Ventas, Inc. — FY 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; the filing also provides fourth-quarter results. Ventas is a healthcare and seniors housing REIT operating through triple-net leased properties, senior living operations, and medical office building (MOB) operations. At year-end it owned more than 1,400 properties across 46 U.S. states, the District of Columbia, and two Canadian provinces.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $2.485 billion | $1.744 billion |
| Net income attributable to common stockholders | $362.8 million | $364.5 million |
| Diluted EPS | $1.23 | $1.58 |
| Income from continuing operations attributable to common stockholders | $305.6 million; $1.04 diluted EPS | $363.1 million; $1.57 diluted EPS |
| Net cash provided by operating activities | $992.8 million | $773.2 million |
| FFO / normalized FFO | $1.025 billion / $1.120 billion | $824.9 million / $777.0 million |
| Segment NOI | $1.505 billion | $1.068 billion |
| Debt, including capital lease obligations | $8.414 billion | $6.429 billion |
| Cash and cash equivalents | $67.9 million | $45.8 million |
Revenue grew 42.6%, while common-stockholder net income was nearly flat and diluted EPS declined. Operating cash flow increased 28.4%. Net cash used in investing was $2.170 billion, primarily reflecting property acquisitions, loans, and development; financing activities provided $1.199 billion. The year-end balance sheet reported $18.980 billion in assets and $9.716 billion in liabilities. Ventas also reported $105.9 million in escrow deposits and restricted cash and $1.45 billion of available capacity under its revolving credit facility.
Senior living operations NOI was $386.3 million, triple-net NOI was $835.7 million, and MOB NOI was $243.1 million. Same-store NOI growth was more modest: 2.3% for triple-net properties, 1.2% for stabilized senior living communities, and approximately flat for stabilized MOBs. Senior living stabilized occupancy rose to 90.4% from 88.1%; total MOB occupancy was 90.5% versus 90.2%.
For Q4 2012, revenue was $660.7 million, continuing-operations income attributable to common stockholders was $98.0 million, net income attributable to common stockholders was $86.3 million, and diluted EPS was $0.29. The comparable Q4 2011 results included $193.0 million of net income attributable to common stockholders; the annual comparison is affected by 2011 litigation proceeds and changing discontinued-operations classifications.
Material changes versus the prior year
- Ventas completed approximately $2.7 billion of gross investments, including the Cogdell acquisition (approximately $760 million including debt), 16 Sunrise-managed communities (approximately $362 million), and additional MOB and senior housing investments.
- Acquisitions materially expanded reported revenue and segment NOI. Same-store performance was substantially slower than total growth.
- Common-stockholder net income declined slightly, and continuing-operations diluted EPS fell from $1.57 to $1.04. The 2011 comparison included $202.3 million of net litigation proceeds; 2012 included $81.0 million of net gains on property dispositions in discontinued operations.
- Interest expense increased to $293.4 million from $229.3 million, mainly reflecting higher debt balances, partly offset by a lower effective interest rate (4.0% versus 4.9%, excluding capital leases). The company also recorded a $37.6 million net loss on debt extinguishment and $63.2 million of merger-related expenses and deal costs.
- Ventas issued $2.4 billion of senior notes and entered a $180 million term loan, and completed a $342.5 million common-stock offering. It repaid or redeemed substantial unsecured and mortgage debt; year-end debt nevertheless increased, reflecting investment growth.
Outlook, risks, and unusual items
Ventas declared $2.48 per share in 2012 dividends, an 8% increase from 2011. In February 2013, the board declared a first-quarter dividend of $0.67 per share. Management expected 2013 liquidity needs—including debt service, capital expenditures, investments, and REIT distributions—to be met through operating cash flow, cash, financing, asset sales, and the revolving facility. The filing provides no explicit full-year 2013 earnings or FFO guidance.
A key near-term issue is the April 30, 2013 expiration of leases covering 89 Kindred properties. Kindred renewed or retained 35 properties; 49 of the remaining 54 skilled nursing facilities had new long-term leases, and five were under sale agreements. Ventas expected approximately $125 million of 2013 cash revenue and NOI from the 89 properties, assuming transitions and sales proceeded as planned. Regulatory approvals and operating transitions remained outstanding for most marketed properties. A further 108 Kindred properties had lease terms expiring in 2015.
Tenant and operator exposure remains material. Kindred represented 10.5% of 2012 revenue and 17.4% of NOI; Brookdale represented 6.4% of revenue and 10.5% of NOI. Atria and Sunrise-managed senior living operations collectively represented 49.6% of revenue. Approximately 20% of revenue and 30% of NOI came from skilled nursing and hospital properties whose operators depend on government healthcare reimbursement. The filing highlights reimbursement reductions, including a scheduled 2% Medicare payment reduction beginning April 1, 2013, as a potential risk.
Other principal risks include operators’ ability to pay rent and meet obligations, staffing and operating-cost pressures, lease renewals and repositioning, healthcare regulation, acquisitions and integration, interest rates and refinancing, insurance and liability claims, and maintaining REIT qualification. Ventas recorded $35.6 million of real estate impairment charges in 2012 and $13.9 million related to assets held for sale. The independent auditor issued an unqualified opinion; management and the auditor concluded internal control over financial reporting was effective, although Cogdell was excluded from the control assessment.
Important facts for investors to verify
- Whether the remaining Kindred property transitions and sales received required licenses and regulatory approvals, and whether the expected rent and NOI were achieved.
- Tenant and operator credit quality, particularly Kindred and Brookdale, as well as Atria and Sunrise management performance and continuity.
- How much of reported revenue, NOI, FFO, and cash-flow growth came from acquisitions versus same-store operating improvement; review the company’s non-GAAP definitions and reconciliations.
- Debt maturities, covenant compliance, interest-rate exposure, and the availability and cost of refinancing; the filing estimates a 100-basis-point increase in variable rates would reduce 2013 net income by about $16.4 million, or $0.06 per diluted share.
- Whether dividends remain supported by recurring cash generation, considering acquisition funding, debt service, required REIT distributions, and the board’s discretion over future payments.