What is a REIT?
REITs - or Real Estate Investment Trusts - are corporations that own, and sometimes operate, income producing real estate such as healthcare facilities, apartments, office buildings and hotels. Companies must meet several requirements in order to qualify as a REIT but one of the most important is that it must distribute at least 90 percent of its taxable income to its shareholders annually. When a company elects REIT status, then it is permitted to deduct dividends paid to its shareholders from its federal tax bill.
What are the qualifications for being a REIT?
To qualify as a REIT, a company must comply with certain provisions within the Internal Revenue Code. As required by the Tax Code, a REIT must, among other things:
- Be an entity that is taxable as a corporation
- Be managed by a board of directors or trustees
- Have shares that are fully transferable
- Have a minimum of 100 shareholders
- Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year
- Invest at least 75 percent of its total assets in real estate assets
- Derive at least 75 percent of its gross income from rents from real estate property or interest on mortgages on real property
- Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
- Pay annually at least 90 percent of its taxable income in the form of shareholder dividends
How many REITs are there?
There are about 190 REITs registered with the Securities and Exchange Commission in the United States that trade on one of the major stock exchanges -- the majority on the New York Stock Exchange. Total assets of these listed REITs exceed $400 billion.
About 20 REITs are registered with the SEC but are not publicly traded. Approximately 800 REITs are not registered with the SEC and are not traded on a stock exchange.
Why were REITs created?
REITs were created in order to make it possible for average investors to invest in real estate the same way they invest in other industries - through the purchase of publicly traded stocks. Two distinct advantages that REIT stocks offer are diversification through investing in a portfolio of properties rather than a single building, and the expert management of the properties by experienced real estate professionals. Investors are attracted to REITs for their reliable, income producing characteristics. Investors who are interested in current yield, stable cash flows and tangible assets (such as real estate), especially favor REITs.
What do REITs offer investors?
NAREIT® identified the following advantages that REITs offer investors:
- Current, stable dividend income
- Dividend growth that has consistently exceeded the rate of consumer price inflation
- High dividend yields
- Liquidity: shares of publicly traded REITs are readily converted into cash because they are traded on the major stock exchanges
- Professional management: REIT managers are skilled, experienced real estate professionals
- Portfolio diversification, which reduces risk
- Oversight: Independent directors of the REIT, independent analysts, independent auditors and the business and financial media monitor a public REIT's financial reporting on a regular basis. This scrutiny provides the investor a measure of protection and more than one barometer of the REIT's financial condition.
- Disclosure obligations: REITs whose securities are registered with the SEC are required to make regular SEC disclosures, including quarterly and yearly financial reports.
Why are REITs attractive investment opportunities?
REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks are likely to be somewhat less than the returns of high-growth stocks and somewhat more than the returns of bonds. Because most REITs also have a small-to-medium equity market capitalization, their returns should be comparable to other small to mid-sized companies. There is a relatively low correlation between REITs and publicly traded real estate stock returns and the returns of other market sectors. Thus, including REITs and publicly traded real estate stocks in your investment programs help to build a diversified portfolio.
There can be no assurances that investors in Ventas will reap all of these advantages.
What types of REITS are there?
REITs can be found in many different industries. In addition to healthcare, there are residential REITs, office-building REITs, lodging REITs and many other property types. Additionally, REITs can be publicly listed or private, non-listed. Further, REITs can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs are real estate operating companies that engage in a wide range of real estate activities. They must acquire and develop their properties primarily to operate them as part of their own portfolios rather than to resell them once they are developed. Mortgage REITs lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Hybrid REITs both own properties and makes loans to real estate owners and operators.
Are all REITs Public?
Ventas is a publicly traded REIT. Publicly traded REITs, such as Ventas, must meet Securities and Exchange Commission requirements. REITs can also be private, non-listed REITs which are not required to report to the public their quarterly/annual earnings, or details of the REITs operations.
What are Healthcare REITs?
Healthcare REITs invest in healthcare properties such as skilled nursing facilities, hospitals (including long-term acute care hospitals), medical office buildings and assisted and independent living facilities. Healthcare REITs do not provide healthcare services since healthcare REITs cannot typically operate the properties they own.
Are REIT dividends "qualified dividends"?
The structure of REITs enables them to deduct dividends paid to their shareholders from their corporate taxable income, while shareholders pay taxes on the dividends received. Accordingly, REIT dividends are generally not eligible dividends for the reduced tax rates under the Job and Growth Tax Relief Reconciliation Act of 2003. Please consult your tax advisor for additional information.
What Is Funds From Operations?
