Hotel executives praised their companies’ performance in the second quarter but all warned of threats to performance coming in the second half of the year.
REPORT FROM THE U.S.—Hotel brand companies and real estate investment trusts by and large reported positive performance in the second quarter, but various headwinds are on the horizon in the second half of 2018.
The 2017 hurricane season generated significant demand from residents displaced by the storms, and industry executives cited those tough comps along with several holidays and calendar shifts as big performance hurdles to weather in Q3 and Q4.
Arne Sorenson, president and CEO, Marriott International
“When we look at Q3 and Q4, if you're worried that the 1.5% to 2% U.S. systemwide (RevPAR growth) number is concerning, don't. It is not a sign of softening. It is very much an impact of the calendar or comparison anomalies. July 4th midweek, obviously, you've already heard about from other companies in this space, we've got some shifting holidays, but probably the most significant pain in the back half of the year is the RevPAR comparisons get tougher because of the strength of the hurricane recovery efforts in Houston and Florida, particularly last year.
“And when you adjust for those things, what we're seeing in our guidance built-in is about a 2.5% RevPAR growth for the balance of the year. And so, it's very much steady as she goes. We see under that, probably still somewhat greater strength in the leisure segment. In the group space, the corporate group is stronger than the associate group. And the corporate transient is probably right in the middle.”
Dominic Dragisich, CFO, Choice Hotels International
“The way to think about fourth-quarter RevPAR growth, the third quarter is the toughest comp that we have for the year obviously, and the two major impacts are the eclipse, we also have the hurricane tailwinds that happened in the third quarter of last year.
“I think in the fourth quarter we do expect to see acceleration … two primary reasons for that you obviously have the removal of the eclipse impact in the fourth quarter and then you started to see some of those hurricane benefits dissipate in the fourth quarter as well.”
Tom Baltimore, president and CEO, Park Hotels and Resorts
“Looking forward to the remainder of the year, although our third quarter is our weakest group quarter of the year, we are encouraged by the pickup during the second quarter as we added over $14 million for the third quarter, which is nearly $3 million more than last year. We also anticipate stronger transient demand and remained positive about the outlook for the rest of the year.
“Although group demand is a bit softer next quarter in San Francisco, relative to a tough comp from last year, we are still forecasting group to be up in the low- to mid-single-digits with a very strong quarter during Q4 with the portfolio from in-house group bookings.
“Finally, there will be some hurricane-related noise as Orlando lapse(s) (after) a strong third quarter last year, while Key West should have very favorable results as it compares to the weak third quarter and fourth quarters from 2017.”
Chris Nassetta, president and CEO, Hilton
“We're year-to-date 3.9% (RevPAR growth). We guided 3% to 4%. So, that implies some lower level of expectation for the second half of the year. … Third quarter is really holiday shift. The Fourth of July fell on the worst day of the week it can fall on. When it falls on a Wednesday, it blows the whole week apart. My guess is nobody on this call was traveling for business that week, nobody in this room was, and nobody on Earth it seems, well, nobody in the United States anyway was.
“So, you have a very weak start to the quarter. You end the quarter in a weak way in the sense that Jewish holidays are moving both day of week and within the month, moving up to a more impactful time, and that when we look at the math, that's all that's happening. If you sort of as best we can cleanse for those things, things are moving along just fine. All of the optimism that we had in my earlier commentary about the various segments holds true as we go into the second half of the year.”
“Fourth quarter is just a matter of honestly—maybe a touch of conservatism honestly—that is based on the fact that the comps are harder, and those are partly driven by the weather comps. All the hurricane activity did create an updraft in results in the fourth quarter. You also were starting to get the early benefits from some of the passage of tax reform and clarity around tax policy in the United States, which gave a bit of a boost.
“And so, I will be the first to say, as we look at that, third quarter I think is reasonably, because it's upon us and we've already experienced 4th of July, I think that's reasonably easy to forecast. Fourth quarter is harder. Those things are little bit more difficult to pin down. So, there could be a touch of conservatism built into that. But I would not want to leave anybody with the impression that we somehow think things are weakening because of trade wars or anything else.”
Mark Brugger, president and CEO, DiamondRock Hospitality
“Looking toward the second-half of the year, we expect lodging demand to remain robust with industry RevPAR growth in the range of 3% in the third quarter. DiamondRock’s third-quarter results will be impacted by about 225 basis points from a combination of repositioning renovations and the timing of citywide calendars.
“However, we expect our fourth quarter to be the strongest of the year with RevPAR growth reaccelerating to over 3% with better citywide calendars, favorable comps to last year’s natural disasters and tailwinds for recent renovations.
“To wrap up, DiamondRock is well positioned as we move forward with the high-quality portfolio that will be largely renovated by the end of this year, a number of unique internal growth catalyst still to be tapped like the repositioning at Vail, The Rex San Francisco and Frenchman’s to drive performance, and the company has over $400 million in dry powder to be opportunistic in pursuing acquisitions.”
Mark Hoplamazian, President and CEO, Hyatt Hotels Corporation
“We have modestly increased our second-half expectations, but we've also given the fact as you know to the lower favorability from (foreign exchange rates), which you know has mitigated the impact we would've otherwise expected given the underlying momentum in our business.
“We have improved visibility versus the last quarter, which is why we took up our guidance in addition to the fact that we had a strong second quarter, but we feel that it's prudent to guide conservatively and we have a high level of confidence around our ability to deliver against our numbers. One thing that we are facing in the second half of the year is that we are facing some tougher comps in Asia, as was the case in the second quarter. And there are some renovation impacts and other things that would contribute potentially to a slightly softer half compared to the first half of the year.”
“One thing actually on the subject of balance of year, one thing I would like to highlight, while we don't provide quarterly guidance as it relates to either RevPAR or adjusted (earnings before interest, taxes, depreciation and amortization) we are expecting, on balance, the third quarter to be a bit softer and the fourth quarter to be a bit stronger. Part of that is due to how the transaction effects lay out across the quarters balance of year. We're expecting about a $20-million transaction impact in the third quarter and about $15 million in the fourth quarter.
“There's also some holiday timing that is adversely impacting the third quarter relative to fourth quarter. And then finally, as a reminder, we took some fairly significant severance and other charges in the fourth quarter of last year. We'll be lapping that this year. So that also contributes to what we expect will be a stronger fourth quarter, a slightly softer third quarter, as it relates to how we're thinking about balance of year.”
Jim Murren, chairman and CEO of MGM Resorts International
“Looking into the third quarter, first, here in Las Vegas, we highlighted, as you recall that—last call—that we had some specifically difficult comparisons in the third quarter. That's, of course, due to the fact that citywides and MGM in particular had a very strong convention calendar mix in the third quarter last year. Of course, we had the two fights that we hosted. We also held above our normal range. But we also preview that we're seeing some discrete pockets of rate pressure. That's driven by the lower citywide convention mix.”
“… We knew that citywide conventions in the market looked what they were going to look like. We knew the third quarter was going to be down over 100,000 roomnights in the third quarter. We knew the fourth quarter, however, was going to be up around 77,000 roomnights. The idea then or the thought we had was to fill those gaps in the year for the year with some convention business, more so than we had done the prior year. That did not come to fruition.
“As you know, summer months are tough, particularly on the convention side, the booking windows are short, and that's the quarter, the third quarter, where we generally have to rely more on leisure channels. And these channels became very competitive over the last couple of months. So, MGM adjusted prices whenever it made sense, and we didn't whenever it did not. We did forego occupancy and have foregone occupancy in properties where we're not going to get our minimum pricing.
“I have to say, though, in the other channels we're seeing in this current quarter, the longer-term convention block, our FIT and casino blocks all came in or are coming in as expected. The combination of the comparison and the less than expected in the year for the quarter, small group business means that we believe that our RevPAR in the third quarter will be down here in Las Vegas between 5% and 7%. That would mean our revenues would be down between 8% and 10%.
“That would mean that our margins in the third quarter here would come in around 28%. And if you exclude Park MGM (Las Vegas), which is dragging our margins, the margins would be around 29%. So, let's size that. About half the EBITDA decrease is simply driven by the tough table games comparison and Park MGM, the rest is mainly driven by the hotel mix shift of this near-term dynamic we're talking about.”
Brian Nicholson, CFO, Extended Stay America
“Looking to the third quarter of 2018, we expect comparable systemwide RevPAR will increase by 1% to 3%. We expect adjusted EBITDA between $170 million and $176 million. For the full-year 2018, we now expect comparable system-wide RevPAR growth of 1.0% to 2.75% and adjusted EBITDA of $595 million to $610 million.
“Our updated full-year RevPAR growth and adjusted EBITDA expectations have now been adjusted to include some renovation disruption in the fourth quarter as we begin our next cyclical renovation program in November. And it also continues to include expectations related to cycling over immediate hurricane-related disruption as well as post-storm increases in demand last year.”
Jim Francis, President and CEO, Chesapeake Lodging Trust
“It’s fair to say that the stable macroeconomic environment, favored corporate profits and sentiment, solid GDP growth—combined with the recent tax reform—are taking hold, and supporting consistent overall demand trends as we now are halfway through 2018. We remain optimistic about our performance for this year. … We continue to remain quiet from a capital markets perspective. We will continue to evaluate various opportunities with regard to capital allocation, particularly with our stronger equity currency as we continue to work through 2018 and the current market environment.”
Jon Bortz, president and CEO, Pebblebrook Hotel Trust
“With pace for the rest of 2018 ahead in a positive way and with economic and travel trends very favorable, we're optimistic about the second half of this year. As a result, we made a tactical decision 30 days ago to expand the scope of renovations at two of our properties in San Francisco in order to position them competitively to take most advantage of the upcoming strength in 2019 and beyond in the city. The increased scope at Hotel Zelos and Sir Francis Drake, which now includes the addition of relatively disruptive and time consuming bathroom upgrades will reduce our room revenues in the second half of the year and primarily in the fourth quarter by almost $3 million. This represents an impact of almost 60 basis points to 2018’s potential RevPAR growth and over 110 basis points to the second-half growth rate. As a result, we're not in a position to increase our RevPAR growth rate or our hotel EBITDA outlook for 2018 even with the second quarter’s favorable performance and our very positive outlook in general for the second half of the year.”
“So by keeping our hotel EBITDA outlook flat for 2018, we're absorbing this higher level of EBITDA disruption from renovations through the $1.4 million second quarter beat and an improved outlook in general for the second half of the year. And due to our improving expectations for the industry, we're increasing our outlook for industry RevPAR growth to a new range of 2.5% to 3.5% and we're increasing our outlook for the urban segment to a RevPAR growth range of 2% to 3%. While our RevPAR growth and hotel EBITDA outlooks are not increasing, we are increasing our outlook for adjusted EBITDA for 2018 by $2.2 million. Despite the higher interest expense due to our increased strategic ownership of LaSalle and the elimination of dividends on the LaSalle investment that were previously included in our outlook for the second half of the year.”