Fitch Ratings has affirmed the credit ratings of Ventas, Inc. (NYSE:
VTR) and three of its rated subsidiaries, Ventas Realty, Limited
Partnership, Ventas Capital Corporation, and Nationwide Health
Properties, LLC (collectively, Ventas or the company) as follows:
Ventas, Inc.
Ventas Realty, Limited Partnership
Ventas Capital Corporation
--Issuer Default Rating (IDR) at 'BBB+';
--$2 billion unsecured revolving credit facility at 'BBB+';
--$682.3 million senior unsecured term loans at 'BBB+';
--$4.3 billion senior unsecured notes at 'BBB+'.
Nationwide Health Properties, LLC (NHP)
--IDR at 'BBB+';
--$209.8 million senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation of the IDR at 'BBB+' reflects the balanced cash flow
from the company's healthcare property portfolio (predominantly seniors
housing, nursing facility and medical office assets) that includes a
diversified roster of operators and managers. Credit strengths include
strong access to capital and liquidity, and a credit-focused but
opportunistic management team that continues to seek growth in the
fragmented healthcare real estate market. Fixed charge coverage has been
and is expected to remain strong for the 'BBB+' rating.
These positive elements are balanced by leverage that has been at the
high end for a healthcare REIT rated 'BBB+' (though appropriate for the
rating on a normalized basis) and the limited operational history for
the company's REIT Investment Diversification and Empowerment Act of
2007 (RIDEA) investments when compared with other commercial real estate
asset classes. RIDEA investments represented 27% of the company's 1Q2013
NOI.
DEMOGRAPHICS BENEFIT PORTFOLIO
The company's seniors housing operating assets are located in markets
with older populations, as well as higher household incomes and net
worth when compared with the U.S. markets at large. The medical office
building (MOB) platform includes the company's Lillibridge subsidiary
and is 94% on-campus or affiliated across over 60 health systems,
providing cash flow stability.
Ventas owns over 1,400 properties in 47 states including Washington
D.C., indicative of granular cash flow. The company's largest states by
annualized NOI are currently California at 13%, Texas at 8%, New York at
7%, and Massachusetts, Illinois and Florida all at 5%, with no other
state exceeding 5% of NOI.
DIVERSIFIED OPERATOR/MANAGER PLATFORM
The company's operator/manager roster concentration continued to
diminish in 2012, which Fitch views positively. Top operators and
managers as of March 31, 2013 were Atria Senior Living, Inc. at 16% of
NOI, Kindred Healthcare, Inc. (NYSE: KND) at 15%, Sunrise Senior Living,
Inc. (Formerly NYSE: SRZ) at 11%, and Brookdale Senior Living Inc.
(NYSE: BKD) at 10%, with no other tenant/operator exceeding 4% of NOI.
As of March 31, 2013, operating seniors housing, triple-net seniors
housing, skilled nursing, medical office and hospitals represented 27%,
24%, 22%, 17% and 7% of NOI, respectively. EBITDARM coverage ratios for
the company's triple-net seniors housing, skilled nursing and hospital
segments were 1.3x, 1.7x and 2.6x, respectively in 4Q2012 (the most
recent quarter available). Blended EBITDARM coverage of 1.6x indicates
good cushion in excess of rent payments to Ventas.
KINDRED MASTER LEASE RENEWAL RISK
In May 2012, Kindred did not renew certain master lease bundles in the
2013 renewal grouping, renewing or re-leasing 35 of 89 skilled nursing
facilities and long-term acute care hospitals. Of the 54 remaining
assets, 50 were leased to four new customers and three existing
customers, and the remaining four assets were sold. Fitch views
positively that Ventas recovered all of the previous rent, but Kindred's
other master lease expirations including in 2015 may result in a similar
lack of renewal and tenant replacement risk.
STRONG ACCESS TO CAPITAL AND LIQUIDITY
Over the past 12 months, Ventas has been active in the unsecured bond
market with both retail and institutional investors, including 1Q2013
offerings of $500 million 2.7% senior unsecured notes due 2020 at a
spread of 132 basis points and $259 million 5.45% senior unsecured notes
due 2043 at a spread of 235 basis points. The company also raised
capital via the unsecured term loan and common equity markets, including
via a recently established at-the-market equity offering program.
Liquidity coverage, defined as liquidity sources divided by uses, is
strong at 3.1x for the period April 1, 2013 through Dec. 31, 2014.
Liquidity sources include unrestricted cash, availability under
revolving credit facilities, and projected retained cash flows from
operating activities after dividends. Liquidity uses include pro rata
debt maturities, projected recurring capital expenditures, and projected
development expenditures. Assuming an 80% refinance rate on 2013-2014
secured debt maturities, liquidity coverage is 8.3x.
Near-term debt maturities are minimal with 2.8% of debt maturing in
2013, followed by 4.1% in 2014, although 15.4% of debt matures in 2015,
including the unsecured revolving credit facility.
Fitch calculates that the company's dividends and distributions
represented 72.7% of normalized FFO adjusted for capital expenditures
and straight-line rent in 1Q2013 compared with 72.3% in 2012, both of
which indicate good retained liquidity generated from operating cash
flow.
Ventas has good contingent liquidity with unencumbered assets
(annualized unencumbered NOI divided by a stressed 8.5% capitalization
rate) to net unsecured debt of 2.8x as of March 31, 2013. In addition,
the covenants in the company's debt agreements do not restrict financial
flexibility.
