Fitch Rates Health Care REIT's $400MM 4.5% Sr. Unsecured Notes due 2024 'BBB'; Outlook Stable

Tue Oct 8, 2013 5:15pm EDT

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(The following statement was released by the rating agency) NEW YORK, October 08 (Fitch) Fitch Ratings has assigned the following debt obligation rating to Health Care REIT, Inc. (NYSE: HCN): --$400 million 4.5% senior unsecured notes 'BBB'. The notes mature in January 2024 and were priced at 98.958% of their face amount to yield 4.626%. The company will use net proceeds from the notes offering to repay borrowings under the company's unsecured revolving credit facility and for general corporate purposes. Fitch currently rates the company as follows: --Issuer Default Rating (IDR) 'BBB'; --$2.25 billion unsecured revolving credit facility 'BBB'; --$738 million senior unsecured term loans 'BBB'; --$5.4 billion senior unsecured notes 'BBB'; --$494 million senior unsecured convertible notes 'BBB'; --$1.0 billion preferred stock 'BB+'. The Rating Outlook is Stable. KEY RATING DRIVERS The ratings reflect HCN's broad healthcare real estate platform, which generates largely predictable cash flow predominantly from private pay sources in markets with strong demographics. The company has projected fixed charge coverage and leverage that are appropriate for a 'BBB' rated healthcare REIT. HCN also has good access to capital and a solid liquidity position, including contingent liquidity from unencumbered assets, and a strong management team. Credit concerns center on operational volatility associated with the company's REIT Investment Diversification and Empowerment Act of 2007 (RIDEA)-related investments and modest operator concentration. Predictable Cash Flow Limited lease rollover risk and structural protections embedded in HCN's management agreements underpin portfolio cash flow stability. HCN's lease expiration schedule is well-laddered with only 12.1% of leases expiring through 2017 (excluding the seniors housing operating portfolio). In addition, master leases and/or cross-collateralization arrangements with seniors housing and healthcare facility operators minimize operators' ability to selectively renew management agreements for higher performance assets. Approximately 80% of the portfolio is in the top 31 metropolitan statistical areas or on the East or West coasts, based on data from the National Investment Center for the Seniors Housing & Care Industry. Strong Same-Store Growth Same-store net operating income (NOI) growth has been solid in the range of 3.5%-5.0% on a quarterly basis since 4Q'10. Growth was 3.8% in 2Q'13, led by the seniors housing operating portfolio at 8.4%, which represents 34.9% of NOI as of 2Q'13. This contribution has increased from 17.7% at 2Q'12 following the close of the Sunrise acquisition earlier this year. Appropriate Credit Metrics for 'BBB' Fixed-charge coverage for the trailing 12 months (TTM) ended June 30, 2013 was 2.7x, which is appropriate for the rating, compared with 2.6x in 2012 and 2.3x in 2011. Fitch projects that coverage will continue to improve over the next 12-to-24 months, driven by projected mid-single-digit same-store performance for the seniors housing operating portfolio and low-single-digit average growth for the rest of the portfolio, coupled with incremental cash flow from new investments. In a more adverse case than anticipated by Fitch, coverage could decline below 2.5x, which is more commensurate with a 'BBB-' rating for a healthcare REIT. Net debt-to-TTM recurring operating EBITDA was 6.5x as of June 30, 2013. However, leverage based on annualized 2Q'13 EBITDA (primarily incorporating HCN's Sunrise investment) was 5.9x, which is appropriate for the 'BBB' rating. In a more adverse case than currently anticipated by Fitch, leverage could rise above 6.5x, which is more appropriate for a 'BBB-' rating for a healthcare REIT. Strong Access to Capital and Adequate Liquidity HCN raised approximately $6 billion of capital in 2012 including unsecured bonds, unsecured term loans, follow-on common equity and preferred equity. The company also upsized its credit facility while increasing the term and lowering the rate. HCN's liquidity position pro forma for recent capital transactions and the closing of the Sunrise acquisition is adequate, with total sources of liquidity covering uses by 1.2x for the period July 1, 2013 to Dec. 31, 2015. Liquidity coverage would improve to 1.9x