Welltower Inc. (WELL) Earnings Call Transcript & Summary

Good morning, everyone. Before we start this morning, as a reminder, certain statements made in today's presentation may be deemed forward-looking statements in the meaning of the Private Securities Ligation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurance that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. And with that, I'll pass the call over to Tom DeRosa, our Chairman and CEO, for some opening remarks.

Thank you, Tim. Good morning. We released a business update on Monday evening which highlights portfolio performance, disposition activity and liquidity since we released our last business update on May 6, along with our first quarter earnings release. After I provide some brief remarks, I will then hand it to Tim McHugh, who is our Executive Vice President and Chief Financial Officer, who will lead us through the presentation, with some additional commentary by Shankh Mitra, our Vice Chairman, Chief Operating Officer and Chief Investment Officer. As COVID-19 has presented our business with many challenges and uncertainty, we are encouraged by some of the recent trends that we will highlight this morning. First, in the last few weeks in May, we began to see some improvement in occupancy decline in our seniors housing operating portfolio, as voluntary move-outs as well as involuntary move-outs have declined just as some operators have begun to remove admission stands as the country is starting to open up. We have been quite active on the disposition front, which will generate over $1 billion in gross proceeds, a true herculean effort, as these transactions were initiated and completed in less than 45 days. As a result, these initiatives are further enhancing our already strong liquidity position. As a reminder, Welltower is an S&P 500 company and the largest owner of health and wellness real estate, which includes seniors housing, outpatient medical and post-acute care facilities. This platform serves close to hundreds of thousands of at-risk seniors who live with us every day and tens of millions of clinician-patient interactions that occur every year. The value of this real estate platform stems from its ability to enable health and wellness products, services, technology and innovation to effectively and efficiently achieve scale. I previously described our strategy of connecting the population of seniors that choose to live in residential care models more directly to the broader health care delivery system. Our initiatives with payers, health systems and technology companies have demonstrated that this connection can improve health outcomes and lower health care costs. However, because of COVID-19, what they've sounded like a nice idea, to some is now an imperative. Every minute of every day, the Welltower team is focused on getting through this challenging period and working with partners across the health care continuum to create an infrastructure that ensures the support and well-being of our growing population of seniors. Today, Welltower's purpose is more important than ever, that is, to address a significant societal challenges through reimagining and reinventing the built environment for effective delivery of health care and wellness services. As is the case with most other companies, the COVID-19 pandemic has created significant strain on our business. We have told you that we would make data-driven decisions to navigate Welltower through these difficult times and to communicate with utmost transparency. While these decisions can be difficult to swallow in the near term for our various stakeholders, they have been made in the best long-term interest of our enterprise. This includes an adjustment to our dividend policy and a continual focus on reducing our corporate overhead budget, an initiative we began in earnest 4 years ago, which has positioned us well for the current environment. During these extraordinary times, there is much outside of our control, but we are taking steps to manage what is within our control. While the near-term path to recovery is not certain, the long-term drivers of our business are undeniable and remain firmly intact. The bottom line is if we are to fix health care, we cannot separate the how from the where. We must first consider the social determinants of health, which include items like where you live, nutrition, transportation, safety and social interaction. What you may not know is that these social determinants make up 80% of an individual health and well-being. Health care, clinical services, procedures and pharmaceuticals account for the remaining 20%. For many seniors who live alone and are isolated, maintaining these elements of daily living are challenging under the best of circumstances and have been exacerbated by COVID-19. In the U.S., we spend a whopping 17% of gross domestic product on pills and procedures and the least on social care as compared to other major developed countries. This is why life expectancy in the U.S. has slipped by 3 years as compared to countries like Norway and Australia. This lack of focus on social determinants will exacerbate these issues due to the fact that our 80-plus-year-old population is growing exponentially faster than any other age cohort, increasing nearly 50% in the next 10 years. Why should we be worried? Due to chronic illnesses associated with this age cohort, they account for 85% of health care spend. This is not sustainable. 76% of our NOI comes from owning residential real estate settings directed at providing assistance with activities of daily living and post-acute rehab care for this population of chronically ill seniors, typically 85 years or older. Our operators strive to keep at-risk seniors in supported settings, which lead to fewer trips to the ER and shorter stays in hospital beds. While it's almost impossible to predict many of the changes our society will face when the current pandemic is over, what remains a near certainty is the need to meet the health and wellness needs of a rapidly aging population and to reimagine and develop a more sustainable health care delivery infrastructure. By delivering a built environment focused on maintaining and enhancing the social determinants of health for aging and other at-risk populations, Welltower seeks to deliver industry-leading financial performance and create long-term shareholder value. We believe we are taking the necessary steps to navigate this uncertain environment and withstand the volatility presented by this pandemic so that we can meet these goals. Now I'll hand it to Tim McHugh.

