Ventas, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing. Financial statements received an unqualified audit opinion. Management and the auditor reported effective internal controls, but excluded the acquired ASLG and NHP businesses from the control assessment; those businesses represented 67.4% of year-end assets and 38.1% of 2011 revenue.
Business context
Ventas is a healthcare and seniors housing REIT operating through triple-net leased properties, senior living operations and medical office building (MOB) operations. At year-end it owned 1,378 properties in 46 states, the District of Columbia and two Canadian provinces. The portfolio included 678 seniors housing communities, 396 skilled nursing facilities, 47 hospitals, 249 MOBs and eight personal care facilities. Results reflect major acquisitions during the year, particularly Nationwide Health Properties (NHP) and Atria Senior Living Group (ASLG), so year-over-year growth is not primarily organic.
Financial performance
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Total revenue | $1,765.0 million | $1,008.8 million | Up 75.0%, principally from acquisitions |
| Income from continuing operations attributable to common stockholders | $362.8 million; $1.57 diluted per share | $215.3 million; $1.36 diluted per share | Up 68.5% in dollars |
| Net income attributable to common stockholders | $364.5 million; $1.58 diluted per share | $246.2 million; $1.56 diluted per share | Up 48.1% in dollars; per-share growth was limited by share issuance |
| Segment NOI (non-GAAP) | $1,085.1 million | $682.8 million | Up 58.9%; approximately 61.5% and 67.7% of reported revenue, respectively |
| FFO / normalized FFO (non-GAAP) | $824.9 million / $777.0 million | $421.5 million / $454.0 million | Normalized FFO increased about 71%; 2011 FFO includes unusual items and both measures exclude real-estate depreciation under their definitions |
| Cash from operating activities | $773.2 million | $447.6 million | Up 72.7% |
| Cash used in investing activities | $(997.4) million | $(301.9) million | Higher acquisition, loan and development investment |
| Cash from / (used in) financing activities | $248.3 million | $(231.5) million | Includes debt and equity issuance, debt repayments and dividends |
Fourth-quarter 2011 unaudited revenue was $571.4 million, income from continuing operations attributable to common stockholders was $193.2 million, and net income attributable to common stockholders was $192.9 million. Diluted net income per share was $0.66.
Segment NOI rose in all three businesses: triple-net leased properties to $654.8 million (+41.8%), senior living operations to $279.3 million (+80.8%) and MOB operations to $116.6 million (more than doubled). Senior living and MOB NOI as a share of their segment revenue was approximately 32.0% and 57.9%, respectively, versus 34.6% and 59.9% in 2010. Acquisition mix and operating costs affected comparisons.
Debt, liquidity and distributions
- Year-end senior notes and other debt on the balance sheet totaled $6.43 billion, versus $2.90 billion a year earlier, largely reflecting assumed debt from NHP and ASLG. Separately, reported debt principal excluding capital leases and certain accounting adjustments was $6.18 billion.
- About 22.1% of consolidated debt was variable-rate debt, excluding debt on assets held for sale. A 100-basis-point rate increase was estimated to increase 2012 interest expense and reduce net income by approximately $13.5 million, or $0.05 per diluted share, assuming debt balances remained unchanged.
- Cash and cash equivalents were $45.8 million; restricted cash and escrow deposits were $76.6 million. Available borrowing capacity under the $2.0 billion revolving facility was approximately $1.54 billion. Ventas reported compliance with debt covenants.
- Contractual debt and other obligations totaled $9.07 billion, including $495 million of acquisition commitments; $1.14 billion was scheduled within one year. Debt maturities include $82.4 million of Ventas 9% notes and $73.0 million of NHP 8.25% notes due in 2012.
- Ventas declared $2.30 per common share in 2011 dividends, a 7.5% increase from 2010. In February 2012, the board declared a $0.62-per-share first-quarter dividend. Management expected 2012 distributions to exceed 100% of taxable income after available NOL carryforwards, while noting that dividends remain subject to board decisions and liquidity.
