| VENTAS INC ITEM 1A Risk Factors Our business, operations and financial condition are subject to various risks |
| However, this section does not describe all risks applicable to us, our industry or our business, and it is intended only as a summary of certain material factors |
| If any of the following risks actually occur, we could be materially adversely affected |
| We have grouped these risk factors into three general categories: • risks arising from our business; • risks arising from our capital structure; and • risks arising from our status as a REIT Risks Arising from Our Business We are dependent on Kindred and Brookdale Senior Living; Kindred’s or Brookdale Senior Living’s inability or unwillingness to satisfy its obligations under its agreements with us could significantly harm us and our ability to service our indebtedness and other obligations and to make distributions to our stockholders as required to continue to qualify as a REIT We are dependent on Kindred and Brookdale Senior Living in a number of ways: • we lease a substantial portion of our properties to Kindred under the Kindred Master Leases, and therefore Kindred was the source of a significant majority of our total revenues in 2005 and 2004 and continues to be a majority source of our revenues; • as a result of the Provident acquisition, subsidiaries of Brookdale Senior Living, Brookdale and Alterra, the operators of the Provident properties, now account for a significant portion of our revenues; and 25 ______________________________________________________________________ [46]Table of Contents • since the Kindred Master Leases and our leases with Brookdale and Alterra are triple-net leases, we depend on Kindred, Brookdale and Alterra to pay insurance, taxes, utilities and maintenance and repair expenses required in connection with the leased properties |
| We cannot assure you that Kindred or Brookdale Senior Living will have sufficient assets, income, access to financing and insurance coverage to enable it to satisfy its obligations under its agreements with us |
| In addition, any failure by Kindred or Brookdale Senior Living to effectively conduct its operations could have a material adverse effect on its business reputation or on its ability to enlist and maintain patients in its facilities |
| Any inability or unwillingness by Kindred or Brookdale Senior Living to satisfy its obligations under its agreements with us could have a Material Adverse Effect on us |
| We may have to find another lessee/operator for the properties covered by one or more of the Kindred Master Leases or the leases with Brookdale, Alterra or our other operators upon the expiration of the terms of the applicable lease or upon a default by Kindred, Brookdale, Alterra or our other operators |
| We cannot assure you that we will be able to locate another suitable lessee/operator or, if we are successful in locating such an operator, that the rental payments from the new operator would not be significantly less than the existing rental payments |
| Our ability to locate another suitable lessee/operator may be significantly delayed or limited by various state licensing, receivership, CON or other laws, as well as by Medicare and Medicaid change-of-ownership rules |
| In addition, we may also incur substantial additional expenses in connection with any such licensing, receivership or change-of-ownership proceedings |
| Such delays, limitations and expenses could materially delay or impact our ability to collect rent, to obtain possession of leased properties or otherwise to exercise remedies for tenant default and could have a Material Adverse Effect on us |
| We may encounter certain risks when implementing our business strategy to pursue investments in, and/or acquisitions or development of, additional healthcare-related and/or seniors housing assets |
| We intend to continue to pursue investments in, and/or acquisitions or development of, additional healthcare-related and/or seniors housing assets domestically and internationally, subject to the contractual restrictions contained in our revolving credit facility and the indentures governing our outstanding senior notes |
| Investments in and acquisitions of these properties entail general investment risks associated with any real estate investment, including risks that the investment will fail to perform in accordance with expectations, the estimates of the cost of improvements necessary for acquired properties will prove inaccurate or the lessee/operator will fail to meet performance expectations |
| In addition, investments in and acquisitions of properties outside the United States would subject us to legal, economic and market risks associated with operating in foreign countries, such as currency and tax risks |
| If we pursue new development projects, these projects would be subject to numerous risks, including risks of construction delays or cost overruns that may increase project costs, new project commencement risks such as receipt of zoning, occupancy and other required governmental approvals and permits and the risk of incurring development costs in connection with projects that are not pursued to completion |
| In addition, we may borrow to finance any investments in, and/or acquisitions or development of, healthcare-related, seniors housing and/ or other properties, which would increase our leverage |
| We compete for investment or acquisition opportunities with entities that have substantially greater financial resources than we do |
| Our ability to compete successfully for these opportunities is affected by many factors, including our cost of obtaining debt and equity capital at rates comparable to or better than our competitors |
