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 Realty, Limited Partnership
Ventas Capital Corporation
--Issuer Default Rating (IDR) at 'BBB+';
--$2 billion unsecured revolving credit facility at 'BBB+';
--$704.7 million senior unsecured term loans at 'BBB+';
--$2.7 billion senior unsecured notes at 'BBB+'.
Nationwide Health Properties, LLC (NHP)
--IDR at 'BBB+';
--$579.6 million senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
Fitch has also withdrawn the ratings on Ventas's senior unsecured convertible notes and NHP's unsecured term loan as these obligations are no longer outstanding.
The rating affirmation reflects:
--The company's diversified healthcare property portfolio that is benefiting from favorable demographics;
--Strong access to capital and liquidity;
--Appropriate leverage for the rating; and
--A solid management team.
The rating is balanced by:
--Uncertainties regarding leasing of certain of Ventas's skilled nursing facilities to be vacated by Kindred;
--The incurrence of increased capital expenditures related to Ventas's May 2011 acquisition of substantially all of the real estate assets and working capital of Atria Senior Living Group, Inc. (ASLG); however, this is mitigated by the fact that since the ASLG acquisition as well as the purchases of NHP in July 2011 and Cogdell Spencer in April 2012, fixed charge coverage has remained and is expected to remain solid for the 'BBB+' rating.
The portfolio benefits from demand by a growing elderly population for various segments of healthcare real estate. As of March 31, 2012, pro forma for the acquisition of Cogdell Spencer and the purchase of 16 Sunrise-managed communities that closed subsequent to quarter-end, triple-net seniors housing represented 27% of NOI, followed by operating seniors housing (26%), skilled nursing (23%), medical office (15%) and hospitals (7%).
Ventas has limited exposure to specific geographical regions. The company's largest states by annualized NOI in the first quarter of 2012 (1Q'12) were California at 13%, Texas at 8%, New York at 7%, Massachusetts at 6% and Illinois at 6%, reducing risks related to single-state healthcare regulatory changes.
The company's pro forma payor sources are 70% private pay by NOI, limiting government reimbursement risk. As a result, Fitch does not expect that the June 28, 2012 U.S. Supreme Court decision on the Patient Protection and Affordable Care Act of 2010 will materially impact Ventas's business in the near term. Cash flow coverage ratios of all of Ventas's triple-net tenants are solid at 1.7 times (x) on average for the trailing 12 months ended Dec. 31, 2011 pro forma, which insulates the company against potential tenant cash flow deterioration, despite the potential ramifications of the Supreme Court decision for certain of Ventas's tenants that rely on government reimbursements.
As noted in Fitch's 2012 midyear REIT outlook, primary industry concerns for the remainder of 2012 relate to how skilled-nursing facility operators are dealing with the 11.1% cut in Medicare reimbursements and their ability to manage an additional 2% Medicare cut in 2013 mandated by the Budget Control Act of 2011. These regulatory risks have been more significant for healthcare REITs with tenants that are more reliant upon government reimbursement.
Ventas's tenant/operator concentration is limited and includes Kindred Healthcare, Inc. (NYSE: KND) at 17% of NOI, Atria Senior Living, Inc. owned by private equity funds managed by Lazard Real Estate Partners LLC at 14%, Sunrise Senior Living, Inc. (NYSE: SRZ) at 12%, and Brookdale Senior Living Inc. (NYSE: BKD) at 11%, with no other tenant/operator exceeding 6% of NOI.
Access to multiple sources of capital provides further support for the 'BBB+' rating. For example, in October 2011, Ventas entered into a new $2 billion unsecured revolving credit facility currently priced at LIBOR plus 110 basis points, and in February and April 2012 issued $600 million of 4.25% senior unsecured notes due 2022 and $600 million of 4% senior unsecured notes due 2019, respectively. The company also has proven access to the unsecured term loan market, raising $500 million at LIBOR plus 125 basis points in December 2011, and has proactively raised follow-on common equity, most recently selling $344 million of common equity (including the overallotment option) in June 2012.
