Welltower Inc. (WELL) Earnings Call Transcript & Summary

[Audio Gap] from Citi Research, and we're extraordinarily pleased to have with us Welltower and CEO, Tom DeRosa; Shankh Mitra; and that guy over there. All right. This session is for investing clients only. If media or other individuals are on their line, please disconnect now. Disclosures are available up here and on the webcast on the Disclosures tab. For those in the room or on the webcast, you can sign into liveqa.com and enter code citi2020 to submit any questions or you can just raise your hand in the room. Tom will introduce -- turn it over to you to introduce the management team, provide the audience 3 reasons why they should buy your stock today, and then we'll begin Q&A. And I know you and I talked a little bit before, clearly, with COVID-19 and your business. I don't know if you want to address that in your opening comments or after, so you can do either. And thank you, Tim, for being here.

Thanks, Michael, and good morning. With me today are Shankh Mitra, Executive Vice President and Chief Investment Officer; and Tim McHugh, our Chief Financial Officer. So Michael, since you gave me the opportunity to talk about coronavirus upfront, I will, because I think it's important to have -- to talk a bit about that before I tell you why you should buy Welltower. You should know that there is no industry where flu and infection control are taken more seriously and are actually day-to-day integral parts of the service model more than in the senior living industry. The seasonal flu has an average annual mortality rate a bit above 0.1% for all infected. And for seniors, the mortality rate is 1%. This is why such precaution is exercised in our facilities and why, after a particularly severe flu season in 2018, Welltower increased its efforts in assisting our operators and entered into a collaboration with the Center for Clinical Innovation (sic) [ Clinical Innovation Center ] at the University of California San Francisco to introduce and update the most current evidence-based patient and caregiver education programs. These studies focused on caregiver vaccination compliance, implementation of best practice checklist for flu and disease outbreaks, monthly flu reports and calls with infectious disease experts at UCSF. As the most prominent owner of premium private-pay senior living assets that are associated with the leading operators in this sector, we believe our operators' flu protocols set a standard, which the rest of the senior living sector should follow and other, more vulnerable industry sectors should look to. While it's impossible for us to tell what the path of the coronavirus will be, the situation requires daily monitoring. But I hope I have assured you as the in-depth safety measures we have in place and that we always have in place for disease prevention and containment. So with that, let me tell you why you should buy Welltower. Number one, no company is better positioned to take advantage of the massive investment opportunities associated with the aging of the population and the disruption underway as health care delivery is transitioning from an acute care hospital-centric model to one more ambulatory and consumer-friendly, focused on improving outcomes, reducing costs and wellness. Two, the deliberate decisions that this management team made over the last 3 years to substantially increase the quality of our cash flow, despite having taken some short-term dilution, is driving tangible results to our shareholders today and ensures a transparent and clear path of growth going forward.

Let me try to quantify that. If you look at our run rate earnings, you know the guidance we gave, $4.20 to $4.30, for the year. But if you look at our run rate earnings exiting this year into next 2 years, of all the dilutions that we have taken due to transition, all the assets that we have delivered but it's in lease-up now, and all the capital we have spent on our CIP, so all aspects of the business that -- where money has been spent, but you're not getting the FFO, that's about a difference of $0.32 of FFO on a run rate basis versus the guidance that we have given you this year. So that sort of gives you a sense of what you should expect from this company in the next couple of years to pick up, which is not part of the normal growth path of the company that -- from NOI and FFO perspective.

Thanks, Shankh. So I talked in point one about the massive secular investment opportunity that's coming from the aging of the population and a rethinking about where the population will receive health and wellness services. And because of that and because of our prominence in this space, companies like Philips, Amazon, Google, Anthem and the Jefferson Health System, which you saw announced in January, are lining up to collaborate with Welltower to bring forward next-generation sites of care delivery that are truly disrupting the status quo in health care.

