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Coverage Initiation: Host Hotels & Resorts
Value Line recently initiated coverage of Host Hotels & Resorts, Inc. (HST). The company, which was formed in 1993, operates as a real estate investment trust (REIT), and owns/controls hotel properties located in the United States, United Kingdom, Canada, and Mexico, among other locales.
In October of 1993, the Marriott Corporation split its operations into two distinct businesses. Its real estate operations would carry the name Host Marriott, and its hotel management business would become Marriott International (MAR). Once the split was completed, Host owned 24 full service hotels, 102 limited service hotels, 14 senior living communities, and the Host Marriott Operating Group, which provided food, beverage, and merchandise in airports and on toll roads.
Soon after the breakup, Host’s management implemented a restructuring program. Its objective was to streamline operations and focus on the full service hotel business. As a result, in 1994, Host sold its senior living communities and 26 limited service Fairfield Inns. That same year, it purchased 15 full service hotels. Throughout the late 1990s, management continued to bolster its luxury hotel portfolio, while selling off its other non-core businesses.
In January of 1999, Host reorganized as a real estate investment trust. REITs were created by the United States Congress in the 1960s, giving individuals the opportunity to invest in large property businesses. Most importantly for investors, REITs must invest at least 75% of their assets in real estate and distribute 90% or more of annual taxable profits, as dividends, to shareholders. For a more complete description of this corporate structure, please peruse Value Line’s REIT Industry Overview.
Throughout the first decade of the 21st century, Host continued to be active on the acquisition front and materially increased its luxury hotel portfolio. At the end of 2011, the company owned more than 100 properties, which contained approximately 60,000 guest rooms. Its portfolio includes hotels managed by Marriott, Ritz-Carlton, Four Seasons, Hyatt, Hilton, Westin, Sheraton, and Fairmont. Host is headquartered in Bethesda, MD and the stock is a component of the S&P 500 Index and Value Line 600.
Host’s top and bottom lines are influenced by a myriad of factors, but most importantly, the health of the global economy. Host and the lodging industry in general, depend on business and leisure travel, which are typically hit hard during economic downturns. For instance, during the 2007-2009 recession, the credit crisis, high unemployment, and a weak U.S. housing market caused corporations and consumers to cut back on spending. As a result, air travel declined materially, which then hampered hotel occupancy rates. During this period, Host struggled mightily. In 2007, the company’s top line reached $5.4 billion. By 2009, revenues declined to less than $4.2 billion, a drop of more than 22%. Moreover, Host sustained quarterly share losses during this time frame. That said, when evaluating a REIT, earnings results do not always tell the full story.
Due to their unique business model and property holdings, properly evaluating a REIT requires some additional metrics. For a hotel REIT, revenues per available room (RevPAR) is a leading indicator of core operations. It is defined as the product of the average daily room rate charged and the average daily occupancy achieved. RevPAR provides a good snapshot of a hotel’s profitability and room demand. Funds from operations (FFO) is also one of the more common figures used. This measure is a REIT’s net income, excluding gains or losses from asset sales, plus depreciation and amortization. Although similar in nature to earnings per share, the use of FFO has its advantages; owning and managing properties leads to hefty depreciation and amortization expenses (non-cash charges), which are better represented in the FFO calculation. Still, when looking at Host’s funds from operations, the company clearly struggled due to the recent global economic weakness. On the bright side, the situation has improved of late, and Host’s near- and long-term prospects appear solid. For a more detailed evaluation of Host’s business and the equity’s investment merits, subscribers are advised to monitor our regular quarterly coverage in The Value Line Investment Survey, while keeping an eye out for Supplementary Reports when breaking news takes place.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.