Hotel Executives Confident in Demand’s Resiliency Ahead of Possible Recession

Just about every day, there’s a new article in any given major newspaper talking about the risk of recession and the likelihood of it hitting this year, next year or ever.

During the second-quarter earnings calls for publicly traded hotel brand companies and real estate investment trusts, hotel executives were generally confident in the industry’s ability to weather another downturn should one occur. They acknowledged a recent slowdown in the economy but otherwise weren’t overly worried.

Some shared their overall confidence in the strength of leisure demand and the recovery pace of group business while others spoke about how well-positioned their portfolios are for long-lasting success.

“What we’re seeing as we’ve kind of got a month under our belt here in Q3, [revenue per available room] is likely to be similar to Q2, so probably around 13%. What could make it better is really the return of the business-transient travel and the strength of the group, which we’ve seen build quarter over quarter. And this return to office, which I think we’re starting to see really start to pick up here, particularly as companies are beginning to kind of get back to normal and start looking at an economy that is maybe a little bit different than what we ‘ve been experiencing a year ago when we saw sort of all this kind of economic growth.

“I think you are seeing a little bit of economic slowdown. So businesses are coming back and they are sending their sales forces out to say, hey, we need to we need to get back on the game here. So I do think if we see more of that business travel, business transient return, which is the trend we’re seeing, that could be a nice motivator on the upside from a RevPAR perspective. So those are probably the things that we’re looking at as we get into Q3 and Q4, would be really does that business traveler return or continue the trends that we’re seeing with the sort of quarter-over-quarter increase in that demand.”

“In terms of our customers, they are not lower-end consumers. They are squarely in the middle class. They represent the vast demographic of America. And what we are seeing is they are earning more, and they are spending more and certainly. With unemployment at historic lows and their wages up from where it was back in 2019, we believe they have ample savings and resources and they are wanting to travel more than ever this year.

“They are booking earlier. We know that they are driving further this year than last year. And we are hearing from them anecdotally and seeing in our research that they are moving travel and experience up into their hierarchy of needs versus doing anything else with their money. All the survey research out there, over 70% of them are saying they want to travel the same or more than they did this time last year.

“And look, last summer was the best summer our franchisees and … any of our domestic brands ever experienced. And if you talk to our franchisees, most are feeling this year will be even better than last year. Certainly, we are pleased with how the summer shaping is up. July month-to-date [revenue per available room] is up 6% to last July, up until this past Saturday. …

“We think that were there to be a downturn, 80% of our system additions would come from conversions as independents seek distribution support from our brands. We’ve been doing throughout this pandemic, and we believe we would still be very well-positioned to grow both our revenue and our EBITDA if there were to be any downturn. …

“We believe we’re much better positioned than we’ve ever been and that the travel landscape will be much more resilient than in previous downturns because pricing has just shown to be so considerably more resilient.”

“While macroeconomic concerns have been dominating the headlines, we are not seeing any signs of a weakening consumer in our business. As we look at history, it is worth discussing why we think today’s macroeconomic environment with respect to lodging is different. First, certain segments of the lodging industry are still recovering, and we believe there is meaningful room for growth, particularly in the business transient and group segments. Even more encouraging, hotels benefit from the ability to reprice rooms on a nightly basis ahead of rising costs, even during periods of high inflation as was the case in the 1970s.

“Second, consumers and businesses have significantly more cash on hand with leverage and debt service ratios better than they were prior to the great financial crisis in 2008. The labor market is also exceptionally strong, with over 3 million more jobs opened than we had at the height of the last expansion and an unemployment rate hovering near a five-decade low. In addition, we have continued to benefit from a consumer spending rotation away from goods and into services, including travel, and we expect this trend to continue. Finally, we expect to benefit from exceptionally low supply growth for the next several years.

“The total pipeline has fallen by 11% since the start of the pandemic and the number of rooms under construction is down 30%. As a result, industry projections suggest annual supply growth of just over 1% through 2023, well below the long-term average of 1.8%. In contrast, supply growth at the start of the last three downturns was running at over 2.5%. The market way to supply growth for Host’s portfolio is projected to be approximately 1% as we will benefit from exceptionally low growth in places like San Diego, Hawaii and San Francisco.”

