Ventas Reports 2018 Second Quarter Results

Ventas, Inc. (NYSE: VTR) today announced its results for the second quarter ended June 30, 2018, including income from continuing operations per diluted common share of $0.37, normalized Funds From Operations (“FFO”) per diluted common share of $1.08 and reported FFO per diluted common share, as defined by the National Association of Real Estate Investment Trusts (“NAREIT FFO”), of $0.98.

“We delivered strong earnings and results in the second quarter, as we grew property cash flows in our high-quality, differentiated portfolio, executed on our strategic priorities and recycled capital from previous successful investments to significantly enhance our strong financial position and increase our liquidity,” said Debra A. Cafaro, Ventas Chairman and Chief Executive Officer. “Our entire Ventas team remains sharply focused on delivering results and positioning the Company to extend its long track record of creating value for shareholders. Building on our achievements and strong performance year-to-date and our continued investment activity, we are pleased to again improve our full year 2018 expectations.”

Second Quarter Financial Performance

• Income from continuing operations per share was $0.37 compared to $0.42 in the same period in 2017. The change from the second quarter 2017 was mainly due to: the recognition of a previously disclosed $21 million, or $0.06 per share, non-cash expense related to the Company’s mutually beneficial agreements with Brookdale Senior Living (NYSE: BKD) in April 2018 (the “Brookdale Agreement”); and the cumulative impact of using the proceeds of asset divestitures and collection of loans receivable primarily to retire and reduce the Company’s debt balance. These impacts were partially offset by total property portfolio growth and the benefit of $27 million, or $0.08 per share, in prepayment fees (the “Ardent Prepayment Fee”) from the Ardent Loans (defined below).
• Normalized FFO per share grew 2 percent to $1.08 compared to the same period in 2017. The increase from the second quarter 2017 was principally due to the same items as described for income from continuing operations, excluding the impact of the non-cash expense related to the Brookdale Agreement.
• NAREIT FFO per share was $0.98 compared to $1.04 in the same period in 2017. The change from the second quarter 2017 was driven primarily by the same items as described for income from continuing operations.

Second Quarter 2018 Portfolio Performance

• For the second quarter 2018, the Company’s same-store total property portfolio (1,057 assets) cash NOI grew 1.3 percent compared to the same period in 2017. Same-store cash NOI growth for the total portfolio and by segment follows:

• The year-over-year changes in the Company’s quarterly same-store property results were driven by:
  • In the NNN portfolio, growth was due largely to in-place lease escalations and the benefit of $2.5 million in cash fees from the Brookdale Agreement.
  • For SHOP, performance was impacted by an expected sequential increase in openings of new communities in the second quarter in select Ventas markets.
  • Office portfolio growth was principally due to strong medical office building (“MOB”) in-place lease escalations and tenant retention in addition to excellent performance from Ventas’s university-based life science properties.

Second Quarter 2018 and Recent Highlights

• Advancing Ventas’s Attractive Office Portfolio
  • University-Based Life Science: The Company made further advancements in its leading university-based life science development business, which continues to have a robust pipeline, including:
    • Ventas opened its $47 million development in an established innovation hub at its Washington University in St. Louis life science campus. The project is already 77 percent leased and is expected to be 90 percent leased by year end.
    • The Company’s $161 million 3675 Market Street development at its University of Pennsylvania life science campus is over 50 percent leased and, with strong pre-leasing activity, is expected to be 70 percent leased by the time of its anticipated opening in late 2018.
    • Ventas’s $62 million Brown research and development project at Brown University, which is expected to open in 2019, is currently 80 percent leased.
  • Medical Office Building: The Company’s $166 million “trophy” MOB development attached to Sutter Health’s (AA-; Standard & Poor’s) new flagship hospital in downtown San Francisco is currently 82 percent leased, an improvement from 52 percent as of the first quarter 2018, and is anticipated to open in 2019.
• Continued Capital Allocation Success
  • Ventas sold properties and received final repayments on loans receivable for proceeds of approximately $950 million during and immediately following the quarter, which were principally used to retire indebtedness. Proceeds were mostly comprised of the receipt of $713 million in principal repayments from a $700 million term loan and revolving credit facility (the “Ardent Loans”) the Company made to Ardent Health Services (“Ardent”). Year-to-date 2018 proceeds from capital recycling exceed $1.2 billion.
  • The Company invested nearly $300 million in the second quarter, including its $200 million purchase of 9.75 percent senior unsecured notes issued by Ardent and over $80 million in funding for development and redevelopment projects currently underway.
  • In addition, Ventas made new commitments of approximately $50 million for development and redevelopment projects in its office, seniors housing and health system portfolios.

• Significant Enhancement of Financial Strength and Liquidity
  • The Company’s financial strength and flexibility were robust at quarter end, including a 0.2x sequential improvement in its net debt to Adjusted Pro Forma EBITDA ratio to 5.3x, fixed charge coverage of 4.5x and total liquidity exceeding $3.1 billion.
  • Ventas has reduced its net debt by nearly $1 billion since December 31, 2017, and the Company’s total indebtedness to gross asset value of 36 percent at quarter end represented a 2-percentage point improvement since year-end 2017.
  • The Company’s second quarter 2018 net cash provided by operating activities grew 7 percent to over $400 million compared to the same period in 2017.
  • In July, Ventas lengthened its debt maturity profile and improved its pricing by renewing and extending its $900 million term loan from 2020 to 2023 and 2024. The Company has refinanced or repaid $2.5 billion in debt since December 31, 2017.

• Key Operator Updates
  • Ventas’s leading health system operator, Ardent, completed its strategic recapitalization in the second quarter 2018 to streamline its capital structure, increase its cash flow and position its platform for future success.
  • Kindred Healthcare, Inc.’s “go private” transaction with TPG, Welsh, Carson, Anderson & Stowe and Humana (NYSE: HUM) was completed in July, which created a separate, operationally focused and financially strong company (“Kindred Healthcare”) that will continue to operate most of Ventas’s long-term acute care and inpatient rehabilitation facilities. Ventas received $12 million, or $0.03 per share, in fees (the “Kindred Merger Fee”) in connection with the transaction in the third quarter.
• Industry Leadership: Ms. Cafaro was elected Chair of The Real Estate Roundtable for its fiscal year beginning July 1, 2018. The Real Estate Roundtable is a public policy organization that brings together leaders of the nation’s top real estate ownership, development, lending and management firms to address key national policy issues relating to real estate and the overall economy.

Updated and Improved 2018 Guidance

Ventas updated and improved its 2018 normalized FFO per share and same-store cash NOI growth expectations in addition to updating its outlook for NAREIT FFO and income from continuing operations per share. The Company’s current guidance ranges are as follows:

The Company’s updated and improved normalized FFO per share guidance range and implied second half 2018 normalized FFO per share of approximately $1.91 at the midpoint includes the following impacts, which were also incorporated in the Company’s previously disclosed guidance: (i) expected receipt of approximately $1.3 billion in proceeds for the full year 2018 from asset dispositions and receipt of principal repayments on loan investments at a GAAP rate of approximately 8.5 percent, which have been substantially completed to date and the proceeds of which have been used principally to retire indebtedness; (ii) receipt of the Ardent Prepayment Fee in the second quarter 2018 and the Kindred Merger Fee in the third quarter 2018; and (iii) expected proactive debt refinancing with longer-duration debt of $1.5 billion for the full year 2018.

The Company’s guidance does not include new unannounced acquisitions. Guidance includes the funding of $400 million for the full year 2018 in high-quality development and redevelopment projects, mostly in Ventas’s attractive office portfolio.

No equity issuance is included in guidance. The 2018 outlook assumes 359 million weighted average fully-diluted shares. A reconciliation of the Company’s guidance to the Company’s projected GAAP measures is included in this press release.

The Company’s guidance is based on a number of other assumptions that are subject to change and many of which are outside the control of the Company. If actual results vary from these assumptions, the Company’s expectations may change. There can be no assurance that the Company will achieve these results.

Second Quarter 2018 Conference Call

Ventas will hold a conference call to discuss this earnings release today at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The dial-in number for the conference call is (844) 776-7841 (or +1 (661) 378-9542 for international callers). The participant passcode is “Ventas.” The conference call is being webcast live by NASDAQ OMX and can be accessed at the Company’s website at www.ventasreit.com. A replay of the webcast will be available following the call online, or by calling (855) 859-2056 (or +1 (404) 537-3406 for international callers), passcode 7465387, beginning at approximately 2:00 p.m. Eastern Time and will remain for 36 days.

Ventas, Inc., an S&P 500 company, is a leading real estate investment trust. Its diverse portfolio of approximately 1,200 assets in the United States, Canada and the United Kingdom consists of seniors housing communities, medical office buildings, life science and innovation centers, inpatient rehabilitation and long-term acute care facilities, health systems and skilled nursing facilities. Through its Lillibridge subsidiary, Ventas provides management, leasing, marketing, facility development and advisory services to highly rated hospitals and health systems throughout the United States. References to “Ventas” or the “Company” mean Ventas, Inc. and its consolidated subsidiaries unless otherwise expressly noted. More information about Ventas and Lillibridge can be found at www.ventasreit.com and www.lillibridge.com.

