(The following statement was released by the rating agency)
July 1 - Fitch Ratings has upgraded the following credit ratings of Ventas,
Inc. (VTR.N) (NYSE: VTR) and its subsidiaries Ventas Realty, Limited
Partnership and Ventas Capital Corporation:
--Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--$867 million unsecured revolving credit facilities to 'BBB' from 'BBB-';
--$1 billion senior unsecured notes to 'BBB' from 'BBB-';
--$230 million senior unsecured convertible notes to 'BBB' from 'BBB-'.
Ventas Realty, Limited Partnership and Ventas Capital Corporation are the
issuers of the senior unsecured debt obligations listed above, which are
guaranteed by Ventas, Inc. In addition, in light of Ventas's recent automatic
shelf registration statement on Form S-3 filed with the Securities and Exchange
Commission in April 2009, Fitch has also assigned an indicative preferred stock
rating for Ventas, Inc. of 'BBB-'. The Rating Outlook has been revised to
Stable from Positive.
The upgrades stem from Fitch's view that Ventas's liquidity, leverage, and
unencumbered healthcare property operating metrics have improved to levels
consistent with a 'BBB' rating following several capital markets transactions
in a difficult market environment.
In March 2009, Ventas increased the borrowing capacity under its unsecured
credit facilities to $867 million from $850 million (of which $277 million
matures in 2010) and repurchased $25.9 million of its 2010 and 2012 bonds in
open market transactions. In April 2009, as one of the few REIT unsecured debt
transactions year-to-date, the company completed the sale of $200 million of
6.5% senior notes due in 2016 through its subsidiaries, Ventas Realty, Limited
Partnership and Ventas Capital Corporation. The company issued the bonds at a
15.75% discount to par, priced to yield 9.6%, and received net proceeds of $166
million. The company also raised $299.7 million in common stock in April 2009.
In May 2009, Ventas completed cash tender offers for $306.1 million of senior
unsecured notes due in 2010, 2012, 2014 and 2015. The tender offers were funded
with net proceeds from the unsecured notes issuance and equity offering. In the
aggregate, these transactions have bolstered the company's liquidity and on a
pro forma basis, strengthened leverage and debt service coverage.
With respect to liquidity, Fitch estimates that the company's sources of
liquidity (cash, availability under its revolving credit facility, retained
cash flows from operating activities as well as additional liquidity from
recent capital market transactions) less uses of liquidity (debt maturities and
routine capital expenditures) result in a liquidity surplus of over $850
million from March 31, 2009 to Dec. 31, 2010, which is solid for a 'BBB'
rating. Excluding the availability from the $277 million tranche under the
company's revolving credit facility that matures in 2010, the company still has
a solid liquidity surplus of over $575 million.
The company's leverage has also improved in light of the company's equity
offering. In 2008 and for the twelve months ended March 31, 2009 pro forma for
the company's equity offering in April 2009, Ventas's gross debt-to-recurring
EBITDA ratio was 5.4 times (x) and 4.5x, respectively. When revising Ventas's
Outlook to Positive from Stable in 2008, Fitch had stated that positive
momentum may be placed on the ratings if the company's gross debt-to-recurring
EBITDA ratio approximated 5.0x or lower. Despite uncertainties regarding the
EBITDA generated by the company's 79 property portfolio operated by Sunrise
Senior Living, Inc. (NYSE:SRZ) in 2009, which represents 34% of total
investments and 17% of total NOI, Fitch anticipates that Ventas's gross
debt-to-recurring EBITDA ratio will be below 5.0x in 2009 and 2010.
Fitch also stated when revising Ventas's Outlook to Positive from Stable in
2008 that there may be a positive impact on the ratings if fixed-charge
coverage (defined as recurring EBITDA less routine capital expenditures and
straight-line rent adjustments divided by interest expense and capitalized
interest) sustained above 2.5x, and the company's fixed charge coverage ratio
was 2.8x for the twelve months ended March 31, 2009, and would exceed 3.0x pro
forma for the company's equity offering in April 2009. Fitch anticipates that
going forward, the majority of Ventas's net operating income will continue to
be derived from operators through predictable triple net leases, such as master
leases with Kindred Healthcare, Inc. (NYSE: KND), which were recently extended
from April 30, 2010 to April 30, 2015. While NOI from the company's operating
portfolio managed by Sunrise may be less predictable and more volatile than
cash flows through triple net leases, Fitch anticipates that the company's
fixed charge coverage will remain above 2.5x over the next 12-24 months.
