10/29/2020

speaker
Operator
Conference Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Welltower, Inc. earnings conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, to Mr. Matt McQueen, General Counsel. Thank you. Please go ahead, sir.

speaker
Matt McQueen
General Counsel

Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Wealthower believes any forward-looking statements are based on reasonable assumptions, And with that, I'll hand the call over to Sean for his opening remarks. Sean.

speaker
Sean
Chief Executive Officer

Thank you, Matt, and good morning, everyone. First and foremost, I hope that all of you and your families are safe and healthy during these difficult times. Before I get into the accomplishment for the quarter and discuss our capital allocation strategy, let me make some comments on leadership changes and strategy going forward for WorldTower. Let me start with our outgoing CEO, my close friend and mentor, Tom DeRosa. Tom's impact on our industry, our company, and me can never be overstated. He was a visionary who saw the need of integrating senior housing into healthcare continuum years before COVID, and now we all know the importance of that today and going forward. He took a successful entrepreneurial company and made it a process-driven institutional company that attracted an incredible caliber of talent. And last but not the least, his contribution on me personally and my career can never be overemphasized. He has been a terrific boss, a great mentor, and a close friend. He continues to help me even today and guide me as necessary. We wish Tom the very best in his retirement. I'm also pleased to announce that Phil Hawkins, one of the most well-respected ex-CEOs of the REIT space, has joined our board. We're looking forward to Phil's guidance and mentorship for many years to come. And finally, I'm thrilled to be working with our new independent chairman of the board, Ken Bacon, who has a strong track record of leadership and experience, both in real estate and finance. Ken will lead our board and partner with me and our leadership team as we execute our company strategy. As far as our team is concerned, the company has never been in a better place. There are about 20 women and men who are leading this company forward every day. I cannot be more proud of this team. In the coming weeks and months, you will see a series of promotions and new roles that will consolidate the leadership of this company. Not a change per se, just a recognition of the exceptional work that the team is doing. Our team has never been busier and more excited to create once-in-a-lifetime value for our owners. Many of you have asked me if our strategy will change going forward. The answer to that question is an emphatic no. Wellfare will continue to strive to be the premier wellness infrastructure company that allocates capital in the path of growth of healthcare and wellness trends. You are not going to get any grand strategic pronouncement from me We'll continue to focus on creating value for our partners and our employees if they create significant value for our owners. And the partners and employees will be able to create long-term sustainable value only if their end customers are happy. It is that simple. We do not need to complicate a simple idea. We need to continue to execute and deliver superior cash flow growth on a partial basis. To paraphrase one of my favorite CEOs of all time, Tom Murphy, the goal is not to have the longest wait, but to arrive at the station first using the least amount of will. We will continue to be vigilant as ever that institutional imperatives do not creep into our culture, and we remain focused on efficiency of the platform, decision-making, and employee satisfaction. Given it is my first call as CEO, I'll lay out a simple capital allocation framework for you. A company effectively has four choices of raising capital. Capping internal cash flow, issuing debt, issuing equity, and disposition of its existing assets. It also has five essential choices of deploying that capital. Investing in existing assets, acquisitions, paying down debt, paying dividends, and buying that stock. You can loosely call the first set of choices is selling, but right description of that would be sourcing or raising capital. You can loosely call the second set of choices is buying, but the current description would be deployment of capital. Following the same line of thinking, loosely speaking, consistent buying low and selling high creates value for our shareholders. In a more wholesome and thoughtful description, Optimizing these choices from this menu of sources and uses in a tax-efficient manner creates value for a continuing shareholder on a partial basis. The goal is to maximize cash flow and value per share, not to become the biggest or the most revolutionary. We at World Tower do not spend a second strategizing on how to win the popularity contest on Wall Street. In fact, as stated in the past, We focus on buying assets when they're out of favor, that is, unpopular, at the right price, in the right structure. Ultimately, this capital deployment strategy allows for outside return with a large margin of safety. Price, not exposure, is the ultimate mitigant of risk. We are constantly striving to create value and trust you as our shareholders will reward the companies that create true intrinsic value over long term. If you allow me to continue this theme of sourcing and deployment of capital, let's look at what we have achieved in Q3 and post-quarter close. We are delighted to inform you that we have executed on two large senior housing transactions at a valuation significant in excess of $400,000 per unit, in the mid-3% cap rate on current NOI and around 5% cap rate on pre-COVID NOI. These transactions with our Invest4Join venture on MOVs puts us in an enviable position of balance sheet strength. We currently have $5.2 billion of liquidity and $2.2 billion of cash, which is expected to rise farther as the quarter progresses. We at World Tower do not see balance sheets as a matter of vanity, like vintage cars, but the most important counter cyclical tool to create values at the cycle load and avoid the need of raising diluted capital at exactly the wrong time in the cycle. That gets us to our menu of capital deployment, too particular of interest, investing in hard assets and doubling down on the assets that we already own to bind back our own stock. In matter of any acquisition, at the first start, patience is a virtue with occasional boldness. And we think that moment of occasional boldness is finally here. We have, in excess of a billion dollars of acquisition in our pipeline, comprised of 6,500 plus units at an average price of $165,000 units at a material discount to replacement costs. 17 deals in the pipeline represent a wide range of transactions, from a $10 million redevelopment asset to $188 million core portfolio of brand new assets. We have identified many of these assets working with our existing partners through our data analytics platform or who are buying up other capital partners of our existing operators. The pipeline's initial yield is a low force. but we believe it will stabilize in the high single digits to low double-digit yields. A very short-term but incorrect way to look at this will be we're deploying capital in the low 4% range and sourcing that capital in the mid 3% range. We believe the correct way to look at this will be that we're sourcing that capital in the mid single-digit unlevered IRR and deploying at a low double-digit unlevered IRR. as evidenced by sourcing the capital in the $400,000-plus per unit level and deploying that capital at $165,000 per unit level. Despite our weak cost of public capital, this spread has never been wider, and hence the opportunity to create generational value for our owners on a part-share basis. And that completes the loop for you, and explains why our team is so excited and so busy. We believe we're making real impact and anticipate creating exceptional value. We not only see this environment as an opportunity for smart capital allocation in the financial realm, but also in the human capital area. We're seeing availability of superior talent in the marketplace today, and we're pouncing on this opportunity as we are on the investment side. With that, I will hand the mic over to Tim, who will walk you through the operational and financial results for the quarter. I will come back to make some additional comments on the operating environment after him. Tim?

