The SHB Interview: Thomas DeRosa, CEO, Welltower

Welltower CEO leads strategy to partner with top operators to promote wellness in seniors

By Jeff Shaw

Thomas DeRosa was appointed to CEO of Welltower in April 2014, and he has made a significant mark on the company already.

The Toledo-based REIT is the largest healthcare REIT in the U.S., based on a market cap of $24 billion at the end of 2015. 

The company was involved in some of the largest transactions of 2015, including the $580 million acquisition of Regal Lifestyle Communities in Canada.

DeRosa oversaw several milestones in the 20 months since his appointment, including changing the company name from Health Care REIT — its name since 1985. 

“I started with the question, ‘Why are we in this business?’” says DeRosa. “We are a healthcare REIT. That’s not a bad business, but that’s not why we do it. What we really do is promote wellness.”

Seniors Housing Business recently held an exclusive interview with DeRosa to talk about his long history with Welltower, the need for better memory care infrastructure, and the future of both the company and the industry.

 

Seniors Housing Business: Tell me about the history of Welltower, its founding, how you became involved, and how the company got to where it is now.

Thomas DeRosa: Welltower was founded in 1970 in Lima, Ohio. That was the early days of a new tax structure called a real estate investment trust, and our founders and principals Fritz Wolfe and Bruce Thompson identified that structure as a good way to own healthcare properties.

When I first met the company in 1992, I was a young banker from Alex. Brown & Sons. I helped them raise capital. I helped them recognize other types of healthcare real estate and other opportunities to invest.

By 2000, this was a company that had a $1 billion market cap. When I met them they had a $150 million market cap. So how did we get to be a company whose market cap today — as you know, our stock price has been under a little pressure — is now about $24 billion?

There were lots of sources of capital that were chasing healthcare real estate in the early days of this company. By the 2000s, most of those sources of capital dried up. The health-care REITs became the major sources of capital to the private healthcare operators.

There was a trend in the 1990s considered very sexy to Wall Street called assisted living. Wall Street built up a large portfolio. That was terrific except for one thing: people in this country didn’t understand what assisted living was. 

Families that were dealing with a decision to relocate their mother, father or grandmother into a new home looked at assisted living and said, “I have to pay $6,000 a month for a skilled nursing home? Medicare’s going to pay for skilled nursing. Why would I pay that much to house her?” It took a long time for people to understand it. 

The reason we have become such a big company is because we recapitalized that assisted living industry when it blew up.

I was one of the people running a successful real estate company, The Rouse Company, that closed in 2004. That’s when I became a director of what was then called Health Care REIT. Then, in the spring of 2014, I became the CEO.

 

Healthcare infrastructure needs rebuilding

SHB: How do you envision Welltower’s role in the seniors housing industry?

DeRosa: The best way for me to describe that is to talk about the fact that we see our business addressing two major problems.

The first problem is our health-care delivery infrastructure hasn’t changed much since the 19th century.

Much of our acute care infrastructure needs to be rebuilt. That’s going to require a tremendous amount of capital. 

The next problem is that all health systems are being pressured to reduce costs and they’re being pressured to improve outcomes. It’s a conundrum that the Affordable Care Act imposes on all of them. 

One of the ways we’re going to meet those goals is by being able to utilize technology more in healthcare delivery and rethinking the settings in which it is delivered. That’s also going to require a tremendous amount of capital.

I’ve articulated the problems, and out of them I see opportunity. A lot of capital is needed, and I think we’re the global platform to meet that need.

 

SHB: What are some other challenges you see in the seniors housing sector?

DeRosa: The world is getting older. Cities are designed for 20- to 34-year-olds. That age cohort is expected to grow about 10 percent over the next 30 years. The 85-and-up cohort, meanwhile, is going to grow 200 percent by 2030.

We are ill prepared for a world that is going to be physically frailer and will have an increasing incidence of cognitive impairment. As people continue to live longer, we will see an increased incidence of a disease for which there is no cure — dementia.

There is no therapy in our sightline to address the problem of dementia. We all hope, and we are all working toward a cure, but the path of this disease is different in every person.