For April 1, 2012 through Dec. 31, 2013, base case liquidity coverage is good at 1.9x. Sources of liquidity include unrestricted cash, availability under the unsecured revolving credit facility, and retained cash flows from operating activities all pro forma for the purchase of Cogdell Spencer, the April 2012 senior unsecured notes issuance, the sale of 12 seniors housing communities to Assisted Living Concepts, Inc., the acquisition of 16 seniors housing communities from Sunrise Senior Living, Inc. and affiliates, and the common stock offering. Uses of liquidity include debt maturities and projected recurring capital expenditures. Contingent liquidity is strong with unencumbered assets to unsecured debt at 3.0x as of March 31, 2012 at an 8% capitalization rate, pro forma for post-quarter end transactions.
Leverage is appropriate for the rating. As of March 31, 2012, pro forma for post-quarter end transactions, net debt to recurring operating EBITDA was 5.2x compared with 4.7x in 1Q'12 and 4.9x in 4Q'11. Fitch anticipates that leverage will remain in the high-4x to low 5x range over the next 12-to-24 months (appropriate for a 'BBB+' rating), due to expectations of ongoing balanced access to unsecured debt and equity coupled with low-single digit same-store NOI growth. Same-store cash NOI growth for the total portfolio was 3.5% in 1Q'12 and 2.6% for full-year 2011. In a stress case not anticipated by Fitch in which leases to be vacated by Kindred remain unleased, leverage would sustain around 5.4x, which would be weak for a 'BBB+' rating.
Ventas has a strong management team, with multiple senior managers together since 2002. The company has adroitly managed its various M&A transactions while remaining attuned to its credit statistics. In addition, the covenants under the company's existing notes and credit facility agreement do not restrict financial flexibility.
The leasing status on Ventas's skilled nursing facilities not renewed by Kindred remains uncertain. As of the end of May, 54 of the 89 assets in the Kindred assets up for lease renewal in 2013 were being marketed. The 35 assets either renewed or re-leased by Kindred include a new lease for 10 of the long-term acute care hospitals. To date, Ventas has replaced approximately 60% of the rent on the 89 assets.
The company's REIT Investment Diversification and Empowerment Act (RIDEA) transactions increased capital expenditures to $52.7 million for the trailing 12 months (TTM) ended March 31, 2012 from $19.9 million in 2010. Fitch views TTM capital expenditures as an appropriate run rate going forward but is cognizant of the potential for increased property-level capital expenditures due to the nature of RIDEA transactions.
Despite increased capital expenditures, fixed-charge coverage is strong for the rating. 1Q'12 fixed-charge coverage (recurring operating EBITDA less recurring capital expenditures and straight-line rent adjustments divided by total interest incurred) pro forma for post-quarter end transactions was 4.1x compared with 4.5x in 1Q'12 and 4.3x in 4Q'11.
Fitch anticipates that low single-digit same store NOI growth and lowering costs of debt capital will result in coverage sustaining in the low-to-mid 4x range over the next 12-to-24 months. In a stress case not anticipated by Fitch in which leases to be vacated by Kindred remain unleased, coverage would fall below 4.0x, which would remain commensurate with a 'BBB+' rating.
Based on Fitch's criteria report, 'Parent and Subsidiary Rating Linkage,' dated Aug. 11, 2011, 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 overall credit profile of the consolidated entity.
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.
The following factors may have a positive impact on the ratings and/or outlook:
--A continued reduction in tenant/operator concentration;
--If the company's fixed-charge coverage ratio were to sustain above 4.0x (pro forma coverage is 4.1x);
--If the company's net debt to recurring operating EBITDA ratio were to sustain below 4.0x (pro forma leverage is 5.2x);
--If unencumbered asset coverage of unsecured debt (UA/UD) sustains above 4.0x (pro forma UA/UD is 3.0x).
The following factors may have a negative impact on the ratings and/or outlook:
--If the company's leverage ratio were to remain above 5.5x;
--If the company's fixed-charge coverage ratio were to remain below 3.0x;
--If unencumbered asset coverage sustains below 3.0x;
--If the company sustains a liquidity shortfall.
Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Ratings and Notching Criteria for Equity REITs' (May 3, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Linkage' (Aug. 11, 2011).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage