TEXT - S&P comments on Health Care REIT
Aug 23 - Standard & Poor's Ratings Services today stated its 'BBB-' rating and positive outlook on Health Care REIT are not affected by the company's recently announced agreement to acquire Sunrise Senior Living Inc. (Sunrise) for $1.9 billion, including the assumption of debt. In our view, the acquisition will enhance the quality of Health Care REIT's portfolio through the addition of well-branded, high-quality, private-pay assisted living facilities that are primarily located in high-barrier and high-cost housing markets. We believe Health Care REIT intends to ultimately finance the purchase in a largely leverage-neutral manner and that the company's core portfolio remains on track to deliver improved debt and dividend coverage measures over the next year. Health Care REIT agreed to pay $14.50 per Sunrise share, representing a 62% premium over its prior closing price, plus the assumption of debt, resulting in a $1.9 billion acquisition. Health Care REIT is acquiring 20 wholly owned properties and 105 off-balance-sheet joint-venture assets (28% average ownership). The initial yield (based on 2013 net operating income) is rich at 6%, but could improve to the mid-6% area, subject to additional leasing, the renegotiation of management contracts and the company's ability to eventually acquire the remaining joint-venture interests in some of Sunrise's partially owned assets. The acquisition will increase Health Care REIT's exposure to senior housing operating assets to 30% of its $18 billion pro forma asset base, the high end of the company's target range, which could result in higher cash flow volatility. It is our understanding that Health Care REIT does not intend to retain ownership of Sunrise's management business. We will monitor the company's plans to integrate this and other acquisitions. We will also monitor its developing capital plan related to the financing of the $950 million cash requirement to fund this acquisition, as well as additional new investments, including the company's desire to eventually acquire 100% positions in some of the Sunrise joint ventures. We acknowledge that Health Care REIT is reliant on the capital markets to fund its voracious appetite for growth. And given the interval between now and the transaction's expected closing in the first half of 2013, there is some risk related to executing public capital market transactions. We would reassess our positive outlook if the company appears unable to meet our 2012 base case, which assumes improvement in operating performance to support fixed-charge coverage between 2.4x-2.5x, low 7x debt plus preferred/EBITDA, and total coverage (including common dividends) above 1x. We could also revise the outlook to stable if the company faces challenges digesting its acquisitions or terms of the Sunrise transaction change such that Health Care REIT pays a higher price or is unable to sell the management business.
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