To the 8:50 A.M. session at Citi's Global Property CEO Conference. I'm Michael Bilerman. I'm here with Nick Joseph. We're very pleased to have with us Deb Cafaro from Ventas, if you don't know. This session is for investment clients only. If media or other individuals are on the line, please disconnect now. For those in the room or on the webcast, you can go on to liveqa.com, enter CITI2019 to submit questions for the session. There's already one in here. Debbie, I'm going to turn it over to you to introduce your management team that's with you here today and provide the audience three reasons why they should buy your stock, and then we'll begin Q&A.
Great and good morning, everyone. I am especially pleased to be here today on my 20th anniversary at Ventas. For those of you who've been with Ventas for all that time, and there are some of you, and those who've joined us recently, I want to express my sincere appreciation for your interest in the company and your support of us over these many years. I'm happy to be here with our CFO, Bob Probst, our Vice President of IR, Juan Sanabria, a recent addition, and our longstanding colleague, Ryan Shannon. As you know, Ventas is a leading enterprise, an S&P 500 company with about $33 billion in enterprise value and a diversified portfolio of high-quality senior living, healthcare, and more recently, research and innovation properties that has a history of delivering reliable cash flow on a strong balance sheet fueled by demographic demand.
So that's who we are. We've delivered in the course of time since 1/1 of 2000, 23% compound annual return to shareholders. And we have a strong commitment to our stakeholders. So three reasons I believe that you should consider buying Ventas stock or increasing your position, hopefully, is our team and track record. I truly believe that Ventas has the most outstanding team that is collaborative and highly skilled in what is a multi-vertical business that is very complex from an operational standpoint. And I do believe that in the healthcare businesses, the quality and experience of management is incrementally much more important than in some of the real estate asset classes. So that's number one. Number two is our relationship with best-in-class managers and providers.
The longer you're around this business, the more you know that the quality of the people who are actually providing care, the quality of your development partners like Wexford and PMB, where we have exclusive relationships, the more successful you are going to be in our business. So that's number two. And the last is really the position that Ventas is in. We've been very clear about the last couple of years, transforming our portfolio, changing our mix into a much higher quality, newer, forward-facing portfolio that's included some dispositions, including a very financially and strategically favorable disposition of our skilled nursing business that started with our 2015 spin. And right now, we believe that we are positioned to get back to growth. And there are really several underpinnings to that. One will be the demand in senior housing that we know is coming and our advantaged portfolio.
One is our $1.5 billion pipeline in research and innovation. And third is our expertise and opportunity set in external growth. So those are three great reasons to buy Ventas. And now we'll open the floor to questions.
Great. Well, thank you for that, Debbie. So we've started each of these sessions talking about disruption. And what do you believe is the biggest potential disruption to your business? And what are you doing to either take advantage of that disruption or mitigate the risk of it? And I know just you've always talked about M&A, right, from a perspective of the risk profile. It's mitigating the risk of sometimes the enterprise in doing M&A rather than the M&A itself, so.
Exactly. In fact, sometimes the riskiest choice is the status quo, as we all know, but disruption in healthcare and people's well-being, I think, could really come from the pharmaceutical and targeted therapies area, and what I mean by that is when you look at aging and you look at population growth, what you see is that by 2030, 171 million people in the United States will have one or more chronic conditions. So as we live longer, as the population grows in the older cohort, you'll see that people will be living with a lot of chronic conditions, and so the disruption to healthcare really is around that issue, and sometimes the lowest-cost way to address that is through pharmaceuticals and targeted therapies and may not be through more traditional healthcare delivery.
Therefore, that is really one of the reasons that we have been investing so heavily in the forward-facing research and innovation business. We believe that there will be increased investment in both the universities that we do business with, who are the leading research universities in the nation, as well as the companies that want to be around them as they are continuing to commercialize these therapies. So we really are, what I would say, mitigating the risk and also capturing an opportunity as we invest in the research and innovation business. There could be a collateral benefit that if people live longer, they also could live longer in our communities. I do think balancing out the portfolio on this forward-facing part of healthcare is a really important mitigant as you think about disruptors.
As you think about that business, do you have a desire to grow in some of the more core life science markets like at Cambridge, at South San Francisco? You see what's going on in New York that Alexandria is building a cluster there down in Maryland. How do you think about going deeper into life sciences overall?
