Hotel Earnings Season Viewpoints From Top Bank Analysts

In the next few weeks, the largest hotel companies will report their financial performance for the first quarter and provide a glimpse of future trends. Here’s a survey of expectations based on recent reports from investment bank analysts.

A “Goldilocks” hotel market …?

• In the tale of Goldilocks and the three bears, the happy outcome is that the porridge isn’t too hot or cold. Similarly, a Goldilocks hotel economy would be one where supply and demand are just right.
• Some research analysts think a Goldilocks outcome is possible for hotels. Analysts at investment banks seem to be counting on two things happening this year. First, the central banks will tame inflation without many more interest rate increases. Second, we’ll dodge a recession in most markets. Or else we’ll have a recession that will be so shallow that pent-up demand for travel — including fresh demand from Chinese tourists resuming international travel — will more than compensate for it.
• Truist’s first-quarter lodging earnings preview expected hotel company results to be in line — but more likely ahead of — market views. Truist’s analysts believe the financial markets have a “wall of worry” to climb, yet investors may underestimate the robustness of the hotel sector.
• Truist analysts expect the greatest strength in U.S. domestic revenue per available room results to come from group bookings and the upper-upscale segment that tends to get a lot of convention and business meeting bookings.
• In terms of profitability and returning to 2019 levels of revenue, hotel groups need a recovery in their international business. Truist believes first quarter international revenue per available room results will exceed most investor expectations.
• Other “catalysts” for growth include forecasted particular strength in leisure demand in the Caribbean and Europe.
• One positive for hotel groups is that many haven’t been pricing at 2019 levels in real, inflation-adjusted terms, so they don’t have far to fall. On average daily rates, Marriott told JP Morgan analysts last month that its inflation-adjusted pricing for non-luxury hotels is below 2019 levels. Truist says this fact is “giving it some comfort on the sustainability of currently strong industry pricing trends.”
• Baird noted that hotel industry executives have been previewing that industry-wide January, February, and March revenue per available room has been better than expected.
• In February, for example, revenue per available room across the U.S. hotel sector rose 13 percent year-over-year, CBRE said.
• Baird expects investors to like what they hear during earnings calls and buy more hotel stocks as investors price in better near-term outlooks.
• These analysts noted that the trillion-dollar stimulus unleashed during the pandemic has indirectly helped support strong travel demand. Plus, consumers may have decided since the pandemic to ringfence their leisure travel spending as a mental hangover from isolation. So spending may stay resilient.

…Or a “three bears” hotel market?

• What we know for sure is that hotel company growth rates are normalizing. That trend will make it harder for hotel companies to beat year-over-year comparisons as the year rolls on.
• In short, Baird expects expense pressures partly because wage, energy, and supply inflation will pressure profit margins. Baird’s analysts remain watchful about the long-term.
• Yet Baird’s analysts note that they can’t rule out a Goldilocks hotel market.
• Even in the worst case, some companies may be hurt less than others. Jefferies analysts wrote this month: “We believe IHG Hotels & Resorts (InterContinental Hotels Group) is a more defensive play on travel trends versus global peers given its exposure to franchise contracts, to essential business and leisure (Holiday Inn / Express is 62 percent of rooms) and to the Asia travel recovery.”

Investment analysts are watching the cloudy financing credit environment’s potential impact on hotel pipeline and each hotel group’s net room growth rate.

• The recent banking crisis in the U.S. may reduce bank lending to businesses in general, cooling business and leisure travel demand. The bank crisis may also make obtaining loans costlier or harder for hotel owners, investors, and developers — leading to a long-term slowdown in hotel refurbishment and construction.
• Many investors wonder if the current U.S. regional bank duress may crimp hotel owners’ and developers’ ability to finance or re-finance projects. Expect to hear analysts ask during earnings calls in the next couple of weeks questions about what percentage of each group’s room development pipelines has committed financing.
• Jefferies this month summarized the debate on whether hotel net unit growth is “structurally” slower because of worsened financing conditions in the following way: “While ten-year US rates have not increased in the last month, if lending conditions were to worsen materially, risks to net unit growth would be industry-wide impacting: 1) conversions in 2023, 2) delays in development and financing from 2024. Our sensitivity suggests if Americas’ openings reduce from 18,000 to 13,000 (to be in line with 2023) in outer years, this will take 2024/25 group NUG from 4.2 percent/4.4 percent to 3.7 percent/3.9 percent on a 1.5 percent removal rate.”

In the U.S., business travel seems steady and not showing signs of trouble, though it’s still below 2019 levels.

• JP Morgan in March hosted Marriott’s chief financial officer and executive vice president of development, Leeny Oberg. The U.S. accounts for two-thirds of Marriott’s revenue. Oberg said her hotel group was continuing to see strong and steady U.S. demand trends in both occupancy and average daily rate in the U.S. Oberg is optimistic about Marriott benefiting from more China outbound travel into other Asia-Pacific markets.
• “Marriott continues to experience mixed trip purpose (i.e., a blend of business and extended-leisure travel), helping improve occupancy in what used to be shoulder days/periods,” JP Morgan analysts noted.
• “Group bookings in the U.S. continue to be more near-term in nature,” JP Morgan noted. “The trend of booking in-the-year-for-the-year continues. It used to be that Marriott had more than 75 percent of group nights booked in prior years, but now it’s only about half, which is good for taking advantage of the current strong average daily rates.

What if the central banks make the wrong decisions?

• Central banks have hiked interest rates to cool down demand for goods and services in the economy and thus stop inflation. They’re also pulling back back on so-called quantitative easing — which means, essentially, that they’re stopping their practice of reissuing bonds that fall due and of buying assets. These actions may curb lending — and eventually demand.
• Monetary policy has historically affected the economy with long delays and unpredictable timing, as Eurointelligence noted last week. A bear market might happen in some countries on the demand side if businesses or consumers start pulling back travel spending because they worry about their finances. On the supply side, hotel companies might find a rising cost of operations — because of inflation in energy costs, wage costs, and supply costs — may eat into their profitability.
• We know what happened the last time that central banks had to deal with a major crisis, namely, the great financial crisis of 2008. After the crisis, central bankers admitted in interviews with journalists and academics that they would’ve made decisions differently if they had instead had an accurate, real-time picture of what was happening in the economy.
• We doubt central bankers have a better, real-time picture of what’s happening today. So they’re operating somewhat in the dark — leading to a chance they’ll miscalculate and either under-respond or over-respond. That could affect hotel demand eventually.

A positive note is the China factor:

• Hotels stand to benefit if Chinese international demand surges post-pandemic the way there have been surges in other markets. That could help hotel companies if they see weakness in Western Europe or North America later in the year.
• Deutsche Bank analysts note that about a quarter of Accor’s revenues are supposed to come from Asia Pacific, which just began its recovery, mostly due to the reopening of China. It has some of the most potential upsides.

I always read tips and feedback. Contact me at [email protected] or through my LinkedIn profile.