During the fourth-quarter and full-year earnings season, hotel executives provided a window into their expectations for how U.S. tax reform will benefit their companies.
REPORT FROM THE U.S.—While it’s only been a matter of months since the United States Congress passed a comprehensive tax-reform package that greatly scales back the corporate tax rate for the country, investors and analysts are eager to find out exactly what the impact will be on the hotel industry.
During the recent fourth-quarter and full-year 2017 earnings season, executives with various companies shared their insights into what they are seeing in terms of tax reform and their long-term expectations for the law.
David Wyshner, EVP and CFO, Wyndham Worldwide
“The recently enacted Tax Cuts and Jobs Act is good news for us. In the fourth quarter, we recorded a $415-million non-cash tax benefit as we reduced our net deferred tax liability because of the new lower federal rate. Even more importantly, we expect that our effective tax rate applicable to adjusted pre-tax earnings will be approximately 25% going forward, about 12 points below where it was previously. And over time, our cash tax rate will be around 19% instead of 30% previously. This will enhance our free cash flow by around $100 million a year. Over time, we expect that tax reform will allow us to invest more in our business and to have more cash flow available to return to shareholders.”
Chris Nassetta, president and CEO, Hilton
“Overall, we think (tax-policy changes) will be good for the broader economy, be good for the lodging industry, it will be good for Hilton and believe it will ultimately drive incremental demand and free cash flow. Consistent with our previously articulated capital allocation strategy, the bulk of our tax-reform benefits will be returned to shareholders.”
“Broadly, as (tax reform) relates to business transient (business), I would say there are reasons to be optimistic. We started to see that show up in numbers at the end of last year. I think we’ve seen that continue into this year. I would say it’s still early days in the sense that it’s not consistently better. It’s been a bit choppy, but my expectation is if forecasts are right that this is going to help move (gross domestic product) growth up a little bit. And given the optimism that I’m sensing from a lot of our big customers and broadly across a bunch of different industries, it’s going to help drive better corporate transient growth than we had last year, which as you will recall looking at the numbers, was very anemic.”
Ross Bierkan, president and CEO, RLJ Lodging Trust
“While we see potential demand upside from tax reform and infrastructure spending, the degree and timing of any such benefits are difficult to predict. So, while we anticipate a positive backdrop for the industry in 2018, new supply growth in urban markets is higher than the national average, tempering expectations for urban-focused portfolios.
“We see some positives, for sure. I mean you know the intangible is the stronger economic backdrop both domestically and abroad, and we're all hoping that tax reform is stimulative for corporate travel going forward. We saw that nice surge in the fourth quarter but you know one quarter does not a trend make, and so we're all watching for that. We certainly didn't want to set our guidance based on being over optimistic on that front, but it will unfold over the next couple of quarters.”
Dominic Dragisich, CFO, Choice Hotels International
“We are very encouraged by the impact tax reform will have on our corporate results and the potential benefits it may provide to our franchisees. The reduction of our corporate tax rate to 21%, the creation of a territorial tax system in the immediate capital expensing of certain qualified property is expected to lower our annual effective tax rate to 23%. This represents a $25-million reduction in annual cash tax payments.
“In addition we're projecting access to an additional $25 million in cash annually related to foreign earnings. Finally, the mandatory repatriation provision of the tax-reform legislation resulted in a repatriating approximately $20 million of foreign earnings in the first quarter of 2018. These repatriated earnings were used toward funding our acquisition of WoodSpring Suites, which we're excited to welcome to our family of brands.”
Tom Baltimore, president and CEO, Park Hotels & Resorts
”Despite the continued softness in the corporate transient segment, we remain encouraged by the broader macro environment and the potential uptick in corporate demand supported by strong corporate profits, comprehensive tax reform, low unemployment and increased business investment spending.
“Looking more closely at our quarterly performance across our core markets, Orlando was by far our strongest performer, posting a (revenue per available room) gain of 10% for the quarter. Our Bonnet Creek complex of hotels far exceeded expectations, with RevPAR growth of 13% at the Hilton and Waldorf Astoria hotels due to rising transient demand in the market as well as some residual demand from Hurricane Irma. Overall, stronger operational performance, coupled with lower real estate taxes, led to a 400-basis-point increase in hotel-adjusted (earnings before interest, taxes, depreciation and amortization) margin during the quarter.”
Jim Forson, EVP and CFO, La Quinta
“For the fourth quarter, we reported net income of $121.2 million, which includes approximately $132 million of income tax benefit arising from the application of the new tax laws to our financial accounts, and more specifically, the effect of lower corporate tax rates on our deferred tax liabilities. On an adjusted basis, we reported net loss of $6.4 million.
“Earnings per share was $1.03, which includes approximately $1.13 of benefit related to the new tax laws. On an adjusted basis, we reported a net loss per share of $0.05.
“For the full year, we reported net income of $152 million, again, inclusive of the application of the new tax laws as compared to a net loss of $1.3 million last year. Adjusted net income was $34.4 million compared to $58.3 million in 2016.”
Leeny Oberg, EVP and CFO, Marriott International
“Our fourth quarter GAAP results also reflect the impact of U.S. tax reform passed in 2017. The fourth quarter included a $745-million provisional transition tax on Marriott's accumulated foreign earnings, $159-million favorable revaluation of our deferred tax liabilities and a favorable $19 million of other tax impact. In total, the Avendra transaction in 2017 tax legislation reduced our fourth-quarter GAAP net income by $167 million, and diluted EPS by $0.45.”
Arne Sorenson, president and CEO, Marriott International
“I've been struck by how broad the optimism is among U.S. corporate CEOs, really dramatically improving post tax reform. But the tone, for example, in many of the conversations I've had with folks is really quite bullish. That doesn't, sadly, immediately translate into somebody saying, therefore, I'm going to have our team out there spending more money on hotels. I think in a sense, that's a detail, if you will, from at least most CEOs' perspectives. But I think if that optimism translates into better corporate profits, if it translates into more investing activity by companies, I think inevitably, we'll see that that is positive for corporate demand for our industry.”
Pat Grismer, CFO, Hyatt Hotels Corporation
“I’d like to briefly address two items that had a material impact on our reported net income for the quarter. The first is the sale of Avendra to Aramark for which we recognized a gain of $217 million during the quarter, as disclosed previously. The second is the significant impact of new U.S. tax legislation on our Q4 tax expense and effective tax rate. While the reduced U.S. corporate tax rate will have a positive impact on our tax expense going forward, the revaluation of our deferred tax assets and a one-time repatriation tax on foreign earnings results in a $110 million additional expense, primarily noncash and an effective tax rate of 74% for the quarter, driving our full-year rate to 56%. Absent these tax adjustments, we would have finished the year with a full-year effective tax rate of 37%, in line with our prior guidance, both the Avendra gain and the U.S. tax reform-related charges are reported outside of adjusted EBITDA and have been characterized as special items.
“When you think about the global portfolio of earnings, we do have a certain percentage that is taxed here in the U.S., but we do have international income taxed at various rates, depending on the jurisdictions where that fee income is earned. And, so, it really is a blend of U.S. and international but also incorporates state tax, and that’s all working in this range that we’ve given of 27% to 31%. … We are taking a provisional approach in establishing those estimates, both for 2017 and for 2018, because as weeks go by, we continue to learn a lot more about various aspects of the new tax legislation that do have some effect to how we account for and quantify various effects. So, we do expect over the course of the year to tighten that range, but we felt that it was prudent given where we’re at in the process to go out with a range of 27% to 31%.
“The other thing I would highlight is that it’s not just the headline corporate rate that has changed, but there are also certain other provisions that are unfavorable, and those are incorporated into the guidance that we’ve given.”
Mike Barnello, president and CEO, LaSalle Hotel Properties
“Looking more broadly now, we suspect many people are hopeful that there are potential catalyst for demand improvement in the future coming from tax cuts, increased international demand and increased corporate travel.
“We too hope these will turn into benefits in 2018, however we feel it is more responsible to be cautious at this point of the cycle. With a prospect of negative RevPAR in 2018, we are focused our budgeted expenses in an efficient way. You've heard me mention that we were able to reduce expenses by 1% in 2017 and a negative 1.8% RevPAR as for Key West.”
Paul Edgecliffe-Johnson, CFO, InterContinental Hotels Group
“We continue to expect U.S. tax reform to benefit our group effective tax rate by mid- to high-single-digit percentage points from 1 January 2018, taking it to mid-to-low 20%s. This benefit will flow through to our cash tax rate, which we now expect to be in the high-single-digit percentage range in 2018, due to tax payments made on account in 2017. This will trend closer to the P&L rate over time.”
James Risoleo, president and CEO, Host Hotels & Resorts
“While we are also hopeful tax reform will prompt corporations to increase their travel spend this year, we have not included the benefit of the Tax Cuts and Jobs Act in our outlook. As I said, we are cautiously optimistic, but realize it is only February and we have a long way to go in 2018.”