filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us,” “our,” “Company” and other similar terms in Item 2 of this Quarterly Report on Form 10-Q refer to Ventas, Inc. and its consolidated subsidiaries.
Cautionary Statements
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, among others, statements of expectations, beliefs, future plans and strategies, anticipated results from operations and developments and other matters that are not historical facts. Forward-looking statements include, among other things, statements regarding our and our officers’ intent, belief or expectation as identified by the use of words such as “assume,” “may,” “will,” “project,” “expect,” “believe,” “intend,” “anticipate,” “seek,” “target,” “forecast,” “plan,” “potential,” “opportunity,” “estimate,” “could,” “would,” “should” and other comparable and derivative terms or the negatives thereof.
Forward-looking statements are based on management’s beliefs as well as on a number of assumptions concerning future events. You should not put undue reliance on these forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors that could cause actual events or results to differ materially from those expressed or implied by the forward-looking statements. We do not undertake a duty to update these forward-looking statements, which speak only as of the date on which they are made. We urge you to carefully review the disclosures we make concerning risks and uncertainties that may affect our business and future financial performance, including those made below and in our filings with the Securities and Exchange Commission, such as in the sections titled “Cautionary Statements — Summary Risk Factors,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Certain factors that could affect our future results and our ability to achieve our stated goals include, but are not limited to: (a) the impact of the ongoing COVID-19 pandemic and other viruses and infections, such as flu and respiratory syncytial virus, and their extended consequences, including of any variants, on our revenue, level of profitability, liquidity and overall risk exposure and the implementation and impact of regulations related to the CARES Act and other stimulus legislation and any future COVID-19 relief measures; (b) our ability to achieve the anticipated benefits and synergies from, and effectively integrate, our completed or anticipated acquisitions and investments, including our acquisition of the Santerre Portfolio; (c) our exposure and the exposure of our tenants, managers and borrowers to complex healthcare and other regulation and the challenges and expense associated with complying with such regulation; (d) the potential for significant general and commercial claims, legal actions, regulatory proceedings or enforcement actions that could subject us or our tenants, managers or borrowers to increased operating costs and uninsured liabilities; (e) the impact of market and general economic conditions on us and our tenants, managers and borrowers, including economic and financial market events, such as bank failures and other events affecting financial institutions, market volatility, increases in inflation, changes in interest rates and exchange rates, tightening of lending standards and reduced availability of credit or capital, supply chain pressures, rising labor costs and historically low unemployment, events that affect consumer confidence, our occupancy rates and resident fee revenues, and the actual and perceived state of the real estate markets, labor markets and public and private capital markets; (f) our reliance and the reliance of our tenants, managers and borrowers on the financial, credit and capital markets and the risk that those markets may be disrupted or become constrained, including as a result of bank failures or concerns or rumors about such events, tightening of lending standards and reduced availability of credit or capital; (g) our ability, and the ability of our tenants, managers and borrowers, to navigate the trends impacting our or their businesses and the industries in which we or they operate; (h) the risk of bankruptcy, inability to obtain benefits from governmental programs, insolvency or financial deterioration of our tenants, managers, borrowers and other obligors which may, among other things, have an adverse impact on the ability of such parties to pay obligations due to us or our financial results and financial condition; (i) the risk that we may be unable to foreclose successfully on the collateral securing our loans and other investments in the event of a borrower default and, if we are able to foreclose or otherwise acquire assets in lieu of foreclosure, the risk that we will be required to incur additional expense or indebtedness in connection therewith, that the assets will underperform expectations or that we may not be able to subsequently dispose of all or part of such assets on favorable terms; (j) the recognition of reserves, allowances, credit losses or impairment charges are inherently uncertain, may increase or decrease in the future and may not represent or reflect the ultimate value of, or loss that we ultimately realize with respect to, the relevant assets, which could have an adverse impact on our results of operations and financial condition; (k) the non-renewal of any leases or management agreement or defaults by tenants or managers thereunder and the risk of our inability to replace those tenants or managers on favorable terms, if at all; (l) our ability to identify and consummate future investments in or dispositions of healthcare assets and effectively
manage our portfolio opportunities and our investments in co-investment vehicles, joint ventures and minority interests, including our ability to dispose of such assets on favorable terms as a result of rights of first offer or rights of first refusal in favor of third parties; (m) risks related to development, redevelopment and construction projects, including costs associated with inflation, rising interest rates, labor conditions and supply chain pressures; (n) our ability to attract and retain talented employees; (o) the limitations and significant requirements imposed upon our business as a result of our status as a REIT and the adverse consequences (including the possible loss of our status as a REIT) that would result if we are not able to comply with such requirements; (p) the risk of changes in healthcare law or regulation or in tax laws, guidance and interpretations, particularly as applied to REITs, that could adversely affect us or our tenants, managers or borrowers; (q) increases in our borrowing costs as a result of becoming more leveraged, including in connection with acquisitions or other investment activity, rising interest rates and the phasing out of LIBOR rates; (r) our reliance on third parties to operate a majority of our assets and our limited control and influence over such operations and results; (s) our dependency on a limited number of tenants and managers for a significant portion of our revenues and operating income; (t) the adequacy and pricing of insurance coverage provided by our policies and policies maintained by our tenants, managers or other counterparties; (u) the occurrence of cyber incidents that could disrupt our operations, result in the loss of confidential information or damage our business relationships and reputation; (v) the impact of merger, acquisition and investment activity in the healthcare industry or otherwise affecting our tenants, managers or borrowers; (w) disruptions to the management and operations of our business and the uncertainties caused by activist investors; (x) the risk of catastrophic or extreme weather and other natural events and the physical effects of climate change; (y) the impact of purchase accounting adjustments, impairments, write downs and other non-cash charges related to our acquisition of the Santerre Portfolio; and (z) the other factors set forth in our periodic filings with the Securities and Exchange Commission.
Note Regarding Third-Party Information
This Quarterly Report includes information that has been derived from SEC filings that has been provided to us by our tenants and managers or been derived from SEC filings or other publicly available information of our tenants and managers. We believe that such information is accurate and that the sources from which it has been obtained are reliable. However, we cannot guarantee the accuracy of such information and have not independently verified the assumptions on which such information is based.
Company Overview
Ventas, Inc., an S&P 500 company, is a real estate investment trust operating at the intersection of healthcare and real estate. We hold a highly diversified portfolio of senior housing communities, medical office buildings (“MOBs”), life science, research and innovation centers, hospitals and other healthcare facilities, which we generally refer to collectively as “healthcare real estate,” located throughout the United States, Canada, and the United Kingdom. As of March 31, 2023, we owned or had investments in approximately 1,200 properties (including properties classified as held for sale). Our company was originally founded in 1983 and is headquartered in Chicago, Illinois with additional corporate offices in Louisville, Kentucky and New York, New York.
We primarily invest in a diversified portfolio of healthcare real estate assets through wholly owned subsidiaries and other co-investment entities. We operate through three reportable business segments: triple-net leased properties, senior housing operating portfolio, which we also refer to as “SHOP” and which was formerly known as senior living operations, and office operations. See our Consolidated Financial Statements and the related notes, including “Note 2 – Accounting Policies” and “Note 15 – Segment Information,” included in Item 1 of this Quarterly Report on Form 10-Q. Our senior housing communities are either subject to triple-net leases, in which case they are included in our triple-net leased properties reportable business segment, or operated by independent third-party managers, in which case they are included in our SHOP reportable business segment.
As of March 31, 2023, we leased a total of 312 properties (excluding properties within our office operations reportable business segment) to various healthcare operating companies under triple-net or absolute-net leases that obligate the tenants to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures. Our three largest tenants, Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”), Ardent Health Partners, LLC (together with its subsidiaries, “Ardent”) and Kindred Healthcare, LLC (together with its subsidiaries, “Kindred”) leased from us 121 properties, 30 properties (including 19 MOBs) and 29 properties, respectively, as of March 31, 2023.
