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Morningstar | Host Hotels Reports Big Gain in Third Quarter That Matches Our Big Expectations

Host Hotels & Resorts increased its bottom line by 12% in the third quarter, but both the top-line and bottom-line results were in line with our expectations. As a result, we do not plan to make any material changes to our $20 fair value estimate or no-moat rating. Comparable Revenue Per Available Room met our estimate of 1.6% growth in the third quarter driven by a 10-basis-point occupancy gain to 81.4% and a 1.5% increase to average rate. Comparable hotel EBITDA margins improved 50 basis points, impressive given that margins usually contract when revenue grows below inflationary levels but still within our expectations for the quarter, leading to a 4.6% gain in comparable hotel EBITDA. Adjusted funds from operations was up 12.1% to $0.37, matching our estimate for the third quarter. Management narrowed RevPAR growth, EBITDA margin growth, and adjusted FFO guidance for 2018, though our estimates for all three metrics are still within the updated guidance range. 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 continues to sell assets in noncore markets as the company looks to reposition the portfolio. In addition to the W New York–Lexington Avenue that Host sold for $190 million in May and the W New York–Union Square that Host sold for $171 million in September, the company also announced that it is selling The Westin New York Grand Central for $300 million, which is expected to close in the first quarter of 2019. Once Host completes the sale, it will have sold half of its hotels and 29% of its rooms in New York City, a market that has experienced and is likely to continue to experience low growth due to elevated levels of supply being absorbed by the market. Management said it sold all three hotels for a 28 times multiple, implying a 3.6% disposition cap rate. Even for high-quality assets in New York City we view this as a low cap rate, so we think management did an excellent job maximizing the value for these assets. It also sold the retail, theater condo, and signage space for the New York Marriott Marquis for $442 million, further demonstrating management's desire to exit the market and redeploy capital elsewhere. As a result of the New York sales, management was able to fully cover the $1 billion spent on the acquisition of the Hyatt portfolio executed in March in a 1031 like-kind exchange, avoiding any tax charges on the deals. We applaud that management was able to successfully navigate the requirements of the 1031, as matching size while getting good pricing on both sides of the deal in a tight time window and shifting the portfolio's market mix to higher growth markets was very difficult to achieve.

Host also announced the sale of part of its international exposure. First, the company is selling the JW Marriott Hotel Mexico City for $183 million, revealing that this was the hotel it had previously cited as being the hotel held for sale it couldn't identify at the time. It is selling the hotel at a 6.7% disposition cap rate, a decent but not great rate in our estimate for the hotel. It has also reached an agreement to sell its Europe joint venture for gross proceeds of EUR 435 million at an estimated 5.9% cap rate. Management came to the conclusion a few years ago that investors were not giving credit to Host for the international exposure and instead saw it as additional risk and G&A costs given that management's core competency was running U.S. hotels. These sales nearly complete that strategic shift to focus on U.S. operations. Once both sales close, Host will only own two hotels in Canada and three hotels in Brazil. We think that the company will likely keep the Canadian hotels given the similarity to the U.S. but would expect Host to sell the Brazilian hotels in the next year or two.