Hotel stocks have lost roughly half their value over the past month as hotel companies face steep drops in demand due to COVID-19, and analysts say a prolonged downturn will test companies’ cash reserves.
REPORT FROM THE U.S.—The hotel industry is coping with the beginning of an unprecedented demand shock, and public markets have reacted accordingly, Wall Street analysts told Hotel News Now.
From a hotel demand-impact perspective, the spread of COVID-19 is clearly worse than the black swans that ended the previous two upcycles: 9/11 and the Great Recession, said Michael Bellisario, senior hotel research analyst and VP at Baird.
“The way to fight this (virus) is to shut down economic activity, and unfortunately that hurts hotels,” he said. “The data is going to get worse before it gets better.”
Broadly, markets have taken a beating over the past month as concerns and cases of the new strain of coronavirus grew. As of press time, the S&P 500 was down 29.1% over the past month and the Dow Jones Industrial Average was down 33.6%.
However, analysts pointed out that hotel stocks have had an even worse month than broader markets. The Baird/STR Hotel Stock Index was down 49% for the same time, sitting at 4993.42 a month ago before falling to 2545.38.
A test of liquidity
Multiple analysts said their firms are now taking a more critical look at how highly leveraged some companies are and how likely they are to survive a prolonged period of little-to-no cash flow.
“We’ve moved from a week ago when companies were slashing guidance estimates to today, where we’re now running liquidity analyses and (looking) at who has cash and credit revolver availability,” said Rich Hightower, managing director and lodging research analyst for Evercore ISI.
He mentioned that how much debt a company carries is a big factor in those analyses, but that’s not the only factor, including if those companies have “other sources of liquidity” and access to capital.
C. Patrick Scholes, managing director of lodging, gaming and leisure equity research at SunTrust Robinson Humphrey, noted the demand drop-off has some hotel companies “literally in survival mode right now,” which has contributed to a widespread push to reduce or eliminate dividends.
He said his company has identified five companies as “high risk” among publicly traded hotel companies, all of which are real estate investment trusts. Those companies are: RLJ Lodging Trust, Pebblebrook Hotel Trust, Ryman Hospitality Properties, Park Hotels & Resorts and DiamondRock Hospitality. Pebblebrook and Park have already announced dividend cuts, and Scholes said it’s inevitable for the others to follow suit.
“I think dividend cutting is the least of their worries,” Scholes said. “It’s just necessary.”
Pebblebrook and RLJ are among the highest-levered hotel REITs, Scholes noted, and their stocks have been particularly battered.
Hightower noted that ultimately dividend cuts will be more important as a headline-grabber than a real influence on the market at this point.
“I don’t think investors really care about it either way, to be honest,” he said.
Over the past month, Pebblebrook’s stock fell 75.4% from $24.87 to $6.20 per share. RLJ was down 73.8% from $16.15 to $4.28 per share.
Bellisario added Hersha Hospitality Trust and Chatham Lodging Trust to the companies with high leverage that could face issues.
Depending on how long COVID-19 impacts hotel demand, every hotel company could expect to see cash-flow issues, Bellisario said, but the best-positioned companies include Sunstone Hotel Investors and Host Hotels & Resorts due to their relatively low debt levels and cash on their balance sheets.
Some hotel companies, such as Park Hotels & Resorts, have publicly disclosed plans to suspend operations at some properties while shutting down portions of others. David Loeb, founder of Dirigo Consulting who also serves on the board of hotel REIT CorePoint Lodging, said these types of adjustments will be vital for hotel ownership groups.
“I think closing floors and towers is likely to happen, and that’s just smart management,” he said, noting not every hotel will be able to shut down, and others will likely be used as quarantine sites, ultimately.
It’s unclear how deep and how long these changes will need to be, and Scholes said it’s unclear how long the impacts ultimately will last. He said, though, that while rates have largely held up amid massive occupancy drops, hotel companies are likely to slash rates to induce new demand once the initial wave of concerns pass.
“My personal view is if (rate cuts) don’t happen this month or next, in order to incentivize people to get back on the road, you’ll have to give them attractive hotel rates,” he said. “If history holds, it’s inevitable you’ll have rates cut to get occupancy back.”
Banking relationships will be key
Ultimately, Scholes said companies will need to have good relationships with their banking partners, as many are going to have a hard time living up to their debt obligations.
One thing that makes this downturn different from the last is that those banks are in “an infinitely better position than in 2008 or 2009,” Scholes said. And because the demand drop-off could be prolonged, those banks have little incentive to take control of hotels in the event owners can’t live up to their debt obligations.
“Banks are not in a rush to take keys back,” he said. “They don’t want to be in that business. But that can only last for so long.”
Loeb agreed that banks are not eager “to take ownership of assets in exchange for secure debt.”
“That doesn’t mean there won’t be strategic defaults on some assets, but I think lenders will be extraordinarily patient,” he said.
At the same time, Bellisario said it’s unclear what the hotel industry ultimately looks like coming out of this crisis. He said there’s a possibility for greater flexibility if some unions are willing to accept new work rules, but there’s the downside of investors potentially trying to price the next demand shock into valuations.
“Maybe this is the new downside scenario people use, and the multiples on stocks come down,” he said.