Fitch Rates HCP's $800MM Senior Unsecured Notes Due 2024 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB+' rating to the $800 million 3.875% senior unsecured notes due 2024 issued by HCP, Inc. The notes were priced at 99.63% of par to yield 3.92%, a 150 basis points spread to the benchmark Treasury. Net proceeds from the offering are expected to be used to repay amounts outstanding under the revolving line of credit and for general corporate purposes, which may include the funding of a portion of the $334 million cash contribution for the Brookdale / Emeritus transaction.

Fitch currently rates HCP as follows:

--Long-term IDR 'BBB+';

--Unsecured bank credit facility 'BBB+';

--Unsecured term loan 'BBB+';

--Senior unsecured notes 'BBB+'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect HCP's credit strengths, namely: the steady and predictable cash flows from a large portfolio of healthcare properties, maintenance of leverage and fixed-charge coverage metrics appropriate for the rating category, manageable lease and debt maturity schedules, financial flexibility stemming from a large unencumbered pool, and appropriate liquidity.

Credit concerns include: operator concentration, which will increase further pro forma for the completed merger between Brookdale Senior Living and Emeritus Corporation and the pending lease amendment and partnership expansion. Of equal concern is the persistently low coverage metrics for HCP's largest tenant (HCR ManorCare), and the impact of government and regulatory actions on operators' profitability.

DURABLE CASHFLOWS

HCP's same-store property performance has been strong over the past seven years and is one of the largest factors behind the rating, with same property net operating income (NOI) increasing between 1.6% and 4.8% annually and 3.3% YTD. The strong fundamentals result from the lease structures (generally triple-net with contractual increases) as well as HCP's active management. Fitch estimates same-property NOI growth to remain within the historical 2%-4% range through 2015 despite the regulatory-based headwinds some operators are facing.

Unlike many other rated healthcare REITs, HCP has traditionally had an insignificant amount of RIDEA exposure, thereby increasing the durability and predictability of cash flows. However, Fitch estimates HCP's RIDEA exposure will increase to approximately 9% of NOI from 3.3% pro forma for the Brookdale transaction.

HCP's revenue maturity schedule (not adjusted for the Brookdale transaction) is well-staggered and long-dated as a result of the high percentage of long-term triple-net leases. Less than 10.5% of annual base rent and interest revenues expire in any one year. Limited lease expirations coupled with contractual rental bumps increase the predictability of future rental revenues, absent tenant bankruptcies and are credit strengths for HCP.

STRONG CREDIT METRICS

HCP's fixed-charge coverage was 3.6x for the trailing 12 months (TTM) ended June 30, 2014 as compared to 3.1x and 2.7x in 2012 and 2011. Fitch projects fixed-charge coverage will improve further, surpassing 4.0x over the next 12-to-36 months driven by SSNOI growth, earnings contributions from recent acquisitions and reduced fixed charges. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures less straight-line rent adjustments and direct financing lease accretion, divided by total interest incurred.

HCP's leverage was 5.2x as of June 30, 2014 which is appropriate for a 'BBB+' IDR. Leverage was 5.5x and 5.4x as of Dec. 31, 2012 and 2011, respectively, pro forma for material acquisitions. Fitch projects HCP's leverage will decline towards 4.5x by 2016. That said, Fitch notes that HCP's propensity for large transactions may cause fluctuations in reported metrics. Fitch defines leverage as net debt divided by TTM recurring operating EBITDA.

STRONG LIQUIDITY & ACCESS TO CAPITAL

HCP has repaid essentially all of its 2014 maturities and has only 7.9% of total debt maturing through 2015. The company's debt maturity schedule is appropriately staggered. The largest year for debt maturities is 2016 when 15.6% matures; however, HCP maintains an option to extend the maturity of the term loan by one year. This reduces potential maturities in 2016 to 13% of total debt outstanding.

Sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions and pro forma adjustments for the bond issuance) divided by uses of liquidity (pro rata debt maturities, development expenditures, net cash payments for the Brookdale transaction and estimated recurring capital expenditures) for the period July 1, 2014 to Dec. 31, 2016 results in a liquidity coverage ratio of 1.1x. HCP has also demonstrated strong access to a wide variety of capital sources over the past two years, mitigating refinance risk.

HCP maintains solid financial flexibility stemming mainly from its large unencumbered property pool, which serves as a source of contingent liquidity. Using a stressed capitalization rate range of 8%-10%, HCP's unencumbered asset coverage of net unsecured debt was approximately 2.0x-2.4x.

CONCENTRATED PORTFOLIO & PERSISTENTLY LOW COVERAGE AT HCR

Credit concerns include the potential impact of government fiscal imbalance and regulatory risk on operators' profitability and operator and geographic concentration. Rent from HCR ManorCare represents 29% of HCP's revenues. This tenant continues to have coverage ratios below 1.0x facility EBITDAR (eight consecutive quarters of TTM coverage at or below 1.0x) and 1.1x guarantor fixed-charge coverage for the TTM ended March 31, 2014, which is a credit concern. Sustained and material improvements in HCR ManorCare's profitability may support positive ratings momentum if reflective of a generally improving and lower risk operating environment. Partially offsetting this concentration is the master lease structure and covenants to provide protection to HCP at the guarantor level.

Furthermore, HCP's tenant mix has become more concentrated since the completion of the merger between Emeritus Corporation and Brookdale Senior Living (previously HCP's second and third largest tenants, respectively). The combined company now makes up 21% of revenues and results in the two largest tenants (HCR and Brookdale/Emeritus) comprising approximately 50% of revenues. The risks associated with a concentrated tenant mix are two-fold: 1) the effects of a potential lease amendment or default are greater and 2) tenants may have significant leverage when negotiating lease renewals given the pooling of assets into master leases. Fitch notes the merger had no immediate impact on HCP's credit ratings given its exposure to the underlying property cash flows is unchanged but notes the longer-term increase in risk.

STABLE OUTLOOK

The Stable Outlook is driven by Fitch's expectations that HCP will maintain its long-standing conservative business and financing strategies and metrics will remain appropriate for the rating over the next 12-to-24 months.

RATING SENSITIVITIES

The following factors may result in positive momentum on the rating and/or Outlook:

--A sustained and material improvement in coverage for skilled nursing/post-acute operators in whole and in part;

--Reduced tenant concentration;

--Fitch's expectation of fixed-charge coverage sustaining above 3.0x for several consecutive quarters (coverage was 3.6x for the TTM ended June 30, 2014);

--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.2x at June 30, 2014).

The following factors may have a negative impact on the ratings or Outlook:

--A sustained and material weakening in coverage for skilled nursing/post-acute operators in whole and in part;

--Fitch's expectation of leverage sustaining above 6.0x;

--Fitch's expectation of fixed-charge coverage sustaining below 2.5x;

--A liquidity shortfall.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' May 28, 2014;

--'HCP's Deal with Brookdale Swaps Reinvestment for Operating Risk; Ratings Unaffected' May 1, 2014;

--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' Feb. 26, 2014;

--'Recovery Ratings and Notching Criteria for Equity REITs' Nov. 19, 2013.

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Rating U.S. Equity REITs and REOCs (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=848295

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Contacts

Fitch Ratings
Primary Analyst
Britton Costa
Director
+1-212-908-0524
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steven Marks
Managing Director
+1-212-908-9161
or
Committee Chairperson
Daniel Chambers
Managing Director
+1-212-908-0782
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Britton Costa
Director
+1-212-908-0524
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steven Marks
Managing Director
+1-212-908-9161
or
Committee Chairperson
Daniel Chambers
Managing Director
+1-212-908-0782
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com