Fitch Ratings has assigned a credit rating of 'BBB+' to the $550 million
aggregate principal amount of 1.55% senior unsecured notes due 2016 and
$300 million aggregate principal amount of 5.70% senior unsecured notes
due 2043 issued by the operating partnership of Ventas, Inc. (NYSE:
VTR), Ventas Realty, Limited Partnership (Ventas Realty). The notes are
guaranteed by Ventas, Inc. on a senior unsecured basis.
The 2016 notes were issued at 99.910% of par value to yield 1.581% or 90
basis points over the benchmark rate and the 2043 notes were issued at
99.628% of par value to yield 5.726% or 195 basis points over the
benchmark rate. Ventas expects to use the net proceeds to repay
indebtedness outstanding under its unsecured revolving credit facility
and for working capital and other general corporate purposes, including
funding future acquisitions or investments, if any.
Fitch currently rates Ventas, Inc. and its subsidiaries (collectively,
Ventas) as follows:
--Issuer Default Rating (IDR) 'BBB+';
--$2 billion unsecured
revolving credit facility 'BBB+';
--$678.3 million senior unsecured
term loans 'BBB+';
--$5.1 billion senior unsecured notes 'BBB+'.
Nationwide Health Properties, LLC (NHP)
--IDR 'BBB+';
--$309.8
million senior unsecured notes 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The 'BBB+' IDR 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 28% of the company's 2Q2013
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 June 30, 2013 were Atria Senior Living, Inc. at 16% of
NOI, Kindred Healthcare, Inc. (NYSE: KND) at 13%, Sunrise Senior Living,
Inc. (Formerly NYSE: SRZ) at 12%, and Brookdale Senior Living Inc.
(NYSE: BKD) at 10%, with no other tenant/operator exceeding 4% of NOI.
As of June 30, 2013, operating seniors housing, triple-net seniors
housing, skilled nursing, medical office and hospitals represented 28%,
24%, 21%, 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, 1.6x and 2.5x,
respectively in 1Q'13 (tenant coverage is reported with a one quarter
lag). Blended EBITDARM coverage of 1.6x indicates a sufficient earnings
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 only 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 those in 2015 may result in a
similar releasing process which weakens earnings visibility and in turn,
cash flow stability.
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 and also raised
capital via the unsecured term loan and common equity markets, including
via an at-the-market equity offering program.
Liquidity coverage, defined as liquidity sources divided by uses, is
strong at 1.7x for the period July 1, 2013 through Dec. 31, 2015.
Liquidity sources include unrestricted cash and availability under the
unsecured revolving credit facility pro forma for the 2016 and 2043
notes offering, 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 - 2015
secured debt maturities, liquidity coverage is 3.2x. Near-term debt
maturities were minimal as of June 30, 2013 with 2.5% of debt maturing
in 2H'13, followed by 4.1% in 2014, and 13.1% in 2015 excluding
unsecured credit facility borrowings.
Fitch calculates that the company's dividends and distributions
represented 72.6% of normalized FFO adjusted for capital expenditures
and straight-line rent in 2Q'13 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) covering net unsecured debt by 2.7x as of June 30, 2013.
In addition, the covenants in the company's debt agreements do not
restrict financial flexibility.
NORMALIZED LEVERAGE APPROPRIATE FOR 'BBB+'
As of June 30, 2013, net debt to trailing 12 months recurring operating
EBITDA was 5.4x (5.3x in 2Q'13), compared with 5.7x in FY2012 and 6.0x
in FY2011. Leverage was high for the 'BBB+' rating at the end of both
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 3% in 2Q'13 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. During 2Q'13, Ventas
invested $419 million in private pay seniors housing communities, MOBs
and other assets. 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 72% private pay by 2Q'13 NOI. As a
result, Fitch does not expect that 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. Prospective payment system
(PPS) payment growth rates for Medicare in skilled nursing facilities
are 1.3% for FY2014 following 1.8% in FY2013 and for long-term acute
care hospitals are 1.3% 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 $240.7
million as of June 30, 2013. Cost-to-complete represented only 0.1% of
gross asset value and a negligible percentage of enterprise value as of
June 30, 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 June 30, 2013 (4.2x in 2Q2013 pro
forma), 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. 5, 2013, 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 (pro forma
coverage is 4.2x);
--Fitch's expectation of leverage sustaining
below 4.0x (TTM leverage is 5.4x);
--Fitch's expectation of
unencumbered asset coverage of unsecured debt (UA/UD) at a stressed
8.5%
capitalization rate sustaining above 4.0x (June 30, 2013 UA/UD is 2.7x).
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:
--'Corporate Rating
Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating
Linkage' (Aug. 5, 2013);
--'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).
Applicable Criteria and Related Research:
Corporate Rating
Methodology - Effective from 8 August 2012 - 5 August 2013
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
Criteria
for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=803329
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