Fitch Ratings has assigned a credit rating of 'BBB+' to the $225 million aggregate principal amount of 5.45% senior unsecured notes due 2043 issued by the operating partnership of Ventas, Inc. (NYSE: VTR), Ventas Realty, Limited Partnership (Ventas Realty), and a wholly owned subsidiary, Ventas Capital Corporation (collectively, Ventas). The notes are guaranteed by Ventas, Inc. on a senior unsecured basis and are redeemable at par in whole at any time, or from time to time in part, on or after March 7, 2018.
The company expects to use the net proceeds from the offering of approximately $217.9 million (or $250.5 million if the overallotment option is exercised in full) to repay indebtedness outstanding under its unsecured revolving credit facility and for working capital and other general corporate purposes, including the funding of future acquisitions or 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+';
--$685.3 million senior unsecured term loans 'BBB+';
--$3.7 billion senior unsecured notes 'BBB+'.
Nationwide Health Properties, LLC (NHP)
--$579.6 million senior unsecured notes 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect the company's broad healthcare property platform that generates cash flow predominantly from private pay sources. The company also has strong access to capital and liquidity, appropriate leverage for the 'BBB+' rating, and a solid management team. The rating is balanced by the incurrence of increased capital expenditures related to the company's operating portfolio, including assets managed by Atria Senior Living, Inc. (Atria), which is 34% owned by Ventas effective Dec. 21, 2012. However, 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 Dec. 31, 2012, operating seniors housing represented 26% of NOI, followed by triple-net seniors housing (24%), skilled nursing (22%), medical office (17%) and hospitals (7%). Operating NOI including NOI related to the company's REIT Investment Diversification and Empowerment Act of 2007 (RIDEA) investments represent 26% of annualized NOI, which is higher than other healthcare REITs. Ventas has limited exposure to specific geographical regions. The company's largest states by property NOI within the owned portfolio in the fourth quarter of 2012 (4Q'12) were California at 13%, Texas at 8%, New York at 7%, with no other state exceeding 5%.
Ventas's tenant/operator concentration is limited and includes Kindred at 16% of fourth quarter 2012 (4Q'12) NOI, Atria Senior Living, Inc. at 14%, Sunrise Senior Living, LLC (Formerly NYSE: SRZ) at 12%, and Brookdale Senior Living Inc. (NYSE: BKD) at 10%, with no other tenant/operator exceeding 5% of NOI.
Mostly Private Pay Portfolio
The company's payor sources are 71% private pay by NOI, limiting government reimbursement risk. Same-store cash flow coverage ratios of all of the company's triple-net tenants declined to 1.6x on average for 3Q'12 (latest data available) from 1.7x in 2Q'12, reflective of the loss of RUG-IV revenues by nursing home operators during the prior calendar year. Uncertainties regarding the resolution of the sequestration spending reductions that became effective on March 1, 2013 further underscore the benefits of a private pay portfolio.
Strong Access to Capital and Liquidity
The company's strong access to multiple sources of capital supports the 'BBB+' rating. 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.
Liquidity coverage, defined as liquidity sources divided by uses, is strong at 2.2x for the period Jan. 1, 2013 through Dec. 31, 2014 pro forma. Liquidity sources include unrestricted cash, availability under revolving credit facilities pro forma for the 2043 notes offering, and projected retained cash flows from operating activities after dividends. Liquidity uses include pro rata debt maturities and projected recurring capital expenditures. Assuming an 80% refinance rate on 2013-2014 secured debt maturities, liquidity coverage is 4.1x.
Fitch calculates that the company's dividends and distributions represented 74.9% of normalized FFO adjusted for capital expenditures and straight-line rent in 2012, indicating some liquidity generated from operating cash flow.
Ventas has good contingent liquidity with unencumbered assets (annualized unencumbered NOI divided by an 8% capitalization rate) to unsecured debt of 3.1x as of Dec. 31, 2012. In addition, the covenants in the company's debt agreements do not restrict financial flexibility.
As of Dec. 31, 2012, net debt to 4Q'12 recurring operating EBITDA was 5.5x compared with 5.0x in 3Q'12 and 4.9x in 2Q'12. Fitch anticipates that leverage will remain in the mid-4x to mid 5x range over the next 12 to 24 months, 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 operational volatility results in same-store NOI declines, leverage would sustain in the high-5x range, which would be weak for a 'BBB+' rating.
Strong Management Team
Management has remained attuned to managing credit metrics through recent acquisitions. 2011 transactions included NHP and the portfolio of senior living communities managed by Atria. 2012 investments totaled $2.7 billion and included Cogdell Spencer, Inc. and 16 private pay seniors housing communities managed by Sunrise. Multiple senior managers have been with the company since 2002, providing stability through real estate and capital market cycles.
Increased Capital Expenditures
Despite increased capital expenditures, fixed-charge coverage is strong for the rating. 4Q'12 annualized fixed-charge coverage pro forma for the bond offering was 4.1x compared with 4.2x in 4Q'12, 4.4x in 3Q'12 and 4.4x in 2Q'12. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures and 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 low-to-mid 4x range over the next 12-to-24 months. In a stress case not anticipated by Fitch in which operational volatility results in same-store NOI declines, coverage remain around 4.0x, which would remain commensurate with a 'BBB+' rating.
Based on Fitch's criteria report, 'Parent and Subsidiary Rating Linkage,' dated Aug. 8, 2012, 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 following factors may have a positive impact on the ratings and/or Outlook:
--A continued reduction in tenant/operator concentration;
--Fitch's expectation of the company's fixed-charge coverage ratio sustaining above 4.0x (4Q'12 pro forma coverage is 4.1x);
--Fitch's expectation of leverage sustaining below 4.0x (Dec. 31, 3012 leverage is 5.5x);
--Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) sustaining above 4.0x (Dec. 31, 3012 UA/UD is 3.1x).
The following factors may have a negative impact 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.
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:
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Criteria for Rating U.S. Equity REITs and REOCs
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage