Earnings Scorecard: Host Hotels & Resorts

Host Hotels & Resorts Inc. (HST) reported second quarter 2011 FFO (funds from operations) of $210 million or 30 cents per share, compared with $151 million or 23 cents per share in the year-earlier quarter.

Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income. Recurring FFO in the quarter stood at 31 cents per share as against 23 cents in the year-ago quarter. The second quarter 2011 recurring FFO surpassed the Zacks Consensus Estimate by 2 cents.

We cover below the results of the recent earnings announcement, as well as the subsequent analyst estimate revisions and the Zacks ratings for the short and long-term outlook on the stock.

Second Quarter Review

Total revenue increased to $1,296 million during the reported quarter from $1,112 million in the year-ago quarter. The reported revenue exceeded the Zacks Consensus Estimate by $ 21 million.

Comparable hotel revenue per available room (RevPAR) increased 6.7% in the reported quarter, driven by higher occupancy (up 1.1%) and average daily rates.

Comparable hotel adjusted operating margins expanded 115 basis points (bps). During the quarter, adjusted EBITDA (Earnings before Interest Expense, Income Taxes, Depreciation and Amortization) climbed 25% to $313 million.

Earnings Estimate Revisions - Overview

Fiscal 2011 earnings estimates for HST have moved in both directions since the earnings release, which imply that the analysts are cautious about the current fiscal performance of the company. Let’s dig into the earnings estimate in details.

Agreement of Estimate Revisions

In the last 30 days, earnings estimates for the upcoming quarter had no revisions. For fiscal 2011, earnings estimates were raised by 3 analysts out of 18 covering the stock over the last 30 days.

However, none of the analysts moved in the opposite direction in the same period. This indicates a positive directional movement for full fiscal earnings.

Magnitude of Estimate Revisions

Earnings estimates for the upcoming quarter have decreased from 19 cents to 17 cents in the last 30 days and from 93 cents to 92 cents for fiscal 2011, which indicates that despite the gradual improvement in fundamentals they were still challenged by the broader economic trends.

Moving Forward

Host Hotels is the largest lodging REIT with high quality lodging assets in geographically diverse locations. Over the years, the company has executed a focused and disciplined long-term strategic plan to acquire high quality lodging assets in hard-to-replicate areas, which have the potential for significant capital appreciation. This provides significant upside potential for the company.

Host Hotels maximizes the value of its existing portfolio through aggressive asset management, and works diligently with the managers of its hotels to reduce operating costs and increase revenues, and conducts selective capital improvements and expansions designed to improve operations.

However, the acquisition spree of Host Hotels involves significant upfront operating expenses with limited near-term profitability. New hotels usually take time to generate revenues, and will continue to drag margins till they get established.

Host Hotels currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, LaSalle Hotel Properties (LHO) also retains a Zacks #3 Rank.

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