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Rating Action:

Moody's downgrades Hospitality Properties Trust to Baa3; outlook stable

06 Sep 2019

Approximately $3.7 billion of rated securities affected

New York, September 06, 2019 -- Moody's Investors Service ("Moody's") today downgraded Hospitality Properties Trust's ("HPT") ratings by one notch, including its senior unsecured ratings to Baa3 from Baa2. The outlook is stable. The downgrade follows HPT's announcement on 4 September that its acquisition of a net lease portfolio from Spirit MTA REIT ("SMTA") for $2.4 billion in cash received SMTA shareholders' approval. This rating action concludes the review for downgrade initiated on 3 June 2019.

The downgrade reflects Moody's view that HPT's credit metrics will deteriorate as a result of the debt-funded SMTA acquisition. Pro-forma for the full year of the SMTA acquisition impact and asset sales, we estimate that net debt/EBITDA will increase to roughly 6x from 5.2x as of LTM Q2 2019 (including Moody's accounting adjustments), a significant increase for HPT which has been operating with moderate leverage of net debt/EBITDA in the 4.5-5.2x range (including Moody's accounting adjustments) for the past four years.

The downgrade also considers the risks associated with the strategic shift in HPT's business model to a net lease lodging and service retail REIT. The net lease service retail business is very fragmented and competitive, thus it will be challenging for HPT to continue to grow this portfolio profitably while competing with the larger and focused net lease REITs, which have longer track records in this business.

The following ratings were downgraded:

Issuer: Hospitality Properties Trust

Senior Unsecured Regular Bond/Debenture to Baa3 from Baa2

Preferred Shelf to (P)Ba1 from (P)Baa3

Preferred Shelf Non-cumulative to (P)Ba1 from (P)Baa3

Senior Unsecured Shelf to (P)Baa3 from (P)Baa2

Junior Subordinate Shelf to (P)Ba1 from (P)Baa3

Senior Subordinate Shelf to (P)Ba1 from (P)Baa3

Outlook Action:

Issuer: Hospitality Properties Trust

Outlook changed to stable from rating under review

RATINGS RATIONALE

Hospitality Properties Trust's Baa3 senior unsecured debt rating reflects the REIT's meaningful scale, unencumbered portfolio that is well diversified geographically across 45 states in the U.S., Washington D.C., with a presence in Puerto Rico and Canada, sound liquidity and conservative balance sheet supported by largely fixed-rate unsecured debt. HPT's credit profile benefits from the strong lease and management agreement structures within its hotel portfolio (approximately 58% of annualized minimum rent pro-forma for SMTA portfolio acquisition before planned asset sales), which is characterized by the lowest historical volatility of returns among lodging REITs. These positives are counterbalanced by material operator concentration, albeit improving as a result of the pending SMTA acquisition, with the top three tenants generating approximately 76% of annual minimum rent as of Q2 2019. Historically, the REIT's TravelCenters of America business, which generated 29% of rental revenue in Q2 2019 (or roughly 25% pro-forma for SMTA portfolio acquisition before asset sales), has been vulnerable to volatility related to consumer spending and overall economic cycles, and Moody's believes that will not change going forward.

Governance risk remains a key credit concern constraining the rating as HPT's external management structure creates potential conflict of interest between HPT investors and management. The REIT is externally managed by The RMR Group LLC (RMR), and is dependent upon RMR to manage its business and implement its growth strategy. However, RMR's multiple responsibilities to other entities to which it provides management services may create conflicts of interest with respect to determining individual operating and investment decisions.

The stable outlook reflects Moody's view that HPT will close the SMTA portfolio acquisition as currently contemplated and will timely execute its planned asset sales in order to reduce its post-acquisition leverage. It also incorporates Moody's expectation that HPT will demonstrate sound operating performance and occupancy rates across its portfolio post acquisition, maintain strong liquidity, and continue to pursue an unsecured funding strategy.

Moody's would likely upgrade HPT's ratings should the REIT de-lever and sustain Net Debt/EBITDA closer to 5x and (Debt + Preferred)/Gross Assets under 40% (both ratios including Moody's accounting adjustments). Demonstration of continued earnings stability through the economic and real estate cycle, with fixed charge coverage above 4x on a consistent basis, would also be needed for an upgrade.

A downgrade would reflect increased leverage with Net Debt/EBITDA exceeding 6.5x on a sustained basis, or fixed charge coverage below 3x or a shift away from unsecured funding strategy with secured debt approaching 10% of gross assets (all three ratios including Moody's accounting adjustments). Significant operating challenges, as demonstrated by occupancy declines or earnings deterioration, or failure to maintain adequate financial flexibility would also result in a downgrade.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Hospitality Properties Trust [NASDAQ: HPT], headquartered in Newton, MA, is a real estate investment trust, or REIT, which owns a diverse portfolio of hotels and travel centers located in 45 states, Washington D.C., Puerto Rico and Canada. HPT property portfolio included 328 hotels and 179 truck service centers as of June 30, 2019. The Spirit MTA REIT acquisition will add an additional 766 service retail focused net lease properties covering approximately 12 million rentable square feet. HPT is externally managed by an asset management firm, The RMR Group LLC.

REGULATORY DISCLOSURES

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dilara Sukhov, CFA
AVP - 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

No Related Data.
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