Welltower Inc. (WELL) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is Michael Klem. I'm a member of JPMorgan's health care investment banking team. Thank you all for coming today. It's my pleasure to introduce our next speakers. Tom DeRosa, the CEO; and Tim McHugh, the CFO of Welltower. One housekeeping note. We're going to do an informal Q&A at the back of the room at the end of the presentation instead of holding at 1:30 in the Yorkshire. So with that, I'll hand it over to Tom.

Thanks. Good morning, everyone. So let's start with the big idea. In redesigning the delivery of care, you cannot separate the how from the where. What does that mean? It means that at Welltower, we believe that the current built environment for health care delivery is one of the biggest risks for achieving the goals of value-based care. In other words, we think it's somewhat broken. So let's talk about some of the secular themes that drive our business. First, we all know this, the population is aging. Why is this a big risk? The big risk is the spike in per capita spend that occurs in the latter years of life. Another issue, when we think about value-based care, is the fact that the U.S. is actually lagging other -- many other developed nations. As you can see, life expectancy in the U.S. is lower than countries like Canada, the Netherlands, Norway, Switzerland, yet our per capita health care spend -- or the -- our health care spend as a percentage of GDP is dramatically larger. A lot of that is the reason that these other countries spend much more in social care. So here's a concept that is finally starting to get some airtime at the JPMorgan Healthcare Conference, but not something that was very much talked about before possibly because there's very little reimbursement around this concept. And there's no pill to address it, and it's called the social determinants of health. And I think many people are often surprised to know that 80% of an individual's health and wellness is influenced by social determinants, things like where you live, food, exercise, sleep. These are critical today as we face a population that is aging, that will live to ages beyond where anyone ever expected someone would live. And the little emphasis that's been placed on this concept is something that can create a tremendous issue in our economy. Another big theme here is that there's a tremendous amount of capital that is locked up in the current health care delivery infrastructure. It's $1 trillion, and we think as health systems have to rethink their business models for the future, having much of their capital locked up in acute care hospitals, many of which will go away, and inadequate outpatient delivery systems is another risk. So let's talk about the Welltower platform. We view ourselves as the largest health and wellness delivery platform that's real estate heavy, not a real estate company that happens to lease space for health and wellness uses. As you can see, we're a very large company. We have a $54 billion enterprise value, and we do own a lot of real estate. You can see 1,300 senior living communities and over 26 million square feet of outpatient buildings. That makes us the largest owner of medical office and outpatient sites of care in the U.S. But what we talk about is, if you could take all those buildings and squeeze them together, if you -- and you couldn't recognize one from the other, what you have is a very large platform with hundreds of thousands of seniors who are frail to demented, living on the platform every day. And tens of millions of clinician-patient visits that occur every year on that platform. And a lot of data comes out of that platform that offers keys to managing some of the big issues in health care. Welltower owns properties across the health care delivery and wellness continuum. We do not own acute care hospitals in the U.S. We own -- most of our business is in the senior housing space today, say, about 60% of our NOI is related to housing, about 30% is related to outpatient medical and other consumer health care delivery sites, and the remaining 10% is in post-acute care. This is a business that we have never abandoned even in the dark days of that sector and reimbursement cuts. Welltower's assets are principally in the United States, about 85% in the U.S., about 10% in the U.K. and 5% in Canada. As you can see from this map, we are clustered really around the major urban markets in the United States, pretty much mostly on the coasts. So let me come back to the concept of the platform. So what is the value of a platform? Platforms enable technology, products and services to plug into them and achieve scale. And that's how we position Welltower to the broader health care industry. So some of the things I'll talk about a bit later, which show how the Welltower platform is being optimized, our partnerships around technology, things we're doing around food and nutrition, how do we get good quality nutrition at an affordable price to at-risk seniors through our platform. Programs with payers. This is very much -- a piece of the future of our company is working with the large payers and the provider-owned payers with the Medicare Advantage program. I'll talk more about that in a minute. We are a company that practices what we preach. So our stock symbol as WELL and -- W-E-L-L, and wellness really drives our -- everything about our company. You can see, we are recognized on the sustainability front with many accolades, including being a member of the Dow Jones World Sustainability Index. From the social recognition standpoint, we're a member of the Bloomberg Gender-Equality Index, and one of the world's most admired companies by Fortune magazine. And in terms of governance, this is an area that we're very differentiated. 