Ventas, Inc. — Q2 2016 Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2016. Ventas is a healthcare and seniors-housing REIT with approximately 1,300 properties in the U.S., Canada and the U.K., across triple-net leased properties, senior living operations and medical office buildings (MOBs). Comparisons reflect the 2015 spin-off of most post-acute/skilled-nursing assets to Care Capital Properties (CCP); those assets’ historical results are presented as discontinued operations.
Financial and operating metrics
| Metric | Q2 2016 | Prior-year comparison |
|---|---|---|
| Total revenue | $848.4 million | $811.9 million; up 4.5% |
| Income from continuing operations | $137.8 million | $124.6 million; up 10.7% |
| Net income attributable to common stockholders | $143.2 million; diluted EPS $0.42 | $149.8 million; diluted EPS $0.45 |
| Segment NOI | $494.5 million | $463.3 million; up 6.7% |
| Normalized FFO attributable to common stockholders | $355.8 million | $394.3 million; down 9.8% |
| Operating cash flow | Six months: $656.5 million, versus $717.7 million in 2015 |
For the six months, revenue was $1.701 billion, up 5.1%; net income attributable to common stockholders was $292.1 million, up 8.1%; and normalized FFO was $707.5 million, down 9.5%. Management attributed the normalized FFO decline principally to the prior-year period including six months of CCP properties’ results, partly offset by 2015 acquisitions.
Q2 segment NOI: triple-net leased properties $211.4 million, up 15.4%; senior living $156.4 million, up 0.7%; and MOB operations $101.6 million, up 2.6%. Same-store NOI rose 2.7%, 1.7% and approximately flat, respectively. Senior living occupancy declined to 90.1% from 91.0%, while revenue per occupied room rose to $5,460 from $5,272. MOB occupancy was 90.7% versus 91.8%.
At June 30, total assets were $22.1 billion, debt carrying value was $10.9 billion, cash and cash equivalents were $57.3 million, and restricted cash was $65.6 million. The company reported $1.7 billion of unused revolving-credit capacity. The weighted-average interest rate on total debt was 3.5%. Operating cash flow was below the prior-year first half; management said it would have increased 10.3% excluding CCP-related cash flow and specified prior-period tenant payments.
Material changes, outlook, risks and unusual items
- Continuing-operations interest expense was $103.7 million in Q2, compared with $84.0 million, and $206.9 million for the first half, compared with $166.3 million. Management’s discussion of lower total interest expense includes interest allocated to discontinued operations, so it is not directly comparable to the continuing-operations statement totals.
- Q2 GAAP net income fell despite higher continuing-operations income, mainly reflecting the prior-year CCP discontinued-operations contribution and lower real-estate disposition gains. First-half results benefited from $31.9 million in disposition gains, versus $14.2 million a year earlier.
- During the first half, Ventas recognized $14.5 million of real-estate impairments, including a $10.3 million impairment associated with seven Kindred long-term acute-care hospitals classified as held for sale. Rent of approximately $8 million annually was reallocated to other assets under amended Kindred master leases; total master-lease rent remained unchanged. The sale was subject to closing conditions.
- After quarter-end, Ventas agreed to acquire substantially all Wexford life-science and medical real-estate assets for $1.5 billion, with closing expected in Q4 2016, subject to customary conditions. The portfolio includes 23 operating properties, two development assets and nine future development sites. A July equity offering raised $735.8 million in gross proceeds, intended in part to fund the acquisition.
- Ventas issued $400 million of 3.125% notes due 2023 and redeemed $455.5 million of 1.55% notes due 2016; the remaining balance was repaid in July. It also issued 6.1 million shares through its ATM program for $378.1 million net proceeds in the first half. The Q2 declared dividend was $0.73 per share.
- Key risks include tenant and operator credit and lease-renewal risk, particularly involving Brookdale, Kindred and Ardent; reliance on senior-living managers Atria and Sunrise; reimbursement, regulatory, labor and operating-cost pressures; refinancing and interest-rate exposure; foreign-currency movements; and the ability to complete and finance acquisitions. Management reported no material effect from lease expirations or renewals in the quarter and expected no material adverse outcome from currently pending litigation, while noting uncertainty and potential defense costs.
- No numeric full-year earnings or FFO guidance is provided in the supplied filing text. Management said liquidity needs are expected to be met through operating cash flows, cash, debt and equity issuance, asset sales and revolving-credit borrowings; it cautioned that inability to access multiple capital sources could materially harm the company.
Important facts for investors to verify
- Whether the Wexford acquisition closes on expected terms and timing, and the resulting funding needs, leverage and dilution.
- Operating and financial condition of major tenants and operators, especially Brookdale, Kindred and Ardent, and progress on the seven-property Kindred sale.
- Senior-living occupancy, revenue growth and labor-cost trends, alongside the weaker same-store MOB NOI and occupancy results.
- Debt maturities, floating-rate exposure and refinancing costs; the filing estimates a 100-basis-point rate increase would add about $17.4 million to 2016 interest expense, or $0.05 per diluted share, assuming unchanged variable debt.
- Underlying cash generation and normalized FFO trends, distinguishing ongoing operations from acquisitions, dispositions, CCP comparisons and other adjustments.