speaker
Tim
Chief Financial Officer

Thank you, John. My comments today will focus on the third quarter 2020 results, the performance of all property segments in the quarter, our capital activity, and finally, a balance sheet liquidity update. In the third quarter, Welltower reported normalized FFO of 84 cents per diluted share. a two-cent decline from the second quarter, driven by a three-cent dilution from dispositions completed in Q2 and Q3, a one-penny negative impact from changes in revenue recognition in our post-acute senior housing triple net portfolios, and a slight decline in sequential senior housing operating performance. Those items were offset by tighter cost controls at corporate and a reduction in COVID-related expenses in our senior housing operating portfolio. As a reminder, in the dilution-type dispositions, We need $2 billion of cash and cash equivalents, inclusive of 1031 deposits, as of 9-30. Now turning to our individual property segments. First, our triple net lease portfolios. As a reminder, our triple net lease portfolio coverage and occupancy stats are reported a quarter in arrears. So these statistics reflect the trailing 12 months ending 6-30-2020, and therefore only reflect a partial impact on COVID-19. Across all triple net lease segments, Maltower collected 98% of contractual rent due in the third quarter. Now, starting with our senior housing triple net portfolio. Same-store NOIs declined 10 basis points year-over-year. Entire bad debt accrual in a tough count drove growth slightly negative. Combined FFO impact of revenue recognition changes on one restructured lease in the quarter was half a penny relative to 2Q and is expected to grow to a full penny in 4Q, i.e., another half penny impact sequentially from 3Q to 4Q. Occupancy was down 390 basis points sequentially, and EBITDA coverage decreased 0.02 times on a sequential basis to 1.02. Consistent with my comments in the past, our senior housing triple net operators have experienced the same headwinds as our day operators over the past seven months. We expect reported lease coverage staff to continue to reflect these challenges as more of the pandemic period is reflected in EBITDA going forward. In the quarter, we also transitioned five of a plan nine properties from capital senior to story point senior living. and expect the other four properties to transition by the end of the year. This is the first phase of the transition agreement we entered into with Capital Senior at the beginning of the year, which allowed for an early termination of CSU's leases on 24 Welltower-owned assets in exchange for full-year 2020 rent being paid in cooperation with transitioning the operations. Despite the challenging environment, our team and our operators have been able to organize and execute transition plans for the story point transitions, as well as the remaining 15 properties CSU currently operates. which will be transitioned to three of our existing day operators in the fourth quarter. As a result of the COVID backdrop, the initial expected dilution from these conversions is expected to be approximately $12 million, or $0.03 per share, in 2021 relative to rent recognized in 2020. As a reminder, since our capital senior rent continues to be paid, the leases on these assets that have yet to be transitioned are reflected on our payment coverage stratification presentation on page 7 of our supplement. and make up roughly three-quarters of the TripleNet senior housing rent that is less than 0.85 times covered by EBITDA. Although the last seven months have been very challenging for the senior housing TripleNet operators, the sequential stabilization we observed in between the second and third quarter, along with relief funds from HHS to be received in the fourth quarter, should help our operators find their footing heading into 2021. Turning to long-term post-acute portfolio, we generated positive 2% year-over-year savings per growth and EBITDA coverage declined by 0.01 times sequentially. As noted in our business update earlier this month, in last night's release, Genesis Healthcare, which makes up approximately half of our long-term post-acute segment exposure, includes language in the second quarter financials filed on August 10th regarding its ability to continue as a going concern. As a result of this, Wealth Tower began recording Genesis lease revenue on a cash basis in the third quarter, retroactive July 1st. This has a negative $2.2 million impact, or approximately half a penny, FFO per share, relative to second quarter 2020. This also resulted in the write-down of $97 million of straight-line rent receivables. Genesis continues to remain current on all financial obligations to WealthPower through October. And lastly within our triple-net-lease segment, health systems, which is comprised of our ProMedica Senior Care Joint Venture with ProMedica Health System. NOI growth was positive 2.3% year-over-year, driven by a 2.75% increase here in August. And trailing 12-month EBITDA coverage was 2.61 times. Turning to medical office. Our outpatient medical portfolios will be a positive 1% savings program. This below-trend growth was driven mainly by increased bad debt reserve, the majority of which related to lease enforcement moratoriums in several California jurisdictions in which we have a sizable footprint. As these moratoriums expire, we've spent next election to further improve. We continue to see signs across our outpatient portfolio that activities return to pre-COVID levels, evidenced by the number of tenant work order requests received, our tenants' own volume data, and parking income in our properties. In the quarter, parking income was still a slight headwind year over year, but its negative contribution to NOI growth decreased to 10 basis points this quarter versus 70 basis points in the second quarter. During the quarter, we collected approximately 97% of contractual rents and had an additional 2% of rents deferred, the majority of which are located in the aforementioned jurisdictions with lease enforcement moratoriums. We also continue to have very strong rent collections and deferral plans we've put in place in April, May, and June. Since we started