After months of speculation, tax reform is a done deal. The final tax bill reduces corporate tax rates, modifies or eliminates a variety of itemized deductions, changes the taxation of foreign income, and limits the number of tax brackets. If the stock market is any indication, these changes will be a boon for businesses. The stock market surged to record highs last week, with business leaders expressing optimism over tax reform.
The hotel industry, in particular, has reason to rejoice.
“Tax reform will enable hoteliers to expand their businesses, create more jobs, and help keep our economy going,” said Katherine Lugar, president and CEO of the American Hotel & Lodging Association. “Tax cuts will contribute to the overall economic growth of our nation and strengthen our economy.” Indeed, according to a study by Oxford Economics, these tax cuts could generate more than $131.7 billion in economic activity for hotels and related industries over the next 10 years.
Here are five ways tax reform will boost the hotel industry:
1. Consumer and business travel are both expected to increase. As consumer spending increases, discretionary categories, such as travel, will benefit disproportionately relative to areas such as housing and utilities. A U.S. hotel industry forecast released by STR and Tourism Economics anticipates 1.9 percent growth in demand next year alone. While occupancy is expected to dip slightly, stronger ADR growth is expected to offset the decline in occupancy
Source: STR/Tourism Economics
2 Direct hotel guest spending is expected to increase. Tax reform is expected to lower personal income taxes and generate broad increases in employment, wages and salaries—which will translate into more direct hotel guest spending. By some estimates, direct hotel guest spending, both onsite and through ancillary spending such as at local restaurants, stores, and attractions, will increase by more than $57 billion over the next five years.
3 Lower taxes will allow hotels—particularly smaller hotels—to increase their capital investments. Some hoteliers have indicated that tax reform will not change how they allocate capital. For instance, during a third-quarter earnings call in November, Marriott CEO Arne Sorenson said that the company had plenty of cash on hand to make capital investments regardless of whether tax reform passed. “Obviously, we have not been capital constrained in current times before tax reform,” he said.
However, an estimated three out of every five hotels are run by small and/or independentlyowned operators. These companies will benefit from lower taxes, and, in turn, will have more flexibility to make capital improvements which Douglas Dreher, CEO of The Hotel Group, calls a “huge part” of every hotel, one way or another. Under the new tax policy, businesses get full and immediate expensing of depreciative assets, a provision that begins to phase out after five years.
4 Hotel investors will benefit from higher earnings. Tax reform is anticipated to usher in higher earnings for hotel shareholders. “Tax reform and reducing our tax rates is going to drive more free cash flow, and the largest part of that free cash flow increase is going to go back to our shareholders,” said Hilton CEO Chris Nassetta during a recent interview.
Reports suggest InterContinental Hotels and Extended Stay America shareholders will also benefit. InterContinental said its investors could see a 10 percent earnings per share benefit from tax reform in fiscal year 2018. According to a December 21 filing from the company, the new tax law will reduce its group’s effective tax rate by mid-to-high single digit percentage points starting in January. The company’s 2017 effective tax rate is expected to be in the low-30s. Extended Stay America has stated that it expects to see an earnings per share boost, as well. The company has been buying back stock since mid-November in anticipation of tax reform.
5 Hotel groups will finally be able to bring profits home. One of the most important aspects of tax reform, according to Navin Shah, chairman of Royal Hotel Investments, is the elimination of double taxation on foreign income. “Let’s make it more economically attractive for American companies to bring money ‘home,’” he said. “This tax change [will] free up billions of dollars that are now sitting unproductively overseas, but instead could be invested here.”
These are just five ways tax reform will boost the hotel industry. We suspect there will be other, less-obvious impacts as well. We will continue to monitor the regulatory landscape for policy changes that affect our investors. Stay tuned for more
ABOUT THE AUTHOR
Sundip Patel is the founder and CEO of AVANA Capital, a nationwide commercial real estate debt fund. AVANA offers hotel financing through conventional, bridge and SBA 504 lending programs for acquisition, refinance and construction. Since its founding in 2002, the company has funded more than $1 billion in loans and is known for its speed and certainty of execution. For more information, visit www.avanacapital.com.