Business & Finance
Business and Finance
Business and Finance
Fri, July 8, 2011
Thu, July 7, 2011 Fitch Upgrades Ventas and Nationwide Health Properties to 'BBB+'; Outlook Stable
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings upgrades the credit ratings of Ventas, Inc. (NYSE: VTR), Ventas Realty, Limited Partnership, Ventas Capital Corporation, and Nationwide Health Properties, LLC (formerly known as Nationwide Health Properties, Inc. or NHP). This removes them from Rating Watch Positive. Fitch also assigns a Rating Outlook of Stable. Ratings actions are as follows:
Ventas, Inc.
Ventas Realty, Limited Partnership
Ventas Capital Corporation
--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--Unsecured revolving credit facility and term loan to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB';
--Senior unsecured convertible notes to 'BBB+' from 'BBB'.
Nationwide Health Properties, LLC (formerly known as Nationwide Health Properties, Inc.)
--IDR to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB'.
Fitch also assigns a 'BBB+' rating to Nationwide Health Properties, LLC's unsecured term loan. The rating for Nationwide Health Properties, Inc.'s unsecured revolving credit facility is withdrawn. This obligation is no longer outstanding.
Rating actions follow the consummation of the merger between Ventas, Inc. and Nationwide Health Properties, Inc. on July 1, 2011 in an all-stock transaction for a total consideration of approximately $7.6 billion including the assumption of debt.
The upgrade reflects Fitch's view that the acquisition of NHP by Ventas, Inc. results in a more diversified healthcare property platform, reduced manager and operator concentration, and a larger triple-net lease portfolio strengthening the position of Ventas's bondholders. The all-stock consideration reduces Ventas's leverage, calculated as net debt to recurring operating EBITDA, to approximately 5.0 times (x) from approximately 5.3x pro forma for the Atria Senior Living Group transaction that closed on May 12, 2011. Ventas's fixed-charge coverage ratio (calculated as recurring operating EBITDA less Fitch's estimate of recurring capital expenditures less straight-line rent adjustments divided by interest incurred) is expected to remain in a range from 3.0x to 3.5x over the next 12-to-24 months following the closing of the Atria and NHP transactions. These metrics are appropriate for a 'BBB+' rated healthcare REIT.
The NHP portfolio expands the newly consolidated company's unencumbered portfolio, which is offset by recent unsecured debt incurrence in connection with the Atria acquisition. However, Fitch notes a weakening of liquidity due to NHP's near-term debt maturities and increased capital expenditures related to Atria and NHP. Liquidity is available from NHP's undrawn unsecured term loan established in June 2011.
The terms of the NHP transaction suggest rich portfolio valuation, resulting in less clarity regarding Ventas's growth prospects. The transaction entails near-term integration risk as the Atria and NHP transactions both closed in 2011.
The merger spawned a parent-subsidiary relationship between Ventas, Inc. and NHP whereby NHP is now a wholly owned, indirect subsidiary of Ventas, Inc. NHP has a stronger standalone credit profile than Ventas, due primarily to its lower leverage and higher fixed-charge coverage. The legal and operational ties between Ventas and NHP are strong. Ventas used a portion of the $700 million aggregate principal amount of 4.750% senior notes due 2021 to make a senior unsecured term loan to NHP. The combined entity is expected to have similar jurisdictional presence, common management, and a centralized treasury. The IDRs of Ventas and NHP are expected to remain the same going forward and the IDR will be based on the consolidated financial metrics and overall credit profile given the stronger subsidiary credit profile, combined with strong legal and operating ties. This is based on Fitch's criteria report, 'Parent and Subsidiary Rating Linkage,' dated July 14, 2010.
Fitch projects consolidated leverage to range between 4.5x to 5.0x over the next 12-to-24 months, principally due to EBITDA growth expected from imbedded rent bumps across the portfolio combined with relatively unchanged net debt. Leverage could approach 6.0x in a more adverse case than anticipated by Fitch in which EBITDA sustains declines. This would likely result in negative rating momentum.
The Ventas portfolio pro forma for the NHP transaction is expected to include 1,361 properties located in 46 states and Washington D.C. as well as two Canadian provinces. In addition, the portfolio exhibits reduced manager and operator concentration. This had previously been a concern for Fitch with the historically sizeable contribution of Kindred-operated properties (despite solid EBITDARM coverage of rents) to Ventas's EBITDA as well as the financial difficulties of Sunrise Senior Living, a manager of Ventas's seniors housing operating portfolio. Following the Atria and NHP transactions, top operators by net operating income are expected to be Kindred (19%), Atria (15%), and Brookdale (13%), and the top five manager/operators are expected to constitute 62% of net operating income, compared with 81% as of March 31, 2011.
