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Hotel REITs Are Resurgent, Operating Leaner After Pandemic

Large hotel landlords reported that revenues to close out 2021 were near or exceeding 2019 levels as the hospitality industry's comeback now appears imminent and ahead of schedule.

While business travel has yet to return in earnest and hotel performance broadly is still behind where it was pre-pandemic, executives at the nation's largest hotel real estate investment trusts said finding efficiencies with staffing — including hiring managers to oversee multiple hotels in a market — have allowed them to beat expectations toward the end of 2021 and plan for growth this year.

Park Hotels & Resorts' Hilton Short Hills in New Jersey, which reopened March 1, 2022.

"More cylinders will be firing six months from now or 12 months from now than there are presently,” said Michael Bellisario, a senior research analyst at R.W. Baird & Co. “There’s a lot of noise in the world right now … but the fundamentals are getting better here. The trend is your friend.”

RLJ Lodging Trust President and CEO Leslie Hale said the Bethesda, Maryland-based REIT saw “sequential” improvements throughout the year, culminating in revenue per available room — the industry's leading performance metric — hitting 97% of 2019 levels at the end of the fourth quarter.

“We are pleased that lodging fundamentals continue their recovery relative to 2019 throughout the fourth quarter, with the industry’s faster-than-expected recovery being the most significant event of 2021,” Hale said during RLJ's Q4 earnings call Thursday. “The recovery during the year was driven by the continuation of robust leisure demand, which is well documented and at levels exceeding 2019 in many resort markets.”

On Host Hotels & Resorts’ quarterly earnings call Feb. 16, CEO Jim Risoleo said the REIT “significantly outperformed expectations during the fourth quarter.” The country’s largest hotel trust saw its highest RevPAR since the pandemic began and posted a net income of $323M in Q4 of 2021, its strongest fourth quarter in years.

Other indicators also show investors are confident that the hospitality sector is back for good: Last year, hotel deals above $25M reached levels not seen since 2018.

Park Hotels & Resorts posted a net loss of $65M in Q4 2021 compared to a net income of $126M in Q4 2019, but its cash flow is improving: 37 of its 46 hotels were at or exceeding break-even levels by Q4, CEO Thomas Baltimore said. 

Park also had two hotels that had yet to reopen by its earnings call, but one, the Hilton Short Hills in New Jersey, opens Tuesday.

Park Chief Financial Officer Sean Dell'Orto said labor costs across the REIT’s portfolio would remain roughly stable for the year; it has operated at full capacity in its high-volume resorts while keeping staff light in markets that have yet to fully re-emerge.

Yet even as they project optimism, many hotel owners still have to dig themselves out of a deep hole, and they are turning in part to cost-cutting measures to make it happen. At RLJ, which posted a loss of $311M in 2021, those have included shrinking the company's workforce and cutting back on food and beverage options.

"Our portfolio is better positioned to operate in this challenging labor environment as a result of fewer [full-time employees] required in our hotels," RLJ Chief Financial Officer Sean Mahoney said on the earnings call. "While our portfolio occupancy was at approximately 83% of 2019 levels, our hotel is operated with approximately 40% fewer FTEs from the comparable period of 2019."

That translated into significant savings: In the fourth quarter, RLJ’s wages and benefits made up 25% less of the REIT’s operating expenses than they did in Q4 of 2019.

“We feel we are coming out after these last two years with a whole different FTE model in regards to how to run our business,” said Thomas Bardenett, RLJ’s executive vice president of asset management. 

Pebblebrook Hotel Trust's W hotel in Boston

Pebblebrook Hotel Trust CEO Jon Bortz said the company saved $1M by cutting out middle managers and bringing its Westin Copley Place and W hotels in Boston under one executive team.

Bortz said Pebblebrook, which posted a net loss of $235M for the year in 2021, is now looking at other positions as well that it can “cluster” instead of hiring for each property, including revenue management, engineering, finance, accounting, HR and food and beverage.

“It's allowed us to hire better quality people and it's allowed us to take costs permanently out of the operating structure,” Bortz said. 

While these landlords have learned how to operate with fewer employees, they also anticipate having an easier time to hire this year. Host’s staffing positions are about 94% filled when historically that number has hovered around 97%, executives said, though they expressed optimism that that number could return to the norm soon.

“Based on conversations we've had with our managers, there is a degree of confidence that the open positions are going to be able to be filled as things open up, as the variant gets behind us, as children get back to school in-person across the country and as the various forms of stimulus burn off, which many of them already have,” said Jaime Marcus, Host’s senior vice president of investor relations.

Those staffing challenges could have impacts beyond costs as well, said Yariv Ben-Ari, co-chair of New York law firm Herrick’s Real Estate Hospitality group.

Ben-Ari said group and conference travel could be delayed by a lack of capacity as hotels compete for employees in a tight labor market.

“Staffing a conference, you need employees you just don’t have right now,” Ben-Ari said. “If the conference hotels are able to find sufficient staff to be able to put together events from a logistical perspective, then there's a good chance it’s starting in Q4, maybe Q3."

Hilton's Kevin Jacobs and LW Hospitality Advisors' Dan Lesser

While the labor issue is expected to abate this year, hospitality's comeback is already afoot, with leisure travel leading the way, especially in Sun Belt markets, multiple industry leaders said. 

That returning business helped push average rental revenue per room for Marriott International to levels that surpassed 2019 for the first time in December, CEO Tony Capuano said on an earnings call last month.

“The composition of our pipeline dovetails nicely with current demand trends,” Capuano said. "Leisure demand has led to recovery, and we are well-positioned to continue growing our lead in resort destinations, including in the high-growth all-inclusive space."

As capital continues to flow into Sun Belt markets, though, some REITs are defrosting their relationships with more traditional urban markets in the Northeast and Midwest, Pebblebrook Chief Financial Officer Raymond Martz said.

Martz said investors were feeling out Sun Belt markets to determine if they were “max[ed] out.” He predicted there would be a pivot back to traditional markets.

“The Sun Belt is certainly the flavor of the day,” Martz said. “You also kind of follow what's happened just in terms of easing of restrictions and flexibility and businesses are open from that perspective. I think they'll continue to be an attraction to those markets.”

RLJ is embarking on a buying streak of its own, which the REIT kicked off this year by acquiring properties in Boston, Atlanta and Denver and match-funding them through seven dispositions. The REIT is increasingly poking around urban select properties in particular, Hale said, including more in Boston.

“We are very focused on off-market transactions and so our pipeline has continued to grow,” Hale said. “We feel pretty good about being a net acquirer for this year.”

But hotel brands still see real estate as a risky business. Kevin Jacobs, chief financial officer and president of global development for Hilton, said the company continues to shift away from real estate holdings and embrace other sectors like its rewards card business that is providing greater returns.

“The real estate has been shrinking over time,” Jacobs said on his earnings call. “Over time, that is going to continue to be a smaller part of the business as we continue to grow the managed and franchised business and continue to work our way out of the risk.”