Hotel REITs bullish on 2023 after strong Q4'22 financial results

U.S. hotel real estate investment trusts closed 2022 with strong financial metrics, and executives believe that momentum will carry over into 2023.

FFO, recurring EBITDA up significantly

All but one hotel REIT reported hefty year-over-year increases in both operating funds from operations and recurring EBITDA for the fourth quarter of 2022, according to an S&P Global Market Intelligence analysis. Earnings for the largest hotel REITs also surpassed those for the fourth quarter of 2019 — before the COVID-19 pandemic.

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.

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Host Hotels & Resorts Inc., the largest hotel REIT by market capitalization, reported adjusted FFO of 44 cents per diluted share, three cents per share higher than the fourth quarter of 2019 and six cents per share higher than the linked quarter.

Ryman Hospitality Properties Inc.'s earnings also surpassed 2019 levels, with AFFO per diluted share up 5.4% from the fourth quarter of 2019 and more than double the year-ago quarter. Hospitality revenue for the REIT was also up 7.8% for full year 2022 compared with 2019, despite a challenging start to the year with the omicron variant spreading throughout the U.S., according to Ryman Hospitality CEO Mark Fioravanti, speaking on the REIT's fourth-quarter earnings call.

Same-store occupancy in the 2022 fourth quarter expanded 10.5 percentage points year over year to 67.3% on a median basis. Compared with the 2019 quarter, median same-store occupancy was down 8.7 percentage points.

Same-store revenue per available room for the group was also up significantly year over year for the recent quarter, increasing 22.2% to $164.84 on a median basis. The figure also surpassed the 2019 median same-store RevPAR of $161.08.

No signs of weakness amid recession concerns

As macroeconomic concerns and fears of a looming recession remain widespread, no signs of weakness have emerged yet in the hotel REIT sector, giving executives a reason to be optimistic for 2023.

"While macroeconomic headwinds continue to dominate the headlines, we remain optimistic about the state of travel," said Host Hotels & Resorts CEO James Risoleo on the REIT's fourth-quarter earnings call.

Risoleo gave several reasons for his optimism, including continued strong leisure transient rates at his company's resorts. While business travelers have historically contributed to the majority of transient demand at the company's hotels, leisure travel drove the bulk of transient demand between 2020 and 2022, and it remains "well above 2019 levels," the executive said.

Host Hotels & Resorts' business transient bookings experienced an accelerated recovery over the second half of 2022, with small and medium-sized businesses driving the growth.

Furthermore, Risoleo noted strong group bookings in the fourth quarter, with the pace of total group revenue down only 70 basis points compared with the same period in 2019.

The Dow Jones U.S. Real Estate Hotels index is down 23.8% from the end of 2019 but is up 10.9% on the year through March 6, the second-highest increase of any Dow Jones U.S. real estate sector index behind self-storage.