As Americans traveled abroad this spring, the lack of inbound international demand to fill the gap left by domestic travelers was hard to ignore at Host Hotels & Resorts' properties.
Pre-pandemic, international inbound demand comprised about 10% of Host's room nights sold in the second quarter of 2019. But during the second quarter of 2023 and the same quarter a year ago, international inbound demand has accounted for less than 8% of Host's total room nights sold.
President and CEO Jim Risoleo said while that demand segment will eventually recover and provide a tailwind to Host, there are some lingering obstacles in the way of international travelers returning to the U.S., namely the crawling pace of travel visa application approvals and flights between China and the U.S. being a fraction of what they once were.
"Hopefully we can sort out the visa wait times in the U.S., which are 400 days now on average, and it's a real drag on international inbound," Risoleo said during an earnings conference call Thursday afternoon. "As an example, in Canada, you can get a visa from a country that they require a visa for travel to Canada and it’s 55 days. That is the big issue that we as an industry are dealing with through [lobbying organizations] U.S. Travel and through [American Hotel & Lodging Association] as well."
The lack of Chinese travelers has had a noticeable effect on Host's West Coast markets, Risoleo said.
"Pre-pandemic, we had 350 direct flights a week between the U.S. and China. As it sits today, we have 24," he said. "We're optimistic that over time things are going to normalize and that we're going to see the return of the international traveler, which will further bolster our performance."
Risoleo acknowledged Host's properties in San Francisco and Seattle observed "moderating transient demand," which was also factor for its resorts portfoliowide. During the quarter, Host's revenue per available room growth was 2.7% year over year, which was below the company's forecast for the quarter.
"We saw performance weaken in the month of June and that's really when we saw the vast majority of the weakness occur. We went back at the property level and really looked at the assumptions that were in the forecast with respect to transient pickup in the quarter for the quarter," Risoleo said. "You may recall that we had transient pickup as high as 28% in the quarter for the quarter and another quarter was at 20%. Well that didn't materialize for the second quarter.
"We have talked about trends normalizing. ... And we were very, I would say, thoughtful and deliberate about how we expected the second half of the year to play out. And we really washed out a meaningful amount of the transient pickup in the quarter for the quarter, and that led to our revised forecasts."
Host revised its full-year 2023 RevPAR growth downward slightly from between 7.5% and 10.5% to between 7% and 9%. The real estate investment trust anticipates 2023 adjusted earnings before interest, taxes, depreciation and amortization for real estate to land between $1.54 billion and $1.59 billion, when previously it projected between $1.55 billion and $1.63 billion.
Risoleo was asked how long "normalization" of hotel demand and rate would last since many in the hotel industry are using the term to describe how traveler trends have shifted. He said that rates are still holding strong and guests aren't lowering their spending outside the guest room on amenities such as spa appointments and tee times.
"One of the things that has been really encouraging over the course of the last several years is the fact that generally across the board, properties have held rate, and rate integrity has has remained intact," Risoleo said. "There would have to be a real meaningful trade-off, a significant pickup in occupancy before we would consider cutting rates because once you've cut rates, it's difficult to go back the other direction."
It's possible 2023 could be another anomalous year for travel demand as U.S. travelers take fewer international trips next year. Risoleo said much of the travel industry was caught off guard by the lack of domestic demand.
"I don't know if people are going to go to Europe every quarter or if they're going to go into Europe in the second quarter of next year. But clearly, this was a phenomenon that I think everyone missed," Risoleo said. "We're just very comfortable with how the resorts have performed in general, certainly from a rate perspective. The issue was really a slowdown in volume."
Risoleo added he'll be glad when the industry is finished comparing everything to the pandemic years.
"Frankly, I hope we can get beyond talking about 2019 and 2022 and say, 'OK, 2023 is the year we look at and it's our new benchmark and our new base year going forward," he said.
During the second quarter, Host Hotels & Resorts did not announce any new portfolio transactions. Risoleo said the REIT has been monitoring other hotel deals but nothing on the market really jumped out as a potential acquisition target. However, Host would be in a position to deploy capital if any opportunities materialize the rest of this year or in 2024, he added.
On July 6, Host reopened the Ritz-Carlton, Naples resort in Naples, Florida. The resort had been closed since Hurricane Ian hit Florida's Gulf Coast in September 2022. As part of the renovations at the Ritz-Carlton, Naples, Host unveiled the Vanderbilt Tower, a 14-floor addition that added a new Ritz-Carlton Club Lounge and 70 club-level guestrooms. The resort's lobby, outdoor spaces and 474 guestrooms have been redesigned as part of the overhaul.
Quarterly Earnings Performance
During the second quarter, Host Hotels & Resorts reported revenue of $1.39 billion, up 0.9% over the second quarter of 2022, according to its earnings release.
Host's second-quarter net income was $214 million — which was down 17.7% year over year — and adjusted EBITDA for real estate was $446 million, down from $500 million a year ago.
The company's portfolio achieved second-quarter RevPAR of $225.12, which was up 2.7% year over year. Average daily rate was $303.29, which was 2.4% higher than the second quarter of 2022. Hotel occupancy was 74.2%, up 0.3% from the same quarter in 2022.
As of press time, Host's stock was trading at $16.80 per share, up 4.6% year to date. The Nasdaq Composite Index was up 6.3% for the same period.