Fitch Rates Ventas' 2026 Senior Unsecured Notes 'BBB+'; Outlook Stable
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 remains 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 the rapid growth of healthcare REITs.
LEVERAGE REMAINS AT HIGH-END OF RANGE
Fitch expects leverage will continue to sustain around 6x, and the extent to which it migrates lower will depend on net acquisition volumes and the timing and relative mix of funding sources (i. e. debt, newly issued common equity and/or dispositions). With leverage near Fitch's rating sensitivity for negative momentum, VTR has a thinner cushion against potential 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. Similarly, Fitch expects it will be more challenging for VTR to grow meaningfully on a leverage-neutral basis going forward.
VTR had leverage of 5.9x and 6.2x, respectively, for the quarters ended June 30, 2016 and Dec. 31, 2015. Leverage on a trailing 12-months (TTM) basis is less relevant given that 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/recurring operating EBITDA.
STEADY CASH FLOW GROWTH DRIVES FIXED CHARGE COVERAGE (FCC)
Fitch assumes cash flow growth will remain steady through 2017 resulting in FCC in the low 4x 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 1.1x for the period July 1, 2016 through Dec. 31, 2017 before the 2026 note issuance. Debt maturities are generally manageable until 2018 and 2019 when $1.3 billion and $1.7 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 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.
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;
--Announced and completed transactions such as the $1.5 billion Wexford portfolio and $500 million of 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 in the ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.9x at June 30, 2016);
--Fitch's expectation of fixed-charge coverage sustaining above 4.0x (FCC was 4.2x for the quarter ended June 30, 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 June 30, 2016).
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 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+'.