Ventas, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Ventas is a REIT operating approximately 1,200 seniors housing, life science, medical office and other healthcare properties in the U.S., Canada and U.K.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $936.5m | $899.9m | $2,822.5m | $2,678.9m |
| Income from continuing operations | $103.3m | $156.9m | $316.8m | $465.1m |
| Net income attributable to common stockholders | $102.0m | $614.0m | $347.2m | $963.9m |
| Diluted EPS from continuing operations | $0.29 | $0.44 | $0.88 | $1.30 |
| Normalized FFO attributable to common stockholders | $354.8m | $372.9m | $1,118.0m | $1,120.2m |
| Adjusted EBITDA | $477.6m | $497.4m | $1,492.6m | $1,490.1m |
Cash flow and liquidity: Nine-month operating cash flow was $1,017.6m, versus $1,082.2m a year earlier. Investing activities provided $664.9m, compared with $710.4m used in 2017, reflecting loan repayments and lower investment outlays. Financing activities used $1,721.8m, primarily because of higher debt repayments. Cash, cash equivalents and restricted cash ended the period at $148.5m, including $86.1m unrestricted cash.
Debt: Debt carrying value was $10,478.5m, down from $11,276.1m at December 31, 2017. Gross debt was $10,584.0m; the weighted average interest rate at period end was 3.7%. The $3.0bn unsecured revolving facility had $514.4m drawn and $2.5bn unused capacity; the construction facility had $336.2m unused. Total maturities were $553.9m in 2019, $598.4m in 2020 and $590.1m in 2021, including revolving-facility borrowings in the 2021 figure.
Dividend: Ventas declared $0.79 per common share for Q3, versus $0.775 in Q3 2017. Nine-month dividends declared were $2.37 per share.
Material changes versus prior comparable periods
- Revenue rose 4.1% in Q3 and 5.4% for the first nine months, while income from continuing operations fell 34.2% and 31.9%, respectively. Common-stockholder net income fell sharply, in large part because 2017 included real estate disposition gains of $458.3m in Q3 and $502.3m for nine months; 2018 recorded $0.02m and $35.9m, respectively.
- Q3 segment NOI declined 5.3% to $495.2m. Triple-net NOI decreased 10.9% to $190.3m, while senior living NOI increased 3.9% to $151.8m and office NOI increased 3.0% to $134.0m. For the nine months, total segment NOI declined 2.0% to $1,534.2m.
- Same-store performance was weaker in senior living: NOI fell 2.7% in Q3 and 1.3% for nine months. Same-store occupancy was 87.8% in Q3 versus 88.5% a year earlier. Office same-store NOI grew 1.3% in Q3 and 0.3% for nine months; triple-net same-store NOI grew 3.7% in Q3 but declined 0.5% for nine months.
- Normalized FFO was down 4.8% in Q3 and essentially flat for nine months. Lower results reflected dispositions and operating/transition costs, partly offset by property performance and certain loan-related income.
- Debt decreased as Ventas repaid maturing and refinanced notes and mortgages. It issued $650m of 4.00% notes due 2028 and $750m of 4.40% notes due 2029, and replaced a $900m term loan due 2020 with facilities maturing in 2023 and 2024. Debt-extinguishment losses were $39.5m in Q3 and $50.4m for nine months.
Outlook, management commentary, risks and unusual items
- The filing provides no specific earnings or FFO guidance. Management expects the next 12 months’ liquidity needs—including operations, debt service, capital spending, investments and REIT distributions—to be met through operating cash flow, cash, debt and equity issuance, asset sales and credit facilities. Management cautions that inability to access multiple capital sources could materially adversely affect the company.
- In January, Ventas moved 76 private-pay senior housing communities from triple-net leases to ESL management. The transition contributed to segment mix changes and $20.9m of nine-month transaction costs. Ventas holds a 34% interest in ESL.
- In April, Ventas consolidated substantially all Brookdale leases into a guaranteed master lease, extended substantially all terms to December 31, 2025, and restructured annual cash rent. The change generated a $21.3m non-cash expense; planned property sales under the arrangement are not assured.
- Ventas received $846.7m from repayment of ten loans, including an Ardent loan repayment. A $200m investment in Ardent subsidiary notes carries a 10.0% effective rate and matures in 2026. The filing identifies tenant and borrower credit as a risk; Ardent’s condition and ability to meet obligations warrant attention.
- Kindred’s July go-private transactions produced a $12.3m fee recognized in Q3 interest and other income. Ventas also recognized $27.2m of income on repayment of Ardent loans, including fees and accelerated recognition of a previously received fee.
- Key exposures include tenant/operator performance and lease renewals, senior housing occupancy and operating costs, healthcare reimbursement and regulation, competition, interest rates, access to capital, foreign exchange, and development execution. Brookdale, Ardent and Kindred are significant tenants; information about several tenants and operators was not independently verified by Ventas.
- Ventas recorded a $35.7m impairment on an unconsolidated SNF-focused joint-venture investment, then sold its 25% interest in July for $57.5m and recorded a $0.9m gain. Real estate impairment charges were $10.7m for nine months.
- ASC 842 lease accounting was scheduled for adoption January 1, 2019. Management expected right-of-use assets and lease liabilities and stated that expensing certain leasing costs could reduce net income; the balance-sheet impact was still under evaluation.
- Management said pending litigation was not expected to have a material adverse effect, while noting that outcomes are uncertain and defense costs may be significant. Disclosure controls were assessed as effective at September 30, 2018.
Important facts for investors to verify
- Whether senior living same-store occupancy and NOI stabilize, and how results at the 76 transitioned communities develop.
- Brookdale’s ability to meet the restructured master-lease terms and any execution, timing or pricing of contemplated property sales.
- Ardent’s credit quality and performance of the $200m notes, as well as exposure to other concentrated tenants and operators.
- Debt refinancing needs, floating-rate exposure and the effect of interest-rate changes; Ventas estimated a 100-basis-point rise would add approximately $14.8m to 2018 interest expense, or $0.04 per diluted share, assuming unchanged variable debt.
- The sustainability of operating cash flow and the $0.79 quarterly dividend in light of capital needs, debt service and REIT distribution requirements.
- The final effect of ASC 842 adoption, tax-law analysis and any material litigation or impairment developments.