Smoke and Mirrors

The term smoke and mirrors mean, that something looks different than it actually is. The smoke part means it is kind of hazy and you can’t quite see it clearly and the mirrors part, means if you use multiple mirrors, it can make something look much larger or smaller than it is. The dictionary meaning says “the obscuring or embellishing of the truth of a situation with misleading or irrelevant information.” The term was first used in reference to the Watergate scandal in 1975.

In my humble opinion, that is what is happening with many of the publicly traded stocks today and especially the lodging stocks. The COVID crisis started in early March of 2020 so when the companies report their earnings for the first quarter, it may look somewhat down but still not as dire as one may think. That’s because reports for the first quarter will still average in January and February to counter act the March performance. So, investor interest is pumping up the lodging stocks as we read this, but no one is thinking ahead to the second quarter earnings report. That report will really show what impact the COVID virus has had on the lodging companies.

Income in the publicly traded world is defined as the net operating income (“NOI”). Meaning it is the amount of profit after all the expenses except debt. It is not about the top line sales revenue, but the focal point is the NOI. When I tell you that these lodging companies will have no NOI for the second quarter, it makes it sound like just a blip on the screen. It is worse than that. It’s not that they will have no income, it is the negative NOI caused by having to pump in new money just to keep the doors open. The average hotel today is losing around 100-200k a month just in operational expenses. The big hotels on the Vegas strip are losing 10’s of millions a month. The full effect will become evident after the second quarter earnings reports are out.

Far be it from me as a little hotel broker to predict the future, but I believe once the real (2nd quarter) effect of COVID is discovered, it will affect hospitality, retail, office, multifamily and residential stocks. Hopefully we will all get through this but possibly what lies on the other side of this pandemic, could look financially very different than it used to. KT

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