NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Starwood Hotels & Resorts Worldwide Inc.'s (Starwood) offering of $350 million unsecured notes due 2025 and $300 million unsecured notes due 2034. The Rating Outlook is Stable.
Net proceeds from the offering will be used for general corporate purposes, which may include the repayment of commercial paper, common stock repurchases, and the payment of previously announced special dividends.
The notes will be issued under Starwood's existing indenture dated Dec. 10, 2012 and will be pari passu with existing and future unsecured obligations. The notes obligate Starwood to repurchase the notes at 101% of par upon a change of control if the notes are rated below investment grade, as defined.
KEY RATING DRIVERS
Leverage Below Target
Given no change in its financial policy, Fitch expects an increase in Starwood's leverage towards its targeted range over time through share repurchases and common dividends, and possibly brand acquisitions if opportunities are present. Starwood's leverage is currently solid for the 'BBB' rating and provides flexibility to absorb a significant weakening in the overall economy (leading to high single/low double digit revenue per available room [RevPAR] declines) without the need for a negative rating action.
Lower borrowings and EBITDA growth have reduced Starwood's core-lease adjusted leverage to 1.7x for the trailing 12 months (TTM) ending June 30, 2014 from 3.8x at year-end 2010. Fitch calculates core-lease adjusted leverage at 2.3x pro forma for the notes issuance. The company has reduced its recourse debt levels from $2.8 billion at year-end 2010 to $1.4 billion as of June 30, 2014.
Although the company's current leverage is below Fitch's 2.75x target for Starwood at the 'BBB' rating, management has publicly stated its 2.5x-3.0x target leverage commitment - a level that should allow it to retain its investment grade rating through a full lodging cycle. While management's target leverage is higher than its previous 2.0x-2.5x target, Fitch believes it remains within the context of Starwood's current ratings.
Committed to Capital Light
Fitch believes that Starwood remains committed to transitioning to a capital light strategy and expects fee income to grow to approximately 80% of the company's segment level operating profit (i.e. before G&A) by 2016. Starwood has grown its recurring fee income as a percentage of segment level operating profit to 67% of total operating profit during 2013 from 17% in 2000.
Although Starwood has sold roughly $8.7 billion of owned hotels since 2000, the global financial crisis (GFC) hampered the company's progress towards asset light by limiting its ability to dispose of properties at attractive prices. However, Fitch expects asset sales to increase during the forecast period due to strong investor demand for hotel properties. Fitch estimates that several billion dollars of real estate on Starwood's balance sheet could be monetized and returned to shareholders through additional special dividends and/or share repurchases.
Starwood has sold $232 million of owned hotels so far during 2014, including the $213 million sale of The St. Regis Bal Harbour Resort in Miami Beach, FL and the Aloft Tucson University, AZ for $19 million. Both sales were conditioned on Starwood receiving a long-term management contract. This follows the sale of six owned hotels for $248 million of net proceeds and eight hotels for $520 million during 2013 and 2012, respectively.
Bending on Return of Capital Strategy
In August, Starwood announced that its Board had approved a new $1.1 billion share repurchase authorization, which brings the company's total authorization to approximately $1.5 billion. Year-to-date, Starwood has repurchased approximately $200 million and announced that it expects to accelerate the rate of repurchases. Outside of debt repayments, Fitch views acquisitions as the most creditor friendly avenue of free cash flow deployment for lodging C-corps, followed by share repurchases and special and regular common dividends.
Starwood management has stated that share repurchases are an important component of its broader capital allocation strategy that is designed to provide maximum flexibility with respect to returning capital to shareholders. Regular common and 'recurring' special dividends are the two principal alternative avenues that the company uses.
In February, Starwood announced a $500 million of special dividend to be paid in four 'recurring' quarter distributions during the year from the net cash generated from its recently completed St. Regis Bal Harbour residential project and related hotel sale. The company paid the first and second $0.65 per share special quarterly distribution in March and June 2014. Starwood declared the next special dividend to be paid on Sept. 26 to shareholders on record as of Sept. 5.
Leveraged to More Volatile Segments
Fitch generally views Starwood's emphasis on upper price tier hotels and its relatively high exposure to advanced emerging economies as a credit positive through the cycle. These segments are well positioned to benefit from key demographic trends within the global hospitality industry, such as a rapidly growing middle class in selected countries (e.g. China) that are leading to increased inbound and outbound travel demand. However, Fitch acknowledges that these segments of the industry have historically been more volatile than the averages in terms of RevPAR growth, which along with the company's sizable owned hotel portfolio could lead to greater cash flow volatility for Starwood. Fitch has reflected this risk in its stress scenario analysis for Starwood by assuming a greater than industry average drop in RevPAR, as well as a larger reduction in its EBITDA margin.
Positive Industry Fundamentals
The ratings reflects Fitch's positive outlook for the lodging industry in 2014 with a base case scenario for U.S. RevPAR growth in the mid-to-high single digits. This level of growth is above the 5.4% growth in 2013, according to STR Global industry data. Fitch expects average daily rate (ADR) increases will drive a majority of the RevPAR improvement given that occupancies are at or above peak levels in many markets. Fitch expects Starwood's systemwide RevPAR to grow at or slightly below the U.S. average due to its exposure to select geographies, such as China and Western Europe that Fitch expected to grow slower than the industry average.
Fitch expects supply to grow by 1.1% in 2014 - a modest acceleration from the 0.7% growth in 2013, but still well below the 1.9% long-term average since 1987. Low new supply growth continues to support greater pricing flexibility for the industry generally and Starwood specifically. Supply growth reached its cycle low at 0.5% in 2012.
The ratings incorporate Fitch's current macroeconomic outlook, including annual U.S. GDP growth of 2% and 3.1% in 2014 and 2015 and world economic growth of 3.3% and 3.6% during the same respective periods. Fitch recognizes the cyclical nature of the lodging industry and the potential for heightened global macroeconomic. However, Starwood is well positioned to withstand softer economic conditions than those contemplated in Fitch's base case expectations, as discussed below.
RATING SENSITIVITIES
--While not expected, a positive rating action could occur if the company publicly commits to a more conservative financial policy, and Fitch believes that the company has the intent and ability to carry out the policy.
--The company has flexibility at the current rating to pursue special dividends, debt funded acquisitions or share repurchases as long as it maintains core lease adjusted leverage below 2.75x.
--As with all investment grade issuers, a negative rating action could occur if management changes its financial policy. Fitch's target leverage for Starwood of 2.75x at the 'BBB' rating is within Starwood's publicly committed leverage range of 2.5x-3.0x.
Fitch currently rates Starwood as follows:
--Issuer Default Rating at 'BBB';
--$1.75 billion senior unsecured credit facility at 'BBB';
--$2.1 billion of senior unsecured notes at 'BBB' (includes new notes).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps' (Jan. 7, 2011);
--'2014 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View' (Dec. 13, 2013);
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=588285
2014 Outlook: Cross-Sector Lodging & Timeshare (The Penthouse View)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726600
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=868895
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