Motley Fool Money - Diving Into Hospitality

Episode Date: May 7, 2022

Ready for a vacation? You’re not the only one! Deidre Woollard talks with Matt Argersinger, lead investor for Millionacres, about the state of hospitality, and the companies and REITs that stand to benefit from more travel. They also discuss: - How resorts are recovering - The present obstacles for Airbnb - Why the outlook for business travel is a mixed bag Stocks mentioned: SUI, ABNB, RHP, MTN, PEB, DIS Host: Deidre Woollard Guest: Matt Argersinger Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. A lot of these hotel reits and hospitality companies aren't necessarily trading for extreme evaluations. They're still beaten down. A lot of them have, you know, they slashed their dividend

a couple of years ago. I've not brought that dividend back and can kind of be had for pretty reasonable valuations. And then you're talking about maybe having record results in the second half of this year. So maybe I'm bearing the lead here. But I do think maybe the overall theme of this conversation we're having is that there's probably opportunities for investors in the industry. I'm Chris Hill, and that was Matt Argusinger, lead investor from Million Acres, the Motley Fool's Real Estate Investing Service. On today's show, we're diving into hospitality. Deidre Woolard talks with Matt about the travel trends that are surging back and the companies

that may stand a benefit. They also discuss how resorts are recovering and why the future for business travel is a mixed bag. I don't know about you, Matt, but it feels like all my friends are going somewhere really exciting this year. What are you seeing? Well, I am also going somewhere really exciting, Dejure. I am going to Europe myself to do some hiking around Mount Blanc in Switzerland, Italy, and France.

So, yes, people are traveling, including me, including your friends. And you're seeing it anecdotally. You're seeing it in the data, though, as well. And I think this is the result of us as Americans, but people around the world being cooped up, really for the last couple years, putting off so many things, putting off travel, putting off big family events, weddings, companies putting off travel. And we finally are at a point, knock on wood, where we're probably past the worst of the pandemic. It doesn't feel like we're going to get another big wave. And a lot of the restrictions that we had in place as recently as a few months ago in a lot of places have been lifted.

Mass are no longer required on airplanes. So that's made a lot of people more comfortable. And so if you start looking into the data that we've been getting so far this year, and I know you're going to present some data later in the show, but you're seeing really almost record hotel rates, record airfares, big year-over-year increases, but also, amazingly, prices that are now above 2019 levels, pre-pandemic levels. And to me, it's really, it's a demand story. You know, those COVID restrictions are gone.

They've been removed. Mass are optional. People are feeling more comfortable. booking travel. I think the trend only strengthens as we get into the summer. And it's really not just a domestic story either. I was listening to the conference call for Sun Communities, which is not really a travel company, but they're the kind of leading RV reet. They do manufactured homes and RVs. And they noted that a lot of their RV parks are seeing big surges and travelers coming from Canada. So I think we're also kind of underestimating the potential international

story here as borders reopen, you know, there's a lot of pent-up demand for foreign travelers to the U.S. as well, and that's going to boost a lot of the hotels and hospitality-related businesses around the country. Yeah, I think that's a really good point. I've been studying the TSA throughput numbers, too, and it's great to see them now consistently up around, up and over 2 million. That was not happening for a long time during the pandemic, so people are absolutely flying through our airports. The other thing I'm really following is Airbnb versus hotels. So there's this kind of narrative where people are like, I'm an Airbnb person or I'm a hotel person. But I'm really noticing that people are kind of both.

And our friend Matt Frankel talked about this recently about, like, if you're traveling maybe with your spouse, you maybe are opting for the hotel experience. If you're traveling with family, maybe that's the time to do Airbnb. What do you think about the kind of optionality in travel that we have today that we didn't used to have kind of before? Airbnb. Well, I love it. I love what Airbnb is brought to the market, because I think more consumer choice is always better. The fact that you now, if you're traveling to a city or a particular destination, not only do

you have just the hotels in the market to choose from, you potentially have dozens, if not hundreds of listings on Airbnb or VRBO, people who are just renting out rooms, houses that you can rent and book and have a really unique experience as you travel. So I view Airbnb as kind of this really disruptive force because it's an entrance to the market. It gives consumers more choices. In a way, sometimes those choices or experiences can be superior to what's offered by the hotels in any particular market. And there are experiences that you can have on Airbnb that you just can't get in a lot of places

that a hotel can't replicate. That said, I also think a lot about this Airbnb versus hotel. And I think most people will offer both. But the thing you don't get with Airbnb is standards. And what I mean by that is when it comes to the quality of any particular listing property, the quality of the service, which there really isn't much service there, amenities, you know, it's really different from listing to listing from host to host. And so as more people resume travel, especially this summer, and especially families or business

travelers, I don't think they're looking for surprises necessarily. I don't think they're looking for, you know, variability in what their experience is going to be. They're looking for standard qualities, standard amenities that really only hotels can offer at scale. I think Airbnb also has this hidden fee challenge, and I'm not saying hotels don't have it, but it is really interesting. I know this is, it's kind of out there and it's buzzy, but you know, you'll book it, you'll see an Airbnb list that you really love. It's $100 a night, and you're thinking, wow, that's a great deal, especially compared to the hotels in the city or the market where I'm booking. But all of a sudden,

you go to book that Airbnb and all of a sudden, that $100 becomes $150 or $180 because you have the cleaning fee, you've got the Airbnb fee, you've got any other assortment of special fees that the host is charging you for God knows what, and all of a sudden that $100 a night is more than double. And there are also some taxes in there that I'll talk about in a second. So as a long-term host on the platform, I see problems with that. I see problems with customer as well on Airbnb. It's a major challenge. It often puts guests and hosts in a position to resolve issues themselves, which isn't always healthy. So, you know, I think when most problems arise, as someone's traveling, they'd rather deal with the management of hotel,

whose purpose and incentive is to make things right, rather than the person they might be in direct conflict with. And then cities, city regulations are also making it much more challenging and expensive to be a host and to actually be a guest as well. For example, for example, where I live in Washington, D.C., where I've done Airbnb in the past, several years ago, they started charging Airbnb travelers the hotel rate taxes for stays below 90 days. That's a 14.5% tax rate. So imagine if you're a guest, you're booking a place in D.C. You get the cleaning fee, you get the Airbnb fee, and all of a sudden you get this 14.5% hotel tax put on top of it. So makes it really expensive to travel. It puts Airbnb much more in sort of the level of hotels.

And then cities around the country are continually enacting new regulations because they often view Airbnb as reducing the affordable housing stock. Most cities, as we know, are really struggling with affordable housing. So Airbnb is viewed as a threat because it's taking long-term rentals away from the market that are being used for short-term rentals. So I'm very mixed on Airbnb, and on one side, I love the idea that there's more choice in the market. On the other side, I think there are a lot of problems with the business model and challenges that might not make. it's sort of the slam dunk business, especially as we go on in sort of the post-COVID travel world. Yeah, there's so much you laid out there that I think is really interesting.

On the cleaning fees, I think the other side of that, too, is what is required from the guest when they leave. So there's a wide variety of things that are required from, you know, just stripping the bed or something like that to cleaning up certain things, you know, maybe starting the laundry instead of just like stripping the bed. Very, very different than the hotel experience. And a lot of those stores are kind of, you mentioned kind of being buzzied.

A lot of those stories are bubbling up on Twitter. One of our own analysts, Bill Mann was talking about that, his experience with Airbnb when he was in Omaha for the Berkshire meeting. So this was really starting to become one of those public awareness issues for Airbnb. The other thing that I always think about with Airbnb is there's always that wildcard of these party houses, things like that. They've done a lot to get rid of that problem, but it keeps coming up in the press,

and I just think that is consistently a worry for them. I agree. And, yeah, to Bill Mann's cleaning fee story, I'm sure it goes something like, wait a second, I'm paying $150 in a cleaning fee, but you expect me not only strip the beds, but I'm supposed to clean the kitchen, sweep the floors, scrub the bathrooms.

So what am I actually paying for? I've seen that a lot. It's certainly out there. It makes everyone be such a, like I said, such a varied experience to people. And, you know, as they travel this summer, I think a lot of people are going to look for more standardized experiences. Which is great news for hotels. One of the things I watch is STR data that comes from Kostar. And they recently put out their release of data through April 23rd occupancy. Pretty strong. It's at about 65.8% down 4.4.4.4.5. 2% from 2019, sort of pre-pandemic. Really interesting stuff, average daily rate is up. You mentioned prices going up earlier.

