Welltower Inc. (WELL) Earnings Call Transcript & Summary

Welcome to Citi's 2026 Global Property CEO Conference. I'm Nick Joseph here with Seth Bergey, and we're very pleased to have with us Welltower Inc. CEO, Shankh Mitra. This session is for Citi clients only and disclosures have been made available at the access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit any questions. Shankh, I'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investors should buy your stock today, and then we'll get into Q&A.

Okay. So to my left is Tim McHugh, our CFO and Co-President; to my right is Nikhil Chaudhri, our CIO and Co-President; and to Nikhil's right is sitting John Burkart, our COO and Vice Chair of Welltower. It's a company that plays at the cross-section of housing, aging and wealth. So we are -- we do senior housing. We're mistakenly known as a health care REIT. We don't do much health care. We don't know much about health care. But we're in the business of providing housing to seniors, and that's what we do. So that's sort of our business. We're in 3 countries, U.S., U.K., Canada. I've never asked anyone to buy our stock. So I'm not going to come up with an answer here. That's not my job will run the company.

Got it. Yes. No, I feel like you'll never tell someone to buy your stock, but maybe to rephrase it a different way. What's misunderstood right now? If someone doesn't own your stock, what maybe are they missing about the story?

That's a different question. So it is a pretty well-known sort of well understood bias of the market that people sort of fade growth in all industries. And depending on what industries you look at, what you grew up looking at, different industries have different sort of time horizon. So if you cover tech, you used to look at things 5 years, 7 years, 10 years out, right? By being the virtue of being a REIT, majority of people who grew up in this industry have learned only to look at things 12 months out, 18 months out. And that sort of created an interesting situation where people don't know how to value compounders, right? So that's my perception because not a lot of companies have been compounders in REITs, at least not for the last 10 years. So if you really want to understand our company, understand what the company, I would suggest you look at understand what the earnings power of the company is years out, not just 12 months out. That will be an observation for me.

So ahead of the conference, I guess, 2 days ago now, you announced -- Welltower announced a strategic data science partnership with self-storage company, PSA. I guess what is the benefit to Welltower of this partnership? Where do you see it going? And kind of what is the opportunity for you?

Yes. I think the announcement was Public Storage and then one private equity group as well, public storage on the storage side, the private equity group on the medical office side. And I think from our perspective, a, it's economics. We're getting paid licensing fee from both parties. But b, more importantly, we're focused on the potential of tapping untapped value from an asset on our balance sheet. If you all think about the data science journey we've been on, which now goes back 11 years, we have spent hundreds of millions of dollars to build out a data science platform that has allowed us to quite effectively allocate capital. And our -- as part of the fundraising process we were on last year for our private funds management business, some of the largest sovereign wealth funds in the world dug into how we allocate capital, how our models work and they like what they saw. They challenged us to ask us, can we apply that to other geographies? Can we apply that to other asset classes? And they like what they saw. And one of them is a prolific investor in the broader AI space, whether it comes to AI infrastructure, software models, all kinds of things. And they suggested at a multibillion-dollar valuation, investing $1 billion into this platform to try and commercialize it. We just fundamentally never want to take money from anyone unless if we're confident we can earn an attractive return on that. So we said, let us go figure this out. Let us go figure this out if there is true commercial interest for this. And if there is, then we'll figure out how to capitalize this. So we started having a few conversations, and you all are seeing the first couple of folks that have got over the finish line, and we're in active conversations with many others. And so -- but let's see where this goes. But it's an asset on our balance sheet that has created substantial value for our shareholders, and there is a potential that there is significant incremental value to be captured from that. So that's the journey we're on.

And so does it change anything internally at Welltower? Or is it just leveraging what you're already doing and essentially being able to monetize it?

Yes, it's predominantly leveraging what we've already built and utilizing it for other asset classes.

