VTR-2014.3.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                        TO
Commission file number: 1-10989
 
Ventas, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
61-1055020
(I.R.S. Employer
Identification No.)
353 N. Clark Street, Suite 3300
Chicago, Illinois
(Address of Principal Executive Offices)
60654
(Zip Code)
(877) 483-6827
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 (Do not check if a
smaller reporting company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class of Common Stock:
 
Outstanding at April 22, 2014:
Common Stock, $0.25 par value
 
294,336,962


VENTAS, INC.
FORM 10-Q
INDEX

 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I—FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
VENTAS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
 
March 31,
2014
 
December 31,
2013
Assets
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,867,146

 
$
1,855,968

Buildings and improvements
18,658,616

 
18,457,028

Construction in progress
71,862

 
80,415

Acquired lease intangibles
1,014,711

 
1,010,181

 
21,612,335

 
21,403,592

Accumulated depreciation and amortization
(3,515,868
)
 
(3,328,006
)
Net real estate property
18,096,467

 
18,075,586

Secured loans receivable and investments, net
376,074

 
376,229

Investments in unconsolidated entities
90,929

 
91,656

Net real estate investments
18,563,470

 
18,543,471

Cash and cash equivalents
59,791

 
94,816

Escrow deposits and restricted cash
76,110

 
84,657

Deferred financing costs, net
59,726

 
62,215

Other assets
943,671

 
946,335

Total assets
$
19,702,768

 
$
19,731,494

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Senior notes payable and other debt
$
9,481,051

 
$
9,364,992

Accrued interest
61,083

 
54,349

Accounts payable and other liabilities
938,098

 
1,001,515

Deferred income taxes
252,499

 
250,167

Total liabilities
10,732,731

 
10,671,023

Redeemable OP unitholder and noncontrolling interests
160,115

 
156,660

Commitments and contingencies

 

Equity:
 
 
 
Ventas stockholders' equity:
 
 
 
Preferred stock, $1.00 par value; 10,000 shares authorized, unissued
—

 
—

Common stock, $0.25 par value; 600,000 shares authorized, 294,346 and 297,901 shares issued at March 31, 2014 and December 31, 2013, respectively
73,599

 
74,488

Capital in excess of par value
9,858,733

 
10,078,592

Accumulated other comprehensive income
18,464

 
19,659

Retained earnings (deficit)
(1,218,967
)
 
(1,126,541
)
Treasury stock, 3 and 3,712 shares at March 31, 2014 and December 31, 2013, respectively
(162
)
 
(221,917
)
Total Ventas stockholders' equity
8,731,667

 
8,824,281

Noncontrolling interest
78,255

 
79,530

Total equity
8,809,922

 
8,903,811

Total liabilities and equity
$
19,702,768

 
$
19,731,494

See accompanying notes.

1

VENTAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
 
For the Three Months Ended March 31,
 
2014
 
2013
Revenues:
 
 
 
Rental income:
 
 
 
Triple-net leased
$
237,846

 
$
212,534

Medical office buildings
115,223

 
110,416

 
353,069

 
322,950

Resident fees and services
371,061

 
339,170

Medical office building and other services revenue
6,300

 
3,648

Income from loans and investments
10,767

 
16,103

Interest and other income
273

 
1,038

Total revenues
741,470

 
682,909

Expenses:
 
 
 
Interest
87,841

 
78,634

Depreciation and amortization
193,594

 
175,468

Property-level operating expenses:
 
 
 
Senior living
248,295

 
230,908

Medical office buildings
39,345

 
36,293

 
287,640

 
267,201

Medical office building services costs
3,371

 
1,639

General, administrative and professional fees
32,866

 
28,774

Gain on extinguishment of debt, net
(259
)
 
—

Merger-related expenses and deal costs
10,760

 
4,262

Other
5,229

 
4,587

Total expenses
621,042

 
560,565

Income before income from unconsolidated entities, income taxes, discontinued operations, real estate dispositions and noncontrolling interest
120,428

 
122,344

Income from unconsolidated entities
248

 
929

Income tax expense
(3,433
)
 
(1,744
)
Income from continuing operations
117,243

 
121,529

Discontinued operations
3,031

 
(8,431
)
Gain on real estate dispositions, net
1,000

 
—

Net income
121,274

 
113,098

Net income attributable to noncontrolling interest
227

 
905

Net income attributable to common stockholders
$
121,047

 
$
112,193

Earnings per common share:
 
 
 
Basic:
 
 
 
Income from continuing operations attributable to common stockholders, including real estate dispositions
$
0.40

 
$
0.41

Discontinued operations
0.01

 
(0.03
)
Net income attributable to common stockholders
$
0.41

 
$
0.38

Diluted:
 
 
 
Income from continuing operations attributable to common stockholders, including real estate dispositions
$
0.40

 
$
0.41

Discontinued operations
0.01

 
(0.03
)
Net income attributable to common stockholders
$
0.41

 
$
0.38

Weighted average shares used in computing earnings per common share:
 
 
 
Basic
293,875

 
291,455

Diluted
296,245

 
293,924

Dividends declared per common share
$
0.725

 
$
0.67

See accompanying notes.

2

VENTAS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
For the Three Months Ended March 31,
 
2014
 
2013
Net income
$
121,274

 
$
113,098

Other comprehensive loss:
 
 
 
Foreign currency translation
(3,334
)
 
(2,091
)
Change in unrealized gain on intra-entity currency loan
594

 
—

Change in unrealized gain on marketable debt securities
1,306

 
61

Other
239

 
504

Total other comprehensive loss
(1,195
)
 
(1,526
)
Comprehensive income
120,079

 
111,572

Comprehensive income attributable to noncontrolling interest
227

 
905

Comprehensive income attributable to common stockholders
$
119,852

 
$
110,667

   
See accompanying notes.

3

VENTAS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Three Months Ended March 31, 2014 and the Year Ended December 31, 2013
(Unaudited)
(In thousands, except per share amounts)
 
Common
Stock Par
Value
 
Capital in
Excess of
Par Value
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
(Deficit)
 
Treasury
Stock
 
Total Ventas
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total Equity
Balance at January 1, 2013
$
73,904

 
$
9,920,962

 
$
23,354

 
$
(777,927
)
 
$
(221,165
)
 
$
9,019,128

 
$
70,235

 
$
9,089,363

Net income
—

 
—

 
—

 
453,509

 
—

 
453,509

 
1,380

 
454,889

Other comprehensive loss
—

 
—

 
(3,695
)
 
—

 
—

 
(3,695
)
 
—

 
(3,695
)
Acquisition-related activity
—

 
(762
)
 
—

 
—

 
—

 
(762
)
 
12,717

 
11,955

Net change in noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(8,202
)
 
(8,202
)
Dividends to common stockholders—$2.735 per share
—

 
—

 
—

 
(802,123
)
 
—

 
(802,123
)
 
—

 
(802,123
)
Issuance of common stock
517

 
140,826

 
—

 
—

 
—

 
141,343

 
—

 
141,343

Issuance of common stock for stock plans
19

 
5,983

 
—

 
—

 
6,638

 
12,640

 
—

 
12,640

Change in redeemable noncontrolling interest
—

 
(13,751
)
 
—

 
—

 
—

 
(13,751
)
 
3,400

 
(10,351
)
Adjust redeemable OP unitholder interests to current fair value
—

 
8,683

 
—

 
—

 
—

 
8,683

 
—

 
8,683

Purchase of OP units
—

 
(579
)
 
—

 
—

 
502

 
(77
)
 
—

 
(77
)
Grant of restricted stock, net of forfeitures
48

 
17,230

 
—

 
—

 
(7,892
)
 
9,386

 
—

 
9,386

Balance at December 31, 2013
74,488

 
10,078,592

 
19,659

 
(1,126,541
)
 
(221,917
)
 
8,824,281

 
79,530

 
8,903,811

Net income
—

 
—

 
—

 
121,047

 
—

 
121,047

 
227

 
121,274

Other comprehensive loss
—

 
—

 
(1,195
)
 
—

 
—

 
(1,195
)
 
—

 
(1,195
)
Retirement of stock
(924
)
 
(220,152
)
 
—

 
—

 
221,076

 
—

 
—

 
—

Net change in noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(2,237
)
 
(2,237
)
Dividends to common stockholders—$0.725 per share
—

 
—

 
—

 
(213,473
)
 
—

 
(213,473
)
 
—

 
(213,473
)
Issuance of common stock for stock plans
2

 
1,760

 
—

 
—

 
1,417

 
3,179

 
—

 
3,179

Change in redeemable noncontrolling interest
—

 
1,463

 
—

 
—

 
—

 
1,463

 
735

 
2,198

Adjust redeemable OP unitholder interests to current fair value
—

 
(6,982
)
 
—

 
—

 
—

 
(6,982
)
 
—

 
(6,982
)
Grant of restricted stock, net of forfeitures
33

 
4,052

 
—

 
—

 
(738
)
 
3,347

 
—

 
3,347

Balance at March 31, 2014
$
73,599

 
$
9,858,733

 
$
18,464

 
$
(1,218,967
)
 
$
(162
)
 
$
8,731,667

 
$
78,255

 
$
8,809,922

See accompanying notes.

4

VENTAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
For the Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
121,274

 
$
113,098

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization (including amounts in discontinued operations)
193,876

 
186,943

Amortization of deferred revenue and lease intangibles, net
(5,383
)
 
(3,310
)
Other non-cash amortization
(1,965
)
 
(5,329
)
Stock-based compensation
6,044

 
5,662

Straight-lining of rental income, net
(7,914
)
 
(7,865
)
Gain on extinguishment of debt, net
(259
)
 
—

Gain on real estate dispositions, net (including amounts in discontinued operations)
(2,437
)
 
(477
)
Gain on real estate loan investments
—

 
(340
)
Income tax expense (including amounts in discontinued operations)
3,433

 
1,744

(Income) loss from unconsolidated entities
(248
)
 
312

Gain on re-measurement of equity interest upon acquisition, net
—

 
(1,241
)
Other
3,076

 
2,905

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in other assets
6,241

 
(10,459
)
Increase in accrued interest
6,753

 
10,530

Decrease in accounts payable and other liabilities
(38,070
)
 
(61,868
)
Net cash provided by operating activities
284,421

 
230,305

Cash flows from investing activities:
 
 
 
Net investment in real estate property
(181,866
)
 
(56,175
)
Purchase of noncontrolling interest
—

 
(3,186
)
Investment in loans receivable and other
(1,192
)
 
(2,789
)
Proceeds from real estate disposals
26,150

 
11,250

Proceeds from loans receivable
1,163

 
146,394

Purchase of marketable debt securities
(25,000
)
 
—

Funds held in escrow for future development expenditures
2,602

 
5,440

Development project expenditures
(23,948
)
 
(21,588
)
Capital expenditures
(16,134
)
 
(19,795
)
Other
(125
)
 
(78
)
Net cash (used in) provided by investing activities
(218,350
)
 
59,473

Cash flows from financing activities:
 
 
 
Net change in borrowings under credit facilities
181,754

 
(375,916
)
Proceeds from debt
—

 
916,871

Repayment of debt
(67,773
)
 
(635,793
)
Payment of deferred financing costs
(167
)
 
(13,808
)
Issuance of common stock, net
—

 
5,050

Cash distribution to common stockholders
(213,473
)
 
(195,700
)
Cash distribution to redeemable OP unitholders
(1,402
)
 
(1,151
)
Purchases of redeemable OP units
—

 
(108
)
Distributions to noncontrolling interest
(2,237
)
 
(1,450
)
Other
1,641

 
2,058

Net cash used in financing activities
(101,657
)
 
(299,947
)
Net decrease in cash and cash equivalents
(35,586
)
 
(10,169
)
Effect of foreign currency translation on cash and cash equivalents
561

 
(49
)
Cash and cash equivalents at beginning of period
94,816

 
67,908

Cash and cash equivalents at end of period
$
59,791

 
$
57,690

See accompanying notes.

5


VENTAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(In thousands)
 
For the Three Months Ended March 31,
 
2014
 
2013
Supplemental schedule of non-cash activities:
 
 
 
Assets and liabilities assumed from acquisitions:
 
 
 
Real estate investments
$
2,952

 
$
8,839

Other assets acquired
—

 
668

Other liabilities
2,952

 
6,422

Deferred income tax liability
—

 
1,532

Noncontrolling interests
—

 
1,553

See accompanying notes.


6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—DESCRIPTION OF BUSINESS
Ventas, Inc. (together with its subsidiaries, unless otherwise indicated or except where the context otherwise requires, “we,” “us” or “our”), an S&P 500 company, is a real estate investment trust (“REIT”) with a highly diversified portfolio of seniors housing and healthcare properties located throughout the United States, Canada and the United Kingdom. As of March 31, 2014, we owned nearly 1,500 properties, including seniors housing communities, medical office buildings (“MOBs”), skilled nursing and other facilities, and hospitals, and we had two new properties under development. Our company is currently headquartered in Chicago, Illinois.
We primarily acquire and own seniors housing and healthcare properties and lease them to unaffiliated tenants or operate them through independent third-party managers. As of March 31, 2014, we leased a total of 912 properties (excluding MOBs and properties classified as held for sale) to various healthcare operating companies under “triple-net” or “absolute-net” leases that obligate the tenants to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures, and we engaged independent operators, such as Atria Senior Living, Inc. (“Atria”) and Sunrise Senior Living, LLC (together with its subsidiaries, “Sunrise”), to manage a total of 239 of our seniors housing communities pursuant to long-term management agreements. Our two largest tenants, Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”) and Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”) leased from us 145 properties (excluding six properties included in investments in unconsolidated entities) and 136 properties, respectively, as of March 31, 2014.
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 seniors housing and healthcare operators or properties.
NOTE 2—ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The accompanying Consolidated Financial Statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 18, 2014. Certain prior period amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
The accompanying Consolidated Financial Statements include our accounts and the accounts of our wholly owned subsidiaries and the joint venture entities over which we exercise control. All intercompany transactions and balances have been eliminated in consolidation, and our net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We consolidate our investment in a VIE when we determine that we are its primary beneficiary. We may change our original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary.

