Hotel owners and brands are still riding the wave of resurgent global travel, even amid inflation and worries about economic turmoil, many of which have already fully recovered from the pandemic.
Several major hospitality brands, including Hilton, Hyatt and Marriott, have moved to all-time share prices in recent weeks and revenue per available room, the key metric of hotel performance, across the US have exceeded pre-pandemic levels. With the ban on international travel lifted and China officially reopened, hotel companies’ fourth-quarter earnings calls took on a distinctly rosy tone.
While demand still remains in some sectors, threats of recession and higher prices have so far failed to dampen consumer appetite – and telecommuting has unlocked a new set of commuters, many of whom are looking to make up for lost time during jams.
“Weekends are now three days or four days in some cases, and the business travel week is now two or three days instead of three or four days,” Michael Bellisario, a senior research analyst at Baird, said in an interview. “People continue to switch from goods to services. Goods were purchased in 2020 – cars, houses, washers and dryers. People are buying services now, going to restaurants and going on vacations.”
The surprisingly healthy rates hoteliers are seeing dominated profits, although uncertainty around the country’s economy and a frozen investment sales market dampened spirits somewhat.
Marriott International posted a profit of $673 million in the fourth quarter, up from $468 million a year earlier. Its quarterly RevPAR was 5% over the fourth quarter of 2019 and it brought in $5.9 billion in revenue in the period, beating Wall Street expectations by more than $500 million, the Wall Street Journal reported.
“Lodging is a cyclical business and is not immune to downturns in the macroeconomic environment,” Marriott CEO Tony Capuano said on his company’s earnings call. “To date, however, we have seen no signs of demand softening.”
Hilton beat expectations in the fourth quarter, CEO Christopher Nassetta said, with RevPAR jumping 24.8% from a year ago. Hyatt reported RevPAR growth of nearly 35% between the fourth quarter of 2021 and 2022, which contributed to a full-year RevPAR jump of 60%.
Hotels have been able to improve their performance dramatically because they have been able to charge higher rates across the board without dissuading consumers, Bellisario said. Demand itself is relatively unchanged from 2019. Overall, the industry grew its RevPAR by 10% between January 2019 and January 2023, he said, and inflation was the main driver — not occupancy, which is still slightly higher. lower than it was before the pandemic.
Plus, he said, hotel brands, compared to publicly traded hotel REITs, are performing well in the current economic climate — which is showing in the share price.
“When you think about the brand business versus the ownership business, the brand business is a better business,” he said. “It’s easy. Someone else is paying you. They don’t have people, they don’t pay property tax.”
Courtesy of Credit Suisse Asset Management/Trinity Real Estate Investments
Diplomat Beach Resort in Hollywood, Florida, which sold for $835 million this year.
Still, hotel REITs had a strong quarter, and executives expressed particular confidence in the group’s business and travel growth.
The nation’s largest hotel REIT, Host Hotels & Resorts, reported that its average daily rate was 22% higher in the fourth quarter than it was in 2019, while RevPAR was above 2019 levels for a third consecutive quarter . Its funds from operations beat analysts’ expectations in the quarter.
Host executives said the company took in more revenue from group bookings than it did in 2019 for the second quarter in a row, and although business travel was still down 18% from pre-pandemic levels, it is growing rapidly.
“We are not seeing any signs of weakness in any business segment,” Host CEO Jim Risoleo said on his company’s earnings call. “Our group pace is performing extremely well.”
Pebblebrook Hotel Trust’s revenue for the quarter rose 29.3% to $319.6 million from $247.3 million a year earlier, although it still posted a loss of $45.3 million and reportedly missed analysts’ estimates. Park Hotels & Resorts posted revenue of $665 million in the fourth quarter, per Nasdaq, from $451 million a year earlier.
Meanwhile, DiamondRock Hospitality reportedly has $600 million in cash and is looking for properties to buy. Apple Hospitality executives told investors during the company’s fourth-quarter earnings call that its balance sheet is in the right place to start buying “when the market is right,” CoStar reported.
Bellisario said the quiet investment sales market is a challenge for REITs, which have historically been able to grow their portfolios in a down cycle.
“What’s interesting is [REITs] are generally lower income, they have access to cash and borrowing capacity and want to grow their portfolio and buy property,” he said. “The challenge is that there is not much for sale and the fundamentals are still good, so sellers are not yet willing to take discounted prices. So I think there’s a little bit of frustration there, but they have a desire to grow.”
There is also concern about the state of the economy. Hotels have historically been the first type of property affected by economic downturns because their customers have the shortest leases.
“Current macroeconomic headwinds and the potential for an economic slowdown are competing with margin recovery,” said Host Chief Financial Officer Sourav Ghosh.
But any potential decline is not yet showing up in the numbers. Executives said in February calls that demand in 2023 is surpassing last year, and most expect continued growth.
“We’re very cautious on the economic backdrop and getting over the worry of a recession, the Fed’s actions, geopolitical issues, the labor market — we’re cautious about that, but we’re not seeing it in the fundamentals today.” said RLJ Lodging Trust CEO Leslie Hale Bisnow in an interview on Tuesday.
“We continue to see things moving forward and expect positive year-over-year trajectories. Having said that, the industry as a whole just came through an environment where we went to zero revenue, so I’m very comfortable that we’re smarter today in terms of how we operate our businesses, develop capabilities and efficiencies within the industry to be able to navigate any kind of recession.”
The hospitality industry was hit by the pandemic, with domestic travelers avoiding travel and visitors from key international markets blocked from entering the country for a year and a half. The immediate impact was more profound than that of 9/11 and the Global Financial Crisis combined. The industry’s recovery has surprised market analysts with its speed.
“It’s wild,” said JLL Global Head of Hotel Research Zach Demuth. “The expectation was that it would take years to get back to 2019 – if ever – but what we’ve seen is this journey that no one expected, as people felt they had to get out of their homes.”
CBRE forecast 5.8% annual growth in RevPAR for 2023, up from a previous forecast of 5.6% growth. Meanwhile, hotels are on a hiring spree, with nearly 80% of hotels experiencing staff shortages, according to the American Hotel & Lodging Association.
Demuth pointed to several expensive trades this year, notably the sale of the Diplomat Beach Resort in Hollywood, Florida, last month for $835 million, the third-largest single-property hotel sale ever in the US.
“We’ve seen some high-priced trades and really valuable transactions,” he said. “A year ago, we thought we could go back into isolation.”
Jon Banister contributed reporting for this article.