| Competition generally may reduce the number of suitable investment or acquisition opportunities available to us and increase the bargaining power of property owners seeking to sell, thereby impeding our investment, acquisition or development activities |
| See “Business—Competition” included in Item 1 of this Annual Report on Form 10-K 26 ______________________________________________________________________ [47]Table of Contents Even if we are successful at identifying and competing for investment or acquisition opportunities, these opportunities involve a number of risks |
| These risks include diversion of management’s attention, the risk that the value of the properties or businesses we invest in or acquire could decrease substantially after such investment or acquisition and the risk that we will be unable to accurately assess the value of properties or businesses that are not of the type we currently own, some or all of which could have a Material Adverse Effect on us |
| Additionally, if we are successful in continuing to implement our business strategy to pursue investments in, and/or acquisitions or development of, additional healthcare-related and/or seniors housing assets or businesses, we intend to increase the number of operators of our properties and, potentially, our business segments |
| We cannot assure you that we will have the capabilities to successfully monitor and manage a portfolio of properties with a growing number of operators and/or manage such businesses |
| Our investments are concentrated in healthcare-related and seniors housing properties, making us more vulnerable economically than if our investments were diversified |
| We invest primarily in real estate—in particular, healthcare-related and seniors housing properties |
| Accordingly, we are exposed to the risks inherent in concentrating investments in real estate, and these risks become even greater due to the fact that all of our investments are in properties used in the healthcare or seniors housing industries |
| A downturn in the real estate industry could adversely affect the value of our properties |
| A downturn in the healthcare or seniors housing industries could negatively impact our operators’ ability to make rental payments to us, which, in turn, could have a Material Adverse Effect on us |
| Furthermore, the healthcare industry is highly regulated, and changes in government regulation and reimbursement in the past have had material adverse consequences on the industry in general, which may not even have been contemplated by lawmakers and regulators |
| We cannot assure you that future changes in government regulation of healthcare will not have a material adverse effect on the healthcare industry, including our lessees/operators |
| Our ability to invest in non-healthcare, non-healthcare-related or non-seniors housing properties is restricted by the terms of our revolving credit facility, so these adverse effects may be more pronounced than if we diversified our investments outside of real estate or outside of healthcare and seniors housing |
| Our tenants, including Kindred, may be adversely affected by increasing healthcare regulation and enforcement |
| We believe that the regulatory environment surrounding the long-term healthcare industry has intensified both in the amount and type of regulations and in the efforts to enforce those regulations |
| This is particularly true for large for-profit, multi-facility providers like Kindred |
| The extensive federal, state and local laws and regulations affecting the healthcare industry include, but are not limited to, laws and regulations relating to licensure, conduct of operations, ownership of facilities, addition of facilities and equipment, allowable costs, services, prices for services, quality of care, patient rights, fraudulent or abusive behavior, and financial and other arrangements which may be entered into by healthcare providers |
| Federal and state governments have intensified enforcement policies, resulting in a significant increase in the number of inspections, citations of regulatory deficiencies and other regulatory sanctions, including terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, civil monetary penalties and even criminal penalties |
| See “Governmental Regulation—Healthcare Regulation” included in Item 1 of this Annual Report on Form 10-K If Kindred or our other tenants and operators fail to comply with the extensive laws, regulations and other requirements applicable to their businesses, they could become ineligible to receive reimbursement from governmental and private third-party payor programs, suffer civil and/or criminal penalties and/or be required to make significant changes to their operations |
| Kindred and our other tenants also could be forced to expend 27 ______________________________________________________________________ [48]Table of Contents considerable resources responding to an investigation or other enforcement action under applicable laws or regulations |
| In addition, as part of a settlement agreement Kindred entered into with the federal government, Kindred agreed to comply with the terms of a corporate integrity agreement |
| Kindred could incur additional expenses in complying with the corporate integrity agreement, and any failure to comply with the corporate integrity agreement could have a material adverse effect on its results of operations, financial condition and its ability to make rental payments to us, which, in turn, could have a Material Adverse Effect on us |
| We are unable to predict the future course of federal, state and local regulation or legislation, including the Medicare and Medicaid statutes and regulations |