I think one of the broad themes here at the conference this year has been AI. And I want to kind of talk about maybe the potential impact to the broader senior housing sector, but more specifically to Welltower, I mean, this is obviously an example of work you've been doing in data science and now AI, but where are you seeing the other opportunities to either be more efficient or across the investment capabilities? How are you deploying AI internally? And what could we expect to see as kind of the benefits from it?

So I think most people these days think LLMs are AI, I don't, right? I think AI is a much bigger, broader discipline than LLMs. And I think if you look at my comments on the press release, you will see that, try to reflect that. Look, the fact is that we thought that commercial real estate is world's largest asset class, and it still works from a corner and a gut feel and that we could disrupt that. And that's the journey we have been on. We didn't call it AI. We call it machine learning, right? In a way it's machine learning, it's statistical learning, supervise and supervised learning. on structured data, right? And then obviously, the transformer model came and that paper came in 2018. We changed the world, right? And so what happened is from there, we own from structured data to unstructured data, right? So that's sort of -- that's the journey we have been on. And I think you don't have to go and look at it very far to see that actually it works. You can see how effectively we allocate capital with what velocity we allocate capital. If you go and read my last annual letter, I wrote a lot about this topic. Commercial real estate transaction takes 5 to 9 months, right? We can give you a price that we live with in 2, 3 days, right? And we give you people a handshake, we never walk away from it. So that sort of change of velocity in an industry can in absolute change the game. So that's what we have been doing. But there is more to the aspect of I think less about cost and more of our revenue. I sort of have a mindset of not cost mindset, a revenue mindset. Having said that, you can see what that does, that kind of user models do to our own people. I mean our investment team has not changed in size in the last 4 years. It's a substantial team. We're not sort of algorithmic traders. So our last mile is always people. But that team has not changed, yet our -- the volume of transaction that we process -- that team process has gone up 4x, 5x in the last 5 years, right? So that's sort of one aspect of how we think about these things in our farm. But Tim and Nikhil and John are sort of thinking about this across the board, different aspect, how you source leads, where people show up, all of those kind of things that every organization is thinking about that we're not as special. I would tell you that senior housing as an industry is particularly interesting, where last few weeks of all these conversations where people are sort of focused on whether it's SaaS, it's others, types of businesses where potential of disruption. And you'll notice that in majority of those businesses, whether it's brokers, insurance brokers, others, you will notice that in majority of those cases, people are revenue in these businesses, wealth managers and others, right? It is interesting to me that I don't know it's going to happen, not happen, it's true, not true and the market is going to move on from there. But it is interesting, senior housing is a business, not the business, but a business where people go to cost. And so there is an aspect of it you think about whether it's AI or broader technological change or automation, you would think, okay, you have on average, 57, 60 FTE in a community, probably 30, 35 of them are caregivers. But there is a substantial number of people who are not, right? You have on-site HR, on-site payroll, on-site this and that and others. Whether it's not less of a question of AI, more of a question of probably broader automation and technological use, what would that look like 10 years from now? It's an interesting sort of thought process to think about.

And as you think about either developing these tools, are you buying them off the shelf? Are you partnering? And what's the investment level from Welltower?

Yes. So our entire platform we have built ourselves over the last 10, 11 years. Entirely, we built ourselves in-house.

As you think of some of the advancements of AI, we've seen some reports on anti-aging or delay aging and maybe people living longer and all those kind of considerations. How do you think that could impact senior housing? I know it's still a little far out, but you are seeing some stuff going through the FDA that could maybe delay when people would actually need senior housing. Do you think that's something to keep an eye on? Or do you think kind of the value that Welltower senior housing is delivering would remain static even if people live for longer?

You want to take that, I'd like to -- I think in general, the problems that we face in our business, right, short length of stay. If folks are healthier, that is a positive, that helps with length of stay. If life expectancy is longer, that is a benefit. If you still -- I was looking this up on ChatGPT earlier today, I don't know if this is actually correct or not, but the average lifespan of males in the United States is still 79 years, right? Our average customer is 84 years old. So if longevity is good for our business, there might be some short-term disruption potentially in a particular year, less folks age this or that. But as a more broad-based concept, folks living longer is good for society, and we happen to be in a business where it's positive for us.