7

We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.
As it relates to investments in joint ventures, GAAP may preclude consolidation by the sole general partner in certain circumstances based on the type of rights held by the limited partner(s). We assess limited partners’ rights and their impact on the presumption of control of the limited partnership by the sole general partner when an investor becomes the sole general partner, and we reassess if there is a change to the terms or in the exercisability of the rights of the limited partners, the sole general partner increases or decreases its ownership of limited partnership interests, or there is an increase or decrease in the number of outstanding limited partnership interests. We also apply this guidance to managing member interests in limited liability companies.
Redeemable OP Unitholder and Noncontrolling Interests
We own a majority interest in NHP/PMB L.P. (“NHP/PMB”), a limited partnership formed in 2008 to acquire properties from entities affiliated with Pacific Medical Buildings LLC. We consolidate NHP/PMB, as our wholly owned subsidiary is the general partner and exercises control of the partnership. As of March 31, 2014, third party investors owned 2,451,878 Class A limited partnership units in NHP/PMB (“OP Units”), which represented 27.9% of the total units then outstanding, and we owned 6,326,112 Class B limited partnership units in NHP/PMB, representing the remaining 72.1%. At any time following the first anniversary of the date of their issuance, the OP Units may be redeemed at the election of the holder for cash or, at our option, 0.7866 shares of our common stock per unit, subject to adjustment in certain circumstances. We are party by assumption to a registration rights agreement with the holders of the OP Units that requires us, subject to the terms and conditions set forth therein, to file and maintain a registration statement relating to the issuance of shares of our common stock upon redemption of OP Units.
As redemption rights are outside of our control, the redeemable OP unitholder interests are classified outside of permanent equity on our Consolidated Balance Sheets. We reflect the redeemable OP unitholder interests at the greater of cost or fair value. As of March 31, 2014 and December 31, 2013, the fair value of the redeemable OP unitholder interests was $117.3 million and $111.6 million, respectively. We recognize changes in fair value through capital in excess of par value, net of cash distributions paid and purchases by us of any OP Units. Our diluted earnings per share (“EPS”) includes the effect of any potential shares outstanding from redemption of the OP Units.
Certain noncontrolling interests of other consolidated joint ventures were also classified as redeemable at March 31, 2014 and December 31, 2013. Accordingly, we record the carrying amount of these noncontrolling interests at the greater of their initial carrying amount (increased or decreased for the noncontrolling interest’s share of net income or loss and distributions) or the redemption value. Our joint venture partners have certain redemption rights with respect to their noncontrolling interest in these joint ventures that are outside our control, and the redeemable noncontrolling interests are classified outside of permanent equity on our Consolidated Balance Sheets. We recognize changes in the carrying value of redeemable noncontrolling interests through capital in excess of par value.
Noncontrolling Interests
Excluding the redeemable noncontrolling interests described above, we present the portion of any equity that we do not own in entities that we control (and thus consolidate) as noncontrolling interests and classify those interests as a component of consolidated equity, separate from total Ventas stockholders’ equity, on our Consolidated Balance Sheets. For earnings of consolidated joint ventures with pro rata distribution allocations, net income or loss is allocated between the joint venture partners based on their respective stated ownership percentages. In other instances, net income or loss is allocated between the joint venture partners based on the hypothetical liquidation at book value method (the “HLBV method”). We account for purchases or sales of equity interests that do not result in a change of control as equity transactions, through capital in excess of par value. In addition, we include net income attributable to the noncontrolling interests in net income in our Consolidated Statements of Income.
Fair Values of Financial Instruments
Fair value is a market-based measurement, not an entity-specific measurement, and we determine fair value based on the assumptions that we expect market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).

8

Level one inputs utilize unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access. Level two inputs consist of inputs other than quoted prices included in level one that are directly or indirectly observable for the asset or liability. Level two inputs may include quoted prices for similar assets and liabilities in active markets and other inputs for the asset or liability that are observable at commonly quoted intervals, such as interest rates, foreign exchange rates and yield curves. Level three inputs are unobservable inputs for the asset or liability, which typically are based on our own assumptions, because there is little, if any, related market activity. If the determination of the fair value measurement is based on inputs from different levels of the hierarchy, the level within which the entire fair value measurement falls is the lowest level input that is significant to the fair value measurement in its entirety. If the volume and level of market activity for an asset or liability has decreased significantly relative to the normal market activity for that asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that a transaction for an asset or liability is not orderly, little, if any, weight is placed on that transaction price as an indicator of fair value. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
We use the following methods and assumptions in estimating the fair value of our financial instruments.
•
Cash and cash equivalents - The carrying amount of unrestricted cash and cash equivalents reported on our Consolidated Balance Sheets approximates fair value due to the short maturity of these instruments.
•
Loans receivable - We estimate the fair value of loans receivable using level two and level three inputs: we discount the future cash flows using current interest rates at which similar loans on the same terms and having the same maturities would be made to borrowers with similar credit ratings. Additionally, we determine the valuation allowance for losses, if any, on loans receivable using level three inputs.
•
Marketable debt securities - We estimate the fair value of corporate bonds using level two inputs: we observe quoted prices for similar assets or liabilities in active markets that we have the ability to access. We estimate the fair value of certain government-sponsored pooled loan investments using level three inputs: we consider credit spreads, underlying asset performance and credit quality, default rates and any other applicable criteria.
•
Derivative instruments - With the assistance of a third party, we estimate the fair value of derivative instruments, including interest rate caps and interest rate swaps, using level two inputs: for interest rate caps, we observe forward yield curves and other relevant information; for interest rate swaps, we observe alternative financing rates derived from market-based financing rates, forward yield curves and discount rates.
•
Senior notes payable and other debt - We estimate the fair value of senior notes payable and other debt using level two inputs: we discount the future cash flows using current interest rates at which we could obtain similar borrowings.
•
Redeemable OP unitholder interests - We estimate the fair value of our redeemable OP unitholder interests using level two inputs: we base fair value on the closing price of our common stock, as units may be redeemed at the election of the holder for cash or, at our option, 0.7866 shares of our common stock per unit, subject to adjustment in certain circumstances.
Revenue Recognition
Triple-Net Leased Properties and MOB Operations
Certain of our triple-net leases and most of our MOB leases provide for periodic and determinable increases in base rent. We recognize base rental revenues under these leases on a straight-line basis over the applicable lease term when collectability is reasonably assured. Recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in other assets on our Consolidated Balance Sheets. At March 31, 2014 and December 31, 2013, this cumulative excess totaled $158.7 million (net of allowances of $115.3 million) and $150.8 million (net of allowances of $101.4 million), respectively.
Certain of our leases provide for periodic increases in base rent only if certain revenue parameters or other substantive contingencies are met. We recognize the increased rental revenue under these leases as the related parameters or contingencies are met, rather than on a straight-line basis over the applicable lease term.
Senior Living Operations
We recognize resident fees and services, other than move-in fees, monthly as services are provided. We recognize move-in fees on a straight-line basis over the average resident stay. Our lease agreements with residents generally have a term of 12 to 18 months and are cancelable by the resident upon 30 days’ notice.

9

Other
We recognize interest income from loans and investments, including discounts and premiums, using the effective interest method when collectibility is reasonably assured. We apply the effective interest method on a loan-by-loan basis and recognize discounts and premiums as yield adjustments over the related loan term. We recognize interest income on an impaired loan to the extent our estimate of the fair value of the collateral is sufficient to support the balance of the loan, other receivables and all related accrued interest. When the balance of the loan, other receivables and all related accrued interest is equal to our estimate of the fair value of the collateral, we recognize interest income on a cash basis. We provide a reserve against an impaired loan to the extent our total investment in the loan exceeds our estimate of the fair value of the loan collateral.
We recognize income from rent, lease termination fees, development services, management advisory services and all other income when all of the following criteria are met in accordance with SEC Staff Accounting Bulletin 104: (i) the applicable agreement has been fully executed and delivered; (ii) services have been rendered; (iii) the amount is fixed or determinable; and (iv) collectibility is reasonably assured.
Allowances
We assess the collectibility of our rent receivables, including straight-line rent receivables, and defer recognition of revenue if collectibility is not reasonably assured. We base our assessment of the collectibility of rent receivables (other than straight-line rent receivables) on several factors, including, among other things, payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, if any, and current economic conditions. If our evaluation of these factors indicates it is probable that we will be unable to recover the full value of the receivable, we provide a reserve against the portion of the receivable that we estimate may not be recovered. We also base our assessment of the collectibility of straight-line rent receivables on several factors, including, among other things, the financial strength of the tenant and any guarantors, the historical operations and operating trends of the property, the historical payment pattern of the tenant and the type of property. If our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments due in the future, we defer recognition of the straight-line rental revenue and, in certain circumstances, provide a reserve against the previously recognized straight-line rent receivable asset for the portion, up to its full value, that we estimate may not be recovered. If we change our assumptions or estimates regarding the collectibility of future rent payments required by a lease, we may adjust our reserve to increase or reduce the rental revenue recognized and/or to increase or reduce the reserve against the previously recognized straight-line rent receivable asset.
Assets Held for Sale and Discontinued Operations
We sell properties from time to time for various reasons, including favorable market conditions or the exercise of purchase options by tenants. We classify certain long-lived assets as held for sale once the criteria, as defined by GAAP, has been met. Long-lived assets meeting this criteria are reported at the lower of their carrying amount or fair value minus cost to sell and are no longer depreciated.
In 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which raises the threshold for disposals to qualify as discontinued operations. A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. The application of this guidance is prospective from the date of adoption and applies only to disposals (or new classifications to held for sale) that have not been reported as discontinued operations in our previously issued financial statements. We adopted ASU 2014-08 for the quarter ended March 31, 2014.
The results of operations for assets meeting the definition of discontinued operations are reflected in our Consolidated Statements of Income as discontinued operations for all periods presented. We allocate estimated interest expense to discontinued operations based on property values and our weighted average interest rate or the property’s actual mortgage interest.
NOTE 3—CONCENTRATION OF CREDIT RISK
As of March 31, 2014, Atria, Sunrise, Brookdale Senior Living and Kindred managed or operated approximately 19.8%, 13.7%, 9.6% and 3.0%, respectively, of our real estate investments based on gross book value (excluding properties classified as held for sale as of March 31, 2014). Seniors housing communities constituted approximately 63.7% of our real estate investments based on gross book value (excluding properties classified as held for sale as of March 31, 2014), while MOBs, skilled nursing and other facilities, and hospitals collectively comprised the remaining 36.3%. Our properties were located in

10

46 states, the District of Columbia, two Canadian provinces and the United Kingdom as of March 31, 2014, with properties in one state (California) accounting for more than 10% of our total revenues and total net operating income (“NOI,” which is defined as total revenues, excluding interest and other income, less property-level operating expenses and medical office building services costs) (in each case excluding amounts in discontinued operations) for the three months then ended.
Triple-Net Leased Properties
For the three months ended March 31, 2014 and 2013, approximately 5.5% and 5.7%, respectively, of our total revenues and 9.0% and 9.5%, respectively, of our total NOI (in each case excluding amounts in discontinued operations) were derived from our lease agreements with Brookdale Senior Living. For the same periods, approximately 7.4% and 9.3%, respectively, of our total revenues and 12.2% and 15.4%, respectively, of our total NOI (in each case excluding amounts in discontinued operations) were derived from our lease agreements with Kindred. Each of our leases with Brookdale Senior Living and Kindred is a triple-net lease that obligates the tenant to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures, and to comply with the terms of the mortgage financing documents, if any, affecting the properties. In addition, each of these leases has guaranty and cross-default provisions tied to other leases with the same tenant or its affiliates, as well as bundled lease renewals.
The properties we lease to Brookdale Senior Living and Kindred currently account for a significant portion of our triple-net leased properties segment revenues and NOI and have a meaningful impact on our total revenues and NOI. If either Brookdale Senior Living or Kindred becomes unable or unwilling to satisfy its obligations to us or to renew its leases with us upon expiration of the terms thereof, our financial condition and results of operations could decline and our ability to service our indebtedness and to make distributions to our stockholders could be limited. We cannot assure you that Brookdale Senior Living and Kindred will have sufficient assets, income and access to financing to enable them to satisfy their respective obligations to us, and any failure, inability or unwillingness by Brookdale Senior Living or Kindred to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity, our ability to service our indebtedness and other obligations and our ability to make distributions to our stockholders, as required for us to continue to qualify as a REIT (a “Material Adverse Effect”). We also cannot assure you that Brookdale Senior Living and Kindred will elect to renew their respective leases with us upon expiration of the leases or that we will be able to reposition any non-renewed properties on a timely basis or on the same or better economic terms, if at all.
In February 2014, Brookdale Senior Living announced that it had entered into a definitive agreement to acquire Emeritus Corporation, another operator of our triple-net leased properties. We do not expect the transaction, when completed, to have a material impact on our financial condition or results of operations.
In September 2013, we entered into favorable agreements with Kindred to extend the leases with respect to 48 of the 108 licensed healthcare assets whose lease terms were originally scheduled to expire on April 30, 2015 (the “2015 Renewal Assets”). The 48 re-leased properties consist of 26 skilled nursing facilities and 22 long-term acute care hospitals. New annual base rent, commencing October 1, 2014, for the 48 re-leased properties will be $95.9 million, an increase of $15 million over then current annual base rent. On October 1, 2013, Kindred also paid us $20 million, which is being amortized over the new lease terms. As part of our agreements, we and Kindred agreed to accelerate the expiration of the lease terms for the 60 non-renewed assets to September 30, 2014.
We currently have signed leases for 55 of the 60 skilled nursing facilities that were not re-leased by Kindred, six of which have already been transitioned to the replacement tenant. We intend to sell the remaining five skilled nursing facilities, four of which are under contract for sale. Although we expect to successfully complete all of these transactions by the fourth quarter of 2014, they remain subject to regulatory approval and other conditions, and we cannot assure you that we will be able to do so on a timely basis, if at all, or that expected financial results will be achieved.
Kindred is required to continue to perform all of its obligations, including without limitation, payment of all rental amounts, under the applicable master lease for the non-renewed assets until expiration of the current lease term. Subject to the terms of our agreements, we have the flexibility to transition the non-renewed assets either before or after the September 30, 2014 lease expiration date. Moreover, we own or have the rights to all licenses and certificates of need at the properties, and Kindred has extensive and detailed obligations to cooperate and ensure an orderly transition of the properties to another operator.
Senior Living Operations
As of March 31, 2014, Atria and Sunrise, collectively, provided comprehensive property management and accounting services with respect to 237 of our seniors housing communities, for which we pay annual management fees pursuant to long-term management agreements.

