Should Your Portfolio Host This REIT?
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Host Hotels & Resorts (NYSE: HST), a lodging real estate company, focuses on strategic acquisitions for maximum profitability. The firm’s goal is to find and acquire high-revenue hotels and resorts in low supply/high demand areas. This would be an excellent strategy in an economic environment where consumers have a lot of disposable income, but what about now? Or are the firm’s properties in such prime locations that economic trends won’t matter?
Host Hotel locations
Host Hotels aims for geographic diversification throughout the world, and it has accomplished that goal, especially in the United States. Below is a quick list of some of the company’s properties and their significance:
- Boston Marriot Copley Square: Largest hotel ballroom in New England
- San Francisco Marriot: Closest hotel to Moscone Convention Center
- New York Marriot Marquis: Times Square landmark
- Orlando World Center Marriot Resort Convention Center: Orlando is a convention hub.
- Philadelphia Marriot Downtown: Connected to Pennsylvania Convention Center and Gallery Mall
- Tampa Marriot Waterside Hotel & Marina: Connected to Tampa Convention Center
As you can see, Host Hotels is highly strategic when it comes to location. This increases the odds of sustainable demand during economic downturns. On the other hand, the convention industry isn't immune to economic downturns, and many companies see conventions as a cost that they can cut if necessary.
Obsessed with cutting costs
In an effort to keep its profits high, Host Hotels only shows interest in well-maintained properties. Once it adds a hotel to its portfolio, a representative communicates with that hotel’s manager on a regular basis. If a hotel is in poor condition and requires too much maintenance, Host Hotels will divest that property, which will reduce costs and improve the bottom line.
However, Host Hotels has only delivered profits in two of the last five years. Looking at the shorter term, it has been profitable in three of the last four quarters. Right now, Host Hotels looks at every angle for bottom-line improvement, including energy-efficient projects such as cogeneration power plants and laundry water recycling. If Host Hotels can further expand its cost-cutting focus, then those quarterly profits could become more frequent.
Is debt a concern?
Unlike many REITs, debt isn’t a concern for Host Hotels. The company sports a debt-to-equity ratio of 0.76 versus an industry average of 0.90. For comparative purposes, Ashford Hospitality (NYSE: AHT) has a debt-to-equity ratio of 2.50, and Hospitality Properties Trust (NYSE: HPT) has a debt-to-equity ratio of 0.78. These numbers are important because they indicate that Host Hotels and Hospitality Properties Trust should be more resilient than Ashford Hospitality Trust during steep stock market corrections. However, let’s not kid ourselves. REITs haven’t held up well in bear markets.
If the broader market holds its own, then Host Hotels’ quality debt management will be a major positive, since it greatly improves the odds of dividend sustainability and potential growth. Host Hotels currently yields 2.70%. This is relatively low for a REIT, but it also shows that the company is wise when it comes to capital allocation. Hospitality Properties Trust also demonstrates quality debt management, and it currently yields an impressive 7.60%.
Host Hotels is a shareholder-friendly firm that’s constantly aiming to increase market share while also reducing costs. Geographic diversification, strong management, and a focus on quality should lead to positive long-term results. Unfortunately, the current economic environment makes Host Hotels a high risk/low reward investment in the near future.
Consider putting Host Hotels on your watch list. If and when the stock market comes back down to reality, you should have a chance to invest in this top-tier REIT at a discounted price.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!