Ventas, Inc. annual report, FY2009

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Ventas, Inc. — FY 2009 Form 10-K

Reporting period: Fiscal year ended December 31, 2009. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.

Business context

Ventas is a healthcare and seniors-housing REIT with two reportable segments: triple-net leased properties and senior living operations. At year-end, its portfolio comprised 505 assets in 43 U.S. states and two Canadian provinces: 244 seniors-housing communities, 187 skilled-nursing facilities, 40 hospitals, and 34 medical-office and other properties. Sunrise managed 79 communities; most other properties were leased to operators, principally under triple-net leases.

Financial performance and condition

  • Revenue: $936.1 million, up 1.3% from $923.7 million in 2008. Rental income rose 4.1% to $501.1 million; resident fees and services fell 1.9% to $421.1 million.
  • Earnings: Income from continuing operations attributable to common stockholders was $194.7 million ($1.27 diluted per share), versus $175.4 million ($1.25) in 2008. Net income attributable to common stockholders was $266.5 million ($1.74 diluted per share), up from $222.6 million ($1.59).
  • Fourth quarter: Revenue was $239.0 million; continuing-operations income attributable to common stockholders was $53.8 million; net income attributable to common stockholders was $54.1 million. Diluted EPS was $0.35, versus $0.40 in fourth-quarter 2008.
  • REIT operating measures: FFO was $393.4 million, down from $412.4 million; normalized FFO increased to $409.0 million from $379.5 million; normalized FAD increased to $389.1 million from $356.7 million. These non-GAAP measures are company-defined and should not be treated as substitutes for GAAP earnings or operating cash flow.
  • Cash flow: Operating cash flow was $422.1 million, up from $379.9 million. Investing cash flow was a net use of $1.7 million, compared with a $136.3 million use in 2008. Financing cash flow was a net use of $490.2 million, including $314.4 million of common dividends.
  • Balance sheet and liquidity: Total assets were $5.62 billion and reported debt was $2.67 billion at year-end. Unrestricted cash was $107.4 million; restricted cash and escrow deposits were $39.8 million. The $1.0 billion revolving facilities had $988.4 million available. The company reported compliance with debt covenants.
  • Debt profile: Gross debt was $2.70 billion, of which 91.7% was fixed-rate; weighted-average year-end debt rates were 6.0% overall, 6.3% fixed and 2.1% variable. Contractual debt obligations, including interest, totaled $3.53 billion. Management identified $173.8 million of mortgage debt repayments among the coming 12-month liquidity needs.
  • Dividends: Declared dividends were $2.05 per common share in 2009, unchanged from 2008. The board declared a first-quarter 2010 dividend of $0.535 per share and management expected 2010 distributions to exceed taxable income.

Material changes versus 2008

  • Continuing-operations income attributable to common stockholders rose 11.0%, while net income rose 19.7%; the latter included $67.3 million of gains on asset sales in discontinued operations, versus $39.0 million in 2008.
  • Rental growth reflected lease escalators and property acquisitions. Sunrise-managed resident revenue declined, with average occupancy falling to 87.7% from 89.1%; same-store stabilized occupancy was 88.6%, down from 91.4%.
  • Interest expense declined 12.7% to $178.5 million, helped by lower debt balances and rates. Depreciation and amortization declined 13.0%, principally because Sunrise acquisition-related in-place lease intangibles had been fully amortized in 2008.
  • Ventas issued 13.1 million common shares for $312.2 million of aggregate proceeds, issued $200 million of 2016 senior notes at a substantial discount, repurchased or tendered $361.6 million of senior notes, and reduced total debt from $3.14 billion to $2.67 billion.
  • Ventas sold 14 assets during 2009, reporting a $67.3 million net gain in discontinued operations. It also bought four medical-office buildings and one skilled-nursing facility and completed development of two medical-office buildings.

Outlook, risks, contingencies and unusual items

  • Management expected operating cash flow, cash on hand, debt financing, asset-sale proceeds and revolver availability to fund operating costs, debt service, capital spending, investments and REIT distributions. This is a liquidity expectation, not earnings guidance; the filing provides no clear quantified full-year 2010 earnings or FFO guidance.
  • Revenue and cash flow depend materially on a small number of counterparties. Kindred accounted for 26.2% of 2009 revenue and 38.5% of NOI; Brookdale accounted for 12.9% of revenue and 19.1% of NOI. Sunrise-managed operations generated 44.7% of revenue and 18.5% of EBITDA.
  • Kindred renewed leases covering 108 assets through April 2015; leases for 89 properties, representing about $117 million of annual base rent, were scheduled to expire in 2013 unless renewed. Nonrenewal or operator distress could require property repositioning, with potential delays, costs and reduced rent.
  • Management cited Sunrise’s weakened financial condition and the potential effects of economic conditions, occupancy, labor and insurance costs, and reimbursement changes on operators. Medicaid rate reductions, Medicare payment changes, healthcare reform, regulation and licensing/CON requirements could weaken tenants and limit the speed of replacing operators.
  • Ventas received a $101.6 million jury award in its litigation against HCP concerning the Sunrise REIT acquisition. HCP appealed, and Ventas cross-appealed seeking additional relief; the outcome was uncertain. HCP posted a $102.8 million letter of credit to secure the judgment during appeal.
  • Other material exposures include refinancing and interest-rate risk, tenant/operator bankruptcy, professional-liability and environmental claims, foreign-exchange movements, REIT qualification and distribution requirements, and $15.4 million of unrecognized tax benefits. The filing states no material environmental capital spending was made in 2009 and none was expected in 2010.
  • Moody’s upgraded Ventas’s unsecured debt to Baa3 in February 2010, giving the company investment-grade ratings from all three cited rating agencies. Management stated an intention to maintain investment-grade ratings, subject to market and operating conditions.
  • Ernst & Young issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.

Important facts for investors to verify

  • Current financial condition and operating outlook of Kindred, Brookdale and Sunrise, including rent coverage, liquidity, occupancy and compliance with lease or management terms.
  • Kindred’s renewal decisions for the 2013 lease bundles and Ventas’s ability to re-tenant properties if leases are not renewed.
  • Near-term debt maturities, the 2010 revolver tranche, mortgage repayments, refinancing access and covenant headroom.
  • Whether 2009 earnings and dividend capacity are supported by recurring operations, given asset-sale gains, and how company-defined normalized FFO/FAD reconcile to GAAP and cash flow.
  • Developments in the HCP appeal and cross-appeal, and the collectability and accounting treatment of any resulting proceeds.
  • Actual effects of Medicare/Medicaid reimbursement changes, healthcare reform and state budget actions on tenants and operators; the filing does not quantify their eventual impact.