Ventas, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative figures are for Q1 2015 unless otherwise noted. Ventas is a healthcare and seniors-housing REIT operating approximately 1,300 properties in the United States, Canada and the United Kingdom. Its three reporting segments are triple-net leased properties, senior living operations and medical office buildings (MOBs). The filing reflects the 2015 spin-off of most post-acute/skilled-nursing properties to Care Capital Properties (CCP), with those historical results reported as discontinued operations.
Financial performance and position
- Revenue: $852.3 million, up 5.8% from $805.6 million. Senior living contributed $464.0 million; rental income was $358.6 million.
- Profit: Net income attributable to common stockholders was $149.0 million, or $0.44 per diluted share, versus $120.4 million, or $0.37, a year earlier. Income from continuing operations was $123.3 million versus $96.5 million. The increase in net income included $26.2 million of real estate disposition gains, compared with $6.7 million in Q1 2015.
- Operating measures: Segment NOI was $492.5 million, up 7.7%; as a proportion of revenue, that is approximately 57.8%. Same-store NOI increased 4.6% for triple-net properties, 1.7% for senior living and 1.6% for MOBs. NAREIT FFO was $356.9 million versus $358.8 million; normalized FFO was $351.7 million versus $387.5 million.
- Cash flow: Operating cash flow was $272.9 million, down from $344.2 million. Investing used $166.8 million and financing used $107.6 million; cash and cash equivalents ended the quarter at $51.7 million. Cash distributions to common stockholders were $245.5 million.
- Margins and occupancy: Senior living segment NOI was $151.4 million on $464.0 million of revenue (approximately 32.6%). Senior-living occupancy was 90.4%, down from 91.3%, while average monthly revenue per occupied room rose to $5,427 from $5,248. MOB occupancy was 91.0%, versus 91.6%.
- Debt and liquidity: Total debt, net of financing adjustments, was $11.25 billion, up from $11.21 billion at year-end. Unrestricted cash was $51.7 million; unused revolving-credit capacity was $1.7 billion. The company had $324.5 million outstanding on its $2.0 billion revolver and $14.9 million of letters of credit. It identified $550 million of senior notes maturing in 2016; total 2016 maturities, including scheduled amortization, were approximately $607.8 million.
- Capital and dividend: Ventas raised $149.9 million net through its at-the-market share program during the quarter and another $39.9 million after quarter-end. The declared dividend was $0.73 per share, compared with $0.79 in Q1 2015.
Material changes versus Q1 2015
- Revenue and segment NOI grew, with triple-net NOI benefiting principally from the 2015 Ardent acquisition and contractual rent escalations. Senior living growth reflected acquisitions and higher revenue per occupied room, partly offset by lower occupancy and higher operating costs.
- Net income increased, but the comparison includes larger real estate gains in 2016 and substantially lower merger-related costs: $1.6 million versus $30.6 million. Q1 2015 also included CCP-property operations before the August 2015 spin-off; discontinued operations were a $0.5 million loss in Q1 2016 versus $17.6 million of income a year earlier.
- Operating cash flow declined, partly because Q1 2015 included CCP operations and tenant receipts. Investing outflows were much lower than in 2015, when substantial acquisition spending occurred.
- Interest expense on the income statement rose to $103.3 million from $82.3 million. Management’s discussion, including interest allocated to discontinued operations, describes a $3.6 million decrease in total interest expense; the differing scope should be considered when comparing periods.
Outlook, commentary and risks
- No specific full-year earnings or FFO guidance is provided in the supplied filing text. Management expects to meet liquidity needs through operating cash flow, cash, debt and equity financing, asset dispositions and its credit facility; access to multiple sources of capital remains important.
- In April 2016, Ventas amended Kindred leases to reallocate approximately $8 million of annual rent from seven LTACs to other assets, with total Kindred Master Lease rent unchanged. Ventas agreed, subject to closing conditions, to sell the seven LTACs and recorded a $10.3 million impairment in Q1. It also reported receipt of $3.5 million from Kindred in April, to be amortized over the applicable lease term.
- CMS proposed a 6.9% decrease in the standard LTAC payment rate for fiscal 2017 and proposed to re-implement the 25% rule. These were proposed, not final, rules. The filing also discusses healthcare reimbursement changes, including value-based payment models, as risks to tenants and property demand.
- Tenant, operator and manager performance is a key exposure. Atria managed or operated 22.6% of real estate investments by gross book value; Brookdale, Kindred and Ardent accounted for 8.4%, 2.1% and 5.3%, respectively. The filing warns that tenant or operator financial distress, lease nonrenewals, litigation, regulation, labor and operating costs, interest rates, refinancing and foreign exchange could adversely affect results and distributions.
- Ventas made a $140 million secured mezzanine loan investment at 9.95%, maturing in 2021. It had four properties under development and had funded $18.5 million of an estimated $68.0–$72.2 million commitment through quarter-end.
- The HCT acquisition-related shareholder litigation settlement was approved and became final in March 2016, with no financial payment to plaintiffs other than attorneys’ fees. Management stated that other currently pending matters were not expected to have a material adverse effect, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Review the 2016 debt maturity schedule and refinancing plans, particularly the $550 million note maturity and continued access to the revolver and capital markets.
- Assess whether same-store senior-living growth can offset lower occupancy and rising labor and property costs; monitor occupancy, revenue per occupied room and operator performance.
- Track the Kindred LTAC disposition, lease amendments and the effect of final CMS reimbursement rules on Kindred and other healthcare tenants.
- Reconcile GAAP earnings, disposition gains, discontinued operations, FFO and normalized FFO; determine how repeatable underlying cash generation is after the CCP spin-off.
- Monitor dividend coverage against operating cash flow and normalized FFO, along with share issuance under the ATM program and resulting dilution.
- Consider concentration and counterparty risk, including reliance on major operators and managers, and verify third-party financial information that Ventas says it has not independently audited.