Welltower Inc. (WELL) Earnings Call Transcript & Summary

Good morning. Welcome to Welltower's session here at NAREIT. My name is Dan Bernstein. I'm a senior analyst at Capital One Securities. We are here with CEO of Welltower, Shankh Mitra; CFO, Tim McHugh. Welltower is a largest health care REIT by market cap at $32 billion. They own roughly 1,300, give or take, senior care facilities, 22 million square feet of medical office. They've also been opportunistic in skilled nursing and senior apartments. Before we begin, I'm going to just quickly give you the standard Capital One disclosures that we do expect to receive or intend to seek compensation for investment banking services at Welltower within the next 3 months. With that, I'm going to turn it over to Shankh and Tim for their prepared remarks and then afterwards, we will have some Q&A. Shankh, Tim?

Thank you, Dan. We really appreciate your interest in Welltower. And I'll just start saying, there are very few times in the history of the company that you find opportunities where internal growth and external growth comes together because, usually, when internal growth is strong, asset values reflect that. So it's hard to make money by allocating capital and vice versa. We're in a unique point in time in our life cycle, in our history that we think that we can create significant shareholder value for our owners on both ends, both sides, both internal and external growth. I'm not going to walk you through every slide. This slide presentation is on our website. I'm going to walk you through a couple of high level. Tim will walk you through some of the details. And our goal would be to wrap it up quickly in 10 minutes, 10 to 15 minutes, and then we can get into Q&A. So I'll just say, just from an acquisition standpoint, let me start there because I think when companies talk about acquisition, a real estate company, most people think its assets. We think its assets, its relationships and its talent. So usually, I talk about that in that order. I'm going to reverse the order today, and I'm going to start from talent. If you're focused on long-term shareholder value, you're going to attract the best people and keep the best people. And I've been talking about this through pandemic, as we have seen several organizations have changed sort of their talent policy and reacted, we at Welltower doubled down on talent. We have welcomed about 40-plus new colleagues last year, and we are on track of attracting 50-plus new colleagues this year. And I want to highlight that today, we announced that John Burkart, who was the COO of Essex Property Trust, one of the most well-respected real estate investment trust, joined our company as COO. We also are extremely happy to announce that Andrew Haslam, who was the Head of Real Estate at Providence, one of the largest health systems in the country, one of the dominant health systems in the West Coast, is also joining the company. Both John and Andrew will join on the company in July. But this is not one of the points we're mentioning to you, but this sort of the talent team continues through our organization, how we're sitting today, we're seeing the quality of talent that's coming to our company because of the opportunity set. So we're going to talk a little bit about what the opportunity set looks like and how secularly we're seeing our competitive positioning has changed and how the industry will evolve. But before I get into that, Tim will walk you through near-term fundamentals, some of the balance sheet changes and some of the -- sort of frame the opportunity for us, and then I'll walk you through some of the details. Tim?

