Hotel earnings are still good — for now
By Danielle Douglas,
Steady guest bookings and increased room rates gave hotel owners another quarter of earnings growth, but threats of a double-dip recession make the sustainability of these gains seem tenuous.
Industry analysts wonder whether the momentum that has sustained the sector’s recovery, and spurred a surge in acquisitions, will be trumped by economic head winds, diminishing demand and leveling rates.
“The longer the economy sputters the more likely both businesses and consumers are to cut back on discretionary items, which would include travel,” said Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “As long as it proves to be temporary and we get the re-acceleration that we’re anticipating, then hotels may well survive it fine.”
Economic troubles — rising oil prices, slowing global growth and shaky consumer confidence — that have plagued the market for months have yet to create weakness in the hotel sector, judging from measures such as occupancy rates and revenue-per-available room, said Janney Capital Markets analyst Daniel Donlan.
“But hotels tend to lag by three to six months behind what the broader economy is doing because consumers tend not to cancel trips they’ve booked months in advance,” he said
Much of the resurgence in hotel demand has occurred amid a sputtering economic recovery, in which unemployment has stubbornly hovered around 9 percent. Companies, nonetheless, spent $62.2 billion in domestic travel in the most recent quarter, a 6.3 percent increase compared to a year earlier, according to the Global Business Travel Association.
“Corporate profits have been great in the first half of the year ... and that is a good sign for our industry,” said Michael Barnello, chief executive of LaSalle Hotel Properties in Bethesda. “The macroeconomic factors at play have not, at this point, effected corporate travel.”
Group bookings, tied to conferences and conventions, represented a major demand driver for LaSalle in the first half of the year, and Barnello anticipates it will hold up going forward.
Raymond Martz, chief financial officer of Bethesda-based Pebblebrook Hotel Trust, said group bookings for 2012 are 30 percent above that of the previous year.
Business and leisure travelers as a whole pushed national occupancy rates up 6 percent from the prior year, allowing operators to boost room prices by an average of 3 percent, according to Smith Travel Research.
Higher rates were responsible for the majority of the room revenue growth that underpinned earnings for hotel owners. These owners, particularly the real estate investment trusts, have been using their cash advantage to tuck properties into their portfolios at a dizzying pace.
Sales through the first half of the year rang in at $8.6 billion for 345 properties, representing a 153 percent jump in hotel transactions from a year earlier, according to research firm Real Capital Analytics. Of the 15 most active buyers in the country, six of them reside in the Washington area, including Pebblebrook, Host Hotels & Resorts and RLJ Lodging Trust.
Pebblebrook leads the local pack with six hotel purchases in the first half of the year. Earlier this month, the REIT took a 49 percent stake in the Denihan Hospitality Group’s portfolio of six Manhattan boutique hotels for $153 million.
Similar to LaSalle Hotel, DiamondRock Hospitality and Chesapeake Lodging Trust, Pebblebrook buys and owns full-service hotels in the top 20 markets in the country, which have benefited the most from the recovery.
“It feels like a bifurcated economy, where you have people in the coastal and major urban markets doing relatively well and they’re traveling,” Martz said.
Limited supply and constrained new construction in core markets promises to give hotel companies further pricing power, making additional acquisitions that much more attractive.
One problem: investors are finding fewer attractive deals that fit their buying criteria. What’s more, the commercial mortgage-backed securities market, a key source of financing, has shunned the hotel sector in recent months. Plus many public REITs have little acquisition capacity left, and with their shares trading low, due to economic uncertainty, they’re not likely to raise equity, Donlan said.
There have been a smattering of deals closed so far this quarter, including Host Hotel’s $442 million acquisition of the Grand Hyatt Washington D.C. and DiamondRock’s purchase $46 million purchase of the Courtyard Denver Downtown.
Donlan suspects if the commercial mortgage-backed securities market remains closed, some owners may run into trouble refinancing their debt and be forced to sell.