Fitch: Credit Risk Selectively Rising for US Lodging Cos.

NEW YORK--(BUSINESS WIRE)-- Event risk in the form of M&A and/or financial policy changes is seemingly increasing for lodging companies that have delivered below-peer total shareholder returns, despite robust industry fundamentals during the past one to three years, according to Fitch Ratings.

Starwood Hotels & Resorts and Host Hotels & Resorts discussed options to create shareholder value that could potentially include creditor unfriendly strategies during their respective 1Q15 earnings conference calls. Starwood indicated that "no options are off the table" as part of a formal review of the company's strategic and financial alternatives it will undertake to increase shareholder value. Fitch views the most likely outcomes as a transformative merger (with Starwood likely the target) or brand acquisition.

Real estate private equity funds are also awash in cash and could consider Starwood an attractive, leverageable acquisition target. Highly liquid hotel capital markets could facilitate a leveraged recapitalization. However, Fitch puts a lower probability on this outcome given the company's public commitments to its existing financial policy and investment-grade ratings.

Separately, Host's recent $500 million share repurchase authorization reopened a long-running debate between buyback proponents and detractors. REIT-dedicated investors have traditionally frowned upon share buybacks. Fitch shares this view, noting that the track record of REIT share repurchase timing is poor, at best. REIT dividend distribution requirements limit cash retention, making the sector reliant on consistent access to capital to satisfy financial obligations and grow.

More generally, heightened competition for unit growth is leading to increased franchise and management spending in the form of "key money," sliver equity and operating profit and/or loan guarantees. Fitch primarily considers risks from off balance sheet contingent liabilities in its liquidity analysis for lodging C-corps.

Nevertheless, lodging C-corps and REITs remain uniformly optimistic regarding the current placement and future path of the U.S. lodging upcycle. Improving economic fundamentals and low levels of new supply were the primary reasons cited. Fitch shares this consensus; however, our 6% expectation for RevPAR growth in 2015 is moderately below notable industry forecasters PKF and PwC.

Fitch expects new supply and increasingly challenging prior-year compares to prevent RevPAR growth from accelerating for the balance of this cycle. However, company views toward "second derivative" RevPAR improvement were mixed, with proponents citing stronger pricing flexibility due to improved group demand and an increase in the number of compression nights -- periods of very high occupancy that allow for ADR spikes -- in select markets. The convention calendar for 2016 also appears favorable.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: Outlook Still Bright; Credit Risk Selectively Increasing (What U.S. Lodging Companies Are Saying)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865931

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Stephen Boyd, CFA, +1-212-908-9153
Director
U.S. REITs
Fitch Ratings
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen, +1-212-908-9123
Senior Director
Fitch Wire
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
[email protected]
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Ingram Micro Holding Corporation (INGM) Tops Q2 EPS by 4c
• Columbia Financial, Inc. (CLBK) Misses Q2 EPS by 1c
• After-Hours Stock Movers: AAPL, AMZN, COIN, RBLX, RDDT, AXTI, FND, WU, GDDY