Fitch Ratings has assigned a 'BBB+' rating to the $800 million 2.625% senior notes due 2020 issued by HCP, Inc. (NYSE: HCP). The notes were priced at 99.729% of par to yield 2.667%.
Net proceeds from the offering are expected to be used to repay amounts outstanding on bank credit facility related to the previously announced $1.73 billion senior housing acquisition. Proceeds may also be used for general corporate purposes including the repayment of 2013 debt maturities and future acquisitions.
Fitch currently rates HCP as follows:
--Unsecured bank credit facility 'BBB+';
--Senior unsecured notes 'BBB+'.
The Rating Outlook is Stable.
The ratings reflect HCP's credit strengths, namely steady cash flows from a large portfolio of high-quality properties across the health care real estate spectrum, maintenance of leverage and fixed charge coverage metrics appropriate for the rating category, manageable lease expiration and debt maturity schedules and financial flexibility stemming from a large unencumbered pool to support unsecured borrowings. Credit concerns include operator and geographic concentration. HCP's credit metrics are unaffected pro forma for the note issuance and senior housing acquisition except for liquidity coverage which improves due to the repayment of amounts outstanding on the bank credit facility.
HCP's portfolio includes assets across the health care property spectrum by both type and structure, including senior housing, post-acute and skilled nursing, medical office, life science, and hospitals. The diversified portfolio reduces exposure to individual demand drivers. HCP's cash flows have significant embedded stability, with long-term leases in place in conjunction with annual rent escalators.
Same-property net operating income (NOI) increased 3.8% for the nine months ended Sept. 30, 2012, behind the 4.7% and 4% growth during 1Q'12 and 2011, respectively and as compared to trough growth of 1.6% in 2008 during the financial crisis. 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 2014 despite the regulatory-based headwinds some operators are facing.
HCP's pro forma fixed charge coverage was 3.1x for the trailing twelve months ended Sept. 30, 2012 (TTM) as compared to 3.0x for the TTM ended Sept. 30, 2012 and 2.9x for the year ended Dec. 31, 2011. Fitch projects fixed charge coverage to remain at or above 3.0x beginning in 2013. 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 interest expense, capitalized interest and preferred dividends.
HCP's pro forma leverage was 5.4x as of Sept. 30, 2012 and is within a range that is appropriate for a 'BBB+' IDR. Leverage was 5.4x for the TTM ended Sept. 30, 2012 and 5.3x the year ended Dec. 31, 2011. Fitch projects HCP's leverage to remain around 5.0x through 2014. Fitch defines leverage as net debt divided by recurring operating EBITDA.
HCP's pro forma liquidity position is appropriate for the rating at 1.1x for the period Oct. 1, 2012 to Dec. 31, 2014. Additionally, the company's debt maturity schedule is well-laddered, with no more than 10% of pro forma debt maturing on an annual basis through 2015. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, 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 (remaining funding obligations, pro rata debt maturities and estimated recurring capital expenditures).
HCP maintains solid financial flexibility stemming mainly from its large unencumbered property pool, which serves as a source of contingent liquidity. HCP's unencumbered assets increased as a result of the recent senior housing acquisition. Using a blended, stressed cap rate of 8.5%, HCP's pro forma unencumbered asset coverage of unsecured debt was approximately 2.2x, which is solid for the 'BBB+' IDR.
Credit concerns include operator and geographic concentration. HCR ManorCare represents 30% of HCP's revenues (pro forma) and increases HCP's exposure to government reimbursement risk. 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, 2012, approximately 32% of HCP's consolidated (not pro forma) 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).
The following factors may result in positive momentum in the rating and/or Outlook:
--Reduced tenant concentration;
--Fitch's expectation of fixed charge coverage sustaining above 3.0x for several consecutive quarters (coverage was 3.1x for the pro forma TTM ended Sept. 30, 2012);
--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 4.5x (pro forma TTM leverage was 5.4x as of Sept. 30, 2012).
The following factors may result in negative momentum in the rating and/or Outlook:
--Fixed-charge coverage sustaining below 2.5x;
--Leverage sustaining above 6.0x;
--A liquidity shortfall.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 15, 2011).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology