Sturm, Ruger & Company - Earnings Call - Q1 2020
May 7, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the First Quarter Sturm Ruger Earnings Conference Call. At this time all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to our speaker, Mr.
Chris Colloy, Chief Executive Officer. Sir, you may begin.
Speaker 1
Good morning, and welcome to the Sturm, Ruger and Company first quarter twenty twenty conference call. Before we get started, I would like to ask Kevin Reed, our General Counsel, to read the caution on forward looking statements. Kevin?
Speaker 2
Sure, Chris. We want to remind everyone that statements made in the course of this meeting that state the company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained from time to time in the company's SEC filings, including, but not limited to, the company's reports on Form 10 ks for the year ended December 3139, and of course, on the Form 10 Q for the 2019, which we filed last night. Copies of these documents may be obtained by contacting the company or the SEC or on the company website at ruger.com/corporate or the SEC website at sec.gov.
We do reference non GAAP EBITDA. Please note that the reconciliation of GAAP net income to non GAAP EBITDA can be found in our Form 10 ks for the year ended December 3139 and Form 10 Q for the 2019, both of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward looking statements. Chris?
Speaker 1
Thank you, Kevin. Before we discuss our first quarter results, I want to provide an update on the impact that the coronavirus pandemic or COVID-nineteen has had on Ruger. As all of you know, the COVID-nineteen pandemic has created significant uncertainty and adversely impacted many industries throughout the global economy. It has also left a trail of heartbreak and sorrow across an anxious nation. We are humbled on a daily basis watching the heroic actions of our health care workers and first responders.
Any adverse financial impact on our business was negligible in the 2020. Nevertheless, we took many proactive steps to maintain the health and safety of our employees and mitigate its impact on our business. These actions included providing all hourly employees with an additional two weeks of paid time off, encouraging employees to work remotely wherever possible and implementing social distancing throughout each manufacturing facility, including in every manufacturing cell, communicating with and assisting employees with potential health issues restricting visitor access to avoid introducing new people to the factory environment implementing additional cleaning, sanitizing and other health and safety processes to maintain a clean and safe workplace and manufacturing and donating personal protective equipment to hospitals, health care facilities and police and fire departments in our local communities. The total cost of these actions are expected to approximate $2,500,000 in 2020, of which approximately $400,000 was recognized during the 2020. The impact of COVID-nineteen on our business has increased in the past month, but we have been fortunate and have been able to keep all of our facilities open with only limited restrictions on production.
We could not have accomplished this feat without the determination and dedication of our 1,600 employees, who have risen to the occasion, rallied around each other and kept our factories productive under difficult circumstances. I could not be prouder of how well we responded to this crisis. We know the COVID-nineteen pandemic is not over. We are well positioned to manage through this crisis, and we continue to monitor and adjust our mitigation efforts daily. Our financial strength, evidenced by our debt free balance sheet and our cash and short term investments, which now exceed $200,000,000 coupled with our unused $40,000,000 credit facility, provide abundant financial security and flexibility.
Now Tom Deneen, our Chief Financial Officer, will give an overview of the first quarter financial results, and then I will discuss the current market and update you on our operations. And then we'll get to your questions. Tom?
Speaker 3
Thanks, Chris. For the 2020, net sales were $123,600,000 and diluted earnings were $0.87 per share. For the comparable prior year period, net sales were $114,000,000 and diluted earnings were $0.74 per share. Strong consumer demand, exciting new products and reduced reliance on sales promotions all contributed to our improved earnings. The balance sheet.
At 03/28/2020, our cash and short term investments totaled $187,600,000 Our current ratio was 4.2:one and we have no debt. As Chris just mentioned, due to our strong cash collections in April, our cash and short term investments now exceed $200,000,000 At 03/28/2020, stockholders' equity totaled $297,800,000 which equates to a book value of $17.03 per share. Cash provided by operations during the 2020 was $31,100,000 Cash returned to shareholders. In the 2020, the company returned $3,000,000 to its shareholders through the payment of dividends. Our Board of Directors declared a $0.35 per share quarterly dividend for shareholders of record as of 05/18/2020, payable on 06/01/2020.
As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter to quarter. That's the financial update for the first quarter. Chris?
Speaker 1
Thanks, Tom. Now let's talk about demand. Since the latter stages of the 2020, there has been a significant increase in consumer demand. The estimated unit sell through of Rooted products from the independent distributors to retailers increased 37% in the 2020 compared to the prior year period. For the same period, the National Instant Criminal Background Check System background checks, as adjusted by the National Shooting Sports Foundation, commonly referred to as adjusted NICS, increased 42%.
