Ventas, Inc. — Q2 2009 Form 10-Q
Business context and reporting period
Unaudited quarter and six months ended June 30, 2009; filed August 5, 2009. Ventas is a healthcare and seniors-housing REIT with 501 assets across 43 U.S. states and two Canadian provinces, including seniors housing, skilled nursing, hospitals and medical office buildings. Most properties are triple-net leased; Sunrise manages many seniors-housing communities.
Financial performance and liquidity
- Q2 revenue: $232.0 million, up 1.3% from $229.0 million. Rental income rose 4.8% to $125.1 million; resident fees and services fell 3.6% to $103.4 million.
- Q2 earnings: Income from continuing operations was $47.0 million, versus $41.9 million; net income attributable to common stockholders was $88.4 million, or $0.57 per diluted share, versus $70.2 million, or $0.51. Discontinued operations contributed $42.2 million, including $39.0 million of sale gains.
- Six-month results: Revenue was $461.4 million, up 1.1%; continuing-operations income was $92.9 million, up 30.2%; common-stockholder net income was $162.6 million, or $1.09 per diluted share, versus $101.3 million, or $0.74. Discontinued operations included $66.9 million in real-estate sale gains.
- NOI and FFO: Six-month segment NOI was $313.0 million versus $305.9 million. FFO was $96.6 million for Q2 versus $100.5 million, and $191.1 million for six months versus $201.8 million. Management attributed the FFO decline primarily to lower non-cash tax benefits.
- Cash flow: Six-month operating cash flow was $195.1 million versus $173.8 million. Investing cash flow was positive $72.3 million, mainly reflecting $95.4 million of real-estate disposal proceeds; it was negative $95.4 million in the prior-year period. Financing used $397.9 million. Cash and cash equivalents fell to $46.5 million from $176.8 million at year-end.
- Debt and liquidity: Debt at June 30 was $2.616 billion net of unamortized adjustments (gross principal $2.651 billion), down from $3.137 billion net at year-end. The company reported $852.3 million of unused revolving-credit availability and $94.5 million of restricted cash and escrow deposits. Its stated net cash available, including $55.7 million of 1031-exchange escrow, was $91.8 million. Debt maturities shown as of July 29 included $29.5 million for the remainder of 2009 and $201.2 million in 2010.
- Margins/operations: Senior-living average occupancy was 86.5% in Q2 versus 88.7% a year earlier; stabilized-community occupancy was 87.2% versus 91.0%. Effective interest rate declined to 6.6% in Q2 from 6.8%.
- Dividend and equity: Quarterly dividend declared was $0.5125 per share, unchanged year over year. The April stock offering issued 13.06 million shares and raised $299.7 million net.
Material changes versus prior comparable periods
- Higher rent, including lease escalators and acquired properties, and lower interest and depreciation expenses supported higher continuing-operations income.
- Sunrise-managed resident revenue declined amid lower occupancy and adverse Canadian-dollar translation; Q2 resident fees were down 3.6% year over year.
- Net income growth substantially reflects asset-sale gains: discontinued-operations income rose to $42.2 million in Q2 and $71.2 million for the first half.
- Debt fell following debt repurchases, repayments and use of proceeds from the April debt and common-stock offerings. The company repurchased $361.6 million principal of senior notes and recorded $6.1 million of first-half debt-extinguishment loss.
Outlook, risks and unusual items
- No specific earnings or FFO guidance is provided in the supplied filing text. Management said its priority amid capital-market conditions was maintaining balance-sheet strength and liquidity. Remaining-2009 needs include operating costs, debt service, $18.8 million of mortgage repayment, capital spending, investments and REIT distributions; management expected funding from operations, cash, financings, asset sales and revolver capacity.
- Revenue and NOI are concentrated among key counterparties: Kindred generated 26.8% of first-half revenue and 38.8% of NOI; Brookdale generated 13.0% of revenue; Sunrise-managed operations accounted for 44.2% of revenue. Weakness or nonperformance by these operators/managers could impair rent, operations, debt service and distributions.
- Kindred renewed leases on 109 assets through April 2015. Ten other lease bundles covering 89 assets, representing about $117 million of annual base rent, may expire in 2013 unless renewed; replacement operators or equivalent lease terms are not assured.
- Healthcare reimbursement and reform are risks. CMS’s 2010 SNF rule was estimated to reduce industry payments by about 1.1%; CMS estimated a 3.3% increase for LTAC hospital payments. Ventas was assessing operator-level effects.
- In June, Ventas sold six skilled nursing facilities to Kindred for $58.0 million consideration and recorded a $38.9 million gain. Earlier in 2009 it sold seven other assets for $95.5 million and recognized $27.8 million of gains. Such gains boost GAAP earnings but are not recurring operating results.
- In the HCP litigation, the court dismissed HCP’s counterclaims with prejudice; one Ventas business-expectancy claim remained for a jury trial scheduled for August 18, 2009. Ventas could not assure recovery or its amount.
- Interest-rate and currency exposure remain. The filing estimated that a 100-basis-point rise on variable-rate debt would increase 2009 interest expense by about $1.3 million, assuming balances remained unchanged.
Important facts for investors to verify
- Separate recurring operating performance and FFO from gains on dispositions and other discontinued-operation results.
- Review tenant/operator financial health and Kindred’s potential 2013 lease renewals, alongside Sunrise occupancy and operating trends.
- Confirm refinancing and repayment plans for near-term maturities, actual revolver availability and cash that is restricted or held at property level.
- Assess dilution from the common-stock offering and the sustainability of the declared dividend relative to recurring cash generation.
- Track outcomes of the HCP litigation and the financial effects of Medicare reimbursement changes on operators.