March 14, 2012 / 2:12 PM / 5 years ago

TEXT-S&P rates Host Hotels & Resorts LP notes 'BB+'

Overview	
     -- Host Hotels & Resorts L.P., a subsidiary of Host Hotels & Resorts 	
Inc., has announced plans to issue $300 million of senior notes due
2022, the 	
proceeds of which will be used for debt repayment.	
     -- We are assigning our 'BB+' issue-level rating to the proposed $300 	
million notes.	
     -- The stable rating outlook on Host Hotels & Resorts Inc. reflects our 	
view that Host will sustain credit measures appropriate for the current rating 	
over the intermediate term. 	
	
Rating Action	
On March 14, 2012, Standard & Poor's Ratings Services assigned Bethesda, 	
Md.-based Host Hotels & Resorts L.P.'s proposed $300 million senior notes due 	
2022 our 'BB+' issue-level rating, with a recovery rating of '1', indicating 	
our expectation of very high (90% to 100%) recovery for lenders in the event 	
of a payment default. Host expects to use the proceeds to repay the $113 	
million principal amount outstanding of the 7.5% mortgage due April 2013 	
secured by the JW Marriott in Washington, D.C., to redeem $150 million of the 	
company's 6 7/8% Series S senior notes due in 2014, and for general corporate 	
purposes.	
	
In November 2011, Host closed on a new $1 billion revolver (which we do not 	
rate) that released former subsidiary guarantees and pledges of equity 	
interests. As a result, the company's existing senior notes and debentures 	
indentures also released former subsidiary guarantees and stock pledges under 	
provisions in the indentures that require the same guarantees and collateral 	
provided to the revolving credit facility. Effectively, the proposed and 	
existing senior notes are currently unsecured. However, if Host's leverage 	
ratio exceeds 6x for two consecutive fiscal quarters at a time when Host does 	
not have an investment-grade, long-term unsecured debt rating, the subsidiary 	
guarantees and equity pledges will spring back into place in the company's 	
revolver and notes indentures. Given that our simulated default scenario for 	
Host incorporates the assumption that the company's leverage ratio will be 	
above 6x, our '1' recovery rating on the company's existing notes remained 	
unchanged.	
Rationale	
Our 'BB-' corporate credit rating on Host Hotels & Resorts Inc. reflects our 	
assessment of the company's financial risk profile as "highly leveraged" and 	
our assessment of the company's business risk profile as "satisfactory," 	
according to our criteria.	
	
Our assessment of Host's financial risk profile as highly leveraged reflects 	
total lease adjusted debt to EBITDA in the low-6x area (including Host's pro 	
rata share of joint venture debt and EBITDA) and funds from operations to 	
total lease adjusted debt in the low-teens percentage area at December 2011, 	
and the company's reliance on external sources of capital for growth as a real 	
estate investment trust (REIT). We believe continued revenue per available 	
room (RevPAR) growth in the U.S. lodging industry in 2012, as well as Host's 	
relatively prudent use of equity capital to expand its hotel portfolio, will 	
enable the company to improve credit measures over time and keep them in line 	
with the current rating.	
	
Our assessment of Host's business risk profile as satisfactory is based on the 	
company's high-quality and geographically diversified hotel portfolio in the 	
U.S., strong brand relationships, and experienced management team. Partly 	
offsetting these positive attributes are the cyclical nature of the lodging 	
industry and the associated revenue and earnings volatility of the company's 	
owned hotel portfolio.	
	
Host reported that comparable-hotel RevPAR increased 6.1% in 2011, primarily 	
the result of a 4.3% increase in average daily rate (ADR). As a result, 	
comparable hotel adjusted profit margin increased 90 basis points. Host's 	
adjusted EBITDA increased 22% due to RevPAR growth and acquired EBITDA. Host 	
completed $1.1 billion in acquisitions in 2011, partly funded with proceeds of 	
$323 million generated from the company's continuous equity offering program, 	
debt issuance, and a moderate amount of cash balances. As a result of Host's 	
operating performance, acquisitions, and debt and equity issuance, the 	
company's total lease adjusted debt to EBITDA (including Host's pro rata share 	
of debt and EBITDA from unconsolidated joint ventures) was in the low-6x area, 	
funds from operations to total debt was in the low-teens percentage area, and 	
EBITDA coverage of interest expense was in the high-2x area at December 2011. 	
These measures are in line with the current 'BB-' rating for Host, in our view.	
	
The rating is also supported by the good expected lodging environment. Hotel 	
room demand in the U.S. achieved sustained levels of growth in 2011 and we 	
believe demand for lodging will increase again in 2012, although at a more 	
moderate rate. In the U.S., demand increased 5% in 2011 and we expect it will 	
improve around 2% in 2012 and 2013, whereas supply growth will be muted at 	
less than 1% in 2012 and just more than 1% in 2013. As a result, we believe 	
occupancy will likely grow to about 61% in 2012 and 2013, and the increase in 	
average daily rate will likely be the majority of U.S. RevPAR growth in 2012 	
and 2013. These drivers would translate into a U.S. RevPAR increase between 3% 	
and 6% in 2012 and in the low-single-digit area in 2013. 	
	
