A Mixed Bag of Travel Trends

Ready for a vacation? You’re not the only one! In this podcast, Motley Fool analyst Deidre Woollard talks with Matt Argersinger, who leads investing on The Motley Fool’s Mogul and Real Estate Winners services, about the state of hospitality, and the companies and real estate investment trusts (REITs) that stand to benefit from more travel. 

They also discuss:

• How resorts are recovering.
• The present obstacles for Airbnb (ABNB 4.75%).
• Why the outlook for business travel is a mixed bag.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on May 7, 2022.

Matt Argersinger: [MUSIC] While these hotel REITs and hospitality companies aren’t necessarily trading for extreme valuations, they’re still beaten down, a lot of them have, you know, they slashed their dividend a couple of years ago, have not brought that dividend back, and can be had for pretty reasonable valuations. Then you’re talking about maybe having record results in the second half of this year, so maybe I’m burying the lead here, [laughs] 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.

Chris Hill: I’m Chris Hill, and that was Matt Argersinger, Lead Investor from Millionacres, The Motley Fool’s real estate investing service. On today’s show, we’re diving into hospitality. Deidre Woollard talks with Matt about the travel trends that are surging back and the companies that may stand to benefit. They also discussed how resorts are recovering and why the future for business travel is a mixed bag.

Deidre Woollard: I don’t know about you, Matt, but it’s feel like all my friends are going somewhere really exciting this year. What are you seeing?

Matt Argersinger: Well, I am also going somewhere really exciting, Deidre. I am going to Europe, myself to do some hiking around Mont Blanc in Switzerland, Italy, and France. 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 of years, putting off so many things, putting off travel, putting off big family events, weddings, companies putting off travel. We finally are at a point, knock on wood, where we’re probably past the worst of the pandemic, doesn’t feel like we’re going to get another big wave and a lot of the restrictions that we had in place has recently as a few months ago and a lot of places have been lifted.

Masks 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 a demand story. Those COVID restrictions are gone, they’ve been removed, masks 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 store either. I was listening to the conference call for Sun Communities, which is not really a travel company, but they are leading RV REIT. They do manufactured homes and RV, and they noted that a lot of RV parks are seeing big surges and travelers coming from Canada. I think we’re also underestimating the potential international story here, as borders reopened. There’s a lot of pent-up demand for foreign travelers to the US as well and that’s going to boost a lot of the hotels and hospitality related businesses around the country.

Deidre Woollard: I think that’s a really good point. I’ve been studying the TSA throughputs numbers too and it’s great to see them now consistently up, around, up and over two 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. There is this narrative where people are like, I’m an Airbnb person or I’m a hotel person. But I’m really noticing that people are 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 optionality and travel that we have today that we didn’t use to have before Airbnb?

Matt Argersinger: I love it. I mean I love what Airbnb has brought to the market because I think more consumer choice is always better. The fact that you know 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 were just renting out rooms, houses that you can rent and book and have a really unique experiences you as travel. I view Airbnb, it’s this really disruptive force because it’s an entrance to the market. It gives consumers more choices in a way sometimes those choices are experiences can be superior to what’s offered by the hotels in any particular market. Their experiences that you can have on Airbnb that you just can’t get in a lot of places that a hotel can’t replicate.

But that said, I also think a lot about this Airbnb versus hotel, and I think most people will offer both. This 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 their, amenities, it’s really different from listening to listing from host-to-host. As more people resume travel especially the 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 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. I’m not saying hotels don’t have it, but it is really interesting and I know this is out there. It’s buzzy, but your book it you’ll see an Airbnb listings you really love.

It’s a 100 dollars a night and you’re thinking, wow, that’s a great deal especially compared to hotels in the city or the market where I’m booking. But all of a sudden you got a book that Airbnb and also that a 100 dollars becomes a 150 dollars or a 180 dollars because you have the cleaning fee, you’ve got the Airbnb fee, you’ve got any other assortment special fees that the host is charging you for God knows what, and all of a sudden, that a $100 a night is more than double. There are also some taxes in there that I’ll talk about in a second. As a long-term host on the platform, I see problems with that, I see problems with customer service 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. I think when most problems arises when someone’s traveling, they’d rather deal with the management of hotel whose purpose and incentives to make things right rather than the person they might be in direct conflict with.

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, where I live in Washington, DC 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 and a half percent tax rate, so imagine if you’re a guest and you’re booking a place in DC, you get the cleaning fee, you get the Airbnb fee, all of a sudden, you get this 14.5 percent hotel tax put on top of it. Makes it really expensive to travel, puts Airbnb much more in the level of hotels, and in 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. 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 slam dunk business especially as we go on in the post COVID travel world.

