Host Hotels & Resorts Inc. HST, which has a portfolio of luxury and upper-upscale hotels in top U.S. Markets and the Sunbelt region, is poised to benefit from the strong demand drivers in these markets. Strategic capital allocations and a healthy balance sheet bode well for long-term growth. However, due to macroeconomic uncertainty, customers choosing lower-priced brands over the company’s premium ones can be a concern.
What’s Supporting Host Hotels?
Host Hotels has a strong Sunbelt exposure and presence in the top 20 U.S. markets. Its properties are advantageously located in central business districts of major cities with close proximity to airports and resort/conference destinations, thus driving demand. The company is also experiencing continued strength in group business as evidenced by a strong pace, banquet, catering growth, and double-digit citywide room night pace in key markets.
Host Hotels undertakes strategic capital allocations to improve its portfolio quality and strengthen its position in the United States, where it has a greater scale and competitive advantage. Moreover, the company’s transformational capital program with Hyatt is expected to provide a competitive edge in those markets and enhance long-term performance through an increase in RevPAR.
In the second quarter of 2024, the company incurred $224 million in capital expenditure. For 2024, management expects total capital expenditures within $500-$600 million, consisting of return on investment (ROI) projects within $220-$260 million, renewal and replacement expenditures of $250-$300 million, and $30-$40 million for reconstruction projects, including the final restoration work for the damage caused by Hurricane Ian.
Host Hotels has a healthy balance sheet and has been undertaking steps to fortify its balance sheet. As of June 30, 2024, the company had $1.4 billion in total available liquidity. Continued cost-containment and prudent expense-management efforts have helped HST preserve liquidity. It is the only company with an investment-grade rating among lodging REITs. Therefore, Host Hotels has ample financial flexibility for deploying capital for long-term growth opportunities while carrying out redevelopment initiatives.
Solid dividend payouts are the biggest attraction for REIT investors, and Host Hotels remained committed to that. Encouragingly, the company has increased its dividend seven times in the last five years and has a 40% payout ratio. Hence, with rebounding operating trends, a lower dividend payout ratio compared with the industry, a healthy financial position and our projected year-over-year rise in 2024 adjusted funds from operations per share, we expect the latest dividend hike to be sustainable in the upcoming period.
What’s Hurting Host Hotels?
Given the geopolitical tensions worldwide, fluctuating oil prices, and the ambiguity surrounding upcoming presidential elections in the United States and other countries, a slowdown in economic growth is anticipated in the upcoming quarters.
However, the majority of Host Hotels’ properties are concentrated in the luxury and upper-upscale segments, and the hotel industry is cyclical in nature and heavily dependent on the overall health of the economies in which it operates. Particularly, during economic downturns, these segments bear the brunt as unfavorable macroeconomic conditions compel customers to reduce discretionary spending and choose lower-priced brands over the company’s premium ones.
Shares of this Zacks Rank #3 (Hold) company have declined 1.2% over the past three months against the industry's growth of 13.5%.
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Stocks to Consider
Some better-ranked stocks from the broader REIT sector are SL Green Realty SLG and Pebblebrook Hotel Trust PEB, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for SL Green’s 2024 FFO per share is pegged at $7.58, which suggests year-over-year growth of 53.4%.
The Zacks Consensus Estimate for Pebblebrook’s full-year FFO per share stands at $1.64, which indicates an increase of 2.5% from the year-ago period.
Note: Anything related to earnings presented in this write-up represents FFO, a widely used metric to gauge the performance of REITs.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
