Fitch Rates Ventas Canada Finance Limited's Sr. Notes due 2019 and 2024 'BBB+'; Outlook Stable

Fitch Ratings has assigned a credit rating of 'BBB+' to the following notes issued by Ventas Canada Finance Limited, a subsidiary of Ventas, Inc. (NYSE:VTR or the company):

--C$400 million aggregate principal amount of 3.00% Series A senior unsecured notes due 2019;

--C$250 million aggregate principal amount of 4.125% Series B senior unsecured notes due 2024.

The notes are fully and unconditionally guaranteed by Ventas, Inc. on a senior unsecured basis. The 2019 notes were issued at 99.713% of par value to yield 3.062% or 137 basis points over the benchmark rate, and the 2024 notes were issued at 99.602% of par value to yield 4.174% or 190 basis points over the benchmark rate. Net proceeds are expected to be used to repay a portion of certain existing indebtedness incurred in connection with the acquisition of 29 independent living seniors housing communities located in Canada from Holiday Retirement Corp. (Holiday Retirement assets), which was completed on August 19, 2014. The bond offerings effectively manage foreign exchange risk.

KEY RATING DRIVERS

In June 2014, Fitch affirmed VTR's 'BBB+' IDR upon the announcements that the company will acquire American Realty Capital Healthcare Trust, Inc. (NASDAQ:HCT or ARC Healthcare), in a stock and cash transaction valued at $2.6 billion along with the since-completed Holiday Retirement transaction for CAD $980 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 slightly improve fixed-charge coverage. These strengths are offset by an expected increase in leverage, and decline in liquidity and unencumbered asset coverage of unsecured debt, pro forma.

Strategically Consistent Transactions Augment Diversification

As of June 30, 2014 pro forma for the HCT and Holiday Retirement assets transactions and Canadian dollar 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% previously. Seniors housing triple net leased assets will comprise 24% of NOI compared with 26% previously. 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 ARC Healthcare and Holiday Retirement assets transactions is 6%), 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 82% of ARC Healthcare revenues while the Holiday Retirement communities to be 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 ARC Healthcare and Holiday Retirement seniors housing operating assets should support cash flow growth going forward. In addition, of the 143 ARC Healthcare assets, 78 are medical office buildings that are over 97% occupied and that are 77% on campus or health-system affiliated, compared with the Ventas MOB portfolio as of June 30, 2014, which had 93% 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% previously; Sunrise and Kindred exposure will comprise 10% and 9% of pro forma NOI respectively, compared with 11% and 10% previously.

Increase in Leverage

Fitch expects leverage will remain elevated for the current rating. As of June 30, 2014 pro forma, net debt to recurring operating EBITDA increases to 5.9x assuming a 10% cash election on the ARC Healthcare transaction, up from 5.5x in 2Q'14. This is up slightly compared with 5.8x as of Dec. 31, 2013 and 5.7x 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 same-store NOI growth. In a stress case not anticipated by Fitch in which operational volatility results in flat same-store NOI, leverage would sustain in the high-5x range, which would be weak for the rating.

Strong Fixed-Charge Coverage

Fitch expects continued above-average SSNOI performance across the healthcare REIT space for the remainder of 2014, partially driven by increasing exposure to RIDEA structure assets, 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 4.5% in 2Q'14, including 4.9% for triple-net assets, 4% for seniors housing operating assets and 3.8% for medical office buildings. For full-year 2013, year-over-year same-store cash NOI grew by 5%, including 4.7% for triple-net assets, 6% for seniors housing operating assets and 3.7% for medical office buildings.

Fitch projects that the company's fixed charge coverage ratio is 4.2x in 2Q'14 pro forma assuming a 10% cash election, flat compared with trailing 12 months ended June 30, 2014, 4.3x in 2013 and 4.4x in 2012. Fitch has assumed combined NOI contribution of $227.5 million, offset by increased capital expenditures related to seniors housing operating assets and increased interest expense related to assumed ARC Healthcare mortgage debt and the Canadian dollar denominated 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

Over the past 12 months, Ventas has been active in the unsecured bond market, unsecured term loan and common equity markets, including via an at-the-market equity offering program. In December 2013, the company entered into a new $3 billion unsecured credit facility that replaced its previous $2 billion unsecured revolving credit facility, as well as three unsecured term loans. The new unsecured credit facility is comprised of a $2 billion revolving credit facility 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%.

Weaker Liquidity

Liquidity coverage, defined as liquidity sources divided by uses, weakens to 0.8x for the period July 1, 2014 through Dec. 31, 2016 pro forma, compared with 1.3x as of June 30, 2014. 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 1.0x. In addition, unencumbered assets (annualized unencumbered NOI divided by a stressed 8.5% capitalization rate) cover net unsecured debt by 2.0x as of June 30, 2014 pro forma, down from 2.2x as of June 30, 2014.

Fitch calculates that the company's dividends and distributions represented 78.3% of normalized funds from operations adjusted for capital expenditures and straight-line rent in 1Q'14, which indicates 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.

Guaranteed Notes Ratings

Fitch has assigned 'BBB+' guaranteed notes ratings to Ventas Canada Finance Limited (the issuer of the Canadian dollar denominated bonds), Ventas Realty, Limited Partnership and Ventas Capital Corporation (the issuer of the company's U.S. dollar denominated bonds except for the NHP bonds). These issuers are 100% owned subsidiaries of Ventas, Inc., which has fully and unconditionally guaranteed the obligation to pay principal and interest with respect to these notes.

Stable Outlook

The Stable Outlook reflects Fitch's base case that fixed-charge coverage will sustain around 4x which is strong for a 'BBB+' rated healthcare REIT, offset by leverage expected to sustain around 5.5x, which is weak for a 'BBB+' rated healthcare REIT. The company announced on Sept. 4, 2014 that KPMG completed its re-audit of Ventas, Inc.'s financials for 2012-2013 following the withdrawal of E&Y audits as announced on July 9, 2014. Fitch anticipated that the KPMG audits would be completed well in advance of the closing of the HCT transaction.

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 4.4x);

--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 2.0x 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 0.8x pro forma but improves to 1.0x assuming an 80% refinance rate on secured debt maturities through Dec. 31, 2016);

--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.

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 (the obligations below were previously listed by Fitch under Ventas, Inc., which guarantees these obligations)

--Senior unsecured guaranteed notes 'BBB+';

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

--$1 billion senior unsecured term loans 'BBB+';

--$5.9 billion senior unsecured notes 'BBB+'.

Ventas Canada Finance Limited

--Senior unsecured guaranteed notes 'BBB+';

--$593.3 million senior unsecured notes 'BBB+'.

Nationwide Health Properties, LLC (NHP)

--IDR 'BBB+';

--$234.4 million senior unsecured notes at 'BBB+'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

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

--'2014 Midyear Outlook: U.S. Equity REITs' (June 2, 2014);

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

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

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013).

Applicable Criteria and Related Research:

2014 Midyear Outlook: U.S. Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748688

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

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=876255

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