collecting on these plans in June, we've experienced 99.5% collection rates through September. As a reminder, the large majority of our second quarter deferral plans were structured to pay back entirely by year end. Now turning to our senior housing operating portfolio. Before reviewing this quarter's senior housing operating portfolio results, I want to briefly summarize the outlook we provided back in August. At that time, our expectations for the third quarter were that occupancy would be down between 125 and 175 basis points from July 1st through September 30th, and that REV4 and total expenses would be flat sequentially. We ended the quarter with occupancy down 150 basis points start to finish, REV4 was down 40 basis points, and expenses were down 3.4%. Turn to results in the quarter. Same-store NOI decreased 27.3% as compared to the third quarter of 2019. driven largely by a 680 basis point year-over-year drop in average occupancy. As we indicated last quarter, two factors drove this outside decline in occupancy. First, the portfolio began the third quarter at a significantly lower level of occupancy, following a steep drop experienced in the second quarter, and continued to decline during the quarter, albeit at a significantly decelerated pace from 2Q. And secondly, we experienced a seasonal increase in occupancy in the third quarter of 29, creating a tougher sequential comp. Revenue for the quarter was down 1% year-over-year, but I want to provide a bit more color here, as mixed shifts has distorted the use of this metric as a proxy for rate growth. Over the last two quarters, our lower acuity properties, active adult and independent living, have held up considerably better on the occupancy front than our higher acuity buildings. This has driven up the percentage of our total portfolio occupied units that are lower acuity and therefore lower rent-paying units. This has had the mathematical effect of averaging down our total portfolio rent for occupied units. If you break the portfolio into two buckets, active adult and independent living in one, and assisted living and memory care in the other, you will see the lower acuity bucket had a 20 basis point decrease in RAP4 year-over-year, while the higher acuity bucket had a positive 1.4% year-over-year change. While we are seeing evidence of select discounting on room rates in some of our markets, In general, rates continue to be fairly resilient in the face of occupancy declines. And lastly, show operating expenses. Same-store operating expenses declined 1.1% year-over-year and declined 3.3% sequentially. I will focus on sequential growth since the changes are more relevant to trends in the current operating environment. We experienced fairly respected sequential expense trends driven by two main items, lower compensation growth as operators adjusted their staffing to lower occupancy levels, and lower COVID expenses, as same-store COVID expenses decreased from $33 million to $15 million sequentially, driven by lower emergency staffing costs and significant reductions in price per unit costs of PPE. We expect COVID-related costs to continue to decrease in the fourth quarter, but at a much slower pace than in 3Q. Looking forward to the fourth quarter, and starting this October day that we've already observed, we've experienced a 30 basis point decline in occupancy to the week of October 23rd. And we expect to finish the fourth quarter approximately 75 to 125 basis points lower than where we ended the third quarter. We also expect both REV4 and total expenses to be flat on sequential basis. This outlook does not include any impact from HHS funds that may be received in the fourth quarter. Now into capital markets activity. In July, we completed the successful tender of $426 million of our 3.75% and 3.95% senior notes due in 2023. Proceeds for the tender were generated from the June issuance of the $600 million in senior unsecured notes, bearing an interest rate of 2.75%, with a maturity date of January 2031. We used the remaining proceeds to pay down $140 million of our term loan due in 2022. These transactions both see rich near-term maturities through 2023 and increase our unsecured bond borrowing with an average maturity to 9.2 years. Additionally, in the quarter, we repaid $289 million in secured debt, of which $112 million was defeased and subsequently extinguished in October. Moving to investment activity, which was mainly focused on our development pipeline, with $96 million invested this quarter. On the disposition front, we completed $1.4 billion of pro-rata dispositions in a 5-3 cap rate. Post-quarter end, we closed in the previously announced sale of a senior housing operating portfolio for $200 million, or $395,000 per unit. The sale price represents a cap rate of 2.6% based on third quarter annualized NOI and a 4.9% cap rate on pre-COVID or March trailing 12-month NOI. Inclusive of this disposition, we've completed 3.3 billion dispositions year-to-date at a 5-4 cap rate. We expect to close another 186 million transactions in the fourth quarter comprised of secondary tranches or broker asset sales tied to previously executed outpatient medical transactions. The near-term FFO impact from the completion of these intra- and post-court dispositions will be approximately $0.03 per share sequentially in the fourth quarter. It will bring cash and cash equivalents to $2.4 billion and total liquidity to $5.4 billion. We believe that the continued ability to execute dispositions at strong pricing supports our view that our private cost of equity capital is substantially better than our public cost at this time. While underlying cash flow continues to be impacted by a challenging backdrop, We're in the quarter at 6.02 times net debt through tested EBITDA. A 34 basis point decrease from last quarter is a result of liquidity generated from successful dispositions in the quarter, which have continued to bolster the balance sheet. Adjusting for EBITDA loss to sales in the quarter and the post-quarter run sales just mentioned, run rate net debt to EBITDA is approximately 6.1 times, with $2.4 billion in cash and cash equivalents. And with that, I will hand the call back over to Sean.

