NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the credit ratings of Host Hotels & Resorts (NYSE: HST) and its subsidiary Host Hotels & Resorts, L.P. (together Host) as follows:
Host Hotels & Resorts, Inc.
--Issuer Default Rating (IDR) at 'BB'.
Host Hotels & Resorts, L.P.
--IDR at 'BB';
--Revolving Credit Facility at 'BB';
--Senior Notes at 'BB';
--Senior Exchangeable Notes at 'BB'.
The Rating Outlook is Stable.
The affirmation reflects Fitch's view that Host's credit metrics will remain appropriate for the 'BB' rating through the economic cycle. The affirmation reflects the continued solid recovery in lodging demand trends, despite the global macroeconomic risk environment. Fitch expects industry-wide U.S. RevPAR to increase 4%-5% in 2012, with Host growing in line with the industry average. Lodging demand will be supported by low U.S. supply growth of less than 1% in 2012-2013, well below the long-term historical average of 2.1%.
Fitch expects Host's lodging portfolio to continue to improve in 2012. Fitch anticipates that Host's leverage will decline and fixed charge coverage will continue to increase as sector-wide operating fundamentals remain strong but remain at levels consistent with the 'BB' rating. RevPAR and related food and beverage revenue growth, along with incremental EBITDA from stabilized property acquisitions in 2011 should also help grow EBITDA.
The rating takes into consideration credit concerns including the potential that economic weakness could jeopardize RevPAR growth potential and the implicit volatility of lodging earnings. Host's recurring operating EBITDA has not yet recovered from the comparable RevPAR declines of 19.9% in 2009 despite growth of 5.8% in 2010 and 6.1% in 2011; it remains about 25% below 2008 levels.
Leverage has improved to 5.0 times (x) for 2011 as compared to 5.4x for 2010. Fitch expects leverage to decline to between 4.5x and 3.5x in 2012 and 2013, after rising to 5.6x in 2009 from 3.6x in 2007. In a more adverse case than currently anticipated by Fitch, leverage could rise above 6.0x over the next 12-to-24 months, which would be consistent with a rating lower than 'BB'. Fitch defines leverage as net debt to recurring operating EBITDA.
Fitch projects that Host's fixed charge coverage ratio, which declined to 1.7x in 2009 from 2.6x in 2008 and rose to 1.9x in 2011, to improve to between 2.5x and 3.0x in 2012 and 2013. In a more adverse case than anticipated by Fitch, coverage could decline below 2.0x over the next 12-to-24 months, which would be commensurate with a rating lower than 'BB'. Fitch defines fixed charge coverage as recurring operating EBITDA less renewal and replacement capital expenditures, divided by cash interest expense and capitalized interest.
Host's liquidity position is solid and is expected to remain so. For the period Jan. 1, 2012 to Dec. 31, 2013, Host's sources of liquidity (cash, availability under its revolving credit facility, and projected retained cash flows from operating activities after dividends and distributions and adjusting for the company's increased dividend) exceed uses of liquidity (debt maturities and amortization and projected renewal and replacement capital expenditures) by 1.7x, which is appropriate for the rating. Fitch estimates that Host would have a breakeven liquidity ratio even if its retained cash flow is minimal.
Host has a manageable near-term debt maturity schedule with less than 15% of total debt maturing through 2013. However, debt maturities in 2014 and 2015 are greater than 20% of total debt per year. During 2009, management took steps to raise various sources of capital, which improved Host's financial position. Fitch expects the company to continue to methodically address upcoming maturities. Company management prudently accessed the capital markets in November 2011 to issue $300 million 6% Series Y senior notes to pre-fund the maturing $388 million 2027 Debentures expected to be put to the company on April 15, 2012.
Host maintains a high-quality, geographically dispersed hotel portfolio of 121 consolidated properties across 26 U.S. states, Australia, Brazil, Canada, Chile, Mexico, and New Zealand, of which 107 are unencumbered from mortgage debt. This portfolio provides significant financial flexibility and geographically diverse cashflow streams, which Fitch views positively. The company has added hotels in Australia, New Zealand and Brazil over the last two years, further diversifying its international presence.
Host's luxury and upscale platform includes brands such as Marriott (54% of 2011 revenues), Westin (10%), Hyatt (9%), Sheraton (8%), and Ritz-Carlton (8%). Fitch anticipates that Host will outperform other lodging price points as they have demonstrated more upside than lower price points.
Host continues to expand the portfolio through acquisitions. In January 2011, Host announced the $313 million purchase of the New York Helmsley Hotel that will be converted into a Westin by mid-2012 and in February 2011 announced the $570 million purchase of the Manchester Grand Hyatt San Diego Hotel. With acquisitions, the company's unencumbered asset base has grown to 107 assets as of Dec. 31, 2011 from 102 assets the year prior.
The company's unencumbered asset base provides further funding flexibility, which Fitch views positively. Based on a range of EBITDA multiples, unencumbered asset coverage of unsecured debt ranges from 2.4x to 3.2x, with a midpoint of 2.8x which Fitch views as strong for the 'BB' rating level.
The Stable Outlook centers on Fitch's expectation that Host's credit profile will remain appropriate for the 'BB' rating through economic cycles, barring any significant changes in the company's capital structure. The Stable Outlook reflects the quality of Host's portfolio and unencumbered asset coverage that provides good downside protection to bondholders. Further, Host continues to access various sources of capital and maintains a solid liquidity profile.
The following factors may result in positive momentum in the ratings and/or Rating Outlook:
--Sustained comparable RevPAR growth beyond Fitch's current forecast of positive 4% to 5% in 2012 and 2013;
--Net debt to recurring operating EBITDA sustaining below 4.0x through economic cycles (leverage was 5.0x for 2011);
--Fixed charge coverage sustaining above 2.5x through economic cycles (coverage was 1.9x in 2011).
The following factors may result in negative momentum on the ratings and/or Rating Outlook:
--Net debt to recurring operating EBITDA sustaining above 5.0x;
--Fixed charge coverage sustaining below 1.5x;
--A base case liquidity coverage ratio sustaining below 1.0x (for Jan. 1, 2012 to Dec. 31, 2013, base case liquidity coverage was 1.7x).
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs', Feb. 27, 2012;
--'Corporate Rating Methodology', Aug. 12, 2011;
--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011;
--'Recovery Rating and Notching Criteria for Equity REITs', May 12, 2011.
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Rating and Notching Criteria for Equity REITs