Thank you, Shankh, and thank you, everyone, for joining us this morning. So the first thing I'll talk about is the near term. So we've been -- we've given quarter-to-quarter guidance since the first quarter of this year as we've started to move back towards a more normalized environment since the bulk of the disruption last year from COVID. And this morning, we updated our second quarter guidance by increasing our FFO range from prior guidance of $0.72 to $0.77 per share to $0.75 to $0.79 per share. So a $0.025 increase at the midpoint or 3.4%. It's being driven by 3 things. The first is senior housing operating results, which is the largest part of our portfolio, have continued to improve and quarter to date have improved at a rate better than what we expected at the time of our earnings call at the end of April. We've also continued to progress on the investment front. As Shankh said, this is really the dual internal, external growth firing at the same time and are driving results right now. And then lastly, we recognized $5 million of HHS funds in the second quarter. As I described in our first quarter call, we do not expect a material amount of HHS going forward, and we're not projecting any more into our numbers. So first, looking at the senior housing operating portfolio. Since March 12, the bottom of our senior housing portfolio of the entire portfolio has increased 150 basis points. Our portfolio is primarily in the U.S. We also have large portfolios in Canada and the U.K. The U.S. portfolio is leading the portfolio out of the downturn. It's up over 240 basis points over this time span. The Canadian portfolio is on the opposite end of this. Canada has been slower to reopen and, therefore, it's been a drag on occupancy to date in the quarter, but we're starting to see some positive trends we can touch on later in the portfolio on our presentation. Investments. We have completed $1.7 billion year-to-date pro rata investments. This is the external growth part. We're in a space, as we'll talk about today, that's got -- that's very fragmented, that has a large opportunity for both rolling up the current infrastructure and also rebuilding and developing where infrastructure is moving. And that's been -- we've built up a lot of liquidity during the downturn and have started to put it to work as early as the fourth quarter, and now you're starting to see fundamentals move along with it. And lastly, this morning, on the balance sheet front, we announced that we closed on -- we renewed our line of credits. We upsized our line of credit from a previous $3 billion line of credit to a new $4 billion line of credit at lower pricing, LIBOR plus 77.5 basis points. We continue to have sector-leading liquidity and that certainly is one of the main drivers, our access to capital, our cost of capital and putting us in a sector-leading spot to continue to consolidate the space. So Welltower at a glance. I'll move through this pretty quickly. Largest health care and wellness REIT platform in the world. $44 billion of enterprise value. We focus primarily in the facility-based residential living and residential care with over 1,300 communities across the U.S., Canada and the U.K. We also have a very large outpatient medical portfolio, and as we'll talk about today, focused on the continual move of health care out of the traditional hospital setting into the outpatient setting. And we also have a very strong focus on sustainability and ESG [ in the company ]. Looking at the portfolio in the first quarter, we are primarily a senior housing portfolio. We've got 61 -- a little over 61% of the portfolio, and that's off depressed levels of NOI. So you'll continue -- during the recovery, you'll continue to see that grow as a part of our portfolio. Our second biggest part of the portfolio is outpatient medical of 24%. We also have a 9% health system segment of the portfolio and then lastly, our long-term post-acute, which was a largest part of the portfolio only a little over a decade ago, and we continued to bring down as we've moved into higher-quality, private pay-focused both senior living and medical outpatient. Our management team, and as Shankh mentioned, the addition of John Burkart this morning. And ESG, the company continues to be very focused on this. We have a strong history of focus on this. And on the environmental front, really, we spend a lot of time focusing on data aggregation and presentation, as it's become more and more of a focus to the investment community. So we've been very focused on reacting to that, to presenting information and presenting what we think is kind of a sector-leading position and continuing to position the portfolio from an environmental standpoint. Social. It's an aspect where the company continues to evolve and seeks to be an industry leader, differentiates itself from peers and our gender parity, which has been recognized by Bloomberg as recently as last year. And lastly, on governance, we have distinctly diverse board. And also, we have moved our governance structure. We continue to improve it. We've got kind of a peer-leading rating from ISS. And just as recently as this last fall, we moved to separating our Chairman and our CEO role in a continued move to move towards a better governance structure. And really, the underlying focus of this -- of our ESG is a triple bottom line focus: profit, planet and people. So I'll go over our secular themes. This is really the opportunity. So as I said earlier, historically, health care has been focused, particularly in the U.S. in an acute care hospital-focused model. And over time, we've seen it continue to move out of the hospital for kind of doctors' appointments, surgeries and that -- and such to move into an outpatient setting. And from an everyday care, wellness perspective, you continue to see it move out of focused on taking care of people when they're sick to staying well, and that really happens in the home, which is both, for us, our senior housing facilities for the senior and the more frail community and then seniors apartment and the actual home for the general population. In the U.S., in the U.K. and Canada, the underlying theme is quite well known, I think, to the investment community and that is, population growth amongst 80-plus is increasing rapidly. We've been talking about this for almost 2 decades when it comes to senior housing, and we're there. We're at the start of it. Shankh will touch on this later, but after kind of a baby bust to slower growth this last decade, it's really starting in '21, '22 and accelerating over the next 15, 20 years. That kind of brings us to the problem. The problem is that as we get older, we consume a lot more health care. So as a greater part of the population enters in their later years in life, they're seeing health care spend increase or projected to increase rapidly off the back of it and seeking both to keep people well and seeking to keep their health care costs out, we need to reimagine how we deliver health care. The U.S. in its current model not only spends a lot more than the rest of our peer countries and the OECD countries but also has worst outcomes. It's best measured by life expectancy. And right here, you see, one of the reasons why more and more conclusive evidence comes of why our spend is [ planned ] this way is because we spend a lot less on social care and a lot more in health care. When we think social care, we think social determinants and more and more evidence is being brought forward on social determinants being a bigger driver of outcomes of health than access -- or hospital care. And so where you live, your access to care, your exercise activity, food security, these things are increasingly important or being recognized as being increasingly important. And that's really where Welltower finds its main footprint, in providing and developing and building out infrastructure that focuses on social determinants of health. And with that, I'll hand the call over to Shankh.

