The History of Host Hotels and Resorts Began With Railroads
- The company’s origins start with the Van Noy brothers in Kansas City, Missouri in the late 1800s. In 1897 Ira Clinton Van Noy, Charles S., Horace Greeley, and Henry Van Noy formed what was then known as the Van Noy Railway News and Hotel Company.
- At this time in America’s history, railroads were a huge growth industry, as they provided the fastest means to transport people and goods, which really facilitated trade, economic growth, and population growth in many areas of the country.
- The brothers set up shop along the rail lines, setting up retail and hotel businesses to serve travelers.
- Many decades passed and the company expanded to own restaurants as well as expand their hotel business.
- At the time of Marritot’s acquisition in 1982, 80% of Host’s revenue came from the airport terminal food business, which Marriott was interested in.
- As we discussed in the Marriott International (MAR) episode, Host eventually got spun off in 1993. At this time they had about 24,000 rooms. The new corporation kept operating concessions at airports, but eventually spun this business off to shareholders just two years later in December 1995.
- In 1996 they increased their footprint to 37,000 rooms. That’s about a 33% increase in just two years! They got rid of almost all of their limited service hotels and went all in on full service hotels.
- In 1998 they spent $1.5 billion to buy an additional 5,000 rooms (12 hotels) from The Blackstone Group – and with this move were able to diversify into different brands such as the Ritz-Carlton and Hyatt.
- Doing some quick math here that’s $300,000 per room. It may seem like a lot but when we consider the fact that a) hotels are open year round, b) occupancy rates are likely to be decent for great properties, and 3) you can charge a lot on a nightly basis based on convenience, it probably doesn’t require too many people per year at a decent nightly rate to generate a satisfactory return on investment.
- In 1999 they qualified as a REIT and by 2006 had over 67,000 rooms – almost double the number they had a decade earlier.
- Since then they’ve made a few adjustments – in the 2012 to 2013 time frame they got their debt upgraded to “investment grade” by the rating agencies of Moody’s and S&P. This means that the overall investment community considered their bonds, and thus the stability of their business, safer than they did before.
- This is a good sign, but on a side note be careful with ratings agencies…there were some less than ideal ratings from these very same agencies on so called “investment grade” assets just before the financial crisis. You really have to dig into things like this in order to uncover risks.
- In 2018 they sold off their international properties and reinvested in their U.S. properties.
- Host Hotels & Resorts is the largest lodging REIT. They are the largest owner of Marriott properties and the largest third-party owner of Hyatt hotels. They own 80 properties which comprise 46,500 rooms. They are almost all in the U.S., only 5 are in Brazil and Canada.
- 98% of their hotels are brand affiliated. 75% are Marriott, 17% are Hyatt, and 6% are other brands
- Three different types of hotels: resorts, convention destination hotels, and high end urban hotels
- The long term trend of hotel occupancy has moved higher over the last several decades, with relatively short periods of downturns during recessions.
- In 1987, the percentage of occupied rooms vs. available rooms was 35%. In 2019 it was 66%. This is about a 4.6% year over year growth in occupancy rates.
- COVID impact – Management has stated that if they can sustain 10-15% occupancy levels then economically it makes sense to re-open (they would lose less money than closing their doors). As of June they were at about 10% occupancy across the entire portfolio of properties.
- Downturns are caused for different reasons. In order to understand these reasons, let’s first look at the three main performance metrics that hotels are judged by:
- Occupancy. This is probably the easiest to understand. When you have high occupancy, more people are staying at a hotel. Lower occupancy means less people are staying there, relative to the total number of rooms.
- ADR = Average Daily Rate. This is the amount of revenue that an occupied room earns per day. How much money are occupied rooms making?
- RevPar = Revenue Per Available Room. This is Occupancy x ADR. It indicates how much money is being made at a hotel based on its capacity, and takes into account occupancy and per room revenue.
- Let’s take these concepts now and apply them to Host. In the recession of 2001, ADR was the primary cause of the decline. This means that people were still booking rooms, but doing so at lower prices than typical. In the recession of 2009, occupancy was the primary cause of the decline. The hotel could still charge reasonable rates, but not as many people were showing up to book rooms.
- In the past few years management has been “asset recycling” by selling lower RevPar hotels and buying higher RevPar hotels. This theoretically increases the quality of the overall portfolio, because the overall mix is more upscale. This can be a benefit because luxury spending tends to bounce back more quickly at the end of recessions.
- Management seems to want to continue this trend.
- From the 2019 annual report: “We constantly are evaluating both single hotel and hotel portfolio transactions to acquire iconic upper-upscale and luxury properties that we believe have sustainable competitive advantages. Similarly, we intend to continue our capital recycling program with strategic and opportunistic dispositions.”
|2012||2019||CAGR (%) / Comments|
|Net Income||63 MM||920 MM||%|
|Earnings Per Share||$0.08||$1.26|
|Adj. FFO||834 MM||1.3||Mainly adjusts Net Income for Depreciation, Amortization, and Gain from selling hotels|
|Adj. FFO Per Share||$1.10||$1.78||7%|
|Operating Cash Flow||782 MM||1.2|
|Investing Cash Flow||(886 MM)||58 MM|
|Financing Cash Flow||(305 MM)||(1.3)|
|Dividends||(187 MM)||(630 MM)|
|Dividends Per Share||$0.30||$0.85||Dividends increased dramatically from 2012 to 2016, and have remained at $0.85/share for the past three years|
|Shares Outstanding||726 MM||705 MM||—|
Valuation and Closing Thoughts
- RevPar growth has been stagnating the last few years and hurting the industry overall. Essentially, supply has outstripped demand.
- The company has managed to growed adjusted funds from operations at 7% annually – not bad for a company who has seen no revenue growth over the better part of a decade.
- This points to the fact that Host’s management is pretty good at controlling costs.
- Even though revenue growth has been non-existent, the reshuffling of assets into more luxury properties seems like a good move. Luxury goods tend to be able to maintain higher margins, and that is especially important as the company tries to bounce back out of the COVID crisis.
- I also like how the balance sheet has clearly improved over time. Cash has gone up a modest amount but total debt has been lowered, which is great.
- Share trade right now for about $11/share. Based on 2019’s numbers that only 6x from a P/FFO perspective. Alas, we are in 2020 now, so it is hard to predict what earnings will look like in 2021 and 2022. However, I think there are good chances that the company will return to profitability.
- From a dividend perspective, as expected the dividends are suspended for now, but assuming they return to normal at some point you’re looking at $0.85 per share (usually structured as four quarterly payments of $0.20 per share, plus a $0.05 bonus payment at the end of the year). This is equivalent to a 7.7% yield. Granted, this yield is not likely to grow anytime soon once it is re-established. But hey, it’s nearly an 8% yield on your money in cash. Keep in mind that this is a REIT and you will have to keep tax rules in mind.
- I think management’s prudent actions the last several years to de-leverage and improve the portfolio mix of the company will help Host survive through the storm and prosper in the years ahead. I don’t expect amazing revenue growth in the medium term, but the company seems to know how to still make money even when revenue isn’t growing that much. I can respect that.