Welltower Inc (WELL) 2020 Q1 法說會逐字稿

Thank you for standing by, and welcome to the Q1 2020 Welltower Inc.

Earnings Conference Call.

(Operator Instructions) Thank you.

I would now like to hand the call over to Mr. Matt McQueen, Senior Vice President and General Counsel.

Please go ahead, sir.

Thank you, Andrea, 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.

Good morning.

I'd first like to say that I hope that you and your families are safe and healthy.

I know many of us have been directly impacted by COVID-19, and all of us have been indirectly impacted in some way which is having an overwhelming effect in shaping everything we are experiencing during this extraordinary period.

Seniors with multiple chronic conditions who populate our senior housing properties are vulnerable to any virus or infection, and particularly, affected by COVID-19.

Historically, our operators have implemented time-tested protocols for flu and infection control that have proven to mitigate the impact of prior influenza outbreaks.

However, we now know that COVID-19 is not an influenza outbreak, but has become a global pandemic.

Further, we have learned our society's ability to slow the spread of COVID-19 rests solely with social distancing measures, given the lack of vaccines or drug therapies.

The high level of personal care delivered to senior living residents, combined with the fact that COVID-19 can be spread by asymptomatic residents, family members and care staff, has resulted in many challenges for our operators.

As Shankh and Tim will describe, our business had a strong start to the year, but starting in mid-March, data began to show that the growing impact of COVID-19 would make this performance not sustainable.

In an effort to maintain transparency regarding our business, we have issued regular updates, which have provided context for declines in occupancy we started to see in late March that have continued through April.

Given the tremendous uncertainty we face from the business model built to own real estate that enables the health and wellness needs of vulnerable seniors to be met in residential settings, this morning's call will be more focused on steps we are taking to manage this uncertainty.

As Tim will discuss, we acted quickly to bolster our liquidity position.

We also took numerous steps to help support our senior housing operators, health system, post-acute care and medical office tenants through this unprecedented period.

For example, in March, we started to source and distribute much needed personal protective equipment or PPE for many of our operators and tenants who could not access, for example, masks, gloves, gowns and testing kits.

These efforts helped our operators and tenants to better protect their staffs and residents.

This is not what a REIT typically does.

But extraordinary measures are often needed in extraordinary times like these.

We told you in March that we would use data to guide all decisions regarding our business.

Therefore, occupancy declines within our senior housing operating portfolio, a continual increase in operator expenses due to staffing and the cost of PPE, rent deferment requests from medical office tenants and the impacts of a sharp decline in elective surgeries combined -- contributed to our decision to withdraw our 2020 guidance on April 17.

There is much outside of our control, but we are taking steps to manage what is within our control.

After a successful program to reduce overall G&A spend over the past 3 years, we believe we can lower G&A expenses this year by approximately $10 million to $15 million on an annualized basis by reducing compensation and non-compensation expenses.

Additionally, at this point, we believe that it would not be prudent to pay 100% of our dividend until we have more clarity regarding our cash flow for the year.

So we've decided to pay 70% of our pre-COVID dividend.

This was also a data-driven decision, but it was by no means an easy decision.

But, we believe this is in the best long-term interest of our shareholders.

Virtually overnight, COVID-19 has meaningfully impacted our business and changed our near-term objectives.

However, we remain committed to our long-term strategy of being an important platform and real estate partner for constituents across the health care continuum to enable them to more effectively achieve the goals of value-based health care.

Critical to our strategy is to focus on ensuring that the social determinants of health are met for all populations and especially for vulnerable populations like seniors.

Since we began to shelter in place, even the most resilient people have experienced challenges with basic social determinants such as sourcing groceries, medication, and isolation and loneliness.

Residential care concepts like senior housing allow these much needed activities of daily living to be delivered in consistent, supportive, efficient and cost-effective ways.

This is why we believe in the long-term viability of this business.

When COVID-19 is a bad memory, we will still need to meet the health and wellness needs of a rapidly aging population and to reimagine and develop a more sustainable health care delivery infrastructure.

That being said, we believe we are taking the necessary steps to navigate this uncertain environment and withstand the volatility presented by this pandemic so that we can meet this mission.

And with that, I will turn this over to Tim McHugh, who will take us through the financials.

Tim?

Thank you, Tom.

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

The early impact of COVID-19 on our tenants observed within the quarter and into April.

And finally, a capital activity and balance sheet update.

As a reminder to everyone on the call, Welltower removed all components of full year guidance in mid-April after reviewing our first month of financial results with the impact of COVID-19.

We believe the extent of COVID-19's impact on our portfolio will depend on many factors.

We cannot accurately predict the future implications this pandemic will have on our business trends at this time.

Although there is no assurance that we are currently experiencing peak impact as it pertains to both our business or the broader economy, we are hopeful that we are moving through the period of peak uncertainty.

And as that uncertainty diminishes, we'll be able to provide you more clarity on our outlook.

Moving to the quarter, Welltower reported normalized FFO of $1.02 per diluted share for the first quarter.

These results included a total of $7 million or approximately $0.02 per diluted share of unanticipated property level costs in our senior housing operating portfolio associated with the COVID-19 pandemic.

Welltower has elected to not normalize these COVID-related expenses from both FFO and same-store results.

Now turning to our individual portfolio components.

First, our Seniors Housing Triple-Net portfolio delivered 3% year-over-year same-store growth, and both occupancy and EBITDAR coverages were flat on a sequential basis.

As a reminder, our Triple-Net lease portfolio operating stats reported a quarter in arrears.

So these statistics reflect the trailing 12 months ending 12/31/2019 and, therefore, do not reflect any impact in COVID-19.

We expect our Seniors Housing Triple-Net operators to experience similar headwinds as our RIDEA operators during the second quarter.

Next, our long-term post-acute portfolio generated 2.6% year-over-year same-store growth.

And EBITDAR coverage declined by 3 basis points sequentially.

