Host Hotels & Resorts: Cheap And Well Positioned

Summary

• Host Hotels has fallen 5% year-to-date and nearly 20% over the past year.
• While recent operating performance has been strong as leisure tourism has rebounded sharply post-pandemic, 2023 results are expected to decline as expenses increase in an uncertain revenue environment.
• Host has a very strong balance sheet with net debt to EBITDA of just 2.6x. The company is well positioned to withstand an economic downturn.
• At less than 10x EBITDA, Host stock trades at a significant discount to hotel transaction multiples, suggesting nearly 50% potential upside.

Dimensions

Host Hotels & Resorts (NASDAQ:HST) has fallen 5% year-to-date and nearly 20% over the past year. Despite strong operational performance and a fortress balance sheet, Host shares have not been spared from the interest rate hike induced REIT selloff.

While hotels are among the most economically sensitive real estate subgroups, with a fortress balance sheet and diverse, well-maintained portfolio of assets, Host is in a position of strength. I expect the company to not only weather an economic downturn but to ultimately emerge even stronger.

Trading at less than 10x 2022 EBITDA, Host trades at a meaningful discount to hotel transaction multiples over the past several years (discussed below).

Current Results & Outlook

With the 2020-21 pandemic lockdowns behind us, Host produced a solid set of results in 2022 as leisure travel demand rebounded sharply. While occupancy was held back by tepid business travel demand, as shown below, top line performance was driven by mid-teens percentage increases in room rates (versus pre-pandemic rates).

Host Rate & Occupancy Performance (Investor Presentation)

In addition, Host has been able to effectively control expenses as some cost reduction measures implemented during the pandemic continued to benefit its income statement during 2022.

Host Margin Performance (Investor Presentation)

That said, Host faces upward pressure on virtually all of its expense items (insurance, utilities, wages) heading into 2023. The combination of rising expenses and a murky top-line outlook (economic slowdown could pressure both rates and occupancy) suggest that 2023 EBITDA will decline from 2022 levels (at the midpoint, management guidance is for a 7.2% EBITDA decline).

Host 2023 Outlook (Investor Presentation)

Beyond the impact of rising interest rates, economic sensitivity in a tougher macro climate appears to be the main factor weighing on Host shares. Relative to other real estate subgroups, hotels have the shortest lease duration (effectively one day) and the highest expense burdens (labor, utilities). As such, near-term hotel operating performance is much more sensitive to both inflationary pressure and consumer confidence than other real estate categories which benefit from long-term leases (and comparatively smaller expense burdens).

Fortress Balance Sheet

Host has one of the strongest balance sheets across all REITs with net debt to EBITDA of just 2.6x. Furthermore, as shown below the company has a well staggered debt maturity profile and limited near-term maturities.

Balance Sheet Strength (Host Investor Presentation)

Not only will Host's strong balance sheet ensure survival in a more difficult economy, but the company has ample debt capacity to make acquisitions (or repurchase stock) should opportunities arise.

Valuation

At $15 per share, Host trades at 9.8x 2022 EBITDA (10x 2019 EBITDA) and 10.1x 2023 expected EBITDA (using the midpoint), and an implied cap rate of over 10%. As shown below, these multiples are at a significant discount to the 13-17x EBITDA multiple where Host has transacted hotel assets over the past several years.

Transaction Multiples (Investor Presentation)

Below I show results from CBRE's (CBRE) 2H22 Cap Rate Survey which shows a broader set of recent hotel transaction cap rates. As you can see, high quality hotel assets have changed hands at much higher valuations (lower cap rates) than where Host shares are currently priced.

Hotel Cap Rates (CBRE 2H22 Cap Rate Survey)

Given the recent turmoil in financial markets, it is likely that hotel cap rates will increase somewhat from 2H22 levels. Were Host to trade at an 8% cap rate (up from the 7-7.5% suggested by the table above), shares would be fairly valued around $22, suggesting nearly 50% upside.

It is worth noting that in addition to having a higher expense burden, hotels also require greater maintenance capital expenditures than most real estate assets such that the economic cap rate (NOI less maintenance capex) is significantly lower than nominal cap rates shown above. I estimate that an 8% nominal cap rate is akin to a 6% economic cap rate for hotel assets (the difference would be markedly lower for apartment, industrial, or self-storage assets which require lower capex levels).

Conclusion

While economic sensitivity and a high ongoing capital expenditure burden are facts of life in the hotel business, I believe that these negatives are more than reflected in Host's share price. As such, I've taken a small position in Host Hotels & Resorts and am interesting in adding to my position should we see further weakness in the share price.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of HST either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[trendwatcher100]

Since you wrote this article, the stock has essentially gone nowhere.

But more importantly, the stock has essentially gone nowhere (or down!) for well over 25 years. It was a lot higher in '89, when I sold it, than it is now!

Did you even look at the chart? No, I suppose not.

[JunkBondage]

Thanks for this. Transaction cap rates/multiples are always better than trading multiples because of the inherent control premium. Nearly every company trades at a meaningful discount to acquisition multiples. Unless Host is being shopped, transaction multiples are limited in their relevance. It would be useful to know how Host's trading multiples compare to the trading multiples of peers.

[CincinnatiRick]

@JunkBondage "It would be useful to know how Host's trading multiples compare to the trading multiples of peers."

Specifically $CLDT, which has been beaten up by Mr. Market even more so than HST and since the selloff is one of the factors behind this tout of HST.