Ventas' CEO Presents at 2013 Citi Global Property CEO Conference (Transcript)

| About: Ventas Inc. (VTR)

Ventas Inc. (NYSE:VTR)

March 05, 2013 7:30 am ET

Executives

Debra A. Cafaro - Chairman, Chief Executive Officer, Member of Executive Committee and Member of Investment Committee

Analysts

Michael Bilerman - Citigroup Inc, Research Division

Quentin Velleley - Citigroup Inc, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Good morning, and welcome to day 2 at the 7:30 a.m. session at Citi's 2013 Global Property CEO Conference. I'm Michael Bilerman. I'm here with Quentin Velleley. This session is for investing clients only, and if media or other individuals are on the line, please disconnect now. We are extraordinarily pleased to have with us Ventas and CEO Debbie Cafaro. Debbie, let me turn it over to you to introduce your team and then provide a couple of minutes of opening remarks, and then we'll turn it over to Q&A. Thank you.

Debra A. Cafaro

Good morning, Michael. Good morning, Quentin, and hello to our investors and other participants. We're really happy to be here at this early morning hour, and I had a wonderful time with Bob Costas last night, listening to all his good sports stories, so that was a great hit, Michael. Thank you.

Most of you know Ventas. I want to introduce a new colleague, Robert Riggs, our manager of IR. And of course, most of you know, Lori Wittman, our Head of IR and Capital Markets. So they'll be joining me this morning, answering questions.

So let's talk about, for a few minutes, just about a Ventas overview. Ventas is a leading, diverse health care REIT with about $29 billion, knocking on the door of $30 billion, enterprise value. We expect to have about $1.6 billion in NOI in 2013. We really pride ourselves on having a balanced portfolio, balanced business model among asset types, diverse tenant base, 83% private pay revenues and a diverse and balanced business model, with some triple net leases and some operating businesses. And we also are constructing the portfolio in our enterprise to deliver both growth as well as defense, and that's a very valuable commodity in what continues to be a fairly uncertain macro environment.

And we also pay a lot of attention to cash flow. We think that growing cash flows and actively managing our portfolio and actively managing risk in our enterprise, really creates value for stakeholders. And this year, in 2012, we kind of crossed a milestone, with about $1 billion in cash flow from operations.

To the point of delivering consistent, superior total returns to shareholders, I think Ventas has really, really put up some good numbers. We have 32%, 13-year compound annual returns to shareholders. We really focus every day on delivering value for shareholders. Our FFO per share has over a 10% CAGR for 10 years. And we believe our dividend is one of the important components of that total return proposition we offer to shareholders and that's grown about 8% for the last 8 years including, as we look, into 2013.

While we do all the growth focuses, we also look at balance sheet. We've maintained a very strong balance sheet, with about 31% debt-to-enterprise value at year end, and we'll continue to focus on making sure we have that balance between growth and a strong balance sheet.

And importantly, our business is really driven by demographic demand, which is necessary but not sufficient to deliver returns to shareholders. So the over-85 population is the fastest-growing segment of the U.S. population. Health care spending, even in a reform world, is expected to continue to grow. There's strong policy reasons why our businesses should experience increased utilization. And that combination of skill, strength, growth and demographic demand are excellent underpinnings of Ventas' future success.

So I'll stop there and open to Michael's questions.

Question-and-Answer Session

Michael Bilerman - Citigroup Inc, Research Division

Great. Debbie, we've been starting off everyone of these sessions with the same question to companies, which is what do you think is the most value-creating opportunity that you currently have within the company that the market is really not giving you much credit for?

Debra A. Cafaro

A value-creating opportunity?

Michael Bilerman - Citigroup Inc, Research Division

Well, I guess, yes, not necessarily just one opportunity but maybe just in -- more of general sense, what is being underappreciated that you think has a lot of value for shareholders?