As of March 31, 2023, pursuant to long-term management agreements, we engaged independent operators, such as Atria Senior Living, Inc. (together with its subsidiaries, including Holiday Retirement (“Holiday”), “Atria”) and Sunrise Senior Living, LLC (together with its subsidiaries, “Sunrise”), to manage 560 senior housing communities in our SHOP reportable business segment.
As of March 31, 2023, we owned or had investments in 373 properties in our office operations reportable business segment. These properties generally consist of MOBs that are predominantly located on or contiguous to a health system campus and life science, research and innovation properties that are affiliated with and often located on or contiguous to a university or academic medical campus. Through our Lillibridge Healthcare Services, Inc. (“Lillibridge”) subsidiary and our ownership interest in PMB Real Estate Services LLC (“PMBRES”), 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 unsecured loans and other investments relating to healthcare real estate or operators.
We have a third-party institutional capital management business, Ventas Investment Management (“VIM”), which includes our open-ended investment vehicle, the Ventas Life Science & Healthcare Real Estate Fund (the “Ventas Fund”). Through VIM, we partner with third-party institutional investors to invest in healthcare real estate through various joint ventures and other co-investment vehicles where we are the sponsor or general partner.
We aim to enhance shareholder value by delivering consistent, superior total returns through a strategy of (1) generating reliable and growing cash flows, (2) maintaining a balanced, diversified portfolio of high-quality assets and (3) preserving our financial strength, flexibility and liquidity.
Our ability to access capital in a timely and cost-effective manner is critical to the success of our business strategy because it affects our ability to satisfy existing obligations, including the repayment of maturing indebtedness, and to make future investments. Factors such as general market conditions, interest rates, credit ratings on our securities, expectations of our potential future earnings and cash distributions, and the trading price of our common stock impact our access to and cost of external capital. For that reason, we generally attempt to match the long-term duration of our investments in real property with long-term financing through the issuance of shares of our common stock or the incurrence of long-term fixed rate debt.
2023 Highlights
Continuing Impact of and Response to COVID-19 and Its Extended Consequences
Starting in 2020, our business was significantly impacted by both the COVID-19 pandemic itself, including actions taken to prevent the spread of the virus and its variants, and its extended consequences. The trajectory and future impact of COVID-19 remains highly uncertain. The extent of COVID-19’s continuing and ultimate effect on our operational and financial performance will depend on a variety of factors, including the impact of new variants of the virus and the effectiveness of available vaccines against those variants; ongoing clinical experience, which may differ considerably across governmental and regulatory bodies and regions and fluctuate over time; and on other future developments, including the ultimate duration, spread and intensity of the outbreak, the availability of testing, the extent to which governments impose, roll-back or re-impose preventative restrictions and the availability of ongoing government financial support to our business, tenants and operators. Due to these uncertainties, we are not able at this time to estimate the ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows.
Investments and Dispositions
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During the three months ended March 31, 2023, we committed to a MOB ground-up development located on the Sutter Roseville Medical Center campus in Roseville, California. The $61.8 million project includes the development of a new class A MOB and is 100% pre-leased to affiliates of Sutter Health for a 15-year lease term.
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During the three months ended March 31, 2023, we sold five senior housing communities (three of which were vacant), four MOBs and two vacant triple-net leased properties for aggregate consideration of $46.4 million and recognized a net gain on the sale of these assets of $10.2 million in our Consolidated Statements of Income.
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On May 1, 2023, we took ownership of the collateral that supported our cash-pay mezzanine loan to Santerre Health Investors (the “Santerre Mezzanine Loan”) by converting the outstanding principal amount of the Santerre Mezzanine Loan to equity, with no additional consideration being paid. As a result, the Santerre Mezzanine Loan is no longer
outstanding. The Company received payment of full contractual interest on the Santerre Mezzanine Loan through the April 2023 payment date. The properties consist of a diverse pool of medical office buildings, senior housing operating portfolio communities, triple-net leased skilled nursing facilities and hospital assets in the United States (such assets, collectively, the “Santerre Portfolio”). Our ownership of the Santerre Portfolio is subject to an existing approximately $1 billion non-recourse senior loan (the “Santerre Senior Loan”) secured by the Santerre Portfolio.
Liquidity and Capital
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As of March 31, 2023, we had approximately $2.4 billion in liquidity, including availability under our revolving credit facility and cash and cash equivalents on hand, with $425.0 million borrowings outstanding under our commercial paper program.
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As of March 31, 2023, we have $1.0 billion remaining under our “at-the-market” equity offering program (“ATM program”), under which we may sell up to $1.0 billion aggregate gross sales price of shares of our common stock.
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In March 2023, we entered into a new five year C$271.8 million mortgage debt secured by 14 SHOP communities in Canada at an effective fixed rate of 4.36%.
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In the first quarter of 2023, we hedged an incremental $200.0 million of variable rate debt to fixed rate debt through the execution in March 2023 of two-year $400.0 million notional swaps on our unsecured term loan due in 2027, replacing a $200.0 million notional swap that matured in January 2023.
*•*In March and April 2023, we entered into a total of $250.0 million aggregate forward starting swaps with a ten-year weighted average rate of 3.37%.
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In April 2023, our 100% owned subsidiary, Ventas Canada Finance Limited (“Ventas Canada”), issued and sold C$600.0 million aggregate principal amount of 5.398% Senior Notes due 2028 in a private placement at par. Pursuant to cash tender offers, we used the proceeds to repurchase C$613.7 million in aggregate principal amount of outstanding senior notes due in 2024 for an aggregate purchase price of C$600.0 million plus accrued and unpaid interest to, but not including, the settlement date.
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Our ownership of the Santerre Portfolio is subject to an existing approximately $1 billion non-recourse Santerre Senior Loan, which is secured by the Santerre Portfolio, bears interest at a current weighted average rate of LIBOR + 1.84% and matures on June 9, 2023. We have given notice to extend the maturity of the Santerre Senior Loan to June 2024, which is subject to the satisfaction of certain conditions, including entering into an interest rate cap for the extension period. The Santerre Senior Loan can be repaid in whole or in part prior to its maturity, without penalty, and assets can be released from the liens, subject to certain conditions.
Other Items
- As of March 31, 2023, we held a 9.8% ownership interest in Ardent, which entitled us to customary minority rights and protections, including the right to appoint one member to the Ardent Board of Directors. In May 2023, we sold approximately 24% of our ownership interest in Ardent to a third-party investor for approximately $50 million in total proceeds. As a result of the sale, we expect to recognize approximately $34 million of gain in the second quarter of 2023 in income from unconsolidated entities in our Consolidated Statements of Income and our ownership interest in Ardent will be reduced to approximately 7.5%. Following the transaction, we continue to have the same minority rights and protections, including the right to appoint one member to the Ardent Board of Directors.
Concentration Risk
We use concentration ratios to identify, understand and evaluate the potential impact of economic downturns and other adverse events that may affect our asset types, geographic locations, business models, and tenants, operators and managers. We evaluate concentration risk in terms of investment mix and operations mix. Investment mix measures the percentage of our investments that is concentrated in a specific asset type or that is operated or managed by a particular tenant, operator or manager. Operations mix measures the percentage of our operating results that is attributed to a particular tenant, operator or manager, geographic location or business model.
