Fitch Rates HCP's Sr Unsecured Notes Due 2025 and GBP Term Loan 'BBB+'

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'BBB+' rating to the $600 million aggregate principal amount of 3.40% senior unsecured notes due 2025 and the GBP220 million unsecured term loan due 2019 issued by HCP, Inc. HCP. The 2025 notes were issued at 99.185% of par value to yield 3.497% or 160 basis points (bps) over the benchmark rate. The term loan bears interest at GBP LIBOR plus 97.5 bps and HCP entered into a three-year interest rate swap agreement that effectively fixes the rate at 1.79%. The combined proceeds will be used to repay amounts outstanding under the revolving credit facility related to the funding of a portion of a GBP395 million debt investment in the United Kingdom, repay senior unsecured notes due later in 2015, and for general corporate purposes.

Fitch currently rates HCP as follows:

--Long-term Issuer Default Rate (IDR) 'BBB+';

--Unsecured bank credit facility 'BBB+';

--Unsecured term loans 'BBB+';

--Senior unsecured notes 'BBB+'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect HCP's credit strengths, namely: the steady and predictable cash flows from a large portfolio of healthcare properties, maintenance of leverage and fixed-charge coverage metrics appropriate for the rating category, manageable lease and debt maturity schedules, financial flexibility stemming from a large unencumbered pool, and appropriate liquidity. Credit concerns include: operator concentration and the persistently low coverage metrics for HCP's largest tenant (HCR ManorCare), and the impact of government and regulatory actions on operators' profitability.

DURABLE CASHFLOWS

HCP's same-store property performance has been strong over the past seven years and is one of the largest factors behind the rating, with same-property net operating income (SSNOI) increasing between 1.6% and 4.8% annually and 3.2% YTD through 3Q'14. 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.

Unlike many other rated healthcare REITs, HCP has traditionally had an insignificant amount of RIDEA exposure, thereby increasing the durability and predictability of cash flows. However, Fitch estimates HCP's RIDEA exposure will increase to approximately 9% of NOI from 3.3% pro forma for the Brookdale transaction.

HCP's revenue maturity schedule is well-staggered and long-dated as a result of the high percentage of long-term triple-net leases. Less than 9.2% of annual base rent and interest revenues expire in any one year. Limited lease expirations coupled with contractual rental bumps increase the predictability of future rental revenues, absent tenant bankruptcies or a lease restructuring with HCR ManorCare, and are credit strengths for HCP. The company had been consistent on past earnings calls that HCR had the capacity to honor its lease, and HCP would not amend it without growth opportunities similar to those received in the Brookdale/Emeritus lease amendment. However, Fitch notes that the Dec. 22, 2014 SEC filing describing a 4Q'14 impairment charge by HCP on its equity investment in HCR signifies that a material improvement in operating fundamentals is less likely. The filing speaks only to HCR's capacity to honor the lease for 2015.

STRONG CREDIT METRICS

HCP's fixed-charge coverage was 3.7x for the trailing 12 months (TTM) ended Sept. 30, 2014 as compared to 3.5x and 3.1x in 2013 and 2012, respectively. Fitch projects fixed-charge coverage will improve further, surpassing 4x over the next 12-to-24 months driven by SSNOI 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 as of Sept. 30, 2014 which, is appropriate for a 'BBB+' IDR. Leverage was 5.2x and 5.5x as of Dec. 31, 2013 and 2012, pro forma for material acquisitions. Fitch projects HCP's leverage will decline toward 4.5x by 2016. That said, Fitch notes that HCP's propensity for large transactions may cause fluctuations in reported metrics. Fitch defines leverage as net debt divided by TTM recurring operating EBITDA.

STRONG LIQUIDITY & ACCESS TO CAPITAL

HCP has prefunded all of its 2015 unsecured maturities and its debt maturities are appropriately staggered thereafter. Liquidity coverage is strong at 1.2x for the period Oct. 1, 2014 through Dec. 31, 2016. Fitch calculates liquidity coverage as 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 and pro forma adjustments for the bond issuance) divided by uses of liquidity (pro rata debt maturities, development expenditures, net cash payments for the Formation Capital transaction and estimated recurring capital expenditures). 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%-10%, HCP's unencumbered asset coverage of net unsecured debt was approximately 2x-2.4x.

CONCENTRATED PORTFOLIO & PERSISTENTLY LOW COVERAGE AT HCR

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. This tenant continues to have coverage ratios below 1x facility EBITDAR (nine consecutive quarters of TTM coverage at or below 1x) and 1.1x guarantor fixed-charge coverage for the TTM ended June 30, 2014, which is a credit concern. Sustained and material improvements in HCR ManorCare's profitability may support positive ratings momentum if reflecting a generally improving and lower-risk operating environment. Partially offsetting this concentration and low coverage ratios are the master lease structure and covenants to provide protection to HCP at the guarantor level.

Furthermore, HCP's tenant mix has become more concentrated since the completion of the merger between Emeritus Corporation and Brookdale Senior Living (previously HCP's second- and third-largest tenants, respectively). The combined company now makes up 19% of revenues and results in the two largest tenants (HCR and Brookdale/Emeritus) comprising approximately 48% of revenues. The risks associated with a concentrated tenant mix are two-fold: the effects of a potential lease amendment or default are greater, and tenants may have significant leverage when negotiating lease renewals given the pooling of assets into master leases. Fitch notes the merger had no immediate impact on HCP's credit ratings given that its exposure to the underlying property cash flows is unchanged but notes the longer-term increase in risk.

STABLE OUTLOOK

The Stable Outlook is driven by Fitch's expectations that HCP will maintain its long-standing conservative business and financing strategies and metrics will remain appropriate for the rating over the next 12-to-24 months.

The following factors may result in positive momentum in 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 3x for several consecutive quarters (coverage was 3.7x for the TTM ended Sept. 30, 2014);

--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.4x at Sept. 30, 2014).

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 6x;

--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:

--'U.S. Healthcare REIT Dashboard: 3Q14' (Jan. 15, 2015);

--'Recovery Ratings and Notching Criteria for REITs' (Nov. 18, 2014);

--'Corporate Rating Methodology' (May 28, 2014);

--'HCP's Deal with Brookdale Swaps Reinvestment for Operating Risk; Ratings Unaffected' (May 1, 2014);

--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors, (Feb. 26, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

U.S. Healthcare REIT Dashboard: 3Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=840849

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=970935

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.