Fitch Rates Host Hotels & Resorts, L.P.'s 3.75% Series D Notes 'BB+'
by Business Wire
Fitch Ratings assigns a credit rating of 'BB+' to the $400 million 3.75% series D senior notes due 2023 issued by Host Hotels & Resorts, L.P., the operating partnership of Host Hotels & Resorts, Inc. (NYSE: HST, collectively, Host).
The $396 million of estimated net proceeds from the issuance and cash on hand will be used to redeem all of the outstanding $400 million 9% series T notes due 2017 at a cost $418 million including pre-payment penalties. Fitch views the transaction as a credit positive as it will lower interest costs and extend duration.
The following covenants have changed when compared with Host's previous senior notes covenants:
--Interest coverage of at least 1.5x from 2.0x previously;
--Secured debt not to exceed 40% compared with 45% previously;
--Maintenance of total unencumbered assets to outstanding unsecured debt of 150% compared with 125% previously.
The total debt covenant (total debt not to exceed 65% of total assets) has not changed. However, the covenant revisions align more closely with other investment grade REIT issuers. These covenants do not restrict Host's financial flexibility.
Fitch currently rates Host as follows:
Host Hotels & Resorts, Inc.
--Issuer Default Rating (IDR) 'BB+'.
Host Hotels & Resorts, L.P.
--Unsecured revolving credit facility 'BB+';
--Senior unsecured notes 'BB+';
--Senior unsecured exchangeable notes 'BB+'.
The Rating Outlook is Stable.
Key Rating Drivers
The 'BB+' IDR reflects that Host's credit metrics will remain appropriate for the rating through the lodging cycle. The ratings also incorporate Host's high-quality portfolio of geographically diversified upper tier hotel properties, its large and liquid unencumbered asset pool and the company's progress and commitment to sustaining lower leverage.
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) for U.S. hotels of 4.5% in 2013, which is at the low end of the 4%-6% range of forecasts from the leading industry forecasting services.
Host maintains a high-quality, geographically diversified portfolio of 118 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.
Expectations for Sustained Lower Leverage
Host has reduced its leverage from its down cycle peak of 5.5x to 4.4x for the trailing 12 month period ending Dec. 31, 2012. Fitch defines leverage as net debt to recurring operating EBITDA, including cash distributions from joint ventures. Fitch's base case scenario projects Host's leverage to decrease to 3.7x in 2013 and 3.2x in 2014.
Large and Liquid Unencumbered Asset Pool
Along with having $737 million (or 73.7%) of availability under its revolving credit facility and $417 million of cash on its balance sheet at Dec. 31, 2012, Host's large unencumbered asset pool provides an excellent source of contingent liquidity. The company's unencumbered assets to unsecured debt (UA/UD) ratio ended 2012 at 385%. 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.
Fitch projects that Host's fixed charge coverage ratio, which declined to 1.7x in 2009 from 2.6x in 2008 and rose to 2.2x in 2012, to improve to 3.2x in 2013 and 3.7x in 2014. In a more adverse case than anticipated by Fitch, coverage could decline to 2.0x over the next 12-to-24 months, which would be commensurate with a rating lower than 'BB+'. Fitch defines 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 'BB+' 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. Host has access to various sources of capital and maintains a solid liquidity profile, moderate leverage, consistent coverage of fixed charges, and solid unencumbered asset coverage.
The following factors may result in positive momentum in the ratings and/or Rating Outlook:
--Achieving leverage of roughly 3x, which Fitch views as adequate cushion to maintain leverage below 5x during a lodging cycle downturn.
--Host maintaining a significant pool of unencumbered assets;
--Sustaining fixed charge coverage above roughly 3x, which Fitch views as adequate cushion to maintain coverage above 2x during a lodging cycle downturn.
The following factors may result in negative momentum on the ratings and/or Rating Outlook:
--Fitch's expectation for leverage to sustain above 5.0x;
--Fitch's expectation for fixed charge coverage sustaining below 1.5x.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs', Feb. 27, 2012;
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'Recovery Ratings and Notching Criteria for Equity REITs', Nov. 12, 2012.
Applicable Criteria and Related Research
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology