Facing Heavy Losses, Hotel Industry Sees Vaccine News As 'Light At The End Of The Tunnel'
Hotel companies have shored up their balance sheets as they prepare for a difficult winter with coronavirus cases rising, and new progress on a vaccine gives the industry more clarity about when demand will start coming back.
Pfizer announced Monday morning that the first set of results from its Phase 3 vaccine trial proved 90% effective. The news sent many segments of the stock market soaring, especially the hotel sector.
The sharpest increase among hotel companies was seen in the REIT sector, where stock prices have remained well below their pre-pandemic highs. Host Hotels & Resorts' share price increased 30% Monday, Pebblebrook Hotel Trust's increased 31% and RLJ Lodging Trust's rose 38%.
"The news of a fairly effective vaccine is great news for the U.S. and international hotel industry," STR Senior Vice President of Lodging Insights Jan Freitag said. "It implies that in the short-to-medium term, corporate business travelers and group travelers will once again take to the skies and meet in person."
The hotel industry has been one of the hardest-hit sectors throughout the pandemic, and the lack of clarity about a vaccine timeline has made it difficult for companies to plan for a recovery.
In their quarterly earnings released over the last month, hotel companies largely showed improvement over the summer months, and they signaled to investors that they were prepared to make it through the winter even without demand growing.
Public hotel companies told investors in recent weeks that they shored up their liquidity by tapping lines of credit, and in some cases selling assets, and they cut costs to keep their businesses sustainable. Marriott laid off 17% of its workforce last month, and Hilton laid off 22% of its workers over the summer, and those layoffs don't account for the thousands of hotel workers on long-term furlough.
Some hotel companies and independent forecasters have projected a vaccine would be available by mid-2021 and demand would begin to recover next summer. Monday's news appeared to affirm those hopes.
Freitag said STR is not changing its forecasts because it had already projected an effective vaccine would be announced by Q1 and the rollout would begin next year.
"We expect that corporate demand, as the vaccine gets rolled out, will increase, and we will see more Americans traveling during next summer," Freitag said. "It was always the expectation that this would happen, and there was downside risk. Now that we know it's going to happen, that downside risk is minimized, and we feel more comfortable with our 2021 and beyond forecast."
Robert W. Baird & Co. Senior Research Analyst Michael Bellisario, who covers hotel REITs, also said the vaccine timing is in line with his firm's projections, and the announcement confirms that the worst-case scenarios that investors feared for hotels likely won't play out.
Bellisario said the winter will still be a challenging period for the hotel industry and demand growth will be difficult to achieve, but he said clarity around the timing of the recovery is the most important factor.
"Everyone’s looking through this, because there is a light at the end of the tunnel, it’s brighter, and there’s a line in the sand now," Bellisario said. "We didn’t really have any of that stuff before. Is the fourth quarter and the first quarter of next year better or worse than expected? I don’t think it matters, because people know beyond that it will be better than it was.”
Georgetown University professor Jonathan Morris, who teaches a course on REITs, said there is still a risk that a percentage of the population chooses not to get vaccinated, and it may take time for people to feel comfortable traveling.
"The fact that there's a blue-chip company announcing high-quality results and it's not politically tainted is a good thing," Morris said. "A vaccine will help the lodging sector probably the most."
As hotel companies await the vaccine rollout, their Q3 financial disclosures show many of them have plenty of liquidity to get through the next few quarters.
Marriott reported positive net income in Q3 of $100M, and it has a net liquidity of $5.1B, including $1.5B in cash and $3.6B in undrawn credit.
"We have made significant strides in shoring up our financial position to weather the crisis," Marriott CEO Arne Sorenson said on his Q3 earnings call, according to a Motley Fool transcript. "While the recovery is going to take longer than anyone would like, we are seeing encouraging signs that demand can be extremely resilient."
Choice Hotels posted a quarterly net income of $14.5M, and it had $792M in cash and additional borrowing capacity as of Sept. 30.
Hilton reported a Q3 net loss of $81M, but it said it improved its cash burn rate from the prior quarter and shored up its liquidity. The company has nearly $3.5B in cash and cash equivalents as of Sept. 30.
The hotel REITs have largely struggled more than the brands, Bellisario said, as they are more asset-heavy and operate with more leverage.
Host Hotels reported a Q3 net loss of $316M, and it had $2.4B in cash as of quarter-end. It estimated its Q4 monthly cash burn willl be $95M to $105M.
“As we enter the ninth month of the pandemic with daily COVID-19 case count in the United States in their all-time highs, we continue to believe that the demand recovery will remain gradual and choppy before the widespread availability of effective COVID-19 vaccines and therapeutics," Host Hotels CEO James Risoleo said on the earnings call, according to a Motley Fool transcript.
RLJ Lodging Trust reported a Q3 net loss of $173.9M, but it reduced its monthly cash burn rate to a range of $23M to $27M, and it has $1B of cash on its balance sheet.
Pebblebrook Hotel Trust posted a Q3 net loss of $130.6M. It has a monthly cash burn rate of $16M to $21M, and it has $570M in liquidity, including $217M in cash on hand.
"I'm not really concerned structurally from the balance sheet perspective and liquidity needs," Bellisario said. "Things got a lot better today because everyone is now on the same page, you have a smaller band of potential outcomes and more people are around a consensus."
Ashford has been missing loan payments across its portfolio since early in the pandemic, and in August it sold the Embassy Suites by Hilton in Manhattan in order to meet its debt obligations. The company reported a Q3 net loss of $109M, and it has $121M of cash on hand, plus $89.5M of restricted cash.
Bellisario said he is worried about Ashford because it doesn't have a revolving credit facility, and much of its debt is in the form of CMBS loans. CMBS loans are harder to reach forbearance agreements on because there is often not a point of contact on the other side that can offer flexibility, as there might be with a bank.
"They had high leverage going into this, their cash flows are so depressed, they're not covering their interest expense, they can't cover operating expenses," Bellisario said of Ashford. "There's just so much more cash burn because of the leverage, and what complicates this is: How do you do workouts? Who's on the other side? It's harder to get those ducks in a row."
Hersha has a similar problem, Bellisario said, in that it was highly levered going into the crisis and has a portfolio focused on urban gateway markets.
After market-close Monday, the REIT reported a Q3 net loss of $49.2M. It had $20.2M in cash on hand and had drawn down $126M of its $250M revolving line of credit as of Sept. 30. Hersha said it expects to close four previously announced asset sales totaling $70M in early 2021.
"They're going to have to totally restructure their debt, and it's going to come in the form of asset sales," Bellisario said of Hersha. "Those proceeds will be used to pay down term loans, and their line of credit borrowings."
Morris said many hotel REITs still face major challenges, but Monday's vaccine announcement should help them survive.
"These companies have a long way to go to get back to 2019, but this was a big shot in the arm for sure," Morris said. "While it's good news, they've still got a lot of issues to work through to get back to normalized operations. That may not come for a full year or more, but it is a good step."