Welltower Inc. (WELL) Earnings Call Transcript & Summary

Welcome to Citi's 2025 Global Property CEO Conference. I'm Nick Joseph here with Michael Griffin with Citi Research. We're pleased to have with us Welltower and CEO, Shankh Mitra. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. [Operator Instructions] Shankh, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons that investors should buy your stock today, and then we'll get into Q&A.

Good afternoon. Can you guys hear me? Okay. So as Nick said, we run a company called Welltower. We work at the intersection of health care and housing. We're, frankly speaking, a business that's focused on providing residential settings, mostly for residential settings to older adults. And we believe it's an interesting business in real estate, which has sort of been untouched for the last 4 decades to professionalize it, to bring it to where 21st century business process, technology implementation, et cetera, should be. So we're very interested in the business to provide a great customer service, provide a great employee experience. And that's our -- every day, that's our hustle, right? What we have here is -- to my left is John Burkart. John is our Vice Chair and COO. We are fundamentally an operating business in a real estate wrapper. And John is our operating brain and John is our operating hands. So anything you like about this business goes to him. Anything you don't like about this business goes to me. To my right is Nikhil Chaudhri. Nikhil is our Co-President and CIO. All the good deals that this company does, Nikhil does it, the bad ones I do. So that's our setup. I'm not going to bore you and waste your time on walking you through why you should -- I've never told anyone to buy our stock, so I don't really know how to answer that question. Though I do believe that it's an interesting company. I laid out sort of we have significant growth ahead of us. We have been delivering significant growth. The better days of this company is ahead of us. And we have a -- it's sort of always a strategy, if you will. We have the lowest levered balance sheet in all REITs of any large companies. I don't want to make a definitive statement. I don't look at REITs anymore, but we have a very, very low levered balance sheet. And we sort of think about how we use that. We run a very business that's sort of a handshake business. And that's pretty much it. I don't know what else you guys want to add.

I think we just put our heads down and execute, and we've had strong operating results. And as Shankh said, that's happened in a really tough environment for our business and for real estate. And we are incredibly bullish and optimistic about the future. And again, we're not asking anyone to buy our stock, but if you look at our actions, our entire management team has never sold a single share of stock. And so we're leading by example in what we believe in.

Great. Well, I think we'll get into all of that, but you did announce a large transaction yesterday in Canada, Amica for CAD 4.6 billion. Already a handful of questions have come in through live QA on that. So maybe that's a good place to start. Maybe you can talk about the opportunity there. I think you called it luxury, ultra-luxury. So maybe we can talk about the opportunity in Canada, particularly at that price point. There's a specific question on the cap rate on the deal, but just why don't we start there?

Any other specific question?

Yes. I guess the desire to expand further into Canada in the investment case for that deal, just given that you've talked about how large of an investment opportunity there is across senior housing, capital is scarce, why that deal?

Okay. Let me start. Nikhil has been working on that deal even before me. So he will tell you more about it. But I guess we have -- on a press release, you can read all about it. I'm not going to bore you with much details, but I'm going to answer your cap rate question. I wrote a ground rule document many years ago, which is posted on my company's website. It's called a letter to future shareholders. If you have any interest on Welltower, you should read it, and that categorically says that if you don't know what cap rate is, you've done yourself a favor. Cap rate is a made-up thing, buyer's cap rate, seller's cap rate, looking back, looking forward, tax adjusted, not adjusted. You tell me what you want, I'll give it to you. And so it's a complete made-up number. You don't eat cap rate, you don't get cap rate. You get total return. So I have never mentioned what cap rate we have bought something at. As long as I'm in the company, that will not happen. So I'm not going to answer that question. We do believe that we should be -- comfortably get to a double-digit unlevered IRR in that portfolio. And it's important for you to understand, we said it's ultra-luxury. And I have -- the reason I don't buy companies or portfolios is that I'm an extremely sort of a quality snob. I never met a company or a portfolio where I looked at the assets and said, more than half of this company's asset base is interesting to me, right? You don't go through a bad meal to have a dessert, right? That's not a pretty smart thing to do. So that's the only portfolio we ever seen that I will comfortably tell you that it's a better portfolio than what Welltower owns. So in my humble opinion, it is the best senior living portfolio that I'm aware of in the world. And we've been working on it for 10-plus years, and Nikhil can tell you a little bit about that.

