VENTAS, INC.
Fitch Ratings has downgraded
Fitch has also downgraded
Key Rating Drivers
Deleveraging Delayed: Fitch expects Ventas's leverage will decline as the senior housing operating portfolio continues to recover from lows, with the company exhibiting double-digit same-store NOI growth in the segment through 2022 and 2023. Although longer term the company is still expected to be able to organically reduce REIT leverage to within the 5x-6x range Fitch considers consistent with a 'BBB+' rating, Ventas's pace of deleveraging is delayed from initial expectations despite the company's operational performance.
As a result, the company's leverage is expected to remain above 6x through 2025 absent additional deleveraging capital allocation such as equity issuance and asset sales. As the company has had elevated leverage above 6x since 2019 and Fitch's expectations of post-pandemic deleveraging did not occur, leading to elevated leverage in 2022 and 2023 due in part to the assumption of debt related to the Santerre portfolio, a 'BBB' rating is more appropriate for the company until such time it is able to consistently maintain leverage below this threshold.
Senior Housing Recovery in Progress: Fitch assumes senior housing NOI will continue to grow meaningfully over the ratings horizon, driven by improving occupancy rates and strong rent growth. Fitch also assumes occupancy rates will return to and exceed pre-pandemic levels due to a combination of healthy demographic trends and a favorable supply backdrop.
The 80+ age cohort is expected to grow at a faster rate than the overall population over the next decade. Additionally, senior housing new starts remain depressed and significantly lower than 2017 peak levels due to rising construction costs and stricter bank lending standards. Finally, senior housing rent growth, both asking and in-place, has accelerated and improving occupancy rates should help rent growth outplace inflationary cost pressures.
Durable Cash Flows in Outpatient Medical Segment: Ventas's Outpatient Medical portfolio is primarily focused on on-campus medical office buildings at ~16% of cash NOI as of
Fitch views the portfolio's proximity to hospitals and the system affiliation with high-quality health and hospital systems as an indicator of the desirability of the real estate, as well as the high portfolio quality of Ventas's assets. Ventas does not disclose the percentage of assets that are single-tenant versus multi-tenant.
High Growth in Research Segment: NOI growth in the past decade for life science, which makes up most of Ventas's Research portfolio, was well above the average for all property sectors, and Fitch assumes the sector will continue to perform well. The sector has multi-decade demand drivers, including an aging population, growing global drug demand and a supportive regulatory environment. Low vacancy rates in many markets are expected to support mid- to high-single-digit annual rent growth.
Most of
Derivation Summary
Ventas's ratings reflect its diversified and high-quality portfolio of health care real estate and its generally conservative financial policies, though with currently elevated leverage. The ratings also reflect Ventas's strong liquidity and above-average access to capital relative to both health care REITs specifically and the broader REIT universe.
Ventas is rated higher than smaller or more narrowly focused health care REITs such as
Fitch rates the IDRs of the parent REIT and subsidiary operating partnership on a consolidated basis using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties.
Key Assumptions
The company grows revenue in the mid-single digits over the forecast, driven by growth in SHOP. Margins also improve slightly over the ratings horizon;
The company spends roughly
The company completes
No additional acquisitions or dispositions are explicitly assumed in the model beyond 2024, but Fitch assumes any acquisitions would be completed at leverage neutral levels;
No equity issuances are assumed beyond 2024;
The company refinances debt such that gross debt is roughly flat over the ratings horizon;
REIT leverage remains above 6.0x through 2025.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch's expectation of REIT leverage, measured as net debt/recurring operating EBITDA after net distributions to noncontrolling interests, sustaining below 6.0x;
Fitch's expectation of REIT fixed-charge coverage sustaining above 3.0x.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Fitch's expectation of REIT leverage sustaining above 7.0x;
Fitch's expectation of REIT fixed-charge coverage sustaining below 2.5x;
Fitch's expectation of UA/UD sustaining below 2.0x.
Liquidity and Debt Structure
Sufficient Liquidity: Fitch estimates Ventas's sources of liquidity (unrestricted cash, availability under the revolving credit facilities, as well as retained cash flow from operations) are sufficient to cover its uses (debt maturities, all committed and remaining development expenditures and maintenance capex) by roughly 1.1x through 2025.
Overall, Ventas has a well-staggered debt maturity profile. The year with the largest amount of debt maturing is 2025, with roughly 16% of debt maturing. Ventas maintained approximately
Below-Average Contingent Liquidity: Fitch estimates that Ventas's UA/UD at 1.8x by assuming an 8.5% stressed cap rate as of YE 2023. Investment-grade REITs rated by Fitch typically have UA/UD ratios around 2.0x, indicating Ventas has below-average amounts of unencumbered assets relative to unsecured borrowings.
The financeability of the underlying real estate is a core tenet of investment-grade REIT ratings. Senior housing, medical office buildings and life science properties generally benefit from strong access to contingent liquidity sources, including multiple durable mortgage capital sources as well as more pro-cyclical bank mortgage and commercial mortgage-backed securities markets.
Issuer Profile
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