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Funding for Entrepreneurs, StartUp Businesses, and the SME sector is a complex and confusing market. This guide aims to help would-be borrowers the alternatives open to them to achieve their specific funding objectives.
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2. INTRODUCTION 2
TABLE OF CONTENTS 2
UNIT I 4
TABLE OF CONTENTS I 4
EXECUTIVE SUMMARY I 5
BUSINESS DESCRIPTION 7
BRIEF COMPANY HISTORY 9
PRODUCTS AND COMPETITION 12
COMPANY STRUCTURE 16
SUBSIDIARIES/EQUITY IN AFFILIATES 17
REIT SPECIFIC INFORMATION 18
COMPANY CONTROL 22
LOOKING FORWARD 27
UNIT II 30
TABLE OF CONTENTS II 30
EXECUTIVE SUMMARY II 31
MERGERS & ACQUISITIONS 32
RELEVANT COMPETITORS 33
STOCK PRICE PERFORMANCE 36
ABSOLUTE PERFORMANCE 38
GROWTH PERFORMANCE 48
FINANCIAL PERFORMANCE 49
DUPONT ANALYSIS 51
ALTMAN’S Z-SCORE 53
UNIT III 54
TABLE OF CONTENTS III 54
EXECUTIVE SUMMARY III 55
DEBT STRUCTURE 56
LEVERAGE RATIOS 58
COST OF EQUITY 60
TARGET CAPITAL STRUCTURE 65
MARKET VALUE CAPITAL STRUCTURE 68
PROJECTED CAPITAL STRUCTURE 69
DISTRIBUTIONS AND PLOWBACK 70
2
3. UNIT IV 71
TABLE OF CONTENTS IV 71
EXECUTIVE SUMMARY IV 72
FORECAST ASSUMPTIONS 73
ALTMAN’S Z-SCORE PRO-FORMA 79
DUPONT ANALYSIS PRO-FORMA 81
DUPONT SPREAD PRO-FORMA 82
PRO FORMA FINANCIAL RATIOS 83
PRO FORMA FINANCIAL STATEMENTS 84
ASSET OVERVIEW 85
LIABILITIES AND EQUITY OVERVIEW 87
PRO FORMA INCOME STATEMENT 89
UNIT V 93
TABLE OF CONTENTS V 93
EXECUTIVE SUMMARY V 94
CASH FLOW VALUATION 95
FREE CASH FLOW METHOD 96
ADJUSTED PRESENT VALUE METHOD 98
FREE CASH FLOW TO EQUITY METHOD 100
SENSITIVITY ANALYSIS 102
MARKET VALUE 103
UNIT VI 104
TABLE OF CONTENTS VI 104
EXECUTIVE SUMMARY VI 105
MULTIPLES ANALYSIS 106
UNIT VII 109
TABLE OF CONTENTS VII 109
CONCLUSION: CASH FLOW VALUATIONS 110
CONCLUSION: MULTIPLES ANALYSIS 111
CONCLUSION: TARGET PRICE 112
SOURCES 113
APPENDIX 114
3
4. UNIT I: COMPANY OVERVIEW 4
TABLE OF CONTENTS I 4
EXECUTIVE SUMMARY I 5
BUSINESS DESCRIPTION 7
BRIEF COMPANY HISTORY 9
PRODUCTS AND COMPETITION 12
COMPANY STRUCTURE 16
SUBSIDIARIES/EQUITY IN AFFILIATES 17
REIT SPECIFIC INFORMATION 18
COMPANY CONTROL 22
LOOKING FORWARD 27
4
5. Executive Summary
Business Description
Host Hotels & Resorts Inc. (HST) is a premier lodging real estate company and investment trust
which owns high quality lodging assets in major markets including urban, airport, resort, and
convention settings. Host’s strategy focuses on maximizing the use of valuable assets to generate
cash flows, while allocating capital expenditures in optimal ways to ensure each hotel achieves
superior performance. This creativity and ingenuity is done through:
Relying on masterful management companies to operate each property to its peak potential
Acquiring a number of promising properties through joint ventures, partnerships, and large
amounts of capital.
Cash flow generation which are dictated by a combination of operating activities, investing
activities, and financing activities
Techniques used to fund the development and renovation of new and improved properties.
Host is invested in a long term strategy that it believes will allow it to thrive in the coming years and
beyond. Big time acquisitions, advantageous use of joint ventures overseas, and a commitment to
continue with major redevelopment projects are what Host believes are key to a healthy future.
Products & Competition
At its core, HST offers one dominating aspect to its customers - high quality lodging. Within this
encompassing description, there are 18+ different brands and classes of hotels in which Host invests
its time and capital. Most of these brands have a novelty associated with them in the consumer’s eye.
18+ management companies and brands are responsible for the
operations and marketing of Host’s properties.
Notable brands/management companies include: Marriott, Hilton,
Four Seasons, and Ritz Carlton.
Host owns a total of 110 hotels in 16 different countries totaling over
50,000 rooms.
HST’s portfolio consists of Luxury and Upper Upscale hotels. These
major classes are operated in four separate property types: Urban,
Suburban, Airport, and Residential (see chart lower left). A majority
of their revenues (75%) are earned in Upper Upscale properties, while
22% is earned in the Luxury category (see chart upper left). Host
controls this market share in heavily populated cities and contracts
with prestigious brand name management companies to run hotels.
In terms of market capitalization, Host’s competitors typically fall on
a smaller scale. Hospitality Properties Trust (HPT) has market
capitalization of $4.32B, approximately 26% of what Host has.
However, it is evident that revenue growth among Host’s smaller competitors has been much steeper.
Competitors HPT, RLJ Lodging Trust (RLJ), and LaSalle Hotel Properties (LHO) have one-year
revenue growth between 10% and 21%, compared to Host’s 2.12%. One fundamental difference
between Host and some of its competitors is the types of properties owned. Host specializes in hotels,
while comparable REITs venture into other spaces. HPT is invested in 185 travel centers in addition
to its 291 hotels. Additionally, Host’s competitors don’t solely focus on luxury and upper upscale;
others are invested in select service, extended stay, and other types of hotel properties. The value gap
Host Hotels & Resorts
CEO:
Edward Walter
Chairman:
Richard Marriott
Capital Expenditures
$355M-$380M
2014 Projections:
Operating Profit:
$880M
NI:
$570M
5
6. Host Hotels & Resorts
CEO:
Edward Walter
Chairman:
Richard Marriott
Capital Expenditures
$355M-$380M
2014 Projections:
Operating Profit:
$880M
NI:
$570M
between Host’s massive, upper upscale hotels and other REITs’ less extravagant properties is what
gives HST its distinction of owning the most valuable assets in its industry.
Company History
Host Hotels & Resorts was formed in 1993 as a subsidiary to Marriott in order to separate its physical
assets from Marriott’s management enterprise. HST became a key player in the REIT business upon
the purchase of several properties and later began leasing them to third party management companies.
Through numerous transactions including an acquisition of Crestone Capital and a group of purchases
from Starwood, HST has become, and will continue to be the predominant player in the REIT
business.
Company Control
Host Hotels & Resorts is led by a diverse and experienced team of executives, as well as an impressive
board. The company’s leaders have backgrounds in investment banking, real estate, auditing, human
resources, government positions, and a long list of other valuable titles. This team is headed by the
following executives.
Richard E. Marriott, Chairman of the Board
Mr. Marriott joined Host in 1965, and has served in a range of executive
positions. 1n 1979, Mr. Marriott joined the board of Directors, and became
Chairman of the Board later in 1993. Among other impressive accolades, he
previously served on the Board of Marriott International, Inc. and the National
Advisory Council of Brigham Young University.
W. Edward Walter, President, CEO, and Director
Mr. Walter is Host’s President and CEO, and a member of Host’s Board
of Directors. His path to these positions has included time as CFO and SVP of
Acquisitions. In addition to Mr. Walter’s role at Host, he serves on six different
real estate centric boards.
Host’s future is optimistic with big plans for CAPX expenditures, including acquisitions, renewals,
and renovations. In total they are looking to spend between $355M-$380M with $25M-$30M in
acquisitions and $330M-$350M for renewals/renovations for the rest of the year (Q2 Earnings
Report). Host appears confident about future projections because of “the current availability of
inexpensive financing” and looks to raise rates in Upper Upscale hotels without losing occupancy.
33% increase in dividends from previous quarter ($0.20/share)
Analyst Opinions (according to Bloomberg)
o Buys: 13
o Holds: 12
o Sells: 0
Consolidated Analysts’ Projections:
2014 2015 2016
Operating Profit 878,666,667 998,111,111 1,107,428,571
YOY Growth 71.48% 13.59% 10.95%
Net Income 569,090,909 629,111,111 998,000,000
YOY Growth 79.50% 10.55% 57.05%
High expected YOY growth in
Operating Profit and Net Income
from 2013 to 2014 is due to major
capital expenditures which will
generate new revenues.
6
7. Description
Host Hotels & Resorts, Inc. is a premier lodging
real estate company, which owns high quality
lodging assets in major markets including urban,
airport, and resort/convention settings. As an
ownership company, Host’s strategy focuses on
maximizing the use of valuable assets to generate
cash flows while simultaneously allocating
capital in optimal ways to achieve superior
performance and reach high goals. Host hires
contractors to manage its properties and then
makes the revenues off the hotel, while paying a
fee to the contractor. Host partners with top tier
brands to maximize market share, profitability,
and soundness of business.
Host acquires its assets in a variety of ways,
including transactions involving entities in which
Host is already a partner, public and private
portfolio transactions, single asset transactions,
and entering into joint ventures. Additionally,
Host can act as a developer, using capital to fund
and oversee the development of entirely new and
innovative properties.
It is important to recognize that Host is broken
into two companies. The first is Host Hotels &
Resorts, Inc., a REIT, which owns properties and
conducts operations through the second
company, Host Hotels & Resorts L.P. Host Inc.
(this refers to Host Hotels & Resorts, Inc.) is the
sole general partner and, as of December 31,
2013, holds approximately 98.7% of the
partnership interests. The leftover 1.3% interests
are owned by other unaffiliated and limited
partners. Being the sole general partner of Host
L.P., Host Inc. manages exclusive and total
responsibility for the day-to-day operations and
control of Host L.P. Although the two work
interchangeably and share the same interest in
performance and success, it is important to
recognize the existence of both separately.
Corporate Responsibility Strategy
Host embodies a business model and culture
that is centered upon a specific set of core
values: EPIC. These values keep the bar set high
for Host. Collectively, Host encourages growth,
create a strong and tight corporate culture, and
emphasize the need to make a positive impact
on the communities influenced by its
properties.
Excellence
Partnership
Integrity
Community
7
8. Strategic Framework for Sustainability
Upon evaluating new opportunities to incorporate sustainability through the ownership of its properties,
Host employs a strategic framework. It is built around three themes:
Responsible Environment
Analyze sustainability opportunities as part of acquisition due diligence
Collaborate with hotel managers to integrate sustainability with operations
Invest in environmental efficiency projects that deliver appropriate financial returns
Leverage investments in sustainable features during disposition
Progress
2012 2013
Host invested nearly $21 Million in sustainable
projects, including:
Chiller replacements
Elevator modernizations
Roofing and façade
32 targeted energy reduction projects
Key priority to work with managers on emissions
reduction projects at a minimum of 10 properties.
Products with recycled content
Low VOC paints, adhesives, finishes
EPA ENERGY STAR qualified appliances
and electronics
Low flow shower heads, toilets, faucets
Environmental Stewardship
Proactively monitor energy, water, and waste performance across portfolio of properties
Collaborate with hotel managers to incorporate approved investments and best practices
Establish L/T capital investment plans for assets (equipment and system upgrades) that improve
efficiency and conserve natural resources
Evaluate new sustainable solutions, as well as building tech, designs, materials and construction
practices with the promise of reducing energy, water, and waste
Progress
Host reduced its carbon intensity per SF by 11.6%, just short of the L/T goal of 12% that is targeted
for 2017
Installed in-room energy management systems at seven hotels
Enhanced energy management systems at three hotels
2.
