Hotel executives are still waiting for the other shoe to drop as a potential recession lingers over another earnings season.

Uncertainty about the strength of the broader economy and whether a recession will occur is likely to once again be the main topic discussed during upcoming fourth-quarter and full-year earning calls with brands and real estate investment trusts.

David Loeb, a former analyst with Baird and owner of Dirigo Consulting — which advises on capital markets, strategy and communications issues — said it will be hard for hotel executives to make predictions about the future because of the questions surrounding the economic landscape.

“The biggest obsession with both operators and investors is whether we’re going to have a recession, and if so, how deep and when and all the questions that come with that,” he said. “Nobody knows whether we’re going to have a recession. If we are going to have one, is it going to be quick? Is it going to be shallow? Is it going to be bigger?”

Whether a recession occurs isn’t necessarily the main issue; it’s the strain on action that the uncertainty causes.

“For the hotel stock market investors, it doesn’t matter,” Loeb said. “I still think that there’s generally the sentiment that it makes more sense to buy when the recession is declared. There will be a bit of waiting until we get a clearer picture in the outlook for the economy.”

C. Patrick Scholes, managing director of lodging and leisure equity research at Truist, said a recession remains an elephant in the room, but he expects companies to be fairly optimistic in outlooks for the year.

“Given all these negative headlines you read about the economy, you would think things would be falling off a cliff and they’re clearly not,” he said. “They’re fairly stable. In today’s environment, stable is not a bad thing.”

Michael Bellisario, senior research analyst at Baird, said that every company is concerned about the big picture, but some management teams will maintain that the recent strength of the stock market indicates that a recession could still be avoided. The increase in stock prices will lead to a more optimistic outlook during calls, he said.

“[A recession] will still be a topic of conversation as it has been and it will continue to be, but the data will continue to suggest, and I'm sure the commentary will, too, that underlying trends are still somewhere between fine to good in most markets,” he said.

Guidance on company expenses will be discussed just as heavily as the recession, Bellisario said. Hotel companies are still in the positive even with the increase in expenses, but it may lead to more cautious outlooks for the first quarter of 2023.

“Companies will probably be conservative on the top line because it can’t see out that far and the booking window is short. What they know about expenses is insurance costs for some portfolios is going to be up 20%, utility costs are up, head counts are up, wages are up. There’s a lot of expense pressures, and I think they’re going to guide conservatively,” he said.

Hotel REITs will discuss their economic outlooks and margins during their calls, Loeb said. Executives will have to answer questions about floating rate debt, upcoming maturities and whether there are any assets to buy — which he said companies are likely to be selective about.

“There’ll be a decent amount, probably more discussion than usual, about the impact of interest rates on financing costs,” he said.

Bellisario said analysts will be listening to hear how REITs plan to create value and grow earnings while the costs of preferred debt and equity are up.

“It’s not the best time to be selling assets, so how do you fund those growth initiatives? How do you balance renovations, [return on investment] projects?” he said.

Domestic business travel, especially in the San Francisco market, will be a topic of interest for REITs, Scholes said. He said he expects executives to receive questions on the recovery, or lack thereof, in the market.

Bellisario said the hotel brand companies will likely be optimistic during earnings calls, citing unit growth picking up, solid travel trends, realized pent-up demand and the continuing return of travel from international markets such as China.

“I think it's going to be pretty positive across the board for all the companies. The balance sheets are generally good,” Bellisario said. “Across the board, net unit growth for all these companies should be up in ’23 versus ’22. Earnings should be up in ’23 versus ’22 given their growth algorithms and the way their models work, so I would expect relatively upbeat commentary from them.”

Loeb said he expects the focus of the brands’ presentations to be on global growth. Scholes said European travel is up 90% year over year and other international markets such as Canada and the Caribbean are exceptionally strong.

With travel normalizing internationally and a tough financing market in the U.S., Loeb said brands will look to take advantage of that.

“The beginning of the war in Ukraine really troubled a lot of travelers and it coincided with omicron. There was less interest in traveling abroad,” he said. “That’s starting to come back to normal and people are thinking more about international travel. That just reminds the brands that there’s a whole world out there for them to continue to conquer, and they’re working hard at it.”

The major brands are unlikely to announce any grand plans for mergers and acquisitions, Bellisario said. Companies such as Wyndham Hotels & Resorts and Hyatt could look to make some small moves, but nothing that sends shockwaves across the industry, he said.

Brands will likely have positive commentary on finding tuck-in acquisitions, especially globally, Scholes said. He added he doesn’t expect any big deals either, though there’s always talk in the background of something happening.

“Every year, people say it’s this year or next year and that’s kind of been going on 10 years straight,” he said. “I’m not holding my breath, but when you hold your breath long enough, something happens.”

Loeb said there’s always a possibility of REIT-to-REIT combinations, but it’s not an easy process. Plus, the results from previous combinations didn’t pan out as successes, albeit some failures arose due to the pandemic.

A couple of REITs to look out for on the buying side are Apple Hospitality REIT and Host Hotels & Resorts, Bellisario said. The expectation over the next three to six months, though, is that companies will be more eager to sell.

“I think you’ll see, at least over the near term, more sells than buys from these companies in part because cost of capital is still not at a point where the equity makes sense, even with the big move in stock prices,” he said.

Pebblebrook Hotel Trust and Sunstone Hotel Investors are two companies Bellisario said he’ll be particularly interested in hearing from.

In December, Pebblebrook revised its fourth-quarter and full-year 2022 outlook down due to weaker-expected-performance in November. The REIT cited the impact of Hurricane Nicole and weaker business and leisure demand during the second half of the month as the reason for its update.

“What went wrong? What did they do wrong? What have they learned? What have they changed in terms of their strategy and revenue management? Are they seeing the same challenges in January? Why is it [Pebblebrook] and no one else? I think investors continue to try to look for answers to that and are a little bit more comfortable with the view that it’s a Pebblebrook, San Francisco, Portland, West Coast kind of problem in sluggish markets,” Bellisario said.

Companies with more leveraged balance sheets, such as Hersha Hospitality Trust, Ashford Hospitality Trust and Braemar Hotels and Resorts, will have to answer questions about their financing, Loeb said. Those with better balance sheets will be asked more about acquisitions than finances, he said.

Scholes said the first three companies to report their earnings — Marriott International, Hilton and Host Hotels & Resorts — will set the tone for the rest of the industry.

“It’s almost like a snowplow clearing the highway; everything else has an easier job after that,” he said. “The snowplow does the heavy work to start with, then you have the traffic behind it with a much easier path.”

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