Average daily rate of $148.35 cents, up 15.4% from 2019. Rev PAR, which is revenue per available room, that's $97.97. That's up 10.5% from 2019. It just seems like the hotel business is really coming back, and they're not having to offer the deals that they had to offer last year to get people to actually stay. Right. Think about what you just said. I mean, the average daily rate, routing for available room, up double digits from 2019. That's incredible to me. Here we are. We're just in the early part of 2022. We haven't even gotten to the, really the heart of the

hotel season, spring and summer here. And yet they're reporting numbers that are exceeding pre-pandemic levels. I mean, that's the, that's the heart of the hotel season, spring and summer here. And yet, they're reporting numbers that's That's really, really impressive. And it speaks to, like you said, pricing power that they have in the market. They didn't have, obviously, in the last two years with COVID. And what you're seeing is hotels now are more profitable. They're generating more revenue, more EBITDA, and they don't even have to have the same occupancy that they had back pre-pantemic.

Occupancies grow, it's rising and it's fine, but it's still below 2019, yet they're still generating meaningful revenues and profits. Remember, these hotels are now just, like I said, they're entering that busy spring and summer period. COVID-19 is more and more in the Riverview Mirror, whether that's actually true from a health standpoint. Let's hope so, but we don't know. But a lot of people really have just moved on and started to make their travel plans. I think that really bodes well for hotel revenue going forward. It wouldn't surprise me at all to see many hotel rates and hospitality companies start exceeding, start lapping their 2019 pre-pandemic financials at some point during

second half of the year. And Deidre, as we talked about, a lot of these hotel reits and hospitality companies aren't necessarily trading for extreme evaluations. They're still beaten down. A lot of them have, you know, they slashed their dividend a couple of years ago. I've not brought that dividend back and can kind of be had for pretty reasonable valuations. And then you're talking about maybe having record results in the second half of this year. So maybe I'm bearing the lead here, but I do think maybe the overall theme of this conversation we're having is that there's probably opportunities for investors in the industry. Yeah, let's talk a little bit about that because in the beginning we saw the sort of leisure travel bounce back, and that was good for some of the reits we follow, like a Ryman hospitality property. They've got those larger resorts. But now we're starting to see urban travel come back a little bit. You know, people are going to Washington, D.C., they're going to Boston. They're going back to New York. So that could be good news also for other types of hotel brands as well, right?

Absolutely. I mean, I think we spent the last couple years avoiding a lot of those places, right? But where do people want to travel generally? We talked a lot about people going to rural places, of course, going out, going camping. I know the RV business has boomed over the last couple years. But I do think the major cities, the major destinations of the country are going to see a huge pickup, a huge revival. I mean, places like Washington, D.C., kind of where we live, I mean, always a tourist mecca. People are going to be coming back to them. They already are. But places like New York, City, Boston, those places. Las Vegas, which really struggled early on in COVID.

That's had a huge revival. Places like Opry land in Nashville or Miami, Florida, or just the number of places that's owned by Vail resorts, for example. I mean, you can't really, what I love to say about Vail is you can't really build new mountains. So, you know, Vail has some of the most unique hospitality assets on the planet. You've got Vail. You've got Breckin Ridge. You've got Heavenly Stowe.

They just made their first major international investment in a Swiss Alps resort. But these are all, I think, the premier places where people want to travel and they've been waiting to travel. And so I think those are the places that are probably going to benefit the most. Well, I want to talk about Las Vegas a little bit because that has been such a comeback story. And that is also the convention travel story, in my opinion. It's a great, great place to figure out what's happening with conventions. I looked at some Las Vegas convention data.

Convention attendance, get this, up over 2,000% from 2021. Now, it's still down 40% or so from 2019. Hotel occupancies still down a little bit. But people are going back to Vegas for conventions, and I think that's really interesting to see. I think we're going to see more of that. We had CES in January, not the usual, like, crazy consumer electronics show that we usually have, but really conventions are starting to come back. Absolutely.

They're coming back. And I think this is where your larger resort-style operators are really going to win. I think you look at Riemann Hospitality or Vichy properties. You mentioned Vegas. They pretty much own Vegas now at this point after buying MGM growth properties. We talked about Vail already. But actually, I was seeing at Stowe, Vermont a couple months ago, which is a Vail resort, at their Spruce Peak Lodge there.

And they were, it's a major hotel. And they were actually hosting a big insurance company there for the week that we're there having some events. And so, yeah, I think the conferences are back. If you look at Ryman Hospitality and their Q1 results, they reported advanced group bookings that actually exceeded levels in 2019. In other words, more large groups are booking stays at Ryman's resorts than were back in 2019.

And that's really across their portfolio. But like you mentioned like CS, I mean, I think the big convention, CS, E3, ComicCon in San Diego, South by Southwest. I mean, they're always going to have a place. People like Tony Robbins or Grant Crodone are always going to need big convention rooms with hundreds or thousands of seats where they can convince people to how to change your life. I mean, those are out there. They're always going to be happening.

So at that side of the business, that's bouncing back. But I also think it's the smaller events as well. The events that happen every day that, of course, are just a part of society, which are weddings, family reunions, class reunions, or state regional sports tournaments. These have a place in the market as well, and they've also been delayed or canceled or put off for the last two years. And so those are all coming back in a big way. So it's not just about travel. You're right.

It's about people getting together for large events or getting together for small events. And those events just haven't been able to happen. You need a space for those events and resorts and hospitality hotels and other places. are right for those. The one spot that I worry about is business travel, not the big conventions, not even some corporate off-sites, but the real, like, the people that used to travel and just go one-to-one meeting clients and things like that. And that's sort of their bread and butter hotel brands that really benefit from that.

What do you think is going to happen there? Yeah, that's a tricky one, Deidre. I think business travel, as you just described it, where it's, you know, one to three colleagues going to visit a client or a supplier to negotiate a deal. I mean, it's going to come back to a certain extent, but it's so much of that now can be handled virtually. And it's not really just Zoom. I think that's changed the game.

I mean, you've got DocuSign, Adobe. The fact that legal contracts have become digital, and that's all contributed to the lesser need for traditional business travel. I think what does come back, and it kind of hints at what we were talking about previously, but the idea of company off-sites that are a little more akin to, I know, the convention event business, but I'm thinking more smaller group outings, you know, collaboration meetings where groups from companies can have strategic planning sessions that go over several days and getting people together in rooms, in an off-side place can really add some benefits. I think that's going to come back.

In a way, that could even be bigger than it was pre-pandemic because the office, as we've talked about the office is in this really, I don't know, precarious situation when it comes to most corporations. Most corporations have not decided really what their long-term office strategy is. I think we were convinced, and I think the data shows, is that office is probably not going to come back. Traditional office is not coming back to where it was pre-pandemic. Certainly companies aren't going to be leasing as much square foot as they had before, but there's still that need to get employees together now and then to foster the kind of creativity and collaboration that can happen when there isn't an office.

So I think that's coming back, and that could be even better. So that's one other thing, I think, that could come back. That also, it won't necessarily offset all that's lost from business travel, but I think that probably replaces a good chunk of it. Yeah, I think that's interesting. And it's, again, another vote for those sort of larger properties that are more distinctive. And, you know, it's very akin to what we've seen in the office space, where Class A, really top-tier property is still doing well.

The stuff that's middle of the road, maybe not so much. And I think that that's middle-of-the-road hospitality is a place that I think that's the place where the weakness is. Well, Matt, as we wrap up, what do you think people should be looking at to understand hospitality kind of going forward as we go into summer and beyond? Well, you know, as always, if you're an investor, I think follow the companies themselves, Follow the hospitality companies, listen to their conference calls, review their investor presentations. Don't do a ton of work.

But, you know, companies like Pebblebrook, Hotel Trust, or Ryman Hospitality, they'll periodically put out detailed updates on their operating trends, pretty easy to digest. You know, I think if occupancy continues to trend higher and hotels can hold on to those record ADRs that we talked about, the average daily rates, the next few quarters are going to be really good for the industry, maybe record profits. So you'll see record revenues, profits, big increases to dividends. Companies like Pepperbrook, Ryman, I mean, Disney, we didn't talk about Disney, but Disney's a travel company as well, to a certain extent. They either drastically cut their dividends or slash them entirely when the pandemic struck.

So more than anything else, I think higher dividend payouts will signal renewed confidence on the part of hotel executives that the pandemic era is officially over. So, you know, you can watch the stock prices, of course, but I think watch those dividends come back. do, that I think management is saying, hey, our balance sheets in good shape, businesses bounce back. We have a lot of confidence in the next few quarters and maybe the next year as to what the industry is going to do and how consumers are going to behave. So we're going to increase our payout. And that more than anything can be the sign that things are certainly back for the hospitality space. Definitely something to keep an eye on. So, Matt, we've talked about a lot of positives for the travel industry. But the thing that worries me a little bit is this whole

discretionary spending. Inflation has gotten really high. We don't know how long that's going to last. People probably have their plans booked for the next couple of months. But is there a long-term concern we need to think about? I think you could certainly see a situation where if high inflation persists, consumers might start pulling back. I mean, gas prices are high. Airfares are rising. And as we talked about, the hotel rates are kind of the highest they've ever been, certainly higher than they were in 2019. But I think the demand story is still the real story here. I mean, it's demand that's really here.

People have been waiting to make big travel plans for over two years now. And I think there's a little bit of misconception about the inflation and the impact it's going to have on consumer spending. I mean, there's these big kind of clickbaity headlines, right? It'll say something like, well, if your job didn't give you a 6% raise this year, then you got a pay cut and you're poor. you're worse off. And that might be true to a small extent, but I think it doesn't exactly work that way. And I think to use an example, what I like to say, I mean, this is going to be pretty

simple. But imagine a household that takes home $100,000 a year. And to keep things simple, let's say their expenses are $50,000. And let's say inflation got even worse. Let's say inflation was 10%, which would really be painful. Okay. So that means their expenses have gone up $5,000. So now instead of 50,000, their expenses are 55,000. But let's pretend that maybe they didn't get the 10% raise, but they got a 5% raise. So that seems reasonable. So, well, then that means they're taking home, their take-home pay went up by 5,000 as well. They're taking home 105,000. So their expenses are actually covered, even though they didn't get the 10% raise, because generally people are making more than they're having to spend to maintain their standard of living.

I know that's oversimplifying things, but I think inflation is not really the killer app for the economy and people spending. I think it's really demand. Demand is really what drives consumer spending and behaviors. I think with the travel industry, we've had such a two-year period where people haven't been able to spend on travel, haven't been able to see loved ones or hold events like weddings and other things. And now they finally can. And I think that kind of overwhelms the idea of, well, things are a little expensive. So I'm going to hold off even more on going traveling, even though I've been waiting two years

because things have gotten a little expensive. I think those kind of expenses are easy to justify when people have been waiting so long to do them. Well, I think that the interesting thing about looking at inflation from the hospitality industry is that you've got the ability to raise rates very quickly. This is a type of real estate where you're not locked into long leases or anything like that because it's night by night. But then it becomes a question of pricing power and, you know, really those distinctive experiences start to come into play because if you're going to be spending money for a hotel room and you really want that experience level, you want to make it count.

And so I think it does become a question of what are you paying for and is it worth the spend? That's such a great point, teacher. Right. Hotels, you know, it's your lease. You've got one, one-day lease, this is basically with your tenants. And you can adjust prices pretty quickly on the fly. But can you maintain those prices? And to your point, the companies and the resorts that have those destinations that people want to go to, the Ryman Hospitals, the Vail Resorts, the Pebblebrooks with their resorts in Florida and California, where people want to go and want to be, they're willing to pay a premium for that. And so I feel like those companies can maintain their pricing power. Your traditional hospitality or hotel rate that owns

You know, maybe your average mid-scale hotel outside of cities probably not going to have as much pricing power as those with the destinations and the leisure focus that I think is really leading this revival that we're seeing so far in 2002 and we'll probably be able to maintain its pricing power for the remainder of the year. Thank you so much. Thank you, Deidre. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy you.

our sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.