There Is Room at the Inn for Hotel Investors After COVID-19

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

The world and especially the hotel industry have undergone significant changes since we published our hotel outlook in December 2019. The coronavirus pandemic has spread across the globe and caused travel bans, canceled large events and vacation plans, and slowed business travel. As a result, the hotel industry has seen a sharp decline in revenue per available room over the past month. We have adjusted our outlook to account for this decline and the likelihood of an economic recession in 2020. While we now expect the hotel industry to see 2020 revPAR declines over 30%, the virus will eventually pass and the industry should recover. The recovery won’t be as fast as the decline, but our expectations for revPAR growth over the next decade are relatively in line with our prior outlook, as there should be several years of double-digit revPAR growth.

We have also adjusted our hotel models to account for their exposure to different hotel markets. We believe many of these markets will see higher GDP growth than the national average, which should drive revenue growth higher. Meanwhile, differences in supply growth will make revPAR for some markets outperform and other markets underperform our national revPAR outlook. As we come out of the recession, all three hotel real estate investment trusts we cover--Host Hotels & Resorts HST, Park Hotels & Resorts PK, and Pebblebrook Hotel Trust PEB--should see revPAR growth higher than the overall industry because of their market exposure. While we are concerned about EBITDA declining near 100% in 2020, it should see a decade of strong growth as the industry returns to normal. Therefore, we believe the hotel REITs are an attractive investment for long-term investors, given current share prices.

Differentiated on Brands and Markets, but Not Segments The hotel REITs we cover each have significantly different exposure to the hotel operating brands. Having been spun out of Marriott in 1993, Host owns many Marriott-branded hotels, such as Marriott, JW Marriott, and Ritz-Carlton. Over the following two decades, the company attempted to diversify by acquiring Starwood-branded hotels, which include Westin, Sheraton, and W. However, Marriott's acquisition of Starwood in 2016 significantly increased Host's operator concentration in Marriott brands. Pebblebrook started as a hotel blind trust following the Great Recession. It has strategically targeted owning independent hotels either through direct acquisition of existing independent hotels or conversion of a branded hotel to an independent hotel once the brand agreement on an acquired hotel lapses. Park was spun out of Hilton in 2017. Before its acquisition of Chesapeake Lodging Trust in 2019, the company exclusively owned Hilton-branded hotels like Hilton, Waldorf Astoria, and DoubleTree. The acquisition of Chesapeake brought in non-Hilton brands such as Marriott, Hyatt, and Starwood, though most of the company is still under Hilton brands. Therefore, each hotel REIT has a unique operator exposure.

However, the revPAR growth inputs we use in our models are calculated based on exposure to different hotel segments rather than exposure to hotel brands. All three hotel REITs mainly own hotels in the higher-priced chain segments, so we should expect them to track with our forecasts for those segments. Between two thirds and three fourths of the rooms in the portfolios for Host, Pebblebrook, and Park are found in the upper upscale segment with the remainder split between the luxury and upscale segments. Since the exposure to hotel chain segments is nearly identical, our revPAR estimates for the three companies are not significantly differentiated. This article aims to find additional ways to differentiate the companies in our forecast for their long-term fundamentals.

We believe that geographic market exposure is one of the biggest strategic decisions for a management team and is likely to be a significant differentiator among the REITs. The hotel operating companies, such as Marriott and Hilton, have such broad exposure across the United States that using national numbers is likely to provide the best estimate of their future results. However, the REITs can be so highly concentrated in markets that could see significantly different results that the national estimates would overestimate or underestimate the results for a REIT. For example, a city that is seeing significant job growth and business investment is likely to have more business travelers and thus higher demand growth over the next several years. On the other hand, a city with a large current supply pipeline is probably going to see lower revPAR growth as the delivery of new rooms to the metropolitan area will take much of the incremental revenue growth. Therefore, we think modeling each of the major metropolitan areas allows us to more accurately estimate any differences in revPAR for the hotel REITs.

