Host’s Q2 better than expected; execs warn of weaker Q3
Host’s Q2 better than expected; execs warn of weaker Q3
27 JULY 2017 2:53 PM

In light of the company’s second-quarter earnings results, executives from Host Hotels & Resorts discussed current and future Marriott International benefits and a likely weak third quarter.

BETHESDA, Maryland—Host Hotels & Resorts executives raised the company’s midpoint guidance for the full year after a better-than-expected second quarter, but executives on the real estate investment trust’s earnings call said they’re anticipating a weak third quarter.

The company reported a 1.7% year-over-year increase in comparable revenue per available room for the second quarter, which was driven by a 0.8% rise in average daily rate and a 0.7% increase in occupancy, according to Host’s earnings release.

Host shifted its total comparable RevPAR guidance for the full year to 1% to 1.75% (from 0% to 2%). The company also raised its full-year net income guidance to $615 million to $646 million (from $557 million to $621 million).

During the Q2 earnings call Thursday, Host President and CEO James Risoleo said the company saw strong numbers for the leisure segment during the quarter, which he believes will continue. But, he said, he still hopes the REIT will see more business travelers going forward.

“As long as consumer confidence remains strong and unemployment remains low and (travelers) feel good about their wallet and their balance sheet, we expect to see the leisure traveler continuing to spend money,” he said. “We’d like nothing better than to see the business traveler return and put us in a better position to yield rates in an even more aggressive manner at (our hotels).”

As of press time, Host’s stocks were down 1.25% year to date. The Baird/STR Hotel Stock Index was up 23.7% at the same time.

Weak Q3 predictions
Host’s hotels benefitted from the U.S. presidential inauguration, the Women’s March in Washington, D.C., and the 2016 Summer Olympics in Brazil during the first half of 2017, but executives said they’re expecting a weaker third quarter.

“I think when I look at the shift of the Jewish holiday and think about a 100 basis-point impact from Brazil, you should think that clearly, for us, RevPAR is going to be negative in the third quarter,” CFO Greg Larson told analysts on the call.

While third-quarter performance is expected to be negative, Risoleo added that it’s expected to rebound in the fourth quarter.

Buying, selling and underwriting strategies
Risoleo and Larson also highlighted the REIT’s methods for buying and selling assets.

Risoleo said the company is looking to acquire large assets such as Host’s Phoenician hotel in Phoenix.

“(The Phoenician) is a good example of the type of property that we’ll be looking for: a large asset with scale and an asset where we can add a lot of value, so I don’t think that you will see us exiting those markets for the sake of exiting them,” he said. “… If we have a noncore hotel that is situated in a market that is likely to underperform the rest of the portfolio over time and is in need of a lot of (capital) … those are the type of assets that we’ll continue to prune.”

He added that Host is “focused at this point in the cycle on unique hotels that (he) would categorize as iconic and would fall into that section of assets (Host owns) today.”

“We are taking into consideration the growth environment that we’re operating in as we’re underwriting hotels. And … we take into account a full (capital plan) and look to solve for an unleveraged (internal rate of return) and a (10-year) basis, that is at least 100 basis points in excess of our cost of capital, if not higher, depending on the facts and circumstances of the particular deal,” he said. “… I wouldn’t say that we’re wildly off underwriting expectations or pricing expectations of buyers today, but I would say that given the attractiveness of the debt markets and the availability of debt capital both from a pricing perspective and proceeds perspective, there has to be a real reason for an owner of an asset to want to sell today.”

Benefits from Marriott/Starwood integration
Larson told analysts Host is currently seeing benefits from some Marriott International programs, but more benefits from the integration of Starwood Hotels & Resorts into Marriott’s culture have yet to be seen. (Marriott acquired Starwood on 23 September 2016.) 

“I think we’re benefitting from quite a few of the things I mentioned … the energy ROI project, the Green Choice program, etc., but I think the benefits that will accrue to us through the Starwood/Marriott merger, really, that’s going to happen later,” he said. “Either late this year or really into ’18 and ’19 as well.”

Strong group bookings for 2018, 2019
For 2017, group bookings were a little weaker than they’ve been in the past, which was expected by Host executives, but bookings for 2018 and 2019 look strong.

“When we look at bookings in the quarter or for this year, and for ’18, ’19 and beyond, bookings were actually stronger,” Risoleo said. “Bookings … for the year, as we expected and as we talked about last quarter, were … a little bit weaker. … We are ahead of group pace in ’18 relative to where we were at this time last year for ’17, so we feel pretty good about (that).”

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