Welltower Inc (WELL) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Q2 2020 Welltower, Inc.

Earnings Conference Call.

(Operator Instructions)

Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today to Mr. Matt McQueen, General Counsel.

Thank you.

Please go ahead, sir.

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 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 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 Tom for his remarks.

Tom?

Thanks, Matt.

First and foremost, I hope that all of you and your families are safe and healthy during these difficult times.

When we last spoke with you in early May, Welltower was in the midst of the most challenging period in the company's history.

Many of our senior housing and post-acute care operators had implemented admissions bans to prevent or control the spread of COVID within their communities, critical personal protective equipment and testing kits were difficult to procure and labor challenges left many of our operators short staffed.

However, I am pleased to report that significant progress has been made on all of these fronts.

And that most of our properties have reopened with appropriate staffing levels and requisite PPE and testing kits.

This was accomplished through careful planning and precautionary measures taken by our operators.

In fact, in just a few months, 95% of our senior housing operating communities are now accepting new residents, and this is significant because our communities are a critical component to the care continuum.

It is imperative that seniors have access to residential settings in which professional care is offered to meet their everyday needs including safety, nutrition, hygiene and medication management.

It is important to remember that this is a need-driven asset class.

Welltower's traditional assisted living portfolio is skewed towards higher acuity settings with our built for seniors who have exhausted the ability to be cared for in a conventional home setting.

We continue to owe a debt of gratitude to the frontline workers in all of our properties who braved extraordinary obstacles to put the care of their residents above all else.

While I'm encouraged by our progress, by no means, are we signaling the all clear.

We are acutely aware of the heightened level of risk, which continues to exist, particularly as the number of COVID cases in the U.S. continues to rise.

As Shankh and Tim will describe in greater detail, the toll from COVID on our business has been and will continue to be pronounced.

However, the decisions we have made since the beginning of the pandemic and the steps we have taken over the past 5 years to strengthen our enterprise have put us in a position to weather this storm.

These decisions, while often difficult, are rooted in data and always executed with the long-term interest of our shareholders in mind.

This management team has earned a reputation for taking on both opportunities and issues in a proactive manner and COVID-19 has not changed that.

One of the strongest examples of this approach relates to our recent efforts to further strengthen our balance sheet.

As financial conditions began to deteriorate at the outset of the pandemic, our team did not panic.

Instead, through a thoughtful and deliberate process, we obtained a $1 billion term loan, providing us with ample flexibility in the event of a prolonged market downturn.

As conditions improved in subsequent months, our team waited for an opportune time at which to return to the public market.

And in June, we issued $600 million of unsecured debt at just 2.75%, the lowest coupon on 10-year notes in Welltower's history.

These actions are a reflection of Tim McHugh and his team's responsible stewardship of our balance sheet and the confidence from investors and our banking partners in the Welltower platform.

Another major achievement was the disposition of 2 large portfolios of seniors housing and outpatient medical assets with a combined total value of $1.3 billion.

These sales were executed during a time in which few real estate assets traded and when the ability for senior housing to withstand the impact of COVID was called into question.

Most notably, our $1 billion transaction with Kayne Anderson provided significant and immediate liquidity to Welltower in a period of under 45 days, and was executed at valuation levels, which were only modestly below pre-COVID pricing.

Again, we were not back into a corner to deplete these deals.

The valuation we achieved demonstrated the appreciation for the long-term growth prospects for health care real estate by astute investors and the strong liquidity, which exists for our asset class.

I applaud our investment teams for their perseverance in completing these deals under the most extenuating of circumstances.

As the year progresses, you should expect to see more of this.

Following the completion of our capital markets activity and portfolio dispositions, our near-term liquidity stands at $4.3 billion.

The company is extremely well positioned to address all near-term capital obligations and has ample capacity to execute on accretive opportunities as they arise.

Our team will continue to explore all avenues through which to create value for our shareholders.

And regardless of how strong our liquidity position is today.

Our underwriting discipline will not be compromised.

Many questions were made unanswered as to the duration and ultimate impact of COVID-19.

However, what we can say with great certainty is that the long-term drivers of our business remain firmly intact.

The population is getting older.

The need for value-based health care is as important as ever and addressing social determinants of health will only grow in relevance.

While it's often difficult to see past the next week or next quarter, rest assured that Welltower's long-term value proposition has not changed.

There will be challenging times ahead.

But we are confident that the company is positioned to navigate through these choppy waters and emerge as the continued leader in delivering the real estate that will enable more efficient and cost-effective health care and wellness.

With that, I'll turn the mic to Tim.

Thank you, Tom.

My comments today will focus on our second quarter 2020 results.

The impact of COVID-19 in the business observed this quarter, our capital activity in the quarter; and finally, a balance sheet and liquidity update.

In the second quarter, Welltower reported normalized FFO of $0.86 per diluted share.

These results include a total of $37 million or approximately $0.09 per share of property level costs in our senior housing operating portfolio associated with COVID-19 pandemic.

As we indicated last quarter, Welltower elected to not normalize these COVID-related expenses for both normalized FFO and same-store results.

Now turning to our individual portfolio components.

First, their triple-net portfolios.

As a reminder, our triple-net lease portfolio coverage and occupancy stats are reported quarter in arrears.

So these statistics reflect the trailing 12 months ending 3/31, 2020, and therefore, only reflects a partial impact on COVID-19.

In the quarter, we collected 98% of cash rents due on these portfolios, and in the last night's release, we reflected 97% of cash rents due in July, which is in line with previous months collections at this time.

First, our senior housing triple-net portfolio delivered 1.4% positive year-over-year same-store growth as a difficult comp, combined with an increased bad debt accrual drove growth below original expectations.

Occupancy was down 50 basis points sequentially, and EBITDAR coverage increased 0.01x on a sequential basis in this portfolio.

Our senior housing triple-net operators have experienced similar headwinds as our [day] operates during the second quarter, and we expect these coverages and occupancy stats reflect that going forward.

Next, our long-term post-acute portfolio generated positive 2.1% year-over-year same-store growth, and EBITDAR coverage declined 0.04x sequentially..

And lastly, health systems, which is comprised of our HCR manager joint venture with ProMedica.

