Helped by growth in revenues, Ventas Inc.’s (VTR) second-quarter 2014 normalized funds from operations (FFO) of $1.12 per share came nearly 4% ahead of the Zacks Consensus Estimate of $1.08 per share and 11% above the year-ago quarter figure of $1.01. The company has also increased its full-year 2014 normalized FFO per share outlook.
Quarterly results of this healthcare real estate investment trust (REIT) were driven by strategic investments, same-store growth in its portfolio, fees receipt and other income. The benefits were, however, partly dwarfed by increased general and administrative expenses, asset sales and loan repayments.
Total revenue during the quarter reached $751.3 million, rising nearly 10% year over year. Revenues also exceeded the Zacks Consensus Estimate of $739 million.
Behind the Headline Numbers
As of Jun 30, 2014, Ventas had seniors housing operating portfolio of 239 communities managed by Atria and Sunrise. Net operating income (NOI) for this portfolio after management fees came in at $125.0 million, denoting a 13.5% rise from the year-ago period, with average unit occupancy of 90.3% for the second quarter.
Notably, from the 198 stabilized private pay seniors housing communities that the company owned in the U.S., same-store NOI after management fees climbed 6.6% year over year (REVPOR – revenue per occupied room – moved north 2.8%). For the 206 communities owned in the U.S., same-store NOI after management fees grew 6.0% year over year.
Notable Activities
Since Apr 1, 2014, Ventas invested a sum of over $250 million (excluding development and redevelopment projects) and disposed ten properties. Moreover, the company currently has $182 million worth of development and redevelopment projects underway.
During the second quarter, Ventas inked an agreement to acquire its competitor, American Realty Capital Healthcare Trust Inc. (HCT) in a stock and cash deal worth $2.9 billion. The deal is expected to be funded with Ventas’ common stock valued at $67.13 per share (for total consideration of $1.8 billion–$2.0 billion), cash and debt assumption. The transaction is, however, subject to HCT shareholders’ nod and satisfaction of customary closing norms.
Additionally, Ventas disclosed a deal to purchase 29 independent seniors housing communities from Holiday Retirement in Canada for $957 million Canadian dollars (approximately $897 million). This acquisition is anticipated to be accomplished shortly.
Liquidity
Ventas currently has an availability of $1.8 billion under its revolving credit facility, 803 million Canadian dollars in cash funded for the Holiday purchase as well as $295 million of cash on hand. As of Jun 30, 2014, Ventas’s debt to total capitalization was 34%.
Reaffirmed 2014 Outlook
Ventas has increased its 2014 normalized FFO per share guidance to $4.39 – $4.43 from the prior projection of $4.31 – $4.37, reflecting around 7% – 8% per share growth in 2014, excluding non-cash items. The Zacks Consensus Estimate of $4.42 per share for 2014 also lies within this range.
Our Take
We are encouraged by a better-than-expected second-quarter performance from Ventas. We believe that the company would benefit from its diversified portfolio, and increasing healthcare spending and aging population in the U.S. Further, strategic acquisitions and decent cash flows would add momentum to the company’s growth.
Particularly, the deals with American Realty Capital Healthcare and Holiday would enhance Ventas’ already sturdy presence in the healthcare REIT sector. These deals, in sync with the company’s strategy of focusing on the private pay properties, are also strengthening its medical-office buildings footprint as well as international existence.
Yet, an expected rise in the interest rate in the long run and the company’s substantial exposure to long-term leased assets, remain our concerns.
Ventas currently has a Zacks Rank #3 (Hold). Investors interested in the REIT industry may consider better-ranked stocks like Omega Healthcare Investors Inc. (OHI) and DCT Industrial Trust Inc. (DCT). Both these stocks carry a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.
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