NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the credit ratings of Host Hotels & Resorts (NYSE: HST) and its operating partnership, Host Hotels & Resorts Limited Partnership (collectively Host, or the company) as follows:
Host Hotels & Resorts, Inc.
--Issuer Default Rating (IDR) to 'BBB-' from 'BB+'.
Host Hotels & Resorts, L.P.
--IDR to 'BBB-' from 'BB+';
--Unsecured revolving credit facility to 'BBB-' from 'BB+';
--Senior unsecured notes to 'BBB-' from 'BB+';
--Senior unsecured exchangeable notes to 'BBB-' from 'BB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The upgrade reflects Fitch's expectation that Host will achieve its stated 3.0x leverage target and that the company's credit metrics will remain appropriate for the 'BBB-' IDR through the lodging cycle. The upgrade also considers Host's high-quality portfolio of geographically diversified upper tier hotel properties, as well as its large and liquid unencumbered asset pool. Fitch views this as an important source of contingent liquidity that supports the rating.
Sustained Lower Leverage
Host has reduced its leverage from its down cycle peak of 5.8x to 3.3x for the trailing 12 month period ending Dec. 31, 2013. Fitch's base case scenario projects Host's leverage to decrease to 2.8x in 2014 and 2.5x in 2015. This reduction and public commitment to sustain leverage around 3.0x or below is a key element behind Fitch's upgrade of Host's ratings.
The ratings have little tolerance for leverage sustaining above 4.0x over a rating horizon (typically two to three years). Ratings also recognize that the cyclicality of the industry, the asset heavy nature of owning hotels, and the limited ability to retain cash and reduce debt due to its REIT status could cause leverage to increase above 4.0x temporarily in a downturn. Fitch's stress case forecast assumes that peak cyclical leverage is comfortably below 5.0x and that it would decline to below 4.0x within the ratings horizon. Fitch defines Host's leverage as net debt to recurring operating EBITDA.
Positive Hotel Industry Outlook
Fitch has a positive view towards U.S. lodging industry fundamentals owing to healthy demand from corporate transient and inbound international visitation trends. Combined with limited new supply, the increase in demand has lifted occupancy rates to levels that support pricing flexibility. Fitch's base case incorporates revenue per available room (RevPAR) growth for U.S. hotels of 5.5% in 2014, which is on the conservative side of the 5%-7% range of forecasts from the leading industry forecasting services. Fitch expects Host's RevPAR to grow in-line to slightly above the industry average during the next one-to-three years.
Host maintains a high-quality, geographically diversified portfolio of 114 consolidated luxury and upscale hotel properties across the U.S. including 15 international hotels located in, Australia, Brazil, Canada, Chile, Mexico, and New Zealand. The company's portfolio provides significant financial flexibility and geographically diverse cash flows, which Fitch views positively.
Large and Liquid Unencumbered Asset Pool
Host's large unencumbered asset pool provides an excellent source of contingent liquidity. Fitch calculates that the company's unencumbered assets to net unsecured debt (UA/UD) ratio at 2.3x as of Dec. 31, 2013. Fitch reflects the cyclicality of Host's cash flows in its UA/UD analysis by haircutting its trailing 12-month unencumbered EBITDA by 20% and applying a stressed 8x multiple to calculate unencumbered asset value.
Host's unencumbered asset profile has several attractive features that should enhance their appeal as collateral. The company's hotels are principally located in key 'gateway' markets that balance sheet lenders tend to favor. Moreover, its hotels are generally aligned with the strongest brands in the industry. Finally, Host owns some of the largest and most valuable hotels in the U.S., which should allow it to raise secured debt capital quickly and in size, if needed.
Strong Fixed-Charge Coverage
Fitch projects that Host's fixed-charge coverage ratio, which declined to 1.7x in 2009 from 2.6x in 2008 and rose to 3.2x in 2013, to improve to 5.1x in 2014 and 5.6x in 2015. Under Fitch's stress case forecast coverage would decline to 2.5x over the next 12-to-24 months. Fitch defines Host's fixed-charge coverage as recurring operating EBITDA less renewal and replacement capital expenditures, divided by cash interest expense and capitalized interest.
Industry Cyclicality Reduces Cash Flow Stability
The cyclical nature of the hotel industry is Fitch's primary credit concern related to Host. Hotels re-price their inventory daily and, therefore, have the shortest lease terms and least stable cash flows of any commercial property type. Economic cycles, as well as exogenous events (i.e. acts of terrorism), have historically caused material declines in revenues and profitability for hotels.
The Stable Outlook centers on Fitch's expectation that Host's credit profile will remain appropriate for the 'BBB-' rating through the economic cycles, barring any significant changes in the company's capital structure plans. The Stable Outlook also reflects the quality of Host's portfolio and unencumbered asset coverage that provides good downside protection to bondholders.
--A reduction in Host's public stated leverage target of 3.0x and commensurate deleveraging of its balance sheet could lead to positive momentum. At this point, Fitch believes this is unlikely given the company's growth strategy and historical financial policies.
--Fitch expects management to support its balance sheet at a level commensurate with a 'BBB-' rating. Host revising its medium to long-term leverage target above 3.0x could have negative rating implications.
--Fitch's expectation for leverage to sustain above 4.0x over the rating horizon could also lead to a downgrade in the ratings and/or outlook;
--A negative rating action could also occur if a downturn is more severe than Fitch's stress case scenarios, which contemplates industrywide RevPAR declines of 13-15%. Due at least in part to the more attractive supply growth environment relative to the last recessions, we believe RevPAR declines would be somewhat less severe than the 20% declines experienced in 2008 - 2009.
--A material reduction in Host's UA/UD ratio could have negative rating implications.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'2014 Outlook: Cross-Sector Lodging and Timeshare - The Penthouse View', Dec. 13, 2013;
--'Recovery Rating and Notching Criteria for Equity REITs', Nov. 19, 2013;
--'Corporate Rating Methodology', Aug. 5, 2013;
--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013.
Applicable Criteria and Related Research:
2014 Outlook: Cross-Sector Lodging & Timeshare (The Penthouse View)
Recovery Rating and Notching Criteria for Equity REITs - Effective May 12, 2011 to May 3, 2012
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage