2023-12-06 14:01:48 ET
Summary
- Host Hotels & Resorts has underperformed the market since becoming an independent company in 1993.
- HST has experienced a challenging business environment due to secular headwinds which are unlikely to abate anytime soon.
- The company has delivered solid recent financial performance driven by margin improvement.
- HST trades at a below market valuation but is not attractive given the low growth prospects.
- I am initiating HST with a sell rating and would consider upgrading the stock if it can show sustainable growth going forward.
Host Hotels & Resorts (HST) has significantly underperformed the broader market since becoming an independent corporation in 1993 following a spin-off of Marriott ( MAR ).
As shown by the chart below, HST has delivered a total return of 565% since becoming an independent company. Comparably, the S&P 500 has delivered a total return of 1,620% since then.
In addition to underperforming the broader market, HST has done so with above market levels of risk, as evidenced by an average 3-year trailing historical beta of 1.27.
While HST trades at a fairly reasonable valuation, secular shifts towards alternative short-term lodging options and a reduction in business travel have created structural challenges which have limited HST's ability to grow.
I expect these structural headwinds to continue going forward, and thus I believe HST will continue underperforming broad market indexes going forward.
Leading Lodging REIT With A Focus on Luxury Hotel Market
HST is the largest lodging focused REIT in the U.S. with ownership of 77 hotels. The company has a total room count of ~42,000 rooms and is focused on the luxury hotel and resort market.
While the company is diversified in terms of brands, Marriott brands account for 60% of the company's total portfolio. This is not surprising, as HST and Marriott were originally one company. Other key brands for HST include Hyatt and Four Seasons, which account for 21% and 5% of HST's portfolio respectively.
HST is well diversified geographically, with its largest market being Maui/Oahu, which accounts for ~10% of revenue. Other key markets include San Diego, Orlando, and Phoenix.
Hotel Business Faces Secular Challenges
The hotel industry has faced substantial disruption over the past decade due to the emergence of short-term stay alternatives. Airbnb ( ABNB ) launched in 2008 and other short-term stay alternatives offered by big players such as Expedia, Booking Holdings, Marriott, Hyatt, and others have emerged in recent years.
The Airbnb platform alone has grown to over 4 million hosts. For FY 2022, Airbnb reported total gross bookings of $63 billion, up from gross bookings of $8 billion in 2015. Comparably, the entire worldwide hotel market is projected to post a total FY 2023 revenue of $410 billion.
Short-term homestay alternatives pose a challenge for hotel owners such as HST, as short-term stay options tend to be significantly cheaper. While HST's focus on the luxury market has helped lessen the blow due to the emergence of short-stay alternatives, the entire hotel market has been impacted due to reduced pricing power. Additionally, short-term stay providers have increased offerings in the luxury space over the past few years.
The impact that the emergence of Airbnb and other short-term stay alternatives has had on HST can be seen by looking at HST's share price performance from inception through Airbnb's launch date of August 2008 to performance during the period following Airbnb's launch. As shown by the chart below, HST had been able to outperform the S&P 500 prior to Airbnb's launch but has significantly underperformed in the period after Airbnb launched.
Another secular challenge faced by the hotel industry is the slowdown in business travel following the Covid-19 pandemic. A recent report suggests that the share of U.S. adults who travel for business is now 18% lower than was the case prior to Covid-19. In addition to less business travel, the characteristics of business travel appear to have changed considerably, with ~55% of business travelers earning $50,000 or less per year. This is a considerable negative for HST given that the company if focused on upmarket hotels and business-related customers accounts for ~33% of HST's total revenue.
HST President & CEO Jim Risoleo noted recent improvements in business revenue on the Q3 2023 earnings , but the company still is sharply down in terms of business revenue vs the pre-pandemic period:
Business transient demand continued its gradual improvement during the third quarter. Business transient revenue was up approximately 9% to 2022 and demand improved 5% compared to the third quarter of 2022. Overall, business transient revenue is down approximately 16% compared to 2019, with room nights down approximately 20%. Room nights have gradually improved throughout the year. In January, we were down nearly 23% to 2019. And in September, we were down just 17% to 2019. We see the continued evolution of business travel, as a tailwind in the future.
While the company sees business travel as a tailwind into the future, I do not agree with that characterization given the structural shifts that have taken place.
Recent Financial Performance
Over the past few years, HST has reported solid financial performance, driven mostly by margin improvement. While revenue has grown over the past few years, revenue growth has been fairly low considering the relatively high inflation rates experienced over the past two years. Margin improvement has been driven by improved efficiencies through cross-utilization of management functions and the adoption of productivity-enhancing technology.
