Fitch Rates HCP's 4.2% Senior Unsecured Notes due 2024 'BBB+'; Rating Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'BBB+' rating to the $350 million 4.2% senior notes due 2024 issued by HCP, Inc. HCP. The notes were priced at 99.54% of par to yield 4.257%, a 148 basis point (bps) spread to the benchmark Treasury.

Net proceeds from the offering are expected to be used to repay the amounts outstanding under the line of credit which, along with cash on hand, repaid $400 million of 2.7% notes due February 2014 and a $156 million 5.7% mortgage due February 2014.

Fitch currently rates HCP as follows:

--Issuer Default Rating (IDR)'BBB+';

--Unsecured bank credit facility 'BBB+';

--Unsecured term loan 'BBB+';

--Senior unsecured notes '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. Despite the uncertainty that stems from the abrupt change in leadership (the termination of Jay Flaherty who had been CEO of HCP since 2003), HCP's reiterated commitment to its existing conservative business and financing strategies alleviates some of the credit concerns.

DURABLE CASHFLOWS

HCP's same-store property performance has been strong over the past five years and is one of the largest factors behind the rating, with same property net operating income (NOI) increasing between 3.1% and 4.8% annually from 2009 - 2013. Same-property NOI increased 3.1% for 2013 as compared to 4.2%, 4.0% and 4.8% for 2012, 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. Less than 10% of annual base rent revenues expires 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 3.5x for 2013 as compared to 3.1x and 2.7x in 2012 and 2011, respectively. 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 5.2x and 5.0x for year and quarter ended Dec. 31, 2013, respectively which is within a range that is appropriate for a 'BBB+' IDR. Leverage was 5.4x and 5.3x as of Dec. 31, 2012 and 2011, 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

HCP has repaid the majority of its 2014 maturities pro forma for the bond issuance and has only 9.7% of total debt maturing through 2015. The company's debt maturity schedule is well-laddered, with less than 17% of debt maturing in any one year. The largest year for debt maturities is 2016; however, HCP maintains options to extend the maturities of its line of credit facility and term loan by one year thereby reducing potential maturities to 14% of total debt outstanding. As such, HCP maintains a solid liquidity position. Sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility and expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities adjusted for recent repayments, development expenditures and estimated recurring capital expenditures) for the period Jan. 1, 2014 to Dec. 31, 2015 results in a liquidity coverage ratio of 1.9x. 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 2.1x - 2.6x, 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 83% and 90% of 2013 and 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. Rent from HCR ManorCare represents 29% of HCP's revenues and this tenant continues to have weak coverage ratios of below 1.0x facility EBITDAR and 1.2x guarantor fixed-charge coverage for the trailing 12 months ended Dec. 31, 2013. 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, 2013, 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 3.5x for the TTM ended Dec. 31, 2013);

--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.2x at Dec. 31, 2013).

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' (Aug. 5, 2013);

--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);

--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

Recovery Rating and Notching Criteria for Equity REITs -- Effective May 12, 2011 to May 3, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820552

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