The Company routinely announces material information to investors and the marketplace using press releases, Securities and Exchange Commission (“SEC”) filings, public conference calls, webcasts and the Company’s website at www.ventasreit.com/investor-relations. The information that the Company posts to its website may be deemed to be material. Accordingly, the Company encourages investors and others interested in the Company to routinely monitor and review the information that the Company posts on its website, in addition to following the Company’s press releases, SEC filings and public conference calls and webcasts. Supplemental information regarding the Company can be found on the Company’s website under the “Investor Relations” section or at www.ventasreit.com/investor-relations/annual-reports---supplemental-information. A comprehensive listing of the Company’s properties is available at www.ventasreit.com/our-portfolio/properties-by-stateprovince.

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding the Company’s or its 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 or acquisition 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 the Company’s expectations. The Company does not undertake a duty to update these forward-looking statements, which speak only as of the date on which they are made.

The Company’s actual future results and trends may differ materially from expectations depending on a variety of factors discussed in the Company’s filings with the SEC. These factors include without limitation: (a) the ability and willingness of the Company’s tenants, operators, borrowers, managers and other third parties to satisfy their obligations under their respective contractual arrangements with the Company, including, in some cases, their obligations to indemnify, defend and hold harmless the Company from and against various claims, litigation and liabilities; (b) the ability of the Company’s 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; (c) the Company’s success in implementing its business strategy and the Company’s ability to identify, underwrite, finance, consummate and integrate diversifying acquisitions and investments; (d) macroeconomic conditions such as a disruption of or lack of access to the capital markets, changes in the debt rating on U.S. government securities, default or delay in payment by the 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; (e) the nature and extent of future competition, including new construction in the markets in which the Company’s seniors housing communities and medical office buildings (“MOBs”) are located; (f) the extent and effect of future or pending healthcare reform and regulation, including cost containment measures and changes in reimbursement policies, procedures and rates; (g) increases in the Company’s borrowing costs as a result of changes in interest rates and other factors; (h) the ability of the Company’s tenants, operators and managers, as applicable, to comply with laws, rules and regulations in the operation of the Company’s properties, to deliver high-quality services, to attract and retain qualified personnel and to attract residents and patients; (i) changes in general economic conditions or economic conditions in the markets in which the Company may, from time to time, compete, and the effect of those changes on the Company’s revenues, earnings and funding sources; (j) the Company’s ability to pay down, refinance, restructure or extend its indebtedness as it becomes due; (k) the Company’s ability and willingness to maintain its qualification as a REIT in light of economic, market, legal, tax and other considerations; (l) final determination of the Company’s taxable net income for the year ended December 31, 2017 and for the year ending December 31, 2018; (m) the ability and willingness of the Company’s tenants to renew their leases with the Company upon expiration of the leases, the Company’s ability to reposition its properties on the same or better terms in the event of nonrenewal or in the event the Company exercises its right to replace an existing tenant, and obligations, including indemnification obligations, the Company may incur in connection with the replacement of an existing tenant; (n) risks associated with the Company’s senior living operating portfolio, such as factors that can cause volatility in the Company’s operating income and earnings generated by those properties, including without limitation national and regional economic conditions, 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; (o) changes in exchange rates for any foreign currency in which the Company may, from time to time, conduct business; (p) year-over-year changes in the Consumer Price Index or the UK Retail Price Index and the effect of those changes on the rent escalators contained in the Company’s leases and the Company’s earnings; (q) the Company’s ability and the ability of its tenants, operators, borrowers and managers to obtain and maintain adequate property, liability and other insurance from reputable, financially stable providers; (r) the impact of increased operating costs and uninsured professional liability claims on the Company’s liquidity, financial condition and results of operations or that of the Company’s tenants, operators, borrowers and managers, and the ability of the Company and the Company’s tenants, operators, borrowers and managers to accurately estimate the magnitude of those claims; (s) risks associated with the Company’s MOB portfolio and operations, including the Company’s ability to successfully design, develop and manage MOBs and to retain key personnel; (t) the ability of the hospitals on or near whose campuses the Company’s MOBs are located and their affiliated health systems to remain competitive and financially viable and to attract physicians and physician groups; (u) risks associated with the Company’s investments in joint ventures and unconsolidated entities, including its lack of sole decision-making authority and its reliance on its joint venture partners’ financial condition; (v) the Company’s ability to obtain the financial results expected from its development and redevelopment projects; (w) the impact of market or issuer events on the liquidity or value of the Company’s investments in marketable securities; (x) consolidation activity in the seniors housing and healthcare industries resulting in a change of control of, or a competitor’s investment in, one or more of the Company’s tenants, operators, borrowers or managers or significant changes in the senior management of the Company’s tenants, operators, borrowers or managers; (y) the impact of litigation or any financial, accounting, legal or regulatory issues that may affect the Company or its tenants, operators, borrowers or managers; and (z) changes in accounting principles, or their application or interpretation, and the Company’s ability to make estimates and the assumptions underlying the estimates, which could have an effect on the Company’s earnings.