Long-term net leases with contractual rate increases continue to be prevalent across the portfolio, as operating assets will comprise 26% of the portfolio following the NHP transaction compared with 39% prior to the NHP transaction. The legacy Ventas portfolio has performed well, with same-store cash net operating income increasing by 6% in 2010 and 3.7% in first-quarter 2011 (1Q'11). Moreover, private pay net operating income is expected to constitute 70% of total assets in the portfolio following the NHP transaction. Fitch anticipates fixed-charge coverage will range from 3.0x to 3.5x principally due to imbedded same-store net operating income growth, and that in a more adverse case than anticipated by Fitch in which EBITDA sustains declines, coverage would be 3.0x, which would be weaker for a 'BBB+' rating.
Ventas's unencumbered asset pool will grow materially following the NHP merger. Unencumbered asset coverage of unsecured debt as of March 31, 2011 centered around 4.0x based on a range of recently observed healthcare REIT transaction capitalization rates, but is expected to decline to around 3.5x pro forma for the Atria and NHP transactions, principally due to the incurrence of unsecured debt in May 2011 to fund a portion of the Atria transaction. In addition, the covenants under Ventas and NHP's credit agreements are not expected to reduce the combined company's financial flexibility.
Ventas's near-term liquidity profile will weaken following the merger due to NHP's near-term debt maturities and increased capital expenditures related to Atria and NHP, which is partially offset by NHP's undrawn unsecured term loan established in June 2011. Ventas's sources of liquidity (unrestricted cash pro forma for the May 2011 unsecured bond offering, availability under its unsecured revolving credit facility, projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro forma debt maturities and projected capital expenditures) was 2.9x for Ventas pro forma for the Atria transaction and 2.1x pro forma for the NHP transaction.
The Stable Outlook reflects the view that Ventas's fixed-charge coverage ratio will range from 3.0x to 3.5x over the next 12-to-24 months, leverage will range from 4.5x to 5.0x over the next 12-to-24 months, unencumbered asset coverage of unsecured debt will be between 3.0x to 4.0x based on a range of capitalization rates appropriate for healthcare real estate assets, and the company will maintain a liquidity coverage ratio above 1.0x. These metrics are relatively unchanged pro forma for capital markets activities and the Atria and NHP transactions that took place after March 31, 2011.
Fitch does not anticipate positive rating momentum over the near- to medium-term. However, the following factors may have a positive impact on Ventas's ratings and/or Outlook:
--A continued reduction in manager/operator concentration;
--If the company's fixed-charge coverage ratio were to sustain above 4.0x (Ventas's standalone fixed-charge coverage ratio was 3.6x in 1Q'11 and 3.2x pro forma for the Atria transaction, NHP's fixed-charge coverage was 4.5x in 1Q2011, and the combined company's fixed charge coverage pro forma for the NHP merger was 4.1x in 1Q'11);
--If the company's net debt-to-recurring operating EBITDA ratio were to sustain below 4.0x (net debt to 1Q'11 annualized recurring operating EBITDA was 3.9x for standalone Ventas and 5.3x pro forma for the Atria transaction, 3.7x for NHP, and 4.7x for the combined company as of 1Q'11 pro forma for the NHP merger);
--If unencumbered asset coverage of unsecured debt sustains above 4.0x (as of March 31, 2011 and pro forma for the Atria transaction, Ventas's unencumbered asset coverage of unsecured debt centered around 3.5x based on a range of recently observed healthcare REIT transaction capitalization rates, while unencumbered asset coverage is expected to remain in this range pro forma for the NHP merger).
The following factors may have a negative impact on Ventas's ratings and/or Outlook:
--If the company's leverage ratio were to remain above 5.5x;
--If the company's fixed-charge coverage ratio were to remain below 3.0x;
--Unencumbered asset coverage sustains below 3.0x;
--A sustained liquidity shortfall.
Ventas is a REIT headquartered in Chicago with an additional office in Louisville that owns a portfolio of seniors housing and healthcare-related properties in 46 states and Washington D.C. as well as two Canadian provinces. Ventas was incorporated in Kentucky in 1983, commenced operations in 1985 and reorganized as a Delaware corporation in 1987. Ventas operates through three reportable business segments: triple-net leased properties, senior living operations, and medical office building operations. As of March 31, 2011 and pro forma for the Atria and NHP transactions, Ventas had approximately $17 billion in total assets and a total enterprise value of approximately $23 billion.
Additional information is available at '[ www.fitchratings.com ]'.
Applicable Criteria and Related Research:
--Recovery Rating and Notching Criteria for REITs, May 12, 2011;
--Criteria for Rating U.S. Equity REITs and REOCs, March 15, 2011;
--Corporate Rating Methodology, Aug. 16, 2010;
--Parent and Subsidiary Rating Linkage, July 14, 2010;
--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;
--Rating Hybrid Securities, Dec. 29, 2009.
Applicable Criteria and Related Research:
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]
Parent and Subsidiary Rating Linkage Criteria Report
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
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