Contact Us

Hotel REIT Earnings Beat 2019 Results As Urban Markets Bounce Back

A resurgence of group travel reignited hotel profits in the second quarter, allowing some hospitality real estate investment trusts to earn a profit for the first time since 2019.

In a promising sign for major U.S. markets, the quarter's demand growth was strongest in cities that had been slower than their Sun Belt counterparts to recover, such as Washington, D.C., San Francisco and Chicago.

Business and group travel is helping return the largest hotel REITs in the U.S. to profitability.

RLJ Lodging Trust saw its highest growth in those urban markets, with its average daily rates there exceeding 2019 levels in June and July, President and CEO Leslie Hale said during the REIT's earnings call Friday.

“We expect demand in urban markets to continue to ramp,” Hale said. “The current trend in urban markets gives us confidence that their recovery is taking hold, despite the uncertainty in the macro environment.”

Much of the urban demand has been driven by group travel. Host Hotels & Resorts saw a 64% increase in group bookings over the first quarter of this year, with more than half of that increase coming from D.C., San Francisco, New York and Chicago, President and CEO Jim Risoleo said on the REIT's earnings call Thursday.

Host, the largest hotel REIT in the U.S., posted the highest figure in its history in the EBITDAre metric, a real estate-specific way of tracking adjusted earnings. Host's group and business travel both improved considerably, with transient business travel revenue now 9.6% higher than in 2019, and group travel revenue just 2.9% behind 2019 levels.

"We're seeing the business recover and feel pretty good about how 2023 is going to play out," Risoleo said. "We're down 9% on the group [demand] pace. I think we'll see that gap continuing to close."

The return of group business has another upside. Leaders of several hospitality REITs say they are not fazed by recession talk in part because of pent-up demand that has yet to fully play out in the market.

“Some of you are thinking, ‘Well, these records are nice, but that's a few weeks ago. And don't you know there's a big recession coming?’” Ryman Hospitality Properties CEO Colin Reed said on the REIT's earnings call last week. “Right now on a net basis, the need and the pressure to resume meetings is winning out.”  

Reed said Ryman set multiple company records last quarter. It recorded its strongest quarterly total revenue ever, driven in part by 601,000 group rooms booked at an all-time-high average daily rate of $243.

Ryman earned a profit last quarter for the first time since the pandemic began, with net income of $50.3M. Beyond the return of group travel, those profits also came thanks to new labor efficiencies: Ryman cut the number of employees in positions of leadership across its hospitality portfolio by about 15%.

“From just about every angle you look, our results this quarter were a testament to our capital allocation strategy and the actions that we've taken over the last several years to meet the challenge of the pandemic head-on,” Reed said.

The 1,024-room Parc 55 San Francisco, owned by Park Hotels & Resorts, as it appeared in February 2021.

Other REITs have also used reduced headcount to drive profit growth. Park Hotels & Resorts, which was still losing money in the fourth quarter of last year, posted $154M in positive net income in the second quarter of this year. That was driven in part by cutting its headcount by 23% among managers and 29% among full-time hourly employees.

The REIT opened its last property that was still shuttered as a result of the pandemic — the Parc 55 San Francisco — on May 19, and it reported that the 1,024-room property exceeded expectations, with occupancy at 67% by the end of June.

Park isn’t out of the woods yet. Its Parc 55 property was part of a CMBS loan created in 2020 during the depths of the pandemic, in part because leisure and international tourism had cratered. 

The REIT is still working to pay off that debt, and it is looking to sell $300M to $400M in assets despite the turbulent economic climate, with “all options” — including selling Parc 55 — on the table, per Park Chairman and CEO Tom Baltimore.

While leisure tourism has largely driven the hospitality industry’s recovery, international travel has yet to bounce back. On his company's earnings call Thursday, Baltimore said across his portfolio inbound international tourism was down 500 to 750 basis points from 2019 levels, and that gap was particularly prominent in markets that see tourism from Japan, such as Hawaii and San Francisco.

“The big gap is really coming out of Asia,” Baltimore said. “To the extent that the lockdowns subside and we start to see those areas begin to open, we see that as real growth potential for us as we move forward.”

One tailwind likely to ease the pain of recovering international travel is the relatively anemic supply pipeline for new hotels. The annual supply growth through 2023 is at about 1% and during the last three market downturns growth was around 2.5%, Risoleo, Host’s chief, pointed out on his earnings call.

“We expect to benefit from exceptionally low supply growth for the next several years,” Risoleo said. "Further, we believe the current rising interest rate environment could create opportunities for Host, as other buyers may step to the sidelines."

Transaction volume also appears to be down, due to rising interest rates and continued market volatility. But there’s still plenty of cash available in the market from investors who have looked for stable, long-term investments in the pandemic era, said Dan Lesser, co-founder, CEO and president of LW Hospitality Advisors, speaking last week at Bisnow’s Lodging and Investment Summit in D.C.

LW Hospitality Advisors' Dan Lesser, Peachtree Hotel Group's Greg Friedman, Hodges Ward Elliot's Cyrus Vazifdar, Noble Investment Group's Ben Brunt and Goodman Gable Gould's Harvey Goodman speak during a panel at Bisnow's Lodging and Investment Summit in Washington, D.C., on Aug. 2, 2022.

“There's a ton of equity that was raised in anticipation of all sorts of distress that never really bubbled up,” Lesser said. “If you hold onto the cash you’re literally losing value every single day, so there's a lot of pressure to get that money out.”

Other green shoots that REITs reported could bode well for the industry's future. Food and beverage revenues were up by more than a third at Host and exceeded expectations by $11M at Park, due in part to renovations the REIT invested in during the pandemic.

Ben Cadwell, chief operating officer of Accor, said during Bisnow’s event that those hotels that put in the capital expenditure to upgrade their food and beverage experience were seeing the greatest return on their investment today.

“What we’ve seen across our portfolio is that hotels that have really leaned into that … those are the hotels that have been the most successful post-Covid,” Cadwell said. “That has translated into much faster recovery for those properties.”