July 2, 2012 / 6:56 PM / 5 years ago

TEXT-Fitch rates Health Care REIT Inc

July 2 - Fitch Ratings assigns a credit rating of 'BBB' to the $250 million
Canadian Dollar (CAD) denominated term loan that matures July 27, 2015 issued by
Health Care REIT, Inc. (NYSE: HCN). 

The loan is coterminous with HCN's $2 billion unsecured credit facility and 
bears interest at 145 basis points above the Canadian Dollar banker's acceptance
rate. The loan also has an accordion feature to expand the loan to a total of 
$500 million CAD and serves as a natural currency hedge with respect to the 
company's recent Canadian acquisition with Chartwell Seniors Housing REIT (TSX: 
CSH.UN). Proceeds will be used to repay balances on the unsecured credit 
facility and for general corporate purposes.

Separately, on June 20, 2012 HCN announced that its largest tenant Genesis 
HealthCare (16.4% of investment balance as of March 31, 2012) entered an 
agreement to purchase Sun Healthcare Group (NASDAQ GS: SUNH) in a $300 million 
transaction. HCN noted that the combination of Genesis HealthCare and Sun 
Healthcare Group will create the largest provider of post-acute and skilled 
nursing services in the country with over 420 facilities located in 29 states. 

Genesis' corporate fixed-charge coverage is expected to remain unchanged in the 
near term, but may benefit longer-term from operational efficiencies. HCN 
currently has 18 facilities leased to Sun Healthcare that will be added to the 
master lease with Genesis, generating a nominal improvement in facility level 
payment coverage of the Genesis lease. Fitch views the acquisition as having a 
negligible impact to the credit profile of HCN in the near term but is a 
longer-term credit positive as operator consolidation leads to increased 
operator efficiencies and coverage levels.      

Fitch currently rates HCN as follows:

--Issuer Default Rating (IDR) 'BBB';
--$2 billion senior unsecured credit facility 'BBB';
--$4.8 billion senior unsecured notes 'BBB';
--$662 million senior unsecured convertible notes 'BBB';
--$1 billion preferred stock 'BB+'.

The Rating Outlook is Stable. 

The 'BBB' IDR takes into account HCN's broad healthcare real estate platform 
that contributes toward a fixed-charge coverage ratio that is consistent with 
the rating, as well as leverage that is appropriate for a 'BBB' rated healthcare
real estate investment trust (REIT). HCN also has good access to capital and a 
solid liquidity position, including contingent liquidity from unencumbered 
assets. 

Credit concerns include operational volatility associated with the company's 
RIDEA-related investments, regulatory risks affecting the healthcare REIT 
sector, and modest operator concentration related to Genesis HealthCare. 

The company's payor sources are 73% private pay (pro forma for the Chartwell 
acquisition), limiting government reimbursement risk. As a result, Fitch does 
not expect that the June 28, 2012 U.S. Supreme Court decision on the Patient 
Protection and Affordable Care Act of 2010 will materially impact HCN's business
in the near term. Cash flow (EBITDARM) coverage ratios of HCN's tenants were 
1.8x on average as of March 31, 2012 which insulates the company against 
potential tenant cash flow deterioration, despite the potential ramifications of
the Supreme Court decision for certain of HCN's tenants that rely on government 
reimbursements.

As noted in Fitch's 2012 midyear REIT outlook, primary industry concerns for the
remainder of 2012 relate to how skilled-nursing facility operators are dealing 
with the 11.1% cut in Medicare reimbursements and their ability to manage an 
additional 2% Medicare cut in 2013 mandated by the Budget Control Act of 2011. 
These regulatory risks have been more significant for healthcare REITs with 
tenants that are more reliant upon government reimbursement.

Fixed-charge coverage is appropriate for the 'BBB' rating. Trailing 12 month 
fixed-charge coverage as of March 31, 2012 was 2.3 times (x), up slightly from 
2.2x in 2011 but down from 2.6x in 2010 and 3.1x in 2009. Fitch defines 
fixed-charge coverage as recurring operating EBITDA including Fitch's estimate 
of recurring cash distributions from unconsolidated entities less recurring 
capital expenditures and straight-line rent adjustments divided by total 
interest incurred and preferred dividends. Fitch anticipates that coverage will 
increase to the mid-to-high 2.0x range through 2013, driven principally by solid
projected operating fundamentals. In a more adverse case than anticipated by 
Fitch, coverage could decline to 2.1x in 2013, which is more commensurate with a
'BBB-' rating for a healthcare REIT. 