On to health systems, which is comprised of our joint venture with ProMedica.

As indicated on last quarter's call, EBITDAR growth was strong in the fourth quarter in this portfolio and subsequently, rent coverage improved 8 basis points sequentially to 2.14x.

Rent collection across our Triple-Net segments, including seniors housing, long-term post-acute and health systems, was consistent with the historical collections in the first quarter.

In April, we have collected 97% of total rents due.

Turning to medical office.

Our outpatient medical portfolio had another consistent quarter, delivering 2.1% same-store growth.

Our rent collection was in line with historical norms in the first quarter, and in April, we collected or approved rent deferral on 95% of our rent due.

Early on in the pandemic, we were in active discussions with our tenants that were most impacted by the considerable slowdown in the facilities-based revenue streams, most significantly, elective procedures.

We focused on providing 60-day deferrals spanning April and May, and as a result of these discussions, we've approved approximately 8% of our monthly rents for 2-month deferral plans with payback periods within calendar year 2020.

As of today, we believe approximately 25% of these deferrals will be brought current in the near term as tenants receive financial support and see operations begin to open back up.

Lastly, our Seniors Housing operating portfolio year-over-year same-store NOI declined 1.6% in the quarter.

A stronger-than-expected first 2 months of the year were more than offset by the negative impact of COVID-19 on both March occupancy and expenses, with approximately 5.2 million of unanticipated expenses occurring in the property level within our same-store pool.

As a reminder, we did not normalize COVID-related expenses out of our same-store metrics.

Turning to April, and as highlighted in our business update presentation released alongside our earnings last night, we experienced an acceleration in the occupancy pressures that began in March as total portfolio occupancy fell 240 basis points in the month of April versus a 70 basis point decline in March, driven primarily by a significant decrease in move-ins as outright admissions bans became more common across our portfolio at the start of April.

We expect these occupancy declines to continue throughout the second quarter, with occupancy expected to decrease 500 to 600 basis points by June 30.

We intend to continue our periodic updates throughout the second quarter to help investors and analysts better understand these trends.

Before turning to the balance sheet, I wanted to make one final point on same-store.

As I alluded to last quarter and as shown in this morning's 10-Q, we have aligned our Q and K disclosures of same-store with our supplemental disclosures, but the only difference is being the normalizations that we detail on Page 22 of our supplement, consistent with historical disclosure practices.

Now on to the balance sheet and capital activity.

I want to move through these highlights in 2 distinct sections.

First, our balance sheet, focusing on both liquidity and leverage; and then capital spend as it pertains to investments, developments, CapEx, corporate overhead, and lastly, our dividend.

Starting with capital market activity.

In early March, we obtained commitments for a 2-year unsecured term loan of $1 billion, bearing interest at LIBOR plus 120 with the right to further upsize the borrowed amount by $200 million.

We've closed on this loan on April 1, and the loan will be drawn in the second quarter.

During the quarter, we issued approximately 2 million shares via our DRIP and ATM forward programs at a weighted average price of $83.94 per share for estimated proceeds of $171 million.

At the end of the quarter, we settled these and all prior forward sale agreements totaling 6.8 million shares and average price of $86.48 per share for $588 million of gross proceeds.

The settlement of these forwards, this brings Welltower's equity raise via DRIP and ATM since the start of 2019 to $1.7 billion at an average price of $80.64.

Following these activities and as of May 4, we have approximately $2.36 billion of capacity under our $3 billion unsecured revolving credit facility, $1 billion of capacity under our undrawn term loan, and cash and cash equivalents of $348 million, totaling just over $3.7 billion of liquidity with no unsecured debt maturities until 2023.

Turning to leverage.

We ended the quarter at 5.93x net debt to adjusted EBITDA, a 44 basis point sequential decrease from year-end.

Although we expect EBITDA to experience more bearing in the coming quarters due to the impact of COVID-19, we believe our leverage position entering this challenging period as well as our liquidity position will allow us to endure this period of uncertainty.

Moving to capital spend and starting with investments.

In the first quarter, we completed $398 million of acquisitions across 4 separate transactions at a blended yield of 5.6%.

We have no further material acquisitions under contract for the remainder of 2020.

On the disposition front, we completed $781 million of pro rata dispositions, including $64 million related to a disposition of an unconsolidated equity investment during the quarter.

We anticipate another $386 million of property sales during the remainder of the year, including $121 million of sales and the final 2 tranches of our Invesco JV, the first of which closed in April for $74 million.

Moving to development, we completed the $141 million of development spend in the quarter.

We expect development spend of $463 million for the remainder of the year and then only $178 million of spend beyond 2020 to complete our current pipeline.

The large majority of our development pipeline in the final stages of construction, we continue to view these developments as excellent uses of capital and as a medium-term source of natural deleveraging as they begin to produce cash flow over the next 24 months.

Turning to capital spend on our existing portfolio.

We anticipate reducing our CapEx by approximately $90 million from our initial budget for 2020.

This will be accomplished from a combination of tighter restrictions on project work during the pandemic, deferred leasing capital on outpatient medical as leasing activity slows during the same period, and also some delaying of larger capital projects across all asset types until we have more certainty around our outlook.

Now on to corporate overhead.

I first want to start by acknowledging the incredible work done across our organization over the past 2 months.

We've spent considerable time over the last 4 years focusing on lowering the run rate costs of managing our business on behalf of shareholders.

Our core initiative in this pursuit has been the operational efficiencies gained through streamlining reporting systems.

And although we certainly did not have this current pandemic in mind when we were designing these processes, it has certainly paid off as our accounting, FP&A, tax and treasury teams, amongst many others, have done a tremendous job keeping our organization functioning at a very high level while working from home.

On the corporate overhead front, we've lowered our expectations for full year G&A to between $125 million to $130 million versus our prior guidance of $140 million.

