Welltower Inc.

Hello, and welcome to the Q1 2022 Welltower, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. It is now my pleasure to introduce General Counsel Matt McQueen.

Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Security Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that projected results will be attained. Factors that could cause actual 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 Sean for his remarks.

Thank you, Matt, and good morning, everyone. I'll describe our capital allocation priorities in the rapidly evolving investment environment and review high-level business trends before handling the call over to John, who will detail operational trends. A little over a year ago, our seniors housing operating business witnessed a powerful inflection point with occupancy gains and pricing power sustained through the remainder of the year, despite Delta and Omicron variants. This momentum continued into first quarter of this year and translated into the first period of year-over-year bottom-line growth for our company since the beginning of pandemic. Our total portfolio revenue is up 32.7% year-over-year, driven by both organic revenue growth as well as a significant volume of high-convection capital deployment during the last 18 months. On a same-store basis, our senior housing operating portfolio revenue is up 11.2% year over year, driven by a 4.6% occupancy growth and 4.6% rate growth. Encouragingly, we saw sequential pricing growth was 4.3%, the fastest growth recorded in our history, despite only half of our operators pushing through in-house rent increases on Jan 1 schedule. All of these translated into 18.4% same-store and Y growth in Q1, an impressive number that surpassed our expectations. We're all very encouraged by the speed at which free trades are moving up, and we expect same-store and Y growth will accelerate into the second half of the year, barring another COVID spike. All of this setting up to be a powerful earnings recovery that we anticipate in 2023 and beyond. Before I turn into investment environment, I want to make two things here that are very important for multi-year earnings growth path. Number one, in 2018, when we converted our Brandywine Senior Living lease to Rydea, I mentioned that two other portfolio we had in TripleNet structure that we hope to convert. One of them was Legend Senior Living. After many years of discussion with Tim Buchanan, Legend's legendary founder and CEO, I'm pleased to report that we have converted this relationship into right here. Recall that we had an 88% and 20% PropCo JV between Voltar and Legend. At conversion, Tim contributed a portion of his PropCo, five brand new assets, and has agreed to a future development agreement to create a powerful 93%-7% equity partnership going forward. Finally, after years of persuasion, we have convinced Tim that we can grow the pie using our data analytics platform so significantly that you will still be better off despite owning a smaller portion of the pie. A partner of our company since 90s, Legend has paid every single dollar of rent that was owed to World Tower regardless of the coverage on a given day. Though this deal is dilutive to our FFO in 2022, Due to significant agency labor usage today, we expect cash flow relative to the previous rent will break even in beginning of 2023, and our shareholders will enjoy upside from there on. We had extraordinary partnership over the last three decades, and we hope that it will continue for many more to come. This transition, along with acquisition and future development partnership, exemplifies our sole focus on enhancing long-term value of the portfolio and is indicative of the potential earnings upside in the portfolio that can be captured through a simple cap rate or multiple valuation methodology. Number two, historically, our show business focused on managing managers and assets. Now that we have significantly upgraded our operational capabilities, including through the hiring of John Barker, our COO, Our focus in the show business will mirror the real estate and management services that we provide in our medical office business or what an apartment rate does, with an understanding that we're limited in providing care services in a qualified healthcare property. This fundamental shift in our approach has a profound impact on how we think about our role in the operating staff. This is particularly important as we think through the most important part of that operating platform, which is the technology staff. John will get into the details as part of his script, but we are delighted that he is in full-scale development and implementation of a true operating platform at World Tower. John is working closely with some of our best operating partners to launch this. Call it right here for now, but honestly, that doesn't do our new approach justice as to the scale and impact we think his plans will have on the customer experience and value creation overall. Needless to say, we expect this multi-year initiative will have a tremendous impact on our earnings growth trajectory and long-term compounding machine that we are setting up at WorldTower. Now