Analysts: Q1 performance shaping into a yearlong trend
Analysts: Q1 performance shaping into a yearlong trend
22 JULY 2019 9:38 AM

Hotel industry analysts say the second quarter earnings calls from publicly traded hotel companies should sound fairly familiar to those paying attention to the results from the first quarter.

REPORT FROM THE U.S.—Publicly traded hotel companies had a rough start to the year, and as they prepare now for their upcoming second-quarter earnings calls, industry analysts are expecting to hear a bit more of the same.

The hotel industry continues to post revenue-per-available-room growth, but it’s slower growth, said Michael Bellisario, VP and equity research senior analyst at Baird. While growth is growth, from an investor standpoint, that’s not a positive, he said.

The hotel industry is late in its cycle, and if it’s coming down, it’s a softer landing compared to 2008 and 2009, he said. However, when compared to how the overall economy and stock market are performing, there’s a divergence.

“It’s broadly disappointing to see but not surprising given where the cycle is,” he said. “There’s only so many hotel rooms you can fill each night, and you’re bumping against ceilings for occupancy and rates. It’s disappointing in that it continues to slip and slide into incrementally slower growth.”

The C-corps
The major brand companies, particularly Marriott International and Hilton, spoke about gaining market share during the first quarter, said C. Patrick Scholes, managing director for lodging, leisure and gaming equity research at Suntrust Robinson Humphrey. They should report similar results during this quarter to come in at the low end of their Q2 guidances, he said.

“If, for whatever reason, they don’t take a similar amount of market share, they’re going to miss guidance,” he said.

The C-corps will also reiterate their guidances for new-unit-growth percentages, Scholes said. While he doesn’t expect any of them to revise those numbers down, he said if any of them do, that is going to be a clear negative.

RevPAR growth is going to come in lower than expected, with many hotel C-corps looking at about 1% growth, Scholes said, adding that he expects it to be closer to zero. The RevPAR guidance they will provide will be “uninspiring,” he said.

“Let’s put it in perspective here,” he said. “We’re going on 10-plus years into a cycle. The fact we might squeak out RevPAR growth is pretty amazing. It’s just an elongated slow growth cycle, and we’re in the late innings here. Look historically at where we have been, and it could have been far, far worse at this juncture.”

The hotel brand company executives have been optimistic about gaining share and the continued strength in their global development pipelines adding dots on the map, Bellisario said. However, they fundamentally will have to acknowledge things have been a bit slower.

“The higher end of the guidance is not really achievable at this point,” he said.

C-corps’ values are decoupling from the REITs, said Rich Hightower, managing director of real estate investment trusts and lodging research at Evercore ISI. As they have moved into their asset-light models, they’re being compared to REITs less frequently and more often to other franchise unit growth stories in the consumer sector, such as quick-service restaurants. The hotel C-corps look pretty attractive when comparing against that industry in terms of same-store growth, unit growth and valuations, he said.

The top line is going to come in at varying degrees for many REITs, but it will likely be worse than anticipated 90 days ago, Hightower said. Earnings before interest, taxes, depreciation and amortization margins see costs growing at a faster rate than RevPAR or total revenue, he said.

Hightower didn’t comment specifically about the recently announced acquisition deal between NexPoint Hospitality Trust and Condor Hospitality Trust, but as a general rule, he said, investors would like to see more consolidation among hotel REITs.

“Finding willing sellers (less so willing buyers), plus lack of dispersion in trading multiples, seems to be the big impediment to getting more deals done,” he said. “Of course, I could have said the same thing five years ago.”

RevPAR is no friend of REITs right now, Scholes said. Each hotel REIT has cost-control plans and methods, and they need to hit their targets on cost controls to hit their goals. While he expects most will, there will be one or two that come up short, he said.

REIT executives are facing top-line pressures and what look to be pretty sustained expense pressures with no relief in sight, Bellisario said. They’re going to face a downer quarter in terms of sentiment, and executives will talk about challenging fundamentals and how things are softened without actually falling off a cliff, he said.

“It’s hard to create value,” he said. “Everyone’s top line is being impacted. Everyone is facing cost pressures.”

Looking ahead
Resort fees, particularly urban resort fees, could become a problem, Scholes said. As public sentiment against these fees grows, hotel companies might turn to disclosing the fees alongside rates in advertising.

“While that won’t sink the industry, it won’t be a positive,” he said.

There’s a modest uptick in group and convention bookings, but by 2021 that pace decelerates, Scholes said.

Some of the optimism expressed earlier in the year comes from executives being hopeful the near-term trends wouldn’t be as soft, Bellisario said. Guidance was more weighted toward the back half of the year, but it doesn’t appear that’s how 2019 will play out.

The industry experienced a handful of soft months by the time of the Q1 earnings calls and hoteliers hoped the rest of the year would go as projected, he said. Now that the industry is six months into the year, four of those months were weaker than expected.

“That means a trend has formed,” Bellisario said.

What to listen for
Hightower said he wants to hear about what Park Hotels & Resorts is seeing as it continues its acquisition of Chesapeake Lodging Trust.

“You want to make sure the aspects of the thesis are still intact as it is proceeding toward closing the deal,” he said.

Among the C-corps, Hilton is the first company to report, so it will set the tone from a macro perspective, Hightower said.

Hyatt Hotels Corporation has recommitted to its $1.5-billion asset sale program and use the proceeds to buy back stock, he said. The stock has performed as well as predicted, he said, so he thinks the company will be an interesting one to watch.

Wyndham Hotels & Resorts has been the value name among the C-corps companies, Scholes said. The company has a good cash-flow story, and midscale and economy hotels are less volatile.

Bellisario said he’s interested to see how the asset disposition and stock buyback theme plays out among the REITs, with RLJ Lodging Trust, Host Hotels & Resorts and Pebblebrook Hotel Trust among those likely to do it. There are going to be a lot of eyes on Park because of the Chesapeake deal, he said.

Generally speaking, stock prices are down and fundamentals are a bit softer, he said. The public-to-private spread is a bit wider, and it will be interesting to see who takes advantage of that, he said.

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