There has been speculation on whether a recession will lead to a trade down in accommodations for travelers, but executives at Sunstone Hotel Investors said a moderating environment for leisure demand has led to a different type of trade down.
On the hotel-focused real estate investment trust's second-quarter earnings call, Sunstone CEO Bryan Giglia said his company has had to rely on lower-rated channels of business, such as discount channels and online travel agencies, as the higher-spending travelers who book direct with brands have been the most likely to head overseas.
"On the rate side, what we're seeing is, of the leisure segments, the retail segment was the weakest" in the second quarter and into the third quarter, he said. "To simplify that segment, that's the brand.com customer. We think that's the customer that is more likely to be the one taking an international trip now. While that customer has gone away in the leisure segment, we're not seeing that in the [business transient] or other segments. But if that customer has gone away for the short term, our expectation is they come back."
A lack of inbound international travel and moderating leisure demand have been recurring themes for U.S.-based hotel REITs this earnings season.
Giglia said he expects those trends to return somewhat to historic norms in 2024 as pent-up demand for European destinations subside and simple economics make domestic U.S. travel more practical, along with a hopeful uptick in inbound international travel to the U.S.
"We are seeing international airfare become very expensive [and] domestic airfare has come down a little bit," he said. "While it tends to be the more affluent traveler that is doing these types of trips, the cost of that international ticket does weigh on the overall cost. And then, are European trips something people do every year or every couple of years?"
Giglia said there have been some positive signs for demand, such as stronger performance in major markets, including severely challenged San Francisco, which has led the company's recovery in revenue per available room.
Sunstone's hotel portfolio also performed well in San Diego, which just recently hosted the annual San Diego Comic Con. The firm's Hilton San Diego Bayfront experienced a dramatic boost in bookings from the event.
"The recent Comic Con event in July was very strong as the hotel remained nimble and was able to resell all the rooms that were canceled related to the Hollywood strikes at average rates that were nearly twice as high," he said. "In total, room revenue was up 10% relative to the Comic Con event last year."
Second Quarter Performance
During the quarter, Sunstone realized a 3.6% year-over-year increase in RevPAR for its comparable hotel portfolio to $245.91. Average daily rate for the second quarter was $319.36 with occupancy at 77%.
RevPAR growth was 10.7% for urban and group demand-driven hotels.
The company recorded $43.1 million in net income for the quarter, compared to $37.7 million for the same quarter a year prior. Adjusted earnings before interest, taxes, depreciation and amortization for real estate came in at $85.1 million, a year-over-year increase of 15%.
At publication time, Sunstone's stock was trading at close to flat since the start of the year, increasing just 0.2% year to date. For the same period, the NYSE Composite was up 6.2%.