The following tables reflect our concentration risk as of the dates and for the periods presented:
| As of March 31, 2023 | As of December 31, 2022 | ||||||||||
| Investment mix by asset type (1)****: | |||||||||||
| Senior housing communities | 66.4 | % | 66.3 | % | |||||||
| MOBs | 18.0 | 18.0 | |||||||||
| Life science, research and innovation centers | 7.0 | 6.9 | |||||||||
| Health systems | 4.9 | 4.9 | |||||||||
| Inpatient rehabilitation facilities (“IRFs”) and long-term acute care facilities (“LTACs”) | 1.5 | 1.5 | |||||||||
| Skilled nursing facilities (“SNFs”) | 0.6 | 0.6 | |||||||||
| Secured loans receivable and investments, net | 1.6 | 1.8 | |||||||||
| Total | 100.0 | % | 100.0 | % | |||||||
| Investment mix by tenant, operator and manager (1)****: | |||||||||||
| Atria (2) | 26.0 | % | 26.0 | % | |||||||
| Sunrise | 9.9 | 9.8 | |||||||||
| Lillibridge | 9.3 | 9.3 | |||||||||
| Brookdale Senior Living | 7.8 | 7.8 | |||||||||
| Le Groupe Maurice | 7.1 | 7.0 | |||||||||
| Wexford | 6.6 | 6.6 | |||||||||
| Ardent | 5.3 | 5.3 | |||||||||
| Kindred | 0.8 | 0.8 | |||||||||
| All other | 27.2 | 27.4 | |||||||||
| Total | 100.0 | % | 100.0 | % |
(1)Ratios are based on the gross book value of consolidated real estate investments (excluding properties classified as held for sale) as of each reporting date.
(2)Includes assets managed by Holiday.
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Operations mix by tenant and operator and business model: | |||||||||||||||||||||||
| Revenues (1): | |||||||||||||||||||||||
| SHOP | 65.5 | % | 64.0 | % | |||||||||||||||||||
| Brookdale Senior Living (2) | 3.5 | 3.7 | |||||||||||||||||||||
| Kindred | 3.0 | 3.3 | |||||||||||||||||||||
| Ardent | 3.1 | 3.2 | |||||||||||||||||||||
| All others | 24.9 | 25.8 | |||||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Net operating income (“NOI”): | |||||||||||||||||||||||
| SHOP | 36.0 | % | 37.1 | % | |||||||||||||||||||
| Brookdale Senior Living (2) | 8.0 | 7.8 | |||||||||||||||||||||
| Kindred | 7.0 | 7.0 | |||||||||||||||||||||
| Ardent | 7.1 | 6.8 | |||||||||||||||||||||
| All others | 41.9 | 41.3 | |||||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Operations mix by geographic location (3)****: | |||||||||||||||||||||||
| California | 14.3 | % | 15.0 | % | |||||||||||||||||||
| New York | 7.7 | 7.4 | |||||||||||||||||||||
| Texas | 6.5 | 6.6 | |||||||||||||||||||||
| Pennsylvania | 5.2 | 4.8 | |||||||||||||||||||||
| North Carolina | 4.2 | 4.4 | |||||||||||||||||||||
| All others | 62.1 | 61.8 | |||||||||||||||||||||
| Total | 100.0 | % | 100.0 | % |
(1)Total revenues include third party capital management revenues, revenue from loans and investments and interest and other income (including amounts related to assets classified as held for sale).
(2)Results exclude nine senior housing communities which are included in the SHOP reportable business segment.
(3)Ratios are based on total revenues (including amounts related to assets classified as held for sale) for each period presented.
See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report on Form 10-Q for additional disclosure and reconciliations of net income attributable to common stockholders, as computed in accordance with GAAP, to NOI.
Triple-Net Lease Performance and Expirations
Any failure, inability or unwillingness by our tenants to satisfy their obligations under our triple-net leases could have a material adverse effect on us. Also, if our tenants are not able or willing to renew our triple-net leases upon expiration, we may be unable to reposition the applicable properties on a timely basis or on the same or better economic terms, if at all. Although our lease expirations are staggered, the non-renewal of some or all of our triple-net leases that expire in any given year could have a material adverse effect on us. During the three months ended March 31, 2023, we had no triple-net lease renewals or expirations without renewal that, in the aggregate, had a material impact on our financial condition or results of operations for that period.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the SEC instructions to Form 10-Q and Article 10 of Regulation S-X. GAAP requires us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain.
Our 2022 Annual Report contains additional information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no material changes to these policies in 2023.
Results of Operations
As of March 31, 2023, we operated through three reportable business segments: triple-net leased properties, SHOP and office operations. In our triple-net leased properties reportable business segment, we invest in and own senior housing and healthcare properties throughout the United States and the United Kingdom and lease those properties to healthcare operating companies under triple-net or absolute-net leases that obligate the tenants to pay all property-related expenses. In our SHOP reportable business segment, we invest in senior housing communities throughout the United States and Canada and engage independent operators, such as Atria and Sunrise, to manage those communities. In our office operations reportable business segment, we primarily acquire, own, develop, lease and manage MOBs and life science, research and innovation centers throughout the United States. Information provided for “non-segment” 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 “non-segment” consist primarily of corporate assets, including cash, restricted cash, loans receivable and investments, and miscellaneous accounts receivable.
Our chief operating decision maker evaluates performance of the combined properties in each reportable business segment and determines how to allocate resources to those segments, in significant part, based on net operating income (“NOI”) and related measures for each segment. For further information regarding our reportable business segments and a discussion of our definition of NOI, see “Note 15 – Segment Information” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report on Form 10-Q for additional disclosure and reconciliations of net income attributable to common stockholders, as computed in accordance with GAAP, to NOI.
Three Months Ended March 31, 2023 and 2022
The table below shows our results of operations for the three months ended March 31, 2023 and 2022 and the effect of changes in those results from period to period on our net income attributable to common stockholders (dollars in thousands):
| For the Three Months Ended March 31, | (Decrease) Increase to Net Income | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| NOI: | |||||||||||||||||||||||
| SHOP | $ | 167,771 | $ | 175,591 | $ | (7,820) | (4.5) | % | |||||||||||||||
| Office operations | 136,719 | 137,974 | (1,255) | (0.9) | |||||||||||||||||||
| Triple-net leased properties | 145,943 | 147,553 | (1,610) | (1.1) | |||||||||||||||||||
| Non-segment | 15,432 | 11,866 | 3,566 | 30.1 | |||||||||||||||||||
| Total NOI | 465,865 | 472,984 | (7,119) | (1.5) | |||||||||||||||||||
| Interest and other income | 1,743 | 536 | 1,207 | nm | |||||||||||||||||||
| Interest expense | (128,075) | (110,794) | (17,281) | (15.6) | |||||||||||||||||||
| Depreciation and amortization | (282,119) | (289,064) | 6,945 | 2.4 | |||||||||||||||||||
| General, administrative and professional fees | (44,798) | (42,998) | (1,800) | (4.2) | |||||||||||||||||||
| Transaction expenses and deal costs | (1,386) | (19,992) | 18,606 | 93.1 | |||||||||||||||||||
| Allowance on loans receivable and investments | 8,064 | 54 | 8,010 | nm | |||||||||||||||||||
| Other | (7,762) | 27,190 | (34,952) | (128.5) | |||||||||||||||||||
| Income before unconsolidated entities, real estate dispositions, income taxes and noncontrolling interests | 11,532 | 37,916 | (26,384) | (69.6) | |||||||||||||||||||
| Loss from unconsolidated entities | (5,623) | (4,269) | (1,354) | (31.7) | |||||||||||||||||||
| Gain on real estate dispositions | 10,201 | 2,455 | 7,746 | nm | |||||||||||||||||||
| Income tax benefit | 2,802 | 4,490 | (1,688) | (37.6) | |||||||||||||||||||
| Income from continuing operations | 18,912 | 40,592 | (21,680) | (53.4) | |||||||||||||||||||
| Net income | 18,912 | 40,592 | (21,680) | (53.4) | |||||||||||||||||||
| Net income attributable to noncontrolling interests | 1,395 | 1,860 | 465 | 25.0 | |||||||||||||||||||
| Net income attributable to common stockholders | $ | 17,517 | $ | 38,732 | $ | (21,215) | (54.8) |
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NOI—SHOP
The following table summarizes results of operations in our SHOP reportable business segment, including assets sold or classified as held for sale as of March 31, 2023 (dollars in thousands):
| For the Three Months Ended March 31, | Increase (Decrease) to NOI | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| NOI—SHOP: | |||||||||||||||||||||||
| Resident fees and services | $ | 704,993 | $ | 651,121 | $ | 53,872 | 8.3 | % | |||||||||||||||
| Less: Property-level operating expenses | (537,222) | (475,530) | (61,692) | (13.0) | |||||||||||||||||||
| NOI | $ | 167,771 | $ | 175,591 | $ | (7,820) | (4.5) |
| Number of Properties at March 31, | Average Unit Occupancy for the Three Months Ended March 31, | Average Monthly Revenue Per Occupied Room for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||
| Total communities | 551 | 546 | 80.6 | % | 80.0 | % | $ | 4,624 | $ | 4,370 |
Resident fees and services include all amounts earned from residents at our senior housing communities, such as rental fees related to resident leases, extended health care fees and other ancillary service income. Property-level operating expenses related to our SHOP reportable business segment include labor, food, utilities, marketing, management and other costs of operating the properties. For senior housing communities in our SHOP reportable business segment, occupancy generally reflects average operator-reported unit occupancy for the reporting period. Average monthly revenue per occupied room reflects average resident fees and services per operator-reported occupied unit for the reporting period.
