Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | | |
(Mark One) | | | |
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
x | | EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED | JUNE 30, 2017 |
OR |
¨ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission file number: 1-10989
Ventas, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
Delaware (State or Other Jurisdiction of Incorporation or Organization) | | 61-1055020 (I.R.S. Employer Identification No.) |
353 N. Clark Street, Suite 3300
Chicago, Illinois
(Address of Principal Executive Offices)
60654
(Zip Code)
(877) 483-6827
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | |
Large accelerated filer x | | Accelerated filer ¨ | | Non-accelerated filer ¨ (Do not check if a smaller reporting company) | | Smaller reporting company ¨ | | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. |
| | |
Class of Common Stock: | | Outstanding at July 26, 2017: |
Common Stock, $0.25 par value | | 356,150,173 |
VENTAS, INC.
FORM 10-Q
INDEX
|
| | | | |
| | | | |
| | | | Page |
| | |
| | | | |
| | Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 | | |
| | Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 | | |
| | Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 | | |
| | Consolidated Statements of Equity for the Six Months Ended June 30, 2017 and the Year Ended December 31, 2016 | | |
| | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
PART I—FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VENTAS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
| As of June 30, 2017 | | As of December 31, 2016 |
| (In thousands, except per share amounts) |
Assets | | | |
Real estate investments: | |
| | |
|
Land and improvements | $ | 2,117,692 |
| | $ | 2,089,591 |
|
Buildings and improvements | 21,827,419 |
| | 21,516,396 |
|
Construction in progress | 281,093 |
| | 210,599 |
|
Acquired lease intangibles | 1,534,173 |
| | 1,510,629 |
|
| 25,760,377 |
| | 25,327,215 |
|
Accumulated depreciation and amortization | (5,220,611 | ) | | (4,932,461 | ) |
Net real estate property | 20,539,766 |
| | 20,394,754 |
|
Secured loans receivable and investments, net | 1,395,404 |
| | 702,021 |
|
Investments in unconsolidated real estate entities | 119,794 |
| | 95,921 |
|
Net real estate investments | 22,054,964 |
| | 21,192,696 |
|
Cash and cash equivalents | 103,353 |
| | 286,707 |
|
Escrow deposits and restricted cash | 68,343 |
| | 80,647 |
|
Goodwill | 1,034,054 |
| | 1,033,225 |
|
Assets held for sale | 89,569 |
| | 54,961 |
|
Other assets | 505,475 |
| | 518,364 |
|
Total assets | $ | 23,855,758 |
| | $ | 23,166,600 |
|
Liabilities and equity | | | |
Liabilities: | | | |
Senior notes payable and other debt | $ | 11,907,997 |
| | $ | 11,127,326 |
|
Accrued interest | 87,248 |
| | 83,762 |
|
Accounts payable and other liabilities | 929,573 |
| | 907,928 |
|
Liabilities related to assets held for sale | 9,812 |
| | 1,462 |
|
Deferred income taxes | 296,822 |
| | 316,641 |
|
Total liabilities | 13,231,452 |
| | 12,437,119 |
|
Redeemable OP unitholder and noncontrolling interests | 182,154 |
| | 200,728 |
|
Commitments and contingencies |
| |
|
Equity: | | | |
Ventas stockholders’ equity: | | | |
Preferred stock, $1.00 par value; 10,000 shares authorized, unissued | — |
| | — |
|
Common stock, $0.25 par value; 600,000 shares authorized, 356,134 and 354,125 shares issued at June 30, 2017 and December 31, 2016, respectively | 89,016 |
| | 88,514 |
|
Capital in excess of par value | 13,019,023 |
| | 12,917,002 |
|
Accumulated other comprehensive loss | (45,035 | ) | | (57,534 | ) |
Retained earnings (deficit) | (2,688,946 | ) | | (2,487,695 | ) |
Treasury stock, 0 and 1 shares at June 30, 2017 and December 31, 2016, respectively | — |
| | (47 | ) |
Total Ventas stockholders’ equity | 10,374,058 |
| | 10,460,240 |
|
Noncontrolling interests | 68,094 |
| | 68,513 |
|
Total equity | 10,442,152 |
| | 10,528,753 |
|
Total liabilities and equity | $ | 23,855,758 |
| | $ | 23,166,600 |
|
See accompanying notes.
VENTAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands, except per share amounts) |
Revenues | | | | | | | |
Rental income: | | | | | | | |
Triple-net leased | $ | 213,258 |
| | $ | 210,119 |
| | $ | 422,585 |
| | $ | 424,606 |
|
Office | 186,240 |
| | 144,087 |
| | 372,135 |
| | 288,223 |
|
| 399,498 |
| | 354,206 |
| | 794,720 |
| | 712,829 |
|
Resident fees and services | 460,243 |
| | 464,437 |
| | 924,431 |
| | 928,413 |
|
Office building and other services revenue | 3,179 |
| | 5,504 |
| | 6,585 |
| | 12,689 |
|
Income from loans and investments | 32,368 |
| | 24,146 |
| | 52,514 |
| | 46,532 |
|
Interest and other income | 202 |
| | 111 |
| | 683 |
| | 230 |
|
Total revenues | 895,490 |
| | 848,404 |
| | 1,778,933 |
| | 1,700,693 |
|
Expenses | | | | | | | |
Interest | 113,572 |
| | 103,665 |
| | 222,376 |
| | 206,938 |
|
Depreciation and amortization | 224,108 |
| | 221,961 |
| | 441,891 |
| | 458,348 |
|
Property-level operating expenses: | | | | | | | |
Senior living | 308,625 |
| | 307,989 |
| | 620,698 |
| | 620,530 |
|
Office | 57,205 |
| | 43,966 |
| | 114,119 |
| | 87,647 |
|
| 365,830 |
| | 351,955 |
| | 734,817 |
| | 708,177 |
|
Office building services costs | 552 |
| | 1,852 |
| | 1,290 |
| | 5,303 |
|
General, administrative and professional fees | 33,282 |
| | 32,094 |
| | 67,243 |
| | 63,820 |
|
Loss on extinguishment of debt, net | 36 |
| | 2,468 |
| | 345 |
| | 2,782 |
|
Merger-related expenses and deal costs | 6,043 |
| | 7,224 |
| | 8,099 |
| | 8,856 |
|
Other | 1,848 |
| | 2,303 |
| | 3,036 |
| | 6,471 |
|
Total expenses | 745,271 |
| | 723,522 |
| | 1,479,097 |
| | 1,460,695 |
|
Income before unconsolidated entities, income taxes, discontinued operations, real estate dispositions and noncontrolling interests | 150,219 |
| | 124,882 |
| | 299,836 |
| | 239,998 |
|
(Loss) income from unconsolidated entities | (106 | ) | | 1,418 |
| | 3,044 |
| | 1,220 |
|
Income tax benefit | 2,159 |
| | 11,549 |
| | 5,304 |
| | 19,970 |
|
Income from continuing operations | 152,272 |
| | 137,849 |
| | 308,184 |
| | 261,188 |
|
Discontinued operations | (23 | ) | | (148 | ) | | (76 | ) | | (637 | ) |
Gain on real estate dispositions | 719 |
| | 5,739 |
| | 44,008 |
| | 31,923 |
|
Net income | 152,968 |
| | 143,440 |
| | 352,116 |
| | 292,474 |
|
Net income attributable to noncontrolling interests | 1,137 |
| | 278 |
| | 2,158 |
| | 332 |
|
Net income attributable to common stockholders | $ | 151,831 |
| | $ | 143,162 |
| | $ | 349,958 |
| | $ | 292,142 |
|
Earnings per common share | | | | | | | |
Basic: | | | | | | | |
Income from continuing operations | $ | 0.43 |
| | $ | 0.41 |
| | $ | 0.87 |
| | $ | 0.77 |
|
Net income attributable to common stockholders | 0.43 |
| | 0.42 |
| | 0.99 |
| | 0.87 |
|
Diluted: | | | | | | | |
Income from continuing operations | $ | 0.42 |
| | $ | 0.40 |
| | $ | 0.86 |
| | $ | 0.77 |
|
Net income attributable to common stockholders | 0.42 |
| | 0.42 |
| | 0.98 |
| | 0.86 |
|
Weighted average shares used in computing earnings per common share: | | | | | | | |
Basic | 355,024 |
| | 338,901 |
| | 354,719 |
| | 337,230 |
|
Diluted | 358,311 |
| | 342,571 |
| | 357,919 |
| | 340,851 |
|
Dividends declared per common share | $ | 0.775 |
| | $ | 0.73 |
| | $ | 1.55 |
| | $ | 1.46 |
|
See accompanying notes.
VENTAS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Net income | $ | 152,968 |
| | $ | 143,440 |
| | $ | 352,116 |
| | $ | 292,474 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation | 8,286 |
| | (22,715 | ) | | 12,368 |
| | (33,383 | ) |
Change in unrealized gain on marketable securities | (62 | ) | | 69 |
| | (185 | ) | | 250 |
|
Other | 398 |
| | (1,617 | ) | | 316 |
| | (3,497 | ) |
Total other comprehensive income (loss) | 8,622 |
| | (24,263 | ) | | 12,499 |
| | (36,630 | ) |
Comprehensive income | 161,590 |
| | 119,177 |
| | 364,615 |
| | 255,844 |
|
Comprehensive income attributable to noncontrolling interests | 1,137 |
| | 278 |
| | 2,158 |
| | 332 |
|
Comprehensive income attributable to common stockholders | $ | 160,453 |
| | $ | 118,899 |
| | $ | 362,457 |
| | $ | 255,512 |
|
See accompanying notes.