This reduction is being driven by expected reductions in management and incentive compensation, reduction in travel expenses and new hires, and a minimization of all discretionary corporate spend.

Lastly, as announced in last night's earnings release, we have decided to reduce our quarterly dividend to 70% of our pre-COVID quarterly dividend levels, resulting in a $0.61 per share dividend declared last night.

Given the uncertainty surrounding the short and long-term impact of COVID-19 in our business and the broader economy as a whole, we felt preserving liquidity by reducing our second quarter dividend to better match our near-term expectations of underlying cash flow was the most prudent way for us to maximize balance sheet stability as we navigate these unprecedented times.

We expect to further evaluate our long-term dividend policy as the year progresses.

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

Thank you, Tim, and good morning, everyone.

I will comment on our operating environment and follow up with our thoughts on capital allocation.

When we last spoke with you on our Q4 earnings call, we had a bullish outlook for the business, with our SHOP portfolio gaining strength, our MOB portfolio retooled and executing on leasing, and significant relationships with health systems were formed.

In January and February, we delivered results that were ahead of this bullish outlook.

And then with a flip of a switch, our business changed in March due to COVID-19.

If you pass through our Q1 SHOP results, you will notice that despite the impact of COVID-19 in March, we still delivered a 3.6% same-store RevPAR growth for the quarter.

That indicates to you how strong this year could have been if COVID-19 didn't happen.

But COVID-19 did happen.

And there is no question that our operating earnings will be considerably lower as a result.

Densely populated coastal markets have consistently helped us to maintain strong pricing power in our SHOP business.

Unfortunately, many of these markets have also become hotspots for the virus.

On the positive side, we are starting to see some relative stabilization in the Seattle area where pandemic had started.

But on the other hand, we're seeing New York, New Jersey getting hit hard with no sign of stabilization just yet.

There are 3 topics that are top of our minds as far as operations are concerned.

Number one, resident safety and employee safety.

This is the highest priority for us and our operators.

Tom discussed how swift actions we have taken on PPE side.

Two, labor.

In the short term, we're experiencing elevated expense levels, as Tim described, though we are encouraged by the expanded labor pool's interest in our business as seniors housing is one of the few industries that is hiring today.

And three, leasing velocity and occupancy.

We have provided you the details of occupancy decline since COVID-19 breakout along the way through our business update.

We lost approximately 70 basis points of occupancy in March, 240 basis points occupancy in April in our total SHO portfolio.

Occupancy will continue to drop until our operators lift admissions ban.

It is challenging to predict exactly when that will take place.

I have discussed with you the details of our SHO portfolio construction and how portfolio's diversity of location, acuity, price point, et cetera, results in lack of a correlated growth amongst our different operators.

We have tested these models again and again and sensitized for business cycles and even debt supercycles.

However, what we are faced with today is a once-in-a-century pandemic, which has led to a perfect storm of an entire economy effectively sheltered in place and a virus that disproportionately affects our frail senior population.

The result is a closing of the front door of many of our communities across the portfolio.

And with that, our diversification benefit has been compromised.

But we remain committed to our long-term strategy and portfolio construction.

On the asset side, we cannot manage a portfolio for once-in-a-century black swan pandemic event that's why we maintained meaningful financial flexibility on the other side of the balance sheet in terms of liquidity, leverage, debt maturity, meaningful unused capacity of secured debt, particularly those available from GSEs and [CMHC] should we get asset mix wrong at a given moment in time.

And in this context, let's not forget seniors housing is also a form of housing and has broader access to debt capital than most other forms of real estate.

As we sit here today, we see a wide range of outcomes, both with the pandemic and with the economy.

The range of outcomes has somewhat narrowed on both of these areas as infection curve has started to flatten and the Federal Reserve's forceful intervention in late March has started the flow of credit again.

The range of outcome still remains meaningfully wide, and we will continue to maintain significant financial flexibility until we have further clarity.

As Tom and Tim discussed, distributing out majority of our cash flow in this uncertain environment with a wide range of outcomes is not a prudent capital-allocation decision at this point in time.

This retention of cash flow is obviously an extremely positive -- credit positive event in the near term, but we also think it will turn out to be a very positive outcome for our continuing shareholders, as it puts us another step closer towards playing offense and helps us avoid dilutive capital raises that we have observed coming out of the last cycle.

In the last 2 months, which feels like a lifetime now, all of our capital-allocation activities can be thought in 2 distinct mental models: short-term defense and long-term offense.

Short-term defense.

We acted swiftly to arrange term loan to bolster our liquidity, settled our forward equity program, completed many in-process dispositions and pivoted away from our acquisition outlook.

All of these actions were done with a view to respond defensively in a short -- really short period of time.

We are working with our operating partners to fine-tune our CapEx spending for rest of the year, working through our leases with tenants across all 3 lines of our businesses and executing our long-term business plan with different operators in certain select assets where it's appropriate.

We're also contemplating a number of development -- we're also completing a number of development projects in 2020 which you know is the last year of our significant committed development spend.

We're not done with this work stream by any means, but we made significant progress in this area of short-term defense.

Long-term offense.

This work stream is now under progress but is by design, behind the previous set of actions.

We're focused on our portfolio, both in terms of refinancing and recapitalization and starting to contemplate what opportunities might emerge for us to deploy capital.

Asset values have clearly come down from pre-COVID levels.

We just don't know to what extent yet.

As we highlighted in our earnings release last night, a large seniors housing transaction that we discussed on our last call after the purchase and sale agreement was executed eventually did not close.

The post-COVID world is more uncertain, and we understand that people get cold feet.

That near-term uncertainty has an impact on asset pricing.

That is true for all the assets that we might be a buyer as well.

We have always been price-sensitive and will continue to be even more so going forward.

We remain excited about the prospects of our industry with a great demographic tailwind, especially in light of near-term supply, which should decline substantially.