speaker
Sean
Chief Executive Officer

Thanks, Jim. Let me provide you some color on underlying trends of what's happening in the senior housing business. Needless to say that we're very encouraged by the sequential stabilization of NOI in the quarter. I would like to draw your attention to slide 16 of our deck, which describes the significant sequential improvement of move-ins. Last quarter, I talked about the hesitation of customers to move in after they put a deposit on. As communities resume visitation, we have seen a significant improvement in this area. Frankly, which was my biggest concern as described last quarter call. Let's take an example of five very large operators which constitute of national operators, large regional operators in Northeast, West Coast, and Sunbelt, a pretty diverse group. The average delay between deposit to move in during October of last year was 19 days. In March of this year, it was 17 days. That increased to a whopping 41 days in June. We have seen a meaningful decrease every month in Q3, and finally it is down to about 18 days in October. We are hearing from our AL-focused partners that in many cases, this lag is now getting shorter than pre-COVID days, as families can no longer delay the care needs of their loved ones. No question we're very encouraged by that. However, we're unwilling to project this move-in trend as we are in the middle of a third wave of COVID across the country. It will be a complete foolhardy for us to predict how things will play out in the next few weeks and months before the COVID curve flattens out again. But the experience of this accelerated move-in in the face of move-ins tells you that our customers need our product. They moved in as soon as they could. we have no ability to predict when we'll be on the other side of the COVID. But we're optimistic when that day finally comes, our need-based product will likely to see meaningful traction in demand. What bridges us between now and then is our fortress balance sheet, and what clears value between now and then is our ability to allocate capital to make outsized returns for our owners. In this age of torrents of information, it is sometimes hard to differentiate between signals from noise. It is important that we periodically take a step back and remind ourselves that stock is a fractional ownership in a business and not a ticker. As managers of the business, we can assure you that our team has never been more energized and excited about creating long-term value for our shareholders. With that, we'll open the call up for questions.

speaker
Operator
Conference Operator

Thank you, sir. Thank you, sir. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, press the pound key. Due to the absence of time, we ask that you please limit yourselves to one question and one follow-up. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Steve Sackler from Evercore ISI. Please go ahead.

speaker
Steve Sackler
Analyst, Evercore ISI

Thanks. Good morning. I guess, Sean, going back to page 16, you know, it's encouraging to see the move-ins. Could you talk maybe a little bit more about leads and kind of where leads are? And I know you spoke a little bit about the time from a lead to a move-in, but just, you know, what are you seeing specifically on that timetable, you know, as it relates to move-ins? Sure.

speaker
Sean
Chief Executive Officer

So, Steve, leads have not been a problem even when we were here 90 days ago. Leads have come back not completely to pre-COVID level, but definitely on a year-over-year basis, but sequentially it has. And it is even on a year-over-year basis is approaching, you know, pre-COVID level, maybe 10%, 15% still lower. But we're definitely approaching the amount of leads and the quality leads, more importantly, in the system. The issue has been that you obviously had a very good follow-through of how many people are doing either, you know, seeing the units, whether virtually or physically, and then getting to the deposit. That's what I talked about, the pressure on the, you know, sort of the front door, if you will. That has not been the issue. The issue has been that the customer was hesitating after that, right? This is purely an IL-focused comment. We're still seeing hesitation in the IL-focused communities. where, you know, if you don't have a need, you're taking time to make a decision, right? I mean, with all the noise and obviously hopeful good news and vaccines, people are just taking time. I can't tell you why that is the case, but on the IL side, people are taking their time. On the AL side, you know, we have faced that pressure on the front door, but that was not translating into the move-in, and that sale was not translating into the move-in, which we kind of described that And since we said that, we have seen some very significant improvement in that area. So that's what you're seeing in that rapid pace of acceleration in that move-in. And that continued, you know, even through last week.

speaker
Operator
Conference Operator

Thank you. Aisha, our next question comes from the line of Nick Joseph from Citi. Please go ahead. Mr. Joseph, your line is open. Okay. I show our next question comes from the line of Rich Anderson from SMBC. Please go ahead.

speaker
Rich Anderson
Analyst, SMBC

Hey, thanks. Good morning, everybody. Good morning, Rich. So I just want to get in a little bit to the fourth quarter sequential occupancy numbers that you went through. Okay, so down 100 basis points versus the third quarter, which is, you know, reasonable in a, you know, perhaps a seasonal environment. And you can comment on seasonality that would typically impact you. But I'm curious, how would 100 basis points compare to your pre-COVID history? Is this a fairly typical basis? change in occupancy, or is it still being impacted in your view by the unique environment we're in?

speaker
Tim
Chief Financial Officer

I'll start with that, Rich. It's higher than we usually see. You typically see kind of a 50 basis point decrease over, that stretches from 4Q to 1Q, but over a typical seasonality of occupancy, you'll see 50 basis points lost over kind of the fourth quarter and first quarter. So this is higher than that. And I think speaking about the seasonality is important because it adds some uncertainty to the number, which is factored in now we're looking at the fourth quarter. We talk about this a bit, and it's at this point in some ways the best guy for hypothesis in that we won't see as much of a seasonal change in demand just due to the disruption we've seen in demand during the year. And so seasonality, there's two things that drive seasonality, right? There's a change in seasonal demand, and there's also the impact of the flu, right? I think data is very supportive that the flu, at this point, won't play a large role in the typical seasonality we see. And on the demand side, we don't necessarily think that the typical demand changes we see will play a role. But the 100 basis points is really just due to the COVID environment, what we've seen so far in the quarter. And certainly, when I say COVID environment, it's really the national picture, the acceleration in cases, and just that adding a bit of uncertainty to – and what the outlook is for the next two or three months.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead.

