Welltower Inc (WELL) — Q4 2019 Earnings Call Transcript

Thank you, Liz and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. And with that, I'll hand the call over to Tom for his remarks. Tom.

Thanks Matt and good morning. I'm pleased to announce our Q4 and annual results to you today, as they reflect the strategic path to growth that we outlined in our Investor Day in December 2018. Simply put, in 2019 we did what we told you we would do. As the clear market leader and dominant provider of real-estate capital to the health and wellness care delivery sector, Welltower has redefined this asset class in terms of quality, operating models, technologically advanced building design, data insight, deal structure and transparency. This has placed us on a sustainable growth path that has generated $4.16 in FFO per share in 2019, a 3.2% increase over 2018 and fuels the optimistic outlook for 2020 we report to you today. The $5 billion we deployed into new investments between January 1, 2019 and today, was not generated by playing the old game of overpaying for real-estate through auctions or being the passive take-out for old school senior housing operators more focused on their personal development profits than running an operating business. For Welltower, that game is over. We are the partner of choice for a next generation of residential senior care operators who enter into aligned structures that reward strong performance, yet don't leave REIT shareholders holding the bag when things don't go according to plan, and in business as in life, things don't always go according to plan. We have also become the partner of choice for health systems. I'm sure you saw Jefferson Health’s recent announcement of a broad partnership with Welltower. Jefferson, one of the nation's largest urban academic health systems has elected to work with Welltower to advance its strategy of health care with no address. This partnership will help recapitalize Jefferson's existing ambulatory assets, build and capitalize their next generation of ambulatory assets, connect Jefferson health delivery capabilities into our existing greater Philadelphia Senior population of over 20,000 lives and together conceive new models of housing and wellness care that can drive better outcomes for an aging and at-risk urban population. We are honored to be working with Dr. Steve Klasko, his team and the Board of Jefferson. They are truly redefining the future of healthcare delivery. Our platform approach is demonstrating that there is value that can be captured in our real-estate beyond collecting rent checks. Our CareMore Anthem collaboration is a great example of this and illustrates that third parties can bring clinical care models into assisted living communities, and with modern Medicare advantage products, reduce out of pocket costs for our residents, enhance resident experience, improve outcomes and increase occupancy and length of stay. What was a California pilot last year is now being rolled out into other markets. Stay tuned for other innovative models like this one. For an example of how Welltower is driving the next generation of residential care design, I point you to our building on East 56th Street and Lexington Avenue opening in late spring. When this building opens, it will be the most technologically advanced residential care facility in the world for seniors suffering with conditions of frailty to memory care. Not only is this purpose-built building designed to meet the needs of this population, but it will incorporate state-of-the-art Phillips Technology that will enable more effective and efficient care, as well as enhance the experience for our residents and their families. Welltower conceived this project and has driven the development process from day one. This will be followed by our next Manhattan Project on Broadway at 85th St, new urban models we will deliver in Hudson Yards and San Francisco as part of our related Atria joint venture and in Boston with Balfour. These are just a few examples of how we have positioned Welltower to redefine and reimagine the built environment that can deliver better healthcare outcomes and lower costs, particularly in view of the aging of the population. We have largely moved beyond the issues that would have slowed our growth and that enables the optimism you hear from me this morning. It is our job to deliver a path of sustainable growth. In our 2020 outlook of $4.20 to $4.30 and FFO per share illustrates that. And I will remind you, this does not include any new net acquisitions or investments that have not been announced.