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As managers, Atria and Sunrise do not lease our properties, and, therefore, we are not directly exposed to their credit risk in the same manner or to the same extent as our triple-net tenants. However, we rely on our managers’ personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our senior living operations efficiently and effectively. We also rely on our managers to set appropriate resident fees and otherwise operate our seniors housing communities in compliance with the terms of our management agreements and all applicable laws and regulations. Although we have various rights as the property owner under our management agreements, including various rights to terminate and exercise remedies under the agreements as provided therein, Atria’s or Sunrise’s failure, inability or unwillingness to satisfy its respective obligations under those agreements, to efficiently and effectively manage our properties or to provide timely and accurate accounting information with respect thereto could have a Material Adverse Effect on us. In addition, significant changes in Atria’s or Sunrise’s senior management or equity ownership or any adverse developments in their businesses and affairs or financial condition could have a Material Adverse Effect on us.
Our 34% ownership interest in Atria entitles us to certain rights and minority protections, as well as the right to appoint two directors to the Atria Board of Directors.
As a result of the recapitalization of Sunrise in April 2014, Health Care REIT, Inc. now owns a 24% interest in Sunrise, and Revera Inc. owns the remainder. We are currently evaluating the impact, if any, this transaction may have on Sunrise or us.
Brookdale Senior Living, Kindred, Atria and Sunrise Information
Each of Brookdale Senior Living and Kindred is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Brookdale Senior Living and Kindred contained or referred to in this Quarterly Report on Form 10-Q has been derived from SEC filings made by Brookdale Senior Living or Kindred, as the case may be, or other publicly available information, or was provided to us by Brookdale Senior Living or Kindred, and we have not verified this information through an independent investigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you of its accuracy. We are providing this data for informational purposes only, and you are encouraged to obtain Brookdale Senior Living’s and Kindred’s publicly available filings, which can be found on the SEC’s website at www.sec.gov.
Neither Atria nor Sunrise is currently subject to the reporting requirements of the SEC. The information related to Atria and Sunrise contained or referred to within this Quarterly Report on Form 10-Q has been derived from publicly available information or was provided to us by Atria or Sunrise, as the case may be, and we have not verified this information through an independent investigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you of its accuracy.
NOTE 4—DISPOSITIONS
2014 Activity
During the three months ended March 31, 2014, we sold two seniors housing communities, one skilled nursing facility (all part of our triple-net leased properties reportable business segment), and three MOBs for aggregate consideration of $26.2 million and recognized a net gain on the sales of these assets of $2.9 million, of which $1.7 million is reported within discontinued operations in our Consolidated Statements of Income.
2013 Activity
During the three months ended March 31, 2013, we sold four seniors housing communities, two skilled nursing facilities (all part of our triple-net leased properties reportable business segment), and one MOB for aggregate consideration of $11.5 million, including lease termination fees of $0.3 million, and recognized a net gain on the sales of these assets of $0.3 million, which is reported within discontinued operations in our Consolidated Statements of Income.
Discontinued Operations

We present separately, as discontinued operations in all periods presented, the results of operations for all assets classified as held for sale as of March 31, 2014, and all assets disposed of during the period from January 1, 2013 through March 31, 2014, that meet the criteria of discontinued operations.


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The table below summarizes our real estate assets classified as held for sale as of March 31, 2014 and December 31, 2013, including the amounts reported within other assets and accounts payable and other liabilities on our Consolidated Balance Sheets.

 
 
March 31, 2014
 
December 31, 2013
 
 
Number of Properties Held for Sale (1)
 
Other Assets
 
Accounts Payable and Other Liabilities
 
Number of Properties Held for Sale (2)
 
Other Assets
 
Accounts Payable and Other Liabilities
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Triple-net leased properties
 
14

 
$
110,440

 
$
48,823

 
15

 
$
125,981

 
$
50,456

MOB operations
 
2

 
13,075

 
82

 
4

 
29,359

 
14,044

Total
 
16

 
$
123,515

 
$
48,905

 
19

 
$
155,340

 
$
64,500

 
 
 
 
 
(1) The operations for ten triple-net leased properties and two MOBs are reported in discontinued operations in our Consolidated Statements of Income.
(2) The operations for all properties listed are reported in discontinued operations in our Consolidated Statements of Income.

We recognized impairments of $4.8 million and $8.6 million for the three months ended March 31, 2014 and 2013, respectively, which are recorded primarily as a component of depreciation and amortization. $0.4 million and $7.3 million of these impairments were recorded in discontinued operations for the three months ended March 31, 2014 and 2013, respectively.

Set forth below is a summary of our results of operations for properties within discontinued operations for the three months ended March 31, 2014 and 2013.
 
For the Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Revenues:
 
 
 
Rental income
$
2,200

 
$
4,032

Resident fees and services
—

 
618

Interest and other income
750

 
—

 
2,950

 
4,650

Expenses:
 
 
 
Interest
678

 
1,695

Depreciation and amortization
281

 
11,475

Property-level operating expenses
281

 
912

Other
116

 
(524
)
 
1,356

 
13,558

Income (loss) before gain on real estate dispositions, net
1,594

 
(8,908
)
Gain on real estate dispositions, net
1,437

 
477

Discontinued operations
$
3,031

 
$
(8,431
)
NOTE 5—LOANS RECEIVABLE AND INVESTMENTS
As of March 31, 2014 and December 31, 2013, we had $442.1 million and $414.7 million, respectively, of net loans receivable and investments relating to seniors housing and healthcare operators or properties.
In January 2014, we purchased $25.0 million principal amount of senior unsecured corporate bonds maturing in 2022. The investment is a marketable debt security classified as available-for-sale and included within other assets on our Consolidated Balance Sheets. As of March 31, 2014, the investment had a cost basis and fair value of $25.0 million and $26.2 million, respectively.

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We own an interest in a government-sponsored pooled loan investment that matures in 2023. The investment is a marketable debt security classified as available-for-sale and included within secured loans receivable and investments, net on our Consolidated Balance Sheets. As of March 31, 2014, the investment had an amortized cost basis and fair value of $22.0 million and $21.9 million, respectively.
In 2013, we sold portions of a $375.0 million secured loan receivable to third parties in separate transactions, as evidenced by separate notes. As of March 31, 2014, we have a $179.5 million remaining investment in this loan receivable, which bears interest at a fixed rate of 9.4% per annum. Under the terms of the loan agreement, we act as the administrative agent and will continue to receive the stated interest rate on our remaining loan receivable balance.
NOTE 6—INVESTMENTS IN UNCONSOLIDATED ENTITIES
We report investments in unconsolidated entities over whose operating and financial policies we have the ability to exercise significant influence under the equity method of accounting. We are not required to consolidate these entities because our joint venture partners have significant participating rights, nor are these entities considered VIEs, as they are controlled by equity holders with sufficient capital. At March 31, 2014 and December 31, 2013, we had ownership interests (ranging from 5% to 25%) in joint ventures that owned 52 properties. We account for our interests in these joint ventures, as well as our 34% interest in Atria, under the equity method of accounting.
With the exception of our interest in Atria, we serve as the managing member of each unconsolidated entity and provide various services in exchange for fees and reimbursements. Total management fees earned in connection with these entities were $2.2 million and $1.5 million for the three months ended March 31, 2014 and 2013, respectively.
In March 2013, we acquired two MOBs for aggregate consideration of approximately $55.6 million from a joint venture entity in which we have a 5% interest and that we account for as an equity method investment. In connection with this acquisition, we re-measured our previously held equity interest (associated with the acquired MOBs) and recognized a gain of $1.3 million, which is included in income from unconsolidated entities in our Consolidated Statements of Income for the three months ended March 31, 2013. Operations relating to these properties are now consolidated in our Consolidated Statements of Income.
NOTE 7—INTANGIBLES
The following is a summary of our intangibles as of March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
 
Balance
 
Remaining
Weighted Average
Amortization
Period in Years
 
Balance
 
Remaining
Weighted Average
Amortization
Period in Years
 
(Dollars in thousands)
Intangible assets:
 
 
 
 
 
 
 
Above market lease intangibles
$
214,152

 
8.3
 
$
214,353

 
8.4
In-place and other lease intangibles
800,559

 
24.8
 
795,829

 
24.1
Goodwill and other intangibles
488,551

 
8.6
 
489,346

 
8.6
Accumulated amortization
(484,791
)
 
 N/A
 
(458,919
)
 
 N/A
Net intangible assets
$
1,018,471

 
20.3
 
$
1,040,609

 
19.8
Intangible liabilities:
 
 
 
 
 
 
 
Below market lease intangibles
$
429,106

 
14.7
 
$
429,199

 
14.7
Other lease intangibles
32,103

 
25.1
 
32,103

 
24.8
Accumulated amortization
(131,659
)
 
 N/A
 
(119,549
)
 
 N/A
Purchase option intangibles
29,294

 
 N/A
 
29,294

 
 N/A
Net intangible liabilities
$
358,844

 
15.2
 
$
371,047

 
15.1
 
 
 
 
 
N/A—Not Applicable.
Above market lease intangibles and in-place and other lease intangibles are included in acquired lease intangibles within real estate investments on our Consolidated Balance Sheets. Goodwill and other intangibles (including non-compete

14

agreements, trade names and trademarks) are included in other assets on our Consolidated Balance Sheets. Below market lease intangibles, other lease intangibles and purchase option intangibles are included in accounts payable and other liabilities on our Consolidated Balance Sheets.
NOTE 8—OTHER ASSETS
The following is a summary of our other assets as of March 31, 2014 and December 31, 2013:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Straight-line rent receivables, net
$
158,721

 
$
150,829

Unsecured loans receivable and investments, net
66,003

 
38,512

Goodwill and other intangibles, net
474,635

 
476,483

Assets held for sale
123,515

 
155,340

Other
120,797

 
125,171

Total other assets
$
943,671

 
$
946,335

NOTE 9—SENIOR NOTES PAYABLE AND OTHER DEBT
The following is a summary of our senior notes payable and other debt as of March 31, 2014 and December 31, 2013:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Unsecured revolving credit facility (1)
$
559,299

 
$
376,343

3.125% Senior Notes due 2015
400,000

 
400,000

6% Senior Notes due 2015
234,420

 
234,420

1.55% Senior Notes due 2016
550,000

 
550,000

2.00% Senior Notes due 2018
700,000

 
700,000

Unsecured term loan due 2018 (2)
200,000

 
200,000

Unsecured term loan due 2019 (2)
796,165

 
800,702

4.00% Senior Notes due 2019
600,000

 
600,000

2.700% Senior Notes due 2020
500,000

 
500,000

4.750% Senior Notes due 2021
700,000

 
700,000

4.25% Senior Notes due 2022
600,000

 
600,000

3.25% Senior Notes due 2022
500,000

 
500,000

6.90% Senior Notes due 2037
52,400

 
52,400

6.59% Senior Notes due 2038
22,973

 
22,973

5.45% Senior Notes due 2043
258,750

 
258,750

5.70% Senior Notes due 2043
300,000

 
300,000

Mortgage loans and other (3)
2,468,629

 
2,524,889

Total
9,442,636

 
9,320,477

Unamortized fair value adjustment
62,578

 
69,611

Unamortized discounts
(24,163
)
 
(25,096
)
Senior notes payable and other debt
$
9,481,051

 
$
9,364,992

 
 
 
 
 
(1)
$192.3 million of aggregate borrowings were in the form of Canadian dollars or pounds sterling as of March 31, 2014. Subsequent to March 31, 2014, we repaid substantially all amounts outstanding under our unsecured revolving credit facility.

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(2)
These amounts represent in aggregate the approximate $1.0 billion of unsecured term loan borrowings under our unsecured credit facility. $112.6 million of borrowings included in the 2019 tranche are in the form of Canadian dollars.
(3)
Excludes debt related to a real estate asset classified as held for sale as of December 31, 2013 and sold in March 2014. The total mortgage debt for this property as of December 31, 2013 was $13.1 million and was included in accounts payable and other liabilities on our Consolidated Balance Sheets.

As of March 31, 2014, our indebtedness had the following maturities:
 
Principal Amount
Due at Maturity
 
Unsecured
Revolving Credit
Facility (1)
 
Scheduled Periodic
Amortization
 
Total Maturities
 
(In thousands)
2014
$
62,634

 
$
—

 
$
34,197

 
$
96,831

2015
918,459

 
—

 
40,730

 
959,189

2016
960,917

 
—

 
33,708

 
994,625

2017
540,072

 
—

 
21,964

 
562,036

2018
1,082,497

 
559,299

 
15,446

 
1,657,242

Thereafter (2)
5,025,751

 
—

 
146,962

 
5,172,713

Total maturities
$
8,590,330

 
$
559,299

 
$
293,007

 
$
9,442,636

 
 
 
 
 
(1)
As of March 31, 2014, we had $59.8 million of unrestricted cash and cash equivalents, for $499.5 million of net borrowings outstanding under our unsecured revolving credit facility. Subsequent to March 31, 2014, we repaid substantially all amounts outstanding under our unsecured revolving credit facility.
(2)
Includes $52.4 million aggregate principal amount of our 6.90% senior notes due 2037 that is subject to repurchase, at the option of the holders, on October 1 in each of 2017 and 2027, and $23.0 million aggregate principal amount of 6.59% senior notes due 2038 that is subject to repurchase, at the option of the holders, on July 7 in each of 2018, 2023 and 2028.
Unsecured Revolving Credit Facility and Unsecured Term Loans
Our unsecured credit facility is comprised of a $2.0 billion revolving credit facility priced at LIBOR plus 1.0% as of March 31, 2014, and a $200.0 million four-year term loan and an $800.0 million five-year term loan, each priced at LIBOR plus 1.05% as of March 31, 2014. The revolving credit facility matures in January 2018, but may be extended, at our option subject to the satisfaction of certain conditions, for an additional period of one year. The $200.0 million and $800.0 million term loans mature in January 2018 and January 2019, respectively. The unsecured credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to $3.5 billion.
As of March 31, 2014, we had $559.3 million of borrowings outstanding, $14.9 million of letters of credit outstanding and $1.4 billion of unused borrowing capacity available under our unsecured revolving credit facility. Subsequent to March 31, 2014, we repaid substantially all amounts outstanding under our unsecured revolving credit facility.
Senior Notes
In April 2014, we issued and sold $300.0 million aggregate principal amount of 1.250% senior notes due 2017 at a public offering price equal to 99.815% of par, for total proceeds of $299.4 million before the underwriting discount and expenses, and $400.0 million aggregate principal amount of 3.750% senior notes due 2024 at a public offering price equal to 99.304% of par, for total proceeds of $397.2 million before the underwriting discount and expenses. We used a portion of these proceeds to repay substantially all amounts outstanding under our unsecured revolving credit facility.