Leverage is appropriate for the 'BBB' rating. Net debt as of March 31, 2012 to 
first quarter 2012 annualized recurring EBITDA was 5.6x, compared to 6.6x at 
Dec. 31, 2011. In a more adverse case than currently anticipated by Fitch, 
leverage could rise above 8.0x over the next 12 to 24 months, which would be 
consistent with a rating lower than 'BBB'. 

HCN exhibits strong access to capital, having raised $2.2 billion of common and 
preferred equity and unsecured debt in 2012, in addition to $4.3 billion of 
total debt and equity in 2011 to fund acquisition and development. 

The company's liquidity is strong pro forma for the recent capital transactions 
and acquisitions subsequent to quarter-end. Sources of liquidity (unrestricted 
cash, unsecured revolving credit facility availability and projected retained 
cash flows from operating activities after dividends) divided by uses of 
liquidity (debt maturities, projected recurring capital expenditures and 
projected development expenditures) was 2.4x for April 1, 2012 to Dec. 31, 2013.
Liquidity coverage would improve to 2.9x if 80% of secured debt is refinanced. 

The company also benefits from a well-laddered maturity schedule. Through 2013 
the company has only 13.8% of total debt maturing (including HCN's pro rata 
share of joint venture debt maturities), and no more than 15% of total debt 
maturing in any given year through 2018. 

HCN also has good contingent liquidity due to the presence of a large 
unencumbered property pool. Unencumbered assets (unencumbered annualized 1Q'12 
net operating income divided by a stressed 9% cap rate) to unsecured debt 
was 2.3x, which is appropriate for the 'BBB' rating.

The portfolio exhibits the potential for increased cash flow volatility from 
recent acquisitions in RIDEA operating partnerships, which represent 15.9% of 
total annualized 1Q'12 NOI, or 19.8% of investment balance at March 31, 2012 
(22% pro forma for the recent Canadian acquisition). Separately, the Centers for
Medicare and Medicaid Services (CMS) announced in July 2011 that it was reducing
Medicare skilled-nursing facility (SNF) Prospective Payment System (PPS) 
payments in fiscal 2012 by $3.87 billion or 11.1% relative to fiscal 2011. While
HCN's tenants exhibit adequate rent (EBITDARM) coverage of 1.35x for the seniors
housing triple net portfolio and 2.0x for the SNF portfolio, reductions in SNF 
PPS will likely result in additional moderate declines in cash flow coverage. 
This change in reimbursement is indicative of the overall regulatory risk that 
the healthcare REIT sector will continue to endure, especially given government 
budget issues. 

HCN's portfolio exhibits moderate tenant concentration resulting from the 2011 
acquisition of certain assets of Genesis HealthCare. As of March 31, 2012, 
Genesis was the largest tenant, representing 16.4% of invested capital. The 
exposure to Genesis will rise nominally subsequent to the recently announced 
acquisition by Genesis of Sun Healthcare Group. The next largest tenant is 
Merrill Gardens at 7.5% of invested capital. The large concentration exposes HCN
to increased individual tenant credit risk. 

The Stable Outlook centers on HCN's solid credit metrics, laddered debt maturity
schedule and strong liquidity position. The Outlook also takes into account 
Fitch's view that assets within the senior healthcare sector will continue to 
benefit from solid fundamentals, positive demographic trends, and limited new 
supply. 

The two-notch differential between HCN's IDR and preferred stock rating is 
consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'. 
Based on Fitch research titled 'Treatment and Notching of Hybrids in 
Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's web site 
at 'www.fitchratings.com', these preferred securities are deeply subordinated 
and have loss absorption elements that would likely result in poor recoveries in
the event of a corporate default. 

The following factors may result in positive momentum in the ratings and/or 
Rating Outlook: 

--Fixed-charge coverage sustaining above 3.0x (fixed charge coverage was 2.3x at
March 31, 2012, but is expected to improve pro forma for recent acquisitions and
the refinancing of preferreds);

--Leverage sustaining below 5.0x (as of March 31, 2012, leverage was 5.6x); 

--Unencumbered assets-to-unsecured debt sustaining above 3.0x (unencumbered 
annualized 1Q'12 NOI divided by a stressed 9% cap rate to unsecured debt was 
2.3x as of March 31, 2012). 

The following factors may result in negative momentum in the ratings and/or 
Rating Outlook: 

--Fixed-charge coverage sustaining below 2.5x;

--Leverage sustaining above 6.0x;

--Deteriorating tenant/operator cash flow coverage of rent;

--Unencumbered assets-to-unsecured debt sustaining below 2.0x;

--A base case liquidity coverage ratio sustaining below 1.0x.

Our Standards:The Thomson Reuters Trust Principles.
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