• Tue. May 21st, 2024

Analysts Say Hotel Fundamentals Strong Despite Complicated Comparisons, Economic Challenges

Bynewsmagzines

Apr 24, 2023
Airline passengers head to their flights at the Harry Reid International Airport in Las Vegas, Nevada. Hotel industry analysts said that while there's ongoing economic uncertainty, hotel industry fundamentals remain strong because people are still traveling for leisure and work. (Getty Images)

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As the hotel industry’s publicly traded companies prepare to report first-quarter earnings, investors will be closely watching for any signs that recent economic troubles are having an impact on performance.

Despite concerns over inflation, rising interest rates, bank failures and other challenges to the overall economy, hotel industry analysts expect executives at hotel brand companies and real estate investment trusts will have mostly positive reports for the first quarter because the industry fundamentals are still strong.

That is because people, either for work or play, are still traveling.

Michael Bellisario, director of equity research and senior analyst at Baird, said there continues to be a bid-ask spread between management teams and industry contacts who say there are no signs of slowing or fundamental weakness and the investors who don’t believe them. Investors see a booking window that’s still short and are keeping an eye on a recession. 

It’s a rolling recession concern that pops up each quarter and then moves on to the next one when things continue to perform well, Bellisario said. Investors realize they were too negative when fundamentals are still fine, but it keeps happening.

“It’s rinse and repeat every 90 days, but people are still traveling,” he said.

The pandemic, which disproportionately affected the hotel industry, has complicated year-over-year performance comparisons, and can give the often-false impression of slowing growth, Bellisario said.

“People in the public market, when they see slowing, freak out, and it doesn’t matter if it’s slowing because of a comparison issue, or there’s actual underlying weakness,” he said.

Investors don’t seem to care about industry fundamentals right now, said David Loeb, a former analyst with Baird and owner of Dirigo Consulting, which advises on capital markets, strategy and communications issues. They’re focused on rising labor costs, among others, that are pinching margins and the end of easier year-over-year comparisons.

Investors generally would rather wait for the perceived bottom in stocks when a recession is confirmed, Loeb said.

“Once there’s consensus that we’re in a recession, investors are likely to pile into these stocks because they’re cheap and they can play the next upcycle,” he said.

Hotel executives, on fourth-quarter earnings calls, were unanimously positive to various degrees, said C. Patrick Scholes, managing director of lodging and leisure equity research at Truist. Everyone will be listening closely to see if anything has changed since then, but that’s unlikely, he said.
 

“It’ll be interesting to see if any management teams want to sort of dip their toe into how the back half of the year is looking,” he said.

Bellisario said there’s unlikely to be any significant changes in guidance on net unit growth from hotel brand company executives.

The pipeline figures will be the leading topic for brands, he said.

There are also likely be questions about what owners are hearing on the lending side. The silver lining is that any effect the lending environment will have on development won’t affect supply growth until 2025 or 2026. That debt was already difficult to obtain is something that works in their favor, he said. The rising cost of debt is an incremental headwind.

“The good projects will continue to get done, and the tier-two projects might not get done that might otherwise have gotten done,” Bellisario said. “But I would expect the management teams to take an upbeat posture regarding that because it’s still early in the year and the fundamental backdrop is still good. I think they’ll shift the focus to that.”

The C-corps will talk positively about international trends, Scholes said. On the leisure side, domestic demand isn’t bad, but a lot of leisure travelers are going somewhere else this summer.

“They went to domestic beach or mountain resorts the last two or three summers, and now they’re looking to go elsewhere, whether its Europe, Canada, the Caribbean or even cruise lines are open again,” he said. “That’s drawing business away. The business is still there; it’s just looking for something new.”

Group occupancy continues to recover, and that segment is expected to post the greatest growth rate in revenue per available room, Scholes said.

In terms of deals, the REITs are going to be quiet, Bellisario said. Their stocks are down, and their cost of capital, for both equity and debt, is higher. Companies are spending more on capital expenditures than last year, some of which is for deferred improvements and return-on-investment projects.

Some REITs, such as Sunstone Hotel Investors, will be looking to buy, Bellisario said. A few others, such as Pebblebrook Hotel Trust, will continue to look to sell hotels. If current trends continue, though, there’s going to be incremental capital deployment on new acquisitions over the near term.

REITs that are well-capitalized have room to borrow as long as costs are reasonable, Loeb said. They may have a lot of opportunities, but their stock prices aren’t great and they’ll worry about how they can finance the equity portion of acquisitions. There’s going to be more hand-wringing among those that have stressed balance sheets, he said.

It’s more difficult for private equity lenders to get the kinds of returns they are accustomed to now that interest rates are higher and there’s a more conservative lending environment, Loeb said. That may lead some to look at REITs as a potential privatization move.

“I don’t think we’re going to see a rush of transactions in the next month, but over the next nine months, the rest of the year, I think we’ll see that momentum grow,” he said.

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