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, the Company considers FFO, normalized FFO, FAD and normalized FAD to be appropriate supplemental measures of operating performance of an equity REIT. In particular, the Company believes that normalized FFO is useful because it allows investors, analysts and Company management to compare the Company’s 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, the Company provides information about identified non-cash components of FFO and normalized FFO because it allows investors, analysts and Company management to assess the impact of those items on the Company’s financial results.

The Company uses 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 basis. The Company defines 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 the Company’s debt; (c) the non-cash effect of income tax benefits or expenses, the non-cash impact of changes to the Company’s executive equity compensation plan, derivative transactions that have non-cash mark-to-market impacts on the Company’s income statement and non-cash charges related to lease terminations; (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 the Company’s historical financial statements and related matters; and (h) net expenses or recoveries related to natural disasters. Normalized FAD represents normalized FFO excluding non-cash components, which include straight-line rental adjustments, and deducting capital expenditures, including certain tenant allowances and leasing commissions. FAD represents normalized FAD after subtracting merger-related expenses, deal costs and re-audit costs and other unusual items related to unconsolidated entities.

FFO, normalized FFO, FAD and normalized FAD presented herein 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. FFO, normalized FFO, FAD and normalized FAD should not be considered as alternatives to net income or income from continuing operations (both determined in accordance with GAAP) as indicators of the Company’s financial performance or as alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of the Company’s liquidity, nor are they necessarily indicative of sufficient cash flow to fund all of the Company’s needs. The Company believes that income from continuing operations is the most comparable GAAP measure because it provides insight into the Company’s continuing operations. The Company believes that in order to facilitate a clear understanding of the consolidated historical operating results of the Company, FFO, normalized FFO, FAD and normalized FAD should be examined in conjunction with net income and income from continuing operations as presented elsewhere herein.

1 The Company’s guidance constitutes forward-looking statements within the meaning of the federal securities laws and is based on a number of assumptions that are subject to change and many of which are outside the control of the Company. Actual results may differ materially from the Company’s expectations depending on factors discussed in the Company’s filings with the Securities and Exchange Commission.

2 Per share quarterly amounts may not add to annual per share amounts due to changes in the Company's weighted average diluted share count, if any.

3 See table titled “Funds From Operations (FFO) and Funds Available for Distribution (FAD)” for detailed breakout of adjustments for each respective category.

4 Includes adjustments related to one-time write-offs of straight-line rent, market lease intangibles and deferred revenue, all related to the Brookdale Agreement.

NON-GAAP FINANCIAL MEASURES RECONCILIATION
Net Debt to Adjusted Pro Forma EBITDA
(Dollars in thousands)

The following table illustrates net debt to pro forma earnings, which includes amounts in discontinued operations, before interest, taxes, depreciation and amortization (including non-cash stock-based compensation expense), excluding gains or losses on extinguishment of debt, 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 the Company’s 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 lease terminations, and including the Company’s share of EBITDA from unconsolidated entities and adjustments for other immaterial or identified items (“Adjusted EBITDA”).

The following information considers the pro forma effect on Adjusted EBITDA of the Company’s activity during the three months ended June 30, 2018, as if the transactions had been consummated as of the beginning of the period (“Adjusted Pro Forma EBITDA”).

The Company believes that net debt, Adjusted Pro Forma EBITDA and net debt to Adjusted Pro Forma EBITDA are useful to investors, analysts and Company management because they allow the comparison of the Company’s credit strength between periods and to other real estate companies without the effect of items that by their nature are not comparable from period to period and tend to obscure the Company’s actual credit quality.

For a reconciliation of net debt to Adjusted Pro Forma EBITDA for the quarter ended March 31, 2018, please refer to the reconciliation included in the Company’s Current Report on Form 8-K filed with the SEC on April 27, 2018, which reconciliation is hereby incorporated by reference.

NON-GAAP FINANCIAL MEASURES RECONCILIATION
Net Operating Income (NOI) and Same-Store Cash NOI by Segment
(Dollars in thousands)

The Company considers NOI and same-store cash NOI as important supplemental measures because they allow investors, analysts and the Company’s management to assess its unlevered property-level operating results and to compare its operating results with those of other real estate companies and between periods on a consistent basis. The Company defines NOI as total revenues, less interest and other income, property-level operating expenses and office building services costs. In the case of NOI, cash receipts may differ due to straight-line recognition of certain rental income and the application of other GAAP policies. The Company believes that income from continuing operations is the most comparable GAAP measure for both NOI and same-store cash NOI because it provides insight into the Company’s continuing operations. The Company defines same-store as properties owned, consolidated, operational and reported under a consistent business model for the full period in both comparison periods, and excluding assets intended for disposition and for SHOP, those properties that transitioned operators after the start of the prior comparison period, and for office operations, redevelopment assets. To normalize for exchange rate movements, all same-store cash 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.