Is it Wise to Retain Host Hotels (HST) Stock in Your Portfolio?
Host Hotels & Resorts HST is well-poised to benefit from its portfolio of luxury and upper-upscale properties across lucrative markets. The recovery in group and business transient demand from the pandemic lows continues to benefit the company. Its capital-recycling efforts and healthy balance sheet support its growth endeavors. However, a cautious approach by many businesses may lead to a slower-than-anticipated recovery in business transient and group travel demand. Also, elevated interest rates pose a concern.
What’s Aiding it?
Host Hotels enjoys a portfolio of luxury and upper-scale hotels in the top 20 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. This is likely to drive the demand for the company’s properties in the upcoming period.
The lodging industry is presently witnessing a recovery from its low during the health crisis. As a result, the improvement in group and business transient demand has aided occupancy and RevPAR growth in recent quarters. From the beginning of 2023 through Sep 30, comparable hotel RevPAR increased 10.4% from the 2022 levels. For 2023, management expects comparable hotel RevPAR growth to be between 7.25% and 8.75%. We expect the metric to exhibit year-over-year growth of 7.8% this year.
This lodging real estate investment trust (REIT) has been undertaking strategic capital allocations to enhance the quality of its portfolio, where it has a greater scale and competitive advantage. It has incurred $472 million of capital expenditure from the beginning of 2023 through Sep 30.
The company reached an agreement with Hyatt to complete transformational reinvestment capital projects at six properties in its portfolio, intended to position the targeted hotels to compete better in their respective markets and improve long-term performance. The total investment is expected to be nearly $500-$600 million, of which Host Hotels plans to invest nearly $125-$200 million per year over the next three to four years on this program. For the current year, management expects to incur a total capital expenditure of $615-$695 million.
Host Hotels’ 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 initiatives highlight its prudent capital-management practices and preserve balance sheet growth.
Per the company’s November 2023 Investor Presentation, from 2021 through the end of the third quarter of 2023, its total dispositions amounted to approximately $1.53 billion, which is 17.5 times the EBITDA multiple. Its acquisitions were around $1.87 billion, which is 13.1 times the EBITDA multiple, during this period. Our estimate suggests a year-over-year increase of 10.5% in EBITDA in the current year.
HST maintains a healthy balance sheet with no material debt maturities until April 2024. As of Sep 30, 2023, the company had $2.6 billion in total available liquidity. Moreover, it is the only company with an investment-grade rating among lodging REITs. It enjoys ratings of Baa3 from Moody’s and BBB- from both Fitch and S&P Global, providing access to the debt market at favorable rates. This financial flexibility will aid capital deployment for long-term growth opportunities and facilitate redevelopment activities.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have gained 5.1% compared with the industry's upside of 1.2%.
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What’s Hurting it?
The recovery in transient and group business travel demand, although having picked up the pace since the start of the pandemic, is likely to be tepid in the near term due to a delayed return to the office and limited face-to-face conferences. In the third quarter of 2023, the company noted that transient demand recovered more slowly in certain markets, particularly in San Francisco and Seattle, while room rates at resort hotels moderated. Moreover, given the present macroeconomic uncertainty, management expects its operations in specific markets to stay uneven in the near term.
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 elevated 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. For 2023, We expect a year-over-year increase of 21.1% in its interest expenses. Further, due to high interest rates, its dividend payout may seem less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the REIT sector are EastGroup Properties EGP, Stag Industrial STAG and Innovative Industrial Properties IIPR, 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 EastGroup Properties’ 2023 FFO per share has moved marginally upward in the past month to $7.71.
The Zacks Consensus Estimate for Stag Industrial’s ongoing year’s FFO per share has been raised 1.3% upward over the past month to $2.28.
The Zacks Consensus Estimate for Innovative Industrial’s current-year FFO per share has moved 2.3% northward over the past month to $9.08.
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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Host Hotels & Resorts, Inc. (HST) : Free Stock Analysis Report
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