So while we’re waiting to find a cure, the only way to manage this population is through progressive residential treatment models that promote wellness and a quality of life for this population. 

The biggest issue for people with cognitive issues is safety. The healthcare infrastructure today is not designed for people with dementia. 

The National Institute on Aging recently came out with a study. It looked at a group of death certificates for a group of Medicare beneficiaries. For someone with heart disease, Medicare paid out an average of $175,186. For cancer, it was $173,383. For dementia, it was $287,000. 

For Alzheimer’s, there is no drug. There is no procedure. So what caused the cost to be so much higher? 

The reason is you have people that are unmanageable in the current infrastructure. When someone has dementia, we don’t know how to manage that person and the cost skyrockets.

This is what we’re trying to address by partnering and nurturing the best operators who know how to keep an aging population healthy and well, which is principally what we do. That is what seniors housing does. We’re not administering healthcare; we’re administering wellness.

That to me is the reason we’re in this business.

 

Welltower Collective connects operators

SHB: Welltower is the largest healthcare REIT in the U.S. with a market cap of $24 billion. How does the company handle such a massive portfolio?

DeRosa: We have a unique model. We have partnered with the leading regional seniors housing operators. The names you know like Brandywine, Benchmark, Merrill Gardens and Silverado — they’re the best-in-class regional operators.

We also connect those operators in different ways. We have an organization called the Welltower Collective, which brings together up to 30 operators on a quarterly basis. We share best practices, and we present the operators with new ideas and technologies.

We also save our operators money by establishing group purchasing organizations. We have a group of diverse operators buying food, fixtures and insurance together, which really helps them lower their costs.

We’re much more than a land-lord. We’re much more than a source of capital. We’re a true partner to help businesses flourish. 

We’re very deliberate about where we deploy capital. We have a diversified portfolio of seniors housing real estate that is concentrated in the major urban markets in the United States, Canada and the United Kingdom. We’re focused on the markets where population is growing, where there is demographic and economic vibrancy. 

Everybody says their operators are the best. But ours have the best reputations in the markets in which we operate. If you go to Houston, everyone knows Belmont Village and Patricia Will. If you’re looking for a place for your father in the mid-Atlantic, people will say “you should be aware of Brenda Bacon’s Brandywine.”

I always look to people like Brenda Bacon and Patricia Will and Loren Shook at Silverado and Chris Winkle at Sunrise Senior Living. They define who we are. They are the people on the front line delivering this wellness care every day.

 

SHB: In one of the biggest deals of the year, a 75/25 joint venture of Welltower and Revera recently bought all of Regal Lifestyles Community’s 23 properties in Canada. Estimates vary based on the exchange rate, but most outlets put it just under $600 million. Can you walk me through that deal? 

DeRosa: That transaction came about because in 2013 we formed a joint venture with Revera, one of the leading companies in Canada for seniors housing. It was Revera who approached Regal about the idea of combining the companies. Because of our existing relationship with Revera, we were brought in.

With the Regal transaction, it gives our company an interest in 21,500 seniors housing units in Canada, which is about 10 percent of the market. 

Regal is an excellent company with great assets and a concentration in Ontario and Quebec, which fits nicely with our strategy of owning in major metro areas. 

We also own seniors housing with operators Sunrise, Signature and Avery Co. in the U.K. The Sunrise and Signature Senior Living portfolios are very concentrated in the very major metro market of London. Our Avery portfolio is also in London, but has strong mass in Birmingham and Manchester.

We have more than 60 seniors housing assets in the U.K., mostly in London, with four hospitals in the center of that ring. We’ve created a private-pay alternative to the national health services.

 

Strategy for Canada slightly different

SHB: So your plan in other countries mirrors your investment plans in the U.S.?

DeRosa: Exactly. We are employing the same strategy. Canada is slightly different because the product is slightly different, as it’s mostly independent living. 

Independent living is strong in Canadian culture. There is a great acceptance that as you age, that four-bedroom, three-bath house in the suburbs of Toronto may not be the optimal place to live. 

Many people opt to live in independent living communities. They give up the maintenance of property, and they give up the property taxes, for a more streamlined lifestyle. People in Canada believe there’s a great benefit to making life simpler as you age.

