REIT giant finds success through diverse and ‘well-curated’ portfolio
By Jeff Shaw
It’s been an action-packed last couple of years for Ventas, the seniors housing industry’s third-largest owner.
In 2015, the company successfully spun off most of its skilled nursing portfolio into a standalone REIT, now known as Care Capital Properties (NYSE: CCP). At the same time that plan was announced, Ventas also acquired the hospital portfolio of Ardent Medical Services for $1.3 billion in an all-cash deal. That acquisition included 10 hospitals and their related network of real estate.
In July 2016, the company further diversified by announcing the acquisition of Wexford Science & Technology life sciences real estate portfolio for $1.5 billion. Earlier this summer, Forbes magazine named the company’s CEO Debra Cafaro as one of the 100 most powerful women in the world. Forbes recently noted that Cafaro is the longest-serving female CEO of an S&P 500 company, and can boast the highest total return during her tenure: 2,373 percent. She’s served as CEO since she joined the company in 1999.
That’s a lot of activity for the publicly traded REIT during a one-year window when many of its peers put M&A activity on hold due to low stock prices.
Although there is a clear effort to diversify the company’s portfolio, Ventas is first and foremost a seniors housing investor. Independent living, assisted living and memory care make up 57 percent of Ventas’ properties. Ventas has 716 seniors housing communities and 61,969 units, according to ASHA, which looks at United States properties (see 2016 ASHA 50 supplement). That makes Ventas the third-largest owner of seniors housing in the entire country, behind only owner-
operator Brookdale Senior Living and fellow healthcare REIT Welltower.
Bob Probst, the company’s chief financial officer,
joined Ventas in 2014 and oversaw many of these changes within the company. Seniors Housing Business interviewed Probst to find out the strategic thinking behind
all these changes and how Ventas manages such a massive portfolio.
Seniors Housing Business: You’ve been with Ventas almost two years now. Tell us what led you to join the company and what you’ve accomplished since you started.
Bob Probst: I spent most of my career with multinational companies, most recently with Jim Beam where I was CFO of that publicly traded company until it was sold in 2014 to a Japanese company called Suntory. I took that acquisition as a chance to look at new opportunities.
I didn’t really know a whole lot about Ventas at the time, but I received a phone call about the CFO position. The more research I did, the more I loved what I learned. Healthcare real estate is a great market where we sit at the intersection of these two sectors. Healthcare and real estate each account for 20 percent of the U.S. gross domestic product (GDP), and there’s a lot of growth ahead.
Ventas’ track record over a decade-and-a-half is unprecedented and really fantastic. It came down to a great portfolio and partnerships with top providers, while having a unique culture that really differentiates the company.
The spinoff of Care Capital Properties last year into a pure-play skilled nursing business was a significant accomplishment. We also simultaneously entered the hospital sector with the acquisition of Ardent Health Services.
The acquisition of Wexford, which will bring us into a new asset class, is another really exciting opportunity for growth. Those were the main pieces of my first two years.
Another thing we’ve accomplished is a sharper focus on investor relations — the messaging and the communication of what defines us. We’ve gotten great feedback on that.
SHB: Tell us more about the culture you’re referring to.
Probst: We define it as our winning competitive edge, and that’s how we branded it internally. It starts at the top. We have a leader in Debbie Cafaro who is a luminary in real estate.
The culture she created is very collaborative and team-based. It’s about smart, hardworking people focused on winning in the world. If you visit our office, you’ll see people having fun but working hard. We use the tagline “Excellence.Sustained,” which we have on all communication internally and externally. We’ve sustained that excellence for more than a decade. It’s a really fun and unique environment.
Wrapped around all of that is a track record of innovation and being able to anticipate where the market is headed before others are able to see it and create a lot of value.
SHB: Do you have some examples of market shifts that Ventas has predicted?
Probst: Our Ardent and Wexford acquisitions are two of the latest examples.
If you go way back to the early 2000s, Debbie was on a campaign to get healthcare REITs into the REIT index because that would help healthcare REITs get noticed and get capital. Now we’re one of the top food groups within real estate. Ventas also was ahead of the game by being one of the first into seniors housing in a big way, along with Brookdale and Sunrise.
In perhaps the biggest shift Ventas predicted, the company saw the financial crisis coming and shored up the balance sheet — our financial strength — before the crisis began in 2008. We were able to come out of that crisis strong and go on offense, while others were not able to do so.