Deidre Woollard: Yeah, there’s so much you’ve 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 is a wide variety of things that are required from just stripping the bed or something like that, to cleaning up at certain things 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, you mentioned being buzzy. A lot of those stores 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. This is 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.

Matt Argersinger: I agree, and yes, to Bill Mann’s cleaning fee story. I’m sure it goes something like wait a second, I’m paying a 150 dollars and cleaning fee, but you expect me to 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? [laughs] I’ve seen that a lot. It’s certainly out there. It makes everybody, like I said, such a varied experience to people. As they travel this summer, I think a lot of people are going to look for more standardized experiences.

Deidre Woollard: Which is great news for hotels. One of the things I watch is STR data that comes from CoStar, and they’ve recently put out their release of data through April 23rd. Occupancy, pretty strong. It’s at about 65.8 percent down 4.2 percent from 2019 pre-pandemic. Really interesting stuff as average daily rate is up. You mentioned prices going up earlier. Average daily rate of $148.35 up 15.4 percent from 2019. RevPAR, which is revenue per available room, that’s over $97. That’s up 10.5 percent from 2019. It just seems 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.

Matt Argersinger: Then think about what you just said. The average daily rate revenue 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, where we haven’t even gone to really the heart of the hotel season spring and summer here, and yet, they’re reporting numbers that are exceeding pre-pandemic levels. That’s really impressive. Like you said, pricing power that they have in the market that they didn’t have obviously in last two years with COVID. 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-pandemic. Occupancy grow, it’s rising, and it’s fine, but it’s still below 2019, yet there’s still generating meaningful revenues and profits. Remember, these hotels are now just, like I said, they are entering that busy spring and summer period.

COVID-19 is more and more in the rearview 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, and it wouldn’t surprise me at all to see many hotel REITs and hospitality companies start lapping their 2019 pre-pandemic financials at some point during the second-half of the year. 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, they slashed their dividend a couple of years ago. Not brought that dividend back, and can be hard for pretty reasonable valuations, and then you’re talking about maybe having record results in the second half of this year. Maybe I’m bearing the lead here, but I do think [laughs] maybe the overall theme of this conversation we’re having is that there’s probably opportunities for investors in the industry.

Deidre Woollard: Yeah, let’s talk a little bit about that because in the beginning, we saw the leisure travel bounce back and that was good for some of the rates we follow like a Ryman Hospitality Properties, they’ve got those larger resorts. But now, we’re starting to see urban travel come back a little bit. People are going to Washington DC, they’re going to Boston, they’re going back to New York. That could be good news also for other types of hotel brands as well.

Matt Argersinger: Absolutely. I think we spent the last couple years avoiding a lot of those places. But where do people want to travel generally? We talked a lot about people going to rural places. Of course, you’re going camping. I know the RV business is booming over the last couple years, but I do think the major cities and major destinations of the country are going to see a huge pickup, a huge revival. Places like Washington, DC, where we live, 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. Place like Opryland in Nashville or Miami Florida, or just the number of places that’s owned by Vail Resorts. For example, what I love to see about Vail is you can’t really build new mountains. Vail has some of the most unique hospitality assets on the planet. You got Vail, you got Breckenridge, you got Heavenly, 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.

Deidre Woollard: 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 place to figure out what’s happening with conventions. I looked at some Las Vegas convention attendance, get this, up over 2000 percent from 2021, that’s still down 40 percent or so from 2019. Hotel occupancy is 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 crazy consumer electronics show that we usually have. But really conventions are starting to come back.

Matt Argersinger: Absolutely, they’re coming back. I think this is where your larger resort-style operators are really going to win. I think you’d look at Ryman Hospitality or VICI 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 it’s still Vermont a couple of months ago, which is a Vail resort, at their Spruce Peak Lodge there and 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.

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. Other words, more large groups or booking stays at Ryman’s resorts than we’re back in 2019, and that’s really across their portfolio. But like you mentioned, like CES, I think the big convention, CES, E3, Comic-Con in San Diego, South by Southwest. They’re always going to have a place, people like Tony Robbins or Grant Cardone are always going to need big convention rooms with hundreds of thousands of seats where they can convince people how change to your life. I mean, [laughs] those are out there.

They’re always going to be happening. 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 everyday 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. Those are all coming back in a big way. It’s not just about travel, it’s about people getting together for large events or getting together for small events. Those events just haven’t been able to happen. Need a space for those events, and resorts and hospitality hotels and other places are right for those.

