Fitch Affirms Ventas' Ratings at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Ventas, Inc.'s (VTR) Issuer Default Rating (IDR) at 'BBB+'. The Rating Outlook is Stable. A full list of rating actions follows the end of the 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 deep management team.

These strengths are tempered by leverage that has increased to the high end of the range appropriate for the rating and remains closer to 6x than 5x. The affirmation and Stable Outlook reflect Fitch's expectation that the company can maintain leverage below 6x should it wish to do so. Nonetheless, Ventas 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 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 Ventas prioritizes/balances rating aspirations and credit metrics with other goals. With leverage near Fitch's rating sensitivity for negative momentum, VTR has a thinner cushion against events such as a deterioration in recurring operating EBITDA than in prior years should there be a decline in the RIDEA portfolio or tenant credit issues in the net lease portfolio. The ratings have limited tolerance for leveraging transactions or leverage-neutral transactions that rely on to-be-completed dispositions or equity issuances. VTR had leverage of 5.9x and 6.1x, respectively, for the quarters ended June 30, 2016 and Dec. 31, 2015.

This 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 Ventas' increasing leverage to its desire to maintain external growth and continue to be a consolidator in healthcare real estate while asset yields declined and the cost of its equity fluctuated (as measured by consensus net asset value (NAV) and price relative to NAV). While Fitch recognizes that 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, Fitch believes healthcare REITs' access to capital and healthcare real estate values will nonetheless be affected by the broader business and capital markets cycles which are in 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 over the past two years. Ventas disposed of the majority of its post-acute / skilled nursing exposure via the Care Capital Properties ('BBB-'/Outlook Stable) spin-off in August 2015, entered acute care hospitals via the Ardent Health Services transaction also in August 2015, 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 science 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. So far, Ventas' portfolio has exhibited moderating yet still positive growth though occupancies have declined by 200 basis points (bps) since the fourth quarter of 2014 (4Q14) and 40 bps since the 2Q14. 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 during the last cycle.

Fitch assumes cash flow growth will remain steady through 2018 resulting in FCC in the low 4x-4.5x range, which is strong for the rating. FCC was 4.2x for the quarter ended June 30, 2016. Fitch defines FCC as recurring operating EBITDA less straight-line rent and recurring maintenance capital expenditures/total interest incurred.

STRONG ACCESS TO CAPITAL & APPROPRIATE LIQUIDITY

A key driver of Ventas' 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. 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 1.3x for the period July 1, 2016 through Dec. 31, 2017 and 0.9x through Dec. 31, 2018 before the $700 million debt investment in Ardent. Debt maturities are generally manageable until 2019 when $1.7 billion matures. 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 as of June 30, 2016. 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.

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 the timing effects of the CCP, Ardent and Wexford transactions. 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, $500 million of dispositions in 2016 and net acquisitions of $500 million per year in 2017-2019. Given the challenges in forecasting VTR's acquisition activity, Fitch has assumed that acquisition volumes above these levels would be funded with a commensurate amount of equity/dispositions to maintain 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 to refinance maturing secured and unsecured debt 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 GPT'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 has affirmed the following ratings:

Ventas, Inc.

--IDR at 'BBB+'.

Ventas Realty Limited Partnership and Ventas Capital Corporation

--Unsecured revolving credit facility at 'BBB+';

--Senior unsecured term loans at 'BBB+';

--Senior unsecured guaranteed notes at 'BBB+'.

Ventas Canada Finance Limited

--Senior unsecured guaranteed notes at 'BBB+'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com.

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.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Recovery Ratings and Notching Criteria for Equity REITs (pub. 03 Dec 2015)

https://www.fitchratings.com/site/re/874214

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012841

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012841

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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+1-212-908-0524
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or
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+1-212-908-9161
or
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or
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Contacts

Fitch Ratings
Primary Analyst
Britton Costa, CFA
Director
+1-212-908-0524
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steven Marks
Managing Director
+1-212-908-9161
or
Committee Chairperson
Stephen Boyd, CFA
Senior Director
+1-212-908-9153
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com