EBITDA Margins for Host Hotels Should Stabilize Well Above the Prior Peak; Raising FVE to $24

We are raising our fair value estimate for no-moat Host Hotels & Resorts to $24 from $18.50 after incorporating third-quarter results and increasing our estimate for comparable EBITDA margins for the company’s hotel portfolio. We believe that hotels often have difficulty enacting many cost-saving programs during periods of economic growth due to pushback from the hotel labor unions but can achieve major gains during periods of economic instability when the unions are willing to make concessions. Therefore, while EBITDA margins fell from around 29% at the prior hotel sector peak in 2019 to negative territory during the height of the pandemic, Host was able to cut operating costs in many categories that should lead to long-term efficiencies. EBITDA margins for the same-store portfolio rebounded to 21.7% in 2021, and management believes that figure should rise to between 31.6% and 31.9% for 2022. We believe that as inflation drives daily rates higher and business travel slowly comes back online that hotel EBITDA margins will eventually stabilize at 34%, well above the prior peak. We think Host is currently trading at an attractive discount to its fair value estimate as we believe that investors are not only discounting the remaining gains to revenue per available room left for the company as business travel picks up but are also discounting the long-term efficiencies the company should realize over the coming years.