Ventas Reports 2018 Fourth Quarter and Full Year Results

Ventas, Inc. (NYSE: VTR) today announced its results for the fourth quarter and full year ended December 31, 2018.

“Ventas extended its two decade track record of sustained excellence in 2018, highlighted by delivering positive total return to shareholders, increasing our dividend and continuing to invest in our future growth. We also expanded our forward university-based research and innovation development pipeline to over $1.5 billion, enhanced our financial strength and flexibility, harvested proceeds from profitable investments and added high-quality assets to our portfolio,” said Debra A. Cafaro, Ventas Chairman and CEO.

“As a result of these successful activities, we enter 2019 with a strong foundation. We are sharply focused on returning to year-over-year growth, and we expect 2019 to be the pivot year in our transition. Our collaborative and cohesive team is committed to delivering growth across our diversified businesses segments,” Cafaro added.

2018 and Fourth Quarter Performance

• Net income attributable to common stockholders per diluted share for the full year 2018 was $1.14 compared to $3.78 in 2017. The change from 2017 results was largely due to the following factors: i) the cumulative net impact of asset dispositions and resulting lower property income, in addition to higher gains on real estate dispositions in 2017 of $1.87 per share due to such disposition activity; ii) $0.17 per share of higher debt extinguishment costs associated with proactively refinancing near-term debt to manage future interest rate risk and extend the Company’s debt maturity schedule; and iii) $0.15 per share of higher natural disaster expenses in 2018 principally due to non-cash impairments. For the fourth quarter 2018, net income attributable to common stockholders per diluted share was $0.17 compared to $1.09 in the same period in 2017. The main drivers of the year-over-year change in fourth quarter 2018 results were the same as those listed above.
• Reported FFO per share, as defined by the National Association of Real Estate Investment Trusts (“Nareit FFO”) for the full year 2018 was $3.64 compared to $4.22 in 2017. The change from 2017 results was principally due to the factors set forth above for net income, excluding gains on sale of real estate. Fourth quarter 2018 Nareit FFO per share was $0.81 compared to $1.13 in the same period in 2017.
• The Company’s fourth quarter and full year 2018 per share net income attributable to common stockholders and Nareit FFO are consistent with the Company’s previously published expectations, excluding the fourth quarter impact of natural disasters that affected several of the Company’s properties and increased non-cash impairments during the quarter and year. The Company believes there is sufficient insurance coverage to mitigate the impact of these natural disasters, and any recoveries will be recognized in future periods, although there can be no assurance regarding the amount or timing of any such recoveries.
• Normalized Funds From Operations (“FFO”) per share for the full year 2018 was $4.07 compared to $4.16 in 2017. The change from 2017 was principally due to the cumulative net impact of asset dispositions and resulting lower property income. Fourth quarter normalized FFO per diluted common share was $0.96 compared to $1.03 in the same period in 2017.
• For the full year 2018, the Company’s same-store total property portfolio (1,041 assets) cash net operating income (“NOI”) grew 1.2 percent compared to 2017, above the midpoint of the Company’s published guidance range of 0.75 to 1.5 percent.
• For the fourth quarter 2018, the Company’s same-store total property portfolio (1,064 assets) cash NOI grew 0.2 percent compared to the same period in 2017.
• Same-store cash NOI growth by segment for the full year and fourth quarter 2018 is as follows:

• Fourth quarter year-over-year changes in the Company’s same-store property results were driven by:
  • NNN portfolio: Growth was due largely to in-place lease escalations.
  • SHOP portfolio: Performance was in-line with expectations and driven by the elevated number of new community openings in select markets.
  • Office portfolio: Growth was principally due to continued strength in Research & Innovation (“R&I”) properties. In the Medical Office Building (“MOB”) segment, in-place lease escalations and strong tenant retention were offset by lower occupancy from elevated 2018 lease expirations and the timing of new leasing.