75% of our independent directors are women and minorities, and 50% of our independent directors are women. We ranked #3 by Deloitte in the Fortune 500 for board diversity. So let's talk about some of these programs that -- in partnerships that are coming to the Welltower platform. One that we announced 2 years ago was a joint venture with the ProMedica Health System in Northwest Ohio, which brought us together to acquire HCR ManorCare, which is a company that many people who've been attending this conference for many years, knew as really the finest post-acute care provider in the United States. Because of leverage put on the business when it was taken private by not one but 2 private equity firms and actually then a third, and then they put a bunch of leverage on in the form of leases, HCR ManorCare was basically driven into bankruptcy. We at Welltower and with ProMedica rescued that company. And this acquisition has positioned ProMedica not only to be one of the most vertically integrated health systems in the country because they go from acute care, all the way to -- they have a payer named Paramount -- called Paramount, but now they're in the post-acute care, they're in home health, they're in hospice. This has really put ProMedica on the map, and they were able to do that because of the partnership and capital that Welltower was able to bring to that joint venture. One of the newest partnerships was announced on Monday by Dr. Steve Klasko from Jefferson Health System is a strategic joint venture between that Jefferson Health and Welltower. What is this going to do? It's really, at its heart, going to take Dr. Klasko and Jefferson strategy of a hospital without walls and make that a reality. So for example, part of the joint venture will be Jefferson will contribute their essential ambulatory portfolio into a joint venture with Welltower, which will free up capital that Jefferson can reinvest in other parts of its business. We have a population of 20,000 seniors that live in the Greater Philadelphia area that now we will connect to Jefferson's home-based care programs. And following that, there will be initiatives to really work together with Jefferson to drive social determinant models through our -- through new affordable residential care assets that we will develop in the Jefferson market. Another area that is a focus for Welltower is developing the next generation of ambulatory care facilities with the nation's largest health systems. I'll just look at the top picture here of the Providence St. Joseph's cancer center in Mission Viejo, California. This is a state-of-the-art outpatient cancer center that has been built in a luxury mall in Orange County, not the place that you typically find health care. And then the bottom picture of Atrium Health in Charlotte, that is the Sanger Vascular Institute that is going to be finished later this year. Interestingly enough, this campus, where this is the anchor, was a former shopping mall. And now the anchor that will establish the sense of place here in Midtown Charlotte, North Carolina, is health care. That -- these are indications that health care is actually -- can become an anchor that helps form community. How are we partnering with other health systems around the country? Here's a great example. We have a business, which is being rebranded Welltower Living, which are affordable senior apartments throughout the U.S. In Pennsylvania, we're working with the Geisinger Health System because when we acquired some buildings in Scranton, Pennsylvania, we found out that 1/3 of the residents were members of the Geisinger Medicare Advantage plan. This came as a surprise to us and came as a surprise to Geisinger. They had no idea they had that many people living under one roof. So just think about that. Geisinger now sees that they can drive products and services to this population that will essentially be -- enable them to lower the medical loss ratios for this population and actually enroll others in their Medicare Advantage programs. And what we're doing is we're connecting Geisinger's home care business as well as its 65 forward clinics to this Welltower network of housing that's affordable. One of the most important initiatives that we put in place this past year is a collaboration with Anthem and CareMore. Let me just take a minute to talk to you about this. So you might not know that most seniors living in residential senior care today are not members of a Medicare Advantage plan. They were too old -- they're too old to enroll in one today, and they were -- Medicare Advantage was not a program that was readily available back when they were in their 60s. So most of the residents in residential senior care today in assisted living are Medicare Fee-For-Service. With CareMore, we are now bringing the -- meeting the clinical needs of a medically complex population that live with us, that where we maintain their social determinants like nutrition, safety, medication management. We bring CareMore's clinical services, nurses and nurse practitioners and physicians into our communities, and Anthem can now enroll them in a Medicare Advantage product called an I-SNP, or an Institutional Special Needs Program. So what this is? It's a win for Anthem and CareMore because they're now -- they now have a new population to enroll in their programs and deliver services to. It's a win for the residents because they are actually seeing a reduction in out-of-pocket costs being in an I-SNP versus their Medicare fee-for-service. It's a win for the residents' families who no longer have to come to our communities and take their parents to doctor appointments a few times a week. And it's a win for Welltower because these programs are increasing length of stays, which means CareMore is keeping our residents alive longer. Because remember, these are people that are living with us generally at -- for end-of-life care, the last 2 years of life because they are very frail or have numerous medical conditions and also have dementia. So what -- this is a true example of a public-private partnership because our residents are paying to live in communities where they can maintain their social determinants and be less of a burden on the health care system. Stay tuned for more on this. Finally, we are -- we have partnered with Philips N. V. to bring state-of-the-art technology to help manage the needs of seniors to what the Welltower building that will open in 3 months in Manhattan on 56th and Lexington, which will be the first purpose-built residential care community for seniors who suffer with cognitive diseases. And this will be the most technologically advanced building in the world for people with cognitive impairment, and we're very proud to -- that Philips is working with us, bringing their next-generation technology to help us manage a very complex population. Now I'm going to turn it over to Tim, who will talk to you a little bit about our financial performance. Tim?

