Fitch Upgrades HCP's IDR to 'BBB+'; Outlook Stable

The upgrades follow the recent closing of transactions including the acquisition of a 65% interest in a joint venture (Ventures II) that owns 25 senior housing assets as well as the $6.1 billion purchase of substantially all of the real estate assets of HCR Manor Care. Upon consummation of these transactions, HCP's credit profile is consistent with a 'BBB+' IDR.

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, post-acute and skilled nursing, medical office, life science, and hospitals. 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 leases expiring annually.

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 2010, after increasing 3.2% and 1.6% during 2009 and 2008, respectively.

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 2.6 times (x) for the trailing 12 months (TTM) ended Dec. 31, 2010 as compared to 2.3x for TTM ended Dec. 31, 2009. Additionally, projected fixed charge coverage levels are expected to remain at or above 3.0x beginning in 2011.

HCP's leverage is within a range that is appropriate for a 'BBB+' IDR. The company's net debt divided by recurring operating EBITDA was approximately 5.0x as of Dec. 31, 2010 pro forma for the HCR Manor Care and Ventures II acquisitions and related financing activity, compared with 6.2x as of Dec. 31, 2009. Fitch projects HCP's leverage to remain at or below 5.0x in 2011 and 2012.

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 HCR Manor Care and Ventures II acquisitions and financing activity, HCP's unencumbered asset coverage of unsecured debt was approximately 2.7x, which is strong for the 'BBB+' IDR.

HCP maintains a solid liquidity position. Pro forma for the closing and financing of the HCR Manor Care and Ventures II transactions including assumed refinancing of 80% of secured debt, 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 Jan. 1, 2011 to Dec. 31, 2012 result in a liquidity coverage ratio of 1.2x.

HCP's debt maturity schedule is well-laddered, with less than 12% of debt maturing on an annual basis through 2015. Additionally, the company's ratios related to the financial covenants under its unsecured credit facility and bond indentures do not hinder its financial flexibility.

While HCP has maintained a diversified investment platform, its portfolio has previously been concentrated geographically. As of Dec. 31, 2010, approximately 47% of HCP's consolidated revenue from wholly owned assets was generated from properties located in California and Texas. However, pro forma for the closing of the HCR Manor Care and Ventures II transactions, HCP's portfolio has become more well-diversified geographically, as there are clusters of assets within these portfolios located in other states.

Credit concerns include operator concentration from HCR Manor Care, and increased exposure to government reimbursement risk. Pro forma for the HCR Manor Care and Ventures II 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 hybrid rating criteria. The company's cumulative preferred stock has loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

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

--Reduced tenant concentration;

--Fixed charge coverage sustaining above 3.0x (fixed charge coverage was 2.6x for 2010).

--Net debt to recurring operating EBITDA, including recurring cash flow from unconsolidated joint ventures, sustaining below 4.5x (leverage was 5.0x pro forma for the HCR Manor Care and Ventures II transactions at Dec. 31, 2010).

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

--Fixed charge coverage sustaining below 2.5x;

--Leverage sustaining above 6.0x;

--A liquidity shortfall.

HCP, Inc. is an equity real estate investment trust (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 Dec. 31, 2010, HCP's portfolio of investments included 672 properties in 42 states and Mexico as well as $2 billion of senior and mezzanine investments. Of these assets, 573 are wholly owned, including 226 senior housing facilities, 187 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:

--'Criteria for Rating U.S. Equity REITs and REOCs', Mar. 15, 2011;

--'Corporate Rating Methodology', Aug. 13, 2010;

--'Rating Hybrid Securities', Dec. 29, 2009;

--'Equity Credit for Hybrids & Other Capital Securities - Amended', Dec. 29, 2009;

--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009.

Applicable Criteria and Related Research:

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]

Corporate Rating Methodology

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

Rating Hybrid Securities

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

Equity Credit for Hybrids & Other Capital Securities - Amended

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

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

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Contributing Sources

Market Wire

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Fitch Upgrades HCP's IDR to 'BBB+'; Outlook Stable