The hotel industry is in a cyclical uptrend with occupancy and average daily rates rising due to increased demand from both leisure and group business travel. A forecast for 2014 published in Hospitality Trends projects demand growth of between 2.1% and 3.1%, with occupancy growing about 2% and average daily room rates up 5.2%. The supply of hotel rooms is expected to grow more slowly than demand, at 1.1%.
Some hotel chains are better positioned to take advantage of this favorable environment than others. Today we see if Marriott International (NASDAQ:MAR) is one of them. We also look at two other large chains, including one that is very strong in the mid-price and budget segments, Choice Hotels International (NYSE:CHH), and one that caters to the upper end of the lodging market, Starwood Hotels & Resorts Worldwide (NYSE:HOT). Each of these companies recently reported full-year 2013 results.
Travelers are ready to spend more
Marriott International truly is international, with 3,916 properties and timeshare resorts in 72 countries. The company's business model emphasizes franchising. For the full year, the company reported an 8.2% increase in total revenue to nearly $13 billion. Total expenses rose 8.5%, as general, administrative, and other costs were up 12.6%. Operating income as a result rose 5%. A decline in interest expenses helped deliver a nearly 10%increase in net income for the year -- an overall fine performance.
Looking at comparable-property results, the company's North American full-service and luxury properties performed better than its limited-service properties. RevPar (occupancy percentage multiplied by average daily room rate) increased 5.7% compared to a 4.7% increase for limited service, as travelers are becoming confident enough to opt for more expensive travel experiences.
In global expansion mode
During 2013, the company added net 115 new properties, a 3% increase over 2012's property count. The bulk of the new hotels, 82, were in the company's domestic limited-service brands, such as Courtyard and Residence Inn. Next came 33 new properties in the international segment; among them there were 11 new Autograph Collection properties and nine in the Marriott Hotels brand. The number of domestic full-service hotels actually dropped by three.
But the hotel openings were just part of the story. Chief executive Arne Sorenson reported that the company signed contracts with owners and franchisees for 67,000 additional rooms, a record performance for the company amounting to one hotel every day. The company had 1,165 properties, nearly 200,000 rooms, in various stages of development at year-end.
Another good choice for investors?
With more than 6,300 franchised properties and more than 500,000 rooms, Choice Hotels International is one of the largest hotel franchisors in the world. It has properties in the U.S. and 35 other countries. Its brands include Clarion, Comfort Inn, MainStay Suites, Econo Lodge, and Rodeway Inn, serving the mid-price and budget sectors of the market.
For full-year 2013, the company reported a smaller revenue increase than Marriott did, at 5%. Operating expenses grew a bit faster than revenue, mainly due to a 12% increase in selling, general, and administrative expenses. As a result, operating income grew only 1%, and net income declined $8 million, or 7%, due to about a $12 million increase in interest expenses.
Of the company's 6,340 franchised properties, more than 80% are in the U.S. These domestic properties recorded a very modest 3% increase in RevPar, as average daily rates increased just 1.6% and occupancy rose less than 1%.
This company was also able to step up its development efforts, executing 530 new domestic hotel contracts during the year, up 12% from 2012. This company doesn't rely solely on the new construction of hotels to grow its system. Of the 422 properties in its development pipeline at year-end, 187 were hotels to be converted from other brands. The number of conversions in the pipeline was up 33 units, or 21%, over the prior year, whereas the number of new construction properties was down by five units.
Record occupancy levels for three straight quarters
Starwood Hotels & Resorts Worldwide focuses on serving the more upscale traveler, with brands including Westin, W, the Luxury Collection, and Sheraton. The company also operates villa-style resorts under its Starwood Vacation Ownership brand. At year-end 2013, the company operated almost 1,200 properties in 100 countries.
Full-year results showed a 4.2% increase in RevPar for comparable properties worldwide, or same-store hotels. North American growth was even more impressive, with a 5.7% RevPar increase year over year.
Operating income rose just 1.4% over 2012. However, a favorable variance in interest expenses and the effect of a loss on the early extinguishment of debt in 2012 resulted in Starwood reporting a 13% increase in net income compared to 2012, reaching $635 million, or more than 10% of revenue.
In 2013 the company added net 42 properties and signed 152 hotel-management and franchise contracts that will bring 32,200 more rooms to the system. The contract additions represented the company's best performance since 2007, reflecting the renewed optimism about the lodging industry among both hotel companies and franchisees.
What we learned
The continued economic recovery bodes well for the hotel industry. Starwood CEO Frits van Paasschen said in the earnings release: "From what we are seeing, the year 2014 looks to be a better version of 2013."
And it looks to be particularly good for companies that serve the upper end of the market, as Starwood does. The Hospitality Trends forecast says that RevPar for the luxury market will grow faster than the industry as a whole in 2014, by 8.3%.
Marriott is earning its share of this growth. The company reported that its international luxury segment had RevPar growth of 6.8% in 2013, and its domestic upscale Ritz-Carlton properties achieved an 8.7% increase in RevPar; both performances were significantly higher than its total worldwide system.
The relatively lower RevPar increase for Choice shows that competition remains fierce in the mid-price and budget segments.
Marriott's diversity of brands allows it to capture a number of different customer segments in the mid and upper segments of the market. Its aggressive expansion plans will allow it to take advantage of the global growth in travel demand that is exceeding growth in the number of hotels worldwide.
With further good times ahead for the lodging industry, Marriott should be a company that investors consider.
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.