2023-12-06 17:24:52 ET
Summary
- Host Hotels & Resorts offers a lower dividend yield than the median for the REIT sector but it has ample dividend growth potential.
- The REIT has a rock-solid balance sheet and is immune to the adverse effects of high interest rates, which are impacting other REITs.
- Host Hotels & Resorts has shown strong recovery and growth, exceeding analysts' estimates and providing positive guidance for future revenue and FFO growth.
Host Hotels & Resorts ( HST ) is offering a forward dividend yield of 4.1%, which is lower than the 4.85% median dividend yield of the REIT sector. As a result, the stock passes under the radar of most income-oriented investors. However, the REIT has an AFFO payout ratio of only 37% and one of the strongest balance sheets in its sector. Therefore, it is essentially immune to the adverse environment of 16-year high interest rates, which are weighing on the results of most REITs. Given also its cheap valuation, Host Hotels & Resorts is attractive for income-oriented investors.
Business overview
Host Hotels & Resorts is the largest lodging REIT and one of the largest owners of luxury and upper-upscale hotels. It has 72 properties in the U.S. and 5 properties abroad, with nearly 42,000 rooms in total.
Source: Investor Presentation
Marriott and Hyatt generate 60% and 21%, respectively, of the total revenue of the REIT. Moreover, the REIT generates approximately half of its revenue in Maui, San Diego, Orlando, Phoenix, Florida and San Francisco.
The luxurious nature of the hotels of Host Hotels & Resorts offer the advantage of wide operating margins. On the other hand, they render the company particularly vulnerable to recessions, as consumers drastically reduce their discretionary spending during adverse economic periods. Host Hotels & Resorts went through a fierce downturn in 2020-2021 due to the coronavirus crisis, which severely affected tourism and hence the business of the REIT.
Fortunately, Host Hotels & Resorts was caught with a rock-solid balance sheet (more on this below) in that crisis and hence it endured the downturn without any problem. Even better, it currently enjoys a strong recovery thanks to the return of people to their normal lifestyle.
In the third quarter, Host Hotels & Resorts grew its revenue per available room 1.8% and its adjusted EBITDA 10% over the prior year’s quarter thanks to increased demand for its properties. As a result, it grew its funds from operations [FFO] per share 8%, from $0.38 to $0.41, and exceeded the analysts’ estimates by $0.06. It has exceeded the analysts’ consensus in 12 of the last 14 quarters, thus confirming its sustained business momentum.
Thanks to the positive trends prevailing in its business, the REIT has provided guidance for 7.25%-8.75% growth of comparable revenue per available room and adjusted FFO per share of $1.90-$1.95 in the full year.
Source: Investor Presentation
Anal ysts agree with the guidance of the REIT, as they expect it to grow its FFO per share 8%, from $1.79 to $1.93.
Moreover, in the latest conference call , Host Hotels & Resorts stated that it expects continued growth in 2024. Its bookings for next year have increased 15% over the prior year. Given also material price hikes and longer booking periods, management expects significant revenue growth in 2024.
Furthermore, Host Hotels & Resorts has promising growth prospects ahead. First of all, it has a strong track record in capital allocation. More precisely, during the last five years, the company has sold $5.0 billion of properties at an average price of 17 times EBITDA while it has acquired $3.5 billion of properties at 14 times EBITDA. Thanks to the continuation of its capital allocation strategy, the REIT expects to enhance its adjusted EBITDA by about 28%, from $1.6 billion to $2.04 billion, throughout the current lodging cycle.
Host Hotels & Resorts also tries to enhance the value of its properties by expanding their capacity. The company intends to enhance the capacity of many of its properties in the upcoming years. It just completed the expansion of Ritz-Carlton in Naples and plans to increase the number of rooms in Four Seasons Resort Orlando and Canyon Suites at the Phoenician. Given also pent-up demand after two years (2020-2021) of depressed tourist activity, Host Hotels & Resorts seems to have ample room for future growth.
