Welltower Inc. (WELL) Earnings Call Transcript & Summary

Welcome, everyone, to the 5:00 p.m. session on day 1 of Citi's Global Property CEO Conference. I'm Michael Bilerman here with Nick Joseph from Citi. We are extraordinarily pleased to have with us Welltower and CEO, Shankh Mitra. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. [Operator Instructions]. Shankh, I'm going to turn it over to you to introduce your management team that's with you here today and any opening comments you want to make, and then we'll start the list of questions that we have. Thank you.

Thank you, Michael. Thank you for inviting us today. We have Tim McHugh, our CFO, here with us, he and Mark Shaver, with the SVP of Business Strategy and Health System Initiative. We're going to just go to Q&A pretty quickly. Just want to make a couple of points. We have published it earlier today, the business update, which has all the details, so you don't need to take any notes. But overall, it seems like business since at least from our quarterly earnings call, appears that business is improving, probably very much related to COVID improving across the country and the 3 countries we do business. So we're excited about it. We're excited that we're seeing a lot of opportunities to deploy capital. And also, we are putting a lot of things in a very value-accretive way, restructure part of our company's NOI stream that has been perceived as risked because of low coverage, et cetera. So we're pretty excited. We're hiring a lot of people, bringing a lot of new operators in the fold. So we're excited about the business, and we're glad to be here.

Thanks for that, Shankh. So we started every one of these sessions asking each CEO, coming out of this pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in Welltower?

Yes. So it's an interesting question, Michael. So I was thinking about it. Very few places you get an opportunity to make money cyclically as well as secularly, right? Obviously, the secular demand side of the business is pretty well known. But because of COVID, we've got a tremendous opportunity cyclically where we are to have massive cash flow growth as we come out of this. So cyclical plus secular is one. Second, I will tell you that I don't know about many other asset classes, but the opportunities that we're seeing to deploy capital, one in early cycle opportunities like deep value opportunities; also on the other side, this is a very much of a partnership-driven business, so we are seeing a lot of new operators and others who want to do business with us because we remain committed to the business. And obviously, that has been very important to the industry. The third is our operating platform with all these operators as well as operating analytics platform that is very unique to Welltower. So I would say those 3, if you think about it, combined will create pretty significant cash flow growth and value accretion for the shareholders in coming years.

How do you think about the timing of the cyclical and secular impacts to your business that will drive that growth? And is it a step function? What needs to happen for that to pick up and drive your earnings?

So what I said on the call, Michael, that it is very hard to point out exactly where the trough is. And what I said on the call, I'm optimistic. I have no idea, but I'm optimistic towards the end of the year. And since then, I will tell you that COVID has come down so much, it feels like that can happen in second quarter. So again, I'm not predicting that it will happen. I'm just saying that is it a possibility that the inflection has moved up 6, 9 months, something like that. More importantly, what we see from our perspective is that secular demand story and the sort of a shift -- significant shift in the demand curve, which sort of starts 2024, 2025 is still 3 years away. But what you have, what bridges you from here to there, there is significantly more population growth. So if you think about from a '19 versus '24, '25, you have 20% more seniors just in those years in the system, right, what is going to be in the system. So demand picture is improved or is improving. There's no question about it. That inflection has happened in 2020. Majority of our customers are fine going through the pandemic, obviously, you saw that our industry has done a very good job of keeping these people safe, at least in the assisted living industry. So that feels good. And supply definitely has come down pretty meaningfully, right? It doesn't mean it will not start, but it takes time to build back that machine and get the banks lend again. So it will happen, but it will probably happen at the same time, the secular -- the significant demand curve hits later this year. So we feel pretty good that that in -- if you have a 3- to 5-year time horizon, you'll do very well in this business, assuming the business doesn't go away. And we don't think the business is not going away. So that's why we're pretty optimistic about it.

The other thing you mentioned, Shankh, was talking about the different countries that you do business in. It feels like the U.K. and Canada are certainly behind the U.S. in terms of vaccine administration and just the overall improvement and I'm just curious how you sort of think about that aspect in managing a global organization.

