All right, good morning, everybody. Today we have Ventas's presentation. I'm Michael Carroll of RBC Capital Markets, and I cover the healthcare REITs. And with me today, I have Debbie Cafaro, CEO at Ventas, and I have Robert Probst, CFO at Ventas. So I think a good way to start is I'll turn it over to Debbie, and she can give us some opening remarks, and then we'll have some Q&A for everybody.
Thank you, and thank you to all for attending this morning. We appreciate your interest and your support of the company. So Ventas celebrated its 20th anniversary in May, and I'm proud to say that it's been 20 years of excellence and 20 years of delivering 22% compound annual returns to shareholders. And that is a heavy mantle to bear, but here we are with a great team and a great company ready to take on that challenge. So most of you know Ventas, but we are the leading provider of capital to high-quality care providers, senior living companies, and research institutions across the U.S., the U.K., and Canada, about a $30 billion enterprise value and a BBB+ balance sheet. Just some remarks about the company: we had a very strong start to the year. We continued to execute on our strategic priorities.
We had all segments growing in our property NOI, and we were able to increase guidance as a result of that. Our portfolio is differentiated and continues to be transformed with a growing high-quality university-based life science business, our exit over the past couple of years from the SNF business in a profitable, tax-efficient way, and a very strong balance sheet at about five and a half times net debt to EBITDA, continued investment in growth and future growth with some really high-quality developments underway, and a very strong pipeline, and we'll talk a little bit about that.
We recently completed a very value-added opportunity with one of our largest relationships and the largest provider of long-term care in the U.S., named Brookdale, and we'll talk a little bit about the benefits of that transaction for Ventas. It was a really outstanding deal for our shareholders. We pride ourselves on having a cohesive, skilled, interdisciplinary team that's committed to shareholders, and we increasingly have a differentiated portfolio, a differentiated strategy that we are pursuing that we believe positions the company for another 20 years of excellence and success. So with that, we will open the floor to questions.
Great. So if anybody has any questions, there's a microphone out there, and we can keep this open, so please go to the microphone if you have a question, or I can call you out too. I have a list, so I can start right here. So Debbie, I want to take a few minutes to talk about the macro trends in the healthcare space, both on the positive and the negative side. The sector broadly has been navigating through some headwinds over the past few years. What is Ventas's outlook on this space, and how have you been positioning the portfolio to drive growth in the future?
This will shock you, but we are bullish on our business, and there are good reasons for that. Demographic demand is obviously a key to our future success and what excites us about our business, and that drives all of the segments that we're in, and it is an important component because we know, unlike some of the other businesses, that we will have demand for our communities, for our facilities, for the sites where researchers are trying to drive cures for disease as people live longer. That is necessary but not sufficient for success, and each of the segments has its own drivers and its own risks, if you will.
And the private pay businesses, the high-quality senior housing businesses, the medical office building businesses that cater to the 80 and over population and the baby boomers, 10,000 of whom are turning Medicare eligible every day, will continue to see that demand. But again, each of those, we have some pockets of anticipatory supply in senior housing that we continue to work through, but the business has been very resilient. In the medical office building side, we're seeing changes in the dynamics of the provision of healthcare, but again, as a low-cost setting, we believe that outpatient and medical office, assuming it's well located and assuming it's associated with growing health systems, will be a winner in these long-term trends. And I'll stop there. Obviously, we're in other segments, and those have their own kind of risk-reward value propositions.
Recently, NIC said that they could see 6% increase in supply, and traditionally, it's taken about three years for that to absorb at 2% a year. And I wondered, does that affect your markets, or is that somewhere else?
So really, the question here, I just want to repeat it for everybody so they can hear, is on supply and if it's impacting Ventas's markets or just if there's any other pockets.
Sure, and I'll start with the industry. You're right to say that there certainly is new supply coming online, and in fact, if you look at when the peak of starts of new construction happened, i.e., shovels in the ground, commencing construction, that was Q2, Q3 of 2015. And typically, there is an 18- to 24-month period from that start to a time that a community is delivered, goes online. And therefore, you would have expected to see in 2017 and now into 2018 those new units coming, and indeed we are. What is encouraging for us is from that peak for the industry in 2015, we've seen consistently that those new starts every quarter have been coming down.
That's all very well and good, but what about this present 6% overhang?