Moreover, the company's net operating income from unencumbered assets divided
by unsecured debt interest expense ratio was 4.5x in the first quarter of 2009
(1Q'09), which is strong for the 'BBB' rating, is expected to further improve
in 2009 and positively reflects the unencumbered asset portfolio supporting
unsecured bondholders.
The rating action takes into account certain offsetting factors including the
company's operator concentration, the weak performance of Sunrise as a
corporate entity, declining occupancy levels, and modest EBITDARM coverage of
rents for the triple-net seniors housing portfolio.
The company's top three operators by net operating income, Sunrise, Brookdale
Senior Living (NYSE: BKD) and Kindred, comprised 74% of total investments and
77% of total net operating income for Ventas in 1Q'09. Operator concentration
is particularly a concern with Sunrise, which had a going concern opinion in
its 2008 Form 10-K and violated certain covenants under its bank facility in
2008. Although Sunrise has received a waiver on its bank covenants through the
end of 2009, Fitch expects that Sunrise's operating performance will remain
under pressure, which Fitch views as a risk for Ventas. However, the Sunrise
portfolio is an operating portfolio rather than a triple net lease portfolio
for Ventas (i.e., seniors, rather than Sunrise itself, pay rent to Ventas), and
Ventas has proven relationships with other operators as a contingency in the
event a replacement for Sunrise is sought.
In addition, demand for senior housing and other healthcare real estate has
weakened over the past year, as Ventas's total occupancy (weighted by the
company's investment in various property types) declined to 86.7% in 4Q'08 for
the triple-net portfolio and 1Q'09 for the operating portfolio, respectively,
from 88% in 4Q'07 for the triple-net portfolio and 1Q'08 for the operating
portfolio, respectively. According to the National Investment Center for the
Seniors Housing and Care Industry, occupancy rates for Independent Living,
Assisted Living, Dementia Care and Nursing Care properties all declined during
2008, and Fitch anticipates that the difficult economic environment may
continue to pressure demand for healthcare real estate in the near-term.
The rating action also takes into consideration that EBITDARM coverage in
Ventas's triple-net lease seniors housing portfolio was 1.3x in 2008, which is
consistent with historical levels. That being said, Ventas's overall triple net
lease portfolio generated a stronger EBITDARM coverage ratio of 1.8x in 2008.
The Stable Outlook reflects the company's unencumbered asset coverage ratio,
which at 3.0x as of March 31, 2009 (based on calculations set forth in the
company's credit agreements) provides downside protection to unsecured
bondholders. Unencumbered asset coverage has increased further pro forma for
the company's recent equity issuance and tender offers to approximately 3.7x.
The Stable Outlook also reflects the broad opportunities for the healthcare
real estate industry. The healthcare industry comprised an estimated 16% of
U.S. gross domestic product (GDP) in 2007 and is projected to be 20% of GDP by
2017. While there are uncertainties in terms of potential changes in healthcare
legislation over the near term, longer-term demographic trends such as growth
in the population over 85 years old and the aging of the baby boomer
demographic bodes well for healthcare real estate fundamentals.
The following factors may have a positive impact on Ventas's ratings:
--A reduction in operator concentration in terms of percentage of NOI;
--If the unencumbered pool were to increase to above 65% of total gross asset
value (as of March 31, based on calculations employed in the company's bank
credit facility, $4.6 billion of the company's $8.1 billion in gross asset
value, or 57%, was unencumbered);
--If the company's gross debt-to-recurring EBITDA ratio were to sustain below
4.5x (as of March 31, 2009, the company's debt-to-recurring EBITDA ratio was
4.5x pro forma for the company's equity offering in April 2009).
The following factors may have a negative impact on Ventas's ratings:
--A liquidity shortfall;
--If the company's fixed charge coverage ratio were to sustain below 2.5x;
--If the company's gross debt-to-recurring EBITDA ratio were to sustain above
5.5x.
Ventas is a REIT headquartered in Chicago, with an additional office in
Louisville, KY, that owns a portfolio of seniors housing and healthcare-related
properties in 43 states in the U.S. and two Canadian provinces. As of March 31,
2009, the portfolio consisted of 505 properties, and the company had a total
market capitalization of approximately $6.1 billion.
Contact: Sean Pattap +1-212-908-0642 or Linda Hammel +1-212-908-0303, New York.
(New York Ratings Team)
