THE HEDGEYE EDGE
Initiating Host Hotels (HST) as a Best Idea Long was predicated on an improving macro environment, superior market positioning and internal (proprietary) trackers that have been calling for an inflection in lodging fundamentals.
Over the long term, we are more cautious on the lodging space and particularly lodging REITs, given that supply (both traditional and non-traditional) will be a significant burden on the industry.
However, during times of pronounced macro acceleration and subsequent RevPAR acceleration (Revenue per available room), the stocks, and their respective multiples tend to look past the longer term headwinds. Our work suggests that HST is the best way to express a bullish view on RevPAR and its acceleration possibly starting in Q2 2017.
The crux of our HST stock pick can be parsed into the following key points:
- Hedgeye Macro Team forecasting 2H GDP pick up – RevPAR highly correlated to GDP
- Hedgeye Gaming, Lodging & Leisure team’s forward looking tools all pointing toward RevPAR acceleration: Forward ADR Survey indicating rate acceleration for the first time in a year; Our Leading Indicator RevPAR model suggests Q2 RevPAR acceleration; RevPAR Trend Model based on known industry data through May also pointing to acceleration
- HST 2017 RevPAR guidance implies no pick up in GDP or RevPAR growth through 2017. Even under that scenario, the midpoint of guidance is very achievable
- Short interest remains elevated, and the sell side is as bearish as they have been at any one point in two years
- HST valuation in line with current REIT average but below REIT average during decelerating RevPAR periods. Multiples expand 2x in accelerating RevPAR periods
- We see 25%+ upside on multiple expansion alone and the potential for another 5-10% EBITDA growth all while collecting a 4.5% dividend
GLL Sector Head Todd Jordan was on The Macro Show last week and walked through the thesis in greater detail. Click the video below to watch.
CLICK HERE to access the associated slides (HST slides begins on page 10).