Leading US listed hotel groups divided themselves into two groups, as they revealed Q3 results – those in the black, and those still calling a loss.
While the quarter’s leisure-driven recovery provided positive progress, CEOs urged caution, with warnings that the improvements of the summer are now looking to stall. Covid-19 lockdowns have returned to parts of Europe, while in the USA, a surge in virus cases has yet to be met with a coordinated response from officials distracted by a presidential election.
The distinction also largely divided along the lines of portfolio style. Those heavy on franchised properties, with limited service, or lower tier hotels, have seen a stronger performance than those tied to a business with more large scale, business-oriented properties in city centre locations.
The edge of town, motorway off-ramp locations have continued to trade better, enjoying a strong summer with leisure bookings from staycation travellers. They have also seen a relatively consistent business demand from blue collar workers, who have largely continued in their normal business roles, throughout covid-19 lockdowns.
Meantime, hotels reliant on white-collar business have been hit by a long tail of homeworking – first compulsory, and still being encouraged by many corporates. In addition, meetings and event business has only now started to recommence, albeit at a small scale, and in limited parts of the world including Australia and China.
Choice Hotels declared a net income of USD14.5m for the quarter, as its US portfolio outperformed the market by close to 20% on the revpar measure. CEO Pat Pacious declared its Ascend Collection “outperformed by over 26% versus the upscale segment”. Extended stay brands did well, too: “Our WoodSpring Suites brand achieved an average occupancy rate of 77% in the third quarter, and the brand’s monthly occupancy levels have remained north of 75% since the last week of June. Our Suburban extended-stay brand experienced year-over-year occupancy gains in the third quarter, further enhancing the brand’s attractiveness to developers looking for a smart, extended-stay conversion opportunity. At the same time, our MainStay Suites mid-scale extended-stay brand gained more than 16% in RevPAR index versus its local competitors in the third quarter.”
As a result of the solid performance – and cost reductions – Choice reduced net debt by around USD50m in the quarter.
Pacious said the group had benefitted from the stronger staycation market of 2020. “So our traditional mix is sort of 70-30 leisure to business. What we’ve seen in the third quarter was leisure at about 80%, 82%.”
Wyndham Hotels, also in the black, declared net income of USD27m for the quarter, with adjusted ebitda of USD101m.
“Our brands collectively gained more than 300 basis points of market share domestically during the quarter,” said CEO Geoff Balotti. “This improvement was driven by rising demand and drive-to leisure travel during the weekends […] combined with a robust return of our everyday business traveller during the weekdays.” He said the group’s split is 70/30 leisure to business.
“Our everyday business traveller is a steady and reliable segment of business travel that has been far less disrupted by the pandemic. Two-thirds of our business bookings come from the infrastructure industries, including construction crews, utility workers and engineers. While this travel demand declined 49% in the second quarter, we have experienced a strong rebound in the third quarter with this business down only 24%. The vast majority of the remaining one-third of business bookings at our hotels come from logistics industries, including manufacturing, trucking, rail and warehouse workers. We have seen similar rebounds in this segment.”
Balotti said Wyndham has delivered three key initiatives to improve performance. “First, as part of our broader digital investment strategy, we recently launched a best-in-class customer data platform to better enable our teams to compile, to visualize and to analyse data from multiple sources and deliver increasingly sophisticated and actionable guest insights. Second, to support our everyday business traveller, we launched a powerful business-to-business solution called Wyndham Direct. And third, we launch what we believe to be the fastest mobile app in the industry providing a first-class user experience that travellers are demanding. Since its launch in late summer, app bookings over September and October are running 4% above prior year.”
Hilton burned through around USD100m of cash in the quarter, a figure CFO Kevin Jacobs said “was better than most people’s expectations, including our own”, as more fees were collected than might have been expected. While he suggested the group was “almost there”, he said that fourth quarter burn was still likely to be similar.
