Ventas, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Ventas is a REIT with more than 1,200 seniors housing and healthcare properties across the U.S., Canada and the U.K.; its segments are triple-net leased properties, senior living operations and office operations.
Key financial results
Amounts are in millions except per-share data. Comparisons are with the same 2017 period unless otherwise stated.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $942.3 | $895.5 | $1,886.0 | $1,778.9 |
| Income from continuing operations | $133.5 | $152.3 | $213.5 | $308.2 |
| Net income attributable to common stockholders | $166.5 | $151.8 | $245.2 | $350.0 |
| Diluted EPS from continuing operations | $0.37 | $0.42 | $0.59 | $0.86 |
| Diluted EPS attributable to common stockholders | $0.46 | $0.42 | $0.68 | $0.98 |
| Normalized FFO attributable to common stockholders | $387.2 | $379.3 | $763.1 | $747.4 |
| Adjusted EBITDA | $515.6 | $504.9 | $1,015.0 | $992.7 |
| NOI | $518.0 | $528.9 | $1,039.1 | $1,042.1 |
Q2 revenue increased about 5%, while continuing-operations income fell 12% and diluted continuing-operations EPS declined to $0.37. Common-stockholder net income rose 10%, principally reflecting a $35.8 million real estate disposition gain versus $0.7 million a year earlier. Six-month common net income declined 30%, reflecting lower continuing income and lower disposition gains.
- Operating segments, Q2: Triple-net NOI fell 21.1% to $169.0 million; senior living NOI rose 4.1% to $157.9 million; office NOI rose 2.5% to $133.5 million. Senior living’s reported increase largely reflects moving 76 communities from triple-net leasing to company-operated management; same-store senior living NOI declined 2.1%. Same-store triple-net NOI fell 8.4%, including the Brookdale lease-related charge; same-store office NOI was essentially flat.
- Margins and occupancy: The filing reports segment NOI rather than a consolidated operating margin. Q2 total segment NOI was down 2.1%. Occupancy was 86.3% across senior living communities (87.9% prior year) and 90.8% for office buildings (92.0% prior year).
- Cash flow, six months: Operating cash flow was $710.3 million versus $723.4 million. Investing activities provided $725.9 million, compared with $1,150.0 million used in 2017, primarily due to loan repayments and asset-sale proceeds. Financing activities used $1,466.0 million, including debt repayment and common-stockholder distributions. Cash, cash equivalents and restricted cash ended at $158.1 million.
- Balance sheet and liquidity: At June 30, total assets were $22.70 billion, total debt was $10.40 billion (down from $11.28 billion at year-end 2017), and total equity was $10.68 billion. Unrestricted cash was $93.7 million; restricted cash was $64.4 million. Available capacity was $2.7 billion under the unsecured revolver and $363.7 million under the construction facility. The reported weighted-average debt rate was 3.8%.
- Dividends: The company declared $0.79 per common share quarterly; dividends declared for the first half totaled $1.58 per share.
Material changes and unusual items
- Ventas received $846.7 million in repayments on ten loans during the first half. Full repayment of Ardent-related loans generated $27.2 million of income from a prepayment fee and accelerated recognition of a prior fee. In June, Ventas invested $200 million in Ardent subsidiary notes carrying a 10.0% effective rate and maturing in 2026.
- Ventas sold 22 properties and two vacant land parcels for aggregate consideration of $307.1 million in the first half, recognizing $35.9 million of gains. A separate $35.7 million impairment of an unconsolidated joint-venture investment contributed to a $47.1 million first-half loss from unconsolidated entities.
- Brookdale agreements consolidated substantially all leases into a guaranteed master lease, extended substantially all terms through December 31, 2025, and restructured annual cash rent. The agreements generated a $21.3 million non-cash Q2 expense from accelerated recognition of rent receivables and lease-related balances; a $2.5 million fee is being amortized over the new term.
- Ventas moved 76 private-pay communities from Elmcroft triple-net leases to ESL management in January and acquired a 34% interest in ESL. The transition involved $18.2 million of first-half transaction costs, net of property-level net assets assumed for no consideration.
- In July, Kindred completed its go-private transaction; Ventas received $12.3 million, expected to be recognized as income in Q3. Also in July, Ventas sold its 25% interest in an SNF-focused joint venture for $57.5 million; management expected no gain or loss and anticipated losing about $4.6 million in annual management fees.
- Debt actions included issuing $650 million of 4.00% notes due 2028, repaying $700 million of 2.00% notes at maturity, and redeeming or repaying the remaining $600 million of 4.00% notes due 2019. The first-half debt extinguishment loss was $10.9 million. In July, a new $900 million term loan facility replaced the prior $900 million facility due 2020 and extended maturities to 2023 and 2024.
Outlook, risks and contingencies
The filing provides no specific earnings or FFO guidance. Management said expected liquidity needs include operating costs, debt service and maturities, capital spending, investment and development commitments, and REIT distributions. It expects to fund these needs through operating cash flow, cash on hand, debt and equity financing, asset dispositions and revolving facilities; it cautioned that inability to access multiple sources of liquidity could materially adversely affect the company.
- Material risks include tenant, borrower, operator and manager ability to meet obligations; lease renewal and property-repositioning risk; senior living labor and operating costs, occupancy and competition; healthcare regulation and reimbursement changes; interest rates and refinancing; capital-market access; foreign exchange; and joint-venture dependence.
- Ventas identifies tenant and operator concentrations, including Atria, Sunrise, Brookdale, Ardent and Kindred. Failure by significant tenants to pay or renew could affect cash flow, debt service and distributions. Kindred and other private counterparties’ financial information was not independently verified by Ventas.
- A 100-basis-point increase in rates on variable-rate debt, assuming debt outstanding remained unchanged, was estimated to increase 2018 interest expense by about $16.7 million, or $0.05 per diluted share.
- Management stated that pending litigation, except as described in the filing, was not expected to have a material adverse effect, while noting legal matters can require significant defense costs and outcomes remain uncertain. Disclosure controls were assessed as effective as of June 30, 2018.
Investor facts to verify
- Whether senior living occupancy and same-store NOI stabilize, given year-over-year occupancy declines and slightly lower same-store NOI.
- Brookdale’s performance and compliance with the revised master lease, including the cash-rent restructuring and contemplated property sales.
- Ardent’s credit quality and its capacity to service the new 10% notes, as well as the concentration exposure to other major tenants and operators.
- The sustainability of normalized FFO and dividends after separating recurring operating performance from loan-fee income, disposition gains, impairments and transition costs.
- Debt maturity, refinancing and variable-rate exposure, and the financial effects of the new term loan and upcoming lease-accounting adoption.