Orient Express Hotels: This Luxury Hotel Company Has Lots of Upside

Feb.28.11 | About: Belmond Ltd. (BEL)

Luxury spending is making a comeback and that's good news for Orient Hotels (OEH), which owns 50 businesses including 40 luxury hotels globally.

The recession weighed heavily on Orient. Its Porto Cupecoy residential development occured at the height of the real estate bubble, forcing Orient to work off its unsold inventory slowly. Its iconic trains saw demand fall sharply as even the wealthiest trimmed leisure spending. Its hotels suffered as personal, business and group travel plummeted.

Today, an improving global economy is sparking global travel as consumer optimism improves and business spending returns. Orient has reduced its debt level, is enjoying double-digit occupancy and revenue per available room (RevPAR) growth and is well positioned for significant earnings upside on future high end spending growth.

In Q4, a typically weak seasonal period for the company, occupancy rose to 56%, which helped RevPAR climb 11%. Orient, which saw RevPAR decline for five consective quarters in the recession, has now seen RevPAR expand for 4 consecutive quarters. And, occupancy has room to grow given the prior 2006 and 2007 peaks of 63-65%.

The company's debt load is getting manageable too. Debt to EBITDA has fallen from a high of 9.1x to 6.7x, down from 7.9x in Q3. Thanks to refinancing, 54% of the company's debt is fixed at 4.5%. And, the company's cash position is improving with unrestricted cash rising $19 million to $150 million exiting Q4.

The majority of strength has come from its Asia Pacific properties, where RevPAR grew 22%. The rest-of-world segment, which includes the region, saw overall revenue growth of 28% and EBITDA growth of 31%. Europe was solid with revenue up 9%, despite sluggish sales to British travelers. In America, revenue rose 7% and EBITDA rose 3%. Clearly, Orient has a lot of work to do in developed nations, however, ongoing global economic improvement offers considerable upside through 2012. Across all Orient's owned hotels, revenue rose 14%.

Orient's 2008 Cupecoy development saddled the company with a significant inventory of unsold units, acting as anvil through the recession. However, in 2010 they sold 22 units for $9.3 million and the development is debt free. With 73 of the 185 units remaining, OEH could reap $50 million more at current prices. And, OEH is selling boat slips at the development which may raise an additional $15 to $20 million too.

So far, 2011 is off to a solid start with Orient's January revenue running 12% above last year. And, the spring won’t have the overhang of 2010’s flood driven Peru closure weighing on 2011 results.

European bookings, which were essentially flat in 2010, are running 24% above last year while America bookings are flat. In Orient's rest-of-world segment, bookings are up 35% if you ex-out last year’s World Cup effect. And, their trains business revenue is up 20%.

Orient didn't sit still through the industry upheaval either. In January 2010, Orient bought two Sicilian luxury hotels for $118 million, funded in part by a $138 million equity offering. These properties, which are being updated and rebranded, offer considerable upside on further recovery.

Additionally, the company is looking to take the next step into managing properties, having just hired its first Chief Development Officer, Roy Paul, who is tasked with identifying acquisition and management opportunities. Prior to joining Orient, Mr. Paul spent 20 years building Four Season's (FS) global brand. The company has also unloaded $108 million in non-core assets since 2009 and last November raised another $117 million in an equity offering.

Orient's shares remain 80% off their 2007 peak, reflecting ongoing uncertainty. However, given occupancy and RevPAR trends, the ongoing global recovery and Orient's improved debt situation, shares offer substantial upside over the coming year.

Disclosure: I am long OEH.