At times, it is important to find partners to diversify investment streams, share risk and merge skill sets. This appears to be the logic behind Host Hotels & Resorts' recent deals to grow its portfolio in Europe, Asia Pacific and beyond.

Host started down this path when it decided to fund the purchase of European assets acquired from Starwood about two years ago. It started a US$1.5 billion fund with Singapore-based GIC Real Estate and a Dutch pension fund called ABP. The fund still has another US$400 million to spend before it considers a second fund for further European investment with, perhaps, an emphasis on eastern Europe, according to Host's President and CEO W. Edward Walter.

In March, Washington, D.C.-based Host made another US$600 million deal with GIC to fund investment in Asia and Australia. With anticipated leverage the total investment potential should reach between US$1.5 billion and US$2 billion. Host will own a 25% interest in the joint venture and potentially will earn a promote based on achieving certain return thresholds. An affiliate of Host will provide asset management services and earn fees for these services.

According to Walter, the next stop on the expansion train could be Latin America, where he sees economic and demographic trends similar to what he sees in India and China.

“To be competitive in Europe based on where pricing was and where yields would be, we needed the benefit of lower cost capital than our own to make the numbers work,” Walter says. “This got the risk-reward ratio in line. It has worked well and we have been successful with the investments we have made there.”

Walter likes the global stage today because, he says, it gives Host the opportunity to leverage the platform it has built in a broader context. “By using joint ventures to expand internationally, it provides us an opportunity to grow FFO in the long term at a faster rate than if we just invested in the United States,” he says. “At the end of the day, we have a more balanced portfolio and should have a faster growing income stream.”

In Asia, the motivation for Host is different. Of course, based on the current hotel cycle, spreading its risk to regions with greater growth potential makes perfect sense. It also gives Host an outlet to use its creative asset management skills and build a nice stream of fees. “The returns we expect there depend a lot on the country,” Walter says. In more stabilized markets like Singapore, Hong Kong and Australia, he expects returns today slightly higher than those achieved in the United States. In India and China, with more risk involved, the returns need to be higher yet. But with a partner like GIC, success in the region has a higher upside. “They are so active in the market, so well respected and bring relationships to the table,” Walter says. “We bring hotel expertise to the table—both on the asset management side and acquisition side. This should allow us to do better transactions and more transactions.”

No deals in Asia are imminent, says Walter, as the new venture establishes an office and hires a managing director. But a pipeline is already in the works and Walter is very optimistic based on market conditions. He points to potential opportunities in Australia and, perhaps, Japan, as well. “There are longer term plays and we have a lot of work to get comfortable, but we will look at India and China, too,” he says.

Looking further afield, Walter does not have the Middle East as a priority as he says he does not understand the supply dynamics. “We would have a lot of work to get comfortable that the markets are strong enough to absorb the supply before we would become investors.”

However, Walter does like South America and sees the potential for a separate venture in that region based on strong economies and an expanding middle class. Host owns an asset in Mexico City and two in Chile. “No deal is imminent at all but we are starting to look at economies like Brazil, Mexico, Chile and Costa Rica, which are performing quite well,” he says. “We see Brazil becoming investment grade and it just announced energy-based discoveries to keep the economy rolling. There could be opportunities in that part of the world.”

Back in the United States, Walter is cautiously optimistic. Host reported 2.4% RevPAR growth in the first quarter of 2008 and has not changed its guidance going forward. It is also moving ahead with its largest ever capital improvement plan, which was approved last summer. “Our outlook is still for overall RevPAR growth,” Walter says. “We need the economy to grow to make that happen. So if we do go into a strong recession, clearly that will have an impact on business, but that is not the consensus view at this point.”

On the deal side, he agrees with the prevailing sentiment that potential sellers at the higher end of the market where Host likes to work are still resistant to price reductions. “If you look at more generic suburban or airport hotel markets, you have seen slippage in cap rates of 100 to 125 basis points,” he says. “But there is still an inability of buyers to lock debt financing to close on deals. Even with pricing adjustments of the past six to eight months, I suspect activity will remain muted most of 2008.”