Ventas, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 5, 2011. Ventas is a healthcare and seniors-housing REIT. At quarter-end, its portfolio comprised 719 properties across 43 states, the District of Columbia, and two Canadian provinces. Amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions where shown.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $364.7m | $243.3m | $635.1m | $484.2m |
| Net income attributable to common stockholders | $19.7m | $58.1m | $68.7m | $110.7m |
| Diluted EPS | $0.11 | $0.37 | $0.40 | $0.70 |
| Segment NOI | $211.6m | $168.0m | $389.7m | $329.8m |
| Normalized FFO | $141.5m | $111.9m | $262.6m | $217.1m |
| Adjusted EBITDA | $199.6m | $162.8m | $367.0m | $318.6m |
- Q2 revenue increased about 50%, chiefly reflecting the Atria acquisition and the 2010 Lillibridge acquisition. Common-stockholder net income fell 66%; merger-related expenses and deal costs were $55.8m, versus $4.2m a year earlier. Six-month deal costs were $62.3m.
- Q2 interest expense was $53.7m, up $9.9m year over year; depreciation and amortization was $80.8m, up $30.7m. Management attributed much of the increases to acquired properties and debt. The Q2 effective interest rate, excluding capital leases, was 5.5%, versus 6.6%.
- Six-month operating cash flow was $186.3m, down from $207.7m. Investing used $744.6m, including $612.9m invested in loans and $264.5m in real estate; financing provided $563.1m, including debt and equity proceeds. Ending cash was $26.7m.
- At June 30, total assets were $9.63b, total liabilities $5.71b, and reported senior notes payable and other debt $5.01b, including $355.8m of capital lease obligations. Debt excluding capital leases and associated accounting adjustments was $4.62b. Debt rose substantially from year-end, principally due to acquisitions.
- Liquidity included $851.2m of available capacity under the $1.0b revolving facilities, $26.7m of unrestricted cash, and $64.3m of escrow and restricted cash. The revolver matured April 2012. The $230m convertible notes were due November 2011; the filing identifies repayment or refinancing of near-term debt as a liquidity need.
- The 2011 quarterly dividend was raised 7.5% to $0.575 per share. A prorated $0.1264-per-share third-quarter dividend related to the NHP transaction was paid July 12.
Material changes and transactions
- On May 12, Ventas acquired substantially all Atria Senior Living real estate assets and working capital for a stated purchase price of $3.4b, including 117 private-pay seniors-housing communities. Consideration included 24.96m Ventas shares valued at $1.38b. Atria-managed assets contributed $85.7m of revenue and $26.2m of NOI during the period from acquisition through June 30. Acquisition-related costs totaled $51.0m through quarter-end.
- On July 1, after the reporting period, Ventas completed its stock-for-stock NHP acquisition, adding 654 properties and issuing about 99.85m shares. No NHP operating results are included in the quarter. The preliminary purchase-price allocation included $8.4b of real estate assets, $2.2b of debt, and $5.4b of equity issued.
- In May, Ventas issued $700m of 4.75% notes due 2021 and made a $600m, 5% fixed-rate loan to NHP. In July, Ventas redeemed $200m of 6.5% notes due 2016 and repaid $339m of NHP notes at maturity; it expected to record an $8.7m extinguishment loss in Q3.
- Segment NOI increased 25.9% in Q2. Senior-living NOI rose 69.4%, primarily due to Atria and higher average daily rates; MOB NOI more than doubled, mainly due to Lillibridge. Same-store stabilized senior-living occupancy was 89.2% in Q2 versus 88.5% a year earlier; total senior-living occupancy was 87.9% versus 88.5%.
Outlook, risks, and unusual items
- The filing provides no specific earnings or FFO guidance. Management said operating results for the first half are not necessarily indicative of full-year results and identified ongoing needs to service debt, fund capital spending and acquisitions, and make REIT distributions.
- CMS’s 2012 skilled-nursing payment rule, announced after quarter-end, reduced the standard federal payment rate by 11.1%; CMS estimated a $3.87b reduction in aggregate SNF payments. Management was assessing the effect on operators. The LTAC hospital payment rate was set to increase 1.8%. Potential Medicare and Medicaid changes remain a risk to tenants’ ability to pay rent.
- Concentration remains material: Atria, Sunrise, Brookdale, and Kindred represented 31.5%, 24.4%, 12.6%, and 8.4% of real estate gross book value, respectively. Kindred generated 19.8% of six-month revenue and 32.3% of NOI; Brookdale generated 9.3% of revenue and 15.1% of NOI. Tenant, operator, and manager financial or operating problems could affect rents, property results, debt service, and distributions.
- Ventas reported a $101.6m compensatory judgment against HCP, affirmed on appeal in May; the company was pursuing collection and a punitive-damages trial scheduled for February 2012. The timing and outcome of further recovery were uncertain.
- Other stated risks include integration of Atria and NHP, private-pay affordability and occupancy, labor and insurance costs, interest-rate and refinancing exposure, currency movements, and dependence on long-term management agreements. Management said disclosure controls were effective; it noted that Atria’s financial reporting controls were still in an initial transition period.
Important facts for investors to verify
- Review post-quarter NHP integration, final purchase accounting, assumed debt, refinancing needs, and the effect of the 99.85m shares issued on per-share results.
- Track maturities and liquidity, especially the convertible notes due November 2011 and the revolver and NHP term loan maturing in 2012; confirm covenant compliance and refinancing or repayment plans.
- Assess whether operator concentration and reimbursement changes—particularly the SNF rate reduction—affect tenant coverage, lease payments, occupancy, or property-level performance.
- Separate recurring operating performance from acquisition and merger costs when evaluating earnings, FFO, and cash generation; these non-GAAP measures are not substitutes for GAAP results or operating cash flow.
- Monitor the HCP judgment’s collection and punitive-damages proceedings, and confirm the status and financial implications of the NHP shareholder-litigation settlement.