Corporate Citizenship
Implement Code of Business Conduct and Ethics to foster a philosophy of integrity and responsibility
Support organizations in the community through volunteer efforts and financial support
Encourage hotel operators to participate in industry efforts to stop human trafficking and violations
of human rights
Engage stakeholders on CSR issues
Collaborate with industry on CSR issues and opportunities
8
9. Recent Property Acquisitions and Dispositions
Acquisitions Dispositions
2014 2014
The Company predicts that acquisition
capital expenditures for 2014 total
between $30 million and $35 million.
December 14: sale of Courtyard Nashua
for $10 million
2013 2013
Acquired the 151-room Powell Hotel in
San Francisco, including the fee simple
interest in the land, for $75 million
On May 31, acquired the fee-simple
interest in the 426-room Hyatt Place
Waikiki Beach in Honolulu for $138.5
million
In December, made the final payment of
$19.9 million for the purchase of the fee
simple interest in the land at the New York
Marriott Marquis Times Square.
December 18: sale of Dallas/Addison
Marriott Quorum by the Galleria for $56
million
November 20: sale of Four Seasons
Atlanta for $63 million
November 1: sale of the Portland Marriott
Downtown Waterfront for $87 million
June 28: sale of The Ritz Carlton, San
Francisco for $161 million
January 11: sale of the Atlanta Marriott
Marquis for $293 million
Recent Renovations and Other Capital Expenditures
Redevelopment and ROI Expenditures
Products such as the redevelopment of a hotel, repositioning of a restaurant or the installation of energy
efficient systems, which are designed to increase cash flow and improve profitability.
2014 $29 million invested YTD in ROI CapEx
Renovation of approximately 10,000 SF of restaurant and public space at
the Denver Marriott West
Expected ROI expenditures for 2014 range from $65 million to $75 million
2013 $97 million spent in 2013
20,000 SF ballroom and renovation to approximately 25,000 SF of existing
ballroom and meeting space at the Newark Airport Marriott
Redevelopment of pool area at the Orlando World Center Marriott
New 17,000 SF pavilion at JW Marriott Desert Springs Resort & Spa
9
10. Events
On Tuesday, August 19th, 2014, Host Hotels & Resorts CEO, W. Edward Walter, sold 200,000 shares of
his stock in the company at an average price of $22.61. The total value of the sale was $4.522 Million. As
a result of the sale, Walter now owns 436,895 shares. The sale had little effect on the stock price, as the
only notable news was a 0.31% pull back during midday trading on Thursday, August 21st.
On October 7, 2014, Host disclosed three transactions to accelerate its capital-recycling program to improve
its portfolio quality and strengthen its position in vibrant global markets.
Bought the B2 Miami Downtown Hotel (242 rooms) for $57.5 million (Down, Left)
o Formed management contract with Destination Hotels & Resorts for refurbishing and
reintroducing the property under a new identity later in 2014
Through European joint venture, bought a 90% stake in a company that owns the 384-room Grand
Hotel Espanade in Berlin, Germany. The gross purchase cost was €81.0 million. (Up, Right)
o Property is in proximity to several embassies in western Berlin.
These transactions are expected to strengthen Host’s presence in a flourishing German market, as well as
in the Downtown Miami region, which is focused on attracting more people.
Divested Tampa Marriott Waterside Hotel & Marina (719 rooms) at $199 million (Below)
10
11. Law Suits
Molinaro Koger
In 2008, Host hired hotel broker Roger Koger, President of Molinaro Koger, to
aid in the sale of three hotels. These included:
Dulles Airport Marriott
Stamford Sheraton
Michigan Ritz.
The deal included 4.4 Million in commission payments to Koger. Molinaro
Koger reportedly netted a $15 million profit in the deals, while Host reported
losses in the quarters in which the properties were sold. Koger was represented
by Fox Rothschild, a Philadelphia based law firm, in sales of the hotels. Prior
to Host’s suit against the two Rothschild lawyers that assisted Koger, Molinaro
Koger was ordered to pay Host $22.7M for its role in the sale of the hotels. The
suit filed against the lawyers was in response to Host’s belief that Fox
Rothschild’s lawyers assisted Koger in two separate deals, setting up shell
corporations in order to defraud Host of millions of dollars throughout the transaction. “In a third
transaction, the brokerage allegedly set up a shell company to buy the debt on several European hotels Host
wanted to acquire and then sold the notes to Host at an inflated price.”
A September 17, 2014 article from bizjournals.com confirms prosecutors’ claims that Koger cost his
victims (Host is the biggest victim) $55M in losses. The guilty plea was to two counts, wire fraud and
conspiracy to commit wire fraud. He bought Host’s properties at one price and resold to others for a much
higher price. Koger was sentenced to 11 years in prison for the crimes. Koger was ordered to:
Pay $40.7M in restitution after his guilty plea.
Serve 11 year prison sentence
Keystone-Texas Holding Corp.
Host Hotels & Resorts, Inc. (NYSE: HST), announced on October 3, 2014 that the Company's litigation
related to the San Antonio Marriott Rivercenter hotel ended in favor of the Company as the Texas Supreme
Court denied the motion for rehearing from Keystone-Texas Holding Corp. On June 13, 2014, the Texas
Supreme Court overruled a lower court's $57.3 million verdict against the Company for allegedly interfering
with an effort to sell a San Antonio shopping mall and adjacent land underlying the San Antonio Marriott
Rivercenter hotel.
Now that the decision by the Texas Supreme Court is final, the company will reverse the $69 million loss
contingency previously recorded under GAAP. In addition, a court-ordered bond will be released and the
Company will recoup its previously funded $25 million escrow.
Roger Koger
11
13. Competition and Market Share
Similar to all REIT’s, Host doesn’t directly compete with any one company. Rather, the hotels that Host
owns compete against the other hotels in its individual markets. For example, if Host owns a Marriott in
Denver, Colorado, it competes with a Hilton in the same market. Therefore, when determining market
share, it is more important to consider the market share that each individual hotel possesses in its own
market than to look at Host as a whole. Taking each hotel’s individual market share, and finding some
kind of average, can produce the best estimate of Host’s footprint size in the hotel industry. The pie chart
below illustrates Host’s revenue by market, giving an idea of where Host is focusing its business and
where cash flows are coming from.
13
16. Host is operated as two different corporations, Host Hotels & Resorts, Inc. (Host Inc.) and Host Hotels &
Resorts, L.P. (Host L.P.). There are limited cases where it is important to distinguish between the two
companies. Host Inc. owns the properties and conducts operations through Host L. P., the sole general
partner of Host Inc. Host Inc. owns 98.7% of the general partnership interest in Host L.P., while the last
1.3% interests are owned by unaffiliated limited partners. Host. Inc., therefore, maintains full
responsibility for Host L.P.’s day-to-day management and control. Financial statements and annual
reports are combined for Host Inc. and Host L.P.
The few differences between Host Inc. and Host L.P. are as follows:
Host Inc. is a REIT, meaning it does not actually conduct business itself, but through Host L.P.
Host contributes proceeds from equity issues to Host L.P. in exchange for OP units
Host L.P. holds all of the company’s assets and the ownership interests in joint ventures
Host L.P. conducts business operations and is structured as a limited partnership with no publicly
traded equity
Aside from public equity issuances by Host Inc., Host L.P. generates capital through its
operations, through its incurrence of indebtedness, or through the issuance of OP units (in
exchange for equity issued by Host, Inc.)
The substantive difference between the filings of Host Inc. and Host L.P. is that Host Inc. is a
REIT with public stock, while Host L.P. is a partnership with no publicly traded equity
The flowchart below is an excellent representation of how Host conducts business. Host Inc. owns the
properties, yet conducts operations through Host L.P. The companies then bring in 3rd
party management
companies and partners with brands to create value for its properties and ensure soundness of operations.
16
17. Subsidiaries
In 2001 Host gained the ability to lease its hotels to wholly-owned subsidiaries.
Purchased the Crestline Capital Corporation subsidiaries that owned the lease rights to Host’s
properties
Simplified Host’s structure, allowing to better control returns from full service hotels and enabling
the company to implement a superior asset management program
Host Hotels & Resorts, Inc. owns 428 subsidiaries incorporated in various locations on the east coast and
elsewhere. A list can be found in Host’s annual 10K statement.
Equity in Affiliates
Host earned a yearly income from its joint venture with Euro JV
32.1% interest in Euro JV Fund I (11 hotels, 3,511 rooms)
33.4% interest in Euro JV Fund II (8 hotels, 2,916 rooms)
In March 2006, we formed a joint venture, HHR Euro CV, to acquire hotels in Europe
Host Hotels & Resorts said its European joint venture with Dutch civil service pension fund ABP
and an affiliate of the government of Singapore’s real estate investment company GIC Real Estate
will continue to expand HST’s international presence.
17
18. Earnings Analysis
The REIT industry uses net income as defined under GAAP as the primary operating performance
measure. However, the REIT industry also uses funds from operations (FFO) as a supplemental measure
of operating performance. NAREIT defines FFO as a measure of cash generated by a REIT. The formula
for FFO is:
When real estate companies use FFO in public releases or SEC filings, Host must reconcile FFO to
GAAP net income.
Investors often believe commercial real estate retains residual value much more so that equipment,
computers, or other personal property, so depreciation, in its minds, often overstates the economic
depreciation of REIT property assets. In fact, REIT assets might actually be appreciation. This is the
reason that FFO excludes real estate depreciation charges from operating performance. Securities analysts
want to consider judging Host’s performance according to its AFFO, deducting certain recurring capital
expenses from FFO.
Factors Affecting Earnings
Growth in earnings typically stems from several sources for REITs:
Higher revenues
Lower costs
New business opportunities
The most immediate sources of revenue growth for Host are:
Higher occupancy
Increasing rates
As Host does a better job of increasing its occupancy, increasing its number of available rooms
worldwide, and increasing its average daily rates in each hotel, revenues reap the benefits accordingly.
REIT Modernization Act (RMA)
The RMA took effect on Jan. 1, 2001 and provides REITs with other opportunities to increase earnings.
Before its enactment, REITs were extremely limited in the services Host provides, but are now able to
own taxable subsidiaries that can provide the competitive services that many of today’s customers desire,
and also to provide services like real estate asset management for other investors. Host Hotels & Resorts
owns over 200 subsidiaries.
FFO=Net Income + Depreciation + Amortization –
Gains on Sales of Properties
18
19. The National Association of Real Estate Investment Trusts (NAREIT)
NAREIT is the worldwide representative voice for REITs and publicly traded real estate companies with
an interest in U.S. real estate and capital markets. Aside from REITs, NAREIT has members that are
businesses that own, operate, and finance income-producing real estate.
NAREIT defines the qualifications a company must possess in order to be a REIT. A REIT must;
Be an entity that is taxable as a corporation
Be managed by a board of directors or trustees
Possess shares that are fully transferable
Possess a minimum of 100 shareholders
Hold no more than 50 percent of its shares held by five or fewer individuals during the last half of
the taxable year
Invest at least 75 percent of its total assets in real estate assets
Derive at least 75 percent of its gross income from rents of real property or interest on mortgages
financing real property
Possess no more than 25 percent of its assets consist of stock in taxable REIT subsidiaries
Pay annually at least 90 percent of its taxable income in the form of shareholder dividends
There are two types of REITs;
Mortgage REITs
Equity REITs
Equity REITs mostly own and operate income-producing real estate.
Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit
indirectly through the acquisition of loans or mortgage backed securities.
Host is an equity REIT and owns and operates hotels, which are income properties. Similarly, other
REITs tend to specialize in only one type of properties. There are some that diversify, however.
10%
90%
Percentage of Total
Mortgage REIT Equity REIT
19
20. REIT Taxation
REITs are able to be exempt from federal taxes if they are able to meet certain requirements. Because of
the luxury of not paying federal taxes, REITs are overseen by a number of associations. These
requirements are enforced by federal law and IRS standards. The guidelines for REITs are established by
NAREIT and in order to hold the REIT classification. If Host can meet these ordinances, then the firm is
only subject to the following taxes:
Local
State
Foreign
Franchise
This creates an ambiguity to project Host’s tax expense as it depends on the state, local, and foreign tax
rates, which fluctuate with the constant acquisition and dispositioning of hotels. In the table below there is
an extended 70pt range of tax rates applied to Host for the past 10 years.
