Ventas, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; balance-sheet comparisons are to December 31, 2009. Ventas is a healthcare and seniors-housing REIT operating in the U.S. and Canada. At quarter-end, its portfolio comprised 503 assets across 43 states and two Canadian provinces.
Financial performance and position
Dollar amounts below are in millions except per-share data.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $244.0 | $231.5 | $485.5 | $460.4 |
| Income from continuing operations | $53.4 | $46.8 | $106.1 | $92.6 |
| Net income attributable to common stockholders | $58.1 | $88.4 | $110.7 | $162.6 |
| Diluted EPS from continuing operations | $0.33 | $0.30 | $0.66 | $0.61 |
| Diluted EPS, total | $0.37 | $0.57 | $0.70 | $1.09 |
| NOI, excluding discontinued operations | $168.7 | $158.8 | $331.1 | $311.9 |
| Adjusted EBITDA | $162.8 | $156.2 | $318.6 | $305.0 |
| Normalized FFO | $111.9 | $105.1 | $217.1 | $200.8 |
| Normalized FAD | $108.1 | $101.5 | $210.2 | $193.1 |
- Six-month operating cash flow was $207.7 million, versus $195.1 million. Investing activities used $21.4 million, while financing activities used $265.8 million. Cash declined to $27.8 million from $107.4 million at year-end.
- At June 30, total debt carrying value was $2.581 billion, down from $2.670 billion at December 31. Total liabilities were $3.031 billion; total assets were $5.462 billion.
- Revolver capacity was $1.0 billion, with $126.3 million drawn and approximately $872.7 million available at June 30. The revolver matures April 26, 2012. By July 27, borrowings and letters of credit totaled $352.7 million, leaving $647.3 million available.
- Debt maturities reported at June 30 included $328.2 million in 2011 and $538.0 million in 2012. Restricted cash and escrow deposits were $43.5 million.
- The declared quarterly dividend was $0.535 per share, up 4.4% from the 2009 quarterly rate; six-month dividends declared totaled $1.07 per share.
Changes versus the prior comparable period
- Revenue increased 5.4% in Q2 and 5.5% for the first six months. Continuing-operations income rose 14.1% and 14.6%, respectively. NOI increased 6.2% in Q2 and 6.1% year to date.
- Senior living NOI increased 14.6% in Q2 and 12.9% year to date, supported by improved occupancy and daily rates, favorable Canadian-dollar translation, and a $3 million reimbursement for expense overages at Sunrise-managed communities. Total senior living occupancy was 88.3% in Q2, versus 86.5%.
- Triple-net property NOI rose 1.5% in Q2 and 2.0% year to date, principally from lease escalators, including Kindred increases effective May 1. “All Other” NOI rose 36.6% in Q2 and 35.6% year to date, mainly reflecting MOB acquisitions made in 2009.
- Common-stockholder net income fell 34.3% in Q2 and 31.9% for the half year, mainly because 2009 discontinued operations included substantially larger property-sale gains. Discontinued-operations income was $5.5 million in Q2 2010 versus $42.4 million in Q2 2009, and $6.0 million for the half versus $71.5 million.
- Interest expense declined $2.8 million year to date, although the reported effective interest rate increased to 6.6% from 6.1%. Depreciation and amortization increased with acquired and developed properties.
Outlook, material developments and risks
- Acquisition after quarter-end: On July 1, Ventas completed its approximately $381 million acquisition of Lillibridge businesses and interests in 96 MOBs and ambulatory facilities, including assumed debt. Funding included cash, revolver borrowings and assumed mortgage debt; approximately $133 million of mortgage debt was paid off. The transaction expanded the portfolio to 153 owned or managed MOBs with 8.6 million square feet.
- Debt actions: Ventas repaid $1.4 million of notes at maturity and redeemed $142.7 million of 7⅛% notes due 2015 at 103.56% of par, recording a $6.4 million debt-extinguishment loss. It also repaid $49.8 million of mortgages on two Sunrise-managed properties and acquired Sunrise’s 20% interests in those properties.
- Management outlook: No specific earnings or FFO guidance is provided in the filing. Management expected remaining-2010 liquidity needs—including operations, debt service, capital spending, investments and dividends—to be met through operating cash flow, cash, asset sales, debt financing and revolver availability, while noting that alternative funding could be needed if these sources are insufficient or acquisitions are significant.
- Concentration: Sunrise-managed or operated properties represented 38.9% of gross real estate investment book value; Brookdale and Kindred represented 21.5% and 14.1%. For the first half, Sunrise accounted for 44.7% of revenue, Kindred 25.2%, and Brookdale 12.5%. A deterioration in these counterparties’ financial health, operating performance, or willingness to renew leases could materially affect Ventas.
- Healthcare reimbursement: The filing discusses the 2010 Affordable Care Act and proposed Medicare payment changes affecting long-term acute-care hospitals and skilled nursing facilities. The company was assessing the effects; proposals were not final, and adverse impacts on operators could affect their ability to meet obligations to Ventas.
- Legal contingency: Ventas had a $101.6 million jury verdict against HCP related to the Sunrise REIT acquisition. HCP appealed, and Ventas cross-appealed seeking additional relief. A $102.8 million letter of credit secured the verdict pending appeal. The filing cautions that the outcome and timing were uncertain.
- Other exposures: Risks include refinancing and interest-rate exposure, tenant/operator performance and lease renewals, Canadian-dollar movements, healthcare regulation, insurance adequacy, litigation, and risks tied to Lillibridge integration, MOB development and joint ventures. A 100-basis-point increase in variable borrowing rates was estimated to raise 2010 interest expense by about $2.7 million, or $0.02 per diluted share, assuming debt balances remained unchanged.
- Management stated that disclosure controls and procedures were effective at June 30, 2010. The interim statements include normal recurring adjustments and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Review Kindred’s, Brookdale’s and Sunrise’s latest financial filings and assess their capacity to meet lease and management obligations; Ventas said it had not independently verified all third-party information cited.
- Track appeal and cross-appeal developments in the HCP case, including whether the verdict is upheld and whether any additional damages are awarded.
- Assess Lillibridge integration, acquisition financing, post-close leverage and the performance of the enlarged MOB portfolio.
- Monitor 2011–2012 debt maturities, revolving-credit availability and the refinancing plan, particularly after post-quarter acquisition funding.
- Separate recurring operating performance from property-sale gains, debt-extinguishment losses, merger-related expenses and other adjustments; FFO, normalized FFO, FAD, NOI and Adjusted EBITDA are non-GAAP measures.
- Follow final Medicare reimbursement rules and any resulting effects on healthcare operators, plus lease renewals, occupancy, operating costs and the ability to sustain dividends.