Thank you Tom and good morning everyone. I will now review our quarterly and annual operating results, provide additional details on performance, trends and recent investment activity and new operator relationships. A year ago when we set our guidance for 2019, we told you that we felt cautiously optimistic about our senior housing operating portfolio or SHOP and set the same store guidance at 0.5% to 2%. We are delighted to inform you that we have achieved 2.7% growth for the year, primarily driven by stronger pricing power and better than expected labor cost inflation. We want to remind you that our SHOP portfolio consists of 600 communities spread across 25 portfolios of different operating partners focused on different price points, acuity levels, geographies and operating models. We quantitatively manage our SHOP portfolio to drive low cross correlation, which creates real diversification benefits. We have added a new disclosure on slide 39 of our corporate presentation that gives you a snapshot of our ability to do this. If you compare it to a randomly chosen operator from that disclosure and compare the long-term NY growth rate by occupied room, you will get a median correlation of 0.23. This remarkably low statistical correlation in a business where casual observers believe all operators in the same generic business called senior housing is debunked. We provide further context using 2019 performance. We had three operating partners that experienced mid-single digit to double-digit NY decline, and we had four operating partners that experienced double-digit NY growth, with all other operators being in between. This demonstrates our unique business model and portfolio that is able to absorb downside volatility of certain operating partners with the contribution of others. Other specific highlights of 2019 include significant outperformance of assisted living over independent living, and outperformance of large core U.S. markets above smaller markets. We have built a highly differentiated and uncorrelated portfolio of assets by using a barbell approach to portfolio construction focusing on high-end senior housing and more affordable communities with limited service, while exiting the product in the middle. 2019 saw the addition of several new operators to the Welltower family; Atria, Balfour, Clover, Frontier and LCB. We are delighted to mention to you that we're off to a great start in 2020 and have already welcomed three new operators to our family, who we have been working with to come to terms for the last six months. Let me give you some details here. We are delighted to partner with Michael Glynn, Andrew Teeters, and others, along with Mark Stephens, to offer a lower acuity, differentiated lifestyle-based, highly amenitized and stunning housing solution to seniors under the Monarch brand. We also partnered with Arun Paul of Priya Living to offer a highly differentiated and relatively affordable product targeting a significant and tremendously under-served market in large core U.S. MSAs. In both cases, our exclusive relationship spans multiple years and will provide a multi-billion dollar investment opportunity in the next decade. Reflecting on the fourth quarter specifically, I will mention that we were positively surprised by a few trends. First, with respect to the seasonality within the senior housing business, occupancy typically peaks in late fall and trends down through the winter months. However, we did not see that seasonal drop-off this year and occupancy has been pretty much flat sequentially through the year and into this year. Second, I'm cautiously optimistic about what we have seen on the labor inflation side. While a couple of quarters do not make a trend, sequentially compensation per occupied room was flat in Q4 and has been the best we have seen in the last five years. This, taken together with consistent pricing power, gives us the confidence to provide guidance of 1% to 2.5% in SHOP, relative to 0.5% to 2% this time last year. We have a long year ahead and we need to execute diligently, but we remain relatively optimistic today as compared to this time last year. We believe demand is increasing in the assisted living business and the impact of deliveries is improving on the margin.

Thank you, Shankh. My comments today will focus on our fourth quarter and full year 2019 results, our balance sheet and our initial guidance for full year 2020. Welltower returned to growth in 2019, reporting normalized FFO of $1.05 per share for the quarter and $4.16 per share for full year 2019, representing positive 4% and positive 3.2% year-over-year growth respectively. Results for the year can be categorized by three main themes: The consistency of our internal growth engine, the volume of accretive capital development activity as we invested $4.8 billion across high quality senior housing and outpatient medical opportunities, and the discipline of our capital recycling efforts, as we had $2.7 billion of property disposition, including $560 million of high yielding LTAC and post-acute assets, and had $192 million of loan payoffs, reducing our loan investment portfolio to its smallest size since 2015. The result of all this was a year in which Welltower returned to earnings growth, while also significantly improving the quality of our asset base. Now let me provide some details around our portfolio's performance. First, our seniors housing triple-net portfolio posted another consistent quarter with positive 2.9% year-over-year same store growth. Sequential occupancy was flat in the quarter and EBITDAR coverage declined by 0.01x. Next, our long term post Q portfolio generated positive 4.3% year-over-year same store growth, driven in part by an easier Q4 ‘18 comp, which involved partial rent recognition from a tenant that is now current on rent. We also benefited from fair market value step-ups and a well-covered conflict healthcare lease acquiring the acquisition of QCP. EBITDAR coverage declined by 0.03x, driven in part by the addition of four development assets in the trailing 12 month pool. As a reminder, we reported our coverage a quarter in arrears. So this September 30 trailing 12 month coverage does not reflect any impact from the new PDPM Medicare Reimbursement System, which was implemented at the start of October.

