Fitch Places Health Care REIT on Rating Watch Positive
September 14 2006 - 4:58PM
Business Wire
Fitch Ratings has placed the ratings of Health Care REIT (NYSE:HCN)
on Rating Watch Positive following the company's announcement of
its intention to acquire Windrose Medical Properties Trust
(NYSE:WNS or Windrose). The following ratings are affected: --
Issuer default rating 'BBB-'; -- Unsecured bank credit facility
'BBB-'; -- Senior unsecured notes 'BBB-'; -- Preferred stock 'BB+'.
The rating action affects approximately $1.5 billion of outstanding
securities. Fitch notes that the acquisition would increase the
company's asset base by approximately 25% and would broaden its
investment portfolio to include medical office buildings,
outpatient facilities and specialty hospitals. The Windrose
properties are well-leased at 94.2% as of June 30, 2006. The
addition of these facilities to the portfolio will decrease HCN's
reliance on revenue from its top tenants. HCN's top five tenants
represented 42% of its total investment balance as of June 30,
2006. Pro forma for the acquisition, HCN's top five tenants would
represent 35%. Moreover, the acquisition would also reduce HCN's
exposure to government reimbursement risk. Skilled nursing
facilities, which generate the vast majority of revenue from
government sources, would decline from 45% of HCN's total portfolio
to 37% with the addition of the Windrose portfolio. Fitch also
notes that HCN has indicated that it intends to maintain debt
service coverage ratios and leverage within existing ranges after
the closing of the acquisition. HCN's interest coverage as measured
by recurring EBITDA over total interest expense was 3.2 times (x)
for the last 12 months and fixed charge coverage after adjusting
for capital expenditures and preferred dividends was 2.5x for the
last 12 months. HCN's total debt to undepreciated book capital was
44.1% and total debt plus preferred securities to total
undepreciated book capital was 52.4% at June 30, 2006. In addition
to the company's solid operating performance, an important
contributor to HCN's existing ratings is the company's relatively
liquid balance sheet which is due in part to its unsecured funding
strategy. As of June 30, 2006, HCN's portion of secured debt was 4%
of total debt. After the closing of the acquisition, however, HCN's
percentage of secured debt would rise to 13%. Fitch anticipates
that the company would reduce this exposure meaningfully over the
next several quarters. Fitch also notes that there is a moderate
degree of execution risk associated with this acquisition. Although
existing HCN management has limited expertise with respect to
managing a platform of medical office buildings, the company will
retain key executives from Windrose. Fitch would expect to see
evidence of a smooth integration of Windrose into HCN prior to
resolving the Rating Watch. Fitch's rating definitions and the
terms of use of such ratings are available on the agency's public
site, 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.
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