Though the benefit of not paying federal taxes is prevalent, it causes Host to tackle different tax implications
year in and year out. This seems to suggest that stockholders have a difficult time projecting cash flows,
which is true, but generally the shareholders of REITs are more concerned with items above EBT.
Tax Implications (in millions) EBT Tax Expense Tax Rate
2013 $ 231.00 $ 21.00 9.09%
2012 $ 45.00 $ 31.00 68.89%
2011 $ (14.00) $ (1.00) 7.14%
2010 $ (161.00) $ (31.00) 19.25%
2009 $ (293.00) $ (39.00) 13.31%
2008 $ 430.44 $ (2.56) -0.59%
2007 $ 574.08 $ 3.08 0.54%
2006 $ 367.27 $ 4.27 1.16%
2005 $ 151.93 $ 22.93 15.09%
2004 $ (54.10) $ (5.10) 9.43%
20
21. Advantages of REITs
One level of taxation- REITs are not subject to tax at the corporate level. So, double taxation does
not apply and investors only pay taxes on their dividends and capital gains.
Resistance to Market Volatility- REITs as a whole contain little correlation to the market as its
value is based on real estate properties. In 2007 this wasn’t the case as REITs suffered immensely;
however, the 2007 crash was correlated directly with the crash of real estate.
High yields to investors- As stated before, REITs are required to pay 90% of its taxable income,
which is good for shareholders, yet a hardship for the REIT.
Disadvantages of REITs
High Payout- Though it is an advantage to investors, it can be a detriment to the company. The
inflexibility to pay less dividends results in taking on more debt, and being able to retain less
earnings that could be used to pay off debt or make additional capital expenditures.
Sensitivity to interest rates- REITs are sensitive to fluctuations in interest rates as they depend on
incurring debt to take on additional properties, so as interest rates rise, cost of debt rises, and its
returns are minimalized.
Property Taxes- According to Morningstar, “REITs must pay property taxes, which can make up
as much as 25% of total operating expenses”. This can be a huge impediment to REITs as they pay
90% of taxable income to investors, then are hit with property taxes after that. This causes its
retained earnings to be extremely minimal, leading to the large negative retained earnings on their
balance sheet that exists today.
These pros and cons of being a REIT are very evident and both stem from the guidelines that must be
followed in order to maintain REIT status. Investors enjoy certain dividends from year to year, but company
leaders are faced a dilemma in which they must find ways to fund operations and new capital expenditures
with minimal help from retained earnings.
21
22. Executive Officers
Richard E. Marriott, Chairman of the Board
Richard Edwin Marriot, the founder of Marriot Corporation, currently holds a non-executive
chairman position in Host. He joined Host in 1965, and served in a range of executive
positions. In 1979, Mr. Marriott joined the board of Directors and became Chairman of the
Board later in 1993. He is currently a chairman of J. Willard & Alice S Marriot Foundation
and First Media Corp. Among other impressive accolades, he previously served on the Board
of Marriott International, Inc. and the National Advisory Council of Brigham Young
University. He graduated from Harvard University with a Masters in Business in 1965. As a
10 % owner in Host, Marriot sold 25,000 shares of Class A Common Stock at a price of $65
on August 4th
, filed with the SEC on a Form 4.
W. Edward Walter, President, CEO, and Director
Mr. Walter is Host’s President and CEO, along with serving on the Board of Directors since
October 2007. His path to these current positions included time as the Senior VP of
acquisitions, followed by Senior VP treasurer in 1998, Executive VP in 2000, COO in 2001,
CFO in 2003 and finally CEO in 2007. In addition to Walter’s executive role at Host, he
serves on six different boards. He’s on the Board of Directors of AvalonBay Communities,
Inc. and the Chairman of the Investment and Finance Committee. He is a Past Chair of the
National Association of Real Estate Investment Trusts, and sits on the board of The Real
Estate Roundtable. Walter recently sold 200,000 shares ranging from a price of $22.61 to
$22.65. In the Last three years, Walter sold $19,225,309 in stock, and $7,140,349 in new
equity grants.
Richard E Marriot (Chairman of the Board) Age 62
Salary $385,220
Bonus $374,500
Stock Awards -
Option Awards -
Non-Equity Incentives -
All Other Compensation $124,748
Total $884,468
W Edward Walter (President and Chief Executive Officer) Age 58
Salary $849,750
Stock Awards $2,963,438
Option Awards $364,969
Non-Equity Incentives $1,711,400
All Other Compensation $175,972
Total $6,065,529
22
23. Gregory J. Larson, Executive Vice President, CFO
Larson, currently Executive VP and CFO of Host, joined Host in October 1993 as Senior
Manager of Partnerships, and then progressed to Director of Acquisitions in 1996. He was
elected treasurer in 2005, and then CFO in May 2013. Larson previously held numerous
accounting positions with Marriott International, Inc. and worked in public accounting.
Recently, Larson Sold 18,000 shares of stock at a price of $22.43, but still holds 117,898
shares. In the Last three years, Larson exercised $335,910 in options, sold $2,919,662 in
stock, and had $2,158,592 in new equity grants.
Struan B. Robertson, Executive Vice President, Chief Investment Officer
Mr. Robertson, currently, Executive VP and Chief Investment Officer, joined Host in early
2013. For almost 20 years prior to his move to Host, he held positions at Morgan Stanley,
including co-head of global real estate investment banking. Struan is a founding member and
past board member of the European Public Real Estate Association and a former advisor to
the World Economic Forum for Real Estate.
James F. Risoleo, Executive Vice President & Managing Director, Europe
Risoleo joined Host in 1996 as Senior VP for Acquisitions, and became Executive VP and
CIO in 2000. In 2012, James became managing director of the company’s European business
practices and is in charge of acquisitions and dispositions for the European Joint Venture.
Prior to joining Host, Mr. Risoleo was VP of Development for Interstate Hotels Corporation,
which was once the nation’s largest independent hotel management company. During
Risoleo’s career with Host, he advanced from Exec VP of Acquisitions and Developments, to
Exec VP CIO, and now currently the Exec VP and Managing Director of Europe. He is also
currently a board member and committee member of Cole Office $ Industrial REIT CCIT II
Inc.
Gregory Jon Larson (Executive Vice President and Chief Financial Officer) Age 50
Salary $435,529
Stock Awards $942,104
Option Awards $119,432
Non-Equity Incentives $587,400
All Other Compensation $73,267
Total $2,157,732
Struan B Robertson (Executive Vice President and Chief Investment Officer) Age 48
Salary $429,041
Stock Awards $1,404,466
Option Awards $146,553
Non-Equity Incentives $571,100
All Other Compensation $144,414
Total $2,695,574
James F Risoleo (2011) (Executive Vice President and Management Director: Europe) Age 58
Salary $515,000
Stock Awards $5,808,333
Non-Equity Incentives $402,000
All other Compensation $83,275
Total $6,808,608
23
24. Elizabeth A. Abdoo, Executive Vice President, General Counsel and Secretary
Elizabeth came to Host in 2001 as Senior VP and General Counsel and was bumped to
Executive VP in February, 2003. Previous to jumping on board at Host, Ms. Abdoo served as
Senior VP and Assistant General Counsel of Orbital Sciences Corporation from 1996 to 2001.
In the last three years at host, Abdoo sold $3,911,280 worth of stock and had new equity grants
of $1,776,243.
Minaz Abji, Executive Vice President, Asset Management
In 2003, Minaz joined Host as Executive VP Asset Management. Previously, Mr. Abji served
as President of Canadian Hotel Income Properties REIT, out of Vancouver, British Columbia. He
also worked for Starwood Hotels and Resorts Canada as area managing director from 1994 to
1998. He was also a General Manager for Westin starting in 1986 to 1998. In the last three
years, Abji sold stock for $8,154,704, and had new equity grants consisting of $2,716,609.
Elizabeth A Abdoo (Executive Vice President and Secretary) Age 55
Salary $437,750
Stock Awards $778,033
Option Awards $95,821
Non-Equity Incentives $587,100
All Other Compensation $63,626
Total $1,962,330
Minaz B Abji (Executive Vice President and Asset Management) Age 60
Salary $489,250
Stock Awards $1,189,960
Option Awards $146,553
Non-Equity Incentives $656,100
All Other Compensation $94,102
Total $2,575,965
24
25. Competitors Compensation
Compensation Analysis
When comparing Host’s executive compensation plans to similar competitors, Hospitality Properties
Trust, Strategic Hotels, and LaSalle Hotel Properties, Host’s compensation contains greater totals on
average. Host averages a total compensation plan of $3,307,172, creating a $579,633 margin from the
next highest competitor, LaSalle Hotel Properties. In comparison, Hospitality Properties Trust’s and
Strategic Hotels average $225,062 and $1,881,745 respectively.
Members of the board of directors for Host consists of a mix of insiders and independent directors. The
board, determined by shareholders, has various duties including: governing an organization by
establishing policies, reviewing the performance of the chief executive, approving budgets, and setting
salaries and compensation plans for the company’s management. Having both insiders and outsiders on
the board allows for the most efficient decisions to be made by the outside members, with the insider’s
discretion. In Comparison, BEE and LHO also have inside members on its board, while HPT has a board
comprised of managing and independent trustees.
Over the past twelve months, key insiders of Host are participating in the buying and selling of shares, but
overall, an 11.23% increase in shares held occurred. Given the increase, the insiders selling are doing so
in order to liquidate at a given point in time, but are not concerned with the financial position Host
currently conveys. HPT has a significant increase of 38.69%, signifying the insiders are expecting solid
future cash flows and a great increase in stock price. Similarly, BEE’s insiders are increasing shares by
8.89%. LHO has shown a decrease of 3.84%, possibly illuminating a scare of financial positing,
however, because the percent change is minimal, the most plausible reasoning is to liquidate current
shares on various accounts.
John G Murray(President/COO) Mark Lawrence Kleifges(CFO/Treasurer) Ethan S Bornstein(Senior VP)
Stock Awards $205,650 $205,650 $205,650
All Other Compensation $19,412 $19,412 $19,412
Total $225,062 $225,062 $225,062
Executive Compensation for Hospitality Properties Trust (HPT)
Diane M Morefield(Exec VP/CFO) Richard J Moreau (Exec VP/ COO) Stephen M Briggs (Senior VP/CAO)
Salary $392,533 $392,533 $250,000
Stock Awards $678,832 $678,832 $286,327
Non-Equity Incentives $414,868 $414,868 $2,090,542
All Other Compensation $15,300 $15,300 $15,300
Total $1,501,533 $1,501,533 $2,642,169
Executive Compensation for Strategic Hotels (BEE)
Michael D Barnello (President/CEO) Bruce A Riggins (Exec VP/CFO) Alfred L Young( Excec VP/COO)
Salary $780,000 $406,000 $470,000
Stock Awards $2,034,015 $767,564 $986,411
Non-Equity Incentives $1,460,200 $435,080 $525,225
All Other Compensation $223,976 $37,443 $56,703
Total $4,498,191 $1,646,087 $2,038,339
Executive Compensation for LaSalle Hotel Properties (LHO)
25
26. Share Ownership
Ownership Activity
The top five insider owners, from most
shares downward, are as follows: Richard
E. Marriot holding 11,816,000 shares, W.
Edward Walter owning 933,000 shares,
Elizabeth A. Abdoo possessing 316,000
shares, Minaz B. Abji maintaining 298,000
shares, and Struan B. Robertson sustaining
190,000 shares.
The top ten institutional investors, from
most invested to least, are as follows:
The Vanguard Group Inc., BlackRock
Institutional Trust Co., Cohen & Steers
Capital Management, Morgan Stanley,
State Street Global Advisors, CBRE
Clarion Securities, APG Asset MGMT,
Fidelity MGMT, Daiwa Asset MGMT,
and Invesco Advisers.
26
27. Analyst Estimates
Earnings History Sep 13 Dec 13 Mar 14 Jun 14
EPS Est 0.26 0.31 0.30 0.43
EPS Actual 0.25 0.33 0.33 0.43
Difference -0.01 0.02 0.03 0.00
Surprise % -3.80% 6.50% 10.00% 0.00%
Earnings Est
Current Qtr.
