In this report I rank the hotel companies under my coverage based on a number of financial measures. In the last section I rank the companies by valuation, and provide my recommendations. (All 2011 estimates are my own.)
RevPAR Growth
Comparable RevPAR Change 
'0811E 

11E 
10 
09 
08 
Avg. 

Millennium & Copthorne 
7.2% 
10.7% 
6.2% 
7.6% 
4.8% 
OrientExpress Hotels 
9.5% 
11.4% 
17.3% 
3.0% 
1.7% 
Accor 
4.5% 
7.1% 
7.9% 
2.8% 
1.6% 
Hyatt Hotels 
6.0% 
7.8% 
18.7% 
5.5% 
0.2% 
Red Lion Hotels 
5.5% 
5.9% 
11.9% 
1.2% 
0.4% 
Starwood Hotels 
8.6% 
9.3% 
20.0% 
1.2% 
0.8% 
Intercontinental Hotels 
4.0% 
6.2% 
14.7% 
0.9% 
0.9% 
Sol Melia SA 
7.0% 
8.9% 
16.8% 
3.2% 
1.0% 
Marriott International 
8.0% 
5.8% 
18.3% 
1.5% 
1.5% 
NH Hotels 
6.1% 
10.4% 
19.7% 
3.0% 
1.6% 
Choice Hotels 
6.5% 
2.8% 
14.4% 
1.9% 
1.7% 
Morgans Hotel Group 
7.6% 
11.2% 
32.4% 
0.8% 
3.6% 
Average 
6.8% 
8.1% 
16.5% 
0.6% 
0.3% 
Having the most geographically diverse portfolio, Millennium & Copthorne (MLC) has enjoyed the steadiest performance in RevPAR since 2008. (Please see table above.) Asia and other emerging markets account for nearly 40% of its revenues. Among the larger names, Accor’s (AC.PA) relatively steady results benefit from its market share in Europe, where it is the biggest hotel operator. Starwood (HOT) and Hyatt (NYSE:H) owe their respectable fouryear RevPAR records mostly to their bias to high end travelers, which have been the most resilient since the lodging cycle’s favorable turn.
PwC Lodging recently forecast a 7.8% increase in 2011 RevPAR, including a 2.5% occupancy increase and a 5.1% rise in ADRs. PKF Hospitality and Smith Travel also forecast 7%plus RevPAR gains in the current year, with a similar bias toward rateled increases. By contrast, the 2010 increase in RevPAR (+5.1% industrywide) was entirely driven by occupancy, as room rates, which only began to flatten in mid2010, began to turn positive in the second half of last year.
The Rich Get Richer
Hotels catering to affluent guests – who have fared relatively well through the recent downturn – will see the broadest improvements in room rates. PKF Hospitality estimates 65% of forecasted 2011 RevPAR growth will arise from higher room rates, compared with a 53% rate contribution within the lower chainscale segments.
The luxury segment, which witnessed the broadest decline in RevPAR from 200709, has thus far seen the most dramatic rebound. For 2010, PKF anticipates the highest RevPAR growth from the top chainscale segment, at 10%. HOT (with luxury brands including St. Regis and W) and OrientExpress (OEH), with the group’s highest average room rate, are among the operators most geared to the luxury traveler, and seeing among the most dramatic swings in RevPAR.
Chain Scale Trumps Geography
The global rebound in RevPAR is more dependent on chain scale than location. Within Sol Melia’s (OTCPK:SMIZF) portfolio, its upscale brands (Melia, Innside) increased RevPAR 14.5% in 2010, despite about half of these upscale rooms being sold in Spain. Likewise, the 2010 RevPAR increase at Accor’s upscale and midscale hotels climbed 9% on a comparable basis, two percentage points ahead of the advance within its economy properties (ex US).
Meanwhile, Choice Hotels (NYSE:CHH), Intercontinental (NYSE:IHG) and Red Lion (NYSE:RLH), aimed primarily toward the budgetminded traveler, have thus far seen the slowest rebounds in RevPAR. Indeed, within limitedservice categories, filling rooms remains the primary focus. For example, CHH, where 2011 occupancy in its economy segment (e.g., EconoLodge, Rodeway Inn), at just over 46%, provides only modest support for rate increases. Ditto for Accor’s Motel 6, whose 107,000 economy rooms are running six percentage points below levels of two years ago.
Group Business Plays CatchUp
Two years of underperformance left group rates some 1520% below peak levels, according to my estimates, mirroring the 18.4% decline in (weekday) group occupancy from 2007 to 2010 recently reported by PwC. Since most group agreements are negotiated in the prior year, 2010 rates – which fell for the second straight year – suffered from recessionary conditions in 2009. Aided by higher corporate profitability, I expect group business agreements will in 2011 make up much of this past underperformance versus business transient and leisure rates.
I forecast the upper upscale segment to see the broadest increases in RevPAR in 2011, thanks to its heavy group mix, as well as minimal (<0.5%) supply growth. In 2010, results (e.g., RevPAR +5.7%) from this segment, the largest within fullservice, were held back by its relatively high group dependence.
Marriott’s flagship brand (Marriott) and Starwood’s Sheraton are likely to see a disproportionate bounce in 2011 given their overindexation to groups. In Europe, Accor should see the broadest benefit from increased group, followed by NH Hotels (NHHEY.PK).
Unit Growth
Hotel Count 
'0811E 

11E 
10 
09 
08 
CAGR 

Hyatt Hotels 
480 
453 
424 
399 
6.3% 
Marriott International 
3,720 
3,545 
3,420 
3,178 
5.4% 
NH Hotels 
403 
397 
398 
345 
5.3% 
Morgans Hotel Group 
14 
14 
15 
12 
5.3% 
Starwood Hotels and Resorts 
1,093 
1,041 
979 
942 
5.1% 
Intercontinental Hotels 
4,570 
4,437 
4,438 
4,186 
3.0% 
Accor 
4,263 
4,191 
4,111 
3,982 
2.3% 
Choice Hotels 
6,188 
6,142 
6,021 
5,827 
2.0% 
Sol Melia SA 
317 
310 
305 
304 
1.4% 
OrientExpress Hotels 
37 
36 
35 
36 
0.9% 
Millennium & Copthorne 
105 
103 
104 
103 
0.6% 
Red Lion Hotels 
46 
44 
45 
47 
0.7% 
While most hotel operators’ expansion has been limited by capital availability, H (which did its IPO in late 2009) and MAR enjoy among the best access to capital and debt ratios (see net debt table below) in the lodging group. In an environment that remains capital constrained, in which growth is closely correlated with balance sheet strength, these large, wellcapitalized operators are growing the fastest.
Slow Developed Market Growth Drives Emerging Market Expansion
The US lodging market, with just over 4.8 million rooms, is mature, as evidenced by <1.5% annual room growth over the past 10 years. After about a 1% increase in net new rooms in 2010, Smith Travel estimates the 2011 room count will climb by about half this 2010 rate. Growth opportunities in developed Europe are similarly modest, with pipelines suggesting 0.3% annual growth through 2013, according to Smith Travel.
Data from the International Monetary Fund suggest the best unit growth opportunities are in Emerging markets. The IMF forecasts the travel market in emerging countries will rise from about 47% of the total in 2010, to about 55% by 2020.
Hyatt, with 70% of its existing rooms in the US, recently announced signed contracts for 32,000 new rooms to be added over the next few years, of which 70% will be located outside the US, and most of these rooms in emerging markets. Marriott recently partnered with Spain’s AC in a joint venture making it the fifth largest hotel operator in Europe. Still, it sees most of its growth opportunities in emerging countries, like India and China – MAR’s second largest market after North America.
Even relatively small hotel operators, like Morgans, are exploiting growth opportunities internationally, with recent management agreements signed in the Middle East (Qatar) and emerging Europe (Turkey). At Millennium & Copthorne, all but two of the 25 hotels in its recent pipeline are located in the Middle East.
To the extent that there is domestic growth, it’s mostly occurring in large, gateway cities, like New York, Boston and San Francisco. This trend is at least partly reflective of the tight current environment for construction financing. Even today, lenders are considering potential worst case scenarios (a la 20089), and placing new investment only in places where occupancy held up relatively well in the downturn. This urban bias has helped Hyatt, which had only a single hotel in New York City to start 2010, put five or six projects underway there.
Operating Margin
EBIT Margin 
'0811E 

11E 
10 
09 
08 
Avg. 

