Ventas Beats Marginally

Ventas Inc. (VTR - Analyst Report), a leading healthcare real estate investment trust (REIT), reported first quarter 2011 funds from operations (FFO) of $101.0 million or 62 cents per share, compared to $103.0 million or 66 cents in the year-earlier quarter. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and other non-cash expenses to net income.

Excluding the non-recurring items, FFO for first quarter 2011 was $121.0 million or 75 cents per share compared to $105.2 million or 67 cents in the year-ago quarter. The recurring FFO per share for the quarter marginally beat the Zacks Consensus Estimate by a penny.

The increase in year-over-year FFO was primarily due to rental increases from its triple-net lease portfolio, and higher Net Operating Income (NOI) from its senior living and medical office building (MOB) operating portfolios, partially offset by higher weighted average diluted shares outstanding during the quarter.

Total revenues during the reported quarter were $270.5 million compared to $240.9 million in the year-earlier quarter. Revenues during first quarter 2011 were well above the Zacks Consensus Estimate of $267.0 million.

Ventas currently has an operating portfolio of 79 senior housing communities in North America that are managed by Sunrise Senior Living Inc. (SRZ - Snapshot Report). NOI from all 79 properties was $36.3 million during the reported quarter, compared to $33.8 million in the year-ago period. The year-over-year increase was primarily due to a 3.1% rise in average daily rate, a 140 bps increase in average occupancy to 89.7% and lower management fees. Same-store NOI for all the triple-net leased healthcare and seniors housing assets owned by the company increased 2.7% during the quarter on a year-over-year basis.

During first quarter 2011, Ventas acquired its rival Nationwide Health Properties Inc. (NHP) in an all-stock deal. The transaction worth $7.4 billion would create one of the largest publicly traded REITs in the U.S. and arguably the leading healthcare REIT as per value. According to the terms of the agreement, each Nationwide Health share was traded for 0.7866 of Ventas' share. Based on the closing pre-bid stock price of Ventas on February 25, 2011, this equated to $44.99 of Ventas stock for each Nationwide Health’s share.

The merged entity brings two of the most complementary customer franchises together in healthcare real estate market and gives way to a much diversified body with better scope. The merged company will have over 1,300 total assets in 47 states, the District of Columbia and two Canadian provinces at their disposal.

During the reported quarter, Ventas sold 5.6 million shares at $53.93 each for total proceeds of $300 million. At the same time, the company repaid $307.2 million of mortgage debt. At quarter-end, the company had $8 million outstanding under its revolving credit facility, $988.9 million additional undrawn availability, and $41.9 million of cash and short-term cash investments. The company’s debt to total capitalization at March 31, 2011was approximately 23% with net-debt-to-adjusted-EBITDA (earnings before interest, tax, depreciation, and amortization) being 3.8x.

For full year 2011, Ventas reiterated its earlier recurring FFO guidance in the range of $3.06 – $3.14 per share. We maintain our ‘Neutral’ recommendation on the stock, which presently has a Zacks #3 Rank translating into a short-term ‘Hold’ rating.

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