EUR 850.00 For Business Accounts Only

Morningstar | Higher-Than-Expected RevPAR, Margins, and Funds From Operation for Host Hotels in Second Quarter

Host Hotels & Resorts produced another solid quarter that came in above our expectations, though we don't plan to make any material changes to our model as hotel fundamentals appear to have settled into a period of low but positive growth that we see persisting for many years. Therefore, we do not expect to change our no-moat rating or our $19.50 fair value estimate. Comparable Revenue Per Available Room grew 2.8% in the second quarter, above our estimate of 0.7% growth, through a combination of rate growth and continued occupancy growth. Host was also able to push up comparable hotel EBITDA margins 90 basis points to 32.3% in the second quarter through a combination of a one-time tax inducement, pushing high-profit ancillary revenue, and increasing operating efficiencies, all leading to comparable hotel EBITDA growth of 6.7%. As a result, Host was able to increase adjusted funds from operations 10.2% year over year to 0.54 for the quarter. Management raised the low-end of 2018 RevPAR growth guidance 25 basis points to a new range of 1.75% to 2.50%, raised the midpoint of 2018 EBITDA margin growth guidance 40 basis points to 50 basis points, and raised the midpoint of AFFO guidance by three and half cents to a new range of $1.71 to $1.76. All three metrics are above our expectations for 2018. However, the outperformance brings 2018 closer in line with our long-term view of low-single-digit growth for hotel EBITDA and AFFO, and supply issues in many major metros appear to have had less of an impact on 2018 than we anticipated. We see this quarter's results and the updated outlook for 2018 as a confirmation for our view of low but steady growth for hotels.

Host completed the sale of the W New York-Lexington Avenue for $190 million in the second quarter and is currently under contract to sell the W New York-Union Square for $171 million, which should close in the third quarter. New York is a market that has been dealing with significant supply issues for many years and is expected to see high supply impacting RevPAR growth for at least the next two years. Many hotel REITs have been slowly exiting the market over the past few years due to the market's continued underperformance in order to recycle capital into markets and assets with higher growth prospects. What is unique about Host's dispositions is that it sold the assets at a combined 1.3% cap rate, a very low figure even by New York's standards. Host expects to only see $2 million of EBITDA dilution in the second half of the year from the sales, so we think management did a great job of selling assets it no longer considered part of its core portfolio at a very high price. At the same time, we question why Host was unable to derive greater profits out of these high-quality New York assets, especially so late in the economic cycle. The buyers of the assets likely see some significant upside to the hotels' operations to pay such a rich price for them. Overall, we like the deal for Host but wonder if there are other hotels in its portfolio that have profits still left on the table.