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By Jason Ren | 11-10-2011 12:00 AM

Ventas CEO: Reducing Risk Creates Total Return

Ventas CEO Debra Cafaro describes how she takes steps to diversify tenant exposure and clean up the firm's balance sheet to consistently create shareholder value.

Jason Ren: I am Jason Ren, REIT analyst with Morningstar. Joining me today is, Philip Martin, REIT strategist with Morningstar and chairman and CEO of Ventas, Deb Cafaro. Ventas is a narrow-moat health-care REIT that we cover. Thank you for being here.

Debra Cafaro: It's my pleasure.

Ren: Ventas has built a quite tremendous total return during the last decade, and it's sometimes been held up as a poster child of building wealth through splitting property operations, PropCo/OpCo, and while others have tried, very few have succeeded. I was wondering, what do you view as the keys toward a successful PropCo/OpCo split?

Cafaro: Yes, Ventas started out 12 years ago or 13 years ago separating what was then the largest vertically integrated owner/operator of long-term care in the United States. We had a single tenant essentially in the early days. The key to PropCo/OpCo wealth creation is that we were able to adopt and execute a growth and diversification play-in over the years.

It was heralded it as a very smart strategy, but it's very common-sense, which is, we had a single tenant and no matter how good the tenant was, we knew that we had to have more tenant relationships. We knew that, it was important to diversify effectively. We knew that our single tenant was in the nursing home and hospital business. So, it was important to expand that to other kinds of asset types within health care. And now Ventas is really 70% private pay net operating income, so we've diversified in that way, as well.

We knew that we had to change our balance sheet at that point in time. We really had access to a single source of capital which was really the bank market, and so understood that as a REIT, we had really to rely on multiple capital markets. So, we really embarked on a strategy of growth and diversification at that time.

We built a great team, and that's really been a big part of it--the team's skill and the team's execution of our strategy. And this is what I think creates total return: We were able to consistently reduce risk in our business, through balance sheet management, through diversification, through good governance, et cetera, while we consistently built cash flows.

So, those two principles, I think, create shareholder wealth. As you know over the past 10 or 12 years, Ventas has led the pack of publicly traded financial firms and REITs in terms of creating wealth for shareholders, and that's what our team is focused on. Again the principles, I think, are managing risks while at the same time building cash flows.

Ren: As of late, a theme we've heard in health care is consolidation. And while some operators overlap across the major health-care REITs, you're also seeing Ventas Healthcare REIT and HCP really putting the dollars behind very specific horses and having sizeable tenant concentration. What is your outlook on consolidation, and how do you kind of mitigate the risk of "possibly backing the wrong horse" in terms of operators?

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