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On Sep 06, 2013, we reaffirmed our long-term Neutral recommendation on lodging real estate investment trust (REIT), Host Hotels & Resorts Inc. (HST - Analyst Report). This was based on the company’s diversified premium hotels’ portfolio, strategic capital recycling program and continued dividend hike. However, the rising interest rates and capital market volatility remain our concerns. Also, Host Hotels’ concentration in the upscale segments exposes it to risks of lower demand in times of economic slump.

Why the Reiteration?

Aided by significant comparable properties’ performance, Host Hotels reported second-quarter 2013 adjusted funds from operations (FFO) per share of 45 cents, exceeding the year-ago figure by 36.4% and the Zacks Consensus Estimate by 7.1%. Including certain non-recurring items, FFO was 39 cents per share, up 25.8% year over year.

Buoyed by its strategic capital recycling efforts, in June, Host Hotels, which has upscale and luxury lodging assets in geographically diverse locations across the world, hiked its dividend payout for the 10th consecutive quarter since Mar 2011. The new dividend stands at 11 cents per share, reflecting a sequential hike of 10%. Notably, the dividend payout facilitates Host Hotels’ long-term strategy to provide attractive risk-adjusted returns to its stockholders.

Moreover, Host Hotels has a strong balance sheet and ample liquidity, which provide it adequate financial flexibility to aim for high-yielding acquisitions and capital projects. Going forward, we believe that with the company’s premier lodging assets in vibrant markets around the world, Host Hotels remains well poised to generate significant growth in capital.

However, rising interest rates, which results in an increase in interest cost on new debt, remains a concern. Higher interest rates will restrict Host Hotels’ ability to refinance existing debt and fund portfolio restructuring activities.

Moreover, the concentration of Host Hotels’ assets in upper-upscale segments – which had been the weakest performing segments during the economic downturn – remains a drag as unfavorable macroeconomic conditions compel customers to reduce their discretionary spending and choose lower priced brands over the company’s premium ones.

Over the last 30 days, the Zacks Consensus Estimate for both 2013 and 2014 remained stable at $1.30 and $1.45 per share, respectively. The stock currently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Better-performing REITs that are worth a look include Hospitality Properties Trust (HPT - Snapshot Report), RLJ Lodging Trust (RLJ - Snapshot Report) and Highwoods Properties Inc. (HIW - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.

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