VTR

Ventas, Inc. 10-Q Summary: Period Ended September 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, and the nine months ended September 30, 2002. Ventas, Inc. is a Real Estate Investment Trust (REIT) that owns and leases healthcare-related facilities, including hospitals, nursing facilities, and personal care facilities. As of September 30, 2002, the portfolio consisted of 43 hospitals, 215 nursing facilities, and eight personal care facilities across 36 states. The Company leases substantially all of its properties to Kindred Healthcare, Inc. ("Kindred") under triple-net leases. Approximately 98.9% of rental revenue for the nine months ended September 30, 2002, was derived from Kindred.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental income increased by $3.7 million (2.7%) for the nine months ended September 30, 2002, compared to the prior year, primarily due to a 3.5% rent increase under Master Leases effective May 1, 2002.
• Profitability: Net income for the nine months ended September 30, 2002, was $56.3 million, a significant increase from $27.8 million in the prior year. This was driven by a $23.8 million gain from discontinued operations (sale of real estate) and a $2.2 million tax benefit, partially offset by a $6.9 million extraordinary loss on debt extinguishment.
• Interest Expense: Interest expense decreased by $6.9 million for the nine-month period due to reduced principal balances and lower interest rates following the April 2002 refinancing (2002 Credit Agreement and Senior Notes Offering).
• Discontinued Operations: The Company sold a hospital in Arlington, Virginia, and a nursing facility in Las Vegas, Nevada, recognizing a total gain of approximately $23.5 million, reported as discontinued operations.
• Debt Reduction: Total debt decreased from $848.4 million at December 31, 2001, to $785.9 million at September 30, 2002, following the repayment of the 2000 Credit Agreement and proceeds from asset sales.

Guidance, Outlook, Risks, and Unusual Items

• Dividend Policy: The Company intends to distribute 100% or more of its taxable income for 2002. It declared quarterly dividends of $0.2375 per share, totaling $0.95 per share for the year. The fourth quarter dividend was declared on October 22, 2002.
• Kindred Concentration Risk: Approximately 98.1% of real estate investments and 98.9% of rental revenue are dependent on Kindred. On October 10, 2002, Kindred announced substantial increases in professional liability costs in Florida and proposed exiting the Florida skilled nursing market (15 facilities leased from Ventas). While Ventas believes Kindred cannot abandon these leases, the outcome of discussions is uncertain.
• Unusual Items:
  • Swap Breakage: A $5.4 million net loss on swap breakage was recognized in the second quarter of 2002 due to the partial termination of a $350 million notional interest rate swap.
  • Extraordinary Loss: A $6.9 million loss was recorded in the second quarter related to the write-off of unamortized deferred financing costs upon refinancing the 2000 Credit Agreement.
  • Tax Benefit: A $2.2 million tax benefit was recorded in the third quarter due to a change in estimate for the 2001 tax year.
• IRS Audit: The IRS is reviewing tax returns for 1997 and 1998. A preliminary report suggests a $1.2 million refund, pending final review.
• Strategic Diversification: On October 3, 2002, the Company entered into commitment letters for a $120 million investment with TransHealthcare, Inc. (THI), covering approximately 27 facilities, to reduce dependence on Kindred.

Investor Verification Checklist

• Kindred's Financial Health: Verify Kindred's ability to meet rent obligations, particularly regarding the 15 Florida facilities and the impact of increased professional liability costs.
• REIT Qualification: Confirm the Company's ability to distribute 90% of taxable income to maintain REIT status, especially given the timing of cash flows versus tax liabilities.
• Debt Covenants: Review the 2002 Credit Agreement and Senior Notes Indentures for compliance with leverage ratios and fixed charge coverage ratios, noting the cross-default provisions.
• Derivative Exposure: Assess the fair value of interest rate swaps (currently a $47.6 million liability) and potential collateral requirements if interest rates shift significantly.
• Discontinued Operations: Understand that the high net income for the nine-month period includes significant one-time gains from asset sales ($23.8 million) and does not reflect recurring operating performance.