Thank you. So if you just -- I'll not walk you through in detail the slides, but touch on one of the most important things on this slide, which is we're focused not on growing the overall enterprise of the company, but we're focused on per-share cash flow growth and per-share value growth. It's very important that you understand that our focus is per-share value creation, not just growing the company. So how is that going to come about? Obviously, Tim touched on many of this. We obviously have a secular growth tailwind that sort of started last year really accelerating. We have significant accretive capital deployment opportunity because it's a very, very fragmented business. I'm going to get into a little bit of details on that topic. But it's not just a question of capital, it's also a question of, senior housing, in particular, it's a game of having the real operating platforms. As you know that we have -- in 3 countries that we do business, we have the best operators that are our partners, and that's obviously what's driving the growth. On the same time, I touched on the talent. We are very entrepreneurial, passionate and diverse talent. We're focused on creating value for the owners. I'll just give you one small anecdote for you to think about. On an average S&P 500 company or Russell 2000 company, [ employee ] participation in the stock is roughly 25% to 29%, depending on what data you look at. At Welltower, that number is 66%. So we not only think like owners, we are owners. That's a very important point. And the last 6 years, we have significantly derisked the business by, obviously, as Tim said, reducing our post-acute, really structuring all the management contracts. So tee up the company for growth that's sort of starting the secular tailwind that I mentioned. If you can go to the next page, Tim. So this is a very important slide from my perspective. If you just think about what the last 5 years or last 10 years have been versus what the next 5 years, it's a very, very interesting thing to think about. Demand and supply has completely slipped. Last decades, if you talk about 15 to 20, for example, you had flat population growth. You had demand growth from an increasing penetration, but the population growth has been relatively flat because of the baby bust, right? That has shifted from starting 2020, really '19 and then a little bit '20, and it's really picking up as we speak. On the other hand, supply on the senior housing is just the reverse, right? Last decade, you had sort of demand chase supply. And we think this decade, you're going to see the reverse, supply is going to chase demand. And this is particularly important, as I'm going to talk to you about, not just what is happening on the debt side, which is the lack of availability of debt capital. What's also very importantly last 18, 24 months, equity capital, as cost has gone up, a large-scale merchant-building model is no longer profitable because cost has gone up that much. The operating platform, obviously, I mentioned, but if you think about the last 5 years, the values were so high, it was very hard to create shareholder value on a per-share basis by doing net investment. We have done a lot of investment. We sold a lot of investments, right? And that opportunity today, given what the pricing environment is, which I'm going to get into in a little bit, is there's a significant opportunity to grow the platform and grow the cash flow. If you can go to the next, Page 17, quickly, so if you think about some of the biggest secular themes, thematic investment opportunity that we have in front of us as investors, we think Welltower is there from a secular growth point of view, and there's a tremendous amount of opportunity just like you're seeing in e-commerce and retail technology and mobile phone usage. There's a secular opportunity of significant demand growth on the health care side that will come through for our owners. So after that, if we can just jump to Page 18 quickly, I'm going to touch on one thing here, which is very important. I'm not going to walk you through everything, that is, we have the leading predictive analytics platform of all real estate companies that you need. We have built over the last 5 years a true data analytics and predictive analytics platform that drives all our capital allocation decision, and we invest on a micro-market basis, which is 0.25 mile by 0.25 mile neighborhoods, not how people invest in real estate, which is on an MSA basis on a submarket basis. That drives all of us. So being in the right product with the right price point for the right customer is our focus. So if you go to Page 27, please, if you can flip it to -- just quickly, what does this all mean from a perspective of sort of growth opportunity, you will see that what you have sort of framed it for you is, if we just go back to pre-COVID and I'm going to mention why that is not a really important timing to think about because the peak of this industry was Q4 of '15, not Q4 of '19. If we just go back to Q4 of '19, though, and have no rate growth, we're talking about, give or take, about $0.5 billion of excess NOI that the company is not earning. We also pointed out before that there is significant opportunity of growth on top of that because we think the frictional vacancy of this business is 7% to 8%, and we have gotten rent growth along the way. So [indiscernible] and talk a little bit about external growth opportunity because, I think, that's on the minds of investors and analysts. As I mentioned, the very few times in the history we see an opportunity to invest capital like this. You can see when we sort of went from defense to offense in Q4, so far, we have invested $2.2 billion in the last 6 months or so. In 29 transactions, 6,000-plus units, and we invested in an average price in U.S. of $161,000 per unit. If you ask me to guess what the replacement cost of that portfolio is, it will be about $300,000. So it gives you a sense of -- and by the way, replacement cost in Florida and Texas and places like that today is sort of around that number. We bought a lot of assets in New Jersey and Coastal California and Seattle and Pacific Northwest that's included in that number where replacement cost is much higher, right? So we're very, very excited that we have been able to deploy capital at such a granular basis. It's an important point that you see the average price that we executed this acquisition is at $16 million, $15.8 million, to be specific, and we're bringing in our operators to make this much more valuable. The additional disclosure at the first time we gave here is that our initial expected yield for this whole class of acquisition is above 7% today, and we expect that they will stabilize above 9%. So it is widely accretive for shareholders. On a long-term basis, we think these are, on an unlevered IRR basis, above -- in the double-digit range on an unlevered IRR basis. So with that, if you can just go to Page 47, please. And I'll just say that this is sort of the opportunity for today, right? There's a lot of -- lack of capital. We have the operators. We have the capital. We have the data analytics platform that we can deploy all 3 of them together and do what we are doing, and we'll continue to do that. However, this slide talks about something different. Last 15 months in the start of COVID, we have acquired 15 relationships, operating and developing relationships that laid the foundation for our growth for the next decade. These relationships are usually structured 10-year, 12-year, 15-year development relationship on an exclusive and a first right basis, and we think that we'll be able to deploy at least $1 billion of capital and aggregate this class, [ COVID ] class of operators and developers for the next decade to come on an annual basis. So we are very excited about the near-term growth prospects, we're very excited about the medium-term growth prospects, and we're very excited about the long-term growth prospects. With that, Dan, over to you.

We're welcome to take any questions from the audience as well. But for now as long as we don't have questions from the audience, I will ask my own. Shankh, Tim, I think the place which we could start off, maybe digging a little bit further into senior housing, which I think -- obviously, you've just talked about external growth, but I think a lot of folks are really focused on that supply-demand dynamic that you discussed and how that slipped over. But let's think about the short term, and you've put an update out this morning, obviously, updating some of those green shoots. But maybe we could talk a little bit more about how COVID impacted the portfolio, what green shoots you're seeing today here in the second quarter on a near-term basis. I like thinking long term, but obviously, there's a lot of investors who also want to understand what is happening today within your portfolio. So if we could talk about some of the dynamics that you're seeing right now here in the second quarter.

Tim, do you want to take that?

Yes. So the dynamics we've seen so far, we've talked about a lot, we're starting to see that occupancy rebound that started actually at the end of the first quarter and accelerated out of the first quarter, and it's been pretty consistent here into the second quarter. We feel pretty encouraged right now by the underlying leads data and other leading indicators coming into June as well and also have very supportive things from our operating partners, expectations around some of the reopening that's happening in June, how that's going to create incremental demand. In addition to that, as I said earlier, looking at our geographies, U.K., U.S. were earlier to open. You're starting to see Canada as highlighted by last week, Toronto coming out of lockdown, start to get into an environment where we should start to see some recovery there as well and adding that as a third leg to our recovery within our senior housing portfolio should continue to be supportive. I'd also note that while we've seen this occupancy recovery, we've actually had a very supportive environment for rents. So we've not seen substantial discounting to get people in the door. We've seen the ability to kind of hold rate. We saw -- we're looking at kind of 1% to 2% type rent growth to kind of back this or as this occupancy recovery is driven. So overall, the fundamental environment continues as noted in this morning's release to surprise the upside.

I think that's really noteworthy, too, on the pricing relative to other real estate classes. We saw this in 2009, 2010 seniors housing, but rent growth has been relatively stable, given the loss of occupancy during COVID. Are there any lessons that your operators learned over the last 15 months that they can apply going forward? Obviously, there's a lot of discussion broadly within -- you take any industry today, automation, technology. What are the lessons being learned that you can apply going forward, whether that's operational, CapEx, technology, automation that's going to benefit your portfolio and your NOI growth going forward?