Thank you, Tom. I'm going to take us through the rest of the slides that will focus a lot on the business update that we've put up on Monday night. Given the unprecedented changes in the operating environment, Welltower has taken an active approach to communicating throughout the last 3 months on the impact to our business, and it's no different than that we put out 2 nights ago. So this is -- can be found on our website, and this is what this presentation is based off of. So starting with occupancy in our seniors housing operating portfolio. Our seniors housing operating portfolio started to be impacted by COVID in mid-March as the presence of the virus in our facilities and also amongst the population that our workers live in started to become more and more impacted. And you saw this through decreases in occupancy going into April. Beginning of April, you started to see a widespread move towards shutting down facilities for move-ins, both because of COVID being in the building due to state regulations or just on abundance of caution. As we've moved through April, you saw kind of an average [ trends ] of weekly decline on the occupancy front. And moving into May, you started to see this slow down with the last quarter -- with the last week that we reported, the week ending May 29, being only a 20 basis point decline in occupancy. Throughout this period of COVID, we have seen this occupancy decline from mid-80s at the start of this pandemic to 81.8% -- 81.1% as of last Friday. The 150 basis point decline we saw in the month of May compares to 240 basis points in the month of April. On the next slide, as I go through some of what our observations or outlook was for the second quarter, we had our call a month ago, it will give you some context for this decline in terms of our expectations. But it's important to look at the month of May to dig in a little deeper to see kind of what was causing or what's kind of driving some of the stabilization in the portfolio. As we move from April to May, we actually saw move-ins increase on the margin, although on a year-over-year -- from a year-over-year perspective, move-ins actually decreased. They're down 79% from May 2019. And as most of you know on the call, there's a seasonality in seniors housing, where move-ins typically happen in the spring to summer seasons. And the comparable years that we talked about a month -- that we talked about on our call a month ago, April of 2019 versus May of 2019, there's more move-ins in the comparable period. So from a comp perspective, our comps have gotten tougher, but we're actually seeing some move-ins that's helping us begin to stabilize occupancy and then move-outs have dropped significantly year-over-year. So the month of May 2020 versus 2019, there was a 21% decline in move-outs, which has again helped stabilize this. To give this some context as well, you think about what I spoke to on the amount of buildings that were closed when we gave -- when we had our call in May, 42% of our buildings were closed to move-ins that has not materially changed as of last Friday. As of last Friday, 39% of our buildings were still [ closed ], and this compares to a little over 10% of our buildings actually have active COVID cases. So there's a large amount of our buildings that are still closed despite there being no COVID. And we think this is going to start to change in the coming weeks as the economy has started to open back up and state regulators have allowed for buildings that have -- don't -- did not have active COVID cases to open up. So as we move into June, we expect this move-in pace to start to improve just from buildings being opened up and a bit of a pent-up demand on the needs-based side of our business to start to drive some increase on the demand side. Expenses. We highlighted with our call that there was an increase in expenses in the month of March at the end of the first quarter due to COVID. It's -- the way this should be thought about is kind of mix of both labor and PPE. So PPE has been much in the headlines across all health care. And there is a drive -- much of it is possible through our facilities. We'll go into a little bit how Welltower assisted in that activity. But the month of April, we've -- from our operators, we've measured about $18 million of expenses that are COVID-related, and that's both from the PPE and then from labor as well. So on the labor side, you've seen elevated labor costs from kind of 2 drivers, the most prominent of which has been putting in what we offer [ probably is hero ] pay and that's pay at the -- our operators are paying, at the property level, the frontline staff that are really carrying forward this population that's -- as it's being impacted by the virus. And this staff and these operators are a big reason why our buildings have done a phenomenal job in dealing with a very tough situation. And part of this kind of flowed through to our P&L, as you just see higher expenses on the labor side. So we expect that to continue as long as the pandemic is around, but some of that will start to be -- will come down just from lower prominence or prevalence of COVID in our buildings. Speaking to the prevalence side of this, you can see we've been tracking at the building level. So these stats on this page are for our seniors housing operating portfolio. We've been tracking at the building level since the beginning of the pandemic the positive cases. Now as most of you know from all the news around the virus, all kind of positive case data is meant to be taken with a grain of salt because testing is being done on those that are showing symptoms for the most part. Now this is starting to improve as