Anecdotal evidence suggests that this increased demand, especially during the last few weeks of the quarter, may likely be related to COVID-nineteen, the impact of state level restrictions and heightened concerns for personal protection. New products. Sales of new products represented $23,000,000 or 20% of our new firearms sales in the 2020. New product sales include only major new products that were introduced in the past two years, which include the Ruger 5.7 pistol, the LCP II pistol in point two two caliber, the Wrangler revolver, the PC charger and the AR-five 56 pistol. As a reminder, derivatives and product line extensions of mature product families are not included in our new product sales calculation, but they provide great value and opportunity to our immediate customers, the independent wholesale distributors, the retailers and ultimately the consumer.
Notably, in the first quarter, we launched 22 new distributor exclusives and product Production and inventory. We base our production and inventory and manage our inventory levels primarily through semi monthly reviews of our sales, the estimated sales of our products from the independent distributors to retailers and our inventory and that of our independent distributors. We were unable to ramp up production quickly enough to meet the increased demand in March. As a result, the combined inventories of our warehouses and at our distributors decreased 113,000 units during the 2020. Although we do not have comprehensive inventory data at the retail level, the retail information we do gather suggests that the retailer inventory of Ruger as well as most other firearms brands has been depleted in the last month or two.
Capital expenditures. Capital expenditures in the first quarter of the year were $4,100,000 Our engineering teams are actively engaged in exciting new products, and I remain optimistic that our new product development activity is going forward at its usual pace and look forward to providing updates throughout 2020. Accordingly, we expect our total capital expenditures to approximate $20,000,000 in 2020. Cash and short term investments. Our cash and short term investments balance was $188,000,000 at the March and currently exceeds $200,000,000 Obviously, this is more than we need to support our normal operations.
Our long term capital allocation philosophy has not changed. Our strategy is predicated on remaining financially strong, fiscally disciplined and focused on delivering long term value to shareholders. We are looking for opportunities to generate strong returns with our capital, and we are prepared to move quickly if the right opportunity arises at the right price. Our short term capital allocation philosophy has changed as we face the uncertainty of the COVID-nineteen pandemic. Our top priority remains protecting Ruger and our employees.
And as such, we will maintain abundant financial security and flexibility as we navigate through this current crisis. Nevertheless, we will continue to be on the lookout for opportunities to employ our capital and create shareholder value. Operator, may we have the first question?
Speaker 0
And the first question will come from the line of Mark Smith of Lake Street.
Speaker 4
Hi, guys. Just
Speaker 5
kind of big picture here. It looks like the most similar historical precedent that we've got to the current environment is kind of that late twenty twelve through twenty thirteen gun surge, if you will. How can you just walk us through big picture how this time is similar or different from that and how we should if we should be looking at this in the same way?
Speaker 1
Thank you, Mark. I think the biggest difference between this time period and that time period that we're referring to is likely the suddenness of this surge in demand. I think in the previous time period you mentioned it was following an election cycle. Obviously, a change in the political spectrum can be anticipated and that can drive some changes. But that was not as rapid and as sudden as we saw in the March.
And I think that was the biggest difference. The other obvious difference is with the COVID-nineteen pandemic in our communities, we have to be extraordinarily careful in how we take care of our employees, how we manage production and how we ramp up production. So it's quite a bit different than that time period in my mind.
Speaker 5
Okay. And that leads to my next question. What steps do you need to take to ramp production up to kind of this higher end, let's call it 500,000 units per quarter or more? And how do you navigate that during the pandemic to be able to kind of ramp that production back up?
Speaker 1
Good question. We've got a very active hiring process in place right now. If people are interested in working at Ruger, they can go to our website, www.ruger.com, and we've got a lot of jobs posted. However, I will tell you the process is a lot more involved. We actually have a 10 step process that our HR teams have put together that really seeks to make sure that the folks coming in to our environment are safe and in particularly our existing workforce is safe as we introduce new folks potentially into their workspace.
And so we've got we're fortunate to have nurses several nurses that work for Ruger. And that's been a big factor in our ability to manage through this. And so it's a lot more cumbersome, but we think that extra prudence, while it may delay ramping as quickly as we might like, think it's the right way to go to make sure we're protecting our employees and protecting our existing production capacity.
