Fitch Ratings has upgraded the following credit ratings of Ventas, Inc. (NYSE: VTR) and its subsidiaries Ventas Realty, Limited Partnership and Ventas Capital Corporation:
-- Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
-- $867 million unsecured revolving credit facilities to 'BBB' from 'BBB-';
-- $1 billion senior unsecured notes to 'BBB' from 'BBB-';
-- $230 million senior unsecured convertible notes to 'BBB' from 'BBB-'.
Ventas Realty, Limited Partnership and Ventas Capital Corporation are the issuers of the senior unsecured debt obligations listed above, which are guaranteed by Ventas, Inc. In addition, in light of Ventas's recent automatic shelf registration statement on Form S-3 filed with the Securities and Exchange Commission in April 2009, Fitch has also assigned an indicative preferred stock rating for Ventas, Inc. of 'BBB-'. The Rating Outlook has been revised to Stable from Positive.
The upgrades stem from Fitch's view that Ventas's liquidity, leverage, and unencumbered healthcare property operating metrics have improved to levels consistent with a 'BBB' rating following several capital markets transactions in a difficult market environment.
In March 2009, Ventas increased the borrowing capacity under its unsecured credit facilities to $867 million from $850 million (of which $277 million matures in 2010) and repurchased $25.9 million of its 2010 and 2012 bonds in open market transactions. In April 2009, as one of the few REIT unsecured debt transactions year-to-date, the company completed the sale of $200 million of 6.5% senior notes due in 2016 through its subsidiaries, Ventas Realty, Limited Partnership and Ventas Capital Corporation. The company issued the bonds at a 15.75% discount to par, priced to yield 9.6%, and received net proceeds of $166 million. The company also raised $299.7 million in common stock in April 2009. In May 2009, Ventas completed cash tender offers for $306.1 million of senior unsecured notes due in 2010, 2012, 2014 and 2015. The tender offers were funded with net proceeds from the unsecured notes issuance and equity offering. In the aggregate, these transactions have bolstered the company's liquidity and on a pro forma basis, strengthened leverage and debt service coverage.
With respect to liquidity, Fitch estimates that the company's sources of liquidity (cash, availability under its revolving credit facility, retained cash flows from operating activities as well as additional liquidity from recent capital market transactions) less uses of liquidity (debt maturities and routine capital expenditures) result in a liquidity surplus of over $850 million from March 31, 2009 to Dec. 31, 2010, which is solid for a 'BBB' rating. Excluding the availability from the $277 million tranche under the company's revolving credit facility that matures in 2010, the company still has a solid liquidity surplus of over $575 million.
The company's leverage has also improved in light of the company's equity offering. In 2008 and for the twelve months ended March 31, 2009 pro forma for the company's equity offering in April 2009, Ventas's gross debt-to-recurring EBITDA ratio was 5.4 times (x) and 4.5x, respectively. When revising Ventas's Outlook to Positive from Stable in 2008, Fitch had stated that positive momentum may be placed on the ratings if the company's gross debt-to-recurring EBITDA ratio approximated 5.0x or lower. Despite uncertainties regarding the EBITDA generated by the company's 79 property portfolio operated by Sunrise Senior Living, Inc. (NYSE:SRZ) in 2009, which represents 34% of total investments and 17% of total NOI, Fitch anticipates that Ventas's gross debt-to-recurring EBITDA ratio will be below 5.0x in 2009 and 2010.
Fitch also stated when revising Ventas's Outlook to Positive from Stable in 2008 that there may be a positive impact on the ratings if fixed-charge coverage (defined as recurring EBITDA less routine capital expenditures and straight-line rent adjustments divided by interest expense and capitalized interest) sustained above 2.5x, and the company's fixed charge coverage ratio was 2.8x for the twelve months ended March 31, 2009, and would exceed 3.0x pro forma for the company's equity offering in April 2009. Fitch anticipates that going forward, the majority of Ventas's net operating income will continue to be derived from operators through predictable triple net leases, such as master leases with Kindred Healthcare, Inc. (NYSE: KND), which were recently extended from April 30, 2010 to April 30, 2015. While NOI from the company's operating portfolio managed by Sunrise may be less predictable and more volatile than cash flows through triple net leases, Fitch anticipates that the company's fixed charge coverage will remain above 2.5x over the next 12-24 months. Moreover, the company's net operating income from unencumbered assets divided by unsecured debt interest expense ratio was 4.5x in the first quarter of 2009 (1Q'09), which is strong for the 'BBB' rating, is expected to further improve in 2009 and positively reflects the unencumbered asset portfolio supporting unsecured bondholders.
