Host Hotels & Resorts, (NYSE: HST) stock has fallen about 20% over the past year,the result of a confluence of factors including weak revenue growth, a strong dollar, and concerns over higher borrowing costs as interest rates rise. Host is in the same boat as many of its peers and does have possible upside, considering the severity of the decline. However, other headwinds are looming that may provide further obstacles to a stock price recovery. Here are three reasons the stock could fall further, although they are more related to macro issues than specific to the company.
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Recessions are bad news for the leisure industry. A recession creates a double whammy with respect to expenditures. Consumers spend less discretionary income, and businesses pull back on sending their people on business trips. A U.S. recession is bad enough. However, a global recession would be even worse, and there are several signs pointing to that possibility.
The Chinese growth engine appears to be sputtering, with GDP growing at about 6.8%, the lowest since the financial crisis.Europe is undergoing a sovereign debt crisis. U.S. retail sales are struggling.U.S. factory orders are weakening.U.S. GDP is anemic.Corporate profits are being revised downwards.
Even more unsettling is that the Labor Force Participation Rate, which effectively measures the number of people who have left the workforce, is at a multi-decade low.It's estimated that there are 94 million people out of the workforce, which means an awful lot of people will not be going on vacation at Host hotels anytime soon.
Think about the implications if all of this were reversed. There would be so much to be optimistic about, that every five-star hotel would be booked. Even I would consider upgrading from Motel 6 to a place that actually serves, you know, things like food. Yet that's not where we are. At best, many indicators seem to be treading water, and I think that has hotel REIT investors spooked.
In addition, REITs like Host live and die on how they manage leverage, or debt. The most astute management will space out debt maturities across many years, combine both floating and fixed-rate debt, engage in various complex hedging transactions, and obtain non-recourse debt whenever possible.
Regardless of how deft management may be, rising interest rates set off fears with investors. Those who are not educated about Host's management and their ability to maneuver in any rate environment are more likely to assume that rising rates automatically means rising costs and thinner margins. Thus, they are more likely to shoot first and sell, then dig into a 10-K and see what real exposure there is to rate hikes.
While the Fed didn't raise rates this quarter, it has signalled its intention to raise the benchmark rates twice this year.
Host says in its 10-K that "Internationally, our focus is on premium assets in major Western European markets through our European Joint Venture platform like London, Paris and Berlin. At the same time, we plan to reduce our exposure to markets in the Asia-Pacific region and in South and Central America." That's great in that it reduces political uncertainty associated with Asia-Pacific and Latin American markets, but it means Host gives up the properties it already has succeeded with over there, and enters a competitive market.
European expansion will be a primary driver of hotel growth going forward.
Hilton is going to give Host a huge run for its money, with 144 European properties in the pipeline. As other hospitality companies place aggressive wagers in Europe, it may put pressure on room rates. This would impede Host's RevPAR growth in the region. Combined with reduction of hotels in the other regions, Host could find itself with reduced RevPAR going forward.
Non-diversified customer base
Host's 10-K notes that "Our customers fall into three broad groups: transient business, group business and contract business, which accounted for approximately 60%, 35%, and 5%, respectively, of our 2015 room sales." Even the Easter Bunny doesn't put that many eggs in one basket.
Any time a company lacks diversification, it puts itself at risk. Host is playing in a very competitive space. Remember that a hotel REIT may own properties that are managed by certain brand names, but other REITs may own competitive properties also managed by the same luxury brand names.
Thus, while Host is "one of the largest owners of Marriott, Starwood and Hyatt properties,"it must compete with other REITs that own the same brands it does, like Starwood Hotels and Resorts'Luxury Collection, Sheraton, and St. Regis; and Marriott International's Ritz-Carlton, JW Marriott, and Marriott Marquis.
Other hotel companies will fight tooth-and-nail-spa for the luxury market and Host could find itself outflanked, especially since it is closing operations in two other regions and trying to enter another. The lack of diversification could undermine its ability to grow since it has no other category to fall back on.
Enough reason to sell?
For me, there is no clear-cut choice here. The macro issues, when combined with the competition issue, are enough to concern me. Add in the lack of diversification, and I think conservative investors may want to look elsewhere. Investors that are highly diversified and are comfortable with these specific risks may want to stand pat.
The article 3 Reasons Host Hotels Stock Could Fall originally appeared on Fool.com.
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