Ventas, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2012. Ventas is a healthcare and seniors housing REIT; it owned 1,450 properties across 46 states, the District of Columbia and two Canadian provinces. Its portfolio included seniors housing, skilled nursing and other facilities, medical office buildings, and hospitals. Comparisons with 2011 are substantially affected by the 2011 NHP and ASLG acquisitions and the 2012 Cogdell acquisition and other property purchases.
Financial performance and position
Amounts below are in millions, except per-share data. Comparisons are year over year.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $616.4 | $359.5 | $1,187.6 | $626.0 |
| Income from continuing operations | $42.3 | $18.5 | $89.6 | $66.6 |
| Net income attributable to common stockholders | $74.0 | $19.7 | $164.7 | $68.7 |
| Diluted EPS, continuing operations | $0.14 | $0.10 | $0.31 | $0.39 |
| Diluted EPS, total | $0.25 | $0.11 | $0.56 | $0.40 |
| Segment NOI, excluding discontinued operations | $375.2 | $207.3 | $726.7 | $381.4 |
| Normalized FFO, non-GAAP | $277.8 | $141.5 | $541.7 | $262.6 |
- Q2 revenue rose about 71%; six-month revenue rose about 90%. Growth was driven mainly by acquired properties, including NHP, ASLG and Cogdell. Total segment NOI increased 81% in Q2 and 91% for the first half.
- Reported net income includes substantial gains from property dispositions: $38.6 million in Q2 and $78.8 million for the first half. Discontinued operations were $31.5 million and $74.2 million, respectively. These gains materially contribute to the increase in reported earnings.
- Same-store performance was more modest: Q2 triple-net NOI rose 2.5%; same-store stabilized senior living NOI fell 2.0% in Q2 but rose 2.3% for the first half; same-store stabilized MOB NOI rose 1.0% in Q2 and was down 0.2% for the first half.
- Operating cash flow was $460.8 million for the first half, versus $186.3 million a year earlier. Investing cash outflow was $975.1 million and financing cash inflow was $521.2 million. Cash ended the period at $52.8 million.
- At June 30, total debt and capital lease obligations were $7.20 billion, up from $6.43 billion at year-end 2011. Restricted cash and escrow deposits were $114.9 million; the revolving facility had $1.63 billion of unused capacity. The filing reports 18.4% of consolidated debt as variable rate.
- Total assets were $18.22 billion and total liabilities were $8.58 billion. The filing does not provide a clear debt-to-earnings leverage ratio in the supplied text.
Material changes, outlook and risks
- Acquisitions and portfolio actions: Ventas acquired Cogdell on April 2, including 71 assets and a MOB management business, for an investment of approximately $760 million including its share of debt. It also purchased 16 Sunrise-managed seniors housing communities for approximately $362 million and made other investments. It sold 22 seniors housing communities during the first half, recognizing disposition gains.
- Debt and equity financing: Ventas issued $600 million of 4.25% notes due 2022 and $600 million of 4.00% notes due 2019; redeemed $200 million of 6.5% notes and $225 million of 6.75% notes at premiums; and repaid $82.4 million of 9% notes at maturity. Debt-extinguishment losses totaled $39.5 million in the first half. A subsequent July repayment of $73 million of NHP notes is disclosed. In June, Ventas issued 5.98 million shares and received $342.5 million, partly to repay revolver borrowings.
- Kindred lease rollover: Of 89 properties with leases expiring April 30, 2013, 25 were renewed and a new 10-year lease was agreed for 10 long-term acute care hospitals. The remaining 54 skilled nursing facilities, with approximately $57 million of current annual rent, were being marketed to replacement operators. Ventas cautioned that re-leasing may be delayed or achieved on less favorable terms and may require added costs.
- Dividend: The Board declared quarterly dividends of $0.62 per share for the first and second quarters. Management described this as an 8% increase over the 2011 regular quarterly dividend. Cash distributions to common stockholders were $362.0 million in the first half.
- Liquidity and commitments: Management expected operating cash flow, cash, debt and equity financing, asset-sale proceeds, loan repayments and revolver capacity to meet operating, debt-service, investment, development and distribution needs. Development commitments were estimated at $190–$210 million in total; $112 million had been funded by June 30. Debt maturities shown for the remainder of 2012 totaled $128.2 million and for 2013 totaled $948.9 million, before considering subsequent repayments and other refinancing actions.
- Operating and regulatory risks: Senior living same-store margins faced higher management fees and operating costs; same-store MOB occupancy was slightly lower year over year. Medicare reimbursement changes, healthcare regulation, interest rates, capital-market access, foreign exchange and the financial condition of tenants, operators and managers could affect results. A proposed LTAC reimbursement rule was not final at the filing date.
- Concentration and contingencies: Atria, Sunrise, Brookdale and Kindred managed or operated 18.2%, 15.6%, 11.5% and 4.7% of real estate investments, respectively. Kindred and Brookdale tenant exposure and reliance on third-party managers are material risks. NHP and Cogdell shareholder litigation settlements remained subject to court approval or documentation; Ventas said it believed the actions were without merit. Management reported disclosure controls were effective, while noting that Cogdell integration controls could not be assured to be error-free during the transition period.
- No specific full-year earnings or FFO guidance is stated in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of revenue, NOI and reported earnings growth reflects acquisitions versus organic same-store performance, and how disposition gains affect comparisons.
- Progress and expected economics for re-leasing the 54 Kindred properties expiring in 2013, including licensing, transition costs and tenant/operator credit quality.
- Debt refinancing plans and financing costs for upcoming maturities, as well as the effect of interest-rate changes on variable-rate borrowings.
- Whether the stated development commitments, acquisition spending and dividends remain supportable by recurring operating cash flow and available capital.
- Final LTAC Medicare reimbursement rules, pending litigation outcomes, tax-asset realizability and the effectiveness of Cogdell integration controls.