Ventas, Inc. annual report, FY2015

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Ventas, Inc. — 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing. Ventas is a healthcare and seniors housing REIT operating across the U.S., Canada and the U.K. Its three reportable segments are triple-net leased properties, senior living operations and medical office building (MOB) operations.

Financial and operating performance

  • Revenue: $3.286 billion, up 18.3% from $2.777 billion in 2014. Growth reflected acquisitions, including HCT and the Ardent real estate transaction.
  • Segment NOI: $1.875 billion, up 20.2% from $1.560 billion. On continuing-operations revenue, this is approximately 57% (calculated as segment NOI divided by revenue).
  • Profit: Income from continuing operations attributable to common stockholders was $406.7 million, up from $376.0 million; diluted continuing-operations EPS was $1.22 versus $1.26. Net income attributable to common stockholders fell 12.2% to $417.8 million, or $1.25 diluted EPS, largely because discontinued-operations income declined after the CCP spin-off.
  • FFO: $1.365 billion; normalized FFO was $1.494 billion, up 12.3% from $1.330 billion. These are non-GAAP measures defined by the company.
  • Cash flow: Operating cash flow was $1.392 billion, up 10.9%. Investing activities used $2.424 billion and financing activities provided $1.030 billion. Year-end cash and cash equivalents were $53.0 million.
  • Debt and interest: Debt carrying value was $11.207 billion ($11.271 billion gross principal); 19.3% of consolidated debt was variable rate, excluding debt related to held-for-sale properties. Continuing-operations interest expense was $367.1 million, up 25.7%; the reported effective interest rate declined to 3.6% from 3.7%.
  • Liquidity: Ventas reported $1.8 billion of unused capacity under its $2.0 billion revolving credit facility. It had $77.9 million in escrow deposits and restricted cash. The company said it was in compliance with debt covenants at year-end.
  • Dividends: Cash dividends declared were $3.04 per common share for 2015. The board declared a $0.73-per-share first-quarter 2016 dividend.
  • Fourth quarter: Revenue was $841.3 million. Income from continuing operations attributable to common stockholders was $127.1 million; diluted continuing-operations EPS was $0.38. Net income attributable to common stockholders was $124.7 million, or $0.37 diluted EPS.

Material changes versus 2014

  • Ventas acquired American Realty Capital Healthcare Trust (HCT) in January 2015, adding 152 properties, and completed the Ardent transaction in August, recording approximately $1.3 billion of hospital and other real estate and entering a long-term triple-net lease for ten hospital campuses.
  • In August, Ventas spun off most of its post-acute and skilled nursing portfolio into Care Capital Properties (CCP). CCP-related historical results are presented as discontinued operations, making reported annual comparisons less directly comparable.
  • Segment NOI increased across the portfolio: triple-net leased properties rose 15.5%, senior living operations 16.5%, and MOB operations 28.8%. Same-store NOI growth was more modest: 4.6%, 1.5%, and 1.1%, respectively.
  • Debt increased from $10.844 billion to $11.207 billion on the balance sheet. Cash from operations rose, while acquisition and development spending drove higher investing outflows.
  • Merger-related expenses and deal costs increased to $102.9 million from $43.3 million; depreciation and amortization also rose, principally due to acquisitions.

Outlook, risks and unusual items

  • The filing gives no quantified operating or earnings guidance. Management said it expected to distribute at least 100% of 2016 taxable net income after available net operating loss carryforwards, while noting that dividend decisions remain subject to the board’s assessment of liquidity, results and other factors.
  • Management identified capital-market access, interest rates, tenant and operator credit, healthcare reimbursement and regulation, labor and operating costs, and competition from new seniors housing construction as significant risks. California represented 14.7% of NOI; seniors housing operations and MOBs expose the company to operating and occupancy variability.
  • Credit and management concentration remain important: Atria and Sunrise together managed 268 communities; Brookdale, Kindred and Ardent leased 140, 76 and 10 properties, respectively. The filing warns that financial or operating difficulties at major tenants or managers could affect rent, property operations and distributions.
  • Ventas reported a $42.2 million real estate impairment charge in 2015, primarily related to changes in intent to hold certain assets. The CCP spin-off included $42.3 million of separation costs in discontinued operations. Acquisition-related expenses and debt-extinguishment losses also affected results.
  • An SEC inquiry concerning the independence of the company’s former auditor, Ernst & Young, remained ongoing; Ventas said it could not reasonably assess the timing or outcome. Litigation challenging the HCT acquisition remained subject to final court approval of a proposed settlement.
  • KPMG issued an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2015.

Key facts investors should verify

  • How the CCP spin-off and discontinued-operations presentation affect comparisons of revenue, earnings, cash flow and per-share results.
  • Tenant and operator financial health, especially Brookdale, Kindred, Ardent, Atria and Sunrise, and the performance of their associated properties.
  • Debt maturities and refinancing needs, including $550 million of senior notes due in 2016, variable-rate exposure and available revolver capacity.
  • Whether same-store NOI, occupancy, resident pricing and operating costs support continued growth after acquisition-related effects.
  • The status and potential consequences of the SEC inquiry and HCT acquisition litigation, as well as the assumptions behind acquisition goodwill and impairment valuations.