A 'First World' War: Luxury hotels are fighting a vicious battle against one another
The hotel business’s annus mirabilis was 2007-08, when global deal volume was $80 billion.
Then came Lehman, credit Armageddon, the Europe debt crisis, Arab Spring, Egypt, Ukraine, Russia, Thailand and the Chinese slowdown. Deal volume plunged to $14 billion in 2009 but has now risen to $26 billion. Las Vegas, Macau, London, San Fran, Dubai and Hong Kong are hot, meaning luxury hotels once again have pricing power. We are in solid midcycle through supply risk is a clear issue.
Starwood Hotel and Resort’s (symbol HOT) has been a winner on Wall Street, rising almost 50 per cent from last summer to its current $75 a share. Starwood blew apart earnings and raised guidance, thanks to stronger Rev par trends in Asia, Europe and the St. Regis Bal Harbor deal. Starwood is positioned for global growth since its luxury/premium brands include St.Regis, Westin, W, and the Luxury Collection. However, management fees in franchise fees Sheraton and Four Point are also strong, meaning EPS can grow at a CAGR of 10 per cent. Yet Starwood trades at a premium valuation at 25.6 times earnings since EPS will be $3 a share in 2015.
The easy money in the shares was made by investors who bought the shares in last summer’s correction. Longer term, I am excited about Starwood’s resorts and Chinese development pipeline for its global brands. The shares could even rise to $100 in the next two years. However, after the stellar outperformance since January 2014, I think it is time to take profits, seeking to reenter in the $64-68 range if we get down here. The big money in luxury hotels is made when management monetizes trophy assets in frothy high end markets as Starwood has clearly done.
The meteoric growth in Macau turned Las Vegas Sands into one of the authentic money machines and turned Sheldon Adelson into one of the world’s richest men. The sheer scale of Macau growth means at least seven per cent free cash flow yields and Sands China owns 38 per cent of all hotel rooms even as minimal supply/mass market will galvanize revenue/booking growth. Las Vegas Sands was a fairy tale investment, rising from 40 in mid-2012 to its recent peak near 86 per cent Sheldon’s next growth engines are Singapore and even Japan. Who would have ever imagined Macau as a $45 billion dollar revenue destination and de facto offshore banking centre for the Middle Kingdom’s high rollers and political heavy hitters? CLSA even predicts Macau will double to a $90 billion revenue market in the next four years. This means Las Vegas Sands is one of the world’s true secular growth stories in hotels. So any hit to the shares is an opportunity to accumulate as near certain (death, taxes and Sheldon are certain!) 20 per cent growth will always command a premium valuation on Wall Street and Hong Kong. Singapore’s financial metrics stun me and Japan/Korea are pure call options on the future. I expect Las Vegas Sands to trade in a $65-100 range in the next two years.
Intercontinental Hotels Group (IHG)’s Richard Salomons has now returned $10 billion to shareholders since 2003 and now trades above 2000 pence in London. The sale of the San Fran Mark Hopkins Intercon and the New York Barclay Intercon were brilliant deals and Paris/Hong Kong could well be next. With 4,700 hotels in 100 cities and some of history’s best loved brands (Intercontinental, Crowne Plaza, Holiday Inn), its asset light/asset monetization business model is a winner. Revenue per available rooms was an incredible six per cent in the US and Britain, two of the best hotel markets in the Western world. The rise in hotel deal volumes, with new Gulf/Asian sovereign wealth funds eager buyers for luxury hotel assets, is hugely bullish for shares, especially if the Paris and Hong Kong Intercons go on the block, as they surely will.
It is surely significant that Richard Solomons was both CFO and Chief Development Officer at the world’s largest hotel operator. The incredible outperformance of the IHG shares is a testament to the growth of the emerging markets middle class (in the early 1990s Singaporeans used to crowd the Latin Quarter/ Boule Mich in the summer. Now it is Chinese and Indians!), travel by older, affluent Europeans and spectacular growth of Websites like Expedia and Booking.com. The London high end property market has gone ballistic, with penthouses in the Shard priced at 60 million pound each. The Shard Shangri La Hotel will be the next Xanadu of Londonium!
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: email@example.com
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