Fitch Ratings has assigned a 'BBB+' rating to the $275 million aggregate principal amount 3.25% coupon senior unsecured notes due 2022 issued by the operating partnership of Ventas, Inc. (NYSE: VTR), Ventas Realty, Limited Partnership (Ventas Realty), and a wholly owned subsidiary of Ventas Realty, Ventas Capital Corporation (collectively, Ventas).
The notes are guaranteed by Ventas, Inc. on a senior unsecured basis and were priced at 99.027% of par to yield 3.365% to maturity, or 188 basis points over the benchmark treasury rate. The company expects to use the net proceeds from the offering to prepay in full its $200 million unsecured term loan due 2013, which bears interest at an all-in fixed rate of 4% per annum, to repay indebtedness outstanding under its unsecured revolving credit facility and for working capital and other general corporate purposes, including to fund future acquisitions and investments, if any.
Fitch currently rates Ventas, Inc. and its subsidiaries (collectively, Ventas) as follows:
Ventas Realty, Limited Partnership
Ventas Capital Corporation
--Issuer Default Rating (IDR) 'BBB+';
--$2 billion unsecured revolving credit facility 'BBB+';
--$502.4 million senior unsecured term loans 'BBB+';
--$2.7 billion senior unsecured notes 'BBB+'.
Nationwide Health Properties, LLC (NHP)
--$579.6 million senior unsecured notes 'BBB+'.
The Rating Outlook is Stable.
The ratings reflect:
--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 June 30, 2012, operating seniors housing represented 26% of NOI, followed by triple-net 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 second quarter of 2012 (2Q'12) were California at 12%, 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. Same-store cash flow coverage ratios of all of the company's triple-net tenants are solid at 1.7 times (x) on average for 1Q'12, 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.
Ventas's tenant/operator concentration is limited and includes Kindred Healthcare, Inc. (NYSE: KND) at 17% of 2Q'12 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. In addition to the 3.25% senior unsecured notes due 2022 and other recent unsecured bond offerings, 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 July 1, 2012 through Dec. 31, 2013, base case liquidity coverage pro forma for the bond offering is good at 1.8x. Sources of liquidity include unrestricted cash, availability under the unsecured revolving credit facility pro forma for the bond offering, and projected retained cash flows from operating activities. 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 June 30, 2012 at an 8% capitalization rate.
As of June 30, 2012, net debt to recurring operating EBITDA was 5.0x 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. 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. Of the 89 licensed SNFs and LTACs whose current lease to Kindred expires April 30, 2013, Kindred has renewed or entered into a new lease for 35 assets at a total annual rent of $75 million, which represents approximately 60% of the total current annual rent of $126 million for the 89 facilities. Ventas is currently marketing for lease to qualified care providers the remaining 54 SNFs whose lease to Kindred expires April 30, 2013.
The company's REIT Investment Diversification and Empowerment Act (RIDEA) transactions increased capital expenditures to $58.7 million for the trailing 12 months (TTM) ended June 30, 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. 2Q'12 fixed-charge coverage (recurring operating EBITDA less recurring capital expenditures and straight-line rent adjustments divided by total interest incurred) pro forma for the bond offering was 4.4x 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
--A continued reduction in tenant/operator concentration;
--If Fitch expects the company's fixed-charge coverage ratio to sustain above 4.0x (pro forma coverage is 4.4x);
--If Fitch expects the company's leverage to sustain below 4.0x (pro forma leverage is 5.0x);
--If Fitch expects unencumbered asset coverage of unsecured debt (UA/UD) to sustain above 4.0x (pro forma UA/UD is 3.0x).
The following factors may have a negative impact on the ratings and/or
--If Fitch expects the company's leverage ratio to remain above 5.5x;
--If Fitch expects the company's fixed-charge coverage ratio to remain below 3.0x;
--If Fitch expects unencumbered asset coverage to sustain below 3.0x;
--If the company sustains a liquidity shortfall.
Additional information is available at 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