Great. Thank you, Tom. Before we dive back into the impacts of coronavirus, we were going to start each of these sessions by asking each company about ESG. And ESG is of increasing importance for all company stakeholders. And we want to know what is the one thing your company is doing to improve your overall ESG score over the next 12 months?

So I'm not sure that we do a good enough job of highlighting that 75% of our independent directors are women and minorities. While participation of women on Boards is tracked, the women and minorities are not, but we believe this places us in the top 5 of all S&P companies. In addition, you're going to see the tenure of our Board drop dramatically starting in 2020 as more new directors come on and we have 3 directors with 10 years, north of 20 years, will start to retire. I'm also in active discussion with our Board about implementing a term limit and eliminating our age limit of 75, which, as you think about it, is kind of crazy for a company that is all focused on the vitality of an aging population. And I have many friends who are in their 80s who still have very active professional and social lives. So for example, if Warren Buffett wanted to join the Welltower Board, I have to tell him, "No Warren, you can't, you're too old," and that's kind of nuts. So Warren, if you're listening, give me a call.

So going back to -- from a Welltower perspective, clearly, since you've taken over, you have been more focused on being a health care delivery company affecting outcomes of your assets -- or outcomes for patients, and so you talked a little bit in the opening about how you worked with UCSF a couple years ago to start thinking about implementing some best practices. Can you share with us some of the impact, at least during this past flu season, that would demonstrate how your senior living assets would outperform the peers, right? Clearly, there would be an impact, but what is the -- what are the tangible results that you're seeing from that intervention and that oversight that you're putting in place?

Michael, I don't think we compare ourselves on the impact of flu across different businesses. I know that 2019 was not a particularly severe flu season, but flu is always a risk. And it's a risk 365 days a year in senior living communities, and that's because seniors, who many have respiratory issues, are vulnerable to the flu. So we have every year learn more and become more stringent in terms of protocols. And while Welltower is not administrating -- administering care on a day-to-day basis, we're very on top of what's happening inside the building. So we take it the next step. We just don't rely on the CDC and our operators to comply with CDC guidelines. We, as a very active owner of the real estate, go one step further, like we have with the University of California San Francisco. Remember, these are not large companies and don't have the resources that we have to establish those types of relationships and drive those types of services to the operator.

Should this get spread across the U.S., clearly, the population that's in your assets, whether it's senior housing, in the skilled nursing, ProMedica venture or even the medical office buildings where patients may be coming in, where there's risk, how should investors sort of frame the potential financial impact, both from an operating perspective, but also from a leased perspective and the health of those leases that you may have relative to operating assets? Is there any way to sort of start to think about the severity of the cash flow impact and also the health of the tenant who may be on a long-term net lease?

So I think the one way you can think about is what's the probability of this happening. That's where you start, right? You pick a probability. Then you think about if it does happen, what's the impact, right? You can pick a number, mortality rate, 15%, 16%, which I think we have been reading all over, I don't know whether that's the right number or not, but it appears in the most sort of extreme case of 85-plus, that's where we can see the impact. And then you have to think about how long it takes to come back. It appears if you look at the impact on our stock price, the market has assigned a probability of 1 on 25% mortality that will never come back. That's sort of the calculation I was doing last night. It does seem like if you look at the loss of market cap ascribed to the senior housing business, assuming I'm not going to get into the medical office side because it's hard to quantify that, it appears that the market is saying you'll lose about the one probability and about 20-plus percent hit that will never come back, which I think a little bit too draconian, in my opinion. I can tell you, as of last Friday, our occupancy has been remarkably steady, actually steadier than you would expect seasonally at this point in the year.

I'd also say you have to remember the people that live in senior housing today, generally, have 3 or more chronic health conditions. These are people -- the idea that because there's a flu outbreak, they can stay at home and be cared for at home, I think, is a bit misguided. If you're very wealthy, you might be able to do that. But for many people, they need to be in a controlled environment where the -- their social determinants of health, things like nutrition and things like safety and Medicaid management, need to be monitored. For most of the senior population, they cannot do that. So I would say I'd like to think that this will make outbreaks like coronavirus actually support the senior housing business. You need to make sure that you have the highest standards in place. And that is something that I can't speak to. What I can speak to is the standards we have in our portfolio. The other point I'd make about medical office is, I would say, most people do not want to set foot in a hospital during these types of situations. On a regular day, the amount of infection that you expose yourself to by just stepping into an emergency room or even the lobby of a hospital building is significant. So looking to sites of care outside of the hospital become even more compelling.

Right. I think the -- and, Shankh, it's helpful perspective as you think about the stock price impact to value. I think with a lot of the health care REITs trading at big premias to underlying asset value, that's the risk, right, where you had one of your peers fail on guidance and have missteps and that premia got obliterated, right? And so I think that's the difficulty in just trying to assign what's happened to the marketplace when your cost of capital has been so strong. So I don't know if it's a perfect correlation, but at least it's one piece.

No. Michael, I'm not suggesting there is. You asked me about a framework. So I sort of started with a framework of probability. You think of -- you have to think about frequency and severity if you are trying to get that. So I think what we should think back on my comment that I think Tim explained it on the call, but I thought that we should probably get a little bit more clear on all these moving parts of what's happening in the company. So just remember what we said, right? If you think about the run rate number versus the actual number, there's a meaningful difference because of what's going on. So if you don't want to think about that sort of $0.30-plus as an upside, at least, think about that as a massive cushion. You can think about it both ways.

Your operators, obviously, can benefit a lot from the initiatives that you're doing. You mentioned UCSF. How do you ensure that they're actually implementing these? Or is there anything in the contracts? Or is it just that they're looking to find best practices across what you can bring to them?

So Nick, a lot of it is that we're present in the facilities. We have a network of offices in this country where a lot of what goes on in those offices is asset management. So while it's hard to asset manage a portfolio as large as ours on the West Coast from the East Coast, we actually have a team of people in the West Coast. So we're often in the communities. That's something that we take seriously. It's why we have offices in Toronto, and it's why we have offices in London and why we opened an office in New York. It just allows us to be much more present and on top of the operators. And we have systems in place that help us more closely monitor what's going on at the property level. And I think that's why our performance is better. We have fewer vulnerable assets. We've taken care of that in the past. And we feel very comfortable about the assets and the operators that we have today.

Yes. And I would add to that, Nick, the last part of your question, you hit on it, is they've got incentives to have best practices. And a lot of what we've talked about and how we've changed our management contracts to better align our operators at the bottom line, which is what everyone in this room is focused on who's investing in Welltower, it means that when we put effort at the corporate level and investing on, whether it's the UCSF study, whether it's operational insights, there's actually incentive on their end to take up these protocols or take up these different operational insights because they're just as aligned with us as driving a bottom line. And as Tom talked about in his opening comments, this is one of the biggest risks in senior housing, and it has been. So this isn't a new risk when it comes to kind of disease outbreak. So it's something that our operators are very focused on. And because they're very focused on the bottom line, and this impacts it, I think there's certainly a lot of alignment in taking any effort we make and kind of pushing it throughout their own platform.

And from a portfolio perspective, you've talked about trying to create a low correlation between your different operators and properties and also barbell between higher price points and lower price points, which we can get into on the lower price points, but how do you think about the right mix there? And as senior housing reaches an inflection point, how do you think about that low correlation if a rising tide is raising all properties?

