HST Completes Union Square Takeover - Analyst Blog

A recent favorable bankruptcy court ruling paved the way for the acquisition of W Union Square, a premium luxury hotel in New York, by Host Hotels & Resorts Inc. (HST), the largest lodging real estate investment trust (REIT) in the U.S. A bankruptcy petition was filed in March 2010 by a junior mezzanine lender alleging that the hotel owed about $100 million to its creditors.

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.

Post acquisition, 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.

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, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation.