Fitch Ratings has affirmed the ratings of Ventas, Inc., its subsidiaries and debt with the long-term ratings at 'BBB+' and the short-term ratings at 'F2' and maintained the Negative Outlook upon its agreement to acquire New Senior Investment Group ('New Senior') for $2.3 billion.
The Negative Outlook reflects Ventas' leverage being above Fitch's negative rating sensitivity and the issuer's financial policy as a result of the pandemic's effects on its senior housing portfolio. Fitch expects leverage will improve back toward the high-end of the range toward the end of the rating outlook horizon despite the modest leveraging effects of this acquisition. A resolution of the Negative Rating Outlook will be based on the shape of the recovery and management's willingness to protect its credit profile.
KEY RATING DRIVERS
Strategically Sound Acquisition: Fitch views Ventas' announced acquisition of New Senior to be strategically sound. The transaction bolsters its senior housing portfolio with assets in solid markets and integration risk is manageable given Ventas' pre-existing relationships with the operators. The acquisition could provide multiple years of significant growth as Ventas has guided to NOI effectively doubling over the medium-term.
Predominantly Debt-Funded Acquisition: The acquisition (approximately 7% of enterprise value) is being funded by the assumption of $1.5 billion of mortgages and $800 million of shares being issued to New Senior's shareholders. This implies a 65% debt to gross assets ratio for the transaction, the inverse of Ventas' 37% debt to gross assets ratio at March 31, 2021. Similarly, Fitch estimates the transaction's leverage (debt/EBITDA) is 11x ($1.5 billion of debt versus $130 million of EBITDA assuming management's guidance of a 6% NOI cap rate in 2022 less $8 million of incremental G&A after cost synergies). Upon achieving the 8% NOI cap rate that management guided to over the medium-term, the transaction's leverage improves to around 8.5x, all else being equal.
Deleveraging Within Rating Horizon: The affirmation reflects that Fitch's forecasts indicate a similar timeline and trajectory for deleveraging as that at the time of the last review in March 2021. The incremental leverage from this transaction is offset by the recovery in senior housing occurring earlier and more meaningfully than we had last assumed. As such, Fitch continues to expect leverage will return to around 6x (the negative rating sensitivity) in 2023 which is toward the end of the rating outlook horizon. Given the rapid changes in EBITDA, Fitch will focus more on each quarter's annualized leverage metrics than TTM metrics.
Ventas has chosen to extend how long it will be out of compliance with its 5x-6x financial policy as a result of the transaction despite it being strategically sound. This compares with Ventas' efforts in 2020 to cauterize the effects of the pandemic on its credit profile by using dispositions and joint ventures to reduce leverage and proactive debt issuances while reducing the dividend to bolster liquidity. The trajectory could improve should Ventas issue meaningful amounts of equity or sell assets to repay debt beyond its public guidance. The trajectory could deteriorate should the recovery in operating fundamentals stall or should Ventas complete additional leveraging transactions.
Recovering Senior Housing Fundamentals: Fitch expects the improvement in senior housing fundamentals that began in late 1Q21 and continued through 2Q21 will drive meaningful revenue and EBITDA growth in 2H21 and thereafter. Ventas' senior housing operating portfolio occupancy increased 140bp in April and May 2021. Continued stabilization at this rate would imply Ventas' portfolio occupancy could rebound to pre-pandemic levels (1Q20) sometime in 2Q22. Fitch views occupancy to be a proxy for NOI though the latter will be influenced by rate growth and normalization in operating expenses.
Fitch has assumed occupancy growth of 2.5%-3% in 2021 including 170bp of declines in 1Q21 and 3% growth per year thereafter which implies occupancy reaching pre-pandemic levels in 2023 or 2024. While operating trends are favorable, continuation is not a foregone conclusion given the fluid nature of the pandemic. For example, health officials are beginning to recommended indoor mask-wearing again to counter the Delta variant (e.g. World Health Organization, Israel, Los Angeles). Senior housing occupancy growth could stall or reverse if operators and/or public health officials reinstate previously lifted safety protocols.
Tenets of 'BBB+' IDR: Ventas' 'BBB+' Issuer Default Rating (IDR) is based on the expectation that its diversified portfolio of healthcare assets would deliver durable EBITDA and FCF, enabling the issuer to maintain its financial policy of leverage between 5x-6x, through-the-cycle. The 'BBB+' ratings also assume Ventas has comparable access to capital with similarly rated peers and above-average relative to the broader REIT universe. Constraining Ventas' IDR is a large senior housing operating portfolio that Fitch expects will exhibit more volatility than a triple-net leased portfolio.
Ventas' ratings reflect the issuer's diversified portfolio of health care real estate its long-term financial policies. The ratings also reflect Ventas' above-average access to capital relative to both health care REITs specifically and the broader REIT universe. Ventas and PEAK (BBB+/Stable) are the highest-rated health care REITs due to the generally comparable aforementioned factors with Ventas' Negative Outlook reflecting leverage being above its financial policy due to weakness in senior housing.
Healthcare Realty Trust is also rated 'BBB+'/Stable, with comparable portfolio quality, lower leverage and stronger contingent liquidity than the bigger REITs offsetting weaker relative access to capital. Fitch rates Physicians Realty Trust 'BBB'/Stable given Fitch's expectation for relatively higher renewal risk at lease expiration for the issuer's single-tenant and off-campus medical office building (MOB) portfolio, as well as leverage expectations in the 5.0x-6.0x range.
The largest health care REITs are rated higher than smaller and/or more narrowly focused health care REITs, such as Sabra Health Care REIT (BBB-/Stable), National Health Investors (BBB-/Stable), Omega Healthcare Investors, Inc. (BBB-/Stable) and CareTrust REIT, Inc. (BB+/Stable), due to their relative access to capital and larger exposure to skilled nursing facilities.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Operating EBITDA around $1.6 billion in 2021 as senior housing occupancy begins to recover and reflecting three months of contributions from New Senior assuming a Sept. 30, 2021 closing.
$1 billion of dispositions in 2021 and $500 million of acquisitions in 2023.
Approximately $1.5 billion of debt repayment in 2021 and 2022 and no significant equity issuances.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of leverage, measured as net debt/recurring operating EBITDA after net distributions to non-controlling interests, sustaining below 5.0x;
Demonstrated market-leading capital markets access relative to REITs generally and comparable with 'A' category corporates;
Fitch's expectation of REIT fixed-charge coverage, measured as recurring operating EBITDA after net distributions to non-controlling interests adjusted for straight line rents and maintenance capex relative to interest and preferred dividends, 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.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
More severe coronavirus effects or muted recovery without the company taking offsetting measures and/or further leveraging transactions that delays timely restoration in credit metrics;
Increased cash flow volatility through-the-cycle due to senior housing operating exposure and a change in SSNOI may be a proxy for comparable cash flow from operations;
Fitch's expectation of leverage, measured as net debt/recurring operating EBITDA after net distributions to non-controlling interests, sustaining above 6.0x;
Fitch's expectation of REIT fixed-charge coverage, measured as recurring operating EBITDA after net distributions to non-controlling interests adjusted for straight-line rents and maintenance capex relative to interest and preferred dividends, sustaining below 3.0x;
Fitch's expectation of UA/UD sustaining below 2.0x.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Liquidity Coverage Appropriate: Fitch views Ventas' sources of liquidity (unrestricted cash, availability under its $2.75 billion revolving credit facility and retained FCF after projected acquisitions and divestitures) to be sufficient to cover debt maturities through Dec. 31, 2022. Ventas maintains $2.7 billion of capacity on its unsecured revolver and has a well-laddered debt maturity schedule with no year of maturities at 10% or more of total debt until 2023. The closing of the New Senior transaction does not influence Ventas' liquidity given its structure.
Ventas is a large health care REIT with a diversified portfolio spanning senior housing, MOBs, life science buildings and hospitals.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Ventas has an ESG Relevance Score of '4' for Exposure to Social Impacts as an owner, operator and provider of real estate to U.S. healthcare operators affected by social and political pressures to play its part in containing healthcare costs, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONSENTITY/DEBT RATING PRIOR
Ventas Canada Finance Limited
LT BBB+ Affirmed BBB+
Ventas Capital Corporation
LT BBB+ Affirmed BBB+
Ventas, Inc. LT IDR BBB+ Affirmed BBB+
Ventas Realty, Limited Partnership LT IDR BBB+ Affirmed BBB+
ST IDR F2 Affirmed F2
LT BBB+ Affirmed BBB+
ST F2 Affirmed F2
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com