NORMALIZED LEVERAGE APPROPRIATE FOR 'BBB+'
As of March 31, 2013, net debt to trailing 12 months recurring operating
EBITDA was 5.5x (5.3x in 1Q2013), compared with 5.7x in FY2012 and 6.0x
in FY2011. Leverage was high for the 'BBB+' rating during 2012 and 2011
due to the timing of the Cogdell Spencer, NHP and Atria acquisitions.
Fitch anticipates that leverage will remain in the low-to-mid 5x range
over the next 12 to 24 months, due to expectations of ongoing balanced
access to unsecured debt and equity markets coupled with low-single
digit same-store NOI growth. Same-store NOI grew by 4.2% in 1Q2013 and
was positive throughout the recent cycle at 4.4% in 2012, 2.6% in 2011,
6% in 2010 and 3.4% in 2009.
In a stress case not anticipated by Fitch in which operational
volatility results in flat same-store NOI, leverage would sustain in the
high-5x range, which would be weak for a 'BBB+' rating.
CREDIT-FOCUSED BUT OPPORTUNISTIC MANAGEMENT
Ventas has a track record of being a flexible allocator of capital
across various healthcare real estate asset classes and management has
remained attuned to managing credit metrics through recent acquisitions.
Transactions closed during 2011 included NHP and a portfolio of senior
living communities managed by Atria. The company's 2012 investments
totaled $2.7 billion and included Cogdell Spencer and 16 private pay
seniors housing communities managed by Sunrise. Multiple senior managers
have been with the company since 2002, providing stability through real
estate and capital market cycles.
LIMITED GOVERNMENT REIMBURSEMENT RISK
The company's payor sources are 71% private pay by 1Q2013 NOI. As a
result, Fitch does not expect that proposed rules by the Centers for
Medicare and Medicaid Services (CMS) for fiscal year 2014 will have a
material negative impact on the company's portfolio. Preliminary
prospective payment system (PPS) payment rates for Medicare in skilled
nursing facilities are 1.4% for FY2014 following 1.8% in FY2013 and for
long-term acute care hospitals are 1.1% for FY2014 following 1.7% in
FY2013. In addition, sequestration that was effective April 1, 2013
lowered Medicare reimbursements by 2% per the Budget Control Act of
2011, but this should lower blended EBITDARM on Ventas' skilled nursing
facility by less than 0.1x going forward.
GROWING BUT STILL SMALL DEVELOPMENT
The company's development pipeline had a total estimated cost of $84.9
million as of March 31, 2013, including $12.9 million to be completed as
of March 31, 2013. Cost-to-complete represented only 0.1% of gross asset
value and a negligible percentage of enterprise value as of March 31,
2013. Historically Ventas has not been an active developer.
STRONG COVERAGE DESPITE CAPEX
Despite increased capital expenditures related to the seniors housing
operating portfolio, fixed-charge coverage was strong for the rating at
4.4x for the trailing 12 months ended March 31, 2013 (4.5x in Q12013),
compared with 4.4x in 2012 and 3.9x in 2011. Fitch defines fixed-charge
coverage as recurring operating EBITDA less recurring capital
expenditures less straight-line rent adjustments divided by total
interest incurred.
Fitch anticipates that low single-digit same store NOI growth will
result in coverage sustaining in the mid-to-high 4x range over the next
12 to 24 months, which is strong for a 'BBB+' rating. In a stress case
not anticipated by Fitch in which operational volatility results in
same-store NOI declines, coverage would remain around 4.0x, which would
remain commensurate with a 'BBB+' rating.
PARENT-SUBSIDIARY LINKAGE
Based on Fitch's criteria report, 'Parent and Subsidiary Rating
Linkage,' dated Aug. 8, 2012, the Ventas merger with NHP in July 2011
spawned a parent-subsidiary relationship whereby NHP is now a wholly
owned subsidiary of Ventas, Inc. Prior to the merger, NHP previously had
stronger standalone credit metrics including lower leverage and higher
fixed-charge coverage. Given the stronger subsidiary credit profile,
combined with strong legal and operating ties (e.g. common management
and a centralized treasury), the IDRs of Ventas and NHP are linked and
are expected to remain the same going forward. The IDRs are based on the
financial metrics and credit profile of the consolidated entity.
STABLE OUTLOOK
The Stable Outlook reflects Fitch's base case that leverage will remain
around 5x, coverage will sustain between 4.0x and 4.5x, and liquidity
will remain solid.
RATING SENSITIVITIES
The following factors may result in positive momentum on the ratings
and/or Outlook:
--A continued reduction in tenant/operator concentration;
--Fitch's expectation of fixed-charge coverage sustaining above 4.0x
(TTM coverage is 4.4x);
--Fitch's expectation of leverage sustaining below 4.0x (TTM leverage is
5.5x);
--Fitch's expectation of unencumbered asset coverage of unsecured debt
(UA/UD) at a stressed 8.5% capitalization rate sustaining above 4.0x
(March 31, 2013 UA/UD is 2.8x).
The following factors may result in negative momentum on the ratings
and/or Outlook:
--Fitch's expectation of fixed-charge coverage sustaining below 3.0x;
--Fitch's expectation of leverage sustaining above 5.5x;
--Fitch's expectation of UA/UD sustaining below 3.0x;
--The company sustaining a liquidity coverage ratio below 1.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Criteria for Rating U.S. Equity REITs and REOCs (Feb. 26, 2013)
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis (Dec. 13, 2012)
--Recovery Ratings and Notching Criteria for Equity REITs (Nov. 12, 2012)
--Corporate Rating Methodology (Aug. 8, 2012)
--Parent and Subsidiary Rating Linkage (Aug. 8, 2012)
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794694
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