Ventas, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; statements are unaudited. Ventas is a healthcare and seniors-housing REIT with more than 1,600 properties across the U.S., Canada and the U.K., operating through triple-net leases, senior living operations and medical office buildings (MOBs).
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $891.3 million | $751.3 million | $1,775.3 million | $1,492.7 million |
| Net income attributable to common stockholders | $149.8 million | $138.4 million | $270.3 million | $259.4 million |
| Diluted EPS | $0.45 | $0.47 | $0.82 | $0.88 |
| Normalized FFO attributable to common stockholders | $394.3 million | $331.6 million | $781.9 million | $655.0 million |
| Cash from operating activities | Not stated for quarter | $717.7 million | $595.7 million |
- Revenue rose 18.6% in Q2 and 18.9% in the first half; common-stockholder net income increased 8.3% and 4.2%, respectively. Diluted EPS fell year over year in both periods as the weighted-average share count increased substantially, including shares issued for the HCT acquisition.
- Company-defined NOI was $542.7 million in Q2, up 17.8%, and $1,078.7 million in the first half, up 18.4%. NOI as a share of revenue was approximately 60.9% in Q2 versus 61.3% a year earlier, and 60.8% for the first half versus 61.0% (calculated from reported NOI and revenue).
- Q2 segment NOI increased 7.3% for triple-net leased properties, 24.3% for senior living and 29.2% for MOBs. Growth included acquired properties; same-store NOI gains were more modest: 1.5%, 3.5% and 1.2%, respectively, in Q2.
- Interest expense rose 17.6% in Q2 and 19.4% for the first half, primarily reflecting higher debt balances. Depreciation and amortization also increased materially, mainly due to acquisitions and higher impairment charges.
- At June 30, assets were $24.28 billion, total debt was $11.51 billion and total equity was $11.09 billion. Cash and cash equivalents were $60.5 million; escrow and restricted cash were $194.0 million. The revolving credit facility had $1.4 billion of unused capacity.
- First-half investing cash outflow was $996.7 million, reflecting substantial real estate investment, partly offset by asset-sale proceeds. Financing cash inflow was $284.1 million. The common dividend declared was $0.79 per share per quarter, up 9% from the comparable prior-year rate.
Material changes and significant transactions
- Ventas completed its January acquisition of American Realty Capital Healthcare Trust (HCT), adding 152 properties. The filing reports approximately $3.62 billion of acquired net assets, including $752.1 million of goodwill. Acquisition-related costs were $49.8 million for the first half, versus $20.4 million a year earlier.
- Other first-half investments totaled approximately $512 million. Ventas sold 30 triple-net properties and 25 MOBs for aggregate consideration of $423.3 million; the filing reports $32.6 million of net-of-tax gains, with $18.1 million deferred in connection with a loan to a buyer.
- Ventas issued $1.1 billion of senior notes in January and repaid $234.4 million of 6% notes at maturity in May. Debt was 17.7% variable-rate at June 30; the weighted-average rate on total debt was 3.5%.
Outlook, risks and unusual items
- Ventas expected to close its $1.75 billion Ardent Health Services acquisition and related hospital-operations separation and sale in Q3 2015, subject to customary conditions and regulatory approvals. Ventas planned long-term triple-net leases with the operating company; completion and terms were not assured.
- The planned spin-off of most of the post-acute/skilled nursing portfolio into Care Capital Properties, expected in August 2015 and intended to be tax-free, remained subject to conditions and board approval.
- Management identified tenant, operator and manager credit and performance, lease renewals, healthcare reimbursement and regulation, competition, interest rates, refinancing access, foreign exchange and transaction execution as risks. A proposed CMS rule could increase skilled-nursing facility requirements; its final form and financial effects were uncertain. CMS had also proposed a 4.6% reduction in overall LTAC PPS payments for FY2016; the proposal was not final.
- A 100-basis-point increase in variable borrowing rates, assuming debt levels were unchanged, was estimated to increase 2015 interest expense by approximately $20.3 million, or $0.06 per diluted share.
- Thirteen lawsuits challenging the HCT transaction had proposed settlements in principle, but court approval and final settlement remained uncertain. Management stated that other currently pending litigation was not expected to have a material adverse effect, while noting defense costs and outcome uncertainty.
- Management reported effective disclosure controls as of June 30, 2015. It noted that financial information for HCT properties remained in an initial transition period and could not be assured to be materially correct in all respects.
Important facts for investors to verify
- Whether the Ardent acquisition, operating-company sale and planned lease arrangements closed on the expected terms and timing.
- Whether the Care Capital Properties spin-off was completed, its final portfolio and distribution terms, and its tax treatment.
- Underlying same-store operating trends and tenant/operator financial health, particularly given reliance on senior living managers and exposure to major tenants.
- Debt maturities, refinancing requirements, variable-rate exposure and the ability to preserve liquidity while funding acquisitions, capital needs and distributions.
- The final CMS reimbursement and facility-rule outcomes and any resulting effect on operators and Ventas.
- HCT integration, acquisition accounting and goodwill assumptions, as well as resolution of HCT-related litigation.