2018 Capital Allocation and Balance Sheet Excellence

R&I Excellence: Expanded Accretive Development Pipeline, New Acquisition Activity, Leasing Progress and Awards

• Expanded R&I Pipeline: As announced separately today, Ventas’s R&I development pipeline (the “R&I Pipeline”) with leading universities exceeds $1.5 billion. The R&I Pipeline will be developed through the Company’s exclusive relationship with leading university-focused developer Wexford Science & Technology, which has been extended for a 10-year term to 2029. The R&I Pipeline includes a new $77 million development commitment at highly rated Arizona State University (“ASU”) (Moody’s Aa2) that is 50 percent pre-leased by ASU for biomedical-focused academic and commercial research space. On a pro forma basis, including the R&I Pipeline, Ventas’s investments in its R&I business will reach over $3.5 billion.
• R&I Transactions: In addition to the new ASU development commitment noted above, the Company acquired a $26 million R&I property in the University City sub-market of Philadelphia that is 100 percent leased and principally occupied by Drexel University (Moody’s: A3) for lab space.
• R&I Fourth Quarter Leasing Highlights:
  • Signed a 25-year lease with Yale University (“Yale”) for 250,000 square feet at 100 College Street, increasing Ventas’s relationship with Yale, enhancing its tenant credit and extending the weighted average lease term of the building. Yale is replacing Alexion Pharmaceuticals in the space.
  • Signed a new lease with Washington University at Ventas’s 4220 Duncan property, making it 100 percent leased within one year of opening.
• R&I Development Awards: Ventas’s recently stabilized 4220 Duncan at Washington University achieved LEED Gold status, and South Street Landing at Brown University was awarded the TOBY award for the best historical building in 2018 by BOMA Boston.

Fourth Quarter Acquisition Highlights: Ventas completed the $194 million acquisition of Brookdale Battery Park, an irreplaceable seniors housing community in Manhattan, and acquired five MOBs, predominately on the West Coast, with Pacific Medical Buildings (“PMB”) and Ardent Health Services.

Full Year Capital Recycling: Ventas sold properties and received final repayments on loans receivable in 2018 for proceeds of $1.3 billion at a blended GAAP yield exceeding eight percent, with proceeds used to repay debt and fund investments.

Extended Exclusive MOB Relationship with PMB: Ventas extended its exclusive MOB development relationship with PMB for a 10-year term. PMB has nearly 50 years of experience developing world-class outpatient facilities with top U.S. health systems. Ventas will continue to enhance its portfolio by investing in newly developed, high-quality MOB assets in attractive markets, as highlighted by the Company’s trophy Sutter development in San Francisco opening in early 2019.

Mutually Beneficial Agreements with Brookdale Senior Living (“Brookdale”): The Company combined and extended its leases with Brookdale to 2026. Ventas’s triple-net seniors housing weighted average lease term is now over eight years.

Significant Financial Strength Positioned for Growth

• $3.4 Billion in Debt Refinancing and Repayment: Ventas significantly improved its maturity profile throughout 2018, increasing its debt duration by nearly one year to seven years. The Company now has only a modest 10 percent of its total debt (and only three percent of its debt as a percentage of enterprise value) maturing over the next three years. This represents a 22 percentage point improvement from year-end 2017 and was achieved in 2018 by:

1. Refinancing and/or repaying more than $2.5 billion in debt since December 31, 2017

2. Renewing and extending a $900 million term loan

3. Proactively issuing $1.4 billion in 10 year senior notes

• The Company’s financial strength was robust at quarter end, including a sector-leading net debt to Adjusted Pro Forma EBITDA ratio of 5.6x and fixed charge coverage ratio of 4.6x.
• In January 2019, Ventas announced a new $1 billion commercial paper program intended to cost effectively supplement the Company’s working capital capacity. Ventas maintains its existing $3 billion revolving credit facility and other credit facilities, together providing the company robust liquidity to ensure financial flexibility.

People & Culture Will Drive Continued Success

• Demonstrated Leadership Excellence, Strengthened Best-in-Class Team and Commitment to Environmental, Social and Governance (“ESG”) Principles
  • Ventas Chairman and CEO, Debra A. Cafaro, was again recognized as a top global CEO and leader in the real estate and healthcare industries in 2018. Recognitions include:
    • Harvard Business Review Top 100 Best Performing CEOs in the World (fifth consecutive year)
    • Modern Healthcare 100 Most Influential People in Healthcare, the only real estate representative on this prestigious list
    • Named Chair of the Real Estate Roundtable, a public policy organization that brings together leaders of the nation’s top real estate firms to address key national policy issues related to real estate and the overall economy
    • A Lifetime Achievement Award from The American Seniors Housing Association (ASHA)
  • Robert F. Probst, Executive Vice President and Chief Financial Officer of Ventas, was awarded the 2019 Chicago Public Company CFO of the Year by the Financial Executives International (FEI) Chicago Chapter.
  • Ventas made significant achievements in 2018 in advancing its leadership position and investment in ESG matters, including publishing its inaugural Corporate Sustainability Report. Other recognitions include:
    • Nareit’s 2018 Healthcare “Leader in the Light” for the second consecutive year and third time
    • Inclusion in the Dow Jones Sustainability IndexTM for North America for the second consecutive year
    • #1 ranked healthcare REIT in the GRESB real estate ESG assessment
• In January, Ventas announced two key appointments to its senior leadership team. Bhavana Devulapally, Chief Information Officer and Senior Vice President, will lead Ventas’s technology team, overseeing the development and implementation of strategy for the Company’s information systems. Juan Sanabria, Vice President of Investor Relations, will be the principal liaison with the equity market and analysts.