we have the ability to test broader and tests are more available. But this is kind of symptom-driven testing, and there's been more of it -- certainly more of it -- as we moved through the pandemic, we've had more access to tests. We've seen the amount of positive cases on a trailing 2-week basis, really start to roll over from the beginning of May. So this is very positive from the perspective that just the amount -- the impact to our buildings from the actual presence of the virus has come down considerably. Moving to the chart at the bottom just to kind of take a little bit deeper into the picture as of May 29, 87% of our buildings have no active cases, 13% of our buildings have at least 1 active case. And looking into this, breaking that down further, 8% of our buildings have 1 to 2 cases and 5% have more than 3. Again, I think this is really a testament to the work being done at the operator level, and we'll get into a bit of how Welltower has helped assist our operators work through this, but really it's a heroic effort at the operator level. It's allowed -- this virus that we all know has been very -- has spread very quickly across the population to really stay -- have a low impact on our population. So thinking about the potential future impact. This is really from -- we said a month ago when we gave an update on the business as part of our earnings call, we tried to give as much of an outlook as possible through very uncertain times, and Tom spoke to this earlier that's been a goal of Welltower is to, one, share data from an investor front because we and investors as well have really no historical context to put this into as far as the operations. So the best that we can do is be data dependent in the way we make decisions and share as much of that data with the investor community as we can. So we took away -- we removed guidance in the first quarter as it became more and more apparent the impact of this was going to cause material changes to our results what we had forecasted when we initially gave guidance in February. But we gave the market as much of kind of an outlook for the second quarter as we could, and that's going to be a theme throughout this as well as kind of doing -- making actions upon the best data we have, too, at the time. So the main 3 pieces of that on the seniors housing operating front were an occupancy outlook that includes expectation for 500 to 600 basis points of decline across the portfolio from the end of the first quarter to the second quarter. As I stated earlier, at the time that we gave this, there was 240 basis point decline in April. So the implication was there would be somewhere between 260 and 360 basis points of decline in May and June, which implies a bit of a stabilization just relative to April as far as occupancy goes in the portfolio. And through May 29 -- you've seen that start to happen. So through May 29, May month-to-date, down 150 basis points, brings us to a cumulative decline in the second quarter of 390 basis points. So as we sit here today with about 5 weeks left in the quarter of data from May 29 through the end of the quarter, that's somewhere between 110 to 210 basis points put us within that range. So incrementally, we feel this is running in line, maybe slightly ahead of where we expected. And important to put that context around how much uncertainty there was at the time we gave these expectations that being in line with them is certainly a very positive thing from our perspective. On the expenses side, if we go a little deeper into some of the stuff we saw, as I said, in March and April and expectation going forward, we expected elevated expenses to continue to the second quarter. We gave an approximation that it's basically 5% sequential uptick in expenses, and expenses going up while occupancy coming down was going to cause a continued compression in margin in the shorter term. We're seeing some positive signs of mitigation of some of these expenses. So although COVID expenses certainly remain elevated, there is an increasing ability of our operators to begin to kind of flex their labor staff to meet the lower occupancies. And that's been kind of one of the things about this business, Seniors Housing business, that's really become apparent in this cycle, starting with some of the occupancy pressure we saw over the last 3 or 4 years and now as people react to COVID and have some time to start to realign the business model with the ability to be flexible on the labor front. These are care-intensive models. 70% of the expenses are labor-related. And so to be able to flex that to how many people you have, new residents you have in the buildings is one way the operators are able to manage profitably in different operating environments. So we expect the second quarter to still be challenged, but we are seeing positive results as far as some ability to mitigate some of the costs. On the NOI margin side, as I kind of hinted out, we expect the second quarter to be much lower margins than the first quarter. In the first quarter, we ran around 29% across our portfolio, and we expect that to be kind of closer to the 20% range in the second quarter. Some of the trends we're seeing keep us positive as this should be -- end up being a conservative view. But as we get more data, we'll continue to update the market. From the Triple-Net side of the portfolio, this is where we're receiving rent checks from our operators and are not exposed to the day-to-day and fluctuations in the P&L. In April, we reported 97% rent collection. In May, we reported 94%. Since the day 1 across the portfolio, we've been in active discussions with our tenants. We have been the leading