“This recovery and the prior recoveries following the great financial recession, the 2001 recession and the events of 9/11, the great real estate collapse of the early 1990s and the Fed-induced recession in the early 1980s have clearly demonstrated the incredible resilience of the hotel industry.

“After each recession, recoveries have led to record highs in hotel revenues and profits. This industry, while obviously much more volatile than other real estate sectors, always bounces back, sets new records relatively quickly, and due to its one-day leases and secular demand growth has forever followed inflation and replacement costs higher. We see no reason for any different outcome this time and this year’s recovery firmly demonstrates our industry’s incredible resilience.

“With replacement costs for our portfolio currently estimated in the $750,000 per key range, and with supply growth severely restricted by the pandemic, very limited availability of construction financing and generally challenging economics for new-builds, our industry and company have a very long runway to not only fully recover, but to grow again and hit new revenue and bottom-line records.

“We expect the supply-constrained environment to last four or five years. And whether we soon have an economic slowdown or recession, it’s just a matter of time before we hit these new records given these supply-restricted fundamentals.”

“It’s hard to ignore the headlines around increased macroeconomic uncertainty and possible recession. However, at this point, we have not seen evidence of a pullback in demand across our portfolio.

“Corporate balance sheets remained healthy. Consumers still have nearly $1 trillion of personal savings following the pandemic-related economic stimulus and pent-up business and international inbound demand still exists following two-and-a-half years of depressed activity, which bodes well for the lodging industry and our portfolio in particular Lodging demand should also be supported by the $1 trillion infrastructure bill Congress passed last year, a key driver of nonresidential fixed investment, which is forecast to be 5% in 2022. While supply growth in major markets remains historically low within Park’s markets, under 1.5 % combined and significant barriers to entry from rising construction costs, limiting supply growth over the next three to four years, which we believe will continue to support solid fundamentals over the next several years.

“With that backdrop, we are very encouraged with the pace of improvement across our major markets, and we expect to see incremental improvement throughout the year and into 2023 as leisure markets remain strong and the urban and corporate recovery accelerates. Group pace sits at 66% and 72% for the second half of 2022 and full year 2023, respectively, when comparing to 2019 bookings for similar periods as of June 2019 and June 2018, respectively.”

“The hotels we own appeal to a broad set of business and leisure customers, operate at attractive margins, are resilient during economic downturns, require reasonable ongoing capital reinvestment, produce attractive cash returns, have a small relative environmental footprint, are attractive on resale to both local and institutional investors, and can be effectively optimized in a scaled portfolio using comparative data analytics and operational benchmarking.

“The strength of our balance sheet further contributes to the long-term stability and optionality of our platform. In July, we refinanced our primary unsecured credit facility, further bolstering our already strong liquidity position. In addition to maturities and improved pricing, the refinancing upsized our revolving credit facility and term loans, providing the company with greater access to liquidity for strategic growth and other corporate initiatives.”

“We’ve certainly done forensics on prior recessions and the impact of changing customer behavior and pricing on our operating model and tried to adjust it for things like the dramatically different supply environment that we have now better than what was experienced back in say, ‘ 07, ’08. And it really depends upon where any reduction in demand would come, whether it be from visitation or pricing or both. I certainly believe having seen this now, just in my relatively brief time with the company, our company twice has dealt with pretty material reductions in demand last August, September and then, of course, back in January.

“The operating model really works here, and the company has playbooks, and I’m confident that we will be able to adjust as much as possible to that kind of reduction and maintain margins, perhaps not where they are now, but above where they ‘ve been in the past under such circumstances. And I think the other thing that I’ll add is that we still have a number of initiatives in flight that would help us greatly in such a situation. And those would include, of course, the cost work that we’ve done over the past couple of years and also the MGM Rewards program, which is designed, in part, to stimulate increased visitation from our regional properties, in Las Vegas visitation that I don’t think we get our fair share of now and also cross-property visitation while our customers are within Las Vegas. These are huge opportunities, and I think would be a bit of a buffer for us in that kind of environment.”

Return to the Hotel News Now homepage.

Leave a Comment

Your email address will not be published.