Yes. So I'm going to start and Tim may join in. Just overall, U.K. and Canada are very different countries and very different businesses. Canada is primarily an independent living business, right? So the business has not been impacted as much as U.S. and U.K. have been, which is a much higher acuity business. So from that perspective, I'll say that Canada has less upside just because it didn't fall that far. U.K. has fallen pretty far. In fact, December, January, I will tell you, those have been the biggest impact there. And they're slowly coming back. It is sort of the opposite of the Texas approach that they have taken, that they're cautiously coming out. But we're seeing pretty significant sort of green shoots in the U.K. business as well. It will be behind the U.S. business probably because of vaccine administration and everything else. But also remember, there's a lot of demand from the local authorities to keep patients out of NHS system and NHS -- to keep people outside. So they are offsetting sort of demand story. But we're excited about what the business is in both countries. Because we are primarily -- in this business, Michael, we're primarily focused on the higher acuity side. And I think you will see that, that side of the business will pretty do very well. Now will it be a 60-day, 90-day, 120-days behind? Probably. We just don't know, but we're seeing a sort of significant green shoots.

Shankh, when you talk about the secular drivers. I mean do you think there's anything that's changed in terms of the average age -- and I'm talking medium and longer term, average age of somebody moving in? Or in terms of penetration rate, coming out of COVID and the pandemic? We've had some questions around people conflating senior housing and skilled nursing. So I'm wondering, even from a marketing or just a resident education perspective, how do you think the industry is positioned?

So Nick, the honest answer is no one knows, right? We're all debating, we're all speculating what's going to happen, and the honest answer is no one knows. Remember, if you think the business fundamentally overall demand will not change, just following the numbers I gave you, if there are 20% more people and overall demand is the same, you're making a bet that penetration comes down 20%, right? Just math. Basic math. Look, we think coming out of this pandemic, the industry will be able to show that we have truly taken care of our residents, right, as an industry and the outcomes have been significantly better, and we're seeing a lot of traction from other payers and providers who wants to partner with us. Mark would be happy to share a lot of those things with you. That we think there is a real story here to tell to the consumers that we truly take care of your mother or your grandmother or your parents, and that will prove out. But Nick, it's too early to say, right? And there is -- as I said, that if we're not wrong about the business going away, which we think that's the bet we're making -- not implicitly, we're making that bid explicitly, then that's the bet we're making, that the consumer will come back. Now will there be tweaks on how that consumer needs to be reached and all of those things? Absolutely. But we do think that the demand will come back. And we're seeing some of that as we speak today. Every time the pandemic sort of overall infection rate has come down to a level where people can make that move, they did. And we saw that even last couple of weeks when the -- it has come down when the pandemic overall inflection level has come down and we open the gates and people come in, right? So we'll see how this plays out. It'll probably be another 12 months -- 6 months, 12 months before we can tell you more, but we are optimistic that the industry will show there.

And when you think about the recovery in occupancy, I recognize no one knows the timing. How do you think about the pricing environment as facilities are open to take in new residents? Is there a risk of concessions? Or how do you think about the discipline around pricing as competition heats up?

There is always a risk of competition, right? There's always that risk. Are we hearing from our operators, Welltower operators, that we are willing to grab occupancy at the expense of rate? No. But it's a dynamic business, right? So never say never, but we're not hearing about that. We expect that our rates, as I pointed out on the call, has held up in 2020 and I expect it to hold up in 2021. But it's a pretty dynamic business, Nick. We'll see -- we're living in an unprecedented times, right? It's an uncharted territory. Is there a risk? Absolutely. But do we think that's possible? Yes. Do we think it's probable? Probably not.

And from an expense structure, as you think about the increased cost that COVID has brought on, how much of that is transitory and how much of that is probably permanently built into the business?

