Storms set the tone for Q3 earnings season
 
Storms set the tone for Q3 earnings season
11 OCTOBER 2017 8:21 AM

Analysts expect the recent rash of major hurricanes to dominate talk during the upcoming earnings calls between investors and publicly traded hotel companies.

REPORT FROM THE U.S.—Hurricanes Harvey, Irma and Maria had an outsized impact on the hotel industry during the third quarter, and thus will likely be the recurring topic of discussion during upcoming calls with investors for publicly traded C-corps and real estate investment trusts, according to analysts.

And at least from a business and investor sentiment perspective, that’s not necessarily a bad thing, said Michael Bellisario, VP of equity research and senior analyst for Robert W. Baird & Company.

“That’s the topic du jour, and the silver lining is (before the storms) everyone was talking about slowing (revenue per available room) growth,” he said. “We all know September would be tough, but there’s now a giant asterisk next to the month.”

But beyond giving hotel companies an out for weakening revenue growth, the events that followed the storm could end up being a net positive for hotel performance, Bellisario said.

“I think generally investors are optimistic there will be some positive demand in aggregate that comes from this,” he said.

C. Patrick Scholes, managing director of lodging and leisure equity research at SunTrust Robinson Humphrey, said the benefits of the storms will mostly be to brands that operate in the midscale and economy spaces, rather than those that focus higher on the chain scales or ownership groups like REITs.

“Historically, due to extended relocations, economy and midscale (hotels) have benefited the most from hurricane-related demand,” he said.

He said he believes the hurricane-related boost in areas like Texas and Florida will last until the second quarter of 2018, and will be seen most dramatically by companies like Choice Hotels International, La Quinta Holdings and Extended Stay America, which have properties in both the geographies and price range most affected by hurricane displacements.

Hurricanes require closer look
Scholes noted it’s important for investors who increase their projections because of the hurricanes to comparably scale back their growth expectations for 2018.

“A year from now, they’ll have that dreaded tough comp,” Scholes said. “Just look at what happened to Choice in 2005 and 2006 after Hurricane Katrina. They had a nice bump, but investors forgot about the tough comp.”

He said Choice saw 9.6% RevPAR growth in Q1 2016, but then grew just 1% in Q1 2017.

“The market really caught them off guard,” he said. “It’s helpful demand, but you have to be careful to not get too excited.”

Wes Golladay, VP and equity research analyst for RBC Capital Markets, said he expects commentary this earnings season to be among the most interesting there has been recently.

“The companies that will be interesting are the few that have southern Florida exposure—to hear how they think that will progress,” he said. “Also, the companies that have Houston exposure, because it will be interesting to hear how much demand was above average. Those are the two (areas) I’m most interested in.”

Golladay said it’s hard to judge the quarter compared to other recent quarters due to events like the storms.

The quarter “benefits from some one-time (events) like the solar eclipse and hurricanes,” Golladay said. “That has boosted performance some, but overall we’re not more bullish.”

Beyond storms and eclipses, there has been a noticeable shift in market perceptions for the industry as a whole, Bellisario said.

“There seems to have been a rotation in the market,” he said, noting many hotel stocks have increased noticeably since mid-August. “Interest rates are moving higher; people are more optimistic about tax reform … and I think people are starting to look to 2018 a little bit more.”

As of press time, the Baird/STR Hotel Stock Index was up 8.1% since 19 August.

But Bellisario noted it’s important to keep expectations tempered because the industry’s underlying “fundamentals are pretty unchanged.”

Industry and Q4 expectations
Jan Freitag, SVP of lodging insights for HNN’s parent company STR, said from a data standpoint the third quarter was defined by stronger-than-expected demand growth.

“As you may recall, the forecast for the year called for supply and demand to remain in balance at the same growth rate,” he said. “But that turns out to be wrong due to an underestimation in the strength of demand growth.”

Freitag said preliminary numbers show RevPAR growth for hotels across the U.S. in September at roughly 2.4%, fueled by a 1.4% increase in occupancy and a 1% increase in rate.

He said it’s now safe to assume occupancies will hover around all-time highs as rates “continue to be fine—not great, but not terrible.”

He said it’s important to note that the hurricanes weren’t the only thing that affected the quarter.

“We have healthy (gross domestic product) growth, with unemployment at historic lows and strong consumer confidence,” Freitag said. “The stock market is at or near all-time highs, which at least makes people feel rich and drives leisure demand. Corporations are doing really well, and many are expecting policy changes that should make life even easier going forward with tax cuts or declines in regulation.”

He said the calendar shift of Jewish holidays should have a noticeably positive impact on the fourth quarter, with Yom Kippur and Rosh Hashanah moving from early October to late September. And that’s not the only thing playing in the quarter’s favor.

“The comps for October are going to be easier, since Hurricane Matthew happened last year,” he said, noting October will be the strongest month of the quarter. “October should come in at a healthy clip.”

Analysts agreed that October and the fourth quarter in general look to be strong.

“It should be the strongest quarter of the year,” Scholes said. “There are two reasons. One is that (hurricane-related demand) is helping, and more so for the Jewish holiday shifts. (Those holidays) really hurt group business in September, but that will reverse in October.”

For months, Bellisario said, investors have been banking on a strong Q4 to help salvage a year of tepid growth. But after the hurricanes, that’s become less important, he said.

“October is (the make-or-break month for the quarter) but that probably matters less than it did a quarter ago, as more investors are now looking to 2018,” he said.

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