Ventas, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Ventas is a REIT owning nearly 1,500 seniors housing and healthcare properties across the United States and Canada, with triple-net leasing, senior living operations, medical office buildings (MOBs), and loans and investments.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $712.4 | $638.7 | $2,081.6 | $1,815.5 |
| Segment NOI | $425.6 | $384.4 | $1,252.5 | $1,101.8 |
| Income from continuing operations | $127.7 | $115.5 | $379.9 | $205.6 |
| Net income attributable to common stockholders | $118.3 | $111.9 | $345.1 | $276.5 |
| Diluted EPS, continuing operations | $0.43 | $0.39 | $1.28 | $0.70 |
| Diluted EPS, total | $0.40 | $0.38 | $1.17 | $0.94 |
| Normalized FFO | $307.2 | $284.9 | $907.1 | $826.6 |
- Q3 revenue rose 11.5%, segment NOI 10.7%, and common-stockholder net income 5.7%. Nine-month revenue rose 14.7% and common-stockholder net income 24.8%.
- For the nine months, operating cash flow was $835.4 million, up from $709.3 million. Investing used $1,178.1 million and financing provided $329.5 million; cash ended at $54.7 million.
- At September 30, total debt was $9,413.3 million, versus $8,413.6 million at December 31, 2012. Total assets were $19,879.4 million and total liabilities $10,743.0 million.
- Liquidity included $54.7 million of unrestricted cash and $1.54 billion of unused revolving-credit capacity. The company also reported $98.2 million of escrow deposits and restricted cash. The revolver had $448.0 million drawn and matures in October 2015, with a conditional one-year extension option.
- Interest expense for the nine months was $245.6 million, versus $214.0 million. The reported effective interest rate was 3.8%, compared with 4.0% in 2012; approximately 16.4% of debt was variable-rate.
- Declared dividends were $0.67 per share for Q3, versus $0.62 a year earlier; the nine-month declared dividend was $2.01 per share.
Material changes and operating trends
- Growth reflected acquisitions and improved operations. In the first nine months, Ventas invested approximately $1.8 billion in seniors housing communities and MOBs, including assumed debt; it also completed four developments.
- Q3 segment NOI increased 5.7% in triple-net leasing, 14.5% in senior living, and 13.4% in MOBs. Same-store NOI rose 2.0% for triple-net properties and 2.4% for stabilized senior living communities, but declined 0.3% for stabilized MOBs.
- Senior living occupancy was 91.4% in Q3, versus 90.4% a year earlier. Total MOB occupancy was 90.2%, unchanged year over year. Triple-net skilled-nursing occupancy was 79.7% in the latest reported comparison, versus 81.4% a year earlier.
- Nine-month discontinued operations produced a $33.7 million loss, versus $70.1 million of income in 2012. The 2013 period included $34.5 million of impairments on assets held for sale; the prior-year period included substantial real-estate disposition gains. Seventeen properties were held for sale at quarter-end.
- Nine-month income tax benefit was $13.1 million, primarily from releasing valuation allowances on deferred tax assets at a taxable REIT subsidiary. This is a material contributor to reported results and is not equivalent to recurring operating performance.
Outlook, commentary and risks
- The filing does not provide a clear quantified full-year earnings or FFO guidance figure. Management said it expected liquidity needs over the next 12 months to be met through operating cash flow, cash, debt and equity issuance, asset sales, and revolver borrowings, while noting that access and cost of capital may vary.
- Kindred renewal and repositioning are significant. In September, Ventas agreed to extend leases on 48 of 108 assets scheduled to expire in 2015. The 48 assets represented about $78 million of current annual base rent; rent is scheduled to increase initially by $15 million effective October 1, 2014. Kindred paid $20 million on October 1, 2013, to be amortized over the new lease terms. The remaining 60 skilled-nursing facilities were being marketed for new operators; their lease term was accelerated to September 30, 2014. Re-leasing may be delayed or made more costly by licensing, certificate-of-need, and Medicare/Medicaid change-of-ownership requirements.
- Tenant/operator exposure remains important: Atria and Sunrise managed or operated 19.5% and 13.9% of real estate investments by gross book value; Brookdale and Kindred accounted for 9.7% and 3.3%. Kindred generated 12.7% of Q3 NOI. Tenant or manager financial weakness, lease nonrenewal, or operating disruption could affect cash flow and distributions.
- CMS’s 2014 rules estimated a net $18 million decrease in LTAC hospital payments, after the effect of the 25-percent rule, and an approximately $470 million increase in skilled-nursing-facility payments. Ventas said it was evaluating the effects on operators and cautioned that reimbursement changes could adversely affect them and the company.
- A 100-basis-point rise in variable interest rates, assuming debt balances stayed constant, was estimated to increase 2013 interest expense by approximately $15.2 million, or $0.05 per diluted share. Other disclosed risks include refinancing needs, higher operating and insurance costs, healthcare regulation, foreign exchange, and litigation. Management stated that pending legal matters were not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Progress and economics of re-leasing or repositioning the 60 Kindred assets, including transition costs, timing, and the additional rent on the 48 extended assets.
- Whether senior living same-store occupancy and NOI gains continue, and whether MOB same-store performance recovers.
- Debt maturities, refinancing costs, variable-rate exposure, and continued access to the revolver and capital markets.
- How much reported earnings growth depends on acquisitions, tax benefits, impairments, and disposition-related comparisons rather than recurring operations.
- Financial condition and reporting of major tenants and operators, along with the effects of Medicare and Medicaid reimbursement changes.