Analysts expect M&A, disruptors to headline Q3 calls
 
Analysts expect M&A, disruptors to headline Q3 calls
24 OCTOBER 2018 8:20 AM

More information about the Pebblebrook/LaSalle deal, global RevPAR growth and Marriott International’s loyalty integration are among topics analysts are listening for on upcoming third-quarter earnings calls.

REPORT FROM THE U.S.—The start of the third-quarter earnings season has arrived, and hotel analysts and investors will be looking for some answers from executives at hotel real estate investment trusts and C-corps.

Hotel News Now reached out to a group of hotel analysts to find out what they expect to hear from company executives and what questions they hope to have answered about this quarter and those in the near future.

Hotel REITS
The Pebblebrook Hotel Trust call is going to be interesting, said Rich Hightower, managing director at Evercore SI. It’s close to finalizing its acquisition of LaSalle Hotel Properties, he said, and its stock has underperformed the last several months “pretty significantly.” Company executives will have to answer a couple of questions during the call.

The second phase of its asset sales will occur after the deal closes, Hightower said. Those announced are under contract with little risk to the deals closing, he said, but others not yet named have some execution risk. Investors have some concerns about that risk, valuations and cap rates.

Once the two companies come together, “what is the pro forma growth organically going to look like next year?” he asked.

Pebblebrook has a lot of exposure to the San Francisco market, Hightower said, and the acquisition of LaSalle’s properties has diluted that somewhat.

All eyes are on the Pebblebrook/LaSalle deal because it’s been out there since March, said Michael Bellisario, VP and equity research senior analyst at Baird. Pebblebrook chairman, president and CEO Jon Bortz has been a good capital allocator, he said, and he’s curious to hear what additional information the company will provide.

This deal is the second stock-for-stock deal seen in the last couple of years, Bellisario said, and these types of transactions have not gone as most people thought they would have.

Hotel C-corps
Marriott International is the current top pick in the space for stock underperformance, Hightower said, and that’s from a long-term fundamental view and cash-flow view. The company suffered some hiccups last quarter, including the group sales integration.

“Have they ironed out some of that disruption?” he asked. “Is the group sales machine working as it should? Have they lost any market share to competitors in that meantime? That impacted several REITs last quarter.”

Marriott combined its loyalty programs in August, he said, so investors will want to know if there is any preliminary assessment. They’re looking to see if there’s any attrition in the programs or, conversely, any increase in signups, he said.

Hilton, Hyatt Hotels Corporation and Marriott are each looking at 1% to 3% revenue-per-available-room growth in 2019, Bellisario said, but most people assume that range actually means 2% to 3%. While performance growth in North America has been steady, international growth is the wild card, he said.

Marriott is focusing on its loyalty program integration, he said. The company now has 110 million rewards members, and about 10,000 to 25,000 of those are upset by it.

“It’s a good story for the media, but it doesn’t change the franchise value,” he said. “Integration is one of the things to work through.”

Bellisario doesn’t think any of the initial integration issues have affected the third-quarter results in a material way, he said.

Wyndham Hotels & Resorts ran into some issues following the release of the second-quarter print, said C. Patrick Scholes, managing director of lodging, gaming and leisure equity research at SunTrust Robinson Humphrey.

“We believe the primary controversy revolves around the company hitting their net rooms growth target,” he said. “Guidance for 2018 is 2% to 4%, and the company did approximately 1.5% in organic net growth in the first half.”

That implies Wyndham needs a “sizable step up” in the back half of the year to hit the low end of the target, let alone the high end, Scholes said. While the low end is likely achievable, the high end is a tall order, he said. Hitting room growth targets is not only an important driver of earnings, but for investor sentiment as they have historically ascribed a higher valuation multiple to companies that liver the highest net room growth.

To bridge this valuation gap between itself and its peers, a stronger pipeline of new rooms is important, Scholes said. However, that’s something that takes years to do, not something easily changed in a quarter or two.

Looking ahead
The global 2019 RevPAR guidance from C-corps will be a big driver for the year end, Hightower said. His company is expecting a systemwide range of 1% to 3% growth, and that essentially includes steady year-over-year growth in the U.S. while there are tougher comparisons internationally.

Hightower said he wants to hear, primarily from REITs, what the latest takes are on operating expense growth, particularly labor. There are a number of high-profile union renegotiations, and those who are in locations where the economy and RevPAR are accelerating could see some degradation if wages exceed the top line.

Tariffs are another form of expense growth, he said, but that could present a bullish argument if it restricts new supply—at least from an existing owners’ perspective.

“Slowing supply growth, conversely, is a negative argument for the C-corps,” Hightower said.

There will be a sharper focus on 2019, Bellisario said, looking at which markets will over perform and which will underperform. Not every market next year will look like San Francisco, he said, and the slope of growth trajectory has flattened a bit.

It all depends on where stocks are for the next couple of weeks, Bellisario said, as most companies are not in stock buyback territory.

Scholes said he expects to hear big-picture questions centering on the trade war affecting everything, including corporate transient rate negotiations, hotel development and China’s RevPAR weakness. Group and convention bookings could be a strength or weakness in 2019, he said, and owners will see continued pressure on margins due primarily to wage inflation and the expected outperformance in San Francisco.

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