if 80% of secured debt is refinanced. The company also benefits from a staggered debt maturity schedule. The company has only 17.8% of total debt maturing through 2015 and no more than 14% of total debt maturing in any given year through 2019. HCN also has good contingent liquidity. Unencumbered assets (unencumbered annualized 2Q'13 NOI divided by a stressed 9% cap rate) to unsecured debt was 2.1x, which is appropriate for the 'BBB' rating. Increasing RIDEA Exposure The portfolio exhibits the potential for increased cash flow volatility from recent investments in RIDEA operating partnerships. RIDEA NOI has increased to nearly 35% of total annualized 2Q'13 NOI from 17.7% at 2Q'12. Fitch views the increase as a moderate credit concern, as increased cash flow volatility is partially mitigated by the quality of the assets and the favorable near- to medium-term fundamental outlook for seniors housing. Modest Reimbursement Risk Approximately 82% of HCN's portfolio NOI is derived from private pay sources, a credit positive. This mitigates reimbursement and regulatory risk, exemplified by the 11.1% reimbursement cut to skilled nursing facilities mandated by the Centers for Medicare and Medicaid Services (CMS) in fiscal 2012. The reimbursement cut was the primary reason for cash flow coverage of skilled nursing facilities tenants to drop to 1.75x in FY2012 from 2.22x in FY2011. Healthcare operators are expected to continue to face reimbursement challenges, particularly given continued government budget issues. Moderate Tenant Concentration As of June 30, 2013, Sunrise Senior Living was the largest tenant, representing 15.6% of invested capital, with the three largest tenants representing 33.7%, evidence of moderate tenant concentration. However, this is mitigated by the solid performance of these tenants, which operate in well-diversified, attractive high-barrier-to-entry markets, and with cross-collateralized lease structures. Strong Management Team HCN's management team has successfully managed the rapid growth of the company while maintaining solid credit metrics and portfolio performance. The company has demonstrated a commitment to pre-funding acquisitions in a leverage-neutral manner for the benefit of unsecured bondholders. Stable Outlook The Stable Rating Outlook centers on HCN's normalized credit metrics that are appropriate for the rating coupled with strong liquidity and access to capital. In addition, Fitch expects healthcare real estate to continue to benefit from positive demographic trends and limited new supply. Preferred Stock Notching The two-notch differential between HCN's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. 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. RATING SENSITIVITIES 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 (TTM coverage at 2Q'13 was 2.7x); --Fitch's expectation of leverage sustaining below 5.5x (2Q'13 leverage was 5.9x); --Fitch's expectation of unencumbered assets to unsecured debt based on a 9% capitalization rate sustaining above 3.0x (this metric was 2.1x as of June 30, 2013). The following factors may result in negative momentum in the ratings and/or Rating Outlook: --Fitch's expectation of fixed charge coverage sustaining below 2.5x; --Fitch's expectation of leverage sustaining above 6.5x; --Fitch's expectation of unencumbered assets to unsecured debt sustaining below 2.0x; --Base case liquidity coverage sustaining below 1.0x (this metric was 1.2x as of June 30, 2013). Contact: Primary Analyst Reinor Bazarewski Associate Director +1-212-908-0291 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Sean Pattap Senior Director +1-212-908-0642 Committee Chairperson Megan Neuburger Senior Director +1-212-908-0501 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013); --'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013); --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013); --'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis' (Dec. 13, 2012); --'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 12, 2012). Applicable Criteria and Related Research: Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Criteria for Rating U.S. Equity REITs and REOCs here Parent and Subsidiary Rating Linkage here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Recovery Ratings and Notching Criteria for Equity REITs here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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