The rating action takes into account certain offsetting factors including the company's operator concentration, the weak performance of Sunrise as a corporate entity, declining occupancy levels, and modest EBITDARM coverage of rents for the triple-net seniors housing portfolio.
The company's top three operators by net operating income, Sunrise, Brookdale Senior Living (NYSE: BKD) and Kindred, comprised 74% of total investments and 77% of total net operating income for Ventas in 1Q'09. Operator concentration is particularly a concern with Sunrise, which had a going concern opinion in its 2008 Form 10-K and violated certain covenants under its bank facility in 2008. Although Sunrise has received a waiver on its bank covenants through the end of 2009, Fitch expects that Sunrise's operating performance will remain under pressure, which Fitch views as a risk for Ventas. However, the Sunrise portfolio is an operating portfolio rather than a triple net lease portfolio for Ventas (i.e., seniors, rather than Sunrise itself, pay rent to Ventas), and Ventas has proven relationships with other operators as a contingency in the event a replacement for Sunrise is sought.
In addition, demand for senior housing and other healthcare real estate has weakened over the past year, as Ventas's total occupancy (weighted by the company's investment in various property types) declined to 86.7% in 4Q'08 for the triple-net portfolio and 1Q'09 for the operating portfolio, respectively, from 88% in 4Q'07 for the triple-net portfolio and 1Q'08 for the operating portfolio, respectively. According to the National Investment Center for the Seniors Housing and Care Industry, occupancy rates for Independent Living, Assisted Living, Dementia Care and Nursing Care properties all declined during 2008, and Fitch anticipates that the difficult economic environment may continue to pressure demand for healthcare real estate in the near-term.
The rating action also takes into consideration that EBITDARM coverage in Ventas's triple-net lease seniors housing portfolio was 1.3x in 2008, which is consistent with historical levels. That being said, Ventas's overall triple net lease portfolio generated a stronger EBITDARM coverage ratio of 1.8x in 2008.
The Stable Outlook reflects the company's unencumbered asset coverage ratio, which at 3.0x as of March 31, 2009 (based on calculations set forth in the company's credit agreements) provides downside protection to unsecured bondholders. Unencumbered asset coverage has increased further pro forma for the company's recent equity issuance and tender offers to approximately 3.7x. The Stable Outlook also reflects the broad opportunities for the healthcare real estate industry. The healthcare industry comprised an estimated 16% of U.S. gross domestic product (GDP) in 2007 and is projected to be 20% of GDP by 2017. While there are uncertainties in terms of potential changes in healthcare legislation over the near term, longer-term demographic trends such as growth in the population over 85 years old and the aging of the baby boomer demographic bodes well for healthcare real estate fundamentals.
The following factors may have a positive impact on Ventas's ratings:
-- A reduction in operator concentration in terms of percentage of NOI;
-- If the unencumbered pool were to increase to above 65% of total gross asset value (as of March 31, based on calculations employed in the company's bank credit facility, $4.6 billion of the company's $8.1 billion in gross asset value, or 57%, was unencumbered);
-- If the company's gross debt-to-recurring EBITDA ratio were to sustain below 4.5x (as of March 31, 2009, the company's debt-to-recurring EBITDA ratio was 4.5x pro forma for the company's equity offering in April 2009).
The following factors may have a negative impact on Ventas's ratings:
-- A liquidity shortfall;
-- If the company's fixed charge coverage ratio were to sustain below 2.5x;
-- If the company's gross debt-to-recurring EBITDA ratio were to sustain above 5.5x.
Ventas is a REIT headquartered in Chicago, with an additional office in Louisville, KY, that owns a portfolio of seniors housing and healthcare-related properties in 43 states in the U.S. and two Canadian provinces. As of March 31, 2009, the portfolio consisted of 505 properties, and the company had a total market capitalization of approximately $6.1 billion.