Yes. I would just add that really what the type of care that goes on in our buildings is for frailty, right? And so you think about where a lot of these breakthroughs and what's happened in -- it's not just what's going on with AI. There's been longevity breakthroughs for a couple of decades now. And the people -- the residents of our buildings are generally healthy people. They reached a point in their life where they're frail. And they have actually, I say, survived, but they have not had something else impact them that's allowed them to be 85, 86 years old. So I think the idea that the last 18 to 24 months of your life, you're going to have -- need some assistance with daily living and a focus on wellness care, that likely doesn't change. And if anything, [indiscernible] to end up with a healthier resident, which is a lot of benefits to both the residents and the business.

Going back to the partnership that you announced, kind of what is the opportunity set here? You announced it with PSA and then another private equity that's looking at medical office building. Do you see kind of this licensing structure applicable to kind of the entire kind of commercial real estate asset class? Or just where do you kind of see the trajectory of monetizing that going?

Can it be? The answer is yes. Nikhil already said that some of our sovereign partners asked us to prove the models in other asset class. We mentioned some of those on that page that if you look at our business update, Will it be remains to be seen, right? So we'll see -- we have proved that we have better capability on predicting multifamily rents than a lot of other multifamily companies or data providers and others. But will somebody pay us to do that? I don't know. If they do, we'll do it. If not, no problem, right? So that's sort of a -- you've got to understand is sort of life is -- as an investor, we are investors. We always think about we know what we know and particularly we're focused on what we don't know and don't try to solve for that. But can these be -- we build our platform? Can we build a business around it? I don't know the answer to that question. We'll see. But definitely, the potential is that the capabilities have been already proven. It does work.

And then just keeping with the technology theme. You hired Jeff and announced the formation of kind of the tech quad. You described yourselves as I believe it was mediocre minus as you think about the use of digitization in the platform. Can you kind of talk about kind of the key priorities and how the digitization process will impact both the resident and employee experience? And how have your expectations kind of changed since you initially thought of the tech quad and the hiring of Jeff and maybe where you are now a few months down the road?

Let me start and explain what I said about mediocre minus, then Tim can answer the rest, which is I think about technology in 2 different aspects. One is what we have been talking about, which is data science and this is an umbrella term we use for ML, machine learning, deep learning and AI in our place, statistical learning at its foundation. That is a mature platform that works extraordinarily well. I cannot give a letter grade to it because there's no comparable set anywhere in the world. So what I have described as mediocre minus is our operating technology platform, which we call Welltower Business System. Just because we do better than the people or other participants in this industry where these types of capabilities are nonexistent, that does not tell you that we're good. I personally think that we are in the infancy of what the capabilities should be and hopefully, they will be, but that's mediocre minus. So with that, Tim will answer the rest of the question.

I like how you asked kind of the impact of digitalization on the resident and employee experience because I think that's the right way to frame it. The -- where you're going to see the biggest impact of it and where you'll see the impact of investment in technology at the property level is going to be in freeing up time on the employee side, caretaker side. This is a business with very high turnover on the front line. It's a very challenging job. And every minute that someone spends in the system means they're not spending it with the resident. And I'd also say, if you have difficult systems to use and you have a lack of digitalization, you should expect to get less and less data from a property because people are going to prioritize the right thing, which is spending time with the resident versus making sure you've got the correct data flowing up. And then from there, it's where we started or we were a few minutes ago in this conversation around AI and the applicability of the business. There's 2 layers that sit above a property kind of between that data and you all, and that's both the management companies and then also the Welltower team. And the more that we're able to get that first, that kind of analog to digital done seamlessly at that property level, you create a better experience, create a better business. And you also create the ability to apply AI to that data in a way that you start to get some significant efficiencies to how the business runs. So it's all connected, but it does start with that kind of employee and resident experience.

