Ventas, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Ventas is a healthcare and seniors-housing REIT with more than 1,200 properties in the U.S., Canada and U.K. Its portfolio spans triple-net leased properties, senior living operations and office operations. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless noted.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $899.9 million | $867.1 million | $2,678.9 million | $2,567.8 million |
| Income from continuing operations | $156.9 million | $150.4 million | $465.1 million | $411.6 million |
| Net income attributable to common stockholders | $614.0 million | $149.5 million | $963.9 million | $441.6 million |
| Diluted EPS from continuing operations | $0.44 | $0.42 | $1.30 | $1.19 |
| Normalized FFO attributable to common stockholders | $372.9 million | $363.8 million | $1,120.2 million | $1,071.3 million |
| Segment NOI | $523.1 million | $504.5 million | $1,565.3 million | $1,491.4 million |
Profitability and operating trends. Q3 revenue rose 3.8% and continuing income rose 4.3%. Segment NOI increased 3.7% in Q3, led by office operations, where NOI rose 17.6%; triple-net NOI increased 0.9%, while senior living NOI declined 2.5%. Q3 senior living same-store NOI declined 1.2%, with occupancy of 88.4% versus 90.9% a year earlier. Q3 office same-store NOI was essentially flat, down 0.1%. The filing reports NOI and FFO as non-GAAP measures; it does not present a single consolidated operating-margin measure.
Common-stockholder net income was unusually elevated by real estate disposition gains: $458.3 million in Q3 and $502.3 million for the nine-month period. Excluding the disposition impact, continuing operations provide a more representative view of operating performance. Dividends declared were $0.775 per share in Q3 and $2.325 per share for the nine months, versus $0.73 and $2.19, respectively, in 2016.
Cash flow and liquidity. For the nine months, operating cash flow was $1,086.2 million, compared with $1,006.1 million in 2016. Investing activities used $710.1 million, versus $1,494.8 million; financing activities used $578.3 million, compared with $525.3 million provided in 2016. Cash and cash equivalents were $85.1 million at September 30, down from $286.7 million at year-end 2016. The company also had $76.5 million of restricted cash and $2.4 billion of unused capacity on its unsecured revolver. Operating cash flow exceeded cash distributions to common stockholders of $827.3 million for the period, before other financing and investment requirements.
Debt. Senior notes payable and other debt totaled $11.42 billion at September 30, 2017, up from $11.13 billion at December 31, 2016. The weighted-average interest rate on total debt was 3.6% at quarter-end. Revolver borrowings were $538.9 million; the $3.0 billion facility matures in 2021 and may be extended, subject to conditions. A $900 million term loan is due in 2020. The filing identifies $922.7 million of total maturities in 2018 and $1.35 billion in 2019. Management cited $700 million of senior notes among debt due within the next 12 months.
Material changes and notable items
- Office rental income increased primarily due to the September 2016 life-science and innovation-center acquisition and lease escalations; office property expenses also rose. Office same-store occupancy was 91.0%, compared with 91.6% in 2016.
- Senior living operating results remained pressured: nine-month segment NOI fell 1.7%, and average occupancy declined to 88.2% from 90.4%, despite higher average monthly revenue per occupied room.
- Ventas sold 37 triple-net properties, three medical office buildings and three land parcels for $617.1 million in the first nine months, recognizing a $502.3 million gain. This included 22 Kindred-operated skilled nursing facilities sold in August for $488.1 million, with a $458.0 million gain. After quarter-end, seven more facilities sold for $82.5 million; management expected an approximately $78 million gain in Q4. Sale of the remaining seven facilities was expected by year-end, but timing and completion were not assured.
- Ventas provided Ardent with a $700 million term loan and a $60 million revolving line to support Ardent’s acquisition of LHP; $23 million of the revolving line was drawn at quarter-end. The financing had a five-year term and a weighted-average interest rate of approximately 9.0% at September 30.
- Natural-disaster-related expenses and impairments contributed to “Other” expense, which increased by $10.6 million in Q3 and $7.2 million for the nine months year over year. Ventas said insurance may mitigate the impact, but recovery amounts and timing were uncertain.
Outlook, risks and contingencies
Ventas did not provide specific earnings guidance in the supplied filing text. Management expected near-term liquidity needs—including operations, debt service and maturities, capital spending, investment and development, and REIT distributions—to be met through operating cash flow, cash, debt and equity issuance, asset sales, debt assumptions and revolver borrowings. It cautioned that inability to access multiple sources of capital could materially adversely affect the company.
Key risks include tenant, operator and borrower financial health; senior-living occupancy and operating costs; lease renewals and the ability to reposition properties; healthcare regulation and reimbursement changes; interest rates and refinancing; and access to capital. Brookdale, Ardent and Kindred represent meaningful tenant exposures, while Atria and Sunrise manage a substantial portion of senior-living communities. Ventas noted that information about certain private counterparties was not independently verified. Litigation and regulatory matters were described, but management stated that pending matters were not expected to have a material adverse effect, while noting outcomes are uncertain and defense costs may be significant.
The company expected to adopt the new revenue standard in 2018 and was evaluating a possible cumulative adjustment relating to $31.2 million of deferred real-estate-sale gains. The new lease standard was expected to take effect in 2019; its impact was still under evaluation. Management reported disclosure controls were effective as of September 30, 2017, and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the remaining Kindred skilled-nursing-facility sales closed as expected, and whether the anticipated Q4 gain was realized.
- Tenant and operator financial condition, including Brookdale, Kindred, Ardent, Atria and Sunrise exposures and any lease or management-agreement changes.
- Senior-living occupancy, same-store NOI and cost trends, and the extent to which higher room revenue can offset lower occupancy and rising expenses.
- Debt maturities, refinancing plans, variable-rate exposure and available revolver capacity; the filing estimates a $0.05 per diluted share annual interest-cost increase from a 100-basis-point rate rise, assuming debt balances stay unchanged.
- Cash generation relative to dividends, development and capital spending, and the approximately $700 million of senior notes management identified as due within 12 months.
- Insurance recoveries for natural-disaster costs and the final accounting effect of adopting revenue and lease standards.