And NOI growth of positive 1.375% year-over-year, and EBITDAR coverage declined 1 basis point sequentially to 2.13x.

Turning to medical office.

Our outpatient medical portfolio delivered positive 1.8% same-store growth as a significant year-over-year decrease in parking revenue caused by National shelter in place orders during the quarter, along with an increase in bad debt accrual was slightly offset by better-than-expected tenant retention.

New leasing velocity remains uneven as a result of COVID, in the second quarter ran behind pre-COVID budget by 104,000 square feet.

But the gap again narrowed June and July with new leasing exceeding budget by 44,000 square feet in July.

During the quarter, we collected approximately 87% of cash rents, while improving 12% of rents for 2 months deferral plan.

While the slower-than-expected reopening of certain regions in our portfolio, caused more deferrals in the May-June period than we had anticipated when we reported our first quarter numbers, we are encouraged by the momentum of the rebound in tenant openings.

They accelerated in the back half of June and July, driving cash rent collections to 95% in July.

We've also had strong deferred rent collection in June and July as our 2 month deferral plans began repayment, and we collected 96% of what was due over this period.

We're extremely proud of the Welltower outpatient medical employees, both on-site and working from home, who have kept our platform running smoothly during these extraordinary times.

Before reviewing this quarter's senior housing operating portfolio results, I want to briefly summarize the outlook we provided back in May, when uncertainty was at its peak.

At that time, our expectations were that occupancy would be down between 500 and 600 basis points from 1st April through June 30.

The REVPOR will be flat on a year-over-year basis, but expenses will increase by 5% sequentially, driven primarily by labor costs.

Before turning to how things actually turned out in the quarter, I'd like to first point out that our same-store pool is now representative 91% of our total senior housing operating NOI, and this will continue to increase in the year-end.

In the quarter, occupancy declines in our same-store portfolio by 490 basis points from 1st April to June 30.

Our same-store expenses declined 10 basis points sequentially, and our same-store REVPOR declined 20 basis points year-over-year.

The net result of this was second quarter same-store NOI declining 24.5% from the previous year and 23.3% from the previous quarter.

These results were a function of widespread admission bans that were in place through most of the quarter that limited movements as well as extraordinary COVID-related expenses totaling $34.2 million in the same-store portfolio, resulting in significant margin compression in the quarter.

As a reminder, we are not normalizing any of these COVID related costs for same store.

Looking forward to the third quarter and starting with the July data we've already observed.

We experienced a 70 basis point decline in occupancy in July from start to finish.

And we expect to finish the third quarter approximately 125 to 175 basis points lower than we ended the second quarter.

We expect overall SHO expenses remain relatively flat sequentially as continued reductions in COVID-related spend will be offset by increased costs related to reopening communities, seasonal utility costs and an increase in insurance costs.

Now on to capital market activities.

In June, we issued a $600 million unsecured bond with a 10.5 year tenure at 2.75%, and as Tom mentioned, the lowest tenure coupon in the company's history.

We're able to tender for $425 million of our 2 outstanding 2023 bonds, increasing the weighted average years of maturity to 9.2 years were unsecured bond borrowings and further derisking maturities through 2023.

Following these tender activities, which closed in July, we have approximately $1.3 billion in cash and cash equivalents and the full capacity of our undrawn $3 billion unsecured revolving credit facility.

Totaling $4.3 billion of near-term liquidity as of July 31.

Moving to investment activity.

In the second quarter, we invested $124 million, almost entirely in our development pipeline.

On the disposition front, we completed $949 million of pro rata disposition at a 5.7% cap rate.

Post quarter end, we closed in the second tranche of the MOB portfolio sale we announced at NAREIT, for proceeds of $173 million at a 5.4% yield, and we expect the third and final tranche to close in the third quarter for $89 million of additional proceeds at a 5.3% yield.

Shankh will speak to you later on.

We feel very good about liquidity for all property types in our high-quality portfolio and view our private cost of capital as significantly better price than our public costs this current time.

As a result of these successful dispositions in the quarter, we ended the quarter at 6.36x net-debt-to-adjusted-EBITDA, a 43 basis point increase in the last quarter, despite an approximately 13.5% decline in sequential EBITDA.

COVID has substantially increased variance in our near-term EBITDA.

And consequently, we have done everything in our control to counter that and maintain a strong cash flow based leverage profile, despite our currently depressed property level cash flows.

We've also been acutely focused on managing what is in our control to maximize retention of cash through is pandemic.

This has been focused on 3 main areas: G&A, CapEx and the dividend.

On G&A, we expect to finish the year between $125 million and $130 million of corporate G&A, implying a run rate of a little over $30 million a quarter for the remainder of the year and representing a $10 million plus decrease from what we'd initially guided for the year.

For Capex, we reduced CapEx spend by $12 million or 18% sequentially.

With our growing liquidity profile and our buildings opening back up, we expect the spend to increase over the next 2 quarters, but still expect to finish the year approximately 16% below our 2019 levels were.

And as we announced last quarter, our dividend reduction, which has created approximately $110 million of quarterly cash flow savings.

The result of these actions, along with many others, was that we were able to retain a significant cash flow before investment activity despite the substantial negative impact of COVID-19 at our second quarter results.

While these decisions, particularly the dividend decision were difficult, we felt strongly that they gave us greater control as we navigate through the pandemic.

Retaining cash flow is, by design, difficult in the reconstruct.

And so on analyzing near-term impact of COVID-19 on our cash flows, it was not just an analysis of when we might return to breakeven levels of cash flow.

There's a question of how long that deficit would last.

And the time it would take will retain cash flow to reach a level that allows for the accumulation of debt deficit to be repaid, i.e., today's dividend would need to be paid with tomorrow's cash flows.

As the duration of the deficit period increases, its compounding impact on the deficit repayment needed to return the balance sheet to pre coded levels.

Ultimately, this has a dual impact of not only amplifying business streams caused by the pandemic, but also destabilizing the balance sheet.

Disposing of assets or selling equity offsets this increased leverage, only increased the payout deficit by either eliminating the cash flow from disposed assets or adding dividend-paying shares to our share count.

