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Fitch Affirms HCP, Inc.'s IDR at 'BBB+'; Outlook Stable
April 9, 2013 / 3:57 PM / 5 years ago

Fitch Affirms HCP, Inc.'s IDR at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 09 (Fitch) Fitch Ratings has affirmed HCP, Inc.'s (NYSE: HCP) credit ratings as follows: --Issuer Default Rating (IDR) at 'BBB+'; --Unsecured bank credit facility at 'BBB+'; --Unsecured term loan at 'BBB+'; --Senior unsecured notes at 'BBB+'. The Rating Outlook is Stable. KEY RATINGS DRIVERS The ratings reflect HCP's credit strengths, namely steady and predictable cash flows from a large portfolio of high-quality properties across the healthcare real estate spectrum, maintenance of leverage and fixed-charge coverage metrics appropriate for the rating category, manageable lease expiration and debt maturity schedules, financial flexibility stemming from a large unencumbered pool to support unsecured borrowings, and a solid liquidity position. Credit concerns include operator and geographic concentration, the impact of government fiscal imbalance and regulatory risk on operators' profitability, and weak coverage for its largest tenant. Durable Cashflows HCP's same-store property performance has been strong over the past six 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 from 2007-2012. Same-property NOI increased 4.2% for 2012 as compared to 4.0% and 4.8% in 2011 and 2010, respectively. 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 other rated healthcare REITs, HCP has an insignificant amount of RIDEA exposure, thereby increasing the durability of cashflows. HCP's lease maturity schedule is well-staggered and long-dated as a result of the high percentage of long-term triple net leases. No more than 7% of annual base rent revenues (including debt investment maturities) expires per year through 2017 and total only 23% in aggregate. 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 3.0x for the year ended Dec. 31, 2012. Fixed-charge coverage was 2.6x for both 2011 and 2010. Fitch projects fixed-charge coverage will improve further towards 3.8x over the next 12-36 months driven by same-store NOI 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 5.4x for the quarter ended Dec. 31, 2012 (Fitch references 4Q'12 leverage as opposed to LTM due to the timing of the Blackstone/Emeritus portfolio acquisition) and is within a range that is appropriate for a 'BBB+' IDR. Leverage was 5.3x and 5.0x as of Dec. 31, 2011 and 2010, respectively, pro forma for material acquisitions. Fitch projects HCP's leverage will decline below 5.0x by 2015 but notes the company's propensity for large transactions may cause fluctuations in reported metrics. Fitch defines leverage as net debt divided by recurring operating EBITDA. Well-Laddered Debt Maturities & Strong Access to Capital The company's debt maturity schedule is well-laddered, with no more than 14% of debt maturing on an annual basis through 2016. As such, HCP maintains a solid liquidity position. 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) divided by uses of liquidity (pro rata debt maturities and estimated recurring capital expenditures) for the period Jan. 1, 2013 to Dec. 31, 2014 results in a liquidity coverage ratio of 1.2x. 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 8.0%-10.0%, HCP's unencumbered asset coverage of unsecured debt was approximately 2.0x-2.5x, which is appropriate for the 'BBB+' IDR. Further, HCP's distributions do not restrict financial flexibility. Fitch calculates that the company's common stock dividends represented only 90% of 2012 adjusted funds from operations to account for capital expenditures, straight-line rents and non-cash income (company-reported funds available for distribution). Concentrated Portfolio Credit concerns include the potential impact of government fiscal imbalance and regulatory risk on operators' profitability and operator and geographic concentration. HCR ManorCare represents 29% of HCP's revenues and had weak (albeit impacted by one-time reserve accruals) coverage ratios of below 1.0x facility EBITDAR and 1.2x guarantor fixed-charge coverage for the trailing 12 months ended Sept. 30, 2012. Adjusted for reserve accruals, guarantor fixed-charge coverage was higher at 1.3x. 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. Further, HCP's portfolio has been and remains geographically concentrated, despite the company maintaining a diversified investment platform. As of Dec. 31, 2012, approximately 31% of HCP's consolidated net operating income from wholly owned assets was generated from properties located in California and Texas (though this is down from 47% as of Dec. 31, 2010). RATINGS 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 3.0x for the year ended Dec. 31, 2012); --Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.4x for 4Q'12). 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. Contact: Primary Analyst Britton Costa Associate Director +1-212-908-0524 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Sean Pattap Senior Director +1-212-908-0642 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --Criteria for Rating U.S. Equity REITs and REOCs, February 26, 2013; --Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, Dec. 13, 2012; --Recovery Rating and Notching Criteria for Equity REITs, Nov. 12, 2012; --Corporate Rating Methodology, Aug. 8, 2012. Applicable Criteria and Related Research Corporate Rating Methodology here Recovery Ratings and Notching Criteria for Equity REITs here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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