speaker
Vikram Malhotra
Analyst, Morgan Stanley

Thanks. Good morning. And, Sean, congrats on taking the leadership and congrats to the whole team. I know you guys put in a lot of hard work. Just to be building on or digging into 16 a little bit, you've seen the acceleration, like you pointed out, and the lead conversion, the timeline narrowing. I'm just wondering if you describe sort of second or third wave or it's hard to categorize now, but can you sort of comment on this decline in timing and the leads in markets where you've really seen a true second and a true third wave versus markets where we're just seeing sort of a new wave? In other words, like, is this more kind of uniform? Are you seeing real dispersion in markets?

speaker
Sean
Chief Executive Officer

That's a really good question, Vikram. We're actually not seeing a lot of dispersion in markets per se. There's a huge dispersion from a product type perspective, right? So you are seeing whether in West Coast or East Coast or Texas or, you know, you pick your market. If you have a need-driven product, the customer's, you know, willingness to make a decision is is significantly higher. And frankly, we are hearing from some of our partners that that is even accelerated relative to even pre-COVID levels. But, you know, in case of where you have a lifestyle-driven product, where somebody wants to be in that environment but doesn't have to be, you are still seeing some hesitation. So it's not a market-driven. It is definitely a product-driven phenomenon.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Nick Joseph from Citi. Please go ahead.

speaker
Michael Billerman
Analyst, Citi

Hey, it's Michael Billerman. Can you hear me now?

speaker
Omotayo Okunsoya
Analyst, Mizuho

Yep.

speaker
Michael Billerman
Analyst, Citi

Awesome. So, Sean, congrats again on the CEO role. How do you see your leadership style and approach both similar but also different than Tom? And maybe secondarily, you know, Tom obviously was highly visible within the industry as well as globally going to Davos and other events. I guess, how do you see yourself doing that, and is that going to be part of your approach as well as CEO of Welltower?

speaker
Sean
Chief Executive Officer

That's a very good question. So I will tell you, look, as you guys know, that Tom has trained me for the job over many years and definitely been very influenced by how he saw the world. The first and foremost, he has... taught us, and that's sort of ingrained in my leadership style as well as a lot of other people in our leadership team, is to think that what we can do more from this platform, not just think about disparate, you know, aggregation of assets, but, you know, thinking through platform, right? And the importance of, you know, being at the bleeding edge of healthcare and wellness trends, and that will continue to happen. I'm very much focused on execution, very much focused on partial value creation, and that's what the team is, and capital allocation. So everybody's leadership style is different and nuanced. Obviously, it is less important on the difference between Tom's leadership style and my leadership style. I will tell you that it is collectively as a leadership team, we see our biggest focus today is to increase the value for our share, execute, and, you know, obviously there's a tremendous amount of potential for us to get back to our lost earnings, not just to the pre-COVID level. As you imagine we have talked about even pre-COVID, our portfolio was under leased, and get back to that and create that value through execution and capitalization, and that's what we are focused on today.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Daniel Bernstein from Capital One. Please go ahead.

speaker
Daniel Bernstein

Good morning, everyone. I just wanted to ask a little bit more about the other side of the equation on move-outs and just understand maybe why residents are moving out, if you have that information. At this point, is it pent-up move-outs, you know, ALs or SNFs that use higher acuity, families taking residents out before the winter, any change in length of stay, just trying to understand that other side of the equation for move-ins.

speaker
Sean
Chief Executive Officer

Then you asked a very interesting question. If you think about move-outs, move-outs have come down pretty much across the board for the last seven, eight months to COVID. Last couple of weeks, I would say that, you know, we have seen some increased move-outs. It's hard to say why that is the case because it's too short of a timeframe to make this as a trend. But it is also the most difficult part of our business to predict, right? It is all of the above of what you mentioned as reasons for move-out. We don't see financial reasons for move-out in our industry, but we have seen some elevated move-outs for the last couple of weeks. We also saw some reduced move-outs a few weeks before that, right? This is a very, very hard business to predict on a weekly basis, monthly basis, so I think it is hard for us to sort of get into that and see what's the trend and what's not. You could have taken the last four weeks and say the first two weeks is that you wanted to have an optimistic trend, and you could have said that I will take that move out trend and move in trend and project, or you could have taken the last two weeks of elevated move out trend and project forward, and there's no right and wrong answer. We have just done the latter part, not the first part. We could be wrong. and things can turn out to be better than we thought. But as we sit here today with the uncertainty that we see, the overall, the national COVID environment, I think it's prudent for us to, at this point, not to try to get too excited about what might or might not happen.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Juan Sanabria from BMO Capital Markets. Please go ahead.

speaker
Juan Sanabria
Analyst, BMO Capital Markets

Hi, good morning. Thanks for the time. Shaka, I just wanted to follow up with one of your points at the end there where you talked about conversions of people putting down money to actually coming in to the communities and that kind of compressing back to kind of pre-COVID levels. Does that mean potentially that once COVID passes that you don't have kind of deferred demand, I guess particularly on the AL side, that would be coming in the door kind of post-COVID, whenever that may be, first or second quarter, that's kind of deferred decision and now is ready to come in if those leads and deposits are converting today?