VENTAS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2017 and the Year Ended December 31, 2016
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2017 | Common Stock Par Value | | Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Deficit) | | Treasury Stock | | Total Ventas Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
2017 | (In thousands, except per share amounts | | |
Balance at January 1, 2016 | $ | 83,579 |
| | $ | 11,602,838 |
| | $ | (7,565 | ) | | $ | (2,111,958 | ) | | $ | (2,567 | ) | | $ | 9,564,327 |
| | $ | 61,100 |
| | $ | 9,625,427 |
|
Net income | — |
| | — |
| | — |
| | 649,231 |
| | — |
| | 649,231 |
| | 2,259 |
| | 651,490 |
|
Other comprehensive loss | — |
| | — |
| | (49,969 | ) | | — |
| | — |
| | (49,969 | ) | | — |
| | (49,969 | ) |
Impact of CCP Spin-Off | — |
| | 640 |
| | — |
| | — |
| | — |
| | 640 |
| | — |
| | 640 |
|
Net change in noncontrolling interests | — |
| | (2,179 | ) | | — |
| | — |
| | — |
| | (2,179 | ) | | 19,008 |
| | 16,829 |
|
Dividends to common stockholders—$2.965 per share | — |
| | — |
| | — |
| | (1,024,968 | ) | | — |
| | (1,024,968 | ) | | — |
| | (1,024,968 | ) |
Issuance of common stock | 4,716 |
| | 1,281,947 |
| | — |
| | — |
| | 17 |
| | 1,286,680 |
| | — |
| | 1,286,680 |
|
Issuance of common stock for stock plans | 99 |
| | 26,594 |
| | — |
| | — |
| | 2,572 |
| | 29,265 |
| | — |
| | 29,265 |
|
Change in redeemable noncontrolling interests | — |
| | (1,714 | ) | | — |
| | — |
| | — |
| | (1,714 | ) | | (13,854 | ) | | (15,568 | ) |
Adjust redeemable OP unitholder interests to current fair value | — |
| | (21,085 | ) | | — |
| | — |
| | — |
| | (21,085 | ) | | — |
| | (21,085 | ) |
Redemption of OP units | 92 |
| | 22,622 |
| | — |
| | — |
| | 1,098 |
| | 23,812 |
| | — |
| | 23,812 |
|
Grant of restricted stock, net of forfeitures | 28 |
| | 7,339 |
| | — |
| | — |
| | (1,167 | ) | | 6,200 |
| | — |
| | 6,200 |
|
Balance at December 31, 2016 | 88,514 |
| | 12,917,002 |
| | (57,534 | ) | | (2,487,695 | ) | | (47 | ) | | 10,460,240 |
| | 68,513 |
| | 10,528,753 |
|
Net income | — |
| | — |
| | — |
| | 349,958 |
| | — |
| | 349,958 |
| | 2,158 |
| | 352,116 |
|
Other comprehensive income | — |
| | — |
| | 12,499 |
| | — |
| | — |
| | 12,499 |
| | — |
| | 12,499 |
|
Impact of CCP Spin-Off | — |
| | 74 |
| | — |
| | — |
| | — |
| | 74 |
| | — |
| | 74 |
|
Net change in noncontrolling interests | — |
| | (1,427 | ) | | — |
| | — |
| | — |
| | (1,427 | ) | | (8,272 | ) | | (9,699 | ) |
Dividends to common stockholders—$1.55 per share | — |
| | — |
| | — |
| | (551,209 | ) | | — |
| | (551,209 | ) | | — |
| | (551,209 | ) |
Issuance of common stock | 276 |
| | 72,768 |
| | — |
| | — |
| | 552 |
| | 73,596 |
| | — |
| | 73,596 |
|
Issuance of common stock for stock plans | 80 |
| | 17,870 |
| | — |
| | — |
| | 226 |
| | 18,176 |
| | — |
| | 18,176 |
|
Change in redeemable noncontrolling interests | — |
| | 746 |
| | — |
| | — |
| | — |
| | 746 |
| | 5,695 |
| | 6,441 |
|
Adjust redeemable OP unitholder interests to current fair value | — |
| | (20,163 | ) | | — |
| | — |
| | — |
| | (20,163 | ) | | — |
| | (20,163 | ) |
Redemption of OP units | 80 |
| | 19,644 |
| | — |
| | — |
| | 2,783 |
| | 22,507 |
| | — |
| | 22,507 |
|
Grant of restricted stock, net of forfeitures | 66 |
| | 12,509 |
| | — |
| | — |
| | (3,514 | ) | | 9,061 |
| | — |
| | 9,061 |
|
Balance at June 30, 2017 | $ | 89,016 |
| | $ | 13,019,023 |
| | $ | (45,035 | ) | | $ | (2,688,946 | ) | | $ | — |
| | $ | 10,374,058 |
| | $ | 68,094 |
| | $ | 10,442,152 |
|
See accompanying notes.
VENTAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| For the Six Months Ended June 30, |
| 2017 | | 2016 |
| (In thousands) |
Cash flows from operating activities: | | | |
Net income | $ | 352,116 |
| | $ | 292,474 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 441,891 |
| | 458,348 |
|
Amortization of deferred revenue and lease intangibles, net | (10,849 | ) | | (10,090 | ) |
Other non-cash amortization | 6,584 |
| | 4,687 |
|
Stock-based compensation | 13,396 |
| | 10,037 |
|
Straight-lining of rental income, net | (11,155 | ) | | (15,426 | ) |
Loss on extinguishment of debt, net | 345 |
| | 2,782 |
|
Gain on real estate dispositions | (44,008 | ) | | (31,923 | ) |
Gain on re-measurement of equity interest upon acquisition, net | (3,027 | ) | | — |
|
Gain on real estate loan investments | (4 | ) | | (33 | ) |
Income tax benefit | (7,104 | ) | | (21,443 | ) |
Income from unconsolidated entities | (17 | ) | | (1,220 | ) |
Distributions from unconsolidated entities | 3,134 |
| | 3,873 |
|
Other | 1,348 |
| | 724 |
|
Changes in operating assets and liabilities: | | | |
Decrease in other assets | 29,934 |
| | 10,609 |
|
Increase (decrease) in accrued interest | 4,550 |
| | (769 | ) |
Decrease in accounts payable and other liabilities | (39,878 | ) | | (41,894 | ) |
Net cash provided by operating activities | 737,256 |
| | 660,736 |
|
Cash flows from investing activities: | | | |
Net investment in real estate property | (239,498 | ) | | (34,453 | ) |
Investment in loans receivable and other | (718,233 | ) | | (152,450 | ) |
Proceeds from real estate disposals | 19,570 |
| | 63,561 |
|
Proceeds from loans receivable | 25,067 |
| | 7,644 |
|
Development project expenditures | (143,269 | ) | | (69,679 | ) |
Capital expenditures | (55,952 | ) | | (46,925 | ) |
Investment in unconsolidated entities | (39,048 | ) | | (4,265 | ) |
Net cash used in investing activities | (1,151,363 | ) | | (236,567 | ) |
Cash flows from financing activities: | | | |
Net change in borrowings under revolving credit facility | 364,456 |
| | 24,304 |
|
Proceeds from debt | 1,028,509 |
| | 416,217 |
|
Repayment of debt | (656,536 | ) | | (740,337 | ) |
Purchase of noncontrolling interests | (15,809 | ) | | (1,604 | ) |
Payment of deferred financing costs | (19,687 | ) | | (3,844 | ) |
Issuance of common stock, net | 73,596 |
| | 377,739 |
|
Cash distribution to common stockholders | (550,965 | ) | | (493,471 | ) |
Cash distribution to redeemable OP unitholders | (3,720 | ) | | (4,437 | ) |
Contributions from noncontrolling interests | 2,227 |
| | 5,680 |
|
Distributions to noncontrolling interests | (4,156 | ) | | (3,582 | ) |
Other | 9,702 |
| | 3,622 |
|
Net cash provided by (used in) financing activities | 227,617 |
| | (419,713 | ) |
Net (decrease) increase in cash and cash equivalents | (186,490 | ) | | 4,456 |
|
Effect of foreign currency translation on cash and cash equivalents | 3,136 |
| | (157 | ) |
Cash and cash equivalents at beginning of period | 286,707 |
| | 53,023 |
|
Cash and cash equivalents at end of period | $ | 103,353 |
| | $ | 57,322 |
|
See accompanying notes.
VENTAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
|
| | | | | | | |
| For the Six Months Ended June 30, |
| 2017 | | 2016 |
| (In thousands) |
Supplemental schedule of non-cash activities: | | | |
Assets and liabilities assumed from acquisitions: | | | |
Real estate investments | $ | 205,266 |
| | $ | 8,665 |
|
Utilization of funds held for an Internal Revenue Code Section 1031 exchange | (84,995 | ) | | (6,954 | ) |
Other assets acquired | (4,096 | ) | | 861 |
|
Debt assumed | 64,629 |
| | — |
|
Other liabilities | 65,754 |
| | 2,638 |
|
Deferred income tax liability | (16,180 | ) | | (66 | ) |
Noncontrolling interests | 1,972 |
| | — |
|
Equity issued for redemption of OP and Class C units | 22,359 |
| | 20,770 |
|
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—DESCRIPTION OF BUSINESS
Ventas, Inc. (together with its subsidiaries, unless otherwise indicated or except where the context otherwise requires, “we,” “us” or “our”), an S&P 500 company, is a real estate investment trust (“REIT”) with a highly diversified portfolio of seniors housing and healthcare properties located throughout the United States, Canada and the United Kingdom. As of June 30, 2017, we owned approximately 1,300 properties (including properties owned through investments in unconsolidated entities and properties classified as held for sale), consisting of seniors housing communities, medical office buildings (“MOBs”), life science and innovation centers, inpatient rehabilitation and long-term acute care facilities, general acute care hospitals and skilled nursing facilities (“SNFs”), and we had eight properties under development, including one property that is owned by an unconsolidated real estate entity. Our company was originally founded in 1983 and is headquartered in Chicago, Illinois.
We primarily invest in seniors housing and healthcare properties through acquisitions and lease our properties to unaffiliated tenants or operate them through independent third-party managers. As of June 30, 2017, we leased a total of 580 properties (excluding MOBs) 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, and we engaged independent operators, such as Atria Senior Living, Inc. (“Atria”) and Sunrise Senior Living, LLC (together with its subsidiaries, “Sunrise”), to manage 301 seniors housing communities for us pursuant to long-term management agreements.
Our three largest tenants, Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”), Ardent Health Partners, LLC (together with its subsidiaries, “Ardent”) and Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”) leased from us 141 properties (excluding one property managed by Brookdale Senior Living pursuant to a long-term management agreement), 10 properties and 68 properties (excluding one MOB included within our office operations reportable business segment), respectively, as of June 30, 2017.
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 seniors housing and healthcare operators or properties.
NOTE 2—ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements 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 Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The accompanying Consolidated Financial Statements and related notes should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 14, 2017. Certain prior period amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
The accompanying Consolidated Financial Statements include our accounts and the accounts of our wholly owned subsidiaries and the joint venture entities over which we exercise control. All intercompany transactions and balances have been eliminated in consolidation, and our net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; and (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities
either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We consolidate our investment in a VIE when we determine that we are its primary beneficiary. We may change our original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary.
We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.