| Changes in the regulatory framework could have a material adverse effect on Kindred and our other operators, which, in turn, could have a Material Adverse Effect on us |
| Changes in the reimbursement rates or methods of payment from third-party payors, including the Medicare and Medicaid programs, could have a material adverse effect on certain of our tenants |
| Kindred and certain of our other tenants and operators rely on reimbursement from third-party payors, including the Medicare and Medicaid programs, for substantially all of their revenues |
| There continue to be various federal and state legislative and regulatory proposals to implement cost-containment measures that limit payments to healthcare providers, such as the proposed rule issued by CMS on January 19, 2006 updating LTAC PPS payment rates for the 2007 rate year |
| See “Governmental Regulation—Healthcare Regulation” included in Item 1 of this Annual Report on Form 10-K In addition, private third-party payors have continued their efforts to control healthcare costs |
| We cannot assure you that adequate reimbursement levels will be available for services to be provided by Kindred and other tenants which are currently being reimbursed by Medicare, Medicaid or private payors |
| Significant limits by governmental and private third-party payors on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on the liquidity, financial condition and results of operations of Kindred and certain of our other operators and tenants, which, in turn, could have a Material Adverse Effect on us |
| Significant legal actions could subject our operators to increased operating costs and substantial uninsured liabilities, which could materially adversely affect our operators’ liquidity, financial condition and results of operation |
| Although claims and costs of professional liability insurance seem to be growing at a slower pace, our skilled nursing facility operators have experienced substantial increases in both the number and size of professional liability claims in recent years |
| In addition to large compensatory claims, plaintiffs’ attorneys continue to seek significant punitive damages and attorneys’ fees |
| Due to the high level in the number and severity of professional liability claims against healthcare providers, the availability of professional liability insurance has been severely restricted and the premiums on such insurance coverage have increased dramatically |
| If our operators are unable to maintain adequate insurance coverage or are required to pay punitive damages, they may be exposed to substantial liabilities |
| Kindred insures its professional liability risks in part through a wholly-owned, limited purpose insurance company |
| The limited purpose insurance company insures initial losses up to specified coverage levels per occurrence with no aggregate coverage limit |
| Coverage for losses in excess of those per occurrence levels is maintained through unaffiliated commercial insurance carriers up to an aggregate limit |
| The limited purpose insurance company then insures all claims in excess of the aggregate limit for the unaffiliated commercial insurance carriers |
| Kindred maintains general liability insurance and professional malpractice liability insurance in amounts and with deductibles which Kindred management has indicated that it believes are sufficient for its operations |
| 28 ______________________________________________________________________ [49]Table of Contents Operators that insure their professional liability risks through their own captive limited purpose entities generally estimate the future cost of professional liability through actuarial studies which rely primarily on historical data |
| However, due to the increase in the number and severity of professional claims against healthcare providers, these actuarial studies may underestimate the future cost of claims, and we cannot assure you that these operators’ reserves for future claims will be adequate to cover the actual cost of those claims |
| If the actual cost of claims is significantly higher than the operators’ reserves, it could have a material adverse effect on the liquidity, financial condition and results of operation of our operators and their ability to make rental payments to us, which, in turn, could have a Material Adverse Effect on us |
| Our operators may be sued under a federal whistleblower statute |
| Our operators who engage in business with the federal government may be sued under a federal whistleblower statute designed to combat fraud and abuse in the healthcare industry |
| See “Governmental Regulation—Healthcare Regulation” included in Item 1 of this Annual Report on Form 10-K These lawsuits can involve significant monetary damages and award bounties to private plaintiffs who successfully bring these suits |
| If any of these lawsuits were to be brought against our operators, such suits combined with increased operating costs and substantial uninsured liabilities could have a material adverse effect on the liquidity, financial condition and results of operation of our operators and their ability to make rental payments to us, which, in turn, could have a Material Adverse Effect on us |
| If any of our properties are found to be contaminated, or if we become involved in any environmental disputes, we could incur substantial liabilities and costs |
| Under federal and state environmental laws and regulations, a current or former owner of real property may be liable for costs related to the investigation, removal and remediation of hazardous or toxic substances or petroleum that are released from or are present at or under, or that are disposed of in connection with such property |
| Owners of real property may also face other environmental liabilities, including government fines and penalties imposed by regulatory authorities and damages for injuries to persons, property or natural resources |
| Environmental laws and regulations often impose liability without regard to whether the owner was aware of, or was responsible for, the presence, release or disposal of hazardous or toxic substances or petroleum |
| In certain circumstances, environmental liability may result from the activities of a current or former operator of the property |
| Although we are generally indemnified by the current operators of our properties for contamination caused by such operators, these indemnities may not adequately cover all environmental costs |
| See “Governmental Regulation—Environmental Regulation” included in Item 1 of this Annual Report on Form 10-K We have assumed substantially all of Provident’s liabilities, including contingent liabilities; if these liabilities are greater than expected, or if there are unknown Provident obligations, our business could be materially adversely affected |
| As a result of the Provident acquisition, we have assumed substantially all of Provident’s liabilities, including contingent liabilities to which Provident succeeded when it acquired the ownership interests in the properties that are currently leased to Brookdale and Alterra |
| We may learn additional information about Provident’s business and liabilities that adversely affects us, such as: • liabilities for clean-up or remediation of undisclosed environmental conditions; • unasserted claims of vendors or other persons dealing with Provident or the former property owners; • liabilities, whether or not incurred in the ordinary course of business, relating to periods prior to the Provident acquisition, including periods prior to the acquisition of the Brookdale and Alterra properties by Provident; • claims for indemnification by general partners, directors, officers and others indemnified by Provident or the former property owners; and 29 ______________________________________________________________________ [50]Table of Contents • liabilities for taxes relating to periods prior to the Provident acquisition, including taxes associated with the acquisition or prior ownership of the Brookdale and Alterra properties |
| As a result, we cannot assure you that the Provident acquisition will be successful or will not, in fact, harm our business |
| Among other things, if Provident’s liabilities are greater than expected, or if there are obligations of Provident of which we were not aware at the time of completion of the acquisition, or if the Provident acquisition fails to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, it could have a Material Adverse Effect on us |
| Risks Arising from Our Capital Structure We may become more leveraged |
| As of December 31, 2005, we had approximately dlra1dtta8 billion of indebtedness |
| Our revolving credit facility and the indentures governing our outstanding senior notes permit us to incur substantial additional debt, and we may borrow additional funds, which may include secured borrowings |
| A high level of indebtedness may have the following consequences: • a substantial portion of our cash flow from operations must be dedicated to the payment of debt service, thus reducing the funds available for our business strategy and for distributions to stockholders; • potential limits on our ability to adjust rapidly to changing market conditions and vulnerability in the event of a downturn in general economic conditions or in the real estate and/or healthcare industries; • a potential impairment of our ability to obtain additional financing for our business strategy; and • a potential downgrade in the rating of our debt securities by one or more rating agencies which could have the effect of, among other things, increasing our cost of borrowing |
| We may be unable to raise additional capital necessary to continue to implement our business plan and to meet our debt payments |
| In order to continue to implement our business plan and to meet our debt payments, we may need to raise additional capital |
| Our ability to incur additional indebtedness is restricted by the terms of our revolving credit facility and the indentures governing our outstanding senior notes |
| In addition, adverse economic conditions could cause the terms on which we can obtain additional borrowings to become unfavorable |
| In such circumstances, we may be required to raise additional equity in the capital markets or liquidate one or more investments in properties at times that may not permit realization of the maximum return on the investments and that could result in adverse tax consequences to us |
| In addition, certain healthcare regulations may constrain our ability to sell assets |
| We cannot assure you that we will be able to meet our debt service obligations, and the failure to do so could have a Material Adverse Effect on us |
| We have now, and may have in the future, exposure to floating interest rates, which can have the effect of reducing our profitability |
| We receive revenue primarily by leasing our assets under long-term triple-net leases in which the rental rate is generally fixed with annual rent escalations, subject to certain limitations |
| Certain of our debt obligations are floating rate obligations with interest rate and related payments that vary with the movement of LIBOR or other indexes |
| The generally fixed rate nature of our revenues and the variable rate nature of certain of our obligations create interest rate risk and can have the effect of reducing our profitability or making our lease and other revenue insufficient to meet our obligations |