Material changes and unusual items
- Ventas acquired ASLG in May and NHP in July 2011. The acquisitions added 117 ASLG seniors housing communities and 643 NHP healthcare and seniors housing properties, significantly expanding the balance sheet, revenue base and share count. The NHP transaction was stock-for-stock; ASLG consideration also included stock.
- Net litigation proceeds of $202.3 million from the settlement of Ventas’s dispute with HCP materially increased 2011 GAAP earnings. The HCP litigation was fully settled in November 2011. Merger-related expenses and deal costs were $153.9 million; loss on extinguishment of debt was $27.6 million.
- In October, Ventas replaced its revolving facilities with a new $2.0 billion facility. In December, it entered a $500 million term-loan facility. In February 2012, it issued $600 million of 4.25% notes due 2022 and announced redemption of $200 million of 6.5% notes due 2016, with a premium and expected first-quarter 2012 extinguishment loss.
- Ventas agreed in December 2011 to acquire Cogdell and its 72 MOBs in an all-cash transaction. The expected investment, including Ventas’s share of debt, was approximately $760–$770 million before transaction costs; completion was subject to approvals and other conditions, with a second-quarter 2012 close expected but not assured.
- Kindred’s leases on 89 properties were scheduled to expire April 30, 2013 absent renewal. Kindred had renewed two groups covering 16 assets; eight other groups covering 73 assets represented approximately $99 million of current annual base rent. Ventas could not assure renewal or successful repositioning. Ventas expected approximately $261.5 million of Kindred base rent for May 2012–April 2013, subject to facility revenue requirements.
Outlook, commentary and principal risks
The filing provides no consolidated earnings or FFO guidance. Management described growth, diversification and balance-sheet flexibility as priorities. It expected to fund normal operations, debt service, capital needs, distributions and the pending Cogdell transaction using operating cash flow, cash, financing, securities issuance and asset-sale proceeds. The 2011 results and pro forma acquisition data should be interpreted with care: acquisitions were only partly reflected in reported periods, and management’s pro forma figures exclude potential synergies and certain other transactions.
- Tenant, operator and manager exposure: Kindred generated 14.3% of 2011 revenue and 23.2% of NOI; Brookdale generated 8.2% and 13.4%. Atria and Sunrise managed a substantial senior living portfolio, and their performance, staffing, costs and reporting affect results.
- Reimbursement and regulation: The 2012 skilled nursing prospective payment rate was reduced by 11.1% under the CMS rule described in the filing. A 2% Medicare payment reduction for skilled nursing and long-term acute care hospitals was scheduled for January 2013. Medicaid cuts, healthcare reform, compliance actions and licensing or certificate-of-need restrictions could weaken operators and complicate property transitions.
- Operating and financing risks: Private-pay affordability and occupancy affect senior living; labor, insurance and other property costs can pressure margins. Interest rates, refinancing access, debt covenants, foreign exchange and the ability to integrate large acquisitions also pose risks.
- Other matters: Cogdell stockholder lawsuits sought to enjoin the merger; Ventas said it was contesting the claims. The filing also describes NHP-related stockholder litigation and a settlement in principle involving supplemental disclosures. Environmental, professional-liability, insurance and acquired-liability exposures remain contingencies.
Important facts for investors to verify
- Review the quality and sustainability of earnings excluding the $202.3 million HCP litigation proceeds, merger costs and debt-extinguishment losses; reconcile GAAP income with normalized FFO and cash flow.
- Check integration and operating performance of NHP and ASLG, including occupancy, NOI, acquisition-related costs and the effect of expanded share count and debt.
- Track Kindred’s 2013 renewal decisions, rent-reset process and any plans for assets not renewed; verify tenant credit and rental-payment capacity.
- Assess refinancing and liquidity needs, near-term maturities, variable-rate exposure, the Cogdell funding and closing status, and post-year-end debt transactions.
- Confirm the effect of Medicare and Medicaid reimbursement changes on affected operators, and monitor whether Ventas’s dividend remains supported by recurring cash generation.
- Consider that internal-control testing excluded ASLG and NHP despite their material contribution to reported assets and revenue, and review subsequent integration of their controls.