Our asset sales this quarter demonstrated why reducing the dividend to a level below current cash flows was made by our management team, as we were able to make a decision to sell assets based solely upon the value received and the stabilizing effect of these retained proceeds have had in our balance sheet.

We believe these decisions have removed dependence on a quick recovery.

Allowing us to decrease downside risk and we continue to make capital allocation decisions with a long-term focus.

And with that, I'll hand the call over to Shankh.

Thank you, Jim, and good morning, everyone.

I will now provide additional color on the operating performance that Tim discussed and discuss our capital allocation strategy in this challenging yet rapidly evolving times.

As we reflect back on the frenzied pace of activity over the last few months, our focus has been and will continue to be the safety of our residents and staff in our communities.

Frontline heroes at these communities have done a tremendous job of improving the safety and quality of our lives of the resident from the earliest days of this crisis.

For example, in our SHO portfolio, reported resident COVID cases over a trailing 2-week period peaked at 510 cases in the first week of May.

And since then, are down to 98 cases, representing an 80% decline from the peak.

This is despite the fact that our operators tested nearly 100,000 residents and employed so far.

While COVID cases have spiked across the nation, the prevalence of cases across our portfolio has remained relatively flat so far.

COVID related deaths, which peaked during the last week of April are down 92% since then and have so far remained relatively stable in July despite a spike in nationwide cases.

This remarkable improvement, though` far from being completed, has allowed our operating partners to cautiously open doors to new prospects.

In the last week of April, 42% of our communities had official admissions ban, that number today is 5%, including 3% partial bans.

Movements were down sequentially from pre-COVID February peak to April when you had the first full amount of COVID by almost 77%.

Since then, moving that up 174% from April low to July.

Move-outs have peaked in March and sequentially down 37% in July relative to March.

However, we still have more move-outs than move-ins.

As a result of this, occupancy loss in our shop business has narrowed from down 60 basis points during the last week of April and 1st week of May to down 10 basis points each of the last 3 weeks.

Though this improvement is encouraging, we are cautious about the overall environment as spike in COVID cases in our markets are real, and they can impact our communities at any time.

We have been seeing a steady increase of leads, inquiries and deposits due to the need driven nature of our business.

The total number of leads in the system, which declined 55% from February to April trough since bounced back 60% in June from that trough.

It is approaching pre-COVID February numbers in July.

However, move-ins are trailing as those leading activities due to the hesitation in the psychology of the consumers as they juggle between the difficulty of taking care of the elderly love one and the fear related to the national headlines of rising COVID cases.

So far, we have been positively surprised by our operating partners' ability to scale expenses to a rapidly declining occupancy so far.

We saw rates held up slightly better than what we thought in assisted living and memory care segment, which is up 1.7%.

The occupancy was hit much more pronounced here, down 6.2% year-over-year.

While occupancy of our IL segment held up relatively better, down 2% year-over-year, rate growth declined 10 basis points year-over-year.

Additionally, the entrance of a lower price point seniors apartment portfolio, 2 same-store pool in Q2 impacted the overall mix, reducing total reported same-store RevPAR growth by 40 basis points for the quarter.

Clearly, given how COVID has spread, the larger coastal markets have been impacted significantly during the quarter, more than other markets.

Finally, we are starting to see some differentiation in operator performance that can be explained by operator value add, not just location, product type or acuity.

As I mentioned last quarter, correlation pattern completely broke down in March and April, and we are happy to see it improving through June and July.

On capital allocation front, we discussed on last quarter's earnings call to distinct mental model, short-term defense and long-term offense, we are glad to inform you that during the quarter, we have largely completed our efforts on the defensive side, and have now shifted our focus on the offense.

We're extraordinarily proud of our execution during the second quarter in both public and private markets.

And it is important to remember and understand these 2 are one interconnected set of decisions and not distinct actions.

For example, our exceptional execution with Dave and his team at Kayne Anderson in record time with our senior housing and MOB portfolio disposition along with our execution to secure a term loan with our banking partners, both took place during the dark days of March.

These gave us confidence to be patient in accessing public bond markets rather than issuing bonds when credit spreads were at their peaks.

If we were to issue bonds during those days, we would be looking a coupon close to 5%, not 2.75% that we issued later in the quarter.

That would have come at a cost to shareholders of $130 million over the life of the bond.

We believe our execution in private markets speak to the significant demand of stabilized assets, both in senior housing and medical office assets -- classes.

We're in middle of other transactions that are premature to discuss at this point, but needless to say, we feel very strongly about the demand of our assets, more to come as we progress through the year.

Notably, this robust interest and pricing are nowhere to be found in assets that are not in the middle of the fairway, such as those deals with broken capital structure, suboptimal operators, development in leased-up assets or generational handover of companies and access, to name a few.

Fundamentals determine cash flow and asset price is a multiple of that same cash flow.

These variables are usually inversely correlated with opportunities to invest at the highest moment of uncertainty.

In other words, when fundamentals are great, asset pricing is high, expected returns are low.

When fundamentals are bad, asset pricing is low, expected returns are high.

We're seeing that playing out in many parts of senior housing sector today.

We're starting to see signs of distress across the spectrum of the issues I mentioned.

These situations not only require capital, but they also require operators who are otherwise overwhelmed with the demand of their time given what's happening within their communities.

And that's where we come in with our toolkit.

As well, we think our value proposition in 3 interrelated groups, capabilities, culture and capital.

We lead with our capability, we execute with our culture of partnership, and we get the ball across the finish line through our ability to ride resolute check with unmatched speed and structural creativity.

When we introduced our idea through our business model to achieve greater alignment with our operators, many of you asked if Welltower will be able to retain its culture of partnership, to which we responded, the proof will be in the pudding.

We are seeing the proof today.

We are working with our operating partners very closely in identifying assets in their backyard through our data analytics platform and tailor-made to their model based on size, acuity, vintage, demographic and psychographic criteria.

This algorithmic approach narrows the opportunity set to a manageable number, which is tilted to succeed for our operating partners to dive in and help us underwrite.

Our operators and deal teams can connect with their fellow operators and owners to run through our thoughts on pricing, our ability to close and execute on operator transfer agreement on an expedited basis.

We are either getting a quick yes and jumping on the execution or we're getting a quick no and moving up to the next opportunity.

