Ventas, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Ventas is a healthcare and seniors-housing REIT with approximately 1,200 properties in the U.S., Canada and U.K. Figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $983.2 | $936.5 | $2,876.7 | $2,822.5 |
| Net income attributable to common stockholders | $85.3 | $102.0 | $421.6 | $347.2 |
| Diluted EPS attributable to common stockholders | $0.23 | $0.28 | $1.15 | $0.97 |
| Segment NOI | $520.4 | $495.2 | $1,537.0 | $1,534.2 |
| Normalized FFO attributable to common stockholders | $360.6 | $354.8 | $1,072.0 | $1,118.0 |
| Cash flow from operating activities | Not provided for quarter | Not provided for quarter | $1,083.5 | $1,017.6 |
- Q3 revenue increased 5.0%, while common-stockholder net income fell 16.4%. Segment NOI rose 5.1%; its margin on revenue was approximately 52.9%, broadly unchanged from the prior-year quarter.
- Q3 segment performance was mixed: office NOI rose 11.4%, senior living NOI rose 0.8%, and triple-net NOI declined 1.7%. Same-store senior living NOI fell 5.7%, principally due to lower occupancy; same-store office NOI rose 2.9%.
- For the first nine months, revenue grew 1.9% and common-stockholder net income increased 21.4%. The increase in reported income included a $57.6 million deferred-tax benefit from reversing valuation allowances. Normalized FFO declined 4.1%, primarily reflecting a prior-year transaction fee and loan repayments and fees.
- Q3 interest expense was $114.0 million, up $6.4 million year over year; the weighted-average effective interest rate was 3.8%, versus 4.0%.
- Operating cash flow for nine months was $1,083.5 million. Investing used $1,421.9 million, reflecting acquisitions and investment activity; financing provided $415.1 million. Cash, cash equivalents and restricted cash ended at $208.6 million.
Balance sheet, debt and liquidity
- At September 30, 2019, total assets were $24.80 billion, total liabilities $13.73 billion, and debt reported on the balance sheet $12.05 billion. Gross debt before financing-cost and other adjustments was $12.14 billion, compared with $10.83 billion at year-end 2018.
- Cash and cash equivalents were $148.1 million; restricted cash and escrow deposits were $60.5 million. Ventas reported $1.7 billion of available liquidity under its unsecured revolving facility, including internal limits, plus $256.9 million of unused capacity under its construction facility.
- Debt activity included new senior-note issuance and refinancing, repayment of the 2.70% notes due 2020 and 4.25% notes due 2022, and assumption of approximately C$1.2 billion of mortgage debt with the LGM acquisition. The company recorded $37.4 million of Q3 debt-extinguishment loss, mainly related to redeeming the 4.25% notes.
- The quarterly dividend declared was $0.7925 per share. The filing does not provide a clear numeric full-year earnings or FFO outlook in the supplied text.
Material developments, commentary and risks
- In September, Ventas acquired an 87% interest in 34 Canadian seniors-housing communities, including five developments, with a stated portfolio value of $1.8 billion. LGM continues to manage the portfolio; Ventas also has rights to fund and own future developments under an exclusive pipeline agreement.
- Senior-living occupancy was 86.6% in Q3, compared with 87.2% a year earlier; same-store occupancy was 86.5%, versus 87.3%. Management attributed the decline in same-store NOI to lower occupancy. Office occupancy improved to 90.1% from 89.8%.
- Real estate impairments were $22.6 million for the first nine months, primarily involving triple-net and office assets and reflecting changes in intent to hold. The company sold 17 properties and a land leasehold for $77.3 million, recognizing $24.6 million in gains.
- Key risks include tenants’ and operators’ ability to meet obligations; reliance on senior-living managers; occupancy and labor-cost pressures; healthcare reimbursement and regulatory changes; refinancing and interest-rate exposure; and execution and integration of acquisitions and development projects. Atria and Sunrise managed 20.8% and 10.3%, respectively, of consolidated real estate investments by gross book value. Brookdale, Ardent and Kindred together represented material tenant exposure.
- Management stated disclosure controls were effective. The company was integrating the LGM assets into its internal control framework; those assets were excluded from the year-end 2019 internal-control assessment scope under SEC guidance for recent acquisitions.
Investor verification points
- Assess the sustainability of senior-living occupancy and same-store NOI trends, and the extent to which the LGM acquisition affects reported growth.
- Separate recurring operating performance from the $57.6 million tax benefit, debt-extinguishment losses, impairment charges and prior-year transaction-related income when evaluating earnings and FFO.
- Review debt maturities, variable-rate exposure and refinancing needs; Ventas estimated a 100-basis-point rise in variable borrowing rates would increase annualized interest expense by approximately $23.8 million.
- Verify LGM acquisition financing, integration progress and future development commitments, along with the performance and credit condition of major tenants and operators.
- Consider that adoption of ASC 842 in 2019 changed lease balance-sheet presentation and the reporting of certain triple-net property taxes and insurance; prior periods were not restated for the new standard.