Ventas, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2019, Ventas operated as a healthcare and seniors-housing REIT with approximately 1,200 properties in the U.S., Canada and U.K. Its portfolio spans triple-net leased properties, senior living operations, and office operations, including medical office buildings and research and innovation centers.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $942.9 million | $943.7 million | Down 0.1% |
| Net income attributable to common stockholders | $125.8 million | $78.7 million | Up 59.8% |
| Diluted EPS | $0.35 | $0.22 | Up $0.13 |
| Segment NOI | $511.5 million | $521.0 million | Down 1.8% |
| Operating cash flow | $336.1 million | $308.0 million | Up 9.1% |
| Normalized FFO | $356.1 million | $375.9 million | Down 5.3% |
Net income attributable to common stockholders was approximately 13.3% of revenue, versus 8.3% a year earlier. This comparison reflects nonrecurring and other items as well as operations. Segment NOI declined despite growth in triple-net leased and office operations: senior living NOI fell 1.3%, while office NOI rose 4.1% and triple-net NOI increased 0.4%. Same-store senior living NOI declined 1.3%; same-store office NOI increased 3.9% and same-store triple-net NOI increased 3.4%.
At March 31, 2019, total assets were $22.7 billion, debt was $10.69 billion, and cash and cash equivalents were $82.5 million. The company reported $2.9 billion of available capacity on its unsecured revolver and $295.4 million on its construction facility. The declared quarterly dividend was $0.7925 per common share. Cash, cash equivalents and restricted cash totaled $140.2 million at quarter-end.
Material changes versus the prior comparable period
- Revenue was essentially flat. Senior living resident fees grew 1.3%, but property-level expenses grew 2.5%, contributing to lower senior living NOI.
- GAAP earnings increased largely alongside lower losses from unconsolidated entities (the prior-year period included a $35.7 million impairment), lower merger-related costs and debt-extinguishment charges, and a $5.4 million gain on property sales. Q1 2019 also included $10.2 million of real estate impairments.
- Normalized FFO fell 5.3%. Management attributed the decline principally to the dilutive effect of using proceeds from prior-year loan repayments and asset dispositions to reduce debt and fund development and redevelopment.
- Operating cash flow increased, while investing cash flow shifted to a $67.8 million use from $170.6 million provided in Q1 2018, primarily reflecting lower proceeds from property sales and loan repayments.
- Debt was slightly lower than at year-end 2018. The company issued $700 million of senior notes, redeemed $258.8 million of notes, began a commercial paper program with $195 million outstanding at quarter-end, and raised $98.5 million net through its at-the-market share offering.
Outlook, risks and unusual items
The filing provides no specific earnings or FFO guidance. Management said it expects to meet the next 12 months’ liquidity needs through operating cash flow, cash, debt and equity financing, asset dispositions, and available credit facilities. Those needs include operating expenses, debt service, repayment of $299.8 million of senior notes, capital spending, development and investment commitments, and distributions required for REIT status.
Key risks include tenant, operator and manager ability to meet obligations; healthcare reimbursement and regulatory changes; senior living labor and operating costs; competition and lease renewals; access to capital and refinancing costs; floating-rate exposure and the anticipated phaseout of LIBOR after 2021; and litigation, insurance and property risks. Atria managed or operated properties representing 22.3% of consolidated real estate investments by gross book value. Brookdale, Ardent and Kindred leased properties representing 8.4%, 5.1% and 1.1%, respectively. California represented 16.3% of revenue. Senior living occupancy was 86.2%, versus 86.6% a year earlier; office occupancy was 90.1%, versus 91.3%.
Ventas adopted ASC 842 on January 1, 2019, recording operating lease assets and liabilities; management stated the associated triple-net tax and insurance presentation change had no impact on net income. Management considered disclosure controls effective and reported no material first-quarter change in internal control over financial reporting. Pending litigation was described, but management stated it did not expect currently pending matters to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- Review senior living same-store expense growth, occupancy and revenue per occupied room, and whether NOI trends improve.
- Assess tenant and operator credit quality and concentration, especially Atria, Brookdale, Ardent and Kindred.
- Check refinancing and liquidity needs, including the $299.8 million 2019 note maturity, floating-rate debt exposure and commercial paper usage.
- Compare normalized FFO and dividend cash requirements with operating cash generation; normalized FFO declined while the declared dividend was $0.7925 per share.
- Examine the assumptions and cash-flow impacts behind impairment charges, development spending, asset sales and ASC 842 adoption.