MOODY’S REVISES OUTLOOK ON LODGING REIT SECTOR TO NEGATIVE
PLACES MOST REIT RATINGS UNDER REVIEW FOR POSSIBLE DOWNGRADE
New York, NY -- (September 25, 2001) -- Moody’s Investors Service has revised its outlook on the lodging REITs sector to negative, from stable, but cautious, following the September 11, 2001 attacks on the World Trade Center in New York City and the United States Pentagon. At the same time, Moody’s placed under review for possible downgrade the ratings of 5 lodging REITs and affirmed its stable outlook on the rating of one lodging property firm. The ratings of one lodging REIT were lowered, and placed under review for possible further downgrade. These rating actions reflect the increasing business and financial risks facing these companies in the aftermath of the terrorist attacks in the United States.
According to Moody’s, the negative outlook for the lodging REIT sector and these rating actions are based on the expectation that the lodging industry will remain under intense operating pressure for the remainder of 2001 and likely well into 2002. Moody’s anticipates a significant decline in intermediate-term business and leisure travel. These factors should result in material erosion in the lodging industry’s operating environment, and will further depress already weakened financial performance for many lodging REITs.
The lodging sector was already experiencing substantial deterioration in revenues per available room (RevPAR) and occupancy rates due to an increasingly weakened economy. The September 11th acts of terrorism will further exacerbate negative lodging industry RevPAR growth. Moody’s anticipates that all hotel segments will be adversely affected, with upscale, luxury hotels, convention and resort properties, being particularly vulnerable.
Airline passengers’ growing travel fears and the performance of the US economy are key determinants of the degree to which the lodging industry’s performance, and in turn, REITs’ credit profiles, will deteriorate. Moody’s believes, however, that circumstances presented by the WTC and Pentagon attacks could result in more permanent structural changes in the lodging industry.
While the lodging industry has faced significant challenges in the past, the circumstances presented by recent events create enormous and unparalleled challenges. These factors make it difficult to predict the depth and extent of the deterioration particularly in light of unusually strong 2000 RevPAR benchmarks. Moody’s will continue to monitor the travel situation to determine the longer-term credit implications.
In general, Moody’s anticipates deterioration in all lodging REITs’ credit profiles. Highly leveraged firms, and REITs with significant exposure to upscale and luxury hotels, particularly in airport hub cities, are more susceptible to ratings downgrades. Most REITs generate the majority of their cash flow from owned properties and sharp declines in average daily rates or occupancy will have an immediate adverse effect on hotel profitability. Cost reduction efforts are not likely to be sufficient to reduce margin erosion given REITs’ business model and high dividend payout requirements. We are also concerned that lodging REITs’ financing choices will become more limited.
Moody’s review of lodging REITs’ ratings will focus on: 1) the degree to which future developments will erode the lodging property sector’s revenue outlook or raise its cost structure; 2) the ability of firms to protect relative market position given eroding lodging industry fundamentals; and 3) firms’ cash flow, liquidity and financial flexibility position over the near-term.
Equity Inns, Inc. ("ENN" )
Moody’s has placed Equity Inns, Inc.’s B3 preferred rating under review for possible downgrade. A large portion of Equity Inns assets are in the limited-service segment, which had been experiencing better performance relative to more upscale segments. Nevertheless, it is likely that this segment, too, will be pressured. In addition, Equity Inns faces the challenges of constrained financial flexibility from a fully secured debt structure, and high leverage. Over the medium term the REIT will face uncertainty and will likely incur higher expenses related to the recapture of its management contracts. Moody’s review will focus on Equity Inns’ operating results and its ability to manage the deterioration of its leverage and fixed charge coverage, and comply with its bank line covenants given a more challenging lodging environment.