16

NOTE 10—FAIR VALUES OF FINANCIAL INSTRUMENTS
As of March 31, 2014 and December 31, 2013, the carrying amounts and fair values of our financial instruments were as follows:
 
March 31, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
59,791

 
$
59,791

 
$
94,816

 
$
94,816

Secured loans receivable, net
354,219

 
353,117

 
354,775

 
355,223

Unsecured loans receivable, net
39,805

 
41,939

 
38,512

 
40,473

Marketable debt securities
48,053

 
48,053

 
21,454

 
21,454

Liabilities:
 
 
 
 
 
 
 
Senior notes payable and other debt, gross
9,442,636

 
9,655,319

 
9,320,477

 
9,405,259

Derivative instruments and other liabilities
10,744

 
10,744

 
11,105

 
11,105

Redeemable OP unitholder interests
117,261

 
117,261

 
111,607

 
111,607

Fair value estimates are subjective in nature and based upon several important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented above are not necessarily indicative of the amounts we would realize in a current market exchange.
NOTE 11—LITIGATION
Proceedings against Tenants, Operators and Managers
From time to time, Brookdale Senior Living, Kindred, Atria, Sunrise and our other tenants, operators and managers are parties to certain legal actions, regulatory investigations and claims arising in the conduct of their business and operations. Even though we generally are not party to these proceedings, the unfavorable resolution of any such actions, investigations or claims could, individually or in the aggregate, materially adversely affect such tenants’, operators’ or managers’ liquidity, financial condition or results of operations and their ability to satisfy their respective obligations to us, which, in turn, could have a Material Adverse Effect on us.
Proceedings Indemnified and Defended by Third Parties
From time to time, we are party to certain legal actions, regulatory investigations and claims for which third parties are contractually obligated to indemnify, defend and hold us harmless. The tenants of our triple-net leased properties and, in some cases, their affiliates are required by the terms of their leases and other agreements with us to indemnify, defend and hold us harmless against certain actions, investigations and claims arising in the course of their business and related to the operations of our triple-net leased properties. In addition, third parties from whom we acquired certain of our assets and, in some cases, their affiliates are required by the terms of the related conveyance documents to indemnify, defend and hold us harmless against certain actions, investigations and claims related to the acquired assets and arising prior to our ownership or related to excluded assets and liabilities. In some cases, a portion of the purchase price consideration is held in escrow for a specified period of time as collateral for these indemnification obligations. We are presently being defended by certain tenants and other obligated third parties in these types of matters. We cannot assure you that our tenants, their affiliates or other obligated third parties will continue to defend us in these matters, that our tenants, their affiliates or other obligated third parties will have sufficient assets, income and access to financing to enable them to satisfy their defense and indemnification obligations to us or that any purchase price consideration held in escrow will be sufficient to satisfy claims for which we are entitled to indemnification. The unfavorable resolution of any such actions, investigations or claims could, individually or in the aggregate, materially adversely affect our tenants’ or other obligated third parties’ liquidity, financial condition or results of operations and their ability to satisfy their respective obligations to us, which, in turn, could have a Material Adverse Effect on us.
Proceedings Arising in Connection with Senior Living and MOB Operations; Other Litigation
From time to time, we are party to various legal actions, regulatory investigations and claims (some of which may not be insured and some of which may allege large damage amounts) arising in connection with our senior living and MOB operations

17

or otherwise in the course of our business. In limited circumstances, the manager of the applicable seniors housing community or MOB may be contractually obligated to indemnify, defend and hold us harmless against such actions, investigations and claims. It is the opinion of management that, except as otherwise set forth in this Note 11, the disposition of any such actions, investigations and claims that are currently pending will not, individually or in the aggregate, have a Material Adverse Effect on us. However, regardless of their merits, we may be forced to expend significant financial resources to defend and resolve these matters. We are unable to predict the ultimate outcome of these actions, investigations and claims, and if management’s assessment of our liability with respect thereto is incorrect, such actions, investigations and claims could have a Material Adverse Effect on us.
NOTE 12—INCOME TAXES
We have elected to be taxed as a REIT under the applicable provisions of the Code for every year beginning with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”), which are subject to federal and state income taxes. All entities other than the TRS entities are collectively referred to as “the REIT” within this Note 12.
Although the TRS entities have paid minimal cash federal income taxes for the three months ended March 31, 2014, their federal income tax liabilities may increase in future periods as we exhaust net operating loss (“NOL”) carryforwards and as our senior living operations reportable business segment grows. Such increases could be significant.
Our consolidated provision for income taxes for the three months ended March 31, 2014 and 2013 was an expense of $3.4 million and $1.7 million, respectively. The income tax expense for the three months ended March 31, 2014 is due primarily to operating income at our TRS entities. The income tax expense for the three months ended March 31, 2013 was due primarily to additions to income tax contingency reserves.
Realization of a deferred tax benefit related to NOLs depends in part upon generating sufficient taxable income in future periods. Our NOL carryforwards begin to expire in 2024 with respect to our TRS entities and in 2016 for the REIT.
Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. Net deferred tax liabilities with respect to our TRS entities totaled $252.5 million and $250.2 million as of March 31, 2014 and December 31, 2013, respectively, and related primarily to differences between the financial reporting and tax bases of fixed and intangible assets and to NOLs.
Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service for the year ended December 31, 2010 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2009 and subsequent years. We are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to 2008 related to entities acquired or formed in connection with our 2007 acquisition of Sunrise Senior Living Real Estate Investment Trust.
NOTE 13—STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Income
The following is a summary of our accumulated other comprehensive income as of March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
 
(In thousands)
Foreign currency translation
$
14,685

 
$
18,019

Unrealized gain on intra-entity foreign currency loan
594

 
—

Unrealized gain (loss) on marketable debt securities
1,090

 
(216
)
Other
2,095

 
1,856

Total accumulated other comprehensive income
$
18,464

 
$
19,659



18

NOTE 14—EARNINGS PER COMMON SHARE
The following table shows the amounts used in computing our basic and diluted earnings per common share:
 
For the Three Months Ended March 31,
 
2014
 
2013
 
(In thousands, except per share amounts)
Numerator for basic and diluted earnings per share:
 
 
 
Income from continuing operations attributable to common stockholders, including real estate dispositions
$
118,016

 
$
120,624

Discontinued operations
3,031

 
(8,431
)
Net income attributable to common stockholders          
$
121,047

 
$
112,193

Denominator:
 
 
 
Denominator for basic earnings per share—weighted average shares
293,875

 
291,455

Effect of dilutive securities:
 
 
 
Stock options
394

 
573

Restricted stock awards
47

 
120

OP units
1,929

 
1,776

Denominator for diluted earnings per share—adjusted weighted average shares
296,245

 
293,924

Basic earnings per share:
 
 
 
Income from continuing operations attributable to common stockholders, including real estate dispositions
$
0.40

 
$
0.41

Discontinued operations
0.01

 
(0.03
)
Net income attributable to common stockholders          
$
0.41

 
$
0.38

Diluted earnings per share:
 
 
 
Income from continuing operations attributable to common stockholders, including real estate dispositions
$
0.40

 
$
0.41

Discontinued operations
0.01

 
(0.03
)
Net income attributable to common stockholders          
$
0.41

 
$
0.38


NOTE 15—SEGMENT INFORMATION
As of March 31, 2014, we operated through three reportable business segments: triple-net leased properties, senior living operations and MOB operations. Under our triple-net leased properties segment, we acquire and own seniors housing and healthcare properties throughout the United States and the United Kingdom and lease those properties to healthcare operating companies under “triple-net” or “absolute-net” leases that obligate the tenants to pay all property-related expenses. In our senior living operations segment, we invest in seniors housing communities throughout the United States and Canada and engage independent operators, such as Atria and Sunrise, to manage those communities. In our MOB operations segment, we primarily acquire, own, develop, lease and manage MOBs. Information provided for “all other” includes income from loans and investments and other miscellaneous income and various corporate-level expenses not directly attributable to any of our three reportable business segments. Assets included in “all other” consist primarily of corporate assets, including cash, restricted cash, deferred financing costs, loans receivable and investments, and miscellaneous accounts receivable.
We evaluate performance of the combined properties in each reportable business segment based on segment profit, which we define as NOI adjusted for income/loss from unconsolidated entities. We define NOI as total revenues, less interest and other income, property-level operating expenses and medical office building services costs. Although we believe that net income, as defined by GAAP, is the most appropriate earnings measurement, we consider segment profit a useful supplement to net income because it allows investors, analysts and our management to measure unlevered property-level operating results and to compare our operating results to the operating results of other real estate companies and between periods on a consistent basis. Segment profit should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance. In order to facilitate a clear understanding of our historical consolidated operating

19

results, segment profit should be examined in conjunction with net income as presented in our Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Interest expense, depreciation and amortization, general, administrative and professional fees, income tax expense, discontinued operations and other non-property specific revenues and expenses are not allocated to individual reportable business segments for purposes of assessing segment performance. There are no intersegment sales or transfers.
Summary information by reportable business segment is as follows:
For the three months ended March 31, 2014:
 
Triple-Net
Leased
Properties
 
Senior
Living
Operations
 
MOB
Operations
 
All
Other
 
Total
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
$
237,846

 
$
—

 
$
115,223

 
$
—

 
$
353,069

Resident fees and services
—

 
371,061

 
—

 
—

 
371,061

Medical office building and other services revenue
1,148

 
—

 
4,652

 
500

 
6,300

Income from loans and investments
—

 
—

 
—

 
10,767

 
10,767

Interest and other income
—

 
—

 
—

 
273

 
273

Total revenues
$
238,994

 
$
371,061

 
$
119,875

 
$
11,540

 
$
741,470

Total revenues
$
238,994

 
$
371,061

 
$
119,875

 
$
11,540

 
$
741,470

Less:
 
 
 
 
 
 
 
 
 
Interest and other income
—

 
—

 
—

 
273

 
273

Property-level operating expenses
—

 
248,295

 
39,345

 
—

 
287,640

Medical office building services costs
—

 
—

 
3,371

 
—

 
3,371

Segment NOI
238,994

 
122,766

 
77,159

 
11,267

 
450,186

Income (loss) from unconsolidated entities
569

 
(144
)
 
(47
)
 
(130
)
 
248

Segment profit
$
239,563

 
$
122,622

 
$
77,112

 
$
11,137

 
450,434

Interest and other income
 

 
 

 
 

 
 

 
273

Interest expense
 

 
 

 
 

 
 

 
(87,841
)
Depreciation and amortization
 

 
 

 
 

 
 

 
(193,594
)
General, administrative and professional fees
 

 
 

 
 

 
 

 
(32,866
)
Gain on extinguishment of debt, net
 
 
 
 
 
 
 
 
259

Merger-related expenses and deal costs
 

 
 

 
 

 
 

 
(10,760
)
Other
 

 
 

 
 

 
 

 
(5,229
)
Income tax expense
 

 
 

 
 

 
 

 
(3,433
)
Discontinued operations
 

 
 

 
 

 
 

 
3,031

Gain on real estate dispositions, net
 
 
 
 
 
 
 
 
1,000

Net income
 

 
 

 
 

 
 

 
$
121,274


20

For the three months ended March 31, 2013:
 
Triple-Net
Leased
Properties
 
Senior
Living
Operations
 
MOB
Operations
 
All
Other
 
Total
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
$
212,534

 
$
—

 
$
110,416

 
$
—

 
$
322,950

Resident fees and services
—

 
339,170

 
—

 
—

 
339,170

Medical office building and other services revenue
1,111

 
—

 
2,537

 
—

 
3,648

Income from loans and investments
—

 
—

 
—

 
16,103

 
16,103

Interest and other income
—

 
—

 
—

 
1,038

 
1,038

Total revenues
$
213,645

 
$
339,170

 
$
112,953

 
$
17,141

 
$
682,909

Total revenues
$
213,645

 
$
339,170

 
$
112,953

 
$
17,141

 
$
682,909

Less:
 
 
 
 
 
 
 
 
 
Interest and other income
—

 
—

 
—

 
1,038

 
1,038

Property-level operating expenses
—

 
230,908

 
36,293

 
—

 
267,201

Medical office building services costs
—

 
—

 
1,639

 
—

 
1,639

Segment NOI
213,645

 
108,262

 
75,021

 
16,103

 
413,031

Income (loss) from unconsolidated entities
187

 
(600
)
 
1,342

 
—

 
929

Segment profit
$
213,832

 
$
107,662

 
$
76,363

 
$
16,103

 
413,960

Interest and other income
 

 
 

 
 

 
 

 
1,038

Interest expense
 

 
 

 
 

 
 

 
(78,634
)
Depreciation and amortization
 

 
 

 
 

 
 

 
(175,468
)
General, administrative and professional fees
 

 
 

 
 

 
 

 
(28,774
)
Merger-related expenses and deal costs
 

 
 

 
 

 
 

 
(4,262
)
Other
 

 
 

 
 

 
 

 
(4,587
)
Income tax expense
 

 
 

 
 

 
 

 
(1,744
)
Discontinued operations
 

 
 

 
 

 
 

 
(8,431
)
Net income
 

 
 

 
 

 
 

 
$
113,098


Capital expenditures, including investments in real estate property and development project expenditures, by reportable business segment are as follows:
 
For the Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Capital expenditures:
 
 
 
Triple-net leased properties
$
192,052

 
$
13,180

Senior living operations
16,863

 
20,168

MOB operations
13,033

 
64,210

Total capital expenditures
$
221,948

 
$
97,558


21

Our portfolio of properties and mortgage loan and other investments are located in the United States, Canada and the United Kingdom. Revenues are attributed to an individual country based on the location of each property.
Geographic information regarding our operations is as follows:
 
For the Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Revenues:
 
 
 
United States
$
720,107

 
$
659,529

Canada
21,218

 
23,380

United Kingdom
145

 
—

Total revenues
$
741,470

 
$
682,909


 
As of March 31, 2014
 
As of December 31, 2013
 
(In thousands)
Net real estate property:
 
 
 
United States
$
17,556,584

 
$
17,705,962

Canada
356,580

 
369,624

United Kingdom
183,303

 
—

Total net real estate property
$
18,096,467

 
$
18,075,586

NOTE 16—CONDENSED CONSOLIDATING INFORMATION
We have 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, Limited Partnership (“Ventas Realty”), including the senior notes that were jointly issued with Ventas Capital Corporation. Ventas Capital Corporation is a direct 100% owned subsidiary of Ventas Realty that has no assets or operations, but was formed in 2002 solely to facilitate offerings of senior notes by a limited partnership. None of our other subsidiaries (excluding Ventas Realty and Ventas Capital Corporation, the “Ventas Subsidiaries”) is obligated with respect to Ventas Realty’s outstanding senior notes.
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.
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 guarantee with respect to Ventas Realty’s senior notes. Certain of our real estate assets are also subject to mortgages.

22

The following summarizes our condensed consolidating information as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013:

CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2014
 
Ventas, Inc.
 
Ventas
Realty (1)
 
Ventas
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
Net real estate investments
$
6,858

 
$
369,528

 
$
18,187,084

 
$
—

 
$
18,563,470

Cash and cash equivalents
20,912

 
—

 
38,879

 
—

 
59,791

Escrow deposits and restricted cash
2,104

 
1,268

 
72,738

 
—

 
76,110

Deferred financing costs, net
758

 
51,945

 
7,023

 
—

 
59,726

Investment in and advances to affiliates
10,232,196

 
3,201,998

 
—

 
(13,434,194
)
 
—

Other assets
57,552

 
14,495

 
871,624

 
—

 
943,671

Total assets
$
10,320,380

 
$
3,639,234

 
$
19,177,348

 
$
(13,434,194
)
 
$
19,702,768

Liabilities and equity
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Senior notes payable and other debt
$
—

 
$
6,520,142

 
$
2,960,909

 
$
—

 
$
9,481,051

Intercompany loans
4,475,259

 
(4,887,411
)
 
412,152

 
—

 
—

Accrued interest
—

 
40,032

 
21,051

 
—

 
61,083

Accounts payable and other liabilities
94,841

 
29,488

 
813,769

 
—

 
938,098

Deferred income taxes
252,499

 
—

 
—

 
—

 
252,499

Total liabilities
4,822,599

 
1,702,251

 
4,207,881

 
—

 
10,732,731

Redeemable OP unitholder and noncontrolling interests
—

 
—

 
160,115

 
—

 
160,115

Total equity
5,497,781

 
1,936,983

 
14,809,352

 
(13,434,194
)
 
8,809,922

Total liabilities and equity
$
10,320,380

 
$
3,639,234

 
$
19,177,348

 
$
(13,434,194
)
 
$
19,702,768

 
 
 
 
 
(1)
Certain of Ventas Realty’s outstanding senior notes were issued jointly with our 100% owned subsidiary, Ventas Capital Corporation, which has no assets or operations.