CEO Chris Nassetta said most of the group’s furloughed corporate staff had now returned. Revpar for Q3 was around 60% year on year, and although business had picked up, September saw the uplift stalling. “Urban full-service hotels remaining particularly challenged due to the lack of meetings and events, negligible international travel and local COVID protocols.”
While hotels in China are achieving 70% occupancy, Europe – in common with the US – had seen stalling business after the summer holidays.
Pressed for an outlook, Nassetta summarised markets: “When you put it all together, Europe is definitely going a bit backwards. Asia continues to move a little bit forward. US is sort of steady, and that’s kind of why we get to a fourth quarter, that’s about where we are.”
Marriott CEO Arne Sorenson confirmed a similar outlook: “Globally, the plateauing of demand that we saw toward the end of the third quarter has generally continued into the first few weeks of the fourth quarter.”
“Our actual cash burn for the third quarter was around flat, much better than the model would have shown even including severance payments of around USD60m in the quarter that were not included in the model.” said CFO Leeny Oberg. “Over 90% of our hotels in Greater China had positive gross operating profit in September, with almost three quarters generating positive profits for the first nine months of the year.”
While Hilton’s Nassetta dismissed alternatives such as day room rental as simply necessary diversions in the current market, so Sorenson hankered for a return to the old normal. And he suggested that, while some changes might be permanent, guests would not accept them all. “We have a fairly limited and sometimes dramatically limited food and beverage service – and that’s not going to be satisfactory to most guests when we get back to a normal demand environment. Guests can be quite sympathetic and empathetic during a tough, tough time. But when we get back to something that feels a little bit more normal, they’re going to expect the full services, particularly from a full-service hotel that they have come to anticipate.”
But he said there would be lasting changes: “I think we will see some things in keyless entry. I think we will see some things in the staffing models that we have been experimenting with. I think some of the above-property costs have been cut – I mean our estimates today I think are we probably reduce breakeven occupancy by 3 to 5 points, depending on the brand. At the end of the day though, we’ve got to make sure that the guest is satisfied with the experience that they’re getting.”
HA Perspective [by Chris Bown]: The fleet of foot – with the lightest business models – appear to have won the first round in this recovery story. But it’s going to be a long game.
Those with big corporate exposure to the US market – in particular Choice – will, however, need to gird themselves. Never mind hanging out the bunting for uncle Joe’s big election win, there’s a nasty looking boom in Covid-19 infections across the USA, and STR has just reported US hotel occupancy for the last week of October being the weakest seen since late June. The coronavirus impact ain’t over yet in the US of A.
Nassetta took comfort from corporate rate negotiations which, he said, had largely been agreed at levels maintained at 2020 levels. That’s all very well, but the more important point is when corporates will actually start to book hotel rooms in volume, once more. That’s far from a certain date.
Additional comment [by Andrew Sangster]: The Q3 numbers have been rendered ancient history by the news on Monday that a vaccine has been developed by Pfizer and BioNTech. It was news that sent share prices racing upwards and will have caused waves of relief in investors and operators in hospitality businesses globally.
With the vaccine tested on 20,000 people without serious side-effects and evidence that it is 90% effective, there is at last a silver bullet that will bring to an end the months of misery. Despite a number of uncertainties remaining, there is enough evidence to be confident that the vaccine is safe and provides protection.
But (you knew there was but, right?) it is still going to be late 2021 at the earliest that normal life resumes. The first batches of the vaccine will be distributed to the most vulnerable and frontline healthcare workers. This will take away the threat of health services being overwhelmed and thousands more deaths.
Until there is widespread availability of the vaccine (and, with luck, a few of the other candidate vaccines), the rest of the population will still be required to continue with social distancing. There will be no sudden bounce-back of trading.
The first half of 2021 will remain a tough slog. Just as it is always darkest before dawn, the next few months are going to be challenging. But at least we know dawn is coming.
