Ventas, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the same 2012 periods unless noted. Ventas is a healthcare and seniors-housing REIT with more than 1,400 properties across the U.S. and Canada, operating through triple-net leasing, senior living, and medical office building (MOB) segments.
Financial performance and position
| Metric | Q2 2013 | Six months 2013 |
|---|---|---|
| Revenue | $685.8 million, up 12.1% | $1,370.5 million, up 16.3% |
| Income from continuing operations | $132.6 million; $0.45 diluted EPS | $251.5 million; $0.85 diluted EPS |
| Net income attributable to common stockholders | $114.6 million; $0.39 diluted EPS | $226.8 million; $0.77 diluted EPS |
| Operating cash flow | Not separately stated for the quarter | $507.7 million, versus $460.8 million |
| Debt at June 30 | $8.42 billion; weighted-average rate 4.1%. About 16.3% of consolidated debt was variable rate. | |
| Cash and liquidity at June 30 | $62.4 million unrestricted cash, $94.5 million restricted cash/escrows, and $1.73 billion available under the revolver. |
Q2 segment NOI increased 4.7% in triple-net leasing, 14.4% in senior living, and 19.4% in MOBs. Growth included acquisitions; same-store NOI rose 1.3% in triple-net properties and 5.1% in stabilized senior living, while same-store stabilized MOB NOI declined 2.2%. Senior-living same-store occupancy improved to 90.9% from 89.7%; MOB occupancy was 91.5% for same-store stabilized properties, down from 92.2%.
For the six months, normalized FFO, a non-GAAP measure, was $599.9 million versus $541.7 million; Q2 normalized FFO was $298.4 million versus $277.8 million. These measures are not substitutes for GAAP earnings or operating cash flow.
Changes, financing and unusual items
- Q2 continuing-operations income rose sharply, while total net income growth was more moderate: discontinued operations were a loss of $18.1 million in Q2 2013, compared with income of $31.3 million in Q2 2012. The prior-year period included substantial property-sale gains.
- For the first half, discontinued operations were a $23.9 million loss, including $23.9 million of impairments on assets held for sale; the comparable 2012 period included $78.8 million of net disposition gains.
- Lower merger-related costs and the absence of 2012 debt-extinguishment losses also supported reported earnings. The six-month tax benefit of $10.3 million primarily reflected release of deferred-tax valuation allowances.
- Ventas issued $500 million of 2.700% notes due 2020 and $258.8 million of 5.45% notes due 2043, and repaid $269.9 million of 6.25% notes at maturity. It established a $750 million at-the-market equity program and had raised $82.4 million through June 30.
- The company declared quarterly dividends of $0.67 per share, an 8% increase from the prior-year rate. First-half cash distributions to common stockholders were $392.2 million.
Outlook, risks and contingencies
Management described liquidity sources and expected needs but did not provide specific earnings or FFO guidance in the supplied filing text. It expects to fund operations, debt service, maturities, capital expenditures, investment and distributions through operating cash flow, cash on hand, financing, asset sales, and revolver borrowings. Four development projects were underway; Ventas had funded $41.7 million of an estimated total commitment of $60 million to $80 million.
- Key risks include tenants’ ability to meet lease obligations and renewals, senior-living operators’ performance, labor and insurance costs, interest rates, capital-market access, and healthcare regulation and reimbursement changes.
- Kindred generated 8.2% of Q2 revenue and 13.6% of Q2 NOI; Brookdale generated 5.7% and 9.5%, respectively. Atria and Sunrise managed significant senior-living operations. The filing warns that tenant, operator, or manager distress could affect cash flows and distributions.
- CMS had proposed 2014 reimbursement updates for long-term acute-care hospitals and skilled-nursing facilities; final rules were pending. Management was assessing the impact and could not assure that future reimbursement changes would not adversely affect operators or Ventas.
- A 100-basis-point rise in rates, assuming unchanged variable-rate debt, was estimated to increase 2013 interest expense by about $13.5 million, or $0.05 per diluted share.
- Management stated that pending legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain and defense costs may be significant. Disclosure controls were assessed as effective.
Investor verification priorities
- Separate acquisition-driven growth from same-store operating trends, particularly the decline in same-store MOB NOI.
- Assess the sustainability of earnings by reconciling GAAP income with discontinued operations, asset-sale gains, impairments, tax benefits, and normalized FFO adjustments.
- Review debt maturities, floating-rate exposure, refinancing needs, and subsequent mortgage repayments; the filing reports approximately $126.2 million of mortgage repayments in July 2013.
- Monitor tenant and operator financial health, lease renewals, and final CMS reimbursement rules, especially for Kindred-related exposure.
- Evaluate dividend coverage against operating cash flow, capital needs, debt service, and the company’s acquisition and development plans.