Analysts expect disasters, taxes to dominate Q4 talk
Analysts expect disasters, taxes to dominate Q4 talk
07 FEBRUARY 2018 9:39 AM

The upcoming earnings season for hotel industry C-corps and real estate investment trusts will be unlike most because of the continued impacts of natural disasters and the recently passed tax-reform package, sources said.

REPORT FROM THE U.S.—The fourth quarter of 2017 was not a normal one for the hotel industry with the lingering impacts of natural disasters artificially pumping up performance in some markets to the point that they buoyed overall performance numbers.

Wall Street analysts who watch the hotel industry noted this will be a short-term positive for companies as they prepare to talk to investors and analysts during the upcoming Q4 and full-year 2017 earnings calls, but ultimately there will be a price to pay in roughly a year’s time.

“I think it’s going to be one of the better quarters we’ve seen in years based on how (companies) guided, but one of the caveats is hurricanes were certainly an intense driver to that upside,” said C. Patrick Scholes, managing director of lodging and leisure equity for Suntrust Robinson Humphrey. “Companies historically don’t give a lot of credit to the impact from natural disasters.”

Both Scholes and Michael Bellisario, senior hotel research analyst and VP at Baird, said hotel performance in Europe and Asia also was strong, to the delight of hotel industry C-corps.

Bellisario said one of the top themes around this quarter will be sorting through tax reform and the investor sentiment tied to it. He said the tax-law changes have lured some investors who aren’t as familiar with the hotel industry to hotel real estate investment trusts, and they might not be as patient as investors who are more versed in the ins and outs of real estate.

“The expectations will be high, especially among those nondedicated real estate investors,” he said. “They’re consumer generalists making a macrobet on better GDP, and in aggregate those investors will be modestly disappointed on the commentary.”

He said hotel REITs continue to face the headwind of lower performance in the types of markets and properties they favor, which he described as “urban full-service.”

“Those markets continue to underperform the broader industry, and (REIT) teams continue to guide conservatively,” he said.

C-corps keep momentum
Both Bellisario and Scholes expressed optimism about the performance of C-corps, based largely on their continued growth and international performance.

“They’re well-oiled machines,” Bellisario said. “Their pipelines are growing on a consistent basis.”

Scholes said he doesn’t expect the market correction seen over the past week to have a material impact on those hotel companies, unless it lingers to the point that it impacts consumer confidence.

“I told my team that when we’re down 30% is when we start to get worried,” he said. “We’re basically back to where we were four weeks ago. It’s a pretty short-term issue. The issues would be if these gyrations in the market made people suddenly think they want to cancel or reschedule trips. I don’t think that’s happening. It’d take a bigger hit to that market.”

He noted if market fluctuations snowballed into a larger economic issue in which people were fearful of losing their jobs that could lead to a dip in leisure travel, but he isn’t predicting that.

“I don’t see that right now,” Scholes said. “This is somewhat of a healthy pullback after a year of low volatility.”

Companies to watch
Bellisario called out Host Hotels & Resorts as one of the top companies to pay attention to during the upcoming earnings calls as the company has a new CFO and is expected to be more “aggressively pursuing acquisitions and dispositions.” He said Host is also set up to “disproportionately benefit from synergies” that result from ongoing integration of what was Starwood Hotels & Resorts Worldwide into Marriott International.

Scholes said he’s keying in on Hyatt Hotels Corporation, which is set to have an extended earnings call with analysts to detail its asset strategy.

“It will be interesting to see if they add anything incremental on that, like what they’re selling, what they can get from (those properties) and what they plan to do with the proceeds,” he said.

On the REIT side, he said he expects LaSalle Hotel Properties to have an interesting quarter.

“They’re coming off a pretty weak (third quarter), and their Kimpton Hotels didn’t do very well,” he said. “It will be interesting to see if they managed to right the ship in the most recent quarter.”

Scholes said he doesn’t expect to hear much more information on Wyndham Worldwide’s planned acquisition of La Quinta Holdings’ hotel franchising and management business during the calls.

“They’ll probably deflect (questions on the deal) until when (Securities and Exchange Commission) filings come out,” he said. “There probably won’t be as much color as people would like.”

Key markets
Bellisario and Scholes agreed that Houston will be a top market for hotel industries as the city continues to sort through the fallout from Hurricane Harvey.

One market that is poised to drag down overall performance for the first quarter of 2018 is Washington, D.C., which Bellisario said has to cope with tough year-over-year comparisons with Q1 2017 when the city hosted both the inauguration of President Donald Trump and the Women’s March.

“D.C. is underperforming, and it’s a midterm election year, so there’s always a bit of a lull,” he said.

Scholes noted that among REITs, Park Hotels & Resorts and RLJ Lodging Trust are most likely to be affected by the strong performance in Texas and Florida as a result of hurricanes in those regions.

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