That foresight, making sure we had plenty of liquidity before the market got difficult, allowed us to invest in some platforms: Lillibridge Healthcare Services and Atria Senior Living.
The Lillibridge acquisition got us into medical office, which has grown exponentially since we pur-chased it. We’ve been able to grow cash flows and see that sector expand for us. The company had 96 medical office buildings when we purchased it. Since that acquisition in 2010, the number of buildings has grown by more than three times, and the square footage by about five times.
Getting a leading operator and strong presence in Atria, as well, helped us grow our platform in seniors housing. Those are all case-study examples that created value.
How to weather rough seas
SHB: There has been a lot of volatility in the stock market in the last year or so. The stock price of Ventas, like many public companies, hit a two-year low in February, but has recovered since. How do you handle such dramatic swings?
Probst: One of the things we hold dear as a strategy and is core to our performance is the idea of balance and diversification. We have a very balanced portfolio by asset type, geography, leasing model and operator. That has provided resilience and stability of cash flows, while at the same time generating growth.
Because we participate across the asset classes, we can handle dynamic markets and work through cycles. We can really arbitrage. Where we see opportunities, we can take advantage of those market conditions.
I’d highlight the Ardent hos--pitals acquisition. Despite a volatile stock price, we saw an opportunity to invest accretively in the hospital space with a leading operator and a platform of growth. We were able to look across asset classes and see opportunities.
SHB: It seems like the seniors housing REITs in general slowed the pace of acquisitions after an extremely fast start in 2015. Did stock prices lead to that slowdown? Do you expect the pace to pick up again?
Probst: You’re right to say the healthcare REITs have become selective in acquisitions. Stock prices certainly have an impact, as do property prices and buyer and seller expectations.
SHB: Do you mean the prices got too high?
Probst: Sellers often don’t believe price is ever going to come down. Price discovery is how people often refer to it. Sellers and buyers can’t find a match because neither side can find a deal that works for them.
Stepping back from it all, seniors housing is a fantastic business with all kinds of fundamental underpinnings that are really attractive, like the trends of an aging population. Therefore we expect the opportunity for all the REITs to grow will continue. There are inevitable ebbs and flows, but the longer-term opportunity will be there.
Shuffling the portfolio
SHB: Last year, Ventas spun off most of its skilled nursing portfolio into a separate publicly traded company. How has it played out so far?
Probst: The CCP transaction is something we had been looking at for a number of years. Last year we saw a number of things come together that told us it was the right time to move. The spinoff was executed in four months from announcement to finish. If that’s not a record, it’s at least a very effective spinoff.
As a result of the CCP spinoff, our business became 83 percent private pay, so it really increased our private pay ratio dramatically. With the Wexford acquisition, which includes 25 life science buildings, we will be at about 84 percent private pay. That helped reshape our portfolio, having less exposure to [government] reimbursement.
It has also further enhanced our diversification and curated our portfolio even more effectively as a consequence. It’s been a very positive experience for us post-spinoff.
SHB: Do you have a response to some of the executives in other companies who think the REITs should stand by their skilled nursing portfolios?
Probst: No response other than we’re very pleased with the spinoff. It created a lot of value for our shareholders. We’re thrilled and we think our shareholders are equally pleased.
SHB: Ventas also recently announced the agreement to purchase Wexford’s life sciences portfolio for $1.5 billion. Walk us through the decision-making process of taking Ventas in this new direction.
Probst: Look at the market construct in healthcare real estate, this trillion-dollar market we work in. In the composition of that trillion dollars, life sciences is only 5 percent . . . but that’s still $50 billion. That’s a large market, and one we weren’t participating in.
It was always a “nice to have” opportunity but not a “need to have.” So, we were very selective in finding a platform to enter that market. Wexford was a perfect
fit for us. In many ways, it mirrors our part in the medical office business.
We’re partnering through leading universities, medical centers and research companies with strong anchor tenants in an on-campus environment with long-term leases and very strong credit. It therefore is very stable with growing cash flows, and also has the opportunity for growth through new development. We can start new relationships and build on them.
So to summarize: It gets us into a new space (life sciences) with a new partner (Wexford) with a lot of opportunity for growth.
We like to partner with a leader when we enter a new space. You can see the playbook of establishing these platforms for growth and investing behind it — Ardent, Lillibridge and now Wexford.
SHB: Ventas has one of the largest seniors housing portfolios in the United States. It makes up the bulk of your portfolio. What are the keys to successfully managing such a massive set of properties?
Probst: We think we have a leading portfolio because of balance, both within seniors housing and the whole portfolio. In seniors housing we have roughly a 50/50 split between triple-net-leased assets and RIDEA assets.
Secondly, we’re very cognizant of having both strong real estate and strong operators. On the first point, over 60 percent of our seniors housing operating portfolio (SHOP) is on the coasts in high-barrier-to-entry markets. Potential residents tend to be well above average in terms of home value and household income, 1.5 to 2 times the national averages.
On the operations side, we have what we believe are leading operators. They are of scale, and they bring best practices. For example, Atria is our largest operator, accounting for roughly 60 percent of our SHOP portfolio. It has scale at both a local and national level. That helps Atria compete against other operators, and brings efficiencies: HR, systems, marketing, purchasing. That overlay of leading operators with top real estate gives us great confidence to build that business.
We have a well-curated portfolio with excellent diversification with strong operators. That’s our winning strategy.
SHB: What do you mean specifically when you say the portfolio is well curated?
Probst: We have a portfolio that is constructed to meet specific objectives: to ensure all the properties meet certain criteria, are high quality, in desirable locations with attractive demographics and highly productive. They must also add to our goal of strategic diversification — working with top-performing operators to build platforms that can grow, and with an emphasis on private pay.
Benchmarks, culture reveal best partners
SHB: Many owners say they partner with the best operators. How do you know the operators you partner with are actually the best?
Probst: We held our most recent Investor Days event at Atria’s headquarters in Louisville, Ky. Many times folks tour communities, but it’s rare for investors to tour the headquarters of a leading operator.
Part of that day was dedicated to a tour of the facility to bring to life for folks what we mean by leading practices. So, they saw the print room where Atria can make sales and marketing materials for a particular location in a matter of hours. They saw the information technology tools being leveraged across communities. They saw the communication tools used to speak to the employees every day. We could show them what scale means in this industry.
Knowing we have top operators is also backed by their performance. If you go back and look at the trend lines, Atria is well ahead of industry averages.
SHB: What are the metrics you use to determine that?
Probst: It’s all very traditional financial measures — amount of revenue generated, occupancy levels, the profitability and growth of the operations. Underpinning all that is the quality of care provision, which is really the driver of all of the above.
Personal history has advantages
SHB: Your personal history includes a lot of work in food and beverage. How has that experience helped you?
Probst: I come from a background of multinational, public companies, largely alcoholic beverage makers. The core of the business is really operational, and that’s served me well. Many of the tools that are used in consumer products have direct applicability in seniors housing.
For example, in sales and marketing, how do you think about your brand, your messaging, your consumer? How do you communicate your points of difference? It’s many of the same tools in a different environment.
From a CFO perspective, I understand how to bring systems together in large, complex organizations to drive efficiency and effectiveness. I’ve been able to bring some of that thinking to Ventas as part of the backbone of how we run the business.
The other aspect is how we speak to the general investors. For years now, Debbie has seen opportunity in bringing in investors who aren’t dedicated solely to real estate, and the huge pool of money they represent. We have to talk to those investors in a way they understand, despite not having the same level of real estate knowledge as our other investors. Those investors from outside real estate are the ones I grew up speaking to.
SHB: What were the steepest parts of the learning curve for you when transferring industries?
Probst: The learning curve for me has been learning the language of real estate. The terms are really unique to the industry. It’s a very close-knit community, so getting to know the investors, the operators, the history of the industry and getting up to speed on that quickly has been one of my challenges.
Intellectually, though, it’s been fascinating. I’ve had a fantastic sponsor in Debbie. I’ve been able to connect some of those dots for the general investors, while still making sure I speak clearly to our real-estate-generalist investors who are really important to us.
SHB: What’s something folks in the industry would be surprised to find out about you?
Probst: I grew up playing soccer. Then I played at Duke and we won the NCAA while I was on the team. Though Ventas is based in Chicago now, it was founded in Louisville, so we have many Kentucky fans here. You’ll see I’m one of the lone Dukies taking on the Kentucky contingent at Ventas.
When I talk about the culture here, I always say we’re like a sports team. We know our roles and we work together to win. Sports has always been a passion of mine. I don’t play anymore, for the record. I think I’d get seriously injured if I tried.