Fitch Ratings has assigned a 'BBB' rating to the $1.2 billion of senior unsecured notes issued by Health Care REIT, Inc. (NYSE: HCN). The notes were issued in the following tranches:
--$450 million of 2.25% notes due March 15, 2018 priced to yield 2.35%;
--$500 million of 3.75% notes due March 15, 2023 priced to yield 3.792%;
--$250 million of 5.125% notes due March 15, 2043 priced to yield 5.184%.
The issuance attests to HCN's strong access to capital, demonstrates the company's commitment to maintaining a large unencumbered asset pool, and helps maintain a well staggered debt maturity schedule. Fitch currently rates HCN as follows:
--Issuer Default Rating (IDR) 'BBB';
--$2 billion senior unsecured credit facility 'BBB';
--$250 million Canadian dollar senior unsecured term loan 'BBB';
--$5.4 billion senior unsecured notes 'BBB';
--$494 million senior unsecured convertible notes 'BBB';
--$1 billion preferred stock 'BB+'.
Proceeds from the bond issuances will be used to repay secured debt to be assumed in connection with the previously announced acquisition of Sunrise Senior living, Inc. (Sunrise). If the Sunrise acquisition is not completed, or there are excess proceeds from the notes issuance, then the remaining proceeds will be used for general corporate purposes, including investing in health care and seniors housing properties.
As previously noted in a press release dated Aug. 24, 2012, Fitch views the Sunrise acquisition as having a neutral impact to the credit profile of HCN, as the transaction is consistent with HCN's strategy of acquiring high-quality health care assets with a mix of equity and debt capital.
The acquisition is balanced by positives and negatives. On the positive side, the acquisition will increase the overall quality of the portfolio, increase the exposure to private-pay assets to 82% from 74%, by July 2013 will give the company access to 115 of Sunrise's 125 communities with a total value of approximately $4.3 billion. Balancing these positives is the increase in cash flow volatility resulting from the increase in exposure to RIDEA assets to above 30% of the portfolio, from 22% currently. In addition, the pricing of the Sunrise transaction implies a 6.5% capitalization rate on projected 2013 NOI (excluding any recurring capital expenditures for which HCN will have funding responsibility), limiting potential near term returns in excess of financing costs.
HCN's leverage as measured by net debt to trailing 12 month recurring EBITDA was approximately 5.0 times (x) at Sept. 30, 2012. Fitch projects that subsequent to the closing of the Sunrise acquisition, leverage will stabilize in the high 5.0x range.
Fixed-charge coverage is appropriate for the 'BBB' rating. Trailing 12 month fixed-charge coverage as of Sept. 30, 2012 was 2.5x, up slightly from 2.4x in 2011 but down from 2.8x in 2010. Fitch projects that coverage will remain in the mid-2.0x range subsequent to the Sunrise acquisition. Fitch defines fixed-charge coverage as recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated entities less recurring capital expenditures and straight-line rent adjustments divided by total interest incurred and preferred dividends.
The company's liquidity is solid pro forma for the Sunrise acquisition. Sources of liquidity (unrestricted cash, unsecured revolving credit facility availability and projected retained cash flows from operating activities after dividends) divided by uses of liquidity (debt maturities, projected recurring capital expenditures and projected development expenditures) was 1.6x for the period Oct. 1, 2012 to Dec. 31, 2014.
HCN also has adequate contingent liquidity due to the presence of a large unencumbered property pool. Fitch estimates that unencumbered assets (unencumbered annualized 3Q'12 net operating income [NOI] divided by a stressed 9% cap rate) divided by unsecured debt is approximately 2.2x at Sept. 30, 2012, which is appropriate for the 'BBB' rating.
The two-notch differential between HCN's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'. Based on Fitch research titled 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's web site at 'www.fitchratings.com', these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
The following factors may result in positive momentum in the ratings and/or Rating Outlook:
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x
(fixed charge coverage was 2.5x for the TTM as of Sept 30, 2012)
--Fitch's expectation of leverage sustaining below 5.0x (leverage was 5.0x as of Sept. 30, 2012);
--Unencumbered assets-to-unsecured debt sustaining above 3.0x (unencumbered annualized 3Q'12 NOI divided by a stressed 9% cap rate to unsecured debt was 2.2x as of Sept. 30, 2012).
The following factors may result in negative momentum in the ratings and/or Rating Outlook:
--Fixed-charge coverage sustaining below 2.5x;
--Leverage sustaining above 6.0x;
--Deteriorating tenant/operator cash flow coverage of rent;
--Unencumbered assets-to-unsecured debt sustaining below 2.0x;
--A base case liquidity coverage ratio sustaining below 1.0x.
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 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 Corporates and REIT Credit Analysis' (Dec. 15, 2011).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Criteria for Rating U.S. Equity REITs and REOCs
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers