While Ventas Inc. focuses on investments across the healthcare spectrum, the Chicago-based REIT will continue to be a major player in seniors housing investments, according to Debra Cafaro, chairman and CEO of Ventas. In an interview with NIC, Cafaro explains why she’s bullish on seniors housing, how Ventas plans to stay ahead of the competition and offers her take on new construction in the industry.
NIC: In the current environment, does Ventas have acquisition preferences for any particular healthcare property type(s)? What’s the rationale behind Ventas’ current strategy? Has reimbursement risk as of late influenced your preference(s)?
Debra Cafaro: Ventas believes that having a balanced diversified portfolio is important for building a great company that can perform across the economic cycles. A significant advantage for Ventas versus single line REITs is that we can invest across the healthcare spectrum in different sub-sectors of healthcare and seniors housing real estate. Our strategy is to be a little ahead of the market from an investment perspective: we did that coming out of the recession, understanding that it was a great time to buy seniors housing and medical office buildings (MOBs). From 2009-2012 we invested over $12 billion, primarily in private pay seniors housing and medical office buildings. We are still bullish on seniors housing and MOBs, where we will continue to be a significant player. We also believed that, in 2010, Medicare reimbursement for skilled nursing was at a cyclical high and as such did not invest at that time in skilled nursing. While reimbursements are at more sustainable levels, we expect to allocate only limited amounts of capital to the skilled nursing area. Ventas now expects over 80% of its revenues to come from private pay sources. Most importantly, we care who we are doing business with and want to make sure we continue to support our operating partners and tenants—and remain committed to the industries in which we invest—throughout the cycles.
NIC: With much discussion across the industry recently regarding new seniors housing construction, please comment on what Ventas is seeing in regards to new seniors housing construction. What’s your perspective on market trends for new development? Is Ventas funding new development?
Cafaro: New construction and development in seniors housing is a function of the strong demand and excellent performance from this attractive asset type. The over 85 population is growing at three times faster than other segments of the population so demand is clearly growing. We expect continuing positive absorption in 2014. The overall number of seniors housing units under construction is between 16,000- 17,000, well under the peak numbers in the early 1990’s. To put the number in perspective there are approximately 17 million people over the age of 75. It is also important to understand the markets and sub-markets where construction is occurring; for example, 25% of the NOI in our Seniors Housing Operating Portfolio (SHOP) is from the New York metropolitan area where the number of units is only 2% of existing supply. As we do with all factors surrounding potential acquisitions and our existing portfolio, we analyze development trends very carefully, looking at units under construction in the overall market, the sub-market as well as the overall occupancy, penetration and growth within the markets. We are funding some new development as well as redevelopment in our portfolio with excellent operators in barrier to entry markets where we believe the risk adjusted returns are attractive.
NIC: You’ve led spectacular growth at Ventas over the past few years. How will Ventas maintain the momentum in light of increased competition and rising interest rates?
Cafaro: Thank you. We are very focused on being good partners to quality healthcare and senior living providers and delivering results for our stakeholders. Ventas has had compound annual growth in FFO per share of 11% since 2000 and dividend compound annual growth of 9% over the same time period. This growth has resulted in a total return of approximately 3,500% (based on midpoint of 2013 guidance). Our total enterprise value grew to $30 billion in 2013 and we have continually improved our balance sheet and credit rating during this time. We have achieved this throughout many different economic and interest rate environments.
- Allocating capital, including $4.5 billion of investments since 1/1/2012
- Raising capital including $4.7 billion in attractively priced debt since 1/1/2012
- Managing our assets with a focus on same store cash flow growth, which was 4.2% year over year in the 3rd quarter of 2013
We work to stay forward thinking about where and when to invest in different subsectors, and to focus our efforts. The seniors housing and healthcare real estate market is tremendous – it is over $1 trillion and still very fragmented, only approximately 10% is owned by REITs . The market is so dynamic, with significant consolidation and change. With that, comes great opportunities.
NIC: Given the need to periodically reexamine accepted ways of doing business and identify new approaches to stay ahead of the competition, how does Ventas do this? What are you doing that your competitors aren’t yet doing?