The NOI decrease in our SHOP reportable business segment for the three months ended March 31, 2023 compared to the same period in 2022 was driven by $34.0 million of HHS grants received in 2022, which are reflected as a reduction in property-level operating expenses, offset by higher revenues in 2023 driven by higher occupancy and revenue per occupied room. No HHS grants were received in 2023.
The following table compares results of operations for our 507 same-store SHOP communities (dollars in thousands). See “Non-GAAP Financial Measures**—**NOI” included elsewhere in this Quarterly Report on Form 10-Q for additional disclosure regarding same-store NOI for each of our reportable business segments.
| For the Three Months Ended March 31, | Increase (Decrease) to NOI | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| Same-Store NOI—SHOP: | |||||||||||||||||||||||
| Resident fees and services | $ | 652,941 | $ | 605,469 | $ | 47,472 | 7.8 | % | |||||||||||||||
| Less: Property-level operating expenses | (494,380) | (440,725) | (53,655) | (12.2) | |||||||||||||||||||
| NOI | $ | 158,561 | $ | 164,744 | $ | (6,183) | (3.8) |
| Number of Properties at March 31, | Average Unit Occupancy for the Three Months Ended March 31, | Average Monthly Revenue Per Occupied Room for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||
| Same-store communities | 507 | 507 | 81.3 | % | 80.5 | % | $ | 4,646 | $ | 4,352 |
The NOI decrease in our same-store SHOP reportable business segment for the three months ended March 31, 2023 compared to the same period in 2022 was primarily driven by $30.7 million of HHS grants received in 2022, offset by higher revenues in 2023 driven by higher occupancy and revenue per occupied room. No HHS grants were received in 2023.
NOI—Office Operations
The following table summarizes results of operations in our office operations reportable business segment, including assets sold or classified as held for sale as of March 31, 2023 (dollars in thousands). For properties in our office operations reportable business segment, occupancy generally reflects occupied square footage divided by net rentable square footage as of the end of the reporting period.
| For the Three Months Ended March 31, | Increase (Decrease) to NOI | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| NOI—Office Operations: | |||||||||||||||||||||||
| Rental income | $ | 203,004 | $ | 200,540 | $ | 2,464 | 1.2 | % | |||||||||||||||
| Third party capital management revenues | 628 | 617 | 11 | 1.8 | |||||||||||||||||||
| Total revenues | 203,632 | 201,157 | 2,475 | 1.2 | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Property-level operating expenses | (66,913) | (63,183) | (3,730) | (5.9) | |||||||||||||||||||
| NOI | $ | 136,719 | $ | 137,974 | $ | (1,255) | (0.9) |
| Number of Properties at March 31, | Occupancy at March 31, | Annualized Average Rent Per Occupied Square Foot for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||
| Total office buildings | 355 | 361 | 89.6 | % | 90.5 | % | $ | 37 | $ | 36 |
The NOI decrease in office operations reportable business segment for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to dispositions of non-core assets, partially offset by leasing activity, high tenant retention, improved parking revenues and acquisitions subsequent to March 31, 2022.
The following table compares results of operations for our 327 same-store office buildings (dollars in thousands):
| For the Three Months Ended March 31, | Increase (Decrease) to NOI | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| Same-Store NOI—Office Operations: | |||||||||||||||||||||||
| Rental income | $ | 191,770 | $ | 187,593 | $ | 4,177 | 2.2 | % | |||||||||||||||
| Less: Property-level operating expenses | (62,690) | (59,513) | (3,177) | (5.3) | |||||||||||||||||||
| NOI | $ | 129,080 | $ | 128,080 | $ | 1,000 | 0.8 |
| Number of Properties at March 31, | Occupancy at March 31, | Annualized Average Rent Per Occupied Square Foot for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||
| Same-store office buildings | 327 | 327 | 91.5 | % | 91.2 | % | $ | 37 | $ | 37 |
The NOI increase in our same-store office operations reportable business segment for the three months ended March 31, 2023 compared to the same period in 2022 was primarily driven by leasing activity, high tenant retention and improved parking revenues.
NOI—Triple-Net Leased Properties
The following table summarizes results of operations in our triple-net leased properties reportable business segment, including assets sold or classified as held for sale as of March 31, 2023 (dollars in thousands):
| For the Three Months Ended March 31, | (Decrease) Increase to NOI | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| NOI—Triple-Net Leased Properties: | |||||||||||||||||||||||
| Rental income | $ | 149,739 | $ | 151,561 | $ | (1,822) | (1.2) | % | |||||||||||||||
| Less: Property-level operating expenses | (3,796) | (4,008) | 212 | 5.3 | |||||||||||||||||||
| NOI | $ | 145,943 | $ | 147,553 | $ | (1,610) | (1.1) |
In our triple-net leased properties reportable business segment, our revenues generally consist of fixed rental amounts (subject to contractual escalations) received from our tenants in accordance with the applicable lease terms. We report revenues and property-level operating expenses within our triple-net leased properties reportable business segment for real estate tax and insurance expenses that are paid from escrows collected from our tenants.
The NOI decrease in our triple-net leased properties for the three months ended March 31, 2023 compared to the same period in 2022 was primarily driven by rental income from communities that were transitioned to our senior housing operating portfolio or sold and lease resolutions with several smaller senior housing triple-net tenants who were materially affected by COVID-19, offset by additional rental income received and contractual rent escalators.