Our business to date has been extremely focused. With our pipeline, it's about a $3.5 billion pro forma business where we have really started investing in a very Ventas-like way, which is the same way we invested in senior housing at the beginning, the same way we invested in MOBs. We developed a thesis. We started out in an area that was very adjacent to what we know and do, and in this case, it's been really credit parties, i.e., the universities. 75% of our rent in the business we're in comes from investment-grade credits or $1 billion market cap companies, and it is a more steady, reliable, cash flow-growing business, and that's worked very well for us, and we invested in or continue to invest in the six-and-a-half to eight unlevered return areas, so we really like that.
Now, could we take that next step to the cluster markets as we've gained relationships, we've gained understanding and expertise? Should circumstances, should an opportunity present itself that we feel capable of doing and we think would advance the cause, then we certainly would consider it. Luckily, we have so much momentum in the university-based business that that's really where we're devoting the vast majority of our resources.
As we step back and think about the external growth pipeline, I think probably over the last year, everyone's been very anxious to know what you're going to do, right, and if you think about your history and the discipline that you've shown and the returns that you've generated, whether it was an Atria or a Lillibridge or the number of different things that you've done, how are you approaching this environment where the healthcare REIT you've now got back to a cost of capital, right? So the market is giving you capital that you could use to go out and buy something. So what's that tension internally about trying to find the right thing that is going to make shareholders money?
We are keen to get back to external growth because we do think it's a core competency and it's one of the areas that has enabled the company to succeed and deliver returns to shareholders. We're lucky that we're in these multiple verticals because typically, it has been an underappreciated asset in healthcare REIT that we've always been able to find something around the world that makes sense for us. We have a team of about 20 people. They're very actively engaged in the market. I would expect us to allocate capital first to the research and innovation pipeline.
Secondly, I'm guessing that we will try to do some opportunistic, unique Ventas-like investments over the next period of time, and then also some regular way, high-quality, relatively low cap rate, but high-quality and/or higher growth assets, which together should produce that both value as well as cash flow growth, which is what we're seeking.
So over time next month, next two months? She's not going to answer that. She's so good.
I'm smiling. For those listening on the phone, I'm smiling at my phone.
So you talked a little bit about the research and innovation development platform. Can you talk a little bit about Ardent, right, which went through a recapitalization last year? Where does that business sit today in terms of your desire to commit new capital? How much will that hospital business become of the total?
We made a very good investment in Ardent, which we invested in real estate and equity with our partner, Sam Zell. Ardent has filed for an IPO and is in a quiet period, so I hope that I can talk to you about it in the coming months, but right now, I can say Ardent's performed incredibly well. We've made good investments there, both on the real estate side, the equity, and the operator side, as well as providing capital to help them grow, and we are very interested in committing further capital should the opportunity present itself to help them grow even further.
As we think about external growth, are frequent flyer miles accumulating? So is this more U.S.-based, or are you thinking about Europe, U.K., Canada? Where is that focus today?
We're currently present in the U.S., U.K., and Canada. Most of our opportunities are domestic. But we continue to do work in the U.K. and Canada, certainly, and to a vastly lesser extent outside of those jurisdictions because I really do think that's where we're most likely to find our opportunities in the three jurisdictions I mentioned.
Right. And as you go back to your comment about disruption, how do you think about Canada and the U.K. in that phase about where you could take advantage? Does it have similar characteristics or not to that?
I mean, some are similar, some are different. Obviously, both Canada and the U.K. have much greater political, government, social support for the healthcare system and much more reliable funding for the healthcare system. And so I would say that in what we view as typically healthcare businesses here in the U.S., they have a lower cap rate and a lower risk profile, a more favorable risk profile. So that's how they're different. They are the same in terms of demographics, the demand profile, and really good functioning capital markets where you can match fund investments. Bob is feeling lonely over here, so I know a senior housing question is coming.
So there was one that came in here on LiveQA. You've mentioned returning to growth. MOB assets are still priced aggressively, and the research and innovation is a good platform. Given your size, it's difficult to drive the outsized growth. Does increasing senior housing exposure towards the bottom make the most sense as internal growth is your best potential to return to growth? If so, how are you thinking about approaching that via acquisitions or conversions from triple-net to RIDEA? Look at that.
Wow. That's a great question, multi-parts.
Juan Sanabria submitted that request.
Thanks for that question, Juan. Well-painted, so one of the pillars of the notion of our pivot back to growth is senior housing recovery.