Sep 14
Next Qtr.
Dec 14
Current Year
Dec 14
Next Year
Dec 15
Avg. Estimate 0.31 0.39 1.46 1.63
No. of Analysts 22.00 22.00 23.00 24.00
Low Estimate 0.29 0.37 1.44 1.57
High Estimate 0.33 0.41 1.48 1.76
Based on earnings history, analyst opinions suggest growth in earnings year over year from 2013. Over
the past four quarters, Host’s earnings are surprising analysts by exceeding EPS estimates by 3.18% on
average. Based on this surprise, analysts are projecting larger EPS growth than usual year-over-year from
fiscal year 2014 to 2015, hoping to match its estimates to actual EPS more suitably. The number of
analysts covering Host increased from 22 earlier in 2014 to 24 estimating earnings for 2015.
Revenue Est
Current Qtr.
Sep 14
Next Qtr.
Dec 14
Current Year
Dec 14
Next Year
Dec 15
Avg. Estimate 1.28B 1.38B 5.39B 5.66B
No. of Analysts 17 17 18 19
Low Estimate 1.23B 1.34B 5.35B 5.53B
High Estimate 1.34B 1.42B 5.45B 5.82B
Year Ago Sales 1.22B 1.33B 5.17B 5.39B
Sales Growth (year/est) 4.30% 3.30% 4.40% 4.90%
Analysts are predicting higher growth in the current quarter than in the next. Then, an increase in the
revenues growth rate is predicted from 2014 to 2015.
27
28. Analyst Recommendations
Average Recommendation: OVERWEIGHT Average Target Price: 23.76
Number of Ratings: 24 Current Quarters Estimate: 0.09
FY Report Date: 12 / 2014 Current Year's Estimate: 0.68
Last Quarter's Earnings: 0.21 Median PE on CY Estimate: 30.78
Year Ago Earnings: 0.40 Next Fiscal Year Estimate: 0.71
Median PE on Next FY Estimate: 29.90
Growth Est HST Industry Sector S&P 500
Current Qtr. 24.00% 24.90% -91.60% 13.70%
Next Qtr. 18.20% 23.80% -91.00% 23.50%
This Year 11.50% 8.40% 10.90% 7.60%
Next Year 11.60% 8.90% 13.20% 12.80%
Past 5 Years (per annum) 52.36% N/A N/A N/A
Next 5 Years (per annum) 11.60% 11.59% 11.03% 10.07%
Price/Earnings (avg. for
comparison categories)
14.51 15.72 15.29 13.48
PEG Ratio (avg. for
comparison categories)
1.25 2.40 1.93 1.21
Current 1 Month Ago 3 Months Ago
BUY 12 12 11
OVERWEIGHT 1 1 1
HOLD 11 11 12
UNDERWEIGHT 0 0 0
SELL 0 0 0
MEAN OVERWEIGHT OVERWEIGHT OVERWEIGHT
Mean Recommendation Conversion
Table
1.00 Thru 1.24 = Buy
1.25 Thru 1.74 = Overweight
1.75 Thru 2.24 = Hold
2.25 Thru 2.74 = Underweight
2.75 Thru 3.00 = Sell
28
29. Analysis of Analyst Recommendations
The number of analysts covering Host remains relatively constant over a number of months. This
indicates that new analysts are not picking up Host and signals that the stock is a good hold. If big news
surrounding Host picks up in the near future, new analysts begin to report on the stock. The following
announcements attract analyst attention, such as:
New acquisitions/divestitures
New deals in European Joint Venture
Macroeconomic trends
Changes in dividend policy
Historically, when new analysts begin to cover a security, the stock price becomes more volatile as
investors respond to the new coverage and trade volume increases for a period of time.
Currently, over 50% of analyst have a buy or
overweight rating on the stock, as compared to just
under 50% putting a hold rating on the stock.
None of the analysts grouped in these charts from
MarketWatch have placed a sell rating on the
stock. This can be attested to the stock’s 17.33%
gain since October 15, 2013. The past three
months, however, have yielded a -9.32% stock
return, which prompts analysts to reconsider its
recommendations in the near future. The market as
a whole is showing signs of a pull back, and these
macroeconomic factors will surely change the way
investors view shares of HST.
29
31. Executive Summary
The next portion of this valuation focuses on a historical financial analysis of Host as compared to its sector and
most similar competitors in its industry. Host is far and away the biggest REIT of its kind, therefore others are
analyzed and compared on a relative rather than a scale basis. A three year monthly average was taken because
it was determined that two market crashes in the real estate industry prior to 2011 affected data adversely.
Stock Price Performance
Host has experienced a 24.60% average
growth in price over the past three years.
Comparable REITs, HPT and LHO,
displayed growths of 9.95% and 20.11%,
respectively, over the same time frame.
The figure to the right illustrates a $100
investment into HST and its competitors
on 10/1/2011 and capital gains ending on
10/1/2014. MSCI US REIT Index (RMZ)
represents nearly 99% of the US REIT
universe, and is also shown here. The
Index is 7.93% hotel and resort REIT’s.
Absolute Performance
Host’s absolute performance is calculated since
10/1/2011 with the following statistics:
Average Return: 24.58%
Standard Deviation: 17.52%.
Coefficient of Variation (CV): 71.30%
These numbers reflect volatile returns with the
high standard deviation and CV, due to stagnate
real estate prices, and lack of confidence from
investors as a result of negative capital
expenditures for the past five years.
Financial Performance
Host has experienced a collapse in the years
following the real estate bubble (2008), turning
negative profits and capital expenditures;
however, analysts are hopeful, projecting
historic returns of $515M. This 8% increase in
the bottom line is promising for the $12.8B hotel
REIT.
DuPont Analysis
Hosts financial leverage, or equity multiplier
indicates that they purchase their assets in
greater proportion to debt, as a result of greater
capital costs. DuPont analysis further reveals a
low profit margin, comparatively higher TAT,
and lower EM. These components expose Hosts
efficiency issues relevant to costs, ability to
reduce investments in assets, and a strategic
approach to financing its capital outside of debt.
Strengths Weaknesses
High Projections for future
Biggest Hotel REIT ($17.8B in
Real Estate, 56k+ Hotel Rooms,
$1.015B in FFO)
47.62% Dividend Growth YoY
High RevPAR & Occupancy
($172.08 & 81% respectively)
Low Debt to Equity; 53%
compared to competitor
average of 96%
Bloated WACC compared to
industry average (10.15% &
8.16% respectively)
Lower ROE & ROA numbers to
competitors, indicate
management deficiencies
3.37% ROIC < 10.15% WACC
$23.2 FFO/Total Revenue
compared to the market's $26
reveals efficiency issues with
operating costs
Host Hotels & Resorts
HST Key Ratios (YTD
2014)
RevPAR: $172.08
ADR: $212.37
Occupancy: 81.0%
Competitor Averages
RevPAR: $165.70
ADR: $200.36
Occupancy: 82.4%
Competitors
Hospitality Property
Trust (HPT)
LaSalle Hotel
Properties (LHO)
Diamond Rock
(DRH)
Strategic Hotels &
Resorts (BEE)
Hersha Hospitality
Trust (HT)
-10%
0%
10%
20%
30%
40%
50%
60%
70%
$80
$100
$120
$140
$160
$180
Growth of $100 Investment
HST
HST
HPT
LHO
RMZ
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
5.00% 10.00% 15.00% 20.00%
Return%
Risk %
Risk vs. Return
31
32. Mergers and Acquisitions
Host has a consistent trend of pursuing an active investment strategy in times of upward economic
movement. Since 2010, Host purchased a total of 14 hotels, ranging from Tennessee to New Zealand,
totaling $2.097B. Some of Host’s most recent acquisitions include:
B2 Miami Hotel ($58MM)
151 room Powell Hotel in San Francisco ($75MM)
426 room Hyatt Place on Waikiki Beach in Honolulu ($138.5MM)
Final payment on one of Host’s most profitable hotels, the New York Marriot Marquis
in Times Square
Host is a very interesting company in regards to their acquisition and disposition strategies. Host seeks to
reduce market exposure based on geographical location, while driving to increase properties in large
market locations. Host does a compelling job of reducing unsystematic risk through a number of
transactions year in and year out.
2010 2011 2012 2013
$531M
$880M
$472M
$214M
$114M
$202M
$144M
$97M
Acquisition vs. Redevelopment Cost
$ Spent (Approximate) $ CapEx (Redevelopment)
32
33. MSCI USREIT Index (^RMZ)
The MSCI US REIT Index broadly represents the equity REIT
opportunity set with proper investment screens to ensure that the
index is investable and replicable. The index represents
approximately 85% of the US REIT universe.
The MSCI US REIT Index Methodology was created based on consultations with various market
participants. It features:
Broad and fair representation of US equity REITs
Transparent index methodology
Free float-adjustment
Timely index reviews (reflects the evolving REIT market on a timely basis using quarterly index
reviews)
The pie chart below depicts the different sub-industries that encompass ^RMZ’s assets. Note that the
Hotel & Resort REITs make up fewer than 4% of the entire portfolio. Regardless, the index is a good
comparable for Host, because it helps to see how economic factors control the market risk of many
REITs.
33
34. Hospitality Properties Trust (HPT)
HPT is a lodging and travel center REIT. Although not only
specializing in hotels, HPT is a good comparable to HST because of its
large market cap and consistent use of capital expenditures to grow the
business. While HST owns many upper upscale hotels with popular
brand names, HPT focuses on ownership of smaller, less expensive
brands with a focus on select service and extended stay. HPT also owns
a few upper upscale brand hotels, but not nearly as many as HST. Some
of these brands include:
Marriott
Hyatt
Staybridge Suites
Candlewood
LaSalle Hotel Properties (LHO)
LaSalle Hotel Properties is a multi-operator REIT that owns 44
upscale, full-service hotels, with 11,100 guest rooms in 9 states
and Washington D.C. Like any REIT, the company’s focus is
on owning, redeveloping and repositioning its properties in
urban, resort, and convention type markets. LHO’s growth
partially depends on strategic relationships with premier
management companies and strong brands. Some of these
brands include:
Marriott
Westin
Hyatt
non-chain hotel brands
Market Cap: $4.49 B RevPAR: $89.21
Stock Price: $29.97 FFO: $113,728,000
EPS (ttm): 1.02 ADR: $113.50
Market Cap: $4.07 B FFO: $231,165,000
Stock Price: $39.12
EPS (ttm): 1.82
34
35. RLJ Lodging Trust (RLJ)
RLJ is also a multi-operator REIT with a focus in hotels. It’s
comprised of 150 properties (148 hotels) in urban areas and
dense suburban markets across 21 states and the District of
Columbia. These markets provide demand generators from
business, leisure, and other travelers. Differently from Host,
RLJ’s focus lies in full-service hotels as well as several select
service and extended stay hotels. RLJ owns many hotels under
the Marriott and Hilton web, including those such as:
Courtyard
Doubletree
Residence Inn
Holiday Inn
Hilton Garden Inn
Spring Hill Suites
Market Cap: $4.21 B FFO: $257,500,000
Stock Price: $32.07 RevPAR: $127.09
EPS (ttm): 1.02 ADR: $153.18
35
36. History of Stock Price
Host stock price over the past decade has fluctuated significantly from a low of $3.70 (Feb. 2009), in light
of the real estate bubble, to a high of $26.47 (Jan. 2007). Though Host experienced near collapse during the
financial crisis, it has proven to provide monthly returns of 4% since the downfall, bouncing back over 90%
just two months later. Host’s management team took a number of strategic moves so that the crisis would
bend, but not break them. These tactical financial decisions were a function of:
Taking on an additional $500M in S/T debt to resulting in the lowest revenue year since 2005
o Host was able to rid $600M in S/T debt the following year
Eliminating Preferred Stock enabled ability to pay obligations to common stockholders without
taking on further S/T debt
Advantageously held on to more cash from the prior year by threefold
o 2009: $1642; 2008: $508
Recognizing a lack of cash flow and selling off six hotels with proceeds of $204M ($26M gain)
o Also did not acquire any properties in 2008 or 2009
Host’s impressive management
team was able to keep the
company from almost certain
demise in a time especially
harsh on REITs, with a 12%
reduction in total number of
REITs from 2007 to 2008
(Boerse Frankfurt).
