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Fitch Downgrades Healthcare Realty's IDR to 'BBB-';; Outlook Revised to Stable

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^{Published in Business and Finance on Thursday, October 20th 2011 at 11:54 GMT by Market Wire}  

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has downgraded the following credit ratings of Healthcare Realty Trust (NYSE: HR):

--Issuer Default Rating (IDR) to 'BBB-' from 'BBB';

--Unsecured revolving credit facility to 'BBB-' from 'BBB';

--Senior unsecured notes to 'BBB-' from 'BBB'.

Fitch also has withdrawn its 'BB+' indicative preferred stock rating for Healthcare Realty as the company has no intentions of issuing preferred stock in the foreseeable future.

The Rating Outlook has been revised to Stable from Negative.

The rating actions reflect Fitch's expectations that leverage, fixed-charge coverage and unencumbered asset coverage of unsecured debt metrics will remain more consistent with a 'BBB-' rating.

Although the company publicly indicated a desire to significantly delever in 2011 through a large equity raise, this did not occur to the extent expected, and Fitch does not expect a significant equity raise in the near term. The $250 million of equity raised year to date in 2011 has primarily been used for acquisition, development and mortgage fundings.

Fitch-defined fixed-charge coverage ratio, calculated as recurring operating EBITDA less Fitch's estimate of routine capital expenditures less straight-line rent adjustments, divided by total interest incurred was 1.5 times (x) for the 12 months ended June 30, 2011, compared with 1.6x and 2.0x during 2010 and 2009, respectively. The recent decline in fixed charge coverage is partially driven by an increase in development funding, assets in stabilization that are not yet contributing to EBITDA, and a one-time increase in interest expense due to the pre-funding of senior notes that were redeemed in March 2011, with proceeds from a bond issuance in Dec. 2010. Adjusting for all of these items, pro forma coverage would approach 2.0x.

Healthcare Realty's leverage, defined as net debt to recurring operating EBITDA, is relatively high for the rating category at 8.1x as of June 30, 2011 (8.8x and 7.4x as of Dec. 31, 2010 and Dec. 31, 2009, respectively). Leverage based on annualized 2Q'11 EBITDA was 7.7x. Fitch anticipates that leverage may decline to approximately 7.1x in 2013, assuming the company completes developments on schedule and leases up assets in stabilization, without any significant new development projects that would provide a drag on EBITDA.

Unencumbered asset coverage of unsecured debt (calculated as unencumbered LTM EBITDA as of 2Q'11, divided by a conservative 8% capitalization rate, divided by unsecured debt) results in coverage of 1.5x as of June 30, 2011 compared to 1.6x as of Sept. 30, 2010, and is low for the rating category.

An additional credit concern is the challenging leasing environment. Occupancy has declined to 87% as of 2Q'11, from 88% at 2Q'10, as master lease expirations have been converted to operating leases, driving a near-term reduction to occupancy as the company becomes responsible for leasing up the vacancy in those properties. The company also faces significant lease expirations over the next few years, ranging between 13.3% and 17.2% of total revenues annually from 2012 through 2014.

Separately, the lease-up of assets in stabilization has been slower than management's projections and these assets representing an investment of $235 million were just 29% leased as of June 30, 2011. The assets in stabilization are not expected to be fully leased for another five to six quarters.

Offsetting these credit concerns are the company's solid liquidity, a well laddered debt maturity schedule, and a diversified portfolio of primarily medical office buildings.

Healthcare Realty's sources of liquidity (unrestricted cash, availability under its unsecured revolving credit facility, and projected retained cash flows from operating activities after dividend payments) divided by uses of liquidity (debt maturities, projected routine capital expenditures and development and construction mortgage funding commitments) result in a liquidity coverage ratio of 1.7x for July 1, 2011 to Dec. 31, 2013, which is strong for the rating category.

Furthermore, the company's debt maturities are well laddered with the first meaningful debt maturity ($266.7 million) occurring in 2014, representing 18.8% of total debt. The bulk of remaining maturities occur in 2016 and beyond.

The company's portfolio exhibits geographic diversification. On a square footage basis, as of June 30, 2011, 28.8% of the company's properties were in Texas, followed by Tennessee (11.5%), Florida (7.8%) and North Carolina (5.4%). No other state exceeded 5% of the total portfolio giving Healthcare Realty broad exposure to demand for health care real estate. With continual growth expected in the healthcare industry, Healthcare Realty's predominantly Medical Office Building portfolio positions the company to benefit from increasing demand for healthcare services.

The Stable Outlook centers on expected positive same store net operating income (NOI) during the forecast period, which will contribute to improving leverage and coverage metrics. Increases in NOI will be driven by positive leasing spreads on below-market expiring leases and contractual rent bumps that offset a challenging leasing environment.

Although Fitch does not anticipate positive ratings momentum in the near-to medium-term, the following factors may have a positive impact on Healthcare Realty's ratings and/or Outlook:

--If the company's net debt to recurring EBITDA ratio were to sustain below 7.0x (as of June 30, 2011 the company's leverage was 8.1x on an LTM basis and 7.7x on a 2Q annualized basis);

--If the company's fixed charge coverage ratio were to sustain above 2.0x (for the trailing 12 months ended June 30, 2011, coverage was 1.5x).

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

--If the company's leverage were to sustain above 8.0x;

--If the company's fixed charge coverage ratio were to sustain below 1.5x;

--Unencumbered asset coverage sustaining below 1.5x based on an 8% cap rate (as of June 30, 2011 coverage was 1.5x).

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--Corporate Rating Methodology, Aug. 12, 2011.

--Recovery Rating and Notching Criteria for REITs, May 12, 2011.

--Criteria for Rating U.S. Equity REITs and REOCs, March 15, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

Recovery Rating and Notching Criteria for Equity REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]

Criteria for Rating U.S. Equity REITs and REOCs

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

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