NEW YORK--(BUSINESS WIRE)--The announcement by Health Care REIT, Inc. (NYSE: HCN, Fitch IDR of 'BBB', Outlook Stable) that it will acquire HealthLease Properties Real Estate Investment Trust for $950 million is credit neutral, in Fitch's view. HCN's strong liquidity position and track record as a capital provider in the healthcare real estate sector should continue to drive accretive acquisition opportunities, which Fitch views positively. Additionally, the 60% equity and 40% debt financing mix will preserve credit metrics, with pro forma leverage of 5.9x, which is appropriate for the 'BBB' rating, and fixed-charge coverage of approximately 3.0x, relatively strong for the rating.
These credit positives are balanced by broader concerns about event risk in the healthcare REIT sector. This stems from vast issuer growth over the past several years - 'The Big 3' have average enterprise values of nearly $30 billion - thus requiring large transactions to 'move the earnings needle' via external growth. This dynamic may also drive REITs to employ higher leverage levels or pursue higher yielding assets (i.e. lower quality) to make transactions accretive.
On Aug. 13, 2014, HCN announced that it will acquire HealthLease Properties Real Estate Investment Trust (TSX: HLP.UN) for $950 million at an initial 7% cash yield. HCN also entered into a partnership with Mainstreet Property Group, HealthLease's external manager, by which HCN will acquire 17 communities managed by various operators under long-term triple-net lease agreements. Health Care REIT will acquire the pipeline for approximately $369 million, representing a 7.5% initial cash yield, and is expected to close in tranches upon completion of construction beginning in 4Q'14 through 1Q'16.
HCN will also provide mezzanine financing to Mainstreet and receive purchase rights at HCN's option for an additional 45 development projects managed under long-term triple-net lease agreements. This pipeline represents $1 billion and a 7.7% initial cash yield. The future pipeline is anticipated to close in tranches upon completion of construction beginning in 2016 through 1Q'17. In total, the transaction represents a potential $2.3 billion investment at 7.4% blended initial cash yield.
The initial HealthLease portfolio consists of 53 communities with 5,331 beds comprised of 46% seniors housing, 30% post-acute care, and 24% long-term care. The average remaining lease term is approximately 11 years and features 2% annual rent escalators, which together with favorable pricing on the acquisition pipeline, should insulate HCN's credit metrics from any uptick in interest rates. The properties are well-diversified across the United States (roughly two-thirds of the portfolio) and Canada (one-third) and 30 of the 53 communities were built since 2010. Operators include Trilogy Health Services, Life Care Services and Saber Healthcare, and two Canadian operators, Continuum Healthcare and AgeCare. The transaction is expected to close in 4Q'14.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Related Research
--2014 Midyear Outlook: U.S. Equity REITs (June 2014);
--Corporate Rating Methodology (May 2014);
--1Q14 U.S. Equity REIT Liquidity Update: Marching to the Beat of the Same Drum (May 2014);
--REIT Buybacks More Palatable: How Long Do Memories Last? (April 2014);
--Cap Rate Trends in a Post-QE World - What U.S. Equity REITs and REOCs are Saying (March 2014);
--Rating U.S. Equity REITs and REOCs - Sector Credit Factors (February 2014).
Applicable Criteria and Related Research:
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Cap Rate Trends in a Post-QE World (What U.S. Equity REITs and REOCs Are Saying)
1Q14 U.S. Equity REIT Liquidity Update: Marching to the Beat of the Same Drum
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Are REIT Share Buybacks Looming?