Fitch Rates Health Care REIT, Inc.'s $750MM 4.00% Notes Due 2025 'BBB+'; Outlook Stable

Fitch Ratings has assigned a credit rating of 'BBB+' to the $750 million aggregate principal amount of senior notes issued by Health Care REIT, Inc. (NYSE: HCN, the company). The 2025 notes have an annual coupon rate of 4.00% and were priced at 99.926% of the principal amount to yield 4.009% to maturity or 177 basis points (bps) over the benchmark rate.

HCN intends to use the net proceeds from the offering to repay advances under its primary unsecured credit facility and for general corporate purposes, including investing in health care and seniors housing properties. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

HCN's Issuer Default Rating (IDR) of 'BBB+' reflects the company's appropriate leverage for the rating for a diversified healthcare REIT, and sustained cash flows in excess of fixed charges from a portfolio in markets with strong demographics and derived principally from private pay sources. Notably, HCN's same store net operating income (SSNOI) growth has exceeded that of its two major peers, HCP, Inc. (HCP; IDR of 'BBB+' with a Stable Outlook) and Ventas, Inc. (VTR; IDR of 'BBB+' with a Stable Outlook) with less volatility, despite historically higher levels of NOI derived from REIT Investment Diversification and Empowerment Act (RIDEA) structured investments.

Credit strengths include strong access to capital and a deep management team. Credit concerns center on the potential for higher volatility in operating cash flows given RIDEA investments through-the-cycle and Fitch's broader worries concerning the healthcare REIT sector's continued rapid growth and the risk that companies in the sector may end up paying premium pricing for new investments, given favorable equity valuations.

Leverage Reduction

The company issued $3.6 billion in common stock in three follow-on equity offerings in May 2014, September 2014 and February 2015, using the proceeds to fund the acquisition of the outstanding units of HealthLease Properties Real Estate Investment Trust and other investments, along with debt repayment. The company's leverage ratio is 5.5x as of March 31, 2015, pro forma for the proceeds from the sale of HCN's 49% interest in its life sciences portfolio for $573.5 million, the issuance of the 2025 notes and expected 2015 investments including those via the Mainstreet Property Group partnership and development conversions (pro forma). Leverage is down from 5.7x and 6.6x as of Dec. 31, 2014 and Dec. 31, 2013, respectively.

Fitch projects leverage to remain around 5.5x over the next several years assuming blended 2.5% to 3% SSNOI growth and future investments with a split of 40% debt and 60% equity and/or proceeds from asset sales. Moreover, HCN's capitalization and key credit metrics are generally consistent with those of its closest peers, HCP and VTR.

In a stress case not anticipated by Fitch in which the company achieves lower SSNOI growth over the next several years and lower proceeds from equity offerings and/or asset sales, leverage would approach 6.0x, which would be weak yet still appropriate for the 'BBB+' rating. Fitch defines leverage as debt less readily available cash divided by recurring operating EBITDA including recurring cash distributions from unconsolidated entities.

Mainly Private Pay Portfolio Focused Strong Demographic Areas

Approximately 34.9% of the company's annualized NOI in the first quarter of 2015 (1Q'15) was generated from RIDEA seniors housing operating assets, followed by triple net seniors housing at 27.8%, skilled nursing/post-acute at 20.8% and medical office at 15.4%. HCN's seniors housing operating assets also have favorable operating metrics such as higher revenues generated per occupied room (REVPOR) per month at the company's seniors housing properties of $6,690 versus the U.S. at $4,228 and are located in markets with above average house values. HCN derived 86.9% of its revenue from private pay sources as of March 31, 2015, limiting relative government reimbursement risk, which Fitch views favorably.

Cash Flow Consistency Despite RIDEA Exposure

Fitch views RIDEA structured seniors housing as having the potential for higher volatility through the cycle than other healthcare property types. Although HCN's portfolio exhibited less volatility with higher growth than its peers from 1Q'10 to 1Q'15 despite deriving a larger percentage of NOI from RIDEA, this has been achieved during a period of strong fundamentals. HCN's portfolio may exhibit more volatility due to supply/demand imbalances. Fitch attributes this recent outperformance to the strong portfolio demographic information noted above. Approximately 86.5% of HCN's NOI is derived from U.S. assets, followed by the United Kingdom at 8.3% and Canada at 5.2%, with non-U.S. assets focused on private pay.

The company's fixed charge coverage ratio is 3.1x in 1Q'15 pro forma (3.1x for full year 2014), up from 2.8x in 2013 and 2.6x in 2012. HCN's lower cost of debt capital, SSNOI growth and NOI from development, offset by NOI reductions from disposed assets, led to the improvement. Fitch projects fixed-charge coverage in the low 3.0x range over the next several years, appropriate for a 'BBB+' rating. Fitch defines fixed charge coverage as recurring operating less straight-line rents and recurring capital expenditures, divided by total cash interest incurred and preferred dividends.

