SRZ: Ventas Q4 Earnings Report

Ventas has reported the Q4 results.. We are not trying to gauge Ventas but learning from it and its impact to Sunrise (SRZ) as Sunrise is one of the largest chunk of Ventas properties.

1. Dilution of shares from 123 million in 2007 to 139 million in 2008 ie 9.4% increase in equity.
(This is pretty expensive.. cause on a long term basis equity is the most expensive form of funding as dividents are given for the life of the equity)

2. Normalized FFO (Funds from Operations) has increased to 2.74 from 2.69. An increase of 2%.
Assuming FFO as Cash flows from operations it shows an increase in cash flows. One thing to keep in mind is "Normalized". There are a multiple changes that happened last year.
- sold properties.
- re-negotiated debt.
- Issued additional equity.
- etc etc..
So its not really apples to apples as you have sold properties and you have made money from the sale but the operating income from the properties is lost.. you have also issued additional equity and paid of debt at a profit..so some magical formula is used to make an apple to orange look like an apple to apple comparison. So there is some merit in the increase in normalized FFO but its not a true comparison.

A good understanding of the normalization trick is here..
Fourth quarter 2008 normalized FFO increased eight percent to $95.0 million, from $87.7 million in the fourth quarter of 2007. Normalized FFO per diluted common share was stable at $0.66 for both periods.
This basically shows that an 8% increase in revenue is equal to 0% increase in EPS.
- Normalization in FFO did not take into consideration the increase in equity.
- Equity increase has been an expensive proposition as the increase in earnings have actually diluted by 8% going forward.

Thats why Stock options are really a very good way to fleece the company of the earnings and pay the management.. (its cheaper to give bonuses in cash from the profit!!)
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NAREIT FFO for the year ended December 31, 2008 increased ten percent to $416.0 million, or $2.97 per diluted common share, from $377.7 million, or $3.07 per diluted common share, for the comparable 2007 period. So Actually National Association of Real Estate Investment Trusts standards are much tougher and according to these standards Ventas had a decrease in earnings from EPS=3.07USD (in 2007) to EPS=2.97USD( 2008)

The decrease in NAREIT FFO per diluted common share is principally due to higher weighted average diluted shares outstanding in 2008.

Interpretation: 10% increase in FFO to 416 million as compared to 377.7 million in 2007 but the earnings per share is down at USD 2.97 per share instead of USD 3.07 per share according to NAREIT earning calculation standards due to dilution of equity and other factors..
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For Sunrise portfolio:

Lower earnings due to the following:
1. Exchange rate fluctuations resulted in lower earnings (can be ignored)
2. Lower occupancy as compared to 2007
ie 300,000 less earnings from the 79 communities owned by Ventas and managed by Sunrise.

For 72 communities that were already stabilized there was a decrease in earnings by 3.2 million
29.4 million (2008) verses 32.6 million(2007) 9.8% decline in earnings or 6.4% decline in earnings (if you consider the 1.1 million exchange rate loss as an exception to the calculation)
Average Daily rates declined by 2% and Occupancy also declined by 2%

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Stabilized/Lease up communities:
Average occupancy increased by 5% in 2008 from 58.2%(Q3 2007) to 63.7% (Q4 2008)
One of the communities has been reclassified as Stabilized.

But what does stabilized mean?? if average occupancy is 63.7% assuming stabilized is 80% occupancy .. then one community is at 80% occupancy and the other community is at 46% occupancy.. I guess SRZ is off the hook once the community is termed as stabilized!! (just my thought)
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Conclusions: Times are tough and Ventas is seeing that SRZ communities had 2% decrease in occupancy and 2% decrease in daily rates..

All Ventas properties are managed by Sunrise.. Its good to know that a Ventas quaterly report talks so much about SRZ cause it clearly shows the brand of SRZ in the assisted living space. I would say Hip Hip Hurray!! for SRZ.
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The link to the Q4 report is here