Fitch Places HCP on Rating Watch Positive

The Rating Watch Positive reflects Fitch's expectation that following the closing of recently announced transactions including a 65% interest in a joint venture (JV) that owns 25 senior housing assets as well as a $6.1 billion purchase of substantially all of the real estate assets of HCR Manor Care, HCP's credit profile is expected to improve to a level consistent with a 'BBB+' IDR assuming the consummation of anticipated equity offerings used to fund the HCR Manor Care transaction. These transactions are expected to close prior to the end of the first quarter of 2011, at which point, Fitch expects to resolve the Rating Watch.

HCP's fixed charge coverage (defined as recurring operating EBITDA less recurring capital expenditures less straight line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) was 2.4 times (x) for the 12 months ended Sept. 30, 2010 as compared to 2.4x for the trailing 12 months (TTM) ended Dec. 31, 2009. Additionally, projected coverage levels are expected to improve modestly.

HCP's leverage ratio is also expected to be consistent with a 'BBB+' rating assuming the consummation of anticipated equity offerings. The company's net debt divided by recurring EBITDA, was 5.6x for the TTM ended Sept. 30, 2010, compared with 6.2x and 6.4x during 2009 and 2008, respectively.

HCP's ratings reflect the company's core credit strengths, including steady cash flows from its large portfolio of high quality, well-diversified properties across the health care real estate spectrum, significant financial flexibility including a large unencumbered pool to support unsecured borrowings, and a solid liquidity position.

HCP's portfolio includes assets across the property spectrum, including senior housing, medical office, life science, hospitals, and skilled nursing. Each property type is subject to varying supply and demand drivers, lowering risk at the portfolio level. Cash flow coverage for the bulk of HCP's portfolio has remained solid, indicating that its facilities are generally performing well.

HCP's cash flows have significant embedded stability, with long-term leases in place in conjunction with annual rent escalators. HCP has a modest lease expiration schedule, with generally below 10% of annual revenue expiring on an annual basis.

Additionally, HCP has actively managed its portfolio, improving portfolio cash flows notably throughout the global economic downturn by changing operators on some assets in its portfolio. This has contributed to good same property performance during the downturn. Same property net operating income (NOI) increased 4.8% during the first nine months of 2010, after increasing 3.2% during 2009, and increasing 2.6% in 2008.

HCP maintains significant financial flexibility. HCP's unsecured debt is supported by a large unencumbered property pool, which serves as a source of contingent liquidity. Using a blended 8.8% cap rate and pro forma for the company's $486 million equity raise in November 2010, Fitch calculated HCP's unencumbered asset coverage of unsecured debt to be approximately 2.7x as of Sept. 30, 2010.

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 expected recurring capital expenditures) from Oct. 1, 2010 to Dec. 31, 2012 result in a liquidity coverage ratio of 1.1x. This stressed analysis assumes that no additional capital is raised to repay obligations. If 80% of maturing secured and pro rata JV debt was refinanced, HCP's liquidity coverage ratio would be 1.2x.

HCP's debt maturity schedule is well-laddered, with less than 15% of debt maturing on an annual basis through 2016 after excluding the secured debt that was used to finance a portion of HCP's debt investment in HCR Manor Care. Additionally, the company's ratios related to the financial covenants under its unsecured credit facilities do not hinder its financial flexibility.

While HCP has maintained a diversified investment platform, its portfolio has been concentrated geographically. As of Sept. 30, 2010, approximately 47% of HCP's consolidated revenue from wholly owned assets was generated from properties located in California and Texas. However, upon closing the HCR Manor Care and Senior Housing JV will provide HCP with additional geographic diversification in its portfolio, as these entities have clusters of assets in other states.

Credit concerns include pro forma operator concentration from HCR Manor Care, and increased exposure to government reimbursement risk. Pro forma for the announced transactions, HCR Manor Care will represent approximately 32% of HCP revenue and deferred lease income. Partially offsetting this concentration is a master lease structure with four distinct pools, ensuring that lease renewals are staggered. Additionally, covenants will remain in place to provide protection for HCP at the guarantor level.

The two-notch differential between HCP's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. Based on Fitch's report, 'Equity Credit for Hybrids and Other Capital Securities' (dated Dec. 29, 2009 and available at [ www.fitchratings.com ]), HCP's preferred stock is 75% equity-like and 25% debt-like since it is perpetual and has no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring operating EBITDA was 5.7x as of Sept. 30, 2010, compared with 6.2x and 6.5x, as of Dec. 31, 2009 and Dec. 31, 2008, respectively.

The following factors may have a positive impact on HCP's ratings:

--Closing of Ventures II and HCR Manor Care transactions as currently contemplated;
--Fitch-defined fixed charge coverage sustaining above 2.5x (coverage was 2.4x for the TTM ended Sept. 30, 2010).
--Net debt to recurring EBITDA, including recurring cash flow from unconsolidated JVs, sustaining below 6.0x (coverage was 5.6x at Sept. 30, 2010).

The following factors may have a negative impact on HCP's ratings and/or Rating Outlook:

--Fitch-defined fixed charge coverage sustaining below 2.0x;
--Net debt to recurring EBITDA sustaining above 7.0x;
--A liquidity shortfall.

HCP, Inc. is an equity REIT based in Long Beach, CA. The company acquires, develops, leases, and manages health care real estate and provides mortgage and other financing to health care operators. As of Sept. 30, 2010, HCP's portfolio of investments included 670 properties in 42 states and Mexico as well as $2 billion of senior and mezzanine investments. Of these assets, 571 are wholly owned, including 225 senior housing facilities, 186 medical office buildings, 98 life science assets, 17 hospitals, and 45 skilled nursing facilities.

Additional information is available at [ www.fitchratings.com ].

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 16, 2010;
--'Criteria for Rating U.S. Equity REITs and REOCs', April 16, 2010;
--'Equity Credit for Hybrids & Other Capital Securities - Amended', Dec. 29, 2009;
--'Rating Hybrid Securities', Dec. 29, 2009;
--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009.

Applicable Criteria and Related Research:
Recovery Rating and Notching Criteria for REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
Equity Credit for Hybrids & Other Capital Securities - Amended
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]

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Contributing Sources

Market Wire

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Fitch Places HCP on Rating Watch Positive