Fitch Rates Ventas Realty, LP and Ventas Canada Finance Ltd.'s Sr. Notes 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a credit rating of 'BBB+' to the following notes issued by Ventas Realty, Limited Partnership (Ventas Realty), a subsidiary of Ventas, Inc. VTR:

--$600 million aggregate principal amount of 3.50% senior unsecured notes due 2025;

--$300 million aggregate principal amount of 4.375% senior unsecured notes due 2045.

In addition, Fitch has assigned a credit rating of 'BBB+' to the following notes issued by Ventas Canada Finance Limited, also a subsidiary of Ventas, Inc.:

--C$250 million aggregate principal amount of 3.30% Series C senior unsecured notes due 2022.

The 2025 notes were issued at 99.663% of par value to yield 3.540% or 160 basis points over the benchmark rate, and the 2045 notes were issued at 99.500% of par value to yield 4.405% or 190 basis points over the benchmark rate. The 2022 notes were issued at 99.992% of par value to yield 3.301% or 182 basis points over the benchmark rate. The notes are guaranteed by Ventas, Inc. on a senior unsecured basis.

Ventas intends to use the net proceeds from the 2025 and 2045 offerings to repay indebtedness outstanding under its unsecured revolving credit facility and for working capital and other general corporate purposes, including to fund a portion of the cash consideration of its pending acquisition of American Realty Capital Healthcare Trust, Inc. (NASDAQ: HCT or ARC Healthcare) and other future acquisitions and investments. The company intends to use the net proceeds from the 2022 offering for general corporate purposes, which may include acquisitions of, or investments in, additional properties and businesses and repayment of indebtedness.

KEY RATING DRIVERS

In June 2014, Fitch affirmed VTR's 'BBB+' IDR upon the announcements that the company will acquire HCT in a stock and cash transaction valued at $2.6 billion along with the Holiday Retirement transaction that closed in August 2014 for CAD957 million. The 'BBB+' rating takes into account that the HCT and Holiday Retirement assets transactions will augment an already well-diversified healthcare real estate portfolio. The transactions will also increase the percentage of VTR's net operating income derived from private pay sources, decrease manager/operator concentration and result in strong fixed-charge coverage. These strengths are offset by the increase in leverage and decline in unencumbered asset coverage of unsecured debt on a pro forma basis.

Strategically Consistent Transactions Augment Diversification

As of Sept. 30, 2014 pro forma for the fourth quarter of 2014 (4Q'14) acquisitions assumed by Fitch, the HCT merger and bond offerings, seniors housing operating assets that utilize RIDEA (REIT Investment Diversification and Empowerment Act)-compliant structures will comprise 30% of net operating income (NOI) compared with 28% in 2Q'14. Comparisons with 2Q'14 illustrate the cumulative impact of the Holiday Retirement and HCT transactions. Seniors housing triple net leased assets will comprise 24% of NOI compared with 26% in 2Q'14. Skilled nursing facility and medical office building NOI will each make up 18% of NOI compared with 20% and 15%, respectively, in 2Q'14.

Property type diversification has led to a stable stream of cash flows over the company's history and continues to contribute strong same-store NOI (SSNOI) growth, which supports operating performance through cycles. However, the terms of the transactions suggest rich portfolio valuation (the combined unlevered capitalization rate for the HCT and Holiday Retirement assets transactions is 6% on a cash basis), resulting in less clarity surrounding VTR's growth prospects. NOI derived from private pay sources will increase slightly to 75% pro forma compared with 73% in 2Q'14, incrementally reducing exposure to risks related to government reimbursement. Private pay revenue sources comprise 84% of ARC Healthcare revenues and the acquired Holiday Retirement communities managed by Atria Senior Living are all private pay.

Strong portfolio demographics (i.e., median household income, population and related growth for the 75+ year old cohort) for HCT and Holiday Retirement seniors housing operating assets should support cash flow growth going forward. In addition, of the 153 HCT assets, 79 are medical office buildings that were 96.9% occupied as of Sept. 30, 2014 and are 77% on campus or health-system affiliated, compared with the Ventas MOB portfolio as of June 30, 2014, which had 91.7% occupancy and which was 96% on campus or health-system affiliated.

Manager/operator diversification remains as a result of the transactions. Atria will comprise 18% of NOI compared with 17% in 2Q'14; Sunrise and Kindred exposure will comprise 10% and 9% of pro forma NOI respectively, compared with 11% and 10% in 2Q'14.

Increase in Leverage

Fitch expects leverage will remain elevated for the current rating. As of Sept. 30, 2014 pro forma, net debt to recurring operating EBITDA increases to 5.9x assuming a 10% cash election on the HCT transaction, up from 5.8x as of Dec. 31, 2013 and 5.6x as of Dec. 31, 2012. Fitch anticipates that leverage will approach the mid-5x range over the next 12 to 24 months, due to expectations of ongoing balanced access to unsecured debt and equity markets coupled with Fitch's projection of low-single digit SSNOI growth. In a stress case not anticipated by Fitch in which operational volatility results in flat SSNOI, leverage would sustain in the high-5x range, which would be weak for the rating. Fitch's expectation of leverage sustaining above 5.5x is one sensitivity for negative momentum on the rating and/or outlook.

