VENTAS, INC. Unless otherwise indicated or except where the context otherwise requires, the terms "we," "us" and "our" and other similar terms in Item 2 of this Quarterly Report on Form 10-Q refer toVentas, Inc. and its consolidated subsidiaries. Cautionary Statements Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements regarding our or our tenants', operators', borrowers' or managers' expected future financial condition, results of operations, cash flows, funds from operations, dividends and dividend plans, financing opportunities and plans, capital markets transactions, business strategy, budgets, projected costs, operating metrics, capital expenditures, competitive positions, acquisitions, investment opportunities, dispositions, merger integration, growth opportunities, expected lease income, continued qualification as a real estate investment trust ("REIT"), plans and objectives of management for future operations, and statements that include words such as "anticipate," "if," "believe," "plan," "estimate," "expect," "intend," "may," "could," "should," "will," and other similar expressions are forward-looking statements. These forward-looking statements are inherently uncertain, and actual results may differ from our expectations. We do not undertake a duty to update these forward-looking statements, which speak only as of the date on which they are made. Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with theSecurities and Exchange Commission ("SEC"). These factors include without limitation: •The severity, duration and geographical scope of the COVID-19 pandemic, the effects of the pandemic and measures intended to prevent its spread on our business, results of operations, cash flows and financial condition, including declines in rental revenues and increases in operating costs in our senior housing operating portfolio; deterioration in the financial conditions of our tenants and their ability to satisfy their payment obligations to us; constraints in our ability to access capital and other sources of funding; increased risk of claims, litigation and regulatory proceedings and uncertainty that may adversely affect us; and the ability of federal, state and local governments to respond to and manage the pandemic effectively; •The ability and willingness of our tenants, operators, borrowers, managers and other third parties to satisfy their obligations under their respective contractual arrangements with us, including, in some cases, their obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;
•The ability of our tenants, operators, borrowers and managers to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to third parties, including without limitation obligations under their existing credit facilities and other indebtedness;
•Our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate and integrate diversifying acquisitions and investments;
•Macroeconomic conditions such as a disruption of or lack of access to the capital markets, changes in the debt rating onU.S. government securities, default or delay in payment bythe United States of its obligations, and changes in the federal or state budgets resulting in the reduction or nonpayment of Medicare or Medicaid reimbursement rates;
•The nature and extent of future competition, including new construction in the markets in which our senior housing communities and office buildings are located;
•The extent and effect of future or pending healthcare reform and regulation, including cost containment measures and changes in reimbursement policies, procedures and rates;
•Increases in our borrowing costs as a result of changes in interest rates and
other factors, including the potential phasing out of London Inter-bank Offered
Rate ("LIBOR") after 2021;
34
--------------------------------------------------------------------------------
•The ability of our tenants, operators and managers, as applicable, to comply
with laws, rules and regulations in the operation of our properties, to deliver
high-quality services, to attract and retain qualified personnel and to attract
residents and patients;
•Changes in general economic conditions or economic conditions in the markets in
which we may, from time to time, compete, and the effect of those changes on our
revenues, earnings and funding sources;
•Our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due;
•Our ability and willingness to maintain our qualification as a REIT in light of economic, market, legal, tax and other considerations;
•Final determination of our taxable net income for the year ended
•The ability and willingness of our tenants to renew their leases with us upon expiration of the leases, our ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we exercise our right to replace an existing tenant, and obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant; •Risks associated with our senior housing operating portfolio, such as factors that can cause volatility in our operating income and earnings generated by those properties, including without limitation national and regional economic conditions, development of new competing properties, costs of food, materials, energy, labor and services, employee benefit costs, insurance costs and professional and general liability claims, and the timely delivery of accurate property-level financial results for those properties;
•Changes in exchange rates for any foreign currency in which we may, from time to time, conduct business;
•Year-over-year changes in the Consumer Price Index or theU.K. Retail Price Index and the effect of those changes on the rent escalators contained in our leases and on our earnings; •Our ability and the ability of our tenants, operators, borrowers and managers to obtain and maintain adequate property, liability and other insurance from reputable, financially stable providers;
•The impact of damage to our properties from catastrophic weather and other natural events and the physical effects of climate change;
•The impact of increased operating costs and uninsured professional liability
claims on our liquidity, financial condition and results of operations or that
of our tenants, operators, borrowers and managers and our ability and the
ability of our tenants, operators, borrowers and managers to accurately estimate
the magnitude of those claims;
•Risks associated with our office building portfolio and operations, including
our ability to successfully design, develop and manage office buildings and to
retain key personnel;
•The ability of the hospitals on or near whose campuses our medical office
buildings ("MOBs") are located and their affiliated health systems to remain
competitive and financially viable and to attract physicians and physician
groups;
•Risks associated with our investments in joint ventures and unconsolidated
entities, including our lack of sole decision-making authority and our reliance
on our joint venture partners' financial condition;
•Our ability to obtain the financial results expected from our development and redevelopment projects, including projects undertaken through our joint ventures;
•The impact of market or issuer events on the liquidity or value of our investments in marketable securities;
•Consolidation in the senior housing and healthcare industries resulting in a
change of control of, or a competitor's investment in, one or more of our
tenants, operators, borrowers or managers or significant changes in the senior
management of our tenants, operators, borrowers or managers;
35
--------------------------------------------------------------------------------•The impact of litigation or any financial, accounting, legal or regulatory issues that may affect us or our tenants, operators, borrowers or managers; and
•Changes in accounting principles, or their application or interpretation, and our ability to make estimates and the assumptions underlying the estimates, which could have an effect on our earnings.
Many of these factors are beyond our control and the control of our management.
Brookdale Senior Living, Kindred, Atria, Sunrise and Ardent Information
Brookdale Senior Living Inc. (together with its subsidiaries, "Brookdale
Senior Living") is subject to the reporting requirements of the SEC and is
required to file with the SEC annual reports containing audited financial
information and quarterly reports containing unaudited financial information.
The information related to Brookdale Senior Living contained or referred to in
this Quarterly Report on Form 10-Q has been derived from SEC filings made by
Brookdale Senior Living or other publicly available information, or was provided
to us by Brookdale Senior Living, and we have not verified this information
through an independent investigation or otherwise. We have no reason to believe
that this information is inaccurate in any material respect, but we cannot
assure you of its accuracy. We are providing this data for informational
purposes only, and you are encouraged to obtain Brookdale Senior Living's
publicly available filings, which can be found on the SEC's website at
www.sec.gov.
Kindred Healthcare, LLC (together with its subsidiaries, "Kindred"), Atria
Senior Living, Inc. ("Atria"), Sunrise Senior Living, LLC (together with its
subsidiaries, "Sunrise") and Ardent Health Partners, LLC (together with its
subsidiaries, "Ardent") are not currently subject to the reporting requirements
of the SEC . The information related to Kindred, Atria, Sunrise and Ardent
contained or referred to in this Quarterly Report on Form 10-Q has been derived
from publicly available information or was provided to us by Kindred, Atria,
Sunrise or Ardent, as the case may be, and we have not verified this information
through an independent investigation or otherwise. We have no reason to believe
that this information is inaccurate in any material respect, but we cannot
assure you of its accuracy.
Company Overview
We are a REIT with a highly diversified portfolio of senior housing,
research and innovation, and healthcare properties located throughout the United
States , Canada and the United Kingdom . As of June 30, 2020 , we owned or managed
through unconsolidated joint ventures approximately 1,200 properties (including
properties classified as held for sale), consisting of senior housing
communities, MOBs, research and innovation centers, inpatient rehabilitation
facilities ("IRFs") and long-term acute care facilities ("LTACs"), and health
systems. We also had 20 properties under development, including two properties
that are owned by unconsolidated real estate entities. We are an S&P 500 company
headquartered in Chicago, Illinois .
We primarily invest in senior housing, research and innovation, and healthcare properties through acquisitions and lease our properties to unaffiliated tenants or operate them through independent third-party managers.
As of June 30, 2020 , we leased a total of 385 properties (excluding
properties within our office operations reportable business segment) to various
healthcare operating companies under "triple-net" or "absolute-net" leases that
obligate the tenants to pay all property-related expenses, including
maintenance, utilities, repairs, taxes, insurance and capital expenditures. Our
three largest tenants, Brookdale Senior Living, Ardent and Kindred leased from
us 122 properties (excluding two properties managed by Brookdale Senior Living
pursuant to long-term management agreements), 11 properties and 32 properties,
respectively, as of June 30, 2020 .
As of June 30, 2020 , pursuant to long-term management agreements, we engaged
independent operators, such as Atria and Sunrise, to manage 435 senior housing
communities for us.
Through our Lillibridge Healthcare Services, Inc. subsidiary and our
ownership interest in PMB Real Estate Services LLC , we also provide MOB
management, leasing, marketing, facility development and advisory services to
highly rated hospitals and health systems throughout the United States . In
addition, from time to time, we make secured and non-mortgage loans and other
investments relating to senior housing and healthcare operators or properties.