And then as AI tools become more accessible, if AI allows people to kind of develop software without having to outsource the software engineers, do you think that, that narrows the competitive gap between sophisticated operators and smaller operators? Or does kind of the data scale that you have actually widen the moat against the competitive set?

I'll start, and you can jump in, Shankh. I think the -- a lot of what you're seeing is, I guess, in the development of AI is likely impacting software first. It's making data more valuable, right? A lot of that is taking what is software, particularly kind of vertical software that's applied to an industry and that's integrated into workflows and it's creating automation around that, that's somewhat removing the need of it. But the actual data that belongs to the company is considerably a stronger asset. I think on your question around kind of whether or not the vibe coding of software will allow for -- to take away some of the competitive advantage a large operator or sophisticated operator has relative to less sophisticated. I don't think that right now, what you've seen is that software is a differentiator. There's a discipline around it in a way in which processes are run at the better operators. And we see -- we interact with them. We think we have the best operators in the business that we work with, and we think technology enhances what they do. It's not the technology is the moat for them. It's going to create a better advantage. But software being able to write your own software, there's going to be no substitute for process and mindset and motivation when it comes to running a business. And so I don't see that playing a big role in senior housing.

I have nothing to add to that.

And then how long does it take to kind of typically deploy the Welltower business system on to new communities as you acquire them?

So it's -- on the new communities you acquire them, it's actually -- it's pretty seamless. That's one of the areas where we're already seeing the efficiencies of it. It's more so the conversion of operators of existing properties and the change management that goes with that. So on the new communities is actually where we're seeing a lot of the promise of how this is going to create more seamless data flow in the future.

And then you've messaged kind of you expect to drive multiple years of margin expansion, both driven by strong fundamentals, the operating leverage within the business and then some of the operational improvements driven by the Welltower business systems. Is there a way to think about kind of looking back how much of that you would kind of attribute to those different buckets? How much is just the operating leverage and the incremental margin flow-through as occupancy -- as you make occupancy gains? And how much of it do you think is attributable to kind of the Welltower business systems and kind of the Welltower platform?

Welltower platform or Welltower Business System, completely different answer. So if you look at -- we own the best assets in this industry by a very long shot. And if you have operating leverage in the business and your occupancy goes up, your margin should expand. There's no question about it. So far, what you have seen the significant excess alpha operating alpha that has come through our system is a function of 2 things, right, 3 things. First, our asset selection, which is the capital allocation and all the things on data science and everything we talked about; b, the operator selection and see, brute force asset management, right? So that's what you have seen the impact of is the Welltower platform impact, right, all 3 of them. But Welltower Business System is nascent enough that I wouldn't say that you have seen a lot of impact of that, you will. Does it make sense? We've got only 250 properties that has been on that system for the last 6, 9 months. So you haven't had a chance to see what that could look like.

And then just kind of what's the current penetration rate across the portfolio? And then as you think about kind of the adoption curve and some of the operational improvements that you're able to make with the Welltower Business System, maybe just using a sports analogy, kind of what inning are we in with where we're at and some of the operational improvements?

Yes. So you're saying the penetration, you're asking how many assets are on the system. It's roughly 250, as we've said. So it's a small amount, and my friend over here keeps buying more. So it hurts that penetration percentage. As it relates to -- what's your next question?

Just what inning we're in, in terms of how much upside there is in the Welltower business?

Yes. I think Shankh just said that. I mean when we talk about brute force, what we're really saying is that's just hard labor. That's us with great tenacity addressing things from an asset management perspective. What Welltower Business System does is it's digitizing the business. It's providing robust data, enabling us to actually get insightful reports and drive value. So we're at the very beginning of that game.