The quick rebound was a result
of Host taking advantage of the
cash management chose to save
in 2009 and investing $410M
into four new hotels in three
different countries (USA,
Brazil, & London). Host Hotels
& Resorts aggressive management approach resulted in the stock price rising from $10.60 in January 2010
to $17.87 in December 2010 (68% gain in 12 mos.), outperforming the S&P 500 gain of 12.3%.
36
37. Dividend Policy
As a result of Host being a REIT, the firm is “required to distribute at least 90% of its annual taxable
income, excluding net capital gain, to its stockholders in order to maintain its qualification as a REIT.” This
compelling dividend policy attracts investors who prefer a “bird in hand” approach as opposed to a dividend
irrelevance policy. Even when Host experienced a loss in its’ taxable income, it managed to payout
dividends by leveraging S/T debt through its credit facility, who issues senior notes.
This REIT classification does allow investors to see immediate returns on capital through dividends;
however, it should be taken woefully because the necessity of having to payout dividends causes Host to
borrow money constantly. From Host’s 10k “We are, however, permitted under our credit facility and senior
notes indenture to make distributions of estimated taxable income that are necessary to maintain Host Inc.’s
REIT status”. In addition to increased S/T debt and decreased net working capital, retained earnings are
also deep in the red, as of 2013 ($1263M).
Host counts on new issuances of stocks year in and year out as the table above demonstrates to maintain a
capital structure and following this requirement, “not more than 50% in value of Host Inc.’s outstanding
shares of capital stock may be owned in the last half of the
taxable year, directly or indirectly, by five or fewer
individuals”. Host operates almost like an open ended
mutual fund, instituting new shares as investors come in.
This allows for Host to bring in additional capital to fund
operations and maintain REIT structure so the firm won’t
have to pay corporate taxes.
Host issues more and more shares every year to raise APIC and finance capital expenditures and pay for
preexisting dividend allocations.
A negative impact of this extensive dividend policy is the consistent additions to retained earnings are
negative. As of 2013, Host has a ($1.263M) balance in retained earnings.
2013 2012 2011 2010 2009 2008
Taxable Income $231M $44M ($13M) ($159M) ($287M) $430M
# of Shares
Outstanding 756M 726M 707M 680M 653M 525M
Dividends $313M $187M $70M $20M $42M $522M
APIC ($MM YOY Growth
2013 8,491$ 5.4%
2012 8,059$ 3.9%
2011 7,756$ 6.7%
2010 7,268$ 5.5%
2009 6,890$ 20.5%
2008 5,716$ -
37
38. Measuring HST’s Performance
As a way of measuring Host’s stock price performance, the month over month returns were examined in
order to measure the stock’s volatility, average return, median return, skew and kurtosis. In addition to
Host’s risk being measured, two of Host’s closest competitors, Hospitality Property Trust (HPT), and
LaSalle Hotel Properties (LHO), were evaluated. A
REIT index, MSCI US REIT Index (RMZ), was also
used to quantify Host’s performance against a
benchmark.
These four tickers were back-tested from October
2011 to October 2014, so implications and outliers
such as the August 2011 Sovereign Debt Crisis would
be avoided. Over this period HST saw a 50% return
from $14.27 on October 3rd
, 2011 to $21.32 on October
1st
, 2014. In comparison, HPT increased 11%, LHO
42% increase, and RMZ 24% increase over the same
time frame. Though Host outperformed its competitors and the MSCI REIT Index, the S&P 500 soared
55% in that three year frame. The stock performances from these tickers and S&P all portrayed a similar
sketch, revealing that the REIT and hospitality business is very much affected by the market. HST, HPT,
LHO, and RMZ reflect similar peaks and valley’s compared to S&P 500. This indication of market risk is
significant to consider for the future of HST’s stock, though past performance doesn’t reflect future, it does
project a significant trend.
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
$20.00
$22.00
$24.00
$26.00
$28.00
$30.00
$32.00
HPT PERFORMANCE
0%
10%
20%
30%
40%
50%
$22.00
$24.00
$26.00
$28.00
$30.00
$32.00
$34.00
$36.00
$38.00
LHO PERFORMANCE
-5%
0%
5%
10%
15%
20%
25%
30%
35%
$750
$800
$850
$900
$950
$1,000
$1,050
$1,100
RMZ PERFORMANCE
-5%
5%
15%
25%
35%
45%
55%
65%
$1,200
$1,300
$1,400
$1,500
$1,600
$1,700
$1,800
$1,900
$2,000
$2,100
S&P 500 PERFORMANCE
0%
10%
20%
30%
40%
50%
60%
70%
$13.00
$15.00
$17.00
$19.00
$21.00
$23.00
$25.00
HST PERFORMANCE
38
40. Regression Analysis
To measure what the benchmark should be, a regression analysis was conducted on the MSCI REIT Index
and the S&P 500 verse HST. The RMZ index was initially thought to be a better benchmark to relate Host
against, but after a thorough analysis, the S&P 500 also provides a valid measure against HST. HST’s
correlation to the S&P 500 & RMZ Index equally produced the same correlation coefficient of .80 over a
10 year period. The correlations were tested amongst a month over month return (as a %). Correlations
were also produced for LHO and HPT to test the how HST’s closest competitors related.
A linear regression was made in order to visually display the results of the analysis and it is evident with
the graph and formula that the S&P 500 as a whole is a better benchmark for HST. Looking at the formulas
we can determine that HST has a beta of 1.1 to RMZ and a beta of 1.8 to the S&P 500. This gives a clear
picture that HST is very vulnerable to what is happening in the market, so market risk is going to be high
for Host.
y = 1.1019x - 0.0017
R² = 0.6458
-40%
-20%
0%
20%
40%
-40% -30% -20% -10% 0% 10% 20%
RMZ Index vs. HSTy = 1.8167x - 0.0061
R² = 0.6327
-40%
-20%
0%
20%
40%
-20% -15% -10% -5% 0% 5% 10% 15%
S&P 500 vs. HST
Correlation (Monthly Returns)
HST MonthlyReturn S&P 500 MonthlyReturn RMZ MonthlyReturn HPT MonthlyReturn LHOMonthlyReturn
HSTMonthly Return 1.00
S&P 500 Monthly Return 0.80 1.00
RMZMonthly Return 0.80 0.77 1.00
HPTMonthly Return 0.61 0.65 0.69 1.00
LHOMonthly Return 0.87 0.79 0.82 0.69 1.00
40
41. Statistical Significance
To further prove the statistical significance of this data, and to further test a proof of correlation between
these two indices, a full regression analysis was performed for both S&P 500 vs. HST and RMZ vs. HST.
The following was found:
The correlation from HST to RMZ is significant through this 14.6 t-stat and 213 F-stat indicate a slightly
higher statistical correlation than the S&P 500’s t-stat of 14.2 and 201 F-stat. This high F-statistic reveals
that the variance for Host, S&P 500, and RMZ are nearly the same. With this analysis we can determine
that HST is as volatile as the market and is susceptible to unsystematic risk.
S&P 500 vs. HST
Regression Statistics Re
Multiple R 0.80
R Square 0.63
Adjusted R Square 0.63
Standard Error 0.06
Observations 119.00
ANOVA
df SS MS F Significance F
Regression 1.00 0.68 0.68 201.56 0.00
Residual 117.00 0.39 0.00
Total 118.00 1.08
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept (0.01) 0.01 (1.14) 0.26 (0.02) 0.00 (0.02) 0.00
S&P 500 Monthly Return 1.82 0.13 14.20 0.00 1.56 2.07 1.56 2.07
RMZ Index vs. HST
Regression Statistics
Multiple R 0.80
R Square 0.65
Adjusted R Square 0.64
Standard Error 0.06
Observations 119.00
ANOVA
df SS MS F Significance F
Regression 1.00 0.69 0.69 213.29 0.00
Residual 117.00 0.38 0.00
Total 118.00 1.08
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept (0.00) 0.01 (0.32) 0.75 (0.01) 0.01 (0.01) 0.01
RMZ Monthly Return 1.10 0.08 14.60 0.00 0.95 1.25 0.95 1.25
41
42. Influences on Stock Price
A number of factors were considered to determine which items on Host’s Income Statement directly
influence HST’s stock price. The four expected determinants of stock price were:
Revenue
Net Income (NI)
Funds from Operations (FFO)
o Defined by NAREIT to be NI for REITs, due to high depreciation expense and constant
sale of properties
Dividends
o REITs require a 90% payout of EBT
The analysis was run over a five year period, with the stock price being the first day of March in the
given year because Annual 10k reports were issued the week prior and therefore full public knowledge
was disclosed, so the price had time reach the correct market value. The NI from the prior year was
used to estimate a correlation as earnings would be released, then market factors set the new price. The
following was used in determining a correlation:
Date Stock Price Revenue NI FFO Dividend
3/3/2014 19.65 5166.00 317.00 978.00 313.00
3/1/2013 17.49 5286.00 61.00 811.00 187.00
3/1/2012 16.42 4998.00 -15.00 648.00 70.00
3/1/2011 17.61 4437.00 -130.00 479.00 20.00
3/1/2010 14.65 4158.00 -252.00 435.00 42.00
General drivers of value
-
0.20
0.40
0.60
0.80
1.00
Revenue NI FFO Dividends
Correlation Coefficient to Stock Price
With this data, the same regression
analysis was used to determine
which I/S item has the most
influence on the stock price. A
correlation coefficient was
established revealing that NI had
the highest correlation to the stock
price, with an r correlation of .89.
42
43. Statistical Significance
Though only five data points (2009-2014) were used for this regression, it proved to be statistically
sound through the regression analysis. The t-stat here was 3.34 proving that the stock price is directly
correlated with the Net Income.
$14.00
$15.00
$16.00
$17.00
$18.00
$19.00
$20.00
400 500 600 700 800 900 1,000
S TOCK P R ICE TO F F O
$14.00
$15.00
$16.00
$17.00
$18.00
$19.00
$20.00
4,000 4,200 4,400 4,600 4,800 5,000 5,200 5,400
S TOCK P R ICE TO R E V E NU E
$14.00
$15.00
$16.00
$17.00
$18.00
$19.00
$20.00
- 50 100 150 200 250 300 350
S TOCK P R ICE TO DIV IDE NDS
$14.00
$15.00
$16.00
$17.00
$18.00
$19.00
$20.00
(300) (200) (100) - 100 200 300 400
S TOCK P R ICE TO NI
NI to Stock Price
Regression Statistics
Multiple R 0.89
R Square 0.79
Adjusted R Square 0.72
Standard Error 0.97
Observations 5.00
ANOVA
df SS MS F Significance F
Regression 1.00 10.53 10.53 11.15 0.04
Residual 3.00 2.83 0.94
Total 4.00 13.36
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 17.19 0.43 39.56 0.00 15.81 18.58 15.81 18.58
NI 0.01 0.00 3.34 0.04 0.00 0.01 0.00 0.01
43
44. Average Return, Standard Deviation, & Sharpe Ratio
Methodology
The monthly returns for HST, HPT, LHO, RMZ, and the S&P 500 index were measured across a five year
period (Nov. 2009-Nov.2014) to evaluate recent activity on the stock. These returns were then annualized
and averages of the annualized returns and standard deviation were taken in order to determine the stock’s
average Sharpe Ratio.
Results
Host exhibited the lowest Sharpe Ratio because of its extreme volatility across the time frame. Host’s
monthly returns reveal a 60 point range from a minimum of -25.4% and maximum of 30.4%. A few
explanations for the large fluctuations are as follows:
In Aug. 2011, the HST’s stock price plummeted 25%, then rebounded quickly with 30% gain in
Oct. 2011
These calculations indicate S&P 500 index as the best risk-reward ratio. The real-estate sector experienced
a slow recovery from the housing bubble in 2008 and this attributes to the lower Sharpe Ratios.
