Fitch Rates Reopening of Welltower's Unsecured Bonds due 2025 'BBB+'

OREANDA-NEWS. Fitch Ratings has assigned a rating of 'BBB+' to the $500 million reopening of Welltower Inc.'s (NYSE: HCN) 4% senior unsecured notes due 2025. The notes were priced at 97.75% of the principal amount to yield 4.287% or a 218 basis point (bp) spread over the benchmark rate. A full list of Fitch's current ratings on HCN follows at the end of this release

KEY RATING DRIVERS
HCN's Issuer Default Rating (IDR) of 'BBB+' reflects the company's leverage which is appropriate for a diversified healthcare REIT, and sustained cash flows in excess of fixed charges from a portfolio in markets with strong demographics and derived principally from private pay sources. Credit strengths include strong access to capital and a deep management team. Credit concerns center on the potential for higher volatility in operating cash flows given REIT Investment Diversification and Empowerment Act (RIDEA) structured investments through-the-cycle and Fitch's broader worries concerning the healthcare REIT sector's rapid growth and the risk that companies in the sector may end up paying premium pricing for new investments or incurring higher leverage given the current cost of equity.

LOWER LEVERAGE; FURTHER IMPROVEMENTS TO MODERATE
Fitch projects leverage will remain around 5.5x over the next several years assuming blended 2.5% to 3% same store net operating income (SSNOI) growth and future investments with a split of 40% debt/60% equity and/or proceeds from asset sales. Leverage in the mid-5x range is down from the 6x-7.7x levels reported for the years ended 2010-2013, though these levels were influenced by the timing of acquisition closings. Moreover, HCN's capitalization and key credit metrics are generally consistent with those of its closest peers, HCP, Inc. (IDR: 'BBB+') and Ventas, Inc. (IDR: 'BBB+').

In a stress case not anticipated by Fitch in which the company achieves lower SSNOI growth over the next several years and lower proceeds from equity offerings and/or asset sales, leverage would approach 6x, which would be weak yet still appropriate for the 'BBB+' rating. Fitch defines leverage as debt less readily available cash divided by recurring operating EBITDA including recurring cash distributions from unconsolidated entities.

Similar to leverage metrics, Fitch projects HCN's fixed-charge coverage (FCC) will maintain in the low-3x range over the next several years, which is appropriate for the rating. FCC was 3.2x for the trailing 12 months (TTM) ended June 30, 2015. Fitch defines FCC as recurring operating less straight-line rents and recurring capital expenditures, divided by total cash interest incurred and preferred dividends.

FOCUSING ON PRIVATE-PAY, LOWER COST SETTINGS; HIGHER RIDEA RISK
HCN's investment thesis focuses on reducing reimbursement risk exposure (private pay comprised 87% of second quarter 2015 [2Q15] facility revenue mix) and focusing on lower cost settings, which Fitch views favorably. However, as a result, HCN's largest segment has been RIDEA seniors housing operating assets which made up 35.4% of 2Q15 NOI, followed by triple net seniors housing at 27.2% and skilled nursing/post-acute at 21.1%.

Fitch views RIDEA structured seniors housing as having the potential for higher volatility through the cycle than other healthcare property types. While Fitch acknowledges the strength of HCN's RIDEA performance to-date, it has not been proven through cycles as the investments were largely made in recent years after the changes in RIDEA regulations allowed for the investments. Operating fundamentals over the past few years have been largely accommodative.

APPROPRIATE LIQUIDITY & STRONG ACCESS TO CAPITAL
Fitch views HCN as having demonstrated strong access to multiple sources of capital across markets and types including in the United States, United Kingdom and Canada. HCN's primary source of liquidity is its $2.5 billion unsecured revolving credit facility due 2018 with a one-year extension option. The facility had $2.15 billion of availability at June 30, 2015 and bore interest at LIBOR + 92.5bps. Debt maturities are generally well-staggered through 2018 when 7%-8% matures per year.

Fitch projects HCN's sources of liquidity cover its uses by 1.2x for the period July 1, 2015 through Dec. 31, 2016 pro forma for the reopening note issuance. Sources of liquidity include unrestricted cash, availability under the company's unsecured credit facility pro forma, and projected retained cash flows from operating activities after dividends. Uses of liquidity include debt maturities, recurring maintenance capital expenditures, projected development costs and announced investments.

HCN's unencumbered assets provided sufficient contingent liquidity to unsecured bondholders. Assuming a stressed capitalization rate of 8.5%, unencumbered assets covered unsecured debt by 2.5x as of June 30, 2015

PREFERRED STOCK NOTCHING
The two-notch differential between HCN's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch research titled 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

KEY ASSUMPTIONS
Fitch's key assumptions for HCN in our base case include:
--3% blended SSNOI growth for 2015, followed by a moderation to 2.5% growth in 2016 and 2% in 2017;
--Capex and G&A grow to maintain historical recurring operating EBITDA margins;
--$3.5 billion in acquisitions in 2015 followed by $2 billion annually in 2016-2017 with yields ranging from 6.5%-7% funded with 40% debt and 60% equity and proceeds from asset sales;
--Debt repayment with the issuance of new unsecured bonds.

RATING SENSITIVITIES
The following factors may result in positive momentum in the ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.6x at June 30, 2015);
--Fitch's expectation of fixed-charge coverage sustaining above 4x (fixed charge coverage was 3.2x for the TTM);
--Fitch's expectation of unencumbered asset coverage of unsecured debt at a stressed 8.5% capitalization rate sustaining above 4x (UA/UD was 2.5x at June 30, 2015).

The following factors may result in negative momentum on the ratings and/or Outlook:

--Increased cash flow volatility through the cycle due to heightened RIDEA exposure and/or a material increase in RIDEA exposure;
--Fitch's expectation of leverage sustaining above 6x;
--Fitch's expectation of fixed-charge coverage sustaining below 3x;
--Fitch's expectation of liquidity coverage sustaining below 1x.

FULL LIST OF RATING ACTIONS

Fitch currently rates HCN as follows:

Health Care REIT, Inc.
--Issuer Default Rating 'BBB+';
--Senior unsecured revolving credit facility 'BBB+';
--Senior unsecured term loans 'BBB+';
--Senior unsecured notes 'BBB+';
--Senior unsecured convertible notes 'BBB+';
--Preferred stock 'BBB-'.

HCN Canadian Holdings
--Senior unsecured term loan 'BBB+'.

Contact:

Primary Analyst
Britton Costa, CFA
Director
+1-212-908-0524
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Steven Marks
Managing Director
+1-212-908-9161

Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.

Date of Relevant Committee: April 27, 2015

Additional information is available on www.fitchratings.com

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