As publicly traded hotel brand and real estate investment companies hold their third-quarter earnings calls, investors and analysts are seeking answers in an uncertain environment.
Investors want to know more about the dynamics at play behind hotel performance during the quarter, said Michael Bellisario, senior research analyst at Baird Capital. That applies to both the hotel brand companies and the real estate investment trusts.
Bellisario said that during several meetings on a recent business trip to New York, people were interested in the latest news, data and trends, among other observations.
“There’s lots of cross currents and good and bad consumer data points, and lots of consumer-focused stocks have not done well,” he said. “Investors are simply trying to figure out what’s going on, specific to hotels, but just more broadly what is the health of the consumer.”
They want to know why the low-end of hotels are soft, the high-end is still strong and all the drivers behind this, he said.
“It’s not a lot of conviction in either direction,” he said. “It’s, ‘Tell me what you’re hearing and tell me what you’re seeing, because I’m seeing mixed data points.’”
Brand expectations
There will be a number of underlying themes during the brands calls, said C. Patrick Scholes, managing director of lodging and leisure equity research at Truist Securities. One is the ongoing bifurcation of demand, with the higher financial demographic carrying a lot of the weight while midscale and economy hotels aren’t doing so well. This will continue into the fourth quarter and into early next year at the least.
Full-service hotels will have stronger performance, and that’s not necessarily because of any green shoots, he said. Last year was the U.S. presidential election, and that typically brings about less business travel in the weeks leading up to it.
“So, you have a really easy comp,” he said. “If nothing else, that will give you better RevPAR growth rates.”
The brands with a lot of exposure to the midscale and economy segments have seen their stock prices underperform, and that’s reflected in sentiment, positioning, expectations and estimates, Bellisario said.
“Those stocks, this segment, this price point is guilty until proven innocent,” he said. “These stocks will remain cheap until RevPAR turns.”
For example, last year when RevPAR was negative, Wyndham Hotels & Resorts’ stock was trading at roughly $75 per share. Once RevPAR turned, the price went to $110 in five months. Then, this year, when RevPAR turned again, the price went to $75 again.
There’s always intense focus on net unit growth with the hotel brand companies, Scholes said. The overall decline in new hotel construction is well known, making it difficult to show higher growth rates. One way to achieve that is new brand launches, as the industry saw with Hilton’s Outset Collection brand and Marriott International’s Outdoor Collection.
“That’s how we’ve got to do it,” he said. “Now, how are you going to hit your targets next year? I think they’ll talk about recently introduced brands, some hints at some new brands, so lots of brands out there.”
The brand landscape is getting pretty saturated compared to how it was years ago, so brands are having to get more creative with their new launches, he said. There used to be big white spaces, and now they’re “pretty niche-y,” he said.
Looking ahead, the fourth-quarter implied outlook is better than the third quarter, but not as good as expected 90 days ago, Bellisario said. Many companies, brands and REITs where applicable, will want to talk about 2026. There’s the World Cup, better comparisons for government travel, better macro clarity, tariff clarity and maybe fewer expense pressures.
REIT expectations
The REITs experienced the same demand bifurcation as the brands, Scholes said. REITs with higher-end properties performed better generally because higher-end guests continue to be able to spend more.
DiamondRock shared a presentation in the last few weeks saying that July and August RevPAR numbers were modestly better than expected.
“I believe that was because luxury was modestly better, but it didn’t blow out anything,” he said. “They are benefitting from greater exposure to luxury.”
Costs growing faster than revenue continues to be an issue for REITs, Scholes said. That will probably continue at least through 2026 and 2027.
For some REITs, activist investors have been pushing for some action to counter lower stock performance. In September, asset manager Tarsadia Capital, which owns 3.4% of Sunstone Hotel Investors’ stock, publicly pushed the REIT to sell itself or liquidate the portfolio as well as appoint new directors to the board.
While he doesn’t believe Sunstone will be able to comment on the situation directly, Scholes said other companies may have something to say about activist investors.
Braemar Hotels & Resorts announced in late August its intent to sell its full portfolio of luxury hotels, citing the high quality of its properties while having an undervalued stock price. In a statement, it pointed to the high quality of its portfolio attracting multiple activist investors over the years.
“It is not believed that a luxury RevPAR lodging REIT like Braemar can flourish in today's market environment due to the historically low [earnings before interest, taxes, depreciation and amortization] multiple lodging REITs are achieving as well as the ongoing activism the company has received,” it said.
What’s driving these activist investors is the desire to unlock value because the individual hotels in the portfolios are worth more than their public company value.
“It’s very fair to say investors are frustrated and would like to see more proactive action on top by management teams to unlock underlying value, because there definitely is value there,” Scholes said. “But the question is, how do you unlock it? You’re starting to get activists who are vocal about what they want to see happen.”
Braemar specifically has a lot of factors at play, Bellisario said. It holds a lot of value in its real estate portfolio, but it has a lot of total debt, a lot of interest expense, a lot of capital expenditure requirements and a lot of preferred dividend expense.
“This is the conundrum that all these management teams face today,” he said. “My real estate is worth X, but the market is valued at X-minus.”
From a capital allocation perspective, the right real estate decision may not be the right stock decision, and conversely the wrong stock decision may be the right stock decision, he said.
Both Scholes and Bellisario said they expect the REITs to mostly sit out on any potential deals.
Expectations for deals generally were higher at the beginning of the year, with some brokers saying the deals pace will pick up in a quarter or two, Scholes said.
“Now it’s like, maybe next year, which after the last two years, it was always next year, next year,” he said.
The lethargic nature of the transaction environment is two-fold, he said. There’s the current interest rate environment and the RevPAR environment paired with cost of hiring. RevPAR growth has been slow, and wage increases have led to higher operations costs, which may be a bigger factor.
In the early 2000s, interest rates were higher, but the hotel industry had a better RevPAR environment and overall lower costs.
“You were doing mid-single digit RevPAR growth. Now you’re doing low single digit, and that’s it,” he said. “That’s a challenge for people thinking, ‘Hey, is this an attractive business that I want to buy into right now?’ I’m not going to say it’s unattractive, but it doesn’t make it as attractive an environment.”
Having a better debt market has helped, but it’s really about the fundamentals, Bellisario said. Conditions are market-specific and property-specific.
“Give me an asset that I’m getting cash flow to start — that I could finance,” he said. “There’s an operational story, there’s a value-add story. There’s some sort of tailwind going on in a particular market — Brickell, for example. West Palm Beach. San Francisco, the market’s getting better. There are things like that, but more broadly, it’s very blah.”