Ventas, Inc. — Third-Quarter 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009; filed November 4, 2009. Unless otherwise noted, financial amounts below are in millions of dollars. Ventas is a healthcare and seniors-housing REIT with 501 assets in the U.S. and Canada, including senior living operations managed by Sunrise and properties leased to operators under triple-net leases.
Financial results and key metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $235.8 | $235.1 | $697.3 | $691.4 |
| Income from continuing operations | $50.3 | $63.3 | $143.2 | $134.6 |
| Net income attributable to common stockholders | $49.8 | $63.8 | $212.4 | $165.1 |
| Diluted EPS | $0.32 | $0.45 | $1.40 | $1.19 |
| FFO | $98.3 | $113.0 | $289.4 | $314.8 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $323.2 | $301.8 |
- Q3 rental income rose 4.0% to $126.0 million, while resident fees and services fell 1.9% to $106.5 million. Sunrise-managed communities’ average occupancy was 87.6%, down from 89.7% a year earlier.
- Q3 income before the contingent-liability reversal, taxes, discontinued operations and noncontrolling interest increased 26.3% to $49.9 million. The continuing-operations margin on revenue was approximately 21.3%, versus 26.9% in Q3 2008.
- For the nine months, revenue increased 0.8%; continuing-operations income rose 6.4%. Common-stockholder net income increased 28.7%, but included $67.0 million of gains on property sales in discontinued operations. FFO declined 8.1%.
- Interest expense fell 14.0% in Q3 and 13.0% for nine months. The company attributed the nine-month reduction to lower rates and lower debt balances. Nine-month depreciation and amortization decreased 15.9%, primarily because Sunrise acquisition-related lease intangibles were fully amortized in Q2 2008.
- At September 30, total assets were $5.59 billion; net real estate investments were $5.21 billion. Gross debt was $2.65 billion, compared with $3.14 billion at year-end 2008; balance-sheet debt, net of adjustments, was $2.62 billion. Debt was 91.5% fixed-rate, with a 5.9% weighted-average rate.
- Cash and cash equivalents were $70.9 million. The company reported $126.6 million of available cash including $55.7 million in a 1031 exchange escrow, plus $853.0 million of unused revolving-credit availability. Operating cash flow of $323.2 million was below cash dividends paid of $234.1 million plus other investing and financing needs. The declared dividend was $0.5125 per share for the quarter.
Material changes and notable transactions
- Q3 common-stockholder net income fell 21.9% year over year, chiefly because Q3 2008 included a $23.3 million reversal of a contingent tax liability; no comparable reversal occurred in 2009. Q3 2009 also had higher merger-related and deal costs, partly offset by lower interest and property-level expenses.
- In April, Ventas issued $200 million principal amount of 6.5% notes due 2016 and 13.1 million common shares, raising approximately $465.7 million in combined net proceeds. During the first nine months it repurchased or tendered $361.6 million principal of senior notes, repaid $49.8 million of 2009 notes at maturity and repaid mortgage debt.
- Ventas sold 13 properties during the first nine months for $153.5 million in aggregate stated sale prices and recognized $67.0 million in net gains. Six skilled nursing facilities were sold to Kindred in June for $58.0 million, including a lease-termination fee.
- Kindred renewed leases through April 2015 on 109 assets whose initial terms were due to expire in April 2010. However, ten other lease bundles covering 89 assets and approximately $117 million in annual base rent could expire in April 2013 if not renewed.
Outlook, risks and contingencies
- Management said it expected operating cash flow, cash on hand, debt financing, asset-sale proceeds and revolving-credit borrowings to meet operating costs, debt service, mortgage repayments, capital spending, investments and REIT distributions. This was not quantified earnings guidance.
- After quarter-end, two lenders committed an additional $125 million of 2012 revolving capacity, increasing total facility capacity to $965 million. The filing also describes post-quarter mortgage financing transactions, including a $132.1 million pool of loans at a 6.68% weighted-average fixed rate.
- Operator and tenant concentration is material: Kindred, Brookdale and Sunrise accounted for approximately 26.5%, 12.9% and 44.5% of nine-month revenue, respectively. Kindred and Brookdale lease properties; Sunrise manages communities. Financial weakness, nonrenewal or operational problems at these counterparties could affect rent, property earnings, debt service and distributions.
- CMS’s FY2010 skilled-nursing payment rule was estimated to reduce industry net payments by approximately 1.1%; the company was assessing the impact on its operators. The LTAC hospital rule was estimated to increase payments by approximately 3.3%. Pending healthcare reform, reimbursement changes, labor and insurance costs, financing access, interest rates and Canadian-dollar movements were also identified risks.
- In litigation against HCP, a jury awarded Ventas $101.6 million on September 4, 2009, and judgment was entered September 8. HCP’s post-trial motions remained pending; HCP had posted a $25 million letter of credit to stay execution during that process. The award and any further recovery remained subject to court rulings and potentially appeal; the filing does not establish a final collected amount.
- The remaining Sunwest loans had a net carrying value of $8.8 million. Recovery depended on foreclosure proceedings and collateral value; the filing provided no assurance of ultimate recovery.
Most important facts for investors to verify
- Whether HCP’s post-trial motions or any appeal changed the $101.6 million judgment, and whether Ventas collected it.
- Kindred’s renewal decisions for the 2013 lease bundles and the financial capacity of Kindred, Brookdale and Sunrise.
- Actual effects of FY2010 Medicare reimbursement changes, occupancy trends and foreign-exchange movements on property-level results.
- Debt maturities, mortgage repayment requirements, covenant and revolver availability, and the company’s ability to sustain dividends while funding capital needs.
- Realized proceeds and gains from dispositions, and recoveries on the remaining Sunwest loans.