Fitch expects Host's RevPAR to grow moderately below the industry average during this year due to its exposure to upper-price-tier hotels and portfolio weightings in markets with weaker near-term outlooks, such as New York and Washington D.C., as well as renovation disruption at several large properties. Accelerating group fundamentals and strong growth from recently renovated properties should support solid RevPAR growth during 2016 and 2017. Fitch has assumed 5% and 4%, respectively.

Host has reduced its leverage from its down-cycle peak of 5.8x to 2.8x for the trailing 12-month (TTM) period ending June 30, 2015, a level that is in line with Fitch's rating case projections. The reduction and Host's public commitment to sustain leverage in the 2.5x to 3.0x range are key considerations incorporated in Fitch's ratings. Host's TTM leverage was 2.6x on a pro-forma basis that assumes its $400 million 2.5% exchangeable notes are converted to equity during October 2015.

Fitch's ratings for Host have only limited tolerance for leverage sustaining above 4.0x over the rating horizon (typically one-two years). However, the ratings contemplate a scenario where Host's leverage temporarily increases above 4.0x - a recognition of hotel industry cyclicality and capital intensity, as well as the limited ability to retain cash and reduce debt due to its REIT status. Under such a scenario, the company's willingness and sense of urgency to bring leverage back below 4.0x would likely determine whether Fitch maintains its investment-grade ratings.

Fitch's stress case forecast assumes that peak cyclical leverage is comfortably below 5.0x and that it would decline to below 4.0x within the ratings horizon. Fitch defines Host's leverage as debt, net of readily available cash divided by recurring operating EBITDA.

Host's large unencumbered asset pool provides an excellent source of contingent liquidity. Fitch calculates that the company's unencumbered assets-to-net unsecured debt (UA/UD) ratio at 2.6x as of June 30, 2015. The company's UA/UD ratio improves to 2.8x on a pro forma basis that assumes its $400 million 2.5% exchangeable notes are converted to equity during October 2015.

Fitch reflects the cyclicality of Host's cash flows in its UA/UD analysis by haircutting its TTM unencumbered EBITDA by 20% and applying a stressed 8x multiple to calculate unencumbered asset value.

Host's unencumbered asset profile has several attractive features that should enhance their appeal as collateral. The company's hotels are principally located in key gateway markets that balance sheet lenders tend to favor. Moreover, its hotels are generally aligned with the strongest brands in the industry. Finally, Host owns some of the largest and most valuable hotels in the country, which should allow it to raise secured debt capital quickly and in size, if needed.

Fitch's rating case projections anticipate that Host's fixed-charge coverage ratio will improve to the 7.0x to 8.0x range over the rating horizon. Strong property-level EBITDA growth, lower leverage and the refinancing of higher-cost debt support Fitch's expectations.

Host maintains a high-quality, geographically diversified portfolio of 110 consolidated luxury and upscale US hotel properties including 16 international hotels located in Australia, Brazil, Canada, Chile, Mexico, and New Zealand. The company's portfolio provides significant financial flexibility and geographically diverse cash flows, which Fitch views positively.

Fitch's ratings for Host do not contemplate a deviation from its current financial policies. However, Fitch recognize the heightened possibility for event risk in the form of a change in financial policy given the weak absolute and relative performance of its shares and concerns expressed by some market participants that the company's low leverage strategy is suboptimal.

Fitch's ratings for Host have some tolerance for share repurchases, provided the company executes its program within its stated financial policies, primarily sustaining leverage below 3.0x. Nevertheless, Fitch view share repurchases as a credit negative, all else equal, that favors equity holders over bondholders.

The company's board authorized a $500 million share repurchase program earlier this year to respond to the share underperformance. Host has repurchased 17.4 million shares for $330 million under its current authorization, leaving $170 million of capacity remaining at Sept. 25, 2015. The $19.00 per share average repurchase price is roughly 18% above Host shares' $16.05 closing price on Sept. 25, 2015.

The cyclical nature of the hotel industry is Fitch's primary credit concern related to Host. Hotels re-price inventory daily and, therefore, have the shortest lease terms and least stable cash flows of any commercial property type. Economic cycles, as well as exogenous events (i.e. acts of terrorism), have historically caused material declines in revenues and profitability for hotels.

The Stable Outlook centers on Fitch's expectation that Host's credit profile will remain appropriate for the 'BBB-' rating through economic cycles, barring any significant changes in the company's capital structure plans. The Stable Outlook also reflects the quality of Host's portfolio and unencumbered asset coverage that provides good downside protection to bondholders.

Fitch has affirmed the following ratings:

Host Hotels & Resorts Inc.

--Long-term IDR at 'BBB-'

Host Hotels & Resorts L.P.

--IDR at 'BBB-';

--Senior unsecured credit facility at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Senior unsecured exchangeable notes at 'BBB-'