force in the industry as far as how actively we have continued to manage the portfolio, particularly on the Triple-Net side, to make sure we drive long-term value for our shareholders. And this is certainly coming -- this is certainly working to our advantage in this backdrop because we've just really kept an eye on this portfolio and continue to manage it. And if I look through the bucket on the Triple-Net side, I think it's just important to give some color. As far as our seniors housing Triple-Net, I mentioned this in the call a month ago, the Seniors Housing business, in general, as it's interrupted by COVID, depending on the duration -- the extent and the duration of it, there's certainly going to be -- there will be some disruption on the Triple-Net side. The business, the underlying business in all 3 of these segments, the rent needs to be supported by profitability in underlying buildings. So as some of the observations we've given on the impact on the seniors housing operating side in our portfolio, where we have obviously the day-to-day data, from a profitability standpoint, we expect that to flow through on the seniors housing Triple-Net side. That being said, we -- what we've seen so far through April and May is resilient to these operating platforms and that's come through, through a continued high rent collection number. Long-term post-acute, which is skilled nursing, predominantly in our portfolio, that's in the post-acute -- with a post-acute focus, this business has been very disrupted by the pandemic. A lot of it relies on elective surgeries and hospital volume. And both of those things were significantly down, certainly in April and beginning of May. We're starting to see that rebound, but these businesses have also been Medicare and Medicaid supportive businesses. The government has done a tremendous job of making sure there's liquidity to keep these business models in a good financial position. So we're continuing to see that through very strong inflection here. And Promedica, which is our health system bucket, which is a partnership we started almost 2 years ago or a little over 2 years ago, is -- it was a very well-covered lease coming into this, very well run platform and is certainly feeling the challenges both on the seniors housing side and post-acute side. But it continues to perform very well within a challenged environment and has also had access to some of the government providing liquidity that's allowed its platform to stay very healthy from a financial perspective. Welltower support and collaboration. We've referenced this quite a bit, and we've put a lot of effort in our business platform to be aligned with our operators to be first -- we were first mover on -- in getting and actually creating distribution center down in Texas to both buy and distribute PPE. 1.2 million units of PPE were distributed to our -- across our seniors housing skilled nursing platform, and the COVID testing side is worth noting. We're continuing to make a great progress here. We've had already over 40,000 tests in our seniors housing operating platform alone, which continues to be a big focus of ours in the industry to make sure we can get to a point at which our buildings can open up safely to the population we take care of. I'll highlight as well that with the University of California, San Francisco, we've had an initiative for 2 years working on protocols around infection protocol in virus spread. You mostly focused on the seasonal flu, but now this has very much grown into a working group that's been working through COVID and how to best manage it in our facilities. It's had a great impact on our operators. Outpatient medical. I'll very briefly go through our outpatient medical platform. 25% of our business is in outpatient medical. In April, this business certainly was impacted as well as a lot of businesses across this country because buildings were shut. And importantly, for this, a lot of elective procedures take place in outpatient medical as elective procedures came down, as [ doctors' ] business came down, essentially all non-COVID-related and essential procedures were kind of put to the side for a period of time. These buildings and these practices very much were closed. And we immediately, at the start of this period, reached out to our tenants, and we're very active on the front in allowing payment plans for these months where the businesses were interrupted to help get their business back on track and to put us in a position where, as things came back, as this pent-up demand came back, we're able to collect the rents that we essentially allowed to be put forward by a couple of months. So in May, we've either collected or we have put into a payment plan 98% of our tenants, and 86% -- importantly, on our stat, 86% of our leases that have actually expired during the pandemic period have renewed. This is even above our long-term average, and it really speaks to the need for tenants to be in these buildings to operate their businesses. The other thing we'd highlight very quickly is that you've seen outpatient volume rebound significantly as the economies reopen. And this chart here is only a couple of weeks old, and we know this has actually continued to move in that direction. At the end of April, for a lot of the data we were reporting on with our call, almost 60% of our facilities or tenants were not operational and now virtually all of them are. So this should continue to support the health of this platform. So before moving into recent transactions and balance sheet, I want to hand it over to Shankh to speak through some of the announcements we made on the transaction side the other night.