Any incremental capital we deploy will be done after maintaining a sound balance sheet, ample liquidity and a laser-focused attention on price with a margin of safety.

I would like to conclude by saying COVID-19 has created a very challenging backdrop for us.

While we cannot control what happens to macro environment around us such as the pandemic, we can control how we respond to it.

You, as our shareholders, employ us as the managers of the business to make capital and resource-allocation decisions to create long-term value per share for continuing shareholders.

We described the capital-allocation decisions we have taken so far, and there are more to come.

I hope our actions to prudently allocate resources to further bolster our cash flow by reducing G&A, a significant portion of which will come out of management compensation, is a reflection of our alignment with you.

This year has been a painful year for our shareholders, and we are stepping in to share that pain with you.

We ourselves are shareholders in the business and think of the stock we own as the ownership and partnership interest in the business that you all collectively own.

We value this business on long-term occupancy, cash flow and margin, subject to a floor of replacement cost of the physical real estate, not just to move around that gets valued and marked by -- marked every day by whoever wins the contest of exposure popularity or earnings prediction for the next quarter.

Uncertain times are unsettling, but they create opportunity to create significant value for our shareholders over the long term.

With that, I'll pass back the mic to Tom.

Tom?

Thanks, Shankh.

Before we open the line for questions, I just would like to say that I'm very fortunate to work with such a team of talented and dedicated individuals who are coming together during the harshest of circumstances.

All of you know it's not easy to be working remotely and having a team that's used to being together and work remotely.

Yet the entire Welltower team has proven their commitment to our company's goals and are playing a critical role in our long-term success, and I could not be more appreciative of their efforts.

I'm happy to share with you this morning that our Board recently moved to recognize 2 of our most trusted leaders.

As a result, Shankh Mitra has been named Vice Chairman and Chief Operating Officer in addition to his role as Chief Investment Officer; and Tim McHugh has been named an Executive Vice President in addition to serving as Chief Financial Officer.

Shank and Tim are being recognized for their intellect, experience, broad internal and external leadership and dedication to Welltower.

I'm extremely grateful and proud to work shoulder to shoulder, albeit virtually now, with both of them every day as we navigate Welltower through a period of great uncertainty toward brighter days ahead.

So before we open for questions, I'd just like to say that we ask that you please limit your question to 1 question.

And if you have another question to please jump back in the queue because a number of analysts have asked that we -- they may have to jump off the call a bit early because of the number of companies reporting today.

So I ask you to please adhere to that.

And with that -- and we'll stay on to answer all your questions.

So with that, I'll turn -- Andrea, you can open up the line.

(Operator Instructions) Your first question comes from the line of Jonathan Hughes with Raymond James.

When I look at the SHO portfolio occupancy trends through May 1 and compare that to what you expect by end of June, it seems like things are expected to be less worse in May and June.

But then in the slide deck, you say in a number of communities that move-in restrictions is expected to rise.

Can you just clarify these seemingly conflicting statements and maybe give any commentary on occupancy or expense trajectory beyond June, assuming the trends do match what you're projecting for this month and next?

Jonathan, I'm going to have Shankh to answer that, but it's going to be -- it's very hard for us to predict anything beyond the second quarter.

But Shankh, why don't you jump in and give your thoughts?

Yes, so Jonathan, we -- as you know that we are expecting 500 to 600 basis points of occupancy decline for the second quarter.

And that should be seen with obviously coupled with the comment that's right next to it about our comments on pricing.

So obviously, those 2 are interrelated and should be seen as together.

But obviously, the fact is, right now, majority of our communities, almost half of it is completely shut down from new admissions' perspective and others are, relatively speaking, behaving like they were shut down, at least in the month of April.

We're starting to see buildings or are at least starting to open up.

Communities are starting to accept new residents or we're having conversations with where our operators are telling us that they're optimistic their buildings will start to open sometimes in May, sometimes in June.

But I want to remind you, this is obviously a decision of our operators, and it's taken at the ground level, community by community.

So we're telling you what we are hearing, but if we knew exactly what will happen, then we would not be taking the decision that we have taken with our dividend and with our guidance.

So understand there is significant uncertainty.

And as we know more, we will, as Tim said, we will let you know more.

But we're telling you what we are hearing from our operating partners.

Your next question comes from the line of Steve Sakwa of Evercore ICI.

I just wanted to try to understand a little more the dividend reset and how the $0.61 was maybe arrived.

I'm just trying to figure out if that's tied to thinking about taxable net income in a specific way or how the SHO portfolio may trend and whether there could be maybe a true-up dividend at the end of the year to get you to taxable income or maybe even a further cut.

I'm just trying to understand how the 30% was sort of arrived.

Yes, Steve, this is Tim here.

I'll take that.

So you're correct in thinking through this from the dividend, largely following taxable book income as part of kind of REIT rules.

Our view is that -- I mean not our view, our expectation is that taxable book income will largely follow profitability.

So there shouldn't be a large gap between what you see on the operating performance side and what ends up being kind of taxable income for the year.

So you should think, without getting too much into kind of how those 2 things might be slightly different within any given period, you should view the dividend cut is just being more a review on our -- on the management team view of where short-term cash flow's gone.

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

So I guess there's a lot of uncertainty on the SHO side, and I -- it's tough to predict out more than the quarter.

But can you maybe give us some color on how you're viewing the Triple-Net portfolio?

How underlying performance is relative to the SHO portfolio recently and the potential need there for restructurings?

Yes, Vikram, Tim here again.

I noted in my prepared remarks, and what we -- what we're -- how we're kind of thinking about that is Triple-Net or RIDEA is the same business in a different financial structure, right?

And we've spent a lot of time talking about there being differences in our ability to control CapEx, various reasons why -- how our businesses evolve as we've become an owner of RIDEA properties in larger part versus Triple-Net properties.

But the underlying businesses are largely the same.

And the day-to-day business that goes in those facilities is the same.