We don’t have memory care assets in Canada today. The issues of dementia and cognitive impairment in Canada are managed through the government. 

In England, healthcare is managed by the National Health Service (NHS), but for people who want other options in the U.K., we are the answer. In metro London, many people choose to augment their use of the NHS. They have a bit more consumer choice.

 

Name change emphasizes wellness

SHB: In September, the company changed its name from Health Care REIT to Welltower. What does the new name mean and why did you change it?

DeRosa: The name change was something that was very important to me because I think the name HCN defined our past. The name Welltower defines who we are today and where we are going in the future.

Welltower to me puts wellness out there in people’s minds. I don’t know of many companies that can define themselves as a wellness business. We’re one of the few companies bringing infrastructure that promotes wellness. That’s what I want people to know: we’re partners with the best in class at promoting wellness.

The tower piece of it fits nicely because towers are aspirational. Historically, hospital buildings have been called towers, though in the future they’ll be very different from what we see today.

We think it’s a name that captures people’s imagination. When you say our name is Health Care REIT, it sounds like a lot of other companies. When you say our name is Welltower, it begs “tell me more.” 

 

SHB: You were named to the Argentum (formerly named ALFA) Board of Directors in November. What does it mean to you to be in a leadership position in one of the industry’s largest advocacy organizations? Do you have any specific plans in mind for your time on the board?

DeRosa: We very much admire what organizations like ASHA and Argentum do to advance the industry. It’s our responsibility to be aligned with the efforts of those organizations. I’m honored to have a seat at the table with the leadership of Argentum. 

I’m hoping that, by sitting on the board of Argentum, Welltower will always be in sync with the direction of the industry, where the people on the front line are headed and the opportunities they’re dealing with. We’re very connected to these businesses.

Connectivity is a word we use a lot here. The better your connectivity, whether between us and operators or connecting operators to each other and advocating for the business, those levels of connectivity drive tremendous value.

As far as plans, I just want to learn from all those professionals. That’s my plan — to absorb as much as I can from the Brenda Bacons of the world.

 

Company has new way to talk about its mission

SHB: You were appointed to CEO about 20 months ago. What have you accomplished in that time, and what are you hoping to accomplish moving forward?

DeRosa: I helped redefine how we articulate the business we’re in. 

Most companies define themselves by what they do. We’re a healthcare REIT. You know what that is. We invest money at a positive spread.

While stating there is a great way for people to talk about business, that’s not how I think about it. You have to really think about why you’re in business.

What’s important to me is to use the Welltower platform to help advance awareness around a number of the big issues that are very important to our partners, and more broadly to society. We’re looking for opportunities and forums to help raise awareness of aging and dementia. We need to be thinking about aging in a positive, proactive sense rather than a reactive sense.

One of the other things I’ve done is significantly reduce our leverage. Our promise to these operators is that we are their capital arm. We have to be very deliberate and always be vigilant about what’s happening in the capital markets. We have to have long-term access to capital. 

When the market was really receiving our story quite well and our stock was quite high, we dramatically reduced our leverage, which puts us in an enviable position today. 

We can grow without accessing the public equity markets. That’s the knock against REITs — they can only grow when the stock price is high. That’s not true about us now.

I’ve also made sure we diversify our sources of capital. We brought in one of the largest investors in commercial real estate, the Canada Pension Plan, as a joint venture partner. They have never invested in healthcare real estate before, but they chose to make their first investment with Welltower, which we’re very proud of. 

The last thing we’ve done is to really expand our international infrastructure. 

We have an office on Corn Hill in London staffed with 10 professionals that manage that U.K portfolio and the other potential growth we might see in Europe. 

We also established a physical presence in Toronto. We have a team in Canada not only to look for new investment opportunities, but to manage the portfolio we’ve built up there. 

I don’t know how U.S. companies grow outside the U.S. unless they’re willing to build infrastructure in those markets. 

 

SHB: What’s something about you that people in the industry would be surprised to find out?

DeRosa: I’m pretty much an open book, so there’s not much. In my NIC talk, I danced. That is something maybe people didn’t know about me: I’m not a dancer. If you watch the video, you’ll know I’m not a dancer.

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