Ventas, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Ventas is a healthcare and seniors-housing REIT with nearly 1,500 properties across the U.S., Canada and the U.K. Financial statements are unaudited.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $751.3M | $684.1M | $1,492.7M | $1,367.0M |
| Net income attributable to common stockholders | $138.4M | $114.6M | $259.4M | $226.8M |
| Diluted EPS | $0.47 | $0.39 | $0.88 | $0.77 |
| Segment NOI | $460.7M | $412.2M | $910.9M | $825.2M |
| Normalized FFO | $331.6M | $298.4M | $655.0M | $599.9M |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $595.7M | $507.7M |
Q2 revenue rose 9.8% and segment NOI rose 11.8% year over year; six-month revenue increased 9.2%, NOI 10.4%, and normalized FFO 9.2%. Q2 net income growth benefited from an $11.9M real-estate disposition gain and much smaller discontinued-operation losses; continuing-operations income declined 4.6%. Six-month common-stockholder income included $12.9M of disposition gains. Same-store NOI grew 4.6% in triple-net properties and 4.0% in senior living during Q2; same-store MOB NOI increased 1.7%.
Balance sheet, debt and liquidity
- At June 30, total assets were $19.79B, total debt $9.60B, total liabilities $10.89B and total equity $8.73B.
- Cash and cash equivalents were $86.6M; restricted cash was $75.5M. Ventas reported $1.8B of unused capacity on its $2.0B revolving facility, with $179.4M drawn and $15.8M of letters of credit outstanding.
- Debt increased from $9.36B at year-end 2013. The reported weighted-average interest rate was 3.7%; 16.2% of consolidated debt was variable rate. Management estimated that a 100-basis-point increase in rates, assuming unchanged variable debt, would add about $15.4M of 2014 interest expense.
- Operating cash flow increased 17.3% year over year for the first half. Investing used $385.4M and financing used $218.1M; cash ended the period at $86.6M.
- Declared dividends were $0.725 per share for Q2, 8% higher than the prior-year quarter.
Developments, outlook and risks
- Ventas agreed to acquire American Realty Capital Healthcare Trust for approximately $2.9B, subject to stockholder approval and customary closing conditions. Expected consideration included $1.8B–$2.0B in Ventas shares, assumed debt and cash. Thirteen putative class actions challenged the transaction; Ventas said it believed the claims lacked merit.
- A separate planned purchase of 29 Canadian independent-living communities was priced at CAD 957M. Ventas expected to fund most of it with a CAD 791M term loan closed in July and assumed debt, and expected closing by September 1, 2014; completion was not assured.
- Kindred leases were due to expire on 108 licensed healthcare assets in September. By the filing, 103 had been re-leased, transitioned or sold; five skilled-nursing facilities remained to be transitioned or sold, subject to approvals. Management did not expect a material 2014–2015 impact but cautioned outcomes and timing were uncertain.
- Brookdale and Kindred accounted for 9.6% and 2.3% of real-estate investment book value, respectively; Atria and Sunrise managed 20.5% and 13.6%. Tenant/operator financial health, lease renewals, senior-living costs, reimbursement policy, interest rates, capital-market access and foreign exchange were identified risks.
- CMS’s 2015 payment rules indicated increases of 2.2% for long-term acute-care hospital rates and 2.0% for skilled-nursing rates. Ventas was still assessing effects on its operators and cautioned future reimbursement changes could adversely affect them.
- Significant reporting matter: EY withdrew its audit reports for 2012 and 2013 and its review procedures for Q1 2014 solely because it determined it was not independent, citing an inappropriate personal relationship involving its audit partner and a Ventas financial-reporting oversight individual. EY reported no other matters affecting the financial statements or controls. Ventas said it continued to believe the statements were fairly presented. KPMG was engaged to re-audit 2012–2013, re-review Q1 2014 and audit 2014; restatements or adjustments could not be ruled out. Ventas also reported cooperating with an SEC inquiry whose timing and outcome it could not assess.
- No annual earnings or FFO guidance is provided in the supplied filing text. Management described liquidity sources and needs but noted that inability to access multiple funding sources could materially affect the company.
Investor verification priorities
- Track KPMG’s re-audits and re-review, any required amendments or restatements, and the SEC inquiry’s outcome.
- Verify completion, financing and integration of the HCT and Holiday Canada acquisitions, including the resulting leverage and share issuance.
- Monitor the remaining Kindred facility transitions, required regulatory approvals and rent/operating outcomes.
- Assess same-store senior-living and MOB performance, cost inflation, occupancy and tenant/operator credit quality.
- Review debt maturities, variable-rate exposure, available revolver capacity and the sustainability of dividend distributions against cash generation.