Analysts expect low-growth talk from REITs, C-corps
Analysts expect low-growth talk from REITs, C-corps
22 OCTOBER 2019 8:41 AM

Wall Street investors typically want to hear why a company is poised to enjoy outsized growth in the near future, but analysts said that simply isn’t the reality for hotel companies in the third quarter of 2019.

REPORT FROM THE U.S.—Investors looking for a catalyst to spark growth in the hotel industry during the third quarter earnings season are likely in for disappointment, according to analysts who cover the industry.

The current low- to no-growth environment is expected to dominate the talk throughout the discussions during earnings calls with U.S.-based, publicly listed hotel companies when they start later this week.

C. Patrick Scholes, managing director for lodging, leisure and gaming equity research at SunTrust Robinson Humphrey, said he doesn’t see anything on the horizon to change the industry’s current trajectory, which won’t be enough to appease Wall Street.

“I struggle with trying to find that catalyst,” he said. “If there is, it’s going to be something out of the control of (hotel) companies. I don’t know what that stimulus will be, especially with Congress and the executive office having bigger fish to fry.”

Scholes said he is currently working under the assumption of “not much if any growth” for the foreseeable future.

“If I had to put a stake in the ground, I’d probably say the bottom for RevPAR probably will be Q3 2021,” he said. “So that’s two years of gradual growth.”

Rich Hightower, managing director of real estate investment trusts and lodging research at Evercore ISI, said investors will be most interested in hearing companies’ early guidance for 2020, and it is unlikely they will be swayed by any overly optimistic predictions.

“The C-corps will put out their initial 2020 RevPAR guidance in a couple of weeks, and most are expected to be in the flat to 2% growth range,” he said. “To get to the high-end of that guidance strains believability, but how the market reacts to (that guidance) is an open question. We’ll find out.”

Scholes said investors could have lingering feelings related to overly optimistic outlooks for 2019.

“Two percent growth is pretty darn optimistic, and anything above that will not be believed by the Street,” he said. “It’s not dissimilar from Hilton guiding at 2% to 4% last year. Nobody believed it, and ultimately it didn’t come true.”

From his perspective, Hightower believes that in 2020, “negative RevPAR is probable even without a recession.”

Michael Bellisario, VP and equity research senior analyst at Baird, similarly said a jump in performance is unlikely without some unexpected, outside catalyst, projecting major players like Marriott International, Hilton and Hyatt Hotels Corporation to issue guidance in the 1% to 1.5% range “unless something changes in the global market place.”

He noted the C-corps have a somewhat easier sales pitch to make to investors than real estate investment trusts, because they can still show global net unit growth, which can provide a path to greater earnings even in a low to no RevPAR-growth environment.

“That’s how they can maintain their valuations,” he said.

Pessimism seems to reign on the side of the REITs though, where Bellisario said “every data point we get is not positive.” However, investors need to be mindful that REIT-quality hotel assets continue to trade at healthy valuations in private markets and “can be sold easily for the most part,” he said.

Pressed for what might be a silver lining for hotel companies—REITs in particular—in the quarter, Bellisario said there likely isn’t one.

“The best thing that can happen for them is flipping the calendar to 1 January,” he said.

It’s still unclear exactly what impact this will have on the stocks of these companies, although Bellisario said some of this pessimism could already be priced in. At the same time, companies don’t seem to be seeing the typical rewards for stock buybacks or lowering leverage levels.

Companies to watch
Investors agreed that Park Hotels & Resorts is one of the most interesting companies of the quarter, as Park executives begin to digest the acquisition of Chesapeake Lodging Trust and seem to be coping with a dislocation in their stock price.

Park’s merger “just closed prior to the end of the quarter, so we’ll be getting updates on synergies and the underlying performance of the portfolio,” Hightower said. “We’ll want to find out where the fundamentals are today versus when the deal was first announced and if their thesis still holds up.”

Bellisario said some investors are looking at Park similarly to RLJ Lodging Trust, which acquired Felcor Lodging Trust, and Pebblebrook Hotel Trust as it deals with its recent acquisition of La Salle Hotel Properties and underperformance related to that deal—which has created a wide range of views.

“They’ll want to create a new set of expectations because (opinions) are all over the place,” he said.

He noted Park is likely to take a hit from the fact that Chesapeake had outsized exposure to urban transient business, which has taken a dip recently, and because the company has higher leverage than it’d like due to the deal.

Another company of interest for analysts is Pebblebrook, which is roughly a year out from the acquisition of LaSalle.

“It’s always good to do a post-mortem on deals like that, so hopefully we get some of that from them,” Hightower said.

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