As the coronavirus epidemic intensifies, corporate giants including Cargill, Facebook, Google, Indeed, Intel, L’Oreal, Nestlé and Twitter are dialing back employee travel. Globally, cancellations of major tech conferences have reportedly triggered an economic loss of more than $500 million.
“Companies are taking a conservative approach to travel, especially non-essential trips, and we’d expect this trend to continue in the near term,” says Michael Bellisario, a senior research analyst at investment bank R.W. Baird & Co. who covers lodging REITs.
Depending on how long that trend continues, U.S. lodging REITs could feel a fair amount of financial pain. In the U.S., that’s particularly true for lodging REITs that own properties in popular business travel destinations like New York City, San Francisco, Chicago and Orlando, Fla.
The coronavirus outbreak has already caused a substantial drop in the Dow Jones U.S. Hotel & Lodging REIT Index. The index plummeted from 106.72 on Feb. 21 to 84.57 on March 3. Meanwhile, this year’s total return for the 17 publicly-traded lodging REITs in the U.S. was negative 24.4 percent as of Feb. 28, according to trade group Nareit.
U.S. lodging REITs with properties in gateway and urban markets will bear the brunt of coronavirus-oriented travel cutbacks, notes Bellisario. He envisions a decline of several hundred basis points in RevPAR growth due to potential declines in occupancy rates and average daily rates (ADRs).
For their part, lodging REITs aren’t hitting the panic button—at least not yet. On their fourth-quarter earnings calls in late February, some REIT executives indicated they were modestly adjusting forecasts to account for a potential coronavirus-related dip in business. Others were holding steady and expressing little to no coronavirus anxiety.
The coronavirus “is something that will get under control fairly quickly worldwide and not impact things too dramatically,” Marcel Verbaas, chairman and CEO of Xenia Hotels & Resorts Inc., predicted on the Feb. 25 earnings call for the Orlando-based REIT. “We, like everyone else, are obviously hopeful that the impact is going to be relatively short-lived.”
At Hendersonville, Tenn.-based research firm STR Inc. Jan Freitag, senior vice president of lodging insights, is closely monitoring how corporations tweak or scrap their travel plans in response to the crisis. That will be a key indicator of the virus’ impact on the U.S. hotel industry.
“Business groups are likely to produce the sharpest and most prolonged decline [in hotel demand],” Freitag says. “Conference attendees will either not want to travel or may be prohibited from doing so. Meeting organizers may see cancellations and decide to outright cancel events.”
As for American leisure travelers, Freitag expects them to shy away from heading to places where lots of other tourists are gathered.
“We fully expect demand to rebound quickly once concerns dissipate and media outlets begin reporting on ‘good deals’ for certain destinations,” she says. “This is a trend we saw after the [economic] downturn in 2009.”
STR predicts RevPAR in the U.S. hotel industry will be flat in 2020. However, that outlook could change based on how the coronavirus outbreak evolves, the firm’s researchers note.
On the Feb. 27 earnings call for Park Hotels & Resorts Inc., Chairman and CEO Tom Baltimore said the Tysons, Va.-based REIT expects an estimated 25-basis-point drag on RevPAR in 2020 stemming from the coronavirus, with an EBIDTA loss of about $5 million.
“With assets in global gateway cities, Park is not immune to the impact [the coronavirus] is having on travel and group meetings,” Baltimore told Wall Street analysts. As a result, he said, the REIT is taking a “more conservative approach” to its 2020 outlook.
Already, booking cancellations have started to happen at Park properties in Hawaii, New York City and San Francisco, according to Baltimore.
Demand from Chinese visitors, the epicenter of the coronavirus outbreak, represents about 0.5 percent of Park’s business, Baltimore said. Last year, Chinese travelers booked about 50,000 room nights, or roughly $10 million to $12 million in revenue, he noted. Meanwhile, Japan, another Asian nation caught up in the crisis, accounts for about 3.0 percent of Park’s business, or roughly 250,000 annual room nights.
On March 3, the U.S. Travel Association projected a 6.0 percent decrease in international inbound travel from February through April compared with the same period in 2019.
“There is a lot of uncertainty around coronavirus, and it is pretty clear that it is having an effect on travel demand—not just from China and not just internationally, but for domestic business and leisure travel as well,” Roger Dow, the association’s president and CEO, said in a news release.
Richmond, Va.-based Apple Hospitality REIT enjoys an advantage in that it has less exposure to the top 25 U.S. markets than some of its rivals do, according to Justin Knight, company president and CEO. Those 25 markets, he said, should see the bulk of coronavirus-related damage to U.S. hotel demand.
That being said, Apple Hospitality envisions “some halo impact” from voluntary reductions in business travel during the crisis, Knight noted. For instance, the REIT owns a Hampton Inn next to the Round Rock, Texas headquarters of Dell Technologies Inc., which he said has temporarily frozen inbound travel from China.
Ashford Hospitality Trust Inc. CEO Douglas Kessler said that so far, his Dallas-based REIT had absorbed a $550,000 jolt due to coronavirus-related cancellations.
“However, this number is increasing,” Kessler told Wall Street analysts on Feb. 26. “If the virus is not contained and travel patterns change, we would expect a greater impact on our operating performance.”
The REIT is somewhat insulated from decreases in business travel and has limited exposure to international markets, according to Kessler. As such, Jeremy Welter, Ashford’s chief operating officer, said the REIT faces more of a threat from the virus’ overall effect on the economy.
“Now, that can all change if something becomes different in terms of the spread of [the coronavirus] throughout the U.S.,” Kessler added.
At Chatham Lodging Trust, Jeff Fisher, chairman, president and CEO, said the REIT doesn’t anticipate any significant harm from a coronavirus-linked decline in demand. West Palm Beach, Fla.-based Chatham had seen a revenue loss of about $200,000 stemming from the virus, he said.
Chatham’s 2020 RevPAR forecast doesn’t reflect coronavirus implications because it’s too early to get a sense of the epidemic’s “magnitude or duration,” Fisher noted.
Similarly, Jay Shah, CEO of Harrisburg, Pa.-based Hersha Property Trust, said the first-quarter and full-year impact of the coronavirus on the company’s portfolio is impossible to predict at this point “until we get more clarity once the virus is contained.”
Shah recalled that the SARS virus outbreak in 2002 and 2003 had a “meaningful” effect on the REIT’s properties in major gateway markets. The New York City market, for instance, experienced a RevPAR decline in the high single digits for a couple of months amid the SARS epidemic, he said.
Hersha’s “worst-case fear” is that the impact “could be that rough,” Shah said. However, he added, “we don’t expect to be at that level.”
At Braemer Hotels & Resorts Inc., President and CEO Richard Stockton said he foresees a minor effect on hotel stays due to cancellations by guests from China. At eight properties, Dallas-based Braemer had lost about $80,000 in revenue associated with coronavirus-related cancellations, he said on Feb. 27.
Stockton agreed with one analyst’s speculation that Braemer might end up benefitting from American vacationers staying at the REIT’s high-end resorts in the U.S. rather than risking travel to Asia or Europe. Resorts make up about half of the REIT’s leisure-oriented portfolio.
“That’s certainly a potential scenario that could happen, and we’d be happy to see that happen” Braemer said in response to the analyst’s theory.