So I'll be really brief. I'm just very proud to announce that we have -- like we said 2 days ago that we have done 2 major transactions during these challenging times. That brings us about $1 billion of proceeds to Welltower. I really want to thank you, my team as well as the 2 transaction partners we had who have showed up and did exactly what they said they're going to do as well as the lenders who have shown tremendous resilience and provided a very strong support for our product and shows you the valuation support as well as the credit that we have. I want to remind everyone who is on this call that seniors housing -- recall, seniors housing is a housing business. Majority of the -- 2/3 of the transactions has closed, and all but 1 building in the senior housing side hasn't closed. All the MOBs that are off-campus have closed and rest of the on-campus will close. So with that, we obviously have very significant near-term liquidity of $4.6 billion. We continue to expect that liquidity will improve. This puts us in a very, very good position with lots of choices and lots of arrows in our quiver as far as how to create tremendous amount of value for our shareholders. We're starting to see emergence of real investment opportunities that can be very, very accretive from a long-term value perspective. And we do believe that the balance sheet and the liquidity that we have today help us access to those acquisitions opportunity, that a lot of, in normal times, would not be available. So we remain very excited, and we think this time will give us a tremendous opportunity to create long-term shareholder value.

And with that, I'll just wrap up with balance sheet and investment highlights. So as Shankh spoke to, I think one of the main points that we made in this presentation and throughout the release Monday night was that we put our balance sheet in a much better position from a liquidity perspective. We've made a lot of moves in the early part of the pandemic to require $1 billion term loan, just have at least $600 million in ATM and really [ short ] liquidity with $1 billion in proceeds we'll get from sales maybe over the last month. We put ourselves in a position to really control even more of our fate. As the business stabilizes, this very well could mean that we have an ability to go back on the offensive to be opportunistic, and it certainly takes a lot of the tail risk away from how COVID and how the economy continues to kind of progress as we move forward over the next few months, the next few quarters. We have any time for questions?

As we don't have anyone from the NAREIT line, that will -- one of the questions -- I think this should be for Shankh. Do you think any of the COVID-related expenses will be in place permanently in the portfolio? Or do you think that some of these will end up being temporary and is impacting NOI over time?

Some of this will be with us for next few quarters, but I do not believe this will be a permanent impairment to the margin. It will be with us for the next few quarters, but as we normalize the business and we get to the other side, margins will normalize.

Great. Do we have anyone from NAREIT line? Are we still live?

No, I think we should end.

Yes. I think we're -- I don't know -- we're going to end up here. You guys know where to find us. We have all the information available on our website. And we've got a link there as well for any questions you have regarding the presentation. We'll make sure to respond to anything that comes in.

Thank you very much, everybody.

Thank you.