So we think -- I'll take that one. We think the expense side, at this point, it's way too early to say anything is permanent. I think a large part of it -- labor is the biggest piece of it. We've even seen, as we've cycled through COVID, that come and go. And so I think that's showing to be something that's going to be pretty transient, if you think about it. And then third quarter, early fourth quarter, we were on declining trends on that. And it picked up in the fourth quarter and carried in the first quarter as COVID cases spike. A lot of that is extra staffing. It's staffing even if staff members get COVID and need to do stay on, and it's also paying people actually to come in and work in a COVID environment. And so that, we feel pretty confident, is going to be transient. What will probably be a bit more sticky, and we'll get into consumer psychology, will be, one, PPE. We don't yet know kind of how long, and then it'll certainly be determined by how successful we are as a country in controlling COVID. And that's not just right now, but that's in the forward kind of flu seasons. This becomes something that's around consistently. That will still develop. Although PPE costs, in general, will come down significantly from where they've sat this year. So that cost will come down. It, being costs, still to be determined by kind of COVID's path going forward. And then on the deep cleaning and some other things that will likely stay around. And now we're talking about, call it, 15%, 20% of the total costs that we've added during COVID. I think that sunsets. It will certainly be sticky at first because there's going to be more focus on these things, given as a society we focused on them more over the past 6, 12 months. But it's going to be determined again by COVID. And if we see COVID -- these are traditionally very, very clean facilities and because of flu and other critical diseases, this is always a focus anyways, but it's just been more of one for the last 12 months, and it's added some expenses. So I think you'll see -- we don't think there's going to be a meaningful shift in the cost structure of this over the long term. How long it takes us to get back there, whether it's end of next year or '23, I think is being more dictated by a little bit of the path of COVID.

Appreciate everyone sending questions. I feel like we're setting a record with this one. I want to hit on some that have to do a SHOP here. Maybe just sticking on the occupancy. Does a $15 minimum wage impact expenses? And what's the likely long-term expense growth rate on the senior housing side?

So $15 minimum wage does impact expenses. That's already hit a decent amount of our portfolio in different states. And you can be sure that we're underwriting it going forward. I think it's a part of how we look at the business that same type of those things. And in general, a lot of the areas that we are in because we're in more infill locations. We're competing against wages in the lower end that aren't too far away from that anyway. So it's made its way into our expenses. It's a big reason why over the last 5, 6 years, you've seen 5-plus percent labor cost growth in our sector. And so it's not -- we're not -- we don't think we're that far behind of what something like that, if it came in from a federal mandate, actually impacting the business. And I think on the -- where we go from here, it's -- the uncertainty is around they're slack in the labor market, we all know that, and we've probably seen some effects of that having a little bit of a downward effect on labor and price in the short term. But all of us in the market are very focused on what inflation looks like over the next 12 to 24 months as an impact of a lot of the stimulus in the market, not inclusive -- or inclusive of the $1.9 trillion package put in place over the weekend. So certainly, this is a labor-heavy business and labor inflation is going to play a role. Part of our strategy all along has been in the part of our business that's labor heavy, meaning higher acuity senior care, being locations where -- and have a resident base as a result of that, where you can pass through the labor costs. And remember, when you're talking about the higher acuity side of this business, your competitor is someone staying at home and getting care. And that labor cost is impacting them as well. And part of the value that a community-based care gives you as you scale that labor. So you do get some efficiencies from [ happening ], getting care in a community versus having it home.

And then maybe a question that came in on the occupancy recovery. How much occupancy is realistic once things normalize to pick up a quarter? And what sort of lead and move in volume would you need to pick up 200 and 300 basis points of occupancy and is that possible from a demographic standpoint?

So look, we're not going to get to speculate what can be possible. I can only tell you that our operators are very focused and they're very savvy. And the incentives are aligned. So if there's a -- obviously, if that -- if the occupancy is there to take, then we'll that. But I pointed out that, remember, in senior housing, occupancy comes with additional labor. So we're very focused on pricing of that occupancy, not necessarily just occupancy, right? What is possible? We have never been in -- this is an uncharted territory in every possible way. We're just not going to speculate on can we get 200 basis points of occupancy in a month or so. We're just not going to get there. We just don't know. No reason to speculate. That's why we are buying what we are buying at the price we are buying, so we don't have to speculate, right?

