Ventas, Inc. quarterly report, Q1 FY2017

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Ventas, Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Ventas is a healthcare and seniors-housing REIT with approximately 1,300 properties in the U.S., Canada and U.K., across triple-net leased, senior living and office operations.

Financial performance

  • Revenue: $883.4 million, up 3.7% from $852.3 million. Office rental income rose to $185.9 million from $144.1 million, while triple-net rental income declined to $209.3 million from $214.5 million; resident fees were essentially flat at $464.2 million.
  • Profit: Income from continuing operations was $155.9 million, up 26.4%. Net income attributable to common stockholders was $198.1 million, or $0.56 basic and $0.55 diluted per share, versus $149.0 million, or $0.44 per share, in Q1 2016. Results included a $43.3 million gain on real estate dispositions.
  • Operating measures: Segment NOI was $513.2 million, up 4.2%. Office NOI increased 27.6% to $130.2 million, senior living NOI increased 0.4% to $152.1 million, and triple-net NOI declined 2.4% to $210.5 million. Normalized FFO, a non-GAAP measure, was $368.1 million versus $351.7 million.
  • Cash flow: Operating cash flow was $335.7 million, up from $277.1 million. Investing activities used $1.034 billion, primarily reflecting loan and real estate investments; financing provided $503.1 million. Cash and cash equivalents ended the quarter at $91.3 million.
  • Debt and liquidity: Balance-sheet debt was $11.94 billion, compared with $11.13 billion at year-end 2016; total liabilities were $13.26 billion. The company reported $1.8 billion of unused capacity under its $2.0 billion revolving facility at quarter-end. On April 25, it replaced that facility with a $3.0 billion revolver, initially priced at LIBOR plus 0.875%, with an accordion feature up to $3.75 billion. Management identified approximately $1.0 billion of senior notes due within the next 12 months.
  • Dividend: $0.775 per common share declared for the quarter, versus $0.73 in Q1 2016.

Changes and drivers

  • Office NOI growth primarily reflected the 2016 acquisition of life science and innovation centers and lease escalations. Same-store office NOI rose 1.7%.
  • Same-store senior living NOI increased 2.9%, supported by 2.1% revenue growth and higher monthly revenue per occupied room, despite average unit occupancy declining to 88.6% from 90.4%.
  • Triple-net NOI declined mainly due to dispositions and foreign currency movements; same-store triple-net NOI was down 0.3%.
  • Interest expense increased $5.5 million to $108.8 million, reflecting higher debt balances and a higher effective rate. The effective interest rate was 3.7%, versus 3.6%.
  • Ventas acquired 11 triple-net seniors housing communities and a life science, research and medical campus for $353.4 million. It also provided Ardent-related financing for the LHP acquisition: a $700 million five-year term loan and a $60 million revolving feature, of which $15 million was drawn at quarter-end; the financing carried a weighted average rate of approximately 8.9%.

Outlook, risks and unusual items

  • The filing provides no specific earnings or FFO guidance. Management expects near-term liquidity needs—including operations, debt service, maturities, capital spending, investments and distributions—to be funded through operating cash flow, cash, financing, asset sales and revolver borrowings.
  • Key risks include tenants’, operators’ and borrowers’ ability to meet obligations; lease renewals and property re-leasing; healthcare reimbursement and regulatory changes; senior living occupancy, labor and operating costs; interest rates and refinancing access; and development and acquisition execution.
  • Tenant and manager exposure is concentrated: Atria represented 21.8% and Sunrise 10.8% of real estate investment gross book value; Brookdale, Kindred and Ardent represented 7.7%, 1.7% and 4.9%, respectively. The filing cautions that several operating and financial details about private counterparties were not independently verified by Ventas.
  • Other notable items were a $3.0 million gain from remeasuring a previously held equity interest, $5.2 million of real estate impairments, and $15.8 million paid for certain joint venture partner interests. Management said pending litigation was not expected to have a material adverse effect, while noting outcomes and defense costs remain uncertain.
  • Ventas adopted ASU 2017-01 for acquisitions and ASU 2016-09 for stock compensation; the latter had no significant financial statement impact. It expected no significant impact from adopting ASC 606 in 2018, subject to continued evaluation.

Investor verification priorities

  1. Separate recurring operating performance from disposition gains and the equity-interest remeasurement; review the company’s FFO and normalized FFO reconciliations.
  2. Assess credit quality and repayment risk in the rapidly expanded loan portfolio, particularly the Ardent financing, and confirm its collateral, guarantees and terms.
  3. Review the $1.0 billion near-term note maturities, the new credit facility terms and debt covenants, and the company’s refinancing capacity.
  4. Track senior living occupancy and same-store NOI, triple-net tenant health and lease renewals, and office occupancy and same-store performance.
  5. Evaluate cash available after dividends, development and capital spending, alongside the company’s reliance on external capital and asset dispositions.