• Host to stay on acquisitions trail

Host Hotels & Resorts said that it would continue to be acquisitive, after spending $430m on three hotels in London, New York and Chicago during the third quarter and acquiring the JW Marriott hotel in Rio de Janeiro after the quarter ended.

The REIT said that, despite half of the deals being outside its domestic market, it expected the majority of future acquisitions to be within the US. The group said that it would continue to use its strong cash position to strengthen its portfolio, in what president and CEO Ed Walter called "a unique period of time in the acquisition market".

In a conference call for Host's third-quarter results Walter said: "These … acquisitions represent a solid cross-section of the types of transactions we are seeking to complete, assets located in major urban gateway markets that can appeal to both business and leisure travellers."

However, the Rio de Janeiro site was the group's first in Brazil and its fourth investment in Latin America, which it said was hopeful would facilitate "further investment into the dynamic resilient market".

Walter said that the four hotels had been purchased for a combined price of $478m and reflected a 2010 EBITDA multiple of slightly less than 14 times. He said: "We project our acquisition prices represent more than a 25% discount through replacement cost. The spread between unlevered return and our cost of capital has rarely been higher and the discount to replacement cost for an acquisition has seldom been more attractive."

He added: "Values have recovered maybe a bit more quickly than people were projecting. The bulk of the reason behind that is the cash flows are recovering more quickly than people have projected."

Walter acknowledged that improved cash flows would encourage development and increase supply of hotels, but did not anticipate this happening "soon". "I don't see a lot of lenders racing to provide loans for new hotels," he said.

In August the group announced that it was selling close to $400m-worth of shares. And on October 19th the company announced a $500m bond issue. At the period end date on September 10, Host had $838m in cash and $543m of available credit, giving it firepower of close to $1.4bn.  And the capital raising means that the group was not under pressure to sell hotels to maintain the liquidity required to buy sites.

Walter added: "Selling assets is more about reaping value where we think we've created as much as we can and also over time repositioning the portfolio. A lot of that's going to be dependent upon the performance of the assets that we are looking to sell." With the group "less focused" on the interior of the US, Walter said that it was an area more likely to see a sale than the better performing coastal markets.

Urban hotels, the focus of the group's buying streak, account for more than half of the rooms in Host's portfolio and performed the best in the third quarter, with revpar up by 9%, against an 8.7% increase for resort conference hotels, while revpar at suburban and airport hotels increased 8.6% and 7.8% respectively.

Total group revpar rose by 8.8%. Walter said: "As we have transitioned more fully into a recovery, the composition of that revpar growth has turned more favorable as the improvement has been increasingly driven by increases in average rate."

The group, which saw average daily rate up by 4.5% and occupancy increase by 2.9 percentage points, said that a shift in business mix towards higher rated segments and improving demand trends had allowed it to be less reliant on booking discounted business.

For the fourth quarter, the company is projecting revpar growth 5.5% to 6.5%, down on the third quarter. Walter said that the more conservative estimate was based on lower expectations for the typically slower quarter, combined with the impact of renovations in some of the group's larger hotels.

For the third quarter, comparable hotel revenue growth of 6.9% combined with an increase in comparable hotel adjusted operating profit margin of 150 basis points to see adjusted EBITDA increase by $24m on the year to $163m.

Host raised its outlook for growth in 2010 revpar to a range of 5.5% to 6.5% from between 4% and 5.5%. The group said that it expected to see additional strengthening on the rate side as the business mix continued to shift more towards the higher rated segment, and as the impact of last year's special corporate rates – determined during the weak environment – diminished and were replaced by higher price contracts.

Walter added: "However, this improvement is slightly offset by a more cautious outlook with respect to food and beverage and ancillary revenue." The group said that the revenue guidance combined with a comparable adjusted margin change of flat to up 15 basis points resulted in full year adjusted EBITDA of approximately $815m to $830m. It expected to post a net loss in the range of $150m to $137m.

Walter said: "Given that we are in the very early stages of our budgeting process, we are not providing 2011 guidance at this point. However, as we look to next year we believe that the positive trends we are seeing now will continue resulting in improvements in revpar margins and EBITDA."


HA Perspective: Host now uses the tagline "The world's premier real estate lodging company" and it is focused on moving investor expectation away from its ability as a property trader towards one of adding value by how it invests and develops assets.

Buying low and selling high is something of a mug's game for REITs which need longer term outlooks and more strategic logic to succeed. Despite study after study showing that the real economic benefit of hotel property comes with ownership horizons of 10 plus, preferably 20 plus, years, there remains something of an obsession with the short-term trades.

The longer term players bring stability and lower costs of capital. Host's evangelising should benefit the whole industry.

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