As it relates to investments in joint ventures, GAAP may preclude consolidation by the sole general partner in certain circumstances based on the type of rights held by the limited partner(s). We assess limited partners’ rights and their impact on our consolidation conclusions, and we reassess if there is a change to the terms or in the exercisability of the rights of the limited partners, the sole general partner increases or decreases its ownership of limited partnership (“LP”) interests or there is an increase or decrease in the number of outstanding LP interests. We also apply this guidance to managing member interests in limited liability companies (“LLCs”).
We consolidate several VIEs that share the following common characteristics:
•the VIE is in the legal form of an LP or LLC;
•the VIE was designed to own and manage its underlying real estate investments;
•we are the general partner or managing member of the VIE;
•we own a majority of the voting interests in the VIE;
•a minority of voting interests in the VIE are owned by external third parties, unrelated to us;
•the minority owners do not have substantive kick-out or participating rights in the VIE; and
•we are the primary beneficiary of the VIE.
We have separately identified certain special purpose entities that were established to allow investments in life science projects by tax credit investors (“TCIs”). We have determined that these special purpose entities are VIEs and that we are the primary beneficiary of the VIEs, and therefore we consolidate these special purpose entities. Our primary beneficiary determination is based upon several factors, including but not limited to the rights we have in directing the activities which most significantly impact the VIEs’ economic performance as well as certain guarantees which protect the TCIs from losses should a tax credit recapture event occur.
In general, the assets of consolidated VIEs are available only for the settlement of the obligations of the respective entities. Unless otherwise required by the LP or LLC agreement, any mortgage loans of the consolidated VIEs are non-recourse to us. The table below summarizes the total assets and liabilities of our consolidated VIEs as reported on our Consolidated Balance Sheets.
|
| | | | | | | | | | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
| | Total Assets | | Total Liabilities | | Total Assets | | Total Liabilities |
| | (In thousands) |
| | | | | | | | |
NHP/PMB L.P. | | $ | 626,227 |
| | $ | 194,369 |
| | $ | 639,763 |
| | $ | 199,674 |
|
Ventas Realty Capital Healthcare Trust Operating Partnership, L.P. | | — |
| | — |
| | 2,143,139 |
| | 162,426 |
|
Other identified VIEs | | 1,945,402 |
| | 332,971 |
| | 1,882,336 |
| | 354,034 |
|
Tax credit VIEs | | 949,241 |
| | 222,644 |
| | 981,752 |
| | 234,109 |
|
Investments in Unconsolidated Entities
We report investments in unconsolidated entities over whose operating and financial policies we have the ability to exercise significant influence under the equity method of accounting. Under this method of accounting, our share of the investee’s earnings or losses is included in our Consolidated Statements of Income.
We base the initial carrying value of investments in unconsolidated entities on the fair value of the assets at the time we acquired the joint venture interest. We estimate fair values for our equity method investments based on discounted cash flow models that include all estimated cash inflows and outflows over a specified holding period and, where applicable, any estimated debt premiums or discounts. The capitalization rates, discount rates and credit spreads we use in these models are based upon assumptions that we believe to be within a reasonable range of current market rates for the respective investments.
We generally amortize any difference between our cost basis and the basis reflected at the joint venture level, if any, over the lives of the related assets and liabilities and include that amortization in our share of income or loss from unconsolidated entities. For earnings of equity method investments with pro rata distribution allocations, net income or loss is allocated between the partners in the joint venture based on their respective stated ownership percentages. In other instances, net income or loss is allocated between the partners in the joint venture based on the hypothetical liquidation at book value method (the “HLBV method”). Under the HLBV method, net income or loss is allocated between the partners based on the difference between each partner’s claim on the net assets of the joint venture at the end and beginning of the period, after taking into account contributions and distributions. Each partner’s share of the net assets of the joint venture is calculated as the amount that the partner would receive if the joint venture were to liquidate all of its assets at net book value and distribute the resulting cash to creditors and partners in accordance with their respective priorities. Under the HLBV method, in any given period, we could record more or less income than the joint venture has generated, than actual cash distributions received or than the amount we may receive in the event of an actual liquidation.
Redeemable OP Unitholder and Noncontrolling Interests
We own a majority interest in NHP/PMB L.P. (“NHP/PMB”), a limited partnership formed in 2008 to acquire properties from entities affiliated with Pacific Medical Buildings LLC. We consolidate NHP/PMB, as our wholly owned subsidiary is the general partner, who is the primary beneficiary of this VIE. As of June 30, 2017, third party investors owned 2.7 million Class A limited partnership units in NHP/PMB (“OP Units”), which represented 27.5% of the total units then outstanding, and we owned 7.2 million Class B limited partnership units in NHP/PMB, representing the remaining 72.5%. At any time following the first anniversary of the date of their issuance, the OP Units may be redeemed at the election of the holder for cash or, at our option, 0.9051 shares of our common stock per OP Unit, subject to further adjustment in certain circumstances. We are party by assumption to a registration rights agreement with the holders of the OP Units that requires us, subject to the terms and conditions and certain exceptions set forth therein, to file and maintain a registration statement relating to the issuance of shares of our common stock upon redemption of OP Units.
Prior to January 2017, we owned a majority interest in Ventas Realty Capital Healthcare Trust Operating Partnership, L.P. (“Ventas Realty OP”) and we consolidated this entity, as our wholly owned subsidiary is the general partner, and was the primary beneficiary of this VIE. In January 2017, third party investors redeemed the remaining 341,776 limited partnership units (“Class C Units”) outstanding for 341,776 shares of Ventas common stock, valued at $20.9 million. After giving effect to such redemptions, Ventas Realty OP is our wholly owned subsidiary.
As redemption rights are outside of our control, the redeemable OP Units and Class C Units (together, the “OP Unitholder Interests”) are classified outside of permanent equity on our Consolidated Balance Sheets. We reflect the redeemable OP Unitholder Interests at the greater of cost or fair value. As of June 30, 2017 and December 31, 2016, the fair value of the redeemable OP Unitholder Interests was $171.1 million and $177.2 million, respectively. We recognize changes in fair value through capital in excess of par value, net of cash distributions paid and purchases by us of any OP Unitholder Interests. Our diluted earnings per share (“EPS”) includes the effect of any potential shares outstanding from redemption of the OP Unitholder Interests.
Certain noncontrolling interests of other consolidated joint ventures were also classified as redeemable at June 30, 2017 and December 31, 2016. Accordingly, we record the carrying amount of these noncontrolling interests at the greater of their initial carrying amount (increased or decreased for the noncontrolling interests’ share of net income or loss and distributions) or the redemption value. Our joint venture partners have certain redemption rights with respect to their noncontrolling interests in these joint ventures that are outside of our control, and the redeemable noncontrolling interests are classified outside of permanent equity on our Consolidated Balance Sheets. We recognize changes in the carrying value of redeemable noncontrolling interests through capital in excess of par value. In March 2017, certain joint venture partners redeemed all (or a portion) of their interests for $15.8 million.
Noncontrolling Interests
Excluding the redeemable noncontrolling interests described above, we present the portion of any equity that we do not own in entities that we control (and thus consolidate) as noncontrolling interests and classify those interests as a component of consolidated equity, separate from total Ventas stockholders’ equity, on our Consolidated Balance Sheets. For consolidated joint ventures with pro rata distribution allocations, net income or loss is allocated between the joint venture partners based on their respective stated ownership percentages. In other cases, net income or loss is allocated between the joint venture partners based on the HLBV method. We account for purchases or sales of equity interests that do not result in a change of control as equity transactions, through capital in excess of par value. In addition, we include net income attributable to the noncontrolling interests in net income in our Consolidated Statements of Income.
Accounting for Historic and New Markets Tax Credits
For certain of our life science and innovation centers, we are party to contractual arrangements with TCIs that were established to enable the TCIs to receive benefits of historic tax credits (“HTCs”) and/or new market tax credits (“NMTCs”). As of June 30, 2017, we owned ten properties (two of which were in development) that had syndicated HTCs or NMTCs, or both, to TCIs.
In general, capital contributions are made by TCIs into special purpose entities that invest in entities owning the subject property that generates the tax credits. The TCIs receive substantially all of the tax credits and hold only a noncontrolling interest in the economic risk and benefits of the special purpose entities.
HTCs are delivered to the TCIs upon substantial completion of the project. NMTCs are allowed for up to 39% of a qualified investment and are delivered to the TCIs after the investment has been funded and spent on a qualified business. HTCs are subject to 20% recapture per year beginning one year after the completion of the historic rehabilitation of the subject property. NMTCs are subject to 100% recapture until the end of the seventh year following the qualifying investment. We have provided the TCIs with certain guarantees which protect the TCIs from losses should a tax credit recapture event occur. The contractual arrangements with the TCIs include a put/call provision whereby we may be obligated or entitled to repurchase the ownership interest of the TCIs in the special purpose entities at the end of the tax credit recapture period. We anticipate that either the TCIs will exercise their put rights or we will exercise our call rights prior to the applicable tax credit recapture periods.
The portion of the TCI’s capital contribution that is attributed to the put is recorded at fair value at inception in accounts payable and other liabilities on our Consolidated Balance Sheets, and is accreted to the expected put price as interest expense in our Consolidated Statements of Income over the recapture period. The remaining balance of the TCI’s capital contribution is initially recorded in accounts payable and other liabilities on our Consolidated Balance Sheets and will be relieved upon delivery of the tax credit to the TCI, as a reduction in the carrying value of the subject property, net of allocated expenses. Direct and incremental costs incurred in structuring the transaction are deferred and will be recognized as an increase in the cost basis of the subject property upon the recognition of the related tax credit as discussed above.
Accounting for Real Estate Acquisitions
On January 1, 2017, we adopted Accounting Standards Update (“ASU”) 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”) which narrows the FASB’s definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the acquired asset is not a business. If this initial test is not met, an acquired asset cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. The primary differences between business combinations and asset acquisitions include recognition of goodwill at the acquisition date and expense recognition for transaction costs as incurred. We are applying ASU 2017-01 prospectively for acquisitions after January 1, 2017.
Regardless of whether an acquisition is considered a business combination or an asset acquisition, we record the cost of the businesses or assets acquired as tangible and intangible assets and liabilities based upon their estimated fair values as of the acquisition date. Intangibles primarily include the value of in-place leases and acquired lease contracts.
