Host Hotels & Resorts Offers Growth and Income in One REIT

Real estate investment trusts typically are purchased for their dividends. But investors should not just buy the highest-yielding REITs as that can lead to trouble. Instead, investors should focus on high-quality businesses with strong property portfolios. Stocks should be selected based on growth and dividend income. Host Hotels & Resorts Inc. does not have the highest dividend yield around. With a 4.5% yield, investors might be tempted to avoid HST in favor of some of its higher-yielding peers. But Host provides more than double the average dividend yield of the S&P 500 Index, and with interest rate hikes put on hold by the Fed it has a renewed growth tailwind going forward. In all, Host is a mix of growth and income that makes the stock an attractive holding for income investors. Consistent Cash Flow, Steady Growth Host Hotels & Resorts is the largest lodging REIT, and the only lodging REIT in the S&P 500 Index. It is one of the largest owners of luxury and upper-upscale hotels, with a market capitalization of $14 billion. The company owns 87 properties in the U.S. and five properties internationally, which together have about 51,500 rooms. Its hotels are operated under strong brand names, such as Marriott (78% of revenues) and Hyatt (14% of revenues). Host currently is reshuffling its property portfolio. It is divesting hotel properties with low revenue per room and high capital expenses, and in turn is using the proceeds to invest in properties with stronger fundamentals and growth potential. Toward this goal, Host plans to sell its three hotels in Brazil and focus on its core North American market. The REIT will use the proceeds from the asset sales to invest in more promising hotels and implement share repurchases. In 2018, Host conducted $2.2 billion of asset dispositions and $1.6 billion of acquisitions. Recent acquisitions show the positive impact of Host's portfolio reshuffling strategy. Last February Host acquired the 1 Hotel South Beach for $610 million, which is already the third-highest RevPAR (revenue per available room) hotel in the company's portfolio. The continuous upgrading of the property portfolio will help fuel revenue and funds from operations (FFO) growth. In early May Host Hotels & Resorts reported results for its fiscal first quarter. The company grew its revenues by 3% and its adjusted FFO per share by 12% thanks to the acquisition of four premier hotels and a slight improvement in average revenue per room. This was a strong performance for HST, as double-digit growth in FFO per share is rare for a REIT. Indeed, HST has exceeded analysts' estimates of FFO per share for six consecutive quarters. For the full year, management expects growth in average revenue per room of 0% to 2%. Moreover, thanks to strong business momentum, management raised its FFO guidance for the full year from a range of $1.72 to $1.81 per share to a range of $1.76 to $1.84 per share. Risk Factors Investors should consider the risks associated with buying individual stocks. No stock is a risk-free investment, and Host is no different. First, Host's business model is under pressure. The broader hotel industry is challenged by a whole new wave of competition from Internet-based services such as Airbnb. Separately, Host would be hurt by a recession. During economic downturns, travel for business and leisure typically declines, which results in lower revenue and profit for hotels. During the Great Recession of 2008-2009, Host saw its FFO per share plunge 71%, from $1.74 in 2008 to $0.51 in 2009, and the company also slashed its dividend. Fortunately, there are factors mitigating these risks for Host. Its focus on luxurious hotels provides the company with exposure to the higher-end consumer, which so far has proven reluctant to switch over to services such as Airbnb. Plus, the Federal Reserve has adopted a more dovish stance toward interest rates this year. Continued interest rate hikes have been put on hold, with the possibility of a cut at some point in 2019. Steady or falling interest rates are broadly positive for REITs, which rely on debt financing to acquire properties. And Host has a strong balance sheet, which adds a margin of safety. Its net debt is $3.8 billion, which is less than five times its annual free cash flow. Moreover, the REIT has a leverage ratio of 1.9, which is much lower than the leverage of most REITs. Host has a projected FFO payout ratio of 44% for 2019, which indicates the dividend is secure even in the event of a significant drop in FFO. As a result, Host appears to have a stronger balance sheet and better dividend coverage than many higher-yielding REITs. Expected Returns Host stock has traded at an average price-to-FFO (P/FFO) ratio of 12.9 during the last decade, excluding the outlier years 2010-2011, in which depressed FFO resulted in abnormally high P/FFO ratios. Host now trades at a much lower multiple of 9.8, which is a very modest valuation given the company's strong fundamentals and growth. Even a P/FFO ratio of 11, which would still be fairly low, could boost returns for investors buying at this level. A valuation multiple of 11 would result in annual returns of 2.3% per year over the next five years. Plus, annual growth in FFO per share will generate positive shareholder returns. Lastly, the dividend yield of 4.5% is attractive and appears sustainable. Given all these factors, shareholders buying at the current price could earn high single-digit total returns through a combination of a higher valuation multiple, FFO growth and dividends. As a result, HST stock is a steady stock pick for income investors.

Host Hotels & Resorts Offers Growth and Income in One REIT

The operator of upscale hotels is the only lodging REIT in the S&P 500 Index and is trading at a below-average multiple.

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