UPDATE: Host Hotels Appeases Wall St. With Earnings Beat

Host Hotels & Resorts Inc. (HST) appeased Wall Street Wednesday with slightly better-than-expected third quarter earnings even as the real-estate investment trust posted its third consecutive quarterly loss amid a prolonged travel and tourism downturn.

Host's results supported the tone set by Marriott International's (MAR) earnings last week that the worst may be over for the embattled lodging industry, while formidable challenges remain. Host sports a strong balance sheet and sits on a plush cash cushion of about $1 billion. As such, the market is shifting focus to what acquisition opportunities are in store for Host which has a market cap of roughly $7 billion.

"Host has a more enviable balance sheet and strong access to both debt and equity capital. We believe the company is going to participate in the buying opportunities that will eventually present themselves," in the distressed market, says John Arabia, an analyst at Green Street Advisors.

He noted the company has a very strong management team and relatively strong capital structure. But, its size is a challenge.

"It has to engage in a lot of acquisitions to create a meaningful amount of value for its large shareholder base," he said.

During the earnings call, management didn't outline specific acquisitions but said they are in wait-and-see mode in Europe and are working on a number of opportunities in Asia where the region's economies are experiencing a quicker economic recovery compared to global peers.

The company has been in selling mode during the last quarter. It disclosed that it sold four non-core properties, including the 253-room Washington Dulles Marriott Suites and the 430-room Boston Marriott Newton, for about $90 million.

"There are certainly ... over the next two or three years, a number of additional non-core assets that we would look to sell. Our sense is that we probably would not be that active over the next several months," said W. Edward Walter, president and chief executive during the call, noting sales could occur on an opportunistic basis.

"As we think about 2010 ... I would expect that our disposition pace would probably be a bit slower than we thought this year," he said.

Host Hotels owns 112 properties globally and hires operating companies such as Marriott or Hilton Hotels Corp. to manage them. Among commercial REITs, hoteliers have been among the worst hit as they struggle to fill rooms, especially those catering to the upscale and luxury market. That has forced hotels across the board to cut costs, including work force reductions, as tumbling occupancy and room rates have left some companies without enough cash to cover expenses.

Although hotel room rates and revenue projections continue on a downward spiral, lodging stocks are on a torrid upswing as investors try to get ahead of any recovery. For instance Host's stock is up more than 50% in the $11 range since the beginning of the year and well over 200% from its 52-week low, when investors were spooked about operating fundamentals and looming debt maturities. The company's shares still well below the $28.71 high reached in Feb. 2007.

"All the hotels stocks have rallied considerably. There was so much uncertainty about where operating fundamentals were going ... and what was going to happen in credit markets and if there was going to be access to capital to pay off maturing debt," said Arabia.

"There has been some comfort level that the industry is approaching the bottom and clearly the credit markets have improved," he added.

Host gave a slightly more upbeat outlook for the year, and now expects a loss of 42 cents to 47 cents a share, with funds from operations of 46 cents to 51 cents, including some items, based on a 20% to 22% drop in revenue per available room.

The company in July reduced its fiscal-year forecast to a loss of 46 cents to 53 cents a share and FFO of 43 cents to 50 cents, based on a 20% to 23% drop in revpar.

For the quarter ended Sept. 11, the highly leveraged company reported a loss of $55 million, or 9 cents a share, compared with prior-year earnings of $47 million, or 9 cents share. Funds from operations, a key REIT profitability measurement, fell to 11 cents from 31 cents, including the one-time items.

Revenue decreased 20% to $912 million.

Analysts polled by Thomson Reuters most recently forecast a loss of 14 cents, FFO of 8 cents and revenue of $892 million. Revpar declined 21%, but it was an improvement from the prior quarter's 25% drop.

"It's the substantial decrease in revenue that is continuing to challenge the company because they have a high degree of fixed costs and a fair amount of debt," said C. Patrick Scholes, an analyst at FBR Capital Markets & Co.

Scholes noted that about 50% of Host's hotels are Marriott brands and that Marriott International suffered less revpar declines because unlike Host, they have exposure to select service hotels which have relatively fared better in the downturn.

-By A.D. Pruitt, Dow Jones Newswires; 212-416-2197; [e-mail]

(Tess Stynes contributed to this report)