Yes. Look, I mean, we've been tracking and been involved with this portfolio for many years. This is the first transaction that I worked on at what was formerly known as Healthcare REIT in 2015. We looked at this transaction at that time, couldn't make sense of valuation, but just incredibly impressed with the execution of the management team and the quality of the portfolio they've built. And we've tracked it since then. The management team is located in downtown Toronto. We have an office there. Eddie Cheung, who runs our international business, works down the street from these guys. And he's kept in touch with them for the last 10 years, lunches, dinners every 3 months. We've engaged with the company over the years at numerous times. And as you would expect from us, we have continued to be price disciplined. And when the stars don't align just because it's the highest-quality portfolio, it doesn't mean you pay whatever it costs, right? You pay a number at which you have high conviction that we can make an incredible return for our shareholders. So we waited, we waited, patiently waited until last year when the seller decided that they were exiting the business no matter what. And there was a process to discover pricing that made sense. That process did not yield any results. And so then after that, they called us and said, let's get in a room and negotiate a transaction that makes sense for everyone, and that's what we did. It is by far the highest-quality portfolio that we have seen, period, full stop. This is not a -- there's no qualifiers about being in the U.S. or North America or any of that. The operating results, I mean, there's 24 buildings out of everything we're buying that are stable. The operating results speak for themselves, 95% occupancy, margin in the low to mid-40s and incredible pricing power that's almost 7% CAGR over the last 5 years. It is the highest-quality portfolio. And it comes with massive growth prospects from leasing up to 7 buildings that are newly delivered to acquiring 7 more buildings that are in construction as they are completed without taking construction or development risk. And then there is incredible development pipeline beyond that. And we're doing this in an incredibly aligned RIDEA 5.0 management contract where we have great alignment with management going forward that we had with the transaction.

And it didn't hurt the day we announced that deal that USD-CAD was 20 years low, and we're an USD investor.

So when you say the highest-quality portfolio, you talked about the operating metrics. I mean if you just put aside the lease-up opportunity, but just on the stabilized side, John, I think a lot of what you've talked about over the past few years is the opportunity to modernize this business and find opportunities and low- and medium-hanging fruit. Would that not be the case for this portfolio? Are there things that they're not doing that you can bring from a Welltower perspective to drive even more out of it? Or is the growth really on that lease-up side?

Let me try to answer that question. First, we didn't buy the stable portfolio. We bought 38 assets, right? So we would not have bought those -- only those stable assets. So from our perspective, our growth investors, we think about growth. We don't buy stable portfolios, but we didn't buy a stable portfolio. We bought a portfolio of 38 assets that we think will have incredible growth. I will -- so that sort of -- you have to think about it what we did. Put that aside, we think they are very, very good operators. And when you can drive significant RevPAR growth at those kind of margins, that translates into significant NOI growth. Just do the math, you will see it. Regardless, there is always opportunity to improve. This is an unusual transaction. I like to buy assets that broken from a capital structure perspective or from an ops perspective and bring in our operators to fix it. And that's not this transaction, though there is significant opportunity to improve in that specific one. And there's significant opportunity for us to learn from them, what Robert and Jens all they have done, and apply it to some of our U.S. and U.K. portfolio as well.

So a question came in on that. The motivation for why to sell now. You talked about having called on them for 10 years now. It sounds like the portfolio is doing well, not a broken capital structure. And so I think the specific question is, can you speak to why the seller was motivated to sell at this point in time?

Yes. Nick, I'm a buyer. I'm not a seller. So I can't speak for someone else's motivation, and it will be inappropriate for me to speak to that, right? But we got what we wanted. We did the deal, what we hope is win-win for both parties. And so I can't speak for the motivation. But I will tell you, generally speaking, we have been seeing a trend towards large Canadian pension funds to sell private equity and private real estate assets. We have seen that from not just Ontario Teachers', but other big U.S. -- Canadian pensions, but I don't know why. So it's sort of inappropriate for me to comment on seller's motivation.

Maybe to that end, Shankh, is there any comment or insight you can give into who you might have been competing with in this deal? Were there other bidders or prospective people looking at the transaction?

Yes. I think Nikhil sort of glossed over it. But as we pointed out that there was -- we don't participate in process. We have very categorically told their banker that they ran a process. They didn't get anything out of it. So they came back to us. And we sat down in the CEO's house and negotiated the deal in 6 hours. That's just how I like to do things, sit down with people and see if I can structure something that's a win-win on a negotiated basis. I'm a handshake person. I've never walked away from any deals I've ever said I'm going to do. And that just -- and they are also very high-quality people, right? So process is not for me. I don't have patience to do process. It just doesn't work for me.

