Stock trader Peter Tuchman looks at a clipboard on the floor of the New York Stock Exchange at the closing bell on Dec. 30. (Getty Images)
By Sean McCracken | Hotel News Now
Source: www.costar.com, January 2023

Wall Street Analysts Say Macroeconomic Factors Could Dampen Results

Challenges and opportunities abound in 2023 for publicly traded hotel companies, and Wall Street analysts who cover those companies say the good and bad won’t be felt evenly across different types of companies or throughout the calendar year.

One of the overarching themes of the year is strong performance in the first quarter might be hard to replicate in the following nine months, said Michael Bellisario, senior research analyst at Baird.

In 2022, the industry benefited from inflation by driving high room rates while keeping a lid on costs, but Bellisario expects that to reverse in 2023 with cost increases outpacing rate growth.

“Growing macro [economic] pressures could impact performance, and the expectation is that’s probably a bigger impact in the back half of the year than the front half,” he said.

C. Patrick Scholes, managing director of lodging and leisure equity research for Truist Securities, struck a more optimistic tone overall, but agreed that the first quarter’s numbers will be hard to match.

“You have a really easy [year-over-year comparison] in January and February, and that’s a real positive,” he said. “You’re gonna see some really big numbers, and that’s probably going to mask some of that weakness. Once you get through that, it’s going to be harder.”

Scholes is more optimistic about signs that corporate group demand for hotels, which lags behind smaller group demand, is coming back, notably with the return of large events such as the Consumer Electronics Show in Las Vegas.

“We haven’t really had that show in two years, and you’re seeing really big numbers in Las Vegas,” he said.

REITs More Challenged Than Brands

Both analysts agreed that the return of international travel and a weaker-than-anticipated return of corporate travel will have a greater impact on real estate investment trusts since brand companies largely have more diversified fee streams and are more likely to benefit from global demand.

“It will be most negative for the REITs that have high business travel exposure and certainly high tech or San Francisco exposure,” Scholes said. “It’s probably not a coincidence that Pebblebrook [Hotel Trust] had a profit warning.”

Bellisario said REITs sitting on more cash — such as Host Hotels & Resorts, Apple Hospitality REIT and Ryman Hospitality Properties — are better-positioned as the industry faces a possible recession. The companies most likely to restructure are “beholden to the capital markets because their balance sheet is not yet fixed or they have too much floating rate debt.”

Scholes said Hyatt Hotels Corp. might be the brand company best poised for success in 2023 due to its international portfolio, strategy of selling off owned hotels and the benefit of years of acquisitions. He added Hyatt’s portfolio in the Caribbean and Europe are particularly well-positioned.

Scholes expects Hyatt to continue to successfully sell owned hotels at high valuations even as financing becomes more expensive because the hotels being sold are such high-quality.

“It’s going to be tougher than last year, but deals will still get done, although a lot slower because of interest rates,” he said.

A likely flight toward economy hotels in a recession will boost Wyndham Hotels & Resorts’ portfolio, which is made up mostly of hotels in the lower-priced tiers, Scholes said. The company, however, faces greater competition after Hilton announced its own economy conversion brand, Spark by Hilton.

In terms of the broader environment for transactions, Bellisario said he doesn’t expect a lot of large-scale mergers and acquisitions, particularly among the REITs. He added that in similar environments, many industry observers predict that one or more hotel-focused REITs will be bought and taken private, but he doesn’t think that is likely for the time being.

The REITs’ “stock prices are a bit discounted, but the debt market is not there to support a billion-dollar, take-private [deal], and a lot of the private equity guys are sitting on their hands,” he said.