Debra A. Cafaro

Well, I think the most underappreciated part of Ventas is really the Ventas team. We -- I love seeing all of you and you have the opportunity to see a small group of us on a regular basis, but investors talk about the importance of the management teams, but I'm not sure always pay as much attention to it as they should. So one of the huge strengths at Ventas is that we have a really deep team that's been at Ventas, by and large, for 10 years. And we have learned how to succeed together. And it's a team that is individually skilled, but more importantly, is skilled at working together and is very focused on shareholders and very committed to the company. And that has been a really important component of Ventas' success. We've been able to add senior level people, like Lori, over the years, and our new chief investment officer. But that is the most underappreciated aspect of Ventas that, I think, drives value for shareholders.

Michael Bilerman - Citigroup Inc, Research Division

And how -- what are some of the more recent hires that you can talk about in that area?

Debra A. Cafaro

Say that again?

Michael Bilerman - Citigroup Inc, Research Division

What are some of the more recent hires that you can talk about in that area?

Debra A. Cafaro

Well, John Cobb came as a Chief Investment Officer. Some of you know him. He has a really interesting background in that he was a health care capital provider at GE and then he actually was the CEO of a senior living company for 3 years. So he has both the operating background as well as the finance background. And all the people at Ventas, really, come from some combination of real estate health care and finance because those are the things that we really have to be excellent at. So he is one. Obviously, Todd Lillibridge joined us in 2010. He has 25 years of experience serving highly rated not-for-profit hospitals and health care systems. Lori, of course, joined us and she is well known to be a debt magnet and has really helped us with one of the other important initiatives that we continue to focus on, which is continually driving down our cost to capital, so that we can make more money for shareholders and manage our balance sheet in a sensible way. And so those are just a couple.

Michael Bilerman - Citigroup Inc, Research Division

When we were at your headquarters, I guess it was last summer, and we went through and it was extraordinarily impressive because we must have met probably about 40 different Ventas executives. We're not worried about G&A. It was -- I don't want to make it out to be that, but it was, certainly, I think, extraordinarily impressive. I think one of the things that came out of that day was being able to attack a deal from an organizational standpoint. So I wanted to know if you can share some of that because at some point the deal environment is still something that's going to be a big growth driver. You talked in your opening comments knocking on $30 billion, so I assume you want to exceed that. And part of that's going to be dependent on being able to continue to grow and put capital out accretively. So maybe you can just talk about the team's perspective of being able to do transactions and then we can know a little bit about what the opportunities are?

Debra A. Cafaro

Okay. So first of all, we have -- I talked about the drivers for Ventas' continued success which, again, is never guaranteed but it is helpful to be in a business where you have structural support for continued external growth. And at Ventas, we definitely see that. You all know, you've heard us say many times, the health care real estate market is a $1 trillion market. But more importantly than that, it is highly fragmented. All of the public REITs together can't own really more than 10% of the market. So you have that huge pie. It's fragmented. It's growing. And it's also changing. It's a very dynamic business. And you are going to continue to see consolidation in these businesses. You're going to see integration, vertical integration, maybe from the hospitals to the senior living businesses at some point in time. And so we have this dynamic business and the challenge for us and our team -- I'll get back to your question -- is to allocate capital wisely and be a little bit ahead of the curve as we decide where the good risk-adjusted returns are and then figure out how to attack those opportunities. And one of the things that, I think, is a huge competitive advantage at Ventas is we have the relationships in the business. We have these extraordinarily skilled professionals at the company. And our tax guy, I would give one example, and our General Counsel as well, I mean we sort of started this PropCo/OpCo, or they did before my time, when Vencor and Ventas separated; Vencor now being Kindred, of course. And so we have seen every different type of transaction, whether -- we completed the Sunrise REIT acquisition with management contracts in the senior living business before the much-talked about RIDEA legislation was even passed. And that is really this interdisciplinary team that comes together and knows how to solve problems and attack an investment opportunity, particularly these complex and highly structured opportunities. And so they've got the tax experience. They've got the legal experience. We've got the finance and capital markets experience and it all comes together, hopefully, to create intelligent, well-structured, disciplined investments that create value for shareholders. And I would put our team up against anyone in really sorting through some of these transactions. And honestly, that makes us a much better counterparty. People know that when they're approaching a complex transaction, we've acquired 8 companies in 8 years very successfully. They've been win-win transactions for both the buyer and the seller because, of course, deals have to work for both sides. But most importantly, people know that when we enter a transaction, we can see the whole court. We know what issues are going to come up. We can identify them. And we can solve them upfront, so that we don't get 2 or 3 months into a transaction and say, oh, we didn't realize that was an issue, and then have to go back to square one. And that has incredible value to a seller.

Michael Bilerman - Citigroup Inc, Research Division

And do you think that -- when you look at the other 2 big health care REITs, I mean, all of 3 of you have been extraordinarily active in terms of deal volume. I mean, where do you think that you have had that excess -- where you have that key -- you talked about being counterparty. I mean, how do you sort of describe or how can you value that piece where all 3 companies have grown substantially in size and ultimately price wins at some point, right?

Debra A. Cafaro

I would say that price and reliability will win and relationships, which also are important. But again, being able to say to a counterparty, we've done this 3 times before, we know how to do this. They see our track record of execution and that has a lot of value. But of course, you have to also have the lowest cost to capital so you can get those opportunities that you want and still have them be profitable for shareholders. So it's a balance.

Michael Bilerman - Citigroup Inc, Research Division

Can you talk a little bit the deal environment today in terms of what's being active in terms of which sectors and how we should think about volumes?

Debra A. Cafaro

One -- well, we said in the call that opportunities for external growth abound, and I would say that the investment opportunities in our business have been strong for at least 5 years and they continue to be very strong. And we're very lucky in that regard. One thing that we've had an advantage in terms of business model is we do have the donut that all of you see in our presentations that show the balance and diversified business model that we have. And being able to allocate capital, again, a little bit ahead of the curve, is a tremendous advantage in terms of driving value for shareholders. So while we see investment activity across hospitals, skilled nursing, senior living and medical office as well as other sectors, and so that flexibility has been, I think, an underappreciated advantage of the Ventas business model. And then again, it's our challenge and our opportunity to be able to use that flexibility wisely and in a disciplined way.

Michael Bilerman - Citigroup Inc, Research Division

We're going to have to change the donut. I don't know if I like that donut terminology. Can we go back to the tree?

Debra A. Cafaro

The tree? We've created something that -- the 3 pillars of excellence.

Quentin Velleley - Citigroup Inc, Research Division

Debbie, you just -- before, you mentioned seeking the best risk-adjusted returns. If you look at cap rates on skilled nursing facilities, arguably, cap rates hit a low 2 years ago. And so now, given all the reimbursement risk, cap rates have backed up significantly probably, so the returns are very attractive. However, on a risk -- if you look at the risk with sequestration, if you look at the risk with reimbursement risk, et cetera, is there enough return at the moment to go back in and buy skilled nursing assets? Are we there yet, or is it some time out in the future?

Debra A. Cafaro

That's an important question. I would say that we have followed a private-pay strategy over the last several years. And last year, 97% of our investments were in the private-pay area. Reimbursement, Medicare reimbursement, like economic cycles is a cycle, and we have been in a down cycle and continue to be with the sequestration of the 2% that will take effect starting April 1. Now, remember, the skilled nursing and hospital providers got almost a 2% increase in rates starting October 1 and now the

