Company Reports

The REIT sector in the US offers many companies that should see relatively stable cashflow growth over the next several years. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past three years with many reaching historical levels of net operating income growth, the REIT sector underperformed the broader equity markets in 2023 and into the first half of 2024. We believe that is due to the sector’s negative correlation with interest rates, as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, interest rates have fallen since the end of July, leading to a rally for the REIT sector. Still, we still view many of companies in the US REIT sector as being undervalued as the companies should continue to produce solid long-term growth.

Despite a rally over the past two months, we still view the US REIT sector as being undervalued. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors led combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past three years, with many reaching historical levels of net operating income growth, the REIT sector has underperformed the broader equity markets in 2023 and into the first half of 2024. We believe that the cause has been due to the sector's negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, interest rates have fallen since the end of July, leading to a rally for the REIT sector. We believe that US REITs will continue to see share price movements that are inverse of interest rate movements.

No-moat Host Hotels & Resorts reported mixed second-quarter results compared with our estimates, but we don’t anticipate any material changes to our $24 fair value estimate. Occupancy increased only 10 basis points year over year to 74.4%, while average room rates were flat, leading to revenue per available room growth of just 0.1% compared with our estimate of 3.0% growth. However, hotel operating expenses were up 0.7% in the quarter, well below our estimate of 5.5% growth. Therefore, while hotel EBITDA and EBITDA margins were flat in the quarter, that is better than our estimate of a 2.9% decline in hotel EBITDA and EBITDA margins falling to 30.7%. Host reported adjusted funds from operations of $0.57 per share in the quarter, which was better than our $0.55 estimate and the $0.53 reported in the second quarter of 2023.

The US REIT sector remains significantly undervalued, in our perspective. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past two years, with many REITs reaching historical levels of net operating income growth, the sector has underperformed the broader equity markets over the past two years. We believe that the cause has been the sector’s negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, we don’t believe that higher rates significantly change our fair value estimates for the sector. Additionally, interest rates are down from the October 2023 highs, and REIT share prices have generally inversely followed the movements of the US 10-year Treasury.

While the hotel industry saw a rapid recovery from the coronavirus pandemic as people sought to resume normal travel plans as soon as possible, growth across the hotel industry has mostly stagnated over the past two years. Leisure travel returned to near prepandemic levels in 2021, but high inflation in 2022 and 2023 caused many consumers to prioritize paying for rising costs on necessities like food and rent over additional vacation travel. Therefore, while business and group travel continue to slowly recover, weakness among leisure led to occupancies across the hotel industry stagnating approximately 5% below the 2019 peak. The average daily rate continues to rise across the industry, but the growth over the past two years has been in line with inflation. With flat occupancy growth and decelerating rate growth, revPAR growth for the industry has fallen to flat to low single digits thus far in 2024. However, we believe that as inflation falls, leisure travel will stabilize and eventually return to the prior peak and, combined with the continued recovery of business and group travel, future years should see revPAR growth closer to 3%.

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, has entered an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.

First-quarter results for no-moat Host Hotels & Resorts were mixed compared with our estimates, though we don’t see anything in the quarter that would materially change our $25 fair value estimate. Occupancy stayed flat at 68.4% in the quarter compared with the first quarter of 2023, while average room rates declined 1.3% year over year. As a result, revenue per available room fell 1.2%, which was below our expectations of 2.3% growth in the quarter. However, nonroom revenue did better as strong group business led to higher food and beverage spending. As a result, same-store revenue was up 1.7%, in line with our assumption for the quarter. Meanwhile, hotel operating expenses were up 4.0% in the quarter, which was lower than our estimate of 5.6% growth for expenses, leading to a hotel EBITDA decline of 2.9% that was better than our estimate of a 7.0% decline. Host reported adjusted funds from operations of $0.60 per share that beat our $0.50 estimate for the first quarter.

