01—Abstract
Summary
Summary of the 10-K filed March 1, 2005. Cited figures are marked; the original filing is the authoritative source.
Ventas, Inc. (NYSE: VTR) is a healthcare REIT that owns 201 skilled nursing facilities, 40 hospitals, 30 senior housing facilities and 16 other facilities in 39 states as of December 31, 2004, and had real estate loan investments relating to 25 additional facilities.
Kindred Healthcare leased 225 of its facilities and accounted for 81.2% of total revenues in 2004, down from 93.5% in 2003, reflecting the company's diversification efforts. Total revenues rose to $236.9 milliona in 2004 from $194.7 million in 2003, and net income was $120.9 million, or $1.43 per diluted share, compared with $162.8 million, or $2.03 per diluted share, in 2003. The 2003 result included a $20.2 million reversal of a contingent liability and a $51.8 million net gain on property sales in discontinued operations, while 2004 included $19.4 million of gains from two property sales.
During 2004 the company acquired ElderTrust for $184.0 millionb, 15 Brookdale-leased facilities for $157.4 million, and 11 other facilities for $109.2 million, funded in part by a $125 million 6 5/8% senior notes offering due 2014 and a new $300 million secured revolving credit facility. Total indebtedness was $843.2 million at year-end, and cash and cash equivalents fell to $3.4 million from $82.1 million. Dividends declared were $1.30 per share for 2004, and the company declared a first-quarter 2005 dividend of $0.36 per share.
Management states it expects to distribute 100% or more of 2005 taxable income, and the company qualifies as a REIT. Key risks highlighted in the filing include dependence on Kindred's ability to meet its lease obligations, the Medicare and Medicaid reimbursement environment for operators (including a proposed FY2006 SNF RUGS refinement the filing says could reduce Medicare payments), and the company's sensitivity to interest rates, which it manages with a $330 millionc notional interest rate swap. The filing also notes pending litigation, including a stockholder derivative suit and a counterclaim by Black Diamond, with no provision recorded at year-end.
02—Key points
Key Highlights
- Total revenues increased 21.6% to $236.9 million in 2004 from $194.7 million in 2003, driven primarily by rental income growth from acquisitions and Kindred lease escalators.
- Net income declined to $120.9 million ($1.43 per diluted share) from $162.8 million ($2.03 per diluted share), largely because 2003 included a $20.2 million reversal of a contingent liability and larger discontinued-operations gains.
- Kindred accounted for 81.2% of 2004 total revenues, down from 93.5% in 2003, as the company diversified through acquisitions.
- The company acquired ElderTrust ($184.0 million), 15 Brookdale-leased facilities ($157.4 million) and 11 other facilities ($109.2 million) during 2004.
- Total indebtedness was $843.2 million at December 31, 2004, up from $640.6 million, including $125 million of new 6 5/8% senior notes due 2014 and a new $300 million revolving credit facility.
- Dividends declared per share rose to $1.30 in 2004 from $1.07 in 2003, and the company declared a $0.36 quarterly dividend for the first quarter of 2005.
- Management's internal control assessment concluded that internal control over financial reporting was effective as of December 31, 2004, with an unqualified opinion from Ernst & Young LLP.
03—Questions
Frequently Asked Questions
How dependent is Ventas on Kindred Healthcare?
Very dependent. Kindred leased 225 of the company's facilities and accounted for approximately 81.2% of 2004 total revenues, down from 93.5% in 2003. The filing states that Kindred's inability or unwillingness to meet its obligations could have a material adverse effect on the company's ability to service debt and make REIT distributions.
What drove the decline in net income in 2004?
Net income fell to $120.9 million from $162.8 million. The filing attributes the decline mainly to the absence of the $20.2 million reversal of a contingent liability recorded in 2003, a $9.0 million gain on the sale of Kindred common stock in 2003 that did not recur, and a lower net gain on property sales within discontinued operations ($19.4 million in 2004 versus $51.8 million in 2003). Rental income growth partly offset these items.
How is the company financing its acquisitions and what is its debt position?
The company funded 2004 acquisitions with cash on hand and borrowings under its revolving credit facility, and it issued $125 million of 6 5/8% senior notes due 2014. Total senior notes payable and other debt was $843.2 million at year-end 2004. The filing reports unused revolving credit availability of $251.3 million and notes that a 100 basis point rate change would affect the fair value of its fixed-rate debt, which it estimates at $636.0 million.
Is the dividend sustainable and does the company remain a REIT?
The filing states that the company declared dividends of $1.30 per share for 2004, above the 90% REIT distribution requirement, and expects to distribute 100% or more of 2005 taxable income. It states the company believes it qualifies as a REIT, but notes that REIT status depends on continuing to meet distribution, ownership and asset tests, and that failure would have a material adverse effect.
What are the main regulatory risks affecting tenants?
The filing describes Medicare and Medicaid reimbursement changes as the primary risk. It cites the proposed 2006 LTAC PPS rule (a combined 5.5% increase if finalized), a 2.8% SNF PPS increase effective October 1, 2004, and a proposed FY2006 budget assumption that RUGS refinement could reduce Medicare payments to SNFs by about $1.5 billion in FY2006. It also notes that Medicaid rate freezes or cuts could materially affect SNF operators.
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