Funds From Operations - or FFO - is an important measure of a REIT's operating performance. NAREIT® defines FFO as net income (computed in accordance with generally accepted accounting principles), excluding gains or losses from sales of real property, plus the depreciation of real estate. REITs also report net income, similar to other publicly held companies. But FFO is viewed as an effective way for REITs to capture some of the special issues related to real estate holdings.
Some companies also provide normalized FFO as a way to provide additional information to investors. Both FFO and normalized FFO are typically reconciled to GAAP net income.
Why do REITs use Funds From Operations as a performance measure?
Funds From Operations is another way for REITs to measure performance, taking into account special consideration that must be given to the real estate assets. Since real estate maintains its residual value to a much greater extent than computers or machinery, current depreciation used in normal earnings measures overstates the real depreciation of REIT assets. REITs do not require as much cash flow to maintain and replace their physical assets, which may in fact be appreciating. FFO recaptures that cash flow and presents it as part of a REIT's annual financial performance. Many securities analysts judge a REIT's performance according to its FFO per share growth.
What is FAD - Funds Available for Distribution?
Funds Available for Distribution (FAD) is also called Adjusted Funds From Operations (AFFO) or cash available for distribution (CAD). The calculation of FAD is derived by adjusting FFO for the straightlining of rents and recurring real estate related expenditures.
What is Ventas's Business?
Ventas is in the business of financing, owning and leasing healthcare related and senior housing facilities. Ventas leases some of its owned healthcare related and senior housing facilities to qualified third party operators under "triple net" leases, which means that the tenant must pay all taxes, insurance, and maintenance for the properties, in addition to rent. Ventas also owns healthcare related and senior housing facilities that are managed by third party operators.
When did Ventas become a REIT?
Ventas elected REIT status for the 1999 tax year. Before May 1, 1998, the Company's name was Vencor, Inc. and it operated skilled nursing facilities and long-term care hospitals throughout the United States. On May 1, 1998, Ventas formed a new corporation, subsequently named Vencor, Inc. and transferred to it all the healthcare operations. At the same time, the Company changed its name to Ventas, Inc. and maintained ownership of the real estate, which it leased to the new Vencor (now named Kindred Healthcare, Inc. (NYSE:KND)).
Where do healthcare REITs - including Ventas - fit in the overall REIT industry?
The 12 publicly traded equity healthcare REITS had total enterprise value of over $45 billion as of March 31, 2008. Healthcare REITs are one of the highest yielding REIT sectors with an average dividend yield of 5.5 percent. The MSCI US REIT Index began including healthcare REITs in the Index on July 16, 2002, with the addition of eight healthcare REIT companies, including Ventas, to the Index. Healthcare REITs comprise approximately 10 percent of the MSCI US REIT Index. Healthcare REITs own a spectrum of senior housing and healthcare assets, ranging from hospitals to skilled nursing facilities to independent and assisted living facilities to medical office buildings. (source: Morgan Stanley and Stifel, Nicolaus).
What distinguishes Ventas from other healthcare REITs?
Ventas is the second largest of the 12 publicly traded equity healthcare REITs based on enterprise value. Its geographically diverse portfolio consists of 513 facilities located in 43 states and two Canadian provinces. Finally, Ventas has consistently been among the top performing healthcare REITs during the last one, three and five year periods. Ventas is also distinguished by its highly experienced management team, which has more than 150 years collective experience in sophisticated aspects of healthcare, real estate, restructurings, finance, law, accounting and tax.
What is Ventas's business strategy and investment philosophy?
Ventas is actively implementing its strategic business plan to diversify its portfolio and enhance its value. Ventas will be seeking opportunities to acquire high-quality assets in protected markets that generate sustainable cash flow, and that are operated by providers with good reputations, regulatory history and quality control systems. The property types will span the continuum of care from independent and assisted living facilities to skilled nursing facilities and hospitals. Ventas will also seek to broaden the ultimate payor sources within its portfolio. Additionally, Ventas will seek investments in states, and also international opportunities, that possess a favorable environment for hospital, long-term care and senior housing operators through their reimbursement rates, regulatory practices such as certificate of need requirements and tort policies.
What properties does Ventas own?
Ventas's real estate portfolio consists of 41 hospitals, 192 nursing facilities, 253 senior living facilities and 27 other healthcare and senior housing facilities. At such date, its assets are located in 43 states across a geographically diverse area of the United States and two Canadian provinces. Ventas also has investments relating to 4 healthcare and senior housing facilities.
Who are the operators of the healthcare facilities owned by Ventas?