23

CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2013
 
Ventas, Inc.
 
Ventas
Realty (1)
 
Ventas
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
Net real estate investments
$
7,009

 
$
374,590

 
$
18,161,872

 
$
—

 
$
18,543,471

Cash and cash equivalents
28,169

 
—

 
66,647

 
—

 
94,816

Escrow deposits and restricted cash
2,104

 
1,211

 
81,342

 
—

 
84,657

Deferred financing costs, net
758

 
54,022

 
7,435

 
—

 
62,215

Investment in and advances to affiliates
10,481,466

 
3,201,998

 
—

 
(13,683,464
)
 
—

Other assets
29,450

 
14,102

 
902,783

 
—

 
946,335

Total assets
$
10,548,956

 
$
3,645,923

 
$
19,220,079

 
$
(13,683,464
)
 
$
19,731,494

Liabilities and equity
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Senior notes payable and other debt
$
—

 
$
6,336,240

 
$
3,028,752

 
$
—

 
$
9,364,992

Intercompany loans
4,247,853

 
(4,682,119
)
 
434,266

 
—

 
—

Accrued interest
—

 
39,561

 
14,788

 
—

 
54,349

Accounts payable and other liabilities
94,495

 
28,152

 
878,868

 
—

 
1,001,515

Deferred income taxes
250,167

 
—

 
—

 
—

 
250,167

Total liabilities
4,592,515

 
1,721,834

 
4,356,674

 
—

 
10,671,023

Redeemable OP unitholder and noncontrolling interests
—

 
—

 
156,660

 
—

 
156,660

Total equity
5,956,441

 
1,924,089

 
14,706,745

 
(13,683,464
)
 
8,903,811

Total liabilities and equity
$
10,548,956

 
$
3,645,923

 
$
19,220,079

 
$
(13,683,464
)
 
$
19,731,494

 
 
 
 
 
(1)
Certain of Ventas Realty’s outstanding senior notes were issued jointly with our 100% owned subsidiary, Ventas Capital Corporation, which has no assets or operations.



24

CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 2014
 
Ventas, Inc.
 
Ventas
Realty (1)
 
Ventas
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
$
618

 
$
69,755

 
$
282,696

 
$
—

 
$
353,069

Resident fees and services
—

 
—

 
371,061

 
—

 
371,061

Medical office building and other services revenue
—

 
—

 
6,300

 
—

 
6,300

Income from loans and investments
306

 
—

 
10,461

 
—

 
10,767

Equity earnings in affiliates
126,085

 
—

 
140

 
(126,225
)
 
—

Interest and other income
152

 
5

 
116

 
—

 
273

Total revenues
127,161

 
69,760

 
670,774

 
(126,225
)
 
741,470

Expenses:
 
 
 
 
 
 
 
 
 
Interest
(647
)
 
43,094

 
45,394

 
—

 
87,841

Depreciation and amortization
1,422

 
7,653

 
184,519

 
—

 
193,594

Property-level operating expenses
—

 
150

 
287,490

 
—

 
287,640

Medical office building services costs
—

 
—

 
3,371

 
—

 
3,371

General, administrative and professional fees
1,887

 
5,613

 
25,366

 
—

 
32,866

(Gain) loss on extinguishment of debt, net
(3
)
 
3

 
(259
)
 
—

 
(259
)
Merger-related expenses and deal costs
1,753

 
—

 
9,007

 
—

 
10,760

Other
707

 
319

 
4,203

 
—

 
5,229

Total expenses
5,119

 
56,832

 
559,091

 
—

 
621,042

Income from continuing operations before income (loss) from unconsolidated entities, income taxes, real estate dispositions and noncontrolling interest
122,042

 
12,928

 
111,683

 
(126,225
)
 
120,428

Income (loss) from unconsolidated entities
—

 
522

 
(274
)
 
—

 
248

Income tax expense
(3,433
)
 
—

 
—

 
—

 
(3,433
)
Income from continuing operations
118,609

 
13,450

 
111,409

 
(126,225
)
 
117,243

Discontinued operations
1,438

 
556

 
1,037

 
—

 
3,031

Gain on real estate dispositions, net
1,000

 
—

 
—

 
—

 
1,000

Net income
121,047

 
14,006

 
112,446

 
(126,225
)
 
121,274

Net income attributable to noncontrolling interest
—

 
—

 
227

 
—

 
227

Net income attributable to common stockholders
$
121,047

 
$
14,006

 
$
112,219

 
$
(126,225
)
 
$
121,047

 
 
 
 
 
(1)
Certain of Ventas Realty’s outstanding senior notes were issued jointly with our 100% owned subsidiary, Ventas Capital Corporation, which has no assets or operations.



25

CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 2013
 
Ventas, Inc.
 
Ventas
Realty (1)
 
Ventas
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
$
640

 
$
69,287

 
$
253,023

 
$
—

 
$
322,950

Resident fees and services
—

 
—

 
339,170

 
—

 
339,170

Medical office building and other services revenue
—

 
—

 
3,648

 
—

 
3,648

Income from loans and investments
103

 
294

 
15,706

 
—

 
16,103

Equity earnings in affiliates
116,077

 
—

 
250

 
(116,327
)
 
—

Interest and other income
37

 
5

 
996

 
—

 
1,038

Total revenues
116,857

 
69,586

 
612,793

 
(116,327
)
 
682,909

Expenses:
 
 
 
 
 
 
 
 
 
Interest
(467
)
 
32,331

 
46,770

 
—

 
78,634

Depreciation and amortization
1,077

 
7,216

 
167,175

 
—

 
175,468

Property-level operating expenses
—

 
102

 
267,099

 
—

 
267,201

Medical office building services costs
—

 
—

 
1,639

 
—

 
1,639

General, administrative and professional fees
(13
)
 
5,622

 
23,165

 
—

 
28,774

Merger-related expenses and deal costs
2,749

 
—

 
1,513

 
—

 
4,262

Other
40

 
21

 
4,526

 
—

 
4,587

Total expenses
3,386

 
45,292

 
511,887

 
—

 
560,565

Income from continuing operations before income from unconsolidated entities, income taxes and noncontrolling interest
113,471

 
24,294

 
100,906

 
(116,327
)
 
122,344

Income from unconsolidated entities
—

 
288

 
641

 
—

 
929

Income tax (expense) benefit
(1,745
)
 
—

 
1

 
—

 
(1,744
)
Income from continuing operations
111,726

 
24,582

 
101,548

 
(116,327
)
 
121,529

Discontinued operations
467

 
428

 
(9,326
)
 
—

 
(8,431
)
Net income
112,193

 
25,010

 
92,222

 
(116,327
)
 
113,098

Net income attributable to noncontrolling interest
—

 
—

 
905

 
—

 
905

Net income attributable to common stockholders
$
112,193

 
$
25,010

 
$
91,317

 
$
(116,327
)
 
$
112,193

 
 
 
 
 
(1)
Certain of Ventas Realty’s outstanding senior notes were issued jointly with our 100% owned subsidiary, Ventas Capital Corporation, which has no assets or operations.


26

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2014
 
Ventas, Inc.
 
Ventas
Realty (1)
 
Ventas
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
 
(In thousands)
Net income
$
121,047

 
$
14,006

 
$
112,446

 
$
(126,225
)
 
$
121,274

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Foreign currency translation
—

 
—

 
(3,334
)
 
—

 
(3,334
)
Change in unrealized gain on intra-entity currency loan
594

 
—

 
—

 
—

 
594

Change in unrealized gain on marketable debt securities
1,306

 
—

 
—

 
—

 
1,306

Other
—

 
—

 
239

 
—

 
239

Total other comprehensive income (loss)
1,900

 
—

 
(3,095
)
 
—

 
(1,195
)
Comprehensive income
122,947

 
14,006

 
109,351

 
(126,225
)
 
120,079

Comprehensive income attributable to noncontrolling interest
—

 
—

 
227

 
—

 
227

Comprehensive income attributable to common stockholders
$
122,947

 
$
14,006

 
$
109,124

 
$
(126,225
)
 
$
119,852

 
 
 
 
 
(1)
Certain of Ventas Realty’s outstanding senior notes were issued jointly with our 100% owned subsidiary, Ventas Capital Corporation, which has no assets or operations.


CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2013
 
Ventas, Inc.
 
Ventas
Realty (1)
 
Ventas
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
 
(In thousands)
Net income
$
112,193

 
$
25,010

 
$
92,222

 
$
(116,327
)
 
$
113,098

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Foreign currency translation
—

 
—

 
(2,091
)
 
—

 
(2,091
)
Change in unrealized gain on marketable debt securities
61

 
—

 
—

 
—

 
61

Other
—

 
—

 
504

 
—

 
504

Total other comprehensive income (loss)
61

 
—

 
(1,587
)
 
—

 
(1,526
)
Comprehensive income
112,254

 
25,010

 
90,635

 
(116,327
)
 
111,572

Comprehensive income attributable to noncontrolling interest
—

 
—

 
905

 
—

 
905

Comprehensive income attributable to common stockholders
$
112,254

 
$
25,010

 
$
89,730

 
$
(116,327
)
 
$
110,667

 
 
 
 
 
(1)
Certain of Ventas Realty’s outstanding senior notes were issued jointly with our 100% owned subsidiary, Ventas Capital Corporation, which has no assets or operations.








27


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2014
 
Ventas, Inc.
 
Ventas
Realty (1)
 
Ventas
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
 
(In thousands)
Net cash (used in) provided by operating activities
$
(46,025
)
 
$
20,487

 
$
309,959

 
$
—

 
$
284,421

Net cash (used in) provided by investing activities
(155,716
)
 
5,190

 
(67,824
)
 
—

 
(218,350
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Net change in borrowings under revolving credit facility
—

 
182,969

 
(1,215
)
 
—

 
181,754

Repayment of debt
—

 
—

 
(67,773
)
 
—

 
(67,773
)
Net change in intercompany debt
227,406

 
(205,292
)
 
(22,114
)
 
—

 
—

Payment of deferred financing costs
—

 
(154
)
 
(13
)
 
—

 
(167
)
Cash distribution from (to) affiliates
179,724

 
(2,618
)
 
(177,106
)
 
—

 
—

Cash distribution to common stockholders
(213,473
)
 
—

 
—

 
—

 
(213,473
)
Cash distribution to redeemable OP unitholders
(1,402
)
 
—

 
—

 
—

 
(1,402
)
Distributions to noncontrolling interest
—

 
—

 
(2,237
)
 
—

 
(2,237
)
Other
1,636

 
5

 
—

 
—

 
1,641

Net cash provided by (used in) financing activities
193,891

 
(25,090
)
 
(270,458
)
 
—

 
(101,657
)
Net (decrease) increase in cash and cash equivalents
(7,850
)
 
587

 
(28,323
)
 
—

 
(35,586
)
Effect of foreign currency translation on cash and cash equivalents
593

 
(587
)
 
555

 
—

 
561

Cash and cash equivalents at beginning of period
28,169

 
—

 
66,647

 
—

 
94,816

Cash and cash equivalents at end of period
$
20,912

 
$
—

 
$
38,879

 
$
—

 
$
59,791

 
 
 
 
 
(1)
Certain of Ventas Realty’s outstanding senior notes were issued jointly with our 100% owned subsidiary, Ventas Capital Corporation, which has no assets or operations.



28

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2013
 
Ventas, Inc.
 
Ventas
Realty (1)
 
Ventas
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
 
(In thousands)
Net cash (used in) provided by operating activities
$
(26,368
)
 
$
51,309

 
$
205,364

 
$
—

 
$
230,305

Net cash (used in) provided by investing activities
(47,169
)
 
(5,835
)
 
112,477

 
—

 
59,473

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Net change in borrowings under revolving credit facility
—

 
(376,000
)
 
84

 
—

 
(375,916
)
Proceeds from debt
—

 
758,460

 
158,411

 
—

 
916,871

Repayment of debt
(11,420
)
 
—

 
(624,373
)
 
—

 
(635,793
)
Net change in intercompany debt
279,196

 
(415,487
)
 
136,291

 
—

 
—

Payment of deferred financing costs
—

 
(12,160
)
 
(1,648
)
 
—

 
(13,808
)
Cash distribution (to) from affiliates
(17,903
)
 
(238
)
 
18,141

 
—

 
—

Issuance of common stock, net
5,050

 
—

 
—

 
—

 
5,050

Cash distribution to common stockholders
(195,700
)
 
—

 
—

 
—

 
(195,700
)
Cash distribution to redeemable OP unitholders
(1,151
)
 
—

 
—

 
—

 
(1,151
)
Purchases of redeemable OP units
(108
)
 
—

 
—

 
—

 
(108
)
Distributions to noncontrolling interest
—

 
—

 
(1,450
)
 
—

 
(1,450
)
Other
2,058

 
—

 
—

 
—

 
2,058

Net cash provided by (used in) financing activities
60,022

 
(45,425
)
 
(314,544
)
 
—

 
(299,947
)
Net (decrease) increase in cash and cash equivalents
(13,515
)
 
49

 
3,297

 
—

 
(10,169
)
Effect of foreign currency translation on cash and cash equivalents
—

 
(49
)
 
—

 
—

 
(49
)
Cash and cash equivalents at beginning of period
16,734

 
—

 
51,174

 
—

 
67,908

Cash and cash equivalents at end of period
$
3,219

 
$
—

 
$
54,471

 
$
—

 
$
57,690

 
 
 
 
 
(1)
Certain of Ventas Realty’s outstanding senior notes were issued jointly with our 100% owned subsidiary, Ventas Capital Corporation, which has no assets or operations.



