Investors are checking out of Host Hotels & Resorts Inc.

Shares of Host, the largest real-estate investment trust in the lodging sector, have struggled since Feb. 19, when it reported disappointing fourth-quarter results and warned of weaker performance than analysts had expected for 2015. Host’s total returns are down about 15% since those earnings, while the S&P 500 index is flat in the same period.

The company, formed more than 20 years ago when Marriott International Inc. split off its real-estate holdings, cited temporary headwinds, including weaker European revenue because of the strong dollar and costs associated with property renovations.

But some analysts warned of deeper issues. Host owns many older, full-service hotels and is light on popular limited-service and boutique properties, which tend to be especially design-conscious and appeal to younger travelers, says Ryan Meliker, a hotel analyst for investment bank MLV & Co.

“Portfolios need to evolve, but Host’s has gotten a bit stagnant,” he says.

Host Chief Executive Edward Walter says the company is in the process of shifting toward more limited-service properties and focusing on major markets, like New York and San Francisco. But with about 100 hotels throughout the U.S., these changes take time.

“We’ve been executing on the plan for four years,” he says. “We have another two to three years to get there.”

While Host has been an industry laggard, it is hardly suffering alone. Despite record room rates and occupancy levels, hotel owners have been the worst performer for much of this year among the 10 categories of publicly traded real-estate investment trusts.

The Baird/STR Hotel REIT subindex, which measures the price performance of 11 lodging companies, was down 9.3% this year through Monday, more than three percentage points worse than the next-weakest category, industrial properties. During the same period, the S&P 500-stock index was up 3.3%.

Lodging REITs’ poor showing this year comes after a combined 55% return in 2013 and 2014, more than double the returns for REITs overall, according to Baird. Recent soft economic data in the U.S. and concerns about the effects of debt issues in Greece and a slowdown in China gave investors an excuse to sell despite healthy industry fundamentals, some analysts suggest.

But the lodging-REIT slump also highlights how volatile the hotel-property sector can be. Because hotels can change their rates daily, they can quickly take advantage of a pickup in travel. But when business is soft, room prices drop fast. Office and retail landlords, by comparison, lock in guaranteed revenue with multiyear leases.

“Hotel REITs’ cash flows have the most volatility,” says Michael Bellisario, a senior research associate at R.W. Baird, “which in turn causes the stocks to be very volatile.”

Total returns for rivals Chesapeake Lodging Trust and RLJ Lodging Trust also are down more than 12% this year. Strategic Hotels & Resorts Inc. was slumping but got a boost Monday after reporting better-than-expected earnings and an agreement to buy the Four Seasons hotel in Austin.

Major hotel operators have been selling off real estate for decades. Hilton Worldwide Hotels Inc. and Starwood Hotels & Resorts Inc. unloaded most of their holdings after analysts warned that the costs of carrying property were hampering their performance and weighing on earnings.

Marriott made the splashiest move, back in 1992, when it announced its plan to split in two. One piece would be a high-growth company that would manage or franchise hotels and operate timeshare locations. The other, which became Host, would own Marriott’s 141 properties, operate concessions at airports and toll roads, and assume nearly all of the company’s $3 billion in debt.

A few years later, Host broke up further, into a real-estate company and an operator of food concessions. The hotel owner then became a REIT.

In 2005, Host paid $4 billion to acquire a 38-hotel portfolio from Starwood Hotels & Resorts Worldwide consisting mostly of Sheraton and Westin-branded properties. Today, Marriott brands comprise about 50% of the Host portfolio, the company said.

Host adopted its latest strategy about four years ago. Believing foreign tourism to the U.S. was poised to rise, the REIT decided to focus on cities it saw as likely to benefit most. It also bet that U.S. metro areas that were active both on weekdays and weekends would be the most profitable. That meant paring down its holdings to 11 major markets, from 25.

The new approach concentrates on the East and West coasts, Hawaii, Chicago and Houston. The company began selling hotels in most of the Midwest, South and less populous regions. Last year it disposed of Marriott hotels in Philadelphia, Tampa and Dayton, Ohio.

Host’s focus on select major markets has caused some recent pain. About 17% of its earnings before interest, taxes, depreciation and amortization are in two slumping cities: New York, which has seen room rates fall as new supply enters the market, and Houston, where falling oil prices have hurt lodging demand.

The strengthening dollar, meanwhile, threatens to reduce foreign travel to the U.S. Host also has the highest European exposure of any hotel REIT, and it says some of its revenue from those hotels was reduced when translated back to dollars.

In April, Host said its chief investment officer, a former Morgan Stanley real-estate banker, was leaving after less than two years on the job. “He and I concluded the fit was not as good as we hoped,” Mr. Walter said.

Host did announce some positive news last week. The company said it expected to make back the money it is spending this year on major renovations when the hotels are fully operational in 2016 and 2017. It also said its board had authorized up to $500 million in share repurchases.

Source: http://www.wsj.com/articles/host-hotels-struggles-with-aging-properties-1430832929