Ventas, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the same 2016 periods unless noted. Ventas is a healthcare and seniors-housing REIT with approximately 1,300 properties across the U.S., Canada and the U.K., operating through triple-net, senior living and office segments.
Financial performance and liquidity
- Q2 revenue: $895.5 million, up 5.6%. Revenue growth in office operations and income from loans and investments was partly offset by lower senior-living resident fees.
- Q2 earnings: Income from continuing operations was $152.3 million, up 10.5%; net income attributable to common stockholders was $151.8 million, up 6.1%. Diluted EPS from continuing operations was $0.42 versus $0.40; diluted EPS including dispositions was $0.42 versus $0.42.
- First-half results: Revenue was $1.779 billion, up 4.6%; continuing-operations income was $308.2 million, up 18.0%; common-stockholder net income was $350.0 million, up 19.8%. Diluted EPS from continuing operations was $0.86 versus $0.77.
- Segment NOI: Q2 NOI was $528.9 million, up 7.0%. Office operations NOI increased 28.2% to $130.3 million, primarily reflecting prior acquisitions; senior living NOI fell 3.1% to $151.6 million; triple-net NOI rose 1.4% to $214.4 million. First-half NOI increased 5.6% to $1.042 billion.
- Non-GAAP measures: Normalized FFO attributable to common stockholders was $379.3 million in Q2 versus $355.8 million, and $747.4 million for the first half versus $707.5 million. These are supplemental measures defined by the company, not GAAP earnings or cash flow.
- Cash flow: First-half operating cash flow was $737.3 million, up from $660.7 million. Investing used $1.151 billion, chiefly reflecting lending, property investment and development; financing provided $227.6 million. Cash and cash equivalents ended at $103.4 million, down from $286.7 million at year-end.
- Debt and liquidity: Debt reported on the balance sheet was $11.908 billion, up from $11.127 billion at year-end. Gross debt maturities totaled $11.992 billion; the company reported $2.5 billion of unused revolving-credit capacity and $68.3 million of restricted cash. Interest expense rose 9.6% in Q2, mainly due to higher debt balances and effective rates.
- Dividend: Dividends declared were $0.775 per share for Q2 and $1.55 per share for the first half, versus $0.73 and $1.46, respectively, in 2016.
Material changes and developments
- Office revenue and NOI benefited substantially from the 2016 life-science and innovation-center acquisition. Same-store office NOI grew only 0.6% in Q2 and 1.2% for the first half.
- Senior-living occupancy weakened: average unit occupancy was 87.9% in Q2 versus 90.1% a year earlier; same-store occupancy was 87.9% versus 90.2%. Same-store senior-living NOI declined 2.4% in Q2, as expense growth outpaced revenue growth.
- During the first half, Ventas acquired 15 properties for $404.4 million and sold 14 properties or land parcels for $104.6 million, recording $44.0 million in disposition gains. It also made a $700 million five-year secured loan to an Ardent subsidiary, with a further $60 million revolving feature, of which $27.5 million was drawn at quarter-end; the weighted-average rate was approximately 9%.
- Ventas entered a new $3.0 billion revolving credit facility, replacing its $2.0 billion facility, and issued senior notes due 2023 and 2027. It repaid $300 million of notes at maturity and $237 million of mortgage loans during the first half.
Outlook, risks and unusual items
- Kindred property sale: Kindred agreed to sell its skilled-nursing business, with Ventas expecting to sell 36 related facilities for an aggregate $700 million. Ventas expected to record a gain exceeding $600 million. Closings were expected in phases beginning in Q3 2017 and ending by year-end, but timing and completion were not assured.
- The filing provides no clear full-year earnings or FFO guidance. Management described expected liquidity sources as operating cash flow, cash, debt and equity issuance, asset sales and revolver borrowings. Next-12-month needs include operating costs, debt service and maturities, capital spending, investments and REIT distributions.
- Key risks include tenant and operator financial health and lease renewals, particularly exposure to major counterparties; senior-living occupancy, labor and operating costs; healthcare reimbursement and regulatory changes; access to capital and refinancing costs; interest-rate and foreign-exchange movements; and execution of acquisitions, development and dispositions. A 100-basis-point rise in variable borrowing rates was estimated to increase 2017 interest expense by approximately $19 million, or $0.05 per diluted share, assuming debt levels were unchanged.
- First-half real-estate impairment charges were $15.6 million. Litigation disclosures describe ongoing claims and regulatory matters; management said pending matters were not expected to have a material adverse effect, while noting outcomes and defense costs remain uncertain. Management reported disclosure controls were effective and no materially impactful changes in internal controls during Q2.
- Ventas planned to adopt revenue standard ASC 606 in 2018 and was assessing the effect on $31.2 million of deferred gains from 2015 real-estate sales; it did not expect a significant overall impact apart from a possible cumulative adjustment.
Important facts for investors to verify
- Progress, timing, proceeds and realized gain from the proposed $700 million Kindred facility sale.
- Credit quality and repayment terms of the $700 million Ardent loan, including the drawn revolving balance and borrower exposure.
- Whether senior-living occupancy and same-store NOI stabilize, and how operating-cost inflation affects margins.
- Debt maturities, floating-rate exposure, refinancing costs and availability of the stated revolver capacity.
- Reconciliation of GAAP results to normalized FFO and other company-defined supplemental measures, and the eventual ASC 606 adjustment.