Bob, just flip the microphone over a little bit. Thanks.
Yep. The senior housing recovery is one of the keys for us as we think about the pivot back to growth, and there's some green shoots around that, as you know, on the trend on new starts, which has been consistently since 2015 trending favorably downward, and as we look into 2020 and beyond, therefore, have pretty good visibility on openings of new units and therefore great confidence and optimism in the organic turnaround in senior housing. Now, within that, we have, of course, the opportunity not only to grow internally but also externally, and so that may manifest itself in, for example, growing our presence in a particular market to grow our scale and our share or, in fact, to grow more broadly, taking advantage of that turnaround, so both internal and external growth in senior housing is attractive and exciting and certainly on the table.
What do you think about senior housing? You mentioned the starts at least coming down, but you still have a lot in the pipeline today. When do you, and occupancy seems to maybe have reached an inflection point, at least doesn't seem to be going down any further. So when do you think you'll see actual growth within that senior housing portfolio?
Right, so translating that start data into deliveries, and as we look at for our portfolio 2019 and 2018, the new openings are very similar in our view, so still working through some of the peak construction that began back in 2015, 2016, and therefore, some of the pressures we see in the here and now this year are very similar to last year. That said, as we look now into 2020 and look at new openings in our estimate, particularly in the back half of 2020, you start to see a drop-off in those openings, and therefore, that's a really encouraging fact. Of course, we have to work through the cumulative deliveries of those units already opened, but as you think about the back half of 2020 and then beyond, that sense of equilibrium returning is pretty strong.
And so when you see that decrease in starts, does that make you want to get either more aggressive or add exposure to senior housing development?
Potentially. Yeah. Again, there are things we want to see this year working through. For example, pricing. How is pricing reacting in the marketplace? What's the competitive marketplace look like? The timing of deliveries is another variable. Again, that's uncertain. But the fundamentals remain very attractive. And that's certainly something that we're looking hard at.
And then on the demand side, you obviously have the demographics come in more and more in your favor. How do you think about the ability to increase the penetration ratio either through marketing or better adoption of senior housing, trying to get that average age a little lower?
Yeah. A favorite topic of mine, penetration rate as we describe it in senior housing, which is how many of the seniors who are in the target market, call it 80+, are actually in senior housing communities is only in the 11%-12% range. The value proposition of senior housing is extremely high. It's not only much more affordable to be in senior housing, you're in a community and have a better wellness and a better life. And to be able to therefore market that value proposition to grow that penetration rate from that 11%-12% is a very, very large opportunity. And for example, 100 basis points of share gain fills every unit in the country. And given that value proposition, it's really a marketing challenge. And how do we speak to the consumers and the decision-makers around that value proposition?
When do we speak to them, and as an industry, I think we have an opportunity to do that, and so that is one of the areas, certainly, of opportunity, not only for our operators, which have scale, example being Atria and sophistication, but also for the industry at large.
So for us, really, the opportunity is twofold. The first, as you described, is having the penetration rate increase because that is very powerful. That is less in our control. What has been in our control is really expanding market share for the focused operators that we work with. And we have been using a significant effort in applied analytics that perhaps Bob can talk about as well, about how we might be gaining market share in our own communities.
Right. There's been a lot of discussion around how do we use data in senior housing, much less within healthcare reach. I think we have an advantage model as we think about data analytics. We are, for example, in senior housing, the second largest owner of real estate in number of units, second to Brookdale. And so we have unique scale in terms of the information that we are able to gather and have done so for nearly 20 years. Within senior housing, the second layer of insight really comes from our scale operators, most notably Atria, which has leading-edge technology and insight around the operations, whether it be pricing, volume, cost controls.
And then finally, we have an exclusive partner, Integra Analytics, which is a third-party data analytics firm, which we are working with basically 24/7 and looking at that ecosystem of data and saying, "How can we drive insight and capital allocation? How do we make better decisions at a market and sub-market level, whether it be redevelopment, acquisition, disposition?" So that ecosystem, I think, is very unique, very advantaged, and something we're talking more and more about.
How do you think about the number of operators within your senior housing portfolio? There seems to be varying across the big three, at least, a varying opinion on is more operators better or is a more concentrated operator base better?