We estimate the fair value of buildings acquired on an as-if-vacant basis, or replacement cost basis and depreciate the building value over the estimated remaining life of the building, generally not to exceed 35 years. We determine the fair value of other fixed assets, such as site improvements and furniture, fixtures and equipment, based upon the replacement cost and depreciate such value over the assets’ estimated remaining useful lives as determined at the applicable acquisition date. We determine the value of land either by considering the sales prices of similar properties in recent transactions or based on internal analyses of recently acquired and existing comparable properties within our portfolio. We generally determine the value of construction in progress based upon the replacement cost. However, for certain acquired properties that are part of a ground-up development, we determine fair value by using the same valuation approach as for all other properties and deducting the estimated cost to complete the development. During the remaining construction period, we capitalize project costs until the development has reached substantial completion. Construction in progress, including capitalized interest, is not depreciated until the development has reached substantial completion.
The fair value of acquired lease-related intangibles, if any, reflects: (i) the estimated value of any above and/or below market leases, determined by discounting the difference between the estimated market rent and in-place lease rent; and (ii) the estimated value of in-place leases related to the cost to obtain tenants, including leasing commissions, and an estimated value of
the absorption period to reflect the value of the rent and recovery costs foregone during a reasonable lease-up period as if the acquired space was vacant. We amortize any acquired lease-related intangibles to revenue or amortization expense over the remaining life of the associated lease plus any assumed bargain renewal periods. If a lease is terminated prior to its stated expiration or not renewed upon expiration, we recognize all unamortized amounts of lease-related intangibles associated with that lease in operations at that time.
We estimate the fair value of purchase option intangible assets and liabilities, if any, by discounting the difference between the applicable property’s acquisition date fair value and an estimate of its future option price. We do not amortize the resulting intangible asset or liability over the term of the lease, but rather adjust the recognized value of the asset or liability upon sale.
We estimate the fair value of tenant or other customer relationships acquired, if any, by considering the nature and extent of existing relationships with the tenant or customer, growth prospects for developing new business with the tenant or customer, the tenant’s credit quality, expectations of lease renewals with the tenant, and the potential for significant, additional future leasing arrangements with the tenant, and we amortize that value over the expected life of the associated arrangements or leases, including the remaining terms of the related leases and any expected renewal periods. We estimate the fair value of trade names and trademarks using a royalty rate methodology and amortize that value over the estimated useful life of the trade name or trademark.
In connection with an acquisition, we may assume rights and obligations under certain lease agreements pursuant to which we become the lessee of a given property. We generally assume the lease classification previously determined by the prior lessee absent a modification in the assumed lease agreement. We assess assumed operating leases, including ground leases, to determine whether the lease terms are favorable or unfavorable to us given current market conditions on the acquisition date. To the extent the lease terms are favorable or unfavorable to us relative to market conditions on the acquisition date, we recognize an intangible asset or liability at fair value and amortize that asset or liability to interest or rental expense in our Consolidated Statements of Income over the applicable lease term. We include all lease-related intangible assets and liabilities within acquired lease intangibles and accounts payable and other liabilities, respectively, on our Consolidated Balance Sheets.
We determine the fair value of loans receivable acquired by discounting the estimated future cash flows using current interest rates at which similar loans with the same terms and length to maturity would be made to borrowers with similar credit ratings. We do not establish a valuation allowance at the acquisition date because the estimated future cash flows already reflect our judgment regarding their uncertainty. We recognize the difference between the acquisition date fair value and the total expected cash flows as interest income using an effective interest method over the life of the applicable loan. Subsequent to the acquisition date, we evaluate changes regarding the uncertainty of future cash flows and the need for a valuation allowance, as appropriate.
We estimate the fair value of noncontrolling interests assumed consistent with the manner in which we value all of the underlying assets and liabilities.
We calculate the fair value of long-term assumed debt by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which we approximate based on the rate at which we would expect to incur a replacement instrument on the date of acquisition, and recognize any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the instrument.
Impairment of Long-Lived and Intangible Assets
We periodically evaluate our long-lived assets, primarily consisting of investments in real estate, for impairment indicators. If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying operations. In performing this evaluation, we consider market conditions and our current intentions with respect to holding or disposing of the asset. We adjust the net book value of leased properties and other long-lived assets to fair value if the sum of the expected future undiscounted cash flows, including sales proceeds, is less than book value. We recognize an impairment loss at the time we make any such determination.
If impairment indicators arise with respect to intangible assets with finite useful lives, we evaluate impairment by comparing the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of the asset, then we estimate the fair value of the asset and compare the estimated fair value to the intangible asset’s carrying value. We recognize any shortfall from carrying value as an impairment loss in the current period.
We evaluate our investments in unconsolidated entities for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying value of our investment may exceed its fair value. If we determine that a decline in the fair value of our investment in an unconsolidated entity is other-than-temporary, and if such reduced fair value is below the carrying value, we record an impairment.
We test goodwill for impairment at least annually, and more frequently if indicators arise. We first assess qualitative factors, such as current macroeconomic conditions, state of the equity and capital markets and our overall financial and operating performance, to determine the likelihood that the fair value of a reporting unit is less than its carrying amount. If we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we proceed with a two-step approach to evaluating impairment. First, we estimate the fair value of the reporting unit and compare it to the reporting unit’s carrying value. If the carrying value exceeds fair value, we proceed with the second step, which requires us to assign the fair value of the reporting unit to all of the assets and liabilities of the reporting unit as if it had been acquired in a business combination at the date of the impairment test. The excess fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied value of goodwill and is used to determine the amount of impairment. We recognize an impairment loss to the extent the carrying value of goodwill exceeds the implied value in the current period.
Estimates of fair value used in our evaluation of goodwill (if necessary based on our qualitative assessment), investments in real estate, investments in unconsolidated entities and intangible assets are based upon discounted future cash flow projections or other acceptable valuation techniques that are based, in turn, upon all available evidence including level three inputs, such as revenue and expense growth rates, estimates of future cash flows, capitalization rates, discount rates, general economic conditions and trends, or other available market data. Our ability to accurately predict future operating results and cash flows and to estimate and determine fair values impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.
Assets Held for Sale and Discontinued Operations
We sell properties from time to time for various reasons, including favorable market conditions or the exercise of purchase options by tenants. We classify certain long-lived assets as held for sale once the criteria, as defined by GAAP, has been met. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value minus cost to sell and are no longer depreciated. We report discontinued operations when the following criteria are met: (1) a component of an entity or group of components has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business is classified as held for sale on the acquisition date. The results of operations for assets meeting the definition of discontinued operations are reflected in our Consolidated Statements of Income as discontinued operations for all periods presented. We allocate estimated interest expense to discontinued operations based on property values and our weighted average interest rate or the property’s actual mortgage interest.
Fair Values of Financial Instruments
Fair value is a market-based measurement, not an entity-specific measurement, and we determine fair value based on the assumptions that we expect market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).
Level one inputs utilize unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access. Level two inputs are inputs other than quoted prices included in level one that are directly or indirectly observable for the asset or liability. Level two inputs may include quoted prices for similar assets and liabilities in active markets and other inputs for the asset or liability that are observable at commonly quoted intervals, such as interest rates, foreign exchange rates and yield curves. Level three inputs are unobservable inputs for the asset or liability, which typically are based on our own assumptions, because there is little, if any, related market activity. If the determination of the fair value measurement is based on inputs from different levels of the hierarchy, the level within which the entire fair value measurement falls is the lowest level input that is significant to the fair value measurement in its entirety. If the volume and level of market activity for an asset or liability has decreased significantly relative to the normal market activity for such asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that a transaction for an asset or liability is not orderly, little, if any, weight is placed on that transaction price as an indicator of fair value. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
We use the following methods and assumptions in estimating the fair value of our financial instruments.
| |
• | Cash and cash equivalents - The carrying amount of unrestricted cash and cash equivalents reported on our Consolidated Balance Sheets approximates fair value due to the short maturity of these instruments. |
| |
• | Escrow deposits and restricted cash - The carrying amount of escrow deposits and restricted cash reported on our Consolidated Balance Sheets approximates fair value due to the short maturity of these instruments. |
| |
• | Loans receivable - We estimate the fair value of loans receivable using level two and level three inputs. We discount future cash flows using current interest rates at which similar loans with the same terms and length to maturity would be made to borrowers with similar credit ratings. |
| |
• | Marketable debt securities - We estimate the fair value of corporate bonds, if any, using level two inputs. We observe quoted prices for similar assets or liabilities in active markets that we have the ability to access. We estimate the fair value of certain government-sponsored pooled loan investments using level three inputs. We consider credit spreads, underlying asset performance and credit quality, and default rates. |
| |
• | Derivative instruments - With the assistance of a third party, we estimate the fair value of derivative instruments, including interest rate caps, interest rate swaps, and foreign currency forward contracts, using level two inputs. |
| |
◦ | Interest rate caps - We observe forward yield curves and other relevant information; |
| |
◦ | Interest rate swaps - We observe alternative financing rates derived from market-based financing rates, forward yield curves and discount rates; and |
| |
◦ | Foreign currency forward contracts - We estimate the future values of the two currency tranches using forward exchange rates that are based on traded forward points and calculate a present value of the net amount using a discount factor based on observable traded interest rates. |
| |
• | Senior notes payable and other debt - We estimate the fair value of senior notes payable and other debt using level two inputs. We discount the future cash flows using current interest rates at which we could obtain similar borrowings. For mortgage debt, we may estimate fair value using level three inputs, similar to those used in determining fair value of loans receivable (above). |
| |
• | Redeemable OP Unitholder Interests - We estimate the fair value of our redeemable OP Unitholder Interests using level one inputs. We base fair value on the closing price of our common stock, as OP Units (and previously Class C Units) may be redeemed at the election of the holder for cash or, at our option, shares of our common stock, subject to adjustment in certain circumstances. |
Revenue Recognition
Triple-Net Leased Properties and Office Operations
Certain of our triple-net leases and most of our MOB and life science and innovation center (collectively, “office operations”) leases provide for periodic and determinable increases in base rent. We recognize base rental revenues under these leases on a straight-line basis over the applicable lease term when collectibility is reasonably assured. Recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in other assets on our Consolidated Balance Sheets. At June 30, 2017 and December 31, 2016, this cumulative excess totaled $256.2 million (net of allowances of $113.1 million) and $244.6 million (net of allowances of $109.8 million), respectively (excluding properties classified as held for sale).
Certain of our leases provide for periodic increases in base rent only if certain revenue parameters or other substantive contingencies are met. We recognize the increased rental revenue under these leases as the related parameters or contingencies are met, rather than on a straight-line basis over the applicable lease term.
Senior Living Operations
We recognize resident fees and services, other than move-in fees, monthly as services are provided. We recognize move-in fees on a straight-line basis over the average resident stay. Our lease agreements with residents generally have terms of 12 to 18 months and are cancelable by the resident upon 30 days’ notice.