We aim to enhance shareholder value by delivering consistent, superior total
returns through a strategy of: (1) generating reliable and growing cash flows;
(2) maintaining a balanced, diversified portfolio of high-quality assets; and
(3) preserving our financial strength, flexibility and liquidity.
36
--------------------------------------------------------------------------------
Our ability to access capital in a timely and cost effective manner is
critical to the success of our business strategy because it affects our ability
to satisfy existing obligations, including the repayment of maturing
indebtedness, and to make future investments. Factors such as general market
conditions, interest rates, credit ratings on our securities, expectations of
our potential future earnings and cash distributions, and the trading price of
our common stock that are beyond our control and fluctuate over time all impact
our access to and cost of external capital. For that reason, we generally
attempt to match the long-term duration of our investments in real property with
long-term financing through the issuance of shares of our common stock or the
incurrence of long-term fixed rate debt.
COVID-19 Update
In
The COVID-19 pandemic and actions taken to prevent its spread continue to affect our business in a number of ways. In our senior living operating portfolio, occupancy, revenue and net operating income decreased as resident move-ins decreased and operating costs increased as a result of the pandemic.
Our triple-net senior housing tenants experienced similar occupancy, revenue and cost pressure trends as our senior living operators. While we collected substantially all triple-net senior housing rent we expected to receive in the first and second quarters, we have given and may continue to provide financial support to our triple-net tenants in the form of rent deferrals and application of portions of lease deposits to fulfill payment obligations. We also recently made material changes to our senior housing triple-net leases with Holiday Retirement and Brookdale Senior Living, respectively, which will decrease our net operating income. Without financial support or other government assistance, certain of our triple-net senior housing tenants will likely experience worsening financial conditions through the third quarter, which would pressure their rent coverage ratios and may affect their ability to pay us contractual rent in full on a timely basis.
In our healthcare triple-net leased properties portfolio, we collected substantially all rent due in the first and second quarters. This cohort of tenants has benefitted from significant government financial support to partially offset the direct financial impact of the COVID-19 pandemic on healthcare providers. Nationally, hospital inpatient admissions and surgeries have rebounded, although still below pre-COVID-19 levels, depending on the particular market.
In our office operations segment, we received 99% of contractual rents in the second quarter. Substantially all of our medical office buildings are in states that have either reopened for elective procedures or announced the resumption of elective procedures, which are an important driver of financial performance for many of our medical office tenants. InMarch 2020 , we took precautionary steps to increase liquidity and preserve financial flexibility in light of the uncertainty resulting from the COVID-19 pandemic by drawing$2.75 billion under our$3.0 billion unsecured revolving credit facility. Due to improved capital market conditions and the decisive actions described below, we have since repaid all borrowings under the facility. As ofAugust 5, 2020 , we had approximately$3.5 billion billion in liquidity, including availability under our revolving credit facility, cash and cash equivalents on hand, with no borrowings outstanding under our commercial paper program and negligible near-term debt maturing. InJune 2020 , our Board of Directors declared a second quarter 2020 dividend of$0.45 per share, which was paid in July and represented a 43 percent reduction from the first quarter dividend of$0.7925 per share. This measure enabled us to conserve approximately$130 million of cash per quarter compared to the prior dividend level. In order to further conserve capital, we have reduced expected capital expenditures for 2020 by$0.3 billion to a new expected total of$0.5 billion , mainly through pausing certain ground-up developments that were not yet substantially underway. Also, in June, we eliminated roles representing over 25% of our corporate positions, excluding onsite field personnel. For the second half of 2020, the base salaries of our CEO and other executive officers was voluntarily reduced by 20% and 10%, respectively. As a result of these capital conservation actions, we expect that our third quarter 2020 annualized general and administrative expenses will be approximately$25 to$30 million lower than our reported general and administrative expenses for full-year 2019. The federal government, as well as state and local governments, have implemented or announced programs to provide financial and other support to businesses affected by the COVID-19 pandemic, some of which benefit or could benefit our company, tenants, operators, borrowers and managers. For example, theDepartment of Health and Human Services ("HHS")Provider Relief Fund for COVID-19 is currently providing grants to licensed senior living providers that bill Medicaid. Eligible providers will receive payments of at least 2% of all annual gross patient care revenues. If HHS funding is ultimately expanded to all licensed senior living providers, we expect most of our senior living communities to benefit. 37 -------------------------------------------------------------------------------- The future impact of the COVID-19 pandemic is highly uncertain. Many of the trends highlighted above have continued into the third quarter. The extent of the COVID-19 pandemic's continued and ultimate effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the rate at which governments across the country lift restrictions and the extent and duration of any rollback of restrictions and the availability of government financial support to our business, tenants and operators. Due to these uncertainties, we are not able at this time to estimate the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows but it could be material. We have not identified the COVID-19 pandemic, on its own, as a "triggering event" for purposes of evaluating impairment of real estate assets, goodwill and other intangibles, investments in unconsolidated entities and financial instruments. However, as ofJune 30, 2020 , we considered the effect of the pandemic on certain of our assets (described below) and our ability to recover the respective carrying values of these assets. We applied our considerations to existing critical accounting policies that require us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities. We based our estimates on our experience and on assumptions we believe to be reasonable under the circumstances. As a result, we have recognized the following charges for the quarter endedJune 30, 2020 : •Adjustment to rental income: As ofJune 30, 2020 , we concluded that it is probable we would not collect substantially all rents from certain tenants, primarily within our triple-net leased properties segment. As a result, we recognized an adjustment to rental income of$54.2 million . Subsequent toJune 30, 2020 , rental payments from these tenants will be recognized in rental income when received. •Impairment of real estate assets: As ofJune 30, 2020 , we concluded that our estimate of undiscounted cash flows, including a hypothetical terminal value, for certain real estate assets did not exceed the assets' respective carrying values. As such, during the quarter endedJune 30, 2020 we recognized$108.8 million of impairments representing the difference between the assets' carrying value and estimated fair value of$192.8 million . The impaired assets, primarily senior housing communities, represent less than 1% of our consolidated net real estate property as ofJune 30, 2020 . Impairments are recorded within depreciation and amortization in our Consolidated Statements of Income and are primarily related to our senior living operations reportable business segment. •Loss on financial instruments and impairment of unconsolidated entities: As ofJune 30, 2020 , we concluded that credit losses exist within certain of our non-mortgage loans receivables and government-sponsored pooled loan investments and impairments have occurred with respect to unconsolidated entities. As a result, (a) we established allowances of$20.8 million and$8.8 million , respectively, which reduces the amounts presented on our Consolidated Balance Sheets with a corresponding loss on financial instruments in our Consolidated Statements of Income, and (b) we recognized an impairment of$10.7 million in an equity investment in an unconsolidated entity. No allowances are recorded within our portfolios of secured mortgage loans or marketable debt securities. •Deferred tax asset valuation allowance: As ofJune 30, 2020 , we concluded that it was not more likely than not that deferred tax assets (primarily US federal NOL carryforwards which begin to expire in 2032) would be realized based on our cumulative loss in recent years for certain of our taxable REIT subsidiaries. As a result, we recorded a valuation allowance of$56.4 million against these deferred tax assets on our Consolidated Balance Sheets with a corresponding charge to income tax (expense) benefit in our Consolidated Statements of Income. 2020 Highlights Investments and Dispositions •InMarch 2020 , we formed and sponsored theVentas Life Science and Healthcare Real Estate Fund, L.P. (the "Fund"), a perpetual life vehicle that focuses on investments in life science, medical office and senior housing real estate.
We
are the manager and general partner of the Fund and have retained a 21% interest in the Fund. To seed the Fund, we contributed six (two of which are on the same campus) stabilized research and innovation and medical office properties comprising 1.2 million square feet of space. We received cash consideration of$620 million and recognized a gain on the transactions of$224.6 million . The Fund had approximately$0.8 billion in assets under management and third-party equity commitments of approximately$0.65 billion from globally respected institutional investors as ofJune 30, 2020 . 38 -------------------------------------------------------------------------------- •During the six months endedJune 30, 2020 , we received aggregate proceeds of$106.1 million for the full repayment of the principal balances of various loans receivable with a weighted average interest rate of 8.3% that were due to mature between 2020 and 2025, resulting in total gains of$1.4 million .
•During the six months ended
Liquidity
•In
Portfolio
•InJuly 2020 , we entered into a revised master lease agreement (the "Brookdale Lease") and certain other agreements (together with the Brookdale Lease, the "Agreements") with Brookdale Senior Living. The Agreements modify our current arrangements with Brookdale Senior Living as follows: We received up-front consideration approximating$235 million dollars , which will be amortized over the remaining lease term and consisted of: (a)$162 million in cash including$47 million from the transfer to Ventas of deposits under the Brookdale Lease; (b) a$45 million cash pay note (the "Note") from Brookdale. The Note has an initial interest rate of nine percent, increasing 50 basis points per annum, and matures onDecember 31, 2025 ; (c) warrants exercisable for 16.3 million shares of Brookdale Senior Living common stock, which are exercisable at any time prior toDecember 31, 2025 and have an exercise price of$3.00 per share.
