Ventas, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Ventas is a healthcare and senior-housing REIT with approximately 1,200 owned or managed properties across the United States, Canada and the United Kingdom. The quarter was affected by the emerging COVID-19 pandemic, particularly from mid-March.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $1.012 billion | $942.9 million | Up 7.3% |
| Net income attributable to common stockholders | $473.1 million | $125.8 million | Increase mainly reflects disposition gain and tax benefit |
| Diluted EPS | $1.26 | $0.35 | Not representative of recurring operating performance |
| Segment NOI | $525.5 million | $511.5 million | Up 2.7% |
| Normalized FFO attributable to common stockholders | $366.1 million | $356.1 million | Up approximately 2.8% |
| Cash provided by operating activities | $314.5 million | $336.1 million | Down 6.4%, primarily due to working-capital changes |
| Cash, cash equivalents and restricted cash at quarter-end | $2.886 billion | $140.2 million | Increase primarily from financing activity |
| Debt, net balance-sheet carrying amount | $14.172 billion | $12.159 billion at year-end 2019 | Increased with precautionary revolver borrowings |
Q1 net income included a $226.2 million real estate disposition gain, primarily from contributing six properties to a newly formed fund, and a $149.0 million income-tax benefit, primarily from a $152.9 million deferred tax benefit related to an internal restructuring. The quarter also included $12.2 million of real estate impairment charges. Interest expense was $116.7 million, up 5.5%; the weighted-average effective interest rate was 3.5%, compared with 3.9%.
Operating trends and changes versus prior year
- Senior living operations NOI rose 3.9% to $166.6 million, but same-store NOI fell 10.4%. Same-store occupancy declined to 85.5% from 87.0%; Ventas cited lower starting occupancy, supply pressures, and an estimated $6 million in COVID-related labor and supply costs beginning in mid-March.
- Triple-net leased properties NOI fell 2.1% to $188.5 million, while same-store NOI increased 1.8%, mainly due to contractual rent escalations. The total segment decline primarily reflected prior-year transitions of properties into the senior living operating portfolio.
- Office operations NOI increased 3.5% to $145.3 million. Same-store NOI rose 3.7%, supported by tenant retention, rent escalations and occupancy growth; quarter-end occupancy was 90.2%.
- Total revenues increased in part with senior living growth and the 2019 acquisition of an 87% interest in 34 Canadian senior housing communities. The filing reports total segment NOI growth, but the same-store senior living results show deterioration before the pandemic’s full-quarter effects.
Liquidity, capital and distributions
- At March 31, Ventas had $2.848 billion of cash and $14.172 billion of debt on the balance sheet. It had drawn approximately $2.75 billion under its $3.0 billion unsecured revolver; reported outstanding revolver borrowings were $2.888 billion, with $87.9 million of facility availability after letters of credit.
- Ventas stated it had approximately $3.2 billion in cash and cash equivalents as of May 6, 2020. It also reported negligible near-term debt maturities and no pending, unfunded or unannounced acquisitions.
- The company issued $500 million of 4.75% senior notes due 2030 in March; settlement and receipt of proceeds occurred in April. The revolver matures in April 2021, with two conditional six-month extension options.
- Investing cash flow was positive $517.2 million, principally reflecting $625.4 million of real estate disposal proceeds. Financing cash flow was positive $1.911 billion, largely due to net borrowing activity. Cash distributions to common stockholders were $296.3 million; the declared distribution in the quarter was $0.7925 per share.
- Ventas reduced expected 2020 capital expenditures by $0.3 billion to a new expected total of $0.5 billion, mainly by pausing certain ground-up developments. It was also reviewing general and administrative expenses for further savings.
Outlook, risks and unusual items
- Ventas provided no specific earnings or FFO guidance in the supplied filing text. Management expected COVID-19 effects to continue and, in some cases, accelerate; it said the ultimate impact could be material and could not be estimated at the time.
- In senior living, move-ins were restricted or slowed, occupancy trends weakened, and labor, services, protective equipment and supply costs rose. Management expected these trends to affect Q2 revenue and NOI and continue through at least May.
- Ventas collected substantially all expected triple-net senior housing rent for March and April, but provided and could continue to provide tenant support through rent deferrals and use of lease deposits. It warned that some senior housing tenants could face worsening finances and difficulty paying contractual rent in full and on time.
- Ventas collected substantially all healthcare triple-net rent due in April and received 96% of anticipated April office rent; it expected most remaining office rent to be collectible. These are post-quarter collection updates, not Q1 results.
- In April, Ventas transitioned 26 Holiday independent living properties from a triple-net lease to a terminable management agreement and received approximately $34 million in cash and $66 million principal amount of secured notes. It expected to record income based on the cash and fair value of the notes, alongside an approximately $50 million write-off of accrued straight-line rent receivable.
- Key risks include pandemic duration and resurgence, occupancy and rent collection, tenant/operator financial health, access to capital and potential credit-rating downgrades, higher borrowing costs, healthcare litigation and regulatory exposure, and reliance on major operators and tenants. The filing also identifies possible legal and professional-liability claims; management said pending matters were not expected individually or collectively to have a material adverse effect, while noting uncertainty and potential defense costs.
Important facts for investors to verify
- How Q2 and subsequent senior living occupancy, move-ins, labor costs and COVID-related expenses compare with management’s early expectations.
- Whether rent deferrals or security-deposit support to triple-net senior housing tenants increase, and whether tenants maintain the ability to pay rent.
- Whether the $3.2 billion of May 6 cash, April note proceeds and revolver availability provide adequate liquidity as operations and capital markets evolve.
- How the Holiday transaction is accounted for, including the expected income and the approximately $50 million straight-line rent receivable write-off.
- Underlying recurring performance apart from the fund-contribution gain and tax restructuring benefit; review normalized FFO, same-store NOI and cash flow alongside GAAP net income.
- Debt refinancing exposure, variable-rate borrowing sensitivity, and the effect of the elevated revolver balance on interest expense and financial flexibility.