So we need to work through that, right? And our guidance for the year incorporates the anticipation of those new units coming online. Of course, we have to absorb those units, and our outlook for the year is to be for our senior housing operating portfolio -1% to -4%, and it's really driven by that new competition coming online. But it's really absorbing that. The encouraging news that I want to highlight is that as we look forward beyond 2018, those new starts have been coming down, and so we expect, therefore, those deliveries as a consequence over time to come down as well.
But Ventas has a three-year supply, so is it fair to infer that your SHOP portfolio for the next three years is going to be limited in its same store NOI growth?
It's certainly clear that we have to work through the inventory. We're not giving guidance, certainly for 2019 and beyond. I think what is crystal clear is the demand is there, right? If you step back, why is this construction happening? It's happening because people are anticipating the silver wave, as everyone's now calling it, coming online, and therefore that inventory has to be absorbed. There's no question about that. Beginning in 2020, we really see the acceleration of that demand, right? And so that is really what people are looking at. And then it's a really market-by-market conversation, and certainly it is affecting us in our markets, as you started with the question.
So, I guess maybe another way to go off of this a little bit is, Debbie, you've done a good job over the past several years resolving potential problems, tenant problems, before they actually occur. So, this could be a good time to talk about the recent Brookdale agreement. How's that strengthened this portfolio, and what's some of the reasons behind that?
Okay, good. So I think one of the areas where the company has significant expertise and an ability to resolve complicated items in a way that can benefit our shareholders and also advance the interests of our customers is really best in class. And we have many proof points of that, but the most recent example is the Brookdale deal. So there we had a situation where we have the largest provider of care in senior housing in the U.S., obviously have been having a tough time of it over the past couple of years. We had about $175 million of rent coming with a lease expiration at the end of 2019, and we came out at our earnings with a new deal with Brookdale that is really great for Ventas shareholders and also helps Brookdale get on a path to success.
And that deal, most importantly, extended our lease term with Brookdale that's guaranteed by the company through 2026, so eight years remaining. That is when the Silver wave, the demand profile is inescapably going to be incredibly robust. We were able to improve credit standards as well as security deposit in the transaction, combine everything into one master lease that's good for the landlord, continue with rent escalators during the term. And in exchange for that, we provided Brookdale with a $6 million average rent reduction for the term of the lease, which again helps them improve their cash flow. We provided them with a more objective change of control standard, but PS, if a change of control happens, Ventas gets additional benefits by way of credit protections, fees, and most importantly, a further lease extension out to 2030.
And then at the same time, we agreed that we could sell up to 15% of the portfolio that may be non-strategic for 6.5% rent yield to us that would enable Brookdale to continue to reduce its overall lease exposure and get out of assets that are non-strategic for them. So overall, I would say a great outcome for Ventas shareholders. It provides us with reliable growing cash flow and at the same time provides optionality to us. If things don't go as well as expected, we can still move the assets and retain security deposit to facilitate that transition. And at the same time, we are very supportive of Brookdale's new management and their operating initiatives to begin to have their whole company and our portfolio operate on an improved basis.
Great. So let's discuss a little bit about your current investment strategy today. What type of deals is the company currently pursuing, and how do these investments fit into your outlook of the space?
One of the really underappreciated value-creating parts of the Ventas business model is that we do have a diversified business, and we have been able to, through different cycles, both find areas to continue to invest in accretively and create value, and also be able to rack and stack investments against each other to decide what is the best deal on a risk-adjusted basis for our shareholders standing on its own and where are the deals that make our overall portfolio construction and our enterprise better as well.
We have always tried to invest in early-stage segments where we believe that cash flows will increase and/or cap rates will come down, hopefully both, and that's what creates value. And so with that context, I want to turn it over to Bob to talk about, as we look across investments now, what some of our priorities are, and we continue to look at investments all around our existing segments, but.
Our number one capital allocation priority at the moment is our university-based life science business. By way of background, we entered this through acquisition in 2015 for about $1.5 billion, and this business is very adjacent to our MOB medical office building business. They share many of the very same characteristics. In each case, you have on the campus of a university, in this case, or on the health system campus for MOBs, the anchor tenant. This is the university where we are conducting life science research. They are our key tenant. They are attracting private capital as well, which is spawning new innovation and creating a campus of innovation. The original acquisition was approximately 23 assets on campuses like Duke, Yale, Wake Forest, etc., and some good ones.
