During the second quarter earnings season, hotel industry analysts anticipate hearing publicly traded hotel companies outline their long-term strategies and recovery expectations.
REPORT FROM THE U.S.—Months into the coronavirus pandemic, publicly traded hotel companies have developed their strategies to survive, working with banks and cutting expenses.
Looking ahead to the next round of quarterly earnings calls, industry analysts said they expect to hear real estate investment trusts and big brands outline their long-term plans and overall outlook.
The actual performance numbers from the last quarter don’t mean as much as they have in past quarters, said Wes Golladay, director, equity research analyst at RBC Capital Markets. For hotel owners, analysts and investors are going to be looking at things like monthly cash burn and what controls they have on expenses as well as the incremental revenue flow to the bottom line.
The REITs have been working with their banks on their loans as revenue is down. The banks don’t want the properties under their control and they would rather work with good owners, he said. The REITs would fall under that classification as they invest in their properties, have them professionally managed and hold them for years.
“They’re going to be more willing to work with these for the majority of the companies,” Golladay said.
That relationship will also benefit REITs when the banks do have to find new homes for other properties, and the banks might see the REITs as logical acquirers, he said.
The credit facility covenant waiver packages the REITs have negotiated with their banks are interesting, said Rich Hightower, managing director and lodging research analyst at Evercore ISI. Each REIT came into their waiver packages in a different situation relative to their peers in terms of leverage.
“The waiver packages specifically have carve-outs for various types of investments under certain circumstances, but not everybody has the same level of flexibility, and usually that’s been contingent on your leverage levels heading into all of this,” he said.
The broader cash flow and liquidity solvency concerns are in the rearview mirror, said Michael Bellisario, senior hotel research analyst and VP at Baird. It’s more a function of what the shape of the recovery looks like and its timing. Baird believes the industry returns to 2019 levels in 2023 or 2024 because business travel is such a large piece of the pie, but that will take a while to come back, he said. Rate lags, which will add another year to the revenue per available room recovery.
It's not so much about the cash burn anymore in terms of magnitude because it’s less bad than it was before, Bellisario said.
“It’s really (about) does this cash burn last until next year?” he said. “Is it two more quarters? Six more quarters? And then what does the balance sheet look like on the back end of that?”
Bellisario said he’s expecting the brands to offer something more qualitative than quantitative. In a recent article in The New York Times, Marriott International President Arne Sorenson said, “I’m less optimistic today than I was 30 days ago.” Bellisario said that may be why the company had underperformed after the story came out.
“In a week or two, Arne and (Hilton President and CEO) Chris (Nassetta) will get on a call and have a pretty sobering qualitative outlook that’s not going to bode well for anyone in terms of the recovery,” he said.
There are only so many quantitative things the CEOs can share about group bookings or cancellations being down a certain percentage, Bellisario said. That’s not what’s important.
“It’s people buying and selling the brands on the macro trade and what the world looks like in ’22 and ’23,” he said. “The qualitative commentary about travel, global trends, what they’re seeing from their biggest customers is how people are going to react to the brands on the conference calls in a few weeks.”
Brand executives will talk about unit growth, looking at properties that closed and reopened, have been delayed or won’t reopen, Golladay said. That will be a headwind but that doesn’t mean they can’t take care of those. The industry will probably shrink a little bit, but the higher-quality brands will probably be less affected. They might have some conversion opportunities come out of this to offset that, he said.
“That's kind of the clarity people are going to want,” Golladay said.
The brands can also talk about their international exposure and explain how their properties are doing in the Asia/Pacific region generally, China specifically and other areas that have been through the pandemic, he said.
The brands will likely see an uptick in conversions, many of which would come from independent hotel properties, Hightower said. Independents are going to see they need the revenue and a booking engine to help with the lack of demand walking in. Soft-brand growth could offset some of the degradation elsewhere in the pipeline.
“I think you'll see an uptick in some of those deals where they could grow via conversions maybe at a greater pace than was probably assumed earlier this year,” Hightower said.
Companies to watch
Host Hotels & Resorts and Sunstone Hotel Investors have the balance sheet to do deals, Bellisario said. He wants to know what their executives are seeing and hear their philosophy for deploying capital. On the other end of the spectrum, there are companies that will need capital or are in a difficult position, he said, pointing out Ashford Hospitality Trust’s preferred tender offer and wondering what Hersha Hospitality Trust will do.
“It’s really just the sources and uses of capital,” he said. “There are companies that have capital that can deploy it and what’s the philosophy on timing. Then there are companies that don’t have a great balance sheet that are going to need to solve for an improved balance sheet in the future.”
Companies with select-service properties might be more interesting to listen to as they have more hotels open and would offer insight into what they’re seeing, Golladay said. Those with national footprints and presence in coastal cities could talk about the different regulatory environments they’re encountering.
For all companies, while the news they share likely won’t be good news, it’s about various degrees of bad, said C. Patrick Scholes, managing director of lodging, gaming and leisure equity research at SunTrust Robinson Humphrey. For brand companies, they benefit from being a fee collector as opposed to a property owner, he said.
Wyndham Hotels & Resorts has the most properties in the economy segment and Extended Stay America’s model has held onto demand, so the situation could be less bad for them, while hotel companies like Park Hotels & Resorts and Host are hurting because of their reliance on business and group travel.
Those with drive-to hotels have seen a greater degree of recovery as the trajectory of leisure travel has been improved over time, Scholes said. That said, with the recent spike in cases in several states, that is changing, he added.