Uncertainty clouds Q1 earnings reports

INTERNATIONAL REPORT — With public hotel companies and REITs announcing their Q1 2025 earnings in the coming weeks, one word is clouding forecasts for 2025 and beyond: “uncertainty.”

With on-again and off-again tariffs and a chaotic economic environment, the first quarter of 2025 has been turbulent for most of the travel sector, including public hotel companies. Most have seen their stocks dip and rebound along with the public markets. In addition, negative consumer sentiment is creating a downward-trending future forecast for many travel-related stocks.

All of this uncertainty is leading to what should be an interesting earnings season for public hotel companies and REITs, which will begin to announce earnings later this week. Most of the biggest public hotel companies will make their Q1 announcements the weeks of April 28 (Hilton, Hyatt and Wyndham) and May 5 (Marriott, IHG and Choice).

Analyst C. Michael Scholes of Truist Securities made a number of interesting comments via published notes based on conversations on and off stage at the Asian American Hotel Owners Association (AAHOA) annual convention last week in New Orleans.

He noted a “not fearful but cautious sentiment” from meetings with hotel franchisees, owners and brand companies at the convention. Scholes also said some new construction projects have been halted due to tariff increasing costs.

“We view U.S. new hotel construction pipelines at great risk of declines by 3Q25 as some new construction projects are already starting to stall with more pressure for 2026-2027 growth assumptions as hotels well under construction continue to move forward,” he said.

Scholes said this setup is setting up an unfavorable environment for stock considerations and C-Corp investor sentiment heading into Q1 earnings.

“We are already hearing of cracks in the new development pipelines and some stalled projects due to tariffs. A number of franchisees told us that tariffs on steel and aluminum were particular issues; in some cases, FF&E is also a problem for furniture and related items that are not sourced domestically,” he said. “Importantly, some elements of construction from both hard and soft costs had shifted to domestic sourcing in recent years given logistical shipping issues from Asia following the pandemic — helpful for development costs in today’s climate. Domestic vendors noted gaining business following tariff announcements.”

The development slowdown is so far viewed as tariff-driven, Scholes said, but hotel operating costs are rising above YTD RevPAR in select-service by 1.3%.

“Given limited bookings visibility, some franchisees strategize/underwrite via recent historical results and for lower-tier hotels via revenue multipliers. Consequently, even if some hoteliers anticipate RevPAR growth to decline later this year, not all hoteliers were willing to make that assumption,” Scholes wrote. “Sentiment from hotel owners was on average cautious but not as negative as we expected; owners were resolute about the long-term strength of the franchise environment (even with lower profit margins) and they will just have to get through this current phase.”

Scholes said Truist doesn’t see any hotel C-Corps as winners from a U.S. hotel development lens or stock investor sentiment.

“We assume easier trade-down conversion opportunities in the economy and midscale chain scales via [Wyndham’s] and [Choice’s] several conversion-friendly brands and secondarily [Hilton’s], particularly from their growing midscale presence,” he said. “In new development, there may still be somewhat better growth prospects for smaller, simpler properties outside of urban markets. Extended-stay properties were viewed more favorably for development as an undersupplied category… A few hoteliers viewed the aging limited-service U.S. hotel supply as ‘underdemolished’ and that the current macro may lead to older hotels from tired brands ending hotel usage.”

Another point of speculation for upcoming earnings calls is whether hotel companies will pull their full-year 2025 guidance. Earlier this month, Delta Airlines announced it was not reaffirming its full-year 2025 guidance “given the lack of economic clarity.” Other airlines like American, Southwest and United revised their Q1 guidance in March because ticket demand was softening.

Outlook for REITs

Senior research analyst Michael Bellisario from R.W. Baird noted that investor sentiment for hotel REIT stocks is extremely negative heading into earnings.

“Investor interest is low and conviction is non-existent,” he wrote last week. “A few people are ‘poking around’ here and there because the stocks look ‘cheap’ after they have declined so much in recent weeks; no one is calling us with an overly bearish perspective or looking for outright short ideas – everyone is already negative.”

Bellisario said that over the last few weeks, investors have focused on balance sheets, refinancing risks, customer/segment exposure and recession scenarios.

“The ‘base case’ downside scenario that has been discussed most frequently [is] RevPAR down 5% and hotel EBITDA down 10-15% (i.e., a mild recession scenario compared to prior recessions),” he wrote.

Bellisario said for the ‘base case’ scenario to materialize, there would need to be a significant drop in business transient demand, which would mean companies start cutting travel to “manage margin.”

“That is the big risk we are monitoring closely, and, frankly, what is keeping us from becoming more positive from a stock/positioning perspective,” he said.