Not just your alma mater.
Not just Duke. And we got that for a six and three-quarters yield. The growth opportunity here is principally through development, and we've, in fact, grown the business already 40% since that acquisition two years ago, not only in developing new communities and facilities with these universities, the existing universities, but expanding that footprint to new schools. And therefore, we see the ability to double this business. That was our initial target when we bought it. We're well on our way to it, and the pipeline is rich. So very nice risk-adjusted returns, very strong tenancy, and very much a fit for our business.
So I think right now you have about 13 of those schools that's within your portfolio. I mean, how many more could you really add to that, and what are you looking for when you add a new tenant into your relationship?
Right, so the key of that existing customer base, if you like, is they are very well-endowed universities that are leaders in life science research from a university perspective. And together, they represent about 11% of the pie of university-based life science research. The opportunity is to expand to the others that are big players in this area, and the next group of 20 represent about 30% of that pie. And so the growth opportunity is to really go and partner with the next 20, if you like. And what we're really excited about is they see the opportunity, having gone to a Wake Forest or a Duke, seeing what's happening, and we are getting, through Wexford in particular, a partner here, which has a long history in this space, a rich pipeline, both with existing and with those new customers.
And I want to say that again for emphasis. So if we have 13 of these universities in our portfolio now, those 13 alone account for 11% of all research and development spending by universities in the U.S. So they are obviously the upper echelon, and the next, I think, 20 universities account for 30% of that total. So the target market is very well identified, and you could probably name them all, and maybe some of you went to these elite schools, but those are where we're targeting.
Could you just an overview then where you are now by sector in terms of your net operating income and where you think you want to be, breakdown between senior living and medical office?
25% of the business is office, and that is composed of $2 billion of total NOI, 25 million sq ft, and 25% of it is office, maybe 26% of it now as we've continued to grow life science. What's interesting about that business, again, is we are investing in assets where our counterparties, our customers, are often more highly rated than we are, and that is a good risk-reward proposition. On senior housing, 32% is under management contracts where we get the P&L statement directly. Most of that business is through the two leading operators, Sunrise Senior Living and Atria, and that portfolio is the highest quality in the U.S. Then we have a new manager that we formed very strategically called ESL, so that accounts for 32%.
And then 24% is triple-net lease senior housing with the likes of Brookdale and a few others as described. And then 6% is health systems, which is basically our investment with Ardent, one of the leading providers of care with significant market share in the hospital space and related real estate assets. We have a post-acute business in specialty hospitals, mostly with Kindred Healthcare and Select Medical and HealthSouth. And then we have a portfolio of loans and international that make up the composition. And we like our mix.
I mentioned earlier it was a differentiated mix as we profitably exited the skilled nursing business over the last few years in a tax-efficient way. And we'll continue to build this life science business. We continue to believe in the senior housing business and that there is a powerful upside on the other side of where we are now, and it's resilient in the meantime. And so I think we like our mix, and it will continue to evolve as we see opportunities for value creation. Does that answer you? Okay, good.
Hi, this is an investor conference, and I have a question about the sources of capital you're using to fund these investments.
Yes.
You've used your at-the-market or ATM program fairly extensively. In fact, I think you've raised more equity capital through ATM than any other REIT. Could you talk about the advantages and possible disadvantages of ATM versus other sources of capital, and more generally what you're looking at for fundraising, capital raising in the current market environment?
ATM is simply another version of raising common equity. You can raise common equity a variety of ways. That is one method. It's particularly appropriate for certain types of transactions, assuming it's at a cost of capital that makes sense for you and your shareholders. We have typically been focused, as I mentioned earlier, on having a very strong credit profile because we think that allows us to play offense and defense.
Our leverage has typically been about 35% of the total company, and we have been able to deliver these 22% compound annual returns while we've continued to improve our credit profile by funding our deals approximately 65% equity or 60% equity and 40% debt. How we raise that equity is a matter of timing and approach. We've done blocks. We've done underwritten deals. We've done ATM over time. Right now, that isn't something we're looking to tap because we have other avenues to access capital, principally asset sales and loan repayments that we've been using to redeploy into new investments.
Okay, thank you.
Thank you.
I'm interested to know where the foresight came from to invest in university and why you exited the university-based portfolio. Just to walk us through a bit about the feedback.
