Ventas, Inc. annual report, FY2013

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Ventas, Inc. — 2013 Form 10-K

Business context and reporting period. This is the annual report for the year ended December 31, 2013, not a standalone quarterly filing. Ventas is a healthcare and seniors-housing REIT operating through triple-net leased properties, senior living operations, and medical office building (MOB) operations. At year-end it owned nearly 1,500 properties in the U.S. and Canada, with three properties under development.

Key financial metrics

  • Revenue: $2.810 billion, up 13.9% from $2.468 billion in 2012. Resident fees and services were $1.406 billion; rental income was $1.326 billion.
  • Profit: Net income attributable to common stockholders was $453.5 million, up 25.0%; diluted EPS was $1.54 versus $1.23. Continuing-operations diluted EPS increased to $1.66 from $1.04. Discontinued operations were a $35.4 million loss in 2013, versus $55.0 million of income in 2012.
  • Property-level results: NOI from continuing operations was $1.690 billion, up 13.4%. Triple-net NOI increased 7.0% to $880.3 million; senior living NOI rose 16.4% to $449.3 million; and MOB NOI rose 24.4% to $300.9 million. Same-store NOI growth was 2.1%, 5.6%, and 1.2%, respectively.
  • Cash flow and REIT measures: Cash from operations was $1.195 billion, up 20.3%. FFO was $1.208 billion, up 18.0%; normalized FFO was $1.221 billion, up 9.0%. These are non-GAAP measures and should be considered alongside GAAP results.
  • Margins and operating indicators: Senior living NOI was approximately 32.0% of segment revenue. Senior living occupancy was 91.1%, compared with 89.9% in 2012. MOB occupancy was 90.2%, compared with 90.5%; annualized average rent per occupied square foot was $29 in both years.
  • Debt and liquidity: Debt carrying value was $9.365 billion at year-end, versus $8.414 billion a year earlier. Cash and cash equivalents were $94.8 million, restricted cash and escrow deposits were $84.7 million, and unused revolving-credit capacity was $1.6 billion. About 18.7% of consolidated debt was variable-rate. The company reported compliance with debt covenants.
  • Dividends: 2013 declared dividends were $2.735 per share, more than 10% above 2012. The board declared a first-quarter 2014 dividend of $0.725 per share.
  • Fourth quarter: Revenue was $732.9 million; income from continuing operations attributable to common stockholders was $108.3 million; net income attributable to common stockholders was $108.4 million; diluted EPS was $0.37. The declared quarterly dividend was $0.725 per share.

Material changes versus 2012

  • Results benefited from acquisitions and investments, including the full-year contribution of 2012 acquisitions, 2013 acquisitions, and growth in senior living occupancy and resident revenue. Senior living same-store NOI grew 5.6%, while same-store MOB NOI grew 1.2%.
  • Interest expense increased 16.0% to $334.5 million, primarily reflecting higher debt balances; the effective interest rate declined to 3.8% from 4.0%.
  • Net income growth partly reflects lower merger-related expenses and debt-extinguishment losses, but comparisons are affected by discontinued operations: 2012 included an $81.0 million net gain on property sales, while 2013 included a $39.7 million impairment charge on assets classified as discontinued operations.
  • Ventas invested approximately $1.8 billion in property, loans, and other investments; issued $1.6 billion of senior notes at a weighted-average rate of 3.3%; and replaced its prior credit arrangements with a $3.0 billion unsecured facility.

Outlook, commentary, and principal risks

  • Kindred lease transitions: Ventas extended leases on 48 of 108 properties scheduled to expire in 2015. New annual rent of $95.9 million begins October 1, 2014, $15 million above then-current rent; Kindred also paid $20 million in 2013. The remaining 60 skilled nursing facilities were being marketed for re-leasing or repositioning, with lease expiration accelerated to September 30, 2014. Management expected no material impact on 2014 or 2015 results, but stated the actual outcome was uncertain. Its estimated 2014 Kindred base rent of approximately $206.8 million assumes successful repositioning of the marketed assets by September 30, 2014 and specified facility revenue conditions.
  • Regulatory exposure: Medicare and Medicaid reimbursement changes, healthcare regulation, licensing and certificate-of-need requirements could pressure tenants’ and operators’ finances and their ability to pay rent. A 2% Medicare sequestration reduction took effect in April 2013; federal payment rules and reimbursement remain subject to change.
  • Concentration and operations: Senior living operations represented 50.2% of total revenue. Brookdale and Kindred represented 5.6% and 8.1% of revenue, respectively; Kindred contributed 13.4% of NOI. Atria and Sunrise managed 237 communities, making operating performance dependent on those managers. California represented 14.5% of revenue and 13.3% of NOI.
  • Capital, insurance, and other risks: Risks include refinancing and interest-rate exposure, tenant or operator defaults and lease nonrenewals, labor and operating-cost inflation, professional-liability claims and insurance availability, development and acquisition execution, environmental liabilities, and maintaining REIT qualification. A 100-basis-point increase in variable borrowing rates was estimated to add about $17.4 million to 2014 interest expense, or $0.06 per diluted share, assuming debt levels remained unchanged.
  • Distributions and outlook: Management intended to distribute at least 100% of 2014 taxable net income after available NOLs and expected cash flows to exceed REIT taxable income. The filing does not provide a clear 2014 earnings or FFO guidance range; dividends remain subject to board review and liquidity needs.
  • Unusual items and assurance: The company recorded $51.5 million of real-estate impairment charges in 2013, including $39.7 million related to discontinued operations. Ernst & Young issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.

Important facts for investors to verify

  • Progress, timing, and economics of re-leasing or repositioning the 60 Kindred skilled nursing facilities, including any transition costs, licensing delays, and rent interruptions.
  • Credit quality and rent coverage of major tenants, particularly Kindred and Brookdale, and operating performance under Atria and Sunrise management.
  • Whether same-store occupancy, resident pricing, and NOI growth continue, and how labor, insurance, and other operating costs affect senior living margins.
  • Debt maturities, floating-rate exposure, covenant headroom, and the availability and cost of refinancing or additional capital.
  • Impairment assumptions and the carrying value and collectibility of straight-line rent receivables, loans, and properties held for sale.
  • 2014 dividend coverage from recurring cash generation, rather than REIT distribution requirements or non-GAAP FFO measures alone.