Look, I think in speaking to the strength of the management team, I obviously talked about the operating results of the stable assets and how great they are. But I think there is a lot of alignment in how we think about the business as well. If you look at their actions and what they have done with the company over the last 10 years since we've been tracking it, just like what we did with Welltower's balance sheet assets, for the first half of that decade, we sold a lot of assets that were nonstrategic or middle market and those kind of things and focused on the highest-quality markets. They did the exact same thing with their portfolio as well. They sold 1/3 of the portfolio and rationalized their footprint into the highest-quality markets in Canada. And just like we have then, we've grown the portfolio with higher-quality assets, they did the exact same thing, right? They took the capital that they took out of selling the bottom 1/3 of the portfolio and redeployed that into newer, higher-quality locations, and they built every asset one at a time, spending years and years on diligence and entitlements and assembling sites.

We've had a couple more questions come in on the Canada piece. Number one, does development pencil today in Canada? And then number two, will these stabilized Canadian assets go into the new fund?

Our new fund is U.S. senior housing fund. These are Canadian assets. So I think the person who asked the question did not read the fund disclosure -- I mean press release closely. And development pencil today, development today where development construction cost is doesn't -- many of the development parcels we bought that is in the development bucket are extensions. And when you have extension, you have a different cost structure, not just operating costs, but also shared amenities and stuff like that. There, it may. It's hard to say. Look, we own a fantastic piece of land in Toronto on Young Street. It doesn't get any better than that. And there, we couldn't make the development pencil. So last year, I think in December, we sold it, right?

Correct.

So it depends, right? I'm not going to say it doesn't blanket. Obviously, I haven't looked at every development deal. But it's hard to say we couldn't make a deal work in Young Street in Toronto. So -- but we'll see one thing at a time. But if it is extension, likely easier to make it work than not. We'll see.

And then just we had some more come in on Amica. So obviously...

I was going to talk about Amica for half an hour.

We are cognizant of getting people's questions answered. So we'll finish with these 2, and then we'll move on to the rest.

I'm happy to do it. I'm just saying is that helpful.

You're getting a record number of questions coming in on it.

Yes, making our job easier. All right. So the market obviously has very strong expectations for Welltower. Is the Amica deal a superior total return relative to the existing portfolio?

Amica deal is a superior return relative to...

I think the question is just the growth rate of what's internal or what you're assuming within Well versus this new deal announced.

I think how we think about every single investment decision we make is what is the IRR on the capital that we put out relative to the foregone IRR on the capital that we are raising, right? So every time we sell a share, we think about what is our internal model for expected IRR on that. And we think about things from an IRR accretion perspective, not on a day 1 earnings accretion perspective. And so that's the first principle. And so you should assume that every transaction that we do, our view is that it is IRR accretive, total return accretive to our shareholders or we wouldn't do it. So the answer to your question is yes.

All right. We'll move on. Look, I think the #1 question that we seem to get is when will senior housing supply return, right? So I think everyone saw in the 2010s, we had an overbuilding ahead of the demographic trends that were expected. The demographics are here. We had COVID, there's phenomenal growth within SHOP and senior housing broadly. So the question is, when does capital return? And I know there's increasing construction costs. I know there's kind of construction loan concerns. But kind of what is your outlook for -- given the strong growth we're seeing right now, when does capital return in on development? And when could we start to be talking about supply as a potential issue in the space again?

We created a couple of slides that's on our business update. You guys should look at it. I'm not going to bore you with details and waste your time. But I think before we talk about development, we should ask why people develop. I have not met one developer in my life who says, let's go build so we can lose money. Why would you build for $1 when every asset trades at 60, 70 cents on the dollar. I think you guys need to look at business history and ask why? Why there was a development boom in the '15 to '19? And the answer is, if I want to be not so kind, is the REITs created that oversupply by paying insane prices, 150, 160 cents on the dollar. And so when an asset trade for 160 cents on the dollar, developers look at that and say, no, I can build for $1 and make $0.60 of profit, especially if I can get $0.75 of leverage, it's really $0.20 and everything else, most developers develop to make 3x money, right? That's really what development performance look like. The fundamental question you have to ask yourself is if assets go from -- I'm just going to take an average just to make a point. If assets trade for $0.65, $0.70 and it needs to go to at least $1.30, $1.40 to make a profit, then that will be our motivation. I don't know when that will happen. I can tell you this company will never pay, right? If assets trade at $1.30, I will be selling assets every day, twice on Sunday. And I have done that, $15 billion of it, right? So first, we need to say asset values double. That's what we need to say. How that's going to happen? Look at where interest rates is. Look at who the buyer is, right? They're disciplined buyers, whether it's public buyers, whether some of the handful of private buyers left. I mean, no one made money in this business over the last 10 years. Why would we think that suddenly irresponsible capital is going to come in and do this? But that's the first level where you have to think about why should somebody develop. And if they have, then you have to think about, okay, what is construction cost, what is financing cost, all sorts of things, what's going to be my takeout? Historically, you think about it, regional banks are the only lenders in this business. Banks like Citi don't lend to this business. Smaller regional banks do. Are they lending? Are they lending to the space? If they, when they lend? Why did they lend? Because they had obviously agency takeouts. Are agencies lending in this space? And so all of these kind of things think through, but there's no crystal ball I don't have. But generally speaking, then think through what -- when asset value returns, then you will see obviously a lag in response because it takes time depending on the market, unless you're in Houston, no offense to Houston. But it's easier to build in places like Houston. But generally, you take time to get through permitting and construction and all those things. That will be a supply response. But first, asset values needs to come significantly above replacement cost for developers to build.

