Host Hotels & Resorts CEO Sees No Black Swans on the Hotel Industry’s Horizon

Industrywide, hotel company executives have remained largely unconvinced that any potential macroeconomic headwinds could disrupt the industry’s recovery from the pandemic.

Jim Risoleo, president and CEO of Host Hotels & Resorts — one of the hotel industry’s largest real estate investment trusts — has both feet firmly planted in that field.

During a conference call to discuss second-quarter earningsRisoleo said hotels are insulated from the effects of inflation, as consumers have shown no reluctance to spend on travel and experiences.

“Hotels benefit from the ability to reprice rooms on a nightly basis ahead of rising costs, even during periods of high inflation, as was the case in the 1970s,” he said. “Second, consumers and businesses have significantly more cash on hand with leverage and debt-service ratios better than they were prior to the great financial crisis in 2008.

“The labor market is also exceptionally strong, with over 3 million more jobs open than we had at the height of the last expansion and an unemployment rate hovering near a five-decade low. In addition, we have continued to benefit from a consumer spending rotation away from goods and into services, including travel, and we expect this trend to continue.”

Transient demand has been phenomenal for Host’s resort properties, Risoleo said. During the second quarter, five of its resorts had average transient rate that exceeded $1,000, including two resorts the company acquired in 2021: the Four Seasons Resort Orlando at Walt Disney World Resort — where transient rates were over $1,500 — and the Alila Ventana Big Sur in California, where rates exceeded $2,000.

“We do have some seasonality involved here with respect to our properties, but the fact that we drove $1,000 transient ADRs in five resorts in [the second quarter] is very positive,” Risoleo said. “We’re not seeing the consumer pullback whatsoever, and we intend to continue to ask for rates going forward. We’re optimistic that we’re going to be able to continue to drive rate, maybe not at the same level as we did in 2021 and this year, but we’ll continue to ask for rate going forward as long as the demand is there.”

The pandemic and the global supply chain crisis slowed down construction timelines and lenders have been more careful on whether to provide financing for new-build hotels. Risoleo said that it has drastically reduced new hotel supply coming online that would directly compete with Host’s portfolio.

“We expect to benefit from exceptionally low supply growth for the next several years,” Risoleo said. “The total pipeline has fallen by 11% since the start of the pandemic, and the number of rooms in construction is down 30%. As a result, industry projections suggest annual supply growth of just over 1% through 2023 well below the long- term average of 1.8%.

“In contrast, supply growth at the start of the last three downturns was running at over 2.5%. The market-weighted supply growth for Host’s portfolio is projected to be approximately 1% as we will benefit from exceptionally low growth in places like San Diego , Hawaii and San Francisco.”

Host’s peers among real estate investment trusts with full-service hotels are still waiting for the group and business-transient segments to recover. In the first quarter, group room nights at Host’s properties were down 42% compared to the first quarter of 2019, but by the second quarter, group room nights had narrowed the gap, just 8.5% behind pre-pandemic levels.

“Meeting planners have not hit pause. We’re still seeing strong booking activity into 2023 with 2.2 million definites on the books for 2023,” Risoleo said. “The total group revenue pace continues to improve; it’s down 9% now to 2019 with strong ADR growth. Hotels booked I think 253,000 group room nights in the quarter for 2023. That activity was about 83% of 2019 levels, which is about on par with where it was in quarter one. So very encouraging as we look out beyond even 2022.”

He added that the recovery of business travel isn’t going to be even across all of Host’s urban markets, which include Chicago, New York, Boston, San Francisco and Miami.

“We continue to pick up business transient room nights, and we’re not seeing any softness there whatsoever,” Risoleo said. “I think it’s just a matter of time that’s going to evolve and it’s not going to evolve evenly across the country.

“There are going to be some markets that are going to take longer to get back to 2019 levels and others that are roaring back right now. So the short answer is we fully anticipate that we’re going to see a recovery to prior peak occupancy levels both on the [business-transient] side and on the group side.”

Across the hotel industry, properties have remained open with less than optimal staffing levels, and Risoleo said Host’s portfolio is operating with about 94% of recommended staffing levels.

“I think the labor situation is going to stabilize as we’ve said before, and we look at this on a regular basis,” he said. “We anticipate wage growth this year, 4% to 5%, probably 4.5% to 5% that is to be a little more tight in the range. So it’s not off the charts.”

In April, Host sold the Sheraton New York Times Square Hotel for $373 million. During Thursday’s earnings conference call, Risoleo said the company is patiently determining how best to deploy capital.

“We are uniquely positioned as a buyer of assets in this marketplace given where the debt capital markets are today, the fact that it is virtually impossible to get meaningful levels of debt on the acquisition front,” he said. “We’re tracking a lot of transactions, and we will balance whether or not the right decision is to invest in an asset given where our cost of capital is today, and what the underwriting requirements would have to be versus buying back our stock over the course of the balance of this year and into next year.”

One analyst asked whether Host could be more active in development, and Risoleo said while Host is willing to spend on capital improvement projects in its portfolio, the REIT is unlikely to uncover dirt for new-build projects.

“I don’t think you should expect us to be a greenfield developer. We’re not out doing big ground-up deals,” he said. “We just don’t think that that is a good use of our capital. And I might add that as part of the Noble investment, we do have the ability to participate in a development fund with Noble and bring our expertise to bear and not tie up all of our capital on our balance sheet. So that’s one of the reasons we made the strategic investment in Noble.”

During the quarter, Host Hotels & Resorts reported revenue of $1.38 billion, up 112.8% over the second quarter of 2021, but down 6.9% from the second quarter of 2019, according to its earnings release. Net income was $260 million, and adjusted EBITDA for real estate was $500 million.

The company’s portfolio reported second-quarter RevPAR of $219.30, which was up 3.7% from the same quarter in 2019. Average daily rate was $296.91, which was 14.8% higher than the second quarter of 2019. Hotel occupancy was 73.9%, down 9.7% from the same quarter in 2019.

As of press time, Host’s stock was trading at $17.68 per share, up 1.7% year to date. The Nasdaq Composite Index was down 19% for the same period.

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