[Audio Gap]

investment because it is really exciting and interesting and I really want to talk about it, but I really want to put it in context again. If you look at the transcript when we bought NHP, which was 2 years ago, I would say we talked about and foreshadowed all of these larger forces that we've talked about in health care and senior housing. The industry is very dynamic. It is changing, whether it's managed care buying physician groups or hospitals trying to get into post-acute or senior living providers trying to create alliances with hospitals or consolidating with each other or Genesis and Sun merging, what you're seeing is a very dynamic $1 trillion market, okay? And everybody is trying to position themselves wisely for taking advantage of those changes in the market even though none of us know exactly what those changes are going to be, either from a policy standpoint or from a consolidation standpoint. And so, again, that's the opportunity, the guy who figures out how to allocate capital in a forward-thinking way intelligently with downside protection, so if you're wrong, you're not going to get crushed, is a company that's going to create value for shareholders. So in getting back -- and that's what we're spending our time on, thinking through. And again, even NHP was a step for us in getting the scale, getting the diversification, getting the cost to capital, so that we could be an active capital allocator in what is an exciting, large, changing environment. So when you look at senior housing or even skilled nursing, I mentioned Genesis and Sun consolidating, what you, I think, will see is you're going to continue to see operators may be merging with each other. You may see operators being more in post-acute, so the senior living providers are into therapy businesses, in some cases. Sometimes they have assets that kind of touch skilled nursing. And so you may see convergence among different sector types. But with Atria, we invested about $240 million in buying the Lazard funds. Most of that was really to buy back our own stock at about $61, because the Lazard funds still own 3.7 million shares of Ventas stock. But the rest of it is very, very small component, call it, 5 million to 10 million was allocated to buying 1/3 of Atria. And so -- and more -- equally important, now the management team of Atria owns the 2/3 of the company. So through this transaction, we were able to create tremendous alignment, so the -- and Atria is the fifth largest operator of senior living in the United States, and I would argue, one of the best. So now we've created tremendous optionality, I would say, for Atria as well as for ourselves at Ventas because Atria is in this great position where they can continue to grow, we continue to want to grow with them, buy assets, give them to Atria to manage. And it gives us an advantage, by the way, in the acquisition market because 1/3 of those management fees are really being recycled back to Ventas. So it effectively increases that yield. And Atria -- so Atria can grow on a stand-alone basis or Atria can go try to be a consolidator because they're in a position to do that. And they're in a very financially stable position with $30 million or so cash on the balance sheet or Atria could be a consolidatee or they could go public at some point in time. They -- so there's tremendous optionality built into the Atria investment, with the downside simply being that they continue on a stand-alone basis and we continue to grow with them, which is a fantastic downside. And then all these other options really are to the good.

Michael Bilerman - Citigroup Inc, Research Division

All right. But how do you, I guess, how do you balance if each of the REITs are sort of having ownership that may be affecting each other's assets, right? You have an entity in Sunrise that's being managed by one of your largest competitors or has an ownership stake, just the same way that if Atria grew through a consolidation and Atria's sort of managing assets that may be HCP or HCM or other REITs, how does that -- those lines are blurring substantially and so I'm just wondering how you deal with that?

Debra A. Cafaro

Well, it's going to be interesting to see how it all shakes out. Maybe at the end of the day there will be one operator and one REIT, but I don't think so. But, that's a story that has yet to play out. At the present time I would say that, certainly, as a partial owner of Atria, if and when Atria manages assets that are owned by other REITs, our peers, we would obviously want to bring the same level of professionalism and NOI growth to those assets that we'd bring to our own, because that's in everyone's interest.

Michael Bilerman - Citigroup Inc, Research Division

Other questions?

Unknown Analyst

Debra, on the pace of consolidation, it picks up a lot in the last 3, 4 years on the senior side, is that going to continue at that pace or -- all we know is it going to slow a bit, have the easy deals been done, is it getting tougher?

Debra A. Cafaro

I haven't ever done an easy deal, but I would say that the pace will continue.

Unknown Analyst

Yesterday, one of the strip center operators, large strip center operators, was talking about the potential physician groups moving into strip centers. I know -- what, medical office is just under 20% of your business? Is that a threat to medical office at all or...