29

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements
Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” and other similar terms in this Quarterly Report on Form 10-Q refer to Ventas, Inc. and its consolidated subsidiaries.
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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding our or our 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 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 our expectations. We do not undertake a duty to update these forward-looking statements, which speak only as of the date on which they are made.
Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the Securities and Exchange Commission (the “SEC”). These factors include without limitation:
•
The ability and willingness of our tenants, operators, borrowers, managers and other third parties to satisfy their obligations under their respective contractual arrangements with us, including, in some cases, their obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;
•
The ability of our 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;
•
Our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate and integrate diversifying acquisitions and investments, including investments in different asset types and outside the United States;
•
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;
•
The nature and extent of future competition, including new construction in the markets in which our seniors housing communities and medical office buildings (“MOBs”) are located;
•
The extent of future or pending healthcare reform and regulation, including cost containment measures and changes in reimbursement policies, procedures and rates;
•
Increases in our borrowing costs as a result of changes in interest rates and other factors;
•
The ability of our operators and managers, as applicable, to comply with laws, rules and regulations in the operation of our properties, to deliver high-quality services, to attract and retain qualified personnel and to attract residents and patients;
•
Changes in general economic conditions or economic conditions in the markets in which we may, from time to time, compete, and the effect of those changes on our revenues, earnings and funding sources;
•
Our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due;
•
Our ability and willingness to maintain our qualification as a REIT in light of economic, market, legal, tax and other considerations;
•
Final determination of our taxable net income for the year ended December 31, 2013 and for the year ending December 31, 2014;

30

•
The ability and willingness of our tenants to renew their leases with us upon expiration of the leases, our ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we exercise our right to replace an existing tenant or manager, and obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant or manager;
•
Risks associated with our senior living operating portfolio, such as factors that can cause volatility in our 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;
•
Changes in exchange rates for any foreign currency in which we may, from time to time, conduct business;
•
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 our leases and our earnings;
•
Our ability and the ability of our tenants, operators, borrowers and managers to obtain and maintain adequate property, liability and other insurance from reputable, financially stable providers;
•
The impact of increased operating costs and uninsured professional liability claims on our liquidity, financial condition and results of operations or that of our tenants, operators, borrowers and managers and our ability and the ability of our tenants, operators, borrowers and managers to accurately estimate the magnitude of those claims;
•
Risks associated with our MOB portfolio and operations, including our ability to successfully design, develop and manage MOBs, to accurately estimate our costs in fixed fee-for-service projects and to retain key personnel;
•
The ability of the hospitals on or near whose campuses our MOBs are located and their affiliated health systems to remain competitive and financially viable and to attract physicians and physician groups;
•
Our ability to build, maintain and expand our relationships with existing and prospective hospital and health system clients;
•
Risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision-making authority and our reliance on our joint venture partners’ financial condition;
•
The impact of market or issuer events on the liquidity or value of our investments in marketable securities;
•
Merger and acquisition 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 our tenants, operators, borrowers or managers or significant changes in the senior management of our tenants, operators, borrowers or managers; and
•
The impact of litigation or any financial, accounting, legal or regulatory issues that may affect us or our tenants, operators, borrowers or managers.
Many of these factors are beyond our control and the control of our management.
Brookdale Senior Living, Kindred, Atria and Sunrise Information
Each of Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”) and Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”) is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Brookdale Senior Living and Kindred contained or referred to in this Quarterly Report on Form 10-Q has been derived from SEC filings made by Brookdale Senior Living or Kindred, as the case may be, or other publicly available information or was provided to us by Brookdale Senior Living or Kindred, and we have not verified this information through an independent investigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you of its accuracy. We are providing this data for informational purposes only, and you are encouraged to obtain Brookdale Senior Living’s and Kindred’s publicly available filings, which can be found on the SEC’s website at www.sec.gov.
Neither Atria Senior Living, Inc. (“Atria”) nor Sunrise Senior Living, LLC (together with its subsidiaries, “Sunrise”) is currently subject to the reporting requirements of the SEC. The information related to Atria and Sunrise contained or referred to in this Quarterly Report on Form 10-Q has been derived from publicly available information or was provided to us by Atria or

31

Sunrise, as the case may be, and we have not verified this information through an independent investigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you of its accuracy.
Company Overview
We are a REIT with a highly diversified portfolio of seniors housing and healthcare properties located throughout the United States, Canada and the United Kingdom. As of March 31, 2014, we owned nearly 1,500 properties, including seniors housing communities, MOBs, skilled nursing and other facilities, and hospitals, and we had two new properties under development. We are an S&P 500 company and currently headquartered in Chicago, Illinois.
We primarily acquire and own seniors housing and healthcare properties and lease them to unaffiliated tenants or operate them through independent third-party managers. As of March 31, 2014, we leased a total of 912 properties (excluding MOBs and properties classified as held for sale) to various healthcare operating companies under “triple-net” or “absolute-net” leases that obligate the tenants to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures, and we engaged independent operators, such as Atria and Sunrise, to manage 239 of our seniors housing communities for us pursuant to long-term management agreements. Our two largest tenants, Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”) and Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”) leased from us 145 properties (excluding six properties included in investments in unconsolidated entities) and 136 properties, respectively, as of March 31, 2014.
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 seniors housing and healthcare operators or properties.
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. Our access to and cost of external capital depend on 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 that are beyond our control and fluctuate over time. Generally, we 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. At March 31, 2014, 20.4% of our consolidated debt was variable rate debt. Immediately following our April 2014 issuance of $700.0 million aggregate principal amount of senior notes and repayment of substantially all borrowings outstanding under our unsecured revolving credit facility, approximately 14% of our consolidated debt was variable rate debt.
Operating Highlights and Key Performance Trends
2014 Highlights to Date
•
We paid the first quarterly installment of our 2014 dividend in the amount of $0.725 per share, which represents an 8% increase over the same period in the prior year.

•
During the first quarter of 2014, we invested approximately $208 million in healthcare assets, including the acquisition of three high-quality private hospitals located in the United Kingdom. The hospitals are leased to the second largest private hospital operator in the United Kingdom under long-term triple-net leases, with annual rent escalators equaling or exceeding 3%.

•
In April, we issued and sold $700 million aggregate principal amount of senior notes with a weighted average interest rate of 2.75% and a weighted average maturity of seven years.



32

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, 2014
 
As of December 31, 2013
Investment mix by asset type (1):
 
 
 
Seniors housing communities
63.7
%
 
64.2
%
MOBs
18.0

 
18.2

Skilled nursing and other facilities
13.5

 
13.6

Hospitals
3.1

 
2.3

Secured loans receivable and investments, net
1.7

 
1.7

Investment mix by tenant, operator and manager (1):
 
 
 
Atria
19.8
%
 
19.9
%
Sunrise
13.7

 
13.9

Brookdale Senior Living
9.6

 
9.7

Kindred
3.0

 
3.2

All other
53.9

 
53.3

 
 
 
 
 
(1)
Ratios are based on the gross book value of real estate investments (excluding assets classified as held for sale) as of each reporting date.




33

 
For the Three Months Ended March 31,
 
2014
 
2013
Operations mix by tenant and operator and business model:
 
 
 
Revenues (1):
 
 
 
Senior living operations
50.4
%
 
50.1
%
Kindred
7.4

 
9.3

Brookdale Senior Living
5.5

 
5.7

All others
36.7

 
34.9

Adjusted EBITDA (2):
 
 
 
Senior living operations
28.5
%
 
27.1
%
Kindred
12.1

 
15.1

Brookdale Senior Living
9.2

 
9.5

All others
50.2

 
48.3

NOI (3):
 
 
 
Senior living operations
27.3
%
 
26.2
%
Kindred
12.2

 
15.4

Brookdale Senior Living
9.0

 
9.5

All others
51.5

 
48.9

Operations mix by geographic location (4):
 
 
 
California
15.3
%
 
14.0
%
New York
9.9

 
10.2

Texas
7.1

 
6.5

Illinois
4.7

 
4.7

Florida
4.2

 
4.2

All others
58.8

 
60.4

 
 
 
 
 
(1)
Total revenues include medical office building and other services revenue, revenue from loans and investments and interest and other income (excluding amounts in discontinued operations).

(2)
“Adjusted EBITDA” is defined as earnings before interest, taxes, depreciation and amortization (including non-cash stock-based compensation expense), excluding gains or losses on extinguishment of debt, merger-related expenses and deal costs, net gains on real estate activity and changes in the fair value of financial instruments (including amounts in discontinued operations).
(3)
“NOI” represents net operating income, which is defined as total revenues, less interest and other income, property-level operating expenses and medical office building services costs (excluding amounts in discontinued operations).
(4)
Ratios are based on total revenues (excluding amounts in discontinued operations) 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 Adjusted EBITDA and NOI to our net income as computed in accordance with GAAP.
Triple-Net Lease Expirations
As our triple-net leases expire, we face the risk that our tenants may elect not to renew those leases and, in the event of non-renewal, 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 terms are staggered, the non-renewal of some or all of our triple-net leases in any given year could have a material adverse effect on our business, financial condition, results of operations and liquidity, our ability to service our indebtedness and other obligations and our ability to make distributions to our stockholders, as required for us to continue to qualify as a REIT (a “Material Adverse Effect”). During the three months ended March 31, 2014, none of our triple-net leases were renewed or expired without renewal that had a material impact on our financial condition or results of operations for that period.

34

In September 2013, we entered into favorable agreements with Kindred to extend the leases with respect to 48 of the 108 licensed healthcare assets whose lease terms were originally scheduled to expire on April 30, 2015 (the “2015 Renewal Assets”). At the time of our agreements, aggregate annual rent for the 2015 Renewal Assets was $138 million. The 48 re-leased properties consist of 26 skilled nursing facilities and 22 long-term acute care hospitals. New annual rent, commencing October 1, 2014, for the 48 re-leased properties will be $95.9 million, an increase of $15 million over then current annual base rent. On October 1, 2013, Kindred also paid us $20 million, which is being amortized over the new lease terms. As part of our agreements, we and Kindred agreed to accelerate the expiration of the lease terms for the 60 non-renewed assets to September 30, 2014.
We currently have signed leases for 55 of the 60 skilled nursing facilities that were not re-leased by Kindred, six of which have already been transitioned to the replacement tenant. We intend to sell the remaining five skilled nursing facilities, four of which are under contract for sale. Although we expect to successfully complete all of these transactions by the fourth quarter of 2014, they remain subject to regulatory approval and other conditions, and we cannot assure you that we will be able to do so on a timely basis, if at all.
Kindred is required to continue to perform all of its obligations, including without limitation, payment of all rental amounts, under the applicable master lease for the non-renewed assets until expiration of the current lease term. Subject to the terms of our agreements, we have the flexibility to transition the non-renewed assets either before or after the September 30, 2014 lease expiration date. Moreover, we own or have the rights to all licenses and certificates of need (“CONs”) at the properties, and Kindred has extensive and detailed obligations to cooperate and ensure an orderly transition of the properties to another operator.
We do not expect that the re-leasing or repositioning of the non-renewed assets will materially impact our results of operations in 2014 or 2015. However, we cannot provide any assurances of the actual impact these transactions will have on our future operations, nor can we assure you as to whether, when or on what terms we will be able to re-lease or reposition any or all of the non-renewed assets to qualified healthcare operators. Our ability to re-lease or reposition the non-renewed assets could be significantly delayed or limited by state licensing, CON or other laws, as well as by the Medicare and Medicaid change-of-ownership rules, and we could incur substantial additional expenses in connection with any licensing or change-of-ownership proceedings. In addition, we may be required to fund certain expenses and incur obligations to preserve the value of, and avoid the imposition of liens on, the non-renewed assets while they are being re-leased or repositioned.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements included in 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”). 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. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 18, 2014, for further 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.
Recently Issued or Adopted Accounting Standards
In 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which raises the threshold for disposals to qualify as discontinued operations. A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. The application of this guidance is prospective from the date of adoption. We adopted ASU 2014-08 for the quarter ended March 31, 2014.


35

Results of Operations
As of March 31, 2014, we operated through three reportable business segments: triple-net leased properties, senior living operations and MOB operations. In our triple-net leased properties segment, we acquire and own seniors housing and healthcare properties throughout the United States and the United Kingdom and lease those properties to healthcare operating companies under “triple-net” or “absolute-net” leases that obligate the tenants to pay all property-related expenses. In our senior living operations segment, we invest in seniors housing communities throughout the United States and Canada and engage independent operators, such as Atria and Sunrise, to manage those communities. In our MOB operations segment, we primarily acquire, own, develop, lease and manage MOBs. Information provided for “all other” includes income from loans and investments and other miscellaneous income and various corporate-level expenses not directly attributable to any of our three reportable business segments. Assets included in “all other” consist primarily of corporate assets, including cash, restricted cash, deferred financing costs, loans receivable and investments, and miscellaneous accounts receivable.
Three Months Ended March 31, 2014 and 2013
The table below shows our results of operations for the three months ended March 31, 2014 and 2013 and the effect of changes in those results from period to period on our net income attributable to common stockholders.
 
For the Three Months Ended March 31,
 
Increase (Decrease)
to Income
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Segment NOI:
 
 
 
 
 
 
 
Triple-Net Leased Properties
$
238,994

 
$
213,645

 
$
25,349

 
11.9
 %
Senior Living Operations
122,766

 
108,262

 
14,504

 
13.4

MOB Operations
77,159

 
75,021

 
2,138

 
2.8

All Other
11,267

 
16,103

 
(4,836
)
 
(30.0
)
Total segment NOI
450,186

 
413,031

 
37,155

 
9.0

Interest and other income
273

 
1,038

 
(765
)
 
(73.7
)
Interest expense
(87,841
)
 
(78,634
)
 
(9,207
)
 
(11.7
)
Depreciation and amortization
(193,594
)
 
(175,468
)
 
(18,126
)
 
(10.3
)
General, administrative and professional fees
(32,866
)
 
(28,774
)
 
(4,092
)
 
(14.2
)
Gain on extinguishment of debt, net
259

 
—

 
259

 
nm

Merger-related expenses and deal costs
(10,760
)
 
(4,262
)
 
(6,498
)
 
( > 100 )

Other
(5,229
)
 
(4,587
)
 
(642
)
 
(14.0
)
Income before income from unconsolidated entities, income taxes, discontinued operations, real estate dispositions and noncontrolling interest
120,428

 
122,344

 
(1,916
)
 
(1.6
)
Income from unconsolidated entities
248

 
929

 
(681
)
 
(73.3
)
Income tax expense
(3,433
)
 
(1,744
)
 
(1,689
)
 
(96.8
)
Income from continuing operations
117,243

 
121,529

 
(4,286
)
 
(3.5
)
Discontinued operations
3,031

 
(8,431
)
 
11,462

 
> 100

Gain on real estate dispositions, net
1,000

 
—

 
1,000

 
nm

Net income
121,274

 
113,098

 
8,176

 
7.2

Net income attributable to noncontrolling interest
227

 
905

 
678

 
74.9

Net income attributable to common stockholders
$
121,047

 
$
112,193

 
8,854

 
7.9

 
 
 
 
 
nm - not meaningful

36

Segment NOI—Triple-Net Leased Properties
NOI for our triple-net leased properties reportable business segment equals the rental income and other services revenue earned from our triple-net assets. We incur no direct operating expenses for this segment.
The following table summarizes results of continuing operations in our triple-net leased properties reportable business segment:
 
For the Three Months Ended March 31,
 
Increase (Decrease) 
to NOI
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Segment NOI—Triple-Net Leased Properties:
 
 
 
 
 
 
 
Rental income
$
237,846

 
$
212,534

 
$
25,312

 
11.9
%
Other services revenue
1,148

 
1,111

 
37

 
3.3

Segment NOI
$
238,994

 
$
213,645

 
25,349

 
11.9

Triple-net leased properties segment NOI increased during the three months ended March 31, 2014 over the prior year primarily due to rent from the properties we acquired after January 1, 2013, contractual escalations in rent pursuant to the terms of our leases, and increases in base and other rent under certain of our leases.
In our triple-net leased properties segment, our revenues generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the properties. Therefore, while occupancy rates may affect the profitability of our tenants’ operations, they do not directly impact our revenues or financial results. The following table sets forth average continuing occupancy rates related to the triple-net leased properties we owned at March 31, 2014 for the fourth quarter of 2013 (which is the most recent information available to us from our tenants) and average continuing occupancy rates related to the triple-net leased properties we owned at March 31, 2013 for the fourth quarter of 2012.
 
