"It's time for hotel stocks to shed the `recession discount' they've been carrying since the summer of 1998," Mr. Ader says.

"Lodging stocks lost almost 40 percent of their value in 1998. And although the Bear Stearns All-Hotel Index has risen 17.3 percent year-to-date in 1999, besting the Dow's 14.3 percent rise and the SP's 7.3 percent gain, hotel issues have not even come close to recovering the ground they lost last year," he added.

Mr. Ader recalls when investors started checking out of lodging stocks.

"Last year, three factors drove lodging stocks down: 

• hotel overbuilding fears, 
• cuts in estimates for revenue-per-available-room (RevPAR) and earnings growth 
• and the risk of a US recession in 1999," 

"That economic reality should find its way into the lodging sector," Mr. Ader says.

Still, for investors with persistent fears of an economic downturn, Mr. Ader shares this analysis. "In the 1980s, it was not uncommon to find leverage of 90 percent or greater in the lodging industry," he observes. "At those debt levels, slow growth in average daily room rates had a quick and poisonous effect, sending loans into default and hotel companies into trouble."

"But today, leverage above 70 percent is rare -- and growth in average daily room rates will be nearly double the inflation rate this year," he says. "Plus the interest rate environment is benign today. These together make debt service as a percentage of revenues a much smaller number today than it was in `the last downturn', so to speak. In the current environment, it would take a global economic downturn to put the US lodging industry into the red," he observes.

For investors looking to allocate capital to the lodging sector, Mr. Ader recommends concentrating on companies with consistently strong brands. "There are more than 100 hotel brands out there," he says, "and only a handful have the critical mass, name recognition,
reservations reach and appeal to franchisees to be of any real value," he adds. "Whether investing in firms that own hotel real estate, firms that manage hotel real estate or firms that franchise hotel brands, the strength of brands is a central issue today."

The 1999 Bear Stearns Lodging Almanac features more information on the above findings plus information on lodging demand growth and hotel occupancy; industry performance by segment, market and company; trends in financing and investment; valuation and more. The Almanac is available by contacting Bear Stearns at (212) 272-4320.

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