Ventas, Inc. Company Interview: Raymond J. Lewis

• On 3:14 pm EDT, Tuesday September 22, 2009

67 WALL STREET, New York - September 22, 2009 - The Wall Street Transcript has just published its Medical Real Estate: Healthcare REITs, Long-Term Care Facilities and Hospitals Report offering a timely review of the sector to serious investors and industry executives. This 45 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investor Perception -- Secular Shift -- Health Care Reform -- REITs Growth -- Public Markets -- Divident Yields -- Debt Levels -- Grow Generation -- Outpatient Versus Inpatient Care -- Health Care Delivery -- Leaseback Arrangements -- Skilled Nursing -- Seniors Housing -- Growth and Expansion -- Positioning the Company for Winning -- Portfolio Diversification -- Geographical Growth -- Advantages to Investing in Licensed Hospitals -- Higher Returns -- Underwriting -- Fragmented Industry -- Consolidation Opportunities -- Debt Refinancing -- Growth in Health Care Spending

Companies include: LifePoint Hospitals (LPNT); Community Health Systems (CYH); Psychiatric Solutions (PSYS) and Tenet (THC); Medical Properties Trust (MPW); Healthcare Realty Trust (HR); LTC Properties (LTC); Health Care REIT (HCN); National Health Investors (NHI); HCP Inc. (HCP); Alexandria (ARE); BioMed (BMR); Senior Housing Properties Trust (SNH); Omega Healthcare Investors (OHI); Ventas (VTR); Emeritus (ESC); Brookdale (BKO); Fannie Mae (FNM); US Physical Therapy (USPH); AmSurg (AMSG)

In the following brief excerpt from the 45 page report, Raymond J. Lewis, Executive Vice President and Chief Investment Officer of Ventas, Inc., discusses the company and the outlook for the sector and for investors.

TWST: Please start by giving us a brief history and overview of the company's business.

Mr. Lewis: Ventas is a health care REIT. We were formed in 1998 when we spun-off our primary tenant, Kindred (KND), in an OpCo/PropCo split. So we've been around for over 10 years. We're one of the largest health care REITs and one of the largest REITs overall. Our enterprise value is a little over $8 billion. Our portfolio is diversified across the entire health care real estate space. We own medical offices, seniors housing, skilled nursing, specialty hospitals - those are the big food groups. We have over 500 properties in 43 states and two Canadian provinces. We're a North American company and primarily a U.S.-focused company. Our management team has been together since 2002. We've got a pretty deep experience set in our core areas of competency, those being real estate finance, health care and legal. And if you think about what our business is, we're basically a company that provides capital to health care owners and operators in the form of being a real estate owner. So what we need to know is we need to understand real estate, we need to understand finance, we need to be able to negotiate and structure good contracts, and we need to understand what's going on in the health care space because that's ultimately where our operators operate, and where they are going to be able to generate the cash flow to repay us. I'm the Chief Investment Officer. I've been a health care lender for about 20 years, first with GE, then with a company called Heller Financial and now with Ventas. I've built businesses both at GE and at Heller Financial that were sizable health care real estate lending businesses as well as health care corporate finance businesses. Our President and CEO is Debra Cafaro, and Debra's background is in real estate and law. She is a lawyer but also ran Ambassador Apartments; she was President of Ambassador Apartments before she came to Ventas in the 1999-2000 time frame. Our General Counsel is Rick Riney, he's been with the company since its inception. His background is in real estate law, and he's been practicing real estate law for almost 30 years now. Our senior citizen, so to speak, is our Chief Financial Officer, Rick Schweinhart, who has been working in the health care industry for hospital companies and insurance companies for a little bit longer than Rick Riney, about 35 years. Rick was the CFO for Galen Hospitals, which was part of Humana. He was also CFO of our primary tenant, Kindred, for a short period of time. And he's been our CFO since 2002. So that's the cast of characters.

TWST: You mentioned the four different property types that you invest in. Is any one a particular focus or is the portfolio evenly divided among the four?

Mr. Lewis: When I came to the company in 2002, we had completed our spin-off of our tenant and had basically one tenant, and all of our portfolio was government reimbursed. Our objective was to diversify and grow our business so that we would have more reliable and predictable cash flows, and have more growth opportunities going forward. Since that time, we have acquired a little over $5 billion in real estate, and we have diversified the portfolio such that right now the government-reimbursement portion makes up about 45% of our portfolio. Our largest tenant, Kindred, accounts for a little under 40% of our revenues. Private pay is now 55% and most of that is seniors housing. We have a small but growing medical office portfolio. Our objective going forward would be to continue to grow in the medical office area. I think right now, at about 3% of our NOI, that portfolio is under-represented. And I think we could have a real opportunity, both from a diversification perspective but also from a strategic perspective. We really like the medical office building space because the demographics are going to play to that in the near term. If you think about the Baby Boomer demographic, which is going to be turning 65 in 2010, they've really had a massive impact on every single sector of the economy that they've touched, whether it was McDonald's in the 1960s or Chrysler minivans in the 1980s, or what will hopefully be our health care business in 2011. They transformed our economy at every major milestone. And so the first place that they're going to be touching the health care system is going to be in the medical office building, because they're going to see their doctor and they're going to have outpatient treatments for knees and hips, and shoulders and other sorts of things like that. They may be going into the hospitals for short stays, but they will be using their doctors more frequently. And the medical office building is going to be the first place that they really interface with the health care system - long before they move into a senior housing community or a skilled nursing facility. So we really like that space in the near term and would like to invest more money there. We think that another area that could hold potential opportunity for us is in the life sciences space - those are pharmaceutical testing and pharmaceutical development labs - and also biotechnology. Certainly, as we continue to focus in this country on driving costs out of the health care system, we are going to be looking for more and more non-invasive therapies. And pharmaceuticals and biotechnology are going to play a very big part in that. And if we can find good real estate around major research centers, we think that's a way that we could add another dimension to our portfolio that could, over time, be a nice growth-driver for us. Those are some areas we're not in right now that we might look to get into, or that we're not into heavily right now that we would look to increase our exposure to over time. We are also going to continue to invest in our core products, that being seniors housing, skilled nursing and hospitals. We may also make some selective debt investments to support our tenants or to take advantage of some attractive pricing for those types of investments. I think that will probably be a small part of our investment strategy.

TWST: Talk about the breakdown of the portfolio in terms of leases to operators versus third-party managers.

Mr. Lewis: Almost 80% of our net operating income comes from TRIPLE NET leases. About 22% comes from managed assets, which includes our medical office buildings and then a portfolio of senior housing assets that are managed by Sunrise (SRZ). The TRIPLE NET lease is a really attractive structure. It basically provides very steady and growing cash flow. Every year the contract rents grow through escalation provisions in the lease contracts. So what you basically get is a stable, growing cash flow stream off of those investments. And then the managed assets - you don't get a contractual income flow, but what you get is all of the cash flow that comes off of the properties. So there is more variability in the cash flows, but over time the growth in those cash flows can be much greater. We look at our TRIPLE NET lease portfolio as being sort of the steady anchor foundation of our company, and then our managed portfolio as providing the long-term excess growth potential for our cash flow, or what the investment community refers to as alpha.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 45 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

For Information on subscribing to The Wall Street Transcript, please call 800/246-7673

Buzz up!