FelCor Lodging Trust ("FCH")
The Ba2 senior unsecured debt and B1 preferred stock ratings of FelCor Lodging are under review for possible downgrade. Moody’s review of FelCor ratings will consider FelCor’s significant exposure to the upscale, full service segment (approximately 70%), which Moody’s believes is more vulnerable to declines in business and leisure travel. The FelCor Lodging /MeriStar merger discussions have been terminated. FelCor Lodging has a reasonably conservative credit profile and substantial financial flexibility, with modest levels of encumbered assets (secured debt to total assets at cost - 16%), ample availability on its $615 million credit facility ($40 million outstanding) and no near-term refinancing risk. Moody’s review will focus on the consequences of a deep and prolonged weakening of the lodging sector on the upscale segment, the REIT’s resulting credit profile - specifically its fixed charge coverages and its ability to operate within its bank and bond covenants, while minimizing the deterioration of franchise value.
Hospitality Properties Trust ("HPT")
Moody’s has affirmed its Baa3 senior unsecured debt and Ba1 preferred stock ratings on Hospitality Properties Trust (HPT). The outlook for HPT’s ratings is currently stable. These rating actions are based on the REIT’s strong balance sheet, well-laddered maturities and conservative lease structure. EBITDA fixed charge coverage is strong at levels above 4.6X. The firm’s liquidity position is also solid following the repayment of short-term bank debt with proceeds from its $175 million of common equity issuance last month. Moody’s believes that the impact of a significant decline in room rates and occupancy would be less severe for HPT. The firm generates the majority of its cash from base rents, which should provide adequate cushion in stressful operating conditions. Its hotel portfolio is well diversified by geography and brand despite some operator concentrations. Minimum exposure to percentage rents, which are more directly tied to hotel performance, is also a positive.
Host Marriott Corporation ("HMT")
Moody’s has placed the long-term debt and preferred stock ratings (Ba2 senior debt) of Host Marriott Corporation, HMH Properties, Host Marriott, L.P., and Host Marriott Financial Trust under review for possible downgrade. Moody’s review of Host Marriott’s ratings is in anticipation of a greater deterioration in the luxury upper upscale segment, which comprises the bulk of Host Marriott’s portfolio. Also, a material portion of Host Marriott’s portfolio is located at airport and resort/convention areas, which are susceptible to demand weakness in discretionary travel. Moody’s is concerned about the potential impact of these factors on the REIT’s operating performance.
Host Marriott suffered loss of its World Trade Center Marriott and substantial damage to its World Financial Center Marriott. Losses should be mitigated by business disruption insurance, under Marriott International’s blanket policy. Remaining New York City assets should benefit from stronger demand for temporary space needs by corporate users. Host Marriott has minimal near-term maturities and sufficient bank line liquidity at the end of the second quarter.
Moody’s review will focus on the impact of a deep and more prolonged weakened lodging sector will have on Host Marriott’s luxury segment and ultimately its debt protection measures. Moody’s will also be assessing the constraints of the firm’s bank and bond covenants and its success in controlling cost while operating in a challenging environment.
Courtyard By Marriott II (SEC Filings)
Moody’s has placed the Ba3 rating of Courtyard By Marriott II (CYBMII) under review for possible downgrade. Moody’s review will focus on the anticipated operating performance of the static portfolio of limited service hotels during a more uncertain environment for the lodging sector. Courtyard by Marriott II is a joint venture between Host Marriott and Marriott International for the ownership of 70 limited-service hotels. The limited service sector had fared better than higher price point segments recently. However, Moody’s believes that all segments of the lodging sector will be negatively affected and, perhaps for a prolonged period. Although fixed charge coverage, including principal amortization and capital reserves for the portfolio has been relatively strong at 1.6Xs, all of the assets are pledged in a modestly leveraged CMBS transaction. Courtyard by Marriott II is not a strategic investment of Marriott International nor Host Marriott, rendering financial support by those entities even more uncertain as they face their own challenges. Moody’s review will focus on the impact of the emerging difficult environment on debt protection measures and covenants.
LaQuinta Properties, Inc.
Moody’s has placed the ratings (Ba3 senior debt) of La Quinta Properties, Inc. and its subsidiaries under review for possible downgrade. Moody’s review of La Quinta ratings will focus on the impact of the expected weak lodging sector on the LaQuinta brand, a limited service lodging brand, which prior to the attacks were experiencing improving performance. The limited service segment was the beneficiary of reduced corporate travel budgets and generally good supply conditions. The implications of modified travel behavior on this segment are uncertain. LaQuinta is facing this tougher environment with a substantially improved balance sheet, including a sizable cash position, from recently completed asset sales, which is more than sufficient to meet debt maturities through 2002. Moody’s review will focus on the impact of an even more challenging lodging environment on the company’s leverage profile and fixed charge coverages, and its ability to modify its corporate structure in order to execute its strategic plan to build brand value and franchise strength.