Shankh, to that end, do us being in a higher for longer rate environment, is that actually beneficial to your acquisition pipeline, just given your current favorable capital structure?

Yes. So you think about it, higher for longer also increases capital cost for everybody, whether you're sort of -- just going back to a previous question, you have to think about what the financing cost would be, what will be your takeout, what will be your [ palm ] and all of those kind of things. On the other hand, it's -- we are seeing a lot of high-quality assets where people have loans come due. There's nothing wrong with it, except values have changed, DSCRs have changed. You're not going to get a loan today -- even if you can convince Freddie, Fannie to lend to you, you're not going to get Freddie Mac give you a loan today below 1.4x DSCR, right? And that's the key is at that prevailing rate, almost regardless of LTVs, you need a strong DSCR. And generally, insurance companies don't lean into the space, but if they did, they would absolutely ask for the same, right? So there's no question that higher for longer is extraordinarily beneficial for us from an external growth standpoint. But if you think about it, this company is not designed for external growth. We have a regional density strategy. We buy one asset at a time in the region, if it is helpful. If we never bought another asset, I'm comfortable that we can grow this company on a partial basis and double digit for a long period of time. We invest capital to make money for existing investor on a partial basis. This is not a deal shop. We're an operating company in a real estate wrapper. Operations first, operations last, everything in between. If we can add an asset in a cluster and do well for the existing assets, do well for our customers, give them choice, give our site-level employees choice, we'll do it. If not, we'll not do it. There is no strategic deal at Welltower. Our only strategy is to make money on a per share basis for existing investors.

Maybe that's a good segue to kind of talk about the operations in the portfolio. Obviously, John, you've been instrumental in building out that platform, leveraging data analytics to help drive both revenue and margin expansion. It seems like, as Nick said earlier, there is some low-hanging fruit in this industry. You obviously came from multifamily. You saw how that industry evolved over time. So just if we think about it like a baseball game, what inning are we in from the senior housing cycle side? And how is Welltower best capitalized to meet that demand?

Yes. As far as where we sit right now, I would say we may have moved in from the parking lot, and we're on the field right now. But we're at the very beginning. We mentioned previously publicly that we just started a launch of our platform last year, and we're now moving into rollout phase. So as far as from an investment perspective, those -- the impact of that is just at the very beginning of starting to hit what you guys care about most. So we're very, very early in the game, super exciting. What we're starting to see is that now that we have a tangible item that the partners can see, their excitement is pretty substantial. They realize the transformation of the business that's going to occur, and they're excited as well.

And can you maybe highlight some examples? It might be little things like redoing a common area or finding other ways to benefit employee retention. Maybe talk about some initiatives you've been able to undertake and the tangible benefits the portfolio has seen as a result.

Yes. So the -- from a physical perspective, and you have to look and say, with employees, what you're trying to do is you're trying to work with people where they're at and you typically want to win their hearts over before their minds. So we mentioned on the call, the most recent call, all of the employee break rooms that we have worked on, and we continue to do that, you look and say some of the most beautiful assets have break rooms that look like something that would come out of a shipping company. And they feel that -- they feel are the fact that we care, that we're in the game. They see it, tangibly see it. That impacts their experience, the employee experience. It impacts the customer experience as well. And of course, as you know, we're touching other parts of the asset as well. But really, it starts with the employees and it starts with recognizing how important they are and what they deserve and executing on that and engaging them in all the other aspects of the things we're doing, whether it's we're adjusting processes or whether it's the technology, et cetera. But they go into it quite excited because they realize that this is a game-changing situation. It's not, frankly, a bunch of suits trying to push something on them. These are people that we're listening to what they say, and we're responding.

