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Fitch Rates Host Hotels & Resorts Series G Notes 'BBB'; Outlook Stable
March 9, 2017 / 5:40 PM / 9 months ago

Fitch Rates Host Hotels & Resorts Series G Notes 'BBB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, March 09 (Fitch) Fitch Ratings has assigned a 'BBB' rating to Host Hotels & Resorts Limited Partnership's (Host) Series G senior unsecured notes due April 1, 2024. Host plans to use the net proceeds to repay a portion of outstanding revolver borrowings and for general corporate purposes. Host will issue the Series G notes under its existing indenture dated May 15, 2015. A full list of Fitch's ratings for Host follows at the end of this release. KEY RATING DRIVERS Host's 'BBB' IDR reflects its demonstrated adherence to, and Fitch's expectation of, maintaining leverage within its more conservative 2.5x to 3.0x public financial policy target adopted following the last downturn. Sustaining leverage in this range during lodging industry expansions should allow Host to keep leverage during a downturn at a turn or more below similarly rated REITs with longer leases and less volatile cash flows. This assumes that the company's peak-to-trough EBITDA decline during a downturn is consistent with its negative 30% to negative 50% historical experience. It is appropriate for Host to sustain trough leverage below similarly rated REITs with less volatile cash flows backed by longer-duration contractual leases. This is due to the generally weaker institutional demand for secured property-level mortgages for hotels during periods of economic and capital markets stress relative to other CRE property type. 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. Host's portfolio is almost entirely unencumbered. The Stable Outlook is based on Fitch's expectation that Host's credit profile will remain appropriate for the 'BBB' rating through economic cycles. The Stable Outlook also reflects the quality of Host's portfolio and unencumbered asset coverage which provides good downside protection to bondholders. U.S. Lodging Cycle Peaking Fitch projects that U.S. revenue per available room (RevPAR) will increase by 1%-2% during 2017, with monthly comparisons possibly turning negative during the latter half of the year. We expect 2018 to mark the first full year of RevPAR declines, assuming the historical six- to 12-month lag between occupancy and RevPAR declines holds. Fitch sees upside risk to its near-term RevPAR expectations given the marked rise in market sentiment towards accelerating private non-residential investment spending. However, a meaningful acceleration in economic growth will likely require the Trump administration to execute on its policies with respect to infrastructure spending and tax and regulatory reform. Fitch expects Host's RevPAR to grow moderately below the industry average during the year due to its exposure to upper-price-tier hotels and portfolio weightings in markets with weaker near-term outlooks, such as New York. Solid group demand and recently completed growth capex investments should support moderate RevPAR growth during 2017. 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 Dec. 31, 2016. This leverage level is in line with Fitch's rating case projections through 2019. The reduction and Host's public commitment to sustain leverage in the 2.5x to 3.0x range are key considerations incorporated in Fitch's ratings. Fitch's stress case forecast assumes that peak cyclical leverage is comfortably below 4.0x. Fitch defines Host's leverage as debt, net of readily available cash divided by recurring operating EBITDA. Fitch's ratings for Host have only limited tolerance for leverage sustaining above 4.0x over the rating horizon (typically one-to-two years). However, the ratings contemplate a scenario where Host's leverage temporarily increases above 4.0x in 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 willingness and sense of urgency to bring leverage back to the around 3.0x would likely determine whether Fitch maintains its ratings and Stable Outlook, along with Fitch's outlook for leverage to return to the company's 2.5x-3.0x policy range. Large and Liquid Unencumbered Portfolio Host's large unencumbered asset pool provides an excellent source of contingent liquidity. Host's unencumbered asset profile has several attractive features that should enhance its 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 a large amount of secured debt capital quickly, if needed. Fitch calculates the company's unencumbered assets-to-net unsecured debt (UA/UD) ratio at 2.7x as of Dec. 1, 2016. 