Occupancy rates may affect the profitability of our tenants’ operations. For senior housing communities and post-acute properties in our triple-net leased properties reportable business segment, occupancy generally reflects average operator-reported unit and bed occupancy, respectively, for the reporting period. Because triple-net financials are delivered to us following the reporting period, occupancy is reported in arrears. The following table sets forth average continuing occupancy rates for the fourth quarter of 2022 and 2021 related to the triple-net leased properties we owned at March 31, 2023 and 2022, respectively. The table excludes non-stabilized properties, properties owned through investments in unconsolidated real estate entities, certain properties for which we do not receive occupancy information and properties acquired or properties that transitioned operators for which we do not have a full quarter of occupancy results.
| Number of Properties Owned at March 31, 2023 | Average Occupancy for the Three Months Ended December 31, 2022 | Number of Properties Owned at March 31, 2022 | Average Occupancy for the Three Months Ended December 31, 2021 | |||||||||||||||||||||||
| Senior housing communities | 244 | 77.8% | 261 | 75.2% | ||||||||||||||||||||||
| SNFs | 16 | 84.3 | 16 | 79.5 | ||||||||||||||||||||||
| IRFs and LTACs | 36 | 55.7 | 35 | 57.0 |
The following table compares results of operations for our 312 same-store triple-net leased properties (dollars in thousands):
| For the Three Months Ended March 31, | Increase to NOI | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| Same-Store NOI—Triple-Net Leased Properties: | |||||||||||||||||||||||
| Rental income | $ | 149,738 | $ | 146,426 | $ | 3,312 | 2.3 | % | |||||||||||||||
| Less: Property-level operating expenses | (3,794) | (3,798) | 4 | 0.1 | |||||||||||||||||||
| NOI | $ | 145,944 | $ | 142,628 | $ | 3,316 | 2.3 |
The NOI increase in our same-store triple-net leased portfolio for the three months ended March 31, 2023 compared to the same period in 2022 was primarily driven by additional rental income received and contractual rent escalators, partially offset by previously executed lease resolutions with several smaller senior housing triple-net tenants who were materially affected by COVID-19.
NOI—Non-Segment
Information provided for non-segment NOI includes management fees and promote revenues, net of expenses, related to our third-party institutional capital management business, income from loans and investments and various corporate-level expenses not directly attributable to any of our three reportable business segments. The $3.6 million increase in non-segment NOI for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to higher interest income from loans receivable and investments due to higher interest rates, partially offset by a $43.4 million loan investment that was repaid at par in February 2023.
Company Results
Interest and Other Income
The $1.2 million increase in interest and other income for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to higher interest rates earned on our bank deposits.
Interest Expense
The $17.3 million increase in interest expense for the three months ended March 31, 2023 compared to the same period in 2022 was due to a higher effective interest rate. Our weighted average debt outstanding was $12.4 billion and $12.3 billion for the three months ended March 31, 2023 and 2022, respectively. Our weighted average effective interest rate was 4.04% and 3.49% for the three months ended March 31, 2023 and 2022, respectively. Capitalized interest was $2.7 million and $2.5 million for the three months ended March 31, 2023 and 2022, respectively.
Depreciation and Amortization
The $6.9 million decrease in depreciation and amortization expense for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to less impairment recognized in the first quarter of 2023 as compared to the same period in 2022.
General, Administrative and Professional Fees
The $1.8 million increase in general, administrative and professional fees for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to inflationary impacts and the return to a more normalized business environment.
Transaction Expenses and Deal Costs
The $18.6 million decrease in transaction expenses and deal costs for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to higher costs in 2022 in connection with stockholder relations matters.
Allowance on Loans Receivable and Investments
The $8.0 million change in allowance on loans receivable and investments for the three months ended March 31, 2023 compared to the same period in 2022 was due to an $8.0 million partial reversal in the current quarter of the $20.0 million allowance recognized in the fourth quarter of 2022 on the Santerre Mezzanine Loan, resulting in a remaining $12.0 million allowance, primarily due to a change in the fair value of the Santerre Senior Loan and working capital. As of March 31, 2023, the Santerre Mezzanine Loan had a gross book value of $485.3 million. On May 1, 2023, we took ownership of the collateral that supported the Santerre Mezzanine Loan by converting the outstanding principal amount of the Santerre Mezzanine Loan to equity, with no additional consideration being paid. As a result, the Santerre Mezzanine Loan is no longer outstanding.
Other
The $35.0 million change in other expense for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to a decrease of $27.6 million in unrealized gain on stock warrants received in connection with the Brookdale Senior Living lease modification and a $6.6 million change relating to materially disruptive events, primarily clean-up costs and impairment associated with winter storm Elliott. As of March 31, 2023, the fair value of the stock warrants was $24.6 million, which was $3.5 million lower than the value at the grant date.
Loss from Unconsolidated Entities
The $1.4 million increase in loss from unconsolidated entities for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to our share of higher net loss from our unconsolidated entities.
Gain on Real Estate Dispositions
The $7.7 million increase in gain on real estate dispositions for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to the dispositions of five senior housing communities (three of which were vacant), four MOBs and two vacant triple-net leased properties, which resulted in a gain on sale of $10.2 million recognized during the first quarter of 2023.
Income Tax Benefit
The $2.8 million of income tax benefit for the three months ended March 31, 2023 was primarily due to operating losses at certain of our TRS entities. The $4.5 million of income tax benefit for the three months ended March 31, 2022 was primarily due to losses in certain of our TRS entities and a $2.0 million benefit from an internal restructuring of a U.S. taxable REIT subsidiary.
Non-GAAP Financial Measures
We consider certain non-GAAP financial measures to be useful supplemental measures of our operating performance. A non-GAAP financial measure is a measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are not so excluded from or included in the most directly comparable measure calculated and presented in accordance with U.S. GAAP. Described below are the non-GAAP financial measures used by management to evaluate our operating performance and that we consider most useful to investors, together with reconciliations of these measures to the most directly comparable GAAP measures.
The non-GAAP financial measures we present in this Quarterly Report on Form 10-Q may not be comparable to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. You should not consider these measures as alternatives to net income attributable to common stockholders (determined in accordance with GAAP) as indicators of our financial performance or as alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of our liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. In order to facilitate a clear understanding of our consolidated historical operating results, you should examine these measures in conjunction with net income attributable to common stockholders as presented in our Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Funds From Operations and Normalized Funds From Operations Attributable to Common Stockholders
Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. However, since real estate values historically have risen or fallen with market conditions, many industry investors deem presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. For that reason, we consider Funds From Operations attributable to common stockholders (“FFO”) and Normalized FFO to be appropriate supplemental measures of operating performance of an equity REIT. We believe that the presentation of FFO, combined with the presentation of required GAAP financial measures, has improved the understanding of operating results of REITs among the investing public and has helped make comparisons of REIT operating results more meaningful. Management generally considers FFO to be a useful measure for understanding and comparing our operating results because, by excluding gains and losses related to sales of previously depreciated operating real estate assets, impairment losses on depreciable real estate and real estate asset depreciation and amortization (which can differ across owners of similar assets in similar condition based on historical cost accounting and useful life estimates), FFO can help investors compare the operating performance of a company’s real estate across reporting periods and to the operating performance of other companies. We believe that Normalized FFO is useful because it allows investors, analysts and our management to compare our operating performance to the operating performance of other real estate companies across periods on a consistent basis without having to account for differences caused by non-recurring items and other non-operational events such as transactions and litigation. In some cases, we provide information about identified non-cash components of FFO and Normalized FFO because it allows investors, analysts and our management to assess the impact of those items on our financial results.
We use the National Association of Real Estate Investment Trusts (“Nareit”) definition of FFO. Nareit defines FFO as net income attributable to common stockholders (computed in accordance with GAAP) excluding gains (or losses) from sales of real estate property, including gain (or loss) on re-measurement of equity method investments and impairment write-downs of depreciable real estate, plus real estate depreciation and amortization, and after adjustments for unconsolidated entities and noncontrolling interests. Adjustments for unconsolidated entities and noncontrolling interests will be calculated to reflect FFO on the same basis. We define Normalized FFO as Nareit FFO excluding the following income and expense items, without duplication: (a) transaction expenses and deal costs, including transaction, integration and severance-related costs and expenses, and amortization of intangibles, in each case net of noncontrolling interests’ share of these items and including Ventas’ share of these items from unconsolidated entities; (b) the impact of expenses related to asset impairment and valuation allowances, the write-off of unamortized deferred financing fees or additional costs, expenses, discounts, make-whole payments, penalties or premiums incurred as a result of early retirement or payment of our debt; (c) the non-cash effect of income tax benefits or expenses, the non-cash impact of changes to our executive equity compensation plan, derivative transactions that have non-cash mark-to-market impacts on our Consolidated Statements of Income and non-cash charges related to leases; (d) the financial impact of contingent consideration; (e) gains and losses for non-operational foreign currency hedge agreements and changes in the fair value of financial instruments; (f) gains and losses on non-real estate dispositions and other items related to unconsolidated entities; (g) net expenses or recoveries related to materially disruptive events; and (h) other items set forth in the Normalized FFO reconciliation included herein.