So we expect the performance of assets within the Triple-Net to be very similar to the RIDEA.

Obviously different according to different types of facilities, different geographies, et cetera.

But our expectation is that the Triple-Net fundamentals very much follow the fundamentals from RIDEA side.

And as we kind of think about that in terms of how that impacts financials, I think the most conservative way to think about it is that long-term rents in any Triple-Net are going to follow the economics of the buildings.

There's a lot more complexity to forecasting that than there's RIDEA where if we think about fundamentals and how they flow, we'll see that go one-for-one into our financials.

And I'll just say that we've been -- we mentioned rent collections in Seniors Housing Triple-Net to this point have been strong.

And it continued to be even into May.

And I think that we have not entered any deferral programs.

We'll continue to update the market as we kind of think through that.

But there will be, I think, some difference between kind of how those rent checks come in and underlying EBITDAR for some period of time.

And it probably matters on the duration of weakness and the extent of it to how -- if any restructures occur, how and when they occur.

Vikram, I'll add a couple of -- 2 more points to that, just to give you some more color.

First is our Triple-Net portfolio, geographic, obviously, very different from obviously our SHO portfolio.

And if you think about the biggest impact of where COVID happened is primarily coast to coast, right?

So a lot of other markets obviously not similarly hit.

But that will be one source of differentiation.

The second source of differentiation, as you know, in the Triple-Net lease, very simplistically speaking, right, your cost is relatively known to the landlord that you write a check and you collect every dollar of cash flow after that.

So if you're an operator and you have collected every dollar of cash flow above that, you have intrinsically assumed that you have the risk both up and down.

That is what the structure is.

Now how we view some of these situations, depending obviously on duration of the spending and the effect of the spending, et cetera, but how we'll act will depend on what we think of you, just as we did with the Triple-Net lease between Welltower and you, how -- what is our thought on you as an operator?

If you think that you're a good operator in your market, and this is a pretty unfortunate event that happened for one time, then we'll act one way.

If you think that you are not a good operator and have never been a good operator or it's not -- we don't see eye to eye on how the business should go forward, then it will be hard for us to tell you the upside is yours and downside is all our shareholders.

That's not how we think.

And so it is going to be a much more nuanced answer that will be based on case by case.

Your next question comes from the line of Michael Bilerman with Citi.

I don't know if it was Tom or Shankh that you mentioned you don't run your business for 100-year century type event.

But I guess with the mindset of what has occurred, do you think about portfolio diversification in terms of the level of senior housing assets that you have, both within SHO as well as net lease as a percentage of the total, especially as -- especially on the IL side and much less need based than your skilled or your higher acuity assets.

And whether you'd want to pursue a more broadly diversified health care portfolio that's more equal weighted across the number of different health care verticals and how does going through this experience, even though it hasn't happened since the 1918 Spanish Flu.

Does it change your perspective of how you want to have your diversification by health care type?

That's a good question, Michael.

Let me start off.

Look, we still believe that because of the aging of the population and because of the needs of a population seniors who are going to be living longer, we are still committed to models that bring those seniors together in settings that can better manage their needs, whether they are less acute or more acute.

So we -- while we are sitting at a moment in time that, that is challenging that model, we think -- we don't think there's a better alternatives longer-term than putting seniors in environments where -- you hear me talk about this a lot.

Their social determinant needs can be met effectively and cost efficiently.

At the same time, we're opportunistic, we're capital allocators and we look across all sectors of health care.

I would say that prior to the last 2-plus months, you saw us making progress with a number of our health system initiatives which would have started to bring in more diversification into our portfolio.

Remember that the nation's health systems are thinking very differently about where they will provide their services in the future, what different settings outside of the hospital.

And many of them are aligned with us about settings that where they can better deliver services to seniors.

So we're very much still committed to the senior business because we think it has the biggest impact on the future of health care.

Shankh, do you want to add anything to that?

Yes.

Michael, a couple of more granular points.

First is the Welltower's portfolio is primarily a need based portfolio, except -- I mean when I say U.S. our portfolio.

Our U.S. and U.K. portfolio is primarily a need based portfolio.

We have a couple of operating partners who are primarily independent living provider in the U.S., which we also think that in right markets with the right operator can be a very good business.

But generally speaking, our U.K., U.S. business -- our U.S. and U.K. business are need-based business.

Our independent living exposure that you're talking about is primarily a Canadian business.

And we think that business is a very different business.

We think that business is a housing alternative business and that will continue to do well.

If you ask me today, that where is the biggest opportunity as we see, price aside, you know that first thing we think about is price, and we're a buyer of everything at a price.

Price aside, all things being equal, I think there is no other real estate asset class that I know of that has a better opportunity to create long-term value than senior housing.

So price aside, if you told me that I have $1 to invest, where would I invest on all health care asset classes, given what the returns are going to be, where total return investors, I fundamentally think that will be senior housing.

So if anything, our exposure, we'd like to take it up, not down.

Now again, that's the price aside comment.

Our next question comes from the line of Rich Anderson with SMBC.

My question is perhaps more big picture.

I wonder if you would at least be open to the possibility of a fundamental change in the back end of this, particularly senior housing into skilled nursing, where social distancing may be here to stay in some form and how that might manifest itself in the business longer term.

Shankh, your comments about no better asset class and perhaps that will prove to be a very reasonable observation longer term.

But will there be an incremental frictional vacancy within the 4 walls of these asset classes?

And are you giving that any thought or is it just too soon to know if there will be some sort of fundamental change.

It's hard to imagine we would go through all this and there's not going to be some fundamental change to how these businesses operate at the back end of all of this.

Yes, that's a fair question, Rich.

Look, it's hard for us to make predictions right now based on what we've been dealing with in the pandemic.

Well, I think that there will be fundamental changes in the service model and the asset positioning?

Somewhat.

I mean we were headed there particularly with technology companies.

