Room For Returns

With strong demand for hotel space and limited supply, more profits may flow into shareholders' pockets

As the treasurer of Sisters Investing Seriously, an investment club with 22 members, Delores McKinley oversees a portfolio that’s just shy of $100,000, and her largest bet is on Hilton Hotels. All told, the Sisters own a stake in 25 companies, among them Hanesbrands Inc. (HBI), Harley-Davidson Motor Co. (HOG), Intel Corp. (INTC), Target Corp. (TGT), and Walgreen Co. (WAG). But with a total of 255 shares, Hilton Hotels Corp. (HLT) represents the investment club’s largest position.

McKinley, an auditor with Fort Lauderdale, Florida’s Broward County school system, says the Sisters began purchasing Hilton stock in 1999. On average the club has paid just over $19 per share, for a stock trading at $34 as of early May. The investment idea stemmed in part from a trip she made to Denver. “It wasn’t easy to find a hotel room,” says McKinley. Recognizing the unmet demand, she says she thought hotels would be a good place to park some of the club’s money.

As you travel for business or pleasure this summer, you might encounter a similar lack of hotel rooms, or perhaps experience top-notch customer service, which may spark thoughts about investing in this industry. If so, you’ll be in good company.
Hotel stocks certainly look attractive to Mark Greenberg, manager of AIM Leisure Fund (FLISX), which posted an impressive 24.2% return in 2006 and carries Morningstar’s five-star rating. “Room rates have risen a great deal, and that increase is not slowing down,” says Greenberg. “Both business and vacation travel are growing, while relatively few hotels are being built.” And though AIM Leisure can invest in a variety of industries, from apparel to restaurants, Greenberg says that right now the hotel sector has the largest weighting at more than 13%.

Jeremy Glaser, a stock analyst with Morningstar, agrees, noting that average nightly hotel room rates have surged 17% since 2002. He adds that revenue per available room (RevPAR), which can be calculated by multiplying the occupancy rate by the average daily room rate, is a key number to look at when evaluating hotels. That indicator rose by more than 8% in 2005 and 2006, the fastest rate in 20 years. Glaser also says that the supply of hotel rooms grew by a mere 0.5% annually over the past three years, well below the historic average rate, helping boost RevPAR.

If demand outstrips supply, investors stand to do very well indeed. “Hotels can benefit from yield management,” says Andy Ingraham, president and CEO of the National Association of Black Hotel Owners, Operators & Developers in Fort Lauderdale. “[Hotel owners] can raise rates on short notice if there’s enough demand for rooms. That can mean more cash flow for investors.”

Long-term trends also favor hotels. More people are now traveling and staying in hotels when they take vacations, according to Greenberg. “In addition, more demand for hotel rooms is likely to come from retiring baby boomers taking more trips,” he says, “and from travelers who live in emerging Asian economies, especially China.”

Leisure Funds
If you’d rather not pick

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