For example, one of our partners in Midwest, StoryPoint, we have identified 137 distinct communities in 7 states that fits their criteria, and we're going through the list of opportunities with the StoryPoint team, one asset at a time.

These states have more than 2,800 senior living properties that are humanly impossible to hone on any practical basis.

The job of the algorithm is to bring our partners and our deal teams to focus at the highest probability last mile effort.

We remain fundamental value investors who are focused on bottom-up underwriting basis relative to replacement costs and structural protection.

In another example, we have -- are in process of executing on 3 premium opportunities with our partner, Brandywine, in extraordinary locations such as Princeton, New Jersey and Summit, New Jersey.

In another example, we're proud to execute tenants, extraordinary opportunity in Fisher Hill submarket of Brookline on an existing land and structure that used to be a college.

The townships and the people of Brookline has given us incredible support and zoning approval even during COVID-19 to create an iconic 160 unit senior living project.

We're underwriting several more transactions with Balfour in their home markets of Colorado as well as the new home in Boston.

I can cite many other examples with other operators, but I will retain those for future calls.

But I hope you walk away from this call understanding that we have never been more excited about the opportunity to invest capital in the senior housing space because of the pricing that we are seeing.

We're buying communities in our core California and New Jersey market for less than $200,000 unit, while replacement costs in these locations are in excess of $0.5 million a unit, targeting development or development plus returns without the majority of the development risk outside lease-up.

We believe in this business long term, we also understand the near-term is going to be uncertain and challenging.

Please note that uniqueness of this very challenge is what's creating a once in a duration opportunity right before the multiticket upturn in the demand cycle.

On the same time, at the same time, the supply is coming to a scratching halt.

Many of you who follow NIC data have seen started down to Q1 of 2009 levels, and we are likely to see this trend continue.

Construction activity across all real estate asset classes is down significantly, which is creating softness in soft and hard cost.

Land prices are starting to show cracks as well.

In this environment, we are standing by our operating partner, shoulder to shoulder when tourist capital is playing the space.

And that is attracting more and more operator and development partners to Welltower, highlighting the proof in the relationship pudding.

I am optimistic we'll be able to create significant value for our long-term shareholders in next 18 to 24 months by allocating smart capital, leveraging our operating platform.

With that, over to you, Tom.

Thanks, Shankh.

Before we begin the Q&A session, I wanted to call your attention to a press release from last week, announcing the appointment of Diana Reid to our Board of Directors.

Diana is an accomplished and highly respected executive with 38 years of experience across the financial services and commercial real estate industries.

She most recently served as Executive Vice President of the PNC Financial Services Group and Executive of the Bank's commercial Real Estate business.

She's also had leadership positions in many prominent organizations, including the Mortgage Bankers Association, Commercial Real Estate Finance Council, the Urban Land Institute and Real Estate Roundtable.

All of Welltower stakeholders will benefit from Diana's extensive experience and insights, and we are extremely fortunate to have someone of her caliber join our Board.

I'm also pleased by the fact that with Diana's appointment, 88% of our independent directors are women and minorities.

As I've said in the past, the diversity of our employee base, our leadership team and our Board continue to be a priority of Welltower.

This is not only a key component of good governance, but it is a proven driver of higher returns to shareholders.

And with that, I will turn the mic back to Glen to open up the line for your questions.

(Operator Instructions)

Our first question comes from the line of Steve Sakwa.

I guess, both Tom and Shankh, you guys spent a fair amount of time talking about the investment opportunities.

And Tom, it sounded like you alluded to some other potential sales coming down the pipe.

I guess, how do we sort of think about a way the sale of assets that may be stabilized?

And Shank, it sounds like you're looking at buying some broken assets.

And just sort of the dilution short-term versus kind of the long-term gain and the high-growth and maybe the high IRR potential is there just -- is there sort of an amount of short-term dilution you're willing to take to get long-term growth out of these transactions?

Steve, that's a very good question.

If you think through at least sort of the mental model that we have, we're fundamentally looking to sell at this point, assets that we think achieved pre-COVID pricing or pre-COVID IRR if we have sold those days.

Our need for liquidity that we had, obviously, or what we wanted to achieve in March is all now achieved at this point.

So we're looking for leasing capital from assets that we think is a testament of their long-term value.

With that, we're looking to buy assets or deploy capital, whether there's assets or any other available opportunities, such as our stock.

Unless we think there's a substantially higher IRR that can be achieved.

So that's how we're thinking about it.

We are long-term value investors, and we're not focused on quarter-to-quarter dilution.

As you might have partly noted that the sales that we executed in the quarter had $0.02 of dilution in the quarter, but we still think that achieved extraordinary pricing as well as the value for the shareholders.

But Steve, I'd add that we're not sellers under duress.

There are many quality sources of capital, institution investors that see the long-term value of this space and are very interested if there's an opportunity to buy high-quality assets from us or partner in a joint venture structure with us.

So there are very active dialogues going on, and that's why I mentioned, you should expect more of this as the year progresses.

There's -- I never want to say that definitively, but we're pretty optimistic at this point.

Our next question comes from the line of Nicholas Joseph from Citi.

It's Mike Bilerman here with Nick.

Maybe you can spend a little bit of time talking about the senior housing operating environment and whether you're seeing any differences in between operators of their pricing strategies, whether some are using concessions versus some are holding rate?

Just how different operators, just like different health care REITs are approaching the market in different ways, I assume your operators are as well?

So if you can go through that, that would be helpful.

Yes.

So we are, obviously, as I mentioned in my prepared remarks that we are seeing different strategies, but sort of more, I will just describe that as a tweaking of pricing strategies than a wholesale change in pricing.

We believe than we provide an exceptional value to customers and for which we need to attract a certain level of staffing for which you need pricing.

So we're not interested in compromising on their pricing or rather compromise on occupancy.

So if you look at, as I mentioned, assisted living and memory care portfolio RevPAR was up 1.7% even during this quarter.

Now if you think about -- as you lose occupancy and you're not building occupancy, you lose community fees that obviously impacts that number in a pretty meaningful way.

However, we're not seeing any decrease of like-to-like pricing in our communities.