And I think there's going to be more new technologies that will enter senior living buildings, that will essentially create tremendous efficiencies and mitigate some of the risks that we're seeing today due to an infection or a viral outbreak in buildings.

I think it's very early to say if social distancing is going to be the way of a future.

I mean, that's a -- if that's true, if we're going to live in a world where we have to stand 6 feet apart from each other, I think every business is going to be challenged.

And -- but I'm hopeful that's not the future.

I'm hopeful that we will get through this period and come back to the types of models that have been evolving to manage what is still one of the biggest demographic issues we've seen, which is the aging of the population.

And I also believe a health care system, a health care delivery infrastructure that will have been compromised by this pandemic.

And we already know that many leaders of health systems are thinking very differently about the setting in which they meet their constituencies.

So Rich, it's very early to say.

I'm hopeful we don't live in a world where we have to stand 6 feet apart from each other long term.

Shankh, you have anything to add.

Rich, if you think about we're always data dependent and if we're always open to the possibilities, if that was your question, we always are.

If things change, we will change.

But I can tell you if you read the letters that we receive, our operators receive and that they share with us, sometimes we receive together about what our customers are saying and what we think is the pent-up demand for this business is we do not believe that's happening.

If anything, I'm not sure you saw -- or you read about Governor Cuomo's presentation yesterday.

Majority of the people, at least in New York, where this data is published with COVID coming to hospitals are coming from homes.

Only 4% of the people who are coming to New York hospitals are actually coming from assisted living.

That tells you that our industry is doing something right.

Now if things change, we will change.

But we believe that our operators and all of our people in the front line are doing an amazing work to keep our residents safe.

There's obviously no guarantee.

Pandemic is everywhere.

That's why it's called pandemic, right?

But all seeing -- when that's all done, when -- and as Tom said, when COVID is a distant memory, it might prove out to be the other way too.

But we are always open to facts, and we're always open to new possibilities.

Your next question comes from the line of Todd Stender with Wells Fargo.

I hope everyone is well.

In Seattle, Shankh, you're seeing improvement or stabilization.

However, you characterized it.

Is it occupancy?

Is it prospects of move ins, expense control?

Just trying to get a sense of how close or far away you are from seeing any signs of improvement in the New York, New Jersey area.

So Todd, in Seattle, in the beginning of this, Seattle fell off the cliff at the beginning of this when we started giving you obviously all these updates.

Occupancy was going down 90, 100 basis points a week.

Now we are seeing occupancy is going down more like 30, 40 basis points a week, something like that.

So it is still going down.

But obviously, the second derivative improved significantly.

All I was pointing out, on the other hand, in New York, you have seen the infection curve has flattened and it's coming down.

But it's sort of -- it's still pretty peak panic here.

And obviously, all the states are not open yet.

And when that happens, obviously, we'll see the impact on occupancy.

But I was trying to drive sort of 2 distinctions.

It is purely a function of not only the psyche of the consumer but also how safe our operators feel.

I'll give you an example.

One of our worst-performing markets today is L.A. Southern California has been years in years out one of our best performing markets.

And why is L.A., which is not, as you think, it's probably -- you don't think about L.A. today as sort of the most impacted, COVID-impacted market.

It is meaningfully impacted, but that's not sort of what you call the eye of the storm.

The reason being all of our operators have buildings, admissions bans everywhere in Southern California, in L.A. particularly.

So it is a function of when our operators feel safe enough to open the buildings for new residents.

And when that happens, you will see occupancy will come back.

It is hard to say when that will happen.

I will give you some more color for you to think about.

Four weeks ago, when we were seeing occupancies going down, so let's call it 60 basis points, whatever we said in our business update, all our operators were coming down significantly, right?

I mean, it's happening across the board.

You see the first impact.

Whoever moves out, moves out.

And obviously, buildings are shut down.

Now we're seeing more nuanced approach and difference of performance.

We're seeing some of our operators have flattened out, literally flat.

We are seeing a couple of our operators are starting to gain occupancy as they have started to open some of the communities, particularly as of May 1. So they are more nuanced location by location, uncorrelated performance that's based on demographics, psychographics and supply of a given location is starting to happen.

But it is too early to say when that will completely manifest and we get back to the norm.

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

Shankh, in your prepared remarks, you kind of commented that there might be some investment opportunities as the result of this.

I mean how should we expect that Welltower is going to pursue those types of deals?

Do you want to wait until the market stabilizes a bit until you actually have some clarity of what's actually going on?

Or you be more opportunistic to find some distressed opportunities?

Thank you for that question, Mike.

So clarity often comes with a price, right?

When you mean clarity, you probably mean that when we have clarity, we have a line of the goalpost of what we know, what will happen to the NOI.

That is generally true for majority of the businesses.

It doesn't have to be true for real estate.

You know what it costs to build a building in a given location.

So if that's the case, you can bake in what is the price per door, price per foot of a specific opportunity, and then you can have enough margin of safety that you don't have to know what will be the NOI next 3 months.

We have never bought buildings that way.

We have our view of what is the margin, occupancy and obviously pricing of a building should be with our operators and specific with us -- one of our specific operators, and we will act accordingly.

But it has to be priced in so that we can take that near-term uncertainty to create long-term value.

Your next question comes from the line of Derek Johnston with Deutsche Bank.

Tom, you mentioned hospitals.

So the CARES Act has essentially provided the federal backstop to hospitals.

And we feel deem them critical infrastructure.

Does this change your view at all on the future of hospital investments within the overall health system?

And secondly, do we still have too many?

I think there are still too many hospitals in the U.S., and I think you're going to continue to see consolidation.

I think that it's very interesting.

If you look at the hospitals, Derek, you've got many of them who are operating at 50% capacity because elective surgeries have fallen off the cliff, and they've not had as many COVID cases.

So it's a very challenging time for the health systems.

And I -- again, it's very hard to predict the future based on where we sit right now in the middle of this pandemic.

