According to the Baird/STR Hotel Stock Index, hotel C-corps’ stocks grew almost 50% in 2017, drastically outpacing the wider market, while hotel REITs saw only modest growth.
REPORT FROM THE U.S.—The stocks for hotel industry C-corps had a banner year in 2017, drastically outpacing both the broader markets and hotel real estate investment trusts.
Michael Bellisario, senior hotel research analyst and VP at Baird, said those overall numbers obscure the strength of C-corps and the relative underperformance of hotels REITs.
“It was the year of the hotel brand,” he said. “You look at the subindexes, and it was all the hotel brands. Wyndham, Choice, Marriott, Hyatt, Hilton—all the big-cap names just ripped. For the most part, it was just over 2% growth for the REITs, but there was a wide range of performance in there.”
The Hotel Stock Index’s brand subindex was up 49.9% for full-year 2017, with top performer Marriott International up 64.2%.
Analysts agreed there are a lot of one-time events feeding into the bump for hotels. However, there are also signs that some of the growth can be sustainable.
C. Patrick Scholes, managing director of lodging and leisure equity research for SunTrust Robinson Humphrey, said stock performance for C-corps wasn’t tied to performance at hotels in 2017 in the same way it had been in the past.
“It wasn’t driven by domestic hotel (revenue per available room),” he said. “What really brought up performance for C-corps is the companies paying taxes will be paying less.”
Analysts universally agreed that tax reform was a major catalyst for improved stock performance among hotel C-corps.
Wes Golladay, VP and equity research analyst at RBC Capital Markets, said hotel brands seem to have benefited from an absence in volatility in 2017, which was something that turned investor sentiment against hotels in years prior.
“It seems like we finally recalibrated to a new normal,” he said.
He agreed that tax reform holds particular promise for C-corps, as investors remain hopeful it can spur a boost in business travel.
Bellisario also noted that hotels are poised to boom with strong economic growth, which some investors are projecting, and the industry is benefiting from weakness in other investment targets, such as retail.
“Hotels were in the right spot almost at the right time,” he said.
Scholes said brands also were bolstered by the strength of international performance.
Regardless of what’s behind it, analysts seem to agree the growth seen by some hotel companies has been impressive.
“Here’s a fun fact: Before the (Starwood Hotels & Resorts Worldwide) merger was announced, Marriott had a $17-billion or $18-billion (market capitalization),” Bellisario said. “Today, they’re basically a $50-billion company. … They went from a mid-cap name doing a merger that some people were surprised at in a sector with relatively negative sentiment to a must-own large-cap in five or six quarters.”
Performance varies for REITs
Analysts noted that 2017 was an interesting year for REITs because it seems to be the year their strategies truly diverged. Perhaps not surprisingly, it was also the year their performance diverged.
Overall, the REIT subindex of the Hotel Stock Index grew 2.7% in 2017.
Analysts believed REITs were more affected by the modest growth in hotel performance metrics than their C-corp counterparts. Golladay said the markets they primarily operate in didn’t help in that regard.
“The unfortunate issue is they’re in urban markets with lots of supply, and the incremental negative is a weaker dollar didn’t translate into strong international travel,” he said.
Golladay said when he looks back at REITs in 2017, he thinks about the strategic shift he saw across different companies.
“We finally saw a divergence in strategies which probably should have already happened,” he said. “LaSalle (Hotel Properties) was selling quite a bit and bolstering their balance sheet. That’s now a low-levered company. And others were buying aggressively; RLJ (Lodging Trust) bought another company. Pebblebrook (Hotel Trust) was selling and buying. That divergence was different than what we’ve seen in the past.”
He pointed to Pebblebrook and Chesapeake Lodging Trust as some of the best performers in the space for 2017. Meanwhile, Ashford Hospitality Prime, Ashford Hospitality Trust and Hersha Hospitality Trust had down years, Bellisario noted.
“It was kind of all over the place,” Bellisario said. “There wasn’t a consistent theme for REITs.”
Scholes also noted that because REITs don’t pay taxes like the C-corps, they don’t see the same benefit from investors with tax reform and they don’t typically have international properties to enjoy the benefits of strength in global markets. And while the REITs aren’t in a position to enjoy the tailwinds that boosted C-corps, they are facing the industry’s headwinds.
“You’re seeing labor costs and supply headwinds,” he said. “And while supply growth helps C-corps, it hurts REITs. … You have a much higher cost base for the REITS, and the biggest cost is labor. With a tighter employment market, labor costs are growing faster than RevPAR.”
There’s a lot of reason optimism for hotel stocks heading into 2018, but analysts agreed growth rates, across the board, are likely to be moderate.
Scholes noted there were several one-time events in 2017 that won’t be replicated in 2018, especially for the fastest growing companies like Marriott, which enjoyed a boost from newly negotiated credit-card agreements.
“I’d be surprised to see Marriott at the same growth rate,” he said. “You just can’t. There can only be so many tax cuts and credit card negotiations. And there will be harder comps in Europe and Asia. I’d be surprised if the C-corps have that huge run, but I’d be surprised too if the REITS underperform the overall market.”
Scholes was still positive overall about the industry in 2018. He added the impact of tax cuts is already “priced in” to most stocks at this point, so continued performance will rely on whether the expected benefits, including a boost in business travel, materialize.
“The wild card is if tax savings flow through to corporate demand,” he said.
Golladay shared a similar sentiment.
“I’d say (business travel has to go up),” he said. “If the narrative is supply increases and business travel decreases, people will be disappointed. But the good thing is the indicators (for business travel) are trending higher. There’s always a little lag in that data, but the markets are trying to be forward looking.”
Golladay said one positive change for REITs in 2018 would be a boost to inbound international travel to the major gateway markets they focus on.
Bellisario said the ultimate impact of tax reform is “the biggest thing we’re eyeing” heading into 2018, but hotel investors must be mindful that there are things that can happen completely independent of hotels that could be impactful of how the markets view the industry.
“The question is do dollars get allocated to this sector,” he said. “Nothing can change with hotels but then retail improves and people get all bulled up on retail. Then money could come out of our names. That’s a bit harder to predict.”