6% Wage Rise And Maui Recovery Will Shape Hotel Future

Key Takeaways

• Rising wage expenses and external challenges like hurricanes and travel imbalances pressure Host Hotels & Resorts' margins and revenue growth.
  
• Economic uncertainties and recovery delays from past events influence cautious growth projections and potential earnings shortfalls.
  
• Host Hotels & Resorts faces pressure from wage increases, weather disruptions, and uneven leisure recovery, posing risks to revenue stability and long-term growth.

Catalysts

An S&P 500 company and is the largest lodging real estate investment trust and one of the largest owners of luxury and upper-upscale hotels.

• Host Hotels & Resorts anticipates a 6% increase in wage and benefit expenses in 2025, impacting overall hotel operating expenses and placing downward pressure on net margins.
  
• The company faces challenges from external events, such as Hurricanes Helene and Milton, which negatively impacted adjusted EBITDA by $15 million in 2024, increasing uncertainty in revenue projections.
  
• A potential slowdown in the international travel imbalance, where outbound demand exceeds inbound, impacts revenue growth, as affluent American consumers continue preferring international travel destinations over domestic stays.
  
• The gradual recovery in Maui following the 2023 wildfires and the shift from government to corporate negotiated segments for transient business, while positive, will require time and may result in lower-than-expected earnings for 2025.
  
• Economic conditions, including nonresidential fixed investment and potential volatility in GDP growth, add uncertainty to future revenue trajectories and contribute to a cautious stance on growth projections.

Host Hotels & Resorts Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Host Hotels & Resorts compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Host Hotels & Resorts's revenue will grow by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 12.2% today to 7.8% in 3 years time.
• The bearish analysts expect earnings to reach $466.5 million (and earnings per share of $0.67) by about April 2028, down from $697.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.6x on those 2028 earnings, up from 13.8x today. This future PE is greater than the current PE for the US Hotel and Resort REITs industry at 18.5x.
• Analysts expect the number of shares outstanding to decline by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.55%, as per the Simply Wall St company report.

Host Hotels & Resorts Future Earnings Per Share Growth

Risks

• Host Hotels & Resorts faces challenges from increased wages and benefits, which impacted their EBITDA margins by 60 basis points in 2024 and are expected to further increase by over 6% in 2025, potentially reducing net margins.
  
• The recovery in Maui, a key revenue driver, was significantly impacted by past wildfires, and while leisure recovery shows promise, full recovery is uncertain. This can lead to volatility in future revenues and earnings.
  
• The reliance on transient revenue growth as evidenced by its uneven recovery, especially in affected areas like Maui, poses risks if leisure travel demand weakens, impacting overall revenue stability.
  
• Business interruption due to hurricanes resulted in a $15 million impact on 2024 adjusted EBITDAre. Future weather events could similarly disrupt revenue and earnings.
  
• Comparisons to prior year group revenue in crucial markets like San Francisco and Maui show downturns, with operational complexities potentially impacting long-term revenue growth if trends continue.

Valuation

• The assumed bearish price target for Host Hotels & Resorts is $16.13, which represents one standard deviation below the consensus price target of $18.53. This valuation is based on what can be assumed as the expectations of Host Hotels & Resorts's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $22.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.0 billion, earnings will come to $466.5 million, and it would be trading on a PE ratio of 29.6x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $13.82, the bearish analyst price target of $16.13 is 14.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.