Sharpe Ratio HST HPT LHO RMZ S&P 500
Average Annualized Returns 19.7% 9.1% 16.8% 13.8% 13.2%
Risk Free 2.3% 2.3% 2.3% 2.3% 2.3%
St. Dev 26.6% 8.1% 15.2% 10.6% 8.6%
Sharpe Ratio 0.65 0.83 0.95 1.08 1.27
44
45. Distribution of Returns (This pg beneath the following)
To get a better idea of how these stock returns are distributed, the following statistics were measured over
a three year period (from Nov-2011 to Nov-2014):
Average Return
Geometric Return
Median Return
$100 Investment Growth
Standard Deviation (as a measure of volatility & risk)
Skew
Kurtosis
Host demonstrates a volatile stock with average annualized returns of 19.6% and 26.6% standard deviation.
With this data, a histogram was created in order to assess the skew and kurtosis of the data set. HST’s slight
positive skew for the past few years indicating few extreme gains and a handful of small losses/gains. In
relation to its competitors and benchmarks, HST demonstrated an overwhelmingly higher risk, contributing
its higher return. Host’s risk, due to its unusually high skew, is overestimated, yet still higher than
competitors due to the fact that Host specializes in upper upscale hotels. In times of a recession or
depression, demand for such hotel rooms historically decreases, leaving Host with subpar occupancy and
RevPAR during hard economic times.
HST exhibited 34 positive monthly returns (57%), with a total return of 121% over the period.
o Outperforming the closest competitor, LHO, by 7%; S&P by 37%, RMZ by 32%
LHO & HST followed similar returns, though LHO’s St. Dev was 15.2% annualized compared to
HST’s 26.6%
HST’s positive skew of .31, result of quick recovery, few extreme gains
Overall, HST most reward, but highest risk, thus low Sharpe Ratio
AnnulizedStatistics(11/2009to11/2014) HST HPT LHO RMZ S&P500
ArithmeticReturn 19.7% 9.1% 16.8% 13.8% 13.2%
GeometricReturn 17.2% 8.9% 16.4% 13.6% 13.0%
StandardDeviation 26.6% 8.1% 15.2% 10.6% 8.6%
$100ReturnoverPeriod $ 220.72 $ 153.48 $ 213.53 $ 189.18 $ 184.17
45
47. RMZ
Bin Frequency
-13.4% 0
-8.6% 1
-3.7% 10
1.2% 18
6.1% 23
10.9% 7
15.8% 1
S&P 500
Bin Frequency
-10.2% 0
-6.4% 2
-2.7% 7
1.1% 17
4.8% 27
8.6% 5
12.3% 2
More 0
47
48. Revenue
Host’s historical growth rates underwent
sporadic changes over the past 5 years,
highlighting the volatility of financial metrics
in the REIT industry. The slowing of revenue
growth at a steady rate since 2011 is due to
less hotel acquisitions than in most years,
which generally are the source of new
revenue. Also, increasing average daily rates
and better occupancy usually lead to
increased revenues. Host’s smaller
competitors demonstrated the ability to
increase revenues more effectively in recent
years.
Gross Profit
The high growth in gross profit is partially due to a decrease in depreciation and SGA in the years 2011
and 2013, and due to the recovery from the
recession from 2009 to 2010. The increase in
gross profit in 2011 is also attributed to a
large bump in revenues from the acquisitions
of new properties.
EBITDA
Aside from 2009, there are consistently large increases in EBITDA since 2010. This highlights the effect of
depreciation on the bottom line in a REIT. REITs are extremely asset heavy because of all the property
and therefore obligate huge depreciation expense every year. Adding back depreciation amplifies the
effect on EBITDA.
Net Income
Net income was very up and down for HST and only increased for the first time in the past five years in
2013. The decrease in net income from year to year is often due to inability to cover interest, as REITs
take on high debt in order to meet the 90% payout of taxable income requirement.
LHO
2013 2012 2011 2010
Revenue 11.52% 13.43% 20.62% 20.39%
Gross Profit 126.37% 12.35% 62.00% 525.00%
EBITDA 48.16% 17.22% 29.81% 41.23%
Net Income 128.89% 26.76% 61.36% 2100.00%
2013 2012 2011 2010 2009
Revenue 2.12% 7.32% 13.48% 8.69% -25.18%
Gross Profit 33.33% 18.89% 46.15% 140.22% -88.35%
EBITDA 16.58% 24.76% 48.03% 16.80% -63.55%
Net Income 411.29% -487.50% -87.88% -48.84% -160.42%
Net PPE -5.12% 1.80% 8.27% 2.77% -4.73%
Dividends 67.38% 167.14% 250.00% -52.38% -91.95%
Host Hotels and Resorts
2013 2012 2011 2010
Revenue 13.58% 12.52% 39.01% 13.28%
Gross Profit 10.91% 30.95% 50.00% 104.88%
EBITDA 9.93% 15.42% 19.34% 49.30%
Net Income 20.56% 160.98% -510.00% -77.78%
RLJ
2013 2012 2011 2010
Revenue 20.59% 7.19% 11.52% 4.63%
Gross Profit 15.33% -1.44% -14.72% -1.51%
EBITDA 9.95% 3.99% -0.54% 38.85%
Net Income 30.08% -12.50% -20.00% 804.76%
HPT
48
49. Host Financial Ratios
Leverage
Notice the decrease in LTD/Total Capital and the increase in Equity/Total Capital over the past
five years. This change is due to secondary stock issues each year increasing Host’s total equity
and leading to a slight change in capital structure over time.
Liquidity
The decrease in current ratio is a definite concern and a sign of increasing likelihood of financial
distress. Current assets are decreasing relative to current liabilities, highlighting the S/T debt
issues used to pay the necessary amount of dividends.
Accounts receivable days are higher in 2013 than in any of the years since 2009, suggesting a
potential need for updates to collection strategies and policies.
PROFITABILITY 2013 2012 2011 2010 2009
Return On Total Equity (ROE) 4.25% 0.19% -0.22% -1.96% -4.38%
Return On Assets (ROA) 2.47% 0.10% -0.11% -1.03% -2.21%
Return On Invested Capital (ROIC) 3.69% 0.88% 2.45% 1.45% 0.73%
Gross Profit Margin 25.75% 27.19% 25.49% 24.59% 24.92%
Operating Profit Margin 9.91% 8.17% 10.22% 8.81% 6.20%
Net Profit Margin 6.14% 1.15% -0.30% -2.93% -6.06%
ASSET UTILIZATION 2013 2012 2011 2010 2009
Assets Per Employee 52,950,413 55,768,240 59,671,233 61,137,931 67,500,000
Assets Turnover 40.32% 40.68% 38.25% 35.75% 33.12%
LEVERAGE 2013 2012 2011 2010 2009
Total Debt/Equity 65.86% 79.28% 86.16% 86.90% 95.86%
LTD/Total Capital 38.98% 42.25% 43.79% 44.76% 44.22%
Equity/Total Capital 59.19% 56.17% 54.62% 53.38% 53.49%
Total Debt/Total Assets 37.15% 41.64% 44.02% 44.13% 46.49%
Common Equity/Total Assets 56.41% 52.52% 51.09% 50.79% 48.50%
Total Capital/Total Assets 95.30% 93.50% 93.54% 95.14% 90.67%
Fixed Charge Coverage Ratio 178.07% 110.32% 94.34% 56.60% 31.17%
Fixed Assets/ Equity 152.12% 169.79% 170.48% 166.81% 168.02%
LIQUIDITY 2013 2012 2011 2010 2009
Current Ratio 180.44% 185.49% 264.11% 244.46% 439.32%
Cash Ratio 104.11% 55.01% 129.47% 143.43% 310.40%
Accounts Receivable Days 4.66 4.04 2.99 3.04 4.13
Dupont Analysis 2013 2012 2011 2010 2009
Dupont Analysis 4.25% 0.19% -0.22% -1.96% -4.38%
Profit Margin (Operating Efficiency) 6.14% 0.25% -0.30% -2.88% -6.69%
Total Asset Turnover (Asset Use) 40.32% 40.68% 38.18% 35.75% 33.12%
Equity Multiplier (Financial Leverage) 171.95% 185.18% 190.51% 190.27% 197.72%
49
50. Host vs. Industry, 2013
Profitability
Host’s ROE stands out as it is in the middle of the pack relative to the industry and closest
competitors. In order to increase ROE, Host’s ROA must constantly shoot up and new assets
must perform very well. This stresses the importance of finding exceptional value in new
acquisitions and other capital expenditures. As an upper upscale hotel provider, it is sometimes
more difficult to project things such as occupancy, while things like ADR are easier to predict.
Other REITs that are focused on hotels that appeal to larger groups of transient customers can
more accurately predict higher occupancy in its hotels.
COMPANY HST RLJ LHO HPT INDUSTRY
PROFITABILITY 2013 2013 2013 2013 2013
Return On Total Equity (ROE) 4.25% 5.76% 3.59% 3.96% 4.39%
Return On Assets (ROA) 2.47% 3.20% 2.08% 1.74% 2.37%
Return On Invested Capital (ROIC) 3.69% 5.26% 3.98% 4.58% 4.38%
Gross Profit Margin 25.75% 40.73% 0.00% 40.56% 26.76%
Operating Profit Margin 9.91% 16.69% 9.76% 17.49% 13.46%
Net Profit Margin 6.14% 11.64% 7.64% 6.46% 7.97%
ASSET UTILIZATION 2013 2013 2013 2013 2013
Assets Per Employee 52,950,413 70,150,943 180,848,484 7,278,048 77,806,972
Assets Turnover 40.32% 27.00% 27.00% 27.00% 30.33%
LEVERAGE 2013 2013 2013 2013 2013
Total Debt/Equity 65.86% 66.00% 60.00% 96.00% 71.96%
LTD/Total Capital 38.98% 39.85% 37.37% 46.69% 40.72%
Equity/Total Capital 59.19% 60.15% 62.63% 53.31% 58.82%
Total Debt/Total Assets 37.15% 37.92% 35.05% 45.31% 38.86%
Common Equity/Total Assets 56.41% 57.24% 58.73% 51.73% 56.02%
Total Capital/Total Assets 95.30% 95.16% 93.77% 97.03% 95.32%
Fixed Assets/ Equity 152.12% 185.57% 160.87% 183.35% 170.48%
LIQUIDITY 2013 2013 2013 2013 2013
Current Ratio 180.44% 282.00% 89.19% 61.00% 153.16%
Cash Ratio 104.11% 187.29% 5.86% 12.43% 77.42%
Accounts Receivable Days 4.66 8.65 40.08 8.87 15.57
Dupont Analysis 2013 2013 2013 2013 2013
Dupont Analysis 4.25% 5.76% 3.59% 3.96% 4.39%
Profit Margin (Operating Efficiency) 6.14% 11.65% 9.69% 8.50% 8.99%
Total Asset Turnover (Asset Use) 40.32% 26.09% 25.94% 26.21% 29.64%
Equity Multiplier (Financial Leverage) 171.95% 174.72% 170.28% 193.33% 177.57%
50
51. DuPont Analysis: Based on most recent filings
ROE is the rate of return on shareholders’ equity, or the firm’s ability to make profits based off of
the stake in shareholders’ equity. Host ROE of 5.84%, which is well below satisfactory.
The profit margin indicates that Host earns $.0907 per one dollar of sales, extremely low for a
company of this size. Host profit margin is below the average, 10.97%, of the comparable
companies dragging down the entirety of the ROE.
Total asset turnover indicates Hosts ability to generate sales utilizing each dollar of assets. Host
exhibits the greatest asset turnover when compared to HPT, LHO, and RLJ, which is also the
greatest component of Host's most current ROE.
Hosts financial leverage, or equity multiplier, indicates that the purchase of assets is financed
through a greater proportion to debt, rather than equity. This portion of the DuPont analysis is the
most important because it further explains where Hosts capital arises.
Without the DuPont formula, ROE can be calculated using only net income and shareholders’ equity. If
this were to be carried out, the amount of financial leverage would be absent, and lead investors to believe
that something appears more desirable than it really is. Overall, when calculating ROE using DuPont
Analysis, a higher profit margin, asset turnover, and equity multiplier are ideal in order to increase the
return on equity.