Yeah. We have a very focused operator strategy. In other words, in our SHOP portfolio, we really have three operators. It's Atria, 60% of that SHOP portfolio, followed by Sunrise, and then ESL, a new operator, which was launched last year. And what we like about that strategy is each of those operators have scale and sophistication that allows them to gain share. And even in a tough market as we're in today, and because we have the P&L in SHOP, we want to have that not only the best real estate and the best locations, but the best operators. And we think, therefore, that's an advantaged position. Smaller operators oftentimes don't have the scale to be able to invest behind technology, to have the processes around pricing, revenue management, retention of its employees.
And so there's a real advantage of not only scale but skill when applying that position that we think drives value and market share. So we like that model. And it's, again, very differentiated.
How do you think about the ability to share best practices across those different operators?
Yeah. At the end of the day, the operators compete with one another. And so it is, as Juan has said, capitalism doesn't work that way. We don't share trade secrets with our competitors. And so.
So we're going to get there to same store in Hawaii, right?
Pardon me?
You're going to get there on the same store in Hawaii, correct?
Yeah.
That was a yes or a no? Maybe.
Yeah. Yeah.
It would be great.
We don't think they're going to.
It would be good for investors.
It would be great.
Yeah.
And analysts.
And analysts.
Yes.
We think they're going to compete rather than collaborate. That's just human nature.
So, senior housing, are we going to?
I would add, I mean, even if you share best practices, if you don't have a very large, say, employee base, then you're not going to be able to swap out employees when you have a vacancy and things like that. It's not only best practices, but your ability to execute on some of these things. The execution is equally important.
So we understand that senior housing is still going to be negative year over year. Is there a chance that a quarter will show year over year positive growth, or do you think it's going to be negative for each quarter of 2019?
Yeah. Just to restate the guidance for the year, it's flat to down 3% on NOI for the year. And as we think about phasing year over year, I think if you just picked at the midpoint down 1.5%, for example, we would expect quarters to be roughly similar in terms of year over year profile. Now, Q1 always has some interesting dynamics. Last year, we had the flu. This year, we have extreme weather, polar vortex in Chicago, for example. So I think there's always something going on quarter to quarter. But as I've said, I don't expect wild quarter to quarter sort of fluctuations.
So we're not going to get to the fourth quarter being up?
I don't expect huge variability quarter to quarter.
Another question on senior housing that came in through the web. How significant is the adoption of in-home care? And what is the cost differential between in-home services versus moving into a senior housing community? And I know for a lot of seniors, moving into a community is difficult and getting out of their lifestyle and their home and where they're comfortable.
I would say that in-home care is a big thematic within healthcare generally. And many of the managed care companies, there was a Kindred at Home, obviously. It is an important way that healthcare is going to be delivered to seniors in the future. There's no question about that. And in fact, many of the residents, for example, in our communities in senior living actually take in some home care. So when you move to senior living, your home is the senior living community. And many of those residents actually utilize that service. I would say that given the size, senior housing is a lot more than healthcare. It really is community. It is activity. It is safety. And that is a really different proposition for living better, longer than having someone come in to do an hour a day or three times a week care.
So I think home care has a very big place in the delivery of care to seniors as we look forward. It so does senior housing. And senior housing, from a cost perspective, is cheaper than replicating all of those services if you are living in your home because, obviously, you don't have real estate taxes. You don't have insurance. You don't have the upkeep costs. And it is safer. And you have friends there. And so we are big believers in the senior living model for more than healthcare, while acknowledging that home care is a healthcare alternative that will be used by large portions of the population.
Another one that came in here is it says you currently have exposure to Griffin within your loan portfolio, which comes due later this year. The entity probably has more leverage than would be marketed today. Is there an opportunity for Ventas to take ownership of these assets, or do they not fit with your strategy?
Thank you for that question. Right now, we assume that that loan will be repaid. I would say that there's always opportunities in the context of these more interesting situations that could arise and, if appropriate, could be good for the borrower and for Ventas.
Maybe just on that loan book, you've obviously been decreasing, I guess, exposure to the loan book. What's the opportunity or desire to backfill that? And where do loans play into the longer-term strategy of Ventas?
So if you think about what we do with capital, we really try to support and provide capital to the leading senior housing, healthcare, and universities in the nation. One way to provide that capital is to lease back. Another is to own assets under management contracts, etc. Another is to provide loans. A great example of what we did is we gave Ardent a $700 million loan that was very well structured, ended up being paid back to us at a 12% unlevered IRR. So a very secure but high-yielding, very profitable piece of paper. At the same time, and this is what really made it sing, was it enabled Ardent to double in size because it was basically an acquisition bridge loan.
