Ventas, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Ventas is a healthcare and seniors-housing REIT with nearly 1,500 properties in the U.S., Canada and U.K., spanning triple-net leases, senior living operations and medical office buildings (MOBs). Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $741.5 million | $682.9 million | +8.6% |
| Income from continuing operations | $117.2 million | $121.5 million | -3.5% |
| Net income attributable to common stockholders | $121.0 million | $112.2 million | +7.9% |
| Diluted EPS | $0.41 | $0.38 | +$0.03 |
| FFO | $309.8 million | $295.3 million | +4.9% |
| Normalized FFO | $323.4 million | $301.6 million | +7.2% |
| Operating cash flow | $284.4 million | $230.3 million | +23.5% |
| Dividend declared per common share | $0.725 | $0.67 | +8.2% |
Segment NOI increased 9.0% to $450.2 million. Triple-net leased properties NOI rose 11.9% to $239.0 million; senior living NOI rose 13.4% to $122.8 million; and MOB NOI rose 2.8% to $77.2 million. Same-store NOI grew 3.8% in triple-net, 4.5% in senior living, and declined 1.5% in MOBs. Senior living occupancy was 90.6%, versus 91.0%; same-store MOB occupancy was 89.9%, versus 90.4%.
Interest expense increased 11.7% to $87.8 million, primarily reflecting higher debt balances; the reported effective interest rate remained 3.7%. Depreciation and amortization increased 10.3% to $193.6 million, largely due to 2013 acquisitions. Merger-related expenses and deal costs were $10.8 million, up from $4.3 million.
Cash, debt and liquidity
- Cash and cash equivalents were $59.8 million at March 31, down from $94.8 million at year-end. Operating activities generated $284.4 million; investing used $218.4 million and financing used $101.7 million.
- Total debt was $9.48 billion, versus $9.36 billion at December 31, 2013. Total assets were $19.70 billion. The filing reports $1.4 billion of unused revolving-credit capacity at quarter-end, alongside $559.3 million drawn and $14.9 million of letters of credit.
- Q1 investing included $181.9 million of net investment in real estate, $23.9 million of development expenditures and $16.1 million of capital expenditures. Cash distributions to common stockholders were $213.5 million.
- After quarter-end, Ventas issued $300 million of 1.250% notes due 2017 and $400 million of 3.750% notes due 2024, then used part of the proceeds to repay substantially all revolver borrowings. Management said variable-rate debt fell from 20.4% of consolidated debt at quarter-end to approximately 14% after these transactions.
Material changes, outlook and risks
- Revenue growth reflected acquisitions, contractual rent increases and higher average monthly revenue per occupied room. Senior living same-store NOI benefited from higher resident revenue, partly offset by higher labor, utility, food and management costs. MOB same-store NOI declined amid higher property expenses.
- Ventas said it invested approximately $208 million in healthcare assets during Q1, including three U.K. private hospitals leased under long-term triple-net leases with annual rent escalators of at least 3%. It had two properties under development.
- No specific full-year 2014 earnings or FFO guidance is provided in the supplied filing text. Management described expected liquidity sources—including operating cash flow, borrowings, debt and equity issuance, and asset sales—and identified operating costs, debt service, maturities, investment and distributions as principal cash needs.
- Kindred’s lease arrangements cover 48 renewed assets, with new annual base rent of $95.9 million beginning October 1, 2014, an increase of $15 million over then-current rent. For 60 non-renewed assets, Ventas had signed replacement leases for 55 skilled nursing facilities and planned to sell the remaining five. Completion was expected by Q4 2014 but remained subject to regulatory approvals and other conditions; management did not expect a material 2014 or 2015 impact, while warning outcomes were uncertain.
- Brookdale announced an agreement to acquire Emeritus; Ventas did not expect a material effect if completed. Atria and Sunrise manage a significant portion of the senior living portfolio; Ventas noted it was evaluating the potential impact of Sunrise’s April recapitalization.
- Key exposures include tenant and operator credit and lease-renewal risk, especially concentration in major operators; healthcare reimbursement, regulation and licensing risks; senior living labor and operating costs; interest rates and refinancing; and access to capital. California accounted for 15.3% of Q1 revenue. Brookdale and Kindred contributed 9.0% and 12.2% of NOI, respectively. Management said pending litigation was not expected to have a material adverse effect, but outcomes and defense costs remain uncertain.
- Q1 included a $2.9 million net gain on sales of assets, $4.8 million of impairment charges, and a $10.8 million merger-related and deal-cost expense. Discontinued operations contributed $3.0 million, compared with a loss of $8.4 million in Q1 2013. Ventas adopted the revised discontinued-operations accounting standard for the quarter.
Investor verification points
- Review the quality and sustainability of FFO growth versus GAAP continuing-operations income, including acquisition contributions and adjusted items.
- Track completion and financial effects of the Kindred transitions and sales, including lease commencement, approvals and any transition costs.
- Assess tenant/operator credit concentration and the consequences of Brookdale’s proposed Emeritus acquisition and Sunrise’s recapitalization.
- Verify post-quarter debt issuance, revolver repayment, variable-rate exposure and upcoming debt maturities; test liquidity against investment and distribution needs.
- Monitor same-store senior living and MOB occupancy, NOI, labor and other operating costs, plus impairments, dispositions and legal or regulatory developments.