TEXT-Fitch affirms HCP Inc IDR at 'BBB+'
April 10 - Fitch Ratings has affirmed the credit ratings of HCP, Inc. (NYSE: HCP) as follows: --Issuer Default Rating (IDR) at 'BBB+'; --Unsecured bank credit facility at 'BBB+'; --Senior unsecured notes at 'BBB+'; --Preferred stock at 'BBB-'. The Rating Outlook is Stable. The affirmations 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, financial flexibility stemming from a large unencumbered pool to support unsecured borrowings, and a solid liquidity position. Credit concerns include operator and geographic concentration. 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 4% during 2011, 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 has a modest lease expiration schedule, with no more than 10% of leases expiring in any single year and an average of 5% over the next 10 years as measured by annual rental revenue. Cash flow coverage for the bulk of HCP's portfolio has remained solid and each property type is subject to varying supply and demand drivers. HCP's fixed charge coverage was 2.6 times (x) for the trailing 12 months (TTM) ended Dec. 31, 2011, and Fitch estimates coverage was 2.9x pro forma for a full year of earnings contributions from the HCR ManorCare transaction. Fixed charge coverage for 2010 and 2009 was 2.5x and 2.4x, respectively. 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 leverage was 5.9x as of Dec. 31, 2011 and is within a range that is appropriate for a 'BBB+' IDR. Pro forma for the HCR ManorCare transaction, leverage was 5.3x compared to 5.0x for 2010 pro forma, 6.1x for 2009 and 6.5x for 2008. Fitch projects HCP's leverage to remain around 5.0x through 2014. Fitch defines leverage as net debt divided by recurring operating EBITDA. The company's debt maturity schedule is well-laddered, with no more than 12% of debt maturing on an annual basis through 2015. As such, HCP maintains a solid liquidity position. 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 (pro rata debt maturities and estimated recurring capital expenditures) from Jan. 1, 2012 to Dec. 31, 2013 result in a liquidity coverage ratio of 1.0x. The ratio improves to 1.3x pro forma for the January 2012 $450 million unsecured debt issuance, the March 2012 issuance of $360 million of common stock and the pending preferred stock redemption. 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 blended, stressed cap rate of 8.6%, HCP's unencumbered asset coverage of unsecured debt was approximately 2.3x, which is solid for the 'BBB+' IDR. Credit concerns include operator and geographic concentration. HCR ManorCare represents more than 32% of HCP's revenues 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 Dec. 31, 2011, approximately 34% of HCP's consolidated revenue 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 two-notch differential between HCP'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 on the rating and/or Outlook: --Reduced tenant concentration; --Fixed charge coverage sustaining above 3.0x for several consecutive quarters (coverage was 2.6x for the 12 months ended Dec. 31, 2011 and 2.9x on a pro forma basis); --Net debt to recurring operating EBITDA, including Fitch's estimate of recurring cash distributions from unconsolidated joint ventures, sustaining below 4.5x (leverage was 5.9x as of Dec. 31, 2011 and 5.3x on a pro forma basis). The following factors may result in negative momentum on 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: --'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; --'Corporate Rating Methodology,' Aug. 12, 2011; --'Recovery Rating and Notching Criteria for Equity REITs,' May 12, 2011. Applicable Criteria and Related Research: Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis Corporate Rating Methodology Recovery Rating and Notching Criteria for Equity REITs Criteria for Rating U.S. Equity REITs and REOCs
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