Dec 3 - Fitch Ratings has assigned a 'BBB' rating to the
$1.2 billion of senior unsecured notes issued by Health Care REIT, Inc. (NYSE:
HCN). The notes were issued in the following tranches:
--$450 million of 2.25% notes due March 15, 2018 priced to yield 2.35%;
--$500 million of 3.75% notes due March 15, 2023 priced to yield 3.792%;
--$250 million of 5.125% notes due March 15, 2043 priced to yield 5.184%.
The issuance attests to HCN's strong access to capital, demonstrates the
company's commitment to maintaining a large unencumbered asset pool, and helps
maintain a well staggered debt maturity schedule. Fitch currently rates HCN as
--Issuer Default Rating (IDR) 'BBB';
--$2 billion senior unsecured credit facility 'BBB';
--$250 million Canadian dollar senior unsecured term loan 'BBB';
--$5.4 billion senior unsecured notes 'BBB';
--$494 million senior unsecured convertible notes 'BBB';
--$1 billion preferred stock 'BB+'.
Proceeds from the bond issuances will be used to repay secured debt to be
assumed in connection with the previously announced acquisition of Sunrise
Senior living, Inc. (Sunrise). If the Sunrise acquisition is not completed, or
there are excess proceeds from the notes issuance, then the remaining proceeds
will be used for general corporate purposes, including investing in health care
and seniors housing properties.
As previously noted in a press release dated Aug. 24, 2012, Fitch views the
Sunrise acquisition as having a neutral impact to the credit profile of HCN, as
the transaction is consistent with HCN's strategy of acquiring high-quality
health care assets with a mix of equity and debt capital.
The acquisition is balanced by positives and negatives. On the positive side,
the acquisition will increase the overall quality of the portfolio, increase the
exposure to private-pay assets to 82% from 74%, by July 2013 will give the
company access to 115 of Sunrise's 125 communities with a total value of
approximately $4.3 billion. Balancing these positives is the increase in cash
flow volatility resulting from the increase in exposure to RIDEA assets to above
30% of the portfolio, from 22% currently. In addition, the pricing of the
Sunrise transaction implies a 6.5% capitalization rate on projected 2013 NOI
(excluding any recurring capital expenditures for which HCN will have funding
responsibility), limiting potential near term returns in excess of financing
HCN's leverage as measured by net debt to trailing 12 month recurring EBITDA
was approximately 5.0 times (x) at Sept. 30, 2012. Fitch projects that
subsequent to the closing of the Sunrise acquisition, leverage will stabilize in
the high 5.0x range.
Fixed-charge coverage is appropriate for the 'BBB' rating. Trailing 12 month
fixed-charge coverage as of Sept. 30, 2012 was 2.5x, up slightly from 2.4x in
2011 but down from 2.8x in 2010. Fitch projects that coverage will remain in the
mid-2.0x range subsequent to the Sunrise acquisition. Fitch defines fixed-charge
coverage as recurring operating EBITDA including Fitch's estimate of recurring
cash distributions from unconsolidated entities less recurring capital
expenditures and straight-line rent adjustments divided by total interest
incurred and preferred dividends.
The company's liquidity is solid pro forma for the Sunrise acquisition. Sources
of liquidity (unrestricted cash, unsecured revolving credit facility
availability and projected retained cash flows from operating activities after
dividends) divided by uses of liquidity (debt maturities, projected recurring
capital expenditures and projected development expenditures) was 1.6x for the
period Oct. 1, 2012 to Dec. 31, 2014.
HCN also has adequate contingent liquidity due to the presence of a large
unencumbered property pool. Fitch estimates that unencumbered assets
(unencumbered annualized 3Q'12 net operating income divided by a stressed
9% cap rate) divided by unsecured debt is approximately 2.2x at Sept. 30, 2012,
which is appropriate for the 'BBB' rating.
The two-notch differential between HCN's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'.
Based on Fitch research titled 'Treatment and Notching of Hybrids in
Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's web site
at 'www.fitchratings.com', 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.
The following factors may result in positive momentum in the ratings and/or
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x (fixed
charge coverage was 2.5x for the TTM as of Sept 30, 2012)
--Fitch's expectation of leverage sustaining below 5.0x (leverage was 5.0x as of
Sept. 30, 2012);
--Unencumbered assets-to-unsecured debt sustaining above 3.0x (unencumbered
annualized 3Q'12 NOI divided by a stressed 9% cap rate to unsecured debt was
2.2x as of Sept. 30, 2012).
The following factors may result in negative momentum in the ratings and/or
--Fixed-charge coverage sustaining below 2.5x;
--Leverage sustaining above 6.0x;
--Deteriorating tenant/operator cash flow coverage of rent;
--Unencumbered assets-to-unsecured debt sustaining below 2.0x;
--A base case liquidity coverage ratio sustaining below 1.0x.