Rating Action: Moody's assigns B1 CFR to Xenia Hotels & Resorts LP; outlook negative
Global Credit Research - 10 Aug 2020
New York, August 10, 2020 -- Moody's Investors Service, ("Moody's") assigned first-time ratings to Xenia Hotels & Resorts LP ("XHR") including a B1 Corporate Family Rating ("CFR") and a B1 rating to the issuer's proposed $300 million senior secured notes currently being marketed. The proceeds from the new debt financing will be used to repay outstanding borrowings on the company's existing corporate credit facilities, including its revolver and term loans, as well as for general corporate purposes. In the same rating action, Moody's assigned a speculative grade liquidity rating of SGL-3 to the company. The rating outlook is negative.
The negative outlook reflects Moody's expectation that current travel restrictions put in place across the US related to the spread of the COVID-19 coronavirus will put significant pressure on Xenia's earnings and operating cash flows over the next twelve to eighteen months. The negative outlook also reflects the uncertain prospects for recovery, as job losses and declining asset values will impact consumer discretionary spending once the public health crisis subsides.
The following ratings were assigned:
Issuer: Xenia Hotels & Resorts LP
-- Corporate Family Rating at B1
-- Gtd Senior Secured Debt Rating at B1
-- Speculative Grade Liquidity Rating at SGL-3
Issuer: Xenia Hotels & Resorts LP
-- Outlook assigned Negative
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Xenia's credit quality it has triggered, given its exposure to the lodging real estate sector, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
Xenia's B1 corporate family rating reflects the company's high quality and well-diversified portfolio of luxury and upper upscale, premium branded hotel properties located in high barrier to entry US markets with low supply growth. Xenia's portfolio benefits from a focus on smaller and more transient orientated properties in key leisure and drive-to markets, which are expected to have a quicker recovery to stabilization in the current environment. The ratings also reflect an experienced management team with many years of hospitality specific experience, which Moody's believes should help the REIT to navigate the challenges stemming from the coronavirus pandemic.
These positives are partially offset by Xenia's weakened credit profile as a result of the pandemic and pro forma for the proposed debt transaction, with high leverage and secured debt levels for the rating category. Furthermore, a modest unencumbered asset pool with a significant portion of assets pledged as collateral to the existing credit facilities and the new $300 million senior secured notes, constrains the ratings and financial flexibility. The ratings also reflect the company's moderate brand concentration to Marriott International, Inc. (Baa3/Negative) and Hyatt Hotels Corporation (Baa3/Negative), representing approximately 77% of total portfolio rooms. Additionally, the inherent cyclicality and volatility of the lodging sector, driven by its sensitivity to consumer demand and sentiment, is a material credit negative versus the broader spectrum of rated REIT issuers. Moody's notes, however, that 35 of the REIT's 39 hotel assets are currently open and operating as of July 2020, with all hotels expected to reopen by year-end -- albeit with reduced occupancy.
Xenia's pro forma liquidity position (SGL-3) is considered adequate, supported by $317 million in cash on hand, and $194 million available on its $500 million revolver due February 2022 with a one-year extension option. Moody's notes that Xenia fully drew down the remaining $340 million on its revolver in March 2020 as a precautionary measure to increase its cash position and preserve financial flexibility. Moreover, Moody's expects the new $300 million senior secured debt issuance to strengthen the REIT's liquidity, near-term maturity profile and access to capital. Concurrent with the transaction, Xenia amended all of its existing corporate credit facilities, including its unsecured $500 million revolver and its unsecured term loans totaling $575 million, to be secured by the same subsidiaries and assets that provide collateral for the new senior secured notes. Additionally, Xenia obtained temporary waivers for all credit facility financial covenant tests through the first quarter of 2021 and extended its existing $175 million term loan by one year to February 2022. Pro forma for the transaction, near-term maturities are manageable, with approximately $263 million due in 2022, including $212 million in term loans due between February and October 2022 and $51 million in non-recourse mortgage debt. That said, Xenia's unencumbered asset pool declined to approximately 37% of gross assets pro forma for the debt issuance and credit facility amendment, from approximately 80% as of June 30, 2020. At the same time, Xenia's secured debt to gross assets increased to approximately 39% from 13% as of June 30, 2020 and represents a material change in capital structure and financial policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be downgraded either via weakened operating performance or inadequate liquidity over the next 12-18 month period. Additionally, a failure to generate positive free cash flow by mid 2021 and/or improve leverage closer to pre-COVID levels could also lead to downward ratings pressure.
Although not likely given the negative outlook, ratings could be upgraded if Net Debt/EBITDA is sustained closer to 5.0x and fixed charge coverage exceeds 3.5x on a sustained basis. A ratings upgrade would also require Xenia to maintain secured debt below 25% of gross assets and ample liquidity through industry and economic cycles.
Xenia Hotels & Resorts, Inc. is a publicly traded lodging REIT that invests primarily in luxury and upper upscale hotels and resorts, with 39 premium-branded hotel assets and a focus on the top 25 US lodging markets as well as key leisure destinations. As of June 30, 2020, the company reported approximately $4.1 billion in gross assets.
The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Reed Valutas Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Philip Kibel Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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