Is the Hospitality Industry Hospitable to Investors?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At the Hunter Hotel Investment Conference held in April, the theme was "Moving Forward with Confidence." Hotel company presidents who shared their views about the state of the industry had a mostly sunny forecast.

From a development standpoint, caution was the watchword in the last year. The supply of hotel rooms in the U.S. increased just 0.5% between February 2012 and this past February, as reported by industry monitor Smith Travel Research (STR) at the conference. This tight supply situation amid increasing demand from travelers resulted in many chains reporting increases in ADR, the average daily room rates they were able to charge.

As the industry puts the recession behind it, development is expected to step up. STR projects the supply of rooms will increase 1% this year and 1.5% in 2014. For hotel companies, additional rooms translate into higher revenue potential.

A key performance metric in this industry is RevPAR, or occupancy percentage multiplied by ADR. STR forecasts RevPAR growth for the industry to be 5.7% this year. Occupancy is expected to grow less than 1%, whereas ADR is forecast to rise nearly 5%. Next year looks even better, according to STR, with RevPAR anticipated to increase 6%.

Today we look at three different approaches to participating in the growth of this industry: a large multi-brand hotel franchiser, a REIT (real estate investment trust) that specializes in owning upscale hotel properties, and a leading online reservation-booking service.

A good Choice for your portfolio?

Choice Hotels International (NYSE: CHH) is one of the largest hotel-franchising companies in the world, with 6,200 franchise properties amounting to 500,000 rooms. Its brands include Clarion, Comfort Inn, MainStay Suites, Econo Lodge and Rodeway Inn.

In the second quarter, the company reported that RevPAR rose 3.5% compared to the same quarter in 2012. EPS declined slightly from $0.55 last year to $0.48 in this year's second quarter. For the full year of 2013, the company projects fairly good RevPAR growth, between 3.5% and 4.2%.

At the April conference, Choice Hotels CEO Stephen P. Joyce predicted, "We’ll accelerate toward the end of the year, and 2014 and 2015 will be great years.”

A standout statistic for this company is its pace of development. It now has 448 new hotels around the globe that are being developed. In the second quarter alone, it opened 113 new properties.

A very profitable hotel owner/operator

Publicly traded REITs give investors the benefits of cash earnings generated from real estate properties along with the comfort of being able to sell their shares quickly if desired. Owning real estate outright, as we know, is not a liquid investment.

For franchisers of hotels to succeed, they need to attract franchisees who are highly skilled at running profitable and growing hotel operations. Host Hotels & Resorts (NYSE: HST) is the largest lodging-focused real estate investment trust in the U.S., with 103 properties in the upper-upscale and luxury sector of the industry. Brands in its portfolio include Ritz-Carlton, Westin, W, St. Regis, Fairmont and Four Seasons.

This company reported a very strong second quarter indeed. Revenue from its properties was up 9.4% (comparable properties up 6.3%), driven by RevPAR that rose 6.1%. Net income nearly doubled to $121 million.

Revenue up but income down -- what happened?

Expedia (NASDAQ: EXPE) is the world's largest online-travel company, whose travel sites include Hotels.com and Hotwire.com. For the second quarter of 2013, the company announced that gross bookings increased an impressive 13% compared to the same quarter in the prior year. Hotel room bookings were up 19%; airline ticket bookings went up 7%. Total revenue increased 16%.

Unfortunately, the revenue gains were eaten up by higher expenses, primarily a 33% increase in selling and marketing costs. Technology costs increased 21% as the company added personnel to support technology development projects. The net result was a decline in income from continuing operations from $105 million to $71.5 million.

Although the revenue growth can give investors reason to cheer, we should see how the technology investments and marketing expenditures help the company maintain its market share in the face of stiff competition -- and whether or not the revenue gains eventually show up on the bottom line.

The technological battleground

Hotel chains have a curious relationship with online-travel agencies. They of course want the sites to send them guests to fill their rooms, but if they could have a strategic wish granted it would be to have guests book their rooms directly with the hotel chain's website.

The hotel saves the cost of the agency commission, and in times when hotels seek profit margin improvement from both higher sales and better operating efficiency, any cost savings are welcome. To that end, hotels are trying to make it as easy as possible for guests to book a room. To encourage guests to book directly, hotels are upgrading their websites with richer content and online promotions, and introducing new customer-friendly technologies.

Choice Hotels, for example, just launched RapidBook, a technology tool that enables guests to book reservations quickly from mobile devices. The company reported that its mobile business was up 200% in 2012 compared to the previous year. In 2009, this company was the first major hotel chain to introduce a global iPhone App for guests to use to manage the reservation-booking process.

From a competitive standpoint, making it easier for the guests to make their choice of hotels increases the chances they will choose a Choice hotel.

What we learned

Barring shocks to the system, like a huge spike in fuel prices that dampens consumer enthusiasm for travel, the hospitality industry is a hospitable place for investors to place their funds. Choice Hotels' large pipeline of new properties shows franchisees believe in the company's brands -- and with interest rates still low, now is the time for them to invest in new properties. With demand growing faster than supply, Choice is right to expand aggressively.

I liked Host Hotels & Resorts' focus on the upscale travel market. You can see how the economic rebound is resulting in net income gains for this REIT as travelers seek out more upscale experiences.

Expedia might look like a weak choice because of the less-than-stellar quarterly income performance, but it has considerable size to remain competitive and continue growing over the long term.

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Brian Hill has no position in any stocks mentioned. The Motley Fool owns shares of Choice Hotels International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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