Oct 18 - HCP, Inc.'s (NYSE: HCP) agreement to acquire 133 senior housing communities for $1.73 billion is a credit neutral event, according to Fitch Ratings. The acquisition has a minimal impact on HCP's credit metrics, has largely been prefunded through an underwritten equity offering and is consistent with the company's long-term strategy. HCP's Issuer Default Rating (IDR) is currently 'BBB+', and the Rating Outlook is Stable. HCP will acquire the communities from a joint venture between Emeritus Corporation (Emeritus) and an affiliate of The Blackstone Group. Emeritus will operate the communities under a new long-term triple-net master lease with a first year lease yield of 6.1% and contractual rental increases at the greater of 3.7% on average or CPI over the initial five years. The portfolio consists of 99 stabilized properties (91.5% occupied) and 34 lease-up properties (74% occupied) and has no RIDEA exposure. In conjunction with the acquisition, HCP announced an underwritten public offering of 22 million shares ($1 billion in gross proceeds based on Oct. 16, 2012 closing price). Fitch views the size and timing of the equity offering as a credit positive and consistent with management's conservatism. Fitch expects HCP will fund the debt portion of the acquisition through an unsecured senior note offering. HCP's credit metrics, pro forma for the acquisition, equity offering and other events subsequent to 2Q'12 (pro forma) remain appropriate for the rating. Fixed charge coverage pro forma was 3.0 times (x) for the trailing 12 months ended June 30, 2012 (TTM) in line with the 2.8x TTM and 2.9x for the year ended Dec. 31, 2011. Pro forma leverage is unchanged at 5.3x as compared to 5.3x for both the 12 months ended June 30, 2012 and Dec. 31, 2011, respectively. Fitch currently rates HCP as follows: --IDR 'BBB+'; --Unsecured bank credit facility 'BBB+'; --Senior unsecured notes 'BBB+'. The Rating Outlook is Stable. The ratings reflect HCP's credit strengths, namely steady cash flows from a large portfolio of high-quality properties across the health care real estate spectrum, maintenance of leverage and fixed charge coverage metrics appropriate for the rating category, manageable lease expiration and debt maturity schedules and financial flexibility stemming from a large unencumbered pool to support unsecured borrowings. Credit concerns include operator and geographic concentration. HCP's portfolio includes assets across the health care property spectrum by both type and structure, including senior housing, post-acute and skilled nursing, medical office, life science, and hospitals. The diversified portfolio reduces exposure to individual demand drivers. HCP's cash flows have significant embedded stability, with long-term leases in place in conjunction with annual rent escalators. Same-property net operating income (NOI) increased 3.1% for the second quarter of 2012 (2Q'12), behind the 4.7% and 4% growth during 1Q'12 and 2011, respectively and as compared to trough growth of 1.6% in 2008 during the financial crisis. The strong fundamentals result from the lease structures (generally triple-net with contractual increases) as well as HCP's active management. Fitch estimates same-property NOI growth to remain within the historical 2%-4% range through 2014 despite the regulatory-based headwinds some operators are facing. HCP's pro forma fixed charge coverage was 3.0x TTM as compared to 2.8x for the TTM ended June 30, 2012 and 2.9x for the year ended Dec. 31, 2011. Fitch projects fixed charge coverage to remain at or above 3.0x beginning in 2013. Fitch defines fixed charge coverage as recurring operating EBITDA less recurring capital expenditures less straight-line rent adjustments and direct financing lease accretion, divided by interest expense, capitalized interest and preferred dividends. HCP's pro forma leverage was 5.3x as of June 30, 2012 and is within a range that is appropriate for a 'BBB+' IDR. Leverage was 5.3x for both the TTM ended June 30, 2012 and the year ended Dec. 31, 2011. Fitch projects HCP's leverage to remain around 5.0x through 2014. Fitch defines leverage as net debt divided by recurring operating EBITDA. HCP's liquidity position is temporarily weakened by the acquisition with a pro forma liquidity coverage ratio of 0.9x for the period July 1, 2012 to Dec. 31, 2014. The terming out of the to be funded portion of the acquisition through an unsecured note issuance will alleviate the pressures and improve the coverage ratio to 1.2x. Fitch notes HCP has demonstrated strong access to a wide variety of capital sources over the past two years, mitigating refinance risk. Further, the company's debt maturity schedule is well-laddered, with no more than 12% of debt maturing on an annual basis through 2015. Fitch defines liquidity coverage as 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 (remaining funding obligations, pro rata debt maturities and estimated recurring capital expenditures). HCP maintains solid financial flexibility stemming mainly from its large unencumbered property pool, which serves as a source of contingent liquidity. Using a blended, stressed cap rate of 8.6%, HCP's pro forma unencumbered asset coverage of unsecured debt was approximately 2.2x, which is solid for the 'BBB+' IDR. Credit concerns include operator and geographic concentration. HCR ManorCare represents 30% of HCP's revenues (pro forma) and increases HCP's exposure to government reimbursement risk. Partially offsetting this concentration is the master lease structure and covenants to provide protection to HCP at the guarantor level. Further, HCP's portfolio has been and remains geographically concentrated, despite the company maintaining a diversified investment platform. As of June 30, 2012, approximately 32% of HCP's consolidated net operating income from wholly owned assets was generated from properties located in California and Texas (though this is down from 47% as of Dec. 31, 2010). The following factors may result in positive momentum in the rating and/or Outlook: --Reduced tenant concentration; --Fixed charge coverage sustaining above 3.0x for several consecutive quarters (coverage was 3.0x for the pro forma TTM ended June 30, 2012); --Net debt to recurring operating EBITDA sustaining below 4.5x (pro forma TTM leverage was 5.3x as of June 30, 2012). The following factors may result in negative momentum in the rating and/or Outlook: --Fixed-charge coverage sustaining below 2.5x; --Leverage sustaining above 6.0x; --A liquidity shortfall.