Host Hotels & Resorts, the behemoth of lodging REITs, is on a mission. Their sights are set on reaching a staggering $2 billion in adjusted EBITDAre, a goal they boldly proclaimed at their 2023 Investor Day. While much of the focus has been on their aggressive acquisition strategy and impressive portfolio renovations, a closer look at their Q1 2024 earnings transcript reveals a potential secret weapon: a surge in attrition and cancellation fees.

This isn't just a minor blip in the numbers. Host Hotels' CFO, Sourav Ghosh, acknowledged a significant jump in cancellation and attrition revenue, revising their full-year forecast from $57 million to a whopping $71 million. This represents a 25% increase, a jump that's certainly caught the attention of Host's management team.

What's driving this windfall? Ghosh attributes it to two key factors: improved contract language and more diligent collection efforts by their managers. He suggests that this elevated level of cancellation revenue might even become the new normal for the company.

Here's where it gets interesting: if this trend continues, cancellation and attrition fees could play a crucial role in Host's ambitious EBITDA goal. Let's crunch some numbers.

In 2019, before the pandemic wreaked havoc on the travel industry, Host Hotels reported $50 million in attrition and cancellation revenue. The $71 million projected for 2024 represents a 42% increase over this pre-pandemic baseline.

Now, assuming a similar proportion of non-room revenue contributing to total revenue as in 2023 (nearly 40%), this $71 million translates to approximately 1.3% of Host's projected total revenue for 2024. While this may seem small, remember that Host is operating with laser focus on maximizing profitability. Every percentage point counts in their quest for $2 billion.

Furthermore, this cancellation revenue stream offers a unique advantage: it's largely immune to the volatility of traditional revenue drivers like occupancy and ADR. While the company has acknowledged softer short-term leisure transient demand and the ongoing evolution of demand on Maui, cancellation fees offer a steady, predictable income stream that bolsters their bottom line.

This raises an intriguing hypothesis: are Host Hotels strategically leveraging cancellation fees as a buffer against potential revenue shortfalls? The company has acknowledged instances where property teams prioritize total revenue over maximizing room rates. Could stricter cancellation policies be part of this strategy, allowing them to lock in guaranteed income even in the face of fluctuating demand?

If this hypothesis holds true, it signifies a savvy approach to revenue management in a post-pandemic world marked by uncertainty. As other analysts focus on traditional metrics, Host Hotels might be quietly building a fortress of cancellation revenue, paving the way for their triumphant march towards $2 billion.

It's worth noting that Host Hotels isn't a newcomer to strategic ingenuity. They've been pioneers in the REIT space, being the first lodging REIT to link green building certifications to their sustainable financings. This commitment to innovation, coupled with their current focus on cancellation revenue, paints a picture of a company poised for continued outperformance.

The question remains: will this cancellation fee strategy be the key that unlocks their ambitious EBITDA goal? Time will tell, but one thing is certain: Host Hotels is playing a long game, and they're using every tool in their arsenal to achieve victory.

Cancellation and Attrition Revenue Trend

The chart below shows the growth of Host Hotels' Cancellation and Attrition Revenue from 2019 to the projected value for 2024.

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