Host Hotels & Resorts, Inc. (NASDAQ:HST) is the largest lodging real estate investment trust (“REIT”) and one of the largest owners of luxury and upper-upscale hotels. The company’s portfolio includes 78 hotels containing over 40K rooms, substantially all of which are located in the top 20 U.S. markets.
Their geographically diverse portfolio in major urban and resort destinations is a key strength with favorable supply and demand dynamics. While strong demand growth tends to encourage new development, lower capitalized entrants face considerable hurdles regarding the availability of capital, interest rates, and construction costs, especially in the current uncertain market environment. The resulting constraints on supply growth create a premium for all existing properties, which are largely owned by HST.
The extended lead-time required to complete development is also a deterrent for new developers who do not have the resources to weather setbacks resulting from a supply/demand mismatch. Demand growth, for example, may accelerate when supply growth is low or vice versa. This further constrains new supply and minimizes risks relating to the threat of new entrants.
As a S&P 500 component and the only lodging REIT with an investment-grade credit rating, HST has access to numerous sources of capital that is otherwise unavailable to most others. This positions them strongly to weather any setbacks in the industry, as they have already proved through the COVID-19 pandemic.
In the early days of the pandemic, shares collapsed to a new low of just $9/share. Since then, it has more than doubled to the $20-range, before dropping back down to their current level in the mid-$17s. With less than $10 separating their current one-year range, the stock has been relatively stable compared to the broader market index.
In advance of their earnings release next week, shares have been on an upward trend over the past month, up nearly 6%. However, the stock may have further room to run in the months ahead, aided by increased travel demand as consumers begin to prioritize their discretionary spending on services/experiences over physical goods.
With an EV multiple of 14.5x EBITDA, shares are hardly at premium levels, especially considering the multiples provided to other hotel-specific names, such as Marriott International, Inc. (MAR), whose current multiple is 25x. For investors seeking lodging exposure for their long-term portfolios, HST provides modest upside at a reasonable level of risk.
A Strong First Quarter Fuels Momentum Into Q2
In the most recent filing period ended March 31, 2022, HST reported total revenues of +$1.1B. This was 168% greater than last year and over +$100M better than expectations. The gains in revenue were driven by strong leisure demand at their resort hotels, with improvement in business and group travel as well. Though still below pre-pandemic levels, continued recovery was clearly evident throughout the quarter.
In January of 2022, for example, all owned hotel revenue per available room (“RevPAR”) was about $110. By March, it grew to $221. These gains coincided with the subsiding of the surge in the Omicron COVID-19 variant. Moreover, the increase in all owned hotel RevPAR and total RevPAR for the first quarter not only surpassed figures reported in 2021, but they also exceeded levels reported in 2019.
Though operations in all markets during the quarter exceeded 2021 levels, HST continues to see wide disparities in results between their resort locations and their large urban properties, which are more reliant on business travel and groups.
All owned hotel total RevPAR in their Miami, Florida Gulf Coast, and Maui/Oahu markets, for example, increased 36.8%, 6.8%, and 6.6%, respectively, compared to 2019. On the other hand, their hotels in San Francisco/San Jose and Washington, D.C., experienced all owned hotel total RevPAR declines of 59.3% and 49.1%, respectively, compared to 2019.
In addition, all owned hotel total RevPAR was lowest in their Chicago market at just $84, a decline of 34.8% compared to 2019. As a business-reliant destination, Chicago has been impacted and is likely to continue being impacted by the departure of numerous businesses, such as Boeing (BA), Caterpillar (CAT), and Citadel.
Within the individual revenue line items, total rooms revenues, which accounted for approximately 60% of total revenues, increased 155%, aided by higher rates that are exceeding pre-pandemic levels. Though leisure travel drove the increase, group revenues in urban markets im
proved considerably over the fourth quarter of 2021. Additionally, banquet and audio-visual contribution per room driven by group room nights exceeded 2019 levels during the quarter, contributing to a 286% increase in revenues from food and beverages.
Though property-level operating expenses were significantly higher, the increases were attributable to higher occupancy, which drives costs related to items such as housekeeping, reservation systems, and other services. Moreover, the increases were fully offset by increased revenues during the period.