Dividend – Debt
Host Hotels & Resorts recently raised its dividend by 20% and thus it is now offering a forward dividend yield of 4.1%. This yield is much lower than the median dividend yield of 4.85% of the REIT sector and hence the stock passes under the radar of most income-oriented investors.
However, it is important to realize that the REIT has a solid AFFO payout ratio of 37% and promising growth prospects ahead. It also has one of the strongest balance sheets in the REIT universe. It is the only lodging REIT with an investment grade rating and has a net leverage ratio (Net Debt to EBITDA) of only 2.1. To provide a perspective, the vast majority of REITs has a leverage ratio in excess of 3.5.
Moreover, net interest expense consumes just 15% of operating income while net debt (as per Buffett’s formula: net debt = total liabilities – cash – receivables) is standing at $4.3 billion . This amount is just 33% of the market capitalization of the stock and about 3 times the annual FFO of the REIT and hence it is exceptionally low. Thanks to its pristine balance sheet, Host Hotels & Resorts is essentially immune to the surge of interest rates to 16-year highs, in contrast to many REITs. To provide a perspective, Realty Income ( O ), Ventas ( VTR ) and STAG Industrial ( STAG ) have seen their interest expense consume 41% , 86% and 40% , respectively, of their operating income in the last 12 months.
To cut a long story short, thanks to its healthy payout ratio, its FFO growth potential and its rock-solid balance sheet, Host Hotels & Resorts can significantly grow its dividend in the upcoming years. In addition, its dividend is much safer than the dividend of most REITs, as the median AFFO payout ratio of the sector is more than double the payout ratio of Host Hotels & Resorts ( 75% vs. 37% ).
Valuation
Host Hotels & Resorts is currently trading at a forward price-to-FFO ratio of 9.2 . This FFO multiple is much lower than the median price-to-FFO ratio of 12.9 of the REIT sector. On the one hand, the cheap valuation could be partly attributed to the slower-than-average growth prospects of Host Hotels & Resorts when compared to the average REIT. On the other hand, it is important to realize that the REIT has one of the strongest balance sheets in its sector. The strong financial position justifies a premium in the valuation of the stock, as it enhances the flexibility of the REIT and reduces its risk.
If the valuation of Host Hotels & Resorts approaches the median valuation of the sector, the stock will enjoy 40% upside (=12.9/9.2 – 1) thanks to the normalization of its valuation. While it may take many years for the valuation of Host Hotels & Resorts to reach the median level of the sector, one can reasonably expect the price-to-FFO ratio of the REIT to expand meaningfully in the upcoming years, given the positive business momentum and the exceptionally rich current valuation of the stock.
Risk
Due to the material debt load of most REITs, the primary risk factor for most of them is an adverse scenario of persistently high inflation and interest rates for years. As Host Hotels & Resorts has a rock-solid balance sheet, it is essentially immune to such a scenario.
On the other hand, due to the luxurious nature of its hotels, Host Hotels & Resorts is vulnerable to recessions. Therefore, the stock is likely to come under great pressure if a severe recession shows up. The stock plunged nearly 50% during the first weeks of the coronavirus crisis. On the bright side, the REIT is likely to endure a recession without any problem thanks to its financial strength, though its stock is likely to be pressured temporarily.
It is also worth noting that a severe recession is highly unlikely for the foreseeable future. In fact, the Fed has been doing its best to cool the economy since early last year. Nevertheless, as recessions have proved unpredictable, investors should be aware of the vulnerability of Host Hotels & Resorts to recessions before purchasing the stock.
Final thoughts
Most REITs have been severely hurt by the surge of interest rates to 16-year highs. Therefore, the investors who are confident that interest rates will deflate in the upcoming years may prefer to invest in other REITs, which will probably outperform Host Hotels & Resorts in such a scenario. On the other hand, the investors who are uncertain about the path of interest rates can purchase Host Hotels & Resorts for its positive business momentum, its growth prospects, its cheap valuation, its strong balance sheet and its dividend growth potential.
For further details see:
Host Hotels & Resorts Is Interesting For Income-Oriented Investors