Other
We recognize interest income from loans and investments, including discounts and premiums, using the effective interest method when collectibility is reasonably assured. We apply the effective interest method on a loan-by-loan basis and
recognize discounts and premiums as yield adjustments over the related loan term. We recognize interest income on an impaired loan to the extent our estimate of the fair value of the collateral is sufficient to support the balance of the loan, other receivables and all related accrued interest. When the balance of the loan, other receivables and all related accrued interest is equal to or less than our estimate of the fair value of the collateral, we recognize interest income on a cash basis. We provide a reserve against an impaired loan to the extent our total investment in the loan exceeds our estimate of the fair value of the loan collateral.
We recognize income from rent, lease termination fees, development services, management advisory services, and all other income when all of the following criteria are met in accordance with SEC Staff Accounting Bulletin 104: (i) the applicable agreement has been fully executed and delivered; (ii) services have been rendered; (iii) the amount is fixed or determinable; and (iv) collectibility is reasonably assured.
Allowances
We assess the collectibility of our rent receivables, including straight-line rent receivables. We base our assessment of the collectibility of rent receivables (other than straight-line rent receivables) on several factors, including, among other things, payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, if any, and current economic conditions. If our evaluation of these factors indicates it is probable that we will be unable to recover the full value of the receivable, we provide a reserve against the portion of the receivable that we estimate may not be recovered. We base our assessment of the collectibility of straight-line rent receivables on several factors, including, among other things, the financial strength of the tenant and any guarantors, the historical operations and operating trends of the property, the historical payment pattern of the tenant and the type of property. If our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments due in the future, we provide a reserve against the recognized straight-line rent receivable asset for the portion, up to its full value, that we estimate may not be recovered. If we change our assumptions or estimates regarding the collectibility of future rent payments required by a lease, we may adjust our reserve to increase or reduce the rental revenue recognized in the period we make such change in our assumptions or estimates.
Recently Issued or Adopted Accounting Standards
On January 1, 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (“ASU 2016-09”) which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. Adoption of ASU 2016-09 did not have a significant impact on our Consolidated Financial Statements.
In 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers (“ASU 2014-09”, as codified in “ASC 606”), which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASC 606 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASC 606 specifically references contracts with customers, it may also apply to certain other transactions such as the sale of real estate. ASC 606 is effective for us beginning January 1, 2018 and we plan to adopt ASC 606 using the modified retrospective method.
We have evaluated all of our revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. Based on a review of our various revenue streams, we believe the following items in our Consolidated Statements of Income are subject to ASC 606: office building and other services revenue, certain elements of our resident fees and services, common area maintenance in our office operations and gains on the sale of real estate. Our office building and other services revenues are primarily generated by management contracts where we provide management, leasing, marketing, facility development and advisory services. Resident fees and services include revenues generated through services we provide to residents of our seniors housing communities that are ancillary to the residents’ contractual rights to occupy living and common-area space at the communities, such as care, meals, transportation and activities. While these revenue streams are subject to the application of ASC 606, we believe that the recognition of income will be consistent with the current accounting model because currently the revenues associated with these services are generally recognized on a monthly basis, the period in which the related services are performed. We will not apply the principles of ASC 606 to our common area maintenance revenues until January 1, 2019, when we adopt ASU 2016-02, Leases (“ASU 2016-02”).
As it relates to gains on sale of real estate, we expect to recognize any gains when we transfer control of a property and will no longer apply existing sales criteria in ASC 360 Property, Plant, and Equipment. We are evaluating the impact of ASC 606 to $31.2 million of deferred gains relating to sales of real estate assets in 2015. Other than the potential cumulative effect adjustment relating to such deferred gains, we do not expect the adoption of ASC 606 to have a significant impact on our Consolidated Financial Statements. Our remaining implementation items include calculating the cumulative effect adjustment,
if any, to be recorded upon adoption of ASC 606, drafting revised disclosures in accordance with the new standard and implementing changes to internal control policies and procedures, if any.
In February 2016, the FASB issued ASU 2016-02, which introduces a lessee model that brings most leases on the balance sheet and, among other changes, eliminates the requirement in current GAAP for an entity to use bright-line tests in determining lease classification. The amendments in ASU 2016-02 do not significantly change the current lessor accounting model. ASU 2016-02 is not effective for us until January 1, 2019, with early adoption permitted. We are continuing to evaluate this guidance and the impact to us, as both lessor and lessee, on our Consolidated Financial Statements.
In 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”), which provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires an entity to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-15 and ASU 2016-18 are effective for us beginning January 1, 2018 and will be applied by us using a retrospective transition method. Adoption of these standards is not expected to have a significant impact on our Consolidated Financial Statements.
In 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires a company to recognize the tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for us beginning January 1, 2018, with early adoption permitted. ASU 2016-16 will be applied by us using a modified retrospective method. Adoption of this standard is not expected to have a significant impact on our Consolidated Financial Statements.
NOTE 3—CONCENTRATION OF CREDIT RISK
As of June 30, 2017, Atria, Sunrise, Brookdale Senior Living, Ardent and Kindred managed or operated approximately 21.9%, 10.9%, 7.7%, 4.9% and 1.1%, respectively, of our real estate investments based on gross book value (excluding properties classified as held for sale and properties owned through investments in unconsolidated entities as of June 30, 2017). Because Atria and Sunrise manage our properties in exchange for the receipt of a management fee from us, we are not directly exposed to the credit risk of our managers in the same manner or to the same extent as our triple-net lease tenants.
Seniors housing communities, based on gross book value, constituted approximately 25.1% of real estate investments in the triple-net leased properties reportable business segment and 35.3% of real estate investments in the senior living operations reportable business segment (excluding properties classified as held for sale and properties owned through investments in unconsolidated entities as of June 30, 2017). MOBs, life science and innovation centers, inpatient rehabilitation and long-term acute care facilities, general acute care hospitals, SNFs and secured loans receivable and investments collectively comprised the remaining 39.6% of real estate investments. Our consolidated properties were located in 46 states, the District of Columbia, seven Canadian provinces and the United Kingdom as of June 30, 2017, with properties in one state (California) accounting for more than 10% of our total continuing revenues and net operating income (“NOI,” which is defined as total revenues, excluding interest and other income, less property-level operating expenses and office building services costs) for the three months then ended.
Triple-Net Leased Properties
|
| | | | | |
| For the Three Months Ended June 30, |
| 2017 | | 2016 |
Revenues(1): | | | |
Kindred(2) | 5.1 | % | | 5.4 | % |
Brookdale Senior Living(3) | 4.7 |
| | 4.9 |
|
Ardent | 3.1 |
| | 3.1 |
|
NOI: | | | |
Kindred(2) | 8.6 | % | | 9.3 | % |
Brookdale Senior Living(3) | 7.9 |
| | 8.3 |
|
Ardent | 5.2 |
| | 5.4 |
|
| |
(1) | Total revenues include office building and other services revenue, income from loans and investments and interest and other income. |
| |
(2) | Includes 36 skilled nursing facilities classified as held for sale at June 30, 2017 that are included in continuing operations. |
| |
(3) | Excludes one seniors housing community included in senior living operations and includes one seniors housing community classified as held for sale at June 30, 2017 that is included in continuing operations. |
Each of our leases with Brookdale Senior Living, Ardent and Kindred is a triple-net lease that obligates the tenant to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures, and to comply with the terms of the mortgage financing documents, if any, affecting the properties. In addition, each of our Brookdale Senior Living, Ardent and Kindred leases has a corporate guaranty. Brookdale Senior Living and Kindred have multiple leases with us and those leases contain cross-default provisions tied to each other, as well as lease renewals by lease agreement or by pool of assets.
The properties we lease to Brookdale Senior Living, Ardent and Kindred accounted for a significant portion of our triple-net leased properties segment revenues and NOI for the three months ended June 30, 2017 and 2016. If any of Brookdale Senior Living, Ardent or Kindred becomes unable or unwilling to satisfy its obligations to us or to renew its leases with us upon expiration of the terms thereof, our financial condition and results of operations could decline, and our ability to service our indebtedness and to make distributions to our stockholders could be impaired. We cannot assure you that Brookdale Senior Living, Ardent and Kindred will have sufficient assets, income and access to financing to enable them to satisfy their respective obligations to us, and any failure, inability or unwillingness by Brookdale Senior Living, Ardent or Kindred to do so 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”). We also cannot assure you that Brookdale Senior Living, Ardent and Kindred will elect to renew their respective leases with us upon expiration of the leases or that we will be able to reposition any non-renewed properties on a timely basis or on the same or better economic terms, if at all.
Senior Living Operations
As of June 30, 2017, Atria and Sunrise, collectively, provided comprehensive property management and accounting services with respect to 269 of our 301 seniors housing communities, for which we pay annual management fees pursuant to long-term management agreements.
We rely on our managers’ personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our senior living operations efficiently and effectively. We also rely on our managers to set appropriate resident fees and otherwise operate our seniors housing communities in compliance with the terms of our management agreements and all applicable laws and regulations. Although we have various rights as the property owner under our management agreements, including various rights to terminate and exercise remedies under the agreements as provided therein, Atria’s or Sunrise’s failure, inability or unwillingness to satisfy its respective obligations under those agreements, to efficiently and effectively manage our properties or to provide timely and accurate accounting information with respect thereto could have a Material Adverse Effect on us. In addition, significant changes in Atria’s or Sunrise’s senior management or equity ownership or any adverse developments in their businesses and affairs or financial condition could have a Material Adverse Effect on us.
Our 34% ownership interest in Atria entitles us to certain rights and minority protections, as well as the right to appoint two of six members on the Atria Board of Directors.
Atria, Sunrise, Brookdale Senior Living, Ardent, and Kindred Information
Each of Brookdale Senior Living and Kindred 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 and Kindred contained or referred to in this Quarterly Report on Form 10-Q has been derived from SEC filings made by Brookdale Senior Living or Kindred, as the case may be, or other publicly available information, or was provided to us by Brookdale Senior Living or Kindred, 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 and Kindred’s publicly available filings, which can be found at the SEC’s website at www.sec.gov.
Atria, Sunrise and Ardent are not currently subject to the reporting requirements of the SEC. The information related to 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 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.
NOTE 4—ACQUISITIONS OF REAL ESTATE PROPERTY
We acquire and invest in seniors housing and healthcare properties primarily to achieve an expected yield on investment, to grow and diversify our portfolio and revenue base, and to reduce our dependence on any single tenant, operator or manager, geographic location, asset type, business model or revenue source.
