Analysts who follow the industry will be listening on earnings calls this quarter for optimism from hotel company executives regarding the continued strength of leisure travel demand, but also for some indication of a pickup in corporate and group bookings.
Michael Bellisario, director and senior research analyst at financial services firm Baird, said the resilience of leisure travel in the U.S., beyond the typical high season for vacationers, has carried hotels as the industry waits for business travelers to book again at pre-pandemic levels.
Though business for the industry overall has slowed down seasonally, several leisure-focused markets continue to reach or surpass 2019 levels for occupancy and rates.
“I think that bodes well for momentum into February, March, April leisure travel season and hopefully people get back to the office,” he said.
Rising COVID-19 cases have a negative impact on business travel, as companies delay return-to-office plans, but Bellisario said the prevailing view is that the omicron variant of the virus is milder than the delta variant was, and thus will have a less-prolonged effect on the economy.
The timing of a rise in omicron cases over the holidays made it difficult to distinguish what effect it had on group and business travel, he said. There weren’t many cancellations, because there wasn’t much to cancel. It wasn’t conference season or business travel season like it was in the fall with the delta variant.
C. Patrick Scholes, managing director of lodging and experiential leisure equity research for Truist Securities Group, said the booking window for business travel is about 12 days, so it’s difficult to say how much the new variant will affect the segment beyond February.
Leisure demand continues to be steady with some weakness among travelers 55 years and older, he said. Starting in April, however, hotels will run into some difficult year-over-year comparisons.
“It’s going to be hard, at least from some of the leisure-centric markets and certainly economy hotels, to show from April onward much year-over-year growth,” he said.
Rich Hightower, managing director at Evercore ISI, said much of leisure travel demand surge can be attributed directly to a rise in personal savings and disposable income during the pandemic, and as spending habits normalize, that demand could drop in tandem.
“If savings levels are kind of back to where they were and people sort of normalize on their spending habits and they’ve gotten their revenge travel out of the way, I wonder if those [high] room rates are sustainable,” he said.
People returning to their offices for at least several days a week is important for business travel because it helps to set up in-person meetings, he said.
The hotel industry can overcome a 10% to 15% deficit in revenue from corporate bookings, but it will be hard to make up for a greater loss than that, he said.
The REITs
Stock values are down for real estate investment trusts with portfolios focused on full-service, urban hotels because of how much they rely on group and business travel, Bellisario said.
“I’ve been saying this since day one: It doesn’t matter how strong your 16 resorts are if you have 66 other hotels,” he said. “Leisure travel alone for the REITs in urban markets cannot make up for the sluggish business traveler.”
On calls with REIT executives, analysts will be listening for insights into recent and planned transactions.
Bellisario said REIT hotel transactions recently have been more about cleaning up portfolios — selling hotels with ground leases and unions, or that were in troubled markets, specifically New York. Others have sold hotels rather than raising equity to fix balance sheets.
REITs such as Host Hotels & Resorts and Apple Hospitality REIT have more leverage with transactions because they don't have the same expectations for their balance sheets, he said.
Overall, analysts expect a balance of buying and selling in the REIT space. Many companies, such as Pebblebrook Hotel Trust or Xenia Hotels & Resorts, will have to sell something to buy something, Bellisario said.
Hotel transactions heated up in 2021, certainly on the per-key basis, but companies now have to make these deals work, Scholes said.
“If you want something in leisure with institutional quality, you’re paying for those properties at or above pre-COVID-19 pricing,” he said.
The question is what deals can or will shake out in depressed markets such as Chicago, New York and San Francisco, he said. Some of the REITs have had to take losses on deals, such as RLJ Lodging Trust’s sale of the DoubleTree Hotel Metropolitan New York City.
Analysts said they don't expect more public-to-private deals like those in 2021 involving Condor Hospitality Trust, CorePoint Lodging or Extended Stay America and its paired-share REIT, ESH Hospitality. The circumstances of those deals were very unique.
“My line on [mergers and acquisitions] is it’s always easier said than done,” Bellisario said. “People love talking about it. Investors love talking about it. It’s always a water cooler conversation that ebbs and flows.”
The Brands
The hotel brand companies have proven to be resilient during the pandemic and have grown largely through conversions and new-construction starts, Bellisario said. Net unit growth is important, and that will be a key focus as the brands consider outlooks for 2022, he said.
“My rhetorical question is, ‘OK, so what's next?’” he said. “We all know that now the stocks are rerated. Now show me the growth and show me how good the businesses are.”
Scholes said in the spring of 2020, it looked like hotel company net growth rates could be cut in half as the pandemic stalled the supply pipeline.
“Well, that didn’t come to fruition,” he said. “They’re not back to where they were, but certainly better than we initially expected.”
The growth rates for companies such as Hilton, Hyatt Hotels Corp. and Marriott International this year should be similar to what they were last year, he said, adding that is compounded growth.
Hightower said hotel brand companies face additional complexities with their international portfolios, as many markets outside of the U.S. have lagged in the recovery.
“On the other hand, the business model is such that when things do get cranking again, the economics are obviously very favorable,” he said.
It’s possible that even before the second half of the year, Hilton or Marriott could get back into capital returns, a big part of the investment story prior to the pandemic for these companies, he said.