But I don't -- I think, ultimately, we have -- you're going to see broader outpatient strategies by health systems, a movement away from the hospital.

At least that's what we're seeing from our conversations.

And obviously, our health systems are on the front line of the COVID-19 pandemic, and the government has responded by supporting them through this.

Because their beds are filled with people, many health systems in the hotspots are filled with people with COVID and they do not have the elective surgeries.

And a lot of those are being pushed off.

It's a real -- it's created a very challenging environment for our health systems today.

But again, Derek, I wouldn't, again, make too many predictions based on the COVID-19.

I think it's going to badly damage a lot of health care infrastructure.

But I think to a large extent, it's going to have to be rethought and reimagined.

So again, hard to make any predictions, but I would say that we still, from our conversations, we think health systems are looking to deliver their services basically outside of the 4 walls of the traditional acute care hospital.

Our next question comes from the line of Jordan Sadler with KeyBanc.

Just wanted to touch on sort of green shoots, if I could.

I know it's way, way too early.

But can you maybe just point to sort of the best story in the portfolio?

And what you're seeing?

I think you did highlight Seattle, but anywhere else that's sort of maybe driving what seems to be a little bit of optimism, at least in the occupancy forecast for May and June in the SHO portfolio?

Just tell us what's happening.

Yes, so John, I know you know this.

I know we have said this many times, I'm going to have to -- I'm going to say it again.

It is too early to comment what -- how things are going to play out.

If we knew exactly what is going to happen, we would not have done what we have done by reducing the dividend, right?

I hope you acknowledge that.

Having said that, I can tell you, there are 2 types of stories.

One I mentioned, we're seeing across the board, this is not just a Welltower comment.

I think you have to acknowledge how hard people on the frontline are working to keep our residents safe, provide all the assistance of daily living, it is very, very hard.

And we are seeing all these letters that are coming from our operators, were sharing with us all these letters where residents and their families are thanking our operating partners, how much that means to them and how good they feel that they're taken care of in this kind of when this pandemic goes on.

That tells us the product, there's a true need for the product.

Now as I told you that we -- the moment one of our operators opened a handful of buildings on May 1, the moment that building opened occupancy went up on that day 50 basis points, right?

I had a conversation a couple of days ago with one of our operators, one of our best operators in the New Jersey, New York market, and the CEO told me that if she opens up buildings today, the occupancy can go up by 300 basis points.

There is that much pent up demand.

I'm not trying to tell you that it's true for every building.

I'm not trying to tell you that will happen.

The moment all these communities open, occupancy is going to go up by 300 basis points.

You asked for a positive story.

I gave you a positive story of what we are hearing.

It is too early to say how things will play out.

If we knew exactly how it will play out, we will not be doing what we just did.

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

I just had a question about some of the normalizing adjustments you guys have for FFO.

So you had a straight-line rent receivable write-off that -- in conjunction with an amended lease.

Trying to understand what's that related to.

And then the provision for loan losses that you booked, I think it was related to your non-real estate loans.

Can you just talk about what's going on with the loan book?

And just remind us, those are corporate loans to operators?

And how should we think about what is actually cash income that you're receiving from your broader loan book this year?

Yes.

Okay.

On the normalizing.

So we -- earlier this quarter, Capital Senior announced agreement that came with a couple of other landlords on top of, I think, when they had come to prior with the third landlord.

We're one of those landlords.

So as part of that, we restructured our lease with them into essentially runs through year-end.

And then the properties will be transitioned.

So the write-off there is due to just the straight-line from the remainder of that lease.

So that was Capital Senior restructure.

And then the provision for loan loss was not a write-off of the actual loan, but it's -- we've impaired the loan under just a change in our view on collectability.

And it's -- you're correct, it's a corporate loan, it's working capital loan.

Part of the loan book that we've continued to shrink meaningfully over time is the non-real estate backed loans, partially for this reason.

They're obviously a bit riskier than your real estate backed loans.

And on kind of cash versus GAAP, we give -- in our supplement on the NAV page, we break out cash interest rates versus any pick or noncash interest we're receiving.

So that should give you a pretty good idea of kind of the run rate on -- from both a cash and a GAAP standpoint.

Our next question comes from the line of Lukas Hartwich of Green Street Advisors.

For the SHOP development pipeline and the unstabilized but recently completed projects, I'm just curious how you're thinking about the change in the trajectory of lease-up there.

Lukas, the lease-up definitely obviously will be slower than what otherwise would be if COVID didn't happen.

We do think they are very strong properties in very strong locations.

I can walk through property-by-property and tell you how many deposits we have, et cetera.

But the matter of fact is, obviously, people need to get into the building for, obviously, that to become a revenue stream.

And in this uncertain times, that's obviously not happening.

Post-COVID, they will get back, obviously, to the leasing velocity, but this is -- there's no question that lease-up what we thought before COVID will be slower.

So you can sort of move back everything, whatever number of months that you thought it will take.

You'll just have to move the number of months, you will think that COVID will exist, added to that, and we will probably get to the similar results.

Maybe there will be some pent-up demand, but I think it's safe to assume that it's pushed out.

Your next question comes from the line of Tayo Okusanya of Mizuho.

My question had just to do with capital allocation.

Again fully understand today the goal is to kind of preserve as much liquidity as possible.

But as things start to look a little bit better whenever that is, can you just talk a little bit about how you would prioritize capital allocation decisions?

Is it back to acquisitions?

Is it the share buyback that maybe become more attractive at that point?

Is it reestablish?

Is it increasing the dividend?

I'm just kind of curious when you kind of think about your liquidity position when the time is right, how do you kind of think about deploying that.

Yes, Tayo, that's a really, really good question, one of the most important questions that we are focused on today.

I laid out on my prepared remarks, how we are thinking about getting on offense.

Everything we buy is a matter of, obviously price and embedded IRR into it.

