Real Estate News

Revised S&P Ratings Hit Host Hotels and Global Hyatt

(NEW YORK, NY) - Two major international hotel organizations Wednesday night were formally told something they already know - the lodging industry is in trouble with no immediate improvement in sight.

Standard & Poor's Ratings Services 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.

S&P also placed its 'BBB+' corporate credit rating on Global Hyatt Corp. on CreditWatch with negative implications.

"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," according to S&P credit analyst Emile Courtney.
"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, compared to our previous expectation of a decline of 5% or slightly more,"  says Courtney.

"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."

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," according to a new report prepared by Courtney and his colleague, credit analyst Liz Fairbanks.

"The negative outlook (also) reflects the possibility of worse operating performance than we currently expect," the analysts state.

"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%)."

The S&P report says, "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."

On Global Hyatt Corp., Courtney and Fairbanks state "the CreditWatch listing reflects a worsening expectation in 2009 for revenue per available room in the U.S. at a time when Global Hyatt's leverage profile is weak for the 'BBB+' rating."

The analysts say that "although the company does not publicly disclose its financial statements, "we expect that year-over-year comparable EBITDA is likely to deteriorate at a pace that is in line with other lodging companies with a similar exposure to owned hotels and to the upscale and luxury lodging segments."

Courtney concludes that  "with business and leisure travel demand worsening and prospects for a long and moderate U.S. recession, we now expect that revenue per available room (RevPAR) in the U.S. in 2009 could decline in the mid-to-high single digits range, compared with our previous expectation for a decline of 5% or more."

The analyst adds, "Given current underperformance industry-wide in upscale and luxury price segments in the U.S., RevPAR for Hyatt's predominantly U.S.-based upscale and luxury portfolio could decline at a high-single-digits pace in 2009.
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