speaker
Sean
Chief Executive Officer

No, Juan. It simply means that the customers need our product, right? So what has been going on is with all the national headlines and all the COVID in the overall situations, People are hesitating. Now we obviously have a need that's sort of, you know, adding up. And now the customers are saying, well, they can move in again. We're not projecting that into the future, right? That's a very important point. If we did, then we would not give you the guidance for four quarters that we did. But very much we're thinking that very simply the customers moved in when they could. Now, if COVID spikes up again, and they can't because you have visitation bans or you have shutdown of facilities and all of those things, that you will see that. But most importantly, will they move in when they can? I was simply answering the question on the need-driven nature of our product and the secular demand of the product. COVID will eventually be behind us, and the demand of the product hasn't changed through this period of time.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Connor Siversky from Berenberg. Please go ahead.

speaker
Connor Siversky
Analyst, Berenberg

Hey, good morning, everybody. Thank you for having me. Just a quick one on testing capacity. Among your peers at the last round of earnings, it still seemed like point-of-care tests were in short supply. So I'm just wondering how this dynamic has improved at all, and then given some news on the vaccination front, what are the goals in terms of testing if we're taking a six- or 12-month view?

speaker
Sean
Chief Executive Officer

We have, Connor, we have made a very significant improvement even in the last 90 days on point of care testing. We tested over 200,000 employees and residents, and that continues to progress. We got some very significant improvement, I would say, in the last 45 days in that particular area of point of, you know, in the testing side. But it's very, it's too premature to say how that will impact the consumer behavior and our ability to move in people. We think it will improve, but, again, given the overall uncertain environment, it is too early for us to comment.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Derek Johnston from Deutsche Bank. Please go ahead.

speaker
Derek Johnston
Analyst, Deutsche Bank

Hi, everyone, and congrats, Sean. I was hoping to get a sense of the legacy RIDEA contracts that were embedded in the show dispositions during 3Q. And if the majority were actually legacy structures, I believe heading into 2020, you had 80% of operators converted to what is seemingly a more favorable RDEA 3.0 contract. And I guess the second part of the question is where would that percentage stand today?

speaker
Sean
Chief Executive Officer

Thank you. Thank you, Gary. I don't have the number percentage for you, but I can tell you that both of what was the two portfolios were sold They were not in radius real contracts. So your fundamental assumption would be correct.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Lucas Hartwich from Green Street. Please go ahead.

speaker
Lucas Hartwich
Analyst, Green Street

Thanks. Good morning. Thanks for the color on F4 earlier. That was really helpful. I was hoping you could dive a bit below the surface and describe what you're seeing with face rents versus confessions, things like that.

speaker
Sean
Chief Executive Officer

Lucas, can you repeat that question, please, one more time?

speaker
Lucas Hartwich
Analyst, Green Street

Sure. So I was curious on the REV4 front if you could dive a little bit deeper on what you're seeing with face rents versus concessions, you know, what's kind of driving the headline REV4 number. I thought the color around the next shift was helpful. I'm just curious what's going on with face rents and concessions.

speaker
Tim
Chief Financial Officer

Yeah, so I think from the numbers we're seeing and what we're seeing in the markets, we're not seeing a lot of evidence of – I think as Sean spoke to, you're probably seeing more on the lower acuity side as far as just of what we're seeing in the market as far as it's – because of the lack to the difference in the kind of needs-based aspect of it, that there's – it's a little bit more of a consumer discretionary good, and therefore you're seeing a bit more of that, let's say, in the front end, whereas on the assisted living side, you're seeing very little of it. We've talked about this a bit, community fees, which – It's typically aligned with when you move in and are both kind of covered costs to move in as well as, you know, having testing, et cetera, to get your acuity level of care set up. You're seeing some discounting of those. And so we've said the combination of community fees coming through REV4 is that you've left people moving in on a year-over-year basis. So you're seeing community fees in total come down, and also you're seeing some discounting. And assisted living, importantly, you're not seeing discounting in care. And more of the residents we're seeing coming in, they're coming in because of the care. And so there isn't a lot of price competition there. Reputation is a huge factor. You saw some competition in general in the market through the supply cycle over the last couple of years, impact pricing. I'd say, you know, in the COVID environment, you're actually seeing a bit of that dissipate because more of the consumer residents are being attracted towards the better brand names and more well-known names in the market. So assisted living pricing is holding up, I'd say, pretty well, is that in the opening of March, given, you know, the steepness of the occupancy declines.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Michael Carroll from RBC Capital Markets. Please go ahead.

speaker
Michael Carroll
Analyst, RBC Capital Markets

Yeah, thanks. Sean, I was hoping you could provide some color on the investment pipeline and the types of deals that you've been able to source. I guess prior market valuations appear to have held up well, especially given WellTower's recent sales, I guess, this past several months. I mean, what is or is there a difference between the assets that you sold versus the deals that are in your pipeline, which are being able to source at much below replacement costs?

speaker
Sean
Chief Executive Officer

Thank you, Mike. There is. So if you think about in today's marketplace, if you take a very simple view of what gets you financing is you've got to check three boxes, pretty assets, pretty market, most importantly, very well-known, well-reported operators, right? If you can't check all those three boxes, it will be very hard, if not impossible, for you to line up financing. And that gets you to the everything else outside that. We talked about this on the last call. We are bringing our operators into assets. So these assets will become financeable, but today it's not. Many of these assets were built in the last two, three years, so they don't have a stabilized 2019 NOI that a lender can underwrite, right? So a lot of things we're buying brand new assets that have been built the last two to three years does not fit that criteria. So those are the ones that we are going. Interestingly, if you see that in real estate over a period of time, for apples to apples, you are asked to trade for higher price than lower price, just purely the difference of capex. That's relative to vintage, right? Given what is happening today in the marketplace, you are seeing exactly opposite of that. Newer assets are trading at a discount purely because they can't get financing because they don't have as stable as NOI for a lender to underwrite. and that's where we are coming in to buy things for cash. So we don't obviously put financing in. We buy assets for cash, and that's bringing in our operators, or these assets are, you know, all obviously owned by other capital partners of our existing operators, and we're buying these assets. So there is a difference. So if you think about what we sold, that checks all the three boxes, pretty assets, pretty market, and very experienced and well-known, well-reported operators. You miss one of those checks, it comes back to pretty much, you know, very, very few buyers in the marketplace, and it will turn out to be the most dominant one.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Stephen Vallecat from Barclays. Please go ahead.

speaker
Stephen Vallecat
Analyst, Barclays

Great. Thanks. Good morning, everyone. Shaq, let me offer my congrats on your promotion as well. Thank you. Actually, the comments you had on the call regarding the portfolio buying and selling was definitely helpful. One of the lines in our model that just really sticks out is the gain on sale of properties with some $3 billion recognized over the last five years or so. So that's definitely not lost upon us. The question I really have, though, is just related to your comments on the lower expenses in the shop portfolio, particularly on the lower PPE where you said the price per unit costs are now way down. Just curious how much you think that trend is more of an industry phenomenon versus how much Well Tower may be driving a better than average trend on that, either due to some of the initiatives like the Dallas Procurement Center and other stuff that's more company-specific. Thanks.

speaker
Tim
Chief Financial Officer

Yeah, that's a good question, Steve. I'd say we actually have wound down a lot of the activity we had in the Dallas Procurement Center. That was very important to operations when to our operators' operations early on in the March and April period when the only way to access PPE or one of the only ways to kind of guarantee access to it was through scale. And I think as we've seen distribution channels normalize, and they're still not back to where they would be pre-COVID, but as we've seen them normalize, our operators have been able to access PPE themselves. And in instances where they haven't, we've stepped in to help. For the most part, that's going direct from operators to providers of PPE. And so I think in saying that, the pricing is more of just seeing a bit of a normalization from you look at mask prices where some masks upwards of $8 and things are retailing $0.80 to $1.10 in a normal environment. And they're still elevated even today. But if they're in the $3 to $4 range, it's coming down significantly from what we were paying on average in the second quarter.

speaker
Sean
Chief Executive Officer

I'll just add some commentary to the first part of your question, which is I want you to understand that we're not trying to buy and sell assets, you know, like trade assets. That's not our goal. Well, obviously, when we see how to finance a transaction, we're trying to always think about what our, you know, sources of capital will be, right? Sometimes that could be stock at some point in the cycle. Some point that could be the equity that's strapped into the asset that you think you have maximized under your sort of umbrella, right? So we have alluded to this before, that the huge amount of portfolio transformation, which I believe sort of amounts to close to $30 billion of assets disposition and acquisition over the last five years, is roughly complete. However, we have seen that the propensity of companies to continue to grow and that, you know, is not inside WealthHour, right? We're always trying to think how we maximize value for share for the continuing shareholder, right? You can say the one good thing will be when your stock is in the right place, just continue to sell your stock instead of selling your assets, right? And that would be a correct approach if you just look at capital allocation from the lens of spot and a V. I told you that's not how we see the world, right? We see the world from the perspective of long-term IRR of what you're selling versus what you're buying and look at a comprehensive way of what your tools, the sort of sources and uses of capitals are. So we'll continue to do that, but the overall transformation of the portfolio that we wanted to do that Tom started, I would say we're roughly close to being done, but that doesn't mean that we'll not sell assets. We'll continue to sell assets if we think that is the best source of capital to fund what we are buying.

speaker
Operator
Conference Operator

Thank you. Thank you. Our next question comes from the line of Omotayo Okunsoya from Missoula. Please go ahead.

speaker
Omotayo Okunsoya
Analyst, Mizuho

Yes. Good morning, everyone. First question, just around government aid to senior housing. Again, we've kind of had this first round, and you guys are getting some proceeds in 4Q, but I think clearly everyone thinks that's not enough. I mean, what's the viewpoint that you have internally of just what the government still has to do or what you would like to see the government do in regards to help for the industry to kind of stabilize things?

speaker
Tim
Chief Financial Officer

Yeah, Ty, I'll start with that. We don't have an internal view of what we'd like to see the government do. I think it's been very beneficial to our operators to have seen them step in with the first crunch that they provided through HHS and There's a second tranche that's currently being contemplated and open for application. It's more performance-based. The first one was just more based on 2019 revenue. But as far as kind of further funds from HHS, management doesn't have an internal view. Part of the reason why we've acted the way we have as far as building our balance sheet and continuing to strengthen our capital position is so that we're not reliant on the duration of the pandemic or the government taking a view on funds to the industry.

speaker
Operator
Conference Operator

Thank you. Our next question comes from the line of Nick Ulico from Scotiabank. Please go ahead.

