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Morningstar | Host's Fourth Quarter Beats; 2019 Guidance Light, but Large Cash Balance Can Fuel Growth

Fourth-quarter earnings for Host Hotels & Resorts beat our estimates, but guidance for 2019 was a slight disappointment. Nothing from this quarter's earnings leads us to believe that we will make material changes to our $19.50 fair value estimate for the no-moat company. Comparable Revenue Per Available Room grew 2.3% in the fourth quarter and beat our estimate by 80 basis points thanks to occupancy growing 0.2% and average rate growing 2.0%. Comparable hotel EBITDA growth was 3.6% as EBITDA margins were also up 45 basis points to 27.9%. The higher internal growth led to Host beating our adjusted funds from operations estimate by 3 cents with a $0.43 mark for the quarter.

We view management's 2019 guidance as a slight disappointment given that our estimates all come in near the high end of management's range. Host believes comparable hotel RevPAR growth will range between 0.0% and 2.0% (our current estimate is 2.0% for 2019), comparable EBITDA margin growth will range between negative 50 basis points and positive 10 basis points (our estimate is negative 10 basis points), and adjusted FFO will be between $1.72 and $1.81 (our estimate is $1.81). Part of the reason operating fundamentals are a bit soft is due to a 45-basis-point RevPAR impact from a major Marriott renovation program in 2019 that provides Host profit guarantees to the bottom line and should promote growth in future years. Even after announcing a $600 million acquisition subsequent to quarter-end, the bottom-line disappointment seems to stem from Host currently sitting on $1.2 billion in cash and management not assuming any uses for that cash in its guidance. If the company can utilize its large cash balance to create value, either through acquisitions or share buy backs, we think that management may raise the midpoint of guidance toward our estimate.

We really like the acquisition of One Hotel South Beach Miami that Host executed last week. The $610 million, 429-room luxury hotel generated $488 in RevPAR in 2018, higher than all but two of Host's hotels. The $45.8 million in EBITDA produced by the hotel in 2018 represents a 7.5% trailing acquisition cap rate, a fantastic cap rate for a luxury property in one of Miami's hottest submarkets. Typically, we would think a cap rate this high would suggest that the property requires significant capital expenditures, but management doesn't foresee any significant capital expenditures spending in the near term after the hotel underwent a $300 million renovation in 2015 that also made the hotel LEED-certified. This hotel instantly slots in as one of the best assets in Host's portfolio.

We hope that management continues to find and execute on deals this good because they have the dry powder to be opportunistic. With the $1.2 billion in cash plus available space on its credit facility and ability to issue more debt given that it is under its target leverage, Host believes it could easily take on $2.0 billion to $2.5 billion in deals. Management said on the call that it has a few more deals in the works, but also noted that the One Hotel deal took two years of negotiating to execute. While we assume in our model that Host deploys capital sooner rather than later, leading to our 209 FFO coming in at the high end of management's guidance range, we are willing to be patient with Host utilizing its dry powder if it is able to achieve prices as good as this deal.