Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q13 Earnings Update
Prev. Ed.: 4Q12 and 2012 Earnings Update, Feb 22, 2013
Brokers’ Recommendations: Neutral: 66.7% (10); Positive: 20.0% (3); Negative: 13.3% (2) Prev. Ed.: 9:4:1
Brokers’ Target Price: $75.00 (↑$6.80 from last edition, 11 firms) Brokers’ Avg. Expected Return: 5.1%
Note: A Flash Update on 1Q13 Earnings was done on Apr 26, 2013.
Portfolio Manager Executive Summary
Ventas, Inc. is a leading healthcare real estate investment trust (REIT) in U.S. The company is primarily engaged in the business of financing, owning and leasing healthcare related and senior housing facilities.
Trend of Broker Opinions: Broker sentiment on the stock remains skewed toward the neutral side, with 66.7% of the firms rating the stock neutral, 20.0% rating it positive and the remaining 13.3% rendering a negative rating. Target prices provided by the firms range from a low of $65.00 to a high of $88.00 per share. The average came in at $75.00, implying a positive return of 5.1%.
Neutral or equivalent outlook – Ten firms or 66.7% – While the firms are bullish on the long-term growth fundamentals of Ventas, they remain cautious over the near term due to stiff competition in the sector. A large portion of the company’s revenues is being determined by the government payout rates and consequently, forces beyond the company’s control could negatively affect revenue growth. Though the firms expect the company to make acquisitions, due to its improved liquidity and strong balance sheet, a reduction in financing could pose a threat to the near-term earnings growth.
Positive or equivalent outlook – Three firms or 20.0% – The bullish stance is based on the belief that the company is well-positioned to generate high return on capital and deliver operational efficiencies. Ventas also has a strong foothold in the senior housing sector. The company is guided by a dedicated and focused management team. Ventas has one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities. These firms believe that with strong quarterly results, the company is well-poised to enhance its shareholder value through dividend hikes. The firms also have a positive outlook on Ventas based on continuous growth in the senior housing sector, apt solid acquisition opportunities and renewal of expiring skilled nursing leases.
Negative or equivalent outlook – Two firms or 13.3% – We did not have access to the reports from the brokers giving a negative recommendation on the stock.
May 31, 2013
Overview
Headquartered in Chicago, Ventas, Inc. primarily engages in the business of financing, owning and leasing healthcare-related as well as senior housing facilities. As of Mar 31, 2013, the company had a portfolio of over 1400 properties, strategically located in 47 U.S. states (including the District of Columbia) and 2 Canadian provinces.
Ventas operates through 3 reportable segments: triple-net leased properties, senior living and medical office building (MOB) operations. The triple-net leased properties segment acquires, finances and owns senior housing and healthcare properties in the U.S. It also leases those properties to healthcare operating companies under ‘triple-net’ leases. The senior living segment comprises investments in senior housing communities across the U.S. and Canada, which are primarily managed by Sunrise Senior Living Inc. MOBs are typically multi-tenant properties leased to several different unrelated medical practices, although they can be associated with a large single-specialty or multi-specialty group.
Moreover, as of Mar 31, 2013, Kindred Healthcare Inc. and Brookdale Senior Living Inc. leased 182 properties and 148 properties (excluding six properties included in investments in unconsolidated entities) from Ventas, respectively. Moreover, independent operators such as Atria Senior Living Inc. and Sunrise Senior Living LLC managed 222 of its seniors housing communities (excluding properties classified as held for sale) pursuant to long-term management agreements.
Further information on the company is available on its website http://www.ventasreit.com/
Key investment considerations according to the firms are as follows:
Key Positive Arguments / Key Negative Arguments§ Ventas has one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities. This gives the company a competitive edge over its peers.
§ Ventas usually leases its healthcare facilities under "triple net" leases. This insulates the company from short-term market swings that may adversely affect the operations of a particular facility.
§ Ventas boasts a strong balance sheet with ample cash to fund further acquisitions.
§ Ventas have largely benefited from the accretive acquisitions of Sunrise and Atria senior living communities in 2012 which have resulted in potential synergies and superior operating platform. / § A considerable amount of Ventas’ income is generated by the government reimbursement rates. If the government reduces reimbursement rates through Medicare or Medicaid, revenues could fall in the future.
§ Ventas’ continuous acquisition spree involves significant upfront operating expenses which limits its near-term profitability.
§ A large portion of Ventas’ revenues is derived from few tenants, which exposes it to concentration risks. If any of the tenants face a financial downturn, the company’s growth could be restricted.
§ The company has an active development pipeline, which increases operational risks, exposing it to rising construction costs, entitlement delays, and lease-up risks.
Note: Ventas operates on a calendar year basis.May 31, 2013
Long-Term Growth
The firms believe that Ventas will benefit from the dynamic nature of healthcare sector, as it is relatively immune to the economic problems faced by office, retail and apartment companies. Consumers will continue to spend on healthcare, while curtailing discretionary purchases. Consequently, Ventas has a steady source of income that insulates it from any short-term market volatility.
Firms believe that the company is likely to benefit from its most diversified asset base in the healthcare REIT space. The company, with its financial flexibility, is expected to identify and acquire uniquely positioned assets, making its growth highly contingent on its aggressive acquisition strategy.
According to bullish firms, the company has an experienced management team, efficient in executing transactions of all risks and size, which enables it to capitalize on significant opportunities in the industry. Additionally, they expect strong operating fundamentals, low cost of capital and accretive acquisitions to drive earnings growth in the long term.
May 30, 2013
Target Price/Valuation
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 20.0%↓
Neutral / 66.7%↑
Negative / 13.3%↑
Average Target Price / $75.00↑
Maximum Upside from Current Price / 23.3%
Minimum downside from Current Price / 8.9%
Upside from Current Price / 5.1%
Digest High / $88.00↑
Digest Low / $65.00↑
No. of Analysts with target price/total / 11/15
Risks that could hinder in achieving the target price include uncertain credit performance from the company's tenants, risks related to government reimbursements and the uncertain timing of acquisitions and dispositions.
Recent Events
On Apr 26, 2013, Ventas reported its 1Q13 financial results. The company’s normalized funds from operations (FFO) reached $1.03 per share in the first quarter, 4.0% ahead of the Zacks Consensus Estimate of $0.99 and 13% above the year-ago FFO of $0.91 per share.
The results were primarily driven by the strategic investments in 2012. Ventas experienced an increase in net operating income in its private pay seniors housing communities managed by Atria and Sunrise, its triple-net lease portfolio and in its medical office building segment. However, a rise in expenses, higher debt levels and asset sales, as well as loan repayments acted as headwinds.
Including the non-recurring items, FFO in the reported quarter came in at $295.3 million or $1.00 per share, up from $214.8 million or $0.74 per share in the year-ago quarter.
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.
Revenue
According to the company, total revenue during 4Q12 rocketed 20.9% to $684.9 million from $566.4 million in the year-earlier quarter. This was primarily driven by substantial increases in total rental revenue, resident fees and services, and income from loans and investments.
In 1Q13, total rental revenue escalated 21.4% year over year to $324.9 million from $267.5 million in 1Q12. During the quarter, resident fees and services increased 18.9% year over year to $339.2 million from $285.2 million in 1Q12. Moreover, income from loans and investments doubled to $16.1 million in 1Q13 from $8.0 million in 1Q12. However, total medical office buildings service revenue during 1Q13 dipped 35.0% to $3.6 million from $5.6 million in the prior-year quarter.
Outlook
Some firms believe that a major part of the company’s revenues is derived from triple-net leases and assets that include senior housing and MOBs, which are expected to generate stable revenues in the long term, thereby preventing it from any short-term market fluctuations.
Margins
Total expenses in 1Q13 increased 11.1% to $565.3 million from $508.7 million in 1Q12. Property-level operating expense escalated 23.9% to $267.4 million in 1Q13 from $215.8 million in 1Q12. General administrative and professional expense jumped 29.6% to $28.8 million in 1Q13 from $22.2 million in 1Q12.
Same-store NOI (for the 195 private pay seniors housing communities) after management fees escalated 7.3% year over year to $96.3 million, which was driven by a rise in average unit occupancy of 270 basis points year over year to 91.1% and REVPOR (revenue per occupied room) increase of 3.2% year over year.
As of Mar 31, 2013, Ventas had an operating portfolio of 95 seniors housing communities managed by Sunrise and 125 seniors housing communities managed by Atria, leading to a total of 220 seniors housing operating portfolio. NOI for this portfolio increased 20.2% year over year to $108.1 million.
Outlook
Ventas continues to expect NOI for all its Sunrise and Atria-managed seniors housing operating portfolio to range from $430–$440 million for 2013, reflecting about 5%–8% same-store NOI growth.
Some of the firms are impressed with the performance of the senior housing operating portfolio and expect it to generate higher NOI growth going forward in 2013.
FFO Per Share
Ventas’ reported 1Q13 FFO of $301.6 million or $1.03 per share, up from $263.9 million or $0.91 per share in the year-earlier quarter. The increase was primarily attributable to the strategic investments in 2012. Additionally, results benefited from a rise in NOI in its private pay seniors housing communities managed by Atria and Sunrise; its triple-net lease portfolio and medical office building segment; and lower weighted average interest rates. However, a rise in expenses, elevated debt levels and asset sales, as well as loan repayments acted as headwinds.
Including the non-recurring items, FFO in the reported quarter came in at $295.3 million or $1.00 per share, up from $214.8 million or $0.74 per share in the year-ago quarter.
Outlook
Ventas has reiterated its normalized FFO per share guidance in the range $3.99–$4.07 for full-year 2013. Notably, this excludes the impact of unannounced acquisitions, divestitures and capital transactions.
Most of the firms increased their normalized FFO guidance for full-year 2013 on the back of expected increase in core senior housing portfolio margin and gain from accretive acquisitions.
Balance Sheet/Others
Balance Sheet & Liquidity
As of Mar 31, 2013, Ventas had $165 million of borrowings outstanding under its unsecured revolving credit facility and $58 million of cash and cash equivalents. Moreover, at quarter-end, debt to total capitalization stood at 28% and net-debt-to-adjusted-pro-forma-EBITDA (earnings before interest, tax, depreciation and amortization) was 5.3x.
The 173 skilled nursing facilities (SNFs) and long-term acute care hospitals (LTACs) that were master leased by Ventas to Kindred generated an EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) to actual cash rent coverage of 2.0x for the trailing 12-month period ended Dec 31, 2012.
During 1Q13, Ventas issued and sold senior notes worth $758.8 million, having a weighted average interest rate of 3.6% and an initial maturity of 15 years. The company used the proceeds from the offering to pay off its outstanding amounts under its unsecured revolving credit facilities. This improved its fixed to floating rate debt ratio and extended its average maturity schedule.
According to its planned strategy, Ventas sold portions of the higher yielding loans it originated in 4Q12. Further, the company projects to conclude the sale of an additional $100 million of this activity in the future, to control its overall loan investments and single borrower exposure.
Moreover, Ventas paid off in full, at par, its outstanding 6.25% senior notes worth $269.9 million during 1Q13. The notes carried an accruing interest at a GAAP (U.S. generally accepted accounting principles) rate of 1.75% and due in 2013.
During 1Q13, Ventas launched an “at-the-market” equity offering program (“ATM”) to facilitate selling common shares worth $750 million. The company generated total proceeds of roughly $5 million from selling off common shares under ATM. As of Apr 26, 2013, Ventas issued 1.1 million shares under the program at an average sales price above $74 per share and generated total gross proceeds of $83.7 million.
Notably, in Apr 2013, Standard & Poor’s Rating Services improved its outlook on the company’s corporate credit rating to “positive”. Currently, Ventas’s senior unsecured debt is rated BBB+ (stable) by Fitch Ratings, Baa2 (positive) by Moody’s Investors Service and BBB (positive) by S&P.
Investments & Dispositions
During 1Q13, Ventas made investments worth around $200 million in 10 assets. In these assets, the company previously had a non-controlling interest or was a tenant under a capital lease prior to the purchase. Such investments were on-campus and 100% leased to medical office buildings (MOBs) and private pay seniors housing communities with a yield of about 6.5%.
In addition, Ventas disposed assets, including loans, and got final repayment on outstanding loans, totaling $156 million in proceeds.
Dividend Update
On May 17, Ventas declared a quarterly dividend of $0.67 per share. The dividend is payable on Jun 28, 2013 to stockholders of record as of Jun 5. Notably, Ventas has increased its quarterly dividend payout by 8% to $0.67 per share in the prior quarter.