And to your point about is it tangible, in our business update, we provided some stats in buildings where we have done these break-room renovations, how that has impacted the turnover, right? The employee turnover is a substantial -- hasn't historically been a substantial issue in the business, and this is a way of tackling that. But then if you think about the impact that it has on our resident experience, right, we are in the business of delighting our residents. And so if the folks that are taking care of our residents are happy and satisfied and there's continuity in their -- and then continuing on with the job, it delivers a better customer experience. That's what we're after. So that's the tangible benefit.

We had a question come in from live QA just about how concerned are you about potential immigration changes and tightening of pushing up labor costs within SHOP?

We have a fundamental assumption. Look, it's -- if you look at the demographics in the moment I said that every one of you are thinking about, I'm talking about the demographics of country aging. I'm actually talking about the demographics of caregiver, it's scary, right? We can get excited about, okay, the demand side. We have to be really concerned about the people who will really serve these people, that's not good, right? So our assumptions is labor cost on a per unit basis will forever grow inflation plus. That's our assumption. Immigration, non-immigration, my general understanding is, at least I'm not aware of, because of this -- the industry has a lot of state-level regulations. I'm not aware of a lot of illegal immigrants or sort of undocumented workers work in this industry. I'm not aware of any, but I'm not going to make that statement because I have not been to every community every day, right? But that's not what happens in this, unlike the construction industry, what I talked about, where a lot of undocumented workers work. So our -- look, our assumption is it's going to grow, which is why we don't do mid-market. We only want to do senior living where we think we can pass on inflation plus, right? We have shown you guys that years and years out, good time, bad time, during disruption, not during disruptions. And that's our fundamental assumptions. I'll just add to one more thing. I said per unit labor cost. When you say professionalize the business, we'll see how much of the work needs to be done by labor versus people. I'm going to give you a dumb example for you to sort of -- just to make a point. We're still collecting rents and checks. Maybe we should go to ACH and not meet the person who collect the checks, right? I'm just giving you a dumb example, but for you to understand what I'm trying to say. Maybe we are having our caregivers, 3 shifts of caregiver, they're wasting 50 minutes. Say, Nick, I'm -- you're caregiver A, I'm caregiver B. And when you are leaving, I'm coming in, it's a 50 minutes of this, a rim of papers that going from you to me, and we're wasting 50 minutes on both of our schedule. And that needs to be an iPad, and that's just a handover, a couple of comments you're done, right? So these are the things John talked about on the call, right? If you just think about the process, you made a decision, your mom is coming in, she's going to live with us. That's a 4-, 5-hour arduous process, so many signature, this rim of paper is 35 different systems. And John has done it 10 minutes, you sign an iPad, every system gets updated, you're done, right? So those are the kind of things we're much more interested in. We are -- I'm a fundamental believer, you get what you pay for, right? We want to -- our average wage in our portfolio is significantly above industry. I'm delighted about that. I want to continue that to go up. I want to pay people well and for the job they do, and I want to attract the best talent, no matter what we do. The question is, how many units of labor we need? But regardless of how many units of labor, that's sort of 2 questions, right? Units of labor and cost of labor for that unit. I absolutely believe cost of labor will grow, immigration, non-immigration, inflation plus for foreseeable future, probably the rest of our lives.

You've talked a lot about the investment you made in the data analytics platform. I'm curious if you can give us any insights on how AI might be integrated into that and then your enterprise as a whole, whether it's a customer acquisition strategy, able to enhance operational efficiencies. Talk about the benefit that Welltower stands to gain from the adoption of AI.

Look, I'm not going to get into that, obviously, for competitive reason, but I will tell you our overall initiative. We have been doing machine learning, deep learning, which is sort of -- you have multiple stacks of deep learning is AI, right? So there's nothing new. We can have a debate whether machine learning has been around from 1937 or 1953. The point is it has been around for a long time. Many, many industries, including your own bank, has been using this for supervised learning for a long period of time. So the technology is nothing new. We have fancier applications and all of those things, right? So put that aside. But most applications today is at -- on the data science side is what I call what you would expect a real estate company to do to find a location, predict NOI, predict rent, predict who will be the best operator, all of these things. The future of tomorrow is when our end-to-end operating platform gets implemented, which we call Welltower business systems. The fun will be when the data, not just transaction data, but all customer interaction data will come out, what you can do with data science with that. We're not there yet. We're in the first phase of that, first getting the -- our Welltower business systems implemented across the board, and then we'll get to the question you're asking.

So I think with that, we'll end with our 2 rapid fires. First one, what is your expectation for same-store growth for the SHOP sector overall, so not Welltower specifically in 2026?

No idea.

And lastly, will there be more, fewer or the same number of publicly traded health care REITs a year from now?

More.

Great. Thank you so much.