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+';
--$682.3 million senior unsecured term loans at 'BBB+';
--$4.3 billion senior unsecured notes at 'BBB+'.
Nationwide Health Properties, LLC (NHP)
--IDR at 'BBB+';
--$209.8 million senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation of the IDR at 'BBB+' 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 27% of the company's 1Q2013 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 March 31, 2013 were Atria Senior Living, Inc. at 16% of NOI, Kindred Healthcare, Inc. (NYSE: KND) at 15%, Sunrise Senior Living, Inc. (Formerly NYSE: SRZ) at 11%, and Brookdale Senior Living Inc. (NYSE: BKD) at 10%, with no other tenant/operator exceeding 4% of NOI.
As of March 31, 2013, operating seniors housing, triple-net seniors housing, skilled nursing, medical office and hospitals represented 27%, 24%, 22%, 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, 1.7x and 2.6x, respectively in 4Q2012 (the most recent quarter available). Blended EBITDARM coverage of 1.6x indicates good 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 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 in 2015 may result in a similar lack of renewal and tenant replacement risk.
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, including 1Q2013 offerings of $500 million 2.7% senior unsecured notes due 2020 at a spread of 132 basis points and $259 million 5.45% senior unsecured notes due 2043 at a spread of 235 basis points. The company also raised capital via the unsecured term loan and common equity markets, including via a recently established at-the-market equity offering program.
Liquidity coverage, defined as liquidity sources divided by uses, is strong at 3.1x for the period April 1, 2013 through Dec. 31, 2014. Liquidity sources include unrestricted cash, availability under revolving credit facilities, 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 2013-2014 secured debt maturities, liquidity coverage is 8.3x.
Near-term debt maturities are minimal with 2.8% of debt maturing in 2013, followed by 4.1% in 2014, although 15.4% of debt matures in 2015, including the unsecured revolving credit facility.
Fitch calculates that the company's dividends and distributions represented 72.7% of normalized FFO adjusted for capital expenditures and straight-line rent in 1Q2013 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) to net unsecured debt of 2.8x as of March 31, 2013. In addition, the covenants in the company's debt agreements do not restrict financial flexibility.
NORMALIZED LEVERAGE APPROPRIATE FOR 'BBB+'
As of March 31, 2013, net debt to trailing 12 months recurring operating EBITDA was 5.5x (5.3x in 1Q2013), compared with 5.7x in FY2012 and 6.0x in FY2011. Leverage was high for the 'BBB+' rating during 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 4.2% in 1Q2013 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. 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 71% private pay by 1Q2013 NOI. As a result, Fitch does not expect that proposed 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. Preliminary prospective payment system (PPS) payment rates for Medicare in skilled nursing facilities are 1.4% for FY2014 following 1.8% in FY2013 and for long-term acute care hospitals are 1.1% 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 $84.9 million as of March 31, 2013, including $12.9 million to be completed as of March 31, 2013. Cost-to-complete represented only 0.1% of gross asset value and a negligible percentage of enterprise value as of March 31, 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 March 31, 2013 (4.5x in Q12013), 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+' 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 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 result in positive momentum on the ratings and/or Outlook:
--A continued reduction in tenant/operator concentration;
--Fitch's expectation of fixed-charge coverage sustaining above 4.0x (TTM coverage is 4.4x);
--Fitch's expectation of leverage sustaining below 4.0x (TTM leverage is 5.5x);
--Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) at a stressed 8.5% capitalization rate sustaining above 4.0x (March 31, 2013 UA/UD is 2.8x).
The following factors may result in negative momentum 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'.
Applicable Criteria and Related Research:
--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)
--Corporate Rating Methodology (Aug. 8, 2012)
--Parent and Subsidiary Rating Linkage (Aug. 8, 2012)
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
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