Host, Pebblebrook, and Park are all highly concentrated in several of the 25 largest hotel markets that STR tracks. While the top 25 markets represent approximately 35% of the total hotel rooms in the U.S., the REITs own 81%-87% of their room counts in these markets. Given that the REITs don’t own any hotels in the largest hotel market, Las Vegas (STR does not cover this market), and also don’t own a significant number of hotels in seven other top 25 markets (Dallas, Detroit, Minneapolis/St. Paul, Nashville, Norfolk/Virginia Beach, St. Louis, Tampa/St. Petersburg), the difference between the REITs and the U.S. overall is actually larger, as the 18 markets that the REITs are concentrated in represent only 26% of the total rooms in the U.S. Pebblebrook has significant exposure to San Francisco, San Diego, Boston, and Los Angeles, with each of those markets representing more than 12% of its total hotel rooms. Park has significant exposure to San Francisco and Hawaii with a concentration above 12% in both markets, while Chicago, New Orleans, New York, and Orlando each represent at least 6% of its total rooms. Host has exposure to all 18 of the top metropolitan statistical areas we have identified, though New York, San Diego, San Francisco, and Washington, D.C., each represent at least 7% of its total room count. The variations in market exposure should provide the potential for differentiated revPAR estimates for the three companies if the supply/demand dynamics for major markets are different.

To calculate our revPAR forecasts for each major market, we make adjustments to our hotel revenue growth forecast for each market by comparing a forecast of metropolitan nominal GDP growth with a U.S. nominal GDP forecast. We make adjustments to our supply growth forecast by comparing the market supply pipeline with the U.S. supply pipeline. We use nominal GDP growth to drive our hotel revenue growth forecast. We found that the percentage of budgets spent on hotels typically rises during economic expansions and quickly falls during recessions, leading to hotel revenue growth outpacing nominal GDP growth during upcycles and seeing larger declines during downcycles.

COVID-19 Will Have a Historic Impact on the Hotel Industry With the coronavirus pandemic resulting in travel bans, cancellations of several large events (including most sports leagues and tournaments, music festivals, and major industry conferences), many businesses limiting travel to protect their employees, and consumers canceling vacation plans, occupancies across the hotel industry have fallen off sharply. STR reported revPAR declines of 32.5% for the week ended March 14, driven by an occupancy decline of 24.4% and an average daily rate decline of 10.7%. Despite STR reporting revPAR growth of 2.2% and 1.7% in January and February, respectively, we believe that first-quarter revPAR will see negative growth, given the rolling 28-day revPAR decline of 12.1% through March 14. As a result, the actual first-quarter numbers will end up being well below our prior expectation of 1%-2% revPAR growth across the U.S.

We have made several significant adjustments to our short-term forecasts to account for the impact of the coronavirus. Spending on the U.S. hotel industry represented 0.198% of U.S. nominal GDP in February, near the theoretical ceiling of 0.205% we have previously calculated for the industry. To cause the 32.5% revPAR drop in the model that we have seen in the most recent STR numbers, we must manually reduce this number by 0.070%, even after taking into account lower GDP growth in the first quarter. This is the largest single month-over-month drop in the monthly numbers in both absolute and relative terms since the start of our data in 1987. The second-largest month-over-month drop in our data is 0.0037% in July 2001, and the impact of the 9/11 attacks was a 0.0031% decline, making the coronavirus almost 20 times worse for the hotel industry than any prior event. Additionally, the 0.128% assumption we are making for March is 19% below the lowest point for the ratio in our history, which was previously July 2009 after several months of declines.

We think the fallout from this pandemic will have a long-lasting impact on the hotel industry, though we don’t anticipate any future month will see a drop as severe as the one in March. Given that the U.S. will still be on lockdown for part or potentially most of April, we think April will see a drop of 0.005%, which is larger than any prior month other than the one that preceded. While we believe that many in the U.S. will be returning to normal life in May and June, travel is one of the last things that people will incorporate back into their daily life. Therefore, we aren’t making any manual adjustments to our model for those months, though the ratio will continue to slightly fall during this period since we are assuming that the economy will be in a recession during those months. We think that the world may start to travel again in July, though it will be added back incrementally and the major conferences canceled in the back half of the year are still lost for good. Therefore, we are only adding 0.002% to the ratio each month in the third and fourth quarters of 2020 and then 0.001% in the first and second quarters of 2021.

After that point, we let the rules we previously established for the model determine the recovery for the hotel industry based on nominal GDP growth. We are assuming that nominal GDP will exceed the 4.2% high hurdle that triggers an increase in the ratio from the third quarter of 2021 through the third quarter of 2023 as the U.S. sees higher growth in the aftermath of a 2020 decline. This leads to the hotel revenue ratio recovering to 0.186% by September 2023. The combination of higher GDP growth and the revenue ratio increasing leads to high revenue growth for the hotel industry (7.5% in 2021, 22.2% in 2022, and 13.5% in 2023). While the combined gains in those years do not completely erase the 29.3% decline we assume for the industry in 2020, they do significantly close the gap.

Our supply forecast for the U.S. is based on a combination of the existing supply pipeline and our assumption of construction starts delivering additional supply. While we believe that the current pipeline of hotel projects is enough to support supply growth of 2% for the U.S. hotel industry in 2020, we believe that many of the projects in the planning and final planning phases will be abandoned. As the current pipeline burns off, the industry will have to turn to new projects to fuel growth. However, we believe that slowing economic growth in 2020 will put a pause on construction starts, pushing the point that the industry sees 1% growth from speculative projects to 2023 in our current forecast (from 2022 in our prior forecast). The combination of projects being abandoned and delayed construction starts will cause supply growth to fall to 1.75% in 2021 and 1.5% in 2023 and remain below that level through the end of the decade. This is significantly lower than our prior forecast where we expected supply growth to be above 2% through 2023 and only reach 1.5% in the outer years. Therefore, the hotel industry should stand to benefit from lower supply growth somewhat offsetting the decreased revenue growth.

We use the same methodology in our forecasts for the economy, midscale, upscale, and luxury hotel segments. The hotel REITs we cover own hotels in the upscale and the luxury segments, so we want to incorporate estimates of those segments into our baseline assumptions for the markets. We expect revPAR in the luxury and upscale segments to underperform the broader hotel industry during a downcycle. This trend has held thus far, with revPAR down 45.9% for the luxury segment and 34.4% for the upscale segment for the week ended March 14 (compared with the national average of a 32.5% revPAR decline). We expect these segments to continue to underperform in 2020, with revPAR declines of 42.2% and 33.2% for luxury and upscale, respectively, compared with the U.S. hotel industry seeing a 30.6% decline. However, we expect that both segments will see higher revPAR growth in the upcycle that will follow this downcycle, with luxury seeing higher revPAR growth starting in 2021 and upscale starting to see higher growth in 2024 once the large supply pipeline burns off. While we believe that the hotel REITs will benefit from exposure to upper upscale hotels that should experience less drag from supply growth than upscale or luxury, combining each company’s exposure to the three hotel segments produces a baseline revPAR of approximately a 2.2% compound annual growth rate over the next decade. We will use this revPAR figure as our forecast for the 13%-19% of each company’s portfolio that is not in one of the major markets identified by STR.

Our updated estimates incorporate the actual hotel results reported from STR for October through February but also try to recognize the dramatic falloff in March. While we assume that revenue will fall more than 30% for the hotel industry and even more for the luxury segment, the recovery in the years that follow should lead to only a small decline to hotel revenue CAGR over the next decade. Luxury actually sees a slight bump to revenue CAGR, as 2019 ended much stronger than we had anticipated and that new level should carry over when the world returns to a more normalized state. Additionally, supply growth should be significantly lower for the total hotel industry, the luxury segment, and the upscale segment. As a result, the decline to our revPAR CAGR estimates from 2020 through 2029 is very small for the U.S. and for upscale while we have increased our outlook for luxury over the next decade. Therefore, while the 2020 declines will reach unprecedented levels, the gains the industry should see over the next few years offset the short-term decline.

Adjusting RevPAR Estimates for Metro Area Exposure While we believe that the U.S. hotel industry will average 3.0% revenue growth over the next decade, differences between U.S. GDP growth and MSA GDP growth will drive the revenue CAGR higher or lower than the U.S. average for each major metropolitan statistical area. Using the Oxford Economics forecast for nominal GDP growth for the MSA of each major hotel market (with Morningstar adjustments to 2020 through 2023 for the impact of the coronavirus), we see that markets with the highest growth are driven by significant exposure to growing industries like technology (San Francisco, Seattle, Denver), life sciences (San Francisco, Phoenix, Orlando, Boston), and oil (Houston), with all of these markets seeing at least a 4.0% GDP CAGR over the next decade. Chicago and New Orleans are expected to grow slower than the national average, though the difference is not significant. Therefore, we expect most major hotel markets to see slightly higher growth than the overall U.S. hotel industry over the next decade.

However, the current construction pipeline for each major metropolitan area suggests widely differing hotel supply growth for those MSAs. The pipeline of hotel rooms in some phase of development (under construction, in final planning, or in initial planning) for the U.S. was about 12% of the total 5.3 million hotel rooms outstanding in May 2019. Markets like Chicago, Honolulu, Orange County, and Washington, D.C., all have less than 10% of the current hotel room supply under some phase of development, which should lead to lower supply growth in the near term for these markets. Meanwhile, Miami (rooms under development represent 25% of its total room stock), New York City (19%), Denver (18%), and Los Angeles (17%) should all see supply growth above the national average due to their larger supply pipelines. Incorporating these differences into our model should produce significantly different revPAR estimates for the markets, particularly in the near-term.

Given that the hotel REITs are almost entirely exposed to the upscale, upper upscale, and luxury segments, the outstanding supply pipeline for these segments are likely to have an outsize impact on the revPAR growth experienced by the REITs’ hotels in each market. Several markets have supply pipelines for these segments that are larger or smaller as a percentage of the segment total than the outstanding supply pipeline percentage for the total market. For example, while Denver is above the national average for the total market and for the upscale segment, the size of the outstanding development pipeline is below average for upper upscale and nonexistent for luxury. Given that more than one fourth of all hotel rooms in Denver are upper upscale and the REITs mainly own upper upscale hotels, we believe the impact of supply on Denver is probably smaller than what we would predict if we just looked total hotel supply pipelines. Therefore, we have adjusted our outlook for each market based on the impact of supply to each segment.

To come up with a single revPAR adjustment for each market, we must forecast revenue and supply growth for each segment and then weight the total adjustment for each market based on the outstanding rooms of each segment in that market. For our revenue forecast, we start with the U.S. total or segment total and then increase or decrease the revenue forecast for the market by the difference in GDP. For supply growth, we use the current supply pipeline to drive our forecast in the near term that slowly transitions to a long-term supply forecast based on GDP growth for the market. We then combine revenue growth, supply growth, and resulting revPAR growth for the total market, the upscale segment, the upper upscale segment, and the luxury segment into a single forecast for the market. To blend the segments, we weight each segment by the percentage of rooms each segment represents of the total market. To continue the Denver example, upscale represents 25% of all rooms, upper upscale represents 26%, and luxury represents just 2%. However, since most rooms in the REIT portfolios are in the upper upscale segment, we double the weight of the upper upscale segment for each market. Then, whatever percentage of rooms are unaccounted for are driven by our forecast for the total market.

After running through this analysis for all 18 metropolitan areas significant to the hotel REITs, we find that most are expected to produce revPAR growth higher than the national average. Most of the outperformance is expected in the near term, when we have the most visibility on each market’s supply situation, and we assume that any imbalances between revenue growth and supply growth erode over time. Still, some of these differences are quite significant. We expect that Chicago, Hawaii, San Francisco, and Washington, D.C., will all see revPAR outperformance of at least 100 basis points above the national average on average between 2021 and 2022. Markets like Boston, Denver, San Diego, and Seattle should also see at least 50 basis points of additional revPAR growth during those years. On the other hand, we have identified New York, Miami, New Orleans, and Los Angeles as markets likely to underperform because of the large supply pipeline present. We believe that the hotel REITs should do their best to acquire assets in the markets likely to outperform, should an attractive opportunity arise, and dispose of assets in the markets likely to underperform, should they get good pricing for their current portfolio.

Now that we have revPAR adjustments for each market, we can apply them to the current REIT portfolios to determine whether they should outperform or underperform our hotel industry revPAR growth estimates. We view Pebblebrook as receiving the greatest benefit from its market exposure. It has 22% of the rooms in its portfolio in San Francisco (a market we project will outperform the U.S. average by 60 basis points over the next five years), 15% of its rooms in Boston (40-basis-point five-year outperformance), and 17% of its rooms in San Diego (25-basis-point five-year outperformance). We do see its 13% exposure to Los Angeles as a drag, as we expect that market to underperform by 20 basis points, but its exposure to the other three markets likely to underperform is small. In total, we think Pebblebrook will see approximately 26 basis points of additional revPAR growth over the national average over the next five years and approximately 15 basis points of additional revPAR growth through 2030.

We also have a favorable opinion of the geographic exposure of Park’s hotel portfolio. Its two largest markets, Hawaii and San Francisco (each a little more than 12% of Park’s total hotel rooms), are among the top markets in our analysis with 110 basis points and 60 basis points, respectively, of revPAR growth outperformance over the next five years. Park also has 10% of its portfolio in Chicago, which we believe should produce 90 basis points higher revPAR growth over the next five years as the city benefits from extremely low levels of supply for several years, and 8% of its portfolio in Orlando, which we believe should outperform by 15 basis points as the area benefits from metro-level GDP growth above the national average. However, we believe Park’s total portfolio performance will be held back by its 18% exposure to the four markets that we believe will underperform over the next decade and 14% exposure to markets outside the top 18 we have identified (which we assume will grow at the national average). As a result, we think Park’s total portfolio will see approximately 28 basis points of additional revPAR growth over the national average over the next five years and approximately 15 basis points of additional revPAR growth through 2030.

While Host’s portfolio should see higher revPAR growth than the overall U.S. hotel industry, we believe that this diversified portfolio provides the smallest market adjustment. Host has many of the same top markets with large positive revPAR adjustments as Pebblebrook’s portfolio. However, it has a smaller exposure to San Francisco (10% of Host’s total rooms compared with 22% for Pebblebrook), San Diego (7% versus 17%), and Boston (6% versus 15%), so the positive benefits to Host’s overall portfolio from these markets is smaller than the benefits that Pebblebrook enjoys. Meanwhile, Host has the most exposure, at 9% of total rooms, to New York City, which we expect to underperform the national hotel industry by 2.4% in 2020 and 100 basis points over the next five years as the market continues to deal with high supply. While no other market represents more than 4% of Host’s overall portfolio, the average market adjustment of the remaining 59% of Host’s portfolio is only 5 basis points above the national average over the next five years. As a result, we use an adjustment of approximately 11 basis points of additional revPAR growth over the national average over the next five years and approximately 7 basis points of additional revPAR growth through 2030 for Host’s total portfolio.

Changes to Our Hotel REIT Models While putting the adjustments for each company's geographic exposure into the models does lead to some small differences in revPAR growth among the three hotel REITs, the adjustments made to the overall industry for the impact of the coronavirus dwarf the geographic adjustments made to each company in the next several years. Even with two months of positive revPAR growth already baked into 2020 results, we think all three companies will approach a 40% decline in revPAR this year with the second quarter nearing a 50% decline. However, we expect that all three will see revPAR growth that could peak above 30% in the quarters that follow and at least double-digit growth from the second quarter of 2021 through 2023. All of the companies' portfolios will converge on 2% revPAR growth in the terminal year of our models as the impact of our adjustments fades. While the dramatic fall we expect for the hotel industry will severely cut into hotel REITs' revenue in 2020, we expect that the revPAR CAGR over the next decade will be similar to the low-single-digit percentage that we expected before the coronavirus pandemic.

A small change in revPAR growth can have a significant impact on the bottom line, because we see a linear relationship between revenue growth and EBITDA margin growth. While hotels have significant variable costs that move with occupancy, including food and beverage costs, marketing costs, and even expenses for labor and energy, they also face significant fixed costs like real estate taxes, maintenance, and general and administrative expense. The variable costs should move up and down with revenue, but the fixed costs should grow at inflationary levels. Therefore, if revPAR growth is above inflation (we currently model a 2% 10-year CAGR for U.S. inflation), then we should see EBITDA margins expand, while the reverse is true at levels below inflation. We found that the historical linear relationship between revPAR and EBITDA margin growth had an 80% R-squared value, which indicates the linear trendline has strong explanatory powers. This means that revPAR declines near 50% over the next several quarters will lead to EBITDA margin declines near 30 percentage points, which is very significant, given that during peak conditions these hotel portfolios operate at 30% EBITDA margins. Therefore, we expect operating revenue to fall to almost zero over the next year. However, the EBITDA margin for each company should show solid gains in the following years as the industry recovers. Combining the declines and the gains, we assume that each company returns to approximately 2019 levels by the end of the decade.

Our revPAR growth and EBITDA margin change estimates for the hotel companies lead to some very dramatic EBITDA growth estimates for their portfolios. With the EBITDA margin approaching (or for a few quarters dipping below) zero, we expect the companies will see a full 100% loss of operating EBITDA for 2020. However, as revPAR rebounds over the following years and pushes EBITDA margins back up toward their pre-pandemic levels, we should see several years of unprecedented growth. The EBITDA growth curve eventually flattens out to the long-term historical average, but we think the hotel industry should see double-digit growth from 2021 through 2025 as it recovers. The combination of the near-complete loss of all operating profits and the massive spike in growth leads to each company producing an EBITDA CAGR between 2% and 2.5%, which is close to the same estimate we held for the hotel REITs before the coronavirus outbreak. Therefore, while 2020 should be a terrible year for the hotel industry, we believe the hotel REITs still hold long-term growth potential.

Pebblebrook and Park Most Attractive; Host Still Attractive and Less Risky All three hotel REITs that we cover are currently trading at very significant discounts to our fair value estimates. We particularly like Park and Pebblebrook, given their profile and steep discount. Each has an exemplary management team that should help navigate the very tough times without destroying value for shareholders, with a record of making accretive acquisitions at huge discounts following prior recessions. Both companies recently acquired another hotel company, and we think they can drive higher operating efficiencies from these large portfolios. We think both companies' geographic exposure should set them up for higher long-term revPAR growth than the industry average. For these reasons, we that Park and Pebblebrook are both great long-term values.

More risk-averse investors should consider Host, which enters the current situation with a 2019 net debt/EBITDA of only 1.6 times. On the other hand, Park and Pebblebrook enter the current crisis with 2019 net debt/EBITDA of 4.6 times and 5.6 times, respectively. While those are relatively standard debt ratios for the REIT industry, the dramatic loss of operating income over the next several quarters will be a significant strain. While we believe that those metrics will worsen in our base-case scenario, we think that Park and Pebblebrook both have sufficient cushion to avoid any significant solvency issues. However, if the current crisis is worse or longer than we currently estimate, then these two companies could be forced take Draconian actions to stay solvent. While no hotel company went bankrupt in the 2008-09 financial crisis, high leverage across the hotel REIT industry in 2007 led to actions that destroyed significant value for shareholders. We caution that a prolonged recession could create a situation similar to the one the hotel industry faced a decade ago.