So first thing is I think it's important for all of you to understand that we're not trying to solve for a very specific portfolio, specific operator, specific type of properties. This is not what we do. We are very focused capital allocators who are focused on making money for our shareholders on a per-share basis for existing shareholders, which gives you a different sense of a lot of companies try to react and solving for exposures. We don't, right? You can see that how we handled -- it's not that we didn't have problem parts of the portfolio, but we have really acted very deliberately to get to the right economic solutions. You would -- think back, Nick, 4 years ago, we talked about Genesis and how much Genesis dispositions we have done and at what return, right, 9-plus percent unlevered IRR, which is a remarkably high number. We didn't say we have to get out of it, right, right now. So just to remind you, we are not solving for a specific portfolio. Having said that, you raise a very, very important point, which we are trying to highlight is, we manage our portfolio in a very quantitative way. There's intracorrelation of the performance of our operators, which is sort of we measure on an NOI per occupied room over a period of time is remarkably low. And I think it will remain low as we get to the other end of the cycle. This is not if you think the -- so the rising tide will lift all the boats. I hope you're right. I don't think that's going to happen. Product is changing. What consumers expect out of the product is changing. And as we said several times, there is no such thing as a senior housing business. There are several types of businesses within that senior housing business, different acuity, different price points. Now getting back to your other question, obviously, which is a lower price point, which is effectively an apartment business with different products and services. That adds a different level of diversity and lack of correlation to the portfolio because it is a much higher-margin business. Think about it as sort of a 60 -- give or take, around 60, plus or minus, percent margin business. And that has a different growth rate, a different impact of labor. So it does help that correlation metrics that you're referring to.

When you think about the Welltower Living brand, is that something that you would want to ultimately operate in-house versus having a third-party operator?

Yes. Majority -- what we are doing in that business is we're -- and multifamily, third-party management is a pretty simple standard business where we have a 30- to 90-day terminable contracts. So just think about that how these things are structured, but we need to have sort of a critical mass before we operate, but that is our goal.

And as you think about building into that critical mass, is that mostly through acquisitions? Or is it through development?

Both.

And you're able to develop to that low price point because that's something we've seen on the apartment side. It's very difficult to build to a low price point?

Yes. So if you look at our -- the Welltower Living press release, we talked about 2 development partnership within that press release. Absolutely, yes, we can.

And I also think that we are offering a different product for this population. And when you start to wrap Medicare Advantage plans around this residential setting for this population, you can start to drive other products and services, which make this a very unique alternative, particularly for younger seniors, people in their early 70s.

There was a couple of questions that came through liveqa. If the mortality rate doubled -- if mortality doubled due to COVID-19, is it just a revenue and occupancy issue or will expenses rise dramatically as well?

Expenses should not rise dramatically. If you look at the age of -- average age of caregivers and look at the mortality rate for COVID-19 on those -- that population, it's actually very, very low.

Another question is what are you hearing about Brookdale, Holiday and Sunrise? What is the health of your regional operators?

I'm not going to comment on Brookdale and Holiday. Holiday is not even our operator. I'm just going to say about Sunrise, which is one of Welltower's most important operators. I'm not sure what you mean by hearing about, but Sunrise events are very strong.

I'm just reading the question, okay. It wasn't my question, but I'm providing the...

Strong operators. And just like we're seeing in our portfolio, there is a very difference -- big difference in performance in Sunrise portfolio as well. Just in large, big markets, they're doing remarkably well. In smaller markets, where Sunrise is not as affordable, they're not doing as well. So if you just think about how our portfolio is doing in large market where we pass on significant price increase, it's doing well. The part of the portfolio where you can, it's not doing well, pretty much similar things happening with Sunrise.

Is there questions from the audience live here?

Shankh, can you give a little more detail on the $0.30-plus tailwind to FFO from non-stabilized? Like is that in the run rate by the end of the year? What buckets is that coming at?

Tim?

Yes. We thinks that's...

And Tim, just repeat the question just to make sure...