I think it's all for you. You just kind of hit on it. It's operational, it's CapEx, it's implementation of technology. As you mentioned, across the economy, we're seeing that theme in a lot of ways in COVID economy is the acceleration in trends that we saw that were occurring pre-COVID. And in our states, what we own is the residents. And the other components within it, the labor component is -- allows for further scaling with an enhanced technology in the building, and we're seeing an acceleration in that. We're also seeing, frankly, and this again applies beyond senior housing, which is in the general economy. Our business -- our operating partners went through a shock over the past 15, 16 months that they -- no one was prepared for. And from an occupancy standpoint, our buildings didn't close. They just saw significant draw-downs in occupancy. And labor was tight and not necessarily for the reason it is today, but over the last few months because challenges that came about because of COVID, and our operators found ways, efficiencies, ways to run their buildings that we continue to hear from them, that I think last beyond COVID. So the ability -- the staffing is a big -- getting staffing right is -- can be the difference between success and failure in this business, and the really good operators know it very well. And these operators -- a lot of our operators have a very -- have stabilized portfolios. And their portfolios in total were pushed essentially lease-up levels, getting in the high -- low -- high 60s, low 70s. And because of that, they were put through kind of a shock treatment on the labor side that, I think, has pushed them to be creative to scale, I think, efficiently in a way they hadn't for a while, and we keep hearing that there's going to be some long-lasting kind of impact from that on the efficiency of our platform or their operating platforms.

Dan, there's a question from the audience. Do you want to read that or you want me to read it and answer? How do you want to do it?

You can go ahead and read it. I'm looking -- I don't see it on my screen. So if you see it on your screen, please read that.

The question is that you mentioned lack of capital in your space. This seems counterintuitive, particularly given the secular drivers. Many other areas of real estate [ are lush ] with demand, the environment is abundant with liquidity and cheap money. Why is your space different? It's a very, very good question because it is just not real estate. You need to have an operating platform to make money in this business. So you need to first have sort of -- you think about a long-term perspective, you need to have staying power. So most of the people, if you -- who were playing in this business, didn't have the staying power. A lot of them decided sort of as we went through this, they gave up, obviously. And what you need is just not money. You need an operating platform. And you need to understand not all operators are good in everything. You have to find the right operator for the right product and the right acuity level, right? And that is the mistake that a lot of players make. We're not the only people who are successful in this business. There are more. But this is not like what you see in other real estate asset classes where you have to underwrite just real estate. In this business, you have to underwrite an operator, you have to underwrite a business. And that's not how most real estate capital is structured. And we're seeing the lack of, obviously, debt capital in the space comes from the fact that you need to have the -- if you have the right asset at the right location with the right operators, you can absolutely get debt capital. So the opportunity set is not just that, the opportunity set is that we bring our operating partners, some of the best operators in the business, to those communities. So we're not just buying an asset with a flag, we're replacing the flag. And that's what the opportunity is. And that sort of answers some of the questions that you're asking. Again, I would also like you to think the last one, which is a tactical point. On Page 45, we mentioned that main median size of the asset that we bought is $16 million. Most real estate investors want to come and write a big check. This is not a big check industry, right? So you need to have an operating platform. You need to have the data. You need to have the patience to do small transactions. And if you do it, you can make money. You need to have staying power, though. Thank you.

We are at actually 11:30, and time has moved very quickly here. Shankh, Tim, I'm just going to give you a quick opportunity to maybe follow up on our pre-call discussion, which is, what are people missing on the Welltower story, maybe senior housing story. I mean we talked about incremental margin. What are people, analysts and buy-side missing on the Welltower story just on a longer-term basis?

Yes. So I wouldn't say that people are missing. There's a lot of really tenured analysts and investors in our space. We're not necessarily missing it. Just the fact is, I think, people -- generally speaking, we think that people are not focused on incremental margin, they're just focused on absolute level of margins and what that means for growth, right? I mean just to give you a sense, 20-plus percent of our communities, they have negative margin. You can say, Dan, oh, the NOI is going to double. It's not going to double, right? It's going to go from a steep negative number or a steep positive number, right? So that's sort of the point you've got to think about incremental margin, for example, right, sort of one thing. The second thing I will just think about the opportunity set here is not just very few sectors, at least I don't know of any other, where you have the opportunity to create value, you have great tailwind on the demand side and you have great sort of setup for the external growth. And that's what, I think, on a per share basis, is going to create significant value for our owners. That's how I would like to conclude here.

Okay. We don't have any other questions from the audience. Again, we're right at that 11:30 mark. I'd like to give people back some time. Shankh, Tim, thank you for joining.

Thanks, everyone, for your time. Dan, thank you for hosting us.

Yes. Appreciate it.

Thank you. Take care.

Take care.