Host Hotels & Resorts HST is well-positioned to benefit from its portfolio of well-located properties in markets with strong demand drivers. Its capital-recycling efforts and a healthy balance sheet bode well for long-term growth. However, constrained business and group travel demand due to a cautious approach by many businesses may weigh on it. Elevated interest rates are also concerning.
What’s Aiding it?
Host Hotels enjoys a portfolio of luxury and upper-scale hotels across the top 20 lucrative U.S. markets, with a strong presence in the attractive Sunbelt region. These properties are strategically located in central business districts of major cities with close proximity to airports and resort/conference destinations and are likely to drive demand, poising HST well to ride the growth curve.
The continued momentum in leisure travel demand and recovery in business transient and group demand from the initial days of the pandemic have aided occupancy and hotel revenue per available room (RevPAR) growth in recent quarters. From the beginning of 2023 through Jun 30, comparable hotel RevPAR increased 14.9% from the 2022 levels. Management expects the metric to grow between 7% and 9% in 2023. We expect it to exhibit year-over-year growth of 8.1% in the current year.
Host Hotels has been undertaking strategic capital allocations to enhance the quality of its portfolio. HST has a greater scale and competitive advantage in the U.S. markets. The company has incurred $323 million of capital expenditure from the beginning of 2023 through Jun 30.
It also completed the transformation of 16 hotels in the past couple of years as part of a transformational capital program led by Marriott to improve long-term performance through higher RevPAR. Management expects to incur capital expenditure of $625-$725 million this year.
Moreover, this lodging real estate investment trust’s (REIT) capital-recycling efforts are encouraging. Over the years, HST has disposed of its non-strategic assets that have lower growth potential or properties with significant capital expenditures and redeployed the proceeds for investments in better-yielding assets. Such efforts highlight the company’s prudent capital-management practices and help preserve balance strength.
Per the company's August 2023 investor presentation, from 2021 to the end of the second quarter of 2023, its total disposition was around $1.5 billion, which is 17.5 times the EBITDA multiple, and its acquisitions were around $1.9 billion, which is 13.1 times the EBITDA multiple. Our estimate suggests an increase of 6.8% in EBITDA for 2023 on a year-over-year basis.
HST maintains a healthy balance sheet and had $2.5 billion in total available liquidity as of Jun 30, 2023. It does not have any material debt maturities until April 2024. Moreover, it is the only company with an investment-grade rating among lodging REITs. It enjoyed ratings of Baa3 from Moody’s and BBB- from both Fitch and S&P Global as of the second quarter of 2023, rendering it favorable access to the debt market. HST’s healthy financial position will aid it in capitalizing on long-term growth opportunities and facilitating redevelopment activities.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have gained 6.4% compared with the industry's upside of 1.8%.
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What’s Hurting it?
The recovery in business and group travel demand, although having picked up the pace since the start of the pandemic, is likely to be tepid in the near term, as businesses continue to adopt a cautious approach and delay the return to the offices. Moreover, given the present macroeconomic uncertainty, management expects its operations in specific markets to stay uneven in the near term. Against this backdrop, we expect adjusted funds from operations to exhibit moderate growth of 1.5% in 2023 on a year-over-year basis.
Host Hotels faces competition from other owners and investors in upper upscale and luxury full-service hotels. Also, the growth of Internet reservation channels is likely to fuel competition, as more people are booking hotel rooms through the online mode. This may adversely impact the company's revenues and profitability. Further, the spike in online short-term rentals has escalated the supply in the lodging industry, leading to increased competition in some markets.
Additionally, a high interest rate environment may lead to greater borrowing costs for the company, hampering its ability to acquire or develop real estate. We expect interest expenses to increase 21.8% in 2023 on a year-over-year basis.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Welltower WELL, SBA Communications SBAC and Americold Realty Trust COLD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Welltower’s 2023 FFO per share has been raised marginally over the past week to $3.55.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past month to $12.90.
The Zacks Consensus Estimate for Americold’s ongoing year’s FFO per share has been raised 1.6% over the past month to $1.26.
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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