Fitch Affirms Ventas, Inc.'s IDR at 'BBB'; Outlook Stable
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the credit ratings of Ventas, Inc. (NYSE: VTR) and two of its subsidiaries, Ventas Realty, Limited Partnership and Ventas Capital Corporation (collectively, Ventas or the company) as follows:
"Equity Credit for Hybrids and Other Capital Securities"
--Issuer Default Rating (IDR) at 'BBB';
--$1 billion unsecured credit facility at 'BBB';
--$750 million senior unsecured notes at 'BBB';
--$230 million senior unsecured convertible Notes at 'BBB';
--Preferred stock (indicative rating) at 'BB+'.
The Rating Outlook is Stable.
The affirmation of Ventas's IDR at 'BBB' centers on the company's robust cash flow from healthcare real estate in excess of the company's fixed charges. The company's portfolio exhibits geographical and property segment diversification, and was further expanded via the July 1, 2010 acquisition of businesses owned and operated by Lillibridge Healthcare Services, Inc. and related entities along with interests in 96 medical office buildings and ambulatory facilities. Ventas also has low leverage for the rating category and a management team with a successful track record. Offsetting these credit strengths are operator and manager concentration across the portfolio, as well as the weak financial condition of Sunrise Senior Living, Inc., one of Ventas's major property managers. Ventas's bondholders are also structurally subordinated to various secured creditors in the company's capital structure. The Stable Outlook is driven by Ventas's solid unencumbered asset coverage of unsecured debt and good near-term liquidity profile, although the company has sizeable debt maturities in 2012.
The company's fixed charge coverage ratio, defined as recurring operating EBITDA less routine capital expenditures and straight-line rent adjustments, divided by interest expense and capitalized interest, was robust at 3.5 times (x) for the trailing 12 months (TTM) ended June 30, 2010, compared with 3.4x and 2.8x during 2009 and 2008, respectively. Increases in fixed charge coverage stem from substantial de-leveraging and rent growth. Ventas generates organic cash flow growth due to contractual rent escalators within certain leases including those with Kindred Healthcare, Inc. and Brookdale Senior Living, Inc., which contributed 38% and 18%, respectively, of Ventas's second-quarter 2010 (2Q'10) net operating income pro forma for the Lillibridge transaction. Fitch anticipates that absent de-leveraging transactions, fixed charge coverage will remain between 3.0x and 3.5x, rising modestly in 2011 and 2012 due to contractual rent escalators. Ventas's long-term fixed charge coverage ratio target as defined by Ventas is at least 3.0x. Per the definition of fixed charge coverage under the company's revolving credit facility, fixed charge coverage was 3.4x in 2Q'10.
The company's portfolio exhibits geographical and property segment diversification, which Fitch views favorably. As of June 30, 2010, 7.4% of the company's properties were in California, followed by Pennsylvania (6.8%), Massachusetts (6.8%), Ohio (5.8%), Kentucky (5.8%), and Florida (5.2%). No other state exceeded 5% of the total portfolio as of June 30, 2010, giving Ventas broad exposure to demand for seniors housing and other health care real estate. In addition, the Lillibridge transaction increased the percentage of net operating income (NOI) derived from medical office buildings (MOBs) to 8% from 5%. Pro forma for the Lillibridge transaction, seniors housing will contribute 48% of NOI, skilled nursing facilities will be 28%, hospitals will be 14%, and loan investments will be 2%. Healthcare real estate is approximately a $700 billion industry in 2009, making up a significant share of gross domestic product. With continual growth expected in the healthcare industry, Ventas's presence across various healthcare real estate segments will position the company to take advantage of macroeconomic demand drivers.
Ventas's leverage, defined as net debt to recurring operating EBITDA, was low for the rating category at 4.2x as of June 30, 2010, compared with 4.3x and 5.1x as of Dec. 31, 2009 and Dec. 31, 2008, respectively. Ventas funded the $381 million Lillibridge transaction at an implied capitalization rate in a range of 7.6% to 7.9% with cash on hand, borrowings under its revolving credit facilities, and the assumption of mortgage debt, thereby increasing leverage modestly above 4.5x on a pro forma basis. Absent de-leveraging transactions, Fitch anticipates that leverage will remain between 4.5x and 5.0x through 2012. Ventas's long-term net debt to EBITDA target as defined by Ventas is 5.0x (leverage as defined by Ventas was 4.0x as of June 30, 2010).
Major credit concerns include operator and manager concentration and the weak financial condition of Sunrise Senior Living, Inc., one of Ventas's top property managers. As of June 30, 2010 pro forma for the Lillibridge transaction, Sunrise-managed properties comprised 19% of total NOI, while Brookdale and Kindred-operated properties comprised 38% and 18% of NOI, respectively. Despite operator and manager concentration, Ventas generates operating portfolio cash flow from approximately 7,000 individual seniors and approximately 1,750 MOB tenants.
