Ventas, Inc. — Q2 2019 Form 10-Q
Business context and period. Ventas is a healthcare and seniors housing REIT with approximately 1,200 properties in the United States, Canada and the United Kingdom. Its three reportable segments are triple-net leased properties, senior living operations and office operations. This filing covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018.
Financial performance and position
- Q2 revenue: $950.7 million, up 0.9% from $942.3 million. Revenue for the first half was $1.894 billion, up 0.4% from $1.886 billion.
- Net income attributable to common stockholders: Q2 was $210.5 million ($0.58 diluted EPS), versus $166.5 million ($0.46) a year earlier. First-half results were $336.3 million ($0.93 diluted EPS), versus $245.2 million ($0.68).
- Important earnings qualification: 2019 results included a $57.6 million deferred tax benefit from reversing valuation allowances on certain taxable REIT subsidiary deferred tax assets. The filing attributes the reversal to sustained profitability and higher expected future taxable income.
- FFO and normalized FFO: Q2 normalized FFO was $355.3 million, down from $387.2 million; first-half normalized FFO was $711.4 million, down from $763.1 million. Management cited the dilutive effect of using proceeds from 2018 loan repayments and asset sales to reduce debt and fund development and redevelopment. These are non-GAAP measures.
- Segment NOI: Q2 total segment NOI was $505.1 million, down 2.5%; first-half NOI was $1.017 billion, down 2.2%. Q2 triple-net NOI rose 12.4% and office NOI rose 5.4%, while senior living NOI fell 2.5%. Same-store senior living NOI declined 4.2% in Q2; same-store office NOI increased 2.1%.
- Cash flow: First-half operating cash flow was $729.2 million, compared with $710.3 million. Investing activities used $507.7 million, versus providing $725.9 million in the prior-year period; financing activities used $214.9 million, versus $1.466 billion. Cash, cash equivalents and restricted cash ended at $138.3 million.
- Debt and liquidity: Debt carrying value was $10.256 billion, down from $10.734 billion at year-end. Unrestricted cash was $82.0 million; Ventas reported $2.5 billion of available liquidity under its unsecured revolver, subject to internal utilization limits. The company had $270 million of commercial paper outstanding and $227.3 million drawn on its unsecured revolver. It identified $805.6 million of senior notes maturing over the next 12 months.
- Dividend and capital: The declared quarterly dividend was $0.7925 per share. Ventas issued shares through its ATM and a public offering; first-half net cash proceeds from common stock issuance were approximately $866 million.
Changes, outlook and notable items
- Senior living operating performance remained a pressure point: Q2 total-community occupancy was 85.8%, versus 86.4% a year earlier; same-store occupancy was 86.2%, versus 86.5%. The company cited higher property expenses and lower same-store resident revenue in the quarter.
- Triple-net Q2 NOI growth reflected contractual rent escalations and comparison with a $21.3 million non-cash Brookdale lease-extension expense in Q2 2018. The adoption of ASC 842 also changed presentation of tenant-escrowed real estate taxes and insurance; Ventas said this presentation change does not affect net income.
- Office Q2 NOI increased on rent escalations, acquisitions and developments entering operation, partly offset by dispositions. Office occupancy was 89.8%, compared with 90.8% a year earlier.
- In June, Ventas agreed to acquire 31 Canadian seniors housing communities and certain developments in an 85%/15% partnership with LGM, subject to customary conditions including regulatory approvals; closing was expected in Q3 2019, with no assurance it would be completed on those terms. In July, Ventas funded a C$947 million (US$723 million) bridge loan to LGM, repayable upon acquisition closing.
- Other unusual items included $24.6 million of first-half gains from property dispositions, $13.5 million of real estate impairments, and insurance recoveries related to natural disasters. Q2 and first-half income also benefited from the tax valuation-allowance reversal.
- The filing does not provide a clear quantified full-year 2019 earnings or FFO guidance figure. Management expects to meet liquidity needs through operating cash flow, cash, debt and equity issuance, asset sales and credit facilities, while noting that reduced access to multiple capital sources could materially harm the business.
- Key risks include tenant, borrower and operator ability to meet obligations; concentration in seniors housing and reliance on third-party managers; occupancy, labor and operating-cost pressures; healthcare reimbursement and regulatory changes; refinancing and interest-rate risk; and acquisition, development, litigation and foreign-currency risks. Brookdale, Ardent and Kindred properties represented material shares of segment NOI, and some counterparty information was not independently verified by Ventas.
Important facts for investors to verify
- How much reported earnings growth remains after excluding the $57.6 million tax benefit, disposition gains and other unusual items, and how it compares with normalized FFO.
- Whether senior living occupancy, same-store revenue and operating costs stabilize, and the effects on segment NOI.
- Completion, financing and economics of the LGM acquisition, including repayment of the bridge loan and any further equity or debt issuance.
- Debt maturities, refinancing plans, commercial-paper funding and actual available liquidity, particularly against the next-12-month requirements.
- Tenant and operator financial health, lease renewals and exposure to Brookdale, Ardent, Kindred and third-party senior living managers.
- Effects of ASC 842 presentation changes and the status of adoption of the expected-credit-loss standard, scheduled to take effect for Ventas in 2020.