NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the senior unsecured notes due 2023 issued by Ventas Realty, L.P. (Issuer Default Rating [IDR] 'BBB+'/Outlook Stable), the operating partnership of Ventas, Inc. (NYSE: VTR). A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The 'BBB+' rating and Stable Outlook reflect Ventas' diverse portfolio of healthcare properties, demonstrated and consistent access to multiple sources of capital, adequate liquidity and a deep management team. These strengths are tempered by leverage that has increased and now persists closer to 6x than 5x. 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 and Fitch's broader concerns surrounding healthcare REITs' rapid growth.
LEVERAGE PERSISTING AT HIGH-END OF RANGE
Fitch expects leverage will sustain around 6x unless VTR issues equity or engages in meaningful asset sales, with the latter less likely given the issuer's guidance for 2016 indicates only modest net dispositions of $300 million. With leverage persisting at Fitch's rating sensitivity for negative momentum, VTR has a thin cushion against the potential for deterioration in recurring operating EBITDA should there be a decline in the RIDEA portfolio or tenant credit issues in the net lease portfolio. Similarly, Fitch expects it will be more challenging for VTR to grow meaningfully on a leverage-neutral basis going forward.
VTR's leverage was 6x and 6.1x for the quarters ended March 31, 2016 and Dec. 31, 2015, respectively. Leverage on a trailing 12 months (TTM) basis is less relevant given 2015 reported earnings include partial year contributions from the assets spun-off into Care Capital Properties, Inc. (NYSE: CCP). Fitch calculates leverage as debt less readily available cash to recurring operating EBITDA.
STEADY CASH FLOW GROWTH DRIVES FIXED CHARGE COVERAGE (FCC)
Fitch assumes cash flow growth will remain steady through 2017 (2% triple net revenue, 3.5% same-store net operating income [SSNOI] growth for seniors housing operating assets and 3% SSNOI growth for medical office buildings) resulting in fixed-charge coverage in the low 4x range, which is strong for the rating. FCC was 4.2x for both the quarter and trailing 12 months (TTM) ended March 31, 2016.
The CCP spin-off has mixed implications for the quality and durability of VTR's operating income. By removing the majority of its skilled nursing exposure, VTR improved the quality of its income by increasing the amount derived from private pay sources. Conversely, the CCP spin-off may increase the volatility of operating cash flows due to the increasing percentage derived from RIDEA investments. Fitch assumes RIDEA portfolios (including VTR's) have the potential for higher volatility through-the-cycle than other owned property types and notes that the strong 2010-2014 performance was achieved during a period of robust fundamentals.
Fitch defines fixed-charge coverage as recurring operating EBITDA less straight-line rent and recurring maintenance capital expenditures to total interest incurred.
STRONG ACCESS TO CAPITAL & APPROPRIATE LIQUIDITY
A key driver of Ventas' ratings is its strong access to capital. Ventas has consistently demonstrated access to the public unsecured bond markets in the U.S. and Canada including two 30-year note issuances. Ventas' 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 1x for the period April 1, 2016 through Dec. 31, 2017 before the 2023 note issuance and 1.2x upon completion assuming it is $350 million in size and used to repay near-term debt maturities. Debt maturities are generally manageable until 2018 and 2019 when $1.4 billion and $1.8 billion mature. 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. On the margin, the portfolio is slightly more leverageable since the CCP spin-off given the increased contribution from seniors housing, offset in part by the addition of hospitals from the Ardent transaction to the unencumbered pool which have limited leveragability.
Fitch's key assumptions within the rating case for VTR include:
--2% triple net revenue growth, 3.5% same store NOI growth on seniors housing operating assets, and 3% same-store NOI growth in medical office buildings through 2017;
--G&A growth to maintain historical margins relative to total revenues;
--$300 million of net dispositions with any incremental acquisitions funded with a like amount of dispositions;
--Debt repayment with the issuance of new unsecured bonds;
--AFFO payout ratio of approximately 85%.
The following factors may result in positive momentum on the ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 4.5x (leverage was 6x at March 31, 2016);
--Fitch's expectation of fixed-charge coverage sustaining above 4.0x (FCC was 4.2x for the TTM ended March 31, 2016);
--Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) at a stressed 8.5% capitalization rate sustaining above 4.0x (UA/UD was 1.9x at March 31, 2016).
The following factors may result in negative momentum on 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 rates Ventas as follows:
Ventas Realty Limited Partnership and Ventas Capital Corporation
--Unsecured revolving credit facility 'BBB+';
--Senior unsecured term loans 'BBB+';
--Senior unsecured guaranteed notes 'BBB+'.
Ventas Canada Finance Limited
--Senior unsecured guaranteed notes 'BBB+'.
Date of Relevant Rating Committee: Oct. 7, 2015
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;
--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.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)