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. Strong Fixed-Charge Coverage Fitch's rating case projections anticipate that Host's fixed-charge coverage (FCC) ratio will improve to the 7.0x to 8.0x range over the rating horizon. Strong property-level EBITDA growth, lower leverage and the refinancing of higher-cost debt support these expectations. Fitch defines FCC as recurring operating EBITDA less renewal and replacement capital expenditures, divided by cash interest expense and capitalized interest. Diversified Portfolio Host maintains a high-quality, geographically diversified portfolio of 90 consolidated luxury and upper upscale hotel properties across the U.S. and seven international hotels located in Australia, Brazil, Canada, and Mexico. The company's portfolio provides significant financial flexibility and geographically diverse cash flows, which Fitch views positively. Heightened Event Risk Potential Fitch's ratings for Host do not contemplate a deviation from the company's current financial policies. However, we recognize the heightened possibility for "event risk" in the form of a change in financial policy given the weak absolute and relative performance of the company's shares and concerns expressed by some market participants that the company's low leverage strategy is suboptimal. Share Repurchases Fitch's ratings for Host have some tolerance for share repurchases, provided the company executes its program within its stated financial policies, primarily sustaining leverage below 3.0x. Nevertheless, Fitch views share repurchases as a credit negative that, all else equal, favor equity holders over bondholders. The company's board authorized a new $500 million share repurchase program in February 2017 after its prior program expired at 2016 year-end. Host repurchased approximately 23 million shares for $394 million under its prior authorization. Cyclicality Drives Earnings Volatility The cyclical nature of the hotel industry is Fitch's primary credit concern. 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. KEY ASSUMPTIONS -U.S. lodging industry RevPAR grows 1%-2% in 2017 before turning negative in 2018; upper-price-tier hotels deliver moderately below-average RevPAR growth; --Fitch expects Host's RevPAR to grow 1% in 2017, based on expectations for continued healthy group demand trends and a moderate benefit from its recently renovated hotels. Fitch has assumed a 2.5% RevPAR decline for Host during 2018; --Host's EBITDA margins are flat through 2017 and contract slightly in 2018, excluding non-routine items; --Fitch expects annual maintenance capital expenditures of $300 million through the forecast horizon. --Excluding the announced acquisition of the W Hollywood and the Don Cesar hotels and sale of the JW Marriott Desert Springs, no further acquisitions or dispositions during the forecast period; --Fitch has assumed no share repurchases in 2017-2019 as the pace of dispositions slow; the company has publicly stated that it will not leverage up beyond its policy targets to repurchase stock. RATING SENSITIVITIES --Host adopting a publicly stated leverage target below its current 2.5x to 3.0x policy could lead to positive momentum. Fitch believes this is unlikely given the company's growth strategy and historical financial policies. --Host revising its policy leverage target above 3.0x could have negative rating implications. The ratings have limited tolerance for Host's leverage temporarily increasing to the mid-3.0x range for a strategic acquisition and, to a lesser extent, for share repurchases. This assumes we see a path for Host's leverage to return to its 2.5x-3.0x policy range within approximately one year (strategic acquisition) to six months (share repurchases) and that Fitch has a stable or positive lodging industry outlook. --Fitch's expectation for leverage to sustain above 4.0x over the rating horizon due to a cyclical lodging industry downturn could also lead to a downgrade in the ratings and/or Outlook. Fitch has little or no tolerance for Host's leverage exceeding 6.0x during a cyclical downturn at the 'BBB' rating level. --A U.S. lodging industry downturn more severe than Fitch's stress case scenario could also cause a negative rating action. Fitch's stress case contemplates industrywide RevPAR declines of 13%-15%, which is conservative, but less severe than the 20% declines in 2008-2009. LIQUIDITY Host has a strong liquidity position that is underpinned by its committed revolving credit facility and retained cash flows from operations. The company has a coverage ratio of 1.4x, including estimated retained cash flows from operations and no refinancing of maturing debt, and 2.0x assuming 80% of secured debt is refinanced at maturity. Fitch expects the company to exercise its option to extend maturity of its $500 million term loan due 2017 and its $1 billion revolving facility due 2018 to 2019, which would result in a coverage ratio of 2.9x, including estimated retained cash flows from operations and no refinancing of maturing debt, and 3.2x assuming 80% of secured debt is refinanced at maturity. FULL LIST OF RATING ACTIONS Fitch currently rates Host as follows: Host Hotels & Resorts, Inc. --Long-Term IDR at 'BBB'. Host Hotels & Resorts, L.P. --Long-Term IDR at 'BBB'; --Senior unsecured credit facility at 'BBB'; --Senior unsecured notes at 'BBB'. The Rating Outlook is Stable. Contact: Primary Analyst Stephen Boyd, CFA Senior Director +1-212 908-9153 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Michael Paladino, CFA Managing Director +1-212 908-9113 Committee Chairperson Steven Marks Managing Director +1-212 908-9161 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Date of Relevant Rating Committee: Sept. 22, 2016 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --No material adjustments have been made that have not been disclosed in public filings of this issuer. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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