First Quarter Dividend

The Company’s Board of Directors declared a dividend for the first quarter 2019 of $0.7925 per share. The dividend is payable in cash on April 12, 2019 to stockholders of record on April 1, 2019.

2019 Guidance

Ventas expects 2019 per share normalized FFO, Nareit FFO and net income attributable to common stockholders, and same-store cash NOI growth, to range as follows:

Ventas’s 2019 normalized FFO per share guidance also assumes $500 million of disposition transactions and receipt of loan repayments in 2019, including the previously announced Brookdale asset sales, with proceeds being used to fund $500 million in development and redevelopment projects, mostly in accelerating the Company’s exciting university-based research and innovation development pipeline. These capital recycling activities have near-term impacts on FFO growth in 2019, but will deliver high-quality and accretive long-term cash flow growth. Guidance also includes $0.02 per share in incremental leasing costs from changes in accounting standards.

The 2019 outlook assumes no acquisitions and 361 million weighted average fully-diluted shares. Ventas expects leverage, as measured by net debt to Adjusted Pro Forma EBITDA, to remain stable year-over-year in 2019.

A reconciliation of the Company’s 2019 guidance to the Company’s projected GAAP measures is included in this press release. The Company’s 2019 guidance is based on a number of other assumptions that are subject to change and many of which are outside the control of the Company. If actual results vary from these assumptions, the Company’s expectations may change. There can be no assurance that the Company will achieve these results.

Fourth Quarter and Full Year 2018 Conference Call

Ventas will hold a conference call to discuss this earnings release today at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The dial-in number for the conference call is (844) 776-7841 (or +1 (661) 378-9542 for international callers). The participant passcode is “Ventas.” The conference call is being webcast live by NASDAQ OMX and can be accessed at the Company’s website at www.ventasreit.com. A replay of the webcast will be available following the call online, or by calling (855) 859-2056 (or +1 (404) 537-3406 for international callers), passcode 3853609, beginning at approximately 2:00 p.m. Eastern Time and will remain for 36 days.

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

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

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding the Company’s or its tenants’, operators’, borrowers’ or managers’ expected future financial condition, results of operations, cash flows, funds from operations, dividends and dividend plans, financing opportunities and plans, capital markets transactions, business strategy, budgets, projected costs, operating metrics, capital expenditures, competitive positions, acquisitions, investment opportunities, dispositions, merger or acquisition integration, growth opportunities, expected lease income, continued qualification as a real estate investment trust (“REIT”), plans and objectives of management for future operations and statements that include words such as “anticipate,” “if,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “could,” “should,” “will” and other similar expressions are forward-looking statements. These forward-looking statements are inherently uncertain, and actual results may differ from the Company’s expectations. The Company does not undertake a duty to update these forward-looking statements, which speak only as of the date on which they are made.