Base cash rent under the Brookdale Lease is set at
Brookdale Senior Living transferred fee ownership of five senior living
communities to us, in full satisfaction and repayment of a
•InApril 2020 , we completed a transaction with affiliates of Holiday Retirement (collectively, "Holiday"), including (a) entry into a new, terminable management agreement withHoliday Management Company for our 26 independent living assets previously subject to a triple-net lease (the "Holiday Lease") with Holiday; (b) termination of the Holiday Lease; and (c) our receipt from Holiday of$33.8 million in cash from the transfer to us of deposits under the Holiday Lease and$66 million in principal amount of secured notes. As a result of the Holiday Lease termination, we recognized net income of$50.2 million , composed of$99.8 million of cash and notes received less$49.6 million from the write-off of accumulated straight-line receivable. 39 --------------------------------------------------------------------------------
Concentration Risk
We use concentration ratios to identify, understand and evaluate the
potential impact of economic downturns and other adverse events that may affect
our asset types, geographic locations, business models, and tenants, operators
and managers. We evaluate concentration risk in terms of investment mix and
operations mix. Investment mix measures the percentage of our investments that
is concentrated in a specific asset type or that is operated or managed by a
particular tenant, operator or manager. Operations mix measures the percentage
of our operating results that is attributed to a particular tenant, operator or
manager, geographic location or business model. The following tables reflect our
concentration risk as of the dates and for the periods presented:
As of June 30, 2020 As of December 31, 2019
Investment mix by asset type(1):
Senior housing communities 63.5 % 62.2 %
MOBs 19.0 19.3
Research and innovation centers 7.4 8.7
Health systems 5.3 5.1
IRFs and LTACs 1.7 1.6
Skilled nursing facilities ("SNFs") 0.7 0.7
Secured loans receivable and investments, net 2.4 2.4
Investment mix by tenant, operator and manager(1):
Atria 20.7 % 20.4 %
Sunrise 10.5 10.3
Brookdale Senior Living 7.9 7.7
Ardent 4.9 4.7
Kindred 1.0 1.0
All other 55.0 55.9
(1)Ratios are based on the gross book value of consolidated real estate investments (excluding properties classified as held for sale) as of each reporting date.
40
--------------------------------------------------------------------------------
For the Six Months
For the Three Months Ended June 30, Ended June 30,
2020 2019 2020 2019
Operations mix by tenant and operator and business
model:
Revenues(1):
Senior living operations 58.4 % 54.8 % 57.7 % 55.0 %
Brookdale Senior Living(2) 4.9 4.8 4.7 5.5
Ardent 3.2 3.1 3.1 3.1
Kindred 3.5 3.4 3.3 3.5
All others 30.0 33.9 31.2 32.9
Adjusted EBITDA:
Senior living operations 27.5 % 31.4 % 30.5 % 32.2 %
Brookdale Senior Living(2) 10.8 8.3 10.0 8.0
Ardent 7.1 5.5 6.6 5.2
Kindred 7.7 6.0 7.1 5.7
All others 46.9 48.8 45.8 48.9
Net operating income ("NOI")
Senior living operations 26.7 % 30.5 % 29.4 % 30.9 %
Brookdale Senior Living(2) 10.4 8.9 9.5 8.9
Ardent 6.8 5.8 6.2 5.8
Kindred 7.4 6.4 6.7 6.3
All others 48.7 48.4 48.2 48.1
Operations mix by geographic location(3):
California 16.2 % 16.3 % 15.7 % 16.3 %
New York 8.1 8.9 8.3 9.0
Texas 6.7 6.1 6.2 6.2
Pennsylvania 4.7 4.6 4.7 4.7
Illinois 4.2 4.3 4.1 4.3
All others 60.1 59.8 61.0 59.5
(1)Total revenues include office building and other services revenue, revenue
from loans and investments and interest and other income (excluding amounts in
discontinued operations and including amounts related to assets classified as
held for sale).
(2)Excludes two senior housing communities which are included in the senior
living operations reportable business segment.
(3)Ratios are based on total revenues (including amounts related to assets
classified as held for sale) for each period presented.
See "Non-GAAP Financial Measures" included elsewhere in this Quarterly
Report on Form 10-Q for additional disclosure and reconciliations of net income
attributable to common stockholders, as computed in accordance with GAAP, to
Adjusted EBITDA and NOI, respectively.
Triple-Net Lease Expirations
If our tenants are not able or willing to renew our triple-net leases upon
expiration, we may be unable to reposition the applicable properties on a timely
basis or on the same or better economic terms, if at all. Although our lease
expirations are staggered, the non-renewal of some or all of our triple-net
leases that expire in any given year could have a material adverse effect on our
business, financial condition, results of operations and liquidity, our ability
to service our indebtedness and other obligations and our ability to make
distributions to our stockholders, as required for us to continue to qualify as
a REIT (a "Material Adverse Effect"). During the six months ended June 30, 2020 ,
we had no triple-net lease renewals or expirations without renewal that, in the
aggregate, had a material impact on our financial condition or results of
operations for that period.
41
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our Consolidated Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP") for interim financial
information set forth in the Accounting Standards Codification ("ASC"), as
published by the Financial Accounting Standards Board ("FASB"), and with the SEC
instructions to Form 10-Q and Article 10 of Regulation S-X. GAAP requires us to
make estimates and assumptions regarding future events that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. We base these estimates on
our experience and assumptions we believe to be reasonable under the
circumstances. However, if our judgment or interpretation of the facts and
circumstances relating to various transactions or other matters had been
different, we may have applied a different accounting treatment, resulting in a
different presentation of our financial statements. We periodically reevaluate
our estimates and assumptions, and in the event they prove to be different from
actual results, we make adjustments in subsequent periods to reflect more
current estimates and assumptions about matters that are inherently uncertain.
Our Annual Report on Form 10-K for the year ended December 31, 2019 , filed
with the SEC on February 24, 2020 , contains further information regarding the
critical accounting policies that affect our more significant estimates and
judgments used in the preparation of our Consolidated Financial Statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have
been no material changes to these policies in 2020. Please refer to "Note 2 -
Accounting Policies" of the Notes to Consolidated Financial Statements included
in Part I, Item 1 of this Quarterly Report on Form 10-Q for information
regarding recently adopted accounting standards.
Results of Operations
As of June 30, 2020 , we operated through three reportable business segments:
triple-net leased properties, senior living operations and office operations. In
our triple-net leased properties segment, we invest in and own senior housing
and healthcare properties throughout the United States and the United Kingdom
and lease those properties to healthcare operating companies under "triple-net"
or "absolute-net" leases that obligate the tenants to pay all property-related
expenses. In our senior living operations segment, we invest in senior housing
communities throughout the United States and Canada and engage independent
operators, such as Atria and Sunrise, to manage those communities. In our office
operations segment, we primarily acquire, own, develop, lease and manage MOBs
and research and innovation centers throughout the United States. Information
provided for "all other" includes income from loans and investments and other
miscellaneous income and various corporate-level expenses not directly
attributable to any of our three reportable business segments. Assets included
in "all other" consist primarily of corporate assets, including cash, restricted
cash, loans receivable and investments, and miscellaneous accounts receivable.
Our chief operating decision makers evaluate performance of the combined
properties in each reportable business segment and determine how to allocate
resources to those segments, in significant part, based on segment NOI and
related measures. For further information regarding our reportable business
segments and a discussion of our definition of segment NOI, see "Note 15 -
Segment Information" of the Notes to Consolidated Financial Statements included
in Part I, Item 1 of this Quarterly Report on Form 10-Q. See "Non-GAAP Financial
Measures" included elsewhere in this Quarterly Report on Form 10-Q for
additional disclosure and reconciliations of net income attributable to common
stockholders, as computed in accordance with GAAP, to NOI.
42
--------------------------------------------------------------------------------
Three Months Ended
The table below shows our results of operations for the three months ended
June 30, 2020 and 2019 and the effect of changes in those results from period to
period on our net income attributable to common stockholders.
For the Three Months Ended June (Decrease) Increase
30, to Net Income
2020 2019 $ %
(Dollars in thousands)
Segment NOI:
Triple-net leased properties $ 170,965 $ 190,061 $ (19,096) (10.0) %
Senior living operations 116,751 153,888 (37,137) (24.1)
Office operations 133,887 140,780 (6,893) (4.9)
All other 20,907 20,370 537 2.6
Total segment NOI 442,510 505,099 (62,589) (12.4)
Interest and other income 1,540 9,202 (7,662) (83.3)
Interest expense (123,132) (110,369) (12,763) (11.6)
Depreciation and amortization (349,594) (226,187) (123,407) (54.6)
General, administrative and professional fees (29,984) (43,079) 13,095 30.4
Loss on extinguishment of debt, net - (4,022) 4,022 nm
Merger-related expenses and deal costs (6,586) (4,600) (1,986) (43.2)
Allowance on loans receivable and investments (29,655) - (29,655) nm
Other (3,382) 11,481 (14,863) nm
(Loss) income before unconsolidated entities, real estate dispositions, income taxes and noncontrolling interests
(98,283) 137,525 (235,808) nm
Loss from unconsolidated entities (5,850) (2,529) (3,321) nm
Gain on real estate dispositions 1,254 19,150 (17,896) (93.5)
Income tax (expense) benefit (56,356) 57,752 (114,108) nm
(Loss) income from continuing operations (159,235) 211,898 (371,133) nm
Net (loss) income (159,235) 211,898 (371,133) nm
Net (loss) income attributable to noncontrolling
interests (2,065) 1,369 3,434 nm
Net (loss) income attributable to common
stockholders $ (157,170) $ 210,529 (367,699) nm
nm - not meaningful
The following table summarizes results of operations in our triple-net
leased properties reportable business segment, including assets sold or
classified as held for sale as of
For the Three Months Ended June (Decrease) Increase
30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
Segment NOI-Triple-Net Leased Properties :
Rental income $ 176,240 $ 196,382 $ (20,142) (10.3) %
Less: Property-level operating expenses (5,275) (6,321) 1,046 16.5
Segment NOI $ 170,965 $ 190,061 (19,096) (10.0)
In our triple-net leased properties reportable business segment, our
revenues generally consist of fixed rental amounts (subject to annual
contractual escalations) received from our tenants in accordance with the
applicable lease terms. We report revenues and property-level operating expenses
within our triple-net leased properties reportable business segment for real
estate tax and insurance expenses that are paid from escrows collected from our
tenants.
43
--------------------------------------------------------------------------------
The segment NOI decrease in our triple-net leased portfolio was primarily
driven by the write-off of previously accrued straight-line rental income during
the second quarter of 2020 of $53.3 million (non-Holiday assets) and the removal
of 26 Holiday communities at the start of the second quarter 2020 from our
triple-net portfolio, partially offset by the $50.2 million net impact of
terminating the Holiday Lease. We will continue to try to collect rent on a
contractual basis for the tenants where straight-line rent has been written off,
but we have determined that collectability is not probable due to COVID-19.
Occupancy rates may affect the profitability of our tenants' operations. For
senior housing communities and post-acute properties in our triple-net leased
properties reportable business segment, occupancy generally reflects average
operator-reported unit and bed occupancy, respectively, for the reporting
period. Because triple-net financials are delivered to us following the
reporting period, occupancy is reported in arrears. The following table sets
forth average continuing occupancy rates related to the triple-net leased
properties we owned at June 30, 2020 and 2019 for the first quarter of 2020 and
2019, respectively. The table excludes non-stabilized properties, properties
owned through investments in unconsolidated entities, certain properties for
which we do not receive occupancy information and properties acquired or
properties that transitioned operators for which we do not have a full quarter
of occupancy results.
Average Occupancy Average Occupancy
Number of for the Three Number of for the Three
Properties Owned Months Ended March Properties Owned Months Ended March
at June 30, 2020 31, 2020 at June 30, 2019 31, 2019
Senior housing communities 302 84.8% 342 84.2%
SNFs 16 88.7 16 88.0
IRFs and LTACs 36 54.7 36 55.8
The following table compares results of operations for our 375 same-store
triple-net leased properties. See "Non-GAAP Financial Measures-NOI" included
elsewhere in this Quarterly Report on Form 10-Q for additional disclosure
regarding same-store NOI.
For the Three Months Ended June Increase to Segment
30, NOI
2020 2019 $ %
(Dollars in thousands)
$ 122,412 $ 172,865 $ (50,453) (29.2) % Less: Property-level operating expenses (5,187) (4,774) (413) (8.7) Segment NOI$ 117,225 $ 168,091 (50,866) (30.3) The segment NOI decrease in our same-store triple net leased portfolio was primarily driven by the write-off of previously accrued straight-line rental income during the second quarter of 2020. We will continue to try to collect rent on a contractual basis for the tenants where straight-line rent has been written off, but we have determined that collectability is not probable due to COVID-19.
Segment NOI-Senior Living Operations
The following table summarizes results of operations in our senior living
operations reportable business segment, including assets sold or classified as
held for sale as of June 30, 2020 . For senior housing communities in our senior
living operations reportable business segment, occupancy generally reflects
average operator-reported unit occupancy for the reporting period.
For the Three Months Ended June Increase (Decrease)
30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
Segment NOI-Senior Living Operations:
Resident fees and services $ 549,329 $ 520,725 $ 28,604 5.5 %
Less: Property-level operating expenses (432,578) (366,837) (65,741) (17.9)
Segment NOI $ 116,751 $ 153,888 (37,137) (24.1)
44--------------------------------------------------------------------------------
Average Monthly
Revenue Per
Occupied Room
For the Three
Average Unit Occupancy for the Months Ended
Number of Properties at June 30, Three Months Ended June 30, June 30,
2020 2019 2020 2019 2020 2019
Total communities 428 367 82.2 % 85.8 % $ 4,674 $ 5,772
Resident fees and services include all amounts earned from residents at our
senior housing communities, such as rental fees related to resident leases,
extended health care fees and other ancillary service income. Property-level
operating expenses related to our senior living operations segment include
labor, food, utilities, marketing, management and other costs of operating the
properties.
The segment NOI decrease in our senior housing operating portfolio was
primarily driven by lower occupancy rates and increased operating costs
resulting from the COVID-19 pandemic. This is offset by the transition of 26
independent living assets at the start of the second quarter 2020, operated by
Holiday from our triple-net portfolio to our senior housing operating portfolio
and the third quarter 2019 acquisition of 34 Canadian senior housing communities
via an equity partnership with Le Groupe Maurice .
The following table compares results of operations for our 340 same-store senior living operating communities.
For the Three Months Ended June Decrease
30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
Same-Store Segment NOI-Senior Living Operations:
Resident fees and services $ 456,275 $ 496,496 $ (40,221) (8.1) %
Less: Property-level operating expenses (369,813) (345,544) (24,269) (7.0)
Segment NOI $ 86,462 $ 150,952 (64,490) (42.7)
Average Monthly
Revenue Per
Occupied Room
For the Three
Average Unit Occupancy for the Months Ended
Number of Properties at June 30, Three Months Ended June 30, June 30,
2020 2019 2020 2019 2020 2019
Same-store communities 340 340 79.7 % 86.4 % $ 5,751 $ 5,782 The segment NOI decrease in our same-store senior housing operating portfolio was primarily driven by lower occupancy and increased operating costs resulting from the COVID-19 pandemic.
45
--------------------------------------------------------------------------------Segment NOI-Office Operations
The following table summarizes results of operations in our office
operations reportable business segment, including assets sold or classified as
held for sale as of June 30, 2020 . For properties in our office operations
reportable business segment, occupancy generally reflects occupied square
footage divided by net rentable square footage as of the end of the reporting
period.
For the Three Months Ended June Increase (Decrease)
30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
Segment NOI-Office Operations:
Rental income $ 192,925 $ 202,188 $ (9,263) (4.6) %
Office building services costs 2,257 1,850 407 22.0
Total revenues 195,182 204,038 (8,856) (4.3)
Less:
Property-level operating expenses (60,752) (62,743) 1,991 3.2 Office building services costs (543) (515) (28) (5.4) Segment NOI$ 133,887 $ 140,780 (6,893) (4.9) Annualized Average Rent Per Occupied Square Foot for the Three Number of Properties at June 30, Occupancy at June 30, Months Ended June 30, 2020 2019 2020 2019 2020 2019
Total office buildings 377 385 90.4 % 89.8 %$ 33 $ 33 The office segment NOI decrease was primarily driven by assets sold to the Fund in the first quarter of 2020 and COVID-impacted reduced parking revenues offset by active leasing at recently developed properties, increasing tenant retention and contractual rent increases. The following table compares results of operations for our 359 same-store office buildings. For the Three Months Ended June Increase (Decrease) 30, to Segment NOI 2020 2019 $ % (Dollars in thousands) Same-Store Segment NOI-Office Operations: Rental income$ 183,150 $ 182,215 $ 935 0.5 % Less: Property-level operating expenses (56,828) (57,325) 497 0.9 Segment NOI$ 126,322 $ 124,890 1,432 1.1 Annualized Average Rent Per Occupied Square Foot for the Three Number of Properties at June 30, Occupancy at June 30, Months Ended June 30, 2020 2019 2020 2019 2020 2019 Same-store office buildings 359 359 91.7 % 90.7 %$ 33 $ 33 46 --------------------------------------------------------------------------------
Same-store operations increases in the first quarter of 2020 over the same period in 2019 were driven by strong tenant retention, contractual rent escalators and increased occupancy primarily in our Research and Innovation centers.
All Other
Information provided for all other segment NOI includes income from loans
and investments and other miscellaneous income not directly attributable to any
of our three reportable business segments. The $0.5 million increase in all
other segment NOI for the three months ended June 30, 2020 over the same period
in 2019 is primarily due to increased management fee revenues from investments
in unconsolidated real estate entities.
Interest and Other Income
The $7.7 million decrease in interest and other income for the three months
ended June 30, 2020 over the same period in 2019 is primarily due to 2019 income
from the exercise of warrants in 2019 related to our research and innovation
properties.
