Q&A: 'We can provide almost unlimited amounts of capital' to help health systems grow

Since 1999, Debra Cafaro has served as CEO of Chicago-based Ventas, one of the country's largest healthcare-focused real estate investment trusts. She became chairman in 2003. Ventas had $3 billion in revenue in 2014, with a portfolio that includes senior housing, medical office buildings and specialty hospitals. The company entered the acute-care hospital space this year when it acquired Nashville-based Ardent Medical Services in a $1.75 billion transaction. Ventas will separate Ardent's hospital operations from its real estate but continue to own a 9.9% stake in the new operating company. At the same time, Ventas spun off its skilled-nursing-facility assets into a separate company, Care Capital Properties, a publicly traded post-acute care REIT. Modern Healthcare reporter Beth Kutscher recently spoke with Cafaro about the strategy behind those transactions, Ventas' plans for expansion and the outlook for the healthcare REIT sector. This is an edited transcript.

Modern Healthcare: What is the strategy behind Ventas' recent spinoff of its skilled-nursing-facility assets and its entrance into the hospital real estate market?

Debra Cafaro: We were very fortunate this year to acquire a top 10 hospital system in Ardent Medical Services. Ventas is the leading capital provider to the healthcare industry via ownership of real estate. Our strategy is to partner with leading healthcare providers in multiple segments and provide capital to help them accomplish their strategic goals and fulfill their mission. We are attracted to the hospital sector for a lot of reasons—size, capital intensity and that it is the center of the delivery system. We are very excited to break into this space with a quality provider like Ardent.

MH: Do you see this as the beginning of building a hospital platform?

Cafaro: Absolutely. Our game plan is to help Ardent grow by providing capital to them to acquire other hospitals that they can add to the fold.

MH: So you plan to make the acquisitions through Ardent as opposed to doing more sale/leaseback transactions?

Cafaro: We can do both. It's exciting that we have entered a segment where the real estate opportunity is over $300 billion in value. It is highly fragmented, there are a lot of capital needs, and it is consolidating. We would also identify other hospital systems, both for-profit and not-for-profit, where we could do sale/leaseback transactions and keep their management team in place. So we have two ways to grow this business.

MH: Have you found that there is more acceptance among not-for-profits of partnering with REITs?

Cafaro: Yes. We have been working on this for a decade. Ventas and Lillibridge Healthcare Services (a REIT Ventas acquired in 2010 that operates as a subsidiary) have been serving not-for-profit systems for over 25 years in the medical office and outpatient sectors. We are finding much more interest in exploring nontraditional ways that high-quality systems can fulfill their missions. We think we can provide almost unlimited amounts of capital to enable these organizations to grow, to consolidate and, ultimately, to become more efficient and better serve their communities.

MH: A lot of care is moving into outpatient. How do you see that evolution going and how do you see your ability to profit from it?

Cafaro: We believe that part of bending the cost curve will be treating patients in the lowest-cost, clinically appropriate settings, which in many cases may be an outpatient setting. But at the same time, we would hope to provide capital to assist hospitals to own both inpatient and outpatient and capture an integrated market. We would own the real estate, and that real estate would operate in a synergistic way. The outpatient settings can be feeders for the high-quality hospital system. We can help hospitals build market share by acquiring other hospitals and working through capacity issues.

MH: How does the spinoff company you created, Care Capital Properties, give you additional flexibility?

Cafaro: The strategy is to create two faster-growing companies with differentiated strategies. Care Capital will be focused on the skilled-nursing business with local and regional providers. It's an external rollup strategy for that sector. We think there is a gap in the market, both on the REIT side as well as on the customer side, and that Care Capital will be well-positioned with a good balance sheet to help that cohort of providers grow by providing capital.

Ventas, on the other hand, improved the quality of our portfolio. We focused on doing this with the nation's leading operators in every sector—hospitals, post-acute and senior living. We have increased our internal growth rate. And we have maintained the ability to serve across the continuum of care by entering the hospital space with Ardent, while keeping our post-acute business with the leading providers like Kindred and Genesis and HealthSouth, and having this outpatient and medical office building business. All of these over time will work together.

MH: Has the skilled-nursing business become more challenging, given the payment cuts and overbilling investigations?

Cafaro: The post-acute business is an integral part of the delivery system. It goes through ups and downs, but it's here to stay. While we reduced our investment in the skilled-nursing business through the spinoff to the tune of about $4 billion of assets, we want to keep this continuum of care within the portfolio as these high-quality providers can start to work more and more together with hospitals and physicians.

MH: Are you considering offering value-added services to the operating companies, such as a group purchasing organization?

Cafaro: We help our customers achieve some benefit from our scale in terms of purchasing and we are likely to pursue that even more aggressively.

MH: How do you see your investment mix over the next couple of years?

Cafaro: We will build a leading business in the hospital space over the coming years. We hope to do that with Ardent, as well as with other quality hospital and healthcare systems. I hope that segment of our portfolio grows. There may be some opportunities in post-acute that would be very selective.

MH: How has healthcare reform affected the industry?

Cafaro: The Affordable Care Act and related healthcare reform has been a net positive for our business. Hospitals have been the greatest beneficiaries. Post-acute providers have not yet gotten the same significant benefits. But on the whole, the ACA is a net positive for our business.

MH: What will be the impact on your company and other REITs when the Federal Reserve raises interest rates, since REITs have benefited from a low-interest rate environment?

Cafaro: We are in an exciting phase when we will continue to see incredible growth in the opportunities we have. There are always sources, such as interest rates, that cause you to change the tactics you may use. Right now, I think you will continue to see a very modest interest rate environment. That will continue to be supportive of our business.