Deidre Woollard: The one spot that I worry about is business travel, not the big conventions, not even some corporate off-sites, but the people that used to travel and just go one-to-one meeting clients and things like that. That’s their bread and butter hotel brands that really benefit from that. What do you think is going to happen there?

Matt Argersinger: That’s a tricky one, Deidre. I think business travel, as you just described it, where it’s one to three colleagues going to visit a client or a supplier to negotiate a deal. It’s going to come back to a certain extent, but it’s so much of that now can be handled virtually. It’s not really just Zoom, I think that’s changed the game. 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 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 addings, collaboration meetings where groups from companies can have strategic planning sessions that go over several days, and getting people together in rooms in an offsite 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 offices in this really 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 are 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 creativity and collaboration that can happen when there isn’t an office. I think that’s coming back and that could be even better. That’s one other thing I think that could come back that also, it won’t necessarily offset all of it that’s lost from business travel, but I think that probably replaces a good chunk of it.

Deidre Woollard: Yeah, I think that’s interesting, and it’s again, another vote for those larger properties that are more distinctive. It’s very akin to what we’ve seen in the office space where Class A, really top tier properties still doing well. The stuff that’s middle of the road, maybe not so much. I think that’s middle of the road hospitality is placed 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 going forward as we go into summer and beyond.

Matt Argersinger: As always, if you were 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 companies like Pebblebrook Hotel Trust, or Ryman Hospitality, they periodically put out detailed updates on their operating trends. Pretty easy to digest. I think if occupancy continues to trend higher and hotels can hold onto 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. You’ll see record revenues, profits, big increases to dividends.

Companies like Pebblebrook, Ryman, Disney, we didn’t talk about Disney. But Disney is a travel company as well, to a certain extent. They either drastically cut their dividends or slash them entirely when the pandemic struck. 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. You can watch the stock prices of course, but I think watch those dividends come back. If they do that, I think management is saying, hey, our balance sheet is in good shape, businesses bounced 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. We’re going to increase our payout. That more than anything can be the sign that things are certainly back for the hospitality space.

Deidre Woollard: Definitely, something to keep an eye on. 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?

Matt Argersinger: I think you could certainly see a situation where if high inflation persists, consumers might start pulling back. Gas prices are high, airfares are rising and as we talked about, the hotel rates are at 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. It’s demand that’s really here people who have been waiting to make big travel plans for over two years now. I think there’s a little bit of misconception about the inflation and the impact that’s going to have on consumer spending. There’s this big clickbaity headlines. It will say something like, well, if your job didn’t give you a six percent raise this year, then you’ve got to pay cut and you’re poor, you are worse off. [laughs]

That might be true to a small extent, but I think it doesn’t exactly work that way. I think to use an example, what I like to say, this is going to be pretty simple. But imagine a household that takes $100000 a year. To keep things simple, let’s say their expenses are 50,000. Let’s say inflation got even worse. Let’s say inflation was 10 percent, which would really be painful. That means their expenses have gone up 5,000. Now, instead of 50,000, their expenses are 55,000. But let’s pretend that maybe they didn’t get the 10 percent raise, but they’ve got a five percent raise. That seems reasonable, so well then that means their take-home pay went up by 5,000 as well. They’re taking home 105,000. Their expenses are actually covered even though they didn’t get the 10 percent 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 behaviors. I think with the travel industry, we had such a two-year period where these 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. Now they finally can. I think that overwhelms the idea of, well, things are a little expensive, so I’m going to hold off even more [laughs] on traveling even though I’ve been waiting two years because things have gotten more expensive. I think those expenses are easy to justify when people have been waiting so long to do them.

Deidre Woollard: 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 really those distinctive experiences start to come into play because if you’re going to be spending money for a hotel room and then you really want that experience level, you want to make it count. I think it does become a question of what are you paying for and is it worth the spend?

Matt Argersinger: That’s such a great point, Deidre. Hotels, you’ve got one-day leases, basically, with your tenants. You can adjust prices pretty quickly on the fly. But how can you maintain those prices into a point the companies and the resorts that have those destinations that people want to go to? The Ryman Hospitality, 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. I feel like those companies can maintain their pricing power. Your traditional hospitality hotel REIT that owns 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. We’ll probably be able to maintain its pricing power for the remainder of the year.

Deidre Woollard: Thank you so much.

Matt Argersinger: Thank you, Deidre. [MUSIC]

Chris Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill, thanks for listening. We’ll see you tomorrow.