NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Host Hotels & Resorts Limited Partnership's (Host) $500 million series E senior unsecured notes due June 15, 2025. Host plans to use the net proceeds and cash on hand to redeem its 5.875% $500 million series X notes due 2019. The company anticipates paying an aggregate redemption price of approximately $515 million. A full list of Fitch's ratings for Host follows at the end of this release.
The Rating Outlook remains Stable.
KEY RATING DRIVERS
The ratings reflect Fitch's expectation that Host will sustain leverage at or below 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 ratings also consider Host's high-quality portfolio of geographically diversified upper-tier hotel properties, as well as its large and liquid unencumbered asset pool. Fitch views the latter as an important source of contingent liquidity that supports the rating.
U.S. Lodging Still in a Good Place
Accelerating U.S. GDP growth and low levels of new supply set the table for strong U.S. lodging industry fundamentals during 2015. Robust demand has boosted occupancy rates, providing hotels with material pricing power. Fitch expects U.S. RevPAR to increase by 6% this year, based on a 1% occupancy gain and 5% average daily room rate (ADR) growth. Fitch expects Host's RevPAR to grow in-line with to slightly below the industry average during the next one-three years, primarily due to the company's exposure to upper-price-tier hotels and portfolio weightings in markets with weaker near-term outlooks, such as New York and Washington, D.C.
Host maintains a high-quality, geographically diversified portfolio of 113 consolidated luxury and upscale hotel properties across the U.S. including 16 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.
Sustained Lower Leverage
Host has reduced its leverage from its down-cycle peak of 5.8x to 2.4x for the trailing 12-month (TTM) period ending March 31, 2015 - a level that is in-line with Fitch's rating case projections. The reduction and Host's public commitment to sustain leverage at around 3.0x or below are key elements behind Fitch's ratings.
Fitch's ratings for Host have only limited tolerance for leverage sustaining above 4.0x over the rating horizon (typically two-three years). However, the ratings contemplate a scenario where Host's leverage temporarily increases above 4.0x - a recognition of hotel industry cyclicality and capital intensity, as well as the limited ability to retain cash and reduce debt due to its REIT status. Under such a scenario, the company's speed and willingness to bring leverage back below 4.0x would likely determine whether Fitch maintains its investment-grade ratings.
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.
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 2.8x as of March 31, 2015.
Fitch reflects the cyclicality of Host's cash flows in its UA/UD analysis by haircutting its TTM 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's rating case projections anticipate that Host's fixed-charge coverage ratio will sustain in the mid-5.0x range over the rating horizon. Strong property-level EBITDA growth, lower leverage and the refinancing of higher-cost debt support Fitch's expectations. Under a stress case scenario not anticipated by Fitch, the company's coverage could decline (but remain adequate) 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.
Cyclicality Drives Earnings Volatility
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 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.
--U.S. lodging industry RevPAR grows 6% during 2015;
--Upper-price-tier hotels deliver moderately below-average RevPAR growth;
--Group demand (room nights booked in blocks of 10, or more) momentum continues to improve;
--Fitch has not incorporated any share repurchases under the company's recently authorized $500 million repurchase program into its rating case projections.
--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.
Fitch currently rates Host as follows:
Host Hotels & Resorts, Inc.
--Issuer Default Rating (IDR) 'BBB-'.
Host Hotels & Resorts, L.P.
--Unsecured revolving credit facility 'BBB-';
--Senior unsecured notes 'BBB-';
--Senior unsecured exchangeable notes 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Equity REITs: The Privatization Fuse Is Lit (Capital Availability and Relative Pricing Reminiscent of Last Wave)', May 5, 2015;
--' U.S. REITs: Macroeconomic Factors Key to Portfolio Performance', Apr. 16, 2015;
--' 2015 Penthouse View (Cross-Sector Lodging and Timeshare ABS)', Mar. 26, 2015;
--' The Role of Size and Seasoning in U.S. REIT Ratings (More Likely to Support than Restrain Ratings)', Mar. 25, 2015;
--'Recovery Rating and Notching Criteria for Equity REITs', Nov. 18, 2014;
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Equity REITs
The Role of Size and Seasoning in U.S. REIT Ratings (More Likely to Support than Restrain Ratings)
2015 Penthouse View (Cross-Sector Lodging and Timeshare ABS)
U.S. REITs: Macroeconomic Factors Key to Portfolio Performance
U.S. Equity REITs: The Privatization Fuse Is Lit (Capital Availability and Relative Pricing Reminiscent of Last Wave)