One of the un-sung virtues of the REIT market is the wide variety of insights that can be gleaned by closely following REIT fundamentals. The various REIT property types form a sort of spider-web of connectivity between real estate and the underlying drivers of the US economy. For investors paying close attention, there is always a fiber or two twitching that can indicate something new occurring that is tethered to the REIT market. It may be an unexpected jump in warehouse absorption due to Amazon increasing its capex spend, or a troubling drop in occupancy for a strip-mall company due to increased retailer bankruptcies.
While many of these small signals are relevant only within a specific property type, some carry outsized significance due to their strong ties to the economic cycle. Hotel REIT RevPAR is one of these such signals, which in the last few months has begun flashing a “warning” sign for the US economy.
Smith Travel Research (https://str.com/) is the leading provider of near real-time data on the hotel industry. They had this to say regarding RevPAR for hotels in June.
“This was just the industry’s second month in the past 112 with a negative year-over-year RevPAR comparison. The other was September 2018, which was due mostly to difficult-to-match levels from the post-hurricane time period the previous year. The longest overall expansion cycle in industry history lasted 112 months from December 1991 through March 2001.”
In other words, RevPAR (Revenue per available room, which is THE key performance metric in hotels) posted its worst month since the recession of 2008 in June of 2019. That’s not good, but a savvy analyst will point out that RevPAR has been mostly un-inspiring since mid 2016. So maybe this is just a blip.
The hotel REITs, however, aren’t projecting much positivity. As second quarter earnings season winds down, it’s become glaringly clear that all is not right in hotel-land. Of the top 5 players in the hotel space (by market cap), all five lowered their full year 2019 estimates for RevPAR growth in the second quarter. This includes Hilton and Marriot, the two largest hotel brands by a wide margin.
Let’s take a look at what some of the management teams said on their Q2 calls.
Arne Sorenson – CEO of Marriot (MAR – $43b market cap)
“Global economic growth is clearly slower than we anticipated when the year began. Demand growth for the US Lodging industry as reported by STR reflected the weaker US economy with lodging demand in the quarter, up less than 2% year-over-year about 50 basis points lower than the past couple of quarters.”
Jim Risoleo – CEO of Host Hotels (HST – $11.9b market cap)
“Overall, as we look to the second half of the year and amid the growing uncertainty of a trade deal with China being –being concluded in the near-term, we do not see any near-term catalyst to induce business transient demand. As a result, we are revising our full-year guidance to reflect a slightly softer operating environment.”
Chris Nassetta – CEO of Hilton (HLT – $27b market cap)
“I mean, on the other hand, we are definitely saying by bringing our guidance down at the top end overall from a same-store point of view that we think the world has, and I said it in my comments, the world is incrementally a little bit weaker. So we’re not debating that with you.”
CEO comments on conference calls are notoriously bullish, as management teams are incentivized to present information in a context that is favorable for their companies. It’s clear from these comments and across the board guidance cuts, that global hotel demand has deteriorated since the beginning of 2019.
So what does this mean for the US economy and the broader REIT market? First of all, it indicates that our economy may not be as healthy as many pundits would have you believe. Record low unemployment, a stock market near all-time highs, and still strong consumer confidence should translate into better than 1-2% RevPAR growth. Supply in the Hotel space is increasing at just over 2% per year, which in a booming economy would be easily absorbed. The fact that hotels can’t generate enough demand to meaningfully grow RevPAR should raise red flags for US Growth and cyclicals broadly.
In the REIT space, this is particularly relevant for cyclical REITs (Apartments in particular) which are making all-time highs. While demand for apartments is typically driven by employment, RevPAR when it turns meaningfully lower acts as a leading indicator for many other economic datapoints. Employment (by contrast) tends to be one of the most lagging of economic data points.
Put another way, RevPAR and demand for multi-family apartments can only move in different directions for so long. Either the economy is really fine, and RevPAR is experiencing a temporary lull and will improve within 6-12 months, or the uptick in demand the apartment landlords have seen in 2019 will be a short-lived episode of transitory strength.
In the end, guidance cuts from the majority of US hotel owners and operators should be noted and carefully observed by real estate and stock market investors alike. As a hyper-cyclical sector within REITs, the hotel companies tend to act as a leading indicator for economic growth, and the signals they are sending are not bullish. With any luck demand will bounce back as it has multiple times since the last downturn, but until it does, it’s hard to be bullish on the US hotel sector.
For more information contact Martin Kollmorgen at Mdkollmorgen@Serenityalts.com.
Martin Kollmorgen, CFA
CEO and Chief Investment Officer
Serenity Alternative Investments
Cell: (630) 730-5745
**All charts generated using data from Bloomberg, LP, S&P Global, and Serenity Alternative Investments
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