Analysts chart takeaways from 2022 year-end performance and 2023 guidance.
NATIONAL REPORT – Now that the dust has settled after the whirlwind of 4Q and 2022 year-end earnings calls, Michael Bellisario, senior research analyst, RW Baird, and C. Patrick Scholes, managing director, lodging and leisure equity research, Truist Securities, sum up the hits, the misses and what that all means for 2023.
Brands got the As; REITs needed a bell curve. “Brands were the winners. Strong 4Q results topped expectations and initial 2023 guidance was in line with forecasts, particularly Hilton and Marriott,” Bellisario said. “For this year, brands that have a lot of levers to pull and idiosyncratic drivers are the ones to watch.”
REITs were more case by case. “Fourth quarter 2022 earnings were less consistent, and the 2023 guidance ranges that were provided embedded a significant amount of expense and renovation-related headwinds, which have biased earnings estimates lower,” he added.
Unsurprisingly, REITs with the best balance sheets could have a good story to tell this year. “Growth in 2023 will be a challenge—both organically and inorganically; therefore, having balance sheet capacity to deploy (and to potentially take advantage of any stressed/distressed opportunities that might arise) is key,” Bellisario said.
It's a good time to be global. “International was the superstar in the fourth quarter and it continues to be into this year,” Scholes said. “Results were extremely strong, especially out of Europe, but also Canada. The Caribbean did very well, both for big brands such as Hyatt [thanks in large part to positive results from the all-inclusive Apple Leisure Group acquired in 2021] and regional brands such as Playa Hotels and Resorts.”
Barring the unforeseen, China is coming back on board, Scholes added. “We’ll see companies that have a reasonable network in China and the feeder markets benefit. China has always been a small component—maybe it was 5% of earnings for a Hilton or a Marriott. But, in one week this year, business was up 65%. That moves the needle. It’s a big thing,” he said.
In-fill M&A, segment launches top the of list of smartest moves. Tuck-in plays proved their bottom-line worth at the close of 2022, especially those that delivered critical mass in hot segments such as resorts, lifestyle plays or access to what some see as pent-up developer demand for a fresh brand face in the select-service and affordable extended-stay sectors.
...it would not surprise me to see one or two [IPOs] in the greater hospitality space.
C. Patrick Scholes
“What we saw at the end of 2022 was that some M&A tuck-ins that seemed expensive at acquisition were real homeruns for their buyers,” Scholes said. “Other smart moves were brand launches that drove unit growth in franchise systems—as in rolling out a select-services suites concept—or ones that can target the conversion market. While it will take another year or so to see how much these new brands show up in their parent companies’ numbers, they made for nice headlines. And a good headline gets people excited.”
Development plans need to reflect changes in lifestyle, travel patterns. Brands are already following their customers’ migration away from CBDs. Those most likely to meet or beat expectations this year need to understand all the factors that influence lifestyle and travel decisions when mapping growth strategies.
“People continue to travel and demand trends remain solid despite all the macroeconomic noise and uncertainty,” Bellisario said. “However, people are traveling to different locations, on different days of the week and for different purposes.”
2023 won’t be 2022. “A theme for 2023 will be tougher year-over-year growth comparisons for all hotels,” Bellisario said. “Since we are now lapping the comps from last year, the winners and losers (e.g., segments, markets, certain portfolios) will be more easily identifiable. We’ll be able to really understand how certain assets/markets over-earned or under-earned in 2022. Net, net—it’ll be a much more normal year.”
Another red thread will be a continuation of some of 2022’s challenges. “Investors are concentrating on the macro backdrop. Industry participants, particularly those looking to deploy capital, are most focused on the capital markets dislocation. We have heard from them frequently: There isn’t a fundamental problem, there’s a capital markets problem,” Bellisario said.
Logistical problems aren’t going away either. “The organic net unit growth outlooks were in line to slightly worse than expected, and that’s due to continued construction and opening delays,” Bellisario said. “This is likely to be a persistent challenge throughout 2023 and beyond.”
Watch for a few surprises. “We’re coming off a year when we saw that most companies were meeting expectations while a few did modestly better and a few fell a tad short,” Scholes said. “Guidance generally reflected the view that the first half of this year looks fairly good, but there’s not a lot of clarity on the back half yet. So, there’s a feeling that hotel companies are preparing to cross that bridge when they come to it.”
One change that could make headlines this year would be the possibility of some IPOs. “It's been a number of years since we've seen anything on the IPO front, but you know, in the next 12 to 24 months, it would not surprise me to see one or two in the greater hospitality space,” he added.