Another week, another dismal report on hotel operating statistics. Last week, the industry posted its worst year-over-year decline in revenue per available room, or RevPAR, in the last two months.

According to data released today from Smith Travel Research, Inc., average weekly occupancy fell 13.9% last week, while average daily room rate, or ADR, fell 10.5% versus the year-ago period.

Together, this resulted in a 22.9% year-over-year decline in RevPAR — the worst weekly decline since early April.

The declines in room rate continue to accelerate, as companies attempt to fill rooms by lowering prices. Ultimately, we believe that this strategy will increase both the severity and length of the industry’s downturn.

Despite bleak operating statistics thus far this year, the hotel stocks have remained resilient, having climbed higher since early March, along with the broad market.

Much of this rally has been based on the expectation by investors that fundamentals in the sector will improve in the second half of the year. Although year-over-year comparisons will likely improve later in the year, we expect that the change will reflect the weakness in 2008 statistics rather than actual improvement this year.

Importantly, we consider the current operating-metric projections by a major industry source to be overly optimistic.

Smith Travel Research, a leading industry research and benchmarking firm, is projecting that occupancy will decline 6.5% in 2009, and that ADR will decline 3.6% this year. Combined, the firm expects the industry to post a RevPAR decline of 9.8% this year. Given that the year-to-date weekly average year-over-year declines in occupancy, ADR, and RevPAR are currently 12.3%, 8.4%, and 19.6%, respectively, we consider these estimates to be overly optimistic.

In order to reach the projections of Smith Travel Research, industry operating metrics will need to improve substantially in the second half of the year. Given our expectation that the ongoing cuts to ADR will prolong and amplify the downturn, we believe that the results will ultimately come in far below the firm’s projections.

As many investors in the hotel sector rely upon these industry operating metric projections, we believe that hotel stocks may be set for a correction if the operating data continues to deteriorate more than investors currently expect.

We continue to maintain our negative outlook on the group, and reiterate our Sell ratings on Starwood (HOT) and Marriott (MAR).

Read the full analyst report on “HOT”
Read the full analyst report on “MAR”
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