The Company’s actual future results and trends may differ materially from expectations depending on a variety of factors discussed in the Company’s filings with the SEC. These factors include without limitation: (a) the ability and willingness of the Company’s tenants, operators, borrowers, managers and other third parties to satisfy their obligations under their respective contractual arrangements with the Company, including, in some cases, their obligations to indemnify, defend and hold harmless the Company from and against various claims, litigation and liabilities; (b) the ability of the Company’s tenants, operators, borrowers and managers to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to third parties, including without limitation obligations under their existing credit facilities and other indebtedness; (c) the Company’s success in implementing its business strategy and the Company’s ability to identify, underwrite, finance, consummate and integrate diversifying acquisitions and investments; (d) macroeconomic conditions such as a disruption of or lack of access to the capital markets, changes in the debt rating on U.S. government securities, default or delay in payment by the United States of its obligations, and changes in the federal or state budgets resulting in the reduction or nonpayment of Medicare or Medicaid reimbursement rates; (e) the nature and extent of future competition, including new construction in the markets in which the Company’s seniors housing communities and medical office buildings (“MOBs”) are located; (f) the extent and effect of future or pending healthcare reform and regulation, including cost containment measures and changes in reimbursement policies, procedures and rates; (g) increases in the Company’s borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of the London Inter-bank Offered Rate after 2021; (h) the ability of the Company’s tenants, operators and managers, as applicable, to comply with laws, rules and regulations in the operation of the Company’s properties, to deliver high-quality services, to attract and retain qualified personnel and to attract residents and patients; (i) changes in general economic conditions or economic conditions in the markets in which the Company may, from time to time, compete, and the effect of those changes on the Company’s revenues, earnings and funding sources; (j) the Company’s ability to pay down, refinance, restructure or extend its indebtedness as it becomes due; (k) the Company’s ability and willingness to maintain its qualification as a REIT in light of economic, market, legal, tax and other considerations; (l) final determination of the Company’s taxable net income for the year ended December 31, 2018 and for the year ending December 31, 2019; (m) the ability and willingness of the Company’s tenants to renew their leases with the Company upon expiration of the leases, the Company’s ability to reposition its properties on the same or better terms in the event of nonrenewal or in the event the Company exercises its right to replace an existing tenant, and obligations, including indemnification obligations, the Company may incur in connection with the replacement of an existing tenant; (n) risks associated with the Company’s senior living operating portfolio, such as factors that can cause volatility in the Company’s operating income and earnings generated by those properties, including without limitation national and regional economic conditions, costs of food, materials, energy, labor and services, employee benefit costs, insurance costs and professional and general liability claims, and the timely delivery of accurate property-level financial results for those properties; (o) changes in exchange rates for any foreign currency in which the Company may, from time to time, conduct business; (p) year-over-year changes in the Consumer Price Index or the UK Retail Price Index and the effect of those changes on the rent escalators contained in the Company’s leases and the Company’s earnings; (q) the Company’s ability and the ability of its tenants, operators, borrowers and managers to obtain and maintain adequate property, liability and other insurance from reputable, financially stable providers; (r) the impact of damage to the Company’s properties from catastrophic weather and other natural events and the physical effects of climate change; (s) the impact of increased operating costs and uninsured professional liability claims on the Company’s liquidity, financial condition and results of operations or that of the Company’s tenants, operators, borrowers and managers, and the ability of the Company and the Company’s tenants, operators, borrowers and managers to accurately estimate the magnitude of those claims; (t) risks associated with the Company’s MOB portfolio and operations, including the Company’s ability to successfully design, develop and manage MOBs and to retain key personnel; (u) the ability of the hospitals on or near whose campuses the Company’s MOBs are located and their affiliated health systems to remain competitive and financially viable and to attract physicians and physician groups; (v) risks associated with the Company’s investments in joint ventures and unconsolidated entities, including its lack of sole decision-making authority and its reliance on its joint venture partners’ financial condition; (w) the Company’s ability to obtain the financial results expected from its development and redevelopment projects; (x) the impact of market or issuer events on the liquidity or value of the Company’s investments in marketable securities; (y) consolidation activity in the seniors housing and healthcare industries resulting in a change of control of, or a competitor’s investment in, one or more of the Company’s tenants, operators, borrowers or managers or significant changes in the senior management of the Company’s tenants, operators, borrowers or managers; (z) the impact of litigation or any financial, accounting, legal or regulatory issues that may affect the Company or its tenants, operators, borrowers or managers; and (aa) changes in accounting principles, or their application or interpretation, and the Company’s ability to make estimates and the assumptions underlying the estimates, which could have an effect on the Company’s earnings.

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. However, since real estate values historically have risen or fallen with market conditions, many industry investors deem presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. For that reason, the Company considers FFO, normalized FFO, FAD and normalized FAD to be appropriate supplemental measures of operating performance of an equity REIT. In particular, the Company believes that normalized FFO is useful because it allows investors, analysts and Company management to compare the Company’s operating performance to the operating performance of other real estate companies and between periods on a consistent basis without having to account for differences caused by non-recurring items and other non-operational events such as transactions and litigation. In some cases, the Company provides information about identified non-cash components of FFO and normalized FFO because it allows investors, analysts and Company management to assess the impact of those items on the Company’s financial results.