The run-up in share prices are justifiable in that the bear case on the virus – that of an enduring and untreatable pandemic – has significantly weakened. It is not eliminated as the mutation of the virus to minks in Denmark and elsewhere shows there is a lingering threat.
Investors in listed hotel groups have now priced in a full recovery. As analysts at Morgan Stanley point out, share prices of most companies are now trading at EV / EBITDA multiples that are higher than their five-year averages. And yet it is hard to see how 2022, let alone 2021, will be better than 2019.
Looking out for a longer period, however, and there are reasons be very optimistic about industry prospects, particularly for the larger and stronger groups.
Marriott and Hilton, for example, are going to enter the recovery from a pole position on the starting grid. Marriott’s 145 million loyalty scheme members have proved more resilient during the decline than non-members which presents a strong base to build back better in terms of cutting out margin-reducing intermediaries.
Pipeline looks remarkably robust with an anticipated net rooms growth at Marriott of between 2.5% and 3%. And this is after losing between 1.5% and 2% of net rooms via deletions.
But coming back, the global brand giants are leaner than they ever were. G&A (corporate expenses) are likely to be 20% lower in 2021 than the guidance of USD950m to USD960m for 2020. Marriott said this cost reduction was sustainable.
Marriott also gave a little more colour on the situation with SVC, the former Hospitality Properties Trust, portfolio. These hotels will represent a loss of around 1% of rooms supply when they leave. Originally, the hotels had a lease structure which has since evolved into a management contract with guarantee that was further diluted at the start of this year to be non-recourse but with termination penalties.
Marriott CEO Arne Sorenson said that discussions with SVC about renewing some form of contract were ongoing but that most likely they would become Sonestas. He said: “Looking at the ROI from assets that are Sonesta flag versus ours, it looks like the ROI is roughly half.”
He added: “It’s a little bit surprising to us that the separate stockholder and debt holder interest in SVC could be furthered by converting those to Sonesta’s brand, as opposed to the dramatically stronger brands that are on those hotels today.” This is, for corporate speak, fighting talk.
There was more fighting talk on the front page of Marriott’s press release for the Q3 results. During the period, 1,400 rooms were added from competitor brands (which, it turns out, includes independents). The total room additions were 19,000.
For the recovery, China is usually put forward as the example of what it might look like. Leisure has come back stronger than business travel but this is because business travel includes international. Marriott said that around a quarter of the business at its hotels in China is from international business travel. Given the ban on international visitors it is therefore no surprise to see business weaker.
In addition, the Chinese outbound market has been forced to travel domestically, which has boosted leisure demand. Marriott said that the business travel recovery “all things considered” had been robust in China.
Where it does look likely that there will be a lag in recovery is with group business. Corporate group, such as events, is the main challenge as things which are more leisure-focused like athletics tours look likely to rebound more quickly.
Sorenson said there were three things that will help business travel rebound. The first, and perhaps most obvious, was the end to restrictions, formal and informal (such as airline capacity).
The second was a recovery in the underlying economy: “My guess is we’re going to see an economy which has got some lingering weakness because of small businesses being closed, many probably not able to reopen, relatively higher levels of unemployment around the world. A number of factors that it will take some time for us to work our way through”.
The final piece was what happens as a function of remote work. Sorenson said this conversation was the same after the tech bubble burst in 2001 and 9-11 followed. “What generally we saw is that in the few years following, most of that group and most of that business transient travel comes back.” But he admitted not all of it did. Over the past 20 years of business mix perhaps two to three points of shift occurred away from business transient towards leisure. “I suspect we’ll continue to see that in the years ahead,” said Sorenson.
Marriott is entering the recovery with a robust balance, a perhaps stronger than expected pipeline, and significantly weaker competitors in some cases. The next few years look set to be a golden period for the industry’s giants.
With the global majors as winners, the next question is who are the losers? Right now it looks to be independents and those smaller, under-capitalised chains.