Ventas, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2014, compared with the same 2013 periods. Ventas is a healthcare and seniors housing REIT operating across the United States, Canada and the United Kingdom, with more than 1,500 properties. Its businesses comprise triple-net leased properties, senior living operations and medical office buildings (MOBs).
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $779.0 million | $711.2 million | $2,271.8 million | $2,078.3 million |
| Net income attributable to common stockholders | $109.1 million | $118.3 million | $368.6 million | $345.1 million |
| Diluted EPS | $0.37 | $0.40 | $1.24 | $1.17 |
| Segment NOI, excluding discontinued operations | $467.7 million | $424.7 million | $1,378.6 million | $1,249.8 million |
| Normalized FFO | $332.8 million | $307.2 million | $987.8 million | $907.1 million |
| Operating cash flow | Not presented by quarter | $920.0 million | $835.4 million |
- Quarterly revenue grew 9.5%; common-stockholder net income declined 7.7% and diluted EPS declined from $0.40 to $0.37. For the nine months, revenue rose 9.3%, common-stockholder net income rose 6.8% and diluted EPS increased from $1.17 to $1.24.
- Q3 segment NOI increased 10.1%; same-store NOI grew 3.5% in triple-net properties, 2.7% in senior living and 1.0% in MOBs. For the nine months, segment NOI rose 10.3%; same-store growth was 4.0%, 3.7% and 0.3%, respectively.
- Interest expense was $98.5 million in Q3 versus $83.8 million, and $277.8 million for nine months versus $244.6 million. The reported effective interest rate declined to 3.6% for Q3 from 3.8%, and to 3.7% for nine months from 3.8%.
- At September 30, cash and cash equivalents were $64.6 million, restricted cash was $78.7 million, and unused revolving-credit capacity was $1.8 billion. Debt totaled $10.47 billion, up from $9.36 billion at year-end 2013. Reported 2015 debt maturities were $919.3 million.
- Operating cash flow increased 10.1% year over year for the nine months. Investing used $1.24 billion and financing provided $282.0 million; cash declined $34.2 million from year-end to $64.6 million.
- Dividends declared were $0.725 per share each quarter, an 8% increase from the comparable 2013 quarterly amount. The filing reports no specific forward earnings or FFO guidance.
Material changes, outlook and risks
- Growth reflected acquisitions, contractual rent escalations and same-store improvements. Ventas invested approximately $1.5 billion in healthcare assets during the first nine months, including 29 Canadian independent-living communities acquired in August for CAD 957 million. Acquisition-related costs and deal expenses rose to $37.1 million for the nine months from $17.1 million.
- The company had agreed to acquire American Realty Capital Healthcare Trust (HCT) in a transaction valued at approximately $2.9 billion, expected to close late in Q4 2014, subject to stockholder approval and customary conditions. Planned funding included $1.8–$2.0 billion of Ventas shares, assumed debt and cash. Thirteen putative class actions challenged the transaction; Ventas said it believed the suits were without merit.
- Of 108 licensed healthcare assets whose leases with Kindred were due to expire September 30, Ventas had re-leased, transitioned or sold 103. Five skilled nursing facilities remained to be transitioned or sold, subject to regulatory approvals and other conditions. Kindred was required to continue lease obligations for four of those assets through December 31, 2014 if transitions had not occurred.
- Credit and operating risks include dependence on tenants and managers, particularly Atria, Sunrise, Brookdale and Kindred; cost pressures in senior living; healthcare reimbursement and regulatory changes; interest-rate and foreign-exchange exposure; and the ability to refinance debt and complete acquisitions. The filing notes California generated more than 10% of quarterly revenue and NOI. A 100-basis-point increase in variable borrowing rates was estimated to increase 2014 interest expense by about $18.7 million, or $0.06 per diluted share, assuming debt levels were unchanged.
- CMS’s 2015 payment updates projected increases of 2.0% for skilled nursing facility rates and slightly more than 1% for long-term acute care hospital rates after specified adjustments. Ventas was assessing effects on its operators and cautioned that reimbursement changes could adversely affect them and the company.
- Ventas reported $17.2 million of impairment charges for the nine months, compared with $38.1 million in 2013, and $16.5 million of gains on real estate dispositions. The nine-month tax provision shifted to $4.8 million expense from a $13.1 million benefit in 2013; deferred tax liabilities rose to $361.5 million, primarily reflecting the Holiday Canada acquisition.
- In July, Ventas told the SEC that its former auditor, Ernst & Young, had determined it was not independent due to an inappropriate personal relationship involving the former lead audit partner and a Ventas financial-reporting oversight individual. Ventas said it was cooperating with the SEC; the matter was at an early stage and its outcome could not be assessed. The company also recorded costs related to re-audit and re-review of historical financial statements. Management concluded disclosure controls were effective as of September 30, 2014.
Important facts for investors to verify
- Whether and when the HCT acquisition closes, its final funding mix, integration costs and realized contribution.
- Completion, licensing and financial impact of the five remaining Kindred asset transitions or sales.
- Developments in the SEC inquiry and historical financial-statement re-audit, including any resulting adjustments or costs.
- Financial condition and lease performance of major tenants and operators, alongside same-store senior living occupancy and operating-cost trends.
- Debt refinancing and liquidity needs, particularly 2015 maturities, the remaining CAD term-loan balance and the effect of interest-rate or currency movements.
FFO, normalized FFO and NOI are company-defined non-GAAP measures; the filing cautions that they are supplemental and may not be comparable with similarly named measures at other companies.