Ventas, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
Reports the three and nine months ended September 30, 2015. Ventas is a healthcare and seniors housing REIT with approximately 1,300 properties in the U.S., Canada and U.K. Its three reportable segments are triple-net leased properties, senior living operations and medical office buildings (MOBs).
Comparability is materially affected by the August 17, 2015 spin-off of Care Capital Properties (CCP), comprising 355 skilled nursing and other healthcare assets. CCP’s results are presented as discontinued operations for both periods; Ventas used CCP’s $1.3 billion distribution to repay about $1.1 billion of debt and fund approximately $0.2 billion of dividends.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $827.6m | $704.9m | $2,445.1m | $2,044.7m |
| Segment NOI, continuing operations | $473.3m | $393.5m | $1,394.0m | $1,151.3m |
| Income from continuing operations | $45.2m | $87.9m | $266.3m | $273.9m |
| Net income attributable to common stockholders | $22.9m | $109.1m | $293.1m | $368.6m |
| Diluted EPS | $0.07 | $0.37 | $0.88 | $1.24 |
| Normalized FFO attributable to common stockholders | $365.5m | $332.8m | $1,147.4m | $987.8m |
- Q3 revenue rose 17.4% and continuing-segment NOI rose 20.3%; nine-month revenue and NOI increased 19.6% and 21.1%, respectively. Acquisitions contributed substantially to growth.
- Q3 net income fell 78.9%, reflecting, among other items, $40.1m of CCP transaction and separation costs included in discontinued operations, higher merger/deal costs and debt-extinguishment losses. Nine-month net income declined 20.4%. Normalized FFO, a non-GAAP measure, increased in both periods.
- Same-store NOI growth was more modest: Q3 triple-net 3.5%, senior living 2.3% and MOB 2.9%; nine-month growth was 5.1%, 1.9% and 1.6%, respectively.
- Senior living occupancy was 91.1% in Q3 versus 91.3% a year earlier. MOB occupancy was 91.9% versus 89.9% across the total portfolio; same-store MOB occupancy was 90.5% versus 91.0%.
- Nine-month operating cash flow was $1,022.0m versus $920.0m. Investing used $2,254.6m, primarily for real estate investment; financing provided $1,242.6m. Cash and cash equivalents ended at $65.2m.
- At September 30, total assets were $22.4bn, debt carrying value was $11.27bn and equity was $9.67bn. The weighted average debt rate was 3.5%; 18.9% of consolidated debt was variable-rate. The $2.0bn revolver had $114.1m drawn and $1.9bn of unused capacity. Debt maturities include $648.4m in 2016, $852.3m in 2017 and $1.24bn in 2018.
- Dividends declared were $0.73 per common share for Q3 and $2.31 for the first nine months. The filing reports that the third-quarter Ventas and CCP dividends combined were 10% higher than the comparable prior-year period.
Material changes, outlook and risks
- Ventas acquired American Realty Capital Healthcare Trust (HCT) in January, adding 152 properties, and completed the Ardent transaction in August. It recorded approximately $1.3bn of acquired hospital and other real estate and entered a long-term triple-net lease for ten hospitals and related real estate; it also acquired a 9.9% interest in Ardent’s operating company.
- Acquisition and transaction costs were significant: $105.0m of merger-related expenses and deal costs in the first nine months, versus $35.9m a year earlier. Acquisition accounting remained subject to adjustment; recorded acquisition goodwill included $746.5m.
- Management did not provide specific earnings or FFO guidance in the supplied filing text. It said near-term liquidity needs include operations, debt service and maturities, capital spending, investment commitments and REIT distributions, to be met through operating cash flow, capital markets, asset sales and revolving-credit availability.
- Management identified tenant/operator credit and lease renewal, senior living costs and execution, healthcare reimbursement and regulation, acquisition integration, access to capital, refinancing and interest rates, foreign exchange, and litigation as material risks. Atria, Sunrise, Brookdale and Kindred represented 22.8%, 11.8%, 8.5% and 2.1% of real estate investment gross book value, respectively.
- CMS’s 2016 LTAC rule was expected by CMS to reduce LTAC payments 4.6% overall, with site-neutral cases projected to decline about 14.8%; the final SNF rule provided for a 1.2% aggregate payment increase. Adverse effects on operators could affect Ventas.
- A proposed settlement of litigation challenging the HCT acquisition remained subject to notice and final court approval. Management said it believed the actions were without merit. Management also stated that disclosure controls were effective as of September 30, 2015.
Most important facts for investors to verify
- Separate acquisition-driven growth from same-store performance, and account for CCP’s spin-off and discontinued-operations presentation when comparing periods.
- Review the quality and sustainability of normalized FFO growth against GAAP earnings, transaction costs, debt costs and dividend distributions.
- Assess refinancing needs and variable-rate exposure, including the filing’s estimate that a 100-basis-point rate increase would add approximately $21.3m of 2015 interest expense, or $0.06 per diluted share, assuming debt balances were unchanged.
- Monitor major tenants’ and managers’ financial health, occupancy trends and the possible effects of Medicare reimbursement changes.
- Track final acquisition accounting, the HCT litigation settlement approval, and the integration and lease performance of HCT and Ardent-related assets.