(The following statement was released by the rating agency)
NEW YORK, April 07 (Fitch) Fitch Ratings has affirmed the
ratings of HCP, Inc.
(NYSE: HCP) as follows:
--Long-term IDR at 'BBB+';
--Unsecured bank credit facility at 'BBB+';
--Unsecured term loan at 'BBB+';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect HCP's credit strengths, namely: the steady
cash flows from a large portfolio of healthcare properties,
leverage and fixed-charge coverage metrics appropriate for the
manageable lease expiration and debt maturity schedules,
stemming from a large unencumbered pool, and a solid liquidity
Credit concerns include: operator concentration, which will
increase further pro
forma for the pending merger between Brookdale Senior Living and
Corporation, persistently low coverage metrics for HCP's largest
ManorCare), and the impact of government and regulatory actions
profitability. HCP's commitment to existing conservative
business and financing
strategies mitigates the abrupt change in senior leadership (the
4Q13 of Jay Flaherty who had been CEO since 2003).
HCP's same-store property performance has been strong over the
past five years
and is one of the largest factors behind the rating, with same
operating income (NOI) increasing between 3.1% and 4.8% annually
Same-property NOI increased 3.1% for 2013 as compared to 4.2%,
4% and 4.8% for
2012, 2011 and 2010, respectively. 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 2015 despite the regulatory-based
operators are facing. Unlike many other rated healthcare REITs,
HCP has an
insignificant amount of RIDEA exposure, thereby increasing the
HCP's lease maturity schedule is well-staggered and long-dated
as a result of
the high percentage of long-term triple net leases. Less than
10% of annual base
rent revenues expires in any one year. Limited lease expirations
contractual rental bumps increase the predictability of future
absent tenant bankruptcies and are credit strengths for HCP.
STRONG CREDIT METRICS
HCP's fixed-charge coverage was 3.5x for 2013 as compared to
3.1x and 2.7x in
2012 and 2011, respectively. Fitch projects fixed-charge
coverage will improve
further above 4.0x over the next 12-to-36 months driven by
growth, earnings contributions from recent acquisitions and
charges. 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 total interest incurred.
HCP's leverage was 5.2x and 5.0x for year and quarter ended Dec.
respectively which is within a range that is appropriate for a
Leverage was 5.4x and 5.3x as of Dec. 31, 2012 and 2011,
respectively, pro forma
for material acquisitions. Fitch projects HCP's leverage will
4.5x by 2016. That said, Fitch notes that HCP's propensity for
transactions may cause fluctuations in reported metrics. Fitch
as net debt divided by recurring operating EBITDA.
STRONG LIQUIDITY & ACCESS TO CAPITAL
HCP has repaid the majority of its 2014 maturities pro forma for
million 4.2% senior unsecured bond issuance in 1Q'14 and has
only 9.7% of total
debt maturing through 2015. The company's debt maturity schedule
appropriately-staggered thereafter, with less than 17% of debt
maturing in any
one year. The largest year for debt maturities is 2016; however,
options to extend the maturity of the term loan by one year.
potential maturities in 2016 to 14% of total debt outstanding.
As such, HCP
maintains a strong liquidity position.
Sources of liquidity (unrestricted cash, availability under the
unsecured revolving credit facility pro forma for the recent
amendment to $2 billion and expected retained cash flows from
activities after dividends and distributions) divided by uses of
rata debt maturities adjusted for recent repayments, development
and estimated recurring capital expenditures) for the period
Jan. 1, 2014 to
Dec. 31, 2015 results in a liquidity coverage ratio of 2.4x. HCP
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
unencumbered property pool, which serves as a source of
Using a stressed capitalization rate range of 8%-10%, HCP's
coverage of net unsecured debt was approximately 2.0x-2.4x,
which is appropriate
for the 'BBB+' IDR.
Further, HCP's distributions do not restrict financial
calculates that the company's common stock dividends represented
only 83% and
90% of 2013 and 2012, respectively, funds from operations
adjusted to account
for capital expenditures, straight-line rents and non-cash
(company-reported funds available for distribution).
CONCENTRATED PORTFOLIO & PERSISTENTLY LOW COVERAGE AT HCR
Credit concerns include the potential impact of government
fiscal imbalance and
regulatory risk on operators' profitability and operator and
concentration. Rent from HCR ManorCare represents 29% of HCP's
tenant continues to have coverage ratios below 1.0x facility
EBITDAR and 1.2x
guarantor fixed-charge coverage for the trailing 12 months ended
Dec. 31, 2013
which is a credit concern. Sustained and material improvements
ManorCare's profitability may support positive ratings momentum
if reflective of
a generally improving and lower risk operating environment.
this concentration is the master lease structure and covenants
protection to HCP at the guarantor level.
Furthermore, HCP's tenant mix will become more concentrated upon
of the merger between Emeritus Corporation and Brookdale Senior
(currently HCP's second and third largest tenants,
respectively). The combined
company will comprise 21% of revenues and result in the two
largest tenants (HCR
and Brookdale/Emeritus) comprising approximately 50% of
revenues. The risks
associated with a concentrated tenant mix are two-fold: 1) the
effects of a
potential default are greater and 2) tenants may have
significant leverage when
negotiating lease renewals given the pooling of assets into
master leases. Fitch
notes the merger has no immediate impact on HCP's credit ratings
exposure to the underlying property cash flows is unchanged but
longer-term increase in risk.
Lastly, HCP's portfolio remains geographically concentrated,
despite the company
maintaining a diversified investment platform. As of Dec. 31,
approximately 31% of HCP's consolidated net operating income
from wholly owned
assets was generated from properties located in California and
this is down from 47% as of Dec. 31, 2010).
The Stable Outlook is driven by Fitch's expectations that HCP
will maintain its
long-standing conservative business and financing strategies and
remain appropriate for the rating over the next 12-to-24 months.
The following factors may result in positive momentum on the
--A sustained and material improvement in coverage for skilled
nursing/post-acute operators in whole and in part;
--Reduced tenant concentration;
--Fitch's expectation of fixed-charge coverage sustaining above
3.0x for several
consecutive quarters (coverage was 3.5x for the TTM ended Dec.
--Fitch's expectation of leverage sustaining below 4.5x
(leverage was 5.2x at
Dec. 31, 2013).
The following factors may have a negative impact on the ratings
--A sustained and material weakening in coverage for skilled
operators in whole and in part;
--Fitch's expectation of leverage sustaining above 6.0x;
--Fitch's expectation of fixed-charge coverage sustaining below
--A liquidity shortfall.
Fitch Ratings, Inc., 33 Whitehall Street, New York, NY 10004
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278,
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors'
(Feb. 26, 2014);
--'Recovery Ratings and Notching Criteria for Equity REITs'
(Nov. 19, 2013);
--'Corporate Rating Methodology: Including Short-Term Ratings
Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology: Including Short-Term Ratings and
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