Stronger business group travel demand helped propel earnings metrics for hotel real estate investment trusts during the second quarter, according to an S&P Global Market Intelligence analysis.
Same-store occupancy and RevPAR growth
Same-store revenue per available room (RevPAR) continued to grow across the US hotel REIT sector, up 3.8% on a median basis over the strong second quarter of 2022.
At the same time, median same-store occupancy for the hotel REIT sector grew 2.7 percentage points year over year to 75.6%, the highest level since the onset of the COVID-19 pandemic.
Host Hotels & Resorts Inc., the largest hotel REIT by market capitalization, attributed its strong results for the quarter to improvements in its group business segment, as well as continued rate strength across its portfolio as a whole.
On the REIT's second-quarter earnings call, CEO James Risoleo mentioned that the REIT booked over 310,000 group rooms in the recent quarter for later in 2023, with the total group revenue pace now 4.2% ahead of the same time in 2019.
Business transient demand also improved 6% for the REIT compared to the second quarter of 2022, while rates were up 10%, Risoleo said.
Ryman Hospitality Properties Inc. cited similar trends in its second-quarter earnings release, with strong group demand driving record second-quarter revenue and average daily rate (ADR) performance for its core Gaylord Hotels portfolio.
Overall, US leisure travel softened a bit in the second quarter, as many of the nation's travelers chose to travel internationally for summer vacations.
US citizen air passenger departures to foreign countries exceeded 7.5 million in June, up 18.5% compared to June 2022 and surpassing the June 2019 volume by 9.5%, according to data released by the National Travel and Tourism Office. Non-US citizen air passenger arrivals to the US from foreign countries totaled about 4.2 million for the summer month, roughly 80.2% of the pre-pandemic June 2019 volume.
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FFO, recurring EBITDA
Looking at Market Intelligence-calculated recurring EBITDA for the second quarter, roughly half of the sector logged year-over-year increases, with the other half showing declines.
A similar trend showed in reported operating funds from operations (FFO). Eight of the 16 publicly traded hotel REITs reported annual declines in operating FFO per share for the second quarter, while the other eight reported operating FFO per share either equal to or exceeding the year-ago quarter.
Market Intelligence defines operating FFO as funds from operations adjusted for extraordinary items or other nonrecurring items at the discretion of the company. Hotel REITs sometimes refer to this as normalized FFO, core FFO or adjusted FFO.
Future outlook
With business travel gradually improving and leisure travel demand remaining high, hotel REITs expressed optimism on the future outlook of the sector.
While outbound international travel outpaced inbound travel this summer, Host Hotels' Risoleo expects international demand to be a tailwind for the US hotel sector as the trend reverts over time. This trend will have less of an impact in the latter part of 2023 as travelers typically seek domestic destinations in the holiday months.
Even with hotel REIT earnings nearing 2019 levels, share prices for the sector still sit far below their pre-pandemic levels. The Dow Jones US Real Estate Hotels index was down 33.9% as of Aug. 21 compared to the end of 2019, underperforming both the broader Dow Jones Equity All REIT index and the S&P 500.
