Fitch Rates Ventas, Inc.'s $300MM 2017 Notes and $400MM 2024 Notes 'BBB+'

Tue Apr 15, 2014 10:36am EDT

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(The following statement was released by the rating agency) NEW YORK, April 15 (Fitch) Fitch Ratings has assigned a credit rating of 'BBB+' to the following notes issued by Ventas Realty, Limited Partnership (Ventas Realty), a subsidiary of Ventas, Inc. (NYSE: VTR): --$300 million aggregate principal amount of 1.25% senior unsecured notes due 2017; --$400 million aggregate principal amount of 3.75% senior unsecured notes due 2024. The notes are guaranteed by Ventas, Inc. on a senior unsecured basis. The 2017 notes were issued at 99.815% of par value to yield 1.313% or 55 basis points over the benchmark rate, and the 2024 notes were issued at 99.304% of par value to yield 3.834% or 120 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+'; --$1 billion senior unsecured term loans 'BBB+'; --$5.9 billion senior unsecured notes 'BBB+'. Nationwide Health Properties, LLC (NHP) --IDR 'BBB+'; --$234.4 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 27% of the company's 4Q2013 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 96% on-campus or affiliated across over 70 health systems, providing cash flow stability. Ventas owns nearly 1,500 properties in 46 states, the District of Columbia and two Canadian provinces. The company's largest states by annualized NOI are currently California at 14%, Texas at 8%, New York at 7%, and Illinois, Florida and Massachusetts all at 5%, with no other state exceeding 5% of NOI. Diversified Operator/Manager Platform The company's operator/manager roster concentration continues to diminish via acquisitions; top operators and managers as of Dec. 31, 2013 were Atria Senior Living, Inc. at 15% of NOI, Kindred Healthcare, Inc. (NYSE: KND) at 13%, Sunrise Senior Living, Inc. at 11%, and Brookdale Senior Living Inc. (NYSE: BKD) at 9%, with no other tenant/operator exceeding 4% of NOI. As of Dec. 31, 2013, operating seniors housing, triple-net seniors housing, skilled nursing, medical office and hospitals represented 27%, 27%, 20%, 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 2.3x, respectively in 3Q'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 Ventas renewed, sold or transitioned to new operators on or before July 1, 2013 all 89 healthcare assets whose leases with Kindred expired during 2Q'13. In September 2013, Ventas entered into agreements with Kindred to extend the leases with respect to 48 of the 108 properties comprising the 2015 renewal assets ($138 million of annual rent), including 26 skilled nursing facilities and 22 long-term acute care hospitals. These transactions increased rents by $15 million over current annual base rent. Ventas launched a project to re-lease the remaining 60 skilled nursing facilities included in the 2015 renewal assets. However, the outcome of the re-leasing project could have a negative impact on cash flow stability. Strong Access to Capital and Liquidity Over the past 12 months, Ventas has been active in the unsecured bond market, unsecured term loan and common equity markets, including via an at-the-market equity offering program. In December 2013, the company entered into a new $3 billion unsecured credit facility that replaced its previous $2 billion unsecured revolving credit facility, as well as three unsecured term loans. The new unsecured credit facility is comprised of a $2 billion revolving credit facility initially priced at LIBOR plus 1%, and a $200 million four-year term loan and an $800 million five-year term loan, each initially priced at LIBOR plus 1.05%. Liquidity coverage, defined as liquidity sources divided by uses, is strong at 2.5x for the period Jan. 1, 2014 through Dec. 31, 2015. Liquidity sources include unrestricted cash and availability under the unsecured revolving credit facility pro forma for the 2017 and 2024 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 2014 - 2015 secured debt maturities, liquidity coverage is 2.8x. Near-term debt maturities were minimal as of Dec. 31, 2013, with 1.5% of debt maturing in 2014, followed by 10.4% in 2015, and 10.7% in 2016. Fitch calculates that the company's dividends and distributions represented 72.7% of normalized FFO adjusted for capital expenditures and straight-line rent in 2013, which indicates 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 2.3x as of Dec. 31, 2013. In addition, the covenants in the company's debt agreements do not restrict financial flexibility. Normalized Leverage Appropriate for 'BBB+' As of Dec. 31, 2013, net debt to fourth-quarter 2013 annualized recurring operating EBITDA was 5.5x (5.8x for full year 2013), 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 cash NOI grew by 5% in 2013 (3.4% excluding a $20 million rent prepayment), following growth of 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 various acquisitions. The company completed $1.9 billion of investments in 2013, including development and redevelopment projects. This included $853 million of triple-net leased assets, $772 million of seniors housing operating assets managed by Atria and $181 million of medical office buildings. Notably, 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 70% private pay by 2013 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 (reflecting a 2.3% increase in the market basket index, less a 0.5% forecast error adjustment and a 0.5% productivity adjustment mandated by the Affordable Care Act) following 1.8% in FY2013 and for long-term acute care hospitals are 1.3% for FY2014 following 1.7% in FY2013. Growing But Still Small Development The company's development pipeline had a total estimated cost of $232.2 million as of June 30, 2013. Cost-to-complete represented only $200.1 million or 0.9% of gross asset value and 0.8% of enterprise value as of Dec. 31, 2013. Historically, Ventas has not been an active developer. Strong Fixed-Charge Coverage Despite CapEx Despite increased capital expenditures related to the seniors housing operating portfolio, fixed-charge coverage was strong for the rating at 4.1x for 4Q'13 pro forma (4.3x for full-year 2013), compared with 4.4x in 2012 and 3.8x 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-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 fall just below 4x, 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 resulted in a parent-subsidiary relationship whereby NHP is 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 around 4x, 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 4.1x); --Fitch's expectation of leverage sustaining below 4.0x (4Q'13 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 (this ratio was 2.3x at year-end 2013). 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. Contact: Primary Analyst Sean Pattap Senior Director +1-212-908-0642 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Megan Neuburger Senior Director +1-212-908-0501 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,' (Feb. 26, 2014); --'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Dec. 23, 2013); --'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013); --'Corporate Rating Methodology' (Aug. 5, 2013); --'Parent and Subsidiary Linkage' (Aug. 5, 2013). Applicable Criteria and Related Research: Rating U.S. Equity REITs and REOCs (Sector Credit Factors) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis here Recovery Ratings and Notching Criteria for Equity REITs here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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