let's talk about capital allocation. As you know, my team is extraordinarily focused on allocating capital to create per share value for existing shareholders. The key word is existing. We favor our existing shareholders who have been our partners through thick and thin, especially through thin. We are fiercely protective of their interest on a partial basis and won't act in a manner that does not create significant value for them. Because we're extremely transparent and genuinely dislike drama, I will mention to you that World Tower is the party F referenced in the HTA-HR merger proxy a couple of weeks ago. Every week, we call owners of assets and express our interest to buy them at a price. This was no different. I am genuinely disappointed that HR board and management did not engage with us, but that is their prerogative. It is completely up to their shareholders and the board, which represents those shareholders, to decide how to maximize value. Because of the many rumors circulating and the reports and articles about this, I'll mention a few things before moving on to much more important items. We're fair, win-win people. We offer to buy the company on public information at $31.75 per share, plus a break-up fee of $163 million from a merger, which, as you have seen, the market voted as significantly value-destructive by analyst reports. We believe that our cash offer provided better value to HR shareholders than the HDM merger, and it was fully financed and we're prepared to move within days. I read research notes that described our unfair pricing relative to what might be in part-coded market cap rate. Please understand that we did not offer to buy an asset. We offered to buy a company that were willing to pay for assets and pay a break-up fee that bailed our company out for company's existing shareholders from potential dilution that well-respected analysis community has been writing about. I hope this will stop mischaracterization of our offer and our intent. Number two, WorldTar always has and always will honor its agreement with third parties, including that with HTA. In fact, HTA itself piloted our NDA with them by first disclosing it to HR and then later to the public in the joint proxy. Further, our NDA with them does not contain a standstill that would apply us to making an offer for HR as a standalone entity. As you would expect, we signed it with HTA in order to access information regarding HTA and its properties. Therefore, the standstill only applies to HTA and its properties. Our proposal was expressly conditioned on HR not completing the HTA transaction. Number three, we have never chased a deal and never will. We buy everything at a price and sell everything at a price. Although I'm disappointed that HR did not engage with us, As our offer, we thought our offer would result into a superior outcome for HR shareholders, I have no intention of being hostile. I personally liked Todd. I called him and expressed our interest. We didn't buy shares in the public market, nor did we act in anything but a friendly way. They did not engage. Under these circumstances, we have nothing to do here. Number four. Contrary to what some analysts might have written, this deal would not have been diluted to our senior housing growth. You don't know what proportion of equity, debt, or joint ventures we might have contemplated for the transaction. But even if you think we were to do this entirely on the balance sheet, it would be a rather simple exercise. Look at the NOI bridge in our business updates, divide that NOI by existing number of shares, calculate the additional shares required by the HR transaction, to calculate dilution on a partial basis and then add back the accretion from the deal. You will see our existing shareholders would have come out ahead. We look at every single investment through the lens of opportunity cost. Specifically, we have to satisfactorily answer three questions that Buffett has taught us. And then what? Compared to what? At the expense of what? This is not different. And number five. We're not disappointed, nor we are concerned about our growth of a senior housing business. Quite the contrary. In fact, we just reported 18.4% same-story ROI growth and expect it to meaningfully accelerate in the second half of the year. Now that I have put all these rumors to bed, let's talk about the 30 or so owners who did engage with us to create win-win partnership transactions. Year-to-date, we have closed $1.2 billion of acquisitions across 21 different off-market, or privately negotiated transactions. This is a remarkable stat, given the torrid pace of activity last year. I find it difficult to talk about specific deals, as it feels like picking your favorite children. But I still mention a handful of transactions to give you a sense. We bought 700 units across three large communities in Washington State, with Koji Air to expand our partnership with Matthew and Dave. Dave Eskenazi is one of the best in the business, and I'm glad that he's now back full-time as Cogea U.S. is the CEO. We're also expanding our partnership to purchase of another property in Brentwood, located in the East