Friday, February 19, 1999
Host Marriott Corp.
Price (2/18/99): $11 5/8
HOW DID IT FIND TROUBLE?
In 1929, at the beginning of the Great Depression, Irving Berlin wrote about "Puttin' on the Ritz." Today global travelers are puttin' off the Ritz. And the Four Seasons. And the Hyatt. Woe is Host Marriott (NYSE: HMT), cursed by owning a block of choice posh hotels at a time when so many factors are working against it.
The Asian contagion has dissuaded most Eastern tourists, and a stronger American dollar has made the company's premium-priced properties that much more unattainable to the rest of the globetrotting world.
While that still left the door open for domestic occupancy, things haven't panned out on that front, either. The ritzy offerings have always been attractive to corporate travelers but, in this era of enhanced communication through the Internet and improved teleconferencing and videoconferencing technology, many deep-pocket executives are staying home.
Even for those who do book a room, the recent past has made it far from a certainty that the guests will eventually check in. Airline strikes, like last year's prolonged Northwest (Nasdaq: NWAC) dispute and the recent AMR (NYSE: AMR) sick-out, have left behind vacancies due to canceled flights.
With so many external factors wreaking havoc at this high-rise purveyor, is it any wonder that shareholders have taken an express elevator... going down?
Host Marriott owns 126 upscale and luxury full-service hotel properties primarily operated under Marriott, Ritz-Carlton, Four Seasons, Hyatt, and Swissotel brand names. As of January, the company transformed itself into a Real Estate Investment Trust, or REIT.
As part of its REIT conversion, the company spun off its stake in more than thirty senior living communities to its shareholders. That segment, which made up less than 10% of total company revenues, now trades as Crestline Capital (NYSE: CLJ).
12-month sales: $1419 million
12-month income: $109million
12-month EPS: $0.52
Profit Margin: 7.7%
Market Cap: $2379.6 million
Cash: $575 million
Total Assets: $6,969 million
Total Liabilities: $5,267 million
Debt: $4,224 million
HOW COULD YOU HAVE SEEN IT COMING?
With so many things going wrong for Host Marriott, it would have been hard to miss each and every single debilitating factor. In April, just as the stock was peaking, the company announced the purchase of 12 luxury hotels from Blackstone. The property list included some exclusive beauties, like Philadelphia's Four Seasons, The Drake New York, and Boston's Ritz-Carlton.
However, instead of admiring the opulence and bidding the shares to new highs, a Foolish investor would have looked ahead. With stateside travel getting more prohibitive to foreigners and the local demand drying up, as sturdy as the properties were, those who grew up playing Monopoly and always aspiring for more and more hotels were about to get a startling reality check. Do not pass go. Do not collect $200.
WHERE TO FROM HERE?
Knowing that the international climate can just as quickly turn itself around, it is certainly not right to dismiss Host Marriott's prospects here. In 1995 the company had just 55 hotels, yet the stock traded for slightly higher than it does presently. Is Host Marriott worth less now with more than twice as many properties?
Probably not. Since that time, the company has managed to raise RevPAR (revenue per available room) every single year -- including its modest projections for 1999. While the year ahead won't bring the double-digit RevPAR that 1996 and 1997 provided, it is still positive.
The patient investor may very well be rewarded unless we hit a prolonged economic slump. Will the corporate travelers abandon homebody communication convenience and return to savor the Swissotel? Well, that might not happen either. Not in droves anyway.
REITs, and more specifically hotel chain REITs, turned in one of the worst market sector performances last year. You can see the confusion. Starwood Hotels & Resorts (NYSE: HOT) dropped its REIT designation just as Host Marriott was getting ready to tack it on. It has been a rudderless segment trying to cope with something as simple as overcapacity. The turnaround may not come for a few more quarters, but with the vacancy sign shining so bright, and the price so cheap, it might just be a rich yielding opportunity worth looking into.
--Rick Aristotle Munarriz
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