speaker
Nick Ulico
Analyst, Scotiabank

Thanks. Good morning, everyone. Just a question on the move-ins. You know, I know you guys pointed to slide 16, which is showing the move-ins, you know, coming back versus February being indexed to February. I guess I guess I'm wondering, though, why is February the appropriate month to be comparing to? I mean, isn't February, the dead of winter, kind of a slower move-in time? Isn't a more relevant metric that your move-ins are down 39% from a year ago?

speaker
Sean
Chief Executive Officer

We do think that's a relevant metric. That's what we put out in our slide deck. However, as far as we understand, if you think about the business, the February marks the last month of pre-COVID, right? So trying to understand the business trend, how that has changed through COVID. So putting out what last, you know, year over year is not a function of just what's happening today. It's also a function of what happened last year. All of us on this call know what happened last year at this point is fairly irrelevant given how COVID has changed our business, right? But we do think that the point that you are making, which is the year over year decline, is an important one, and that's why we put it in board phase on our side deck.

speaker
Operator
Conference Operator

Thank you. I'm sure our last question comes from the line of Mike Mueller from J.P. Morgan. Please go ahead.

speaker
Mike Mueller
Analyst, J.P. Morgan

Yeah, hi. Just two quick ones here. Number one, should we think of all near-term acquisitions as pretty much entirely being focused on senior housing? And then second, can you update us on the – progress with the 56th Street project that opened recently.

speaker
Sean
Chief Executive Officer

So let me answer both of those two questions. Our near-term acquisition pipeline is primarily focused on senior housing. We have a couple of smaller MLB deals in the pipeline. However, it's primarily focused on senior housing because that's where we see the significant disruption on the pricing side. MOBs are not priced for distress, and we see for the marginal use of the capital, we see significantly higher, bigger opportunity on the senior housing side. And the East 56th Street, we're still waiting for our license. New York State seems to be opening up again for licensure. So when we get the licensure, then we'll open the buildings for residents.

speaker
Operator
Conference Operator

Thank you. We have a follow-up from Jordan Sadler from KeyBank. Please go ahead.

speaker
Jordan Sadler
Analyst, KeyBank

Thank you. Good morning and congratulations, Shank. So I want to ask you, and I might have missed this because I dropped for a second off the call, but I had a question about sort of the market in general, right? I mean, I appreciate your commentary and I know this has been your cadence about sort of, you know, buying low, selling high essentially. very focused on capital allocation. How would you characterize the market for seniors housing right now? In other words, supply of assets versus demand. I mean, are we in equilibrium? Are people better to buy or better to sell? Is it tough to source stuff, easy to source stuff? How would you sort of characterize it?

speaker
Sean
Chief Executive Officer

That's a great question, Jordan. And it's a tell of two cities. If you have, as I described, you know, previously, pretty assets, pretty markets, and most importantly, experienced operator, and a stabilized 2019 NOI base that a lender can underwrite, you cannot, it is a feeling frenzy. You cannot have enough assets for capital to buy because everybody, private capital is not focused on what's going to be the occupancy from fourth quarter, right? They're focused on what's coming, you know, for next three or five or 10 or 15 year, and the opportunity to make a generational return given where we are from an industry perspective, the demand side of the equation. So that sort of, you have one side. On the other side, the financier misses one of those, one or more of those checks that I talked about, then you cannot finance those transactions today. And because of that, you know, usually transactions like that have been financed in the bank side of the house rather than like companies or, you know, agencies, uncivilized assets. And banks are obviously not lending in the space today anywhere close, anywhere close to where they were. No, I don't want, I almost would venture a guess to say they're not lending at all other than a couple of circumstances. So you have a tale of two cities. On those kind of assets, which are not, you know, financeable because you didn't check all the three boxes that I talked about, there's almost no bid for the assets because you have to buy those assets for cash. And there, we have very significant buyers. You know we buy everything for cash, right? And so we're finding tremendous opportunity on that. And frankly, as I described previously, we're finding many of these assets you can buy, brand-new assets, at a significantly lower price than the older assets purely because of all the margin-building activity that has happened in our industry from, call it, you know, 16, 17 to 18, 19. And those assets are, in many cases, are not financeable, and we're finding tremendous risk adjusted return, bringing our operators and our data capabilities and, you know, filling those assets out, as you will see in the next few years.

speaker
Operator
Conference Operator

Thank you. I share a last question and follow up comes from Amartya Okunsoyar from Mizoho.

speaker
Omotayo Okunsoya
Analyst, Mizuho

Please go ahead. Yes, that's another quick one. Is there any pressure to kind of ramp up acquisition activity in a world where you have a Biden win and he kind of, you know, eliminates the 1031 exchanges? How does that kind of change how you think about deals going forward?

speaker
Sean
Chief Executive Officer

There is only one pressure of buying things in our shop, and that's price. We're not trying to fight assets exactly at the bottom, you know, regardless of outcome of election. It is possible that you will see asset prices are lower in three months than it is today. But, you know, again, if you think about the scale and scope of our balance sheet of how much value we want to create for our shareholders, you know, if the asset prices go down, we'll buy more. So, there is no pressure other than price. And we can tell you at World Tower, we're salivating on the prices that we see today in the marketplace.

speaker
Operator
Conference Operator

Thank you. I do sure we have a question. Thank you. I sure know for the questions in the queue, I'd like to turn the call over to management.

speaker
Sean
Chief Executive Officer

Thank you very much. We'll see you in another 90 days. Thank you.

speaker
Operator
Conference Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Disclaimer

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