A Few Top Takeaways From Hotel Earnings Season

It was a stellar hotel earnings season. Demand remains strong, and pricing remains robust, according to groups reporting their financial performance in February 2023.

After covering hotel earnings in a dozen stories and posts, I’ve been preparing for a soon-to-air podcast chat with Pranavi Agarwal, the London-based Senior Analyst at Skift Research, on this topic. Here are a few themes that popped to mind.

Ongoing Resilience

Analysts scoured results for any glimpse of a slowdown in demand. But they didn’t find any in either the fourth quarter results or the upbeat outlook from executives for at least the next nine months of the year.

• Marriott said that group bookings revenue for 2023 is already pacing up 20 percent year-over-year, with room nights and rate gains.
• Hyatt forecasted that it would generate 2023 system-wide revenue per room growth of 10 percent to 15 percent compared to 2022.
• Many executives expressed their faith that the hotel sector would either dodge recessions or not have recessions damper travel demand, partly because of changes in consumer behavior, at least in the short term. “You continue to see consumers shifting how they’re spending,” Hilton CEO Christopher Nassetta said. “It continues to be shifted more towards experiences, and we’re sort of Exhibit A on the experience side.”
• “Pricing power is here to stay,” said IHG CEO Keith Barr. The UK-based hotel operator — which has 18 brands, such as Holiday Inn and Six Senses — saw its average daily rates in the fourth quarter be 13 percent above pre-pandemic levels. 
• “The calendar in March is positioned to have us have the best hotel revenue month, we believe, in our history,” said Bill Hornbuckle, president and CEO of MGM Resorts.
• Accor forecasted this year’s revenue per available room — a key industry metric — would rise between 5 and 9 percent versus 2022’s level. 
• Wyndham forecasted its revenue per available room would grow this year by between 6 percent and 8 percent on top of the growth it has already had compared to 2019. 
• “With January gone by almost tonight, we see the momentum continuing,” said Puneet Chhatwal, CEO and managing director of Indian Hotels Company (IHCL), India’s largest hotel operator, after reporting the company’s best-ever quarter. “We have a fair idea and depth of the business on the books, and the pick up the way it is coming. The outlook is very strong.”
• Choice Hotels International said that in 2022 it generated a company-record net income of $332.2 million on revenue of $1.4 billion, another record. It predicted that its net income this year would range between $245 million and $265 million.

Hotel Development Lags

The one metric all the analysts locked onto with eyebrows raised is the continuing struggle hotel groups have had in restoring the pace of hotel construction and conversions to historical levels.

• Analysts care a lot about systemwide net unit growth because, at asset-light hotel companies, each additional property usually means more incremental fees than it adds expenses on average. So it’s a key indicator of a company’s profitability.
• According to Lodging Econometrics, construction remains down from its peak. The data provider forecasted that supply growth would be 1.3 percent this year and 1.4 percent next year — below the long-term average of 2 percent.
• At the global hotel companies, many reported higher net user growth rates but rates that were still below their historical averages.

Where Are We in the Cycle?

• Analysts are debating this question.
• “Lodging is a cyclical business,” wrote Robin Farley’s research team at UBS. “Typically, the biggest question investors ask is where we are in the cycle. Before the pandemic, there was broad consensus among lodging management teams that we were late in the cycle.”
• Today, it’s unclear if we’re still at the start of a bullish time, the peak, or the end.
• India is just at the start of “a longer up-cycle,” according to HSBC’s Achal Kumar. One reason: Developers are eagerly building hotels in India, but analysts say they’re not doing it quickly enough to meet demand over the next five years.
• In much of the world, the supply constraints I mentioned above may have pulled the sector into an early-stage cycle. With less supply to compete with, existing properties can sustain their pricing power for longer.
• “The story is more about average daily rates than occupancies,” wrote Jefferies’ Kumar Prateek. This dynamic is bad news if you think the post-pandemic surge in demand will fade with inflation, depleted savings, and time.
• But the dynamic of pricing power countering lower traveler numbers is great news if you believe, as IHG’s management does, that smarter tools and practices for setting room rates are another catalyst that may be setting up the sector for a few years of growth.
• Here’s the view of Patrick Scholes’s team at Truist Securities: “We view revenue management tools as particularly valuable to focus owners on driving ADR/RevPAR [average daily rate and revenue per available room] as opposed to the legacy strategy of “heads in beds” occupancy — the latter of which is not necessarily more profitable or operationally efficient. Tools to support franchisees combined with a more sophisticated/trained franchisee base are reflecting in weekly STR results, especially in Economy ADR outperforming most chain scales versus 2019, even as occupancy renormalizes to 2019 levels in Economy.”
• Another supply issue is that many independent hotel owners may give up after a rough few years, either selling to big brands or morphing older properties for other uses. In the UK, analysts believe Whitbread, the parent company of Premier Inn, may be able to gain market share as U.K. hotel supply relatively declines.
• Accor’s management raised another specter, namely, that as the major U.S. hotel companies expand beyond the U.S. market with its unified currency and regulatory regime and try to grow in dozens of countries worldwide, they may encounter friction that hinders their pace of growth and pricing power.

Please watch your Skift email for my upcoming podcast chat with Pranavi, who has her own themes, observations, and insights on hotel earnings seasons. Did I miss anything big? I always read tips and feedback. Contact me at [email protected] or through my LinkedIn profile.