During the six months ended June 30, 2017, we acquired 14 triple-net leased properties (including six assets previously owned by an equity method investee) and one life science, research and medical campus (reported within our office operations reportable business segment) for an aggregate purchase price of $404.4 million. Each of these acquisitions was accounted for as an asset acquisition.
NOTE 5—DISPOSITIONS
2017 Activity
During the six months ended June 30, 2017, we sold 10 triple-net leased properties, two MOBs, and two vacant land parcels for aggregate consideration of $104.6 million and we recognized a gain on the sale of these assets of $44.0 million.
Pending Kindred Dispositions
In November 2016, we entered into agreements with Kindred providing that Kindred will either acquire all 36 SNFs owned by us and operated by Kindred (the “Ventas SNFs”) for $700 million, in connection with Kindred’s previously announced plan to exit its SNF business; or, renew the current lease on all unpurchased Ventas SNFs not purchased by Kindred by April 30, 2018 until 2025 at the current rent level plus annual escalations. On June 30, 2017, Kindred announced that it had signed definitive agreements to sell its entire SNF business to an affiliate of Blue Mountain Capital Management, LLC and that, as Kindred closes on the sale of its SNFs, Kindred will pay to us its allocable portion of the sale proceeds for a total $700 million aggregate purchase price for the Ventas SNFs and we will convey the applicable Ventas SNFs to the ultimate buyer. We expect to record a gain exceeding $600 million upon the sale of the Ventas SNFs, which are classified as held for sale on our Consolidated Balance Sheets as of June 30, 2017. Kindred expects the closings of the sale of the Ventas SNFs to occur in phases, beginning in the third quarter of 2017 and completed by year end 2017. However, there can be no assurance that the closings will occur or the timing of any such closings.
Real Estate Impairment
We recognized impairments of $15.6 million and $14.5 million, respectively, for the six months ended June 30, 2017 and 2016, which are recorded in depreciation and amortization in our Consolidated Statements of Income.
Assets Held for Sale
The table below summarizes our real estate assets classified as held for sale as of June 30, 2017 and December 31, 2016, including the amounts reported on our Consolidated Balance Sheets.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
| | Number of Properties Held for Sale | | Assets Held for Sale | | Liabilities Related to Assets Held for Sale | | Number of Properties Held for Sale | | Assets Held for Sale | | Liabilities Related to Assets Held for Sale |
| | (Dollars in thousands) |
Triple-net Leased Properties | | 37 |
| | $ | 36,500 |
| | $ | 8,547 |
| | — |
| | $ | — |
| | $ | — |
|
Office Operations | | 7 |
| | 53,069 |
| | 1,265 |
| | 7 |
| | 53,151 |
| | 1,462 |
|
Senior Living Operations* | | — |
| | — |
| | — |
| | — |
| | 1,810 |
| | — |
|
Total | | 44 |
| | $ | 89,569 |
| | $ | 9,812 |
| | 7 |
| | $ | 54,961 |
| | $ | 1,462 |
|
| | | | | | | | | | | | |
* Includes one vacant land parcel classified as held for sale as of December 31, 2016 and sold in June 2017. |
NOTE 6—LOANS RECEIVABLE AND INVESTMENTS
As of June 30, 2017 and December 31, 2016, we had $1.4 billion and $754.6 million, respectively, of net loans receivable and investments relating to seniors housing and healthcare operators or properties. The following is a summary of our net loans receivable and investments as of June 30, 2017 and December 31, 2016, including amortized cost, fair value and unrealized gains or losses on available-for-sale investments: |
| | | | | | | | | | | | | | | |
| Carrying Amount | | Amortized Cost | | Fair Value | | Unrealized Gain |
| (In thousands) |
As of June 30, 2017: | | | | | | | |
Secured/mortgage loans and other | $ | 1,339,886 |
| | $ | 1,339,886 |
| | $ | 1,359,831 |
| | $ | — |
|
Government-sponsored pooled loan investments (1) | 55,518 |
| | 54,464 |
| | 55,518 |
| | 1,054 |
|
Total investments reported as Secured loans receivable and investments, net | 1,395,404 |
| | 1,394,350 |
| | 1,415,349 |
| | 1,054 |
|
| | | | | | | |
Non-mortgage loans receivable, net | 53,724 |
| | 53,724 |
| | 54,587 |
| | — |
|
Total investments reported as Other assets | 53,724 |
| | 53,724 |
| | 54,587 |
| | — |
|
Total loans receivable and investments, net | $ | 1,449,128 |
| | $ | 1,448,074 |
| | $ | 1,469,936 |
| | $ | 1,054 |
|
| | | | | | | |
As of December 31, 2016: | | | | | | | |
Secured/mortgage loans and other | $ | 646,972 |
| | $ | 646,972 |
| | $ | 655,981 |
| | $ | — |
|
Government-sponsored pooled loan investments (1) | 55,049 |
| | 53,810 |
| | 55,049 |
| | 1,239 |
|
Total investments reported as Secured loans receivable and investments, net | 702,021 |
| | 700,782 |
| | 711,030 |
| | 1,239 |
|
| | | | | | | |
Non-mortgage loans receivable, net | 52,544 |
| | 52,544 |
| | 53,626 |
| | — |
|
Total investments reported as Other assets | 52,544 |
| | 52,544 |
| | 53,626 |
| | — |
|
Total loans receivable and investments, net | $ | 754,565 |
| | $ | 753,326 |
| | $ | 764,656 |
| | $ | 1,239 |
|
(1) Investments in government-sponsored pool loans have contractual maturity dates in 2023.
2017 Activity
In March 2017, we provided secured debt financing to a subsidiary of Ardent to facilitate Ardent’s acquisition of LHP Hospital Group, Inc., which included a $700.0 million term loan and a $60.0 million revolving line of credit feature (of which $27.5 million was outstanding at June 30, 2017). The LIBOR-based debt financing has a five-year term with a weighted average interest rate of approximately 9.0% as of June 30, 2017 and is guaranteed by Ardent’s parent company.
During the six months ended June 30, 2017, we received $13.7 million for the partial prepayment of secured and unsecured loans receivable and $6.0 million for the full repayment of one secured loan receivable that was due to mature on July 5, 2017.
NOTE 7—INVESTMENTS IN UNCONSOLIDATED ENTITIES
We report investments in unconsolidated entities over whose operating and financial policies we have the ability to exercise significant influence under the equity method of accounting. We are not required to consolidate these entities because our joint venture partners have significant participating rights, nor are these entities considered VIEs, as they are controlled by equity holders with sufficient capital. At June 30, 2017, we had ownership interests (ranging from 5% to 25%) in joint ventures that owned 31 properties, excluding properties under development and properties classified as held for sale. We account for our interests in real estate joint ventures, as well as our 34% interest in Atria and 9.9% interest in Ardent (which are included within other assets on our Consolidated Balance Sheets), under the equity method of accounting.
With the exception of our interests in Atria and Ardent, we provide various services to each unconsolidated entity in exchange for fees and reimbursements. Total management fees earned in connection with these entities were $1.4 million and $1.6 million for the three months ended June 30, 2017 and 2016, respectively, and $3.0 million and $3.2 million for the six months ended June 30, 2017 and 2016, respectively, which is included in office building and other services revenue in our Consolidated Statements of Income.
In February 2017, we acquired the controlling interest in six triple-net leased seniors housing communities for a purchase price of $100.0 million. In connection with this acquisition, we re-measured the fair value of our previously held equity interest, resulting in a gain on re-measurement of $3.0 million, which is included in income (loss) from unconsolidated entities in our Consolidated Statements of Income.
NOTE 8—INTANGIBLES
The following is a summary of our intangibles as of June 30, 2017 and December 31, 2016: |
| | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Balance | | Remaining Weighted Average Amortization Period in Years | | Balance | | Remaining Weighted Average Amortization Period in Years |
| (Dollars in thousands) |
Intangible assets: | | | | | | | |
Above market lease intangibles | $ | 186,323 |
| | 7.2 | | $ | 184,993 |
| | 6.9 |
In-place and other lease intangibles | 1,347,850 | | 23.6 | | 1,325,636 |
| | 23.6 |
Goodwill | 1,034,054 | | N/A | | 1,033,225 |
| | N/A |
Other intangibles | 35,840 |
| | 12.0 | | 35,783 |
| | 11.3 |
Accumulated amortization | (818,055 | ) | | N/A | | (769,558 | ) | | N/A |
Net intangible assets | $ | 1,786,012 |
| | 21.5 | | $ | 1,810,079 |
| | 21.5 |
Intangible liabilities: | | | | | | | |
Below market lease intangibles | $ | 361,009 |
| | 13.8 | | $ | 345,103 |
| | 14.1 |
Other lease intangibles | 40,343 |
| | 39.5 | | 40,843 |
| | 38.5 |
Accumulated amortization | (148,110 | ) | | N/A | | (133,468 | ) | | N/A |
Purchase option intangibles | 3,568 |
| | N/A | | 3,568 |
| | N/A |
Net intangible liabilities | $ | 256,810 |
| | 15.6 | | $ | 256,046 |
| | 15.9 |
N/A—Not Applicable.
Above market lease intangibles and in-place and other lease intangibles are included in acquired lease intangibles within real estate investments on our Consolidated Balance Sheets. Other intangibles (including non-compete agreements, trade names and trademarks) are included in other assets on our Consolidated Balance Sheets. Below market lease intangibles, other lease intangibles and purchase option intangibles are included in accounts payable and other liabilities on our Consolidated Balance Sheets.