For Q3 2023, HST reported a 2.1% increase in total revenue and a 1.8% increase in comparable hotel total revenue per room vs. the same period a year ago. For the nine months ending Q3 2023, HST reported a 10.4% increase in comparable hotel total revenue per room. The slowdown in growth during Q3 compared to the earlier part of 2023 was driven in part due to the wildfires in Maui, Hawaii, where the company has three hotels. Total revenue per room was impacted by 120 bps due to this impact. Thus, even after adjusting for the impact of wildfires, HST still reported lower revenue growth than in the earlier part of 2023 which suggests the business is normalizing.
Adjusted FFO per share for Q3 2023 was $0.41 which represents a 7.9% increase from the same period a year ago.
As part of its Q3 2023 earnings release, HST increased its FY 2023 adjusted FFO per share guidance by $0.06 to $1.90 to $1.95. The midpoint of this range represents a ~7.5% increase from FY 2022 adjusted FFO. Additionally, this level of adjusted FFO per share represents an increase from FY 2019 levels of $1.78 suggesting the company has fully recovered from the impacts due to the pandemic.
Solid Share Repurchase Program & Dividend
During Q3 2023, HST repurchased 6.3 million shares at an average price of $15.9 per share. The company has modestly reduced its share count over the past year and has an additional $823 million remaining under its existing program. Based on a current market capitalization of ~$12.45 billion, the repurchase authorization represents ~6.6% of all shares outstanding.
In addition to having a solid repurchase program, HST has a solid dividend yield. During Q3 2023, the company increased its dividend by 20% to a quarterly level of $0.18. Based on current market prices, HST has a dividend yield of ~4.1%.
While the yield is attractive, it should be noted that historically HST has not been a dividend growth story as the current dividend is in line with the company's dividend level in late 2014.
Reasonable Valuation But Not Highly Attractive
HST is trading at 9.4x consensus FY 2023 FFO per share. Currently, consensus estimates do not call for much FFO per share growth over the next two years, as HST is trading at 9.4x consensus FY 2024 FFO per share and 9.2x consensus FY 2025 FFO per share. Comparably, the S&P 500 trades at ~18.9x consensus FY 2024 earnings. While HST is trading at a cheaper valuation, it is much less attractive considering below market growth potential. For content, the S&P 500 is estimated to grow FY 2024 earnings by ~12% and has grown EPS historically at a high single-digit rate.
HST trades mostly in line with lodging REIT peers. Park Hotels & Resorts ( PK ) trades at 7.3x FY 2024 consensus FFO while DiamondRock Hospitality ( DRH ) trades at 9x consensus FY 2024 FFO. Sunstone Hotel Investors ( SHO ) trades at 11.9x consensus FY 2024 FFO.
HST's price to FFO per share is roughly in line with the company's own historical valuation range, suggesting the stock is not highly attractive.
Potential Upside Catalysts
The biggest potential upside driver for HST is if the company is able to execute its growth plans despite secular headwinds.
As shown by the chart below, HST believes it can grow EBITDA from the current level of ~$1.62 to ~$2 billion via improvements in occupancy, acquisitions, and portfolio reinvestment geared at increasing profitability. While I believe occupancy gains are possible from current levels, I am more skeptical of the company's acquisition strategy upside and upside related to portfolio reinvestment. The company's acquisition strategy appears to be focused on buying assets at an attractive valuation as opposed to realizing potential synergies, and thus I am somewhat skeptical.
Additionally, I believe secular headwinds will continue to weigh on average revenue per room growth going forward, which may offset efficiency gains.
Conclusion
Historically, HST has significantly underperformed the broader market while exhibiting a significantly higher level of risk.
The company faces significant secular headwinds due to the emergence of competition for short-term stay providers such as Airbnb and reduced levels of business travel.
HST has delivered solid recent financial performance, and FY 2023 FFO is above pre-pandemic levels. The strong performance has been driven in large part by margin improvement, while revenue growth has been more muted.
HST has a solid share repurchase program and dividend. While the company recently increased its quarterly dividend, it is just back to 2014 levels, and thus I do not view the company as a dividend growth story.
The company trades at a reasonable valuation vs. peers and is cheaper than the S&P 500. However, given the modest growth prospects, I do not find HST highly attractive on a valuation basis.
While HST may be able to deliver positive returns for investors going forward, as has been the case historically, I believe the company is poised to continue underperforming the S&P 500 due to secular challenges. Thus, I rate HST a sell and would consider upgrading the company if it is able to deliver solid FFO per share growth going forward.
For further details see:
Host Hotels & Resorts: Long-Term Underperformance Likely To Continue