Host delivers on NYC asset disposition strategy
Host delivers on NYC asset disposition strategy
02 NOVEMBER 2018 2:44 PM

Host Hotels & Resorts homed in on two of its top strategies during the third quarter: reducing its exposure in New York City as well as its European footprint.

BETHESDA, Maryland—Host Hotels & Resorts made significant headway in the third quarter on its standing strategy to reduce both its New York City footprint and its international exposure.

In a quarterly earnings call with analysts, Host executives also detailed the company’s operating performance and a new agreement in place with Marriott International to undertake a four-year reinvestment and renovation strategy on some of the company’s highest-profile Marriott assets.

Disposition highlights
“We were very active in capital recycling,” Host President and CEO James Risoleo said on the call, adding that the strategic activity allows the company to focus its attention back on the U.S., “where we have the greatest scale and compset advantage.”

In the U.S., the company completed its previously announced sale of the W New York – Union Square for $171 million, and placed the Westin New York Grand Central hotel under contract for $300 million. Host also sold the retail space at the New York Marriott Marquis for $442 million during the third quarter.

“Including the W New York, which was sold earlier in the year, by early 2019 we will have sold three (hotels) in New York City for a combined (earnings before interest, taxes, depreciation and amortization) multiple of 29 times, significantly limiting our exposure,” Risoleo said.

On why the real estate investment trust is keen to exit New York City, Risoleo said he believes it’s “a market that continues to face headwinds due to significant supply and expense inflation.”

Internationally, the company sold the JW Marriott Hotel Mexico City during the third quarter for $183 million, according to the company’s third-quarter earnings release. Host also reached an agreement during the quarter to sell its approximate 33% interest in its European joint venture to its partners for proceeds of approximately €435 million ($505 million). 

“While we have been successful with our platform in Europe and very grateful to our partners … we believe it is the right time for the company to focus its efforts where it can have the most impact for shareholders,” Risoleo said.

The company still owns five assets outside of the U.S.—two hotels in Canada and three in Brazil—but now Risoleo said less than 2% of the company’s EBITDA will come from outside the country.

Reinvestment plans
Risoleo said that so far this year, the company has spent $320 million on capital expenditures, including approximately $119 million in the third quarter. For the full year, he said the company likely will spend $475 million to $520 million total on return on investment capital expenditures, and renewal and replacement projects.

This reinvestment falls into what Risoleo called the three areas that make the most sense for the company’s capital recycling activity—buying assets “to further upgrade quality, growth and free cash flow generation of our portfolio;” investing back into the portfolio, “where we can drive meaningful returns by reinventing properties;” and buying back stock, he said.

On the reinvestment front, he announced an agreement Host recently reached with Marriott to complete a number of “transformational brand reinvestment capital projects” over a four-year period.

Beginning this year with the San Francisco Marriott Marquis and including, over the next four years, the New York Marriott Marquis, the Boston Marriott Copley Place, the Orlando World Center Marriott and the Ritz-Carlton Amelia Island in Georgia, Host will undertake major renovations “to compete better and enhance long-term success,” Risoleo said.

“Marriott will provide us with priority returns on the agreed-upon investment, and additionally they will provide operating profit guarantees” to offset expected business disruptions, he said.

The goal is “to really make these hotels fit with what people are looking for today and make them No. 1 in their set,” Risoleo said, adding that he’s “hopeful other owners of other Marriott hotels will follow down the same path.”

Operating highlights
A 1.5% average daily rate increase in Q3 compared to the same period last year drove Host’s revenue-per-available-room growth of 1.6% in the quarter. Comparable occupancy in the quarter grew 10 basis points to 81.4%, “the highest since the third quarter of 2000,” Risoleo said.

He acknowledged that while the company’s top-line performance was in line with expectations and bottom-line performance was better than expected, the company’s hotels did feel the impact of moving Fourth of July and Jewish holidays, as well as business disruption due to Hurricane Florence and Hurricane Lane.

Risoleo said he anticipates the fourth quarter will be the strongest of 2018 in terms of group booking pace. “With 90% of group revenues on the books for 2019, we continue to see the booking window extend,” he said. “While we are early in the 2019 budgeting process, the global economy continues to exhibit strength and appears supportive of industry growth.”

Host EVP and CFO Michael Bluhm said groups RevPAR was up 2.3% in the quarter, led by association business, and transient business was bolstered by strong business transient and corporate travelers.

“We continue to see improvements in business transient,” Bluhm said. “We (think) business travel will remain strong over the course of the remainder of the year.”

Host revised its full-year 2018 RevPAR expectations guidance, from its previous guidance range of 1.75% to 2.5% growth, to a range of 1.9% to 2.1% growth. That midpoint shift, Risoleo said, is “due entirely to the impact of Hurricane Florence and Hurricane Lane in Q3.”

At press time, Host Hotels & Resorts’ stock was trading at $18.69, down 5.8% year to date. The Baird/STR Hotel Stock Index is down 8.1% for the same period.

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