The aging of America is opening the door to new real estate opportunities in senior housing and medical office properties, according to two experts in these fields.
Andrea Heuson, professor of finance and academic director of Miami Herbert Business School’s real estate programs, introduced Patricia Will, founder and CEO, Belmont Village, a senior living company, and Debra A. Cafaro, chairman and CEO, Ventas, Inc, a public REIT. “This is the first time we have had a conversation with three women on the stage,” she said, gaining a round of applause.
Cafaro began the afternoon session, “Riding the Silver Tsunami,” by outlining Ventas’ business strategy. “Our company is well positioned at the intersection of health care and real estate,” she said. “When we started back in the 1990s, medical was not a recognized asset class. Since then we have shown the market how to think about these real estate assets, price them, and understand the risk-reward relationship. That has helped to institutionalize the asset class.”
Today, most medical real estate is owned by operators, Cafaro added, noting that as a diversified investment trust Ventas offers a more efficient way to hold those assets. “Ventas has been my work for 21 years, and we are still in the early innings of that story,” she said.
Asked about Ventas’ model , Cafaro said the REIT is active in senior housing, as well as post-acute care, long-term acute care, inpatient rehabilitation, medical office building and outpatient buildings. A relatively new sector is academic life science, medical and technology buildings, including a relationship with the University of Miami. “Our expertise is raising capital at a lower cost and then investing it wisely in these verticals,” she said. “Our low-leverage model has delivered 22 percent compound annual returns for the past 20 years.”
Cafaro added that Ventas recently introduced an open-end private fund for long-term investors who are concerned about the market volatility of a public REIT. To date, the fund has raised about $600 million in capital, she said.
Next, Will turned the discussion to senior housing, noting that her firm has partnered with Ventas. “We believe in the senior living business,” said Cafaro. “There is tremendous demand from people age 85 and up, and that’s our customer base now. But there is oversupply in many U.S. markets with declines in occupancies and net operating income (NOI) over the past couple of years.” Cafaro said Ventas saw a change first in markets like Atlanta, which has a low barrier to entry. “Like other aspects of real estate, it’s a matter of timing, as well as demographics,” she added.
However, Cafaro said senior housing starts in 4Q of 2019 were dramatically lower than at the peak of the market cycle and that might help to balance the supply-demand equation in the future.
Will then asked Cafaro if Ventas would consider investing overseas. “We have global ambitions, but the opportunities in North America are very attractive,” she said. “Europe and Japan have great demographics for senior housing, but the returns are very low. That’s tempered our international ambitions at least for the time being.”
Cafaro talked about the importance of sustainability in real estate development and investment. “We care about maximizing shareholder value but we also want to make our buildings more sustainable and be good contributors to our communities,” she said. “We are also committed to diversity in all its dimensions.”
The “silver tsunami” in North America is broader than senior housing, noted Will, who asked about Ventas’ healthcare real estate assets. “Our office buildings cater to the over 65 population, who spend more on healthcare and visit doctors far more often than younger groups,” Cafaro said. “That market has seen steady growth and our buildings have 36 million visits every year.”
Ventas also has more than 6 million square feet of space in the life sciences sector and another 2 million square feet under development, Cafaro said. “We are super-excited about laboratories that support genetic research and hold the promise of delivering precision medicine and curing diseases in the future.”
Asked about prescription drug costs, Cafaro said there is some predatory pricing on the pharmaceutical side, but this is an industry where the U.S. is leading the world. “In a market economy, the winners have to subsidize the losers,” she said. “Hopefully, the ability to have groundbreaking cures will bend the cost curve in a better way.”
Cafaro added that she believes basic healthcare is a fundamental right for everyone. “The Affordable Care Act (ACA) was a good start, because the way to bring down costs is to get everyone into the insurance pool,” she said. “We should look at evolution, not revolution in expanding access to care.”
Looking at her own career, Cafaro said she has taken an unconventional path. From a “working class girl” from Pittsburgh, she kept learning about real estate and finance, always trying to add value to her positions. Today, she is also an owner of the Pittsburgh Penguins with two Stanley Cup championship rings. “I have always been willing to take risks, and that has led to a very satisfying career,” she concluded.
