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 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
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. “Excluding the cost of acquiring the land, we have seen hotels carrying our brands such as Embassy Suites and Hampton Inns that required investments in the $4 million to $5 million range,” says Floyd Pitts, senior director of diversity programs for Hilton Hotels, who is based in Beverly Hills, California. Assuming 80% financing, hotel ownership might be possible with $800,000 to commit, and that sum could be shared among an investor group.
One entrepreneur backing hotels is Ken Fearn, managing partner of Integrated Capital, a Los Angeles-based real estate private equity group with a focus on hospitality. “The hotel business seems to have seven-year cycles,” he says, “and we’re not quite halfway through the current cycle. We might see continued growth in occupancy and room rates.”
If more people are willing to pay more to stay in hotels, more dollars are likely to find their way into investors’ pockets.