The most pressing concern for the hotel REITs is covering negative near-term cash flows. In our current hotel models, we assume that operating margins will fall to zero in 2020, causing negative cash flow in 2020 even after the companies eliminate their dividend payments as they still must pay administrative costs, service their debt, and pay for maintenance capital expenditures. We assume that operating margins rebound in 2021 but that operating cash flow stays flat for the year. It is unlikely that the companies will see positive operating cash flows until 2022. Still, we currently believe that recently announced dispositions, funds raised from their credit facilities, and cash on hand should cover operating expenses and interest payments for the next several quarters. Pebblebrook sold $310 million in assets in the first quarter, drew down the remaining $485 million on its credit facility, and had $30 million in cash on hand at the end of the fourth quarter, which should cover the combined $344 million cash flow shortfall in 2020 and 2021. Park sold $208 million in assets in the first quarter, drew down $1 billion in cash from its credit facility, and had $346 million in cash available at the end of the fourth quarter, which should cover the combined $492 million cash flow shortfall in 2020 and 2021. Therefore, both companies have ample liquidity to survive the downturn to the hotel industry in our base scenario.

The bigger concern we have for both companies is in our bear-case scenario, where cash flows stay negative through 2022, flatten out in 2023, and only turn positive again in 2024. While the amount of capital raised in the past few months should cover the $725 million shortfall for Pebblebrook and $1.1 billion shortfall for Park in this scenario, our concern is their debt maturities during this period. The earliest debt maturing for either company isn’t until November 2021 for Pebblebrook and December 2021 for Park, by which point we believe both should be cash flow positive and able to receive loans at reasonable rates. However, if the companies don’t see positive cash flow until 2024, they may find it difficult to receive new loans when their current term loans and credit facilities come due. At that point, they will be forced to either issue equity at likely low prices that would destroy shareholder value or raise cash through selling assets. While Pebblebrook’s portfolio is entirely free from secured debt and most of Park’s portfolio is as well, which will give them the necessary flexibility to sell assets, they would probably have to sell at high cap rates to move the distressed assets. This should continue to be an option for both companies, which makes the likelihood of a default on debt very low, but the destruction of value drives down our fair value estimates in our bear-case scenario. Given the wide range in outcomes, we think rating both companies as having very high uncertainty is appropriate.

Meanwhile, a low-debt balance sheet puts Host in a much better position to handle any cash flow or debt issues that may pop up over the next few quarters. Host’s management team made the strategic decision to limit leverage after witnessing how high leverage destroyed value for many hotel REITs in the 2008-09 financial crisis. While we believe this limited growth during the decadelong upcycle, this leverage position provides the company with much greater security against any bear-case scenario. Host had $1.57 billion in cash available at the end of the fourth quarter, more than sufficient to cover the $550 million cash flow shortfall in our base-case scenario and $1.33 billion shortfall in our bear-case scenario. While the company has $3.7 billion of unsecured debt, none of that is due until 2023, by which point it should be able to access the debt markets to replace any maturing debt. Therefore, we don’t think Host will face any situation that will force it to destroy value in order to remain solvent. Additionally, the dry powder the company has in terms of cash and available credit facility should provide it with significant buying opportunities, should any hotels be forced to sell at massive discounts over the next several quarters. As such, we rate Host as having only high uncertainty. We believe that investors have recognized this difference in leverage among the companies, which is why Host has not sold off as much as Park and Pebblebrook have over the past month. Still, it does trade at discount to our fair value estimate, so investors looking to capture the growth of the hotel industry in the upcoming years in a relatively lower-risk company should consider Host.