NOTE 9—OTHER ASSETS
The following is a summary of our other assets as of June 30, 2017 and December 31, 2016: |
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (In thousands) |
Straight-line rent receivables, net | $ | 256,160 |
| | $ | 244,580 |
|
Non-mortgage loans receivable, net | 53,724 |
| | 52,544 |
|
Other intangibles, net | 7,138 |
| | 8,190 |
|
Investments in unconsolidated operating entities | 43,668 |
| | 28,431 |
|
Other | 144,785 |
| | 184,619 |
|
Total other assets | $ | 505,475 |
| | $ | 518,364 |
|
NOTE 10—SENIOR NOTES PAYABLE AND OTHER DEBT
The following is a summary of our senior notes payable and other debt as of June 30, 2017 and December 31, 2016: |
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (In thousands) |
Unsecured revolving credit facility (1) | $ | 516,455 |
| | $ | 146,538 |
|
1.250% Senior Notes due 2017 | — |
| | 300,000 |
|
2.00% Senior Notes due 2018 | 700,000 |
| | 700,000 |
|
Unsecured term loan due 2018 (2) | 200,000 |
| | 200,000 |
|
Unsecured term loan due 2019 (2) | 278,586 |
| | 371,215 |
|
4.00% Senior Notes due 2019 | 600,000 |
| | 600,000 |
|
3.00% Senior Notes, Series A due 2019 (3) | 308,595 |
| | 297,841 |
|
2.700% Senior Notes due 2020 | 500,000 |
| | 500,000 |
|
Unsecured term loan due 2020 | 900,000 |
| | 900,000 |
|
4.750% Senior Notes due 2021 | 700,000 |
| | 700,000 |
|
4.25% Senior Notes due 2022 | 600,000 |
| | 600,000 |
|
3.25% Senior Notes due 2022 | 500,000 |
| | 500,000 |
|
3.300% Senior Notes due 2022 (3) | 192,871 |
| | 186,150 |
|
3.125% Senior Notes due 2023 | 400,000 |
| | 400,000 |
|
3.100% Senior Notes due 2023 | 400,000 |
| | — |
|
2.55% Senior Notes, Series D due 2023 (3) | 212,159 |
| | — |
|
3.750% Senior Notes due 2024 | 400,000 |
| | 400,000 |
|
4.125% Senior Notes, Series B due 2024 (3) | 192,872 |
| | 186,150 |
|
3.500% Senior Notes due 2025 | 600,000 |
| | 600,000 |
|
4.125% Senior Notes due 2026 | 500,000 |
| | 500,000 |
|
3.25% Senior Notes due 2026 | 450,000 |
| | 450,000 |
|
3.850% Senior Notes due 2027 | 400,000 |
| | — |
|
6.90% Senior Notes due 2037 | 52,400 |
| | 52,400 |
|
6.59% Senior Notes due 2038 | 22,973 |
| | 22,973 |
|
5.45% Senior Notes due 2043 | 258,750 |
| | 258,750 |
|
5.70% Senior Notes due 2043 | 300,000 |
| | 300,000 |
|
4.375% Senior Notes due 2045 | 300,000 |
| | 300,000 |
|
Mortgage loans and other | 1,506,572 |
| | 1,718,897 |
|
Total | 11,992,233 |
| | 11,190,914 |
|
Deferred financing costs, net | (73,679 | ) | | (61,304 | ) |
Unamortized fair value adjustment | 20,696 |
| | 25,224 |
|
Unamortized discounts | (31,253 | ) | | (27,508 | ) |
Senior notes payable and other debt | $ | 11,907,997 |
| | $ | 11,127,326 |
|
| |
(1) | As of June 30, 2017 and December 31, 2016, respectively, $33.1 million and $146.5 million of aggregate borrowings were denominated in Canadian dollars. Aggregate borrowings of $30.4 million were denominated in British pounds as of June 30, 2017. There were no aggregate borrowings denominated in British pounds as of December 31, 2016. |
| |
(2) | These amounts represent in aggregate the $478.6 million and $571.2 million of unsecured term loan borrowings under our unsecured credit facility as of June 30, 2017 and December 31, 2016, respectively. As of December 31, 2016, $92.6 million due 2019 was in the form of Canadian dollars, which was repaid in full during the six months ended June 30, 2017. |
| |
(3) | These borrowings are in the form of Canadian dollars. |
As of June 30, 2017, our indebtedness had the following maturities: |
| | | | | | | | | | | | | | | |
| Principal Amount Due at Maturity | | Unsecured Revolving Credit Facility (1) | | Scheduled Periodic Amortization | | Total Maturities |
| (In thousands) |
2017 | $ | 103,561 |
| | $ | — |
| | $ | 11,611 |
| | $ | 115,172 |
|
2018 | 1,101,879 |
| | — |
| | 20,559 |
| | 1,122,438 |
|
2019 | 1,599,713 |
| | — |
| | 14,596 |
| | 1,614,309 |
|
2020 | 1,422,547 |
| | — |
| | 11,697 |
| | 1,434,244 |
|
2021 | 772,838 |
| | 516,455 |
| | 10,228 |
| | 1,299,521 |
|
Thereafter (2) | 6,291,984 |
| | — |
| | 114,565 |
| | 6,406,549 |
|
Total maturities | $ | 11,292,522 |
| | $ | 516,455 |
| | $ | 183,256 |
| | $ | 11,992,233 |
|
| |
(1) | As of June 30, 2017, we had $103.4 million of unrestricted cash and cash equivalents, for $413.1 million of net borrowings outstanding under our unsecured revolving credit facility. |
| |
(2) | Includes $52.4 million aggregate principal amount of our 6.90% senior notes due 2037 that is subject to repurchase, at the option of the holders, on October 1 in each of 2017 and 2027, and $23.0 million aggregate principal amount of 6.59% senior notes due 2038 that is subject to repurchase, at the option of the holders, on July 7 in each of 2018, 2023 and 2028. |
Unsecured Revolving Credit Facility and Unsecured Term Loans
In April 2017, we entered into a new unsecured credit facility comprised of a $3.0 billion unsecured revolving credit facility, initially priced at LIBOR plus 0.875%, that replaced our previous $2.0 billion unsecured revolving credit facility priced at LIBOR plus 1.0%. The new unsecured credit facility is also comprised of our $200.0 million term loan that is scheduled to mature in 2018 and our $278.6 million term loan that is scheduled to mature in 2019. The 2018 and 2019 term loans remain priced at LIBOR plus 1.05%.
The new revolving credit facility matures in 2021, but may be extended at our option subject to the satisfaction of certain conditions for two additional periods of six months each. The new revolving credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to $3.75 billion.
As of June 30, 2017, we had $516.5 million of borrowings outstanding, $14.5 million of letters of credit outstanding and $2.5 billion of unused borrowing capacity available under our new revolving credit facility.
As of June 30, 2017, we also had a $900.0 million term loan due 2020 priced at LIBOR plus 0.975%.
Senior Notes
In March 2017, Ventas Realty, Limited Partnership (“Ventas Realty”) issued and sold $400.0 million aggregate principal amount of 3.100% senior notes due 2023 at a public offering price equal to 99.280% of par, for total proceeds of $397.1 million before the underwriting discount and expenses, and $400.0 million aggregate principal amount of 3.850% senior notes due 2027 at a public offering price equal to 99.196% of par, for total proceeds of $396.8 million before the underwriting discount and expenses.
In April 2017, we repaid in full, at par, $300.0 million aggregate principal amount then outstanding of our 1.250% senior notes due 2017 upon maturity.
In June 2017, Ventas Canada Finance Limited issued and sold C$275.0 million aggregate principal amount of 2.55% senior notes, Series D due 2023 at a price equal to 99.954% of par, for total proceeds of C$274.9 million before the agent fees and expenses. The notes were offered on a private placement basis in Canada. We used part of the proceeds to repay C$124.4 million on our unsecured term loan due 2019.
Mortgage Loan Obligations
During the six months ended June 30, 2017, we repaid in full mortgage loans outstanding in the aggregate principal amount of $237.0 million with a weighted average maturity of 1.7 years and recognized a gain on extinguishment of debt of $0.4 million in connection with these repayments.
Derivatives and Hedging
In January and February 2017, we entered into a total of $275 million of notional forward starting swaps with an effective date of April 3, 2017, that reduced our exposure to fluctuations in interest rates related to changes in rates between the trade dates of the swaps and the forecasted issuance of long-term debt. The rate on the notional amounts was locked at a weighted average rate of 2.33%. In March 2017, these swaps were terminated in conjunction with our issuance of the 3.850% senior notes due 2027, which resulted in a $0.8 million gain which will be recognized over the life of the notes using the effective interest method.
In March 2017, we entered into interest rate swaps totaling a notional amount of $400 million with a maturity of January 15, 2023, effectively converting fixed rate debt to three month LIBOR-based floating rate debt. As a result, we will receive a fixed rate on the swap of 3.10% and will pay a floating rate equal to three month LIBOR plus a weighted average swap spread of 0.98%.
In June 2017, we entered into a total of $125 million of notional forward starting swaps with an effective date of January 15, 2018 and a maturity of January 15, 2028, that reduced our exposure to fluctuations in interest rates related to changes in rates between the trade dates of the swaps and the forecasted issuance of long-term debt. The rate on the notional amounts was locked at a weighted average rate of 2.1832%.
NOTE 11—FAIR VALUES OF FINANCIAL INSTRUMENTS
As of June 30, 2017 and December 31, 2016, the carrying amounts and fair values of our financial instruments were as follows: |
| | | | | | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| (In thousands) |
Assets: | | | | | | | |
Cash and cash equivalents | $ | 103,353 |
| | $ | 103,353 |
| | $ | 286,707 |
| | $ | 286,707 |
|
Secured mortgage loans and other, net | 1,339,886 |
| | 1,359,831 |
| | 646,972 |
| | 655,981 |
|
Non-mortgage loans receivable, net | 53,724 |
| | 54,587 |
| | 52,544 |
| | 53,626 |
|
Government-sponsored pooled loan investments | 55,518 |
| | 55,518 |
| | 55,049 |
| | 55,049 |
|
Derivative instruments | 6,716 |
| | 6,716 |
| | 3,302 |
| | 3,302 |
|
Liabilities: | | | | | | | |
Senior notes payable and other debt, gross | 11,992,233 |
| | 12,234,725 |
| | 11,190,914 |
| | 11,369,440 |
|
Derivative instruments | 2,358 |
| | 2,358 |
| | 2,316 |
| | 2,316 |
|
Redeemable OP unitholder interests | 171,114 |
| | 171,114 |
| | 177,177 |
| | 177,177 |
|
For a discussion of the assumptions considered, refer to “NOTE 2—ACCOUNTING POLICIES.” The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented above are not necessarily indicative of the amounts we would realize in a current market exchange.
NOTE 12—LITIGATION
Proceedings against Tenants, Operators and Managers
From time to time, Atria, Sunrise, Brookdale Senior Living, Kindred, Ardent and our other tenants, operators and managers are parties to certain legal actions, regulatory investigations and claims arising in the conduct of their business and operations. Even though we generally are not party to these proceedings, the unfavorable resolution of any such actions, investigations or claims could, individually or in the aggregate, materially adversely affect such tenants’, operators’ or managers’ liquidity, financial condition or results of operations and their ability to satisfy their respective obligations to us, which, in turn, could have a Material Adverse Effect on us.