The following table summarizes our FFO and Normalized FFO for the three months ended March 31, 2023 and 2022 (dollars in thousands). Normalized FFO for the three months ended March 31, 2022 includes $34.0 million of HHS grants received in 2022, which reduced property-level operating expenses. Excluding HHS grants, Normalized FFO for the three months ended March 31, 2023 increased over the same period in 2022 due to increased net operating income from our properties led by our SHOP reportable business segment as a result of increased revenues, partially offset by higher interest expense.
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 17,517 | $ | 38,732 | |||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Depreciation and amortization on real estate assets | 281,477 | 288,103 | |||||||||||||||||||||
| Depreciation on real estate assets related to noncontrolling interests | (4,377) | (4,449) | |||||||||||||||||||||
| Depreciation on real estate assets related to unconsolidated entities | 10,177 | 7,265 | |||||||||||||||||||||
| Gain on real estate dispositions | (10,201) | (2,455) | |||||||||||||||||||||
| (Loss) gain on real estate dispositions related to noncontrolling interests | (5) | 17 | |||||||||||||||||||||
| Gain on real estate dispositions and other related to unconsolidated entities | (180) | — | |||||||||||||||||||||
| Nareit FFO attributable to common stockholders | 294,408 | 327,213 | |||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Change in fair value of financial instruments | (77) | (29,881) | |||||||||||||||||||||
| Non-cash income tax benefit | (4,272) | (5,805) | |||||||||||||||||||||
| Loss (gain) on transactions related to unconsolidated entities | 180 | (3) | |||||||||||||||||||||
| Transaction expenses and deal costs, net of noncontrolling interests and including Ventas’ share attributable to unconsolidated entities | 2,104 | 21,288 | |||||||||||||||||||||
| Amortization of other intangibles including Ventas’ share attributable to unconsolidated entities | 96 | 268 | |||||||||||||||||||||
| Other items related to unconsolidated entities | 1,087 | 131 | |||||||||||||||||||||
| Non-cash impact of changes to equity plan | 7,222 | 7,206 | |||||||||||||||||||||
| Materially disruptive events, net including Ventas’ share attributable to unconsolidated entities | 4,186 | (3,709) | |||||||||||||||||||||
| Allowance on loan investments and impairment of unconsolidated entities, net of noncontrolling interests | (8,063) | (53) | |||||||||||||||||||||
| Normalized FFO attributable to common stockholders | $ | 296,871 | $ | 316,655 |
NOI
We also consider NOI an important supplemental measure because it allows investors, analysts and our management to assess our unlevered property-level operating results and to compare our operating results with those of other real estate companies and between periods on a consistent basis. We define NOI as total revenues, less interest and other income, property-level operating expenses and third party capital management expenses.
The following table sets forth a reconciliation of net income attributable to common stockholders to NOI (dollars in thousands):
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 17,517 | $ | 38,732 | |||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Interest and other income | (1,743) | (536) | |||||||||||||||||||||
| Interest expense | 128,075 | 110,794 | |||||||||||||||||||||
| Depreciation and amortization | 282,119 | 289,064 | |||||||||||||||||||||
| General, administrative and professional fees | 44,798 | 42,998 | |||||||||||||||||||||
| Transaction expenses and deal costs | 1,386 | 19,992 | |||||||||||||||||||||
| Allowance on loans receivable and investments | (8,064) | (54) | |||||||||||||||||||||
| Other | 7,762 | (27,190) | |||||||||||||||||||||
| Net income attributable to noncontrolling interests | 1,395 | 1,860 | |||||||||||||||||||||
| Loss from unconsolidated entities | 5,623 | 4,269 | |||||||||||||||||||||
| Income tax benefit | (2,802) | (4,490) | |||||||||||||||||||||
| Gain on real estate dispositions | (10,201) | (2,455) | |||||||||||||||||||||
| NOI | $ | 465,865 | $ | 472,984 | |||||||||||||||||||
See “Results of Operations” for discussions regarding both NOI and same-store NOI. We define same-store as properties owned, consolidated and operational for the full period in both comparison periods and that are not otherwise excluded; provided, however, that we may include selected properties that otherwise meet the same-store criteria if they are included in substantially all of, but not a full, period for one or both of the comparison periods, and in our judgment such inclusion provides a more meaningful presentation of our segment performance.
Newly acquired development properties and recently developed or redeveloped properties in our SHOP reportable business segment will be included in same-store once they are stabilized for the full period in both periods presented. These properties are considered stabilized upon the earlier of (a) the achievement of 80% sustained occupancy or (b) 24 months from the date of acquisition or substantial completion of work. Recently developed or redeveloped properties in our office operations and triple-net leased properties reportable business segments will be included in same-store once substantial completion of work has occurred for the full period in both periods presented. Our senior housing operating portfolio and triple-net leased properties that have undergone operator or business model transitions will be included in same-store once operating under consistent operating structures for the full period in both periods presented.
Properties are excluded from same-store if they are: (i) sold, classified as held for sale or properties whose operations were classified as discontinued operations in accordance with GAAP; (ii) impacted by materially disruptive events such as flood or fire; (iii) for SHOP, those properties that are currently undergoing a materially disruptive redevelopment; (iv) for our office operations and triple-net leased properties reportable business segments, those properties for which management has an intention to institute, or has instituted, a redevelopment plan because the properties may require major property-level expenditures to maximize value, increase NOI, or maintain a market-competitive position and/or achieve property stabilization, most commonly as the result of an expected or actual material change in occupancy or NOI; or (v) for SHOP and triple-net leased properties reportable business segments, those properties that are scheduled to undergo operator or business model transitions, or have transitioned operators or business models after the start of the prior comparison period.
To eliminate the impact of exchange rate movements, all portfolio performance-based disclosures assume constant exchange rates across comparable periods, using the following methodology: the current period’s results are shown in actual
reported USD, while prior comparison period’s results are adjusted and converted to USD based on the average exchange rate for the current period.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operations, proceeds from the issuance of debt and equity securities, borrowings under our unsecured revolving credit facility and commercial paper program, and proceeds from asset sales.
For the next 12 months, our principal liquidity needs are to: (i) fund operating expenses; (ii) meet our debt service requirements; (iii) repay maturing mortgage and other debt; (iv) fund acquisitions, investments and commitments and any development and redevelopment activities; (v) fund capital expenditures; and (vi) make distributions to our stockholders and unitholders, as required for us to continue to qualify as a REIT. Depending upon the availability of external capital, we believe our liquidity is sufficient to fund these uses of cash. We expect that these liquidity needs generally will be satisfied by a combination of the following: cash flows from operations, cash on hand, debt assumptions and financings (including secured financings), issuances of debt and equity securities, dispositions of assets (in whole or in part through joint venture arrangements with third parties) and borrowings under our revolving credit facilities and commercial paper program. However, an inability to access liquidity through multiple capital sources concurrently could have a material adverse effect on us.
Our material contractual obligations arising in the normal course of business primarily consist of long-term debt and related interest payments, and operating obligations which include ground lease obligations. During the three months ended March 31, 2023, there were no significant changes to our contractual obligations from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report. See “Note 9 – Senior Notes Payable And Other Debt” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding our significant debt activities.
We may, from time to time, seek to retire or purchase our outstanding indebtedness for cash or in exchange for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, prospects for capital and other factors. The amounts involved may be material.
