (IHG).

The London-based operator of higher-end hotels, as well as the budget Holiday Inn flag, is the standout in the group, with revenues actually growing while working on containing costs. And with a broader collection of hotel brands up and down the star lists around key markets around the world, Intercontinental might be better prepared for the reality than its competitors.

Perhaps this is why it’s the only stock in its to have generated not only a positive return so far this year, but a positive return for the past 12 months, as well as the past five years.

Bottom line is that the hotel sector’s recent gains, while reflecting the upturn in the broader market, doesn’t mean you should buy these stocks. Go ahead and check out The Inn at Little Washington or any of its top-flight competitors for a night. These are places to rest your head, not your cash.

Article printed from InvestorPlace Media,

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