Host Hotels & Resorts Inc. Outlook Revised To Negative On Worsening Revenue Expectations

NEW YORK, NY--Standard & Poor's Ratings Services has revised its outlook on Host Hotels & Resorts Inc. and Host Hotels & Resorts L.P. to negative from stable and affirmed the 'BB' corporate credit rating and all other ratings.

(Harbor Beach Marriott Resort & Spa, Fort Lauderdale, FL, top right photo)

The negative outlook reflects our worsening expectation for revenue per available room (RevPAR) in the U.S. next year and that Host's credit measures are likely to deteriorate more than we expected because of a higher year-over-year pace of EBITDA decline.

"With business and leisure travel demand worsening and prospects for a long and moderate U.S. recession, we now expect RevPAR in the U.S. in 2009 to decline to the mid- to high-single-digits," said Standard & Poor's credit analyst Emile Courtney, "compared to our previous expectation of a decline of 5% or slightly more."

Notably, given the current underperformance industry-wide in Host's predominantly upscale and luxury price segments, RevPAR for Host's portfolio of companies could decline at a high-single-digits pace in 2009.

(Scottsdale Marriott at McDowell Mountains, Scottsdale, AZ, top left photo)

Host's EBITDA in 2009 could decline by 15% to 20%, compared to our previous expectation of about 10%.

Host currently has some flexibility in credit measures--lease-adjusted debt to EBITDA of 4.5x (compared to our threshold level of 5x for the 'BB' rating), EBITDA coverage of interest and preferred dividends of 3.6x (above 2.5x), and debt to total capital of 55% (less than 60%), all as of the 12 months ended September 2008.

However, we are increasingly concerned that a decline in EBITDA of 15% to 20% in 2009 would result in measures that would be weak for the current rating.

At the end of 2009, we estimate that credit measures could be at or worse than the threshold levels: lease-adjusted debt to EBITDA could be in the mid-5x area, EBITDA coverage of interest and preferred dividends could be in the mid-2x area, and debt to total capital could be about 60%

(Coronado Island Marriott, San Diego, CA, middle right photo).

In addition, Host on Nov. 18, 2008, revised its guidance for comparable hotel RevPAR to a year-over-year decline of 9% to 11% for the December 2008 quarter and a decline of 3% for the full-year 2008, reflecting significantly slowing travel demand and a worsening economy.

Host gave no updated guidance for 2009.

The rating reflects Host's aggressive financial risk profile and, as a real estate investment trust (REIT), its reliance on external sources of capital for growth.

These factors are tempered by the company's high-quality and geographically diversified hotel portfolio of 117 owned hotels and more than 60,000 rooms (at September 2008), high barriers to entry for new competitors because of its hotels' locations (primarily in urban and resort markets or close to airports), its strong brand relationships, and its experienced management team.

(Denver Marriott West, bottom left photo)
Host's credit measures can move within a wide range over time, given the cyclical nature of lodging and the company's operating leverage, and we expect the current rating to hold, notwithstanding intermediate-term weakness in credit measures.

The negative outlook reflects the possibility of worse operating performance than we currently expect.

The negative outlook reflects our concern that a decline in EBITDA of 15% to 20% in 2009 would result in credit measures at or worse than our threshold levels for the 'BB' rating: lease adjusted debt to EBITDA could be in the mid-5x area (compared to our threshold level of 5x), EBITDA coverage of interest and preferred dividends could be in the mid-2x area (more than 2.5x), and debt to total capital could be in the 60% area (less than 60%).

(Hartford Marriott Rocky Hill, Hartford, CT, bottom right photo)

Driving our concern for Host's credit measures is worsening business and leisure travel demand and prospects for a long and moderate U.S. recession.

As a result, we now believe RevPAR in the U.S. in 2009 could decline in the mid- to high-single-digits range, and that Host's portfolio of hotels concentrated in predominantly upscale and luxury segments could experience a 2009 RevPAR decline in the high-single-digits area.

Also, we currently expect that Host would borrow modestly to fund regular and special dividends, although we believe share repurchases and opportunistic acquisitions would be minimal over the intermediate term.

We could lower the ratings if operating conditions worsen more than our expected 15% to 20% decline in EBITDA, or if Host borrows significant amounts to fund dividends, acquisitions, or share repurchases.

(New Orleans Marriott, bottom left photo)

The outlook could be revised back to stable if it becomes clear during the next several quarters that our 2009 EBITDA assumption proves too aggressive and there is a path toward sustainable recovery in the U.S. lodging industry.

CONTACTS:

Media Contact:
Mimi Barker, New York (1) 212.438.5054, mimi_barker@standardandpoors.com

Analyst Contacts:
Emile Courtney, CFA, New York (1) 212-438-7824
Liz Fairbanks, New York (1) 212-438-7459