| We are not limited in the amount of floating rate debt we may incur |
| 30 ______________________________________________________________________ [51]Table of Contents Risks Arising from Our Status as a REIT Loss of our status as a REIT would have significant adverse consequences to us and the value of our common stock |
| If we lose our status as a REIT, we will face serious tax consequences that will substantially reduce the funds available for satisfying our obligations and for distribution to our stockholders for each of the years involved because: • we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates; • we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and • unless we are entitled to relief under statutory provisions, we could not elect to be subject to tax as a REIT for four taxable years following the year during which we were disqualified |
| In addition, if we fail to qualify as a REIT, all distributions to stockholders would continue to be treated as dividends to the extent of our current and accumulated earning and profits, although corporate stockholders may be eligible for the dividends received deduction and individual stockholders may be eligible for taxation at the rates generally applicable to long-term capital gains (currently at a maximum rate of fifteen percent) with respect to distributions |
| We would no longer be required to pay dividends to maintain REIT status |
| As a result of all these factors, our failure to qualify as a REIT also could impair our ability to implement our business strategy and would adversely affect the value of our common stock |
| Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations |
| The determination of various factual matters and circumstances not entirely within our control may affect our ability to remain qualified as a REIT In addition, new legislation, regulations, administrative interpretations or court decisions may adversely affect our investors or our ability to remain qualified as a REIT for tax purposes |
| Although we believe that we qualify as a REIT, we cannot assure you that we will continue to qualify or remain qualified as a REIT for tax purposes |
| See “Certain US Federal Income Tax Considerations—Federal Income Taxation of Ventas” and “—Requirements for Qualification as a REIT” included in Item 1 of this Annual Report on Form 10-K The 90 percent distribution requirement will decrease our liquidity and may limit our ability to engage in otherwise beneficial transactions |
| To comply with the 90 percent distribution requirement applicable to REITs and to avoid the nondeductible excise tax, we must make distributions to our stockholders |
| See “Certain US Federal Income Tax Considerations—Requirements for Qualification as a REIT—Annual Distribution Requirements” included in Item 1 of this Annual Report on Form 10-K The indentures governing our outstanding senior notes permit us to make annual distributions to our stockholders in an amount equal to the minimum amount necessary to maintain our REIT status so long as the ratio of our Debt to Adjusted Total Assets (as each term is defined in the indentures) does not exceed 60 percent and to make additional distributions if we pass certain other financial tests |
| However, distributions may limit our ability to rely upon rental payments from our properties or subsequently acquired properties to finance investments, acquisitions or new developments |
| Although we anticipate that we generally will have sufficient cash or liquid assets to enable us to satisfy the REIT distribution requirement, it is possible that, from time to time, we may not have sufficient cash or other liquid assets to meet the 90 percent distribution requirement or we may decide to retain cash or distribute such greater amount as may be necessary to avoid income and excise taxation |
| This may be due to the timing differences between the actual receipt of income and actual payment of deductible expenses, on the one hand, 31 ______________________________________________________________________ [52]Table of Contents and the inclusion of that income and deduction of those expenses in arriving at our taxable income, on the other hand |
| In addition, non-deductible expenses such as principal amortization or repayments or capital expenditures in excess of non-cash deductions also may cause us to fail to have sufficient cash or liquid assets to enable us to satisfy the 90 percent distribution requirement |
| In the event that timing differences occur or we deem it appropriate to retain cash, we may borrow funds, issue additional equity securities (although we cannot assure you that we will be able to do so), pay taxable stock dividends, if possible, distribute other property or securities or engage in a transaction intended to enable us to meet the REIT distribution requirements |
| This may require us to raise additional capital to meet our obligations; however, see “—Risks Arising from Our Capital Structure—We may be unable to raise additional capital necessary to continue to implement our business plan and to meet our debt payments |
| ” The terms of our revolving credit facility and the indentures governing our outstanding senior notes restrict our ability to engage in some of these transactions |
| We may still be subject to corporate level taxes |
| Following our REIT election, we are considered to be a former C corporation for income tax purposes |
| Therefore, we remain potentially subject to corporate level taxes for any Kindred asset dispositions occurring between January 1, 1999 and December 31, 2008 |
| Also, as a consequence of the Provident acquisition, we remain potentially subject to corporate level taxes if we dispose of any of the Brookdale properties before November 2014 |