Ventas, Inc. — FY2017 Form 10-K
Business and reporting period. Annual report for the fiscal year ended December 31, 2017, filed February 9, 2018. Ventas is a healthcare and seniors housing REIT operating through triple-net leased properties, senior living operations, and office operations. It owned more than 1,200 properties, including unconsolidated and held-for-sale assets, across the U.S., Canada, and U.K.; 14 properties were under development.
Financial performance and position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $3.574 billion | $3.444 billion | +3.8% |
| Income from continuing operations | $643.9 million | $554.2 million | +16.2% |
| Net income attributable to common stockholders | $1.356 billion | $649.2 million | More than doubled |
| Diluted EPS from continuing operations | $1.80 | $1.59 | +13.2% |
| FFO attributable to common stockholders | $1.513 billion | $1.441 billion | +5.0% |
| Normalized FFO attributable to common stockholders | $1.491 billion | $1.439 billion | +3.7% |
| Cash from operating activities | $1.442 billion | $1.372 billion | +5.1% |
Profit and unusual items. Net income growth principally reflects $717.3 million of gains on real estate dispositions, versus $98.2 million in 2016. The 2017 gain included $657.6 million, net of taxes, from selling 36 Kindred skilled nursing facilities for approximately $700 million. The income tax benefit was $59.8 million, including a $64.5 million benefit from remeasuring deferred tax liabilities under the 2017 Tax Act, partly offset by a $23.3 million valuation allowance expense and other tax items.
Segments and operating indicators. Total segment NOI was $2.082 billion, up 4.1%. Triple-net NOI declined 0.7% to $844.7 million, principally reflecting the Kindred SNF sale; same-store triple-net NOI rose 1.1%. Senior living NOI declined 1.8% to $593.2 million; same-store NOI was down 0.2%, with occupancy falling to 88.3% from 90.4%. Office NOI increased 18.1% to $524.6 million, primarily from acquired properties; same-store NOI increased 0.5%. Office occupancy was 92.0%, compared with 91.7%.
Cash flow, debt, and liquidity. Investing activities used $976.5 million and financing activities used $671.3 million. Year-end cash and cash equivalents were $81.4 million, down from $286.7 million. Ventas reported $11.276 billion of debt on the balance sheet ($11.366 billion gross principal) and a 3.6% weighted average interest rate at year-end. Available capacity included $2.4 billion on the $3.0 billion unsecured revolver and $397.1 million on a $400 million construction facility. The company had $1.214 billion of contractual long-term debt obligations due within one year, including $700 million principal of senior notes due in 2018. It was in compliance with debt covenants at year-end.
Dividends. Dividends declared for 2017 totaled $3.115 per common share. The fourth-quarter dividend was $0.79 per share, paid in January 2018. The Board declared a $0.79-per-share first-quarter 2018 dividend; management expected to distribute at least 100% of 2018 taxable net income after applicable NOL carryforwards. Dividend levels remain subject to Board decisions and business conditions.
Material changes versus the prior year
- Revenue rose 3.8%, while income from continuing operations rose 16.2%; reported net income was substantially affected by the larger property-sale gain.
- Office NOI grew strongly, largely from acquisitions, while senior living occupancy and NOI weakened and triple-net NOI edged lower after asset sales.
- Ventas sold 53 triple-net properties, five MOBs, and vacant land for aggregate consideration of $870.8 million; it acquired 22 properties for $691.3 million.
- Net loans receivable and investments increased to $1.4 billion from $754.6 million, including a $700 million secured term loan to an Ardent subsidiary to support its LHP acquisition. The facility carried an approximately 9.3% weighted average rate at year-end.
- Operating cash flow increased, but year-end cash fell as debt repayments, dividends, and other financing uses exceeded financing inflows. Debt increased modestly on a balance-sheet basis.
- The 2017 Tax Act affected reported tax results; adoption of the new revenue standard in 2018 was expected to result in a $31.2 million retained-earnings adjustment for deferred gains, with no other significant financial statement impact expected.
Outlook, commentary, risks, and contingencies
- Management emphasized reliable cash flows, portfolio diversification, and maintaining financial flexibility. The filing does not provide a clear numerical 2018 revenue, earnings, or FFO forecast.
- In January 2018, Ventas transitioned management of 76 private-pay seniors housing communities previously substantially leased to Elmcroft to Eclipse Senior Living, in which Ventas acquired a 34% interest. A contemplated institutional-partner joint venture was not assured.
- Senior housing operating results face occupancy, wage and benefit, insurance, and other cost pressures; the filing also cites elevated expected new-community deliveries in 2018 in some markets.
- Tenant and operator credit, especially the capacity of Brookdale, Ardent, and Kindred to meet lease and other obligations, is a material risk. Atria and Sunrise manage a substantial portfolio, creating reliance on their operating performance and reporting.
- Healthcare regulation, Medicare and Medicaid reimbursement changes, value-based payment models, labor availability, and possible changes to health coverage could affect operators’ finances and ability to pay rent. Life science tenants also depend on research funding and regulatory and commercial success.
- Other disclosed risks include interest-rate and refinancing exposure, access to capital, geographic concentration (California represented 15.3% of revenue and 13.9% of NOI), foreign exchange, development execution, insurance and environmental liabilities, litigation, and maintaining REIT qualification.
- Management reported no material pending legal proceeding other than matters described in the notes, and stated that the disposition of currently pending matters was not expected to have a material adverse effect; outcomes remain uncertain. The 2017 Tax Act analysis was provisional in certain respects, with further analysis expected by the end of 2018.
Most important facts for investors to verify
- Whether normalized FFO growth and senior living same-store performance improve, particularly occupancy, expenses, and NOI.
- Credit and rent coverage trends for major tenants and operators, and the performance of the large Ardent loan, including repayment and collateral protections.
- How the 2018 $700 million note maturity and other scheduled obligations are funded, and the effect of interest rates, refinancing costs, and debt covenants.
- Whether the declared dividend is supported by recurring cash generation and how REIT distribution requirements affect liquidity.
- Realized proceeds, gains, and reinvestment effects from property sales; progress and returns on development projects and the Eclipse transition or proposed joint venture.
- Final tax effects of the 2017 Tax Act and actual adoption impacts of new accounting standards. The filing reports unqualified audit opinions on the financial statements and internal controls.