Interest Expense
The $12.8 million increase in total interest expense for the three months
ended June 30, 2020 compared to the same period in 2019 is attributable to an
increase of $31.9 million due to higher debt balances, partially offset by a
decrease of $19.2 million due to a lower effective interest rate and increased
capitalized interest. Our weighted average effective interest rate was 3.3% and
4.0% for the three months ended June 30, 2020 and 2019, respectively.
Capitalized interest for the three months ended June 30, 2020 and 2019 was $2.7
million and $2.0 million , respectively.
Depreciation and Amortization
Depreciation and amortization expense increased$123.4 million during the three months endedJune 30, 2020 compared to the same period in 2019 primarily due to real estate impairments recognized in 2020, asset acquisitions, net of dispositions. See "COVID-19 Update" for information regarding 2020 impairment charges.
Merger-Related Expenses and Deal Costs
The
Other
The
Loss from Unconsolidated Entities
The $3.3 million increase in loss from unconsolidated entities during the
three months ended June 30, 2020 compared to the same period in 2019 is
primarily due to an impairment of our investment in an unconsolidated operating
entity offset by an increase in income from one of our unconsolidated entities.
See "COVID-19 Update" for information regarding 2020 impairment charges.
Gain on Real Estate Dispositions
The
Income Tax (Expense) Benefit
The $114.1 million increase in income tax expense related to continuing
operations for the three months ended June 30, 2020 compared to the same period
in 2019 is primarily due to establishing a $56.4 million valuation allowance
against deferred tax assets of certain of our TRS entities in 2020.
47
--------------------------------------------------------------------------------
Six Months Ended
The table below shows our results of operations for the six months ended
June 30, 2020 and 2019 and the effect of changes in those results from period to
period on our net income attributable to common stockholders.
(Decrease) Increase
For the Six Months Ended June 30, to Net Income
2020 2019 $ %
(Dollars in thousands)
Segment NOI:
Triple-net leased properties $ 359,496 $ 382,696 $ (23,200) (6.1) %
Senior living operations 283,390 314,349 (30,959) (9.8)
Office operations 279,224 281,266 (2,042) (0.7)
All other 45,906 38,238 7,668 20.1
Total segment NOI 968,016 1,016,549 (48,533) (4.8)
Interest and other income 6,393 9,489 (3,096) (32.6)
Interest expense (239,828) (220,988) (18,840) (8.5)
Depreciation and amortization (598,431) (462,107) (136,324) (29.5)
General, administrative and professional fees (72,519) (83,839) 11,320 13.5
Loss on extinguishment of debt, net - (4,427) 4,427 nm
Merger-related expenses and deal costs (14,804) (6,780) (8,024) nm
Allowance on loans receivable and investments (29,655) - (29,655) nm
Other (7,090) 11,458 (18,548) nm
Income before unconsolidated entities, real estate dispositions, income taxes and noncontrolling interests
12,082 259,355 (247,273) (95.3)
Loss from unconsolidated entities (16,726) (3,475) (13,251) nm
Gain on real estate dispositions 227,479 24,597 202,882 nm
Income tax benefit 92,660 59,009 33,651 57.0
Income from continuing operations 315,495 339,486 (23,991) (7.1)
Net income 315,495 339,486 (23,991) (7.1)
Net (loss) income attributable to noncontrolling
interests (452) 3,172 3,624 nm
Net income attributable to common stockholders
(20,367) (6.1)
nm - not meaningful
The following table summarizes results of operations in our triple-net
leased properties reportable business segment, including assets sold or
classified as held for sale as of
(Decrease) Increase
For the Six Months Ended June 30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
Segment NOI-Triple-Net Leased Properties :
Rental income $ 371,102 $ 396,450 $ (25,348) (6.4) %
Less: Property-level operating expenses (11,606) (13,754) 2,148 15.6
Segment NOI $ 359,496 $ 382,696 (23,200) (6.1)
nm - not meaningful
The decrease in our triple-net leased properties segment NOI for the six
months ended June 30, 2020 over the same period in 2019 is attributable
primarily to the the write-off of previously accrued straight-line rental income
during the second quarter of 2020 of $53.3 million (non-Holiday assets) and the
transition of 26 independent living assets at the start of the second
48
--------------------------------------------------------------------------------
quarter 2020 operated by Holiday from our triple-net portfolio to our senior
housing operating portfolio, partially offset by the $50.2 million impact of
terminating the Holiday Lease. We will continue to try to collect rent on a
contractual basis for the tenants where straight-line rent has been written off,
but we have determined that collectability as not probable due to COVID-19.
The following table compares results of operations for our 373 same-store
triple-net leased properties.
Increase (Decrease)
For the Six Months Ended June 30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
$ 298,501 $ 346,357 $ (47,856) (13.8) % Less: Property-level operating expenses (10,018) (10,494) 476 (4.5) Segment NOI$ 288,483 $ 335,863 (47,380) (14.1)
nm - not meaningful
The decrease in our same-store triple-net leased properties rental income
for the six months ended June 30, 2020 over the same period in 2019 is
attributable primarily to the write-off of previously accrued straight-line
rental income of $53.3 million during the second quarter of 2020 offset by rent
increases due to contractual escalations pursuant to the terms of our leases. We
will continue to try to collect rent on a contractual basis for the tenants
where straight-line rent has been written off, but we have determined that
collectability is not probable due to COVID-19.
Segment NOI-Senior Living Operations
The following table summarizes results of operations in our senior living
operations reportable business segment, including assets sold or classified as
held for sale as of June 30, 2020 .
Increase (Decrease)
For the Six Months Ended June 30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
Segment NOI-Senior Living Operations:
Resident fees and services $ 1,126,099 $ 1,042,172 $ 83,927 8.1 %
Less: Property-level operating expenses (842,709) (727,823) (114,886) (15.8)
Segment NOI $ 283,390 $ 314,349 (30,959) (9.8)
Average Monthly
Revenue Per
Occupied Room
For the Six
Average Unit Occupancy For the Months Ended
Number of Properties at June 30, Six Months Ended June 30, June 30,
2020 2019 2020 2019 2020 2019
Total communities 428 367 84.3 % 86.1 % $ 4,862 $ 5,785
The decrease in our senior living operations segment NOI was primarily
attributable to lower occupancy and increased operating costs resulting from the
COVID-19 pandemic. This is offset by the transition of 26 independent living
assets at the start of the second quarter 2020 operated by Holiday from our
triple-net portfolio to our senior housing operating portfolio and the third
quarter 2019 acquisition of 34 Canadian senior housing communities via an equity
partnership with Le Groupe Maurice .
49
--------------------------------------------------------------------------------The following table compares results of operations for our 335 same-store senior living operating communities.
Decrease
For the Six Months Ended June 30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
Same-Store Segment NOI-Senior Living Operations:
Resident fees and services $ 945,802 $ 987,465 $ (41,663) (4.2) %
Less: Property-level operating expenses (718,070) (678,824) (39,246) (5.8)
Segment NOI $ 227,732 $ 308,641 (80,909) (26.2)
Average Monthly
Revenue Per
Occupied Room
For the Six
Average Unit Occupancy For the Months Ended
Number of Properties at June 30, Six Months Ended June 30, June 30,
2020 2019 2020 2019 2020 2019Same-store communities 335 335 82.7 % 87.2 %$ 6,382 $ 6,724
The decrease in our same-store senior living operations segment NOI was primarily attributable to lower occupancy rates and increased operating costs resulting from the COVID-19 pandemic.
Segment NOI-Office Operations
The following table summarizes results of operations in our office
operations reportable business segment, including assets sold or classified as
held for sale as of
(Decrease) Increase
For the Six Months Ended June 30, to Segment NOI
2020 2019 $ %
(Dollars in thousands)
Segment NOI-Office Operations:
Rental income $ 401,320 $ 403,616 $ (2,296) (0.6) %
Office building services revenue 4,432 3,626 806 22.2
Total revenues 405,752 407,242 (1,490) (0.4)
Less:
Property-level operating expenses (125,258) (124,828) (430) (0.3) Office building services costs (1,270) (1,148) (122) (10.6) Segment NOI$ 279,224 $ 281,266 (2,042) (0.7) Annualized Average Rent Per Occupied Square Foot For the Six Months Number of Properties at June 30, Occupancy at June 30, Ended June 30, 2020 2019 2020 2019 2020 2019 Total office buildings 377 385 90.4 % 89.8 %$ 33 $ 33 The decrease in our office operations segment NOI for the six months endedJune 30, 2020 over the same period in 2019 is attributable primarily to first quarter 2020 assets sold to the Fund, COVID-impacted reduced parking revenues partially offset by active leasing at recently developed properties, increased tenant retention, contractual rent escalators, acquisitions and business interruption insurance proceeds. 50 -------------------------------------------------------------------------------- The following table compares results of operations for our 359 same-store office buildings. Increase (Decrease) For the Six Months Ended June 30, to Segment NOI 2020 2019 $ % (Dollars in thousands) Same-Store Segment NOI-Office Operations: Rental income$ 371,107 $ 364,315 $ 6,792 1.9 % Less: Property-level operating expenses (115,456) (114,522) (934) (0.8) Segment NOI$ 255,651 $ 249,793 5,858 2.3 Annualized Average Rent Per Occupied Square Foot For the Six Months Number of Properties at June 30, OccupancyJune 30, Ended June 30, 2020 2019 2020 2019 2020 2019 Same-store office buildings 359 359 91.7 % 90.7 %$ 33 $ 33
The increase in our same-store office operations segment NOI for the six months
ended
All Other
The $7.7 million increase in all other segment NOI for the six months ended
June 30, 2020 over the same period in 2019 is primarily due to increased
interest income from our secured mortgage loan portfolio as well as increased
management fee revenues from investments in unconsolidated real estate entities.
