Leisure Demand Recovery And Acquisitions Will Strengthen Future Performance

Key Takeaways

• Strong transient room revenue growth driven by leisure demand, strategic acquisitions, and renovation projects enhance future revenue and earnings potential.
  
• Investment-grade balance sheet and excess liquidity enable flexibility for strategic investments and shareholder value creation through potential stock buybacks.
  
• Rising wage pressures and operational challenges, including from natural disasters and international travel imbalances, threaten Host Hotels & Resorts' net and EBITDA margins.

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 is experiencing strong transient room revenue growth, particularly driven by leisure demand in Maui and other key markets like New York and O'ahu. This trend is expected to positively impact future revenue growth as leisure demand continues to recover and exceed previous levels.
  
• The company has acquired $1.5 billion worth of iconic real estate in new markets, which are performing well according to underwriting expectations. These strategic acquisitions are likely to enhance revenue and earnings through increased market presence and adding high-quality assets to the portfolio.
  
• Host Hotels is investing significantly in renovations and expansion projects, such as the Hyatt Transformational Capital Program and the Four Seasons Resort Orlando condo development. These initiatives are projected to improve net margins and future earnings by attracting more guests and increasing ancillary revenues.
  
• The company is focused on group business recovery, with an increased definite group room nights on the books for 2025. This increase in group business and related banquet and catering revenue will likely bolster revenue and earnings through higher occupancy and out-of-room spend.
  
• Host Hotels maintains an investment-grade balance sheet and has excess liquidity, providing the flexibility to capitalize on future opportunities, including stock buybacks and strategic investments. This financial strength supports the potential for earnings growth and value creation for shareholders.

Host Hotels & Resorts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Host Hotels & Resorts's revenue will grow by 4.2% annually over the next 3 years.
• Analysts are assuming Host Hotels & Resorts's profit margins will remain the same at 12.2% over the next 3 years.
• Analysts expect earnings to reach $786.0 million (and earnings per share of $1.07) by about March 2028, up from $697.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 15.1x today. This future PE is lower than the current PE for the US Hotel and Resort REITs industry at 24.5x.
• 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 7.96%, as per the Simply Wall St company report.

Host Hotels & Resorts Future Earnings Per Share Growth

Risks

• The company faces operational risks due to increased wages and fixed expense pressures, which negatively impacted their hotel EBITDA margins, potentially affecting net margins.
  
• The recovery of operations in Maui is uncertain and is expected to pose a significant challenge, including a potential variable $15 million to $30 million in operational improvements, affecting revenues and earnings.
  
• The impact of hurricanes has caused substantial property damage and remediation costs, including at the Don CeSar, which impacts capital expenditures and future EBITDA margins due to business interruptions.
  
• The rising costs related to labor, with overall wage and benefit expenses expected to increase over 6%, are putting pressure on operating expenses and affecting net margins.
  
• The company anticipates some challenges due to the international travel imbalance, which might continue to weaken and affect group and business transient segment growth, potentially impacting revenue growth.

Valuation

• The analysts have a consensus price target of $19.611 for Host Hotels & Resorts based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.4 billion, earnings will come to $786.0 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $15.07, the analyst price target of $19.61 is 23.2% higher.
• 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.