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On Apr 3, 2013, we reiterated our long-term recommendation on Host Hotels & Resorts Inc. (HST - Analyst Report), a lodging real estate investment trust (REIT) at Neutral. The move reflects the company’s better-than-expected fourth-quarter results, dividend hike as well as continued benefits from its strategic acquisitions and joint venture (JV) deals.

Yet, its concentration of properties in the upscale segments increases its risk profile while continuous acquisitions involve significant upfront operating expenses, which drag down margins till these stabilize.

Why Neutral?

Host Hotels reported fourth-quarter 2012 adjusted FFO (funds from operations) per share of 40 cents, beating the Zacks Consensus Estimate by 3 cents. The results came on the back of strong performance by the company’s operating properties.

Over the last 30 days, the Zacks Consensus Estimate for full-year 2013 remained unchanged at $1.25 per share while the Zacks Consensus Estimate for full year 2014 marginally fell by 1 cent to $1.41 per share. In addition, Host Hotels has now delivered positive earnings surprises in the past four quarters with an average beat of 5.96%. Hence, Host Hotels now has a Zacks Rank #3 (Hold).

Host Hotels has high-quality lodging assets in geographically diverse locations. Over the years, the company has executed a focused and disciplined long-term strategic plan to acquire premier lodging assets in hard-to-replicate areas, which have the potential for significant capital appreciation. Also, it conducts selective capital improvements and expansions to improve operations.

Host Hotels has a strong balance sheet, which provides it with financial flexibility to aim for high-yielding acquisitions, high ROI (return on investments) capital projects, steady dividend payouts and share buybacks. In Feb 2013, Host Hotels announced a dividend hike of 11% from the earlier dividend.

However, its concentration of properties in the upscale segments expose it to the risks of lower demand during the economic downturn, as in such periods, customers prefer lower priced brands over Host Hotels’ premium ones. Moreover, continuous acquisitions involve significant upfront operating expenses, which drag down margins till they stabilize.

Other Stocks to Consider

REITs that are currently performing well include Federal Realty Investment Trust (FRT - Analyst Report), Brandywine Realty Trust (BDN - Snapshot Report) and Cousins Properties Incorporated (CUZ - Analyst Report), all carrying a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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