Much like three months ago, investors listening to upcoming third-quarter earnings calls from publicly traded hotel brand companies and real estate investment trusts will want clarity on executives' economic outlook, according to industry analysts.
David Loeb, a former analyst with Baird and owner of Dirigo Consulting — which advises on capital markets, strategy and communications issues — said investors specifically will be listening for commentary on whether a recession has begun. He expects the interest in group and independent business travel recovery to be high as well.
Loeb said he is consistently surprised by the lack of talk about the impact of Hurricane Ian, though he notes it's still early.
He said that figures from the Federal Emergency Management Agency as of Sept. 16 note that 1,256 households with 3,233 people were in emergency shelters, which includes hotel stays. Similarly, Red Cross had 1,300 people across 12 shelters.
"What we don't know, is what's going to happen with mold?" he said. "Are people who are in their houses going to find out that they're not going to be able to stay their during the renovations?"
If there's a multitude of displaced homeowners at hotels — along with volunteers, insurance adjusters, construction and utility workers — he questions what will happen once vacationers from the Northeast and Midwest want to travel to states such as Florida, Alabama and Georgia as the weather turns colder.
"Maybe, suddenly, they're not going to find rooms," he said. "When you start adding the vacation travel component with hotels out of service, other hotels full with business, where are those travelers going to go? I suspect they will go to other warm-weather vacation markets."
If Orlando hotels that typically cater to groups are selling out to construction workers, for example, and guests are being pushed to a smaller pool of higher-end hotels, it's possible groups may need to go elsewhere, he said.
Expectations From the Real Estate Investment Trusts
Michael Bellisario, senior research analyst at Baird, predicts that investor sentiment will be negative due to macroeconomic uncertainty. Investors now are turning their focus to microeconomics trends.
"There's lots of concern about the macro; certain companies, certain markets, certain portfolios are over-earning," he said. "Have we already hit peak pent-up travel demand realization, have we hit peak rate growth, peak margins? If these portfolios over-earned, are we going to run into tough comparisons next year?"
Capital allocation will also be key, he said. Investors are worried about debt, rising interest rates and financing risks.
Bellisario said it's likely that a few REITs will be buying hotels, but a majority will continue to sell because the public market "is forcing the management teams to sell assets, given where their stocks are trading."
Hotel executives are also likely to discuss plans for stock buybacks and deleveraging, he said.
C. Patrick Scholes, managing director of lodging and leisure equity research at Truist, said investors will want to know if management teams are seeing signs of recession.
He will also be listening for discussions of labor costs, upcoming debt maturity and refinancing.
"One of the big topics I get from investors, certainly ... is the hotel REITs trade at the bottom end of their historical valuation ranges. What's the catalyst to change that? It remains a question mark," he said. "I think it's definitely an area of investor frustration, that the management teams have not been more proactive."
Expectations From the Brands
Bellisario said the one thing he will be focused on from the brands is net-unit-growth outlook.
"It will be interesting if any of these companies give any initial outlook or how they're thinking about it. Do they downgrade their outlook because projects are taking longer?" he said.
In terms of performance, he expects this quarter's numbers will beat the previous year's, but not to the same degree as the first quarter or second quarter.
"The rate of change is still positive, just not as positive. But, maybe in this challenging stock market environment, flat or slightly up is the new up," he said.
Scholes expects the brands to highlight hotel demand strength in Europe, the Caribbean and Canada as China demand remains weak. Brands will be cautious to give forecasts on China.
"I don't think anyone has a crystal ball on China. One week it starts to look like it's getting better, then the next week everything goes back into lockdown," he said. "We've seen this repeat."
He anticipates conversations about the return of investment capital will crop up as well.
Historically at this time, brands will give some solid financial guidance, however, he's not holding his breath that they will this quarter.
"I'm not sure it's a wise idea given a lot of the unknowns for next year," he added. "But we might see a net-unit-growth number, if anything."
Mergers and Acquisitions
Loeb said talk about the sale of individual hotel assets will be interesting this quarter.
"I think there's a lot of sellers, and I'm not sure if there are that many buyers to actually take up those bids," he said. "Debts a lot more expensive; cap rates have not yet responded to that and we're at a time where we're headed toward a bid-ask spread."
He anticipates owners are feeling it's a better time to sell than to refinance, which is opposite to what it's been in years past.
The cost of capital is reasonably high for public companies, he noted, but there are fewer competitors.
"I don't think the public companies are going to rush into anything," he said. "I think we're headed to a market where we could see differences in the way the public market values individual companies, and that's what creates opportunities for corporate combinations."
Historically, investors get excited about the next hotel cycle when they feel the industry is in recession, but there is not a universal agreement on that.
Companies To Watch
Bellisario said this quarter he will be paying attention to Sunstone Hotel Investors, which has assets in Miami and Napa, California, that are "under-earning."
Sunstone "is still proving to the investor community the new management team, the deals they've done — it's all eyes on that," he added.
Additionally, Host Hotels and Resorts has a big balance sheet in terms of investment capacity. He will be interested to see if the company buys any stock back and if it is in acquisition mode.
He expects Apple Hospitality REIT to be a buyer of hotels, while Pebblebrook Hotel Trust and Park Hotels and Resorts are still in asset-sale mode, he said.