Thanks, Tim. So you’ve heard us repeat the word optimism throughout our prepared remarks this morning; this is sincere. The green shoots from our core portfolio we saw in late ‘18 that grew in 2019 are fueling this optimism. Our senior strategy to align with major health systems has been validated and we are mining many interesting investment opportunities that will enable accretive growth and drive shareholder value. We look forward to talking more about this with you throughout the year. Now Liz, please open up the line for questions.

Thanks, good morning. I guess Shankh, first on just the acquisition environment and kind of the pipeline. Could you sort of give us a sense for how big the pipeline is today versus say six to 12 months ago? And in what areas is it sort of most robust?

Thank you, Steve. Good morning. The pipeline is as big as we have felt this time, you know really throughout the year, but particularly relative to the last 12 months, the pipeline is significantly bigger. As I told you in my prepared remarks that the pipeline is focused on two areas: one is on the senior housing side, the other is our deals that are sourced through our relationship with health systems. Mostly you will see that this year other than the transactions that we have made or we have shaken hands on 12 months ago or six months ago, will be mostly out of that MOB markets this year, so senior housing and health system transactions directly with the system.

And is there anything without getting specific. Can you share anything just about pricing trends or cap rates kind of as you look to deploy capital versus maybe where you spent capital in 2019, or are things better, getting tighter?

So on the senior housing side, if you look at sort of the top end of really pretty assets, really good markets, very good operators, cap rates are extremely tight and they have gotten tighter in the last say 12 to 18 months, particularly the last six months. The transactions we announced yesterday sort of show you that. On the other hand, we are seeing the emergence of distress, particularly in memory care and in markets where you saw the first burst of supply in ’15, ’16, ’17, everything in the middle is sort of, it depends right. If you look at our pipeline and look at our history, you will see that we grow with our operating partners with a development of off-market acquisitions one or two efforts at a time, and that market remains extremely favorable. So we have a lot of you know either very small portfolios or a lot of one-off or two assets, three assets that are in the pipeline that add up to a big volume, but that's where we get our pricing and that becomes very accretive. So we are very, very optimistic about the deal pipeline this year.

Thank you, Shankh. My comments today will focus on our fourth quarter and full year 2019 results, our balance sheet and our initial guidance for full year 2020. Welltower returned to growth in 2019, reporting normalized FFO of $1.05 per share for the quarter and $4.16 per share for full year 2019, representing positive 4% and positive 3.2% year-over-year growth respectively. Results for the year are to be categorized by three main themes: The consistency of our internal growth engine; the volume of accretive capital development activity as we invested $4.8 billion across high-quality senior housing and outpatient medical opportunities; and the discipline of our capital recycling efforts, as we had $2.7 billion of property disposition, including $560 million of high yielding LTAC and post-acute assets, and had $192 million of loan payoffs, reducing our loan investment portfolio to its smaller size since 2015. The result of all this was a year in which Welltower returned to earnings growth while also significantly improving the quality of our asset base. Now let me provide some details around our portfolios performance.

If you compare it to randomly chosen operator from that disclosure and compare the long-term NY growth rate by occupied room, you will get a median correlation of 0.23. This remarkably rose statistical correlation in a business where casual observers believe all operators in the same genetic business called senior housing is debunked.

As a reminder, we reported our coverage a quarter in arrears. So this September 30 trailing 12-month coverage does not reflect any impact from the new PDPM Medicare Reimbursement System, which is implemented at the start of October.

Thanks, Tim. We’ve often discussed the transactions and the focus within the health systems; this highlights our value proposition. Our relationships allow us to innovate and streamline operations, which in turn supports our overall strategy moving forward.

Reflecting on the fourth quarter specifically, I will mention that we are positively surprised by a few trends. First, with respect to the seasonality within senior housing business, occupancy typically peaks in late fall and trends down through the winter months. However, we did not see that seasonal drop-off this year and occupancy has been pretty much flat sequentially through the year and into this year.

As indicated in our press release, we are initiating full year 2020 FFO guidance to a range of $4.20 to $4.30; the total portfolio same store growth, NOI growth of 1.5% to 2.5%. At the same level this NOI is comprised of outpatient medical grow a positive 2.25% to 2.75%. Long term post-acute grow of positive 2% to 2.5%; health systems grow a positive 1.95%, and senior housing triple-net growth of positive 2.25% to 2.75%, and total portfolio senior housing operating growth of 1% to 2.5%.