Business context and reporting period
Ventas, Inc. is a healthcare and seniors housing REIT with approximately 1,200 properties across the U.S., Canada and the U.K. Its portfolio spans seniors housing, medical office buildings, research and innovation centers, and other healthcare facilities. This Form 10-K covers the fiscal year ended December 31, 2018; quarterly figures below are unaudited.
Ventas operates through triple-net leased properties, senior living operations and office operations. The portfolio included 19 properties under development at year-end. Senior living operations expanded after 76 private-pay communities shifted from triple-net leases to management contracts in January 2018.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $3.746 billion | $3.574 billion | +4.8% |
| Segment NOI | $2.030 billion | $2.082 billion | -2.5% |
| Net income attributable to common stockholders | $409.5 million | $1.356 billion | -69.8% |
| Diluted EPS attributable to common stockholders | $1.14 | $3.78 | — |
| FFO | $1.308 billion | $1.513 billion | -13.5% |
| Normalized FFO | $1.462 billion | $1.491 billion | -2.0% |
| Cash from operating activities | $1.381 billion | $1.429 billion | -3.3% |
Revenue rose largely alongside the shift of communities into the senior living operating segment; it should not be read as equivalent organic growth. Segment NOI declined as triple-net NOI fell 12.4%, partly offset by senior living NOI growth of 5.1% and office NOI growth of 2.7%. Senior living same-store NOI declined 1.9%, with occupancy down to 87.6% from 88.5%; office same-store NOI rose 0.9%.
Common-stockholder net income fell sharply primarily because 2017 included a $717.3 million real estate disposition gain, including the sale of 36 Kindred skilled nursing facilities; 2018 gains were $46.2 million. Other 2018 charges included $58.3 million of net debt-extinguishment loss, $30.5 million of merger-related expenses and deal costs, and disaster-related expenses and impairments. The filing reports interest expense of $442.5 million and total property-level operating expenses of $1.690 billion. It does not provide a single consolidated profit-margin figure.
Fourth quarter: Revenue was $923.3 million, continuing-operations income $63.3 million, net income attributable to common stockholders $62.3 million, and diluted EPS $0.17. The declared quarterly dividend was $0.7925 per share.
Year-end total assets were $22.585 billion and senior notes and other debt were $10.734 billion, down from $11.276 billion. The debt schedule showed $10.830 billion gross principal debt, with a 3.7% weighted-average rate; approximately 83.5% was fixed-rate based on the filing’s debt table. Cash and cash equivalents were $72.3 million, with $59.2 million of escrow and restricted cash. Available capacity was $2.2 billion on the unsecured revolving facility and $309.5 million on the secured construction facility; the company reported covenant compliance.
Operating cash flow was $1.381 billion. Investing activities provided $324.5 million, reflecting substantial loan repayments, while financing activities used $1.762 billion, including debt repayments and common-stockholder distributions. Cash, cash equivalents and restricted cash ended at $131.5 million. Dividends declared totaled $3.1625 per share for 2018; management said it expected to distribute at least 100% of 2019 taxable net income after use of NOL carryforwards, but did not provide earnings or FFO guidance in the supplied filing text.
Material changes and unusual items
- Ventas repaid or redeemed $2.0 billion of senior notes and issued $1.4 billion of senior notes at a weighted-average rate of 4.2%, with maturities in 2028–2029. It also refinanced a $900 million term loan into facilities maturing in 2023 and 2024.
- It received $862.9 million from repayment of 14 loans. This included repayment of Ardent-related lending and a $14 million prepayment fee; Ventas then invested $200 million in Ardent subsidiary notes bearing an effective 10.0% rate and maturing in 2026.
- Ventas sold 23 properties and two land parcels for $348.6 million and acquired six properties for $311.3 million. It also sold its 25% interest in an SNF joint venture for $57.5 million after recording a $35.7 million impairment.
- Brookdale lease agreements were consolidated into a master lease, substantially extending terms through at least 2025. The change produced a $21.3 million non-cash expense. The company also transitioned 76 communities from Elmcroft leases to ESL management, recording $23.6 million in transaction costs.
- Hurricane Michael and California wildfires contributed to $52.5 million of real estate impairments and $63.8 million of net natural-disaster expenses/recoveries used in normalized FFO adjustments. Insurance recovery amount and timing were uncertain.
- In January 2019, Ventas redeemed $258.8 million of 5.45% notes due 2043 and established a $1 billion commercial paper program. It expected to adopt the new lease accounting standard in 2019, with estimated operating lease assets of $320–$420 million and liabilities of $175–$275 million.
Outlook, risks and contingencies
Management’s stated strategy is to generate reliable cash flows, maintain a diversified portfolio and preserve financial flexibility. Key risks include tenant/operator credit and lease renewal, particularly concentration involving Brookdale, Ardent and Kindred; seniors housing occupancy and labor costs; healthcare reimbursement, regulation and enforcement; competition and new construction; interest-rate and LIBOR-transition exposure; access to capital and refinancing; and development, insurance, climate, environmental and foreign-currency risks.
Senior living and office operations expose Ventas more directly to occupancy, resident-fee, labor and property-cost variability than triple-net leases. The filing notes elevated seniors housing construction deliveries expected in 2019. California represented 14.0% of NOI in the geographic disclosure, while the five largest state exposures collectively represented 36.2%. The company also disclosed legal proceedings and indemnification matters, but management said currently pending matters were not expected, individually or in aggregate, to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- Whether senior living occupancy and same-store NOI stabilize after 2018 declines, and whether growth from the 76-community transition is sustainable.
- Credit quality, rent coverage and contractual performance of Brookdale, Ardent and Kindred, including the implications of Brookdale’s master lease and the 2025 concentration of scheduled lease expirations.
- Cash available for dividends and debt service relative to normalized FFO, capital spending, development commitments and upcoming maturities; confirm 2019 dividend and taxable-income expectations against subsequent disclosures.
- Realized insurance recoveries for 2018 disaster losses, and whether further impairments, loan losses or joint-venture charges arise.
- Progress on refinancing, floating-rate exposure and the commercial paper program, including actual costs and effects of lease-accounting adoption.