Ventas, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; balance-sheet amounts are as of March 31, 2010. Unless stated otherwise, amounts below are in millions of U.S. dollars. Ventas is a healthcare and seniors-housing REIT with 505 assets in the U.S. and Canada, including 244 seniors-housing communities, 187 skilled nursing facilities, 40 hospitals, and 34 medical office buildings and other properties.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $241.5 | $228.9 | Up 5.5% |
| Income from continuing operations | $52.7 | $45.8 | Up 15.1% |
| Net income attributable to common stockholders | $52.6 | $74.2 | Down 29.1% |
| Common diluted EPS | $0.34 | $0.52 | Down $0.18 |
| Operating cash flow | $115.6 | $113.6 | Up $2.0 |
| NOI, including discontinued operations | $162.9 | $155.6 | Up $7.3 |
| Adjusted EBITDA | $155.9 | $148.8 | Up $7.1 |
| Normalized FFO | $105.2 | $95.7 | Up $9.5 |
| Normalized FAD | $102.2 | $91.6 | Up $10.5 |
Revenue growth reflected rent escalators, acquisitions and developments, and higher resident fees. Resident fees rose 5.4%, partly due to a favorable $3.3 million Canadian-dollar exchange-rate effect and higher average daily rates. Average occupancy across 79 Sunrise-managed communities was 88.3%, compared with 88.1%; stabilized-community occupancy was 88.4%, down from 89.0%. Interest expense declined overall, although the effective interest rate rose to 6.6% from 5.6%. Property-level operating expense increased 4.5%, and depreciation and amortization rose 6.0%.
Common-stockholder earnings and EPS fell principally because Q1 2009 included $27.9 million of gains on real-estate sales in discontinued operations; Q1 2010 discontinued operations contributed $0.5 million. Continuing-operations EPS improved to $0.34 from $0.32. The declared dividend was $0.535 per share, up 4.4% from $0.5125.
Cash, debt and liquidity
- Cash and cash equivalents were $132.7 million, up from $107.4 million at year-end 2009; restricted cash and escrow deposits were $41.0 million. Cash available after revolver borrowings was reported as $94.5 million.
- Gross debt was $2.728 billion; the balance-sheet carrying amount, net of adjustments, was $2.698 billion. Debt increased from $2.702 billion gross at December 31, 2009. Fixed-rate debt represented 90.6% of gross debt; total weighted-average debt rate was 5.9%.
- Revolver availability was approximately $961.8 million on March 31, with $38.2 million drawn. The filing states that, by filing, the full $1.0 billion of committed revolving capacity matured April 26, 2012; a $125 million tranche had been scheduled to mature April 26, 2010. Management reported receiving $235 million of additional commitments since January 1.
- Scheduled 2010 debt maturities were $197.3 million, including amortization. Operating cash flow exceeded cash used in investing activities of $30.0 million and financing activities of $61.1 million; cash increased $24.5 million before currency effects.
- Q1 investing included $11.9 million of real-estate investment, $15.8 million of loan investment, and $4.3 million of capital expenditures. Financing included $83.9 million of common dividends and $7.8 million of debt repayments, partly offset by revolver borrowings.
Material developments, outlook and risks
- Ventas classified five seniors-housing communities with a $19.0 million net book value as held for sale and expected an approximately $5.2 million sale gain in Q2 2010. It also sold one community for approximately $2.5 million in Q1 and recorded a $0.1 million gain.
- In February, Moody’s upgraded unsecured debt to Baa3 from Ba1, with a stable outlook; in March, S&P revised its corporate-credit outlook to positive. The filing gives no quantitative full-year earnings or operating guidance. Management expected liquidity needs to be met through operating cash flow, cash, financing, asset-sale proceeds and revolver capacity, while noting additional financing or asset sales might be needed if sources were unavailable or investment needs grew.
- Healthcare reform enacted in March 2010 includes Medicare reimbursement reductions and productivity adjustments affecting certain healthcare providers. The company was assessing implications for operators; adverse effects on operators could affect their ability to meet lease obligations. A proposed LTAC payment update was also under review and was not final.
- Tenant, operator and manager concentration is material. Sunrise-managed operations accounted for 44.7% of revenue and 20.9% of Adjusted EBITDA; Kindred master leases accounted for 25.2% of revenue and 37.4% of NOI; Brookdale leases accounted for 12.6% of revenue. Ventas cautioned that financial distress, operating problems or nonrenewal by these counterparties could materially affect results, liquidity, debt service and distributions.
- Ventas obtained a $101.6 million jury award in its dispute with HCP over the Sunrise REIT acquisition. HCP appealed; Ventas cross-appealed for additional relief. HCP posted a $102.8 million letter of credit to secure the award during appeal. The filing gives no assurance of the outcome or timing; the award was not presented as recognized Q1 income.
- Five-year and near-term risks include refinancing and interest-rate exposure, tenant credit and lease renewals, healthcare reimbursement and regulation, insurance and operating costs, Canadian-dollar movements, REIT qualification, and pending litigation. Management said disclosure controls were effective; implementation of a new ERP/general-ledger system modified internal controls.
Key facts investors should verify
- Review the debt-maturity schedule and confirm refinancing or repayment plans, particularly for 2010 and 2011 obligations, and the status and terms of the extended revolver commitments.
- Assess the financial condition and lease coverage of Sunrise, Kindred and Brookdale, and monitor Sunrise occupancy and operating performance.
- Track Medicare rulemaking and the effects of enacted healthcare reform on operators and their capacity to meet obligations.
- Follow the HCP appeal and cross-appeal, and confirm whether the expected Q2 asset-sale gain was realized.
- Reconcile GAAP earnings and cash flow with the company’s non-GAAP NOI, Adjusted EBITDA, FFO and FAD measures; these measures are not substitutes for GAAP results or cash flow.