Fitch Affirms Health Care REIT, Inc. at 'BBB'; Outlook Stable

The rating affirmations and Stable Outlook follow Health Care REIT's announcement that it entered a definitive agreement to acquire substantially all of the real estate assets of Genesis HealthCare Corporation (Genesis) for total consideration of $2.4 billion. The company is financing the acquisition in part with 25 million common shares ($1.2 billion), and 12.5 million convertible preferred shares ($625 million) issued on March 1, 2011. Total proceeds from the offering may reach $2.1 billion if the company's underwriters fully exercise their over-allotment options for an additional 3.75 million common shares and 1.875 million preferred shares.

The affirmation reflects Fitch's view that HCN's coverage and leverage ratios will remain appropriate for a 'BBB' IDR when recent acquisitions and developments are normalized for their full year contribution to earnings. In addition, Fitch recognizes the company's growth during 2010 to 683 properties from 590 at year-end 2009, which has significantly increased both tenant and market diversity. The company's 2011 acquisition announcements will add another 197 properties: 147 post-acute care and assisted living facilities from Genesis, 34 senior housing facilities from Benchmark Senior Living (Benchmark), and 12 skilled nursing facilities from Silverado Senior Living (Silverado), and four properties from Capital Senior Housing.

HCN's portfolio of investments across five major health service property types consists primarily of long-term triple net leases to experienced operators of seniors housing and health care facilities. The majority of the company's leases are master leased or cross-collateralized, thereby minimizing the ability of operators to selectively renew management agreements for higher performance assets. Lease rollover risk is mitigated by a well laddered lease expiration schedule, as fewer than 10% of HCN's leases expire annually.

HCN continues to exhibit coverage metrics that are commensurate with a 'BBB' rating. While leverage, measured by net debt to recurring EBITDA, was 8.0x for 2010, the company underwent significant capital markets activity late in the fourth quarter in order to complete $1.6 billion in acquisitions and development over the period. As such, much of the earnings associated with these acquired and developed properties were not reflected in the company's income statement. Fitch expects that income from these properties, annualized income from the company's 2011 investments, and deleveraging from $300 million of planned dispositions in the first half of 2011 will return net to debt to EBITDA to the low 5x range. The company's leverage at year-end 2009 was 5.0x. Fixed charge coverage is expected to dip from its year-end 2010 level of 2.7x due to increased interest expense but return to the mid 2x range as earnings from 2010 and 2011 acquisitions and developments are fully appreciated. Fixed charge coverage at year-end 2009 was 2.8x.

Health Care REIT exhibits strong access to capital, as evidenced by the company's successful equity raise yesterday, in addition to $2.96 billion of capital in 2010. Financing activity during 2010 occurred in various forms: HCN issued 20.7 million common shares for $1.03 billion in net proceeds, $1.35 billion in senior unsecured notes, $494 million in convertible unsecured notes, and $82 million in HUD debt.

As of year end 2010, the company had $852 million (18.2% of total debt outstanding at year-end 2010) maturing through 2012, including the $300 million outstanding on the company's credit facility, $293 million of puttable convertible notes, $116 million of secured debt, $76 million of unsecured notes, and $65 million associated with the company's joint ventures. Given the company's successful capital markets activity through the credit cycle, Fitch expects the company be able to address these upcoming maturities, the majority of which are in 2012, without difficulty.

The company's capital markets activity has contributed to strong overall liquidity coverage for year-end 2010 at 1.8x. Fitch expects liquidity to improve after completing the Genesis and Benchmark transactions. Pro forma for the company's planned 2011 acquisitions for the period January 1, 2011 through Dec. 31, 2012, HCN's sources of liquidity (recent capital markets activity, unrestricted cash, availability under the company's credit facility, projected retained earnings from operating activities after dividends and distributions) divided by uses of liquidity (pro forma debt maturities and projected capital expenditures) was 1.9x.

Fitch's key credit concerns include the potential for increased cash flow volatility associated with the company's recent completed and planned acquisitions. The company's recent acquisitions have included interests in operating partnerships formed under the REIT Investment Diversification and Empowerment Act of 2007 (RIDEA). The RIDEA structure allows HCN to partner with operators, giving the company direct exposure to healthcare properties' fundamental performance, as compared to a stable triple-net lease arrangement with an operator. Further, Fitch is mindful that the company's rapid recent growth has the potential to strain its infrastructure.

The Stable Outlook centers on HCN's strong normalized credit metrics, its manageable debt maturity schedule, its strong liquidity position, and an unencumbered asset coverage of 1.9x that is appropriate for the rating category. The Outlook takes into account Fitch's view that assets within the senior healthcare sector will continue to be upheld by solid fundamentals, positive demographic trends, and limited new supply.

The two-notch differential between Health Care REIT'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 ]'), HCN's preferred units are 75% equity-like and 25% debt-like since they are perpetual and have no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring operating EBITDA was 8.2x as of Dec. 31, 2010.

Guidelines for Further Rating Actions:

The following factors may have a positive impact on Health Care REIT's ratings:

--Maintaining a fixed charge coverage ratio above 3.0x (for the year ended Dec. 31, 2010, fixed charge coverage was 2.7x);

--Maintaining leverage (net debt to recurring operating EBITDA) in a range below 5.0x (for the year ended Dec. 31, 2010, leverage was 8.0x);

--Maintaining an unencumbered asset to unsecured debt ratio above 3.0x.

Going forward, the following factors may have a negative impact on Health Care REIT's ratings:

--Maintaining a fixed charge coverage ratio below 2.5x;

--Maintaining leverage in a range above 6.0x (for the year ended Dec. 31, 2010, leverage was 8.0x);

--Maintaining an unencumbered asset to unsecured debt ratio below 2.0x;

--A liquidity shortfall.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 13, 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 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

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.

Contributing Sources

Market Wire

N@N

Fitch Affirms Health Care REIT, Inc. at 'BBB'; Outlook Stable