Yes. So the question was the 30 -- the $0.32 Shankh spoke about at the beginning of the panel here, what -- kind of some more detail on it. So it's basically -- it's in 3 buckets. So it's the transition piece, which is the 77 assets that we've transitioned from triple net to senior housing operating. The majority of that has occurred in the fourth quarter of '18 through this last fourth quarter. So we've talked about a bit in our call how they all come into same-store. The majority of it will come in the same-store by the fourth quarter of this year. But we look at that as kind of a hitting a run rate by the end of '21 would be kind of the estimated timing of that cash flow. Then the other portions are the stabilization of our development delivery. So we've got a large development portfolio. We've consistently developed. And then kind of the fourth quarter of '19 through the fourth quarter of 2020, we delivered almost $900 million of our pipeline and a large piece of that's senior housing. So I gave the color on the call that that's actually $0.02 dilutive to our 2020 numbers. And we'll stabilize to kind of $0.06 to $0.08 and do that, again, pretty similar timing. End of '21, first quarter '22 is when we expect to kind of hit that run rate. And then the last piece was just -- is the smallest piece of it, but it's just the stabilization of the already spent development. So most of that gets delivered -- is delivered over the next more -- so into '21. So it's -- that piece is probably the mid '22 when we hit stabilization on that.

And that difference is net of any capitalized interest or...

Correct, correct. So that stabilized yields net of our current capitalized interest rate. So we're thinking about this from an FFO perspective. But the impact would be even greater if we were thinking about it from like -- from the deleveraging impact of this where our EBITDA -- debt to EBITDA, EBIT is not taking into account any of that capitalized interest.

Any other questions before we move on? We have another question, actually, just on expenses with relation to, I guess, both the senior housing and the skilled nursing side. How will you backfill -- or how will your operators backfill nursing staff if there were to be a quarantine? And is there a cost difference between temporary nurses and full time?

As I mentioned, that we don't think that for our population that work in the buildings, this is not a big issue, right? You might have, obviously -- because of all the protocols that Tom talked about, if somebody's sick, we make sure that person doesn't come to work. But on any given sort of any time period, a reasonable time period, we do not think that's an issue.

I think the main point of our comments on coronavirus here that it is not to try to predict what's going to happen next because I think if you look at the markets, particularly, all of last week and this morning, I think it's -- a lot of it is anybody's guess, but it's just to make the point that whether it's the coronavirus or the flu -- and obviously, coronavirus is a much more significant -- so far, what we know of it, more significant disease. This isn't -- senior housing operators didn't wake up last week just starting to think about this. I think a lot of the economy is -- this isn't part of their normal business, for obvious reasons. People don't die of it on an annual basis within -- where they operate, but it is something that is constantly part of this business. So there's protocols in place that, we think, mitigate some of the risk, but we're certainly not trying to guess what the impact is and not trying to think of what happens if A, B and C occurs. We are thinking about it, but not trying to quantify it. I think that's more of the job of those in this room that are trying to buy and sell stocks off of it, but we're just trying to operate a business around -- and maybe kind of mitigate that risk.

I think we're the only one of the few industries where flu is talked about historically and how it impacts our business. I think the biggest risk right now is all industries may be impacted by the flu, if you take the draconian view that is out there and certainly in the markets. And we know what the world looks like to have a flu outbreak in one of our communities. But I don't think many companies have ever confronted this or have ever been asked to quantify what the impact of flu is going to be on their business. And I don't want to start naming names, but I think that many of those companies, some of those sectors are here, and some of those sectors are people that we interact with on a daily basis, who've never thought about the impact of flu on their business. I said to someone this morning, and I won't name the name of the company. But I said, "If this thing escalates, would you be comfortable going into that shop to get your coffee in the morning?" When you see -- because I don't see the people wearing masks. I don't see them wearing gloves yet. People are still lining up to get their coffee in the morning. And I think these businesses have never confronted this. But again, we confront it every day in our business. And we've talked about it here. We've talked about it other places. We have protocols in place. We are -- we cannot predict what is going to happen here. Some people have said, "This is a more violent flu." And some people have said, "This is a less violent flu than other strains that have been inside of our buildings, at least since I've been sitting in this seat." So all I can tell you is I think we are as prepared as any industry sector in the world right now for a flu outbreak like this.

