With over $4 billion invested since the fourth quarter of 2020, Welltower (NYSE: WELL) has added a “Covid class” of assets and operators to its portfolio, positioning the company for future growth.
The Toledo, Ohio-based real estate investment trust (REIT) has executed so many deals in part because the organization’s CEO, Shankh Mitra, hit the road over a year ago. Aside from some holidays, he has been traveling every week since late April of 2020, he told Senior Housing News.
Though cautious about Covid-19, Mitra said he had to seize a golden opportunity.
“You would say, ‘Why are you out there, when everybody’s home?’” he said. “Because no one else is out there. It’s easier to do business if I’m the only person who shows up to do business with you.”
In one example, Mitra visited the home of a potential partner for a morning meeting. But, given Covid-19 concerns, they did the deal in the backyard.
“This is during relatively cold times we did that, right outside,” Mitra told SHN. “Those relationships are formed in the trenches.”
His busy travel schedule and the related string of deals reflects attractive pricing that resulted from “two negative cycles superimposed on each other” and Welltower’s enduring belief in the long-term value of senior housing, he emphasized.
“We are more optimistic about senior housing than we have ever been, particularly relative to where we were two years ago,” he said, referring to pre-pandemic oversupply issues.
Furthermore, the recent deals are a testament to what Welltower can offer its partners by way of data-driven insights and financial rewards, he stressed.
But, to realize those rewards, operators must execute at a high level and be prepared to meet rigorous expectations.
“It’s great to be a public company with a great cost of capital, which flows into our operating partners, but there’s a cost of doing that, which is transparent communication, which we do very frequently, probably more than anybody else,” Mitra said.
Not a ‘deal shop’
Mitra became CEO of Welltower in Oct. 2020, succeeding Tom DeRosa. The timing of the transition was surprising, but the choice of Mitra to take the helm was not — after joining Welltower in 2016, he rose through the ranks and was viewed by analysts covering the company as the apparent next chief executive.
Now, about eight months after taking the CEO role, Mitra downplays the importance of his title change. That is an “arbitrary” marker, he said, considering that he and DeRosa shaped the current strategic direction of the company together. Mitra stressed he remains grateful to DeRosa for his “daring vision for the industry.”
And Mitra emphatically does not frame all the recent dealmaking as related to him becoming CEO. Some of the recently announced transactions were underway before he became CEO, while others are a function of the unique market conditions that are favorable for Welltower.
“We are fundamentally capital allocators, we’re investors — not a deal shop — and there’s a significant difference between the two,” he said. “And so, we are very much driven by price.”
Whereas Welltower was selling senior housing and buying other types of assets before Covid-19, prices for senior housing assets have now “meaningfully” fallen, he said, and the REIT has therefore shifted into buy mode.
The easiest way to measure price in Mitra’s view is on a per-unit basis, compared to what it would cost to build new product in that location. Welltower’s most significant recent transaction — the $1.6 billion acquisition of 86 Holiday Retirement properties — was executed at about $152,000 per unit, which is about a 30% discount to replacement cost, by the REIT’s estimates.
The favorable pricing is due not only to Covid-19, Mitra noted.
“You need to think about this pandemic as the last straw that broke the camel’s back,” he said. “The original problem was the supply cycle.”
Oversupply had been seriously weighing on senior housing performance in the years prior to 2020, with banks already “kicking the can down the road” in some situations, he noted. So, the pandemic-related downturn was “superimposed” on the existing negative cycle.
The result was an unusual situation, in which the newest senior housing inventory became the most distressed part of the market. Developers who had highly leveraged their projects in pursuit of significant equity multiples already were in trouble given that oversupply was impeding lease up. They were not able to absorb the added blow of the pandemic.
So, senior housing opportunities began to materialize at attractive prices — but debt financing became the big obstacle for many would-be buyers. With occupancy cratering and cash flow seriously squeezed, investors were hard-pressed to show banks a reasonable debt service coverage ratio. And potential lenders were more focused than ever on a high-quality operator being in place.
All these factors played into Welltower’s favor, given that the REIT does not need financing and has a large cohort of strong operating partners, Mitra said. In this environment, the company leveraged its data systems to quickly identify the right opportunities to pursue, and get transactions done fast.
“The data analytics capability, the AI [artificial intelligence] capability we have built is incredible,” Mitra said. “ … American Express 20 years ago figured out that they should send you a Platinum card but me a Blue card, using the exact same technology. We have adapted this technology.”
Welltower buys data from 200-plus sources to glean a comprehensive picture of would-be consumer groups and market dynamics, which augments the 15-plus years of unit-level information data the company has collected from its portfolio, on a weekly basis, as provided by 60-plus operators. Mitra believes no other company can rival this scope of data collection.
“We have a team of data scientists who we hire, who can precisely tell you — within 95% accuracy — if you build this many IL, that many AL, this many memory care, roughly speaking, give or take, this will be your NOI,” he said. “Our data scientists have become so good that within 95% to 99% accuracy, they can tell you what your labor costs will be.”
Of course, in addition to looking at whether a deal makes sense financially for Welltower, Mitra and his leadership team are executing on strategic imperatives in deciding what opportunities to seize. Strategic considerations include building out health system partnerships and expanding in the active adult rental space.
