Renovations, not acquisitions, top Host’s priority list
Renovations, not acquisitions, top Host’s priority list
06 NOVEMBER 2019 4:12 PM

Amid a period of economic and industry uncertainty, Host Hotels & Resorts officials say they’re more comfortable investing in their existing portfolio through significant ROI projects than going out to the market as a buyer.

BETHESDA, Maryland—Analysts wondered if Host Hotels & Resorts—with plenty of capital and low leverage—was poised to make any big acquisitions.

While executives didn’t rule out buying properties during the company’s third-quarter earnings call, they noted their focus in the near term will be investing in and refining Host’s existing portfolio along with purchasing stock.

President and CEO Jim Risoleo said the company is still in the midst of a massive, portfolio-wide renovation and transformation project for its Marriott International-branded properties. With uncertainty over the state of the hotel investment cycle, he noted right now could be the perfect time to improve the company’s hotels.

“The timing of the Marriott transformation program is highly beneficial to shareholders,” Risoleo said. “In a low-growth environment, it lowers the impacts (of renovation disruptions) and positions us well for significant index gains.”

The company is 45% of the way through its renovations in the program, which Risoleo said is ahead of schedule and coming in under budget. EVP and CFO Michael Bluhm said the company spent $225 million in 2019 and has projected to spend another $200 million in 2020 and $175 million in 2021. Hotels that have seen improvements through the program so far in 2019 include the Coronado Island Marriott Resort & Spa, New York Marriott Downtown and the San Francisco Marriott Marquis.

Altogether, the company projects between $550 million and $590 million in capital expenditures. During Q3, the company also spent $200 million on share repurchases, bringing the annual total up to $400 million.

“We will take a measured approach on when and what amount to buy back stock based on our view of macro conditions,” Risoleo said.

Macro-uncertainty means any near-term hotel acquisitions will have to clear “a high bar,” he said, while noting the company isn’t ruling out being a buyer if the right opportunity presents itself.

“There may very well be a transaction, or more than one, that makes sense,” he said. “It depends on what market the asset is located in, what demand drivers there are, what the pricing is and what we can achieve going forward from asset-management initiatives and improving operating performance. There’s a lot on the table. We never say never to anything, but by no means are we in any rush to get all our money invested.”

At the end of the quarter, Host had $2 billion in unrestricted cash on its balance sheet with another $1.5 billion available in its credit facility.

Transactions in the quarter
During the third quarter, Host sold eight properties that executives described as noncore assets for a combined price of $565 million. Those hotels are the Courtyard Chicago Downtown/River North, the Residence Inn Arlington Pentagon City, the Scottsdale Marriott Suites Old Town, the Scottsdale Marriott at McDowell Mountains, the Costa Mesa Marriott, the Atlanta Marriott Suites Midtown, The Westin Indianapolis and the Chicago Marriott Suites O’Hare.

The company also sold the Hyatt Regency Cambridge and the Sheraton San Diego Hotel & Marina early in the quarter for a combined price of $297 million.

Risoleo described the San Diego property as a relatively low-RevPAR hotel compared to the rest of Host’s portfolio that had significant CapEx needs and a location in a “third-tier” submarket of San Diego.

Asked by an analyst how far off Host is from having a closer-to-ideal portfolio, Risoleo responded that goal might not be far off.

“If you look at some of the assets we sold, we’d describe them as profitability-challenged hotels,” he said.

Q3 performance
According to the company’s third-quarter earnings news release, Host collected $1.3 billion in revenue for the quarter and $312 million in adjusted earnings before interest, taxes, depreciation and amortization for real estate.

U.S. revenue per available room fell 0.2% for the quarter, with Risoleo noting the company’s overall performance was negatively impacted by renovation disruptions and some tropical storm and hurricane issues.

The company saw a stronger quarter, though, in terms of total revenue per available room, which was up 1.2% year over year. Host officials said 35% of the company’s revenues come from streams other than rooms, including food and beverage, conference and meeting space and spas.

Host executives told analysts they believe that strong ancillary revenue growth can continue going forward, especially as the company improves its business mix by refining its portfolio.

“We continue to see pickup in food-and-beverage and (audio/visual) revenues across the portfolio,” Risoleo said. “And we have better capture of cancellation fees now, not because cancellations are higher but due to automated systems.”

The company lowered its full-year 2019 RevPAR guidance to between a 0.25% dip and a 1% decrease.

As of press time, Host’s stock was trading at $17.44 a share, a 4.6% year-to-date increase. The Baird/STR Hotel Stock Index was up 13.3% for the same period.

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