Aug 23 - Standard & Poor's Ratings Services today stated its 'BBB-' rating
and positive outlook on Health Care REIT are not affected by the
company's recently announced agreement to acquire Sunrise Senior Living Inc.
(Sunrise) for $1.9 billion, including the assumption of debt. In our view, the
acquisition will enhance the quality of Health Care REIT's portfolio through the
addition of well-branded, high-quality, private-pay assisted living facilities
that are primarily located in high-barrier and high-cost housing markets. We
believe Health Care REIT intends to ultimately finance the purchase in a largely
leverage-neutral manner and that the company's core portfolio remains on track
to deliver improved debt and dividend coverage measures over the next year.
Health Care REIT agreed to pay $14.50 per Sunrise share, representing a 62%
premium over its prior closing price, plus the assumption of debt, resulting
in a $1.9 billion acquisition. Health Care REIT is acquiring 20 wholly owned
properties and 105 off-balance-sheet joint-venture assets (28% average
ownership). The initial yield (based on 2013 net operating income) is rich at
6%, but could improve to the mid-6% area, subject to additional leasing, the
renegotiation of management contracts and the company's ability to eventually
acquire the remaining joint-venture interests in some of Sunrise's partially
owned assets. The acquisition will increase Health Care REIT's exposure to
senior housing operating assets to 30% of its $18 billion pro forma asset
base, the high end of the company's target range, which could result in higher
cash flow volatility. It is our understanding that Health Care REIT does not
intend to retain ownership of Sunrise's management business.
We will monitor the company's plans to integrate this and other acquisitions.
We will also monitor its developing capital plan related to the financing of
the $950 million cash requirement to fund this acquisition, as well as
additional new investments, including the company's desire to eventually
acquire 100% positions in some of the Sunrise joint ventures. We acknowledge
that Health Care REIT is reliant on the capital markets to fund its voracious
appetite for growth. And given the interval between now and the transaction's
expected closing in the first half of 2013, there is some risk related to
executing public capital market transactions. We would reassess our positive
outlook if the company appears unable to meet our 2012 base case, which
assumes improvement in operating performance to support fixed-charge coverage
between 2.4x-2.5x, low 7x debt plus preferred/EBITDA, and total coverage
(including common dividends) above 1x. We could also revise the outlook to
stable if the company faces challenges digesting its acquisitions or terms of
the Sunrise transaction change such that Health Care REIT pays a higher price
or is unable to sell the management business.