A recent note put forth by Morgan Stanley argues that the hotel industry is taking an about-face. Economy, midscale and resort—a troika of segments that performed gangbusters in the short-term, post-COVID era—are now backing up, with urban, group and upper-upscale segments and assets—which struggled mightily at the outset of the pandemic—picking up steam as the overall industry pushes back to more normal travel patterns.
In its Lodging 1Q24 Check-in, Morgan Stanley called the leisure to business hand-off choppy, but was sanguine on better forward indicators. It revised its RevPAR tracker and modestly changed estimates to reflect Q1 RevPAR “slightly decelerating” from Q4 as weaker leisure dragged down the U.S. “We are seeing a bifurcation in performance with urban, group and upper upscale at +3% to +5% year-over-year compared to economy/midscale/resort at -1% to -7% YOY.
Trends sequentially decelerated in Q1: U.S. RevPAR was flat YOY compared to +2% in Q4; Europe RevPAR increased 6% YOY compared to +7% in Q4; and China RevPAR was +4% YOY versus -6% vs. 2019 and below -4% in Q4. Morgan Stanley noted that management teams alluded to bad weather, particularly in Florida, California and Phoenix, and headwinds from the Easter shift as culprits for lower U.S. performance. “While positive trends for business transient and group persist, softer leisure trends will grow in importance into the key summer months,” Morgan Stanley wrote. However, despite the softer Q1 trends, management commentary pointed to RevPAR building into Q2 and out.
It noted some other key takeaways:
- U.S. RevPAR was flat in 1Q YOY, decelerating from +2% in Q4. International trends were better, but also slowed— Europe YOY/China vs. 2019 +6%/-6% vs. 4Q +7%/-4%.
- Within the U.S., leisure (weekends/resorts) has lagged business (urban/group) and the low end (midscale/economy) has lagged the high end.
- Despite the deceleration, expect most results to be in line with guidance/consensus, with upside more pronounced at the high end.
- Forward indicators are more robust, particularly for business travel, which could alleviate more muted consumer travel spend intentions in our AlphaWise Survey.
- Valuation is still at a discount compared to historical levels vs. the market, albeit not as depressed as other areas of our coverage.
International RevPAR growth is increasing at a higher clip than in the U.S., Morgan Stanley wrote, with trends holding steadier in Europe compared to more choppiness across Asia Pacific.
Themes to Watch
Morgan Stanley pointed to three themes to watch out for as the hotel industry progresses through the year.
- What can stabilize the low end? It wrote that “several areas across consumer have shown weakness in the low end, similar to what we have seen in the economy/midscale segments of lodging: regional gross gaming revenue, slots revenue in Las Vegas, restaurant traffic/spend, pockets of retail (i.e., Dollar Stores). In lodging, economy RevPAR, it wrote, posted negative YOY growth for 12 consecutive months. “This has driven the ratio of U.S. economy RevPAR to U.S. industry RevPAR near historical lows.” In its latest Alphawise Consumer Pulse Survey, conducted March 22nd – 25th, the low end still showed net negative spending intentions for travel over the next six months, but with material improvement from a year ago. In comparison, “the high end is showing net positive spending intentions, but at lower levels vs. last year.”
- Fee upside vs. RevPAR + Room Growth: Industry lodestars Marriott and Hilton guided to RevPAR-related fee growth of around 4% to 7% for the year with 5.5% to 6% net rooms growth. “As a result, even if system-wide RevPAR comes in toward the low end of guidance, we see potential for upside on EBITDA and EPS,” MS wrote.
- International inbound/outbound opportunity: International inbound spending, it wrote, remains depressed as a percentage of U.S. personal consumption expenditures, “which we continue to see as a potential future driver of RevPAR, particularly in urban/gateway markets. We expect to see some signs of this recovery in Q1, with optionality for upside as the year progresses.”
Market Matters
On Wall Street, Morgan Stanley remains rosier on the C-corps over REITs. The latter weighed on its lodging coverage as the group underperformed the market by 5%, while the C-corps outperformed by 2%, wrote Morgan Stanley, which remains positive on the C-corps versus the REITs.
Company specific, Morgan Stanley is overweight on Marriott International, Hilton and Wyndham Hotels & Resorts and less so on Hyatt Hotels Corp., noting it recently took “chips off the table.”
“Stay cautious on hotel REITs given more modest EBITDA and EPS growth potential with inflation limiting flow-through plus a more skewed risk-reward given operating leverage,” it wrote.