VTR

Ventas, Inc. 10-Q Summary: Period Ended June 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for Ventas, Inc., a Real Estate Investment Trust (REIT) specializing in financing, owning, and leasing healthcare-related and senior housing facilities. As of the reporting date, the portfolio consisted of 44 hospitals, 204 nursing facilities, and nine other healthcare facilities across 37 states. The Company leases these properties primarily under triple-net leases. A critical concentration risk exists as Kindred Healthcare, Inc. operates approximately 93.3% of the properties and accounts for roughly 92.4% of total revenue.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental income increased to $94.9 million (six months 2003) from $88.9 million (six months 2002), driven by a 3.5% rent escalation under Master Leases effective May 1, 2003, and new leases with Trans Healthcare, Inc.
• Net Income Surge: Net income increased significantly to $53.4 million, primarily due to a $20.2 million reversal of a contingent liability related to federal tax audits (1997-1998 periods) and reduced interest expenses. This compares to $39.2 million in the prior year.
• Discontinued Operations: The Company sold 16 skilled nursing facilities (15 in Florida, 1 in Texas) to Kindred on June 30, 2003, for $59.7 million, recognizing a $5.3 million loss included in discontinued operations. This contrasts with a $23.4 million gain on discontinued operations in the prior year period.
• Debt Reduction: Proceeds from asset sales and tax refunds were used to fully repay the "United States Settlement" obligation and reduce outstanding indebtedness.

Guidance, Outlook, and Risks

• Dividend Policy: The Company intends to distribute 100% or more of its taxable income for 2003. Quarterly dividends of $0.2675 per share were declared for Q1 and Q2 2003. Management estimates a total 2003 dividend of $1.07 per share, though this is subject to Kindred's performance and other variables.
• Kindred Concentration Risk: The filing highlights significant risk regarding Kindred's liquidity due to rising professional liability costs in Florida and Texas. While Ventas sold its Florida/Texas nursing facilities to Kindred to mitigate this, Kindred continues to operate the remaining portfolio. Failure of Kindred to meet lease obligations would have a material adverse effect on Ventas.
• Regulatory Environment: The Company faces uncertainty regarding Medicare reimbursement rates for Skilled Nursing Facilities (SNF) and Long-Term Acute Care Hospitals (LTAC), as well as potential Medicaid rate cuts in various states.
• Liquidity: As of June 30, 2003, the Company had $176.6 million of unused availability under its $350 million credit facility. The Borrowing Base was increased to $334.8 million effective July 1, 2003.
• REIT Status: The Company intends to maintain its REIT qualification. Failure to do so would subject the Company to a 35% federal income tax rate.

Investor Verification Checklist

• Kindred's Financial Health: Verify Kindred Healthcare's ability to service its debt and pay rent, particularly given the recent divestiture of its Florida and Texas nursing operations and rising liability costs.
• Tax Refund Escrow: Confirm the status of the remaining funds in the Tax Refund Escrow and the final resolution of the IRS audit for 1997-1998.
• Debt Covenants: Review the amended 2002 Credit Agreement to ensure compliance with financial covenants, specifically the definition of consolidated adjusted net worth excluding unrealized gains/losses on derivatives.
• Dividend Sustainability: Assess whether Funds from Operations (FFO) and cash flow from operations are sufficient to cover the projected $1.07 per share dividend for 2003 without requiring additional equity issuance or borrowing.
• Discontinued Operations Impact: Analyze the long-term impact of the $5.3 million loss on the sale of Florida/Texas facilities on future rental income streams.