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Can Host Hotels Bank on Healthy Lodging Real Estate Demand?

Fundamentals of the lodging real estate are expected to be favorable in the near-to-mid term amid economic recovery. Particularly, business travel is likely to benefit from rising corporate profits and corporate tax cuts, as well as a healthy business investment, while leisure travel may benefit from low unemployment level and rising wages.

Amid these, Host Hotels & Resorts, Inc. HST, the largest lodging REIT and one of the largest owners of luxury and upper-upscale hotels, is poised to excel. Moreover, group business demand is expected to be strong in the rest of the year with solid group booking pace.

Notably, Host Hotels’ properties are positioned in major urban centers and resort destinations with comparatively higher barriers to entry. Furthermore, the company is likely to grow its revenue per available room (RevPAR) backed by value enhancement and rebranding initiatives.  Host Hotels undertakes a strategic capital-recycling program to improve its portfolio quality. Particularly, during first-quarter 2018, it completed the acquisition of 301-room Andaz Maui at Wailea Resort, 668-room Grand Hyatt San Francisco, as well as the 454-room Hyatt Regency Coconut Point Resort and Spa for $1 billion. Furthermore, the company has been monetizing a considerable part of real estate in Washington D.C. and lowering its exposure in New York.

Moreover, during the April-June quarter, the company expended around $86 million on capital expenditures — $29 million was return on investment (ROI) capital projects, and $57 million for renewal and replacement projects. Also, it projects capital expenditures of $475-$550 million for the year. This comprises $185-$220 million in ROI projects, and $290-$330 million in renewal and replacement projects. Such investments are likely to help the company enhance its portfolio and bolster revenues.

Host Hotels also has a decent balance sheet and ample liquidity. The company exited Q2 with around $646 million of unrestricted cash and $551 million of available capacity under the revolver part of its credit facility. Notably, the company has no debt maturities until 2020. Also, following the quarter end, $150 million was repaid by the company under the revolver part of its credit facility and therefore, it now has $701 million of available capacity. This provides the company ample scope for deploying capital for long-term growth opportunities and at the same time, carrying out redevelopment initiatives.

Additionally, solid dividend payouts remain arguably the biggest attraction for REIT investors and Host Hotels remains committed to that. Moreover, the company has $500 million of capacity available under its current-repurchase program.

Although the company’s shares have lost 3.7%, compared with the 4.7% growth of the industry it belongs to in the past three months, the trend in estimate revisions of current-year FFO per share indicates a decent outlook. In fact, over the past month, the Zacks Consensus Estimate for 2018 funds from operations (FFO) per share has moved 1.8% north to $1.74.

In fact, the company posted a better-than-expected performance in second-quarter 2018, driven by growth in room rate, rising occupancy level, solid food and beverage profitability, better ancillary revenues and improvement in margin. However, these positives were partly offset by the disposition of six hotels in 2017 and 2018. Also, the company raised its outlook for the current year. Given the progress on fundamentals, the stock is likely to perform well in the upcoming period.

Nevertheless, supply has ramped up in recent times. In fact, supply level will likely remain elevated in 2018 as well as 2019, particularly in markets where the company has exposure. Higher supply in some of the company’s key markets might affect its pricing power. Also, the dilutive effect on earnings from dispositions cannot be bypassed in the near term.

Further, hike in interest rates can pose a challenge for Host Hotels. Essentially, rising rates imply higher borrowing costs for the company that would impact its ability to purchase or develop real estate. Moreover, REIT stock yields become less attractive when treasury yields rise.

Host Hotels currently has a Zacks Rank #3 (Hold). This stock has rallied 12% in the past year, outperforming 0.3% growth recorded by its industry.



 

Stocks to Consider

A few better-ranked stocks from the real estate space are Outfront Media Inc. OUT, PS Business Parks, Inc. PSB and W. P. Carey Inc. WPC. While Outfront Media sports a Zacks Rank #1 (Strong Buy), PS Business Parks and W. P. Carey carry Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Outfront Media’s Zacks Consensus Estimate for 2018 FFO per share remained unchanged at $2.06 in the last 30 days.

PS Business Parks’ current-year FFO per share estimates inched up 0.3% to $6.39 over the last 30 days.

W. P. Carey’s FFO per share estimates for 2018 moved 5.8% north to $5.12 in 60 days’ time.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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