Should Investors Book an Extended Stay With Hotel Stocks?

Hotel development slowed significantly during the recession, but with the economy improving, chains such as Marriott, Wyndham, and Starwood are in a global race to add properties and build market share.

Jan 6, 2014 at 1:21PM

Today we look at three global hotel companies, Marriott International (NASDAQ:MAR), Wyndham Worldwide (NYSE:WYN), and Starwood Hotels & Resorts Worldwide (NYSE:HOT). These companies are leveraging the popularity of their American-based brands and spreading them across the globe. This expansion strategy is aimed at taking advantage of areas of relatively higher economic growth, such as Asia.

Brands to serve nearly every market niche
Marriott International is a leading franchise-based hospitality company with almost 3,900 properties in 72 countries. Among the company's 18 brands are Marriott Hotels, The Ritz-Carlton, Renaissance, Courtyard, and Fairfield Inn & Suites.

In the third quarter, Marriott reported that total revenue rose nearly 16% compared to the same quarter of 2012, to $3.2 billion. Part of this outstanding gain was due to a change in the company's fiscal calendar, which meant that the third quarter had 92 days compared to 84 last year. Nonetheless, the company had, as CEO Arne M. Sorensen termed it, "a solid quarter."

 Key metric RevPAR, or average daily room rate charged multiplied by average occupancy percentage, was up almost 5% for the company's worldwide operations. Its worldwide occupancy percentage rose to the highest level in the last six years.

Operating income was up 15% to $245 million. Total expenses increased at the same rate as revenue, 16%, so the revenue increase made it to the bottom line.

The company is going full bore at developing new franchise properties. The number of rooms in its development pipeline increased for the fifth quarter in a row. Here's a number that astounded me: in its Asia region alone, the company expects to open one hotel every eight days through 2016. In the third quarter, the company added 44 new properties worldwide, or about one every two days. 

In the last 12 months, of the net total 113 new properties added, 74 of these were in the company's domestic limited-service brands, which included Courtyard, and 33 in its international portfolio. The number of domestic full-service hotels increased by a net of only seven.

Across-the-board revenue growth
Based on number of properties, Wyndham Worldwide is the largest hospitality company in the world, with more than 7,440 franchised hotels. The company also generates revenue from its vacation rental and vacation ownership (timeshare) business segments.

Wyndham's brands run the gamut from the more upscale Wyndham Hotels and Resorts, to mid-price Ramada, to budget brands such as Days Inn and Super 8, which account for 57% of the company's total properties.

Each of these segments performed very well in the third quarter. Total revenue rose 13% compared with the same quarter last year and reached $1.4 billion. Within the Lodging segment, revenue increased 19% as domestic system RevPAR rose 5.2% and 3.4% system wide.

The vacation-exchange and rentals segment achieved a 12% revenue increase year over year, and an 11% revenue increase was achieved in the vacation ownership segment. 

Earnings performance for each segment was strong as well, with double-digit earnings before interest, taxes, depreciation, and amortization increases for each segment and a company-wide increase of 13.8%.

Striving to be the best for the upscale guest
Starwood Hotels & Resorts Worldwide serves primarily the upscale side of the hospitality industry, with brands such as Westin, W, The Luxury Collection, and Sheraton. The company also operates Starwood Vacation Ownership, providing vacation experiences in villa-style resorts. The company has 1,169 properties in 100 countries.      

Starwood's third-quarter results were highlighted by a system wide increase in RevPAR for same-store hotels of 4.7% compared to the same quarter last year.

North American properties performed extremely well, with RevPAR growth of 5.8%. Internationally, the Greater China region showed only a 1.6% increase, but the rest of Asia was up 9.3%. In terms of its brands, Starwood's star performer was its St. Regis/Luxury Collection, which recorded a 7.3% increase in RevPAR.

Total revenue for the quarter was up 3.6% year over year, and because costs were basically unchanged, operating income soared 21.5% to $243 million. Margins at same-store owned hotels worldwide improved 130 basis points during the quarter.

In the earnings release, CEO Frits van Paasschen stated, "We remain bullish on the long-term trends of rising wealth and increasing demand for travel in fast growing economies, even in the face of slower growth in China, unrest in the Middle East, and economic challenges in Latin America."

Hmmm...I can't quite see the bullishness in that comment.  

What we learned
The hotel industry is fundamentally sound and should achieve good growth in 2014 and beyond. According to hotel-industry observer STR, in November U.S. hotels achieved another healthy RevPAR of 4.7%. The best-performing segments were the upper-upscale, with RevPAR growth of 6.2%, and the luxury segment, up 5.7%.

Plentiful capital at historically low rates helps boost hotel franchisees' enthusiasm to develop new properties. I don't think the increase in supply of rooms will result in a glut, which would have a dampening effect on occupancy and average daily room rate (ADR) growth. The current expansion phase of the industry should continue.

Marriott has a portfolio of brands that meets the needs a wide range of business and leisure travelers, from the super luxury Ritz-Carlton with an average daily rate for the quarter of $309 to the TownePlace suites with a budget-minded ADR of just $90. This brand mix also appeals to prospective franchisees, who can choose the brand that is the right fit for a given market's demographics thus increasing the chances of achieving a high occupancy percentage.

Wyndham is also actively pursuing international growth. Of the 900 hotels in its development pipeline, 60% of these new properties are international. 

At quarter's end Starwood had 400 new hotels in its development pipeline. It is well positioned given the strong performance of upper-end lodging properties. The company created one of the most innovative hotel brands of the last two decades, W Hotels, which offers premium, personalized guest service and design and amenities to create the overall impression of a cool experience. We should keep in mind, though, that there are only 45 of these hotels worldwide.

To me, Marriott offers the best combination of excellent current performance and aggressive growth plans. This would be the stock I'd invest in. 

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Brian Hill 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.

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