TEXT-S&P raises HCP Inc. corporate credit, debt ratings

Tue Nov 13, 2012 4:06pm EST

Overview
     -- We raised our ratings on HCP Inc., including the corporate
credit rating, which we raised to 'BBB+' from 'BBB'. The outlook is stable.
     -- The upgrade reflects HCP's improved credit metrics, as well as our 
view that HCP's diversified investment platform and portfolio of long term 
triple net leased health care assets with annual rent escalators, will enable 
the REIT to continue to grow cash flow over the next few years despite 
regulatory uncertainty regarding the delivery and reimbursement of health 
care, and our expectations for weak economic growth over the next one to two 
years.
     -- Our stable outlook reflects our expectation that HCP will continue to 
finance acquisitions with sufficient equity to maintain an "intermediate" 
financial risk profile. We expect debt-to-book capital to remain in the low to 
mid 40% area, and debt-to-EBITDA to be sustained at around 5.5x.
 
Rating Action
On Nov. 13, 2012, Standard & Poor's Ratings Services raised its ratings on 
Long Beach, Calif.-based HCP Inc. (HCP), including the corporate credit 
rating, which we raised to 'BBB+' from 'BBB'.

Rationale
The upgrade reflects HCP's improved credit metrics, as well as our view that 
HCP's diversified investment platform and portfolio of long-term 
triple-net-leased skilled nursing and senior housing assets, will enable the 
REIT to continue to grow cash flow over the next few years despite regulatory 
uncertainty regarding the delivery and reimbursement of health care and our 
expectations for weak economic growth over the next year. Debt coverage 
metrics have gradually strengthened over the past year, and we expect 
fixed-charge coverage (FCC) will exceed 3x for full-year 2012. Our stable 
outlook reflects our expectation that HCP will continue to finance 
acquisitions with sufficient equity to maintain an "intermediate" financial 
risk profile. We expect debt-to-book capital to remain in the low to mid 40% 
area and debt-to-EBITDA to be sustained at around 5.5x.

Our ratings on HCP reflect the diversified health care REIT's "satisfactory" 
business risk profile, characterized by a large portfolio of health care 
properties that continue to provide more robust income growth relative to 
other commercial property types. With an undepreciated asset base of $21 
billion at Sept. 30, 2012 (pro forma for the recent acquisition of 133 senior 
housing properties), we believe HCP's investment platform has sufficient scale 
and diversity to deliver consistent growth in funds from operation (FFO). In 
addition, HCP leases most of its skilled nursing and senior housing portfolios 
to operators under long-term triple net leases, most of which contain annual 
rent bumps, providing solid earnings visibility. Our assessment of HCP's 
management and governance is "satisfactory". An "intermediate" financial risk 
profile, characterized by strengthening debt coverage metrics and low leverage 
also supports our ratings on HCP. The financial risk profile is further 
bolstered by adequate liquidity and strong standing in both the equity and 
debt markets. 

HCP's owned real estate portfolio at Sept. 30, 2012 (including joint 
ventures), consists of 955 properties that are well diversified across 
multiple health care asset types including skilled nursing (33% of net 
operating income {NOI}), senior housing (32%), life science buildings (16%), 
medical offices (14%), and hospitals (5%). The portfolio is also 
geographically diverse with California (22% of NOI) and Texas (10%) 
representing just 10% or more of NOI. However, HCP does have meaningful tenant 
concentration. HCR ManorCare (ManorCare) comprises 29% of annualized revenue 
at Sept. 30, 2012, pro forma for the recent acquisition of 133 senior housing 
facilities that Emeritus Corp. operates.

HCP derives approximately 85% to  of its adjusted NOI from triple-net-leased 
properties including its skilled nursing facilities, hospitals, the majority 
of its senior housing and life science assets, and a portion of its medical 
office portfolio. Standard & Poor's believes the traditional triple-net-lease 
structure (which requires the tenant to pay all property-level costs, such as 
taxes and maintenance expenses) generally results in more stable cash flows 
compared with assets that HCP owns and operates. Despite recent significant 
reductions in Medicare reimbursement rates, EBITDAR coverage for HCP's legacy 
leased skilled nursing portfolio was still ample, totaling 1.49x, (down from 
1.78x a year ago). Facility-level coverage for the ManorCare portfolio 
(including 66 assisted living facilities), which represents the bulk of HCP's 
skilled nursing portfolio, was less robust at 1.04x. However, coverage, 
including cash flow from the portfolio operator (which is also a guarantor for 
the master lease), was more robust at 1.29x. 