Speaker 5
Okay. I guess to look at it again and maybe more directly, do you feel do you have confidence that you can get that high level? If we look at it at 500,000 units per quarter and produced, can you get to that level? Or is there just impediments that keep you from getting back to that high level of production?
Speaker 1
Well, you have to remember in some of those when you look at some of those years in previous history where Ruger produced in excess of 2,000,000 units in a year, a lot of those were very focused on individual product lines like the LCP, the ten twenty two, etcetera. Our mix today is much more balanced, to be perfectly honest. We have a lot more product lines, rifles, revolvers and pistols that cover a lot more individual models. And so that's a challenge. It's also a challenge ramping up the supply line.
So as you know, we don't give forward looking guidance, but we're going to do our best to go after that demand where we see it. And it's a combination of both the people, the manufacturing capacity in terms of machines as well as the supply chain. All of those are involved in pursuing that. And we want to make sure what we're doing makes sense long term. We've got a we've managed through quite a few of these ups and downs.
And kind of as a reminder, in the last twenty five, twenty six years, you've heard me say it before, we've had about 16 year over year up years, but we've also had 10 or 11 year over year down years. And so we try to make sure we're ready to succeed in both those up and down years.
Speaker 5
Okay. And then sorry if I missed it during the commentary, but have you guys had any temporary shutdowns or any outbreaks or cases that have hurt production either during the quarter, late in the quarter or as we look quarter to date?
Speaker 1
We've been very fortunate. And as some of you may have seen reported in the North Carolina press, we did have one case of COVID-nineteen with an active employee. We've only had, frankly, very minor disruptions. We have rigorous procedures in place to clean work areas, clean the entire factory to a high standard to disinfect it. Even if we had a suspicion of somebody waiting a test, we have a very disciplined process to go ahead and manage through that.
So to date and through first quarter and through today, we've had, like I said, only minimal disruptions. All of our factories have remained open. And employee health will remain our top priority as we go forward.
Speaker 5
Okay. And then I think the last one from me, just looking at the ASP of your price on shipped units, it's a little lower than maybe I would have expected given some of the pricing on the backlog and the orders received. Were you able to clean up maybe some aged inventory, which pushed that a little lower? Or was there any other dynamic going on, on the ASP on shipped units?
Speaker 1
Again, without getting into the finite details, I think the biggest change you probably saw in there was when you look at the mix of products. If you remember this time last year, the Wrangler line of single action revolvers had just been introduced. We were in the beginning of ramping up production there. And this year, the Wrangler line is kind of hit its full stride. So the Wrangler is a lower priced model.
There's lots of Wranglers in that mix. We also have lots of LCPs to include the brand new LCP chambered in 22 bar rifle. And all of that, while they're great guns and generate a lot of volume in terms of average seller price, they're slightly lower than some the models in the mix, particularly things like the Ruger 57 pistol.
Speaker 5
Okay. That's helpful. Thank you, guys.
Speaker 6
Thank you.
Speaker 3
Valerie, I think Brian Hamilton is ready to ask the question.
Speaker 7
Good morning, everyone.
Speaker 8
Morning. Good morning, Ryan.
Speaker 4
Sorry about that. I don't know exactly what happened, but I'm happy to ask a couple of questions here. You touched a little bit on the cadence of the quarter, how things picked up in March. Could you walk us through kind of what January and February look like and maybe March relative to last year? Kind of just give us a little picture of the cadence of the quarter, if you don't mind.
Speaker 1
Yes. Thank you, Ryan. Yes, actually, we had a we were moving through the quarter at a pretty good pace. And we had a good January and a
Speaker 8
good
Speaker 1
February. And frankly, it was a when things kind of accelerated in March, that was certainly a factor. But we were, again, doing fairly well in January and February. Our new products were doing extremely well. Like I mentioned before, the Wrangler had hit stride.
The new products that we launched at the SHOT Show, particularly the Ruger 57 pistol and the Ruger LCP II in 2022 were both off to fantastic starts. And then we also we launched in near the end of the quarter, the PC charger pistol. So all of that contributed to the positive excitement from the good news standpoint. And obviously, the impact of COVID-nineteen as it spread across the country and its impact is devastating in so many ways. And again, that's only part of the story in this quarter.
Speaker 4
Thank you. Could you I'm looking back over the last couple of years. Looks like cash and short term investments are at a higher level than I can recall. Is there could you kind of give us the makeup of that short term investments? I know that's kind of usually it's in cash for you guys.
