Despite a strong first quarter for its portfolio and a secure liquidity position, Host Hotels & Resorts is tempering expectations for the remainder of 2022 as the prospects of recovery remain uncertain.
Jim Risoleo, president, CEO and director at the Bethesda, Maryland-based hotel real estate investment trust — the hospitality industry's largest with 78 properties and 42,334 rooms — said leisure demand has been consistently strong over the past several quarters, but hotel rates won't be able to stay elevated for long. Host's resort properties led the portfolio in the first quarter, but Risoleo said he expects some demand to moderate at those properties in the summer months.
"We have talked a lot about the [first quarter] performance and April performance internally at Host, and we just don't think we're going to be able to sustain the level of rate that we achieved in [the first quarter] and in the month of April at our resort properties," he said. "The spring break that occurred this year was off the charts. It really was very, very, very strong. And we expect to see some moderation back to the mean."
When pressed about the expected declines, Risoleo said Host was being conservative and that demand at its resort properties is still strong.
"I don't want to give the impression that our 16 resorts and those five properties that had over $1,000 in [average daily rate] for the quarter are going to fall off the face of the earth," he said. "They're not, I mean, the demand is still there. We're still seeing it. ... The One Hotel South Beach in Miami, the Ritz-Carlton in Naples, Four Seasons Orlando — there's just natural seasonality we think may temper some of the of the demand at those properties."
Group demand and business transient demand are trending upward, but those segments are still a long way from recovering, Risoleo said. In the meantime, a strong resort portfolio and high-performing assets over the past year "served as a good bridge to get us to the point where business transient and group recover," he added.
"We are seeing group and business transient come back, which is going to clearly result in a [revenue per available room] that in the aggregate is lower than what we saw in the first quarter and in the month of April," he said. "We're delighted to have the business, make no mistake about it. We're very excited to see group and [business transient] come back as strong as they have been coming back."
During the first quarter, Host's 16 resort properties achieved outlet revenue per available room — or spending by guests outside the room — of $180, which Risoleo said was "clearly a high watermark for our portfolio and I would say industrywide, it's a high watermark." He added banquet revenue in the first quarter grew $24 million over the fourth quarter of 2021 and that groups might lowball their budgets at the contract stage but in fact are spending more on property once they finally meet.
"When they arrive at the hotels, they're spending a lot more money than they contracted for, which makes it a little bit difficult to forecast going forward," Risoleo said. "That's one of the reasons why we're not comfortable talking about the second half of the year but only talking about the second quarter at this point in time."
Booking windows for group business at Host's properties are lengthening, Risoleo said, but he reiterated executives believe it's premature to provide a full-year outlook.
"It's very difficult at this point in time to forecast how this recovery is going to continue to unfold," he said. "So much of the business is being booked short-term, although we are starting to see the booking window extend."
For the second quarter, Host projects hotel revenue per available room between $195 and $205, which is down between 8% and 3%, respectively, of the RevPAR levels achieved in the second quarter of 2019. The REIT expects net income in the second quarter of 2022 between $147 million and $181 million, and adjusted earnings before interest, taxes, depreciation and amortization between $375 million and $410 million.
Asset Acquisitions and Dispositions
During the first quarter, Host Hotels & Resorts closed on the acquisition of the 319-room Hotel Van Zandt in Austin, Texas, for approximately $246 million. The REIT sold the Sheraton Boston Hotel for $233 million, including a $163 million bridge loan to the buyer. Subsequent to the end of the quarter, Host sold the Sheraton New York Times Square Hotel for $373 million, including a $250 million bridge loan to the buyer.
Asked if Host plans to fully exit its major urban markets, Risoleo said the company still has a "healthy presence" in both Boston and New York.
"The Sheraton [Boston], given its location in Back Bay and the size of the hotel and the plans on the part of the state of Massachusetts to sell the Hynes Center — which the hotel was very dependent upon for groups — it doesn't have an adequate meeting space platform to service groups," Risoleo said. "The group business in Boston now has moved to the main convention center, and the hotel needed a lot of capital, a significant amount of deferred [capital expenditures] at that property. It just made a lot more sense for us to dispose of that asset."
In New York, Host executives similarly determined selling the Sheraton New York Times Square was a better decision than investing significant capital in the property.
"We have the New York Marriott Marquis in Times Square and the Financial Center Marriott in downtown New York," Risoleo said. "Both are in incredible shape. They were both part of the Marriott transformational capital program. The assets are well-primed to really outperform as the recovery continues apace, whereas the Sheraton is again an older hotel in need of substantial CapEx."
In 2021, Host acquired seven hotels and two golf courses, spending a combined $1.6 billion. Risoleo said the REIT has $2 billion in liquidity and is in a good position to buy hotels and resorts when the timing is right.
"Pricing expectations for a number of the properties that have been in the market early in this year have been beyond our reach," Risoleo said. "We just have not been able to pencil the underwriting to make sense. ... Other assets that we might want to acquire just aren't available for sale right now as owners sit and wait until cash flow recovers."
He added Host will be able to offer all-cash deals that buyers will be more interested in as the year unfolds.
"As we get later into this year and opportunities become available, [we'll] really pivot and again be the buyer of choice as we were last year, and take deals on all-cash and not have to worry about the state of the debt capital markets today, which have gotten a little bit choppy," Risoleo said. "There's less loan-to-value proceeds, higher interest rates, and given the the commentary and actions that the Fed has taken, I think that patience is warranted at this point in time."
Earlier this year, Host announced a joint venture with Noble Investment Group to buy select-service hotel assets. Host executives gave more color on that deal during the fourth quarter and full-year 2021 earnings conference call, and Noble CEO Mit Shah spoke to Hotel News Now in March at the Hunter Hotel Investment Conference about the deal.
First Quarter Performance
During the quarter, Host Hotels & Resorts reported revenue of $1.1 billion, up 169.2% over the first quarter of 2021, but down 22.7% from the first quarter of 2019, according to its earnings release. Net income was $118 million, and adjusted EBITDA for real estate was $306 million.
The company's portfolio reported first quarter RevPAR of $166.93, which was down 18.5% from the same quarter in 2019. Average daily rate was $305.63, 13.9% higher than the first quarter of 2019, yet hotel occupancy was 54.6%, down 28.4% from the same quarter in 2019.
As of press time, Host's stock was trading at $19.67 per share, up 13.2% year to date. The Nasdaq Composite Index was down 21.6% for the same period.