Ventas Tops Q3 FFO, Guides High

Zacks

Ventas Inc.’s (VTR) third-quarter 2013 normalized funds from operations (:FFO) per share of $1.04 exceeded the Zacks Consensus Estimate of $1.02 by nearly 2% and the year-ago quarter figure by 8.3%.

Including the non-recurring items, FFO in the reported quarter stood at $1.03 per share, up 6.2% from 97 cents in the year-ago quarter.

Quarterly results at this healthcare real estate investment trust (:REIT) were driven by strategic investments made this year and last year. In particular, the company experienced an uptick in net operating income in its private pay seniors housing communities, triple-net lease portfolio and medical office building segment.

Also, the company benefited from a decline in weighted average interest rates and lower share count. These positives were partly dwarfed by higher debt balances, asset sales and receipt of loan repayments.

Ventas has raised its outlook for full-year 2013, backed by its solid business model, strategic efforts and accretive acquisitions. Recently, the company also crafted a favorable lease extension deal with its tenant Kindred Healthcare Inc. (KND).

Total revenue during the quarter reached $712.4 million, escalating 11.5% year over year. Revenues also exceeded the Zacks Consensus Estimate of $677 million.

Behind the Headline Numbers

As of Sep 30, 2013, Ventas had an operating portfolio of 140 seniors housing communities managed by Atria and 95 seniors housing communities managed by Sunrise, leading to a total of 235 seniors housing operating portfolio (7 of them acquired in Q3). Net Operating Income (:NOI) for this portfolio after management fees stood at $114.7 million.

Average unit occupancy for the 212 private pay seniors housing communities climbed 110 basis points year over year to 91.5% in the quarter under review. Same-store NOI after management fees escalated 4.4% while REVPOR (revenue per occupied room) increased 3.6% year over year.

Notable Activities

Since the beginning of the third quarter, Ventas made investments worth around $1.3 billion. These were mainly in private pay seniors housing communities and medical office buildings (MOBs). In addition, during the quarter, Ventas disposed assets and received final repayments on outstanding loans aggregating $81.5 million.

Liquidity

As of Sep 30, 2013, Ventas had $448.0 million of borrowings outstanding under its $2 billion unsecured revolving credit facility and $54.7 million of cash and cash equivalents.

Moreover, the company’s current debt to total capitalization is 32%. Its fixed charge coverage ratio was 4.3x in third-quarter 2013 and net debt to adjusted pro forma EBITDA (earnings before interest, tax, depreciation and amortization) was 5.6x as Sep 30, 2013.

Notably, Ventas sold $850 million worth of senior notes in September 2013 and reaped $51.6 million in proceeds from its common stock sale since July under its at-the-market” equity offering program (of this $27.9 million raised in Q4). Such moves enhanced the company’s liquidity. The company also received a rating upgrade from Moody’s Investors Service of Moody's Corporation (MCO) on its senior unsecured debt to Baa1 (stable) in Aug 2013.

Kindred Deal

Ventas crafted a favorable lease extension deal with its tenant Kindred Healthcare. The move will ensure that the company receives majority (two-thirds) of its existing rent for the 2015 renewals and offers a way for re-leasing the rest of the assets.

Specifically, Ventas’ deal helped extend leases on 48 of the 108 licensed healthcare assets (86 skilled nursing facilities (SNFs) and 22 long-term acute care hospitals). The lease term for these assets was scheduled to expire on Apr 30, 2015. Ventas managed to increase the annual rent on these 48 assets by $15 million from Oct 1, 2014, while it would receive $20 million from Kindred (to be recognized as rent over the life of the new and renewed leases).

Guides High

Ventas now projects normalized FFO per share in the range $4.12 – $4.14, up from the prior range of $4.06 – $4.10.

NOI for its total 236 Atria- and Sunrise-managed seniors housing communities, including 15 communities bought year to date, are expected in the range of $447 million – $451 million for 2013. Moreover, the company projects same-store NOI growth of 5% – 6% for the 195 communities owned by the company.

Our Take

We expect Ventas to benefit from its diversified portfolio, growing healthcare spending and aging population. Strategic acquisitions, favorable lease deals and decent cash flows would provide the tempo for riding on the growth trajectory. Yet, a large portion of its revenue originates from a few tenants, which exposes it to concentration risk.

Ventas currently has a Zacks Rank #3 (Hold). We now look forward to the results of the other healthcare REIT – HCP Inc. (HCP), carrying a Zacks Rank #3, that is scheduled to report next week.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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