Strong Fixed-Charge Coverage

Fitch expects continued above-average SSNOI performance across the healthcare REIT space for 2015, partially driven by the exposure to RIDEA assets acquired over the past several years, which are experiencing outsized growth relative to triple-net assets, although the pace of growth is slowing. Ventas generated year-over-year same-store cash NOI growth of 3% in 3Q'14 down from full-year 2013, when year-over-year same-store cash NOI grew by 5%.

The company's fixed charge coverage ratio was 3.9x in 3Q'14 pro forma, flat compared with 3Q'14 actual but down from 4.4x in 2013 and 4.5x in 2012. Fitch has assumed an NOI contribution of $212.4 million from 4Q'14 acquisitions assumed by Fitch and the HCT transaction, offset by increased capital expenditures related to seniors housing operating assets and increased interest expense related to assumed HCT mortgage debt and the unsecured bond offerings.

Fixed-charge coverage is strong for the 'BBB+' rating. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures less straight-line rent adjustments divided by total interest incurred.

Fitch anticipates low single-digit SSNOI growth will result in coverage sustaining in the low-to-mid-4x range over the next 12 to 24 months, which is strong for a 'BBB+' rating. In a stress case not anticipated by Fitch in which operational volatility results in SSNOI declines, coverage would fall just below 4x, which would remain commensurate with a 'BBB+' rating.

Strong Access to Capital and Adequate Liquidity

Over the past 12 months, Ventas has been active in the U.S. and Canadian dollar denominated unsecured bond markets, as well as the unsecured term loan and common equity markets, including via an at-the-market equity offering program.

Liquidity coverage, defined as liquidity sources divided by uses, is adequate at 1.2x for the period Oct. 1, 2014 through Dec. 31, 2016 pro forma. Liquidity sources include readily available cash, availability under the unsecured revolving credit facility pro forma, and projected retained cash flows from operating activities after dividends. Liquidity uses include pro rata debt maturities, projected recurring capital expenditures, and projected development expenditures. Assuming that the company refinances 80% of secured debt maturities through Dec. 31, 2016, liquidity coverage improves to 1.5x.

Unencumbered assets (annualized unencumbered NOI divided by a stressed 8.5% capitalization rate) cover net unsecured debt by 2.1x as of Sept. 30, 2014 pro forma, which is weak for the 'BBB+' rating. This ratio is down from 3.2x in 1Q'12 and 2.8x in 1Q'13.

Fitch calculates that the company's dividends and distributions represented 81.3% of normalized funds from operations adjusted for capital expenditures and straight-line rent in 3Q'14, up from 75.7%, however, these ratios indicate good retained liquidity generated from operating cash flow.

Parent-Subsidiary Linkage

Based on Fitch's criteria report, 'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage,' dated May 28, 2014, the Ventas merger with Nationwide Health Properties, Inc. in July 2011 resulted in a parent-subsidiary relationship whereby Nationwide Health Properties, LLC (NHP) is a wholly owned subsidiary of Ventas, Inc. Prior to the merger, NHP previously had stronger standalone credit metrics including lower leverage and higher fixed-charge coverage. Given the stronger subsidiary credit profile, combined with strong legal and operating ties (e.g. common management and a centralized treasury), the IDRs of Ventas, Inc. and NHP are linked and are expected to remain the same going forward. The IDRs are based on the financial metrics and credit profile of the consolidated entity.

RATING SENSITIVITIES

The following factors may result in positive momentum on the ratings and/or Outlook:

--Fitch's expectation of fixed-charge coverage sustaining above 4.0x (pro forma fixed-charge coverage is 3.9x);

--Fitch's expectation of leverage sustaining below 4.0x (pro forma leverage is 5.9x);

--Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) at a stressed 8.5% capitalization rate sustaining above 4.0x (this ratio is 2.1x pro forma).

The following factors may result in negative momentum on the ratings and/or Outlook:

--Fitch's expectation of liquidity coverage sustaining below 1.0x (this ratio is 1.2x pro forma);

--Fitch's expectation of fixed-charge coverage sustaining below 3.0x;

--Fitch's expectation of leverage sustaining above 5.5x;

--Fitch's expectation of UA/UD sustaining below 3.0x.

In addition to the notes listed above, Fitch currently rates Ventas, Inc. and its subsidiaries as follows:

Ventas, Inc.

--Issuer Default Rating (IDR) 'BBB+'.

Ventas Realty Limited Partnership and Ventas Capital Corporation

--$2 billion unsecured revolving credit facility 'BBB+';

--$1.1 billion senior unsecured term loans 'BBB+';

--$5.8 billion senior unsecured notes 'BBB+'.

Ventas Canada Finance Limited

--$580.6 million senior unsecured notes 'BBB+'.

Nationwide Health Properties, LLC (NHP)

--IDR 'BBB+';

--$309.8 million senior unsecured notes 'BBB+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'2015 Outlook: U.S. Equity REITs' (Dec. 16, 2014);

--'2015 Outlook: U.S. Healthcare' (Dec. 4, 2014);

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Nov. 25, 2014);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 18, 2014);

--'Corporate Rating Methodology' (May 28, 2014);

--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26, 2014).

Applicable Criteria and Related Research:

2015 Outlook: U.S. Equity REITs (Capital Access Underpins Disciplined Growth)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=828828

2015 Outlook: U.S. Healthcare (The Value Debate Intensifies While Aggressive M&A Continues)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=824368

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating U.S. Equity REITs and REOCs (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=966855

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