Ventas, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012. Ventas is a healthcare and seniors-housing REIT with 1,370 properties across the U.S. and Canada. Comparisons with Q1 2011 are substantially affected by the 2011 NHP and ASLG acquisitions.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $573.7 million | $268.4 million |
| Income from continuing operations | $47.8 million | $48.3 million |
| Net income attributable to common stockholders | $90.6 million; $0.31 per diluted share | $49.0 million; $0.30 per diluted share |
| Normalized FFO | $263.9 million | $121.0 million |
| Operating cash flow | $245.0 million | $130.8 million |
| Cash and cash equivalents | $53.2 million | $45.8 million at Dec. 31, 2011 |
| Senior notes payable and other debt | $6.43 billion | $6.43 billion at Dec. 31, 2011 |
| Quarterly dividend declared | $0.62 per share | $0.575 per share |
Segment NOI was $353.9 million, up from $176.0 million. NOI as a share of reported revenue was approximately 61.7%, versus 65.6% in Q1 2011; this is a simple calculation using the filing’s NOI and revenue figures, and the periods’ acquisition-driven mix differs. Net income included $42.3 million from discontinued operations, principally the gain on property sales. Normalized FFO excludes specified items and is a non-GAAP measure.
At quarter-end, Ventas had $114.4 million in escrow deposits and restricted cash and $1.92 billion of unused capacity on its $2.0 billion revolver; $73.4 million was drawn and $6.3 million of letters of credit were outstanding. The company reported that 15.9% of consolidated debt was variable-rate. Operating cash flow increased 87.3% year over year; investing activities used $40.3 million and financing activities used $197.3 million.
Material changes versus Q1 2011
- Revenue rose 113.8%, led by acquired properties: triple-net rental income increased 80.7%, senior living revenue more than doubled, and MOB revenue more than doubled.
- Total segment NOI more than doubled. Senior living NOI rose to $90.1 million from $36.4 million, and MOB NOI to $45.1 million from $17.0 million. Management attributed growth primarily to the NHP and ASLG acquisitions, additional properties, rent escalators, and higher occupancy and rates at Sunrise-managed properties.
- Interest expense increased to $70.7 million from $41.7 million, mainly due to higher debt balances; the effective interest rate excluding capital leases fell to 4.1% from 5.7%.
- Continuing-operations income was nearly flat, while common-stockholder net income increased 85.0%, largely because Q1 2012 included gains and other results from discontinued operations. The 2012 discontinued-operations result included a $40.2 million gain on sale.
- Ventas issued $600 million of 4.25% notes due 2022 and redeemed $200 million of 6.5% notes due 2016, recording a $29.5 million debt-extinguishment loss. The dividend increased approximately 8% year over year.
Outlook, risks and unusual items
- The filing gives no specific full-year earnings or FFO guidance. Management said remaining-2012 liquidity needs include operations, debt service and maturities, capital spending, acquisitions and REIT distributions, and expects to fund them through operating cash flow, cash, financing, asset sales and revolver capacity.
- After quarter-end, Ventas completed its approximately $760 million Cogdell acquisition on April 2, adding 72 MOBs and a property-management business. It also issued $600 million of 4.00% notes due 2019 and used net proceeds to repay revolver borrowings; it exercised an option to redeem $225 million of 6.75% notes due 2017, with an expected approximately $10 million second-quarter loss.
- In April, Ventas agreed to acquire 16 Sunrise-managed seniors housing communities for approximately $362 million, expected to close in Q2; completion was not assured. Q1 acquisitions were approximately $56.8 million, including assumed debt.
- Kindred had irrevocably renewed three of ten renewal groups covering 25 properties and approximately $46 million in annual base rent for leases expiring April 30, 2013. The other seven groups cover 64 properties and approximately $77 million in annual base rent. Repositioning could be delayed or costly, including due to licensing and Medicare/Medicaid change-of-ownership requirements.
- Tenant/operator concentration remains material: Atria, Sunrise, Brookdale and Kindred represented approximately 19.3%, 14.5%, 12.2% and 5.0% of real estate investments by gross book value. Kindred represented 11.1% of Q1 revenue and 18.0% of NOI. Tenant or manager financial weakness, nonrenewals, healthcare reimbursement or regulatory changes, operating costs, capital-market access, interest rates and foreign exchange are identified risks.
- Q1 income tax expense of $11.3 million included a $14.9 million valuation allowance against deferred tax assets. The February sale of nine seniors housing communities generated $121.3 million of consideration and a $55.2 million gain; $15.0 million of the gain was deferred as the buyer repays a related loan. Management noted that interim results are not necessarily indicative of full-year results.
- CMS’s proposed FY2013 LTAC hospital payment rule projected a 0.8% increase in the standard rate after a budget-neutrality adjustment; the rule was not final, and Ventas was assessing implications for operators.
Investor verification points
- Separate acquisition-driven growth from organic performance; verify same-store occupancy and operating trends, including lower total MOB occupancy (89.0% versus 91.0%) and the reported same-store measures.
- Assess the quality and sustainability of earnings and cash flow, including the property-sale gain, debt-extinguishment loss, tax valuation allowance, and the difference between GAAP income and normalized FFO.
- Track Kindred’s remaining 2013 lease decisions and Ventas’s ability to renew, transition or reposition the 64 nonrenewed properties on acceptable terms.
- Review post-quarter acquisition financing, the announced Sunrise transaction, upcoming debt maturities and the company’s continuing access to revolver and capital markets.
- Evaluate tenant, operator and geographic concentration, reimbursement and regulatory exposure, and the assumptions used in acquisition valuations and contingent consideration.