FFO (excluding impairments and other one-time items) for the first nine months 
of 2012 increased 12.6% from the prior year, reflecting contributions from the 
ManorCare acquisition (which closed in April 2011), as well as a 3.8% increase 
in same-store NOI. Debt service coverage (DSC) and FCC totaled 3.1x and 3.0x, 
respectively, at Sept. 30, 2012. Total coverage of all obligations increased 
to roughly 1.1x from 0.9x at year-end 2010. We expect modest improvement in 
these metrics over the next 18 months as HCP continues to drive growth in FFO 
through contractual rent bumps in its triple-net portfolio and steady 
occupancy and rent growth for its life science and medical office portfolios.

Debt-to-total implied market capitalization totaled 29% and 
debt-to-last-quarter annualized EBITDA (adjusted for straight line rents and 
noncash amortization) was moderate at 5.6x at Sept. 30, 2012. We expect HCP to 
maintain leverage in this range over the next one to two years, which will 
require the REIT to fund any sizeable acquisitions in a leverage neutral 
manner. 

Stress scenario
HCP coverage metrics are relatively protected from rising interest rates due 
to the company's relatively modest debt maturities over the next two years and 
the fact that variable-rate debt represents only 1.0% of total debt. In fact, 
we estimate that HCP could experience no growth in FFO and a 200-basis-point 
(bp) increase in interest rates over the next two years and still maintain FCC 
of around 2.5x. Under this scenario, total coverage of all obligations would 
remain above 1x.

Liquidity
HCP has an adequate liquidity profile, in our opinion, with available sources 
sufficient to meet identified needs over the next two years.
     -- We expect the company to produce roughly $1 billion to $1.1 billion in 
FFO in 2012 and 2013, after adjusting for straight line rents, noncash 
depreciation, and amortization related to deferred financing leases. 
     -- HCP's unrestricted cash balance at Sept. 30, 2012, totaled $96.5 
million, and the REIT had full availability under a $1.5 billion revolving 
credit facility at Sept. 30, 2012. In March 2012, HCP amended this facility 
extending the maturity date by one year to March 11, 2016 (excluding a one 
year extension), and reducing pricing on borrowings under the facility by 42.5 
bps to LIBOR plus 107.5 bps. 
     -- The company's uses of capital include remaining debt maturities 
totaling $8.7 million for the remainder of 2012. Debt maturities in 2013 are 
more meaningful at approximately $870 million, but the company could 
temporarily refinance them using the revolver if capital markets access is 
limited.
     -- HCP also financed approximately $650 million of its recent $1.73 
billion acquisition of 133 senior housing assets with borrowings under its 
revolving credit facility. We anticipate that the company will refinance these 
borrowings with longer term debt in the near future.
     -- Additional uses of cash include an estimated $60 million to fund 
anticipated leasing, tenant improvements and capital expenditures, $81 million 
to complete in-process redevelopment projects, and about $860 million of 
common dividends in 2012. 
     -- HCP has good access to multiple sources of capital including common 
equity. Year-to-date, the REIT raised $2.5 billion through the sale of $750 
million of senior unsecured notes and $1.7 billion of common stock.
     -- HCP was in compliance with the financial covenants governing its 
credit facility on Sept. 30, 2012. Additionally, with the issuance of $2.4 
billion of senior unsecured notes in the first quarter of 2011, HCP is now 
subject to bond covenants, including the maintenance of an unencumbered 
asset-to-unencumbered debt ratio of more than 150%.
 
Outlook
The stable outlook reflects our view that HCP will maintain DSC and FCC in the 
low 3x area over next year, and total coverage (including the common dividend) 
will remain above 1x despite the uncertain regulatory environment and 
potential for weak macroeconomic trends. We expect HCP to continue to realize 
annual rent bumps in its triple-net-leased portfolio over the next three to 
five years given that its skilled nursing portfolio is largely focused on 
post-acute care. We would lower our ratings by one notch if tenant stress or 
additional large leveraged acquisitions caused FCC to decline to the mid 2x 
area and debt-to-undepreciated book capital approached 50%. Tenant 
concentration and slim facility level rent coverage within the ManorCare 
portfolio presently inhibit further ratings improvement, in our view.

Temporary telephone contact numbers: Susan Madison (201-259-1034); George 
Skoufis (201-470-2589).

Related Criteria And Research
     -- Industry Report Card: Strong Capital Access And Gradually Improving 
Fundamentals Continue To Support North American REITs, published October 19, 
2012
     -- Bulletin: HCP Inc. Ratings Unaffected By The Company's Plan To Acquire 
Portfolio of 133 Senior Living Properties, published October 17, 2012.
     -- Issuer Ranking: North American REITs and Real Estate Operating 
Companies, Stronest To Weakest, published October 10, 2012.
     -- Criteria/Corporates/Industrials: Key Credit Factors: Global Criteria 
For Rating Real Estate Companies, published June 21, 2011.

Ratings List
HCP Inc.
                                    Rating
                               To             From
Corporate credit rating        BBB+/Stable    BBB/Positive
Unsecured                      BBB+           BBB



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.