And Shankh, you mentioned the incentives with the operators. You introduced RIDEA 3.0, the incentive structure. Coming out COVID, are there any tweaks to that? Is -- how do you think about making sure you and your operators are aligned for the recovery?

So Nick, there are always tweaks to that because we're also, as we go into situations, we're improving all the structures. So I'm not going to get into too much details, which we consider proprietary technology. We have spent a lot of time to build these structures and a lot of people, both on the investment side as well as on the legal side. But fundamentally, the idea is very simple. We want to sink or swim together, right? So we -- what we don't like in a traditional structure is our shareholders are holding the bag and operators not impacted that is something -- we never liked that on the downside. On the upside, we're willing to share. If people perform very well, people can create alpha, our operators, we're willing to share more upside with them and that hasn't changed.

And we have one more question, just the risk of kind of the impact of home health as technology has improved, allowing seniors to age in place for longer.

Tim, you want to take that?

Yes. I mean, I think -- so home health, in general -- and this is the way we kind of look at -- as we have really 2 different businesses and our real incumbent businesses, the higher acuity senior care, that is a business that -- we have home health cost come into. It's a residential setting that it's not necessarily a straight competition for. But I think in general, as Shankh spoke to earlier, there's going to be some ability over time for people to stay home a bit later. The higher acuity, until you replace the ability to kind of service their ADLs and the need to have that fun in person, I think you're going to continue to see senior care and the need for it to be the person to bear.

On the other hand, I will tell you that if you're not high acuity, which is -- Nick, you will recall, that the last 3 years we have been moving the business towards high acuity, at least in U.S. and U.K. Because of that, on the other hand that we have built an entirely different business, which is our seniors apartment business, which is focused on taking advantage of that. So we do think there is a lot of disruption possible in the middle. I still think the product will be needed, but will not be -- we'll let other smart people to make money in the middle. We're focused on either on very high acuity, where ADLs, we do not believe, can be provided through technology, right, so sort of that aspect. Or we're focused on no acuity, basically housing options for people at a much lower cost. Not saying you can't make money in the middle, we're just not going to be the ones doing it.

Great. Maybe let's shift to the transactions announced last week, Genesis and ProMedica. Why is it important to Welltower to do both of those transactions?

So look, I mean, at the end of the day, we have been very focused on communicating to many of you, including you Nick, that the fundamental idea that coverage is a reflection of value is a misguided one. If you go and do the math on what Genesis' coverage was, I mean, we have given you the EBITDA cap rate today, you can back into that. And the values that we got, you will see that if you did a market rent and a market coverage, you would be at a significantly different price than what we have been able to get, right? So the idea -- you said, why is it important? We're always trying to make -- ultimately, shareholders need obviously the total return that we achieved, not cap rate, not multiple, not stories, what returns that you have actually achieved. And in the -- one of the most controversial investment this company has made, we made 8.5% unlevered return, which I would say in this environment, you would say that's a very significant return for all that we have gone through, right? On the other hand, so we extracted value for our owners for where most people think there was no value. And we still think there will be more value coming our way. The way we are leaving all this stuff behind. So second thing, on the other hand, as you can see, when we did the ProMedica transactions, we said that buying -- making money in real estate is all about its basis, right? And we bought it cheap enough that we can make money. We sold the bottom of that portfolio, 41 year old assets that lost $10 million of EBITDA before pandemic in [ 1990 ]. It is the bottom of the portfolio. And we have sold that at a -- achieved 22% unlevered IRR, unlevered not levered, right? So that tells you that both of those 2 together gives you an indication of how -- we know how to make money in the business. We're patient, we're not moving with sort of what is the flavor of the day is. And we know through right operator, through right structures and with patients, we can make a lot of money for our owners. Even if it is not the most popular transaction or popular asset type that we're chasing.

And what -- so you now have a larger stake in Genesis going forward, what's the outlook for that? And what's the plan for that equity stake?

So this is why we give you the numbers that we did. If we get back -- not get back another penny, we'll still achieve 8.5%. 8.5% assumes that we write off everything else. And if we can, then obviously, that IRR will get better. You will see there will be more things that will make it clear how the new capital that came in -- which is Pinta, right, the new capital that came in. And Joel has a lot of really great idea about how to turn around this business. And we'll be his partner, with Genesis' existing owners. And we think that there's going to be significant value creation, but that's not for me to comment on.

And then on the ProMedica side, the assets that were added to the JV, how do they compare? What's the outlook for those versus the assets that you mentioned disposing out of the JV?

So generally, it is considered. It is very hard to make these kind of statements without somebody finding something to pull calls on. Overall, I will tell you, generally considered those 9 PowerBack asset generally considered, ex PowerBack assets, considered the best assets in the business that work under a skilled nursing license. They're not really skilled nursing assets. They are short-term rehab assets. If you visit, there are in the New York metro, I would encourage you to visit, Nick. Anything you know about skill nursing, you have to forget and rethink, right? So that improves the -- obviously, the ProMedica overall got added to the master lease, significantly adds to the quality of that portfolio. These also work as a hub-and-spoke model. Remember that a lot of ProMedica's assets are in this market. So these -- the 9 that they acquired obviously will act as a feeder. So improved quality, this becomes a feeder. As well as it was funded by the asset sales. So it is a capital movement, so they're not putting new money into it, writing a check from the balance sheet. It is money going from one pocket to the other pocket, but it significantly improves not only asset quality but also how the operational nature of the business, how patients flow.

And how do you think about the redeployment of those asset proceeds? I think you talked about $0.16 dilution initially, but then $0.05 longer-term redeploying. How do you think about the timing of that? And then also, I think you quoted a 6% yield on the redeployment, about getting to that 6%.

Getting to that $0.05 dilution. So that is standard underwriting. There's no magic to the 6%. We're not saying 6% is our pipeline, sort of yield reflects, that's just how we underwrite. When we sell anything, we just calculate the dilution on that, sort of, that kind of rate, 5.5%, 6% or 6.5% depending on what we're doing. So pick the midpoint of that. When we think we'll be able to deploy capital, I think rather soon. But it depends on -- we're a price-dependent buyer, we don't first pick up -- make a story that we're going to have to buy and then we buy. We buy if we see value and we're seeing a lot of value. So we think we're pretty optimistic about deployment of capital.

And so where -- you mentioned kind of finding deep value opportunities today, where are those? Because certainly, there seems to be a lot of capital chasing, a lot of the asset types that you own, which you've proven out on the disposition side.

Senior housing, there's a lot of value in the senior housing side. Majority of the senior housing assets never go to market, they trade because families go through transitions and it's a very family-driven business and that's what they are. You will see that we'll do a lot of transactions that are -- that will be the way we do transaction, privately negotiated transaction, principle to principle. And we figure out a way that both sides can be happy.

And for those opportunities today, what are the going-in yields? And what sort of IRRs can you underwrite?

I would rather talk about IRR than yield because I'm very uncomfortable talking about yields. It just depends on opportunity. We are still underwriting a high single digit, low double-digit unlevered IRR today, and we are getting it.

The IRR is all dependent on your growth and your exit cap. So I mean, I can make an IRR look great, too.

Yes. But that's why you need to see. That goes back to Nick's comment on why it is important, the ProMedica sale. We told you that we're going to do low double-digit unlevered IRR, and we've sold the bottom of the portfolio at 22% unlevered IRR, right? It is -- you're right, Michael, you can make IRR look good, except that you have to think about the basis. So when we are thinking about our IRRs, we're thinking about who is the next buyer and is the next buyer going to buy that a discount as well. Even then it is a high single-digit, low double-digit IRR. We always take next buyer's analysis.

And what's the income stream over that time in terms of where you're going in and what you're capping? Versus just from a real estate perspective, saying I'm going at 100 and I think the guys are going to pay 110 at the end of...

Yes. So that depends on what the asset is, what portfolio you're talking about. We're buying at 4 and where we think that your NOI can go up 2x, 2.5x. We are buying at 6, where it's not that much, we're buying at 0. It just depends on what you're buying, right? We just bought an asset from a bank last week at $80,000 a unit, brand-new asset, it took $280,000 to build it. There's no cash flow there. But we think that we'll make easy low double-digit IRR on that trade. We bought it that cheap.

Shankh, we have a couple more questions that came in, specific to the Canadian portfolio. What are the long-term plans for Canada?

We love Canada. That's why we like that assisted living business. We're going to spring in few high acuity trophy assets here and there, but we really like the Canadian business and like the fact it's a -- what's a very good diversifier to our high price point U.K. [ senior care ] business.

And then we have a question on markets. I know this is a big topic at the Investor Day a few years ago. But are you remaining focused on gateway markets? Or does the entry price today change the way that you think about marketing exposure?

We have never been focused on gateway markets. 4 years ago, we told you while we have moved away from market-level investing to micro market level investing and talked about 9 million micro markets. And the example that we used in those conversations going back 4 years is why a specific market in west side of L.A. might not be attractive, while a specific micro market in Kansas City might be attractive. So if you go back and look it up, you will actually see that. We remain that exact same investor. We're a micro market level investor. Clearly, there is more green dots in West L.A. than in Kansas City, but you can make money in both places. We are market agnostic.

And we wanted to ask on ESG. What are your top 3 priorities to improve your ESG score over the next year?

Tim, you want to take that?

Yes, I can start with that. So our first is on the social side and focus on diversity and inclusion. So we're creating a Welltower diversity council this year with the idea of promoting the goals, accepting, respecting and valuing differences across the company. And on the environmental side, our goal is to meet a 7% total electricity supply from renewable energies by 2025. And then sticking with the environmental side, a 10% reduction in GHGs, energy and water use by 2025.

Maybe on the G side, Shankh, as you think about the composition of the Board today. What skill set would you most like to add to it?

Well, we have some changes in the Board coming with a couple of our Board members are going to step down in next, call it, 6 to 18 months because of the term. And we're focused on what skill set we don't have and what we need. So there's a lot of conversations going on. You will see probably more in this topic next, call it, 3 months. It's too premature to comment, but you'll see a lot is going to come through in next. Ken is personally very involved in this, our Chairman. And it's premature, but I'm hoping that we'll see more in 60 to 90 days.

Shankh, you joined the Public Storage Board over the course of this quarter. I guess how do you feel the time for that commitment, especially when they have an activist in the stock and all the changes that are going on relative to the commitments you have at Welltower being a new CEO?

I assume, Michael, that you know that I -- how -- I work 120-plus hours a week and that hasn't changed. Public Storage is an iconic company, it has a tremendous Board and a management team and a product. And so I'm contributing every way I can, but it has a tremendous Board with David Neithercut and others joining recently, and has some incredible people on the Board before me and us. So it's not a huge time commitment for me, but I'm trying to obviously contribute everywhere I can. On the other hand, I'm also learning a lot about the business topics of interest to me, such as e-marketing, revenue management and other things.

Okay. We have our rapid-fire to end day 1. When we're sitting physically together in Florida a year from today, what will be the one thing that will have surprised people the most about your business over the prior 12 months?

How well we have bought in the prior 12 months.

What do you think your corporate travel budget will be in 2022 as a rough percentage of what you spend in 2019 pre-pandemic?

Tim, do you have any idea?

Say, 75%.

Okay. Will same-store NOI growth be for your property sector overall, for the health care sector overall in 2022? Recognize we're going to have to go through every single property type. Nick, I don't know how you've been doing these.

No, senior housing.

We'll stay away from that, from this one.

You're only a sliver of the market.

Yes. We're just going to stay away from that question.

I know you're going to do better than whatever the industry is going to do. So I'm sure...

The industry is going to do very well.

You would say you do better than the industry. So what would the industry do?

Industry is going to do very well in 2022 if current COVID conditions stay.

Okay. And then U.S. 10-year treasury yield, a year from today, it's 1.6 right now.

Probably higher.

How much higher? Do you want to give me a number, like 20, 30 basis?

[ Well, 20, 30 basis points ].

Great. Thank you so much for participating. I hope the rest of your meetings go well the next few days. And Shankh, we still have time to do all the [ Legos ].