While we shift to capital allocation. Obviously, you've been very active over -- really over the past few years, both in terms of buying and selling and different structures in terms of the fund and everything else. Are you starting to see more competition? I mean it feels like senior housing is at the top of a lot of institutional investors kind of surveys. I think everyone sees the supply and demand dynamics there. Does it feel like competition is increasing right now?

I think how I would describe it is, I think Shankh's annual letter from last year does a really good job of explaining how we have been able to quite substantially eliminate the latency in our process, right? How quickly we can have something hit our desk and in a couple of days, in a very narrow range, have a view on pricing on the asset, right? Those are our capital allocation tools we talked about earlier today. So -- and we're market participants in terms of what pricing makes sense, right? We're not trying to steal assets. So it makes sense if you're a seller, it's a free option to give Welltower a quick call and say, "Hey, do you want to buy my assets?" And at worst, you lose 2 days compared to a process that runs 6 to 9 months. And so everyone still does that with us. And every quarter, I quantify what percentage of our transaction activity has been done on an off-market basis, and it's pretty much all of it. And so that part is still happening. The difference between 2 years ago versus today is 2 years ago, when we would say no to a transaction and our hit rate is probably about 10% on the stuff you look at. When you would say no to a transaction, it wouldn't get done. Today, those are getting done. So we are still getting to do transactions and acquire assets that we like. Values are a little bit higher today, but the competition part is irrelevant because that's when we say no to an asset that somebody else gets to buy.

What hasn't changed is all the assets that trade away from us, not all, I shouldn't make a general statement. Majority, a vast majority of the asset that trades away from us, it trades away from us because we made a decision not to buy them, usually because of quality and product market misfit that we think about what drives it. But I have seen other problems show up, which is I talked about on the call, such as we have seen that some participants have started buying assets with encumbrance of operations and all of those things, which we think an absolute third line for us, we would not do that. So -- but you should assume that if an asset ABC traded owner XYZ bought it, you should assume that there's a 90% probability we looked at it and said no for reason.

We've seen private equity come in and out of the space in the past, some that clearly were not successful in it. Part of that was probably a mismatch of supply and demand. But for these assets that you're passing on, is it just the CapEx or the growth rate isn't up to what Welltower needs? Or do you think that there's going to be a concern if we're looking back in 5 years off of some of these deals that you don't get?

Look, I mean, we're not scared of CapEx. We have great CapEx capabilities. And if asset requires CapEx that is a worthwhile asset, we would gladly do that. For us, if we say no to an asset is we think about the incredible growth prospects that the assets we already own have. And when we add something to the mix, we say, is this going to enhance or subtract from the growth prospects of our company. And that's where our data science platform comes in, right? We're looking at not assets at a market level, which is like a metro level that everybody else looks at. We look at assets based on what corner they're at. We have the insights into being able to look at that granular level, and we've showcased some of that with a lot of you in the room. So it's just a different view of the terrain, right, where someone might say, pick a market that this is a Miami asset, we'll say that this is a Hollywood asset versus this neighborhood versus that neighborhood asset, and it's a different lens. So it could be the product market fit. It could be what's within the walls of the asset in terms of when you open a door, how big is the unit behind it. It could be operational aspects, how big is the floor plate? Is it efficient from a staffing perspective? Or it could be the management contract that it's encumbered by. There's multiple reasons or it could be price, all of those.

Are you seeing divergence in underwritten expected returns across the different geographies? So outside U.S. versus U.K. versus Canada?

Yes. I mean each of those markets has a different risk profile. Each of them have a different capital markets outlook. Canadian yield curve is 1 point lower than the U.S. yield curve. So on a risk-adjusted basis, there should be a divergence and expected returns on top of risk-free returns in each of those markets. So there is certainly a difference in all 3.

What's the most attractive right now for you?

It's opportunity dependent. We've we're disciplined on how we look at transactions, which is unlevered IRRs relative to base rates in the market. And we think, generally speaking, we're able to get the same risk premium in the 3 places we do business.