As we sit here today, there is nothing we see on the investment side that is more attractive than the stock.

And that might change tomorrow, that might -- we might see opportunities that are very different tomorrow but as we sit here today.

And if you -- I know you were asking about obviously liquidity, so I'll give you a more comprehensive answer on how we're thinking about buyback because that's probably is helpful for everybody to think through.

As I mentioned in my script, we believe a stock is a fractional ownership in a business.

It's not a ticker.

I described to you how we're thinking about allocating new capital and getting on offense.

That applies to new opportunities as well as the opportunity we know the best.

That is our own company.

We think buyback should be, number one, price sensitive.

It should be only done when we think we can do that below what the business is intrinsically worth, and which, as we discussed, should be pretty simple for a real estate company like us with a fairly good estimate of replacement cost on price per door and price per foot basis; two, it should be need sensitive, should be done keeping our balance sheet sound and after intelligent growth prospects are met; and number three, it should be to the advantage of continuing shareholders.

So as you know that we did not buy back stock when it was fashionable to do so and lots of S&P 500 companies are doing it at the top of the market cycle.

In fact, we sold billions of dollars of stock to grow our company.

We're not contemplating buying back stock to financially engineer our earnings so that we can get paid.

Just the opposite.

We just described to you significant management compensation reduction today.

At this current state of uncertain world, we believe that buyback is more intelligent form of capital return method than distributing all the cash from the business in form of dividend.

But as we said, we'll not leverage up the balance sheet at this point to take that liquidity and buy back stock.

Hence, we need to source other forms of liquidity from our own assets.

If we do believe that this management team is capable of executing such transaction during this pandemic, then you should think that we'll buy back stock or deploy that capital for other acquisition opportunities.

If you don't and you think that the market is too uncertain, and we can't get the liquidity from somewhere else, then you should not think that we'll deploy cash, buyback or not.

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

Regarding the Triple-Net portfolio updates on Page 11 in the slide deck, that's definitely helpful, and just regarding the health systems in particular regardless of what's happening operationally in the memory care assets, just curious if you're able to provide a little more color on the financial health of ProMedica overall beyond 1Q '20.

And when thinking about the low 2s EBITDAR coverage ratio that you showed, is there any color you have from ProMedica whether these federal stimulus payments that they're receiving in April and May are offsetting hopefully the majority of the operational softness that they might be seeing in their acute care hospital opportunities in the second quarter?

So I'll take that, Steve.

It is extremely inappropriate for us to get into the details of ProMedica financials.

Given that it's a company with obviously have a lot of bonds outstanding.

I will tell you that ProMedica is in a fine shape.

Your assessment is generally right in the direction that there will be, obviously, as you know, all the elective surgeries stopped.

Obviously, the post-acute side of the business and the senior housing side of the business got impacted.

On the other hand, they have a very large insurance business which obviously is working in a completely -- performing in a completely different direction.

Regardless, your general assessment that any operating weakness should be offset by what any system, whether ProMedica or not should be receiving from the CARES Act directionally is right.

But it is not appropriate for us to get into more details than that.

Our coverage does not include obviously any of that and primarily because it's a coverage, as Tim said.

All our coverage reported are on a 1 quarter lag and this is the actual operating performance of what happened in the buildings as of December 31st.

Well, maybe the simpler question then maybe is just on the overall list of things that you might be worried about right now in the overall business, where do ProMedica and memory care rank right now, low or high?

I'm guessing it's low, but I just want to check the box on that.

We're worried about everything.

But on that line, it's very, very low.

Your next question comes from the line of John Kim of BMO.

I guess a similar question on any commentary you could have on financial health of your senior housing partners, whether it's SHOP or Triple-Net, whether it's the ability for them to receive any government assistance.

And if not, are you contemplating any financial support outside of a rent cut?

I'll take that.

John.

We think our obviously an ideal structure our operating partners do not have.

That's not a financial liability.

So if you look at this -- I'm glad you asked this question.

If you look at the balance sheet of the large operators this cycle versus the last, it's in a meaningfully better position.

So that's sort of one general observation.

On the second, where there is a lease with an operator, which is obviously a form of leverage, I already had the discussion in response to another colleague of you asked the question how we're thinking about Triple-Net.

So I'm not going to get into that.

But generally speaking, other than that, right at this moment, we are not contemplating anything else.

And your final question comes from the line of Derek Johnston of Deutsche Bank.

It seems so far that Welltower has fared favorably in COVID-19 containment versus other senior housing peers, let's say, with less resources.

So how are you planning on marketing your core SHO competencies, really to capture outside or outsized or maybe even pent-up demand once admission bans end and basically go on offense.

So Derek, it's very much at the hands of the operators.

We are not -- we don't promote individual operators.

That's their business.

I do think as they have good data to show, that will be very helpful.

I think that the industry is gathering together, which is, I think, an important piece here to promote what good is happening throughout the senior living industry.

A lot of the media attention has been focused on negativity on some tragic situations that have occurred in largely undercapitalized nursing facilities.

But I think that there will -- Shankh said this.

I think there will be good stories to tell about how they manage the needs of their population during this impossible situation.

And you can be sure that they will be aggressively marketing those stories to help people regain confidence in the sector.

And I'll just add, Derek, you're asking an extremely good question.

We do believe that coming out of this crisis, there will be stronger operators.

Strong operators will get stronger, strong operators with more access to technology or other types of health opportunities or outcomes will have -- will get stronger.

So there has been a lot of marginal players got into the business because of slip in real estate was very profitable in sort of, call it, the '14, '15, '16 time frame.

And I think that you will see the operators who have been here and time-tested with operating models, they will gain market share.

And there are no further questions.

I would like to hand it over to management for any closing remarks.

Thank you for participating in our call today, and we're always happy to take any additional questions directly.

So please reach out to the team if you have other questions.

Thank you.

Thank you for your participation.

This concludes today's call.

You may now disconnect.