You Don't Need to Be Rich to Ride the Hotel Boom
Thankfully, you don't need to win the lottery or back into a huge inheritance to arm yourself with the means to buy into the industry. There are plenty of publicly traded hotel operators and even income-producing investment vehicles that can let you ride the hotel boom. Let's check in to check out some of the opportunities.
Inns Are In
There are a few favorable trends helping out the lodging industry these days. Occupancy rates are higher as the improving economy finds leisure and business travel on the rise. Hotel operators also finally have the flexibility to bump their rates higher. The combination of higher rates and a greater percentage of available rooms being occupied have resulted in a spike in revenue per available room, or RevPAR for short.
RevPAR is the lodging industry's biggest measuring stick of success, and the leading publicly traded chains have come through with robust showings this earnings season. Marriott International (MAR) -- the industry titan with 4,100 properties housing more than 700,000 rooms worldwide -- saw its RevPAR spike 8.7 percent in North America, and just 5 percent of that was the result of higher rates.
Marriott isn't alone. Hilton Worldwide (HLT) clocked in with a similar showing, checking in with an 8.4 percent increase in RevPAR worldwide and an even better 8.8 percent increase at its stateside properties.
Marriott and Hilton are hospitality giants, watching over more than 1.4 million hotel rooms. We're not just talking about their namesake brands. Marriott's also the parent of Courtyard, the high-end Ritz-Carlton and other hotel chains. Some of Hilton's properties include Hampton Inn, Embassy Suites, and DoubleTree.
Given the high fixed costs associated with operating a hotel, it's easy to see how modest improvement in bookings can have a more pronounced impact on the bottom line. Revenue grew 9 percent in Marriott's latest quarter, but operating profit soared 22 percent. Hilton's top line climbed 8 percent, but its operating profit grew at a hearty 25 percent clip.
Getting It Right With REITs
Investors who don't want to tie their fortunes to a single hotelier, or those looking to generate some interest income, can turn their attention to real estate investment trusts -- or REITs -- that specialize in the lodging industry. Companies including Pebblebrook Hotel Trust (PEB) and RLJ Lodging Trust (RLJ) run hotels and return the bulk of the proceeds to shareholders in the form of dividends.
The payouts don't always add up to much. Pebblebook and RLJ yield 2.2 percent and 3.7 percent, respectively. However, there's always the hope for even fatter dividend checks as the value of the properties improves given the buoyant fundamentals. That's certainly happening these days. Just as RevPAR is a beefy metric for hotel operators, the stat that matters for REIT investors is funds from operations, or FFO.
FFO dictates how much operating cash flow a company is generating, and it ultimately dictates how much money a REIT can distribute to its stakeholders. FFO at Pebblebrook and RLJ rose 48 percent and 34 percent, respectively, in the third quarter.
With publicly traded hotels and hotel REITs performing well -- and the prospects for continuing growth bright -- no one would blame you if you approach Wall Street the way you do Monopoly: Buy the hotels and roll the dice.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Pebblebrook Hotel Trust. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check outour free report.