Just a reported number, Michael, was impacted by bringing the lower pricing or lower price points in those apartment into the pool.

If you exclude that, we would have reported a RevPAR increase of 20 basis points, increase of 20 basis points relative to flat of what Tim described last call.

I would just add to that, Michael, from Shankh's point, at this point, who you're seeing moving as you've seen move-ins pick up are really going to be your most needs-based resident.

So the value proposition from high-quality care, which -- and the reputation, which is where our operators sit within these markets has probably never been higher.

There could be a point when things actually start to pick up, and you see the incremental demand come back where pricing comes into the equation, just given where -- how suboptimal occupancy is across most markets.

But at this point, pricing isn't what's driving incremental occupancy.

It's not driving the marginal customer.

It's truly really a needs-based client that's coming in.

So next question comes from Rich Adison from SMBC.

So obviously, you've got a commitment long-term to senior housing.

I wonder -- and Shankh, I understand you're not a seller unless you get obviously, reasonable price pre-COVID value and IRRs and all the rest.

But how would you characterize the future from an asset allocation perspective for Welltower in light of skilled [nursing] and post-acute assets and medical office?

Could -- if you had your way and you got the pricing that you wanted, could senior housing almost the entire story here, 5 or 10 years from now?

Or is it more just growth in senior housing, and you'll continue to maintain some exposure to those other asset classes?

So Rich, as we have mentioned, and pretty much every call, our asset allocation strategy or really our capital allocation strategy is driven by price.

In the scenario that which you described that every asset class that we play in remains perfectly overpriced for rest of 10 years and senior housing remains perfectly underpriced for the next 10 years, then yes, the description that you give that is possible.

That is really how things happen, obviously, right?

In moments of opportunity in the -- when you see in capital markets, but capital comes in and out of sector for various reasons, you see these moments of opportunity.

And that's what we believe we're seeing.

So near-term capital allocation, you're obviously, you're going to see a significant increase in senior housing.

But we love all of our asset classes.

We love -- like we love all of our children.

There's no cushion that we want -- we remain interested in playing all different asset classes.

Our incremental capital allocation strategy is a function of price, not a function of our love for one asset versus other.

Right now, today, we have never seen a better opportunity to invest in senior housing as an asset class.

Our next question comes from Jonathan Hughes from Raymond James.

My question is on the rate outlook, and you did touch on it a bit in Michael's question earlier, but I was hoping you could share some thoughts on the trajectory or reception of rate increases in a world where amenities have been taken away from residents?

Of course, they've been taking away for their safety the social interaction aspect is what attracts a lot of residents to these properties, and that might not be back to normal for some time.

So how does this removal of the socioeconomic factor kind of impact the rates your operators are able to achieve today for both new residents and existing resident rate increases?

Jonathan, that is a great question, which is why you're seeing the lower acuity models where the need of providing health care and social determinant of health is lower you are seeing rates not as pronounced rate increases, as we have described to you, that we saw a slight decrease of rate.

On the other hand, where the social aspect of this business is very important, social aspect of the living is very important, but more important is taking care of other health issues, obviously, that's where you're seeing increase of rates.

So it's an interplay between all aspects of the services that we provide.

Where you have more need-driven, obviously, residents, there will have less impact on rates.

In this kind of environment, where you have more lifestyle driven residents, you will see more impact of it just because of what you just described.

Right.

Jonathan, it's what I said earlier, our portfolio is skewed towards the higher acuity.

So these are truly people that are moving in, in this environment, have really exhausted other options.

So the social part of the senior housing model is not as important to them.

They need to make sure that these seniors are getting their daily care they can't -- that cannot be done in -- by many families today in the world we're living it.

It becomes impossible, particularly if someone has dementia.

So that is the profile generally of who's moving in today.

They're not as concerned about the social aspects of the senior living model.

But as things start to come back to normal that, once again, will become a more important attribute to the consumer.

But today, it's really all about safety and care.

Our next question comes from Michael Carroll from RBC Capital Markets.

Shankh or Tom, can you talk a little bit about how the second CVID wave or maybe the continuation of the first COVID has impacted your operators, I guess, particularly in California, had they been forced to re shut down or delay reopening some of those facilities?

Or what's the thought process behind that?

Thank you, Mike.

That's a really, really good question.

Frankly, I am extremely encouraged and positively surprised by the example you just brought it up in your question, I was going to use that.

California is probably the only place where you can see there's a true second wave, right?

There's a lot of other states where you're seeing sort of the first big wave, I'm happy to tell you, this is why I was so encouraged by the performance of the last 3 weeks, we haven't seen a significant admissions ban or lack of performance in California in the last 3 weeks.

That's really surprised me.

We reported, as you can see in our presentation, sort of 10 basis points of occupancy decrease in the last 3 weeks.

Those are obviously rounded numbers, Mike.

But if you just followed the real numbers, they were down 14 basis points, down 10 basis points and last week, it was down 7 basis points.

Given California, is our largest market, in California has obviously impact to those numbers, you would have seen a much, much worse, and worsening impact, not an incrementally better numbers going forward.

Mike, I wanted to add to that.

I'm not going to name the operator, but there's one operator, in particular, who was very quick to shut the door during the first wave in California.

And what I would tell you is, in the second wave, they are taking new residents.

So they needed to adjust to this COVID environment, and they did that by, really by effectively shutting down.

And now when COVID comes back, they are in a position to safely admit new residents.

They have the right protocols and procedures in place that are enabling them to, again, meet the demand for this quality of care in a residential setting in markets where the headlines are pretty scary.

But I think that's a good indicator, and it helps us explain some of the stats that you see in our deck, why the number of cases while are not spiking in our portfolio like they had back in April, in May, when the operators were blindsided at not just our operators, I mean, we all were blindsided by COVID.

And so again, this could change, Mike.

But it's an interesting -- California is an interesting data point for us.

Our next question comes from Jordan Sadler from KeyBanc Capital Markets.

I want to follow-up on the investment cadence within the context of what's going on with cash flows and leverage.

Are you guys better to buy or to sell right now?

In other words, will sales and purchases be more balanced here going forward and offset one another in terms of volume?

No.

I cannot sit here and tell you that I know or have any idea.

