Goldman Sachs (GS, Financial) recently came out with a list of companies with low labor costs that may possibly benefit as wage growth comes into play and one was Host Hotels & Resorts (HST, Financial).
The $13.8 billion Maryland-based lodging real estate investment trust (REIT) company reported its second-quarter results in July. Host Hotels & Resorts reported a (-)0.3% revenue decline year over year to $2.79 billion in the first half and an uglier (-)30.4% drop in profits to $368 million (13.2% margin vs. 18.9% in the prior year).
Overall costs and expenses actually declined in the same period by (-)1.4%. Host Hotels’ gain on assets sales from the year prior helped push down its profits in the first half ($231 million in first-half 2016 vs. $46 million in first-half 2017). Excluding these figures would make the REIT exhibit an 8.05% profit growth in comparison.
In addition, Host Hotels raised its full-year guidance indicating total revenue growth in a range of (-)1.1 to (-)0.1% among other increases.
“We are very pleased to post another solid quarter of operating results, which exceeded our expectations and has led to an increase in the midpoint of our full-year guidance.
“Our geographically diverse portfolio of irreplaceable assets, combined with our scale, asset management expertise and enterprise analytic capabilities, continues to drive value for our stockholders.” – James F. Risoleo, president and CEO
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Valuations
Host Hotels is overvalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 23.3 times vs. the industry median of 17 times, a price-book (P/B) ratio of 2 times vs. 1.1 times and a price-sales (P/S) ratio of 2.6 times vs. 7.5 times.
The REIT also had a 4.55% dividend yield with 86% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 2.55 times and 11.2 times.
Total returns
Host Hotels underperformed the broader Standard & Poor's 500 index in the past year having generated 1.17% total returns vs. the index’s 11.6% (Morningstar).
Host Hotels & Resorts
According to filings Host Inc. was incorporated as a Maryland corporation in 1998 and operates as a self-managed and self-administered REIT.
Host Inc. owns properties and conducts operations through Host LP, of which Host Inc. is the sole general partner and of which it held approximately 99% of the partnership interests in December 2016.
As of February Host Hotels’ consolidated lodging portfolio consisted of 96 primarily luxury and upper-upscale hotels containing approximately 53,500 rooms, with the majority located in the U.S. and with seven of the properties located outside the U.S. in Australia, Brazil, Canada and Mexico.
In addition, the REIT owns noncontrolling interests in two international joint ventures: approximately a 33% interest in a joint venture in Europe, which owns 10 luxury and upper-upscale hotels with approximately 3,900 rooms in Belgium, France, Germany, Spain, Sweden, the Netherlands and the United Kingdom; and a 9% indirect interest, through joint ventures, in five operating hotels and two hotels in the final stages of completion in India.
The company also holds noncontrolling investments in three domestic hotels and a timeshare joint venture in Hawaii.
In 2016, Host Hotels generated 96.9% of its revenue in the U.S., 1% in Canada, 0.6% each in Australia and Brazil, 0.5% in Mexico and 0.2% in New Zealand.
Key performance indicators
Revenue per available room
Revenue per available room (RevPAR) is a commonly used measure within the hotel industry to evaluate hotel operations.
RevPAR is defined as the product of the average daily room rate charged and the average daily occupancy achieved. RevPAR does not include food and beverage, parking or other guest service revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is considered the key indicator of core revenues for many hotels (1).
In 2015 and 2016, Host Hotels RevPar figures at constant currency were $172.04 and $176.71 indicating a 2.7% growth.
In the first half of 2016 and 2017, RevPar figures were $178.83 and $183.29 exhibiting 2.5% growth.
Funds from operations
According to filings Host Hotels use NAREIT funds from operations (FFO)Â and Adjusted FFO per diluted share as supplemental measures of companywide profitability. NAREIT adopted FFO in order to promote an industrywide measure of REIT operating performance.
The company also adjusts NAREIT FFO for gains and losses on extinguishment of debt, acquisition costs and litigation gains or losses outside the ordinary course of business.
NAREIT FFO per diluted share for 2015 and 2016 were $1.49 and $1.69 –13.4% growth. In the first half 2016 and 2017, these figures were 90 cents and 93 cents – 3.33% increase.
Meanwhile, Adjusted FFO for 2015 and 2016 were $1.54 and $1.69 – 9.7% growth. In the first half 2016 and 2017, the adjusted figures were 90 cents and 94 cents – 4.44%.
Comparable hotel EBITDA margins
Hotel EBITDA measures property-level results before debt service, depreciation and corporate expenses (as this is a property-level measure) and is a supplemental measure of aggregate property-level profitability.
Host Hotels uses Hotel EBITDA and associated margins to evaluate the profitability of its comparable hotels.
Comparable margins in fiscal years 2015 and 2016 were 27% and 27.8% while in first-half 2016 and 2017 they were 28.55% and 29% –Â 45 basis points higher.
Sales and profits
In the past three years, Host Hotels registered an average revenue growth rate of 1.68%, profit growth average of 33.96% and profit margin average of 12.7%.
Cash, debt and book value
As of June, Host Hotels had $644 million in cash and cash equivalents and $3.99 billion in debt with debt-equity ratio 0.56 times vs. 0.52 times the year prior period. Overall debt rose by $277 million year over year while equity decreased by $74 million.
No blue sky elements such as goodwill or intangibles were observed in REIT’s $11.85 billion assets while book value declined by (-)0.009% year over year to $7.3 billion.
Cash flow
In the first half, Host Hotels’ cash flow from operations rose 0.16% year over year to $612 million while capital expenditures were $143 million leaving the REIT with $469 million in free cash flow compared with $303 million in the year prior.
Host Hotels’ allocated 71% or $332 million of its free cash flow in dividends and took in $387 million in debt net repayment, costs and credit facility cash flow changes.
The cash flow summary
In the past three years, Host Hotels allocated $1.62 billion in capital expenditures, paid $534 million in debt (net any issuances and other financing), raised $10 million in share issuances and provided $2.6 billion in dividends and share repurchases at an average free cash flow payout ratio of 143%.
Conclusion
After reviewing its first-half filings, Host Hotels’ recent sharp profit decline should not worry investors. This was brought by gains recorded in the prior year, inflating the company’s bottom line in comparison to the current period resulting in lower profits but actually higher having excluded such one-time gains. Meanwhile, key performance indicators highlighted by the company indicated strong if not steady growth figures and level of profitability for the outstanding REIT.
Host Hotels did carry a leveraged balance sheet at 0.56 times debt-equity ratio while having served its investors well in recent years absent much of share dilution and having allocated 143% of free cash flow in dividend payouts on average.
Analysts have an average price target of $19.38 a share vs. $18.66 per share at the time of writing. Applying three-year revenue growth and P/S averages followed by a 10% margin indicated a per share figure of $18.4.
In summary, Host Hotels REIT is a hold.
Notes
- Company filings
RevPAR changes that are driven by occupancy have different implications on overall revenue levels, as well as incremental operating profit, than do changes that are driven by average room rate. For example, increases in occupancy at a hotel will lead to increases in rooms revenues and ancillary revenues, such as food and beverage revenue as well as additional incremental costs (including housekeeping services, utilities and room amenity costs). RevPAR increases due to higher room rates, however, will not result in additional room-related costs, with the exception of those charged as a percentage of revenue. As a result, changes in RevPAR driven by increases or decreases in average room rates have a greater effect on profitability than do changes in RevPAR caused by occupancy levels.
Disclosure: I do not have shares in any of the companies mentioned.
