Current Macro Factors for the Hotel Industry

Hotels have seen a good year with rates recovering far more than most could fathom. Much of the excess savings built up over the pandemic period were used well. The re-opening trades were quite the success and hotels made good use of people’s need to travel.

But now, we’re seeing a shift in that narrative and there are a couple of factors here that could drive a pullback in stock prices for a few of the larger hotel companies.

Current Macro Factors for the Hotel Industry

The Consumer

Most of us were caught off guard by the strength of the consumer and we underestimated the strength in excess savings. However now, you’ve probably seen charts that show you excess savings is almost gone. Here’s a recent chart that shows us that excess savings for the bottom 80% of US household has been depleted.

You’ve also probably seen that credit card debt has ballooned and delinquency + net charge off (default) rates are going up. We think that there will be discretion in spending, i.e., people will be more careful with their money. So even if people travel, they will choose cheaper alternatives.

Pipeline of Construction

Something to understand about the big hotel companies is that they don’t own their hotel properties, at least not for the majority of hotels that they operate. While the Hilton still owns quite a few hotels, Marriott and Wyndham are more asset light. They either

• franchise hotels - this is where they give the asset / building owner rights to use the brand and provide high level support in exchange for franchise fees

• managed hotels - this is where they agree to fully manage the hotel on a day-to-day basis in exchange for several levels of management fees

So then these companies rely on property owners to actually construct hotel properties.

According to the latest report from Lodging Econometrics, who tracks hotel pipeline construction, Q2, 2023, was a great quarter US Hotel companies, particularly Hilton, Marriott and IHG. These three franchise companies comprise 68% of all projects in the total U.S. hotel construction pipeline.

Having a steady pipeline of properties is very important. However, it’s still just a “pipeline” and many of these properties have not been constructed. Given the current macro situation, we may see a situation where many properties may never get constructed, or may be delayed.

Most of these properties are large and require quite a lot of funding, which comes from debt. With rates rising, the cost of debt becomes very expensive and certain projects become tough to justify.

Moreover, banks are tightening their lending standards. Granted it’s easier to get finance if you have an operator like Marriott in place but, I’ve worked in this industry (both on the property owner side and bank lending side) and I can tell you marginal projects will be dropped. Banks still rely on the strength of the actual borrower.

Business Travel & MICE

No I don’t mean rats, although that would be a reason to short a hotel company. MICE stands for Meetings, Incentives, Conferences and Exhibitions and remain a major source of revenue for hotels.

Hotels have much higher corporate rates for business travelers anyway and these rates tend go even higher if there are events. If the hotel is hosting an event, they not only get revenue from the event, food and catering but as well get captive customers who stay in the hotel. Unfortunately the likelihood of people attending these events are reducing.

Post-pandemic however, businesses still have resumed business travel as before. After companies have realized that they can cut costs with a simple Zoom call, many are opting to cut travel. Furthermore, the hotel rates and airfares have increased to exorbitant levels, causing businesses to switch to economy / coach and lower grade hotels. The chart below is a survey of business people who usually travel, so it’s specific to the target population.

Given the current situation, we’re looking at a few potential names to short with their entry and exit levels.

The Ideas

We are looking at three companies here for a potential short - Hyatt (H); Wyndham Hotels (WH); and Vail Resorts (MTN).

I also looked at Choice Hotels (CHH) and Marriott (MAR) but, I can’t find a good entry and exit here.

Please bear in mind that none of these companies are “short to zero” type of companies. While they all have their risks, they are basically stable companies. What we’re trying to do here is take advantage of the current macroeconomic cycle that will affect them negatively for a gain.

Please also remember to put on stop losses at 3%-5%, so that if the trade moves against us, we get stopped out.

Finally, shorting should always be in small allocations for opportunistic shorts. These names could bounce for bit and then we would get another opportunity. We take most of the profits at the first target (below) and leave 25% for the second profit target. But, remember to move your stop loss once again 3%-5% above the first target.

Hyatt Hotels (H)

Short below $99; First Profit Target $93; Second Profit Target $88.

Wyndham Hotels (WH)

Short below $62; First Profit Target $59; Second Profit Target $54.

Vail Resorts (MTN)

Short below $202; First Profit Target $186; Second Profit Target $154.

Disclaimer: None of the above is investment advice. They are ideas and you should do your own due diligence before you invest or trade. Please also remember shorting is dangerous and ensuring you have stop losses in place is essential. Never take a trade that makes you uncomfortable.