While the hotel sector was seen as largely doomed during the early stages of the pandemic, as the world emerged from lockdowns, we have seen the hospitality sector provide some unique opportunities and entry points. Among all the bad headlines were some regions and hotel types that seemingly weathered the storm better than others. And when it comes to unlocking opportunity in real estate, it lies in the ability to separate unique situations from those broad industry headlines.
Part of monitoring a portfolio or sector extends beyond the performance metrics and operating history of any specific asset, but carefully tracking the outside drivers that impact property cash flow. In other words, an asset’s revenue is determined by leases (or bookings in the case of hotels), but the strength of those revenues is driven by market dynamics and the financial health of those users paying the rates. This holds especially true for hotels.
So, as we explore the hotel sector for opportunities, we naturally try to understand how the major players in the market are performing and the strength of overall demand. And in this case, it appears the recovery is well underway. Take for example recent (and highly encouraging) reporting by some major US hotel brands:
- Choice Hotels (NYSE: CHH) reported Q4 2022 revenue of $361.98 million which exceeded market expectations by over $5 million and a RevPAR (Revenue Per Available Room) 20.4% above its pre-pandemic levels. For the fiscal year 2022, it reported record net income of $332.2 million on revenue of $1.4 billion, which was another record for the firm.
- The report of Hyatt’s (NYSE: H) performance was just as impressive. Its full year revenue 2022 was $5.891 billion, which was substantially more than the $3.028 billion posted in 2021. Its Q4 2022 revenues exceeded expectations by 6% and its top-line revenue increased by 47.6% year-over-year. For its Owned and Leased segment, Q4 2022 RevPAR increased by 41.7% year-over-year, ADR (Average Daily Rate) increased by 11.7% and its occupancy rate increased by 14.5% compared to the same quarter 2021. While not entirely relevant to our domestic strategy, it is worth noting that among its international holdings, its ASPC segment (Southeast Asia, Greater China, Australia, South Korea, Japan and Micronesia) is also showing robust growth. RevPAR during Q4 reportedly grew 46.6% year-over-year, ADR increased by 24.1% and occupancy jumped by 8.4% (Specifically, it reported increased demand in its South Korea, Japan, and SE Asia portfolio).
- Marriott (NASDAQ: MAR) Q4 2022 RevPAR increased by 28.8% worldwide (and 23.6% for the US and Canada) compared to the same period 2021. Its Q4 2022 net income was $673 million, compared to $468 million in Q4 2021.
In terms of hotel brands maintaining momentum into 2023 and beyond, it appears the outlook for travel and hotel demand is fairly optimistic (of course, for select brands in certain markets, as not all regions are performing as well as others):
- According to the National Travel and Tourism office (as reported by Skift), the US expects approximately 62.8 million international visitors in 2023, which is a 21.2% increase from the 51.8 million recorded in 2022. While this is short of the 79.4 million reported in 2019, it still points to a positive trend on a year-over-year basis. For example, the same bureau estimates that 2024 projected international visits will reach 79.9 million, which would be a slight increase over the 2019 pre-pandemic volume. As for 2025, it anticipates a full recovery with 82.4 million visitors and 91 million by 2027.
- According to the UN’s World Tourism Organization (UNWTO), after a stronger than expected recovery for tourism in 2022, international tourism could approach 80% to 95% of pre-pandemic levels. Over 900 million tourists traveled in 2022 which was twice as much as the level reported in 2021. That said, 2022 remained below pre-pandemic levels. While the Middle-East and Europe have led the bounce back, the Americas saw an aggregate recovery of about 65% of its pre-pandemic levels. And this does not even take into account that outbound tourism from China has not yet entirely kicked in.
- In an interesting data point we found in an Ipsos Q1 2023 travel survey, US travelers are showing continued interest in combining business trips with leisure travel (they used the term “bleisure”). In this report, 11% of respondents said they would prioritize trips that were a mix of business and leisure. In fact, 81% of respondents with business travel plans in the next 6 months had leisure travel planned in that same timeframe (presumably, extending hotel stays per trip). We do think that as flexible remote work or hybrid models become the norm, this trend may have continued support. (Another interesting data point in this survey was that almost a quarter of Americans planned to increase their leisure travel in 2023 when compared to 2022.)
- In another sign that points to improved sector health, local tax revenue generated from hotels in the US is expected to reach $45 billion in 2023, which would represent a new high, an approximately 14% increase from the pre-pandemic levels of 2019. This growth is expected to be highest in destination states like Florida, California, Texas, and Nevada – which happen to be regions in which we have managed assets or are considering investments in the sector (although not the only regions we find promising).
Of course, there remain challenges in hospitality. Between staffing shortages, inflationary pressure, and some jitters about the economic landscape, the positive post-pandemic recovery trend mentioned above may face some headwinds. However, disruption caused by the pandemic, uncertainty about the economy (and its impact on travel), and overall cooling caused by Fed policy is precisely what has presented us with some interesting opportunities in the hotel sector. Given the data we have seen so far, there is cause for optimism – albeit cautious, as the economy has many moving parts.
In keeping with our commitment to staying connected with our community, as we unpack research and assess the deals that show up on our radar, we simply wanted to share with you some of our high-level observations or data that excites us. If you enjoy this sort of content, please be sure to follow our social media and be on the lookout for an announcement on when we will launch our official newsletter!