Healthcare, Seniors Housing and Research to Remain Strong for CRE, Ventas CEO Says

As the head of Ventas for nearly two decades, Debra Cafaro has led her company to its position as one of the "Big Three" healthcare real estate investment trusts (REITs) in the United States. She's also the longest-serving female CEO among Standard & Poor 500 firms.

Ventas now owns nearly 1,300 healthcare properties − and it's made moves to expand to other areas. With DLA Piper's Global Real Estate Summit just weeks away, Cafaro provided some perspective on Ventas's growth and her outlook for the months and years ahead.

Q: Let's start big picture. Are you bullish or bearish about the CRE market over the next 12 months – and why? Are there any specific disruptive forces that you've got your eye on?

DC: Ventas continues to be bullish on the long-term opportunity and value proposition offered by the real estate market for senior housing, healthcare and research. Our high-quality portfolio has never been more valuable than it is today as equity flows continue to accelerate for our assets.

This capital is attracted by our rapidly aging population that has immense wealth and spending power and increasing care needs. More than 10,000 baby boomers are turning 65 and Medicare eligible daily, and 73 percent of the US healthcare spending is coming from the 50+ population. This means growing, powerful and sustainable demand that will provide superior risk-adjusted returns and make our business resilient. Our leading diversified portfolio, consistent strategy and best-in-class tenured team give us confidence that we will continue to capitalize on our strong position and enjoy enduring advantage and value creation.

Q: In 2014, you said one of the keys to your company's success was policy from Washington – stemming from the Affordable Care Act. Now that the law's future is in question, how have you adjusted your strategy?

DC: Ventas has been consistent in our strategy of producing reliable cash flows and dividend growth for our stakeholders from a diversified portfolio that is increasingly private pay and depends primarily on the powerful demand created by an aging population. Indeed, 94 percent of Ventas's property revenues come from private pay sources. That said, a stable predictable healthcare policy that rationally addresses how to manage and pay for the healthcare needs of our population would be an incremental positive for our business. Regardless of the policy debate in Washington, our strategy is to remain financially strong and liquid, retain a cohesive, expert team, maintain a high-quality diverse asset portfolio, continue to drive cash flow and efficiency in our enterprise, allocate capital wisely, stay nimble to capture opportunities and always seek to elevate our enterprise. That is how we've delivered 25 percent total returns to shareholders for almost 20 years.

Q: Over the past year, you've made investments in the life sciences arena, most recently the South Street Landing acquisition. Can you explain your thinking on these moves?

DC: We are excited to be invested with the leading research universities in the nation by owning labs and innovation centers where cutting-edge research is conducted to cure and treat illness and disease. We've already invested about US$2 billion in this segment, which represents Ventas's number one capital allocation priority. Currently, institutional life science properties generate about 6 percent of our net operating income. This high-quality business consists of attractive real estate with long-term leases, strong occupancy and affiliations with highly rated institutional-quality tenants including Yale, Duke, Brown, UPenn Medicine, Wake Forest and Washington University in St. Louis.

South Street Landing is an excellent example. With Brown University and the University of Rhode Island leasing 100 percent of the building, this stunning historic renovation includes advanced teaching labs and simulation facilities to provide cutting-edge nursing education. It is a hub for innovation and a catalyst for additional development in the submarket.

Ventas is in the best position to assist top-tier research universities in developing attractive on-campus research, medical and technology hubs, and we look forward to partnering with other top-tier research universities to help them achieve their research missions.

Q: Your company has also made commitments to improve sustainability, including reducing electricity and natural gas consumption by 10 percent in the next 10 years. Have we reached a tipping point where such moves are viewed as both good for the environment and good for business?

DC: Environmental sustainability is good for business and good for the planet. All Ventas stakeholders recognize that being a sustainable and responsible company is essential to delivering long-term superior results. Our shareholders increasingly view sustainability as a source of competitive advantage and, in some cases, even a minimum requirement for investing. Sustainability initiatives also deliver positive financial performance because they lower operating costs and improve the efficiency of our portfolio.

Ventas is taking a systematic approach to improving our energy, water and landfill waste footprint across our portfolio, setting clear actionable ten-year targets to reduce our environmental impact from a 2013 baseline including a 10 percent reduction in energy use and greenhouse gas emissions, a 5 percent reduction in water use and a 4 percent reduction in landfill waste. We are working with our customers and partners to ensure that our combined actions support an emphasis on sustainability, and we are measuring progress by participating in certification standards including LEED® and ENERGY STAR®, as well as transparent public reporting methods such as Dow Jones Sustainability Indices, CDP and GRESB.

In addition, our focus on sustainability extends through our commitment to social responsibility that enables us to be a good employer for our workforce, an engaged neighbor within our communities and a valuable partner to our stakeholders. We intentionally recruit and develop a diverse workforce, building a team that is committed to maintaining the highest levels of ethics and integrity and is rewarded through consistent and fair wages and benefits. And as a responsible corporate citizen, we support the communities in which we operate through corporate philanthropy, employee engagement and volunteerism.

Q: Finally, you've had a remarkable run at Ventas. What has allowed you to achieve success throughout the ups and downs of the market, technology changes and increased competition?

DC: First, we are in a great market: Ventas operates at the exciting intersection of nearly 40 percent of the US economy – 20 percent real estate and 20 percent healthcare. Our sector is dynamic, growing and essential for the wellbeing of our country. We are at the early stages of incredible long-term growth based on demographic shifts in the growing population of healthcare consumers, as our asset classes become institutionally prized and more assets flow into public hands like Ventas.

Over the 20 years I've been at Ventas, we've delivered 25 percent compound annual returns to shareholders and built a strong and cohesive company that benefits from a fantastic team of skilled leaders who are committed to the company and to each other. We've had the vision in our large and dynamic market to spot trends early, execute flawlessly on new initiatives and build out high-quality platforms, like our highly valuable medical office building business, our senior housing business and our new university-based life science business. Every environment offers opportunities to thrive if you have creative strategies and a willingness to take smart risks, make an occasional counter-intuitive move, like the successful spinoff of our nursing home business, and stay financially strong.

With all the success Ventas has had, what excites me is that we are still in the early days of growth in our business, and we look forward to continuing our positive trajectory in the future.