Fitch Affirms Ventas, Inc.'s IDR at 'BBB+' on SNF Spin-off and Ardent Announcements; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed its ratings on Ventas, Inc. VTR and certain rated subsidiaries (collectively, Ventas) following the company's announcements that it intends to spin-off 355 primarily post-acute skilled nursing facility (SNF) properties operated by regional and local care providers (spin-off) and also acquire the real estate of Ardent Health Services for a net value of approximately $1.4 billion (Ardent transaction).

Fitch currently rates Ventas' long-term Issuer Default Rating (IDR) 'BBB+'. A full list of ratings is shown at the bottom of this release.

KEY RATING DRIVERS

The spin-off and Ardent transactions will enable the company to focus primarily on seniors housing and medical office buildings, and to a lesser extent hospitals, which will lessen post-acute reimbursement risk by increasing the percentage of NOI derived from private pay sources to 83% from 75% as of Dec. 31, 2014 pro forma for the American Realty Capital Healthcare Trust, Inc. (HCT) transaction that closed in January 2015. Credit strengths incorporated into the rating include strong fixed charge coverage, demonstrated access to multiple sources of capital, adequate liquidity, and a deep management team.

The rating takes into account that the company has increased leverage over the past several quarters due to acquisition timing and Fitch expects the company to operate in the 5.6x to 5.8x range over the next two years. This range will be appropriate for the 'BBB+' rating going forward due to the higher growth potential of cash flows post-spin.

Credit concerns include the potential for higher volatility in operating cash flows through the cycle given the company's RIDEA (REIT Investment Diversification and Empowerment Act) structured investments and Fitch's broader worries concerning the healthcare REIT sector's continued rapid growth and the risk that companies in the sector may end up paying premium pricing for new investments, given favorable equity valuations.

SNF Spin-off and Ardent Collectively Lessen Reimbursement Risk; Continued Diversification

Skilled nursing has not been a large drain on Ventas' capital allocation, as the portfolio is triple-net leased. However, the spin-off will allow Ventas to sharpen its strategy while remaining diversified by property type, with a focus on operators/managers with a national presence. As of Dec. 31, 2014 pro forma for the HCT, spin-off and Ardent transactions, triple-net skilled nursing will decline to 4% of net operating income (NOI) from 18%. Domestic seniors housing operating assets that utilize RIDEA structures will comprise 28% of NOI compared with 25% previously. Seniors housing triple net leased assets will increase to 26% of NOI from 23%, and medical office will increase to 20% of NOI from 18%.

The seniors housing portfolio includes properties in high-barrier-to-entry coastal markets that are experiencing favorable demographics including household income, home values and senior population growth above U.S. averages, which should continue to support cash flow growth.

Exposure to regional managers will be reduced pro forma for the spin-off and Ardent transactions, a credit positive. The company's partners will include Atria Senior Living, Brookdale Senior Living and Sunrise Senior Living on the seniors housing side, Kindred Healthcare, Genesis Healthcare, HealthSouth and Ensign Group on the post-acute SNF side, and Ventas will continue its Lillibridge medical office business. The company's top operators/managers pro forma are Atria at 19% of NOI, Sunrise, Kindred and Lillibridge, all at 10%, and Brookdale at 9%.

EBITDAR Coverage on Ardent Portfolio Below Other Hospitals

The Ardent transaction is a slight credit negative since initial rent coverage levels indicate limited cushion against operator cash flow deterioration relative to other hospitals. EBITDARM coverage of rents for the Ardent portfolio is expected to be 2.9x initially. By contrast, Medical Properties Trust's MPW acute care hospital rent coverage ratios have been in the 4.5x-6.0x range over the past several years. Ardent is currently owned by a private equity firm, so it is unclear if the credit quality of the Ardent portfolio is superior to that of MPW's hospital operators.

VTR's entire triple net portfolio cash flow coverage was 1.6x as of Sept. 30, 2014, as this metric is reported in a one-quarter lag.

Secular trends such as increased hospital expenditures and emergency room visits should support the need for acute care hospitals. The Ardent hospital portfolio includes acute care facilities in Amarillo, TX, Tulsa, OK and Albuquerque, NM, regions in which these hospitals have a dominant market share. Ventas intends to complete an OpCo/PropCo split of the portfolio and fund the acquisition in a leverage neutral manner, net of a sale of the hospital operations business. Following the OpCo/PropCo split, Ventas will enter into a long-term master lease agreement with the OpCo.

Leverage Trending Higher

As of Dec. 31, 2014 pro forma, net debt to recurring operating EBITDA is 5.8x, compared to 6.1x for full year 2014 (5.9x in 4Q2014), and 5.8x in 2013. Leverage increased in 2014 when compared with 5.6x as of Dec. 31, 2012 due to the timing of recent transactions including the all-cash acquisition of 29 Canadian senior living communities from Holiday Retirement in August 2014; net real estate investments have trended in the $1.4 billion to $1.5 billion range over the past several years.

Fitch anticipates that leverage will remain between 5.6x and 5.8x through 2016, due to expectations of ongoing balanced access to unsecured debt and equity markets coupled with Fitch's projection of approximately 3% same-store NOI growth. This leverage level remains appropriate for the 'BBB+' rating, but has trended closer to the potential negative rating sensitivity leverage level of 6.0x.