I will only tell you that's dependent on one thing and that's price and expected return out of those buy and sell.

If we find the opportunity to deploy capital, that is an extraordinary basis and return, we'll buy more.

If we think that we're better off selling because the market is providing us great value for our assets, that sort of sees through these uncertain times, then we'll sell.

On a practical basis, there's going to be a combination of both.

Obviously, as you think through how assets and how that debt repriced, eventually the stress to debt service coverage, how that stress is obviously equity.

It takes time, but we're very encouraged by what we are seeing already seeing today.

But I cannot tell you sitting here on any given quarter, how those sales versus buys volumes, whether they will sort of cancel each other, one will be higher than each other.

I can't tell you that.

It's just purely price dependent.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley.

Maybe both for Tom and Shankh.

You've obviously talked a lot about exciting acquisition opportunities across the spectrum, more so seniors housing.

I'm just wondering, seniors housing specific, can you talk about those opportunities in context of kind of geographies, meaning the U.K. and Canada as well, product type, IL, AL?

And then maybe even something that you've talked about in the past, the affordable product.

So what are you looking at in terms of potentially getting a little bit more aggressive on in terms of building the portfolio out from here?

So Vikram, we're looking at opportunities across the board in all 3 countries, obviously, just given the population and the number of product, we're seeing more opportunities in U.S., distressed or rather more favorable pricing so far we see across the board, not necessarily one product versus other, but probably more in high, high acuity and AL memory care, probably there is more distress because you saw the occupancy fall the most in that.

And that's pretty much I can tell you, we're seeing, as I mentioned, we are seeing across Coast, East Coast, West Coast, we're seeing extraordinary, we have seen some extraordinary pricing in both coasts.

We're seeing a lot of opportunities in Midwest.

We're seeing opportunities in Texas.

We are in it, our deal team, which is our legal team, our investment teams and all the teams that support them have never been busier.

But whether we will be able to -- what we execute on will be a function of, as I said, price and needs to be reflective of the environment that we find ourselves today.

Our next question comes from Tayo Okusanya from Mizuho.

Yes.

So I just wanted to focus a little bit on the comments around the improvement in the -- well, improvement in the rate of decline as it pertains to occupancy in senior housing.

Again, clear that most of your facilities are open, it sounds like virtual tours and things are happening.

But can you just talk a little bit more about why that slowdown especially is occurring and the ability of the directors of these buildings to still kind of get movement in traffic despite COVID or whatever have you?

Yes.

So I think we touched on this a little bit.

But as you can think about our portfolio, primarily our U.S. and U.K. portfolio, it's high acuity.

It's a need-driven portfolio, right?

So there is, again, you can only push off this demand so much.

So we're seeing, as I mentioned, that just if you think about leading indicators, just take leads.

And I mentioned those in my prepared remarks, you saw a rapid decline of lease pre-COVID, first -- last month of pre-COVID is February, a significant decline, 55% decline sort of to the trough of May -- April.

And by June, it was up 60%, in July, it's now actually -- in month of July approached the pre-COVID numbers of February.

But if you kind of peel back the onion and you will see, there are -- the majority of the people are more need-driven than just lifestyle-driven, and it just is due to the fact that they can only push off the need that much into the future.

So that's why we think we're seeing it.

The other thing I will tell you, we have given you the absolute number, not just the percentages number of what is going on in the community from the perspective of COVID.

I hope you think given how large our portfolio is, how many units available versus the number of people in the COVID, which we mentioned, 98 cases, that is a remarkable testament to the quality of care that's provided by our operators in those places.

And that reputation does matter.

And that -- you cannot say the same thing about the industry as a whole.

But our operating partners have that reputation, they're delivering on that reputation, and that's what's attracting new residents.

One of the things I’m going to add to that, Tayo, is the decision has changed today, it's can you -- number one, is there COVID in the building?

Can you take my mother or father?

Are you able to take them in?

What -- how are you going to protect them?

And that's -- and can you meet their needs?

That is the decision chain today because so many people have exhausted their ability to care for that relative.

And have been, in many cases, in many markets, they've had no options, but just to take care of them at home or in their home.

And if you think about it, a lot of these residents or incoming residents, their lifestyle is being shut into a room in a house or they're living by themselves in a apartment with some limited, either family care or home health care.

So in a sense, the lifestyle component doesn't change too much for that individual, except there's much more security and consistency around their care program than can be achieved in a conventional home unless you're extremely wealthy.

Our next question comes from the line of John Kim from BMO Capital Markets.

So your operator diversification is a positive for your company in the performance.

But when you look at some of your larger tenants and the sequential decline, looking at the Sunrise or Revera, the pretty significant underperformance within your portfolio.

I'm not sure if you can comment on these operator specifically?

Or if not, overall, the ability for some of your private pay senior housing operators and their ability to handle this kind of performance in the absence of government assistance?

Before Shankh gives you an answer just as the operators, just point out, you know this, but in-place NOI be annualized in the quarter.

And so sequential changes are just more pronounced.

So if you're taking the entire sequential change and you're multiplying by 4 to get to that in-place NOI number.

But regardless, John, you make a point, there's no question that some of our higher acuity operators have definitely underperform.

And if you add higher acuity with coastal locations that is definitely some -- in some operators, we have seen some significant performance decline.

But that is why you have a diversified portfolio, right?

Without getting into very specific names.

But if you follow through the coastal market and then you add acuity, where we saw the most decline, it is not difficult to find out who would have performed relatively better or worse.

But as Tim pointed out, that you should not take 1 quarter when NOI declines staggering 25%, if you multiply by that 4, you're going to get very, very different results.

Our next question comes from the line of Nick Yulico from Scotiabank.

So I just wanted to turn back to the move in issue.

So I mean, move-ins have improved, but they're still down 45% in July versus last year.

And so I guess I'm wondering, do you have any data on why customers are delaying move-ins?

And particularly, if you have any feel for the time frame of that delay?

Are people telling you, they just want to wait 3 months, they're going to wait a year, they're going to wait until there's a vaccine?

And then I guess, I know you talked about leads, but it would be helpful to understand instead if you had any sort of backlog of deposits you can point to?

Okay.