We have a page on this in our presentation, two pages I would refer you to, which are seven and eight. When we talk about 20 years of excellence, what we're really talking about, again, is trying to be slightly ahead of the curve. We don't fancy ourselves to be visionaries in any way, shape, or form, but we do work very hard to be students of the market, which helped us foresee and protect the company in front of the financial crisis.
We see ourselves as working hard to be experts in the asset classes in which we operate, and in doing so, we believe we've been able to make good investment decisions and, in the case you raised with the SNF spin, good disposition decisions as well. We've tried to do it, again, a little ahead of the consensus view because that has been more value-creating to do so. Do you want to talk about what drove us to essentially divest from the skilled nursing business?
Sure. So in 2015, if you back up and look at valuations within the SNF space, they were at record highs. Meanwhile, the operating fundamentals and the challenges that were being experienced even at that time around length of stay shortening, for example, were quite clear, and so there was an obvious opportunity for us, given those dynamics, to efficiently sell those assets in a tax-efficient way through a spin-off to our shareholders and thereby minimize our exposure to that segment.
And indeed, that's been very prescient. What we've seen since is the cap rates have expanded or multiples come in since that time. The fundamentals continue to be challenged, and indeed, we got out of the balance of our SNF assets through sales last year, so only have 1% left of our business in that segment. So it was really understanding the difference between valuations in the marketplace versus underlying operating fundamentals and capitalizing on that.
And I would say in most of these cases, including the financial crisis or looking at medical office, which we got into in the early days, and having a thesis about why cash flows should go up or why valuation should rise, and then the information is there for people to see. And it's just a question, I think, if you are really a student of that information, you're willing to do the work around it and have conviction, you're willing to then structure something where you admit you could be wrong and try to protect the downside. And that's really what we do, and we've replicated that. And it's all there for people to see or do if they want to look for it.
It's great to hear some of your experience for 30, so I'm excited to have that.
Thank you. I mean, that's one thing about healthcare, guys. I mean, that I love is I love real estate, but getting into healthcare for 20 years, it is certainly the business is humbling. It is very I learn something every single day, and I do love that. So hopefully I put that learning to good use on your behalf.
What would it take to get you to go back into the SNF?
So the question was, what would it take for them to get back into the skilled nursing facility space?
You know, we would have to believe that it would be one of our best capital allocation uses. And right now, we think we have far better risk-adjusted returns in other areas.
So maybe this will be a good time to talk about some of those other opportunities that you have within the portfolio. What specific property types do you like right now? And maybe it's a good time to explain the Ardent platform a little bit more because that's kind of a differentiated approach for Ventas too, is how you guys have been looking into the hospital space.
Okay. So we had been the hospital market of the $1 trillion healthcare real estate market. The hospital and outpatient part of it is by far the largest. And within government-reimbursed healthcare, which doesn't count senior housing, etc., it tends to be the dominant driver of who gets the federal dollars and things like that. And so we always believe that, like hospitality, for example, these assets, which are principally owner-operated, should be held in public hands. And at the same time, though, we recognize that there is a wide dispersion of quality in the hospital business. There is some overbedding. Some hospitals just shouldn't exist, maybe like malls. There are some malls that shouldn't exist. And so for 10 years, we tried to figure out the right way to provide capital to a good hospital provider who had good market share.
As you mentioned, in 2015, we did a $1.4 billion deal with acquiring the real estate with Ardent Health Services, which is one of the largest privately owned hospital companies in the U.S. We partnered up with Sam Zell, who invested in the operating company with us, and we owned the real estate. That has been a great investment. Our yields are over 8%. We have three times coverage. Most importantly, we have used our capital and our partnership with Sam to help the extraordinary management team and scalable infrastructure to make Ardent a success. It has doubled in size since we made the original investment. It's now a $4 billion revenue company, and it has really the characteristics of a public company as you think about its possible future. So that has been a great investment.
We provided another $700 million-plus in capital to enable Ardent to buy a high-quality private hospital company to be a consolidator, which is part of our and Sam's hypothesis in the investment. And that has all gone very well. And we continue to look for opportunities, although with Ardent and elsewhere in the space, but we were very clear when we started that we would be highly selective in our investments, and we have. And so it's been a success so far. And if it expands, that will be great. And if we have a great investment with Ardent and maybe they go public or what have you, that would be great too.
All right. I think that we're out of time right now. So thanks, everybody, for coming.
That went fast. Thank you so much for being here.