Debra A. Cafaro

That's a great question. That's the 5-minute warning? Okay. So what's really interesting about the question -- what's really interesting about the question, which I'll repeat for those of you who didn't hear it is someone in the strip center business talked about physicians moving into strip centers. So what that says to me, first of all, is anybody who has real estate is trying to go where the demand is and the demand is in these demographic businesses. Again, I talked about the over-85, the fastest-growing segment of population, that's in the senior living and nursing home business. The medical office is demographically supported by the baby boomer generation, which started turning Medicare-eligible in 2011, okay? 79 million people plus you have 32 million coming into the health care system through the policy changes with access, universal access, to health insurance starting in 2014. So people want to go where the demand is. And obviously, there's not enough retail demand in some of these places. Is that -- how does that affect the Ventas Lillibridge business? So we have about 20 million square feet owned and managed in our Lillibridge business. So Lillibridge, as I mentioned, their team has been providing advice and ownership to highly rated health care and hospital systems for over 25 years. The strategy that we have followed in their footsteps is really to own on-campus medical office buildings that are associated with growing health care systems both not-for-profits as well as for-profit businesses. So we feel very good about the stickiness of our tenant base. They are kind of irreplaceable, so the issues that you want to think about when you think about how high quality a medical office building portfolio is, is you want to understand is it on-campus, not to be all and end all, but we prefer that model and is it on the campus of a hospital that is a leader in its market and is going to continue to grow and add physicians, right? And that is a business model that Lillibridge had. It's a business model that Ventas has had. And it's a business model that Cogdell Spencer had, which we acquired last year. So the strip center kind of pediatrician, which has a place, obviously -- we see those storefront kinds of practices -- is not really competing with the on-campus model where the physician walks across to the hospital and visits his or her patient. And the other kind of area that we like could be a hospital-sponsored off-campus development. We -- but it's basically a hospital-sponsored. And we opened a couple of these in the fourth quarter where we have 10-year fully leased buildings that are being open Northern California, say, with a AA-rated hospital credit occupant and we've got a 7% to 8% unlevered return. That's an outstanding investment as well. So that's the medical office building business, as we see it anyway.

Quentin Velleley - Citigroup Inc, Research Division

Debbie, maybe just the last question, could you talk a little bit more about the potential to expand your hospital platform, whether you're seeing more opportunities today and whether that's a business where you could get some kind of economies of scale or synergies from owning a large portfolio?

Debra A. Cafaro

Well, I would say that between our Lillibridge business and relationships and our deal structuring capabilities and our own relationships, that we are probably the best physician company to think about real estate ownership of hospitals. It is one of the largest sectors. I would say that, in general, in the past, there's been a lot of adverse selection that -- and by that I mean hospitals who were willing to sell their hospitals are not hospitals we would necessarily want to have as tenants. But as a good University of Chicago economist that I am, I would say that assets over time will flow to the most efficient owners. And that's true regardless of sector. And these are long-term secular trends that may or may not ever materialize or may or may not materialize in my lifetime. But as there is multiple differential and as hospitals need capital and their capital sources are shrinking or becoming more expensive, it is an area that there may be more activity in as we look forward 1, 3, 5 years.

Michael Bilerman - Citigroup Inc, Research Division

Okay. Three very quick ones. What will same-store NOI growth be for the health care property sector for 2014?

Debra A. Cafaro

2014?

Michael Bilerman - Citigroup Inc, Research Division

2014.

Debra A. Cafaro

So it was 4.4 last year, so I would hope to continue that rate.

Michael Bilerman - Citigroup Inc, Research Division

If you had to, what property sector other than your own would you personally invest in right now?

Debra A. Cafaro

Multi-family.

Michael Bilerman - Citigroup Inc, Research Division

Do you expect to see more or less public companies in your space, in the health care space, one year from today?

Debra A. Cafaro

More.

Michael Bilerman - Citigroup Inc, Research Division

But there's a caveat in there somewhere.

Debra A. Cafaro

Time's up. Thank you all for coming.

Michael Bilerman - Citigroup Inc, Research Division

Okay, thanks.

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