Room For Returns

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

individual stocks, there are a few leisure mutual funds that include hotels among their holdings. While leisure funds offer diversification, mutual fund analyst Federico Cepeda of Morningstar says investors should hold no more than 5% to 10% of their portfolio in any fund that concentrates on one sector of the economy.
Besides AIM Leisure, Fidelity Select Leisure (FDLSX) is another five-star rated Morningstar fund with at least one-third of its assets in the hotel, resort, and cruise line category. For investors who prefer greater diversification, ICON Leisure and Consumer Staples Fund (ICLEX) has about 4% of its assets in hotel stocks. Finally, Rydex Leisure (RYLIX), a mutual fund, and PowerShares Dynamic Leisure (PEJ), an exchange-traded fund, both track industry indexes put together by the sponsoring firms.

Lodging REITs
Hotel stocks and leisure-oriented funds are not the only investment vehicles to consider. There’s a trend in the hotel industry that involves many chains selling off properties to third parties and generating a larger portion of their revenues from franchise and management fees. Thus hotel companies with recognizable names may be the top performers because potential hotel owners will likely prefer to license well-established brands.
Many of the properties being sold off are purchased by real estate investment trusts (REITs), which are publicly-traded companies that own, and in most cases operate, income-producing properties. Therefore, buying shares of these REITs will allow you to become a part-owner of multiple hotels. For example, the largest hotel REIT, Host Hotels & Resorts (HST), owns more than 120 properties, including brands such as Hilton, Global Hyatt Corp., Marriott, Ritz-Carlton Co. L.L.C., and Sheraton. “The tax code requires REITs to distribute [90%] of their net income to investors,” says Abigail McCarthy, the National Association of Real Estate Investment Trust’s senior director of investment affairs and investor education. As a group, hotel REITs currently yield around 4.5%, far higher than the yields on individual hotel stocks or leisure funds.

The Big Picture
So which is the more attractive play: hotel stocks or REITs? With REITs, investors get the benefits of real estate ownership as well as high current yields. However, Morningstar’s Glaser warns that hotel REITs can be cyclical, as occupancy levels rise and fall. “[Hotel stocks] have more stable earnings, from operating and franchising fees.” Glaser finds the hotel group to be fairly valued now, with Wyndham a shade undervalued and Marriott perhaps a bit overvalued.

Still another investment alternative is to put money directly into one or more hotels. “We’ve acquired 125 hotels in the last seven years,” says Thomas J. Baltimore Jr., president of RLJ Development, a Bethesda, Maryland, company formed by Robert L. Johnson, founder of Black Entertainment Television. “Our total equity in those hotels is over $1 billion. With strong demand from travelers and benign growth in the supply of new properties, hotels are very attractive as an asset investment class.”

If such savvy players are putting money into hotels, other entrepreneurs may want to follow suit. What’s more, you don’t have to be a billionaire to join the club.

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