Loans Receivable and Investments
As of March 31, 2023, the Santerre Mezzanine Loan had a principal balance of $486.1 million and gross book value of $485.3 million, and was priced at LIBOR + 6.42%. On May 1, 2023, we took ownership of the collateral that supported the Santerre Mezzanine Loan by converting the outstanding principal amount of the Santerre Mezzanine Loan to equity, with no additional consideration being paid. As a result, the Santerre Mezzanine Loan is no longer outstanding.
Credit Facilities, Commercial Paper, Unsecured Term Loans and Letters of Credit
As of March 31, 2023, we had $2.7 billion of undrawn capacity on our unsecured revolving credit facility with $40.2 million outstanding and an additional $1.2 million restricted to support outstanding letters of credit. We limit our use of the unsecured revolving credit facility, to the extent necessary, to support our commercial paper program when commercial paper notes are outstanding.
As of March 31, 2023, our $100.0 million uncommitted line for standby letters of credit had an outstanding balance of $14.5 million. The agreement governing the line contains certain customary covenants and, under its terms, we are required to pay a commission on each outstanding letter of credit at a fixed rate.
Our wholly owned subsidiary, Ventas Realty, Limited Partnership (“Ventas Realty”), may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $1.0 billion. The notes are sold under customary terms in the U.S. commercial paper note market and are ranked pari passu with all of Ventas Realty’s other unsecured senior indebtedness. The notes are fully and unconditionally guaranteed by Ventas, Inc. As of March 31, 2023, we had $425.0 million in borrowings outstanding under our commercial paper program.
As of March 31, 2023, we had a C$500.0 million unsecured term loan facility priced at Canadian Dollar Offered Rate (“CDOR”) plus 0.90% that matures in 2025.
Senior Notes
In April 2023, our 100% owned subsidiary, Ventas Canada Finance Limited (“Ventas Canada”), issued and sold C$600.0 million aggregate principal amount of 5.398% Senior Notes due 2028 in a private placement at par. Pursuant to cash tender offers, we used the proceeds to repurchase C$613.7 million in aggregate principal amount of outstanding senior notes due in 2024 for an aggregate purchase price of C$600.0 million plus accrued and unpaid interest as disclosed below:
-
In April 2023, we repurchased C$527.0 million principal amount of our 2.80% Senior Notes, Series E due April 2024 at 97.6% of par value, plus accrued and unpaid interest to, but not including, the settlement date.
-
In April 2023, we repurchased C$86.7 million principal amount of our 4.125% Senior Notes, Series B due September 2024 at 98.5% of par value, plus accrued and unpaid interest to, but not including, the settlement date.
Mortgages
In March 2023, we entered into a C$271.8 million floating rate mortgage debt maturing in 2028 with an interest rate of CDOR + 0.88%. The mortgage is secured by 14 SHOP communities in Canada.
On May 1, 2023, we took ownership of the collateral that supported the Santerre Mezzanine Loan, which we refer to as the Santerre Portfolio, by converting the outstanding principal amount of the Santerre Mezzanine Loan to equity, with no additional consideration being paid. Our ownership of the Santerre Portfolio is subject to an existing approximately $1 billion non-recourse Santerre Senior Loan, which is secured by the Santerre Portfolio, bears interest at a current weighted average rate of LIBOR + 1.84% and matures on June 9, 2023. We have given notice to extend the maturity of the Santerre Senior Loan to June 2024, which is subject to the satisfaction of certain conditions, including entering into an interest rate cap for the extension period. The Santerre Senior Loan can be repaid in whole or in part prior to its maturity, without penalty, and assets can be released from the liens, subject to certain conditions.
Equity Offerings
We participate in an “at-the-market” equity offering program (“ATM program”), pursuant to which we may, from time to time, sell up to $1.0 billion aggregate gross sales price of shares of our common stock. There were no issuances under the ATM program for the three months ended March 31, 2023. As of March 31, 2023, $1.0 billion aggregate gross sales price of shares of our common stock remains available for issuance under the ATM program.
Derivatives and Hedging
In the normal course of our business, interest rate fluctuations affect future cash flows under our variable rate debt obligations, loans receivable and marketable debt securities, and foreign currency exchange rate fluctuations affect our operating results. We follow established risk management policies and procedures, including the use of derivative instruments, to mitigate the impact of these risks.
In the first quarter of 2023, we hedged an incremental $200.0 million of variable rate debt to fixed rate debt through the execution in March 2023 of two-year $400.0 million notional swaps on our unsecured term loan due in 2027, replacing a $200.0 million notional swap that matured in January 2023. The swap instruments are designated as cash flow hedges.
In March 2023, in connection with our new C$271.8 million mortgage debt, we entered into an interest rate swap totaling a notional amount of C$271.8 million with a maturity of March 14, 2028 that effectively converts CDOR-based floating rate debt to fixed rate debt.
In March and April 2023, we entered into a total of $250.0 million aggregate forward starting swaps with a ten-year weighted average rate of 3.37%:
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In March 2023, we entered into a total of $200.0 million of notional forward starting swaps 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 ten-year weighted average rate of 3.41%. The forward-starting interest rate swap instruments are designated as cash flow hedges.
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In April 2023, we entered into a total of $50.0 million of notional forward starting swaps that reduced our exposure to fluctuations in interest rates related to changes in rates between the trade dates of the swap and the forecasted issuance of long-term debt. The rate on the notional amounts was locked at a ten-year weighted average rate of 3.17%. The forward-starting interest rate swap instruments are designated as cash flow hedges.
On May 1, 2023, in connection with taking ownership of the Santerre Portfolio, which is collateral for the Santerre Senior Loan, we also took ownership of existing interest rate caps based on LIBOR with an aggregate notional amount of $1.5 billion that expire in June 2023. The objective of the interest rate caps is to offset the variability of cash flows in the Santerre Senior Loan interest payments attributable to fluctuations in LIBOR beyond 3.36%. In order to extend the maturity of the Santerre Senior Loan, which we intend to do, we will be required to obtain an interest rate cap in the notional amount of the Santerre Senior Loan covering the extended period, based on market terms and conditions. We currently expect the interest rate cap required in connection with the extension of the Santerre Senior Loan to be available for a minimal cost and to be “out of the money.” As a result, based on current market conditions, we expect to pay the actual interest due under the Santerre Senior Loan without the benefit of payments from the new interest rate cap.
Dividends
During the three months ended March 31, 2023, we declared a dividend of $0.45 per share of our common stock. In order to continue to qualify as a REIT, we must make annual distributions to our stockholders of at least 90% of our REIT taxable income (excluding net capital gain). In addition, we will be subject to income tax at the regular corporate rate to the extent we distribute less than 100% of our REIT taxable income, including any net capital gains. We intend to pay dividends greater than 100% of our taxable income, after the use of any net operating loss carryforwards, for 2023.
We expect that our cash flows will exceed our REIT taxable income due to depreciation and other non-cash deductions in computing REIT taxable income and that we will be able to satisfy the 90% distribution requirement. However, from time to time, we may not have sufficient cash on hand or other liquid assets to meet this requirement or we may decide to retain cash or distribute such greater amount as may be necessary to avoid income and excise taxation. If we do not have sufficient cash on hand or other liquid assets to enable us to satisfy the 90% distribution requirement, or if we desire to retain cash, we may borrow funds, issue additional equity securities, pay taxable stock dividends, if possible, distribute other property or securities or engage in a transaction intended to enable us to meet the REIT distribution requirements or any combination of the foregoing.
