Aug 24 - The announced acquisition of Sunrise Senior Living, Inc.
(NYSE: SRZ) by Health Care REIT, Inc. (NYSE: HCN) has no impact on the
current 'BBB' Issuer Default Rating (IDR) and Stable Rating Outlook for HCN.
Fitch currently rates HCN as follows:
--$2 billion senior unsecured credit facility 'BBB';
--$250 million Canadian dollar senior unsecured term loan 'BBB';
--$4.8 billion senior unsecured notes 'BBB';
--$494 million senior unsecured convertible notes 'BBB';
--$1 billion preferred stock 'BB+'.
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 77% from 74%, and give the company access to a
$2 billion embedded investment pipeline.
Balancing these positives is the increase in cash flow volatility resulting from
the increase in exposure to RIDEA assets to 30% of the portfolio, from 22%
currently, and the inherent execution risk in raising equity post-transaction
announcement. The acquisition needs to be approved by Sunrise's shareholders and
if Sunrise receives a superior bid, HCN has the right to match that offer or
receive a $40 million break-up fee. Fitch views the transaction as likely to
close given Fitch's view that the price of $14.50 per share, a 62% premium to
Sunrise's previous day closing price is a full price. If the transaction does
not close on or prior to Feb. 21, 2013, HCN will have to pay an additional $50
million per quarter in consideration until the closing date of the transaction.
Lastly, the pricing implies a 6% 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
Fitch anticipates that HCN will access the equity market in late 2012 to fund a
portion of the transaction, which carries the risk that HCN's stock price may
decline in the interim. Partially mitigating this funding risk is HCN's
demonstrated access to capital, having raised $3 billion of common equity,
preferred equity and unsecured debt year-to-date in 2012, in addition to $4.3
billion of total capital raised in 2011. Notably, the company remains committed
to funding acquisitions on a leverage neutral basis, as demonstrated by its
recent issuance of 13.8 million common shares for gross proceeds of
approximately $811 million to fund 3Q12 acquisitions.
Under the terms of the transaction, HCN agreed to acquire all of the common
stock outstanding of Sunrise Senior Living, Inc. for $14.50 per share with cash,
which reflects a total real estate value (net of the management company) of
approximately $1.9 billion. HCN will assume approximately $1 billion of secured
debt at an average interest rate of 4.9% and will pay approximately $950 million
in cash as consideration. In conjunction with a closing date expected in 1Q'13,
the Sunrise management company will be spun-off as a separate entity, but will
continue to manage the assets. It is expected that the management company will
continue to manage the assets in other REIT portfolios under its existing
Included in the acquisition are 17 wholly-owned seniors housing communities in
the U.S. and 3 in Canada, as well as Sunrise's interest in joint ventures that
own 105 seniors housing communities in the U.S. and U.K. The Sunrise assets are
high quality with an average revenue per occupied room (RevPOR) of $7,510 and
average age of eight years compared with HCN's existing portfolio RevPOR of
$4,764 and average age of 13 years. As a result of the transaction, Sunrise will
become HCN's second largest operator at approximately 11% of the portfolio based
on investment balance. Fitch views the assets favorably given the locations in
high barrier to entry markets and the high quality of the assets.
HCN's leverage as measured by net debt to annualized 2Q'12 recurring EBITDA was
approximately 5.9 times (x) at June 30, 2012, after adjusting for the timing of
2Q'12 acquisitions and pro forma the $811 million equity raise subsequent to
quarter-end that is expected to be used to fund acquisitions. Pro forma for the
Sunrise transaction assuming HCN raises approximately $1.1 billion of equity to
fund the transaction, leverage is approximately 6.0x.
Fixed-charge coverage is appropriate for the 'BBB' rating. Trailing 12 month
fixed-charge coverage as of June 30, 2012 was 2.4x, unchanged from 2.4x in 2011
but down from 2.8x in 2010 and 3.1x in 2009. Pro forma for the Sunrise
acquisition assuming HCN raises approximately $1.1 billion of equity to fund the
transaction, coverage is 2.6x, which is appropriate for the rating. 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 strong 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 1.4x for the
period July 1, 2012 to Dec. 31, 2014. Liquidity coverage would be 0.7x in a
stressed scenario whereby HCN uses the credit facility to fund the equity
portion of the acquisition, which would be weak for the 'BBB' IDR.
HCN also has adequate contingent liquidity due to the presence of a large
unencumbered property pool. Fitch estimates that unencumbered assets
(unencumbered annualized 2Q'12 net operating income divided by a stressed
9% cap rate) to unsecured debt is approximately 2.0x pro forma for the Sunrise
acquisition, 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
--Fixed-charge coverage sustaining above 3.0x (fixed charge coverage is 2.6x as
of June 30, 2012 pro forma for the Sunrise acquisition)
--Leverage sustaining below 5.0x (leverage is 6.0x as of June 30, 2012 pro forma
for the Sunrise acquisition);
--Unencumbered assets-to-unsecured debt sustaining above 3.0x (unencumbered
annualized 2Q'12 NOI divided by a stressed 9% cap rate to unsecured debt was
2.0x as of June 30, 2012 pro forma the Sunrise acquisition).
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Rating and Notching Criteria for REITs' (May. 3, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit
Analysis' (Dec. 15, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit