Fitch Rates Ventas $550MM Sr. Notes Due 2016 & $300MM Sr. Notes Due 2043
NEW YORK -- September 26, 2013
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
Fitch currently rates Ventas, Inc. and its subsidiaries (collectively, Ventas)
--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)
--$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
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
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+'
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
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
The following factors may result in positive momentum on the ratings and/or
--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
--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
--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
Parent and Subsidiary Rating Linkage
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
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Sean Pattap, +1-212-908-0642
Fitch Ratings, Inc.
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