Could you kind of touch on where that's invested?
Speaker 1
It's when we say short term investments, it's T Bills. We're very conservative in our approach. We keep those in a very liquid state, and we like to be able to move quickly if we see an opportunity that makes sense for But obviously, with that much cash, a few years ago, we started to put that into treasuries rather than pure cash accounts.
Speaker 4
It's a good position to be in today for sure. Oftentimes when you see these spikes in demand in firearms, you also see kind of sometimes a bottleneck on the ammunition front. Could you talk a little bit about what you're seeing in that market as far as the accessibility of buying ammunition?
Speaker 1
Well, I know anecdotally and talking to my friends in the business and talking to our primary customers at wholesale and retail level, Certainly, ammunition like nine millimeter in particular was very scarce. A lot of people were buying nine millimeter ammo, taking anything they could get. One of the things we were concerned about with the success of our Ruger 57 pistol, that uses the 57 by 28 millimeter cartridge. And the folks that manufacture that have done a fine job keeping up with that. And so, so far, we don't see the ammunition having a negative impact on the sale of the new guns.
Speaker 4
Sweet. That's good to hear. I know you kind of touched a little bit on headcount and any slowdowns in production. Can you just give us a picture what the what your shifts look like at your different plants, please?
Speaker 1
You said oh, shifts. Okay. Yes. Sorry about that.
Speaker 4
Didn't hear you. Well,
Speaker 1
shifts are largely driven at our plants, not just by total demand, but capacity of individual lines. Sometimes we have lines where we flex our capacity and work weekend shifts and staggered shifts so that we can increase production on a short term basis without increasing the number of machines committed to that line. So it varies on plant by plant. Obviously, first shift is strongest. Second shift goes on in all three plants.
And then in some of the plants, we have a third shift, but it's not the typical in some of those operations, it's not like we think of an old school auto manufacturer where the same thing is done on second and third shift is done on first shift. I mean, we use that to flex up. And so we have all three plants that have all three shifts, but it varies in terms of what is being done on those second and third shifts.
Speaker 4
Perfect. And last one for me. Any commodity inflation to note?
Speaker 1
We haven't seen any. We given our strong balance sheet, we've been able to look forward. We try to work with all of our vendors when this pandemic first hit to make sure we took care of our vendors, make sure we they remember Ruger always pays on time and make sure we can be first in line in terms of supply. And by and large, our vendors have done very well. We haven't seen any commodity impacts on pricing.
We've got a good supply of steel, so we're okay there. And we've been working with our suppliers as they manage through their own challenges of keeping their factories and their offices open as well. So it's been a challenge, but our supply chain folks have done a great job keeping the pump primed and keeping us in production.
Speaker 4
And are you seeing you touched on it. Are you seeing any kind of potential bottlenecks from vendors and suppliers as far as them having to close down? Or I know you said it's been a challenge, but are you seeing anything to note or anything that we should be overly concerned with?
Speaker 1
It's actually been very minimal. We've had a couple of folks that while they dealt with individual illnesses in their plant and went through cleaning procedures and things like that, They did so in a pretty rapid manner and got back online in short order. And so we've been very pleased with our supply chain and our suppliers. They've done a great job as well as the folks in our facilities.
Speaker 4
Thank you very much. Kudos to you in there.
Speaker 0
And at this time, there are no further questions in the queue.
Speaker 1
I would like to again thank our 1,600 employees for their hard work and dedication during these difficult times. On behalf of all of us at Ruger, I also want to thank all of the first responders, nurses, doctors and other emergency and medical personnel that are fighting this pandemic and helping our fellow Americans at the point of the attack. I also want to thank everyone performing other essential work, our truck drivers, grocery store workers, sanitation workers, postal carriers, military service members and of course, factory workers like our dedicated Ruger employees. Thank you for attending our conference call and for your continued interest in Ruger. I encourage all of you to listen to our Annual Meeting of Shareholders, which will take place next Wednesday, May 13 at nine a.
M. Eastern Time. The login information can be found at the end of our earnings release and at www.virtualshareholdermeeting.com/rgr2020. Shareholders received their instructions to log in to the virtual annual meeting when they received their proxy materials last month. Thank you again and stay safe.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.
Speaker 9
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 two things might be slightly different, within any given period, you should view the dividend cut as just being more review on on the management team view of where short term cash flow is going.
