Ventas, Inc. — Third-Quarter 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; filed November 5, 2010. Ventas is a healthcare and seniors-housing REIT with 598 assets across 43 states, the District of Columbia, and two Canadian provinces. Unless noted otherwise, amounts below are in millions of dollars.
Business context and key financial metrics
- Revenue: Third-quarter revenue was $264.7, up 12.8% from $234.6 a year earlier. Nine-month revenue was $748.9, up 8.0% from $693.7.
- Profit: Third-quarter net income attributable to common stockholders was $57.9, or $0.37 per diluted share, versus $49.8, or $0.32, in 2009. For nine months, common-stockholder net income was $168.6, or $1.07 per diluted share, compared with $212.4, or $1.40.
- Continuing operations: Nine-month income from continuing operations was $163.9, up 15.5%; diluted continuing-operations EPS was $1.02 versus $0.92. The filing reports FFO of $313.2 for nine months, up from $289.4, and normalized FFO of $332.5, up from $304.2. These are non-GAAP measures.
- Operating performance: Nine-month segment NOI was $507.8, up 8.3%. Third-quarter segment NOI was $178.0, up 12.5%. Calculated NOI as a share of revenue was approximately 67.8% for the first nine months versus 67.6% in 2009; the filing does not present this as a labeled margin.
- Cash flow: Nine-month operating cash flow was $346.1, compared with $323.2. Investing activities used $268.5, versus $27.4 provided in 2009; financing activities used $151.3, versus $457.0 used. Cash and cash equivalents ended the period at $33.8, down from $107.4 at year-end 2009.
- Debt and liquidity: Debt carrying value was $2.896 billion at quarter-end, up from $2.670 billion at December 31, 2009; gross debt was $2.920 billion. Ventas had $747.8 of unused capacity on its $1.0 billion revolving facilities, which mature in April 2012. Debt maturities listed for 2011 total $329.7 and for 2012 total $657.0, including revolving borrowings. The company also had $42.0 of restricted cash.
- Dividends: Quarterly dividends declared were $0.535 per share, 4.4% higher than the 2009 quarterly rate. Nine-month declared dividends totaled $1.605 per share.
Material changes versus the prior comparable period
- Third-quarter results benefited from higher senior-living revenue and NOI, higher triple-net rents, and the Lillibridge MOB acquisition. Senior-living NOI increased 17.2% and MOB NOI increased substantially, with comparisons affected by acquisitions and the new segment presentation.
- Nine-month common-stockholder net income declined 20.6% despite higher continuing-operations income. Discontinued operations fell to $7.1 from $72.6, mainly because 2009 included $67.0 of gains on real-estate sales, compared with $5.4 in 2010.
- The July 1 Lillibridge acquisition added MOB properties and management and advisory operations. The approximately $381 purchase price included assumption of $79.5 of mortgage debt; Ventas also repaid $132.7 of mortgage debt in connection with the transaction. MOB operations became a separate reportable segment.
- Interest expense was $45.5 in the quarter, up from $43.3, primarily reflecting higher debt balances, partly offset by lower effective rates. The nine-month effective interest rate was 6.5%, versus 6.2%.
- Ventas closed a $200.0 three-year unsecured term loan at a fixed all-in rate of 4%, redeemed $142.7 of 2015 notes at a premium, and repaid $49.8 of mortgage loans. The 2015-note redemption contributed to a nine-month debt-extinguishment loss of $6.5.
Outlook, commentary, risks, contingencies, and unusual items
- Management said anticipated operating, debt-service, capital-expenditure, investment, and dividend needs were expected to be met through operating cash flow, cash, asset-sale proceeds, and borrowing capacity. No numerical full-year earnings or revenue guidance is provided in the filing.
- In October 2010, Ventas agreed to acquire Atria’s real-estate assets for $3.1 billion: $1.35 billion in Ventas shares, $150 million cash, and assumption or repayment of $1.6 billion of net debt. The transaction covers 118 private-pay seniors-housing communities and remained subject to closing conditions.
- Also in October, Ventas agreed to acquire Sunrise’s minority interests in 58 communities for an indicated total valuation of approximately $186 million, including about $145 million of mortgage debt. The deal and related management-agreement changes were conditional and not yet closed.
- Tenant and manager concentration remains significant. For the first nine months, Kindred generated 24.6% of revenue and 36.2% of NOI; Brookdale generated 12.1% of revenue and 17.8% of NOI. Sunrise managed communities accounted for 43.8% of revenue and 22.3% of Adjusted EBITDA. The company cautions that operator or manager financial distress could affect rent, operations, liquidity, debt service, and distributions.
- Healthcare reform and Medicare reimbursement changes may pressure skilled-nursing and hospital operators. Other disclosed risks include tenant renewals and replacement, interest-rate and refinancing exposure, Canadian-dollar movements, MOB hospital-client and development risks, joint-venture dependence, and insurance adequacy.
- Ventas had a $101.6 jury award against HCP related to the Sunrise REIT acquisition. HCP appealed and Ventas cross-appealed; a $102.8 letter of credit secured the award pending appeal. The filing said an appellate decision could be issued by June 2011; outcome and timing were uncertain.
- Ventas expected an approximately $12.3 gain in fourth-quarter 2010 from the sale of a seniors-housing community classified as held for sale. Separately, it redeemed $71.7 of 2014 notes in October and expected a further $2.5 debt-extinguishment loss in the fourth quarter.
- Management reported effective disclosure controls. It noted the 2010 ERP implementation and the Lillibridge transition, for which it could not provide absolute assurance that acquired financial information was materially correct in all respects.
Important facts for investors to verify
- Closing terms, funding mix, share dilution, debt assumption, and integration outcomes for the Atria transaction, and completion of the Sunrise minority-interest acquisition.
- Kindred’s, Brookdale’s, and Sunrise’s current financial condition and capacity to meet lease or management obligations; Ventas noted that some operator information had not been independently verified.
- Liquidity and refinancing plans for debt maturities, particularly the 2011–2012 maturities and revolving facilities due April 2012.
- Whether senior-living and MOB occupancy, NOI growth, and acquisition-related contributions persist after one-time effects and transaction costs.
- Resolution of the HCP appeals and realization of the expected gain on the held-for-sale property.
- Potential effects of healthcare reimbursement changes, interest-rate movements, and uninsured claims on operators and Ventas.