Fitch Assigns Positive Outlook to HCP; Affirms IDR at 'BBB'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for HCP, Inc. (HCP) as follows:

-- Issuer Default Rating (IDR) at 'BBB';

-- Unsecured bank credit facilities at 'BBB';

-- Senior unsecured notes at 'BBB';

-- Preferred stock at 'BBB-'.

The Rating Outlook has been revised to Positive from Stable.

The rating affirmation is supported by a large, well-diversified portfolio of investments with strong property level cash flows, a strong liquidity position, a large pool of unencumbered assets, solid debt service coverage ratios, reasonable leverage, modest investment expiration schedule, and demonstrated access to a wide variety of capital sources. Credit weaknesses include meaningful exposure to a few large operators, some geographic concentration, and some uncertainty related to one of HCP's mezzanine debt investments.

Fitch notes that HCP completed a large de-levering plan during 2008 and has paid off the bulk of the bridge facility used to fund the acquisition of Slough Estates USA (SEUSA). Pro forma for the closing of the term loan used to repay a portion of the balance on the facility, HCP had $320 million outstanding on the bridge facility. The final extension on this bridge facility expires on July 31, 2009.

Over the past several years, the composition of HCP's portfolio has changed significantly. It now has investments across the health care spectrum, including senior housing, medical office, life science, hospitals, and skilled nursing. In conjunction with the portfolio repositioning, HCP has significantly reduced its exposure to government reimbursement risk. Approximately 85% of HCP's revenue and interest income in the consolidated portfolio was derived from private pay sources. This private pay revenue was generated from pools of assets in the senior housing (41%), medical office (22%) and life science (22%) spaces, which have varied supply and demand drivers.

HCP maintains a strong liquidity position. As of Sept. 30, 2008, the company had $117 million of cash on hand as well as full availability under its $1.5 billion unsecured credit facility. The company also has a large pool of unencumbered assets across its platforms, which can serve as a source of contingent liquidity. HCP has limited capital needs beyond a measured debt maturity schedule. Fannie Mae and Freddie Mac remain active in the senior housing space, while some portfolio lenders are lending on other property types on a highly selective basis.

Fitch notes that HCP's debt service coverage ratios improved meaningfully in the third quarter of 2008 (3Q'08), and expects these ratios to be more reflective of future financial performance. For the three months ended Sept. 30, 2008, HCP's fixed charge coverage ratio (defined as recurring earnings before interest, taxes, depreciation and amortization less capital expenditures divided by interest expense, capitalized interest and preferred dividends) measured 2.6 times (x). For the twelve months ended Sept. 30, 2008, HCP's fixed charge coverage ratio measured 2.0x.

Credit concerns include exposure to two large health care operators, Sunrise Senior Living and HCA Inc., that each have sizable corporate debt obligations, as well as some geographic concentration inherent in the portfolio.

Pro forma for the 11 assets transferred from Sunrise Senior Living to Senior Living by Emeritus during 4Q'08, Sunrise represented approximately 13% of HCP revenue at Sept. 30, 2008, while HCA represented 6% of revenue. The cash flow coverage from the assets in HCP's portfolio that are operated by these entities remained solid as of Sept. 30, 2008.

While HCP maintains a diversified investment platform, its portfolio is concentrated geographically. As of Sept. 30, 2008, approximately 32% of HCP's consolidated revenue was generated from properties in California and approximately 15% of revenue was generated from properties in Texas. This increases the risk that statewide or regional events or economic downturns could have a disproportionate effect on the company's investments.

In resolving the Positive Outlook over the next 12 to 24 months, Fitch expects to review whether HCP has maintained credit metrics in the range that was reported in 3Q'08 as well as assess the ongoing progress of some of its leading operators to manage their debt obligations.

HCP, Inc. is an equity REIT based in Long Beach, CA. The company acquires, develops, leases, and manages healthcare real estate and provides mortgage and other financing to healthcare operators. As of Sept. 30, 2008, HCP's portfolio of investments included 704 properties in 43 states and Mexico as well as two sizable mezzanine positions. Of these properties 601 are consolidated, including 240 senior housing facilities, 190 medical office buildings, 21 hospitals, and 51 skilled nursing facilities.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.