Strong Access to Capital

The company has demonstrated strong access to multiple sources of capital, having issued nearly $10 billion in fixed income securities since 2006, including U.S. dollar and British Sterling denominated bonds and preferred equity. Since 2006, the company also issued approximately $13.9 billion in common equity at a weighted average premium to mean consensus net asset value of 25.6% per SNL Financial. In July 2014, the company entered into a new $3.23 billion unsecured credit facility consisting of a $2.5 billion revolver, a $500 million term loan and a CAD250 million term loan. The $3.23 billion facility replaced the company's previous credit facilities of approximately $2.98 billion, improving the company's liquidity position.

Deep Management Team Focused on Relationship Investing

HCN's Chief Executive Officer and the other five members of the company's Management Committee have experience with HCN and in the industry and ranging from 10 to 29 years. The management team focuses on a model that encourages connectivity across property managers and operators. As of March 31, 2015, approximately 16.6% of HCN's NOI was generated by properties operated by Genesis Healthcare, followed by Sunrise Senior Living at 13.7%, Brookdale Senior Living at 7.7%, Benchmark Senior Living at 3.8%, and Brandywine Senior Living at 2.9%. Connectivity is emphasized through partner working group discussions and other forums, and manifests in operating cost synergies, lower capital expenditures and repeat business with managers/operators.

Bond Offering Improves Liquidity

Liquidity coverage, calculated as liquidity sources divided by uses, is 1.2x for the period April 1, 2015 to Dec. 31, 2016. Sources of liquidity include unrestricted cash, availability under the company's unsecured credit facility pro forma, and projected retained cash flows from operating activities after dividends. Uses of liquidity include debt maturities and projected development costs. Liquidity coverage was 1.0x prior to the bond offering. As of March 31, 2015 pro forma, the company had 2.8% of debt maturing for the remainder of 2015, 10.4% in 2016 and 7.4% in 2017.

HCN's unencumbered assets (unencumbered NOI based on a stressed 8.5% capitalization rate) divided by net unsecured debt was 2.4x as of March 31, 2015 pro forma, which is adequate for a 'BBB+' rating. The company's adjusted funds from operations (AFFO) payout ratio increased to 89.7% in 1Q'15 after declining to 86.9% in 2014 from 91.1% and 95.2% in 2013 and 2012, respectively. Based on the 1Q'15 payout ratio, the company retains approximately $128.5 million of operating cash flow annually.

Preferred Stock Notching

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', 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.

KEY ASSUMPTIONS

Fitch's key assumptions for HCN in Fitch's base case include:

--3% blended SSNOI growth for 2015, followed by a moderation to 2.5% growth in 2016 and 2% in 2017;

--CapEx and G&A grow to maintain historical recurring operating EBITDA margins;

--$3.5 billion in acquisitions in 2015 followed by $2 billion annually in 2016-2017 with yields ranging from 6.5%-7% funded with 40% debt and 60% equity and proceeds from asset sales;

--Debt repayment with the issuance of new unsecured bonds.

RATING SENSITIVITIES

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

--Fitch's expectation of leverage sustaining below 4.5x (pro forma leverage is 5.5x);

--Fitch's expectation of fixed-charge coverage sustaining above 4.0x (pro forma fixed charge coverage is 3.1x);

--Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) at a stressed 8.5% capitalization rate sustaining above 4.0x (pro forma UA/UD is 2.4x).

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

--Increased cash flow volatility through the cycle due to heightened RIDEA exposure and/or a material increase in RIDEA exposure;

--Fitch's expectation of leverage sustaining above 6.0x;

--Fitch's expectation of fixed-charge coverage sustaining below 3.0x;

--Fitch's expectation of liquidity coverage sustaining below 1.0x.

In addition to the $750 million senior notes due 2025, Fitch currently rates Health Care REIT, Inc. and its obligations as follows:

--Issuer Default Rating 'BBB+';

--$2.5 billion senior unsecured revolving credit facility 'BBB+';

--$697 million senior unsecured term loans 'BBB+';

--$6.9 billion senior unsecured notes 'BBB+';

--$200 million senior unsecured convertible notes 'BBB+';

--$1 billion preferred stock 'BBB-'.

The Rating Outlook is Stable.

Date of Relevant Committee: April 27, 2015.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Health Care REIT, Inc. Ratings Navigator' (March 20, 2015);

--'U.S. Equity REITs and REOCs Ratings Navigator Companion' (Feb. 5, 2015);

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Nov. 25, 2014);

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

--'Healthcare REIT Deals Highlight Risks to Continued Growth' (Aug. 20, 2014);

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

Applicable Criteria and Related Research:

Health Care REIT, Inc. - Ratings Navigator

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863761

U.S. Equity REITs and REOCs: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861519

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Recovery Ratings and Notching Criteria for Equity REITs

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

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985160

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