Ventas, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Ventas is a healthcare and seniors-housing REIT with more than 1,600 properties across the U.S., Canada and the U.K., operating through triple-net leasing, senior living and medical office building (MOB) businesses.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $884.0 million | $741.5 million; up 19.2% |
| Net income attributable to common stockholders | $120.4 million | $121.0 million; down 0.5% |
| Diluted EPS | $0.37 | $0.41 |
| Operating cash flow | $344.2 million | $284.4 million |
| Company-defined NOI | $535.9 million | $450.2 million; up 19.0% |
| Normalized FFO (non-GAAP) | $387.5 million | $323.4 million; up 19.9% |
| Cash dividends declared per share | $0.79 | $0.725; 9% increase |
- NOI as a share of revenue was approximately 60.6%, versus 60.7% in Q1 2014. This is a derived ratio using the company’s non-GAAP NOI and reported revenue.
- Segment NOI increased 11.9% in triple-net leasing, 21.0% in senior living and 25.2% in MOB operations. Same-store NOI growth was much more modest: 2.0%, approximately flat and 0.8%, respectively.
- Senior living occupancy was 91.3% overall versus 90.6%; same-store occupancy was 91.1% versus 90.6%. Average monthly revenue per occupied room across all communities fell to $5,248 from $5,541; same-store revenue per occupied room rose to $5,682 from $5,553.
Balance sheet, liquidity and cash flow
- At March 31, total assets were $24.44 billion, total debt was $11.60 billion and total equity was $11.11 billion. Debt increased from $10.89 billion at year-end 2014.
- Cash and cash equivalents were $120.2 million; escrow deposits and restricted cash were $223.8 million. The company reported $1.5 billion of unused revolving-credit capacity, with $451.9 million drawn and $13.3 million of letters of credit outstanding.
- Operating cash flow rose 21.0%. Investing used $908.5 million, principally reflecting $1.1 billion of real estate investment; financing provided $629.5 million. Ending cash was $120.2 million, up from $55.3 million at year-end.
- Debt maturities totaled $743.1 million for the remainder of 2015, including $634.4 million of senior notes identified as a liquidity need over the next 12 months. The revolving facility matures in 2018, with an option to extend for one year.
- About 16.4% of consolidated debt was variable rate. Management estimated that a 100-basis-point increase in rates, assuming debt levels unchanged, would add about $18.9 million to 2015 interest expense, or $0.06 per diluted share.
Material changes and unusual items
- Ventas acquired Healthcare Trust, Inc. (HCT) in January, adding 152 properties. Consideration included approximately 28.4 million Ventas shares, redeemable units and cash; Ventas also assumed approximately $167 million of mortgage debt and repaid approximately $730 million of HCT debt. Acquisition-related assets included $665.8 million of goodwill.
- Other 2015 investments totaled approximately $320 million. Acquisitions drove much of the revenue and segment growth; same-store results were considerably slower. Senior living same-store NOI was essentially unchanged.
- Merger-related expenses and deal costs rose to $35.2 million from $10.8 million, including $33.5 million of acquisition-related costs incurred for completed 2015 acquisitions. Depreciation and amortization increased 27.8%, partly due to acquisitions and $19.2 million of impairment charges, versus $4.8 million in Q1 2014.
- Ventas sold 21 triple-net properties and 22 MOBs for $336.7 million, including a $5.0 million lease termination fee. It reported $28.2 million of net-of-tax gains, of which $21.4 million was deferred in connection with a buyer loan. A further $153.9 million of sale proceeds was held in a 1031 exchange escrow.
- January debt issuance included $900 million of U.S.-dollar notes and CAD 250 million of Canadian notes. Ventas also raised $285.4 million net from an at-the-market stock sale, increasing the share count.
- Net income was nearly flat despite revenue growth, reflecting higher interest, depreciation, merger costs and lower discontinued-operations income. Normalized FFO is a company-defined non-GAAP measure and excludes specified items; it should not be treated as GAAP earnings or operating cash flow.
Outlook, risks and contingencies
- The filing provides no numerical full-year earnings or FFO guidance. Management said near-term liquidity needs include debt service and maturities, capital expenditures, distributions, investments and the pending Ardent transaction; it expects to use operating cash flow, cash, financing, securities issuance and asset dispositions.
- In April 2015, Ventas announced a planned tax-free spin-off of 353 post-acute/skilled-nursing and other healthcare assets, expected in the second half of 2015, subject to approvals and other conditions. It also agreed to acquire Ardent Health Services for $1.75 billion in cash, with closing expected mid-year, subject to customary conditions. These were post-quarter developments, not completed Q1 transactions.
- Tenant, operator and manager concentration remains material. Atria and Sunrise managed or operated 21.1% and 11.0% of real estate investments by gross book value; Brookdale and Kindred represented 8.2% and 2.0%. The company cautions that tenant or operator financial distress, lease nonrenewal or operating failures could impair rent, liquidity and distributions.
- Healthcare reimbursement and regulation are key risks. Post-quarter CMS proposed a 4.6% FY2016 payment-rate decrease for long-term acute-care hospitals and a 1.4% increase for skilled-nursing facilities; Ventas was assessing the effects on operators. These were proposed rules, not final actions.
- Thirteen lawsuits challenged the HCT acquisition. Settlement memoranda were reached, but court approval and final settlement remained uncertain. Management stated that other pending matters were not expected to have a material adverse effect, while noting litigation outcomes cannot be assured.
- Management reported effective disclosure controls as of March 31. It noted that financial reporting procedures for newly acquired HCT properties were being monitored during the transition period and could not be assured to be correct in all respects.
Important facts for investors to verify
- Whether HCT integration delivers durable operating gains, particularly given the gap between reported segment growth and modest same-store NOI growth.
- Ardent acquisition financing, closing conditions and the planned separation and sale of hospital operations; also the spin-off’s timing, tax treatment and resulting capital structure.
- Debt refinancing and liquidity needs, especially 2015 maturities, interest-rate exposure and the capacity to fund acquisitions and dividends.
- Tenant/operator credit and reimbursement exposure, including developments affecting Kindred, Brookdale, Atria, Sunrise and skilled-nursing and long-term acute-care providers.
- The treatment of acquisition costs, impairments, disposition gains and other exclusions in normalized FFO, and the reconciliation of that non-GAAP measure to GAAP results.