Choice Hotels 
28.1% 
27.0% 
26.2% 
27.2% 
27.1% 
Intercontinental Hotels 
28.2% 
27.3% 
23.6% 
28.9% 
27.0% 
Millennium & Copthorne 
20.6% 
19.4% 
15.0% 
20.4% 
18.8% 
Sol Melia SA 
12.6% 
11.4% 
9.2% 
12.4% 
11.4% 
Starwood Hotels and Resorts 
11.8% 
10.1% 
8.5% 
10.6% 
10.3% 
Marriott International 
7.9% 
6.9% 
5.8% 
7.2% 
7.0% 
Accor* 
8.0% 
7.5% 
7.2% 
3.9% 
6.6% 
OrientExpress Hotels 
6.1% 
1.4% 
4.3% 
17.4% 
6.6% 
Hyatt Hotels 
4.0% 
3.1% 
1.4% 
9.5% 
4.5% 
Red Lion Hotels 
4.1% 
1.8% 
2.1% 
2.6% 
1.6% 
NH Hotels 
3.0% 
1.2% 
7.6% 
7.9% 
1.1% 
Morgans Hotel Group 
0.0% 
4.4% 
14.8% 
4.6% 
3.6% 
Average 
11.2% 
9.2% 
6.4% 
12.7% 
9.9% 
* The operating margins for Accor are pro forma for the 2010 spinoff of Edenred.
A company’s ranking in operating margin (in the table above) correlates strongly with its percentage of rooms franchised or managed. Among the two highest margin operators, Choice is a franchisor exclusively, and Intercontinental owns only 17 of its 4,400plus properties. By contrast, each operator with margins below 10% controls more than half its rooms through direct ownership or long term leases.
Asset Sales Prompted by Higher FeeBased Returns and High Current Leverage
Hotel operators are shifting to a high margin, assetlight business model, making it perhaps the most pervasive trend in lodging. Several, including IHG, AC and MAR, fortuitously began selling assets to enhance margins and returns, prior to 2008, when cap rates were far lower than today’s levels. But from the start of this trend, the vast majority of transactions have been structured as sales and leasebacks, allowing the hotel to continue managing the property with minimal capital contributions.
Leverage
Net Debt to EBITDA 
'0811E 

11E 
10E 
09 
08 
Avg. 

Hyatt Hotels 
1.7x 
1.2x 
1.1x 
1.3x 
0.1x 
Accor 
0.2x 
0.8x 
1.5x 
0.7x 
0.8x 
Choice Hotels 
0.9x 
1.3x 
1.3x 
1.2x 
1.2x 
Millennium & Copthorne 
0.8x 
0.8x 
1.6x 
1.6x 
1.2x 
Intercontinental Hotels 
1.3x 
2.3x 
2.1x 
2.6x 
2.1x 
Marriott International 
2.2x 
2.4x 
3.0x 
1.9x 
2.4x 
Starwood Hotels and Resorts 
3.0x 
4.0x 
3.9x 
3.0x 
3.5x 
Sol Melia SA 
4.5x 
4.8x 
5.8x 
5.2x 
5.1x 
Red Lion Hotels 
7.3x 
6.9x 
5.0x 
2.7x 
5.5x 
NH Hotels 
5.5x 
6.7x 
16.0x 
4.2x 
8.1x 
OrientExpress Hotels 
7.4x 
15.8x 
12.6x 
5.2x 
10.3x 
Morgans Hotel Group 
nmf 
Nmf 
15.3x 
8.3x 
11.8x 
Average 
2.9x 
4.1x 
5.8x 
3.2x 
4.3x 
Today, with per key property values still 1530% peak levels, balance sheets (i.e., debt), rather than income statements, force much of the activity. The most heavily leveraged operators (as measured by net debt to EBITDA), with relatively unfavorable capital market access, including OEH (7.4x), MHGC (>10x), and Sol Melia (4.8x), are most aggressively selling properties. RLH (7.3x) currently has three of its 31 owned hotels listed for sale. NHH (6.7x) has shed most of the EU300 million projected for divestitures.
Valuations and Recommendations
EV/EBITDA 
'0811E 

11E 
10 
09 
08 
Avg. 

Accor 
8.0x 
9.5x 
9.4x 
6.3x 
8.3x 
Millennium & Copthorne 
9.9x 
11.1x 
8.9x 
6.4x 
9.1x 
Sol Melia SA 
10.6x 
10.3x 
11.2x 
8.2x 
10.1x 
Intercontinental Hotels 
11.6x 
11.9x 
11.0x 
6.0x 
10.1x 
Red Lion Hotels 
14.3x 
11.3x 
11.7x 
6.7x 
11.0x 
Starwood Hotels and Resorts 
14.0x 
16.5x 
13.2x 
7.5x 
12.8x 
Hyatt Hotels 
12.5x 
15.1x 
11.6x 
na 
13.0x 
Choice Hotels 
13.0x 
14.4x 
13.4x 
11.5x 
13.1x 
Marriott International 
14.2x 
17.3x 
13.6x 
11.2x 
14.1x 
NH Hotels 
17.0x 
18.1x 
36.7x 
6.5x 
19.6x 
OrientExpress Hotels 
21.3x 
24.1x 
33.5x 
22.0x 
25.2x 
Morgans Hotel Group 
34.8x 
nmf 
Nmf 
18.8x 
26.8x 
Average 
15.1x 
14.5x 
15.8x 
10.1x 
14.4x 
My recommendations are unchanged from my December report (“Favoring Overlooked Hotel Operators”), in which I provide a brief rationale for each. My six favored hotels have generally lower 2011 EBITDA valuation multiples than the group’s average, despite what I believe are relatively favorable longterm growth prospects. My three sell candidates have multiples above the group average. The two least attractive hotel stocks (OEH, MHGC) have 4 year average multiples of at least 25x EBITDA.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.