Number of Properties Owned at March 31, 2014 (1)
 
Average
Occupancy For the
Three Months
Ended December 31,
2013 (1)
 
 
Number of Properties Owned at March 31, 2013 (1)
 
Average
Occupancy For the
Three Months
Ended December 31,
2012 (1)
Seniors housing communities
444

 
88.2
%
 
 
417

 
86.5
%
Skilled nursing facilities
305

 
80.5

 
 
305

 
81.9

Hospitals
46

 
53.7

 
 
46

 
56.7

 
 
 
 
 
(1)
Excludes properties classified as held for sale, non-stabilized properties, properties included in investments in unconsolidated entities and certain properties for which we do not receive occupancy information.  Also excludes properties acquired during the three months ended March 31, 2014 and 2013, respectively, and properties that transitioned operators for which we do not have five full quarters of results subsequent to the transition.
The following table compares results of continuing operations for our 845 same-store triple-net leased properties. For purposes of this table, we define same-store properties as properties that we owned for the entire period from January 1, 2013 through March 31, 2014.
 
For the Three Months Ended March 31,
 
Increase (Decrease) to Income
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Same-Store Segment NOI—Triple-Net Leased Properties:
 
 
 
 
 
 
 
Rental income
$
220,310

 
$
212,335

 
$
7,975

 
3.8
%
Other services revenue
1,148

 
1,111

 
37

 
3.3

Segment NOI
$
221,458

 
$
213,446

 
8,012

 
3.8

The year-over-year increase in same-store triple-net leased properties NOI is due to the contractual escalations in rent pursuant to the terms of our leases and increases in base and other rent under certain of our leases.

37

Segment NOI—Senior Living Operations
The following table summarizes results of continuing operations in our senior living operations reportable business segment:
 
For the Three Months Ended March 31,
 
Increase (Decrease) to Income
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Segment NOI—Senior Living Operations:
 
 
 
 
 
 
 
Total revenues
$
371,061

 
$
339,170

 
$
31,891

 
9.4
 %
Less:
 
 
 
 
 
 
 
Property-level operating expenses
(248,295
)
 
(230,908
)
 
(17,387
)
 
(7.5
)
Segment NOI
$
122,766

 
$
108,262

 
14,504

 
13.4

Revenues attributed to our senior living operations segment consist of resident fees and services, which include all amounts earned from residents at our seniors housing communities, such as rental fees related to resident leases, extended health care fees and other ancillary service income. Our senior living operations segment revenues increased in the first quarter of 2014 over the first quarter of 2013 primarily due to the seniors housing communities we acquired after January 1, 2013 and higher average monthly revenue per occupied room in our communities.
Property-level operating expenses related to our senior living operations segment include labor, food, utilities, marketing, management and other costs of operating the properties. Property-level operating expenses increased for the three months ended March 31, 2014 over the same period in 2013 primarily due to the acquired properties described above, increases in salaries, utilities and food costs and higher management fees primarily due to increased revenues.
The following table compares results of continuing operations for our 222 same-store senior living operating communities. For purposes of this table, we define same-store communities as communities that we owned for the full period in both comparison periods.
 
For the Three Months Ended March 31,
 
Increase (Decrease) to Income
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Same-Store Segment NOI—Senior Living Operations:
 
 
 
 
 
 
 
Total revenues
$
346,471

 
$
339,170

 
$
7,301

 
2.2
 %
Less:
 
 
 
 
 
 
 
Property-level operating expenses
(233,354
)
 
(230,908
)
 
(2,446
)
 
(1.1
)
Segment NOI
$
113,117

 
$
108,262

 
4,855

 
4.5

Same-store senior living operations NOI increased year over year primarily due to higher average monthly revenue per occupied room, partially offset by increases in salaries, utilities and food costs and higher management fees primarily due to increased revenues.
The following table sets forth average unit occupancy rates and the average monthly revenue per occupied room related to continuing operations in our senior living operations segment during the three months ended March 31, 2014 and 2013:
 
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,
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Total communities
239

 
222

 
90.6
%
 
91.0
%
 
$
5,541

 
$
5,492

Same-store communities
222

 
222

 
90.8

 
91.0

 
5,628

 
5,492


38

Segment NOI—MOB Operations
The following table summarizes results of continuing operations in our MOB operations reportable business segment:
 
For the Three Months Ended March 31,
 
Increase
(Decrease) to NOI
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Segment NOI—MOB Operations:
 
 
 
 
 
 
 
Rental income
$
115,223

 
$
110,416

 
$
4,807

 
4.4
 %
Medical office building services revenue
4,652

 
2,537

 
2,115

 
83.4

Total revenues
119,875

 
112,953

 
6,922

 
6.1

Less:
 
 
 
 
 
 
 
Property-level operating expenses
(39,345
)
 
(36,293
)
 
(3,052
)
 
(8.4
)
Medical office building services costs
(3,371
)
 
(1,639
)
 
(1,732
)
 
( > 100 )
Segment NOI
$
77,159

 
$
75,021

 
2,138

 
2.8

The increases in our MOB operations segment revenues and property-level operating expenses in the first quarter of 2014 over the same period in 2013 are attributed primarily to the MOBs we acquired after January 1, 2013 and slightly higher base rents, partially offset by increased weather-related expenses.
Medical office building services revenue and costs both increased year over year primarily due to increased construction activity during the first quarter of 2014 over the same period in 2013.
The following table compares results of continuing operations for our 296 same-store MOBs. For purposes of this table, we define same-store MOBs as MOBs that we owned for the full period in both comparison periods.
 
For the Three Months Ended March 31,
 
Increase (Decrease) to Income
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Same-Store Segment NOI—MOB Operations:
 
 
 
 
 
 
 
Rental income
$
109,580

 
$
109,383

 
$
197

 
0.2
 %
Less:
 
 
 
 
 
 
 
Property-level operating expenses
(37,301
)
 
(35,979
)
 
(1,322
)
 
(3.7
)
Segment NOI
$
72,279

 
$
73,404

 
(1,125
)
 
(1.5
)
The following table sets forth occupancy rates and the annualized average rent per occupied square foot related to continuing operations in our MOB operations segment at and for the three months ended March 31, 2014 and 2013:
 
Number of Properties at March 31,
 
Occupancy at March 31,
 
Annualized Average Rent Per Occupied Square Foot for the Three Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Total MOBs
309

 
300

 
90.0
%
 
90.5
%
 
$
30

 
$
30

Same-store MOBs
296

 
296

 
89.9

 
90.4

 
29

 
29

Segment NOI—All Other
All other NOI consists solely of income from loans and investments. Income from loans and investments decreased for the three months ended March 31, 2014 over the same period in 2013 primarily due to final repayments and sales of portions of certain loans receivable throughout 2013.
Interest Expense
The $8.2 million increase in total interest expense, including interest allocated to discontinued operations of $0.7 million and $1.7 million for the three months ended March 31, 2014 and 2013, respectively, is attributed primarily to $8.4 million of additional interest due to higher debt balances, partially offset by a $0.6 million reduction in interest due to lower effective

39

interest rates, including the amortization of any fair value adjustments. Our effective interest rate was 3.7% for the three months ended March 31, 2014 and 2013.
Depreciation and Amortization
Depreciation and amortization expense increased during the three months ended March 31, 2014 compared to the same period in 2013 primarily due to the $1.8 billion of acquisitions we made in 2013.
General, Administrative and Professional Fees
General, administrative and professional fees increased $4.1 million during the three months ended March 31, 2014 compared to the same period in 2013 primarily due to our continued organizational growth.
Gain on Extinguishment of Debt, Net
The gain on extinguishment of debt for the three months ended March 31, 2014 resulted primarily from early mortgage repayments. There were no similar transactions during the three months ended March 31, 2013.
Merger-Related Expenses and Deal Costs
Merger-related expenses and deal costs for both periods consist of transition, integration, deal and severance-related expenses primarily related to consummated transactions as required by GAAP to be expensed rather than capitalized into the asset value. The $6.5 million increase during the three months ended March 31, 2014 over the prior year is primarily due to increased investment activity in the first quarter of 2014 compared to the first quarter of 2013.
Other
Other primarily includes building rent expense paid to lease certain of our senior living operating communities, as well as certain unreimbursable expenses related to our triple-net leased portfolio. The increase in other during the three months ended March 31, 2014 compared to the same period in 2013 is due primarily to costs associated with re-leasing certain triple-net leased assets.
Income Tax Expense
Income tax expense for the three months ended March 31, 2014 was due primarily to operating income at our TRS entities. Income tax expense for the three months ended March 31, 2013 was due primarily to additions to income tax contingency reserves.
Discontinued Operations
Discontinued operations for the three months ended March 31, 2014 reflects activity related to 17 properties, five of which were sold during the first quarter of 2014 and 12 of which were classified as held for sale as of March 31, 2014. We recognized a net gain of $1.4 million on real estate dispositions during the three months ended March 31, 2014. Discontinued operations for the comparable 2013 period reflects activity related to 39 properties, seven of which were sold during the first quarter of 2013, resulting in a net gain of $0.5 million.
Gain on Real Estate Dispositions, Net
The net gain on real estate dispositions for the three months ended March 31, 2014 resulted primarily from the sale of an MOB that was not reported in discontinued operations. Net gains on real estate dispositions for the three months ended March 31, 2013 are classified in discontinued operations.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest for the three months ended March 31, 2014 and 2013 represents our partners’ joint venture interests in 51 properties and 57 properties, respectively.

40

Non-GAAP Financial Measures
We believe that net income, as defined by GAAP, is the most appropriate earnings measurement. However, 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 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 their most directly comparable GAAP measures.
The non-GAAP financial measures we present in this Quarterly Report on Form 10-Q may not be identical 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 (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 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
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. To overcome this problem, we consider Funds From Operations (“FFO”) and normalized FFO to be appropriate measures of operating performance of an equity REIT. In particular, 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 and between periods on a consistent basis without having to account for differences caused by unanticipated items and other 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 (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, including gain 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. We define 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 our 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 our debt; (c) the non-cash effect of income tax benefits or expenses and derivative transactions that have non-cash mark-to-market impacts on our Consolidated Statements of Income; (d) the impact of future acquisitions or divestitures (including pursuant to tenant options to purchase) and capital transactions; and (e) the financial impact of contingent consideration, severance-related costs, charitable donations made to the Ventas Charitable Foundation, gains and losses for non-operational foreign currency hedge agreements and changes in the fair value of financial instruments.

41

Our FFO and normalized FFO for the three months ended March 31, 2014 and 2013 are summarized in the following table. The increase in normalized FFO for the three months ended March 31, 2014 over the same period in 2013 is due primarily to our 2013 investments, strong same-store growth in our senior living operations segment, rental increases from our triple-net leased portfolio and receipt of other payments. These benefits were partially offset by higher debt balances, increases in general and administrative expenses and asset sales and loan repayments.
 
For the Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Net income attributable to common stockholders
$
121,047

 
$
112,193

Adjustments:
 
 
 
Real estate depreciation and amortization
192,043

 
174,190

Real estate depreciation related to noncontrolling interest
(2,644
)
 
(2,502
)
Real estate depreciation related to unconsolidated entities
1,494

 
1,646

Gain on re-measurement of equity interest upon acquisition, net
—

 
(1,241
)
Gain on real estate dispositions, net
(1,000
)
 
—

Discontinued operations:
 
 
 
Gain on real estate dispositions, net
(1,438
)
 
(477
)
Depreciation on real estate assets
281

 
11,475

FFO
309,783

 
295,284

Adjustments:
 
 
 
Change in fair value of financial instruments
(68
)
 
25

Income tax expense
3,433

 
1,744

Gain on extinguishment of debt, net
(810
)
 
—

Merger-related expenses and deal costs
10,761

 
4,262

Amortization of other intangibles
256

 
256

Normalized FFO
$
323,355

 
$
301,571


42

Adjusted EBITDA
We consider Adjusted EBITDA an important supplemental measure to net income because it provides another manner in which to evaluate our operating performance and serves as another indicator of our ability to service debt. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization (including non-cash stock-based compensation expense), excluding gains or losses on extinguishment of debt, merger-related expenses and deal costs, net gains on real estate activity and changes in the fair value of financial instruments (including amounts in discontinued operations). The following table sets forth a reconciliation of Adjusted EBITDA to net income (including amounts in discontinued operations) for the three months ended March 31, 2014 and 2013:
 
For the Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Net income
$
121,274

 
$
113,098

Adjustments:
 
 
 
Interest
88,519

 
80,329

Gain on extinguishment of debt, net
(810
)
 
—

Taxes (including amounts in general, administrative and professional fees)
4,660

 
2,893

Depreciation and amortization
193,875

 
186,943

Non-cash stock-based compensation expense
6,044

 
5,662

Merger-related expenses and deal costs
10,760

 
4,262

Gain on real estate dispositions, net
(2,437
)
 
(477
)
Change in fair value of financial instruments
(68
)
 
25

Gain on re-measurement of equity interest upon acquisition, net
—

 
(1,241
)
Adjusted EBITDA
$
421,817

 
$
391,494


43

NOI
We also consider NOI an important supplemental measure to net income because it allows investors, analysts and our management to assess our unlevered property-level operating results and to compare our operating results with the operating results 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 medical office building services costs (including amounts in discontinued operations). Cash receipts may differ due to straight-line recognition of certain rental income and the application of other GAAP policies. The following table sets forth a reconciliation of NOI to net income (including amounts in discontinued operations) for the three months ended March 31, 2014 and 2013:
 
For the Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Net income
$
121,274

 
$
113,098

Adjustments:
 
 
 
Interest and other income
(1,023
)
 
(1,038
)
Interest
88,519

 
80,329

Depreciation and amortization
193,875

 
186,943

General, administrative and professional fees
32,866

 
28,774

Gain on extinguishment of debt, net
(259
)
 
—

Merger-related expenses and deal costs
10,760

 
4,262

Other
5,345

 
4,063

Income from unconsolidated entities
(248
)
 
(929
)
Income tax expense
3,433

 
1,744

Gain on real estate dispositions, net
(2,437
)
 
(477
)
NOI
452,105

 
416,769

Discontinued operations
(1,919
)
 
(3,738
)
NOI (excluding amounts in discontinued operations)
$
450,186

 
$
413,031

Liquidity and Capital Resources
As of March 31, 2014, we had a total of $59.8 million of unrestricted cash and cash equivalents, operating cash and cash related to our senior living operations and MOB operations reportable business segments that is deposited and held in property-level accounts. Funds maintained in the property-level accounts are used primarily for the payment of property-level expenses, debt service payments and certain capital expenditures. As of March 31, 2014, we also had escrow deposits and restricted cash of $76.1 million and $1.4 billion of unused borrowing capacity available under our unsecured revolving credit facility.
During the three months ended March 31, 2014, our principal sources of liquidity were cash flows from operations, net borrowings under our unsecured revolving credit facility, proceeds from asset sales and cash on hand.
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 capital expenditures; (v) fund acquisitions, investments and commitments, including development and redevelopment activities; and (vi) make distributions to our stockholders and unitholders, as required for us to continue to qualify as a REIT. 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, issuances of debt and equity securities, sales of real estate assets and borrowings under our unsecured revolving credit facility. However, if any of these sources of liquidity is unavailable to us or is not available at an acceptable cost or if we engage in significant acquisition or investment activity, we may seek or require additional capital through additional debt assumptions and financings (including secured financings), dispositions of assets (in whole or in part through joint venture arrangements with third parties) and/or issuances of debt and equity securities.
Unsecured Revolving Credit Facility and Term Loans
Our unsecured credit facility is comprised of a $2.0 billion revolving credit facility priced at LIBOR plus 1.0% as of March 31, 2014, and a $200.0 million four-year term loan and an $800.0 million five-year term loan, each priced at LIBOR