In addition to the aforementioned RevPAR expectations, key aspects of our 	
operating performance expectations for Host are:	
     -- We believe Host's 2012 RevPAR will grow in the mid-single-digit area 	
and that EBITDA will grow in the high-single-digit area, primarily because of 	
continued room rate increases. We believe Host's 2012 RevPAR likely will grow 	
at the high end of our U.S. industry range, because of its mix of upscale and 	
luxury hotels.	
     -- Under these operating assumptions and assuming debt repayment from the 	
proceeds of the proposed notes issuance, we believe Host's total adjusted debt 	
to EBITDA will decrease to the mid- to high-5x area, funds from operations 	
(FFO) to total debt will increase to the low-to mid-teens percentage area, and 	
EBITDA coverage of interest will increase to around 3x by the end of 2012. 	
These expected measures are good for our current 'BB-' rating.	
     -- We have not assumed in these expected credit measures that Host 	
pursues the purchase of the Grand Hyatt Washington, D.C. in 2012. Host 	
recently terminated the acquisition of this hotel, which would have cost $442 	
million, plus the assumption of a $166 million mortgage loan, under the terms 	
of the terminated purchase agreement.	
     -- In the event Host completes acquisitions in 2012, we believe it likely 	
will partly finance them with the issuance of equity. Host's frequent access 	
of the equity market to partly fund acquisitions gives it the ability to 	
pursue them in the future without significantly increasing leverage. This has 	
been particularly important given valuation multiples for its recently 	
announced and completed acquisitions were high and reflected competition for 	
high-quality assets in urban markets that had propelled acquisition multiples 	
to elevated levels last year.	
	
Liquidity	
Based on its likely sources and uses of cash over the next 12 to 18 months, 	
Host has an "adequate" liquidity profile, according to our criteria. Relevant 	
elements of its liquidity profile are:	
     -- As a REIT, Host pays out at least 90% of its taxable income as 	
dividends, and relies on external sources of liquidity and asset sales to fund 	
growth. 	
     -- We expect sources of liquidity to exceed uses by at least 1.2x.	
     -- Net sources of liquidity would remain positive, even in the event of a 	
15% decline in EBITDA.	
     -- We believe Host has satisfactory standing in credit markets and a 	
sound relationship with its banks.	
     -- We expect Host to sustain a prudent approach to financial risk 	
management. 	
     -- We expect the cushion relative to Host's financial covenants in its 	
credit agreement will remain good, and believe the company would not violate 	
these measures, even if EBITDA unexpectedly declines by 15%.	
	
Also supporting Host's liquidity position is $826 million in cash balances and 	
$883 million in availability under its $1 billion revolving credit facility 	
due November 2015. Under Host's continuous equity offering program, used 	
partly to fund acquisitions, the company raised $323 million in equity 	
proceeds in 2011 and $148 million year to date in 2012. Host is also expected 	
to fund significant capital expenditures, which the company anticipates will 	
total between $545 million and $605 million in 2012. Host has aggregate debt 	
maturities of $395 million in 2012, $246 million in 2013 (pro forma for the 	
repayment of the J.W. Marriott, Washington D.C. mortgage from the proposed 	
notes proceeds), and $741 million in 2014 (pro forma for the planned 	
redemption of the $150 million Series S notes from the proposed notes 	
proceeds). We believe Host will successfully access capital markets to 	
refinance these maturities. 	
	
Recovery analysis	
Our rating on Host's senior notes is 'BB+' (two notches higher than the 	
corporate credit rating), with a recovery rating of '1', indicating our 	
expectation of very high (90% to 100%) recovery for lenders in the event of a 	
payment default. For the complete recovery analysis, see Standard & Poor's 	
recovery report on Host to be published following this report on 	
RatingsDirect. 	
Outlook	
Our stable rating outlook reflects our expectation that Host will sustain 	
credit measures in line with the current rating over the intermediate term. We 	
believe the company's RevPAR will increase in the mid-single digits area and 	
EBITDA will increase in the high-single digits are in 2012. Based on these 	
assumptions, as well as giving pro forma consideration for acquisitions, we 	
expect adjusted debt leverage to be in the mid- to high-5x area, FFO to total 	
debt will increase to the low- to mid-teens percentage area, and EBITDA 	
coverage of interest will increase to around 3x at the end of 2012. These 	
expected measures are good for our current 'BB-' rating. Any positive rating 	
action would be contingent on our gaining confidence that the company could 	
sustain adjusted debt to EBITDA below the mid-5x area and FFO to total debt 	
around 15%. A downgrade is unlikely over the intermediate term, but could 	
arise from excessive debt-financed acquisitions, or a worse-than-expected 	
RevPAR moderation, causing credit measures to weaken.	
	
	
Ratings List	
	
Host Hotels & Resorts L.P.	
 Corporate Credit Rating                BB-/Stable/--	
	
New Ratings	
	
Host Hotels & Resorts L.P.	
 Senior Secured	
  US$300 mil nts due 2022               BB+                	
   Recovery Rating                      1

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