Ventas, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet amounts are as of March 31, 2018. Ventas is a healthcare and seniors-housing REIT with more than 1,200 properties across the U.S., Canada and the U.K. Unless otherwise noted, dollar amounts below are in millions.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $943.7 | $883.4 | Up 6.8% |
| Income from continuing operations | $80.1 | $155.9 | Down 48.7% |
| Net income attributable to common stockholders | $78.7 | $198.1 | Down 60.3% |
| Diluted EPS | $0.22 | $0.55 | Down from $0.55 |
| Segment NOI | $521.0 | $513.2 | Up 1.5% |
| Normalized FFO attributable to common stockholders | $375.9 | $368.1 | Up 2.1% |
| Cash provided by operating activities | $308.0 | $345.8 | Down $37.8 |
Operating trends: Senior living NOI rose 6.8% to $162.5 million, including the contribution from 76 communities moved from triple-net leases into senior living operations. Same-store senior living NOI increased 0.9%; same-store occupancy was 87.3%, versus 88.9%. Office NOI increased 3.7% to $135.0 million, while same-store office NOI rose 0.3%. Triple-net NOI fell 8.9% to $191.8 million, mainly reflecting Kindred property sales and the 76-community transition; same-store triple-net NOI increased 3.4%.
Cash, debt and liquidity: Cash and cash equivalents were $92.5 million, restricted cash and escrow deposits were $71.0 million, and total debt was $11.04 billion, compared with $11.28 billion at year-end 2017. The company reported $2.2 billion of unused capacity on its unsecured revolver and $381.4 million on its construction facility. Q1 investing activities provided $170.6 million, including $175.4 million of real estate disposal proceeds and $143.1 million of loan repayments; financing activities used $503.2 million, including $1.22 billion of debt repayments and $281.6 million of common-stockholder distributions. The declared quarterly dividend was $0.79 per share.
Total assets were $23.49 billion and total liabilities were $12.56 billion at quarter-end. Interest expense was $111.4 million, and the reported effective interest rate was 3.8%, versus 3.7% a year earlier. Management estimated a 100-basis-point rise in variable rates would increase 2018 interest expense by approximately $21.6 million, or $0.06 per diluted share, assuming debt levels remained unchanged.
Material changes and unusual items
- Revenue growth was led by resident fees and services, up 10.9%, and income from loans and investments, up from $20.1 million to $31.2 million. Triple-net rental income declined 8.9%.
- GAAP earnings were pressured by a $35.7 million impairment of an equity-method investment in a joint venture principally holding skilled nursing facilities; Ventas intends to sell its interest, with a sale expected in the second half of 2018, but completion and terms are uncertain.
- Q1 included $17.3 million of merger-related expenses and deal costs, primarily associated with the Eclipse Senior Living transition, and an $11.0 million loss on debt extinguishment. Real estate impairment charges were $7.0 million. Q1 2017, by contrast, included a $43.3 million gain on real estate dispositions.
- Ventas received $125.9 million from repayment of three loans and sold 14 properties and a vacant land parcel for aggregate consideration of $170.2 million.
- In January, management of 76 private-pay communities shifted from Elmcroft triple-net leases to Eclipse management contracts. Ventas also acquired a 34% interest in Eclipse. The transition included $14.6 million of transaction costs, net of property-level net assets assumed for no consideration; the company also derecognized a $75.2 million straight-line rent receivable and related reserve.
- In February, Ventas issued $650 million of 4.00% notes due 2028, redeemed $502.1 million of 4.00% notes due 2019, and repaid $700 million of 2.00% notes at maturity. The remaining $97.9 million balance of the 2019 notes was repaid in April, after quarter-end.
- Ventas adopted ASC 610-20 and recorded a $31.2 million cumulative-effect increase to retained earnings for deferred gains on 2015 real estate sales. Adoption of ASC 606 did not change the pattern or timing of revenue recognition, according to the filing.
Outlook, risks and contingencies
The filing provides no specific full-year earnings or FFO guidance. Management said expected liquidity needs—including operations, debt service and maturities, capital expenditures, investments and REIT distributions—are expected to be funded through operating cash flow, cash, debt and equity financing, asset sales and revolving facilities. It cautioned that inability to access multiple capital sources could have a material adverse effect.
- On April 26, 2018, Ventas agreed with Brookdale to consolidate substantially all leases into a master lease and extend terms through December 31, 2025, with two 10-year renewal options. The agreements include rent credits and other protections; Ventas anticipates a $22 million non-cash expense. Brookdale tenant performance and the terms and implementation of the agreements remain important considerations.
- Key disclosed risks include tenant, operator and manager financial health; lease renewals and property repositioning; healthcare reimbursement and regulation; labor and other senior-living operating costs; interest-rate and refinancing exposure; development execution; and joint-venture partner performance. Atria, Sunrise, Brookdale, Ardent and Kindred represented significant portions of the portfolio or operating results.
- Management stated that pending litigation was not expected to have a material adverse effect, except that outcomes remain uncertain and defense costs may be significant. The filing also notes guarantees related to tax-credit investments and a provisional $23.3 million tax adjustment under the 2017 Tax Act, still under analysis.
- Disclosure controls were deemed effective. The company noted that, despite transition-period procedures, it could not provide absolute assurance that financial information for the newly transitioned communities was materially correct in all respects.
Important facts for investors to verify
- Whether normalized FFO growth is sustainable and how GAAP earnings reconcile to recurring property performance, given the joint-venture impairment, transaction costs and prior-year property-sale gain.
- Same-store senior living occupancy and NOI trends, and operating results for the 76 communities transitioned to Eclipse.
- Brookdale’s ability to meet master-lease obligations and the actual effect of rent credits, the anticipated non-cash charge and any property sales under the agreement.
- Debt maturities, refinancing costs, variable-rate exposure and available revolver capacity; the filing’s rate-sensitivity estimate assumes unchanged variable debt.
- Whether the planned sale of the SNF-focused joint-venture interest closes in the expected timeframe and on acceptable terms.
- Tenant and operator concentration, including the financial condition and obligations of Brookdale, Kindred, Ardent, Atria and Sunrise.