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, has entered an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

No-moat Host Hotels & Resorts reported fourth-quarter results that were in line with our expectations, giving us confidence in our $24 fair value estimate. Occupancy increased 80 basis points year over year to 67.2% but is still below the 75.6% seen in the fourth quarter of 2019. Average daily rate was up 0.4% year over year and is now 17.5% higher than the fourth quarter of 2019. As a result, revenue per available room grew 1.5% in the fourth quarter, slightly better than our estimate of 0.6%, and is now 4.4% higher than 2019. However, hotel operating expenses were up 3.4% in the quarter, leading to hotel EBITDA margin falling 180 basis points to 28.1% and hotel EBITDA falling 5.3% year over year, though that is better than our estimate of an 8.3% decline. Host reported adjusted funds from operations of $0.44 per share in the fourth quarter, slightly better than our $0.40 estimate.

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, has entered an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.

Third-quarter results for no-moat Host Hotels and Resorts were relatively in line with our expectations, leading us to reaffirm our $23 fair value estimate. Occupancy increased 150 basis points to 71.8% in the third quarter, though it is still below the 80.0% level reported in the third quarter of 2019. Meanwhile, the average daily rate fell 0.4% year over year but is up 16.3% over the same period in 2019. As a result, revenue per available room grew 1.8% year over year, in line with our estimate of 2.1% growth, and is up 4.4% over the third quarter of 2019. However, food and beverage revenue fell 3.4% and other hotel revenue fell 7.9% in the quarter, leading to same-store revenues falling 0.5%. Same-store operating expenses still rose 2.7%, leading to hotel EBITDA margins falling 280 basis points to 26.6% and hotel EBITDA falling 10.2% year over year, worse than our estimate of a 6.0% decline. Host did report adjusted funds from operations of $0.41 per share in the quarter, better than our $0.36 estimate. However, that includes $54 million, or $0.08 per share, of business interruption proceeds from lost operations caused by Hurricane Ian in September 2022.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, has entered an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.

Host Hotels and Resorts reported second-quarter results that were mixed compared with our estimates, though we didn't see anything in the quarter that would materially change our $23 fair value estimate for the no-moat company. Occupancy increased only 20 basis points year over year to 74.2% in the second quarter. Average daily rate improved 2.4%, leading to revenue per available room growth of just 2.7%, which missed our 8.8% estimate. However, while comparable operating expense growth of 11.3% outpaced revenue growth in the quarter, the reported figure was lower than our estimate of 18.5% operating expense growth. As a result, hotel EBITDA declined 8.8% in the second quarter, slightly better than our estimate of a 14.0% decline. Host reported second-quarter adjusted funds from operations of $0.53 per share, which is $0.05 below the $0.58 figure the company reported in the second quarter of 2022 but in line with our $0.52 estimate.

First-quarter results for no-moat Host Hotels & Resorts were better than we anticipated, giving us confidence in our $23 fair value estimate. Occupancy improved to 68.4%, which is up from 54.4% in the first quarter of 2022, but it is still below the 76.3% level reported in the first quarter of 2019. Average daily rate improved 4.2% year over year and is up 19.8% compared with the first quarter of 2019. As a result, revenue per available room was up 31.1% in the first quarter, slightly ahead of our 28.6% estimate. Hotel EBITDA margins improved to 32.6% from 30.3% a year ago, leading to hotel EBITDA growth of 44.1%, well ahead of our estimate. Host reported adjusted funds from operations in the first quarter of $0.55 per share, 14 cents better than our $0.41 estimate and 16 cents higher than the $0.39 figure reported in the first quarter of 2022.

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, has entered an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.

Host Hotels and Resorts reported fourth-quarter earnings that were in line with our expectations, leading us to reaffirm our $24 fair value estimate for the no-moat company. Occupancy improved to 65.7% in the fourth quarter compared with 57.0% in the fourth quarter of 2021, though that is still below the 75.5% occupancy level reported in the fourth quarter of 2019. The average daily rate was up 11.7% year over year and 15.6% relative to the fourth quarter of 2019. As a result, revenue per available room increased 28.7% year over year, which is relatively in line with our estimate of 32.7% growth, and is now 0.6% higher than the fourth quarter of 2019. Hotel EBITDA margins also improved 110 basis points year over year to 29.5%, leading to hotel EBITDA growth of 36.3% that was relatively in line with our estimate of 34.8% growth. Host reported adjusted funds from operations of $0.44 per share in the fourth quarter that matched our estimate and was 51.7% higher than the $0.29 per share figure the company reported in the fourth quarter of 2021.

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.

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, has entered an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.