Interest and Other Income
The $3.1 million decrease in interest and other income for the six months ended
June 30, 2020 over the same period in 2019 is primarily due to 2019 income from
the exercise of warrants related to our research and innovation properties
offset by a 2020 reduction of a liability related to an acquisition and interest
income on short term investments.
Interest Expense
The $18.8 million increase in total interest expense for the six months ended
June 30, 2020 over the same period in 2019 is attributable to an increase of
$44.8 million due to higher debt balances, offset by a decrease of $26.6 million
due to a lower effective interest rate and increased capitalized interest. Our
weighted average effective interest rate was 3.5% and 3.9% for the six months
ended June 30, 2020 and 2019, respectively. Capitalized interest for the six
months ended June 30, 2020 and 2019 was $5.6 million and $4.0 million ,
respectively.
Depreciation and Amortization
The $136.3 million increase in depreciation and amortization expense during the
six months ended June 30, 2020 compared to the same period in 2019, is primarily
due to an increase in real estate impairments during 2020 and asset
acquisitions, net of dispositions. See "COVID-19 Update" for information
regarding 2020 impairment charges.
Merger-Related Expenses and Deal Costs
The $8.0 million decrease in merger-related expenses and deal costs for the
six months ended June 30, 2020 over the same period in 2019 was due primarily
due to 2020 expenses related to severance and operator transitions offset by
2019 expenses relating to operator transitions.
51
--------------------------------------------------------------------------------Other
The $18.5 million change in other for the six months ended June 30, 2020
over the same period in 2019 is primarily due to insurance recoveries received
in 2019 related to natural disasters and increased corporate-level insurance
costs in 2020.
Loss from Unconsolidated Entities
The $13.3 million increase in loss from unconsolidated entities for the six
months ended June 30, 2020 over the same period in 2019 is due to an impairment
of our investment in an unconsolidated operating entity and our share of
operating results from our unconsolidated entities. See "COVID-19 Update" for
information regarding 2020 impairment charges.
Gain on Real Estate Dispositions
The $202.9 million increase in gain on real estate dispositions to $227.5
million for the six months ended June 30, 2020 over the same period in 2019 is
due primarily to our contribution of six properties to the Fund.
Income Tax Benefit
The $33.7 million increase in income tax benefit related to continuing
operations for the six months ended June 30, 2020 compared to the same period in
2019 is primarily due to a $152.9 million deferred tax benefit related to the
internal restructuring of certain US taxable REIT subsidiaries completed within
the first quarter of 2020, offset by changes in the valuation allowance against
deferred tax assets of certain of our TRS entities. The benefit resulted from
the transfer of assets subject to certain deferred tax liabilities from taxable
REIT subsidiaries to the entities other than the TRS entities in this tax-free
transaction.
Non-GAAP Financial Measures
We consider certain non-GAAP financial measures to be useful supplemental
measures of our operating performance. A non-GAAP financial measure is a measure
of historical or future financial performance, financial position or cash flows
that excludes or includes amounts that are not so excluded from or included in
the most directly comparable measure calculated and presented in accordance with
GAAP. Described below are the non-GAAP financial measures used by management to
evaluate our operating performance and that we consider most useful to
investors, together with reconciliations of these measures to the most directly
comparable GAAP measures.
The non-GAAP financial measures we present in this Quarterly Report on Form
10-Q may not be comparable to those presented by other real estate companies due
to the fact that not all real estate companies use the same definitions. You
should not consider these measures as alternatives to net income attributable to
common stockholders (determined in accordance with GAAP) as indicators of our
financial performance or as alternatives to cash flow from operating activities
(determined in accordance with GAAP) as measures of our liquidity, nor are these
measures necessarily indicative of sufficient cash flow to fund all of our
needs. In order to facilitate a clear understanding of our consolidated
historical operating results, you should examine these measures in conjunction
with net income attributable to common stockholders as presented in our
Consolidated Financial Statements and other financial data included elsewhere in
this Quarterly Report on Form 10-Q.
Funds From Operations and Normalized Funds From Operations
Historical cost accounting for real estate assets implicitly assumes that
the value of real estate assets diminishes predictably over time. However, since
real estate values historically have risen or fallen with market conditions,
many industry investors deem presentations of operating results for real estate
companies that use historical cost accounting to be insufficient by themselves.
For that reason, we consider Funds From Operations ("FFO") and normalized FFO to
be appropriate supplemental measures of operating performance of an equity REIT.
In particular, we believe that normalized FFO is useful because it allows
investors, analysts and our management to compare our operating performance to
the operating performance of other real estate companies and between periods on
a consistent basis without having to account for differences caused by
non-recurring items and other non-operational events such as transactions and
litigation. In some cases, we provide information about identified non-cash
components of FFO and normalized FFO because it allows investors, analysts and
our management to assess the impact of those items on our financial results.
We use the National Association of Real Estate Investment Trusts ("Nareit")
definition of FFO. Nareit defines FFO as net income attributable to common
stockholders (computed in accordance with GAAP), excluding gains or losses from
sales of real estate property, including gains or losses on re-measurement of
equity method investments, and impairment write-downs of depreciable real
estate, plus real estate depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures will be calculated to reflect FFO
on the same
52
--------------------------------------------------------------------------------
basis. We define normalized FFO as FFO excluding the following income and
expense items (which may be recurring in nature): (a) merger-related costs and
expenses, including amortization of intangibles, transition and integration
expenses, and deal costs and expenses, including expenses and recoveries
relating to acquisition lawsuits; (b) the impact of any expenses related to
asset impairment and valuation allowances, the write-off of unamortized deferred
financing fees, or additional costs, expenses, discounts, make-whole payments,
penalties or premiums incurred as a result of early retirement or payment of our
debt; (c) the non-cash effect of income tax benefits or expenses, the non-cash
impact of changes to our executive equity compensation plan, derivative
transactions that have non-cash mark-to-market impacts on our Consolidated
Statements of Income and non-cash charges related to leases; (d) the financial
impact of contingent consideration, severance-related costs and charitable
donations made to the Ventas Charitable Foundation ; (e) gains and losses for
non-operational foreign currency hedge agreements and changes in the fair value
of financial instruments; (f) gains and losses on non-real estate dispositions
and other unusual items related to unconsolidated entities; (g) expenses related
to the re-audit and re-review in 2014 of our historical financial statements and
related matters; (h) net expenses or recoveries related to natural disasters and
(i) any other incremental items set forth in the normalized FFO reconciliation
included herein.
The following table summarizes our FFO and normalized FFO for the three and
six months ended June 30, 2020 and 2019. The decrease in normalized FFO for the
six months ended June 30, 2020 over the same period in 2019 is principally due
to the impact of COVID-19 on our senior housing business and increases in
interest expense from incremental borrowings arising as a consequence of the
impact of COVID-19, partially offset by the positive impact of our third quarter
2019 acquisition of an interest in 34 Canadian senior housing communities via an
equity partnership with Le Groupe Maurice . See "COVID-19 Update".
For the Three Months Ended June For the Six Months Ended
30, June 30,
2020 2019 2020 2019
(In thousands)
Net (loss) income attributable to common stockholders
348,110 224,630 595,440 459,101
Real estate depreciation related to noncontrolling interests
(4,068) (1,750) (7,911) (3,584)
Real estate depreciation related to unconsolidated entities
1,307 167 1,868 332
Gain on real estate dispositions related to unconsolidated entities
- (2) - (801)
(Loss) gain on real estate dispositions related to noncontrolling interests
(3) - (9) 354
Gain on real estate dispositions (1,254) (19,150) (227,479) (24,597)
FFO attributable to common stockholders 186,922 414,424 677,856 767,119
Adjustments:
Change in fair value of financial instruments (13) (11) (23) (49) Non-cash income tax benefit (expense) 55,505 (59,480) (85,391) (61,194) Loss on extinguishment of debt, net - 4,022 - 4,427
(Gain) loss on non-real estate dispositions related to unconsolidated entities
- (3) 239 (3)
Merger-related expenses, deal costs and re-audit costs 6,605 5,564 15,378 8,393
Amortization of other intangibles 118 121 236 242
Other items related to unconsolidated entities (263) 1,377 (1,138) 2,415
Non-cash impact of changes to equity plan (3,337) 2,584 3,558 4,918
Natural disaster expenses (recoveries), net 252 (13,339) 1,193 (14,878)
Impact of Holiday lease termination (50,184) - (50,184) -
Write-off of straightline rental income, net of
noncontrolling interests 52,368 - 52,368 -
Allowance on loan investments and impairment of
unconsolidated entities 40,320 - 40,320 -
Normalized FFO attributable to common stockholders
53
--------------------------------------------------------------------------------Adjusted EBITDA
We consider Adjusted EBITDA an important supplemental measure because it
provides another manner in which to evaluate our operating performance and
serves as another indicator of our credit strength and our ability to service
our debt obligations. We define Adjusted EBITDA as consolidated earnings before
interest, taxes, depreciation and amortization (including non-cash stock-based
compensation expense, asset impairment and valuation allowances), excluding
gains or losses on extinguishment of debt, our consolidated joint venture
partners' share of EBITDA, merger-related expenses and deal costs, expenses
related to the re-audit and re-review in 2014 of our historical financial
statements, net gains or losses on real estate activity, gains or losses on
re-measurement of equity interest upon acquisition, changes in the fair value of
financial instruments, unrealized foreign currency gains or losses, net expenses
or recoveries related to natural disasters and non-cash charges related to
leases, and including our share of EBITDA from unconsolidated entities and
adjustments for other immaterial or identified items. The following table sets
forth a reconciliation of net (loss) income attributable to common stockholders
to Adjusted EBITDA:
For the Three Months Ended June For the Six Months Ended
30, June 30,
2020 2019 2020 2019
(In thousands)
Net (loss) income attributable to common stockholders
123,132 110,369 239,828 220,988
Loss on extinguishment of debt, net - 4,022 - 4,427
Taxes (including tax amounts in general, administrative and professional fees)
57,500 (57,412) (90,207) (57,298)
Depreciation and amortization 349,594 226,187 598,431 462,107
Non-cash stock-based compensation expense 1,043 10,070 11,557 18,475
Merger-related expenses, deal costs and re-audit costs 6,586
4,600 14,804 6,791
Net income attributable to noncontrolling interests, adjusted for consolidated joint venture partners' share of EBITDA
(5,639) (3,199) (11,737) (6,073)
Loss from unconsolidated entities, adjusted for Ventas share of EBITDA from unconsolidated entities
10,439 9,009 28,173 16,767
Gain on real estate dispositions (1,254) (19,150) (227,478) (24,597)
Unrealized foreign currency gains (37) (265) (6) (692)
Change in fair value of financial instruments (13) (14) (22) (67)
Natural disaster expenses (recoveries), net 198 (13,308) 981 (14,957)
Impact of Holiday lease termination (50,184) - (50,184) -
Write-off of straightline rental income, net of
noncontrolling interests 52,368 - 52,368 -
Allowance on loan investments and impairment of
unconsolidated entities 40,320 - 40,320 -
Adjusted EBITDA $ 426,883 $ 481,438 $ 922,775 $ 962,185
54--------------------------------------------------------------------------------
NOI
We also consider NOI an important supplemental measure because it allows
investors, analysts and our management to assess our unlevered property-level
operating results and to compare our operating results with those of other real
estate companies and between periods on a consistent basis. We define NOI as
total revenues, less interest and other income, property-level operating
expenses and office building services costs. Cash receipts may differ due to
straight-line recognition of certain rental income and the application of other
GAAP policies. The following table sets forth a reconciliation of net (loss)
income attributable to common stockholders to NOI:
For the Three Months Ended June For the Six Months Ended
30, June 30,
2020 2019 2020 2019
(In thousands)
Net (loss) income attributable to common stockholders
(1,540) (9,202) (6,393) (9,489)
Interest 123,132 110,369 239,828 220,988
Depreciation and amortization 349,594 226,187 598,431 462,107
General, administrative and professional fees 29,984 43,079 72,519 83,839
Loss on extinguishment of debt, net - 4,022 - 4,427
Merger-related expenses and deal costs 6,586 4,600 14,804 6,780
Allowance on loans receivable and investments 29,655 - 29,655 -
Other 3,382 (11,481) 7,090 (11,458)
Net (loss) income attributable to noncontrolling
interests (2,065) 1,369 (452) 3,172
Loss from unconsolidated entities 5,850 2,529 16,726 3,475
Income tax expense (benefit) 56,356 (57,752) (92,660) (59,009)
Gain on real estate dispositions (1,254) (19,150) (227,479) (24,597)
NOI $ 442,510 $ 505,099 $ 968,016 $ 1,016,549
See "Results of Operations" for discussions regarding both segment NOI and
same-store segment NOI. We define same-store as properties owned, consolidated
and operational for the full period in both comparison periods and are not
otherwise excluded; provided, however, that we may include selected properties
that otherwise meet the same-store criteria if they are included in
substantially all of, but not a full, period for one or both of the comparison
periods, and in our judgment such inclusion provides a more meaningful
presentation of our portfolio performance. Newly acquired or recently developed
or redeveloped properties in our senior living operations segment will be
included in same-store once they are stabilized for the full period in both
periods presented. These properties are considered stabilized upon the earlier
of (a) the achievement of 80% sustained occupancy or (b) 24 months from the date
of acquisition or substantial completion of work. Recently developed or
redeveloped properties in our office operations and triple-net leased properties
segments will be included in same-store once substantial completion of work has
occurred for the full period in both periods presented. Our senior living
operations and triple-net leased properties that have undergone operator or
business model transitions will be included in same-store once operating under
consistent operating structures for the full period in both periods presented.
Properties are excluded from same-store if they are: (i) sold, classified as
held for sale or properties whose operations were classified as discontinued
operations in accordance with GAAP; (ii) impacted by materially disruptive
events such as flood or fire; (iii) those properties that are currently
undergoing a materially disruptive redevelopment; (iv) for our office
operations, those properties for which management has an intention to institute
a redevelopment plan because the properties may require major property-level
expenditures to maximize value, increase NOI, or maintain a market-competitive
position and/or achieve property stabilization; or (v) for the senior living
operations and triple-net leased segments, those properties that are scheduled
to undergo operator or business model transitions, or have transitioned
operators or business models after the start of the prior comparison period.
To eliminate the impact of exchange rate movements, all same-store NOI
measures assume constant exchange rates across comparable periods, using the
following methodology: the current period's results are shown in actual reported
USD, while prior comparison period's results are adjusted and converted to USD
based on the average exchange rate for the current period.
55
--------------------------------------------------------------------------------Liquidity and Capital Resources
During the six months ended June 30, 2020 , our principal sources of
liquidity were cash flows from operations, proceeds from the issuance of debt
securities, borrowings under our unsecured revolving credit facility, proceeds
from asset sales and cash on hand.
For the next 12 months, our principal liquidity needs are to: (i) fund
operating expenses; (ii) meet our debt service requirements; (iii) repay
maturing mortgage and other debt; (iv) fund acquisitions, investments and
commitments and any development and redevelopment activities; (v) fund capital
expenditures; and (vi) make distributions to our stockholders and unitholders,
as required for us to continue to qualify as a REIT. We expect that these
liquidity needs generally will be satisfied by a combination of the following:
cash flows from operations, cash on hand, debt assumptions and financings
(including secured financings), issuances of debt and equity securities,
dispositions of assets (in whole or in part through joint venture arrangements
with third parties) and borrowings under our revolving credit facilities and
commercial paper program. However, an inability to access liquidity through
multiple capital sources concurrently could have a Material Adverse Effect on
us. In addition, while continuing decreased revenue and net operating income as
a result of the COVID-19 pandemic could lead to downgrades of our long-term
credit rating and therefore adversely impact our cost of borrowing, we currently
believe we will continue to have access to one or more debt markets during the
duration of the pandemic and could seek to enter into secured debt financings or
issue debt and equity securities to satisfy our liquidity needs, although no
assurances can be made in this regard. See "COVID-19 Update."
Recent Capital Conservation Actions
InJune 2020 , our Board of Directors declared a second quarter 2020 dividend of$0.45 per share, which was paid in July and represented a 43 percent reduction from the first quarter dividend of$0.7925 per share. This measure enabled us to conserve approximately$130 million of cash per quarter compared to the prior dividend level. In order to further conserve capital, we have reduced expected capital expenditures for 2020 by$0.3 billion to a new expected total of$0.5 billion , mainly through pausing certain ground-up developments that were not yet substantially underway. Also, in June, we eliminated roles representing over 25% of our corporate positions, excluding onsite field personnel. For the second half of 2020, the base salaries of our CEO and other executive officers was voluntarily reduced by 20% and 10%, respectively. As a result of these capital conservation actions, we expect that our third quarter 2020 annualized general and administrative expenses will be approximately$25 to$30 million lower than our reported general and administrative expenses for full-year 2019. See "Note 9 - Senior Notes Payable And Other Debt" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding our significant financing activities.
Credit Facilities, Commercial Paper and Unsecured Term Loans
Our unsecured credit facility is comprised of a $3.0 billion unsecured
revolving credit facility priced at LIBOR plus 0.875% as of June 30, 2020 . The
unsecured revolving credit facility matures in April 2021 , but may be extended
at our option subject to the satisfaction of certain conditions, including all
representations and warranties being correct in all material respects with no
existing defaults, for two additional periods of six months each to April 2022 .