So when there are opportunities like that, we are excited about pursuing them, even though they can create some lumpiness in earnings when they get repaid. So we take a risk-adjusted return opportunistic approach to the loan book. We also made a loan a couple of years ago to BioMed that was a 10% piece of paper that was repaid also in 2018. And so when those opportunities present themselves on assets that we know, with operators that we know, where we think they're well structured and well secured, and especially when we can help a customer, we will do more. Absent that, we'll be very selective.
You talked about the CC spin in your opening comments about the transaction activity that you've completed. Do you ever think about reentering the skilled nursing space in a different way? There has been some changes going on. I would say that some of the fundamentals have probably been better than what were feared and seems to be climbing up a little bit. So have your thoughts changed at all there?
Having entered this business with a large nursing home portfolio, I would say that the business ebbs a lot more than it flows, and it is not really because of demographics. It's really because of the form of payment and the margins that are expected from the operators. There are moments in time when it's possible to make money on skilled nursing, and some people have. In general, it's not our top capital allocation priority, and that remains true at this moment, but again, if interesting opportunities present themselves that we think will drive growth and also will drive reliable cash flow, then that's what we want to do for shareholders.
A couple of years ago, MOB investment was extraordinarily hot. Cap rates got down pretty low. I would say the same thing a little bit before senior housing fundamentals turned more negative, that you found a lot of capital chasing that. Where do those discussions lie today? And is there an opportunity for you to monetize any parts of your portfolio, not necessarily non-core, but remain as a venture partner? Or would you prefer just to raise equity capital through your stock than through your assets?
So we have been really fortunate in creating a lot of value within the portfolio, which I think we're replicating in the research and innovation business by entering segments early where we thought cash flow would grow and/or cap rates would compress. And of course, if both happen, then that's really the way to create a lot of value, which has happened in senior housing. It's happened in medical office. I think it's happening in the research and innovation. That gives us. It does give us a great opportunity to raise capital for appropriate capital needs in multiple ways. And we have a very valuable unlevered portfolio that I think is attractive to a lot of institutional capital sources.
And so we would consider that if we have a use that is more attractive than what we have, and depending on how that capital raise compares to other ways of raising capital. And I think we have a tremendous platform that we can use to attract capital should we wish to do so in multiple formats.
There was a follow-up question to whoever asked the home services question. They have a follow-up now. They said, "Does the in-home care increase the age of which seniors choose to move into a senior community? And would that increased age impact the absorption rate in the senior housing industry?
Yeah. I mean, I really see in-home care as one of the bigger threats to the nursing home business rather than the senior living business because it really is used by the managed care providers to divert people from institutional healthcare settings, not really senior housing settings. And so it is really used for a different purpose than what senior housing is used for. And it is a nice supplement for a senior who needs a healthcare use here or there a couple of times a week or even every day. But it really doesn't change the safety and community of moving to a multi-family, essentially senior living community for a senior, which provides a lot more mental security for children and families who have seniors living alone. It is not a substitute for that.
Maybe just a final question on the net lease senior housing portfolio. What are the thoughts on lease modifications this year and maybe specific to Holiday as well?
Okay. We've talked about that. We have a Triple-Net Lease portfolio that is about, call it $460 million-$470 million of NOI. The vast majority of that is expected to be steady state status quo as we look into 2019. When you look at two smaller parts of it, one is Holiday, where lease coverage is tight, although we have a structured guarantor that has improved its financial condition. Our view there is that if appropriate, we would talk to Holiday about some kind of modification. It's quite small in our portfolio. And in any event, if we chose to do something, we believe it would make us substantially economically whole. And there's a lot of different things we could do there that are interesting.
Secondly, in terms of a handful of other less creditworthy triple-net operators, I would expect us to enter into some types of lease modifications with them this year, probably to the tune of about $10 million in some way, shape, or form, and we will continue to try to optimize each of those very tiny situations as we look to the turn in senior housing.
Okay. We have rapid fire.
The session will begin at 5:00.
Okay. We're going to have to go over the event. Will the healthcare sector have more or fewer companies a year from now?
Fewer.
NOI growth for the healthcare sector overall in 2020?
We'll tell you when we get there.
10-year Treasury a year from now, it's 2.75%.
Good one. I'm going to say 275.
What year will the U.S. enter a recession?
The end of 2020.
Perfect. Thank you.