Hilton, Accor Won’t Have a China Growth Story to Tell Shareholders This Week

The hotel industry’s go-to market for optimism and expansion narratives during the pandemic won’t offer such a rosy picture from this week’s earnings calls for companies like Hilton, Accor, and Wyndham. 

China was supposed to be the global hotel industry’s V-shaped recovery market from the pandemic. Marriott anticipated a return to pre-pandemic performance there sometime this year. Hilton CEO Christopher Nassetta indicated earlier this year the company’s construction pipeline would likely center on Asia because of a cooling off in the U.S. lending market. 

But stringent virus mitigation efforts zapping occupancy rates, a potential default by the country’s largest property developer, and even the risk of heightened regulation in the gaming region of Macau are major headwinds to western companies that have spent a bulk of the recovery labeling China as fertile soil for future hotel development. 

“China is of great importance for all the major hotel players,” Gilda Perez-Alvarado, CEO of JLL Hotels & Hospitality, said in an interview with Skift. “However, with so much of the media focusing on the China Evergrande situation, hotel companies may opt to shift focus and let the storm go by.”

The major hotel companies are highly unlikely to just give up on China. It’s simply too lucrative and durable of a domestic travel market, similar to the U.S. 

China was the first to post year-over-year hotel performance gains during the pandemic due to its containment measures and massive population of domestic travelers. Significant hotel development is also expected to accompany China’s massive Belt and Road Initiative of funding enhanced infrastructure projects stretching from East Asia to Europe. China is home to an increasingly wealthy population, and major hotel companies find their brands resonate well with travelers in that part of the world.

“Our view is the Chinese government is highly desirous of having branded products from companies such as Hilton, Hyatt, Marriott, etc. for the prestige factor, especially as one enters new [smaller city] markets with no internationally branded product,” Patrick Scholes, managing director of lodging and experiential leisure equity research at Truist Securities, said via email.

While the ingredients for success are all there, it is the various degrees of volatility that will have hotel companies putting less of an emphasis on China as they did on prior earnings calls.

Evergrande, China’s second-largest real estate developer, was teetering on the edge of default in recent weeks. While a delayed payment last week prevented default, Evergrande’s financial woes have rippled out to other real estate developers — primarily in the residential sector — across the country. The debt of roughly 40 percent of China’s development sector was at risk of default earlier this month, according to the Wall Street Journal.

Chinese leaders appear to be concentrating more on curbing excessive borrowing in the future rather than bailing out any of the companies in trouble. This may center on residential property developers, but there is a lesson for all commercial developers.

The government’s unwillingness to step in and prevent failure by these companies is a clear warning to any developer considering embarking on a massive wave of hotel construction projects: Nobody is too big to fail.

More Lockdowns: China’s more stringent approach to containing the virus as well as increased regulation in one of its top tourist destinations also weighs heavy on the hotel industry. 

The country’s no-tolerance approach to new cases, as small as an outbreak might be, dragged occupancy rates and performance levels this year. The government limits travel and orders lockdowns very early into a rise in new cases. 

China’s occupancy recovery was wiped out in a matter of two weeks this summer due to a surge of new Delta variant cases. There are already signs of a new surge, with China reporting last Friday its highest number of new cases (38) seen in a month. 

Another 26 cases were reported Sunday, and events like the Wuhan Marathon were postponed and some travel services between provinces were suspended.

Keep in mind: This was for only a surge of tens of new cases compared to the U.S., which posts tens of thousands of new cases daily and remains largely open for business. 

IHG Hotels & Resorts was the first major hotel company to report third quarter earnings, and company leaders fielded questions on the volatile recovery in China. The company chalked up the drag on its recovery to the various restrictions enacted to mitigate the spread of the virus.

“Where it ends up will depend on what restrictions the Chinese government puts in place,” Paul Edgecliffe-Johnson, the chief financial officer at IHG Hotels & Resorts, said on an investor call Friday. “With restrictions, it will be tougher, and that’s why the swing factors are very difficult to call with that factor in mind.”

Regulation Uncertainty: Other factors weighing heavy on the hospitality sector in China at the moment include the government’s ongoing review process in Macau, a special administrative region that is also the country’s leading casino gaming market, for more regulation as well as license renewals.

This sent stock prices and valuations at U.S.-based casino companies like MGM Resorts International, Las Vegas Sands, and Wynn Resorts into a nosedive last month. Each of these companies has a presence in Macau.

Las Vegas Sands leaders downplayed any potential negative drag on their business last week on an investor call. But this is the latest example of uncertainty hanging over hospitality companies wanting to beef up their presence in China. 

Given the progress of reopening international borders in other parts of the world, it may be time to shift attention away from the industry’s original pandemic growth talking point. 

“Global hotel operators have been talking a lot about China as a major growth market in their portfolios,” Perez-Alvarado said. “However, my sense is that the conversation will shift to the industry recovery we are experiencing in the U.S., Europe and select parts of Asia now that travel is opening up.”

Vegas Resort Sale Will Boost Blackstone’s (Already High) Profits

Blackstone’s announcement last month to sell the Cosmopolitan of Las Vegas resort for $5.65 billion should keep the good times rolling at the investment firm. The company doubled its earnings in the third quarter to $1.6 billion, what Blackstone CEO Steve Schwarzman called “the best results in our 36-year history” on an earnings call last week. 

Blackstone has notable investments in the hospitality sector, including a joint takeover of Extended Stay America earlier this year with Starwood Capital for $6 billion. The company also built up a presence in Las Vegas with several sale-leaseback deals with MGM Resorts on the Vegas Strip.

While the Cosmopolitan deal won’t close until early next year, it is certainly going to be a boost to the company’s earnings. The roughly 3,000-room resort deal would be Blackstone’s most-profitable real estate sale in company history. Blackstone bought the resort in 2014 for $1.7 billion and has since spent $500 million in upgrades and renovations.

“This investment is a classic example of our buy it, fix it, sell it model at work, in which we transform the asset and improved operations,” Jonathan Gray, Blackstone’s president and chief operating officer, said on an investor call last week. “Our long-term capital combined with our focus on value creation led to a tremendous outcome for our investors.”