Ventas's primary tenant, Kindred Healthcare, Inc. (NYSE:KND), is expected to account for about 28 percent of the Company's REIT revenues, proforma based on annualized 1Q 2008 Ventas revenue assuming all events occurred at the beginning of the period. Under the terms of the four Amended Master Lease Agreements with Kindred, Ventas, Inc. is scheduled to receive annualized rent of $237 million. This annualized rent includes the additional rent as a result of Ventas's election to accept the Reset Right valuation.
During the calendar year of 2007, Ventas completed approximately $2.2 billion of additional investments, and in the 2006 calendar year, Ventas completed approximately $700 million of additional investments. With the completion of those transactions, Ventas has a diverse group of qualified operators of long-term care assets and other tenants outside of its relationship with Kindred (Kindred accounts for approximately 28 percent of Ventas's annualized revenue).
What is Ventas's recent performance record?
Ventas was a top performing REIT for the five year period ended March 31, 2008, with total annual shareholder return of 37.7 percent, compared with 18.1 percent and 11.3 percent for the MSCI US REIT Index and the S&P 500 Total Return Index, respectively.
What makes Ventas a good investment?
Ventas's appeal as an investment is its diverse portfolio, the fundamentals of its business strategy, and its diligent management team committed to good governance.
Ventas has achieved diversification by asset class, geography and payor source. Its 513 healthcare facilities are spread over 43 states, with 66 percent of its annualized revenues coming from 253 senior housing facilities, 20 percent of annualized revenues coming from its 192 skilled nursing facilities (SNF), 11 percent of annualized revenues from its 41 hospitals and the remaining revenues coming from 27 other healthcare properties.
The aging of the American population is at the heart of the success of the Company's strategy. Ventas’s senior housing facilities provide care to the growing segment of seniors who live in a community setting and require limited or no medical care. Ventas’s SNFs and hospitals provide care to the growing segment of seniors that have long-term healthcare needs.
Although the number of SNFs in the United States is stable at about 16,000, the fastest growing population segment in this country is the 85 and over age group, which has a utilization rate of about 25 percent. In addition, the prospects for new construction of SNFs are limited due to the high cost of construction coupled with a long payback period and regulatory barriers in many states.
With some of the industry's strongest leases, which are structured as triple-net, pooled, multi-facility Master Leases, Ventas has been able to establish industry-leading Funds from Operations (FFO).
Finally, Ventas's management is focused on building shareholder value as it continues to execute on its strategic diversification program with accretive acquisitions, excellent balance sheet management and unflagging commitment to good governance.
What is Ventas's current dividend?
Ventas's Board of Directors declared a dividend of $0.5125 per share for the first quarter of 2008. This represents an eight percent increase over the 2007 level. The total annual dividend for 2007 was $1.90 per share.
What is Ventas's dividend policy?
Ventas intends to grow its dividend year-over-year as its cash flow increases. The Ventas Board considers its dividend each quarter and historically has increased the dividend in the first quarter of each year. There can be no assurances regarding the Company's ability to pay dividends. The Company may from time-to-time update its publicly announced expectations regarding future dividends, but it is not obligated to do so.
Does Ventas offer a dividend reinvestment plan?
Ventas offers a Distribution Reinvestment and Stock Purchase Plan that provides a convenient and economical means for Ventas shareholders and new investors to purchase common shares of the Company. Effective with its 2005 first quarter dividend, Ventas will offer a one percent discount to shareholders on its DRIP program. For more information please call the Ventas Plan administrator, National City Bank, at 1.800.622.6757.
What is Ventas's FFO guidance?
Ventas currently expects its 2008 normalized FFO to be between $2.75 and $2.82 per diluted common share and FAD to be between $2.56 and $2.63 per diluted common share. Included within the Company's normalized FFO and FAD range is approximately $8 million to $10 million, or $0.06 to $0.07 per diluted share, of non-cash equity compensation.
The Company's normalized FFO and FAD guidance for all periods assumes that all of the Company's tenants, borrowers and managers continue to meet all of their obligations to the Company. In addition, the Company's normalized FFO and FAD guidance (and related U.S. generally accepted accounting principles ("GAAP") earnings projections) excludes (a) gains and losses on the sales of assets, (b) the impact of future, unannounced acquisitions, divestitures (including pursuant to tenant options to purchase) and capital transactions, (c) merger-related benefits, costs and expenses that are not capitalized under GAAP, including transitional expenses, amortization of fees related to acquisition financing and costs, gains and losses for foreign currency hedge agreements, and expenses relating to the Company's lawsuit against HCP, (d) the impact of any expenses related to asset impairment, the write-off of unamortized deferred financing fees, or additional costs, expenses or premiums incurred as a result of early debt retirement, (e) the non-cash effect of income tax benefits, and (f) dilution, if any, resulting from the Company's convertible notes.