Strong Cash Flow Despite RIDEA Exposure

Fitch views RIDEA structured seniors housing as having the potential for higher volatility through the cycle than other healthcare property types. VTR's portfolio exhibited average volatility and growth when compared to its two closest peers (HCP, Inc., IDR of 'BBB+' with a Stable Outlook and Health Care REIT, Inc., IDR of 'BBB+' with a Stable Outlook) from 2010 - 2014, although this growth was achieved during a period of strong fundamentals.

The company's fixed charge coverage ratio is 4.2x in 4Q2014 pro forma for the HCT, spin-off and Ardent transactions (4.3x for full year 2014), compared to 4.4x in 2013 and 4.5x in 2012. VTR's increased interest expense associated with debt-financed acquisitions such as the Holiday Retirement portfolio in 2014, offset by same-store NOI growth and NOI from development, led to this trend. Fitch projects fixed-charge coverage in the low-to-mid 4.0x range over the next several years, which is strong for a 'BBB+' rating. Fitch defines fixed charge coverage as recurring operating EBITDA less straight-line rents and recurring capital expenditures, divided by total cash interest incurred and preferred dividends.

Strong Access to Capital

The company continues to demonstrate strong access to multiple sources of capital as evidenced by the January issuance of $600 million 3.5% 10-year notes, $300 million 4.375% 30-year notes and C$250 million private placements due 2022. Ventas recently established a $1 billion at-the-market (ATM) equity offering program, following the initial $750 million program in 2013. In December 2014 and January 2015, Ventas issued $536 million under the initial ATM program.

In December 2013, the company entered into a new $3 billion unsecured credit facility that replaced its previous $2.68 billion unsecured revolving credit facility and unsecured term loans. The current unsecured credit facility is comprised of a $2 billion revolver initially priced at LIBOR plus 1%, and a $200 million four-year term loan and an $800 million five-year term loan, each initially priced at LIBOR plus 1.05%. VTR's revolver pricing is similar to HCN's $2.5 billion unsecured revolver (LIBOR plus 1.05%) and HCP's $2 billion revolver (LIBOR plus 0.925%).

Adequate Liquidity

Liquidity coverage, calculated as liquidity sources divided by uses, is 1.3x for the period Jan. 1, 2015 to Dec. 31, 2016. Sources of liquidity include unrestricted cash, availability under the company's unsecured credit facility pro forma for HCT, spin-off and Ardent transactions and January bond offerings, and projected retained cash flows from operating activities after dividends. Uses of liquidity include debt maturities and projected development costs, including to-be-completed development.

The company's AFFO payout ratio was 73% in 2014, compared to 73.5% in 2013 and 72.6% in 2012. Based on the 2014 payout ratio, the company retains approximately $325 million of operating cash flow annually; however Fitch expects this to be approximately $180 million in 2015 due to the reduced cash flow from the spin-off as well as the recent dividend increase, resulting in an AFFO payout ratio closer to 85%. VTR's unencumbered assets (unencumbered NOI based on a stressed 8.5% capitalization rate) divided by net unsecured debt is 2.2x pro forma, which is adequate for the 'BBB+' rating. On the margin, the portfolio is more leverageable as evidenced by the increased NOI contribution from seniors housing pro forma, although offset by the addition of hospitals to the unencumbered pool, which have limited leveragability.

KEY ASSUMPTIONS

Fitch's key assumptions for Ventas in Fitch's base case 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;

--The SNF spin-off and Ardent transactions close in 3Q2015;

--$2 billion in annual acquisitions in 2016-2017 funded with 50% equity and 50% debt;

--Debt repayment with the issuance of new unsecured bonds;

--AFFO payout ratio of approximately 85%.

RATING SENSITIVITIES

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

--Fitch's expectation of leverage sustaining below 4.5x (pro forma leverage is 5.8x);

--Fitch's expectation of fixed-charge coverage sustaining above 4.0x (pro forma fixed charge coverage is 4.2x);

--Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) at a stressed 8.5% capitalization rate sustaining above 4.0x (pro forma UA/UD is 2.2x).

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.

Fitch has affirmed the following ratings:

Ventas, Inc.

--IDR at 'BBB+'.

Ventas Realty Limited Partnership and Ventas Capital Corporation

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

--$990 million senior unsecured term loans at 'BBB+';

--$6.7 billion senior unsecured guaranteed notes at 'BBB+'.

Ventas Canada Finance Limited

--$774.5 million senior unsecured guaranteed notes at 'BBB+'.

Nationwide Health Properties, LLC

--IDR at 'BBB+';

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

The Rating Outlook is Stable.

NHP Ratings

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. Fitch expects Ventas to repay $234.4 million of the NHP bonds in May 2015, at which point the remaining NHP bonds will comprise 0.8% of Ventas' unsecured indebtedness. Therefore, in May 2015, Fitch will likely withdraw the 'BBB+' NHP IDR with a Stable Outlook and 'BBB+' ratings on the remaining NHP bonds, as these ratings will no longer be relevant to the agency's coverage.

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

Applicable Criteria and Related Research:

--'U.S. Equity REITs and REOCs Ratings Navigator Companion' (Feb. 5, 2015);

--'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);

--'Healthcare REIT Deals Highlight Risks to Continued Growth' (Aug. 20, 2014);

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

Applicable Criteria and Related Research:

U.S. Equity REITs and REOCs: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861519

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982464

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