Top-Notch Portfolio and Recovery Opportunities – Host Hotels & Resorts (HST) has a glittering portfolio of luxury and upscale properties strategically located across sought-after markets, boding well for its future. The company has seen a resurgence in the demand for business and group transient accommodations, fueling growth and occupancy rates. Additionally, its robust balance sheet and strategic capital recycling efforts contribute to its upward trajectory. However, a gold-plated recovery might not be in the cards, with a lingering caution in business approaches and the looming threat of inflated interest rates.
What’s Sparkling in Its Treasure Chest?
Host Hotels boasts a treasure trove of luxury and upscale hotels spread across the top 20 U.S. markets, particularly in the Sunbelt region. These properties are strategically placed in bustling city centers, close to airports, and popular resort or conference destinations. This advantageous positioning is expected to drive heightened demand for the company’s properties in the upcoming period.
The lodging industry is on an upswing from the lows during the health crisis. This improvement in group and business transient demand has led to growth in occupancy and revenue per available room (RevPAR) in recent quarters. Comparing the beginning of 2023 to Sep 30, comparable hotel RevPAR jumped 10.4% from 2022. Management anticipates a 7.25-8.75% growth in comparable hotel RevPAR for 2023. It is projected to reflect a 7.8% year-over-year increase this year.
This lodging real estate investment trust (REIT) has been strategically allocating capital to elevate the quality of its portfolio to attain a greater scale and competitive edge. From the start of 2023 through Sep 30, the company has incurred a substantial $472 million on capital expenditure.
The company has also made groundbreaking agreements, such as with Hyatt, to undertake transformative reinvestment capital projects at six properties in its portfolio. This move is poised to enhance the competitive edge of the targeted hotels in their respective markets and boost long-term performance. The total investment is anticipated to reach nearly $500-$600 million, with plans to invest nearly $125-$200 million per year over the next three to four years. Management expects to fork out a total capital expenditure of $615-$695 million for the current year.
Host Hotels’ capital-recycling initiatives are paying off handsomely. Over the years, HST has divested non-strategic assets with lower growth potential or those needing significant capital expenditures, reinvesting the profits into high-yield assets. This shrewd maneuver highlights its astute capital-management practices.
According to the company’s November 2023 Investor Presentation, its total dispositions from 2021 through the end of the third quarter of 2023 were approximately $1.53 billion, at an EBITDA multiple of 17.5 times. During the same period, its acquisitions were around $1.87 billion, at a 13.1 times EBITDA multiple. This translates to a 10.5% year-over-year increase in EBITDA for the current year.
HST maintains a robust balance sheet with no significant debt maturities until April 2024. As of Sep 30, 2023, the company had $2.6 billion in total available liquidity. It stands out as the only lodging REIT with an investment-grade rating, holding ratings of Baa3 from Moody’s and BBB- from both Fitch and S&P Global. These ratings enable it to access the debt market at favorable rates, providing financial flexibility for long-term growth opportunities and redevelopment activities.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have gained 5.1% compared with the industry’s 1.2% upward trend.
Image Source: Zacks Investment Research
What Could Tarnish the Shine?
Although there’s been a ramp-up in transient and group business travel demand since the start of the pandemic, the pace may be lackluster in the near term due to delayed office returns and limited face-to-face conferences. In the third quarter of 2023, the company reported slow recovery in transient demand in certain markets, especially San Francisco and Seattle, while room rates at resort hotels saw a slowdown. Furthermore, due to ongoing macroeconomic uncertainty, management anticipates uneven operations in specific markets in the near term.
Host Hotels faces competition from other owners and investors in the upper upscale and luxury full-service hotel segments. Additionally, the proliferation of online reservation channels is expected to intensify competition, further aggravating the company’s revenue and profitability. Moreover, the surge in online short-term rentals has contributed to increased supply in the lodging industry, escalating competition in some markets.
Furthermore, a high interest rate environment could result in greater borrowing costs for the company, impeding its ability to acquire or develop real estate. For 2023, an eye-watering 21.1% year-over-year increase in interest expenses is estimated. Consequently, higher interest rates might make the company’s dividend payout less appealing compared to fixed-income and money market account yields.
Unearth Other Potential Gems
There are other shining prospects in the REIT sector, such as EastGroup Properties (EGP), Stag Industrial (STAG), and Innovative Industrial Properties (IIPR), each carrying a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for these companies’ financial performance indicates a bright outlook, reflecting the promising potential in this sector.
Note: Funds from operations (FFO) – a widely used metric to gauge REIT performance.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.