Thank you, Tom. So I want to start with looking at our current footprint. So Tom often says, we're a health care company that expresses our view on where health care is going through ownership of real estate. And we exist in the structure in which we can do that very efficiently. So Tom just walked you through a lot of the -- a lot of our views on where we think health care is going and why. And I want to talk about how we currently -- there's 2 parts of how you should kind of view how Welltower plays that. There's currently the platform. We talked about the platform. What is our current platform? And then secondly, what I'm going to talk about is how we capitalize -- continue to capitalize that opportunity. I think if you walk away with nothing else from this presentation today is that there is a vast opportunity to continue to capitalize this, both through the existing footprints of health care, how health care is delivered. And also, as that continues to evolve, building a new infrastructure of health care. So one of the staples of Welltower, particularly when compared to our peers in real estate space, is that we're not afraid to continue to change our footprint. We are -- REIT is a very efficient way to hold cap -- hold real estate. I mean a lot of people view it as a perpetual holder. We view it as a continually evolving way in which we express our view through capital. So you've seen on the slide that's up on the screen right now. You see our footprint in 2015 is very different from what it looks like currently. And I think 2 of the ways in which I'd highlight our views continue to change as we've derisked our profile significantly by moving away from direct government reimbursement real estate. And we've also continued to integrate more with the leading health systems in the country. Health system -- the health system bucket, which we did not have exposure to in 2015, essentially direct joint ventures with health systems. And Jefferson, which Tom just spoke about, is the example of how we'll continue to grow that, and it will be a growing piece of our footprint going forward. We're a leading owner of senior housing across 3 geographies, the U.K., Canada and the U.S., and we're also integrated with health systems both directly in joint ventures, but also by being the largest owner of outpatient medical, which is really a broad category that envelopes every kind of location of health care delivery outside of the hospital. So how do we capitalize the opportunity going forward? This is an area where our structure allows us to do this more efficiently than any other public investment vehicle. We have really access to capital in 2 ways. One is direct access to the capital markets, and we continue to issue equity very efficiently to capitalize our investment opportunities. And we also draw a lot of interest from leading sources of capital globally that allow us to both monetize assets on our balance sheet and joint venture in projects in which it makes sense to bring in outside capital. And we often talk about the opportunity that we're capitalizing is truly a secular theme. On the senior housing side, it's just a growing demand curve that's truly mathematical. And on the kind of health care infrastructure side, it's a evolving infrastructure that regardless of where the capital markets are at will continue to move forward. So we've -- what we've really done is we've got a very efficient source of capital through the capital markets, which should be cyclical, and then very efficient source of capital through sources that are much less cyclical, which is going to allow us to capitalize these opportunities regardless of the market backdrop. On the debt side, we've got access to capital that's both very efficiently priced and diverse as far as our sources of capital. So we've got unsecured debt in 3 countries, both the U.S., Canada and the U.K. We've got a leading source of cost of debt relative to our peers. And we really take a active approach to how we manage our balance sheet from a risk perspective. So we've derisked our balance sheet by virtually removing all maturities over the next 4 years, and we've got a very well-laddered -- maturity ladder or maturity profile after that. So when looking at 2019, I think 2019 was a year in which -- it encapsulates both a lot of the way in which we're moving our portfolio forward by continuing to invest capital. How we very efficiently capitalize that, and also the value proposition we provide through our investment profile. So we continue to show superior internal and external growth through strong organic growth in our existing portfolio and also through very active acquisition strategy, which through the third quarter of this year, proved out to over $5 billion in investment opportunities. That drove us to a 23% total return in 2019. We also paid out our 194th consecutive quarterly dividend, which is a real staple of how our structure allows us to be a very stable source of income for investors, which is something that, obviously, is highly sought after in this market environment and only exists through having a strong balance sheet that capitalizes an incredibly stable portfolio that creates this income. And then our balance sheet. I just talked about that a little bit, but we're BBB+ across all 3 rating agencies and view ourselves as being on kind of higher-quality end of that spectrum. And it's demonstrated I think through where our debt trades on the markets. And then lastly, outstanding access to capital. I spoke about this a bit just through where and how we've accessed capital. But one interesting 2019 instance of this was in December. We issued $500 million in green bonds. We were the first health care REIT to do this. Green bonds create an extra hurdle for Welltower to kind of prove how we're spending that capital in environmentally friendly ways. And Tom spoke about the ESG efforts we make. This was a true demonstration that it's being recognized by investors and that we are long-term committed to this, both ESG and environmentally friendly investment in our properties. So with that, thank you all for being here today. Tom and I will be available to talk to any of you.

We do have a few minutes where we can handle questions here, and we're happy to stay behind. I know a lot of you want to get to see Seema Verma, but if there's any questions in the remaining 6 minutes we have, we'd be happy to entertain them here. If not, we'll meet you in the back of the room because I know they're going to use this room for overflow for Dr. Verma's talk. Thank you very much for your attention.