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Morningstar | Host Enters a Mature Growth Stage That Is Unprecedented for Hotels as the Economic Cycle Lengthens

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, is entering an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats. However, the current extended cycle has led to hotels entering a low-growth stage with revPAR growth at or below inflationary levels, leading to sluggish revenue increases but flat or falling margins. Several factors keep revenue growth suppressed for hotels. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing Host from pushing rate increases even though it is nearing full occupancy on many nights. Nearly all of Host's hotels are Marriott/Starwood brands, so Host benefits from Marriott directing its loyalty members to Host's hotels. However, considering that most of Host's hotels are upper upscale or luxury hotels, Marriott loyalty members redeem many of their points at Host's hotels, which pays Host a reduced percentage of what it might have otherwise earned. Finally, while the shadow supply created by Airbnb doesn’t directly compete with Host on most nights, it does limit Host's ability to push rates on nights where it would have typically generated its highest profits. We think these factors will limit Host to inflationary growth levels until the next recession starts a new hotel cycle.