Ventas, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual report; the filing also reports unaudited fourth-quarter results. Ventas is a healthcare and seniors housing REIT operating across the United States, Canada and the United Kingdom.
Business context and portfolio
Ventas reported approximately 1,300 properties, including unconsolidated investments and properties held for sale, across seniors housing, medical office buildings (MOBs), life science and innovation centers, skilled nursing facilities, and hospitals. Its three reporting segments are triple-net leased properties, senior living operations and office operations.
In September 2016, Ventas acquired substantially all of Wexford’s university-affiliated life science and innovation real estate assets for approximately $1.5 billion. The acquisition added 23 operating properties, two development assets and nine future development sites.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $3.444 billion | $3.286 billion | +4.8% |
| Income from continuing operations | $554.2 million | $389.5 million | +42.3% |
| Net income attributable to common stockholders | $649.2 million | $417.8 million | +55.4% |
| Diluted EPS | $1.86 | $1.25 | +48.8% |
| Segment NOI | $2.001 billion | $1.875 billion | +6.7% |
| FFO attributable to common stockholders | $1.441 billion | $1.365 billion | +5.5% |
| Normalized FFO attributable to common stockholders | $1.439 billion | $1.494 billion | -3.7% |
| Cash from operating activities | $1.367 billion | $1.392 billion | -1.7% |
GAAP interest expense was $419.7 million, up 14.3% from $367.1 million. Segment NOI was approximately 58% of revenue in 2016; NOI is a company-defined non-GAAP measure. Senior living operations NOI grew 0.4%, triple-net NOI grew 8.5%, and office operations NOI grew 11.1%. Same-store NOI growth was 3.2% in triple-net, 2.0% in senior living and approximately flat in office operations.
Senior living occupancy declined to 90.3% from 91.2%, while average monthly revenue per occupied room rose to $5,474 from $5,255. Same-store office occupancy was 90.6% versus 91.2%; total office portfolio occupancy was 91.7% in both years. Triple-net seniors housing occupancy was 88.2% in both periods; skilled nursing occupancy declined to 79.9% from 81.4%.
At year-end, total assets were $23.17 billion, cash and cash equivalents were $286.7 million, and debt on the balance sheet was $11.13 billion. Ventas also reported $80.6 million of escrow deposits and restricted cash and $1.8 billion of unused revolving-credit capacity. Debt covenant compliance was reported. Operating cash flow was below the $1.683 billion of reported capital expenditures, including real estate investment and development spending; investing activities used $1.235 billion, while financing activities provided $101.7 million.
The company paid $2.965 per common share in 2016 dividends; fourth-quarter dividend was $0.775 per share. The board declared a first-quarter 2017 dividend of $0.775 per share. Management said it expected to distribute at least 100% of 2017 taxable net income after available net operating loss carryforwards, but did not provide earnings or FFO guidance.
Material changes and notable items
- Total revenue and NOI increased, supported by acquisitions, contractual rent escalations and portfolio growth. The Wexford acquisition was a major addition to office operations.
- Net income included $98.2 million of gains on real estate dispositions, compared with $18.6 million in 2015. Ventas also recognized $9.6 million of gains on loan repayments.
- Normalized FFO declined year over year, principally because 2015 included results from properties later spun off to Care Capital Properties (CCP); acquisitions and loan income partly offset that effect. Normalized FFO is a non-GAAP measure and its adjustments may include items that recur.
- Ventas issued 18.9 million common shares and received approximately $1.3 billion net proceeds in 2016, principally helping fund the Wexford acquisition. It issued $850 million of senior notes in 2016 and repaid or redeemed 2016-maturity notes.
- Kindred extended certain LTAC leases through 2025 at current rent. For 36 Ventas-owned skilled nursing facilities operated by Kindred, the agreement provides for Kindred either to purchase them for $700 million or renew the lease through 2025 at current rent.
Outlook, risks and contingencies
Near-term liquidity needs include operating costs, debt service, capital spending, investment commitments, distributions and repayment of maturing debt, including $300 million of senior notes due in 2017. Contractual debt obligations, including interest, totaled $14.44 billion; $1.03 billion was scheduled within one year as of December 31, 2016. Management expected to meet liquidity needs through operating cash flow, cash, financing, equity issuance and asset dispositions, while cautioning that constrained capital-market access could adversely affect the company.
Key risks include dependence on senior living managers Atria and Sunrise and material tenants Brookdale, Kindred and Ardent; tenant/operator credit and lease-renewal risk; labor costs and occupancy; healthcare reimbursement, regulation and possible changes to the Affordable Care Act; new seniors housing supply; interest rates, refinancing and capital-market access; and execution and integration of acquisitions and development. California represented 13.8% of NOI, the largest state concentration disclosed.
Ventas committed to a proposed $700 million, five-year, LIBOR-based secured loan to an Ardent subsidiary, initially priced at approximately 8.0%, to support Ardent’s planned acquisition of LHP. The transaction and loan remained subject to closing conditions; Ventas cautioned completion was not assured. The filing also reports $35.2 million of real estate impairments in 2016, primarily in triple-net properties, and a $52.3 million foreign-currency translation loss, primarily related to U.K. properties.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end. The filing identifies no material pending legal proceeding beyond matters discussed in its commitments and contingencies note.
Most important facts for investors to verify
- Whether Kindred completes the $700 million SNF purchase or renews the leases, and the effect on rent, asset value and transition risk.
- Whether Ardent’s LHP acquisition and Ventas’s conditional $700 million loan close, and the resulting borrower and credit exposure.
- Brookdale, Kindred, Atria and Sunrise operating performance and credit quality, including rent coverage, occupancy and lease or management agreement terms.
- Senior living occupancy and same-store NOI trends, labor-cost growth, and the impact of new competing supply.
- Debt maturities, refinancing costs, interest-rate sensitivity, covenant headroom and access to the revolving facility and capital markets.
- The contribution of disposition gains and non-GAAP adjustments to reported earnings and FFO, and the impact of 2016 share issuance on per-share results.
- The sustainability of the dividend relative to cash generation, capital needs and REIT distribution requirements.