Ventas, Inc. annual report, FY2014

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Ventas, Inc. — 2014 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2014. Although the request identifies 2014 Q4, this is an annual filing; quarterly figures below are identified separately. Amounts are in U.S. dollars unless otherwise noted.

Business context

Ventas is a healthcare and seniors housing REIT operating across the United States, Canada and the United Kingdom. At year-end it owned more than 1,500 properties, including held-for-sale assets, and reported three segments: triple-net leased properties, senior living operations and medical office building (MOB) operations. Seniors housing represented about 65.5% of real estate investments at gross book value. The company’s strategy emphasizes recurring cash flow, portfolio diversification and financial flexibility.

Financial performance and liquidity

  • Full-year revenue: $3.076 billion, up 9.4% from $2.811 billion in 2013. Rental income was $1.434 billion; resident fees and services were $1.553 billion.
  • Full-year earnings: Net income attributable to common stockholders was $475.8 million, up 4.9%; diluted EPS was $1.60 versus $1.54. Continuing-operations income attributable to common stockholders, including real estate dispositions, fell to $473.7 million from $489.8 million; diluted continuing-operations EPS was $1.59 versus $1.66.
  • REIT operating measures: NOI excluding discontinued operations was $1.859 billion, up 9.9%. FFO was $1.274 billion and normalized FFO was $1.330 billion, up 8.9% from 2013. These non-GAAP measures are supplemental and are not substitutes for GAAP earnings or operating cash flow.
  • Segment NOI: Triple-net leased properties $974.9 million (+10.6%); senior living operations $516.4 million (+14.9%); MOB operations $310.5 million (+3.2%). Same-store NOI grew 3.6%, 3.7% and 0.8%, respectively.
  • Fourth quarter: Revenue was $804.0 million versus $733.2 million in Q4 2013. Net income attributable to common stockholders was $107.2 million versus $108.4 million; diluted EPS was $0.36 versus $0.37. Q4 continuing-operations income attributable to common stockholders was $107.6 million versus $108.6 million. Dividends declared were $0.79 per share versus $0.725.
  • Cash flow: Operating cash flow was $1.255 billion, up 5.0%. Investing activities used $2.055 billion, principally reflecting property and loan investments; financing activities provided $758.1 million. Year-end cash was $55.3 million, down from $94.8 million.
  • Debt and liquidity: Year-end debt was $10.888 billion, up from $9.365 billion; total assets were $21.226 billion. The company reported $1.1 billion of unused revolving-credit capacity and $71.8 million of escrow deposits and restricted cash. About 21.9% of consolidated debt was variable-rate. The effective interest rate was 3.7% versus 3.8% in 2013. A 100-basis-point increase in variable rates, assuming debt balances stayed constant, was estimated to raise 2015 interest expense by $23.8 million, or $0.08 per diluted share.
  • Dividend: The company paid $2.965 per common share for 2014, up from $2.735. Cash distributions to common stockholders were $875.6 million.

Material changes and transactions

  • Ventas invested approximately $2.4 billion in seniors housing and healthcare assets during 2014, including 29 Canadian seniors housing communities acquired from Holiday Retirement, three UK hospitals and a $425 million secured mezzanine loan with a blended annual interest rate of 8.1%.
  • Net loans receivable and investments rose to $927.7 million from $414.8 million, largely reflecting new lending and investment activity.
  • 2014 segment growth was supported by acquisitions in 2014 and 2013, contractual rent escalations and same-store growth. Same-store senior living occupancy was 91.1%, approximately flat year over year; same-store MOB occupancy was 90.1%, also approximately flat. Average monthly revenue per occupied senior living room was $5,653 for same-store properties, up from $5,533.
  • Interest expense increased 12.5% to $376.8 million, primarily due to higher debt balances, partly offset by lower effective rates. Depreciation and amortization increased 14.5% to $826.9 million, primarily due to acquisitions.
  • Ventas recorded $56.6 million of impairments in 2014. A $30.6 million impairment related to four seniors housing assets agreed for sale. Merger-related, deal and re-audit costs were also elevated.
  • In January 2015, Ventas completed the HCT acquisition, adding 152 properties. Consideration included approximately 28.4 million common shares, 1.1 million redeemable partnership units, cash and assumed debt. The filing’s unaudited pro forma 2014 figures, assuming HCT had been acquired at the start of the year, show revenue of $3.369 billion and diluted continuing-operations EPS of $1.48; these are not actual reported results or forecasts.

Outlook, risks and unusual items

  • Ventas stated it expected to pay a 2015 quarterly dividend of $0.79 per share and expected distributions to exceed 100% of 2015 taxable net income after use of net operating loss carryforwards. Dividend decisions remain subject to the board’s quarterly review; no formal earnings or FFO guidance is provided in the supplied filing text.
  • Management identified 2015 liquidity needs including operating costs, debt service, capital expenditures, investments and distributions. It expected to meet those needs through operating cash flow, cash, debt and equity issuance, asset sales and its revolving facility. The filing lists $634.4 million of senior notes principal due in 2015; total scheduled debt maturities and amortization for 2015 were $745.8 million.
  • In the Kindred lease transition, 107 of 108 licensed healthcare assets with terms scheduled to expire in September 2014 had been re-leased, transitioned to new operators or sold by year-end. The remaining asset was expected to be sold in 2015, subject to customary conditions. Kindred paid $37 million in January 2015 under agreements addressing transitions, lease modifications and deferred capital expenditures.
  • Key exposures include tenant and operator credit, reliance on Atria and Sunrise to manage a substantial senior living portfolio, reimbursement and healthcare regulation, occupancy and labor costs, competition, interest rates, foreign exchange, acquisition integration, insurance and litigation, and continued REIT qualification. California accounted for 13.7% of NOI; California, Texas, New York, Illinois and Florida together accounted for 37.7%.
  • Ventas disclosed an ongoing SEC inquiry after its former auditor, Ernst & Young, determined it was not independent because of an inappropriate personal relationship involving the lead audit partner and a company financial-reporting oversight employee. Ventas said it was cooperating and could not assess the inquiry’s timing or outcome. KPMG issued an unqualified opinion on the 2014 financial statements and internal controls; management and KPMG reported internal control over financial reporting was effective at year-end.
  • Litigation challenging the HCT transaction remained subject to settlement documentation and court approval. The filing also notes that management considered pending proceedings against the company not expected to have a material adverse effect, while acknowledging outcomes cannot be assured.

Important facts for investors to verify

  • Reconcile the annual and Q4 earnings picture: reported net income rose, while continuing-operations income attributable to common stockholders and diluted continuing-operations EPS declined.
  • Review the debt maturity schedule, refinancing plans and post-year-end debt and equity issuance, particularly in light of the HCT acquisition and 2015 maturities.
  • Assess whether senior living same-store growth and operating costs can sustain NOI growth, and monitor the credit and operating performance of major tenants and managers.
  • Verify the final outcome of the SEC auditor-independence inquiry and any related reporting or governance developments.
  • Track completion of the remaining Kindred asset disposition, HCT integration costs and any court-approved resolution of HCT acquisition litigation.
  • Examine impairment assumptions, straight-line rent collectibility allowances and the quality of non-GAAP FFO and normalized FFO adjustments.