Fitch Ratings has affirmed the ratings of HCP, Inc. (NYSE: HCP) as
follows:
--Long-term IDR at 'BBB+';
--Unsecured bank credit facility at 'BBB+';
--Unsecured term loan at 'BBB+';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect HCP's credit strengths, namely: the steady and
predictable cash flows from a large portfolio of healthcare properties,
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, and a solid liquidity position.
Credit concerns include: operator concentration, which will increase
further pro forma for the pending merger between Brookdale Senior Living
and Emeritus Corporation, persistently low coverage metrics for HCP's
largest tenant (HCR ManorCare), and the impact of government and
regulatory actions on operators' profitability. HCP's commitment to
existing conservative business and financing strategies mitigates the
abrupt change in senior leadership (the termination in 4Q13 of Jay
Flaherty who had been CEO since 2003).
DURABLE CASHFLOWS
HCP's same-store property performance has been strong over the past five
years and is one of the largest factors behind the rating, with same
property net operating income (NOI) increasing between 3.1% and 4.8%
annually from 2009-2013. Same-property NOI increased 3.1% for 2013 as
compared to 4.2%, 4% and 4.8% for 2012, 2011 and 2010, respectively. 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 many other rated healthcare
REITs, HCP has an insignificant amount of RIDEA exposure, thereby
increasing the durability of cash flows.
HCP's lease maturity schedule is well-staggered and long-dated as a
result of the high percentage of long-term triple net leases. Less than
10% of annual base rent revenues expires in any one year. 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 3.5x for 2013 as compared to 3.1x and
2.7x in 2012 and 2011, respectively. Fitch projects fixed-charge
coverage will improve further above 4.0x over the next 12-to-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 5.2x and 5.0x for year and quarter ended Dec. 31,
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 towards 4.5x by 2016. That said, Fitch notes that
HCP's propensity for large transactions may cause fluctuations in
reported metrics. Fitch defines leverage as net debt divided by
recurring operating EBITDA.
STRONG LIQUIDITY & ACCESS TO CAPITAL
HCP has repaid the majority of its 2014 maturities pro forma for the
$350 million 4.2% senior unsecured bond issuance in 1Q'14 and has only
9.7% of total debt maturing through 2015. The company's debt maturity
schedule is appropriately-staggered thereafter, with less than 17% of
debt maturing in any one year. The largest year for debt maturities is
2016; however, HCP maintains options to extend the maturity of the term
loan by one year. This reduces potential maturities in 2016 to 14% of
total debt outstanding. As such, HCP maintains a strong liquidity
position.
Sources of liquidity (unrestricted cash, availability under the
company's unsecured revolving credit facility pro forma for the recent
extension and amendment to $2 billion and expected retained cash flows
from operating activities after dividends and distributions) divided by
uses of liquidity (pro rata debt maturities adjusted for recent
repayments, development expenditures and estimated recurring capital
expenditures) for the period Jan. 1, 2014 to Dec. 31, 2015 results in a
liquidity coverage ratio of 2.4x. 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%-10%, HCP's
unencumbered asset coverage of net unsecured debt was approximately
2.0x-2.4x, 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 83% and 90% of 2013 and 2012, respectively, funds from operations
adjusted to account for capital expenditures, straight-line rents and
non-cash income (company-reported funds available for distribution).
CONCENTRATED PORTFOLIO & PERSISTENTLY LOW COVERAGE AT HCR
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 29% of
HCP's revenues. This tenant continues to have coverage ratios below 1.0x
facility EBITDAR and 1.2x guarantor fixed-charge coverage for the
trailing 12 months ended Dec. 31, 2013 which is a credit concern.
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.
Furthermore, HCP's tenant mix will become more concentrated upon the
completion of the merger between Emeritus Corporation and Brookdale
Senior Living (currently HCP's second and third largest tenants,
respectively). The combined company will comprise 21% of revenues and
result in the two largest tenants (HCR and Brookdale/Emeritus)
comprising approximately 50% of revenues. The risks associated with a
concentrated tenant mix are two-fold: 1) the effects of a potential
default are greater and 2) tenants may have significant leverage when
negotiating lease renewals given the pooling of assets into master
leases. Fitch notes the merger has no immediate impact on HCP's credit
ratings given its exposure to the underlying property cash flows is
unchanged but notes the longer-term increase in risk.
Lastly, HCP's portfolio remains geographically concentrated, despite the
company maintaining a diversified investment platform. As of Dec. 31,
2013, approximately 31% 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).
STABLE OUTLOOK
The Stable Outlook is driven by Fitch's expectations that HCP will
maintain its long-standing conservative business and financing
strategies and metrics will remain appropriate for the rating over the
next 12-to-24 months.
RATING 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 3.5x for the TTM ended Dec.
31, 2013);
--Fitch's expectation of leverage sustaining below 4.5x (leverage was
5.2x at Dec. 31, 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:
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26,
2014);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19,
2013);
--'Corporate Rating Methodology: Including Short-Term Ratings and
Subsidiary Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826339
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