Hotel brands and real estate investment trusts broadly are expected to have surpassed Wall Street estimates for performance in the second quarter, but analysts say investors will be more interested to hear from executives during earnings reports about the companies’ trajectories and strategies for what’s ahead.
Michael Bellisario, senior research analyst at Baird, said the focal point will be on projections for next year and the severity of a potential recession.
“The big focus is macro and not even what’s going on now. It’s about later this year and into 2023, which is always hard to see for travel because you know how quickly it can turn off and turn back on,” he said.
David Loeb, a former analyst with Baird and owner of Dirigo Consulting — which advises on capital markets, strategy and communications issues — said while he expects companies to tout the return of business and group travel along with strong leisure demand in the previous quarter, most questions from analysts will be centered around a potential recession in the near future.
“I think there’s going to be all this discussion about how great everything is. And at the end of the day, investors are going to say, ‘Call us when you know we’re in a recession because that’s when we want to buy the stock.’ It’s going to go down more in the meantime,” he said.
Even if a recession were to hit, Loeb said hotel companies would likely remain optimistic since leisure demand will remain high and business and group travel demand still has room to grow.
“If we see [a recession], I suspect it will be relatively shallow. It may last a while, it may last a year just because the comparisons are really tough, but I think once we’re in it, investors will start to look beyond it. They’ll know we’ll come out of it,” he said.
C. Patrick Scholes, managing director of lodging and leisure equity research at Truist, said he’d be surprised if hotel management teams give much color on a potential slowdown.
“There’s not a lot of visibility beyond say 30, 60 days, so it’s not like we have the next year of corporate bookings,” he said. “I think management teams will say, ‘Hey, based on what we know, for the next 60 days, things look strong,’ and that’s absolutely true.”
The hotel industry isn’t uniformly strong right now, though, Scholes said. High interest rates, construction costs and supply-chain delays have led to a slowdown in hotel development and pipeline growth.
“What’s interesting is, that may not necessarily be recession-driven,” he said. “Just the fact that real estate development is slowing down in general, whether it’s hotels or housing construction… that kind of stuff brings about a recession.”
Scholes said the first three companies to report second-quarter results — Wyndham Hotels & Resorts, Hilton and Pebblebrook Hotel Trust — will be a good starting point to hear the tone of the industry and will pave the way for the rest.
Wyndham in particular is a company to watch with regard to mergers and acquisitions, he said. It has the balance sheet to make big deals and hasn’t been shy about its intentions to grow.
Bellisario said he doesn’t expect significant deals to be announced by any of the bigger brands, including Wyndham, due to the current environment and pricing expectations. However, he said there are several REITs that have positioned their balance sheets to make deals, including RLJ Lodging Trust, Braemar Hotels & Resorts, Xenia Hotels & Resorts and Host Hotels & Resorts.
Loeb said he expects companies to be more patient about making deals due to rising interest rates and the possibility of a recession. He said companies with similar portfolios could find benefits from merging, but there isn’t a ton of economic clarity right now.
“The execution is challenging, and past previous cycle M&A deals have looked really good at the time and in the long run will look really good. But you can’t tell that now because we’re stuck with this pandemic and maybe an early-post-pandemic stock market that isn’t really valuing them based on the additional synergies from operations or spreading overhead over a larger portfolio or cost of capital,” I said.
Bellisario said he’s interested in hearing from Hilton and Marriott International executives about net unit growth and construction slowdowns.
“I think they need to acknowledge that the outlook isn’t as rosy today for new starts and signings as it was 90 days ago,” he said.
On the REIT side, Bellisario wants to hear from Sunstone Hotel Investors CEO Bryan Giglia about how his strategy is unfolding after making some moves that investors weren’t fond of in his first quarter as CEO.
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