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Host Hotels CEO's replacement raises questions, and M&A hopes

Host Hotels & Resorts Inc.'s decision to replace longtime CEO Ed Walter with a little-known internal candidate raises strategic questions but could also point toward more active dealmaking, observers say.

Since announcing Walter's planned departure, which is scheduled for the end of 2016, the company has not responded to subsequent inquiries from S&P Global Market Intelligence. Walter, who became president and CEO and a member of the company's board in 2007, is being replaced by James Risoleo, Host's executive vice president and managing director of investments for the West Coast and Europe.

Risoleo is an unfamiliar figure to many on Wall Street, but some observers say his elevation could be a positive if it signals more openness to property purchases or even M&A. Some investors and analysts viewed the widely respected Walter as overly risk-averse, and a portfolio manager whose firm has an investment in Host said the "unspoken assumption" is that Risoleo will be more aggressive about asset management.

A surprise appointment

Risoleo, 61, served as Host's chief investment officer from 2000 to 2011, but his path to the chief executive's chair has not been linear. In 2012 he left the chief investment officer post, and the company's Washington, D.C.-area headquarters, to move to Phoenix and oversee the Europe portfolio. He took on responsibility for the West Coast properties in 2015.

When Risoleo stepped down as CIO, Host said the transition stemmed from his desire to leave the Washington area in conjunction with his then-recent marriage. His tenure as CIO — and Walter's as CEO — also coincided with a period in which a hotel broker defrauded Host of more than $22 million in a series of property transactions.

Host sued the broker, Robert Koger, in 2011. Koger pleaded guilty to wire fraud and conspiracy to commit wire fraud in 2014 and was sentenced to 11 years in prison.

In published notes, Canaccord Genuity analyst Ryan Meliker called Walter's departure and Risoleo's promotion "surprising and definitely … not telegraphed to the Street," and Robert W. Baird analyst David Loeb said Risoleo is "not widely known by the investment community." The portfolio manager with an investment in Host called the move unexpected, especially since Walter had met with investors and led a property tour at NAREIT's REITWorld event in Phoenix in November.

Though Risoleo is a known quantity to Host's board, "he's probably relatively unknown to the investment community and possibly the lending community," the investor said. "He may be well known to the property brokerage community because he was very active in acquisitions for Host, but on the other hand, they haven't done much in terms of acquisitions for the last couple of years."

Risk and reward

Though Host's share-price performance in recent years was roughly in line with its hotel REIT peers, the company missed the opportunity to use its advantages in size and cost of capital to outperform the competition during the strongest years of the hotel cycle, both Loeb and the portfolio manager said.

"They had an opportunity to be the consolidator then, and if you look today, their multiple is much more in line with their peers," Loeb said. "I think that's what a lot of investors have been critical of, that they didn't take advantage of the fact that they could have bought accretively."

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In contrast with Walter, who is "very data-driven, conservative, concerned about taking too much risk," Risoleo is "much more likely to trust his gut and to be very opportunistic," Loeb said.

Still, observers wondered why Host's board, if it was looking to change the tone at the company, apparently did not conduct an external search for a new chief executive. The portfolio manager said he and others are withholding judgment until the early months of 2017, when they can speak with Risoleo and see how his vision for the company differs from Walter's. Host has not yet been in touch with his firm, the portfolio manager said.

Much depends on what the investors conclude. Since Risoleo has been working at Host since 1996, Meliker wrote, "we believe investors should expect a strategy that is more of the same until it is proven otherwise."

Options open

There is, however, a largely speculative theory that Risoleo's promotion could signal the Host board is receptive to M&A, as either a buyer or a seller. If the board was interested in participating in a strategic transaction, the thinking goes, a high-profile CEO search could work counter to that aim.

"This is just reading the tea leaves, but an external search would be expensive, and it would hire somebody that would expect to be the CEO for some period of time, rather than a 60-year-old insider who got kind of a double promotion," Loeb said. "So maybe they were also just clearing a path that makes it easier for Host to participate in these transactions."

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If Host were to seek growth through M&A, it could combine with any of the other public hotel REITs. One intriguing counterparty might be Park Hotels & Resorts Inc, the forthcoming Hilton Worldwide Holdings Inc. spinoff. Both companies have high exposure to a single brand operator and both would benefit from brand diversification, Loeb said. All of Park's properties are tied to Hilton brands, while Host, itself a former Marriott International Inc. spinoff, has 82% exposure to Marriott brands by room count.

Park's CEO, Thomas Baltimore, has spoken publicly in recent months about the benefits of scale, Loeb noted. And Hilton's president and CEO, Christopher Nassetta, is Walter's predecessor as Host CEO, and remains close to his own predecessor in that job, current Host board member Terry Golden.

The rest of Host's board, which includes Chairman Richard Marriott, former Prologis Inc. CEO Walter Rakowich, General Growth Properties Inc. CEO Sandeep Mathrani and former Federal Deposit Insurance Corp. chair Sheila Bair, could see the appeal of a CEO who is less cautious, but also less prominent, if it tries to pursue a deal.

Though there is no evidence that the board has considered such a course, "I think the door went from being tightly locked to being cracked open a little teeny bit with this CEO change," Loeb said.