Host Hotels: The Best Value in REITs
01/30/2018 5:00 am EST
While hotel operators have had huge gains this year, their landlords have been mostly treading water. The Bloomberg Hotels REIT Index has gained just 5.2%. In my view, hotels REITs now offer the best value, explains Ari Charney, editor of Investing Daily's Personal Finance.
Among the reasons hotel REITs are lagging their operators is that the supply of available rooms is catching up with demand. Tax reform could help property owners catch up with their tenants in a couple of different ways. Indeed, hotel REITs have jumped higher as the final tax bill cleared Congress.
Industry observers believe corporate tax cuts could boost business travel, while also reviving group travel.
REIT investors, in general, will see tax rates on distributions drop by as much as 10 percentage points thanks to the deduction on pass-through income.
Even with their sudden rally, hotel REITs generally trade at a steep discount to their peers. On a price-to-FFO basis, the average hotel REIT trades at a multiple of just 10.8.
Income Portfolio holding Host Hotels & Resorts (HST) spent most of the year in the red until recently. Now its units are up 9.2% year to date. Not great compared to the market, but far better than where it was earlier. The $15.2 billion REIT owns a portfolio of 96 hotels in 70 cities around the world, though its U.S. holdings account for about 97% of revenue.
The REIT was originally part of Marriott (MAR), and as a result Marriott manages more than 70% of its hotels. In fact, the REIT is one of the largest owners of Marriott and Hyatt (H) properties. Host’s luxury hotels are primarily situated in urban areas, where they serve both leisure and business customers.
The REIT’s U.S. holdings are concentrated in growing markets in the Northeast, Mid-Atlantic, and West. My personal favorite is the revolving lounge atop the Marriott Marquis in Times Square, but I prefer upscale kitsch over luxury.
Host’s executives are disciplined capital allocators who seek to enhance their property portfolio’s returns through redevelopment and timely divestitures.
Given pressures from rising supply, such discipline should help management wring every bit of value out of the portfolio until the hotel space has a more favorable tailwind. FFO per unit is forecast to grow just 1% annually over the next two years, then accelerate thereafter.
Although it’s a non-GAAP metric, FFO is the relevant measure of a REIT’s profitability. It accounts for the cash generated by operations before non-cash expenses such as depreciation and amortization.
At the end of the third-quarter, Host’s net debt to EBITDA (earnings before interest, taxation, depreciation, and amortization) stood at just 2.3 times, compared to 3.7 times in the hotel REIT space and 6.2 times for the average REIT. Debt to equity also was reasonable at 54.5% versus 92.7% for the average hotel REIT.
Host shares the wealth with unitholders, but it’s attentive to distribution coverage. The trailing-year FFO payout ratio was a very manageable 50.6%.
The REIT has kept a level quarterly payout over the past three years, at $0.20 per unit. But it’s also paid a special cash distribution in three of the past of four years, generally around $0.05 per unit. With a forward yield of 3.9%, Host remains a buy below $25.