Cafaro: Ventas is a data driven company – we are always looking at the external and internal environment to make sure that we have all the facts to make good decisions. Our exposure to all segments of healthcare and seniors housing, our relationship with quality care providers, our long experience and tenured team give us an edge in making sound judgments. And our work ethic is off the charts!
NIC: What do you see as the most important long-range opportunities and challenges for the industry as well as your company? What keeps you up at night?
Cafaro: The seniors housing and healthcare real estate sector has wonderful opportunities for capital providers like Ventas. Due to the size of the market, fragmentation, change in policy, consolidation and demographic trends, Ventas has many opportunities. Over time, assets will flow to more efficient owners like Ventas although that won’t occur in a straight line.
As an industry, I hope we will promulgate and improve quality standards for care providers and also increase the sophistication and use of technology, including on pricing as the multifamily sector has done very effectively.
We continue to see improvements in Ventas’ cost of capital, because of credit upgrades, like the one we received to BBB+ this month, which enable us to be a better partner. The REIT stock market re-valuation in 2013 has been a challenge, but we strongly believe every situation provides opportunities for those who see them and are nimble and strong enough to take advantage of them. That’s a hallmark of Ventas and I hope we will continue to produce good outcomes for our customers and stakeholders in any external environment
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Registration for the 2014 NIC Regional Conference is in full swing. This year’s educational programming includes four general sessions and almost 20 breakout sessions covering a wide range of topics on the capital markets and the latest issues surrounding the seniors housing and care sector.
Hear from general session speakers including economist Jed Kolko from Trulia on the health of the US residential housing market and what that means for seniors housing fundamentals, Senator Bill Frist addressing the next chapter in healthcare reform, Dan Mendelson leading a panel on federal and state driven policy changes and how they will alter post-acute care, long term care and seniors housing business models, and NIC’s president Bob Kramer moderating a panel discussion on tomorrow’s customer and what that means for today’s products and services.
- Today’s Value Drivers for Seniors Housing — institutional investors will discuss how they approach acquisitions, recapitalizations, and new development opportunities in the seniors housing sector as well how property location and the quality of construction affect value.
- The Quality Curve and Assessing Skilled Nursing Properties — quality of care is receiving much greater emphasis under federal and state level healthcare initiatives. But what does it mean to deliver a high quality of care and what factors are measured in making that assessment? Hear from three experts from different vantage points on how quality will dictate the financial performance of skilled nursing properties.
For detailed information on sessions and speakers please visit the conference website.
Reminder – Early Bird Rates End January 10th!
There is still time to get a “Real Deal” — Register on or before January 10th and save more than $500 off the regular registration rate.
We’ll look forward to seeing you in sunny Boca Raton, Florida, March 16-18.
The health of the for-sale residential housing market can impact the demand within the seniors housing market, specifically in independent living and continuing care retirement communities. Recent indicators for the resale housing market have been disappointing, as home sales velocity and price growth have slowed in recent months.
Existing home sales have slowed 5% since July. Furthermore, a leading indicator of existing home sales, the Pending Home Sales Index, fell 0.6% in October, suggesting continued declines in existing home sales for at least the next few months.
As for-sale housing demand has softened, home prices have moderated, falling in both October and November. However, Zillow is predicting home prices will rebound and grow by 2.7% during the next 12 months.
Despite the rise in interest rates and run-up in home prices earlier this year, housing affordability remains intact, which should continue to benefit the housing market as consumers regain their confidence. Prices (as a multiple of income) remain in the housing market’s pre-bubble range, and mortgage payments remain for the time being near historic lows due to the continued low interest rate environment.
Source: Zillow Research; NAR
NIC, in association with National Real Estate Investor (NREI) hosted a “Seniors Housing Investor Briefing” webinar on December 5 discussing the opportunities and risks associated with investing in seniors housing properties.
The briefing provided an overview of the seniors housing sector performance with particular focus on:
- Transactions volume, pricing and cap rate trends
- Investment returns
- Current and near-term market fundamentals
- Construction trends
- Long-term demographics
Click here to view the archived event.