44

plus 1.05% as of March 31, 2014. The revolving credit facility matures in January 2018, but may be extended, at our option subject to the satisfaction of certain conditions, for an additional period of one year. The $200.0 million and $800.0 million term loans mature in January 2018 and January 2019, respectively. The unsecured credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to $3.5 billion.
As of March 31, 2014, we had $559.3 million of borrowings outstanding, $14.9 million of letters of credit outstanding and $1.4 billion of unused borrowing capacity available under our unsecured revolving credit facility. Subsequent to March 31, 2014, we repaid substantially all amounts outstanding under our unsecured revolving credit facility.
Senior Notes
In April 2014, we issued and sold $300.0 million aggregate principal amount of 1.250% senior notes due 2017 at a public offering price equal to 99.815% of par, for total proceeds of $299.4 million before the underwriting discount and expenses, and $400.0 million aggregate principal amount of 3.750% senior notes due 2024 at a public offering price equal to 99.304% of par, for total proceeds of $397.2 million before the underwriting discount and expenses. We used a portion of these proceeds to repay substantially all amounts outstanding under our unsecured revolving credit facility.
Cash Flows
The following table sets forth our sources and uses of cash flows for the three months ended March 31, 2014 and 2013:
 
For the Three Months Ended March 31,
 
Increase
(Decrease) to Cash
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Cash and cash equivalents at beginning of period
$
94,816

 
$
67,908

 
$
26,908

 
39.6
%
Net cash provided by operating activities
284,421

 
230,305

 
54,116

 
23.5

Net cash (used in) provided by investing activities
(218,350
)
 
59,473

 
(277,823
)
 
( > 100 )

Net cash used in financing activities
(101,657
)
 
(299,947
)
 
198,290

 
66.1

Effect of foreign currency translation on cash and cash equivalents
561

 
(49
)
 
610

 
> 100

Cash and cash equivalents at end of period
$
59,791

 
$
57,690

 
2,101

 
3.6

Cash Flows from Operating Activities
Cash flows from operating activities increased during the three months ended March 31, 2014 over the same period in 2013 primarily due to the increases in NOI and FFO as previously described.
Cash Flows from Investing Activities
Cash used in investing activities during the three months ended March 31, 2014 and 2013 consisted primarily of cash paid for our investments in real estate ($181.9 million and $56.2 million in 2014 and 2013, respectively), purchase of marketable debt securities ($25.0 million in 2014), capital expenditures ($16.1 million and $19.8 million in 2014 and 2013, respectively) and development project expenditures ($23.9 million and $21.6 million in 2014 and 2013, respectively). Cash provided by investing activities during the three months ended March 31, 2014 and 2013 consisted primarily of proceeds from loans receivable ($1.2 million and $146.4 million in 2014 and 2013, respectively) and proceeds from real estate disposals ($26.2 million and $11.3 million in 2014 and 2013, respectively).
Cash Flows from Financing Activities
Cash used in financing activities during the three months ended March 31, 2014 and 2013 consisted primarily of net payments made on our unsecured revolving credit facility and term loans ($375.9 million in 2013), debt repayments ($67.8 million and $635.8 million in 2014 and 2013, respectively) and cash distributions to common stockholders, unitholders and noncontrolling interest parties ($217.1 million and $198.3 million in 2014 and 2013, respectively). These cash outflows were partially offset by net proceeds from the issuance of debt ($916.9 million in 2013) and net borrowings under our unsecured revolving credit facility ($181.8 million in 2014).
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 to the tenants or advances, which may increase the amount of rent payable with respect to the

45

properties in certain cases. We expect to fund any 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 with cash flows from operations or through additional borrowings.
We also expect to fund capital expenditures related to our senior living operations and MOB operations reportable business segments with the cash flows from the properties or through additional borrowings. 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 healthcare or seniors housing properties funded through capital that we or our joint venture partners provide. As of March 31, 2014, we had two properties in various stages of development pursuant to these agreements. Through March 31, 2014, we have funded $2.9 million of our estimated total commitment over the projected development period ($11.0 million to $12.0 million) toward these projects.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of our exposure to various market risks contains forward-looking statements that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in light of information currently available to us. Nevertheless, because of the inherent unpredictability of interest rates and other factors, actual results could differ materially from those projected in such forward-looking information.
We are exposed to market risk related to changes in interest rates with respect to borrowings under our unsecured revolving credit facility and our unsecured term loans, certain of our mortgage loans that are floating rate obligations, mortgage loans receivable that bear interest at floating rates and marketable debt securities. These market risks result primarily from changes in LIBOR rates or prime rates. To address these risks, we continuously monitor our level of floating rate debt with respect to total debt and other factors, including our assessment of current and future economic conditions.
For fixed rate debt, interest rate fluctuations generally affect the fair value, but not our earnings or cash flows. Therefore, interest rate risk does not have a significant impact on our fixed rate debt obligations until their maturity or earlier prepayment and refinancing. If interest rates have risen at the time we seek to refinance our fixed rate debt, whether at maturity or otherwise, our future earnings and cash flows could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of refinancing may reduce our overall borrowing costs.
To highlight the sensitivity of our fixed rate debt to changes in interest rates, the following summary shows the effects of a hypothetical instantaneous change of 100 basis points (“BPS”) in interest rates as of March 31, 2014 and December 31, 2013:
 
As of March 31, 2014
 
As of December 31, 2013
 
(In thousands)
Gross book value
$
7,517,498

 
$
7,573,698

Fair value (1)
7,740,732

 
7,690,196

Fair value reflecting change in interest rates (1):
 
 
 
 -100 basis points
8,125,779

 
8,069,013

 +100 basis points
7,371,979

 
7,320,251


(1)
The change in fair value of our fixed rate debt from December 31, 2013 to March 31, 2014 was due primarily to 2014 mortgage loan repayments.

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The table below sets forth certain information with respect to our debt, excluding premiums and discounts.
 
As of March 31, 2014
 
As of December 31, 2013
 
As of March 31, 2013
 
(Dollars in thousands)
Balance:
 
 
 
 
 
Fixed rate:
 
 
 
 
 
Senior notes and other
$
5,418,543

 
$
5,418,543

 
$
4,568,543

Mortgage loans and other (1)
2,098,955

 
2,155,155

 
2,384,126

Variable rate:
 
 
 
 
 
Unsecured revolving credit facilities (2)
559,299

 
376,343

 
164,734

Unsecured term loans
996,165

 
1,000,702

 
682,282

Mortgage loans and other
369,674

 
369,734

 
429,904

Total
$
9,442,636

 
$
9,320,477

 
$
8,229,589

Percentage of total debt:
 
 
 
 
 
Fixed rate:
 
 
 
 
 
Senior notes and other
57.4
%
 
58.1
%
 
55.5
%
Mortgage loans and other (1)
22.2

 
23.2

 
29.0

Variable rate:
 
 
 
 
 
Unsecured revolving credit facilities (2)
5.9

 
4.0

 
2.0

Unsecured term loans
10.6

 
10.7

 
8.3

Mortgage loans and other
3.9

 
4.0

 
5.2

Total
100.0
%
 
100.0
%
 
100.0
%
Weighted average interest rate at end of period:
 
 
 
 
 
Fixed rate:
 
 
 
 
 
Senior notes and other
3.7
%
 
3.7
%
 
3.8
%
Mortgage loans and other (1)
6.0

 
6.0

 
6.1

Variable rate:
 
 
 
 
 
Unsecured revolving credit facilities (2)
1.3

 
1.2

 
1.4

Unsecured term loans
1.3

 
1.3

 
1.6

Mortgage loans and other
1.7

 
1.7

 
1.9

Total
3.7

 
3.8

 
4.1

 
 
 
 
 
(1)
Borrowings as of December 31, 2013 exclude $13.1 million of debt related to a real estate asset classified as held for sale as of December 31, 2013 and sold in March 2014. Borrowings as of March 31, 2013 exclude $23.0 million of debt related to a real estate asset classified as held for sale as of March 31, 2013, which matured in September 2013. Both amounts were included in accounts payable and other liabilities on our Consolidated Balance Sheets.
(2)
Subsequent to March 31, 2014, we repaid substantially all amounts outstanding under our unsecured revolving credit facility.
The variable rate debt in the table above reflects, in part, the effect of $153.7 million notional amount of interest rate swaps with a maturity of March 21, 2016 that effectively convert fixed rate debt to variable rate debt. In addition, the fixed rate debt in the table above reflects, in part, the effect of $59.6 million notional amount of interest rate swaps with maturities ranging from March 2, 2015 to April 1, 2019, in each case that effectively convert variable rate debt to fixed rate debt. The increase in our outstanding variable rate debt at March 31, 2014 compared to December 31, 2013 is primarily attributable to additional borrowings under our unsecured revolving credit facility. Pursuant to the terms of certain leases with one of our tenants, if interest rates increase on certain variable rate debt that we have totaling $80.0 million as of March 31, 2014, our tenant is required to pay us additional rent (on a dollar-for-dollar basis) in an amount equal to the increase in interest expense resulting from the increased interest rates. Therefore, the increase in interest expense related to this debt is equally offset by an increase in additional rent due to us from the tenant. Assuming a 100 basis point increase in the weighted average interest rate related to our variable rate debt and assuming no change in our variable rate debt outstanding as of March 31, 2014, interest expense for 2014 would increase by approximately $19.2 million, or $0.06 per diluted common share. The fair value of our fixed and variable rate debt is based on current interest rates at which we could obtain similar borrowings.

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As of March 31, 2014 and December 31, 2013, our joint venture and operating partners’ aggregate share of total debt was $172.5 million and $174.5 million, respectively, with respect to certain properties we owned through consolidated joint ventures and an operating partnership. Total debt does not include our portion of debt related to investments in unconsolidated entities, which was $88.7 million and $89.3 million as of March 31, 2014 and December 31, 2013, respectively.
As of March 31, 2014 and December 31, 2013, the fair value of our secured and unsecured loans receivable, based on our estimates of currently prevailing rates for comparable loans, was $395.1 million and $395.7 million, respectively.
We are subject to fluctuations in certain foreign currency exchange rates that may, from time to time, affect our financial condition and results of operations. Based solely on our operating results for the three months ended March 31, 2014, if the value of the U.S. dollar relative to these foreign currencies were to increase or decrease by 10%, our NOI would have decreased or increased, as applicable, by less than approximately $0.3 million and less than $0.4 million, respectively, and net income would have decreased or increased, as applicable, each by less than $0.1 million, for the three-month period. We currently have in place, and may in the future pursue, various hedging arrangements or borrowings in local currencies (including under our unsecured credit facility) to mitigate the impact of foreign currency exchange rate fluctuations, depending on our assessment of the interest rate and foreign currency exchange rate environments and the costs and risks of such strategies.  Nevertheless, we cannot assure you that any such fluctuations will not have a Material Adverse Effect on us.
ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2014. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of March 31, 2014, at the reasonable assurance level.
Internal Control Over Financial Reporting
During the first quarter of 2014, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION
ITEM 1.    LEGAL PROCEEDINGS
The information contained in “Note 11—Litigation” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1. Except as set forth therein, there have been no new material legal proceedings and no material developments in the legal proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2013.
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The table below summarizes repurchases of our common stock made during the quarter ended March 31, 2014:
 
Number of Shares
Repurchased (1)
 
Average Price
Per Share
January 1 through January 31
52,105

 
$
61.33

February 1 through February 28
1,553

 
61.49

March 1 through March 31
9,713

 
60.50

 
 
 
 
 
(1)
Repurchases represent shares withheld to pay taxes on the vesting of restricted stock or restricted stock units granted to employees under our 2006 Incentive Plan or 2012 Incentive Plan or under the Nationwide Health Properties, Inc. (“NHP”) 2005 Performance Incentive Plan and assumed by us in connection with our acquisition of NHP. The value of the shares withheld is the closing price of our common stock on the date the vesting or exercise occurred (or, if not a trading day, the immediately preceding trading day) or the fair market value of our common stock at the time of exercise, as the case may be.

49

ITEM 6.    EXHIBITS

 
 
 
Exhibit
Number
Description of Document
Location of Document
4.1

Third Supplemental Indenture dated as of April 17, 2014 by and among Ventas Realty, Limited Partnership, as Issuer, Ventas, Inc., as Guarantor, and U.S. Bank National Association, as Trustee.
Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K, filed on April 17, 2014.
4.2

Fourth Supplemental Indenture dated as of April 17, 2014 by and among Ventas, Realty, Limited Partnership, as Issuer, Ventas, Inc., as Guarantor, and U.S. Bank National Association, as Trustee.
Incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K, filed on April 17, 2014.
12.1

Statement Regarding Computation of Ratios of Earnings to Fixed Charges.
Filed herewith.
31.1

Certification of Debra A. Cafaro, Chairman and Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
Filed herewith.
31.2

Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
Filed herewith.
32.1

Certification of Debra A. Cafaro, Chairman and Chief Executive Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
Filed herewith.
32.2

Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
Filed herewith.
101

Interactive Data File.
Filed herewith.

50

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 28, 2014

 
VENTAS, INC.
 
 
 
 
By:
/s/ DEBRA A. CAFARO
 
 
Debra A. Cafaro
Chairman and
Chief Executive Officer
 
 
 
 
By:
/s/ RICHARD A. SCHWEINHART
 
 
Richard A. Schweinhart
Executive Vice President and
Chief Financial Officer

51

EXHIBIT INDEX

 
 
 
Exhibit
Number
Description of Document
Location of Document
4.1

Third Supplemental Indenture dated as of April 17, 2014 by and among Ventas Realty, Limited Partnership, as Issuer, Ventas, Inc., as Guarantor, and U.S. Bank National Association, as Trustee.
Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K, filed on April 17, 2014.
4.2

Fourth Supplemental Indenture dated as of April 17, 2014 by and among Ventas, Realty, Limited Partnership, as Issuer, Ventas, Inc., as Guarantor, and U.S. Bank National Association, as Trustee.
Incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K, filed on April 17, 2014.
12.1

Statement Regarding Computation of Ratios of Earnings to Fixed Charges.
Filed herewith.
31.1

Certification of Debra A. Cafaro, Chairman and Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
Filed herewith.
31.2

Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
Filed herewith.
32.1

Certification of Debra A. Cafaro, Chairman and Chief Executive Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
Filed herewith.
32.2

Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
Filed herewith.
101

Interactive Data File.
Filed herewith.

52