March 27, 2017 / 2:55 PM / 10 months ago

Fitch Rates Ventas' Senior Notes due 2023 and 2027 'BBB+'

(The following statement was released by the rating agency) NEW YORK, March 27 (Fitch) Fitch Ratings has assigned 'BBB+' ratings to $400 million of 3.1% senior unsecured notes due 2023 and $400 million of 3.85% senior unsecured notes due 2027 issued by Ventas Realty, L.P., an operating partnership of Ventas Inc. (NYSE: VTR). A full list of Fitch's current ratings on VTR follows at the end of this release. KEY RATING DRIVERS The 'BBB+' rating and Stable Outlook reflect VTR's diverse portfolio of healthcare properties, demonstrated and consistent access to multiple sources of capital, adequate liquidity, and deep management team. These strengths are tempered by leverage that has increased to the high end of the range appropriate for the rating, remaining closer to 6x than 5x. The ratings and Stable Outlook reflect Fitch's expectation that the company can maintain leverage below 6x should it choose to do so (5.7x and 5.8x for the quarter and year ended Dec. 31, 2016). Nonetheless, VTR has a thinner cushion to withstand events such as a largely debt-financed transaction, a worse than expected decline in senior housing fundamentals, or an unforeseen tenant/lease default. Other credit concerns include the potential for higher volatility in operating cash flows through the cycle given the company's REIT Investment Diversification and Empowerment Act (RIDEA) structured investments, increasing uncertainty surrounding federal healthcare legislation and Fitch's broader concerns surrounding the rapid growth of healthcare REITs. LEVERAGE REMAINS AT HIGH END OF RANGE Fitch projects that leverage will continue to sustain around 6x, and whether it migrates meaningfully lower will depend on the extent to which VTR prioritizes rating aspirations and credit metrics over other goals. The company has a thinner cushion against events such as deterioration in recurring operating EBITDA, from a decline in the RIDEA portfolio or tenant credit issues in the net lease portfolio, than in prior years with leverage near Fitch's rating sensitivity for negative momentum. The ratings have limited tolerance for leveraging transactions or leverage-neutral transactions that rely on future dispositions or equity issuances. VTR had leverage of 5.7x and 6.1x, respectively for the quarters ended Dec. 31, 2016 and Dec. 31, 2015. The positioning is in contrast to most other REIT asset classes, which have reduced leverage since the financial crisis and are currently operating towards the lower end of their financial policies. Fitch attributes VTR's leverage being higher than late 2011 (albeit declining since late 2015) to its desire to maintain external growth and continue to be a consolidator within healthcare real estate while asset yield declined and its cost of equity fluctuated (as measured by consensus net asset value and price relative to NAV). Healthcare real estate operates under a different business cycle than other real estate asset classes because its tenants generally provide non-cyclical and less discretionary services. However, Fitch believes healthcare REITs' access to capital and real estate values will nonetheless be affected by the broader business and capital markets cycles that are likely in the later stages. PIVOTING THE PORTFOLIO VIA LARGE TRANSACTIONS Ventas, which is known for being willing and able to execute on large transactions, has undergone a fairly material pivot in its portfolio in the last two years. VTR will have disposed of its post-acute/skilled nursing exposure via the Care Capital Properties (NYSE: CCP; 'BBB-'/Outlook Stable) spin-off in August 2015 and the in-progress Kindred transaction, entered acute care hospitals via the Ardent Health Services transaction in the same month, made a follow-on $700 million debt investment for Ardent's purchase of LHP announced in October 2016, and acquired a $1.5 billion portfolio of life sciences buildings in September 2016. On the margin, the transactions do not materially alter VTR's credit profile from a qualitative or quantitative perspective given offsetting elements across the transactions. Instead they demonstrate the issuer pursuing large transactions to enter or exit sub-sectors, particularly into less favored/fragmented ones where it believes it can achieve higher returns as a consolidator. STEADY CASH FLOW GROWTH DRIVES FIXED CHARGE COVERAGE (FCC) Operating cash flow growth has been resilient, sustaining in the low single digits as measured by same-store net operating income despite significant levels of supply in senior housing. VTR's portfolio has exhibited moderating yet still positive growth to date despite declining occupancies. Fitch is paying particular