HST HPT LHO RLJ Average
Net Income $476,000,000 $151,800,000 $137,200,000 $128,800,000 $223,450,000
Sales $5,249,000,000 $1,643,200,000 $1,054,000,000 $1,026,400,000 $2,243,150,000
Total Assets $12,215,000,000 $5,988,900,000 $3,577,800,000 $4,108,800,000 $6,472,625,000
Total Equity $7,595,000,000 $3,024,800,000 $2,057,400,000 $2,383,000,000 $3,765,050,000
Profit Margin 9.07% 9.24% 13.02% 12.55% 10.97%
Total Assets Turnover 42.97% 27.44% 29.46% 24.98% 31.21%
Equity Multiplier 160.83% 197.99% 173.90% 172.42% 176.29%
ROA 3.90% 2.53% 3.83% 3.13% 3.45%
ROE 6.27% 5.02% 6.67% 5.40% 5.84%
-7.00%
-5.00%
-3.00%
-1.00%
1.00%
3.00%
5.00%
7.00%
2009 2010 2011 2012 2013
DuPont Analysis
ROE Profit Margin ROA
51
53. Altman’s Z-Score: Based on most recent filings
Altman’s Z-Score is a credit strength tool used by publically traded companies to determine the likelihood
of bankruptcy. Using five weighted financial ratios the z-score is calculated as:
The liquidity ratio of net working capital to total assets helps stakeholders analyze the extent of
assets tied up in working capital, or amount of assets required to run day to day operations. When
the ratio is greater than zero the current liabilities are covered and can be paid off within the year.
Retained earnings to total assets determines a company’s ability to accumulate earnings using
total assets. When the ratio is high, the company is able to continuously retain more profits. In a
growing company this ratio continues to increase.
The earnings before taxes and interest to total assets is the return on total assets shown in
proportion of a company’s profits to total assets. This ratio determines the operating profit a
company earns from the assets owned. When this ratio exceeds zero, assets are being used in a
proper manner in order to generate earnings, and the greater the number, the better functionality
of assets. This is similar to ROA, however, ROA uses net income rather than EBIT, which takes
into account payments on taxes and interest.
Market value of equity to total liabilities compares the stock price of a company to the total value
of debt the company possesses. Owners and investors care about this ratio because it is
essentially the markets view on the financial position of a company.
The efficiency ratio of sales to total assets measures the company’s ability to generate sales using
the assets owned. This shows how many sales are generated per one dollar of assets.
Host’s Z-Score of 2.1271, below the benchmark of 2.675, places the firm in the “grey zone”, implying
financial distress with possible bankruptcy. The average Z-Score within the compared companies above is
1.6575, indicating a prediction of bankruptcy in one year. When looking at the average retained earnings
to total assets, 6.41% appears lower than expected. Three out of four companies showed a negative
retained earnings due to impact of REIT dividend policies.
Z=1.2x+1.4x+3.3x+0.6x+x
HST HPT LHO RLJ Average
Working Capital -$117,000,000 -$53,000,000 -$351,476,000 $472,444,594 -$12,257,852
Current Assets $473,000,000 $84,000,000 $86,845,000 $472,607,000 $279,113,000
Current Liabilities $590,000,000 $137,000,000 $438,321,000 $162,406 $291,370,852
Retained Earnings -$1,148,000,000 $2,609,519,000 -$273,244,000 -$37,223,000 $287,763,000
EBIT $225,000,000 $89,031,000 $66,849,000 $65,370,000 $111,562,500
Market Value of Equity $16,110,000,000 $4,040,000,000 $3,550,000,000 $3,720,000,000 $6,855,000,000
Sales $1,431,000,000 $1,643,000,000 $313,105 $295,047,000 $842,340,026
Total Assets $12,215,000,000 $5,988,925,000 $3,577,842,000 $4,108,764,000 $6,472,632,750
Total Liabilities $4,620,000,000 $2,964,141,000 $1,526,515,000 $1,743,303,000 $2,713,489,750
Working Capital/ Total Assets -0.96% -0.88% -9.82% 11.50% -0.04%
Retained Earnings/ Total Assets -9.40% 43.57% -7.64% -0.91% 6.41%
EBIT/ Total Assets 1.84% 1.49% 1.87% 1.59% 1.70%
Market Value of Equity/ Total Liabilities 348.70% 136.30% 232.56% 213.39% 232.74%
Sales/ Total Assets 11.72% 27.43% 0.01% 7.18% 11.58%
Z-Score 2.1271 1.7406 1.2323 1.5299 1.6575
53
54. UNIT III: COST OF CAPITAL, CAPITAL STRUCTURE ANALYSIS AND DISTRIBUTIONS 54
TABLE OF CONTENTS III 54
EXECUTIVE SUMMARY III 55
DEBT STRUCTURE 56
LEVERAGE RATIOS 58
COST OF EQUITY 60
TARGET CAPITAL STRUCTURE 65
MARKET VALUE CAPITAL STRUCTURE 68
PROJECTED CAPITAL STRUCTURE 69
DISTRIBUTIONS AND PLOWBACK 70
54
55. Host Hotels & Resorts
Debt Structure
-BV: $4.4 trillion
-MV: $4.86 trillion
Cost of Debt
-After tax: 1.50%
Leverage Ratios
-Debt/EBITDA: 2.3%
-Debt/Equity: 24.8%
-Debt/Assets: 33.1%
-Debt/Capital: 34.7%
CAPM Model
-Beta: 1.29
-Risk Premium: 9.34%
-CAPM: 11.67%
WACC
-Cost of Eq: 11.67%
-Cost of Debt: 1.5%
-Wt. of Equity: 80.07%
-Wt. of Debt: 19.93%
Enterprise Value
Q3 2014: $19.98B
EVA
Q3 2014: ($663M)
Target Cap Structure
Equity: 75%
Debt: 25%
New Beta: 1.03
New Cost of Eq.: 9.8%
Cost of Capital, Capital Structure & Distributions
Debt Structure
Host’s debt structure can be broken down into a
mixture of outstanding bonds and outstanding loans.
The average time to maturity on HST’s
bonds is 9.8 years, and they range in value
from $300M to $500M. Total debt is $4.4B.
Unsecured loans use floating rates, causing
high volatility vs. market rates. The loans
have a value of $1.5 trillion and are not
traded on the open market but held by a
credit institution.
HST market value of debt is $4,858,268,000
Cost of Debt
Host’s after tax cost of debt hovers in the same area as its closest competitors and the industry at 1.5%.
Cost of debt is low in comparison to cost of equity which remains high due to dividend policy.
External Equity
It’s vitally important to reiterate that Host conducts new issues of equity year over year in order to
finance a mix of capital expenditures, and sometimes dividend payments. Capital expenditures include
mostly acquisitions and redevelopments, which can be broken down into renovations but also repairs.
It should be noted that:
Secondary Offerings are usually at a discount
Issuing new shares dilutes ownership
New share issues are necessary to keep the company’s wheels spinning
Host’s cost of equity is the second highest (LHO) among its industry and closest competitors at
approximately 12%. This brings up its WACC significantly due to the fact that weight of equity is
80.07% and weight of debt is only the remaining 19.93%.
WACC
2014 Q3 WACC is 9.30%. This is a decrease from EOY 2013 when WACC was 9.70%. Host has been
able to successfully decrease its WACC through a lessening of both cost of equity and cost of debt.
Target Capital Structure
When examining capital structure, an important piece is to keep
debt low. Host carries a huge amount of illiquid assets on their
BS, making it imperative to keep debt low and avoid high
probability of default on loans. It would not be ideal to have to
sell income generating assets to pay debt, as those assets are
necessary to keep cash flowing into the company. That being
said, HST’s target blend is 75% equity and 25% debt.
55
56. Debt Structure
Current Book Value of Debt
Bonds
Host has a total of seven bonds outstanding
ranging in value from $300MM to $500MM.
The average remaining time to maturity is 9.8
years, with the closest maturity date is June
2019 and the latest in October 2023. The
current book value of debt as released for Q3
earnings, has total debt of sitting at $4,400MM
(i.e. $4.4 trillion). The six callable bonds pay
semi-annual coupon payments and the
convention pays quarterly coupons. This gives
the current BV of debt a weight of 19.9%, just short of HST’s target structure of 25% debt.
All of these outstanding bonds are callable (one is both convertible and callable), which are riskier for the
investor, yet of the seven bonds only one is priced at a discount. The median of the price returned a
premium of 1.074 to par. That’s a 7% premium for callable bonds, proving that Host has compelling
coupon rates relative to the market. Even with their BB+ rating, Host effectively compensates all
stakeholders associated with the company. Below is the list of current outstanding bonds:
Loans
In addition to bonds to the market, Host issues unsecured loans with tranches from credit facilities. These
are all floating rate loans, making them highly volatile against market rates. These gave a total book value
$1.5 trillion and will not fluctuate as the loans are not traded on the open market, but rather held by a
credit institution.
56
57. Debt Structure
Maturity Dates
The maturity dates of these bonds is important to
analyze because this will determine when the
principal of that outstanding debt is due back.
For Host, this could cause cash flow issues and
affect the day to day operations. It is also
imperative for investors to know these dates, as
free cash flows may be limited if these maturity
dates fall near the same date.
For HST, the dates to be concerned with (as seen
by the graph to the right) are 2018 and 2023. In
2018 all of Host’s 75% of their loan debt expires and in 2023, two of the bonds will have reached
maturity.
Market Value of Debt
The market value of debt was computed by taking
the price/10 to get the price of par, then multiplied
by the principal due for each individual bond, then
summed to get the market value of bonds. This
method was much better than using a Market/Book
ratio, as that factors in equity and assets, whereas
this gave a bond by bond market value giving it
more accuracy.
The loans were chosen to remain at the par price
because they are not traded on the market. The
interest rates are the only flexible
element for these loans, so the interest
paid on them will fluctuate with the
market.
The total market value of all debt is
estimated to be approximately $4.86
trillion, giving the MVdebt/BVdebt a value
of 1.1. This market to book value
reflects the fact that HST is likely to be
undervalued.
57
58. Leverage Ratios
Methodology
All the leverage ratios listed below were pulled from the Bloomberg research domain to determine the
relationship between REITs leverage and capital structure. Through comparing HST, RLJ, LHO, and
HPT, the companies in general have similar debt structures. Long-term debt-to-equity reveals differing
structures throughtout the industry. On one end, HPT maintains a 0% ratio, and opposing its strucutre,
RLJ reveals a 65.68% ratio. This dramatic increase from shows that REITs can be operational with and
with out long term debt. Each company continues to issue new debt year over year to assist its funding
for vast amounts of properties.
Calculating Cost of Debt
The after tax cost of debt for the companies in the industry is calculated by multiplying total debt
by the weight of debt, then further multiplying that value by (1-tax rate)
Total debt was pulled from Bloomberg
Weight of debt was calculated by total debt divided by the sum of debt and equity
Tax rate calculated through tax expense divided by taxable income
Industry Comparison
In comparison, HST is consistently below
the industry for all leverage ratios. HST
debt structure of 23.16% debt and 76.84%
equity and being below the industry, leads
to the conclusion that Host finances
operations in greater proportion to equity
than the other REITs.
Company HST RLJ LHO HPT Industry
New Debt/ EBITDA 2.09% 3.36% 4.39% 4.68% 3.63%
New Debt/ EBIT 5.26% 6.55% 8.96% 9.80% 7.64%
LTD/ Equity 14.81% 65.68% 49.40% 0 32.47%
LTD/ Capital 9.67% 39.64% 30.75% 0 20.02%
LTD/ Total Assets 9.22% 37.91% 28.89% 0 19.01%
New Debt/ Equity 47.99% 50.20% 58.86% 86.87% 60.98%
New Debt/ Capital 31.34% 30.30% 36.90% 46.31% 36.21%
Financial Leverage Ratios (Q3 2014)
58
59. Leverage Ratios
Overview
Most relevant leverage ratios
o Total Debt/EBITDA:
EBITDA is good for REITs because high net PPE, so without depreciation, gives
a good representation of operations
o Debt/Equity:
Gives general idea of sources of capital
Defines the sources of capital
o Debt/Assets:
Shows how assets are funded, lower when funded more by equity
Low ratio due to the year to year issuance of stock
o Debt/Capital:
More specific to capital assets such as net plant, property, and equipment
Describes how the vast amount of hotels are funded
Competitors Total Debt Ratios
Total debt ratios are relevant in the REIT industry because total debt is the source to finance all assets.
