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Fitch Rates Health Care REIT's GBP550MM 4.8% Sr. Unsecured Notes due 2028 'BBB'; Outlook Stable
November 11, 2013 / 10:06 PM / in 4 years

Fitch Rates Health Care REIT's GBP550MM 4.8% Sr. Unsecured Notes due 2028 'BBB'; Outlook Stable

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(The following statement was released by the rating agency) NEW YORK, November 11 (Fitch) Fitch Ratings has assigned the following debt obligation rating to Health Care REIT, Inc. (NYSE: HCN): --GBP550 million 4.8% senior unsecured notes 'BBB'. The notes mature in November 2028 and were priced at 98.599% of their face amount to yield 4.875% or 178 basis points over the benchmark government security. The company will use net proceeds from the notes offering to repay borrowings under its 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'; --$743 million senior unsecured term loans 'BBB'; --$5.8 billion senior unsecured notes 'BBB'; --$275 million senior unsecured convertible notes 'BBB'; --$1 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 10.7% 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% on a quarterly basis since 4Q'10. Growth was 3.7% in 3Q'13, led by the seniors housing operating portfolio at 9.4%, which represents 33.1% of NOI as of 3Q'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 Sept. 30, 2013 was 2.8x, which is appropriate for the rating, compared with 2.6x in 2012 and 2.3x in 2011. Fitch projects that coverage will improve marginally 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. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures and straight-line rent adjustments divided by total interest incurred and preferred stock dividends. Net debt-to-TTM recurring operating EBITDA was 6.9x as of Sept. 30, 2013. However, leverage based on annualized 3Q'13 EBITDA (primarily incorporating the final phase of HCN's Sunrise investment) was 6.2x, which is appropriate for the 'BBB' rating. In a more adverse case than currently anticipated by Fitch, leverage could approach 7.0x, which is more appropriate for a 'BBB-' rating for a healthcare REIT. Strong Access to Capital and Adequate Liquidity HCN has raised approximately $3.6 billion year-to-date including unsecured bonds, unsecured term loans and follow-on common equity. The company also upsized its credit facility while increasing the term and lowering the LIBOR spread to 117.5 basis points (bps) from 135 bps. 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 1.3x for the period Oct. 1, 2013 to Dec. 31, 2015. Liquidity coverage would improve to 2.0x if 80% of secured debt is refinanced. HCN also benefits from a staggered debt maturity schedule. The company has only 14.4% of total debt maturing through 2015 and no more than 13% of total debt maturing in any given year through 2017. HCN also has good contingent liquidity. Unencumbered assets (unencumbered annualized 3Q'13 NOI divided by a stressed 9% cap rate) to pro forma unsecured debt is 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 33.1% of total annualized 3Q'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. As a result, Fitch does not expect that rules by the Centers for Medicare and Medicaid Services (CMS) for fiscal year 2014 will have a material negative impact on the company's portfolio. Prospective payment system (PPS) payment growth rates for Medicare in skilled nursing facilities are 1.3% for FY2014 following 1.8% in FY2013 and for long-term acute care hospitals are 1.3% for FY2014 following 1.7% in FY2013. In addition, sequestration that was effective April 1, 2013 lowered Medicare reimbursements by 2% per the Budget Control Act of 2011, but this should only modestly impact EBITDARM coverage in the company's skilled nursing portfolio in the near term. Moderate Tenant Concentration As of Sept. 30, 2013, Sunrise Senior Living was the largest tenant, representing 18.2% of invested capital, with the three largest tenants representing 35.6%, 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 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 over the near to medium-term. 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 Outlook: --Fitch's expectation of fixed-charge coverage sustaining above 3.0x (TTM coverage at 3Q'13 was 2.8x); --Fitch's expectation of leverage sustaining below 5.5x (3Q'13 annualized leverage was 6.2x); --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 Sept. 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 1.3x as of Sept. 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: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at ''. 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: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Criteria for Rating U.S. Equity REITs and REOCs here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis 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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