After the collapse of Bear Stearns and Lehman Brothers in 2008, Debra Cafaro, the CEO of Ventas Inc., worried that the country was heading for a massive financial crisis. “I had never seen such big companies go down,” she recalls. She called her senior management team to a meeting and could feel the fear and tension in the conference room as she told the group of 10 executives not to panic. “I knew I had to be calm and say that I believed in what we were doing,” she says.
The stock price of the Chicago-based real estate investment trust plummeted along with the rest of the stock market, hitting a low in March 2009. “Focus on liquidity,” she told her managers, urging them to concentrate on keeping the business going. Cafaro tabled the company’s plans for growth, sold some properties and relied on $2 billion in capital she’d raised before the crisis.
Her foresight and determination paid off. Two years later, the company, which owns nursing homes and other health care facilities, is thriving. Ventas now owns 599 health-care properties in the U.S. and Canada. Its $8 billion market value is nearly three times what it was in March 2009. Unlike other debt-laden companies, Ventas was poised to capitalize on well-priced properties.
Cafaro hopes to take advantage of the trend
among cash-strapped hospitals of divesting their
outpatient facilities to build “a diversified portfolio
that will ensure reliable cash flows.”
This June, the company acquired Lillibridge Health Systems and its 95 medical office buildings for $381 million, giving the company instant scale in a health care niche that is expected to grow rapidly in the next decade. “This fits with health care reform, which is about treating people in the lowest cost, most appropriate settings,” says Cafaro. She cites data showing that patient visits to hospitals are expected to be flat or decline in the next 10 years, while visits to less costly outpatient facilities are expected to grow by 30 percent. Demand in the outpatient market will be driven by the medical needs of 79 million aging baby boomers, as well as 39 million previously uninsured people.
Cafaro hopes to take advantage of the trend among cash-strapped hospitals of divesting their outpatient facilities to build “a diversified portfolio that will ensure reliable cash flows,” she says. “It’s such an uncertain time that we need to be building the company in a way that it can do well in multiple environments.” She tracks unemployment figures, consumer spending, inflation trends, interest rates and the bond market. The 52-year-old daughter of a Pittsburgh mailman and the first in her family to go to college, Cafaro talks to hedge fund managers and real estate developers, restaurant managers, retail store employees and taxi drivers — asking, “How’s business, and what’s the mood of your customers?”
Executives need “a working hypothesis” about the economy in order to make intelligent decisions, Cafaro says. Her current view, which she has held for the past 12 months, is that there will be economic growth but it will be slow and uneven. But she isn’t ruling out other possibilities. She considers how big decisions she is making will play out if a double-dip recession occurs, or if growth occurs at a faster pace than she expects.
Ventas was on life support when Cafaro, a former real estate and corporate lawyer, was recruited to lead the health care REIT in 1999. The main tenant of its properties was about to file for protection under bankruptcy law. She insisted on playing a leadership role to financially restructure the tenant, which emerged from bankruptcy as Kindred Healthcare Inc. She met with screaming, angry creditors, and eventually renegotiated leases with Kindred to guarantee that Ventas received steady 3.5 percent annual rent increases. At the same time, she shrank Ventas’s debt.
Some of her managers wanted to keep spending on
new properties, but Cafaro, while encouraging
debate, told them to “get conservative.”
In 2004, Cafaro started making acquisitions. But she was keenly aware that the real estate boom wouldn’t last forever. Although health care properties were far less likely than housing to suddenly decline in value, she didn’t go on a buying spree. She carefully monitored the rate of mortgage defaults. In mid-2007, just after Ventas completed its fourth acquisition, Cafaro began seeing the first write-downs in the subprime mortgage market. Some of her managers wanted to keep spending on new properties, but Cafaro, while encouraging debate, told them to “get conservative.”
With the $2 billion in equity and debt she raised before the markets tumbled, as well as money from asset sales and the annual rent increases she had negotiated in lease agreements before the crisis, Ventas had plenty of cash and a solid balance sheet when the financial markets were in turmoil. Cafaro thought that if Ventas could raise even a small amount of additional capital, investors might be persuaded that the company was “still a good bet” and had a future. Ventas raised several hundred million dollars of equity and debt in the first half of 2009, when some companies had little or no access to capital. In subsequent months, Ventas led the REIT sector as the stock market began recovering.
The return to shareholders for the 12 months through Aug. 31, including stock price appreciation and dividends, was a stunning 35 percent, while the return on the Standard & Poor’s 500 stock index was 4.9 percent.