A manager of Ventas's operating seniors housing portfolio, Sunrise has a weak financial condition. As of June 30, 2010, Sunrise had significant debt maturities in 2010 and debt that is in default. Sunrise has extended certain debt in default and is seeking additional waivers to avoid acceleration and has pursued asset sales to improve liquidity. Nevertheless, Ventas continues to generate cash flow within its operating portfolio and pay management fees to Sunrise. In addition, Ventas may terminate its management agreements with Sunrise (wherein Ventas pays Sunrise a base management fee of 6%), under certain scenarios including if certain Sunrise-managed properties fail to achieve a targeted NOI level for a given period. Overall, Sunrise's financial condition is not having an adverse impact on Ventas's operating portfolio and Ventas has downside protection in the event of a Sunrise liquidation, but manager replacement risk remains a possibility.
Ventas's secured debt to undepreciated book capital ratio was 23.6% as of June 30, 2010, compared with 24.3% and 23.4%, as of Dec. 31, 2009 and Dec. 31, 2008, respectively. Ventas intends to reduce secured debt and expand the unencumbered property pool over time, which Fitch would view positively. Ventas's secured debt levels are offset by the company's unencumbered asset coverage of unsecured debt, which was 3.7x per the covenants within the company's bond indenture and was approximately 3x based on a stress capitalization rate of 10% on the company's unencumbered EBITDA and pro forma for the Lillibridge transaction.
The Stable Outlook centers on Ventas's good near-term liquidity position. The company's sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility pro forma for the Lillibridge transaction, projected retained cash flows from operating activities after dividend payments) divided by uses of liquidity (debt maturities and projected routine capital expenditures) result in a liquidity coverage ratio of 1.5x for July 1, 2010 to Dec. 31, 2011. However, 20.6% of the company's debt matures in 2012 (28.2% pro forma for the Lillibridge transaction) and the company would have a liquidity coverage ratio of below 1x through Dec. 31, 2012 in a stressed case assuming no additional capital raises and a reduced commitment size of one-third under Ventas's unsecured revolving credit facility.
Based on Fitch's report, "Equity Credit for Hybrids and Other Capital Securities" dated Dec. 29, 2009, the two-notch differential between Ventas's IDR and its indicative preferred stock rating of 'BB+' is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. In March 2009, Ventas filed an automatic shelf registration statement on Form S-3 with the SEC relating to the sale of securities including the authorization of 10,000 shares of preferred stock. The company had no preferred stock outstanding as of June 30, 2010.
The following factors may have a positive impact on Ventas's ratings and/or Outlook:
--If the company's net debt-to-recurring EBITDA ratio were to sustain below 4x (as of June 30, 2010 the company's debt-to-recurring EBITDA ratio was 4.2x but is expected to rise above 4.5x pro forma for the Lillibridge transaction);
--If the company's fixed charge coverage ratio were to sustain above 3.5x (for the TTM ended June 30, 2010, fixed charge coverage was 3.5x but is expected to decrease pro forma for the Lillibridge transaction);
--Demonstrated access to multiple sources of capital;
--Continued operator and manager diversification.
The following factors may have a negative impact on Ventas's ratings:
--If the company's net debt-to-recurring EBITDA ratio were to sustain above 5.5x;
--If the company's fixed charge coverage ratio were to sustain below 3x;
--A sustained decline in unencumbered asset coverage below 2.5x;
--A liquidity shortfall.
Ventas is a real estate investment trust (REIT) headquartered in Chicago with an additional office in Louisville that owns a portfolio of seniors housing and healthcare-related properties in 43 states in the U.S. and two Canadian provinces. As of June 30, 2010 and pro forma for the Lillibridge transaction, the portfolio consisted of 599 assets: 242 senior housing communities, 187 skilled nursing facilities, 40 hospitals, 122 MOBs, including 96 Lillibridge MOBs, and eight other properties. As of June 30, 2010, Ventas had $6.7 billion of undepreciated book assets, a total market capitalization of $9.9 billion and an equity market capitalization of $7.3 billion. With the exception of the company's senior housing communities managed by Sunrise pursuant to long-term management agreements and medical office buildings, Ventas leases its properties to healthcare operating companies under triple-net leases.
Additional information is available at '[ www.fitchratings.com ]'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 13, 2010;
--'Parent and Subsidiary Rating Linkage', July 14, 2010;
--'Criteria for Rating U.S. Equity REITs and REOCs', April 16, 2010;
--'Equity Credit for Hybrids & Other Capital Securities - Amended', Dec. 29, 2009;
--'Rating Hybrid Securities', Dec. 29, 2009;
--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009;
--'Evaluating Corporate Governance', Dec. 12, 2007.
Applicable Criteria and Related Research:
Evaluating Corporate Governance
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=363502 ]
Recovery Rating and Notching Criteria for REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]
Equity Credit for Hybrids & Other Capital Securities - Amended
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
Parent and Subsidiary Rating Linkage Criteria Report
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826 ]
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