Host Hotels and Resorts Inc. is a REIT that owns luxury hotels that operate under well-known brands such as Ritz-Carlton, Hilton and Four Seasons. Expanding internationally, HST owns 7 hotels with 2471 rooms in Canada and Chile, as well as a 32.1% stake in a European joint venture with Stichting Pensioenfonds ABP and Jasmine Hotels Pte Ltd., consisting of 10 hotels and 3234 rooms.
HST seeks to acquire luxury or upscale hotels that are located in urban or resort locations. . A continuation of the 2007-2008 credit crunch will stunt the growth of HST since required capital would be difficult to come by. HST has significant debt obligations, and requires fresh capital to fund its purchase of new properties. At times this capital comes from the sale of other properties. Their approximate leverage ratio of 2 is smaller than that of many other REITs and positions them well to ride out a tightening credit market. Conversely, as HST seeks to unload non-core properties potential suitors may be limited by the credit crunch that HST faces. The proceeds from such sales are used to fund new acquisitions or pay down debt.
Management has projected the state of the domestic economy to lower revenues and occupancy rates occupancy rates. Since many of HST's properties are located in the business districts of major cities, cash-strapped businesses cutting back on traveling expenses and the length of their stays will affect the bottom line. Similarly, consumersconsumers rattled by poor economic conditions in the third and fourth quarter of 2008 are less likely to splurge on a vacation or travel at all.
Spiking oil prices over the past 14 months have caused pump prices to soar, and airlines too are now beginning to pass along fuel increases to passengers. Rising transportation costs had HST forecasting a decrease in ADR and occupancy rates. However, as the credit crunch worsened in September and October of 2008, commodity are well of their highs and oil prices in particular are off 51% from their peak in July 2008.
Host Hotels and Resorts has international holdings, but these holdings accounted for only 3% of revenues in 2007. Therefore, the domestic market is of eminent importance. All of HST’s revenue comes from hotel operations or the sale of hotels, therefore any factors that negatively impact these two areas would adversely affect the bottom line.
On April 10, 2006, HST acquired 25 domestic and 3 international hotels from Starwood Hotels and Resorts Worldwide, for a total of 35 hotels in the past five years. In line with its stated business strategy, HST will sell hotels and then reinvest the money in other locations or in paying down its sizable debt, which stands at 5.6 billion dollars.
Due to HST’s sizable debt, and its status as a REIT which requires it to distribute 90% of its earnings, HST is dependent on credit facilities. In relation to its peers, HST is less leveraged and in better shape to withstand as tightness of credit since its debt of 5.6 billion dollars is on assets of 11.8 billion dollars. Its leverage ratio has become more favorable in the past 3 years. Importantly 3.4 billion dollars of HST’s debt does not mature until after 2012, and HST still has access to a 300 million dollar revolving credit facility with Deutche Bank.
HST saw its revenues rise to 3.3 billion dollars, which as a year over year increase of 13.0%. Key metrics RevPar and ADR increased 7.0% and 6.7% respectively to $142.81 and $194.71. Occupancy rates also increased by 0.2 percentage points to 73.3%. Operating profits increased 25.1% to 953 million dollars. Management attributed the good results to strong economic conditions in the first half of 2007, and a dearth of new hotels in the upscale and luxury hotel ranges. Poor economic conditions in individual markets affected occupancy rates at certain hotels.
These three performance measures are good indicators of the business health of Felcor's hotels and are widely used across the industry. They include
|HST Occupancy Rate||72.6||73.1||73.3|
|HST's ADR ($)||167.64||182.56||194.71|
|Felcor's RevPar ($)||121.66||133.48||142.81|
Long Term Hotel Industry Trends-- STR, a research firm, predicts that in 2008 the supply of hotel rooms will increase by 2.2 percent which will slightly exceed 1.9%, the historical average. However, demand growth is projected to increase only by 1.4 which will fall short of the historical average of 1.8%. If the growth in supply exceeds the growth in demand as predicted, the 2008 occupancy rate is expected to drop 0.8%, to 62.4%. However, the majority of hotel construction projects scheduled for completion in the near-term are concentrated in the mid-scale and economy segments, are located outside of major urban markets. The new hotels also tend to have fewer than 200 rooms which is an indicator that they will not haave the amenities to compete with many of HST's more upscale properties.
The 2007-2008 Credit Crisis- HST as a REIT is obligated to distribute over 90% of its income to shareholders. Consequently, HST must borrow money to finance acquisitions and renovations of existing hotels. In the midst of tightening credit this capital is increasingly difficult to come by, and it is even more difficult to find favorable financing deals. On a second level, HST is also active in the sale some of its properties, the unavailability of easy financing means that the potential buying pool is greatly limited. Tighter credit generally means higher interest rates, but HST is insulated from shocks due to interest rates since their debt is at fixed rates, and 3.4 billion of it is not due until after 2012.
The overall condition of the economy affects all business, but it has an acute effect on the travel and lodging industry in particular. A large percentage of HST’s occupants are business travelers, and during an economic downturn businesses tend to cutback on travel. A shrinking of this sizable pool of customers will adversely affect occupancy rates and ADR. The second effect from a poor economy, is that families have less disposable income and are more likely to cut back on vacation spending. This has clear ramifications on hotels and HST will likely suffer lower occupancy rates and ADR.
HST has some international exposure and the profitability of these ventures is partly determined by how the relative strength or weakness of the dollar. Furthermore, HST is looking to expand their holdings abroad, and a strong dollar makes it cheaper for them to acquire hotels, while a weak dollar makes it more difficult to do so. On the consumer front, international businesses and tourists find it cheaper to travel to the United States when the dollar is weak, and therefore a strengthening of the dollar could reduce the inflow of foreign guests. Considering that the majority of HST’s holdings are in the United States this would negatively affect the bottom line.
Unlike most REIT’s in the travel and lodgings sector, HST has international holdings. While its international holdings currently only account for 3% of its total revenues, it does provide HST with a foothold with which to further expand in these markets, and management continues to seek opportunities to invest in international markets. This gives HST a favorable growth potential advantage over its rivals.
Furthermore, HST’s debt to asset ratio is more favorable than many other REIT’s which is significant during times of tightening credit. Banks are more likely to loan to HST, and HST is less reliant on loans to operate.
As is true of all REITs, HST does not directly compete with any one company, but rather its individual hotels compete with other hotels in their individual markets. HST competes against the industry as a whole rather than a particular REIT or even brand of chain of hotels.