The Company uses the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO. NAREIT defines FFO as net income attributable to common stockholders (computed in accordance with GAAP), excluding gains or losses from sales of real estate property, including gains or losses on re-measurement of equity method investments, and impairment write-downs of depreciable real estate, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. The Company defines normalized FFO as FFO excluding the following income and expense items (which may be recurring in nature): (a) merger-related costs and expenses, including amortization of intangibles, transition and integration expenses, and deal costs and expenses, including expenses and recoveries relating to acquisition lawsuits; (b) the impact of any expenses related to asset impairment and valuation allowances, the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts, make-whole payments, penalties or premiums incurred as a result of early retirement or payment of the Company’s debt; (c) the non-cash effect of income tax benefits or expenses, the non-cash impact of changes to the Company’s executive equity compensation plan, derivative transactions that have non-cash mark-to-market impacts on the Company’s income statement and non-cash charges related to lease terminations; (d) the financial impact of contingent consideration, severance-related costs and charitable donations made to the Ventas Charitable Foundation; (e) gains and losses for non-operational foreign currency hedge agreements and changes in the fair value of financial instruments; (f) gains and losses on non-real estate dispositions and other unusual items related to unconsolidated entities; (g) expenses related to the re-audit and re-review in 2014 of the Company’s historical financial statements and related matters; and (h) net expenses or recoveries related to natural disasters. Normalized FAD represents normalized FFO excluding non-cash components, which include straight-line rental adjustments, and deducting capital expenditures, including certain tenant allowances and leasing commissions. FAD represents normalized FAD after subtracting merger-related expenses, deal costs and re-audit costs and other unusual items related to unconsolidated entities.

FFO, normalized FFO, FAD and normalized FAD presented herein may not be comparable to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. FFO, normalized FFO, FAD and normalized FAD should not be considered as alternatives to net income attributable to common stockholders (determined in accordance with GAAP) as indicators of the Company’s financial performance or as alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of the Company’s liquidity, nor are they necessarily indicative of sufficient cash flow to fund all of the Company’s needs. The Company has historically reconciled FFO, normalized FFO, FAD and normalized FAD to income from continuing operations because it provides insight into the Company’s continuing operations, but, in light of recent SEC regulations that changed the presentation of statements of income, the Company now believes that net income attributable to common stockholders is the most comparable GAAP measure. The Company believes that in order to facilitate a clear understanding of the consolidated historical operating results of the Company, FFO, normalized FFO, FAD and normalized FAD should be examined in conjunction with net income attributable to common stockholders as presented elsewhere herein.

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

The following table illustrates net debt to pro forma earnings before interest, taxes, depreciation and amortization (including non-cash stock-based compensation expense), excluding gains or losses on extinguishment of debt, consolidated joint venture partners’ share of EBITDA, merger-related expenses and deal costs, expenses related to the re-audit and re-review in 2014 of the Company’s historical financial statements, net gains or losses on real estate activity, gains or losses on re-measurement of equity interest upon acquisition, changes in the fair value of financial instruments, unrealized foreign currency gains or losses, net expenses or recoveries related to natural disasters and non-cash charges related to lease terminations, and including the Company’s share of EBITDA from unconsolidated entities and adjustments for other immaterial or identified items (“Adjusted EBITDA”).

The following information considers the pro forma effect on Adjusted EBITDA of the Company’s activity during the three months ended December 31, 2018, as if the transactions had been consummated as of the beginning of the period (“Adjusted Pro Forma EBITDA”).

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

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

The Company considers NOI and same-store cash NOI as important supplemental measures because they allow investors, analysts and the Company’s management to assess its unlevered property-level operating results and to compare its operating results with those of other real estate companies and between periods on a consistent basis. The Company defines NOI as total revenues, less interest and other income, property-level operating expenses and office building services costs. In the case of NOI, cash receipts may differ due to straight-line recognition of certain rental income and the application of other GAAP policies. The Company has historically reconciled NOI and same-store cash NOI to income from continuing operations because it provides insight into the Company’s continuing operations, but, in light of recent SEC regulations that changed the presentation of statements of income, the Company now believes that net income attributable to common stockholders is the most comparable GAAP measure for both NOI and same-store cash NOI. The Company defines same-store as properties owned, consolidated, operational and reported under a consistent business model for the full period in both comparison periods, and excluding assets intended for disposition and for SHOP, those properties that transitioned operators after the start of the prior comparison period, and for office operations, assets that experience a significant disruption in operations and redevelopment assets. To normalize for exchange rate movements, all same-store cash NOI measures assume constant exchange rates across comparable periods, using the following methodology: the current period’s results are shown in actual reported USD, while prior comparison period’s results are adjusted and converted to USD based on the average exchange rate for the current period.