BETHESDA, Maryland—Because of its size and amount of invested capital, company updates from Host Hotels & Resorts are often reflective of the overall economic hotel landscape. Thursday was no different as the hotel real-estate investment trust discussed myriad opportunities and challenges on its first-quarter 2011 earnings call.
“I am pleased to say the lodging industry recovery continues to gain momentum,” said President and CEO Ed Walter. “Combined with low supply growth, we expect increased earnings.”
Host in Q1 was successful in acquiring a handful of high-profile hotels but struggled with driving revenue per available room in a few key markets because of renovations and increasing property-level bonuses.
Key buys
Host has been in acquisition mode thus far this year, spending more than US$1 billion in the first three months. The company will continue to monitor the transactions market for opportunities, although not aggressively. On Thursday’s call, the company announced it will acquire a 75% interest in the US$150-million Hilton Melbourne South Wharf complex, part of a convention center mixed-use development in Melbourne, Australia.
The Australian hotel—for which Host contributed US$49 million in equity—is the fourth acquisition for Host this year, bringing the total portfolio size to 108 hotels. Host also is under agreement to purchase the Manchester Grand Hyatt San Diego for US$570 million, the New York Helmsley for US$313.5 million, and closed in January on a portfolio of seven New Zealand properties acquired for US$143 million from that country’s Tourism Asset Holdings.
Of the Hilton Melbourne, Walter said, “It is located in a rapidly developing area of the city. We are very excited about the acquisition and potential for growth in this hotel.”
Also announced Thursday, Host launched a joint-venture fund that, with 55% leverage, will be used to acquire €1 billion (US$1.48 million) worth of hotels across Europe.
Toward the end of the year, Host will review its portfolio for likely sale candidates, Walter said. “We expect to be sellers in the second half of 2011 and into 2012,” he said.
Certain markets struggling
While Q1 results were in line with expectations—revenue up 7% (US$54 million), net loss at US$60 million, FFO up 57% (US$77 million) and adjusted EBITDA up 14% (US$144 million)—Walter said hotel revenue per available room declined further than expected.
He attributed RevPAR declines to several major renovations taking place across Host’s portfolio. Eighteen of Host’s hotels are in the midst of a renovation or under some sort of construction, including two high-profile properties.
In New York, RevPAR for the first quarter was down 2.5% as a result of 7% occupancy declines and 7% rate increases. Host is in the midst of a full repositioning of The Sheraton New York. In Philadelphia, RevPAR fell 14.3% while Host renovates a ballroom at the Philadelphia Marriott Downtown.
Larry Harvey, executive VP and CFO, said Host hotels in both markets will continue to struggle into the second quarter as the properties remain under construction, but they expect strong rebounds in the second half of the year.
“It is worth noting that we expect the second half of year will exhibit better growth in RevPAR and basis points as we won’t be as negatively affected by renovation costs,” Harvey said.
The Washington, D.C., market was relatively weak in the first quarter for Host hotels, Walter said, affected primarily by a potential government shutdown.
“Not because people weren’t coming in to see the government, but companies couldn’t sign contracts because they didn’t have the authority,” he said. “I am hopeful that that business wasn’t lost, just postponed.”
“Frankly, the best thing to happen to the Washington hotel market is a huge tax bill because everyone would be in town to give their perspective,” Walter continued. “As we look into 2012 we don’t expect it to be particularly weak.”
Some of Host’s top performing markets included: San Francisco (RevPAR up 23%, ADR up 12%); San Diego (rate up 9%, occupancy up 8%); and Hawaii (RevPAR up 18.7%).
“We expect Hawaii to have an outstanding second quarter driven by increases in group demand,” Harvey said.
Other Q1 notes
In addition to specific RevPAR struggles, operating income across Host’s portfolio suffered slightly because of increased property level bonuses and a reduction of cancellation fees.
“In the first quarter of 2010 minimal bonuses were made,” Walter said. “For Q1 2011, bonuses were at normal levels as operating performance improved.”
In Q1 2010, cancellation and attrition fees were in excess, Walter said. In 2011 those fees reflected more of a typical year and Walter expects that trend to continue throughout 2011.
In February, shortly after Host closed on the seven hotels in New Zealand, a 6.3-magnitude earthquake hit Christchurch, a gateway city. Following the damaging quake, two of Host’s properties (the Hotel ibis Christchurch and the Hotel Novotel Christchurch Cathedral Square) are in a government-declared red zone. The two hotels represent about 25% of Host’s New Zealand portfolio.
“There is damage in about 39% of the rooms,” Walter said. “We’re engaging with a construction firm to evaluate the situation further. Now that access has been granted (to the damaged hotels) we should have much better idea by second quarter.”
