HCP, Inc. (HCP - Free Report) recently announced that Moody's Investors Service, the rating arm of Moody's Corporation (MCO - Free Report) , has upgraded the senior unsecured debt rating of the former to Baa1 from Baa2.
The rating agency also maintained its stable outlook. The credit rating affects securities worth nearly $5.3 billion.
Per management, the upgrade reflects strategic improvements in the company’s portfolio and balance sheet over the last two years.
Reasons Behind Rating Upgrade
Moody's revised rating reflects the real estate investment trust’s (REIT) successful execution of its portfolio-repositioning strategy. Accordingly, the company has shed its skilled nursing business and disposed or transitioned non-core assets worth more than $12 billion. This is a notable foot for the company, enabling it to improve asset quality and achieve significant portfolio diversification.
In fact, HCP now has sizable asset ownership across multiple segments of healthcare. This includes senior housing, medical office buildings (MOBs), life sciences, and, to a lesser extent, hospitals.
Moody’s also acknowledged that most of these property types generate income from private-pay sources, leaving HCP with minimum exposure to government reimbursement risk. Further, HCP’s premium MOB and life-sciences portfolio will likely perform well in the near term, mitigating the challenges currently tormenting the senior housing market.
The rating upgrade can also be accredited to HCP’s balance-sheet fortification efforts. In fact, it has significantly reduced leverage and improved debt maturity ladder. Moody's expects HCP to maintain leverage in the mid-to-upper 5x level as it continues to explore growth opportunities through acquisitions and developments.
Moreover, the company’s low secured debt holding and impressive fixed charge coverage remain additional credit strengths.
Nonetheless, HCP's high tenant/operator concentration and geographically clustered portfolio remain key concerns. In fact, Brookdale accounts for 17% of the company’s pro forma portfolio income, while its portfolio in San Francisco generated 16% of the third-quarter 2018 portfolio income. Furthermore, near-term headwinds in the senior housing market — higher supply and labor crisis — might affect the company’s performance.
However, the conferring of this credit rating boosts the company's creditworthiness in the market and is likely to enhance investors' confidence in the stock. In fact, such moves provide companies an opportunity to enjoy favorable costs on debts and solid access to capital, and are therefore encouraging.
HCP currently carries a Zacks Rank #3 (Hold). Also, its shares have gained 9.9% as against the industry’s decline of 5.6%, over the past six months.
Some better-ranked stocks in the REIT space are Lamar Advertising Company (LAMR - Free Report) and PS Business Parks, Inc. (PSB - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Lamar’s funds from operations (FFO) per share estimates for 2019 have been marginally revised upward to $5.89 in the past 30 days.
PS Business Parks’ Zacks Consensus Estimate for 2019 FFO per share remained unchanged at $6.58 over the past two months.
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