Speaker 10
Your next question comes from the line of Vikram Malhotra of Morgan Stanley.
Speaker 11
Thanks for taking the question. So I guess there's a lot of uncertainty on the shore side and know 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?
Speaker 9
Yes, Vikram. Tim here again. I noted in my prepared remarks and what we've 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 ability to control CapEx, various reasons why how our businesses evolve as we've become, an owner of RIDEA properties, in a larger part versus triple net properties. But the underlying businesses are largely the same.
And the day to day business that goes on 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, etcetera. But our expectation is that the triple net fundamentals, very much follow the fundamentals in RIDEA side. And as we kind of think about that in terms of how that impacts financials, and 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 is 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 senior 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 weakness and the extent of it
Speaker 4
to
Speaker 9
how, if any, restructures occur, how and when they occur.
Speaker 7
Vikram, I'll add a couple of two more points to that just to give you some more color. First is our triple net portfolio's geographic obviously very different from obviously our SHOP portfolio. And if you think about the biggest impact of where COVID happened is primarily coast to coast, right? So 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 this pandemic, the effect of this pandemic, etcetera. But how we'll act will depend on what we think of you just to Vikram, this is a triple net lease between Walter and you.
What is our thought on you as an operator? If you think that you are 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 I think. And so it is going to be a much more nuanced answer that will be based on case by case.
Speaker 10
Your next question comes from the line of Michael Bilerman with Citi.
Speaker 8
I don't know if
Speaker 1
it was Tom
Speaker 12
or Shankh that you mentioned you don't run your business for a 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 especially on the IL side, much less needs 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 healthcare 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?
Speaker 13
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 of 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're sitting at a moment in time that is challenging that model, we think we don't think there's a better alternative longer term than putting seniors in environments where and 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 two 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?
Speaker 7
Yes. Michael, a couple of more granular points. First is Welltower's portfolio is primarily a need based portfolio except I mean when I say 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 providers 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 a dollar to invest, where would I invest on all healthcare asset classes given what the returns are going to be, where total return invested, I fundamentally think that will be senior housing.
So if anything our exposure would like to take it up not down. Now again, that's a price aside comment.
Speaker 10
Your next question comes from the line of Rich Anderson with SMBC.
Speaker 14
Good morning and thanks for the color and the commentary, tough times as we all know. 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 state 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 be that will prove to be a very reasonable observation longer term. But will there be an incremental frictional vacancy within the four 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'd 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.
Speaker 13
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 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 infection or 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 if that's true, if we're going to live in a world where we have to stand six 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 hoping 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 six feet apart from each other long term. Sean, do you
Speaker 7
to Yes, add anything to Tom. Reg, 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 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 the data is published with COVID coming to hospitals are coming from homes. Only four percent 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 frontline are doing an amazing work to keep our residents safe.
There's obviously no guarantee. Pandemic is everywhere. That's why it gets called pandemic, right? But all seeing when it's all done 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.
Speaker 10
Your next question comes from the line of Todd Stender with Wells Fargo.
Speaker 8
Hi, thanks guys. I hope everyone's well. Thanks Todd. In Seattle, Shankh, you're seeing improvement or stabilization, however you characterized 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?
Speaker 7
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 9,100 basis points a week. Now we are seeing occupancy is going down more like thirty, forty basis points a week, something like that. So it is still going down. But obviously the second derivative improved significantly.
All
Speaker 13
I
Speaker 7
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 these states are not open yet. And when that happens obviously we'll see the impact on occupancy. But I was trying to drive you sort of few distinction.
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 LA. Southern California has been years in years out one of our best performing markets. And why is LA, which is not as you think, it's probably you don't think about LA today as sort of the most impacted COVID impacted market.
It is, you know, meaningfully impacted but that's not sort of what you call the eye of the storm. The reason being, you know, all of our operators have billing, you know, admissions banned everywhere in South California and L. A. Particularly. So it is a function of when our operators feel safe enough to open the, you know, 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, you know, 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're 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 the more nuanced location by location uncorrelated performance that's based on demographics, hypographics 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.
Speaker 10
Your next question comes from the line of Michael Carroll with RBC Capital Markets.
Speaker 13
Yes, thanks. Shankh, in your prepared remarks, you kind
Speaker 15
of commented that there might be some investment opportunities as the result of this. I mean, 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'd be more opportunistic that you find some distressed opportunities?
Speaker 7
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 on 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 three 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 and specific with 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.
