Fitch Rates Host Hotels & Resorts, L.P.'s 3.75% Series D Notes 'BB+'
NEW YORK -- March 21, 2013
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,
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
The following covenants have changed when compared with Host's previous senior
--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
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
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
--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
The following factors may result in negative momentum on the ratings and/or
--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
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
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Stephen Boyd, CFA, +1 212-908-9153
Fitch Ratings, Inc.
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