NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the $100 million of 5.38% senior unsecured private placement notes due 2027 issued by Care Capital Properties, L.P. ('BBB-') the operating partnership of Care Capital Properties, Inc. (NYSE: CCP, collectively "Care Capital"). Fitch also assigned a 'BBB-' rating to the $200 million term loan due 2023. A complete list of ratings follows the end of this release.
KEY RATING DRIVERS
The ratings reflect the strength of Care Capital's headline metrics and industry-tenured management team offset by the focus on skilled nursing and post-acute facilities and a still immature capitalization despite the issuance.
STRONG HEADLINE METRICS
Fitch expects CCP will operate within its targeted capitalization through 2017. Fitch's forecasts assume leverage will sustain in the 4.5x-5x range before adjusting for the timing effects of acquisitions. Leverage was 4.9x for the quarter ended March 31, 2016. Fixed-charge coverage (FCC) has come down from being uniquely high due to CCP's debt initially being 100% floating rate (as a result of $400 million in swap agreements and the $200 million fixed-rate term loan and $100 million private placement). Fitch expects FCC will moderate towards 5x over the rating horizon and closer to the industry average thereafter. FCC was 8.4x for the quarter ended March 31, 2016. Fitch defines leverage as debt less readily available cash to recurring operating EBITDA. Fitch defines FCC as recurring operating EBITDA less straight-line rent and recurring maintenance capital expenditures to total interest incurred.
FOCUSED INVESTMENT STRATEGY WITH EXPERIENCED MANAGEMENT TEAM
CCP was created through a spin-off of the majority of Ventas, Inc.'s ('BBB+'/ Stable) skilled-nursing properties leased to private operators in August 2015. Ventas retained properties leased to larger public tenants. CCP's portfolio was comprised of 351 properties leased to 43 operators across 38 states as of March 31, 2016. CCP has a strong management team with extensive health care real estate and capital markets experience. Many of the company's key executives held high-level positions at Ventas prior to the spin-off.
COMMONALITY OF TENANT REVENUE SOURCES MITIGATES OPERATOR DIVERSIFICATION BENEFITS
Fitch views skilled nursing real estate (and by extension pure-play REITs) as having more risk than other real estate subsectors due to the potential for legislative or regulatory changes (including the annual changes to reimbursement amounts by the Center for Medicare and Medicaid Services). These unilateral actions can impact the profitability of most tenants thus partially mitigating the benefits of tenant and geographic diversification. Fitch expects skilled nursing operators' margins will be pressured for the foreseeable future due to increasing coverage under Medicare Advantage (i.e. shorter stays and lower rates); Department of Justice investigations into billing practices; and various pilot programs related to the Affordable Care Act. Moreover, the cost of capital for healthcare REITs with meaningful exposure to skilled nursing (e.g. CCP) has become increasingly tethered to operator market sentiment.
Another limiting factor on the rating (but inherent in the strategy) is CCP's exposure to private, unrated operators which limits the extent to which Fitch can assess their creditworthiness. Rent coverage, as measured by earnings before interest, tax, depreciation and amortization, rent and management fees of 1.8x at March 31, 2016 is comparable to peers and implies some cushion to sustain annual rental increases and/or unforeseen changes to reimbursement rates.
CAPITALIZATION REMAINS IMMATURE; IMPROVEMENT NECESSARY TO MAINTAIN RATING
CCP's capitalization remains dependent on shorter-term, floating-rate bank capital despite the private placement and swapping of some term loan debt to fixed-rate. While these efforts are steps in the right direction, CCP has not made as much progress as Fitch expected when assigning ratings in third quarter 2015 (3Q15). Fitch's ratings assume that CCP will -- as a regular issuer of non-bank debt and equity securities, which allows it to stagger its debt maturities -- fund net investment activity and maintain its targeted capitalization.
Should CCP be unable or unwilling to issue debt and equity to achieve its target capitalization and therefore find itself with weaker relative access to capital there would likely be negative momentum in the ratings and/or Outlook, all else being equal.
APPROPRIATE LIQUIDITY; CONCENTRATED DEBT MATURITIES
CCP's balance sheet has significant bullet maturity risk with large portions of debt coming due in 2017 and 2020 (20% and 52%, respectively). Perversely, this results in appropriate liquidity through the rating horizon, as the company will have its $600 million unsecured revolving credit facility due 2019 (and extendable to 2020 at CCP's option) and retained cash flow from operations after dividends to fund investments without any offsetting debt maturities. Fitch estimates CCP will be able to retain $50 million-$75 million of cash flow per year given its targeted dividend payout ratio of less than 80% of funds from operations (FFO) and limited maintenance capital expenditures. Adjusted FFO payout was 73% for 12-month period ending March 31, 2016.
As CCP's portfolio is entirely unencumbered, it will benefit from significant financial flexibility. Fitch estimates unencumbered assets covered unsecured debt by 1.9x-2.3x assuming a stressed 10%-12% cap rate. However, this flexibility is tempered in part over the next two years by the Tax Matters Agreement. The agreement restricts certain transactions that could result in CCP's spin-off no longer being considered tax-free. As part of this agreement, CCP cannot sell more than 30% of its assets (based on market value). CCP could seek to sell more assets by obtaining a waiver from the IRS or if the IRS would consider sales as part of the ordinary course of business.
The Stable Outlook reflects Fitch's expectation that CCP will operate within its targeted metrics through the rating horizon and the issuer will have sufficient capacity to address any potential tenant credit issues.
Fitch's key assumptions within our rating case for the issuer include:
--General stability in the regulatory and legislative markets resulting in general stability in tenant operator reimbursement levels;
--CCP will complete unsecured debt issuance(s), thus demonstrating access to capital and begin to stagger debt maturities;
--CCP will operate consistent with its operating and financial strategies.
Although Fitch does not expect positive ratings momentum in the near- to medium-term, the following factors could result in positive momentum in the ratings and/or Outlook:
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 4x;
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x.
Should CCP be unable or unwilling to refinance and rebalance its capitalization via public or private placement debt issuances, Fitch could downgrade the IDR to 'BB+', since CCP would have relatively weaker access to capital and a higher-risk capitalization (i.e. bullet maturity and interest rate risk).
In addition, the following factors may also have a negative impact on CCP's ratings and/or Outlook:
--Further pressure on operators through reimbursement cuts;
--Fitch's expectation of leverage sustaining above 5.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 2.5x.
FULL LIST OF RATING ACTIONS
Fitch currently rates Care Capital as follows:
Care Capital Properties, Inc.
--Issuer Default Rating (IDR) 'BBB-'
Care Capital Properties, L.P.
--Senior unsecured revolving credit facility 'BBB-';
--Senior unsecured term loans 'BBB-';
--Senior unsecured notes 'BBB-'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation;
--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $1 million of cash for working capital purposes, which is otherwise unavailable to repay debt.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Equity REITs (pub. 03 Dec 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)