Ventas, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Dollar amounts below are in millions unless stated otherwise. Ventas is a healthcare and seniors-housing REIT operating triple-net leased properties, managed senior living communities, and medical office buildings (MOBs). Its portfolio expanded substantially following the May 2011 Atria Senior Living and July 2011 Nationwide Health Properties (NHP) acquisitions.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $566.0 | $264.7 | $1,201.1 | $748.9 |
| Net income attributable to common stockholders | $102.9 | $57.9 | $171.5 | $168.6 |
| Diluted EPS | $0.35 | $0.37 | $0.81 | $1.07 |
| Segment NOI | $350.1 | $178.0 | $739.7 | $507.8 |
| Normalized FFO | $255.1 | $115.4 | $517.6 | $332.5 |
| Operating cash flow | Not separately presented | Not separately presented | $443.9 | $346.1 |
Q3 revenue increased about 114%, while nine-month revenue rose about 60%, primarily reflecting the acquisitions. Nine-month common-stockholder income was up 1.8%, but diluted EPS declined because the share count increased materially, including shares issued for NHP and Atria. Q3 results also included approximately $85.3 million of net litigation proceeds; normalized FFO excludes this item and other specified nonrecurring or non-operating items. NOI and FFO are non-GAAP measures and should be considered alongside GAAP earnings.
- Balance sheet at September 30: Total assets were $17.21 billion; total debt was $6.31 billion, up from $2.90 billion at December 31, 2010. Cash and cash equivalents were $57.5 million, with $84.8 million in escrow deposits and restricted cash.
- Cash flows: Nine-month investing cash outflow was $842.9 million, including $619.9 million invested in loans receivable and $344.7 million of net real estate investment. Financing provided $434.8 million, including debt and equity issuance, partly offset by debt repayments and $354.9 million of common dividends.
- Debt and liquidity: At quarter-end, $474 million was drawn on the prior revolver, with $517.7 million available; the company reported covenant compliance. On October 18, it replaced that facility with a $2.0 billion revolver maturing in 2015, extendable one year. At November 2, $727 million was drawn and $1.26 billion remained available. The $250 million drawn under NHP’s term loan was repaid November 1; $550 million of capacity remained available.
- Margins: The filing reports NOI, but does not provide a single consolidated operating-margin measure. Q3 segment NOI increased across triple-net, senior living, and MOB operations; acquisition-related growth dominates the year-over-year comparison.
Material changes and unusual items
- NHP and Atria materially enlarged and diversified the portfolio, while increasing debt, depreciation and amortization, and acquisition-related costs. The company issued about 99.8 million shares for NHP and 25.0 million shares as partial consideration for Atria.
- Q3 merger-related expenses and deal costs were $69.4 million; nine-month costs were $131.6 million. The filing says Atria- and NHP-related acquisition costs were expensed as incurred.
- Ventas received $102.8 million from HCP in August following a court judgment; after fees, costs, and a charitable contribution, it recorded $85.3 million net. HCP later petitioned the U.S. Supreme Court, and a punitive-damages trial was scheduled for February 2012.
- The board’s 2011 regular quarterly dividend was $0.575 per share, 7.5% above the 2010 quarterly dividend. The two prorated Q3 payments together equaled that quarterly amount.
Outlook, risks, and contingencies
The filing does not provide specific earnings or FFO guidance. Management said expected liquidity needs—including debt service, capital spending, acquisitions, and REIT distributions—were expected to be met through operating cash flow, cash, financing, asset sales, and available credit, while cautioning that capital-market access and acquisition activity could affect funding needs.
- Reimbursement and regulation: The 2012 skilled-nursing Medicare payment rule reduced the standard federal rate by 11.1%; CMS estimated net industry payments would fall about $3.87 billion. Management was assessing the operator impact. The long-term acute-care hospital rate was set to increase 1.8%. Potential federal deficit-related Medicare cuts and state Medicaid reductions also pose risks.
- Operator and tenant concentration: Atria, Sunrise, Brookdale, and Kindred represented approximately 18.7%, 14.4%, 13.0%, and 5.0% of portfolio gross book value, respectively. Kindred and Brookdale leases contributed significant revenue and NOI. Ten Kindred lease bundles covering 89 properties and $122.8 million of annual base rent were due to expire in April 2013 absent renewal notices by April 30, 2012.
- Operating and integration risks: Management cited acquisition integration, senior-living occupancy and labor costs, reliance on third-party managers, tenant credit, joint-venture partners, interest rates, foreign exchange, and access to capital. Senior-living residents generally can terminate on 30 days’ notice.
- Legal and contingent matters: The NHP shareholder litigation settlement required documentation and court approval. Atria acquisition contingent consideration had an estimated fair value of $44.2 million, but the eventual payment depends on future performance and other factors.
Important facts for investors to verify
- Track integration results and comparable-property operating trends separately from acquired revenue and NOI; confirm occupancy and expense trends, particularly in senior living and MOBs.
- Review debt maturities, interest-rate exposure, covenant headroom, and actual revolver availability after the post-quarter refinancing and term-loan repayment.
- Assess Kindred’s renewal decisions and the ability to re-lease or reposition any properties not renewed in 2013.
- Monitor the effect of Medicare and Medicaid payment changes on operators’ financial health and ability to meet lease obligations.
- Follow the HCP Supreme Court petition and punitive-damages proceedings, and the status of the NHP litigation settlement and Atria contingent consideration.
- Evaluate dividend coverage using recurring cash flow and FFO measures, recognizing that reported Q3 GAAP income included the litigation gain.