The Company's guidance is based on a number of other assumptions, which 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.
Ventas also refers to normalized FFO, which excludes certain amounts that would otherwise be included in FFO to provide the Company's "core" FFO to the stockholder. The Company provides a reconciliation of its FFO and normalized FFO to the Company's GAAP earnings.
What is happening with Medicare and Medicaid reimbursements?
Within the Ventas portfolio, approximately 31 percent of the Company's annualized revenues are tied to facilities relying on government reimbursements. In May 2008, CMS issued the final FY2009 Medicare reimbursement rule for long term acute care (LTAC) hospitals, commencing July 1, 2008 and ending September 30, 2009. CMS estimates a net increase of 2.5 percent in overall reimbursement due to: a positive market basket update, offset by coding adjustments, adjustments to the wage index, adjustments to the high cost outlier threshold, short stay outlier changes and other impacts. Due to variances in acuity and referral sources LTAC operators may experience an impact that is materially more or less than the 2.5 percent that CMS estimates. Also in May 2008, CMS issued a proposed FY2009 Medicare reimbursement rule for SNFs, commencing October 1, 2008 and ending September 30, 2009. The proposed rule provides a market basket update of 3.1%, offset by a proposed recalibration of the case-mix index of 3.3%. CMS estimates the net change in payments will be a decrease of 0.3%. The proposed rule is subject to a 60-day comment period and the final rule can be expected around August 2008. Ventas is expecting Consumer Price Index-type increases in Medicaid rates across the 28 states where the Company's SNFs are located.
Ventas often talks about certificate of need or CON - what is that?
Some states have certificate of need (CON) laws that require state approval for development and expansion of healthcare facilities and services, including findings of the need for additional or expanded healthcare facilities or services. A CON, which is issued by governmental agencies with jurisdiction over healthcare facilities, is at times required for expansion of existing facilities, construction of new facilities, additions of beds, acquisition of major items, equipment or introduction of new services. Approximately 22 percent of Ventas's revenues come from states that have CON requirements, which limits the supply of new facilities that can be built, thus reducing the risk of owning facilities in those states.
What is a Master Lease?
A Master Lease is a lease that covers multiple properties. A Master Lease gives a landlord more protection than leasing single assets by providing pooled performance and cross-defaults.
What is rent coverage and why is it important?
Rent coverage is generally the ratio equal to the EBITDAR (earnings before interest, taxes, depreciation and amortization, and rents) at a tenant's leased facilities divided by its rent at those facilities. The rent coverage ratio is an important tool to evaluate whether the leased facilities' operations are performing at expected levels. Higher EBITDAR:rent ratios mean that the facilities are profitable to the tenant/operator and that the tenant/operator should be incentivized and able to continue paying rents. In addition, rent coverages are also used as a tool to renegotiate rents during reset and/or certain renewal periods.
What is the "Reset Right" in Ventas's leases with Kindred?
The Reset Right in the Kindred Master Leases has enabled Ventas to capture "upside" in the operating business of its tenant by allowing Ventas to increase Kindred's rents to market levels in 2006. On May 9, 2006 Ventas initiated the process whereby the one-time one-way option can be exercised by Ventas to adjust the current rents to "market" rent levels effective July 19, 2006 if the current "market" rent levels in 2006 exceed contractual rents. On October 6, 2006 the final appraisers determined an annualized rent increase of $33.1 million over the current annual base rent level under the four Master Leases ("Master Leases") between the companies. The final appraisers have also specified that the market annual rent escalator is 2.7 percent under Master Leases 1, 3 and 4, and is based on the Consumer Price Index (CPI), with a floor of 2.25 percent and a ceiling of 4 percent, under Master Lease 2. On October 12, 2006 Ventas exercised its election to increase the annualized rent of $33.1 million along with the specified market annual escalators. In connection with its election, Ventas has paid to Kindred a $4.6 million aggregate reset fee.
What is Ventas's position on corporate governance?
The Institutional Shareholder Services recently rated Ventas in the 99th percentile for corporate governance in Russell 3000 companies. Ventas is committed to adopting and complying with "best practices" in corporate governance. It exhibits that commitment in several ways. Well ahead of new NYSE rules and Sarbanes-Oxley requirements, the Company's Board of Directors was composed of a majority of independent members. By the middle of 2002 it had reconfigured its three key committees -- audit, compensation and government -- to meet the stringent standards now imposed on public corporations. In January of 2003, Ventas named Board member Douglas Crocker II as presiding director to chair its regularly scheduled executive sessions among Ventas's independent directors. The Company believes in open and honest communications and it uses its website and news releases to keep its shareholders fully apprised of important activities and developments.
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