Ventas, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet figures are as of September 30, 2012. Unless noted otherwise, amounts below are in U.S. dollars. Ventas is a healthcare and seniors-housing REIT with 1,450 properties across the U.S. and Canada.
Financial performance and position
- Third-quarter revenue: $642.0 million, up 15.6% from $555.4 million. Revenue included $317.1 million in resident fees, $310.9 million in rental income, and $9.0 million in loan and investment income.
- Third-quarter earnings: Net income attributable to common stockholders was $111.9 million, or $0.38 per diluted share, versus $102.9 million, or $0.35, a year earlier. Continuing-operations diluted EPS was $0.39, versus $0.35.
- Nine-month results: Revenue was $1.826 billion versus $1.181 billion; net income attributable to common stockholders was $276.5 million versus $171.5 million. Diluted EPS was $0.94 versus $0.81, while continuing-operations diluted EPS declined to $0.70 from $0.80.
- Property operating performance: Third-quarter segment NOI was $387.1 million, up 13.5% year over year; total segment NOI was 60.3% of revenue, compared with 61.4%. Same-store NOI grew 1.4% for triple-net properties, 4.4% for stabilized senior living, and 2.2% for stabilized medical office buildings (MOBs).
- Supplemental measures: Third-quarter normalized FFO was $284.9 million versus $255.1 million; Adjusted EBITDA was $369.3 million versus $333.4 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Cash flow: For the first nine months, operating cash flow was $709.3 million, investing cash outflow $1.214 billion, and financing cash inflow $517.3 million. Cash and equivalents ended at $58.5 million, up from $45.8 million at year-end 2011.
- Debt and liquidity: Balance-sheet debt, including capital lease obligations and adjustments, was $7.495 billion, up from $6.429 billion at year-end 2011. The debt schedule reported $7.264 billion of principal debt excluding capital leases. Ventas had $1.29 billion of unused revolving-credit capacity and $76.9 million of restricted cash. Variable-rate debt was 22.3% of consolidated debt, excluding debt on assets held for sale.
- Dividends: The company declared $0.62 per share for each of the first three 2012 quarters, an 8% increase over the 2011 quarterly dividend; nine-month declared dividends were $1.86 per share.
Changes, transactions, and drivers
- Growth was substantially acquisition-driven and comparisons are not like-for-like. The 2012 period included the April Cogdell acquisition, 16 Sunrise-managed communities acquired in May, and other property purchases. The prior-year comparison included the 2011 NHP and ASLG acquisitions.
- Third-quarter segment NOI increased 3.4% in triple-net leasing, 15.3% in senior living, and 66.9% in MOB operations. MOB growth primarily reflected acquired properties, including 36 MOBs whose controlling interests were acquired in August. Same-store growth was considerably lower than portfolio-wide growth.
- Senior-living same-store stabilized occupancy increased to 90.9% from 88.1% in the quarter; average monthly revenue per occupied room rose to $5,386 from $5,293. Higher management fees and labor costs partly offset revenue growth. MOB same-store occupancy was 91.1%, versus 92.2%.
- Nine-month income included $79.1 million of gains on real-estate dispositions and $16.6 million from remeasuring a previously held equity interest upon gaining control of MOB joint ventures. These items materially contributed to reported earnings and should be distinguished from recurring operations.
- Operating cash flow rose 59.8% year over year, while real-estate investment spending increased. The company issued $342.5 million of common stock and issued new senior notes; total dividends paid were $545.2 million.
Outlook, risks, and unusual items
- The filing provides no specific earnings, FFO, or revenue guidance. Management said remaining-2012 and 2013 liquidity needs—including debt service, maturities, capital expenditures, investments, and distributions—were expected to be met through operating cash flow, cash, financings, asset-sale proceeds, loan repayments, and the revolving facility. Actual results are not necessarily indicative of full-year results.
- Kindred lease rollover: Leases on 89 properties were scheduled to expire April 30, 2013, representing $126 million of current annual rent. Kindred renewed or entered new leases covering 35 assets for $75 million of annual rent; Ventas was marketing the remaining 54 skilled-nursing facilities. The company cautioned that re-leasing could be delayed, cost more, or occur on less favorable terms.
- Tenant and manager concentration: Atria, Sunrise, Brookdale, and Kindred managed or operated approximately 17.9%, 15.3%, 10.8%, and 4.6% of gross real-estate investments, respectively. Kindred accounted for 16.9% and Brookdale for 10.8% of third-quarter NOI. California represented 13.7% of quarterly revenue. Tenant or manager financial distress could affect rent, property operations, liquidity, debt service, or distributions.
- Debt and interest-rate exposure: A 100-basis-point increase in rates, assuming unchanged variable-rate debt, was estimated to increase 2012 interest expense by approximately $15.9 million, or $0.05 per diluted share. The company also cited refinancing, capital-market access, and debt repayment risks. It entered a new $180 million term loan in October 2012, priced initially at 120 basis points over LIBOR and maturing in January 2018.
- Healthcare reimbursement and operating risks: Medicare payment updates for fiscal 2013 were expected to increase standard payment rates for long-term acute-care hospitals and skilled-nursing facilities, but Ventas was still assessing operator impacts and noted future reimbursement changes and sequestration as risks. Senior-living costs, staffing, insurance claims, regulation, and property occupancy also pose risks.
- Other unusual matters: Nine-month results included $38.3 million of debt-extinguishment losses and $49.6 million of merger-related expenses. The 2011 comparison included $85.3 million of net litigation proceeds and $131.6 million of merger-related expenses. A $44.2 million estimated fair value liability for ASLG acquisition contingent consideration was recorded; its eventual amount is uncertain. NHP and Cogdell shareholder litigation settlements remained subject to court approval or documentation; Ventas stated it believed the actions were without merit.
Important facts for investors to verify
- How much reported growth reflects acquisitions versus same-store performance, particularly given the large difference between portfolio-wide and same-store NOI growth.
- Progress and final economics of re-leasing the 54 Kindred properties, and the timing and terms of the 2013 lease expirations.
- Tenant and manager financial condition, including exposure to Kindred, Brookdale, Atria, and Sunrise, and the effects of Sunrise’s announced ownership and management-business transactions.
- Debt maturities, refinancing access, variable-rate exposure, and the costs and proceeds of recent debt and equity transactions.
- Recurring earnings and cash generation after excluding disposition gains, the MOB remeasurement gain, debt-extinguishment charges, merger costs, and other nonrecurring items; also compare non-GAAP FFO definitions and reconciliations.
- Potential changes to healthcare reimbursement, litigation outcomes, contingent consideration, and the company’s ability to maintain REIT qualification and distributions.