Ventas, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Ventas is a healthcare and seniors-housing REIT operating in the U.S., Canada and the U.K. At quarter-end it owned approximately 1,300 properties and reported triple-net leased properties, senior living operations, and office operations, which now includes life-science assets. Figures below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $867.1 | $827.6 | $2,567.8 | $2,445.1 |
| Income from continuing operations | $150.4 | $45.2 | $411.6 | $266.3 |
| Net income attributable to common stockholders | $149.5 | $22.9 | $441.6 | $293.1 |
| Diluted EPS | $0.42 | $0.07 | $1.28 | $0.88 |
| Segment NOI | $504.5 | $473.3 | $1,491.4 | $1,394.0 |
| Normalized FFO attributable to common stockholders | $363.8 | $365.5 | $1,071.3 | $1,147.4 |
| Adjusted EBITDA | $479.9 | $484.2 | $1,416.7 | $1,495.3 |
- Q3 revenue increased 4.8%; nine-month revenue increased 5.0%. Q3 segment NOI rose 6.6%, while nine-month segment NOI rose 7.0%.
- Reported income and EPS rose sharply year over year, but comparisons include much lower merger-related expenses and debt-extinguishment losses in 2016, as well as 2015 discontinued operations associated mainly with the CCP spin-off. Normalized FFO declined 0.4% in Q3 and 6.6% for the nine-month period.
- Quarterly segment trends: triple-net NOI increased 4.8%; senior living NOI decreased 0.3%; office NOI increased 8.9%. Same-store NOI was up 2.3% in triple-net, 2.0% in senior living and down 0.8% in office operations for Q3.
- Senior living Q3 occupancy was 90.7%, compared with 91.1% a year earlier; monthly revenue per occupied room was $5,495, versus $5,259. Management attributed the senior-living NOI pressure to higher labor costs and lower occupancy, partly offset by higher room revenue.
- Nine-month operating cash flow was $1,001.3 million, compared with $1,022.0 million. Investing used $1,494.8 million and financing provided $530.2 million; cash and cash equivalents ended at $89.3 million. The company paid $2.19 per share in dividends during the nine months; Q3 dividend was $0.73 per share.
- At September 30, total debt carrying value was $11,252.3 million, versus $11,207.0 million at year-end 2015. Cash was $89.3 million, restricted cash $89.5 million, and unused revolving-credit capacity approximately $1.8 billion. The stated weighted-average interest rate on total debt was 3.5%.
- Debt maturities include approximately $658 million in 2017, $1.36 billion in 2018, $1.72 billion in 2019 and $1.43 billion in 2020. Revolver borrowings were $232.4 million; the $2.0 billion facility matures in January 2018, with an extension option subject to conditions.
Material changes and significant transactions
- In September, Ventas acquired substantially all Wexford university-affiliated life-science and innovation real estate assets for total consideration of $1.5 billion, adding 23 operating properties, two development assets and nine future development sites. Acquired assets produced $14.0 million of revenue and $9.6 million of NOI during the quarter while owned.
- Ventas issued 18.6 million common shares through public and at-the-market offerings during the nine months, raising net proceeds of approximately $1.3 billion, used partly to fund Wexford. This increased the share base and is relevant to per-share comparisons.
- Ventas issued $400 million of 3.125% notes due 2023 and $450 million of 3.25% notes due 2026; it redeemed or repaid the remaining $550 million of 1.55% notes due 2016 and repaid $254.7 million of mortgage debt.
- After quarter-end, Ventas sold seven Kindred-leased long-term acute-care hospitals for $3.0 million and expected to record an approximately $2.8 million gain. Rent of approximately $8 million annually had been reallocated to other assets under the master leases, with total master-lease rent unchanged.
- In October, Ventas committed up to $700 million of secured, five-year, LIBOR-based financing to an Ardent subsidiary in connection with Ardent’s proposed acquisition of LHP Hospital Group. The filing states the transaction and loan remained subject to customary closing conditions, with the acquisition expected in Q1 2017.
Outlook, risks and contingencies
- The filing does not provide a clear numerical full-year earnings or FFO guidance figure. Management described expected liquidity sources as operating cash flow, cash, debt and equity issuance, asset dispositions, and revolver borrowings; it cautioned that inability to access multiple sources could materially affect the company.
- Key exposures include tenant/operator financial health and lease renewal or performance, especially Brookdale, Kindred and Ardent; senior-housing occupancy, labor and other operating costs; interest rates and refinancing; healthcare reimbursement and regulation; competition and development; foreign exchange; and access to capital markets.
- Brookdale, Kindred and Ardent represented 8.0%, 1.7% and 5.1% of gross real-estate investment, respectively. California accounted for more than 10% of revenue and NOI. The company warns that tenant or operator failures could impair cash flows, debt service and distributions.
- A $10.3 million impairment was recognized in the first nine months related to the seven Kindred LTAC properties; total real-estate impairments were $14.5 million. Legal matters are described, but management believed currently pending matters would not individually or collectively have a material adverse effect; outcomes remain uncertain.
- Management reported effective disclosure controls as of September 30, 2016, and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether Wexford’s acquisition, development pipeline and financing yield support returns after considering the substantial equity issuance and integration costs.
- Whether same-store operating trends, especially senior living occupancy and office NOI, improve or weaken, and how labor-cost pressure develops.
- Credit condition and lease coverage of major tenants and operators, along with the status and performance of the Kindred portfolio after the LTAC sale and rent reallocation.
- Debt refinancing needs, interest-rate sensitivity, revolver availability and the outcome of the proposed $700 million Ardent financing.
- How much reported earnings growth reflects recurring operations versus disposals, tax benefits, impairments, acquisition costs, discontinued operations and other adjustments; compare GAAP EPS with normalized FFO and cash flow.