As hotel companies prepare to report fourth-quarter and full-year 2023 earnings, analysts say normalization of travel segments and the cost of debt are likely to be among the main topics under discussion.
David Loeb, a former analyst with Baird and owner of Dirigo Consulting, said he expects a lot of focus on revenue across travel segments, specifically group and business travel. While both segments have been trending upward in recent years, there’s still room for further growth.
“I think those are the biggest holes. Leisure filled a lot of the gap for a while, and it’s certainly been tough comparisons. [Now] leisure has been slowing a bit, which makes sense given where the economy is,” he said. “What people are going to be talking about more than anything else is whether group comes in and fills that gap. Group and business travel, but primarily group.”
The return of those segments could go a long way in shoring up hotel margins, as expenses are likely to outpace revenue, Loeb said.
C. Patrick Scholes, managing director of lodging and leisure equity research at Truist, said margins, particularly among hotel real estate investment trusts, will be a topic investors are listening for.
“The most interesting thing from the hotel REITs will be the latest commentary on margins for these companies. It’s going to be difficult — if your [revenue per available room] is three but your costs are going five — to see flat margins,” Scholes said.
Meanwhile, the challenge with debt isn't necessarily its availability, but rather the concurrent increase in cost, Loeb said.
“The good news is that there’s debt available. The bad news is that the debt that is available is much more expensive,” he said.
How hotel companies tackle this will be dependent on balance sheets, he said. Companies with strong balance sheets will likely continue to selectively add to portfolios, while others might sell assets to pay down some debt.
This could create an environment in which not only are assets acquired and sold, but companies, too.
“We could potentially see companies go up for sale,” Loeb said. “It’s not easy. If you want to sell a company, take it private, for example. That requires the acquirer to be able to replace or add to the debt, and that’s expensive and challenging.”
While there could be some potential mergers and acquisitions in the near future, there’s one potential acquisition that has already been widely discussed: Choice Hotels International’s pursuit of Wyndham Hotels & Resorts.
Choice escalated its acquisition attempts to a hostile takeover after making an exchange offer of $90 per share for all outstanding shares of Wyndham on Dec. 12, 2023. On Jan. 22, Choice nominated eight people to stand for election at Wyndham’s upcoming annual shareholder meeting.
Wyndham has consistently rebuffed Choice’s offers and continues to urge shareholders to not tender their shares. Scholes said for a deal to be done, Choice likely needs to increase its offer price.
“Choice, at this point, has to raise their offer here. Certainly, there’s hardly any guarantee that this deal is going to go through with the Department of Justice. It could really go either way here, and either way, it’s going to take some time,” Scholes said. “The [timing] is maybe a year from this May, which is the Wyndham board meeting. Is that $90 [per share] in 18 months from now a [more] attractive offer? Probably not.”
Looking Ahead
When executives turn their attention to 2024, normalization will remain a main theme, given that it will be the first year since 2019 that year-over-year comparisons can be made to a year mostly unaffected by COVID-19.
“As we look forward to this year, the theme is normalization here because we’ve pretty much washed out all of those easy comps that we had a year ago from omicron,” Scholes said.
Companies will likely be conservative with outlooks for the first quarter of 2024, as Easter falls on March 31, right at the end of the quarter, Scholes said.
“[First quarter 2024] is going to likely be the weakest quarter of the year because you have a big impact with the Easter shift this year that’s really going to hurt your results in March but make for a very strong April,” he said.
Last year at this time, the main topic was whether a recession would hit the U.S. economy and how big of an impact it would have on hotel industry performance. The U.S. escaped 2023 without one, and while there are still some economic issues such as wage pressures and inflation, the concern isn’t as high anymore, Loeb said.
“There’s a lot of unknowns and there’s a lot of volatility in the world, so it’s not like the risk of a recession is off the table. It just appears to be a lot lower,” he said. “There’s ongoing risk, but I think that risk is much less than it was a year ago, and the perception of risk has lowered tremendously.”