A high-yield portfolio manager and a lodging analyst are divided on the high-yield lodging sector. Tom O'Reilly, analyst and portfolio manager at Lincoln Capital Management in Chicago, Ill., says lodging is trading too rich for industry fundamentals. Lincoln upgraded its lodging portfolio earlier this year, and O'Reilly says even the highly rated names the firm has added are beginning to look like possible candidates for sale. Lincoln's Starwood Hotels & Resorts 7.875% notes of '12 (Ba1/BBB-) had moved up to 99 last Monday and the John Q. Hammons Hotels 8.875% notes of '12 (B2/B) were at 97. O'Reilly says he would sell both issues at par. "Most of the upside is already priced in," he says.
Ashley Craig, lodging analyst at Morgan Stanley, says both Starwood and John Q. Hammons are still cheap relative to their historical trading levels. She urges investors to add to both names, arguing that they have outperformed the industry all year. She declines to say at what point investors should sell the bonds, however.
Craig has a market weight on the sector as a whole. She says that while average revenue per room continues to decline, it is doing so by a smaller amount each month. She expects third quarter earnings to disappoint investors as has happened in previous quarters, but she expects a recovery by mid- to late-2003. Craig does not have a sell on any of the bonds in the sector.