attention to how REITs with material senior housing operating portfolios perform as this is the first test of how they will perform through a cycle given they were principally triple-net leased portfolios during the last cycle. Fitch assumes cash flow growth will remain steady through 2018 resulting in FCC in the 4x to 4.5x range (4.4x for 2016), which is strong for the rating. STRONG ACCESS TO CAPITAL & APPROPRIATE LIQUIDITY A key driver of VTR's ratings is its strong access to capital. The company has consistently demonstrated access to the public unsecured bond markets in the U.S. and Canada including two 30-year note issuances. VTR's access to capital is supplemented by its bank lending group, which provides a $2 billion unsecured revolving credit facility due 2019 assuming extension options are exercised. Fitch projects VTR's sources of liquidity cover its uses by 1.1x for the period Jan. 1, 2017 through Dec. 31, 2018 pro forma for the offering, the $700 million debt investment in Ardent and, notably, before proceeds from the Kindred asset sales that are expected to be realized in 2017. Fitch defines sources as readily available cash, availability under the revolving credit facility and retained cash flow from operations after dividends and uses as debt maturities, maintenance capital expenditures and development expenditures. ADEQUATE CONTINGENT LIQUIDITY VTR's unencumbered asset pool provides adequate contingent liquidity to its unsecured debt at 1.9x assuming a stressed 8.5% capitalization rate at Dec. 31, 2016. The portfolio is slightly more leverageable on the margin since the CCP spin-off given the increased contributions from seniors housing, offset in part by the addition of hospitals from the Ardent transaction to the unencumbered pool which have limited leveragability. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for VTR include: --Operating cash flow growth: Supported by 2.5% growth in SSNOI adjusted for timing effects of the Wexford transaction. Fitch has assumed operating margins decline to reflect lower margins for operating portfolio and life science portfolios relative to the CCP portfolio. --Capital expenditures: Fitch's projections reflect announced transactions, $900 million in 2017 and $500 million of dispositions per year in 2018 and 2019. Given the challenges in forecasting VTR's acquisition activity, Fitch has assumed that volumes above these levels would be funded with a commensurate amount of equity/dispositions to sustain leverage in the 5.5x - 6x range. Fitch's projections also assume VTR maintains its current spend rate for development, redevelopment, and maintenance capital expenditures. --Capital markets activity: Fitch's projections reflect announced transactions and assume VTR will issue $1.2 billion of unsecured debt per year (including this offering) to refinance maturing secured and unsecured obligations and other general corporate purposes. RATING SENSITIVITIES While Fitch does not envision positive rating momentum in the near term, the following factors may have a positive impact on VTR's ratings and/or Outlook: --Fitch's expectation of leverage sustaining below 4.5x; --Fitch's expectation of fixed charge coverage sustaining above 4.0x; --Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) at a stressed 8.5% capitalization rate sustaining above 4.0x. The following factors may result in negative momentum in the ratings and/or Outlook: --Increased cash flow volatility through-the-cycle due to heightened RIDEA exposure and/or material increase in RIDEA exposure; --Fitch's expectation of leverage sustaining above 6.0x; --Fitch's expectation of fixed charge coverage sustaining below 3.0x; --Fitch's expectation of liquidity coverage sustaining below 1.0x. FULL LIST OF RATING ACTIONS Fitch currently rates VTR as follows: Ventas, Inc. --IDR 'BBB+'. Ventas Realty, L.P. and Ventas Capital Corp. --Unsecured revolving credit facility 'BBB+'; --Senior unsecured term loans 'BBB+'; --Senior unsecured guaranteed notes 'BBB+'. Ventas Canada Finance Limited --Senior unsecured guaranteed notes 'BBB+'. The Rating Outlook is Stable. Contact: Primary Analyst Britton Costa, CFA Senior Director +1-212-908-0524 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Caitlin Blalock Associate Director +1-512-215-3732 Committee Chairperson Stephen Boyd, CFA Senior Director +1-212-908-9153 Date of Relevant Rating Committee: Oct. 6, 2016 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation and include operating income from discontinued operations; --Fitch has adjusted the historical and projected net debt by assuming the issuer requires $5 million of cash for working capital purposes that is otherwise unavailable to repay debt. 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