Many investors avoid hotel companies because of the unpredictability of income streams due to the extremely short term of their "leases." This lack of contractual stability, however, can prove to be a blessing.
For such a popular travel destination, the New Orleans area has surprisingly little lodging. This undersupply combined with hosting the Super Bowl at the Superdome gives rise to the possibility of extreme price gouging. A recent survey from cheaphotels.org reveals that New Orleans hotels increased their prices by an average of 304% with some at the epicenter charging as high as 590% more. The cheapest rooms currently available are over $300 and that's just a mid-scale hotel. To extend the exploitation, many hoteliers are requiring a minimum booking of 3 nights. It is very clear that the whole ordeal will be an incredible boost to 1st quarter earnings, but which companies are the beneficiaries and what are the implications to investors?
Felcor Lodging trust (NYSE:FCH) has two hotels in very close proximity to the stadium:
The red dots are Felcor hotels located approximately 10 blocks from the Superdome boxed on the left. Felcor had previously sold its hotel on Julia St. along with 1 other hotel for $70mm.
Hospitality Properties Trust (NYSE:HPT) also has two hotels in very close proximity shown here:
Host Hotels and Resorts (NYSE:HST) and Sunstone Hotel Investors (NYSE:SHO) each have 1 property at approximately the same 10 block distance, RLJ Lodging Trust (NYSE:RLJ) has 2 hotels, but slightly further at around 25-50 blocks. Once it gets to this taxi distance rather than walking it begins to reduce the ability to gouge.
Starwood Hotels and Resorts (NYSE:HOT) has an impressive 3 hotels in close proximity:
A few other hotels are sprinkled throughout the Greater New Orleans area, but these are privately owned.
Implications to Investors
There simply is no argument to suggest that this event was not beneficial. Instead, the concern lies in the magnitude of benefit, so let us examine that. As none of the numbers has been published yet, we will have to make some gratuitous estimations, but it should nonetheless give an idea as to the scope of impact. The ADR increase (200%-400%) will be multiplicative with the occupancy increase (33%-66%) for total revenues of around 400%-800% of normal, or an increase of 300%-700%. In terms of what effect this will have on the 1st quarter performance we must factor in both time dilution and portfolio dilution. The extreme profitability will only last for about 3 days, so when averaged over a quarter that's 3/92 times 300%-700% for average returns of about 10% to 23% above normal for those hotels. We must then factor in the percentage of each company's portfolio in the area.
Number of hotels near Superdome
Number of properties in portfolio
Host Hotels & resorts
For many of the companies, even the diluted impact is material. To show how these figures are derived, we will use Felcor as a sample calculation. 10%-23% increased earnings for 2 hotels out of a portfolio of 67 hotels yields a revenue increase of (10%-23%)X(2)/67=0.299%-0.687%. The rest of the calculations are summarized in the box below.
4Q revenue increase from event
These figures are with the assumption that each company's New Orleans hotels are of approximate equal size and quality with the average of their respective portfolios. An obvious error in this approximation is with HPT as its portfolio contains many trucker stops which are much less relevant to the overall portfolio's earnings than are its 288 hotels. As such, its revenue increase from the event could be a bit higher than the above estimate.
Felcor, and Sunstone will likely get the most benefit and this could potentially be enough to beat earnings estimates, in which case these stocks get a nice boost come press release time. Keep in mind that these are only my estimates and could deviate from the actual results.
A single event is never enough reason to invest with a company, so further research is highly recommended before jumping in. For more information on the primary beneficiaries, you may follow the links to company presentations below:
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.