With large amounts of assets, total debt ratios are significant to REITs because if will be better off if they
are able to detect problems before they occur.
59
60. Cost of Equity
Overview
Host Hotels & Resorts is the largest Real Estate Investment Trust with a current market capitalization of
$17.24 billion. As a REIT, HST is required by the IRS/NAREIT to payout 90% of its taxable income to
maintain its status. In order to grow, maintain current properties, and fund debt repayments, HST
primarily uses external sources of capital to fund its operations by issuing secondary shares of common
stock year over year to continue operations. With more capital inflows, revenue increased from 2004 to
the most recent fiscal year 2013. As a result of increased revenue, cost of goods sold increased, at a
slower rate however. Becoming a more efficient company, taxable income increases, resulting in greater
payouts, and overall requiring additional capital. Hosts ability to access such capital depends on its
existing indebtedness, market perception of potential growth, projected earnings, and fluctuations in
market price.
Capital Expenditures
o Host consistently uses CAPX for acquisitions and redevelopment
o This keeps hotels in superior condition to maintain its upper upscale reputation
Acquisitions
B2 Miami Hotel acquired for $58 million
After 2013 year end, acquired 151-room Powell Hotel in San Francisco
May 31, 2013 acquired 426-room Hyatt Place on Waikiki Beach in
Honolulu for $138.5 million
December 2013 acquired New York Marriott Marquis Times Square for
$19.9 million
Redevelopment
On November 12, 2013, opened the 255-room Hyatt Place Nashville
Downtown through a 50/50 joint venture with White Lodging Services
for $43 million
Renovated 21k sq. ft. and 600 rooms at the Sheraton Memphis
Since December 31, 2013, developed two hotels in Rio de Janeiro
costing $45 million
Secondary offerings
Offered at a discount with priority for existing shareholders
Decrease the dilution effect
Good investment even with high risk due to payout policy
60
61. Cost of Equity
Capital Asset Pricing Model
The CAPM is the relationship between the risk and expected return used to price risky securities.
Investors need to be compensated in two aspects:
Time Value of Money: the risk-free rate which compensates investors over a period of time
Risk: the amount of compensation an investor needs for accepting additional risk, beta,
comparing security returns to the market, and
the market risk premium
Methodology
Hosts CAPM is calculated using the expected market return, risk-free rate, and HSTs unlevered
beta
o Expected Market Return: 9.57%
Based on relevant country data pulled from Bloomberg
o Risk-free rate: 2.33%
Based on relevant country data pulled form Bloomberg
o Beta: 1.29
Measures the specific risk of Host relative to the market as a whole. Hosts beta
exceeds market beta by .29, representing greater volatility that the market
Based on equity data for HST specifically
Risk factors:
Positive shifts in the market will increase investment return
Negative shifts in the market will decrease investment return
Lessons
The contribution of risk to a portfolio depends on the stocks covariance in the market
CAPM implies that undiversifiable risk is priced in proportion to market variance
CAPM insights:
o Alpha is driven to 0
o Market price of risk is the same across the board
Market Return 9.57% Beta 1.29
Risk-Free Rate 2.33% CAPM 11.67%
Host DataCountry Data
Cost of Equity (Q3 2014)
HST 9.60%
RLJ 7.70%
LHO 9.40%
HPT 6.40%
INDUSTRY 8.28%
Waighted Average Cost of Capital (Q3 2014)
61
62. Cost of Equity
Advantages
Considers systematic risk reflecting most investors have well-diversified portfolios where
unsystematic risk has been virtually eliminated
Better than the dividend growth model by taking into consideration the systematic risk of a
specific company relative to the stock market
Superior to WACC by providing discount rates
Derives the relationship between required return and market risk
CAPM is used to discount investments future cash flow to their present value, determining fair
value
Further, investors can compare personal approximations to the fair price of a security. If
estimates are less than fair price, the stock’s considered to be overpriced
Disadvantages
Many unrealistic assumptions including
o Investors only plan for one period at a time: planning for one period may be more
sufficient for investors that day trading
o All investors have the same beliefs: all investors have different views on what they
believe will occur in the market
o Investors can borrow at the risk-free rate: created by portfolio theory providing only a
minimum level of return required by investors
o Investors have full information: only a small percentage of less than 2% of all investors
are informed traders, the remainder is made up of uninformed traders and delusional
traders, those who think they are informed but are mistaken
o There are no transaction cost associated with trades
The assumptions listed above all deviate creating criticism for the use of CAPM
Significance
Used to determine cost of equity, which is then used in calculating WACC
Hosts CAPM directly relates to its operations. Over the past 8 years, Host has issued 233 billion
shares, totaling 756.7 billion in 2013. Given the substantial amount of shares outstanding and the
REIT requirement of a 90% payout, cost of equity drives its ability to raise external capital in the
form of common equity. With an unlevered beta exceeding market beta, cost of equity increases
to compensate potential shareholders.
For Host to decrease its existing cost of equity, either
o The market risk premium needs to decrease
o The rate at which investors can borrow, risk-free, needs to increase or,
o Host beta needs to decrease, achieved by reaching the optimal target structure of 25%
debt and 75% equity
62
63. Cost of Equity
Industry Comparison
Results
As REITS, Host Hotels & Resorts, RLJ Lodging Trust, LaSalle Hotel Properties, and Hospitality
Properties Trust must conform to IRS and NAREIT conduct to preserve REIT status. Given
significant payouts with increased shares outstanding year over year, CAPM plays a major role in
the company’s flexibility in raise capital
Host cost of equity lies in the middle of its competition and above the industry overall
o Due to specific risk of 1.29, HSTs cost of equity equates to 11.67%
o Compared to the industry, HST pays greater costs for raising external capital
LaSalle endures the greatest costs of equity, caused by its beta exceeding market beta by .307
With the smallest beta of 1.022, nearly mirroring the market, RLJ pays the least amount in costs
for external equity
The specific risk associated with each company compared to the market determines each
company’s beta
o In the industry, fluctuations in the cost of equity depend on firm specific risk
o The continuous issuances of shares dilutes both ownership in the company and earnings
per share
Company HST RLJ LHO HPT INDUSTRY
Market Return 9.57% 9.57% 9.57% 9.57% 9.57%
Risk-Free Rate 2.33% 2.33% 2.33% 2.33% 2.33%
Beta 1.29 1.022 1.307 1.134 1.188
CAPM 11.67% 9.73% 11.79% 10.54% 98.77%
Cost of Equity (Q3 2014)
63
64. Cost of Equity
Hosts historical cost of capital bell curved from 2005 to 2013, with the peak in 2010. During this period,
HST experienced rising costs of equity with relatively constant costs of debt. From 2005 to 2009, HST
had preferred stock outstanding, contributing to the rising cost of capital. In 2010, preferred stock was
completely eliminated, decreasing the factors affecting WACC, however, recording the largest cost of
equity at 17.9%, WACC still rose to 12.7%. After 2010, HST experienced a decreasing WACC due to
the decreasing weight of debt, increasing weight of equity, decreasing cost of equity, and overall
decreasing tax rate.
Factors contributing to WACC
Capital structure affects cost of capital through assigning proper weights to debt and equity. As
the weight of equity rises, the weight of debt falls, and the cost of capital rises.
Cost of debt and equity rising or falling impacts WACC in conjunction
Tax is factored into debt. Increasing taxes decrease the after tax cost of debt, leading to a
decreased WACC. Taxes are determined by tax expense divided by taxable income.
Weight Cost Weight * Cost
Equity 56.00% 14.90% 8.40%
After Tax Cost of Debt 43.30% 5.10% 2.20%
Prefered Equity 0.70% 9.30% 10.00%
WACC 10.60%
Weight Cost Weight * Cost
Equity 40.00% 16.50% 6.60%
After Tax Cost of Debt 59.00% 1.80% 1.00%
Prefered Equity 1.00% 9.00% 10.00%
WACC 7.70%
Weight Cost Weight * Cost
Equity 60.90% 12.30% 7.50%
After Tax Cost of Debt 38.40% 5.20% 2.00%
Prefered Equity 0.70% 9.00% 0.10%
WACC 9.60%
Weight Cost Weight * Cost
Equity 68.20% 9.10% 6.20%
After Tax Cost of Debt 31.30% 6.30% 2.00%
Prefered Equity 0.50% 14.00% 0.10%
WACC 8.20%
Weight Cost Weight * Cost
Equity 54.90% 9.70% 5.30%
After Tax Cost of Debt 43.10% 5.50% 2.40%
Prefered Equity 1.90% 11.20% 0.20%
WACC 7.90%
Cost of Capital (2006)
Cost of Capital (2005)
Cost of Capital (2007)
Cost of Capital (2009)
Cost of Capital (2008)
Year 2005 2006 2007 2008 2009 2010 2011 2012 2013
WACC 7.90% 8.20% 9.60% 7.70% 10.60% 12.70% 9.90% 9.80% 9.15%
Change in WACC -$ 3.66% 14.58% -24.68% 27.36% 16.54% -28.28% -1.02% -7.10%
Historical WACC
Weight Cost Weight * Cost
Equity 80.10% 11.70% 9.30%
After Tax Cost of Debt 19.90% 1.50% 0.30%
Prefered Equity 0.00% 0.00% 0.00%
WACC 9.60%
Weight Cost Weight * Cost
Equity 78.28% 12.80% 10.02%
After Tax Cost of Debt 21.72% 1.90% 0.41%
Prefered Equity 0.00% 0.00% 0.00%
WACC 9.15%
Weight Cost Weight * Cost
Equity 67.70% 14.30% 9.70%
After Tax Cost of Debt 32.30% 0.50% 20.00%
Prefered Equity 0.00% 0.00% 0.00%
WACC 9.80%
Weight Cost Weight * Cost
Equity 64.40% 14.80% 9.60%
After Tax Cost of Debt 35.60% 0.90% 30.00%
Prefered Equity 0.00% 0.00% 0.00%
WACC 9.90%
Weight Cost Weight * Cost
Equity 67.80% 17.90% 12.10%
After Tax Cost of Debt 32.20% 1.80% 60.00%
Prefered Equity 0.00% 0.00% 0.00%
WACC 12.70%
Cost of Capital (2013)
Cost of Capital (2012)
Cost of Capital (2011)
Cost of Capital (Q3 2014)
Cost of Capital (2010)
64
65. Target Capital Structure
Overview
In order to maintain the qualification as a REIT, Host is required by the IRS to distribute 90% of
their taxable income to their stockholders. Given this criteria, HST primarily relies on external
sources of capital and cash from operations to finance growth. The assortment of debt and equity
sources include: senior unsecured bonds, senior notes and annual common stock offerings. HST
currently holds a balance of zero in preferred stock, though they have issued preferred stock in
the past. With the ability to issues debt at any time, Host targets a leverage ratio of approximately
3 x debt-to-EBITDA according to their most recent 10K. Keeping leverage at a lower rate
reduces overall cost of capital and earnings volatility, while simultaneously increases access to
capital. Earnings before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA), provides necessary operating information to management and investors to decipher
continuing performance. With improved operations, Hosts focuses on decreasing their debt-to-
equity ratio through acquisitions and other investments, and repaying/refinancing outstanding
debt to lower interest rates.
HST current debt structure
consists of debt valued at
19.93% of total capital and
equity valued at 80.07% of total
capital.
Targeted Capital structure
consists of a lower debt-to-
equity ratio. With debt
representing 25% of total
capital and equity representing
75% of total capital.
Decreasing the value of debt
has an equal reaction in
lowering leverage. With lower
leverage, overall cost of equity
will decrease, increasing access
to capital, and allowing HST to
become more flexible when
additional capital is necessary.
65
