Ventas CEO Debra Cafaro: Diversified Business Model Is Key To Success

On March 3, 2015 Chairman and CEO Debra Cafaro of $23 billion cap healthcare REIT Ventas, Inc. (NYSE: VTR) spoke at the Citi Global CEO Property Conference.Ventas owns and manages over 1,600 properties in the U.S., Canada and the U.K., comprised of ~50 percent senior living, along with skilled/post-acute nursing, medical office buildings (MOBs), hospitals and a small portfolio of loans.One of the main themes that Cafaro hammered home during her talk was the Ventas approach to achieving risk adjusted returns through diversity of product type, geography and its capital stack.

Tale Of The Tape - Past Decade

Ventas is part of a large-cap trio of healthcare sector REITs which includes: $18 billion cap HCP, Inc. (NYSE: HCP) and $26 billion cap Health Care REIT Inc. (NYSE: HCN) as its peers.Long-term investors who took a "set it and forget it," approach when it comes owning shares of these healthcare REIT also benefited from the hefty cumulative dividend payouts which boosted the total return.However, in the short run, investors should also be keenly aware that healthcare REITs -- in a similar fashion to the net-lease REIT sector -- tend to trade lower in a rising interest rate environment.

3 Slides - Ventas: At A Glance

Ventas senior housing operating portfolio (SHOP) assets can provide higher growth in a strong economy. The triple-net senior housing assets typically have leases containing contractual rent increases.In 2014 Ventas had a relatively low dividend-to-FFO payout ratio of 66 percent.

1 Slide - The Growth Opportunity

The entire healthcare REIT sector benefits from two tailwinds: 1. Demographics from an aging U.S. population; and, 2. A highly fragmented industry, with ~85 percent of assets in private hands -- often lacking access to low cost capital.

5 Key Takeaways - Citi Presentation

1. Ventas - Three Pillars:

• Low Cost of Capital - 3.6 percent Q1 2015 weighted average cost of debt.
• Invest Wisely - In addition to closing HCT acquisition in January, another $1 billion of acquisitions from October through February.
• Manage Assets Productively - 3.9 percent same store NOI growth 2014 Y/Y.

2. Rising Interest Rate Environment:Cafaro emphasized that all commercial real estate assets have some interest rate sensitivity:

• Economic Cycles - Ventas has proven it can perform in all capital markets and reimbursement cycles.
• Diversified Model - "NOI from the operating side of the business can rise with in a robust economy," while triple-net leases contribute to CAGR through contracted rent bumps.

3. Government Healthcare Reimbursement:

• The Affordable Care Act - Obamacare has been "a mild net positive."
• Medicare - Post-acute reimbursements have risen the past few years.
• Federal Exchanges - Supreme Court to rule on federal subsidies for 37 state exchanges; Cafaro has seen reimbursements evolve for 16 years; in the event the ruling went against the present ACA formula there are many ways that subsidies could be structured.
• Outside The U.S. - Ventas will look at both private and publicly funded assets; "government pay" in the U.K. could end up being a better risk adjusted cash flow, ultimately providing lower cap-rates.

4. HCT Acquisition:

• A Simple Story - Strategically consistent assets at a fair/market price.
• MOB's - Newer assets, 97 percent occupied, acquired at "fantastic cap-rate." MOB's are vertically integrated and provide opportunities to internalize management.
• Scale - Opportunity for Ventas "to improve metrics and drive performance" through purchasing and best practices.
• Market Perspective - Ventas sees deals of every type which help to give a better estimate of market cap-rates. In the case of HCT, events have shown the cap-rate to have been "reasonable and attractive."

5. Who Needs Innings?Cafaro chose not to swing at a baseball metaphor, but certainly didn't miss an opportunity to share her beliefs regarding the future "institutionalization" of healthcare assets:  The future of health care real estate is in early stages of a long-term secular trend; Private assets will be trading into public hands; These assets "will flow to the most efficient owners over time."