I will tell you that flows change depending on time. But if I just look at very short-term current flow has been very primarily focused on U.S. But that could change next month, right? So it's just sort of -- it's hard to say. We like senior living in all 3 markets we do business in, and we're very -- it needs to be the right asset. Product market fit is important for us.

Most common question that we receive on senior housing broadly is when is supply going to return, right? You're seeing this outsized growth. You see the demand side. Obviously, we had a lot of supply ahead of it pre-COVID. But what is holding it back today? And when do you expect supply to start to pick back up?

Well, I think construction development, whatever you want to call it, is a commercial activity. People should only do it to make money. And when assets trade below replacement cost and as a developer, you should be targeting at least a 2x on your equity. And so it's a $100 deal, you're putting up $40 of equity. You need to be able to sell the asset for $140, right? That's the first and foremost thing. So economics don't pencil, and that's why people are not doing it. Will they pencil at some point in the future? Of course, right? I mean capital follows growth and at some point, that will change. Then the question becomes, are we talking about supply? Or are we talking about excess supply? And what hurt the industry in the last cycle was that there was excess supply. But for there to be excess supply 3, 4 years out, which is how long it will take if people decide today that it's a good idea to start building senior housing, which it isn't. But even if that were the case, the demand profile that we're talking about 4 years from now, 5 years from now is 120,000, 130,000 units that is needed for excess supply. Prior peak supply was 44,000, 45,000 units in a year. And so we're talking about replacement costs being at least 2x, if not more. And so the quantum of capital that is needed for excess supply many years out, that doesn't exist in this industry. So we're not sitting here today concerned about excess supply and even supply just doesn't make pencil today.

How far off are we from either rent growth or construction costs coming down that it would pencil. I know it's market specific, but if you can just frame it broadly.

One thing I want to make it very clear that I've heard second participants believe that construction cost is coming down. I do not believe that's the case. There is no evidence of construction cost in senior living is coming down. In fact, the evidence is exact opposite. Construction cost escalation is between 4% and 5%.

And to answer your question directly, assuming construction cost doesn't change and stays flat, today's dollars, do you need deal economics to be 30%, 40% better for development to pencil. That's the gap.

So ways away?

Yes.

And maybe just thinking about some of the changes you've announced with the management compensation and the RIDEA 6.0, how is your thinking kind of evolved as you think about trying to align incentives with both operators for shareholders and management with shareholders?

We think it's an incredibly powerful thing if everyone has the same exact goal. And even with the RIDEA 6.0 contracts that we just announced recently, where the biggest changes operators -- some of our operators have not chosen to get compensated for their incentives in Welltower stock. What you've instantly seen as soon as that happened, that those operators went from -- they're in different geographic areas, but all of a sudden, the mindset shifted from, I've got my secrets that I'm not going to share with others to now being, hey, I'm really good at this. I want to make sure you learn from me and you're also really good at this because otherwise, given that we're all getting paid in the same currency, your underperformance can tank my performance, right? So that fundamentally changes the mindset. And that's the level of alignment we all want because we view our outcomes as what the entire portfolio produces. Now that's how the operators are thinking about it, and that's aligned with all of you shareholders.

And the buy-in from the operators, I know...

What was that?

The buy in from the operators or they -- have they been pretty receptive to it?

No one forced the operators to sign these contracts, right? The operators came to us and said, we see the reflexivity. We see that our actions result in positive outcomes for you and your shareholders, and we want to be aligned and we want to be compensated in the same -- we want to benefit on an exponential basis from on our efforts. That's what they're looking for.

It's an invite only club. The question is not whether we have -- whether there was a resistance to be in the club. A few people have been invited. Everybody who was invited have been delighted to be part of the club.

Really quickly, rapid fire. Same-store NOI growth for senior housing broadly sector-wide next year in 2027.

No idea.

Higher, lower, the same than this year.

No idea.

More fewer of the same number of -- you won't like this, but health care REITs a year from now.

No.

All right. Thank you.