MeriStar Hospitality Corporation ("MHX")
Moody’s has lowered its long-term debt ratings (senior debt to Ba3, from Ba2) of MeriStar Hospitality Corporation, MeriStar Operating Partnership, L.P., and CapStar Hotel Company. The ratings remain under review for possible further downgrade. These rating actions reflect the increasing business and financial risks facing the REIT in the aftermath of the recent terrorist attacks in the United States, and the resulting impact of further deterioration in RevPAR performance on its hotel portfolio. The firm was weakly positioned in its rating category prior to the attacks. Moody’s cited negative RevPAR trends for 2Q2001 and weakening fixed charge coverage, including principal amortization and capital reserves. MeriStar’s strong brand and geographic diversity provide some cushion, however, rising costs and reductions in corporate and leisure travel will likely result in material margin erosion. These factors, combined with the firm’s already leveraged capital structure and thin liquidity position will further depress its financial fundamentals. Moreover, the merger between MeriStar and FelCor Properties Trust has been terminated, creating additional uncertainty around future operating performance.
The review will focus on the depth and extent of the deterioration in industry fundamentals, and the resulting impact on the firm’s market position, bank and bond covenants and financial flexibility.
Winston Hotels, Inc. ("WXH")
Moody’s has placed the B3 rating on the preferred stock of Winston Hotels, Inc. under review for possible downgrade due to the stresses affecting the lodging sector—stress exacerbated by the recent terrorist attacks. Winston Hotels has a diversified portfolio including limited service, extended stay, and full service properties. - a plus. However, the implications of modified travel behavior on all segments of the hotel industry are negative and could be prolonged. Winston Hotels’ fixed charge coverages are relatively solid at 2.7X. However, 100% of its debt is secured debt and the majority of its properties are located in the southeastern part of the USA. Moody’s will review the ability of Winston Hotels to maintain strong coverage levels in a weakening lodging environment.
The following ratings were affected.
RATINGS LOWERED, PLACED UNDER REVIEW FOR FURTHER POSSIBLE DOWNGRADE
MeriStar Hospitality Corporation - Senior subordinated debt to B2, from B1.
MeriStar Hospitality Operating Partnership, L.P. - Backed senior secured bank credit facility to Ba2, from Ba1 and senior unsecured debt to Ba3, from Ba2.
CapStar Hotel Company - Backed senior subordinated debt to B2, from B1.
REVIEW FOR POSSIBLE DOWNGRADE
Equity Inns, Inc. - Preferred stock at B3.
FelCor Lodging Trust - Preferred stock at Ba3 and preferred stock shelf at (P)Ba3.
FelCor Lodging Limited Partnership - Senior unsecured debt at Ba2 and subordinated debt shelf at (P)Ba3.
Host Marriott Corporation - Senior unsecured debt at Ba2; preferred stock at Ba3; and preferred stock shelf at (P)Ba3.
HMH Properties, Inc. - Senior secured debt at Ba2 and backed senior unsecured debt at Ba3.
Host Marriott, L.P. - Senior unsecured debt at Ba2.
Host Marriott Financial Trust - Backed preferred stock at Ba3.
La Quinta Properties Inc. - Senior unsecured debt shelf at (P)Ba3; preferred stock at B2; and preferred stock shelf at (P)B2.
La Quinta Excercisable Put Option Securities Trust (formerly Meditrust Excercisable Put Option Securities Trust) - Senior unsecured debt at Ba3.
Courtyard by Marriott II - Senior unsecured debt at Ba3.
Winston Hotels - Preferred stock at B3 and preferred stock shelf at (P)B3.
AFFIRMATION
Hospitality Properties Trust - Senior unsecured bank credit facility at Baa3; senior unsecured debt at Baa3; subordinated debt shelf at (P)Ba1; preferred stock at Ba1 and preferred stock shelf at (P)Ba1.