While the publicly traded hotel companies continued to enjoy solid, if unspectacular, fundamentals through 2018 and into 2019, analysts said their stock performance suffered due to overly negative sentiment about the industry and drops across markets.
REPORT FROM THE U.S.—If you looked at hotel stocks in 2018, it’d be easy to draw the conclusion that the industry is faring poorly.
Analysts who cover the publicly traded hotel companies agreed the industry continues to see decent but not dazzling performance metrics, but investors hold a perhaps overly pessimistic view on hotels and drops in the broader markets have pushed down performance for hotel stocks.
“Overall for both 2017 and 2018, underlying supply and demand fundamentals were very steady,” said C. Patrick Scholes, managing director of lodging, gaming and leisure equity research for Suntrust Robinson Humphrey. “However, stocks have been much more volatile, but that’s more of a reflection of a political climate that has created more volatility.”
Michael Bellisario, VP and senior research analyst for Baird, also noted the news on the ground doesn’t reflect the performance on Wall Street.
“It’s good, but could be better,” he said. “Demand continues to be resilient and surprisingly steady. In the conversations I’ve had with people, they were surprised that every month but September they were plus or minus within budget. But the markets have been volatile.”
Expectations for 2019
Both Bellisario and Scholes noted that the poor stock performance in 2018 sets up opportunity for long-term investors in 2019.
“It sets up stocks pretty good because they’ve fallen so far,” Bellisario said. “They’re due for a bounce because they’re just too cheap.”
Overall, Bellisario described his outlook as fairly positive, but some uncertainty still remains. He believes the first quarter of the year should be telling.
“We’re in a waiting phase now,” he said. “There was a big downdraft in November and December, so you ask, ‘Does that lead to softening 90 to 120 days from now?’”
He said one thing that is reassuring is the continued strength of macro indicators like consumer confidence.
Scholes said it’s fair to expect continued solid unit growth from the C-corps, particularly Marriott International and Hilton, but the hotel real estate investment trusts face major challenges in containing costs related to labor.
David Loeb, a former analyst and founder of Dirigo Consulting, admitted hotel owners face significant headwinds to their bottom lines, most notably increasing labor costs and property taxes, but noted conditions are set up for a bounce back. But he believes 2019 will be set apart from recent years by the fact that there will be greater variety in how companies perform in the stock market.
“It will be sloppier, with more variance in public company performance,” he said. “Some should have pretty good results, particularly those heavily weighted to San Francisco.”
He said the REITs with heavy presence in that market, like Chesapeake Lodging Trust, Pebblebrook Hotel Trust and Park Hotels & Resorts, are well-positioned heading into 2019.
“If you look at the (San Francisco) convention calendar, it’s a giant shift. It’s like all the business is draining down from markets across the country and into San Francisco,” he said, noting there is a pent-up demand for that market following the prolonged renovation work at the Moscone Center.
The other side of that coin is that markets like Boston, Chicago and New Orleans have softer conventions years. Several sources also noted Washington, D.C., could suffer based on its weaker convention calendar and the lingering effects of a federal government shutdown with no end in sight.
“Outside of hotels in D.C. and national parks, there’s not been much impact from the government shutdown, but if we come back in a month and it’s not resolved, there’s probably a bit more impact,” Scholes said.
Bellisario said the shutdown is “more of a sentiment headwind in the short term” and overall not a good thing to start a year off with that sort of looming issue.
He said the current elevated level of market volatility has actually benefited non-hotel REITs as real estate is often viewed as a safe haven for investors, but hotels REITs are viewed as a riskier bet and haven’t benefited in the same way.
Scholes said investors might be swayed if hotels can maintain strong yields.
“For the hotel REITs, the good news is the dividends they’re going to pay,” he said. “Yields of 5% to 7% are attractive.”
Loeb warned the potential bad news will be things hoteliers can’t plan for, like further hurricanes or some unexpected black-swan event.
“This is a year where if there are surprises, they’re not going to be positive ones,” he said.
The silver lining, according to Wes Golladay, VP and equity research analyst at RBC Capital Markets, is performance of hotel stocks in 2019 should be more based on what happens within the hotel industry than 2019 itself.
“We don’t have a pinpoint number (for performance), but we do expect a cleaner year,” he said. “It will be a more industry-specific year.”
Golladay said there are several reasons to feel at least somewhat optimistic, including the fact the industry won’t have the same issue of tough comparisons like it did in late 2018 and several of the REITs are wrapping up broad renovations programs, which he said were well-timed in retrospect.
“With easier comps and less integration issues, it should be a positive setup,” he said. “But the big wild cards are the macro (economy) and things like how long the government shutdown lasts.”
But investors with less familiarity about hotels are still in “show-me” mode because the general perception is the hotel industry is more susceptible to economic volatility than other forms of real estate, he said.
“People want to get the guidance out of the way because visibility in the lodging sector is low,” he said.
Companies to watch
Marriott International remains the 800-pound gorilla in the hotel industry, analysts agreed, and that company has several different story lines heading into 2019, including how it copes with a yearslong breach of legacy Starwood Hotels & Resorts reservations systems announced late in 2018 and continued integration hurdles with Starwood’s systems and sales force.
“Those are the hiccups owners have talked about, and resolving those things will be a big, industrywide focus,” Bellisario said.
Analysts are also on the lookout for continued brand rollouts from Hilton and what Hyatt Hotels Corporation will do next in terms of its planned sell-down of owned real estate.
“My favorite (company to watch) continues to be Hilton,” Scholes said. “They have a great pipeline, and their current valuation is not bad at all.”
Bellisario said he’s also interested to see what the next steps are for some of the more cash-rich REITs like Sunstone Hotel Investors and Host Hotels & Resorts. He noted he still views hotel REIT M&A as unlikely, but there is transactions news to keep an eye on, including how market volatility might impact Pebblebrook’s plans to sell some legacy LaSalle Hotel Properties assets.