Active adult is hard to define, Mitra said. But recent deals with Treplus Communities and Sparrow Partners fall into this category.
Welltower is harnessing its consumer data to get a clearer picture of the active adult demographic and sees “tremendous opportunity” in this area, Mitra said.
The recent period of active dealmaking has resulted in Welltower further expanding its roster of operating partners. Between the start of the Covid-19 pandemic and early June, the REIT added 15 new developers and operators, including Treplus and Monarch. The new partners come with multi-year growth pipelines, Mitra pointed out.
Achieving close alignment with operating partners is another top priority for Mitra — and alignment is a key factor in whether Welltower succeeds or struggles, given the proliferation of RIDEA deals that expose the REIT to operational upside and downside. Mitra touts the company’s “RIDEA 3.0” structure as an industry-best in syncing up owner and operator interests.
He declined to share details of RIDEA 3.0, saying it is proprietary, but the basic concept is simple:
“We’ve got to sink or swim together,” he said. “I don’t like the fact that an operator would win at the expense of our owners, and I don’t want our owners to win at the expense of our operators, because they might win this quarter, next quarter, the quarter after, but not long term.”
This alignment is created through a “nuanced” approach and a willingness on the part of Welltower to incorporate significant financial incentives tied to operator performance. He again cited the recent Holiday deal, which also involves Atria Senior Living, as the new owner of Holiday.
“They will earn a very significant promote if they make our shareholders a lot of money, and they should,” Mitra said.
The “sink or swim together” approach might sound like common sense, but misalignment between owners and operators plagues the industry.
“As a capitalist participant in a capitalist society, we absolutely believe that to hire the best people, you need to pay people well — if we don’t pay our partners well, they can’t pay their employees,” Mitra said. “… The way this industry is structured, in which most operators get paid 5% off the top, that’s not enough to attract the best people. I just don’t believe that. I’ve never believed that.”
Welltower’s approach might sound like an ideal one for operators, and judging by the REIT’s ability to attract new partners, many operators do see merit in the company’s approach — perhaps even moreso after the pandemic. Covid-19 was an undeniable “human tragedy,” Mitra said, but he believes that it also showcased to current and prospective partners the value of Welltower’s capabilities and the company’s commitment to the senior housing space.
“Covid has given us the opportunity to prove this beyond anybody’s question,” Mitra said.
Still, would-be partners must be aware that a Welltower partnership does come with expectations.
“You can’t have it both ways,” Mitra said. “You can expect that [you’re] going to benefit from the low cost of capital and everything that comes with it, plus Welltower is willing to pay its operators meaningfully more than anybody else, but it will come with the cost that they have a responsibility to perform.”
Mitra acknowledges that “running a real business is messy,” which necessitates “constant dialogue.” The REIT needs timely and transparent information to communicate with and make decisions that are in the best interest of its shareholders.
“I’m known as an extreme fiduciary — lots of my shareholders and operators call me an extreme fiduciary, and I take it as a badge of honor,” he said.
REIT competition and collaboration
There is no getting around the fact that REITs investing in senior housing compete for deals and talent. And Mitra trumpets Welltower’s advantages over its rivals, singling out its data systems, collaborations with payers and providers, and “structural” considerations such as RIDEA 3.0.
The company is also adding new talent to bolster its strengths, he said. Welltower hired 40-plus employees in 2020 and is on track to hire 50-plus this year. For a company that is lean in terms of total number of direct employees, this represents a significant expansion.
The hiring push was made possible by the fact that Welltower is a countercyclical investor, and so was pursuing growth at a time when many other businesses were shedding workers.
Mitra is confident in Welltower’s position relative to the competition:
“We are a partner of choice, and that moat is only deepening every day.”
On the other hand, he takes pains to point out that senior housing REITs are not only rivals but have significant common interests and goals. It’s a message he sent early on after becoming CEO. On Welltower’s Q4 2020 earnings call, he expressed confidence that “we are embarking on a new era of collaboration amongst the public companies in our space.”
The need for collaboration was highlighted starkly during Covid-19, when the entire industry pulled together to advocate for federal relief and to meet unprecedented challenges in terms of operations and finances. But even apart from the pandemic, the REITs’ interests are intertwined.
Most obviously, many of the REITs work with the same operating companies, Mitra pointed out. So, it’s in the best interest of all parties that those operators are performing to their highest capabilities.
The Holiday-Atria deal illustrates some of the interrelationships at play. Another of the largest REITs — Chicago-based Ventas (NYSE: VTR) — is a 34% owner of Atria, and so will benefit if Atria can enhance the performance of the 86 Holiday properties that Welltower just acquired.
Furthermore, the aging of the U.S. population creates a multi-trillion dollar opportunity, but the senior housing industry component has historically struggled to drive penetration rates much past 10%. That is, there already is enough opportunity for all the REITs to be successful, but also a need for leaders across the sector to address common challenges and maximize market share.
So, even as he strives to “deepen the moat” between Welltower and competitors, Mitra does not want to put the industry in a combative framework.
“I think public or private companies, we need to stop focusing on share of the pie and start really caring about growing the pie,” he said.