So first is, let me answer your second part of your question.

Deposit activity is extraordinarily strong.

As I've pointed out, the move-in activity, which has been obviously improved pretty meaningfully is not matching the deposit activity as people are spreading out their move-in days.

That's what I think you're asking about, and I pointed out in my prepared remarks.

I think the other part of your question was.

Is move-in down from last year?

Absolutely, it is.

If you think about what we are trying to get to, at least what most analysts and investors asking us they're trying to get to a point, understand the run rate earnings power of the company.

Sequential gives you that.

Year-over-year is a function of what happened yesterday.

Sequential gives you what is going to happen tomorrow, and I think that's what sort of -- we are personally with -- eager to figure out the exact time and say anyway, what is our run rate EBITDA.

But is move-in down from last year?

There's no question.

Of course, you see we have lost 500 basis points of occupancy in 1 quarter.

So you are not at the same level of activity, and it is going to take some time to come back to the same level of activity.

Nick, I want to add something to that.

What you see is people are, as Shankh mentioned, the deposit activities is good.

The move-ins are delayed.

What's delaying that move-in?

I think it was your question.

In some cases, it's -- you -- if I can't visit right now, on a regular basis.

I can't visit mom or dad on a regular basis.

I'm going to wait until there's some safe visitation model before I move them in.

So they've secured a place, but they're delaying until perhaps there's some -- again, we've seen visitation allowed in many states, and again, under very strict protocols.

In some cases, in some states, it's the testing.

It's that, I don't want my mom to be tested to be poked and prodded twice a week.

So I'm going to wait until that settles down.

So it's elements like that.

These are people that need to come in they've secured a place with a deposit, but they're waiting to the conditions might meet their needs a bit better if the situation isn't desperate.

Like today, I need to move my dad today, I cannot take care of him anymore in the situation he's in.

So it's individual, it's specific to the family and the individual, but it's things like that, that are causing that delay.

And Nick, that's why we're not giving you our best guest scenario or our best guess, that occupancy will be up next quarter, right?

Given the amount of activity and demand that we see in the system, you think that just from that, we will be indicating that occupancy will be up, we're not.

Because we want to see that hesitation sort of gets at least for next 3 months, we want to see how that plays out before we tell you that we feel that the consumers are coming back in-house.

So we're not saying that.

We want to see how that plays out.

Our next question comes from Joshua Dennerlein from Bank of America.

Curious on operator expenses going forward, there obviously was a lot of extra COVID costs.

What should we kind of look for in 3Q?

And maybe the ability for labor to flex as occupancy has come down in marketing budgets?

That would be really helpful.

Yes.

So I think the way I would think about that is just within the quarter, looking at kind of COVID costs, the biggest piece of it, if you think about COVID costs and roughly, call it, 20% of that is kind of PPE and cleaning.

And that is likely going to be around until a vaccine or the pandemic has come down a lot.

In saying that, I'd say the cost of PPE still likely inflated.

So the cost of acquiring requiring has come down quite a bit from the certainly March-April area, but it's still, in many years, probably 2x to 3x or it should be when supply change and completely kind of normalize.

But just speaking to kind of current pricing if PPE, cleaning make up about 20% of that, there's a piece of it then that is kind of dietary and that dietary piece is from delivering meals to rooms instead of running the common or dining areas, that will start to come down as you see some normalization of internal activities.

And then lastly, the labor piece.

And the labor piece makes up the large majority of the cost here.

And the labor piece, actually, it's probably fair to think about in our -- the deck we put out last night, we've got our trailing 2-week COVID cases, and you see they peak on May, and that's actually probably a very good indicator of when our labor costs were tied to COVID peaked.

So April and May, both had pretty high COVID-related labor costs.

It came down considerably into June.

That will burn off, obviously, dependent on the pandemic and the prevalence of COVID-19 in our facilities.

But as that's come down, that labor piece is almost burned off entirely at this point.

So going forward, I think it's right to think about just that kind of PPE and cleaning cost being a dominant force and then labor will be dependent on the actual prevalence of the virus.

Our next question comes from the line of Steve Valiquette from Barclays.

A couple of questions here.

I mean, you touched on this a little bit already, but just that comment on Slide 17 that the recent rise in COVID case may result in near-term increases in admissions ban.

It sounds like your operators are now generally want to be on the offensive move-ins.

So I guess if there are potential new emission ban, it sounds like they would be more mandated by state government as opposed to voluntary bans.

So just want to make sure that we're thinking about that the right way?

And then maybe the bigger question overall, Shankh, you kind of touched on this for 3Q, but the way it stands right now, is it your expectation that in calendar '20, that Welltower will cross the threshold and SHO where the move-ins will exceed move-outs and occupancy will start to increase at some point this year or is that still up in the air right now, the way it stands, just wanted to get clarity around the calendar '20 thoughts around that?

Thanks, Steve.

This is Tim here.

I'll start with your question on move-ins ban and then Shankh can answer your second question.

I think I'd just kind of recharacterize your comment on our operators being on the offensive.

I think our operators are being very smart about the way that they're admitting residents.

And I think you're correct in what we'll call it kind of outright admissions bans.

And Tom kind of made this point about California with one of our operators that kind of voluntarily move to admission ban in the first wave, the second wave, they're admitting residents.

But certainly, the admission protocol is extremely heightened, and that gets a little bit of Tom's point and even some of that hitting of that protocol being part of the reason why you're not seeing people choose to move-in.

But I think part of what we've seen so far is, as you've seen, the cases spike nationally again.

You've seen cases within our facilities move up but stay very controlled and start to come back down the last 2 weeks.

And I think that's actually -- it's symbolic of the admission protocol is working very well.

So do I think the actual admissions ban, you're correct.

That will be driven more so by probably state and local municipalities.

And then obviously, the building itself when there is an actual case of COVID.

But the building -- the operators themselves, I think, are just being very cautious about admitting.

And so that's playing a role here.

But the actual bans will be more driven by governing bodies.

Steve, to your second question, do we -- are we here to sit down and predict when move-in and move-outs will cross over?

Well, absolutely not.

You tell us how you think COVID will play out, and we'll tell you how that will translate into our numbers.

We're only telling you what we have seen until yesterday.

