NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the credit ratings of Host Hotels & Resorts, Inc. and its subsidiary Host Hotels & Resorts, L.P. (together 'Host') as follows:
Host Hotels & Resorts, Inc.
--Issuer Default Rating (IDR) to 'BB' from 'BB-'.
Host Hotels & Resorts, L.P.
--IDR to 'BB' from 'BB-';
--Revolving Credit Facility to 'BB' from 'BB-';
--Senior Notes to 'BB' from 'BB-';
--Senior Exchangeable Notes to 'BB' from 'BB-'.
The Rating Outlook is Stable.
On June 18, 2010, the company redeemed all of the issued and outstanding shares of its preferred stock. Since the company has redeemed its outstanding preferred stock, Fitch no longer considers the rating of the preferred stock to be relevant to its coverage.
The upgrade reflects Fitch's view that Host's lodging portfolio will continue to improve in 2011 following tumultuous results in 2009 and a stabilization in 2010. The company's fixed charge coverage ratios have improved and are expected to remain appropriate for the 'BB' IDR. While leverage has only slightly improved to 5.4 times (x) for 2010 as compared to 5.6x for 2009, Fitch expects that following same property RevPAR growth of 5.8% in 2010, Host will benefit from the recovery and mid-to-high single digit comparable RevPAR will lead to leverage levels in line with a 'BB' rating for a lodging REIT.
After experiencing a comparable RevPAR decline across the portfolio of 19.9% in 2009, Host experienced comparable RevPAR growth of 5.8% and a 7.9% increase in RevPAR across all its operating hotels during 2010. Fitch estimates that the lodging recovery will result in industry-wide RevPAR growth of between 5% and 7% in 2011 and 2012. Consistent with these expectations, Fitch projects that Host's fixed charge coverage ratio (defined as recurring operating EBITDA less renewal and replacement capital expenditures, divided by cash interest expense, capitalized interest and preferred dividends), which declined from 2.6x in 2008 to 1.6x in 2009 and rose to 1.7x in 2010, will be between 2.5x and 3.0x in 2011 and 2012. Fixed charge coverage will be impacted by renewal and replacement capital expenditures ranging from $260 million to $280 million in 2011. While the company is pursuing various return on investment renovation projects in Chicago, Indianapolis and Atlanta, these projects are expected to result in improving RevPAR in 2012.
Host's leverage, measured as net debt divided by recurring operating EBITDA, is high for a lodging REIT for the 'BB' rating at 5.4x as of Dec. 31, 2010. Fitch projects that after increasing from 4.1x in 2008 to 5.6x in 2009, leverage will continue to decline from 5.4x as of Dec. 31, 2010 and remain in a range of 4.0x to 5.0x. Improvements in leverage stem from expected incremental revenue from properties acquired in 2010 and 2011 along with overall RevPAR improvements.
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. The Stable Outlook reflects the quality of Host's portfolio and unencumbered asset coverage that provides good downside protection to bondholders. Further, Host continues to access various sources of capital and maintains a solid liquidity profile. For the period of Jan. 1, 2011 to Dec. 31, 2012, Fitch calculates that Host's sources of liquidity (cash, availability under its revolving credit facility, and projected retained cash flows from operating activities after dividends and distributions and adjusting for the company's increased dividend) exceed uses of liquidity (debt maturities and amortization and projected renewal and replacement capital expenditures) by 1.8x, which is strong for the existing ratings. Fitch estimates that Host would have a liquidity surplus even if its retained cash flow is minimal. In addition, Host has a smooth debt maturity schedule generally, allowing the company to methodically address upcoming maturities through capital markets cycles.
Host maintains a high-quality, geographically dispersed hotel portfolio of 120 consolidated properties across 26 U.S. states, Canada, Mexico, New Zealand, Brazil, Chile and the United Kingdom, of which 102 are unencumbered from mortgage debt. Host's luxury and upscale platform includes brands such as Marriott (58% of 2010 revenues), Westin (9%), Sheraton (9%), Ritz-Carlton (8%), Hyatt (7%), and Fitch anticipates that it will outperform other lodging price points as it has demonstrated more upside than lower price points. In addition, the improvement in average daily rates was driven by the premium and corporate segments, driving average ADRs to $183.46 in 4Q2010 from $174.31 in 4Q2009. Average occupancy also increased to 68% in the fourth quarter of 2010 (4Q'10) from 65.2% in 4Q'09. That being said, ADRs are approximately 17% below market peaks in 2007 and long-term average stabilized occupancy of 74%. ADRs and occupancy levels have outperformed the luxury sectors at large by 26% and 19% respectively, according to Smith Travel Research.
Host's portfolio by and large continues to supports bondholders in that 106 of the company's properties are unencumbered (pro forma for the four Canadian loans the company expects to repay on March 1, 2011), and the portfolio continues to expand. Recent acquisitions include the $313 million purchase of the New York Helmsley Hotel announced in January 2011, which will be converted into a Westin by mid-2012, and the $570 million purchase of the Manchester Grand Hyatt San Diego Hotel announced in February 2011. During 1Q'11, the company also acquired seven hotels in New Zealand for $145 million. Fitch views this portfolio expansion favorably in that it augments an already sizeable unencumbered property pool. Unencumbered asset coverage as defined under the company's senior notes indenture was 343% as of Dec. 31, 2010. This unencumbered asset coverage ratio is strong for a lodging REIT for the 'BB' rating level. In addition, the company's current ratios under its unsecured credit facility covenants do not hinder its financial flexibility.
The rating also takes into consideration credit concerns including the potential that economic weakness could jeopardize RevPAR growth potential, and the implicit volatility of lodging earnings.
The following factors may have a positive impact on Host's ratings and/or Outlook:
--Significant performance over Fitch's forecasted industry comparable RevPAR growth of positive 5% to 7% in 2011 and 2012;
--Net debt to recurring operating EBITDA sustaining below 4.0x for several quarters (leverage was 5.4x for 2010);
--Fixed charge coverage sustaining above 2.5x for several quarters (coverage was 1.7x in 2010).
The following factors may have a negative impact on Host's ratings and/or Outlook:
--Net debt to recurring operating EBITDA sustaining above 5.0x;
--Fixed charge coverage sustaining below 1.5x;
--A liquidity shortfall.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Corporate Rating Methodology, Aug. 16, 2010;
--Criteria for Rating U.S. Equity REITs and REOCs, April 16, 2010;
--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;
--Rating Hybrid Securities, Dec. 29, 2009;
--Recovery Rating and Notching Criteria for REITs, Dec. 23, 2009.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465
Equity Credit for Hybrids & Other Capital Securities - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112
Rating Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086
Recovery Rating and Notching Criteria for REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.