3 Hotel Companies for Luxurious Returns

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

With the global economy on the path to recovery, it will lead to a rise in the spending capacity of the population. This directly impacts the demand for hotel rooms, as the tourism industry gets a boost. According to PFK Hospitality Research, residents staying away from home for more than one day are expected to rise to 3.3% this year. Compare that to the increase in supply of hotel rooms, which stands at only 1%. Consequently, revenue per available room, or RevPAR, of the hotel industry will rise 7.7% in 2014, after 5.7% growth in 2012.

Here are the three picks from the hotel industry that are expanding through the approach of franchisee and management contracts to cater the robust demand of hotel rooms. Let's discuss them in detail.

Condos – high in demand

During the recession, Starwood Hotels & Resorts Worldwide's (NYSE: HOT) EBITDA was down by 50%, and its fee-based revenue was down by 20%. From that point forward, the company transitioned its focus to franchisee-based business with 1,100 franchise properties in approximately 100 countries. At present, it generates 50% of EBITDA from fee-based business and plans to reach 80% by 2016. To generate more profits from fee-based business, it is increasing the number of rooms franchised to 134,688 in 2013 from 127,666 in 2012. With more rooms franchised, it expects to generate $222 million in fee revenue this year and $240 million next year from $200 million in 2012.

Starwood demolished and replaced the Sheraton with St. Regis Bal Harbour Resort. The company put $375 million cash into this project from 2008 to 2011. St. Regis features condos within the resort. Its infrastructure was unique in Florida, which created high demand for the condos. Approximately $1 billion worth of condos have sold, and the company expects to be completely sold out by the end of this year. This venture will bring $611 million in cash by the end of this, benefiting the company.

Expanding in China for more benefits

Intercontinental Hotels Group's (NYSE: IHG) franchisee business makes up 74% of its total number of rooms. The owner of the franchised hotel pays approximately 6% of sales as royalty fees for using the company’s brand name. Franchise fees contributed 60% of EBITDA in 2012, generating high profit margins of 84%. To capitalize on this further, it is increasing the number of rooms franchised by 5,300 worldwide in 2013 and will reach approximately 511,273 rooms in 2014. Revenue from franchise fees will to reach $704 million this year from $653 million in 2012.

Chinese residents were the highest spenders, reaching $102 billion on travel and tourism in 2012. This was up 40% from 2011. To monetize this opportunity, the company will increase the number of rooms in China by approximately 7,700 in 2013, reaching 78,000 rooms in 2014. This expansion will match China’s demand and increase revenue in China from $230 million in 2012 to $251 million in 2014.

Growing incentive management fees

Marriott International's (NYSE: MAR) main business is franchising and purchasing management contracts. The company remains focused on expanding its international portfolio. Therefore, it purchased a management contract from Ryman Hospitality Properties, or RHP, in the first quarter of 2012. This added five hotels, and approximately 8,100 rooms, to its portfolio in exchange for $210 million. Originally, the company expected $20 million in base management fees and $5 million as incentives in 2013. However, due to lower-than-expected group bookings, Marriott expects $3 million in base management fees and nil incentive earnings in 2013. RevPAR will decrease to 1% this year from 5% in 2012. The company is working to solve this issue through various sales incentives.

As of the first quarter, Marriott has approximately 1,021 management contracts. It receives the basic fees as well as incentives after a certain level of profits as per the contract terms and conditions. The company earns approximately 15% of the incremental cash flow from incentives. The company's strength is in management of its resorts, and the recovering North American economy is increasing the company's RevPAR. RevPAR will rise from 5.2% currently to 6.2% by the end of 2013. With this rise, Marriott’s incentive management fees will increase from $232 million in 2012 to $264 million this year and $302 million in 2014.

Conclusion

Starwood’s focus on expansion will be beneficial for the company. Furthermore, its condos project will yield capital return this year. Intercontinental Hotels is expanding in China to capitalize on its high growth rate. In addition to this, it is also franchising more rooms for incremental fees. I recommend a buy for both of these stocks.

Marriott’s management contract will witness low revenue, but its international contract will provide incremental management fees. I recommend holding the stock.

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Shweta Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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