The unsecured revolving credit facility also includes an accordion feature that
permits us to increase our aggregate borrowing capacity thereunder to up to
$3.75 billion .
Our wholly-owned subsidiary, Ventas Realty , may issue from time to time
unsecured commercial paper notes up to a maximum aggregate amount outstanding at
any time of $1.0 billion . The notes are sold under customary terms in the United
States commercial paper note market and are ranked pari passu with all of Ventas
Realty's other unsecured senior indebtedness. The notes are fully and
unconditionally guaranteed by Ventas, Inc. As of June 30, 2020 , we had no
borrowings outstanding under our commercial paper program.
As of June 30, 2020 , $587.2 million was outstanding under the unsecured
revolving credit facility with an additional $23.9 million restricted to support
outstanding letters of credit. In addition, we limit our utilization of the
unsecured revolving credit facility, to the extent necessary, to support our
commercial paper program when commercial paper notes are outstanding. We had
$2.4 billion in available liquidity under the unsecured revolving credit
facility as of June 30, 2020 .
As of June 30, 2020 , we had a $200.0 million unsecured term loan priced at
LIBOR plus 0.90% that matures in 2023. The term loan also includes an accordion
feature that effectively permits us to increase our aggregate borrowings
thereunder to up to $800.0 million .
56
--------------------------------------------------------------------------------
As of
As of June 30, 2020 , we had a $400.0 million secured revolving construction
credit facility with $157.2 million of borrowings outstanding. The secured
revolving construction credit facility matures in 2022 and is primarily used to
finance the development of research and innovation centers and other
construction projects.
Senior Notes
In
Equity Offerings
From time to time, we may sell up to an aggregate of $1.0 billion of our
common stock under an "at-the-market" equity offering program ("ATM program").
During the six months ended June 30, 2020 , we sold no shares of common stock
under our ATM program. As of June 30, 2020 , $822.1 million of our common stock
remained available for sale under our ATM program.
Derivatives and Hedging
In the normal course of our business, interest rate fluctuations affect
future cash flows under our variable rate debt obligations, loans receivable and
marketable debt securities, and foreign currency exchange rate fluctuations
affect our operating results. We follow established risk management policies and
procedures, including the use of derivative instruments, to mitigate the impact
of these risks.
Cash Flows
The following table sets forth our sources and uses of cash flows:
Increase (Decrease) to
For the Six Months Ended June 30, Cash
2020 2019 $ %
(Dollars in thousands)
Cash, cash equivalents and restricted cash at
beginning of period $ 146,102 $ 131,464 $ 14,638 11.1 %
Net cash provided by operating activities 720,011 729,219 (9,208) (1.3)
Net cash provided by (used in) investing activities 348,080 (507,727) 855,807 nm
Net cash used in financing activities (183,228) (214,868) 31,640 14.7
Effect of foreign currency translation (1,829) 208 (2,037) nm
Cash, cash equivalents and restricted cash at end of
period $ 1,029,136 $ 138,296 890,840 nm
nm - not meaningful
Cash Flows from Operating Activities
Cash flows from operating activities decreased $9.2 million during the six
months ended June 30, 2020 over the same period in 2019 due primarily to lower
NOI and changes in working capital.
Cash Flows from Investing Activities
Cash flows from investing activities increased $855.8 million during the six
months ended June 30, 2020 over the same period in 2019 primarily due to
increased proceeds from real estate dispositions, decreased acquisitions and
investments activity, partially offset by increased capital expenditures.
57
--------------------------------------------------------------------------------Cash Flows from Financing Activities
Cash flows used in financing activities increased $31.6 million during the
six months ended June 30, 2020 over the same period in 2019 primarily due to
lower debt repayments during 2020 offset by the issuance of common stock in
2019.
Capital Expenditures
The terms of our triple-net leases generally obligate our tenants to pay all
capital expenditures necessary to maintain and improve our triple-net leased
properties. However, from time to time, we may fund the capital expenditures for
our triple-net leased properties through loans or advances to the tenants, which
may increase the amount of rent payable with respect to the properties in
certain cases. We may also fund capital expenditures for which we may become
responsible upon expiration of our triple-net leases or in the event that our
tenants are unable or unwilling to meet their obligations under those leases. We
also expect to fund capital expenditures related to our senior living operations
and office operations reportable business segments with the cash flows from the
properties or through additional borrowings. We expect that these liquidity
needs generally will be satisfied by a combination of the following: cash flows
from operations, cash on hand, debt assumptions and financings (including
secured financings), issuances of debt and equity securities, dispositions of
assets (in whole or in part through joint venture arrangements with third
parties) and borrowings under our revolving credit facilities.
To the extent that unanticipated capital expenditure needs arise or significant borrowings are required, our liquidity may be affected adversely. Our ability to borrow additional funds may be restricted in certain circumstances by the terms of the instruments governing our outstanding indebtedness.
We are party to certain agreements that obligate us to develop senior
housing or healthcare properties funded through capital that we and, in certain
circumstances, our joint venture partners provide. As of June 30, 2020 , we had
20 properties under development pursuant to these agreements, including two
properties that are owned by unconsolidated real estate entities. In addition,
from time to time, we engage in redevelopment projects with respect to our
existing senior housing communities to maximize the value, increase NOI,
maintain a market-competitive position, achieve property stabilization or change
the primary use of the property.
Guarantor and Issuer Financial Information
Ventas, Inc. has fully and unconditionally guaranteed the obligation to pay principal and interest with respect to the outstanding senior notes issued by our 100% owned subsidiary,Ventas Realty , including the senior notes that were jointly issued withVentas Capital Corporation .Ventas Capital Corporation is a direct 100% owned subsidiary ofVentas Realty that has no assets or operations, but was formed in 2002 solely to facilitate offerings of senior notes by a limited partnership. None of our other subsidiaries (excludingVentas Realty andVentas Capital Corporation ) is obligated with respect toVentas Realty's outstanding senior notes.Ventas, Inc. has also fully and unconditionally guaranteed the obligation to pay principal and interest with respect to the outstanding senior notes issued by our 100% owned subsidiary,Ventas Canada Finance Limited ("Ventas Canada"). None of our other subsidiaries is obligated with respect to Ventas Canada's outstanding senior notes, all of which were issued on a private placement basis inCanada . In connection with the acquisition ofNationwide Health Properties, Inc. ("NHP"), our 100% owned subsidiary,Nationwide Health Properties, LLC ("NHP LLC "), as successor to NHP, assumed the obligation to pay principal and interest with respect to the outstanding senior notes issued by NHP. Neither we nor any of our subsidiaries (other thanNHP LLC ) is obligated with respect to any ofNHP LLC's outstanding senior notes. Under certain circumstances, contractual and legal restrictions, including those contained in the instruments governing our subsidiaries' outstanding mortgage indebtedness, may restrict our ability to obtain cash from our subsidiaries for the purpose of meeting our debt service obligations, including our payment guarantees with respect toVentas Realty's and Ventas Canada's senior notes. 58 -------------------------------------------------------------------------------- The following summarizes our guarantor and issuer balance sheet and statement of income information as ofJune 30, 2020 andDecember 31, 2019 and for the three and six months endedJune 30, 2020 and the year endedDecember 31, 2019 . Balance Sheet Information As of June 30, 2020 Guarantor Issuer (In thousands) Assets Investment in and advances to affiliates$ 16,095,449 $ 2,728,110 Total assets 17,005,493 2,835,587 Liabilities and equity Intercompany loans 10,509,659 (5,414,735) Total liabilities 10,773,108 3,472,417
Redeemable OP unitholder and noncontrolling interests 112,843
-
Total equity (deficit) 6,159,542
(636,831)
Total liabilities and equity 17,005,493 2,835,587
Balance Sheet Information
As of December 31, 2019
Guarantor Issuer
(In thousands)
Assets
Investment in and advances to affiliates $ 15,774,897 $ 2,728,110
Total assets 15,875,910 2,838,270
Liabilities and equity
Intercompany loans 8,789,600 (5,105,070)
Total liabilities 9,133,733 3,363,067Redeemable OP unitholder and noncontrolling interests 102,657
-
Total equity (deficit) 6,639,520
(524,797)
Total liabilities and equity 15,875,910 2,838,270
Statement of Income Information
For
the Six Months Ended
Guarantor Issuer
(In thousands)
Equity earnings in affiliates $ 357,163 $ -
Total revenues 360,712 71,847
Income (loss) before unconsolidated entities, real estate dispositions, income taxes and noncontrolling interests
316,674 (105,994)
Net income (loss) 315,947 (105,994)
Net income (loss) attributable to common stockholders 315,947 (105,994)
59
--------------------------------------------------------------------------------
Statement of Income Information
For
the Year Ended
Guarantor Issuer
(In thousands)
Equity earnings in affiliates $ 362,143 $ -
Total revenues 366,243 142,754
Income (loss) before unconsolidated entities, real estate dispositions, income taxes and noncontrolling interests
432,020 (246,929) Net income (loss) 433,016 (246,841) Net income (loss) attributable to common stockholders 433,016 (246,841)
© Edgar Online, source
