Publicly traded hotel companies with a broad global reach were well-positioned in the second quarter amid a surge in international travel, while key metrics dipped for U.S. companies focused on domestic travel, according to analysts.
Major hotel brands such as Marriott International, Hyatt Hotels Corp. and Hilton continue to lead the way, in part due to the companies’ international reach. Hotel REITs, however, experienced some slowing of top-line revenue, and their second-quarter results are projected to be worse than expected at the end of the first quarter.
“It’s a real mixed bag right now,” said C. Patrick Scholes, managing director of lodging and leisure equity research at Truist. “That’s going to depend on geographic strengths and weaknesses, depending on geographic location and customer mix.”
Hotel Brands
During second-quarter earnings calls from hotel brands, analysts will be most keen to hear about the sustainability of strong international travel. Michael Bellisario, director of equity research and senior analyst at Baird, said the higher-end hotel brands performed well in the second quarter thanks to this demand segment.
“Marriott, Hilton, Hyatt, the higher-end hotels continue to perform better. International is knocking the cover off the ball; that’s going to be the driver for them this quarter. Softer domestic, better international, bigger operating leverage in the model,” he said.
Whether this pickup in international travel is a result of temporary “revenge travel” or a trend moving forward remains to be seen, Scholes said.
“This year, we're clearly seeing, as evidenced by soft year-over-year leisure RevPAR numbers in the United States, there was certainly some revenge travel last year that's not being replicated this year, at least domestically,” he said. “Some of that business has gone to Canada, Europe, Caribbean, but how much of that is sustainable?”
U.S. mountain and beach resorts were pricing at record levels the previous two summers since the option for international travel wasn’t there due to the pandemic, Scholes said. Those properties are going to have to deal with rising labor and insurance costs while also being in a difficult position to raise rates.
On the other side of the coin, there’s been slower growth in the lower-end chain scale. Brands will need to answer whether this is due to tough comparisons year over year, inflation having an impact on consumers of this scale or if the underlying fundamentals are slowing, Bellisario said.
He said brands are likely to face questions about net unit growth, construction delays and their ability to hit targets set in the second half of 2023. Another focus will be on whether rates can continue to accelerate into 2024.
Hotel REITs
Investors listening in on hotel REITs' second-quarter earnings calls will be interested in hearing about the outlook on expenses, Bellisario said. Top-line revenues are behind the expectations set at the end of the first quarter, and the addition of higher insurance renewals, property taxes and wages hurt margins as well.
“It’s another quarter for the REITs of slowing top-line growth, higher expense growth, flat-ish to negative in some cases year-over-year [earnings before interest, taxes, depreciation and amortization] growth and significantly negative margins — probably the most negative margins and the toughest comp will be in [the second quarter],” he said.
There will be an increased focus on third-quarter projections since some REITs, such as RLJ Lodging Trust and Pebblebrook Hotel Trust, have posted negative preliminary results this quarter.
“That kind of sets the tone there,” Scholes said. “It’s not disastrous by any means, but for many of the hotel REITs, things were soft.”
Investors won’t necessarily be listening for more announcements on loan terminations or handing hotels back to lenders, as those situations were more specific, Bellisario said. Park Hotels & Resorts ceased payments on a loan that covers two San Francisco hotels in June, and Ashford Hospitality Trust announced on July 7 that it has plans to turn in keys on 19 hotels.
Mortgage debt is generally well-capitalized and small, so the worst-case scenario for other companies would be to pay properties off with cash. Bellisario said Ashford and Braemar Hotels & Resorts are two REITs to keep an eye on in regard to floating rate debt extension tests.
Scholes said he’s interested to hear from Ryman Hospitality Properties on group booking projections for next year. REITs had the benefit of an easy competitive set this year, but 2024 year-over-year comparisons will be a sign of the segment’s sustainability.
“Group continues to be the outperformer of the customer segments domestically. How long can the good times last for group?” he said.
Bellisario said there’s not much transaction activity expected from the REITs, and he expects some moderation in stock buybacks because of where the cost of capital is.