Bay of Northern California. All properties were bought at significant discount replacement costs. For example, the Brentwood asset contains large units, and it was bought for 320K per unit. We believe the replacement cost in East Bay today is easily significantly north of 500,000 units. Additionally, we are significantly deepening our relationship with Dan and his team at StoryPoint with the acquisition of 33 communities in Michigan, Ohio, and Tennessee in their backyard. With a median vintage of 2016, we're extremely pleased with the average price of 197K units, which is meaningful discounted replacement costs. With 63% of current average occupancy, this sizable deal will be diluted to a 2022 SFO per share, but properties are anticipated to generate significant occupancy, margin, and cash flow growth in 2023 and beyond under StoryPoint's enhanced operating platform. This is another example of us choosing the right long-term investment decision and cash flow growth over gap earnings accretion, another thing you hear from us consistently. In another transaction, we announced we're expanding our partnership with Courtney and her team at Oakmont with seven new assets in extraordinary locations in California. Courtney and her team are at the absolute top of operating echelons, and we cannot be happier to grow this partnership together. Separately, within the medical office space, we bought four building property portfolio on the campus of one of the strongest hospitals in Birmingham, Alabama, for a 5.5% cap rate in an absolute net lease structure at a great basis. Given the absolute net structure, we expect unlevered IRR to be high single digit range. We also are under contract to buy two large, beautiful MOBs, one in San Francisco Bay Area, another in Sacramento MSA, for a high 5% going in cap rate at a great basis. Again, we expect to generate high single digits in IRR in both cases. In terms of the financing market, in the last 30 days or so, we have seen a massive shift with property level leverage down 15 points, cost doubling, and interest only disappearing from the market, both in seniors as well as in MOBs. This is starting to have a tectonic impact on asset pricing. To put it bluntly, I have not been this excited about our acquisition prospects since Q4 of 2020. About six weeks ago, an investor whom I respect very much asked me, If I'm optimistic about the next $7 billion of acquisition as I was about the last $7 billion of acquisition that we did since pivoting to offense in 40 of 20, I instinctively answered what I truly believe, that we're driven by value, not by volume, which is this investor took it as a no. Today, that answer will be unequivocally yes. Yes, we are excited about the figuratively next $7 billion as we are when we acted on the last $7 billion. To that effect, our pipeline today is roughly $1.5 billion of deals in process across 20 different off-market or privately negotiated transactions. Several of these are potentially operating unit transactions, which we expect to be very popular with the sellers. Please recall that we define our pipeline as transactions that are already under contract. In addition to this, we're negotiating transactions and a couple of billion dollars of acquisition across several other transactions. While we may not eventually succeed in convincing sellers to agree to our price, please note that we don't need any given transaction. Price is the price. We see cracks in the market and are focused on where the puck is going and not where the puck might have been. The value of a party that never retreats and doesn't request debt has rarely been higher. In most rough systems in nature, such as coastline, clouds, turbulence, no matter how much you scale up or scale down, you notice a remarkable self-similarity property. You notice that in the same occurrence everywhere in nature. For example, a florid of a cauliflower is same as a cauliflower. This phenomenon is called fractal geometry. This is the same idea that our drive-time polygons or isochrons are based on, if you have seen our data science presentation. Increasingly, interestingly, organization history is full of companies who grow successfully through small bolt-on acquisition in their advantageous niche, only to convince themselves of strategic acquisitions that get them in trouble. David Packer, the founder of HP, brilliantly said, more businesses die of indigestion than starvation, to describe this phenomenon. At WorldTower, we don't have strategic acquisitions. In fact, Self-similarity of mother nature is highly visible in our investment philosophy. No matter how small or big a specific investment is, we're after the same, driven by the same factors. In all cases, we're buying, number one, a reasonable basis relative to replacement cost, and number two, where we can add value by driving operational improvement. We are not spread investing deal junkies. We have true total return investors and are optimistic that 2022 will be one of the best years in the company's history from an acquisition point. With that, I'll hand the call over to my partner, John Barker, our Chief Operating Officer. John? Thank you, Sean.