Proceedings Indemnified and Defended by Third Parties
From time to time, we are party to certain legal actions, regulatory investigations and claims for which third parties are contractually obligated to indemnify, defend and hold us harmless. The tenants of our triple-net leased properties and, in some
cases, their affiliates are required by the terms of their leases and other agreements with us to indemnify, defend and hold us harmless against certain actions, investigations and claims arising in the course of their business and related to the operations of our triple-net leased properties. In addition, third parties from whom we acquired certain of our assets and, in some cases, their affiliates are required by the terms of the related conveyance documents to indemnify, defend and hold us harmless against certain actions, investigations and claims related to the acquired assets and arising prior to our ownership or related to excluded assets and liabilities. In some cases, a portion of the purchase price consideration is held in escrow for a specified period of time as collateral for these indemnification obligations. We are presently being defended by certain tenants and other obligated third parties in these types of matters. We cannot assure you that our tenants, their affiliates or other obligated third parties will continue to defend us in these matters, that our tenants, their affiliates or other obligated third parties will have sufficient assets, income and access to financing to enable them to satisfy their defense and indemnification obligations to us or that any purchase price consideration held in escrow will be sufficient to satisfy claims for which we are entitled to indemnification. The unfavorable resolution of any such actions, investigations or claims could, individually or in the aggregate, materially adversely affect our tenants’ or other obligated third parties’ liquidity, financial condition or results of operations and their ability to satisfy their respective obligations to us, which, in turn, could have a Material Adverse Effect on us.
Proceedings Arising in Connection with Senior Living and Office Operations; Other Litigation
From time to time, we are party to various legal actions, regulatory investigations and claims (some of which may not be insured and some of which may allege large damage amounts) arising in connection with our senior living and office operations or otherwise in the course of our business. In limited circumstances, the manager of the applicable seniors housing community, MOB or life science and innovation center may be contractually obligated to indemnify, defend and hold us harmless against such actions, investigations and claims. It is the opinion of management, except as otherwise set forth in this Note 12, that the disposition of any such actions, investigations and claims that are currently pending will not, individually or in the aggregate, have a Material Adverse Effect on us. However, regardless of their merits, we may be forced to expend significant financial resources to defend and resolve these matters. We are unable to predict the ultimate outcome of these actions, investigations and claims, and if management’s assessment of our liability with respect thereto is incorrect, such actions, investigations and claims could have a Material Adverse Effect on us.
NOTE 13—INCOME TAXES
We have elected to be taxed as a REIT under the applicable provisions of the Internal Revenue Code of 1986, as amended for every year beginning with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”), which are subject to federal, state and foreign income taxes. All entities other than the TRS entities are collectively referred to as the “REIT” within this Note 13. Certain REIT entities are subject to foreign income tax.
Although the TRS entities and certain other foreign entities have paid minimal cash federal, state and foreign income taxes for the six months ended June 30, 2017, their income tax liabilities may increase in future periods as we exhaust net operating loss (“NOL”) carryforwards and as our senior living and other operations grow. Such increases could be significant.
Our consolidated provision for income taxes for the three months ended June 30, 2017 and 2016 was a benefit of $2.2 million and $11.5 million, respectively. Our consolidated provision for income taxes for the six months ended June 30, 2017 and 2016 was a benefit of $5.3 million and $20.0 million, respectively. The income tax benefits for the three months and six months ended June 30, 2017 and 2016 were each due primarily to operating losses at our taxable REIT subsidiaries; however, $0.8 million and $5.9 million of the income tax benefit for the three and six months ended June 30, 2017 and 2016, respectively, were due to the reversal of a net deferred tax liability at a TRS entity.
Realization of a deferred tax benefit related to NOLs depends in part upon generating sufficient taxable income in future periods. The NOL carryforwards have begun to expire annually for the REIT and begin to expire in 2024 with respect to the TRS entities.
Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. Net deferred tax liabilities with respect to our TRS entities totaled $296.8 million and $316.6 million as of June 30, 2017 and December 31, 2016, respectively, and related primarily to differences between the financial reporting and tax bases of fixed and intangible assets, net of loss carryforwards.
Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service for the year ended December 31, 2013 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2012 and subsequent years. We are subject to audit generally under the statutes of limitation by the Canada Revenue Agency and provincial authorities with respect to the Canadian entities for years ended December 31, 2012 and subsequent years. We are also subject to audit in Canada for periods subsequent to the acquisition, and certain prior periods, with respect to the
entities acquired in 2014 from Holiday Retirement. We are subject to audit in the United Kingdom generally for periods ended in and subsequent to 2015.
NOTE 14—STOCKHOLDERS' EQUITY
Capital Stock
During the six months ended June 30, 2017, we sold 1.1 million shares of common stock under our “at-the-market” (“ATM”) equity offering program for aggregate net proceeds of $73.9 million, after sales agent commissions. As of June 30, 2017, approximately $155.6 million of our common stock remained available for sale under our ATM equity offering program.
Accumulated Other Comprehensive Loss
The following is a summary of our accumulated other comprehensive loss as of June 30, 2017 and December 31, 2016:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (In thousands) |
Foreign currency translation | $ | (53,824 | ) | | $ | (66,192 | ) |
Unrealized gain on marketable securities | 1,054 |
| | 1,239 |
|
Other | 7,735 |
| | 7,419 |
|
Total accumulated other comprehensive loss | $ | (45,035 | ) | | $ | (57,534 | ) |
NOTE 15—EARNINGS PER SHARE
The following table shows the amounts used in computing our basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands, except per share amounts) |
Numerator for basic and diluted earnings per share: | | | | | | | |
Income from continuing operations | $ | 152,272 |
| | $ | 137,849 |
| | $ | 308,184 |
| | $ | 261,188 |
|
Discontinued operations | (23 | ) | | (148 | ) | | (76 | ) | | (637 | ) |
Gain on real estate dispositions | 719 |
| | 5,739 |
| | 44,008 |
| | 31,923 |
|
Net income | 152,968 |
| | 143,440 |
| | 352,116 |
| | 292,474 |
|
Net income attributable to noncontrolling interests | 1,137 |
| | 278 |
| | 2,158 |
| | 332 |
|
Net income attributable to common stockholders | $ | 151,831 |
| | $ | 143,162 |
| | $ | 349,958 |
| | $ | 292,142 |
|
Denominator: | | | | | | | |
Denominator for basic earnings per share—weighted average shares | 355,024 |
| | 338,901 |
| | 354,719 |
| | 337,230 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 596 |
| | 630 |
| | 501 |
| | 475 |
|
Restricted stock awards | 225 |
| | 154 |
| | 193 |
| | 153 |
|
OP Unitholder interests | 2,466 |
| | 2,886 |
| | 2,506 |
| | 2,993 |
|
Denominator for diluted earnings per share—adjusted weighted average shares | 358,311 |
| | 342,571 |
| | 357,919 |
| | 340,851 |
|
Basic earnings per share: | | | | | | | |
Income from continuing operations | $ | 0.43 |
| | $ | 0.41 |
| | $ | 0.87 |
| | $ | 0.77 |
|
Net income attributable to common stockholders | 0.43 |
| | 0.42 |
| | 0.99 |
| | 0.87 |
|
Diluted earnings per share: | | | | | | | |
Income from continuing operations | $ | 0.42 |
| | $ | 0.40 |
| | $ | 0.86 |
| | $ | 0.77 |
|
Net income attributable to common stockholders | 0.42 |
| | 0.42 |
| | 0.98 |
| | 0.86 |
|
NOTE 16—SEGMENT INFORMATION
As of June 30, 2017, we operated through three reportable business segments: triple-net leased properties, senior living operations and office operations. Under our triple-net leased properties segment, we invest in and own seniors 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 seniors 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 life science 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 net operating income (“NOI”) and related measures. We define segment NOI as total revenues, less interest and other income, property-level operating expenses and office building services costs. We consider segment NOI useful because it allows investors, analysts and our management to measure unlevered property-level operating results and to compare our operating results to the operating results of other real estate companies between periods on a consistent basis. In order to facilitate a clear understanding of our historical consolidated operating results, segment NOI should be examined in conjunction with income from continuing operations as presented in our Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Interest expense, depreciation and amortization, general, administrative and professional fees, income tax expense and other non-property specific revenues and expenses are not allocated to individual reportable business segments for purposes of assessing segment performance. There are no intersegment sales or transfers.
Summary information by reportable business segment is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, 2017 |
| Triple-Net Leased Properties | | Senior Living Operations | | Office Operations | | All Other | | Total |
| (In thousands) |
Revenues: | | | | | | | | | |
Rental income | $ | 213,258 |
| | $ | — |
| | $ | 186,240 |
| | $ | — |
| | $ | 399,498 |
|
Resident fees and services | — |
| | 460,243 |
| | — |
| | — |
| | 460,243 |
|
Office building and other services revenue | 1,125 |
| | — |
| | 1,848 |
| | 206 |
| | 3,179 |
|
Income from loans and investments | — |
| | — |
| | — |
| | 32,368 |
| | 32,368 |
|
Interest and other income | — |
| | — |
| | — |
| | 202 |
| | 202 |
|
Total revenues | $ | 214,383 |
| | $ | 460,243 |
| | $ | 188,088 |
| | $ | 32,776 |
| | $ | 895,490 |
|
Total revenues | $ | 214,383 |
| | $ | 460,243 |
| | $ | 188,088 |
| | $ | 32,776 |
| | $ | 895,490 |
|
Less: | | | | | | | | | |
Interest and other income | — |
| | — |
| | — |
| | 202 |
| | 202 |
|
Property-level operating expenses | — |
| | 308,625 |
| | 57,205 |
| | — |
| | 365,830 |
|
Office building services costs | — |
| | — |
| | 552 |
| | — |
| | 552 |
|
Segment NOI | 214,383 |
| | 151,618 |
| | 130,331 |
| | 32,574 |
| | 528,906 |
|
Income (loss) from unconsolidated entities | 377 |
| | (381 | ) | | 298 |
| | (400 | ) | | (106 | ) |
Segment profit | $ | 214,760 |
| | $ | 151,237 |
| | $ | 130,629 |
| | $ | 32,174 |
| | 528,800 |
|
Interest and other income | |
| | |
| | |
| | |
| | 202 |
|
Interest expense | |
| | |
| | |
| | |
| | (113,572 | ) |
Depreciation and amortization | |
| | |
| | |
| | |
| | (224,108 | ) |
General, administrative and professional fees | |
| | |
| | |
| | |
| | (33,282 | ) |
Loss on extinguishment of debt, net | | | | | | | | | (36 | ) |
Merger-related expenses and deal costs | |
| | |
| | |
| | |
| | (6,043 | ) |
Other | |
| | |
| | |
| | |
| | (1,848 | ) |
Income tax benefit | |
| | |
| | | |