We're not going to sit here and predict what might happen tomorrow, given the uncertainty of this environment.

We're encouraged by what we have seen.

We're also obviously, telling you that we're very cautious that things can change anytime.

So we'll obviously not going to sit here and predict when those 2 will cross world.

But we are very, very encouraged that it came very close last week.

Yes.

And the one thing we do know, Steve, is that the operators know what they're dealing with today.

In March, April, May, they were, again, trying to figure out what was happening.

And we're unprepared as we all were.

So I think that the positive today is that they do have the right policies, procedures in place to manage a very difficult situation, but things can change on a dime.

So again, reiterating why we're not being -- looking try to predict what's going to happen through the rest of the year.

Our next question comes from Lukas Hartwich from Green Street Advisors.

There's a lot of focus on the potential for government support for senior housing here in the U.S. I was hoping you could provide some color on that discussion in Canada and the U.K.?

Well, in the U.K., it's a very different story, Lukas.

This -- there is much government support for the senior housing industry in the U.K. and unlike in the U.S., it did not become a target of hysteria around COVID, what's interesting in the U.K. The frontline workers in the senior care business are considered heroes like the people who work in hospitals.

In the United States, that's not the case.

And that's a shame because the health care workers in the senior living in post-acute care spaces, have been subject to the same conditions that as health care workers and hospitals, they faced a lot of the same challenges.

And like our health care workers and hospitals, they're doing the best they can to meet the needs of their population.

So I'm hoping that will change in the U.S. But in the U.K., it's a different.

And there's certainly more government support for the senior living industry in the U.K. in Canada, remember, our business is really more of an independent living business.

The higher acuity models in Canada, our government provided.

So to date, I can't comment on government support in Canada coming into the independent living model -- into the independent living sector.

I really couldn't comment on that.

They're both -- obviously, both countries are at a very different health care system than the United States.

Our next question comes from the line of Daniel Bernstein from Capital One.

Quick question.

So when we look back at '09, average entrance age went up, acuity went up, margins went down.

Length of stay went down.

Where you're looking at the opportunities that sound generational, how are you thinking about the underwriting of the long-term fundamentals of the business?

I know that may be very difficult.

But are you concerned about maybe the long-term upside of the NOI, the business is a little bit lower going forward than it has been in the past?

Yes, I am not only concerned, I'm paranoid about everything that changes investment returns.

So that's why in this uncertain environment, the price needs to reflect that uncertainty, right?

But I do think the industry is coming to a point where you can underwrite different scenarios and then price that in.

At the end of the day, we deploy capital to make money for our shareholders.

There's no guaranteed return.

If we want a guaranteed return, we'll be buying government bonds.

But we do think that today, as opposed to 90 days ago, our sector is reaching a point where you can underwrite.

And you can price in uncertainties of the various things that you mentioned.

So we'll see how it plays out, but we do believe that at the end of the day, if the revenue characteristic, the cash flow characteristics, not just revenue, the cash flow characteristic of an asset comes down, what will do is that will depress returns.

And obviously, that means that will depress future developments if there's no returns, they'll help us sell not chase the assets and ultimately, demand and supply will balance.

That is true for any capital-intensive business.

So will not be any different here as well.

But you're raising some very, very good points, and we are not only concerned, we're also paranoid about those things.

And we're trying to do the best we can from top-down sort of data analytics approach to bottom-up a value investing approach, and I sort of described, I'm not prepared to remark how we're bringing those together.

Our next question comes from Sarah Tan from JP Morgan.

This is Sarah on from Mike Müller.

Just one question on my end.

How much of your triple-net revenues are at risk on rent reset, could you comment on that?

Sarah, can you say that how much of the triple-net rent?

I couldn't hear the last part of questions?

How much of your -- what portion of the triple-net revenues are risk for rent reset?

I think, Sarah, I think you said, how much of our rents are risk of a rent reset?

That's right for the triple-net revenue?

Yes.

So as I said in my prepared remarks, the triple-net business and senior housing are 2 different structures.

And so the headwinds in our felt by everyday business is certainly being felt on the triple-net side.

There's some differences given different products mix and locations.

But what I said last quarter and will repeat again, is that the economics long term, have to support the rents.

And I think that's something we've talked about a lot on calls in the last 2 years, and we've restructured a lot of these rents and we got on some of this is that operators see the long-term opportunity in this asset class and want to remain in these buildings and in control of these buildings.

And so the thought of there being kind of a rent reset based just on current economics, I think, is somewhat misplaced.

So -- and you look at rent collection, and it remains very strong in this space as well.

So I think in general, there's no -- we're not here to say that the economics underlying these properties been challenged, and there will be certainly conversations around economics and the rental line and we were prepared to have those.

But at this time, I think the best we can do is continue to see where rents go and collections stay high, and we'll continue to observe that and report to the market.

And Sarah, as you think through, we're not obviously going to speculate, but as Tim talked about, that's how we think about it.

As you think through our numbers and try to get to your best guess, just remember, our reported numbers still include a very large tenant that we have already restructured and announced to the Street, which is Capital Senior.

That's still in those numbers.

They will be out in the next 2 quarters, but that has already happened.

Our last question comes from the line of Tayo Okusanya from Mizuho Capital.

Just a quick follow-up on the health systems platform.

Could you just help us understand at this point, I know there's a lot going on in skilled nursing and government funding?

But could you just help us understand specifically what you'd expect to kind of happen next from a government funding perspective?

We're just kind of hearing also from the states about Medicaid funding, just given all their budgets are pretty stretched right now because of the whole COVID issue?

Yes.

So Tayo, we're reading the same things that you are reading.

This is inappropriate for us to speculate on what additional government funding might be or might not be coming to the space.

So we'll just leave that for future discussions.

But we're encouraged by the support that post security industry has seen so far.

What about on the state level, just given a lot of them are setting the budgets right now.

Are you kind of hearing anything of any states actively set next year.

Just to have a good sense of what the Medicaid funding would look like?

Thank you for trying, Tayo, will remain the same answer that it is an inappropriate venue for us to speculate on future state government action as well.

Thank you.

I show no further questions in the queue at this time.

This concludes our Q&A session.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may all disconnect.