Market Commentary: Summer Palace

The Beverly Hills Hotel, subject of the 1977 Eagles classic rock and roll platinum album, is among the California hotels where you are welcome to check in anytime you like. The 108 year-old Pink Palace with its five-star luxury suites and bungalows, long associated with honeymoons and Hollywood, are open although spa services have not resumed yet. Denver’s Brown Palace, which just re-opened after a 64-night shutdown, the first in its 128-year history, is back to offering manicures and massages as well as its iconic afternoon tea. Nationwide, hotel occupancy rates have been slowly rising since April, when they reached a low of 21%. There have been one or two point gains almost weekly in May and June, so reservations have crept up to 36.4% in the most recent week tracked by data firm STR.

All classes of lodging are reporting rates over 20 percent now with the economy bracket showing the best improvement. Many hotels were deemed essential businesses at the state and local level, and have remained open to house medical workers and non-critical patients. But as stay-at-home orders ease, Americans are arranging for some getaways. Among the hotel markets with the fastest improving figures are Virginia Beach, Phoenix, and Philadelphia. In central business districts such as the one in Chicago, however, occupancy is still stuck in the 16% range and it may take two or more years before corporate travel returns to pre-pandemic levels. New York’s hotel industry has perhaps been hardest hit; as many as 25,000 rooms or 20 percent of the city’s total, may never reopen in their current form or under current ownership.

Since March, when travel came to a virtual standstill, an estimated 83% of hotel debt borrowers have asked their lenders for forbearance or payment deferral on loans according to the American Hotel and Lodging Association. The Bureau of Labor Statistics reports unemployment in the leisure and hospitality industry at 35.9% in May; the number of workers has fallen from 16.8 million in February to 9.8 million. Hyatt just announced that it is cutting 22% of its global workforce and extending pay cuts, reduced hours and furloughs for another three months.

So, what is the future of our hotels, valets, concierges, chefs, and housekeepers in the post CV-19 world? When will we leave the palaces we call home and again feel comfortable staying at, eating in, and enjoying the facilities, features and attractions they offer in major cities, quaint towns, and bucket-list destinations such as the palaces of Versailles and Buckingham?

The answers seem to hinge on more widespread antibody testing as well as our acceptance of data, social distancing regimens, vaccines and treatments. The future of this industry is also closely tied to the airlines, how safe we perceive planes to be, how businesses view the necessity and liability of travel. Some analysts expect that drive-to and limited service hotels will come back first and indeed leisure travelers are starting to take short road trips. But various state restrictions with respect to quarantining and rentals still apply and the Centers for Disease Control and Prevention still post alarming warnings of the associated risks of getting and spreading Covid-19. In the meantime, hotels are struggling to address key concerns via contact-free check-ins and rigorous cleaning and safety protocols. Marriott has overhauled its housekeeping practices, Hilton has partnered with Lysol, and Westin is introducing UV light-zapping robots.

The overall growth in the economy is generally expected to lead to a rebound in the hotel industry when we take to the roadways and skies again. The IMF estimates the global economy will expand by 5.8%, and the U.S. economy by 4.7%, in 2021. The Federal Reserve estimates that our economy will shrink by 6.5% this year, then grow by 5% in 2021. In testimony before Congress this week, Fed Chair Powell described three phases related to the pandemic and our recovery. The initial phase of course was the shutdown. Now he believes we are entering the second stage, a bounce-back, evidenced by the drop in the unemployment rate and record 117.7% spike in May retail sales. While continuing to pledge the use of all available tools to help bring about robust growth, he noted that there is still great uncertainty due to rising case counts, consumer fears, and the substantial damage done to many industries. A full recovery is unlikely, he noted, until the public is confident that the disease is contained.

Fallout from the coronavirus has left no sector of our economy untouched, but it is hard to tell by looking at the stock market. Since the end of February, the Dow has gained 3.5%, the S&P 500 5.8% and the Nasdaq 16%. Equity investors are casting many virus-related worries aside, feeling confident in government and central bank stimulus and better than expected economic numbers. Since the pandemic was declared on March 11, Hilton Hotels (NYSE: HLT) stock prices are up 40 percent from their low on April 3, Marriott (Nasdaq: MAR) is up 59 percent from its low on the same date, and Hyatt (NYSE: H) has gained 55% from where it sank on March 18. The prices of 30-year BB rated Hilton corporate bonds have increased by 35% from their pandemic lows in March to $104.329 at this writing. At $98.345, Baa3 rated Marriott Corporation bonds with a similar maturity are also up 35%, and Baa3 rated Hyatt bonds at $103.50 have gained 30%.

Despite the massive increase in U.S. Treasury bond issuance to finance the stimulus, demand has remained steady for the world’s haven asset and yields low. The 2-year Treasury yield has fallen 34 basis points to 0.19% since the pandemic was declared. At this writing, the 10-year yield at 0.75% is down 5 basis points, and the 30-year yield at 1.54% is only 27 basis points off its low. Similarly, municipal bonds have demonstrated remarkable resilience. Two-year tax-exempt AAA rated general obligation bond yields at 0.25% are 30 basis points below where they stood in mid-March. The 10-year benchmark at 0.87% is 4 basis points lower while the 30-year yield at 1.64% s only 9 basis points higher. The municipal new issue calendar has been very well received, municipal bond mutual fund flows have been net positive for six consecutive weeks, and daily customer “buy” trades have exceeded “sell” volume since March 17. Last week we saw a Ba2 rated Texas charter school with a 30-year maturity price with a coupon of 5.00% to yield 4.80% and two non-rated limited offerings: a Florida charter school financing due in 2055 priced at par to yield 6.00%, and a California charter school deal priced at par to yield 6.25%.

At HJ Sims, we believe in the outcome of income. Our bankers, traders and advisors are hard at work every day delivering revenue-maximizing and income-generating ideas for our clients. We have a nice pipeline of senior living financings to benefit non-profit and for-profit partners who have been waiting for conditions like these. We read that assets in money market funds have ballooned to $4.6 trillion, the highest level on record, up $1 trillion so far this year, and reach out to our clients all day long with specific proposals for putting their cash to work in smart ways that are in line with their respective risk tolerances.

With many public companies eliminating dividends to protect liquidity, we find that the steady interest, monthly or semi-annual, produced by higher yielding corporate and municipal bonds to be the right solution for many investors. Whether on Elm Street or Rodeo Drive, as you prepare to celebrate the official start to Summer, pay tribute to the fantastic fathers in your life, and mark the midway point in the year, we invite you to make an appointment with your HJ Sims advisor to discuss your income needs, your views on the economic recovery, and your interest in the opportunities being identified by our traders in sectors including hotels, airlines, schools, and senior living.