So it's just going to be bad everywhere. And...

Well, that's what the world seems to be telling us.

Well, I mean it sounds like a horrible, like -- it's like don't go anywhere, don't go shopping, don't go to the office building, don't go to your -- don't go to movies, don't go to gaming, don't go to a hotel...

That's why we came to Florida, right, exactly.

We are not suggesting that that's our view.

Just the Citi Conference.

If that was our view, then we wouldn't be here. We would have canceled, right?

Yes.

Well, I mean, you could extrapolate that, and you can see how it impacts every business who's never confronted this issue before.

Maybe just quickly moving on to medical office. Obviously, you're very active last year acquiring, and, Tom, you made comments about health care increasingly being delivered kind of off-campus. So how does that -- I think right now, you're about 50-50 on-campus/off-campus. How does that inform your decision going forward?

Do you want to answer that, Shankh? And I'll give a comment.

Yes. So just like how much medical office we should own as a percent of the portfolio, just like we don't have a number in our mind, we also don't have a number in our mind what should be on-campus versus off-campus. I can tell you that over a period of time, what we're seeing that health care is becoming more of a consumer-focused business than health care as a -- or a hospital-driven business, right? And so that would suggest, over a period of time, we should focus more on off-campus than on-campus. But at the same time, you don't -- the physician is at the center of delivering health care, right? So the on-campus assets will also be -- always be important because of that. Just know that you have to be able to underwrite the risk of an on-campus business, which doesn't have a lot of value if a hospital goes down. So you -- the tail risk on an on-campus business -- on-campus medical office is much, much higher than an off-campus. So you just have to be able to underwrite each building at a time, and that's how we start. When we look at any medical office business, we look at the viability of the specific hospital that it's affiliated with, first. That's the first thing we look at, and then we go into on versus off and demand, et cetera.

The other thing I'll add to that is many hospitals in the last 10, 15 years have grown -- health systems have grown by acquiring other hospitals. It's very likely they -- in the future, they're not going to need to keep all those acute care sites open. What they did was acquire population. And what you'll see is ambulatory care replacing some of those acute assets in the future. Some of that is part of the Jefferson partnership that we announced in January, is to help them build a more vibrant ambulatory network out away from Center City, Philadelphia.

We have our rapid-fire questions, but we had one final one maybe for Tim. Is the commercial paper rolling smoothly?

Yes. At this point, it is.

Other audience? 1.53 minutes, it's your chance. Do you want to have another one or go with this? All right, so we'll go to rapid fire. Will the health care property sector have more or fewer public companies a year from now? You have to choose one or the other?

We can't say same? We always say the same one.

No. Same is not an answer. I said more or fewer.

I'll say fewer.

Same-store NOI growth for the health care sector overall, not Welltower specific, in 2021? For reference, 2020 guidance. Well, I guess, we're not consistent yet completely on same-store, but 2020 guidance is...

1% on average.

So if it's 1% this year, next year would be...

So starting in 2020, demand for senior housing starts to accelerate. And we see that accelerating for the foreseeable future based on the number of seniors reaching the ages of 85. I think we've demonstrated that we took the necessary steps to position the company to take advantage of this accelerated demand, and that should allow us to, I'd say, sustain superior growth relative to the industry. I'm not going to give you 2021 same-store guidance today.

So accelerate off of the 1%?

Yes.

Okay. So we'll say 2%? 2% is a good answer?

You can say whatever you'd like.

The 10-year treasury is at 1.07% right now. A year from today, it's going to be...

I have to always turn it -- you all want to hear from Shankh on this one.

I have a pretty long-standing personal bet on 10-year treasury, so that's why he does this to me. We're not going to venture into a guessing 10-year treasury, but it's going to probably remain lower than you think.

What year will the U.S. enter a recession?

I think a lot of it depends on the results of the 2020 election. How about that?

Okay. Thank you.

Thank you.