Cash Flows
The following table sets forth our sources and uses of cash flows for the three months ended March 31, 2023 and 2022 (dollars in thousands):
| For the Three Months Ended March 31, | (Decrease) Increase to Cash | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | $ | 170,745 | $ | 196,597 | $ | (25,852) | (13.1)% | ||||||||||||||||
| Net cash provided by operating activities | 242,817 | 274,553 | (31,736) | (11.6) | |||||||||||||||||||
| Net cash used in investing activities | (56,280) | (437,326) | 381,046 | 87.1 | |||||||||||||||||||
| Net cash (used in) provided by financing activities | (162,107) | 165,382 | (327,489) | (198.0) | |||||||||||||||||||
| Effect of foreign currency translation | 106 | 241 | (135) | (56.0) | |||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 195,281 | $ | 199,447 | $ | (4,166) | (2.1) |
Cash Flows from Operating Activities
Cash flows from operating activities decreased $31.7 million during the three months ended March 31, 2023 compared to the same period in 2022 primarily due to no HHS grants received and higher interest expense in 2023, partially offset by higher property NOI in 2023, and higher transaction expenses and deal costs in 2022 in connection with stockholder relations matters.
Cash Flows from Investing Activities
Cash flows from investing activities increased $381.0 million during the three months ended March 31, 2023 compared to the same period in 2022 primarily due to higher acquisition volume in 2022.
Cash Flows from Financing Activities
Cash flows from financing activities decreased $327.5 million during the three months ended March 31, 2023 compared to the same period in 2022 primarily due to decreased borrowings under our commercial paper program in 2023.
Capital Expenditures
The terms of our triple-net leases generally obligate our tenants to pay all capital expenditures necessary to maintain and improve our triple-net leased properties. However, from time to time, we may fund the capital expenditures for our triple-net leased properties through loans or advances to the tenants, which may increase the amount of rent payable with respect to the properties in certain cases. We may also fund capital expenditures for which we may become responsible upon expiration of our triple-net leases or in the event that our tenants are unable or unwilling to meet their obligations under those leases. We also expect to fund capital expenditures related to our SHOP and office operations reportable business segments with the cash flows from the properties or through additional borrowings. We expect that these liquidity needs generally will be satisfied by a combination of the following: cash flows from operations, cash on hand, debt assumptions and financings (including secured financings), issuances of debt and equity securities, dispositions of assets (in whole or in part through joint venture arrangements with third parties) and borrowings under our revolving credit facilities and commercial paper program.
To the extent that unanticipated capital expenditure needs arise or significant borrowings are required, our liquidity may be affected adversely. Our ability to borrow additional funds may be restricted in certain circumstances by the terms of the instruments governing our outstanding indebtedness.
We are party to certain agreements that obligate us to develop senior housing or healthcare properties funded through capital that we and, in certain circumstances, our joint venture partners provide. As of March 31, 2023, we had seven active and committed projects pursuant to these agreements, including three projects that are unconsolidated.
In addition, from time to time, we engage in redevelopment projects with respect to our existing senior housing communities to maximize the value, increase NOI, maintain a market-competitive position, achieve property stabilization or change the primary use of the property.
Off-Balance Sheet Arrangements
We own interests in certain unconsolidated entities as described in “Note 6 – Investments In Unconsolidated Entities.” Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding loans receivable. In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities, as described under “Note 9 – Senior Notes Payable And Other Debt” to the Consolidated Financial Statements. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. Further, we use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. Finally, at March 31, 2023, we had $15.7 million outstanding letters of credit obligations. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those described above.
Guarantor and Issuer Financial Information
Ventas, Inc. has fully and unconditionally guaranteed the obligation to pay principal and interest with respect to the outstanding senior notes issued by our 100% owned subsidiary, Ventas Realty. None of our other subsidiaries is obligated with respect to Ventas Realty’s outstanding senior notes.
Ventas, Inc. has also fully and unconditionally guaranteed the obligation to pay principal and interest with respect to the outstanding senior notes issued by our 100% owned subsidiary, Ventas Canada Finance Limited (“Ventas Canada”). None of our other subsidiaries is obligated with respect to Ventas Canada’s outstanding senior notes, all of which were issued on a private placement basis in Canada.
In connection with the acquisition of Nationwide Health Properties, Inc. (“NHP”), our 100% owned subsidiary Nationwide Health Properties, LLC (“NHP LLC”), as successor to NHP, assumed the obligation to pay principal and interest
with respect to the outstanding senior notes issued by NHP. Neither we nor any of our subsidiaries (other than NHP LLC) is obligated with respect to any of NHP LLC’s outstanding senior notes.
In addition, Ventas, Inc. has fully and unconditionally guaranteed the obligations under our $2.75 billion unsecured revolving credit facility, our C$500.0 million unsecured term loan facility, the New Credit Agreement and our $100.0 million uncommitted line for standby letters of credit.
Under certain circumstances, contractual and legal restrictions, including those contained in the instruments governing our subsidiaries’ outstanding mortgage indebtedness, may restrict our ability to obtain cash from our subsidiaries for the purpose of meeting our debt service obligations, including our payment guarantees with respect to Ventas Realty’s and Ventas Canada’s senior notes.
The following summarizes our guarantor and issuer balance sheet and statement of income information as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and the year ended December 31, 2022 (in thousands) for each of Ventas Realty, as issuer of certain notes registered under the Exchange Act, and Ventas, Inc., on an unconsolidated basis, as guarantor of such notes:
Balance Sheet Information
| As of March 31, 2023 | |||||||||||
| Guarantor | Issuer | ||||||||||
| Assets | |||||||||||
| Investment in and advances to affiliates | $ | 17,774,593 | $ | 3,049,374 | |||||||
| Total assets | 17,839,481 | 3,154,642 | |||||||||
| Liabilities and equity | |||||||||||
| Intercompany loans | 11,995,794 | (3,784,207) | |||||||||
| Total liabilities | 12,200,374 | 4,313,214 | |||||||||
| Redeemable OP unitholder and noncontrolling interests | 102,616 | — | |||||||||
| Total equity (deficit) | 5,536,491 | (1,158,572) | |||||||||
| Total liabilities and equity | 17,839,481 | 3,154,642 |
| As of December 31, 2022 | |||||||||||
| Guarantor | Issuer | ||||||||||
| Assets | |||||||||||
| Investment in and advances to affiliates | $ | 17,691,107 | $ | 3,049,374 | |||||||
| Total assets | 17,752,892 | 3,155,014 | |||||||||
| Liabilities and equity | |||||||||||
| Intercompany loans | 11,704,160 | (3,825,402) | |||||||||
| Total liabilities | 11,925,997 | 4,263,316 | |||||||||
| Redeemable OP unitholder and noncontrolling interests | 102,148 | — | |||||||||
| Total equity (deficit) | 5,724,747 | (1,108,302) | |||||||||
| Total liabilities and equity | 17,752,892 | 3,155,014 |
Statement of Income Information
| For the Three Months Ended March 31, 2023 | |||||||||||||||||||||||
| Guarantor | Issuer | ||||||||||||||||||||||
| Equity earnings in affiliates | $ | 40,494 | $ | — | |||||||||||||||||||
| Total revenues | 41,209 | 35,635 | |||||||||||||||||||||
| Income (loss) before unconsolidated entities, real estate dispositions, income taxes and noncontrolling interests | 18,066 | (50,152) | |||||||||||||||||||||
| Net income (loss) | 17,517 | (50,152) | |||||||||||||||||||||
| Net income (loss) attributable to common stockholders | 17,517 | (50,152) |
| For the Year Ended December 31, 2022 | |||||||||||||||||||||||||||||
| Guarantor | Issuer | ||||||||||||||||||||||||||||
| Equity earnings in affiliates | $ | 43,317 | $ | — | |||||||||||||||||||||||||
| Total revenues | 45,037 | 145,560 | |||||||||||||||||||||||||||
| Loss before unconsolidated entities, real estate dispositions, income taxes and noncontrolling interests | (45,383) | (173,407) | |||||||||||||||||||||||||||
| Net loss | (47,447) | (173,407) | |||||||||||||||||||||||||||
| Net loss attributable to common stockholders | (47,447) | (173,407) |
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