Host Hotels & Resorts Inc. (HST), the largest lodging real estate investment trust (REIT) in the U.S., reported third quarter fiscal 2010 FFO (funds from operations) of 11 cents per share that was in line with the Zacks Consensus Estimate. Funds from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
We cover below the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Review
During the third quarter fiscal 2010, total revenues increased 11.4% to $1.0 billion compared to the year-earlier quarter. Total quarterly revenues were well ahead of the Zacks Consensus Estimate of $969 million. Comparable hotel revenue per available room (RevPAR) increased 8.8% during the quarter driven by a rise in occupancy and average daily rates. The increase in RevPAR was primarily due to a 4.5% increase in average daily rate along with a 2.9% improvement in occupancy.
Earnings Estimate Revisions- Overview
Fiscal 2010 earnings estimates have moved down for Host Hotels since the earnings release, while those of fiscal 2011 have moved in the opposite direction meaning that analysts were optimistic about the long-term performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last seven days, fiscal 2010 earnings estimates have been decreased by 7 out of 15 analysts covering the stock, while only 2 have increased the same. For fiscal 2011, 8 out of 18 analysts covering the stock have revised their estimates upward, while 3 have reduced it. This indicates a positive directional movement for fiscal 2011 earnings. Host Hotels also anticipates that the gradual revival of the overall economy will positively affect its operating results in the near future.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2010 nudged down by a penny from 71 cents to 70 cents since the earnings announcement. Host Hotels currently expects FFO for full year 2010 in the range of 67 cents to 69 cents per share. For fiscal 2011, earnings estimates have moved up 2 cents from 91 cents to 93 cents. This is encouraging news for the company.
The long-term earnings estimate picture of Host Hotels is positive. Host Hotels is the largest lodging REIT with high quality lodging assets in geographically diverse locations. Over the years, the company has executed a focused and disciplined long-term strategic plan to acquire high quality lodging assets in hard-to-replicate areas, which have the potential for significant capital appreciation.
However, the continuous acquisition spree of Host Hotels involves significant upfront operating expenses with limited near-term profitability. New hotels usually go through longer gestation before generating revenues and are a drag on performance till they start producing healthy margins.
We maintain our Neutral rating on Host Hotels, which presently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S.equity market for the next 1-3 months.