Analysts believe the big question looming over publicly traded hotel companies during first-quarter earnings season is if they can maintain full-year expectations after a weaker-than-expected March.
REPORT FROM THE U.S.—Was a weak March a blip on the radar or a sign of things to come?
That’s the question the publicly traded hotel companies will have answer as the first-quarter earnings season kicks off.
“Performance was weaker than the midpoint of (companies’) guidance; March was weaker than companies expected,” said David Loeb, a former analyst and founder of Dirigo Consulting.
Michael Bellisario, VP and senior research analyst at Baird, said it comes down to March performance in terms of forecasting the full year because January and February were already baked into full-year expectations. Because of that, analysts are likely to pepper hotel executives with questions about preliminary April performance looking for any sign of a bounce back or a continued downward trend.
“They’ll be more focused on April trends and how they’re potentially looking better,” he said. “In a macro-sense May, June and July are the more important travel months.”
No one expected Q1 2019 to be particularly strong, but the fact it was weaker than already low expectations was concerning, Bellisario said. He noted there are several factors feeding into the weak quarter.
“Select-service (real estate investment trusts) were negatively impacted from tough hurricane comps, and we’ve finally started to lap that,” he said. “Everyone thought March would be better with the Easter calendar shift, but that didn’t play out as hoped. A handful of REITs had some renovations they hoped would provide tailwinds.”
And it’s not just the REITs that will have to account for weak performance. C. Patrick Scholes, managing director for lodging, leisure and gaming equity research at Suntrust Robinson Humphrey, said domestic RevPAR results were “light for Hilton, Hyatt and Marriott.”
“We estimate RevPAR growth for U.S. full-service branded domestic hotels (the typical Hilton, Hyatt or Marriott hotel) will finish flattish,” he said via email. “We estimate that the overall industry will finish approximately +1-2% due to relative outperformance by economy and independent/non-branded hotels.”
When asked to answer the key question of if March is part of a trend or a short-term slow down, analysts leaned toward a more pessimistic outlook.
“I think it’s the start of a trend or the continuation of slowing growth,” Loeb said.
“If it’s one more month of things not being better than expected or average, that creates risk as things are more weighted to the back half of the year to try to get to that midpoint of the guidance range,” Bellisario said. “It’s more about the headline and trajectory of growth. … We probably need a softer April and May for people to buy into that (more pessimistic) narrative.”
Few market bright spots
Bellisario said almost all of the major urban markets underperformed during the quarter, which took a toll on almost all of the REITs as they tend to concentrate their portfolios in the biggest, highest RevPAR markets.
But the lone bright spot was San Francisco, which enjoyed a Q1 bounce back following the renovations and reopening of the Moscone Convention Center. At the same time, REIT executives can’t expect San Francisco to carry their full portfolios indefinitely.
The massive growth seen in San Francisco in Q1 “is not going to be there every quarter,” Bellisario said. “That will be the strongest of the year, so you have to recalibrate expectations. Don’t expect to see 15% RevPAR growth. It should be closer to the high single digit range.”
Companies to watch
Because of the San Francisco bounce back, Bellisario said Park Hotels & Resorts is currently the best-positioned among hotel REITs, and that company is also enjoying “momentum in its stock and the group segment in its markets.”
He said investors will also be keenly interested in the prospects of more M&A, particularly among the REITs. One company that continues to come up in those conversations is DiamondRock Hospitality.
“There’s been more and more water cooler chatter around that name and some others,” he said.
People are also interested to see what Host Hotels & Resorts is poised to do with a strong balance sheet and the possibility of Anbang Insurance Group selling off the former Strategic Hotels & Resorts portfolio.
Overall, Bellisario said more companies are looking to sell assets than buy, with several C-corps selling off real estate assets and REITs like RLJ Lodging Trust and Pebblebrook Hotel Trust continuing to refine their portfolios following large-scale M&A.