Higher revenue growth combined with controlled expense growth contributed to pro forma EBITDA of +$330M. Overall, this was 18% lower than 2019 levels. In the month of March, alone, however, pro forma EBITDA came in 8% above 2019, driven by higher rate growth in their resorts.
Looking ahead, management expects continued recovery though the remainder of 2022, with meaningful gains in group room bookings. Though they didn’t provide full-year operational guidance, they are projecting Q2 RevPAR of $195 to $205, which would be down just 8-3% relative to 2019. At that range, it would imply an adjusted EBITDAre range of +$375M to +$410M for the quarter.
Limited Near-Term Debt Maturities and Investment-Grade Credit Ratings
At the end of March 31, 2022, HST had total assets of +$11.8B and total liabilities of +$5.1B, comprised primarily of fixed-rate debt with a weighted average maturity of 5.3 years. As a percentage of total debt, fixed-rate holdings accounted for 76% of the total. This is up significantly from 66% reported at the end of 2021. In a period marked with rising interest rates, having a greater allocation to fixed-rate debt is certainly desirable.
While a greater portion of debt is due prior to 2027, HST has no immediate near-term maturities. In 2024, +$1.6B will be due, but it’s unlikely the company will have an issue rolling the debt into later periods. At present, the company has +$2B in available liquidity, comprised of cash and available capacity on their credit facility. In addition, they have an investment-grade credit rating. These two factors should enable the company to fulfill their obligations at the best possible terms.
The ability to satisfy current obligations is further supported by HST’s strong compliance with their covenant requirements. Specifically, their fixed charge and interest coverage ratios are well in excess of their minimum ratios. With a weighted average interest rate on debt of approximately 3.5%, this should be expected. Even if rates were significantly higher, however, HST would still have adequate cushion to cover their reoccurring obligations.
Improving Cash Flows Will Support Continued Dividend Growth
Improving cash flows ensures HST will be able to maintain or even increase their existing liquidity position. In the current period, for example, HST generated +$261M in operating cash flows. This was enough to fully cover their investing activities during the period, which totaled +$92M. In addition, the company is steadily increasing their dividend back to acceptable levels after it was suspended in 2020.
After being re-instated at a quarterly rate of $0.03/share earlier in the year, it was most recently increased by 100% for Q2 to $0.06/share. Though this represents an anemic yield for income-focused investors, there is significant upside potential.
Prior to the pandemic, the company was paying an annual dividend of $0.85/share, which would be a 5% yield at current pricing. As operations continue to improve in the periods ahead, investors should expect a gradual return to their pre-pandemic payout levels.
Shares Have Further Room To Run
HST is the largest publicly traded lodging REIT that operates in some of the most desirable resort locations in the U.S. In a market with high barriers to entry, the company is insulated from the threat of new competition. This is even more true in the current market environment as new developers confront unfavorable market conditions.
Limited supply growth paired with soaring demand has produced a premium on HST’s properties. From 2021 to 2022, for example, the company completed +$1.4B in dispositions at a blended multiple of 17.8x EBITDA, with a recent disposition in the NYC market even fetching 28x 2019 EBITDA.
The value of HST’s properties is evidenced not only in their disposition activities but also through recent occupancy trends, which have been steadily increasing throughout the first half of 2022. With all owned hotel RevPAR at or above 2019 levels, the company appears to be rebounding to new heights following their downturn during the worst months of the COVID-19 pandemic.
While risks remain,
such as the shortage of labor, which is contributing to higher wage expenses, and other general macroeconomic uncertainties arising from a multitude of consumer-centric headwinds, HST is built on a solid foundation that includes significant liquidity and limited exposure to debt-related financing activities.
Ahead of their earnings release next week, HST is up about 6% for the month. But at an EV multiple of 14.5x, shares aren’t expensive. A favorable release with positive commentary has the potential to send shares another 10% higher in the coming months. Combined with further dividend hikes, this could produce attractive annualized returns of about 15% for long-term investors. For those seeking an upside addition to their travel-focused portfolios, HST provides a solid opportunity at current trading levels.