Fitch Ratings has assigned a 'BBB+' rating to the $800 million 4.25%
senior notes due 2023 issued by HCP, Inc. (NYSE: HCP). The notes were
priced at 99.54% of par to yield 4.307%, a 165 basis point (bps) spread
to the benchmark Treasury.
Net proceeds from the offering are expected to be used to repay the $400
million of 5.65% notes due December 2013, repay amounts outstanding on
the company's bank credit facility and for general corporate purposes.
Fitch currently rates HCP as follows:
--Issuer Default Rating (IDR)'BBB+';
--Unsecured bank credit facility 'BBB+';
--Unsecured term loan 'BBB+';
--Senior unsecured notes 'BBB+'.
The Rating Outlook is Stable.
KEY RATINGS DRIVERS
The ratings reflect HCP's credit strengths, namely steady and
predictable cash flows from a large portfolio of high-quality properties
across the healthcare real estate spectrum, maintenance of leverage and
fixed-charge coverage metrics appropriate for the rating category,
manageable lease expiration and debt maturity schedules, financial
flexibility stemming from a large unencumbered pool to support unsecured
borrowings, and a solid liquidity position.
Credit concerns include operator and geographic concentration, the
impact of government fiscal imbalance and regulatory risk on operators'
profitability, and weak coverage for its largest tenant. Despite the
uncertainty that stems from the abrupt change in leadership (the
termination of Jay Flaherty who had been CEO of HCP since 2003), HCP's
reiterated commitment to its existing conservative business and
financing strategies alleviates some of the credit concerns.
DURABLE CASHFLOWS
HCP's same-store property performance has been strong over the past six
years and is one of the largest factors behind the rating, with same
property net operating income (NOI) increasing between 1.6% and 4.8%
annually from 2007-2012. Same-property NOI increased 4.2% for 2012 as
compared to 4.0% and 4.8% in 2011 and 2010, respectively and has
increased 2.8% year-to-date (YTD) through Sept. 30, 2013. The strong
fundamentals result from the lease structures (generally triple-net with
contractual increases) as well as HCP's active management. Fitch
estimates same-property NOI growth to remain within the historical 2%-4%
range through 2015 despite the regulatory-based headwinds some operators
are facing. Unlike other rated healthcare REITs, HCP has an
insignificant amount of RIDEA exposure, thereby increasing the
durability of cashflows.
HCP's lease maturity schedule is well-staggered and long-dated as a
result of the high percentage of long-term triple net leases. No more
than 10% of annual base rent revenues expires in any one year and less
than 20% through 2016. Limited lease expirations coupled with
contractual rental bumps increase the predictability of future rental
revenues, absent tenant bankruptcies and are credit strengths for HCP.
STRONG CREDIT METRICS
HCP's fixed-charge coverage was 3.4x for the trailing twelve months
ended Sept. 30, 2013. Fixed-charge coverage was 3.0x and 2.6x in 2012
and 2011, respectively. Fitch projects fixed-charge coverage will
improve further towards 3.8x over the next 12-36 months driven by
same-store NOI growth, earnings contributions from recent acquisitions
and reduced fixed charges. Fitch defines fixed-charge coverage as
recurring operating EBITDA less recurring capital expenditures less
straight-line rent adjustments and direct financing lease accretion,
divided by total interest incurred.
HCP's leverage was 5.3x and 5.1x for the TTM and quarter ended Sept. 30,
2013, respectively which is within a range that is appropriate for a
'BBB+' IDR. Leverage was 5.4x and 5.3x as of Dec. 31, 2012 and 2011,
respectively, pro forma for material acquisitions. Fitch projects HCP's
leverage will decline below 5.0x by 2015 but notes the company's
propensity for large transactions may cause fluctuations in reported
metrics. Fitch defines leverage as net debt divided by recurring
operating EBITDA.
WELL-LADDERED DEBT MATURITIES & STRONG ACCESS TO CAPITAL
The company's debt maturity schedule is well-laddered, with no more than
20% of debt maturing in any one year. The largest year for debt
maturities is 2017; however, HCP maintains options to extend the
maturities of its line of credit facility and term loan by one year
thereby reducing potential maturities to less than 14% of total debt
outstanding. As such, HCP maintains a solid liquidity position. Sources
of liquidity (unrestricted cash, net proceeds from the note offering,
availability under the company's unsecured revolving credit facility,
expected retained cash flows from operating activities after dividends
and distributions) divided by uses of liquidity (pro rata debt
maturities and estimated recurring capital expenditures) for the period
Oct. 1, 2013 to Dec. 31, 2015 results in a liquidity coverage ratio of
1.2x. HCP has also demonstrated strong access to a wide variety of
capital sources over the past two years, mitigating refinance risk.
HCP maintains solid financial flexibility stemming mainly from its large
unencumbered property pool, which serves as a source of contingent
liquidity. Using a stressed capitalization rate range of 8.0%-10.0%,
HCP's unencumbered asset coverage of unsecured debt was approximately
2.1x - 2.6x, which is appropriate for the 'BBB+' IDR. Further, HCP's
distributions do not restrict financial flexibility. Fitch calculates
that the company's common stock dividends represented only 82% and 90%
of YTD and 2012 adjusted funds from operations to account for capital
expenditures, straight-line rents and non-cash income (company-reported
funds available for distribution).
CONCENTRATED PORTFOLIO
Credit concerns include the potential impact of government fiscal
imbalance and regulatory risk on operators' profitability and operator
and geographic concentration. Rent from HCR ManorCare represents 30% of
HCP's revenues and this tenant continues to have weak coverage ratios of
below 1.0x facility EBITDAR and 1.1x guarantor fixed-charge coverage for
the trailing 12 months ended June 30, 2013. Sustained and material
improvements in HCR ManorCare's profitability may support positive
ratings momentum if reflective of a generally improving and lower risk
operating environment. Partially offsetting this concentration is the
master lease structure and covenants to provide protection to HCP at the
guarantor level.
Further, HCP's portfolio has been and remains geographically
concentrated, despite the company maintaining a diversified investment
platform. As of Sept. 30, 2013, approximately 30% of HCP's consolidated
net operating income from wholly owned assets was generated from
properties located in California and Texas (though this is down from 47%
as of Dec. 31, 2010).
RATINGS SENSITIVITIES
The following factors may result in positive momentum on the rating
and/or Outlook:
--A sustained and material improvement in coverage for skilled
nursing/post-acute operators in whole and in part;
--Reduced tenant concentration;
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x for
several consecutive quarters (coverage was 3.4x for the TTM ended Sept.
30, 2013);
--Fitch's expectation of leverage sustaining below 4.5x (leverage was
5.3x at Sept. 30, 2013).
The following factors may have a negative impact on the ratings or
Outlook:
--A sustained and material weakening in coverage for skilled
nursing/post-acute operators in whole and in part;
--Fitch's expectation of leverage sustaining above 6.0x;
--Fitch's expectation of fixed-charge coverage sustaining below 2.5x;
--A liquidity shortfall.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology,' Aug. 5, 2013;
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 26, 2013;
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12,
2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August
2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Recovery Rating and Notching Criteria for Equity REITs - Effective May
12, 2011 to May 3, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=807431
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