Host Hotels & Resorts Inc. (HST), the largest lodging real estate investment trust (REIT) in the U.S., has recently acquired W Union Square, a premium luxury hotel in New York, through a joint venture in which it has a majority stake. The transaction, the terms and conditions of which were not revealed, and it is expected to be completed by September 2010.
 
W Union Square was previously owned by Istithmar World Capital, the Dubai World unit that bought the property in 2006 for $285 million. However, the hotel, which was placed in the premium category, was hit hard by the economic downturn as consumers reduced their discretionary spending.
 
Furthermore, Istithmar had defaulted on loans taken for purchasing the hotel. A legal suit relating to the default also alleged that no payments were made on mezzanine debt since October 2009. Consequently, W Union Square was sold to a joint venture led by Host Hotels for an undisclosed amount bringing an end to its bankruptcy proceedings.
 
Istithmar retains a minority stake in the hotel. The property is operated by W Hotel Management Inc., a unit of New York-based Starwood Hotels & Resorts Worldwide Inc. (HOT), the third-largest U.S. lodging company. W Hotel Management Inc. will continue to manage the hotel under the existing agreement.
 
Host Hotels is one of the largest owners of luxury and upper-upscale hotels, primarily operated under premium brand, such as Marriott, Westin, Sheraton, Ritz-Carlton, Hyatt, W, Four Seasons and St. Regi. Over the years, the company has executed a focused and disciplined long-term strategic plan to acquire high quality lodging assets in hard-to-replicate areas, which have the potential for significant capital appreciation.
 
Host Hotels anticipates that gradual revival of the overall economy will positively affect its operating results in 2010, with comparable hotel RevPAR (revenue per available room) expected to increase in the range of 1% to 4% for the full year.
 
Host Hotels further anticipates FFO (funds from operations) for 2010 in the range of 58 cents to 65 cents per share, up from its earlier guidance of 41 cents to 57 cents. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
 
However, the continuous acquisition spree of Host Hotels involves significant upfront operating expenses with limited near-term profitability. New hotels usually go through longer gestation to create revenues and are a drag on performance till they start generating healthy margins. Consequently, we maintain our Neutral rating on Host Hotels with a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.
Read the full analyst report on “HST”
Read the full analyst report on “HOT”
Zacks Investment Research