Speaker 10
Your next question comes from the line of Derek Johnston with Deutsche Bank.
Speaker 16
Morning, everyone. Thank you. Tom, you mentioned hospitals. The CARES Act has essentially provided a federal backstop to hospitals, and we feel deemed 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?
Speaker 13
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 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 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, 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-nineteen pandemic, and the government has responded by supporting them through this. Because their beds are filled with people many health systems and 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-nineteen.
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 four walls of the traditional acute care hospital.
Speaker 10
Your next question comes from the line of Jordan Sadler with KeyBanc.
Speaker 8
Thanks. 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?
Speaker 1
Just tell us what's Yes.
Speaker 7
So, John, I know you know this. I know we have said this many times. I'm going to have to I'm going say it again. It is too early to comment 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 two types of stories. You know, one I mentioned we're seeing, you know, across the board this is not just a well tower 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're seeing all these letters that are coming from our operators, you know, 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, you know, 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 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 positive stories.
I gave you positive stories 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.
Speaker 10
Your next question comes from the line of Nick Yulico of Scotiabank.
Speaker 17
Thanks. 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 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? Just remind us, are 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? Thank you.
Speaker 9
Yes. Thanks, Nick. I'll take that.
Speaker 7
Go ahead,
Speaker 9
the normalizing, so we earlier this quarter, Capital Senior announced an agreement that came with, a couple of landlords on top of, I think, one they'd come to prior with a third landlord. We were 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 a 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 a 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 PIK 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.
Speaker 10
Your next question comes from the line of Lucas Hatchwitz of Green Street Advisors.
Speaker 8
Thanks. 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?
Speaker 7
Lucas, 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, etcetera. But the matter of fact is obviously people need to get into the building for obviously that to become a revenue stream. And in these uncertain times that's obviously not happening.
Post COVID they will get back obviously to the leasing velocity. But 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.
Speaker 10
Your next question comes from the line of Tayo Okusanya of Mizuho.
Speaker 8
Yes. Good morning, everyone.
Speaker 10
My question
Speaker 8
had to just do 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 may 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 great liquidity position when the time is right. How do you kind of think about deploying that?
Speaker 7
Phil, that's a really, really good question. One of the most important questions that we're 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 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 opportunities 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 and 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 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 you do believe that this management team is capable of executing such transactions 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.
Speaker 10
Your next question comes from the line of Steven Valiquette of Barclays.
Speaker 6
Great, thanks. Good morning, Tom and Tim and Shankh. Hope everyone is staying safe. Just 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 ManorCare assets, Just curious if you're able to provide a little more color on the financial health of ProMedica overall beyond 1Q twenty twenty.
And thinking about that low-2s EBITDA coverage ratio that you showed, there any color you have from ProMedica whether the 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 operations in the second quarter? Thanks.
Speaker 7
So I'll take that Steve. It is extremely inappropriate for us to get into the details of ProMedica's 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.
You know, 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 care set 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 it's primarily because it's a coverage as Tim said.
All our coverage reported are on a one quarter lag. And this is the actual operating performance of what happened in the buildings as of December 31.
Speaker 6
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 ManorCare rank right now, low or high? I'm guessing it's low but I just want to check the box on that. Thanks.
Speaker 7
We're worried about everything, but on that line, it's very, very low.
Speaker 10
Your next question comes from the line of John Kim of BMO.
Speaker 8
Thanks. Good morning. 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?
Speaker 7
I'll take that. John, we think our obvious linear 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 is 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 who 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.
Speaker 10
And your final question comes from the line of Derek Johnston of Deutsche Bank.
Speaker 16
Hi everyone. Thanks for letting me get another one in. It seems so far that Welltower has fared favorably in COVID-nineteen containment versus other senior housing peers, let's say, with less resources. So how are you planning on marketing your core show competencies really to capture outside or outsized or maybe even pent up demand once admission bans end and basically go on offense?
Speaker 13
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.
Speaker 7
And I'll just add, Rick, you were 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, you know, 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 flipping real estate was very profitable in sort of call it the 'fourteen, 'fifteen, 'sixteen timeframe.
And I think that you will see the operators who have been here and time tested with operating models, they will gain market share.
Speaker 10
And there are no further questions. I would like to hand it over to management for any closing remarks.
Speaker 13
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.
Speaker 7
Thank you.
Speaker 10
Thank you for your participation. This concludes today's call. You may now disconnect.